As filed with the Securities and Exchange Commission on
December 13, 2005
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
American Railcar Industries, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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3743
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43-1481791
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. employer
identification number)
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100 Clark Street
St. Charles, MO 63301
(636) 940-6000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
James J. Unger
President and Chief Executive Officer
American Railcar Industries, Inc.
100 Clark Street
St. Charles, MO 63301
(636) 940-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies To:
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Philip J. Flink, Esquire
Samuel P. Williams, Esquire
BROWN RUDNICK BERLACK ISRAELS LLP
One Financial Center
Boston, MA 02111
(617) 856-8200
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Lisa L. Jacobs, Esquire
SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, NY 10022
(212) 848-4000
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effectiveness of
this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, please check the
following
box.
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If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
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If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
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If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
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If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box.
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CALCULATION OF REGISTRATION FEE
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Proposed maximum aggregate
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Amount of
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Title of each class of securities to be registered
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offering price(a)(b)
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registration fee(c)
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Common Stock, par value $0.01 per share
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$150,000,000
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$17,655
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(a)
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Includes shares of Common Stock to cover over-allotments, if any.
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(b)
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Estimated solely for the purpose of calculating the registration
fee in accordance with Rule 457(o) promulgated under the
Securities Act, as amended.
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(c)
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A registration fee in the amount of $17,655 was previously paid
by American Railcar Industries, Inc., a Missouri corporation
(American Railcar Industries Missouri) in connection
with the filing of a Registration Statement on Form S-1
(Registration No. 333-128177) on September 8, 2005.
The Registrant is a wholly owned subsidiary of American Railcar
Industries Missouri. Pursuant to Rule 457(p) under the
Securities Act, the filing fee of $17,655 previously paid by
American Railcar Industries Missouri is to be offset against the
filing fee of $17,655 required for the filing of this
Registration Statement. As a result, no filing fee is due in
connection with this filing.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and we are not soliciting offers
to buy these securities in any jurisdiction where the offer or
sale is not
permitted.
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PRELIMINARY PROSPECTUS
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Subject to Completion
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December 13, 2005
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Shares
American Railcar Industries,
Inc.
Common Stock
This is our initial public offering of our common stock. No
public market currently exists for our common stock. We are
offering shares
of common stock by this prospectus. We expect the public
offering price to be between
$ and
$ per
share.
We expect to apply to have our common stock approved for
quotation on the Nasdaq National Market under the trading symbol
ARII.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock in
Risk factors beginning on page 14 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters may also purchase up to an
additional shares
of our common stock at the public offering price, less the
underwriting discounts and commissions, to cover
over-allotments, if any, within 30 days from the date of
this prospectus.
The underwriters are offering the common stock as set forth
under Underwriting. Delivery of the shares will be
made on or
about ,
2005.
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UBS Investment Bank
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Bear, Stearns & Co. Inc.
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BB&T
Capital Markets
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Morgan
Keegan & Company, Inc.
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The date of this prospectus
is ,
2005.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with additional information or
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of shares
of our common stock.
TABLE OF CONTENTS
ARI®, Pressureaide®, Center Flow® and our railcar
logo are our U.S. registered trademarks. Each trademark,
trade name or service mark of any other company appearing in
this prospectus belongs to its respective holder.
The market and industry data and forecasts included in this
prospectus are based upon independent industry sources,
including the Association of American Railroads, the Railway
Supply Institute, Inc., Global Insight and the
U.S. Department of Agriculture. Although we believe that
these independent sources are reliable, we have not
independently verified the accuracy and completeness of this
information, nor have we independently verified the underlying
economic assumptions relied upon in preparing any forecasts. See
Risk factorsRisks related to our businessThe
market and industry data contained in this prospectus, including
estimates and forecasts relating to the growth of the railcar
market, cannot be verified with certainty and may prove to be
inaccurate.
We have been advised by Global Insight that forecasts and
projections included in this prospectus that have been
attributed to Global Insight should not be construed as a
guarantee that the forecasts and projections will, in fact, be
achieved. These forecasts and projections have been prepared on
the basis of certain assumptions, judgments and hypotheses and
accordingly no representation or warranty of any kind is or can
be made with respect to the accuracy or completeness of, and no
representation or warranty shall be inferred from, the forecasts
and projections. The forecasts and projections made by Global
Insight herein are based on assumptions as to future events and,
therefore, are subject to varying degrees of uncertainty.
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Prospectus summary
This summary highlights information contained elsewhere in
this prospectus. It is not complete and may not contain all the
information that may be important to you. You should read the
entire prospectus carefully before making an investment
decision, especially the information presented under the heading
Risk factors and our consolidated financial
statements and the related notes included elsewhere in this
prospectus.
OUR COMPANY
We are a leading North American manufacturer of covered hopper
and tank railcars. We also repair and refurbish railcars,
provide fleet management services and design and manufacture
certain railcar and industrial components used in the production
of our railcars as well as railcars and non-railcar industrial
products produced by others. We provide our railcar customers
with integrated solutions through a comprehensive set of high
quality products and related services.
Our primary customers include companies that purchase railcars
for lease by third parties, or leasing companies, industrial
companies that use railcars for freight transport, or shippers,
and Class I railroads. In servicing this customer base, we
believe our integrated railcar repair and refurbishment and
fleet management services and our railcar components
manufacturing business help us further penetrate the general
railcar manufacturing market. These products and services
provide us with significant cross-selling opportunities and
insights into our customers railcar needs that we use to
improve our products and services and enhance our reputation for
high quality. Although we build, service and manage railcars
through an integrated, complementary set of products and
services, we have chosen not to offer railcar leasing services
so that we do not compete with our leasing company customers,
which represent a significant source of our revenues.
For the year ended December 31, 2004, we generated total
revenues of $355.1 million and net earnings of
$1.9 million. For the nine months ended September 30,
2005, we generated total revenues of $442.1 million and net
earnings of $14.5 million. As of September 30, 2005,
our total railcar backlog was 15,567 railcars, compared to a
total backlog of 5,653 railcars as of September 30, 2004.
The reported backlog as of September 30, 2005 includes
9,000 railcars relating to the CIT Groups minimum
purchase obligations under its agreement with us based upon an
assumed product mix consistent with CITs orders for
railcars. This agreement is described below under
Managements discussion and analysis of financial
conditions and results of operations Backlog.
OUR HISTORY
Since our formation in 1988, we have grown our business from
being a small provider of railcar components and maintenance
services to one of North Americas leading integrated
providers of railcars, railcar components, railcar maintenance
services and fleet management services. In October 1994, we
acquired railcar components manufacturing and railcar
maintenance assets from ACF Industries, Incorporated (now known
as ACF Industries LLC), or ACF, a company controlled by
Carl C. Icahn, our principal beneficial stockholder and the
chairman of our board of directors. Through this acquisition, we
also hired members of ACFs management, many of whom,
including our president, remain a significant part of our
current management team. These executives brought with them
established relationships with important customers and suppliers
and extensive industry knowledge, as ACF and its predecessor
companies have roots in the railcar manufacturing industry that
trace back to 1873. Led by this management team, we entered the
railcar manufacturing business through the construction of new
manufacturing facilities.
In October 1995, we produced our first railcar at our Paragould,
Arkansas manufacturing facility. We primarily manufacture
covered hopper railcars at our Paragould facility, but we have
the ability to manufacture many other types of railcars at this
facility. The Paragould facility initially had two railcar
manufacturing lines. We added painting and lining capabilities
to this facility in 1999 and a third
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manufacturing line in December 2004. We are currently
constructing additional painting and lining capabilities at our
Paragould facility to increase efficiency, which we expect to
open at the end of 2005. Our Paragould facility also features
component manufacturing capabilities.
In January 2000, we produced our first railcar at our Marmaduke,
Arkansas manufacturing facility. We manufacture tank railcars at
this facility. The design of this facility enables us to
manufacture many different types of tank railcars at the same
time.
Since 1994, we have significantly expanded our components
manufacturing and railcar services operations. Our operations
now include three railcar assembly, sub-assembly and fabrication
facilities, three railcar and industrial component manufacturing
facilities, six railcar repair plants and four mobile repair
units. Our services business has grown to include online access
by customers, remote fleet management, expanded painting, lining
and cleaning offerings, regulatory consulting and engineering
support. Additionally, members of our management team helped
found and develop, and continue to operate, a joint venture,
Ohio Castings Company, LLC, which we refer to as Ohio Castings,
in which we own a one-third interest and that manufactures and
sells sideframes, bolsters, couplers and yokes for distribution
to third parties and to us. We believe that our involvement in
this joint venture helps us maintain our levels of production at
competitive prices, despite industry-wide shortages of these
potentially capacity constraining components.
OUR INDUSTRY
Overview.
Demand for railcars reflects their importance
to the North American economy in moving goods and raw materials.
In periods of rising economic activity, fleet utilization
typically increases, driving an increase in demand for new
railcars, which also increases backlog for new railcars.
Conversely, during economic slowdowns, fleet utilization
typically declines, resulting in reduced demand, deliveries and
backlog for new railcars. According to Global Insights
Freight Car Outlook Third Quarter 2005, orders for new railcars
are expected to be strong with deliveries projected to
average 59,400 railcars per year from 2005 through 2010.
This compares to deliveries of 17,714 railcars in 2002, 32,184
railcars in 2003 and 46,871 railcars in 2004, as reported by
Railway Supply Institute, or RSI. RSI reported that at the end
of 2004, the total backlog for the railcar manufacturing
industry reached 58,677 railcars. This growth trend has
continued through the first nine months of 2005, with 54,134 new
railcars ordered and 50,682 railcars delivered, with total
backlog increasing to 60,986 railcars.
We believe the main characteristics and trends affecting the
North American railcar industry are:
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the cyclical nature of the railcar
market;
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the replacement demand for the
aging North American railcar fleet;
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the shift in the customer base
from railroads to leasing companies and shippers; and
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the consolidation of railcar
manufacturers.
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Covered hopper railcars.
North American demand for
covered hopper railcars has shown renewed strength due to
increased shipments of a variety of products including plastics,
chemicals and food. We believe there will be strong demand for
covered hopper railcars in the North American market over the
next several years. Global Insights Freight Car Outlook
Third Quarter 2005 forecasts a significant increase in
deliveries of covered hopper railcars, from 3,801 in 2003 and
5,602 in 2004 to 14,927 in 2005 and 16,926 in 2006, with
deliveries averaging approximately 15,800 railcars per year from
2007 through 2010. We believe the main characteristics and
trends affecting the North American covered hopper railcar
market are:
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the health of the
U.S. economy;
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increases in production of a
number of consumer and business durable goods;
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increases in domestic and
international demand for U.S. agricultural products;
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increases in demand for corn used
in ethanol production; and
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the need to replace aging covered
hopper railcars.
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Tank railcars.
Tank railcars are in higher demand in
North America as manufacturing activity and the need for liquids
and gases used in manufacturing increases. The manufacturing of
tank railcars is highly regulated and their production requires
a specially trained workforce and dedicated manufacturing
facilities. As a result, the tank railcar market is difficult to
enter and competition is concentrated. We believe the demand for
tank railcars in the North American market will continue to be
strong and stable over the next several years. Global
Insights Freight Car Outlook Third-Quarter 2005 projects
an increase in tank railcar deliveries, from 8,176 in 2003 and
8,939 in 2004, to 11,069 in 2005 and 11,075 in 2006, with
deliveries averaging approximately 9,900 tank railcars per year
from 2007 through 2010. We believe the main characteristics and
trends affecting the North American tank railcar market are:
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increases in manufacturing
activity and the resulting demand for higher volumes of
chemicals and gases;
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increases in demand for
petrochemicals, ethanol, edible and lubricating oils and liquid
food products; and
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the need to replace aging tank
railcars.
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These trends affecting the railcar industry and the covered
hopper and tank railcar markets are discussed in the section
entitled Industry.
OUR BUSINESS STRENGTHS AND COMPETITIVE ADVANTAGES
We believe that the following key business strengths and
competitive advantages will contribute to our growth:
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Leading railcar manufacturer
with focus on the covered hopper and tank railcar
markets.
We are a
leading North American manufacturer of covered hopper and tank
railcars. Over the last three years, we believe we have produced
an estimated 33% of the covered hopper railcars and an estimated
16% of the tank railcars delivered in North America. Based on a
report by the Association of American Railroads, these represent
the two largest segments of the North American railcar industry,
with covered hopper railcars representing approximately 30% and
tank railcars representing approximately 19% of the total North
American railcar fleet, based on the number of railcars in
service. We believe our railcars are differentiated by their
superior quality, innovation and reliability.
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Modern non-union, low-cost
railcar manufacturing facilities in strategic
locations.
Unlike
many of our competitors, we manufacture all of our railcars in
modern facilities built in the last ten years. We designed these
facilities to provide manufacturing flexibility and allow for
the production of a variety of railcar sizes and types. We
strategically located these facilities in close proximity to our
main customers and suppliers. This reduces freight time and
costs for the components we purchase and the time for delivery
of completed railcars. Over the past several years, we increased
our production capacity and efficiency and reduced our costs per
railcar through a number of targeted operational and design
improvements, which has also reduced the amount of raw materials
necessary for production of railcars. Currently none of our over
1,100 employees at our Paragould and Marmaduke railcar
manufacturing facilities are represented by a union. However,
employees of three of our repair facilities and one of our
component manufacturing facilities, representing 16% of our
total workforce as of September 30, 2005, are represented
by a union.
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Preferred access to
components through in-house production, a joint venture and
strategic sourcing
arrangements.
We
produce many of the components necessary to our railcar
manufacturing business ourselves and we own a one-third interest
in, and our management team operates, our Ohio Castings joint
venture, from which we obtain certain other components. We
believe our in-house production capabilities and our involvement
in this joint venture help us maintain access to components at
competitive prices, despite industry-wide shortages of these
potentially capacity constraining components. We also have
developed and actively maintain strategic sourcing arrangements
and strong relationships with our suppliers. These arrangements
and relationships help ensure our continued access to critical
components and raw materials that we use to produce railcars,
including steel, wheels, and heavy castings. We believe our
attention to strengthening our supply chain helps us maintain
operational continuity and high production levels.
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Integrated railcar repair
and refurbishment and fleet management services complement
railcar
manufacturing.
We
provide a wide array of complementary products and services to
the railcar industry. Unlike some other railcar manufacturers,
we also repair, maintain and provide fleet management services
for existing railcars, including railcars built by others, and
manufacture railcar components for third parties and us. We
believe this diverse product and service offering provides us
with a competitive advantage relative to other railcar
manufacturers, primarily in the form of cross- selling
opportunities. We also believe that our ability to address the
needs of our customers throughout the lifecycle of a railcar
enhances our customer relationships and provides us with
additional growth opportunities and unique insights into
industry trends.
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Strong relationships with a
long-term customer
base.
We believe
that our customers value our products and services. Many of our
major customers have been doing business with us for a number of
years, including CIT, Dow Chemical Company, GE Capital
Corporation and Solvay America, Inc. Many of our customers have
demonstrated a willingness to purchase several different types
of our products and services over time. We believe we deliver
high quality products and services to our customers with low
operating and maintenance costs, while maintaining what we
believe are low levels of warranty claims.
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Strong management team with
long-standing industry
experience.
We have
an experienced senior operations management team that has an
average of over 25 years of experience in the railcar and
related manufacturing industries. Our senior operations
management team, including our president, James J. Unger, has
been with us since we began manufacturing railcars. This team
conceived and built our Paragould and Marmaduke railcar
manufacturing facilities and has been responsible for growing
our revenues from $80.9 million in 1994 to
$355.1 million in 2004.
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OUR STRATEGY
The key elements of our business strategy are as follows:
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Maintain and expand presence
in covered hopper and tank railcar
markets.
We intend
to maintain and expand our presence in the covered hopper and
tank railcar markets by continuing to deliver high quality and
innovative products. We believe our excellent customer
relationships have enabled us to identify market demands that we
then target through our product development and marketing
efforts. We intend to continue the close collaboration between
our customers and our engineering, marketing, operations and
management personnel to meet demand and, where appropriate, to
selectively expand production capacity.
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Continue to improve
operating
efficiencies.
We
intend to build on the success of our production initiatives at
our Paragould and Marmaduke railcar manufacturing facilities and
plan to continue to identify opportunities to enhance operating
efficiencies across these and our other manufacturing
facilities. These opportunities include our continued
streamlining of our manufacturing processes and our quality
control initiatives. We also intend to continue the efforts
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of our design cost reduction team, formed in 2003, which has
already significantly reduced our railcar production costs
through standardization of components used in our railcars,
implemented design changes to reduce the amount of raw material
required for our railcars, and improved manufacturing techniques
that reduce our labor requirements. These efforts should allow
us to reduce our costs and maintain competitive prices.
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Continue to grow railcar service and fleet management
businesses and increase sales of railcar and industrial
components.
As the existing North American railcar fleet
continues to age, we anticipate increased demand for maintenance
and repair services and railcar components used in the
maintenance and repair of railcars. Additionally, we expect
growing demand for our fleet management services as ownership of
railcars continues to shift away from the railroads and toward
the shippers and leasing companies, which often outsource their
fleet management activities to third-party service providers
such as us. We intend to capitalize on these trends and we
believe we are well positioned to provide increased services
through our strategically located network of railcar repair and
service facilities.
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Leverage manufacturing expertise to selectively expand
product portfolio.
We may seek to expand our product
portfolio to other selected types of railcars. Our management
designed and constructed our Paragould manufacturing facility to
be able to produce most railcar types, and we believe our
adaptive production lines and flexible employees are able to
shift production among various railcar types with minimal
interruption to our operations. In addition, as the existing
fleet of North American railcars is aging, expansion of our
product portfolio into new railcar types will allow us to grow
our business by capturing a portion of the natural replacement
demand for existing railcar types. Our ability to produce other
types of railcars positions us to respond to customer requests
for production outside of our traditional markets and provides
us additional manufacturing flexibility in the event the covered
hopper or tank railcar markets weaken.
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Selectively pursue strategic external growth
opportunities.
By significantly reducing our debt
through this offering and with the establishment of a public
market for our common stock, we believe we will have increased
financial flexibility to supplement internal growth with select
acquisitions, alliances or joint ventures. We also believe our
in-house fabrication of railcar components and our Ohio Castings
joint venture provide us with competitive advantages and we
intend to enhance these advantages by selectively acquiring or
establishing strategic relationships with railcar component
manufacturers and suppliers of critical raw materials. While we
have in the past engaged in preliminary discussions with certain
parties regarding potential strategic acquisitions, alliances or
joint ventures, as of the date of this prospectus, we are not
currently engaged in any such discussions and do not have any
commitments to enter into any acquisition, alliance or joint
venture. We may also seek to expand our railcar components
business into international markets on an opportunistic basis.
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THE TRANSACTIONS
We intend to use the proceeds of this offering to:
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repay outstanding borrowings under
our existing revolving credit facility and amend and restate our
revolving credit facility;
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repay the notes payable that we
issued to ACF Industries Holding Corp. in connection with the
acquisition of our joint venture interest in Ohio Castings, and
that we issued to Arnos Corp., both of which are entities
controlled by Carl C. Icahn, our principal beneficial
stockholder and the chairman of our board of directors;
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redeem all of our industrial
revenue bonds;
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redeem all of the outstanding
shares of our preferred stock, all of which are held by Carl C.
Icahn and his affiliates; and
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pay fees and expenses related to
this offering and the transactions identified above.
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For more information, see Use of proceeds.
Our outstanding shares of preferred stock include our
mandatorily redeemable preferred stock and our new preferred
stock. See Description of capital stock.
Concurrently with this offering, we expect to issue to our
president and chief executive officer, James J. Unger, the
number of shares of our common stock obtained by dividing
$6.0 million by the public offering price set forth on the
cover page of this prospectus. See
ManagementExecutive compensationEmployment
agreements. Concurrently with this offering, we also
intend to amend and restate provisions of our existing revolving
credit facility to increase its size to $75 million and
extend its term to three years from the closing of this
offering, pursuant to a commitment letter we have obtained from
North Fork Business Capital Corporation and our other lenders.
See Managements discussion and analysis of financial
condition and results of operations Liquidity and capital
reservesOutstanding debtRevolving credit
facility for a description of our existing revolving
credit facility and the expected terms of our new revolving
credit facility. Immediately prior to the closing of this
offering, our parent company will merge with and into us
pursuant to which all of the outstanding shares of our parent
companys capital stock will be exchanged for shares of our
capital stock in the manner described below in
Corporate Information. We refer to this
offering, the application of the proceeds of this offering as
described above, the issuance of shares of our common stock to
James J. Unger, the amendment and restatement of our
revolving credit facility and the merger described below
collectively as the Transactions.
OUR RELATIONSHIP WITH CARL C. ICAHN AND ENTITIES AFFILIATED
WITH CARL C. ICAHN
Overview.
Carl C. Icahn is our principal beneficial
stockholder and is the chairman of our board of directors. Since
our formation, we have entered into agreements relating to the
acquisition of assets from and disposition of assets to entities
controlled by Mr. Icahn, the provision of goods and
services to us by entities controlled by Mr. Icahn, the
provision of goods and services by us to entities affiliated
with Mr. Icahn and other matters involving entities
controlled by Mr. Icahn. We receive substantial benefit
from these agreements and we expect that in the future we will
continue to conduct business with entities affiliated with or
controlled by Mr. Icahn. In 2002, 2003, 2004 and the first
nine months of 2005, our revenues from affiliates of
Mr. Icahn accounted for 45%, 34%, 24% and 14% of our total
revenues, respectively. In addition, we receive other benefits
from our affiliation with Mr. Icahn and companies
controlled by Mr. Icahn, such as financial and advisory
support, sales support and our participation in buying groups
and other arrangements with entities controlled by
Mr. Icahn. Until recently, most of our capital needs have
been provided by entities controlled by Mr. Icahn.
Application of the net proceeds of this offering.
We
intend to use the net proceeds of this offering to, among other
things, repay
$ million
of indebtedness that we owe to entities controlled by
Mr. Icahn. We also intend to use
$ million
of the net proceeds of this offering to redeem all of our new
preferred stock, all of which is held by Mr. Icahn and his
affiliates, including all accumulated and unpaid dividends due
on our preferred stock. For more information, see Use of
proceeds.
Mr. Icahns holdings of our common stock.
We
have been advised that in December 2005, Modal LLC, a
company controlled by Mr. Icahn, entered into a stock
purchase agreement with the Foundation for a Greater
Opportunity, or the Foundation, our other significant beneficial
stockholder, to acquire all of our common stock held by the
Foundation. The consummation of this acquisition of our common
stock requires the completion of this offering and the approval
of applicable authorities of the State of New York. If the
parties obtain this approval, we have been advised that the
parties expect that the purchase would be completed in the first
three months of 2006. Pending the closing of this purchase, and
for so long as the stock purchase agreement has not been
terminated, the
6
Foundation has granted Modal LLC an irrevocable proxy to vote
all of the shares of our common stock held by the Foundation.
The stock purchase agreement may be terminated by either party
if the purchase does not occur by May 2006. As a result of these
contemplated arrangements, we expect that Mr. Icahn will
control
approximately %
of the voting power of our capital stock following the offering.
As a result, Mr. Icahn is, and will be, able to exert
substantial influence over us, elect our directors and control
most matters requiring board or shareholder approval. If,
following this offering, Mr. Icahn does not acquire all of
the shares of our common stock held by the Foundation, following
the termination of the irrevocable proxy granted to Modal LLC,
Mr. Icahn will continue to beneficially
own %
of our common stock and will still be able to exert substantial
influence over us. See Principal stockholders Icahn
agreement to purchase Foundation shares.
For information about the risks associated with our
relationships with Carl C. Icahn and entities affiliated
with Carl C. Icahn, see Risk factorsRisks
related to our businessAfter this offering, companies
affiliated with Carl C. Icahn will continue to be important
suppliers and customers, Risk factorsRisks
related to our businessServices being provided to us by
ARL, an entity controlled by Carl C. Icahn, may not be
sufficient to meet our needs, which may require us to incur
additional costs, Risk factorsRisks related to
our businessAfter this offering, we may have reduced
access to resources of, and benefits provided by, entities
affiliated with Carl C. Icahn, Risk
factorsRisks related to our businessWe could be
liable for liabilities associated with pension plans sponsored
by companies controlled by Carl C. Icahn, Risk
factorsRisks related to the purchase of our common stock
in this offeringOur stock price may decline due to sales
of shares by Carl C. Icahn and other stockholders,
Risk factorsRisks related to the purchase of our
common stock in this offeringCarl C. Icahn will continue
to exert significant influence over us, Risk
factorsRisks related to the purchase of our common stock
in this offeringMr. Icahns interests may
conflict with the interest of our stockholders, Risk
factorsRisks related to the purchase of our common stock
in this offeringUpon the closing of this offering we may
be a controlled company within the meaning of the
Nasdaq National Market rules and you will not have the same
protections afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to
all of the Nasdaq National Market corporate governance
requirements. Also, see Certain relationships and
related party transactionsTransactions with Carl C. Icahn
and entities affiliated with Carl C. Icahn for more
information about our affiliation with Mr. Icahn and entities
affiliated with Mr. Icahn.
CORPORATE INFORMATION
American Railcar Industries, Inc., a Delaware corporation formed
on November 16, 2005 (referred to as American Railcar
Industries Delaware), will be the issuer of the common stock
offered hereby. American Railcar Industries Delaware is a wholly
owned subsidiary of American Railcar Industries, Inc., a
Missouri corporation (referred to as American Railcar Industries
Missouri). Immediately prior to the closing of this offering,
American Railcar Industries Missouri will merge with and into
American Railcar Industries Delaware, with American Railcar
Industries Delaware being the surviving corporation. As a part
of this merger American Railcar Industries Missouri will
exchange all of its shares of common stock for shares of
American Railcar Industries Delawares common stock on a
one-for- basis.
In addition, American Railcar Industries Missouri will also
exchange all of its new preferred stock for shares of American
Railcar Industries Delawares new preferred stock on a
one-for-one basis. We refer to the merger of American Railcar
Industries Missouri with and into American Railcar Industries
Delaware and these share exchanges collectively as the merger.
The surviving corporation of the merger will be incorporated in
Delaware and will be named American Railcar Industries, Inc. In
this prospectus, references to our company,
we, us and our, except where
the context otherwise indicates, refer to American Railcar
Industries Delaware and its consolidated subsidiaries and its
predecessors, assuming the merger has occurred. The address of
our principal executive offices is 100 Clark Street, St.
Charles, Missouri, 63301. Our telephone number is
(636) 940-6000. Our website address is
www.americanrailcar.com. Information contained in or connected
to our website is not part of this prospectus.
7
The offering
Unless otherwise indicated, all of the information in this
prospectus assumes the underwriters do not exercise their
over-allotment option to purchase additional shares of our
common stock. Please see Description of capital
stock for a summary of the terms of our common stock.
|
|
|
Common stock offered by us
|
|
shares.
|
|
Common stock outstanding after this offering
|
|
shares.
|
|
Common stock subject to the over-allotment option
|
|
shares.
|
|
Use of proceeds
|
|
We expect to receive net proceeds from the offering of
approximately
$ million,
after deducting underwriting discounts and commissions and
estimated expenses of this offering payable by us, assuming an
initial offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus.
|
|
|
|
We intend to use the net proceeds from this offering to repay
amounts outstanding under our revolving credit facility, repay
notes due to our affiliates, redeem all of our industrial
revenue bonds, redeem all shares of our outstanding preferred
stock, all of which are held by affiliates of Mr. Icahn,
and pay the fees and expenses related to the Transactions. See
Use of proceeds.
|
|
|
Dividend policy
|
|
Although our board of directors has never declared or paid any
cash dividends on our common stock, following this offering we
intend to pay cash dividends on our common stock. Payment of
dividends will be at the discretion of our board of directors
and will depend upon our operating results, strategic plans,
capital requirements, financial condition, provisions of our
borrowing arrangements, applicable law and other factors our
board of directors considers relevant. As of the date of this
prospectus, our board of directors has not determined the amount
of any specific dividend, if any. See Risk
factorsRisks related to the purchase of our common stock
in this offeringPayments of cash dividends on our common
stock may be made only at the discretion of our board of
directors and Delaware law may restrict, and the agreements
governing our revolving credit facility contain provisions that
limit, our ability to pay dividends and Dividend
policy and restrictions.
|
|
|
Proposed Nasdaq symbol
|
|
ARII.
|
|
Risk factors
|
|
You should carefully read and consider the information set forth
under the caption Risk factors beginning on
page 14 and all other information set forth in this
prospectus before investing in our common stock.
|
8
Unless otherwise indicated, all of the information in this
prospectus relating to the number of shares of common stock to
be outstanding after this offering:
|
|
|
Ø
|
gives effect to the merger immediately prior to the closing of
this offering;
|
|
|
Ø
|
gives effect to the issuance of the number of shares of our
common stock obtained by dividing $6.0 million by the
public offering price set forth on the cover page of this
prospectus to our president and chief executive officer,
James J. Unger, see ManagementExecutive
compensationEmployment agreements; and
|
|
Ø
|
excludes shares of our common stock that will be available for
future issuance under stock options granted under our 2005
Equity Incentive Plan, none of which will be exercisable upon
the completion of this offering. See
ManagementExecutive compensationEquity
incentive plan.
|
9
Summary consolidated financial data
The following table sets forth our summary consolidated
financial data for the periods presented. The consolidated
statements of operations and cash flow data for the years ended
December 31, 2002, 2003 and 2004 and the consolidated
balance sheet data as of December 31, 2003 and 2004 are
derived from our audited consolidated financial statements and
related notes included elsewhere in this prospectus. The
consolidated statements of operations and cash flow data for the
years ended December 31, 2000 and 2001 and the consolidated
balance sheet data as of December 31, 2000, 2001 and 2002
are derived from our historical consolidated financial
statements not included in this prospectus. The consolidated
statements of operations and cash flow data for the nine months
ended September 30, 2004 and 2005 and the consolidated
balance sheet data as of September 30, 2005 have been
derived from unaudited consolidated financial statements and
related notes included elsewhere in this prospectus and reflect
all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of management, necessary
for a fair presentation of our financial position, the results
of operations and cash flows for the periods presented.
Operating results for the nine months ended September 30,
2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005 or any other
future period.
You should read this information together with
Capitalization, Managements discussion
and analysis of financial condition and results of
operations and our consolidated financial statements and
the related notes thereto included elsewhere in this prospectus.
10
Summary Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
Years ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share data and number of railcars)
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations(1)
|
|
$
|
200,691
|
|
|
$
|
181,438
|
|
|
$
|
138,441
|
|
|
$
|
188,119
|
|
|
$
|
316,432
|
|
|
$
|
226,759
|
|
|
$
|
409,208
|
|
|
Railcar services(2)
|
|
|
38,093
|
|
|
|
32,703
|
|
|
|
30,387
|
|
|
|
29,875
|
|
|
|
38,624
|
|
|
|
27,572
|
|
|
|
32,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
238,784
|
|
|
|
214,141
|
|
|
|
168,828
|
|
|
|
217,994
|
|
|
|
355,056
|
|
|
|
254,331
|
|
|
|
442,148
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations(3)
|
|
|
187,375
|
|
|
|
169,952
|
|
|
|
134,363
|
|
|
|
174,629
|
|
|
|
306,283
|
|
|
|
216,027
|
|
|
|
377,181
|
|
|
Cost of railcar services(4)
|
|
|
37,111
|
|
|
|
33,255
|
|
|
|
29,533
|
|
|
|
29,762
|
|
|
|
34,473
|
|
|
|
24,585
|
|
|
|
27,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
224,486
|
|
|
|
203,207
|
|
|
|
163,896
|
|
|
|
204,391
|
|
|
|
340,756
|
|
|
|
240,612
|
|
|
|
404,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,298
|
|
|
|
10,934
|
|
|
|
4,932
|
|
|
|
13,603
|
|
|
|
14,300
|
|
|
|
13,719
|
|
|
|
37,429
|
|
Selling, administrative and other
|
|
|
8,693
|
|
|
|
9,219
|
|
|
|
9,505
|
|
|
|
10,340
|
|
|
|
10,334
|
|
|
|
8,543
|
|
|
|
11,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
5,605
|
|
|
|
1,715
|
|
|
|
(4,573
|
)
|
|
|
3,263
|
|
|
|
3,966
|
|
|
|
5,176
|
|
|
|
26,012
|
|
Interest income(5)
|
|
|
5,777
|
|
|
|
4,770
|
|
|
|
3,619
|
|
|
|
3,161
|
|
|
|
4,422
|
|
|
|
2,122
|
|
|
|
1,265
|
|
Interest expense(6)
|
|
|
(13,687
|
)
|
|
|
(9,525
|
)
|
|
|
(4,853
|
)
|
|
|
(3,616
|
)
|
|
|
(3,667
|
)
|
|
|
(2,216
|
)
|
|
|
(3,577
|
)
|
Income (loss) from joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(604
|
)
|
|
|
(609
|
)
|
|
|
(351
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax (benefit) expense
|
|
|
(2,305
|
)
|
|
|
(3,040
|
)
|
|
|
(5,807
|
)
|
|
|
2,204
|
|
|
|
4,112
|
|
|
|
4,731
|
|
|
|
24,143
|
|
Income tax (benefit) expense
|
|
|
(713
|
)
|
|
|
(1,074
|
)
|
|
|
(1,894
|
)
|
|
|
1,139
|
|
|
|
2,191
|
|
|
|
1,858
|
|
|
|
9,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(1,592
|
)
|
|
$
|
(1,966
|
)
|
|
$
|
(3,913
|
)
|
|
$
|
1,065
|
|
|
$
|
1,921
|
|
|
$
|
2,873
|
|
|
$
|
14,532
|
|
|
|
Less preferred dividends
|
|
|
|
|
|
|
(3,070
|
)
|
|
|
(7,139
|
)
|
|
|
(9,690
|
)
|
|
|
(13,241
|
)
|
|
|
(9,296
|
)
|
|
|
(11,171
|
)
|
|
Net earnings (loss) available to common shareholders
|
|
$
|
(1,592
|
)
|
|
$
|
(5,036
|
)
|
|
$
|
(11,052
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(11,320
|
)
|
|
$
|
(6,423
|
)
|
|
$
|
3,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted(7)
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,087
|
|
|
|
1,051
|
|
|
|
1,195
|
|
Net earnings (loss) per common share, basic and diluted(7)
|
|
$
|
(1,592
|
)
|
|
$
|
(5,036
|
)
|
|
$
|
(11,052
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(10,414
|
)
|
|
$
|
(6,111
|
)
|
|
$
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,342
|
|
|
$
|
1,476
|
|
|
$
|
183
|
|
|
$
|
65
|
|
|
$
|
6,943
|
|
|
$
|
50,605
|
|
|
$
|
26,201
|
|
Net working capital
|
|
|
32,096
|
|
|
|
35,172
|
|
|
|
16,065
|
|
|
|
15,084
|
|
|
|
46,565
|
|
|
|
83,355
|
|
|
|
31,197
|
|
Net property, plant and equipment
|
|
|
84,897
|
|
|
|
81,090
|
|
|
|
75,746
|
|
|
|
71,230
|
|
|
|
76,951
|
|
|
|
73,706
|
|
|
|
88,555
|
|
Total assets
|
|
|
204,764
|
|
|
|
191,229
|
|
|
|
187,590
|
|
|
|
196,508
|
|
|
|
356,840
|
|
|
|
300,764
|
|
|
|
262,024
|
|
Total liabilities
|
|
|
170,158
|
|
|
|
113,596
|
|
|
|
98,463
|
|
|
|
190,704
|
|
|
|
221,817
|
|
|
|
95,332
|
|
|
|
154,489
|
|
Total shareholders equity
|
|
$
|
34,606
|
|
|
$
|
77,633
|
|
|
$
|
89,127
|
|
|
$
|
5,804
|
|
|
$
|
135,023
|
|
|
$
|
205,432
|
|
|
$
|
107,535
|
|
Consolidated other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(8)
|
|
$
|
12,202
|
|
|
$
|
8,764
|
|
|
$
|
1,698
|
|
|
$
|
9,067
|
|
|
$
|
9,604
|
|
|
$
|
9,599
|
|
|
$
|
31,427
|
|
Items decreasing EBITDA(9)
|
|
$
|
8,619
|
|
|
$
|
1,848
|
|
|
$
|
193
|
|
|
$
|
1,256
|
|
|
$
|
7,922
|
|
|
$
|
2,586
|
|
|
$
|
1,265
|
|
Capital expenditures
|
|
$
|
8,662
|
|
|
$
|
2,617
|
|
|
$
|
1,816
|
|
|
$
|
2,301
|
|
|
$
|
11,441
|
|
|
$
|
6,750
|
|
|
$
|
16,356
|
|
New railcars delivered
|
|
|
2,423
|
|
|
|
2,312
|
|
|
|
1,766
|
|
|
|
2,557
|
|
|
|
4,384
|
|
|
|
3,260
|
|
|
|
4,980
|
|
New railcar orders
|
|
|
2,054
|
|
|
|
1,598
|
|
|
|
1,861
|
|
|
|
4,432
|
|
|
|
9,644
|
|
|
|
6,626
|
|
|
|
13,000
|
|
New railcar backlog
|
|
|
1,031
|
|
|
|
317
|
|
|
|
412
|
|
|
|
2,287
|
|
|
|
7,547
|
|
|
|
5,653
|
|
|
|
15,567
|
|
Estimated backlog value(10)
|
|
$
|
60,417
|
|
|
$
|
19,864
|
|
|
$
|
26,906
|
|
|
$
|
129,850
|
|
|
$
|
494,107
|
|
|
$
|
365,097
|
|
|
$
|
1,132,788
|
|
Consolidated cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
5,217
|
|
|
$
|
13,434
|
|
|
$
|
10,611
|
|
|
$
|
(1,639
|
)
|
|
$
|
(17,082
|
)
|
|
$
|
1,946
|
|
|
$
|
27,831
|
|
Net cash used in investing activities
|
|
|
(8,782
|
)
|
|
|
(2,189
|
)
|
|
|
(535
|
)
|
|
|
(2,251
|
)
|
|
|
(11,037
|
)
|
|
|
(6,750
|
)
|
|
|
(16,356
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
5,490
|
|
|
$
|
(12,111
|
)
|
|
$
|
(11,369
|
)
|
|
$
|
3,772
|
|
|
$
|
34,997
|
|
|
$
|
55,344
|
|
|
$
|
7,783
|
|
11
|
|
(1)
|
Includes revenues from transactions with affiliates of
$52.8 million, $64.8 million, $63.6 million,
$62.9 million and $64.4 million in 2000, 2001, 2002,
2003 and 2004, respectively and $44.6 million and
$44.5 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(2)
|
Includes revenues from transactions with affiliates of
$16.1 million, $8.6 million, $12.8 million,
$11.0 million and $19.4 million in 2000, 2001, 2002,
2003 and 2004, respectively and $12.7 million and
$16.0 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(3)
|
Including costs from transactions with affiliates of
$46.6 million, $57.6 million, $55.7 million,
$54.4 million and $59.1 million in 2000, 2001, 2002,
2003 and 2004, respectively and $40.2 million and
$41.4 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(4)
|
Includes costs from transactions with affiliates of
$12.8 million, $7.2 million, $12.2 million,
$10.1 million and $15.5 million in 2000, 2001, 2002,
2003 and 2004, respectively and $9.6 million and
$12.7 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(5)
|
Includes interest income from affiliates of $5.6 million,
$4.3 million, $3.4 million, $3.0 million and
$3.9 million in 2000, 2001, 2002, 2003 and 2004,
respectively and $1.2 million and $0.8 million for the
nine months ended September 30, 2004 and 2005, respectively.
|
|
(6)
|
Includes interest expense to affiliates of $0.2 million in
2001, and $1.5 million in 2004 and $0.2 million and
$1.7 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
|
(7)
|
Share and per share data have not been restated to give effect
to the merger.
|
|
|
(8)
|
EBITDA represents net earnings (loss) before income tax expense
(benefit), interest (income) expense, net and amortization and
depreciation of property and equipment. We believe EBITDA is
useful to investors in evaluating our operating performance
compared to that of other companies in our industry. In
addition, our management uses EBITDA to evaluate our operating
performance. The calculation of EBITDA eliminates the effects of
financing, income taxes and the accounting effects of capital
spending. These items may vary for different companies for
reasons unrelated to the overall operating performance of a
companys business. EBITDA is not a financial measure
presented in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP. Accordingly, when
analyzing our operating performance, investors should not
consider EBITDA in isolation or as a substitute for net earnings
(loss), cash flows from operating activities or other statements
of operations or statements of cash flow data prepared in
accordance with U.S. GAAP. Our calculation of EBITDA is not
necessarily comparable to that of other similarly titled
measures reported by other companies.
|
The following is a reconciliation of net earnings (loss) to
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
Years ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Net earnings (loss)
|
|
$
|
(1,592
|
)
|
|
$
|
(1,966
|
)
|
|
$
|
(3,913
|
)
|
|
$
|
1,065
|
|
|
$
|
1,921
|
|
|
$
|
2,873
|
|
|
$
|
14,532
|
|
Income tax (benefit) expense
|
|
|
(713
|
)
|
|
|
(1,074
|
)
|
|
|
(1,894
|
)
|
|
|
1,139
|
|
|
|
2,191
|
|
|
|
1,858
|
|
|
|
9,611
|
|
Interest expense
|
|
|
13,687
|
|
|
|
9,525
|
|
|
|
4,853
|
|
|
|
3,616
|
|
|
|
3,667
|
|
|
|
2,216
|
|
|
|
3,577
|
|
Interest income
|
|
|
(5,777
|
)
|
|
|
(4,770
|
)
|
|
|
(3,619
|
)
|
|
|
(3,161
|
)
|
|
|
(4,422
|
)
|
|
|
(2,122
|
)
|
|
|
(1,265
|
)
|
Depreciation and amortization
|
|
|
6,597
|
|
|
|
7,049
|
|
|
|
6,271
|
|
|
|
6,408
|
|
|
|
6,247
|
|
|
|
4,774
|
|
|
|
4,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,202
|
|
|
$
|
8,764
|
|
|
$
|
1,698
|
|
|
$
|
9,067
|
|
|
$
|
9,604
|
|
|
$
|
9,599
|
|
|
$
|
31,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
Our net earnings (loss) and EBITDA decreased in the periods
specified below as a result of the following items:
|
|
|
|
|
(a)
|
In 2000 and 2001, we incurred start-up expenses totaling
$8.6 million and $1.8 million, respectively, in
connection with our Marmaduke tank railcar manufacturing
facility. The start-up expenses related to costs associated with
introducing new tank railcar products, learning new
manufacturing processes and commencing new operating procedures
to reach normal productive capacity.
|
|
|
|
|
|
(b)
|
In 2002 and 2003, we recorded an asset impairment charge of $0.2
million and $0.8 million respectively to reduce the
carrying value of buildings and improvements, and equipment
related to our Milton, Pennsylvania railcar repair plant.
Inventory value was also reduced by $0.4 million in
|
|
12
|
|
|
|
|
|
2003 to reflect the lower of cost
or market value. Due to reduced demand for railcar repairs at
this location, we elected to idle this facility until business
conditions warrant its reopening.
|
|
|
|
|
|
(c)
|
In 2004 and in the nine months ended September 30, 2004 and
September 30, 2005, we incurred an estimated
$7.9 million, $4.9 million and $1.5 million,
respectively, in increased raw materials costs, consisting
primarily of costs relating to steel and railcar components
which we were unable to pass on to our customers under our then
existing fixed-price customer contracts. Since the first quarter
of 2004, we have renegotiated most of our railcar manufacturing
contracts to include provisions that adjust the selling prices
of our railcars to reflect increases or decreases in the costs
of certain raw materials and components. As a result of this
change to our railcar manufacturing contracts, we were able to
pass on to our customers approximately 32% of the increased raw
material and component costs with respect to the railcars that
we produced and delivered in 2004. Most of our railcar
manufacturing contracts covering railcars to be produced after
September 30, 2005 allow for variable pricing to protect us
against future changes in the cost of certain raw materials and
components.
|
|
|
(10)
|
Estimated backlog reflects the total sales attributable to the
backlog reported at the end of the particular period as if such
backlog were converted to actual sales. Estimated backlog does
not reflect potential price increases or decreases under most of
our customer contracts that provide for variable pricing based
on changes in the cost of certain raw materials and railcar
components or the possibility that contracts may be canceled or
railcar delivery dates delayed and does not reflect the effects
of any cancellation or delay of railcar orders that may occur.
See Managements discussion and analysis of financial
condition and results of operationsBacklog.
|
13
Risk factors
Investing in our common stock involves a high degree of risk.
Before you invest in our common stock, you should understand and
carefully consider the risks below, as well as all of the other
information contained in this prospectus and our financial
statements and the related notes included elsewhere in this
prospectus. Any of these risks could materially adversely affect
our business, financial condition, results of operations and the
trading price of our common stock, and you may lose all or part
of your investment.
RISKS RELATED TO OUR BUSINESS
Due in part to the highly cyclical nature of the railcar
industry, we have incurred substantial operating losses in the
past and may experience declines in revenue and substantial
operating losses in the future.
Historically, the North American railcar market has been highly
cyclical and we expect it to continue to be highly cyclical.
During the most recent industry cycle, industry-wide railcar
deliveries declined from a peak of 75,704 in 1998 to a low of
17,714 railcars in 2002. During this downturn, our revenues
dropped from $238.8 million in 2000 to $168.8 million
in 2002 and we incurred losses of $1.6 million,
$2.0 million and $3.9 million in 2000, 2001 and 2002,
respectively. We believe that downturns in the railcar
manufacturing industry will occur in the future and will result
in decreased demand for our products and services. The cycles in
our industry result from many factors that are beyond our
control, including economic conditions in the United States.
Although railcar production has increased since 2002, industry
professionals believe that demand for railcars may have reached
a peak and may not persist if favorable economic and other
conditions are not sustained. Even if a sustained economic
recovery occurs in the United States, demand for our railcars
may not match or exceed expected levels. An economic downturn
may result in increased cancellations of railcar orders which
could have a material adverse effect on our ability to convert
our railcar backlog into revenues. If industry backlog for
railcars declines below certain levels, CIT, one of our
customers which accounts for 71% of our backlog as of
September 30, 2005, will be permitted to cancel some or, in
certain circumstances, all its orders with at least
180 days written notice, which could have a material
adverse effect on our business, financial condition and results
of operations. In addition, an economic downturn in the United
States could result in lower sales volumes, lower prices for
railcars and a loss of profits for us.
A substantial number of the end users of our railcars acquire
railcars through leasing arrangements with our leasing company
customers. Economic conditions that result in higher interest
rates would increase the cost of new leasing arrangements, which
could cause our leasing company customers to purchase fewer
railcars. A reduction in the number of railcars purchased by our
leasing company customers could have a material adverse effect
on our business, financial condition and results of operations.
The cost of the raw materials that we use to manufacture
railcars, particularly steel, are high and these costs are
expected to increase. Any increase in these costs or delivery
delays of these raw materials may materially adversely affect
our business, financial condition and results of operations.
The production of railcars requires substantial amounts of
steel. The cost of steel and all other materials, including
scrap metal, used in the production of our railcars represents
approximately 80% to 85% of our manufacturing costs. Although we
have negotiated variable pricing provisions in most of our
railcar manufacturing contracts that pass certain increases or
decreases in our steel costs on to
14
Risk factors
our customers, our business remains subject to risks related to
price increases and periodic delays in the delivery of steel and
other raw materials, all of which are beyond our control. The
price for steel, the primary raw material component of our
railcars, increased sharply in 2004 as a result of strong
worldwide demand and supply limitations caused, in part, by
steel industry consolidation and import trade barriers. Price
levels for steel have increased again in 2005 and we expect
worldwide demand for steel to increase, supplies to be more
limited and prices to continue to increase in 2006. In addition,
the price and availability of other railcar components that are
made of steel have been adversely affected by the increased cost
and limited availability of steel. Any fluctuations in the price
or availability of steel, or any other material used in the
production of our railcars, may have a material adverse effect
on our business, financial condition and results of operations.
In addition, if any of our raw material suppliers were unable to
continue its business or were to seek bankruptcy relief, the
availability or price of the materials we use could be adversely
affected. Deliveries of our raw materials, and the components
made from those raw materials, may also fluctuate depending on
supply and demand for the raw material or governmental
regulation relating to the raw material, including regulation
relating to the importation of the raw material.
We have entered into contracts with most of our railcar
customers that allow for variable pricing to protect us against
future increases in the cost of certain raw materials and
components, including steel. However, in 2004 and in the nine
months ended September 30, 2005, we were unable to pass on
an estimated $7.9 million and $1.5 million,
respectively, in increases in raw material and components costs.
As prices for steel, other raw materials and components
increase, we may not be able to pass on such price increases to
our customers in the future, which could adversely affect our
operating margins and cash flows. Even if we are able to
increase prices, any such price increases may reduce demand for
our railcars. In addition, our customers may not be willing to
accept contractual terms that provide for variable pricing and
our competitors, in an effort to gain market share or otherwise,
have agreed in the past, and may in the future agree, to railcar
supply arrangements that provide for fixed pricing. As a result,
we may lose railcar orders or we may be required to agree to
supply railcars with fixed pricing provisions or be subject to
less favorable contract terms, any of which could have a
material adverse effect on our business, financial condition and
results of operations.
Fluctuations in the supply of components and raw materials we
use in manufacturing railcars could cause production delays or
reductions in the number of railcars we manufacture, which could
materially adversely affect our business, financial condition
and results of operations.
Our railcar manufacturing business depends on the adequate
supply of numerous components, such as railcar wheels, brakes,
tank railcar heads, sideframes, axles, bearings, yokes, bolsters
and other heavy castings, and raw materials, such as normalized
steel plate. Over the last few years many suppliers have been
acquired or ceased operations, which has caused the number of
alternative suppliers of components and raw materials to
decline. The combination of industry consolidation and high
demand has caused recent industry-wide shortages of many
critical components as reliable suppliers are frequently at or
near production capacity. For example, with respect to railcar
wheels, there are only two significant suppliers that continue
to produce the type of component we use in our products. We rely
on one of these suppliers for most of our railcar wheels. Also,
a small percentage of the railcar wheels we use are refurbished
and are obtained from scrapped railcars. Supply of these
refurbished railcar wheels is available in limited quantities
and is unpredictable because the supply of refurbished railcar
wheels depends on the level and type of railcars being scrapped
in any given period. The supply of steel is similarly limited.
While we receive regular steel from three suppliers, we have
entered into agreements this year requiring us to buy the lesser
of a fixed volume or 75% of our steel requirements from one
supplier. In addition, there is currently only one North
American supplier of the types and sizes of normalized steel
plate we use in the production of many of our tank railcars.
15
Risk factors
Supply constraints are exacerbated in our industry because,
although multiple suppliers may produce certain components,
railcar manufacturing regulations and the physical capabilities
of manufacturing facilities restrict the types and sizes of
components and raw materials that manufacturers may use. In
addition, we do not carry significant inventories of components
and procure many of our components on a just-in-time basis. With
the recent increased demand for railcars, our remaining
suppliers are facing significant challenges in providing
components and materials on a timely basis to all railcar
manufacturers, including to us. In the event that our suppliers
of railcar components and raw materials were to stop or reduce
the production of railcar components and raw materials that we
use, go out of business, refuse to continue their business
relationships with us or become subject to work stoppages, our
business would be disrupted. Our inability to obtain components
and raw materials in required quantities or of acceptable
quality could result in significant delays or reductions in
railcar shipments. Any of these events would materially and
adversely affect our operating results. Furthermore, our ability
to increase our railcar production to expand our business
depends on our ability to obtain an increased supply of these
railcar components and raw materials.
While we believe that we may, in certain circumstances, secure
alternative sources of these components and materials, we may
incur substantial delays and significant expense in doing so,
the quality and reliability of alternative sources may not be
the same and our operating results may be materially adversely
affected. Alternative suppliers might charge significantly
higher prices for railcar components and materials than we
currently pay. Even if alternative suppliers are available to
us, these suppliers may be unacceptable to our customers because
our customers often specify the components we may use in
railcars manufactured for them. Under such circumstances, the
disruption to our business could have a material adverse impact
on our customer relationships, business, financial condition and
results of operations.
We operate in a highly competitive industry and we may be
unable to compete successfully, which would materially adversely
affect our results of operations.
We face intense competition in all of our markets. In each of
our covered hopper and tank railcar manufacturing businesses, we
have two principal competitors. Both of our principal
competitors in the tank railcar market, Trinity Industries, Inc.
and the Union Tank Car Company, and one of our principal
competitors in the covered hopper railcar market, Trinity
Industries, Inc., have substantially greater resources and
produce substantially more railcars than we do. For example,
according to Trinity Industries, Inc.s annual report for
the year ended December 31, 2004 and its quarterly report
for the nine months ended September 30, 2005, Trinity
delivered a total of approximately 15,100 and 17,016 railcars,
respectively, during those periods in North America. By
comparison, for the year ended December 31, 2004 and for
the nine months ended September 30, 2005, we delivered a
total of approximately 4,384 and 4,980 railcars, respectively,
during those periods in North America. In addition, some of
these and other railcar manufacturers produce railcars primarily
for use in their own railcar leasing operations, competing
directly with leasing companies, some of which are our largest
customers. Some of our competitors have greater financial and
technological resources than we have. Our competitors may
increase their participation in the railcar markets in which we
compete and other railcar manufacturers that currently do not
manufacture covered hopper or tank railcars may choose to
compete directly with us. Railcar purchasers sensitivity
to price and strong price competition within the industry have
historically limited our ability to increase prices to obtain
better margins on our railcars. Additionally, as we selectively
seek to manufacture different types of railcars we will be
competing against railcar manufacturers with significantly more
experience than we have with regard to such railcar types. Our
competition for the sale of railcar components includes our
competitors in the railcar manufacturing market as well as a
concentrated group of companies whose primary business focus is
the production of one or more specialty components. We compete
with numerous
16
Risk factors
companies in our railcar fleet management and railcar repair
services business, ranging from companies with greater resources
than we have to small, local companies.
In all our markets, in addition to price, competition is based
on quality, reputation, reliability of delivery, product
performance, customer service and other factors. In particular,
technological innovation by any of our existing competitors, or
new competitors entering any of the markets in which we do
business, could put us at a competitive disadvantage. We may be
unable to compete successfully or retain our market share in our
established markets. Increased competition for the sales of our
railcars, our fleet management and repair services and our
railcar components could result in price reductions, reduced
margins and loss of market share, which could materially
adversely affect our prospects, business, financial condition
and results of operations.
Equipment failures, delays in deliveries or extensive damage
to our facilities, particularly our railcar manufacturing
facilities in Paragould or Marmaduke, Arkansas, could lead to
production or service curtailments or shutdowns.
We manufacture our railcars at manufacturing facilities in
Paragould and Marmaduke, Arkansas. An interruption in
manufacturing capabilities at either of these facilities, as a
result of equipment failure or other reasons, could reduce or
prevent the production of our railcars. A halt of production at
either facility could severely delay scheduled railcar delivery
dates to our customers and affect our production schedule, which
would delay future production. Any significant delay in
deliveries to our customers could result in the termination of
orders, cause us to lose future sales and negatively affect our
reputation among our customers and in the railcar industry, all
of which would materially adversely affect our business and
results of operations. Additionally, production delays or
interruptions at our Jackson, St. Charles or Kennett,
Missouri components manufacturing facilities or at our Ohio
Castings joint venture, all of which provide key components to
our Paragould and Marmaduke railcar manufacturing facilities,
could contribute to delays of railcar deliveries and order
cancellations. Interruptions at our repair, cleaning and
maintenance facilities, including our mobile repair units, may
also have a material adverse effect on our business. All of our
manufacturing and service facilities are also subject to the
risk of catastrophic loss due to unanticipated events, such as
fires, earthquakes, explosions, floods or weather conditions. We
may experience plant shutdowns or periods of reduced production
as a result of equipment failures, loss of power, gray outs,
delays in deliveries or extensive damage to any of our
facilities, which could have a material adverse effect on our
business, results of operations or financial condition.
We depend upon a small number of customers that represent a
large percentage of our revenues. The loss of any single
customer, or a reduction in sales to any such customer, could
have a material adverse effect on our business, financial
condition and results of operations.
Railcars are typically sold pursuant to large, periodic orders
and, therefore, a limited number of customers typically
represents a significant percentage of our railcar sales in any
given year. Our top ten customers based on revenues represented,
in the aggregate, approximately 77%, 79% and 79% in 2002, 2003
and 2004, respectively, of our total revenues. Moreover, our top
three customers based on revenues represented, in the aggregate,
approximately 65%, 70% and 59% in 2002, 2003 and 2004,
respectively, of our total revenues. In 2004, sales to our top
three customers accounted for approximately 23%, 20% and 16%,
respectively, of our total revenues. In the nine months ended
September 30, 2005, sales to our top three customers
accounted for approximately 17%, 16% and 15%, respectively, of
our total revenues. The loss of any significant portion of our
sales to any major customer, the loss of a single major customer
or a material adverse change in the financial condition of any
one of our major customers could have a material adverse effect
on our business, financial condition and financial results.
17
Risk factors
If we lose any of our executive officers or key employees, or
Carl C. Icahn, the chairman of our board of directors, our
operations and ability to manage the day-to-day aspects of our
business may be materially adversely affected.
We believe our success depends to a significant degree upon the
continued contributions of our executive officers and key
employees, both individually and as a group. Our future
performance will substantially depend on our ability to retain
and motivate them. If we lose any of our executive officers or
key employees or are unable to recruit qualified personnel, our
ability to manage the day-to-day aspects of our business may be
materially adversely affected. It would be difficult to replace
any of our executive officers or key employees without
materially adversely affecting our business operations because
our executive officers and key employees have many years of
experience with our company and within the railcar industry and
other manufacturing industries and strong personal ties with
many of our important customers and suppliers. Additionally,
Mr. Icahn and his affiliated entities have been key
resources for strategic and management advice, which we have
obtained at no cost. We believe the availability and access to
these resources has provided us with a competitive advantage. If
Mr. Icahn were no longer the chairman of our board of
directors we could lose access to these resources. Furthermore,
if Mr. Icahn were no longer the chairman of our board of
directors, certain other risks we face relating to our customer,
supplier and service relationships with, and competition between
us and Mr. Icahn and affiliates of Mr. Icahn,
described below, may be exacerbated. The loss of the services of
one or more of our executive officers or key employees or the
chairman of our board of directors could have a material adverse
effect on our business, financial condition and results of
operations. We do not currently maintain key person
life insurance.
If we face labor shortages or increased labor costs our
growth and results of operations could be materially adversely
affected.
Due to the cyclical nature of the demand for our products, we
have had to reduce and then rebuild our workforce as our
business has gone through downturns followed by upturns in
business activity. Due to the competitive and rural nature of
the labor markets in which we operate, this type of employment
cycle increases our risk of not being able to retain and recruit
the personnel we require in our railcar manufacturing and other
businesses, particularly in periods of economic expansion. Our
Paragould and Marmaduke facilities are located in sparsely
populated communities and we have experienced a high turnover
rate at these locations among newly-hired employees. The
additional painting and lining capabilities that we are adding
to our Paragould facility, which we expect will be completed by
the end of 2005, will require additional employees to operate.
Our inability to recruit, retain and train adequate numbers of
qualified personnel on a timely basis could materially adversely
affect our ability to operate our businesses, our financial
condition and our results of operations.
The variable purchase patterns of our railcar customers and
the timing of completion, delivery and acceptance of customer
orders may cause our revenues and income from operations to vary
substantially each quarter, which could result in significant
fluctuations in our quarterly results.
Most of our individual railcar customers do not make railcar
purchases every year because they do not need to replace or
replenish their railcar fleets on a yearly basis. Many of our
customers place orders for railcars on an as-needed basis,
sometimes only once every few years. As a result, the order
levels for railcars, the mix of railcar types ordered and the
railcars ordered by any particular customer have varied
significantly from quarterly period to quarterly period in the
past and may continue to vary significantly in the future.
Railcar sales comprised approximately 75% of our total revenue
in 2004 and 81% of our total revenue in the nine months ended
September 30, 2005, and our results of
18
Risk factors
operations in any particular quarterly period may be
significantly affected by the number and type of railcars
manufactured and delivered in any given quarterly period. For
example, our net income increased 156% from the first quarter to
the second quarter of this year while it decreased 207% from the
third quarter to the fourth quarter of fiscal 2004. We record
the sale of a railcar after completion of production of the
railcar, the railcar is accepted by the customer following
inspection, the risk for any damage or loss with respect to the
railcar passes to the customer and title to the railcar
transfers to the customer. This revenue recognition policy
determines when we record the revenues associated with our
railcar sales and, as a result, will cause fluctuations in our
quarterly results. As a result of these fluctuations, we believe
that comparisons of our sales and operating results between
quarterly periods within the same fiscal year and between
quarterly periods within different fiscal years may not be
meaningful and, as such, these comparisons should not be relied
upon as indicators of our future performance.
Our relationships with our partners in our Ohio Castings
joint venture may not be successful, which could materially
adversely affect our business.
Effective on January 1, 2005, we acquired from ACF
Industries Holding Corp., an affiliate of Carl C. Icahn, our
principal beneficial stockholder and the chairman of our board
of directors, its one-third ownership interest in Ohio Castings,
our joint venture with affiliates of Amsted Industries Inc., a
railcar components manufacturing company, and The Greenbrier
Companies, a railcar manufacturer and leasing company. We
acquired this joint venture interest in order to increase our
supply alternatives for heavy castings, which are critical
components for the manufacture of railcars and the supply of
which is constrained. The companies that supply the railcar
industry with heavy castings have been unable to meet the
short-term or long-term demand of railcar manufacturers and, as
such, the production capacity of many railcar manufacturers,
including ours, is restricted by the limited availability of
these components. Although the allocation of castings that we
receive from Ohio Castings does not provide us with all of our
castings requirements, the joint venture does provide us with a
committed source for a critical portion of the castings that we
require for the successful operation of our business. If Ohio
Castings is unable to provide us with our allocation of castings
on a timely basis or at all, our manufacturing costs could
increase and we may have to delay or cancel the production of
ordered railcars, all of which could materially adversely affect
our business, financial condition and results of operations.
The level of our reported railcar backlog may not necessarily
indicate what our future revenues will be and our actual
revenues may fall short of the estimated revenue value
attributed to our railcar backlog.
We define backlog as the number of railcars, and the revenue
value in dollars attributed to these railcars, to which our
customers have committed in writing to purchase from us that
have not yet been recognized as revenues. Our competitors may
not define railcar backlog in the same manner as we do, which
could make comparisons of our railcar backlog with theirs
misleading. In this prospectus, we have disclosed our railcar
backlog for various periods and the estimated revenue value in
dollars that would be attributed to this railcar backlog once
the railcar backlog is converted to actual sales. We consider
railcar backlog to be an indicator of future revenues. However,
our reported railcar backlog may not be converted into revenues
in any particular period, if at all, and the actual revenues
from such sales may not equal our reported estimates of railcar
backlog value. For example, if the price for raw materials, such
as steel, and other components used in the production of our
railcars decreases or increases and we have entered into
applicable variable pricing contracts with a customer or we are
otherwise able to pass on these price changes to a customer, our
actual revenues will differ from the estimated revenue value
attributed to our railcar backlog. In addition, our railcar
manufacturing business relies on third-party suppliers for heavy
castings, wheels and other components and raw
19
Risk factors
materials and if these third parties were to stop or reduce
their supply of components or raw materials, our production
would decline and our actual revenues would fall short of the
estimated revenue value attributed to our railcar backlog.
Customer orders may be subject to cancellation, inspection
rights and other customary industry terms, all of which could
affect our recognition of revenue currently reflected in our
September 30, 2005 backlog. If industry backlog for
railcars declines below certain levels, CIT, one of our
customers which accounts for 71% of our September 30, 2005
backlog, will be permitted to cancel some or, in certain
circumstances, all its orders after at least 180 days written
notice, which could have a material adverse effect on our
business, financial condition and results of operations.
Furthermore, delivery dates may be subject to deferral, thereby
delaying the date on which we will deliver the associated
railcars and realize revenues attributable to such railcar
backlog. Therefore, our current level of reported railcar
backlog may not necessarily represent the level of revenues that
we may generate in any future period. Furthermore, any contract
included in our reported railcar backlog that actually generates
revenues may not be profitable.
Our management and auditors have identified three significant
deficiencies in our internal controls as of December 31,
2004, which, if not properly remediated could result in
misstatements in our financial statements in future periods.
Our independent auditors, Grant Thornton LLP, issued a letter to
our board of directors in which they identified three
significant deficiencies in the design and operation of our
internal controls as of December 31, 2004. A significant
deficiency is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that
a misstatement of the financial statements that is more than
inconsequential will not be prevented or detected. A control
deficiency exists when the design or operation of a control does
not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect
misstatements on a timely basis. The letter specifically noted
the following significant deficiencies:
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Inventory
cut-off.
Our
manufacturing facilities recorded inventory shipped by our
vendors to us on the date we received the inventory in our
facilities, rather than on the date of shipment.
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4
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Construction in
process.
We
transferred assets from construction in process to fixed assets
on a quarterly basis rather than at the time assets are actually
placed into service. There was insufficient documentation
authorizing the movement of assets from construction in process
to fixed assets. Certain assets were still being classified as
construction in process even though the asset was in service.
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Fixed asset recording and
reconciliation.
Our
fixed asset subsidiary ledgers were not updated in a timely
manner. Supporting ledgers for depreciation schedules were
tracked using Microsoft Excel. The schedules were not reconciled
on a timely basis. The procedures surrounding the compilation of
the data was manual and subject to error.
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In light of the noted significant deficiencies, we have
instituted control improvements that we believe will reduce the
likelihood of similar errors. If the remedial policies and
procedures we have implemented are insufficient to address the
three significant deficiencies or if additional significant
deficiencies or other conditions relating to our internal
controls are discovered in the future, we may fail to meet our
future reporting obligations, our financial statements may
contain misstatements and our operating results may be adversely
affected. Any such failure could also adversely affect the
results of the periodic management evaluations and annual
auditor attestation reports regarding the effectiveness of our
internal controls over financial reporting, which will be
required when the SECs rules under Section 404 of the
Sarbanes-Oxley Act of 2002 become applicable to us beginning
with the filing of our Annual Report on Form 10-K for the
year ended December 31, 2006. Although we believe we have
addressed our significant deficiencies in internal controls with
the remedial measures
20
Risk factors
we have implemented, we cannot guarantee that the measures we
have taken to date or any future measures will remediate the
significant deficiencies identified or that any additional
significant deficiencies will not arise in the future due to a
failure to implement and maintain adequate internal controls
over financial reporting. Internal control deficiencies could
cause investors to lose confidence in the reliability of our
financial statements and other reported financial information,
which in turn could harm our business and negatively impact the
trading price of our common stock.
Once we become a public company, we will need to comply with
the reporting obligations of the Exchange Act and
Section 404 of the Sarbanes-Oxley Act. If we fail to comply
with the reporting obligations of the Exchange Act and
Section 404 of the Sarbanes-Oxley Act, or if we fail to
achieve and maintain adequate internal controls over financial
reporting, our business, results of operations and financial
condition, and investors confidence in us, could be
materially adversely affected.
As a public company, we will be required to comply with the
periodic reporting obligations of the Exchange Act, including
preparing annual reports, quarterly reports and current reports.
Our failure to prepare and disclose this information in a timely
manner could subject us to penalties under federal securities
laws, expose us to lawsuits and restrict our ability to access
financing. In addition, we will be required under applicable law
and regulations to integrate our systems of internal controls
over financial reporting. We plan to evaluate our existing
internal controls with respect to the standards adopted by the
Public Company Accounting Oversight Board. During the course of
our evaluation, we may identify areas requiring improvement and
may be required to design enhanced processes and controls to
address issues identified through this review. This could result
in significant delays and cost to us and require us to divert
substantial resources, including management time, from other
activities. For example, during the audit of our 2004 fiscal
year, our independent registered public accounting firm issued a
letter to our board of directors noting certain significant
deficiencies, as described above.
We expect to dedicate significant management, financial and
other resources in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act in the second half of
2005. We expect these efforts to include a review of our
existing internal control structure. As a result of this review,
we may either hire or outsource additional personnel to expand
and strengthen our finance function. There have been no external
costs associated with this effort through September 30,
2005, and we cannot be certain at this time that we will be able
to comply with all of our reporting obligations and successfully
complete the procedures, certification and attestation
requirements of Section 404 of the Sarbanes-Oxley Act by
the time that we are required to file our Annual Report on
Form 10-K for the year ended December 31, 2006. If we
fail to achieve and maintain the adequacy of our internal
controls and do not address the deficiencies identified by our
auditors, we may not be able to ensure that we can conclude on
an ongoing basis that we have effective internal controls over
financial reporting in accordance with the Sarbanes-Oxley Act.
Moreover, effective internal controls are necessary for us to
produce reliable financial reports and are important to help
prevent fraud. As a result, our failure to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act on a
timely basis could result in the loss of investor confidence in
the reliability of our financial statements, which in turn could
harm our business and negatively impact the trading price of our
common stock.
Rapid growth is straining our operations and requiring us to
incur costs to upgrade our infrastructure.
During the last five quarters, we have experienced rapid growth
in our operations, number of our employees and our product
offerings. Our growth places a significant strain on our
management, operations and financial systems and also on our
ability to retain employees. Our future operating results will
depend in part on our ability to continue to implement and
improve our operating and
21
Risk factors
financial controls and management information systems. If we
fail to manage our growth effectively, our business, financial
condition and results of operations could be materially
adversely affected.
After this offering, companies affiliated with Carl C. Icahn
will continue to be important suppliers and customers.
We manufacture railcars and railcar components and provide
railcar services for companies affiliated with Carl C. Icahn,
our principal beneficial stockholder and the chairman of our
board of directors. To the extent our relationships with
affiliates of Mr. Icahn change due to the sale of his
interest in us or otherwise, our business, results of operations
and financial condition may be materially adversely affected.
Affiliates of Mr. Icahn have accounted for approximately
45%, 34%, 24% and 14% of our revenues in 2002, 2003, 2004 and
the nine months ended September 30, 2005, respectively.
This revenue is primarily attributable to our sale of railcars.
American Railcar Leasing LLC, or ARL, a railcar leasing company
owned by affiliates of Mr. Icahn, currently purchases all
of its railcars from us. However, we have no long-term
agreements with ARL or any other affiliates of Mr. Icahn to
purchase our railcars, and we cannot assure you that ARL or
other affiliates of Mr. Icahn will continue to do so. ARL
could, in the future, purchase railcars from one of our
competitors. In addition, we have a railcar servicing agreement
with ARL, under which we provide fleet management services for
the entire railcar fleet of ARL and its subsidiaries. These
railcars represented approximately 39% of the railcars for which
we provided fleet management services as of September 30,
2005. This agreement is terminable by either party at the end of
any contract year upon six months prior notice and ARL is not
restricted from using the services of our competitors for its
existing fleet of railcars or any other railcars it may
purchase. A significant change in the nature of the business
relationship with ARL and other affiliates of Mr. Icahn
could have a material adverse effect on our business, financial
condition and results of operations.
We also purchase railcar and industrial components from ACF,
another entity affiliated with Mr. Icahn. ACF has been the
supplier of approximately $19.0 million, $31.3 million
and $56.2 million of our inventory purchases in 2003, 2004
and the nine months ended September 30, 2005, respectively.
Currently, ACF is our sole supplier of tank railcar heads and
one of a limited number of suppliers for other important railcar
components that we use in our manufacturing operations. These
railcar components are manufactured and sold to us under a
supply agreement that is terminable by ACF at the end of any
contract year on six months prior notice. We cannot guarantee
that we would be able to obtain alternative supplies of these
railcar components on a timely basis and on comparable terms if
we were no longer able to purchase these railcar components from
ACF. A failure to obtain component supplies from ACF could
materially adversely affect our business, financial condition
and results of operations.
For more information on these arrangements, see Certain
relationships and related party transactions.
Services being provided to us by ARL, an entity controlled by
Carl C. Icahn, may not be sufficient to meet our needs, which
may require us to incur additional costs.
We use certain outsourced information technology and
administrative services from ARL, an entity controlled by
Mr. Icahn. We also sublease our headquarters office space
in St. Charles, Missouri from ARL. We cannot assure you that
these services will be provided at the same level as they are
currently being provided or that we will be able to maintain our
sublease on the same terms as currently in effect. These
arrangements may be terminated by ARL or by us upon six months
notice and, if they were terminated, we would be required to
find a third-party provider of these services or begin to
provide them for ourselves and relocate our office headquarters.
As these agreements were negotiated
22
Risk factors
with ARL, an entity affiliated with us, the prices and rates
charged to us under these agreements may be lower than the
prices and rates that may be charged by unaffiliated third
parties for similar services and an office sublease or for us to
provide these services on our own. We cannot assure you that, if
these agreements are terminated, we will be able to replace
these services and the sublease in a timely manner or on terms
and conditions, including cost, as favorable as those we are
currently receiving. Additional expenses incurred in replacing
these services and relocation of our office facilities or the
failure to replace these services could materially adversely
affect our business, financial condition and results of
operations.
After this offering, we may have reduced access to resources
of, and benefits provided by, entities affiliated with Carl C.
Icahn.
We have in the past obtained access to significant financial and
other resources from entities affiliated with Carl C. Icahn. For
example, until recently, most of our capital needs have been
satisfied by entities affiliated with Mr. Icahn. In
addition, we believe that our relationship with entities
affiliated with Mr. Icahn have, in many cases, provided us
with a competitive advantage in identifying opportunities for
sales of our products and identifying and attracting partners
for critical supply arrangements. For example, we participate in
product and service purchasing arrangements with entities
controlled by Mr. Icahn, which we believe may provide us
with favorable pricing as a result of larger aggregate purchases
by the Icahn-affiliated buying group. If we were unable to
participate in these buying group arrangements our manufacturing
costs would increase and our results of operations and financial
condition may be materially adversely affected. Also, lease
sales agents of ARL and ACF, in connection with their own
leasing sales activities have, from time to time, referred their
customers or contacts to us if the customer or contact prefers
to purchase rather than lease railcars, which has, in some
cases, led to us selling railcars to these customers or
contacts. ACF and ARL have in the past accepted orders to
purchase railcars for us on our behalf. ARL and ACF have
discontinued accepting orders to sell railcars on our behalf. At
this time there is no formal arrangement under which referral
services are provided and we do not compensate ARL, ACF or any
of their leasing sales agents for any railcar sales that we may
make as a result of these referrals. To the extent that ARL or
ACF discontinue referring potential customers to us, or require
us to compensate them for these referrals, our business, results
of operations and financial condition may be adversely affected.
Lack of acceptance of our new railcar offerings by our
customers could materially adversely affect our business.
Our strategy depends in part on our continued development and
sale of new railcar designs to expand or maintain our market
share in the railcar markets in which we currently compete. The
investment required by us in connection with the development of
new railcar designs is considerable and we usually make
decisions to develop and market new railcars and railcars with
modified designs without firm indications of customer
acceptance. New or modified railcar designs may require
customers to alter their existing business methods or displace
existing equipment in which these customers may have a
substantial capital investment. Additionally, many railcar
purchasers prefer to maintain a standardized fleet of railcars
and railcar purchasers with established railcar fleets are
generally resistant to railcar design changes. Therefore, any
new or modified railcar designs that we develop may not gain
widespread acceptance in the marketplace and any such products
may not be able to compete successfully with existing railcar
designs or new railcar designs that may be introduced by our
competitors.
23
Risk factors
Our production of new railcar product lines may not be
initially profitable and may result in financial losses.
Our strategy includes developing new railcars and selectively
expanding beyond the covered hopper and tank railcar markets.
When we begin production of a new railcar product line, we
usually experience higher initial costs of production due to
training and labor and operating inefficiencies associated with
new manufacturing processes. Due to pricing pressures in our
industry, the pricing for new railcars in customer contracts
usually does not reflect the initial additional costs, and our
costs of production may exceed the anticipated revenues until we
are able to gain labor efficiencies. For example, in 2004 and
2005, we used a portion of the railcar production capacity at
our Paragould facility, which we primarily use to manufacture
covered hopper railcars, to manufacture centerbeam platform
railcars. This was the first time we manufactured centerbeam
platform railcars and primarily as a result of initial training
and start-up costs, we incurred a loss on this product. To the
extent that the total costs of production significantly exceed
our anticipated costs of production, we may incur a loss on our
sale of new railcar product lines.
We may pursue acquisitions or joint ventures that involve
inherent risks, any of which may cause us not to realize
anticipated benefits.
Our business strategy includes the potential acquisition of
businesses and entering into joint ventures and other business
combinations that we expect will complement and expand our
business. We may not be able to successfully identify suitable
acquisition or joint venture opportunities or complete any
particular acquisition, combination, joint venture or other
transaction on acceptable terms. Our identification of suitable
acquisition candidates and joint venture opportunities involves
risks inherent in assessing the values, strengths, weaknesses,
risks and profitability of these opportunities including their
effects on our business, diversion of our managements
attention and risks associated with unanticipated problems or
unforeseen liabilities. If we are successful in pursuing future
acquisitions or joint ventures, we may be required to expend
significant funds, incur additional debt or issue additional
securities, which may materially adversely affect our results of
operations and be dilutive to our stockholders. If we spend
significant funds or incur additional debt, our ability to
obtain financing for working capital or other purposes could
decline and we may be more vulnerable to economic downturns and
competitive pressures. In addition, we cannot guarantee that we
will be able to finance additional acquisitions or that we will
realize any anticipated benefits from acquisitions or joint
ventures that we complete. Should we successfully acquire
another business, the process of integrating acquired operations
into our existing operations may result in unforeseen operating
difficulties and may require significant financial resources
that would otherwise be available for the ongoing development or
expansion of our existing business. Our failure to identify
suitable acquisition or joint venture opportunities may restrict
our ability to grow our business.
If we are unable to protect our intellectual property and
prevent its improper use by third parties, our ability to
compete in the market may be harmed.
We rely on patent protection and a combination of copyright,
trade secret and trademark laws to protect our proprietary
technology and prevent others from duplicating our products.
However, these means afford only limited protection and may not
prevent our competitors from duplicating our products or gaining
access to our proprietary information and technology. These
means also may not permit us to gain or maintain a competitive
advantage.
Any of our patents may be challenged, invalidated, circumvented
or rendered unenforceable. We cannot guarantee that we will be
successful should one or more of our patents be challenged for
any reason. If our patent claims are rendered invalid or
unenforceable, or narrowed in scope, the patent coverage
afforded our products could be impaired, which could
significantly impede our ability to
24
Risk factors
market our products, negatively affect our competitive position
and materially adversely affect our business and results of
operations.
We cannot assure you that any pending or future patent
applications held by us will result in an issued patent, or that
if patents are issued to us, that such patents will provide
meaningful protection against competitors or against competitive
technologies. The issuance of a patent is not conclusive as to
its validity or its enforceability. The United States federal
courts may invalidate our patents or find them unenforceable.
Competitors may also be able to design around our patents. Our
patents and patent applications cover particular aspects of our
products. Other parties may develop and obtain patent protection
for more effective technologies, designs or methods. If these
developments were to occur, it could have an adverse effect on
our sales. If our intellectual property rights are not
adequately protected, we may not be able to commercialize our
technologies, products or services and our competitors could
commercialize our technologies, which could result in a decrease
in our sales and market share and could materially adversely
affect our business, financial condition and results of
operations.
Our products could infringe the intellectual property rights
of others, which may lead to litigation that could itself be
costly, could result in the payment of substantial damages or
royalties, and could prevent us from using technology that is
essential to our products.
We cannot guarantee you that our products, manufacturing
processes or other methods do not infringe the patents or other
intellectual property rights of third parties. Infringement and
other intellectual property claims and proceedings brought
against us, whether successful or not, could result in
substantial costs and harm our reputation. Such claims and
proceedings can also distract and divert management and key
personnel from other tasks important to the success of our
business. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
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cease selling or using any of our
products that incorporate the asserted intellectual property,
which would adversely affect our revenue;
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pay substantial damages for past
use of the asserted intellectual property;
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4
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obtain a license from the holder
of the asserted intellectual property, which license may not be
available on reasonable terms, if at all; and
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4
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redesign or rename, in the case of
trademark claims, our products to avoid infringing the
intellectual property rights of third parties, which may not be
possible and could be costly and time-consuming if it is
possible to do.
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In the event of an adverse determination in an intellectual
property suit or proceeding, or our failure to license essential
technology, our sales could be harmed and our costs could
increase, which could materially adversely affect our business,
financial condition and results of operations.
We are subject to a variety of environmental laws and
regulations and the cost of complying, or our failure to comply,
with such requirements may have a material adverse effect on our
business, financial condition and results of operations.
We are subject to a variety of federal, state and local
environmental laws and regulations relating to the release or
discharge of materials into the environment, the management,
use, processing, handling, storage, transport or disposal of
hazardous materials, or otherwise relating to the protection of
human health and the environment. These laws and regulations
expose us to liability for the environmental condition of our
current or formerly owned or operated facilities, and also may
expose us to liability for the conduct of others or for our
actions that were in compliance with all applicable laws at the
time these actions were taken. Despite our intention to be in
compliance, we cannot guarantee that we
25
Risk factors
will at all times be in compliance with all such requirements.
The cost of complying with environmental requirements may also
increase substantially in future years. If we violate or fail to
comply with these regulations, we could be fined or otherwise
sanctioned by regulators. In addition, these requirements are
complex, change frequently and may become more stringent over
time, which could have a material adverse effect on our
business. We are also required to maintain a variety of
environmental permits. Our failure to maintain and comply with
these permits could result in fines or penalties or other
sanctions and have a material adverse effect on our operations
or results. Future events, such as new environmental regulations
or changes in or modified interpretations of existing laws and
regulations or enforcement policies, or further investigation or
evaluation of the potential health hazards of products or
business activities, may give rise to additional compliance and
other costs that could have a material adverse effect on our
business, financial conditions and operations.
We are involved in investigation and remediation activities at
properties that we now own or lease to address historic
contamination and potential contamination by third parties. We
are also involved with state agencies in the cleanup of two
sites under these laws. These investigations are at a
preliminary stage, and it is impossible to estimate, with any
certainty, the timing and extent of remedial actions that may be
required, and the costs that would be involved in such
remediation. Substantially all of the issues identified relate
to the use of the properties prior to their transfer to us in
1994 by ACF and for which ACF has retained liability and agreed
to indemnify us. However, if ACF fails to honor its obligations
to us, we would be responsible for the cost of such remediation.
We have been advised that ACF estimates that, for the remainder
of 2005, ACF will spend approximately $0.1 million on
environmental investigation and, in 2006 and 2007, respectively,
it will spend approximately $0.2 million on environmental
investigation, relating to contamination that existed at
properties prior to their transfer to us in 1994 and for which
ACF has retained liability and agreed to indemnify us. We
expense all costs associated with environmental investigation
and remediation relating to our properties even if we receive
indemnification from ACF. ACFs indemnification is not
treated as an offset to that expense, but rather as an
additional capital contribution. The discovery of historic
contamination or the release of substances into the environment
at our current or formerly owned or operated facilities could
require ACF or us in the future to incur investigative or
remedial costs or other liabilities that could be material or
that could interfere with the operation of our business. Any
environmental liabilities that we may incur that are not covered
by adequate insurance or indemnification from a party other than
ACF will also increase our costs and have a negative impact on
our profitability. See Business Environmental
matters for more information.
Failure of ACF to honor its indemnification obligations to us
may have a material adverse effect on our business and financial
condition.
In connection with our 1994 acquisition from ACF of assets and
certain properties relating to ACFs railcar components
manufacturing and railcar manufacturing and railcar maintenance
businesses, ACF agreed to retain and indemnify us for certain
liabilities relating to its ownership of those assets and
operation of its business prior to the transfer, including
liabilities relating to employee benefit plans, workers
compensation, environmental contamination and third-party
litigation. The total of such accrued liabilities was $11.1
million as of December 31, 2004. Additional such
liabilities may accrue in the future. If ACF fails to honor its
indemnification obligations, whether as a result of a dispute
related to the applicability of the indemnification, ACF having
insufficient assets to pay liabilities or otherwise, our
business and financial condition could be materially adversely
affected.
26
Risk factors
Changes in assumptions or investment performance of pension
and other postretirement benefit plans that we either sponsor or
participate in could materially adversely affect our financial
condition and results of operations.
We either sponsor or participate in several pension plans,
including two plans that were frozen effective April 1,
2004, and in which our employees are therefore no longer
accruing additional benefits. To the extent we continue to
sponsor or participate in these plans, we will be responsible
for making funding contributions to the plans, including the
frozen pension plans, and may be liable for a share of any
unfunded liabilities that may exist at the time we cease to
participate in the plans or the plans are terminated. Our
liability and resulting costs for these plans may increase or
decrease based upon a number of factors, including actuarial
assumptions used, the discount rate used in calculating the
present value of future liabilities, and investment performance.
An adverse change or result in one or more of these factors
could have a material adverse effect on our financial condition
and results of operations.
We also provide other postretirement benefits to certain of our
employees. Our postretirement benefit obligations and related
expense with respect to these postretirement benefits also
increase or decrease based on several factors, including changes
in health care cost trend rates, and could similarly be
materially adversely affected by adverse changes in these
factors.
We could be liable for liabilities associated with pension
plans sponsored by companies controlled by Carl C. Icahn.
Mr. Icahn, our principal beneficial stockholder and the
chairman of our board of directors, and his affiliates currently
hold over 80% of our outstanding voting securities. Applicable
pension and tax laws make each member of a plan sponsors
controlled group, generally defined as entities in which there
is at least an 80% common ownership interest, jointly and
severally liable for pension plan obligations sponsored by other
members of the controlled group. These pension obligations
include liability for any unfunded liabilities that may exist at
the time the plans are terminated. We and our subsidiaries are
currently members of a controlled group that includes ACF, an
entity in which Mr. Icahn has an indirect ownership
interest of at least 80%. ACF is the sponsor of several pension
plans that are underfunded, as of December 31, 2004, by a
total of approximately $24.1 million on an ongoing
actuarial basis and $172.4 million if those plans were
terminated, as most recently reported by the plans
actuaries. These liabilities could increase or decrease,
depending on a number of factors, including future changes in
promised benefits, investment returns and the assumptions used
to calculate the liability. As members of the controlled group,
we would be jointly and severally liable for any failure of ACF
to pay the unfunded liabilities upon a termination of the ACF
pension plans.
Upon completion of this offering, we believe that we should no
longer be a member of the ACF controlled group. As a result, we
should no longer be subject to ACFs pension liabilities,
unless it were determined that we were otherwise a member of the
ACF controlled group or that a principal purpose of the offering
or other transactions that resulted in our ceasing to be a
member of the ACF controlled group was to evade pension
liabilities and the termination date of the underfunded plan was
within five years after the offering or other transactions. If
such a determination were made and upheld by a court, we could
remain jointly and severally liable for pension plan obligations
of ACF, which could have a material adverse effect on our
financial condition and results of operations.
In connection with Trans World Airlines, Inc.s (or TWA)
1992 bankruptcy proceedings under Chapter 11 of the Bankruptcy
Code, the Pension Benefit Guarantee Corporation (or the PBGC)
asserted that ACF as well as the other entities in which Mr.
Icahn had a controlling interest were obligated along with TWA
to satisfy any underfunding of obligations under TWAs
defined benefit plan. Subsequently, and in response to a
petition of another member of the Icahn control group, the PBGC
terminated the TWA pension plan and obligated an affiliate of
ours, Highcrest Investors Corp (or Highcrest), to make
27
Risk factors
eight annual termination payments of $30 million, totaling $240
million. We have been advised that as of December 31, 2004,
Highcrest had made termination payments totaling $130 million
and still owed $110 million of this obligation. The obligation
to make termination payments is non-recourse except to the
common stock of ACF Industries Holding Corp., which is also a
member of the Icahn control group. The authority of the PBGC to
enter into the settlement agreement is currently being
contested. If such a contest were to succeed, we could be
jointly and severally liable with the other members of the Icahn
control group for the termination liability associated with the
TWA pension plan, which may be in excess of the remaining
termination payments.
Our manufacturers warranties expose us to potentially
significant claims.
We warrant the workmanship and materials of many of our products
under express limited warranties. Accordingly, we may be subject
to significant warranty claims in the future such as multiple
claims based on one defect repeated throughout our mass
production process or claims for which the cost of repairing the
defective component is highly disproportionate to the original
cost of the part. These types of warranty claims could result in
costly product recalls, significant repair costs and damage to
our reputation, which could materially adversely affect our
business, financial condition and results of operations.
Unresolved warranty claims could result in users of our products
bringing legal actions against us. For example, we have been
named as the defendant in a lawsuit in which the plaintiff, OCI
Chemical Company, claims we were responsible for the damage
caused by allegedly defective railcars that were manufactured by
us. OCI Chemical Company alleges that failures in certain
components caused the contents transported by these railcars to
spill out of the railcars causing property damage, clean-up
costs, monitoring costs, testing costs and other costs and
damages.
Increasing insurance claims and expenses could lower
profitability and increase business risk.
The nature of our business subjects us to product liability,
property damage and personal injury claims, especially in
connection with our manufacture and repair of products that
transport hazardous or volatile materials, such as pressure tank
railcars. We maintain reserves and liability insurance coverage
at levels based upon commercial norms in the industries in which
we operate and our historical claims experience. Over the last
several years, insurance carriers have raised premiums for many
companies operating in our industry. Increased premiums may
further increase our insurance expense as coverages expire or
cause us to raise our self-insured retention. If the number or
severity of claims within our self-insured retention increases,
we could suffer costs in excess of our reserves. An unusually
large liability claim or a series of claims based on a failure
repeated throughout our mass production process may exceed our
insurance coverage or result in direct damages if we were unable
or elected not to insure against certain hazards because of high
premiums or other reasons. In addition, the availability of, and
our ability to collect on, insurance coverage is often subject
to factors beyond our control. Moreover, any accident or
incident involving us, even if we are fully insured or not held
to be liable, could negatively affect our reputation among
customers and the public, thereby making it more difficult for
us to compete effectively, and could materially adversely affect
the cost and availability of insurance in the future.
Covenants in our revolving credit facility currently restrict
and, following amendments to our revolving credit facility that
we expect to enter into concurrently with this offering,
covenants in our revolving credit facility will continue to
restrict our discretion in operating our business and provide
for certain minimum financial requirements.
We expect to amend and restate our revolving credit facility
concurrently with this offering. Our amended and restated
revolving credit facility will contain various covenants,
similar to those in our
28
Risk factors
existing revolving credit facility, that, among other things,
will require us to satisfy certain financial covenants and will
limit our managements discretion by restricting our
ability to:
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incur additional debt;
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redeem our capital stock;
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enter into certain transactions
with affiliates;
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pay dividends and make other
distributions;
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make investments and other
restricted payments; and
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create liens.
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Our failure to comply with any covenants under the amended and
restated revolving credit facility could lead to an event of
default under the agreements governing our indebtedness that we
may have outstanding at the time, permitting our lenders to
accelerate our borrowings and to foreclose on any collateral.
Some of our railcar services and component manufacturing
employees belong to labor unions and strikes or work stoppages
by them or unions formed by some or all of our other employees
in the future could adversely affect our operations.
We are a party to collective bargaining agreements with labor
unions at our Longview, Texas, North Kansas City, Missouri and
our Milton, Pennsylvania repair facilities and at our Longview,
Texas steel foundry and components manufacturing facility. As of
September 30, 2005, the covered employees at these sites
collectively represent approximately 16% of our total workforce.
Disputes with regard to the terms of these agreements or our
potential inability to negotiate acceptable contracts with these
unions in the future could result in, among other things,
strikes, work stoppages or other slowdowns by the affected
workers. We cannot guarantee that our relations with our railcar
services workforce will remain positive. We cannot guarantee
that union organizers will not be successful in future attempts
to organize our railcar manufacturing employees or our other
employees at some of our other facilities. If our workers were
to engage in a strike, work stoppage or other slowdown, or other
employees were to become unionized or the terms and conditions
in future labor agreements were renegotiated, we could
experience a significant disruption of our operations and higher
ongoing labor costs. In addition, we could face higher labor
costs in the future as a result of severance or other charges
associated with layoffs, shutdowns or reductions in the size and
scope of our operations.
The market and industry data contained in this prospectus,
including estimates and forecasts relating to the growth of the
railcar market, cannot be verified with certainty and may prove
to be inaccurate.
This prospectus contains market and industry data obtained
primarily from industry publications of the Association of
American Railroads, the Railway Supply Institute, Global Insight
and information from the U.S. Department of Agriculture.
Industry publications typically indicate that they have derived
the published data from sources believed to be reasonable,
including other railcar manufacturers, but do not guarantee the
accuracy or completeness of the data. While we believe these
publications to be reliable, we have not independently verified
the data or any of the assumptions on which the estimates and
forecasts are based, and the data may prove to be inaccurate.
This data includes estimates and forecasts regarding future
growth in these industries, specifically data related to railcar
production, railcar growth and the historical average age of
active railcars in North America. Forecasts and estimates
regarding future growth of the railcar industry included in
these reports are based on assumptions of the growth and
improvement of certain sectors of the U.S. economy. The
29
Risk factors
growth and improvement of these sectors of the U.S. economy
during the period of these forecasts and estimates are not
assured. The failure of these sectors of the U.S. economy
to perform as assumed in these forecasts and estimates would
cause the forecasted expansion of the railcar industry not to
occur or to occur to a lesser extent than predicted. The failure
of the rail industry or the railcar supply industry to continue
to grow as forecasted by the market and industry data included
in this prospectus may have a material adverse effect on our
business and the market price of our common stock. See
additional information on industry data on page (i).
Our failure to comply with regulations imposed by federal and
foreign agencies could negatively affect our financial
results.
Our railcar operations are subject to extensive regulation by
governmental regulatory and industry authorities and by federal
and foreign agencies. These organizations establish rules and
regulations for the railcar industry, including construction
specifications and standards for the design and manufacture of
railcars; mechanical, maintenance and related standards; and
railroad safety. New regulatory rulings and regulations from
these federal or foreign agencies may impact our financial
condition and results of operations. If we fail to comply with
the requirements and regulations of these agencies, we may face
sanctions and penalties that could materially adversely affect
our results of operations.
Further consolidation of the railroad industry may materially
adversely affect our business.
Over the past ten years, there has been a consolidation of
railroad carriers operating in North America. Railroad carriers
are large purchasers of railcars and represent a significant
portion of our historical customer base. With fewer railroad
carriers, each railroad carrier will have proportionately
greater buying power and operating efficiency. This may
intensify competition among railcar manufacturers to retain
customer relationships with the consolidated railroad carriers
and cause our prices to decline. Future consolidation of
railroad carriers may materially adversely affect our sales and
reduce our income from operations.
Reductions in the availability of energy supplies or an
increase in energy costs may increase our operating costs.
We use electricity and natural gas at our manufacturing
facilities and to operate our equipment. Over the past three
years, prices for electricity and natural gas have fluctuated
significantly. An outbreak or escalation of hostilities between
the United States and any foreign power and, in particular, a
prolonged armed conflict in the Middle East, or a natural
disaster such as the recent hurricane and related flooding in
the oil producing region of the Gulf Coast of the United States,
could result in a real or perceived shortage of petroleum and/or
natural gas, which could result in an increase in the cost of
electricity or energy generally. Future limitations on the
availability or consumption of petroleum products and/or an
increase in energy costs, particularly electricity for plant
operations, could have a materially adverse effect upon our
business and results of operations.
We may be required to reduce our inventory carrying values,
which could materially adversely affect our financial condition
and results of operations.
We are required to record our inventories at the lower of cost
or market. In assessing the ultimate realization of inventories,
we are required to make judgments as to future demand
requirements and compare them with the current or committed
inventory levels. We have recorded reductions in inventory
carrying values in recent periods due to the discontinuance of
product lines and changes in market conditions due to changes in
demand requirements. We may be required to reduce inventory
carrying values in the future due to a decline in market
conditions in the railcar business, which could have a material
adverse effect on our financial condition and results of
operations.
30
Risk factors
We may be required to reduce the value of our long-lived
assets, which could materially adversely affect our financial
condition and results of operations.
We periodically evaluate the carrying values of our long-lived
assets for potential impairment. The carrying value of a
long-lived asset is considered impaired when the carrying value
is not recoverable through undiscounted future cash flows and
the fair value of the asset is less than the carrying value
reduced by the estimated cost to dispose of the asset. Any
resulting impairment loss related to reductions in the value of
our long-lived assets could materially adversely affect our
financial condition and results of operations.
RISKS RELATED TO THE PURCHASE OF OUR COMMON STOCK IN THIS
OFFERING
As a new investor, you will experience immediate and
substantial dilution.
You will pay a price for each share of our common stock that
exceeds the per share value attributed from our tangible assets
less our total liabilities. Therefore, if we distributed our
consolidated tangible assets after deducting our consolidated
liabilities to our stockholders following this offering, our
stockholders would receive less per share of common stock than
you paid in this offering. After giving effect to the sale of
our shares of common stock in this offering at the assumed
initial public offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus, after deducting the underwriting discount
and estimated offering expenses payable by us and after giving
effect to the Transactions, our net tangible book value would
have been approximately
$ million,
or
$ per
share. Accordingly, if you purchase shares of our common stock
in this offering you will suffer immediate dilution of
$ per
share in net tangible book value. Net tangible book value per
share represents the amount of our total consolidated tangible
assets less our total consolidated liabilities, divided by the
total number of shares of common stock outstanding adjusted for
this offering and the expected use of the proceeds of this
offering, based on an assumed initial offering price of
$ per
share of common stock, which represents the midpoint of the
range on the cover of this prospectus. This dilution is due in
large part to the fact that our earlier investors paid
substantially less than the initial public offering price when
they purchased their shares of our capital stock. You may suffer
additional dilution to the extent outstanding options to
purchase shares of our common stock are exercised. For more
information, see Dilution.
Our common stock may trade at prices below the initial public
offering price and may be susceptible to declines based on
securities analysts or industry research and reports.
Prior to this offering, you could not buy or sell our common
stock publicly. We cannot predict the extent to which an active
trading market for our common stock will develop or be sustained
after this offering. The initial public offering price will be
determined by negotiations between us and representatives of the
underwriters based on factors that may not be indicative of
future performance and may not bear any relationship to the
price at which our common stock will trade upon completion of
this offering. You may not be able to resell our common stock at
or above the initial public offering price.
In addition, the trading market for our common stock will be
influenced by the research and reports that industry or
securities analysts publish about us or our business. If one or
more of the analysts who cover us or our industry downgrade our
stock or project a downturn in our industry, our stock price
would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on
us, we could lose visibility in the financial markets, which in
turn could cause our stock price or trading volume to decline.
31
Risk factors
The price of our common stock is subject to volatility and
you could lose all or part of your investment.
Various factors, such as general economic changes in the
financial markets, announcements or significant developments
with respect to the railcar industry, actual or anticipated
variations in our or our competitors quarterly or annual
financial results, the introduction of new products or
technologies by us or our competitors, changes in other
conditions or trends in our industry or in the markets of any of
our significant customers, changes in governmental regulation,
our financial results failing to meet expectations of analysts
or investors, or changes in securities analysts estimates
of our future performance or of that of our competitors or our
industry, could cause the market price of our common stock to
fluctuate substantially. In addition, our customers
practice of placing large, periodic orders for products on an as
needed basis makes our quarterly sales and operating results
difficult to predict and could cause our operating results in
some quarters to vary from market expectations and also lead to
volatility in our stock price.
Our stock price may decline due to sales of shares by Carl C.
Icahn and other stockholders.
Sales of substantial amounts of our common stock, or the
perception that these sales may occur, may adversely affect the
price of our common stock and impede our ability to raise
capital through the issuance of equity securities in the future.
There will
be shares
of our common stock outstanding immediately after this offering.
Of these
shares, %
will be beneficially owned by our principal beneficial
stockholder and the chairman of our board of directors, Carl C.
Icahn. These include shares of our common stock,
representing %
of our shares of common stock outstanding immediately after this
offering, held by the Foundation for Greater Opportunity, which
an affiliate of Mr. Icahn has agreed to purchase pursuant
to a stock purchase agreement entered into in December 2005. The
consummation of this acquisition requires the completion of this
offering and the approval of applicable authorities of the State
of New York. If the parties obtain this approval, we have been
advised that the parties expect that the acquisition would be
completed in the first three months of 2006. Pending the closing
of this acquisition, and for so long as the stock purchase
agreement has not been terminated, the Foundation has granted
the affiliate of Mr. Icahn purchasing the shares owned by
the Foundation an irrevocable proxy to vote all of the shares of
our common stock held by the Foundation. All shares sold in this
offering will be freely transferable without restriction or
further registration under the Securities Act of 1933. All of
our other outstanding shares of common stock are subject to
restrictions applicable to our affiliates, as that
term is defined in Rule 144 of the Securities Act and
subject to 180-day lock-up agreements. See Shares eligible
for future sale and Underwriting.
We and our executive officers, directors and all our existing
stockholders have entered, and certain individuals who purchase
shares of our common stock in this offering through the directed
share program may enter, into 180-day lock-up agreements with
the underwriters. The lock-up agreements prohibit us and our
executive officers, directors, existing stockholders and certain
individuals who have purchased shares of our common stock
through the directed share program from selling or otherwise
disposing of shares of common stock, except in limited
circumstances. The terms of the lock-up agreements can be
waived, at any time, by UBS Securities LLC and Bear, Stearns
& Co. Inc. in their sole discretion, without prior notice or
announcement, to allow us or our officers, directors, existing
stockholders and certain individuals who have purchased shares
of our common stock through the directed share program to sell
shares of our common stock. If the terms of the lock-up
agreements are waived, shares of our common stock will be
available for sale in the public market, which could reduce the
price of our common stock. See Shares eligible for future
sale Lock-up agreements and Underwriting
Directed share program.
32
Risk factors
Following the expiration of the lock-up period, certain
shareholders under our new registration rights agreement will be
entitled, subject to certain exceptions, to exercise their
demand registration rights to register their shares under the
Securities Act. If this right is exercised, holders of any of
our common stock subject to the registration rights agreement
will be entitled to participate in such registration. In
addition, in our letter agreement with James Unger, we have
agreed to use commercially reasonable efforts to file a
registration statement on Form S-8 with the SEC to cover
the registration
of shares
of our common stock (assuming an initial public offering price
of
$ ,
which represents the midpoint of the range on the cover page of
this prospectus). We have agreed to include the balance of
Mr. Ungers shares in any registration statement we
file on behalf of Mr. Icahn with regard to the registration
for sale of our shares held by Mr. Icahn, provided the
contractual restrictions and applicable lock-up period of
Mr. Ungers shares have lapsed. By exercising their
registration rights, and selling a large number of shares, these
holders could cause the price of our common stock to decline. An
estimated shares
of common stock will be subject to our registration rights
agreement and Mr. Ungers letter agreement upon
completion of this offering. See Shares eligible for
future sale, Certain relationships and related party
transactions Registration rights,
Management Executive compensation Employment
agreements and Description of capital stock
Registration rights.
We may require additional capital in the future and sales of
our equity securities to provide this capital may dilute your
ownership in us.
We may need to raise additional funds through public or private
equity financings to:
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expand and grow our business;
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develop new products and services;
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respond to competitive
pressures; or
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acquire complementary businesses
or technologies.
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Any additional capital raised through the sale of our equity
securities may dilute your percentage ownership interest in us.
Carl C. Icahn will continue to exert significant influence
over us.
We have been advised that in December 2005 an affiliate of Carl
C. Icahn, our principal beneficial stockholder and the chairman
of our board of directors, entered into a stock purchase
agreement with the Foundation for a Greater Opportunity, or the
Foundation, our other significant beneficial stockholder, to
acquire all of our common stock held by the Foundation. The
consummation of this acquisition requires the completion of this
offering and the approval of applicable authorities of the State
of New York. If the parties obtain this approval, we have been
advised that the parties expect that the purchase would be
completed in the first three months of 2006. Pending the closing
of this purchase, and for so long as the stock purchase
agreement has not been terminated, the Foundation has granted
the affiliate of Mr. Icahn purchasing the shares owned by
the Foundation an irrevocable proxy to vote all of the shares of
our common stock held by the Foundation. The stock purchase
agreement may be terminated by either party if the purchase does
not occur by May 2006. As a result of these contemplated
arrangements, we expect that Mr. Icahn will control
approximately %
of the voting power of our capital stock following the offering.
If the common stock held by the Foundation is not acquired by
affiliates of Mr. Icahn, and the irrevocable proxy expires,
Mr. Icahn will control
approximately %
of the voting power of our common stock. Whether or not
affiliates of Mr. Icahn acquire our common stock held by
the Foundation, Mr. Icahn will be able to exert
33
Risk factors
substantial influence over us, including the election of our
directors, and controlling most matters requiring board or
shareholder approval, including:
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any determination with respect to
our business strategy and policies;
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mergers or other business
combinations involving us;
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our acquisition or disposition of
assets;
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future issuances of common stock
or other securities by us;
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our incurrence of debt or
obtaining other sources of financing; and
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the payment of dividends on our
common stock.
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In addition, the existence of a controlling stockholder may have
the effect of making it difficult for, or may discourage or
delay, a third party from seeking to acquire, a majority of our
outstanding common stock, which may adversely affect the market
price of the stock.
Mr. Icahns interests may conflict with the
interest of our stockholders.
Mr. Icahn owns and controls and has an interest in a wide
array of companies, some of which such as ARL and ACF as
described below, may compete directly or indirectly with us. As
a result, his interests may not always be consistent with our
interests or the interests of our other stockholders. For
example, ARL, a railcar leasing company owned by Mr. Icahn,
competes directly with our other customers that are in the
railcar leasing business and ACF, which supplies us with
critical components, also provides components to our
competitors. ACF has also previously manufactured railcars and
may do so in the future. Mr. Icahn and entities controlled
by him may also pursue acquisitions or business opportunities
that may be complementary to our business. Our certificate of
incorporation will allow Mr. Icahn, entities controlled by
him, and any director, officer, member, partner, stockholder or
employee of Mr. Icahn or entities controlled by him, to
take advantage of such corporate opportunities without first
presenting such opportunities to us, unless such opportunities
are expressly offered to any such party solely in, and as a
direct result of, his or her capacity as our director, officer
or employee. As a result, corporate opportunities that may
benefit us may not be available to us in a timely manner, or at
all. See Description of Capital Stock Corporate
Opportunities. To the extent that conflicts of interest
may arise between us and Mr. Icahn and his affiliates,
those conflicts may be resolved in a manner adverse to us or to
you or other holders of our securities.
Upon the closing of this offering we may be a
controlled company within the meaning of the Nasdaq
National Market rules and you will not have the same protections
afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to
all of the Nasdaq National Market corporate governance
requirements.
We have been advised that an affiliate of Carl C. Icahn has
entered into an agreement to acquire all of our common stock
held by the Foundation. The consummation of this acquisition of
our common stock would require the completion of this offering
and the approval of applicable authorities of the State of New
York. If the parties obtain this approval, we have been advised
that the parties expect that the purchase would be completed in
the first three months of 2006. Pending the closing of this
purchase, and for so long as the stock purchase agreement has
not been terminated, the Foundation has granted the affiliate of
Mr. Icahn purchasing the shares owned by the Foundation an
irrevocable proxy to vote all of the shares of our common stock
held by the Foundation. As a result of these contemplated
arrangements, Mr. Icahn will control
approximately %
of the voting power of our capital stock following the offering.
Consequently, after the offering, we will be a controlled
company within the meaning of the corporate governance
standards of the Nasdaq National Market. Under these rules, a
controlled company may elect not to comply with
certain Nasdaq National Market corporate governance
requirements, including requirements that a majority of the
board of directors consist of independent directors;
compensation of
34
Risk factors
officers be determined or recommended to the board of directors
by a majority of its independent directors or by a compensation
committee that is composed entirely of independent directors;
and director nominees be selected or recommended for selection
by a majority of the independent directors or by a nominating
committee composed solely of independent directors. If we are a
controlled company following this offering, we
intend to use these exemptions. As a result, we expect that we
would not have a majority of independent directors, we would not
have a compensation committee and we would not have a nominating
committee. Accordingly, if we are a controlled
company following this offering, you will not have the
same protections afforded to shareholders of other companies
that are not controlled companies and, therefore,
are subject to all of the Nasdaq National Market corporate
governance requirements.
Payments of cash dividends on our common stock may be made
only at the discretion of our board of directors and Delaware
law may restrict, and the agreements governing our revolving
credit facility contain provisions that limit, our ability to
pay dividends.
Our board of directors has never declared or paid any cash
dividends on our common stock. Our board of directors may, in
its discretion, refuse to pay dividends and any payment of
dividends will depend upon our operating results, strategic
plans, capital requirements, financial condition, provisions of
our borrowing arrangements and other factors our board of
directors considers relevant. In addition, the agreements
governing our existing revolving credit facility restrict our
ability to declare and pay dividends on our capital stock and
the amended and restated revolving credit facility that we
expect to enter into concurrently with this offering will also
restrict our ability to declare and pay dividends. Furthermore,
Delaware law imposes restrictions on our ability to pay
dividends. For example, our board of directors may declare
dividends only to the extent of our surplus (which
is defined as total assets at fair market value minus total
liabilities, minus statutory capital), or if there is no
surplus, out of our net profits for the then-current and/or
immediately preceding fiscal years. Accordingly, we may not be
able to pay dividends in any given amount in the future, or at
all.
As a result of being a public company, we will incur
increased costs that may place a strain on our resources and our
managements attention may be diverted from other business
concerns.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, as well as new rules
subsequently implemented by the Securities and Exchange
Commission, or SEC, and the Nasdaq National Market, have
required changes in corporate governance practices of public
companies. We expect these new rules and regulations to increase
our legal and financial compliance costs and to make some
activities more time-consuming and costly. These requirements
may place a strain on our systems and resources. The Exchange
Act requires that we file annual, quarterly and current reports
with respect to our business and financial condition. The
Sarbanes-Oxley Act requires that we maintain effective
disclosure controls and procedures and internal controls over
financial reporting. We currently do not have an internal audit
group. We will require significant resources and management
oversight to maintain and improve the effectiveness of our
disclosure controls and procedures and internal controls over
financial reporting. This may divert managements attention
from other business concerns, which could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. In addition, we will need to hire or
outsource additional accounting and financial staff with
appropriate public company experience and technical accounting
knowledge.
We also expect these new rules and regulations to make it more
difficult and expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs
to obtain coverage. As a result, it may be more difficult for us
to attract and retain qualified persons to serve on our board of
directors or as executive officers. We
35
Risk factors
are currently evaluating and monitoring developments with
respect to these new rules, and we cannot predict or estimate
the amount of costs we may incur with respect to them or the
timing of such costs.
This offering may cause us to undergo an ownership
change for purposes of Section 382 of the Internal
Revenue Code, which may limit our ability to use our net
operating loss carryforwards and certain other tax
attributes.
At December 31, 2004, the Company had net operating loss
carryforwards of $26 million, which begin to expire in 2024. The
tax effect of this federal net operating loss carryforwards were
approximately $10.1 million. Under Section 382 of the
Internal Revenue Code, if a corporation undergoes an
ownership change, generally defined as a greater
than 50% change (by value) in its equity ownership over a
three-year period, the corporations ability to use its
pre-change of control net operating loss carryforward and other
pre-change tax attributes against its post-change income may be
limited. Although no definite determination can be made at this
time, there is a possibility that this offering will cause us to
undergo an ownership change under the Internal Revenue Code.
These limitations may have the effect of reducing our after-tax
cash flow. Even if this offering does not cause an ownership
change to occur, we may undergo an ownership change after the
offering due to subsequent changes in ownership of our common
stock.
36
Special note regarding forward-looking statements
This prospectus contains some forward-looking statements
including, in particular, statements about our industry, plans,
strategies and prospects. These statements involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, financial position or performance to be
materially different from any future results, financial position
or performance expressed or implied by such forward-looking
statements. We have used the words may,
will, expect, anticipate,
believe, forecast, estimate,
plan, projected, intend and
similar expressions in this prospectus to identify
forward-looking statements. We have based these forward-looking
statements on our current views with respect to future events
and financial performance. Our actual results or those of our
industry could differ materially from those projected in the
forward-looking statements.
Our forward-looking statements are subject to risks and
uncertainties, including:
|
|
4
|
the cyclical nature of our
business;
|
|
4
|
adverse economic and market
conditions;
|
|
4
|
fluctuating costs of raw
materials, including steel and railcar components, and delays in
the delivery of such raw materials and components;
|
|
4
|
our ability to maintain
relationships with our suppliers of railcar components and raw
materials;
|
|
4
|
fluctuations in the supply of
components and raw materials we use in railcar manufacturing;
|
|
4
|
the highly competitive nature of
our industry;
|
|
4
|
the risk of damage to our primary
railcar manufacturing facilities or equipment in Paragould or
Marmaduke, Arkansas;
|
|
4
|
our reliance upon a small number
of customers that represent a large percentage of our revenues;
|
|
4
|
the variable purchase patterns of
our railcar customers and the timing of completion, delivery and
acceptance of customer orders;
|
|
4
|
our dependence on our key
personnel;
|
|
4
|
the risks of a labor shortage in
light of our recent growth;
|
|
4
|
risks associated with the
conversion of our railcar backlog into revenues;
|
|
4
|
the risk of lack of acceptance of
our new railcar offerings by our customers;
|
|
4
|
the cost of complying with
environmental laws and regulations;
|
|
4
|
the costs associated with being a
public company;
|
|
4
|
our relationship with Carl C.
Icahn, our principal beneficial stockholder and the chairman of
our board of directors, and his affiliates as a purchaser of our
products, supplier of components and services to us and as a
provider of significant capital, financial and managerial
support;
|
|
4
|
potential failure by ACF to honor
its indemnification obligations to us;
|
|
4
|
potential risk of increased
unionization of our workforce;
|
|
4
|
our ability to manage our pension
costs;
|
|
4
|
potential significant warranty
claims; and
|
|
4
|
covenants in our existing
revolving credit facility and other agreements as they presently
exist and similar covenants that we expect in our amended and
restated revolving credit facility governing our indebtedness
that limit our managements discretion in the operation of
our businesses.
|
37
Special note regarding forward-looking statements
Our actual results could be different from the results described
in or anticipated by our forward-looking statements due to the
inherent uncertainty of estimates, forecasts and projections and
may be better or worse than anticipated. Given these
uncertainties, you should not rely on forward-looking
statements. Forward-looking statements represent our estimates
and assumptions only as of the date that they were made. We
expressly disclaim any duty to provide updates to
forward-looking statements, and the estimates and assumptions
associated with them, after the date of this prospectus, in
order to reflect changes in circumstances or expectations or the
occurrence of unanticipated events except to the extent required
by applicable securities laws. All of the forward-looking
statements are qualified in their entirety by reference to the
factors discussed above under Risk factors. We
caution you that these risks may not be exhaustive. We operate
in a continually changing business environment and new risks
emerge from time to time. You should carefully read this
prospectus in its entirety as it contains information you should
consider when making your investment decision.
38
Use of proceeds
We estimate that we will receive net proceeds from this offering
of approximately $ million
(or $ million, if the
underwriters exercise their over-allotment option in full),
after deducting underwriting discounts and other estimated fees
and expenses related to this offering payable by us, assuming an
initial offering price of $ per
share, which represents the midpoint of the range on the cover
of this prospectus.
The table below shows the application of the net proceeds of
this offering to give effect to the Transactions, as if the
Transactions were completed as of September 30, 2005.
Actual amounts will vary from the amounts shown below.
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
(in thousands)
|
|
Uses of Funds
|
|
|
|
|
Repayment of amounts outstanding under revolving credit
facility(1)
|
|
|
|
|
Repayment of notes due to affiliates(2)
|
|
|
|
|
Repayment of all industrial revenue bonds(3)
|
|
|
|
|
Redemption of all outstanding shares of preferred stock(4)
|
|
|
|
|
Fees and expenses relating to this offering(5)
|
|
|
|
|
|
|
|
|
|
Total uses
|
|
$
|
|
|
|
|
|
|
|
|
(1)
|
Borrowings under our existing revolving credit facility bear
interest at various rates based on either the LIBOR or the
U.S. prime rate. As of September 30, 2005, the
interest rate on the borrowings under the revolving credit
facility was 6.5%, based on the U.S. prime rate at that
time. Our existing revolving credit facility matures in
March 2006. In conjunction with this offering we intend to
amend and restate the existing revolving credit facility
pursuant to a commitment letter we have obtained from our
lenders. See Managements discussion and analysis of
financial condition and results of operationsLiquidity and
capital resourcesRevolving credit facility for a
description of the material terms of our existing revolving
credit facility and the expected terms of our amended and
restated revolving credit facility.
|
|
(2)
|
Includes indebtedness owed to Arnos Corp. and ACF Industries
Holding Corp., both of which are beneficially-owned and
controlled by Carl C. Icahn, our principal beneficial
stockholder and the chairman of our board of directors. On
December 17, 2004, we issued a note payable to Arnos Corp.
in the amount of $7.0 million that bears interest at the
U.S. prime rate plus 1.75% and is payable on demand. We
refer to this note as the Arnos note. We used the proceeds of
the Arnos note to provide additional working capital. As of
September 30, 2005, the interest rate on the Arnos note was
8.0%. As of September 30, 2005, we had $7.0 million in
principal amount and $0.4 million in accrued interest on
the Arnos note outstanding. As of January 1, 2005, in
connection with our purchase of Castings LLC, the entity through
which we own our interest in the Ohio Castings joint venture,
from ACF Industries Holding Corp., we issued a note payable to
ACF Industries Holding Corp. in the principal amount of
$12.0 million. We refer to this note as the Castings note.
The Castings note bears interest at the U.S. prime rate
plus 0.5% and is due on demand. As of September 30, 2005,
the interest rate on the Castings note was 7.25%. As of
September 30, 2005, we had $12.0 million in principal
amount and $0.6 million in accrued interest on the Castings
note outstanding. See Certain relationships and related
party transactionsCertain transactions with ACF Industries
LLC and American Railcar Leasing LLCAmounts due to
affiliates.
|
|
(3)
|
The industrial revenue bonds are due at varying dates through
2011 and as of September 30, 2005 bear interest at rates
ranging from 7.75% to 8.5%, with a weighted average interest
rate of 8.3% per year. See Managements
discussion and analysis of financial condition and results of
operationsLiquidity and capital resourcesIndustrial
revenue bonds. The industrial revenue bonds are guaranteed
by affiliates of Mr. Icahn, and these affiliates will be
released from such guarantees upon repayment of the industrial
revenue bonds. In addition, James J. Unger, our president and
chief executive officer, and his wife own
|
39
Use of proceeds
|
|
|
$0.4 million of the industrial
revenue bonds issued by Paragould, Arkansas. See Certain
relationships and related party transactionsGuarantees of
indebtedness by ACF and other related partiesIndustrial
revenue bonds and Certain relationships and related
party transactionsCertain transactions involving James J.
UngerIndustrial revenue bonds for more details.
Amounts include accrued and unpaid interest through the date of
the repurchase of the industrial revenue bonds. At the closing
of this offering, we will deliver the aggregate principal amount
outstanding under the industrial revenue bonds and accrued and
unpaid interest to the date of redemption to the trustee under
the indenture governing the industrial revenue bonds and we will
deliver to the trustee irrevocable instructions to notify the
holders of the industrial revenue bonds of the redemption of all
outstanding industrial revenue bonds. Pursuant to the terms of
the indenture, the industrial revenue bonds will be redeemed
upon the expiration of a 30-day to 60-day notice period from the
date the trustee gives notice to the holders of the industrial
revenue bonds. At the time we deposit the amounts due under the
industrial revenue bonds with the trustee and give irrevocable
instructions to the trustee the industrial revenue bonds will be
deemed to be repaid.
|
|
(4)
|
We intend to redeem all of the
outstanding shares of our preferred stock and pay all
accumulated and unpaid dividends on that stock immediately
following the completion of this offering. As of
September 30, 2005, there was one share of our mandatorily
redeemable preferred stock outstanding and $770 of accumulated
and unpaid dividends on that share. As of September 30,
2005, there were 82,055 shares of our new preferred stock
outstanding and $9.3 million of accumulated and unpaid
dividends on those shares. All of our outstanding preferred
stock is held by Mr. Icahn and his affiliates. See
Certain relationships and related party
transactionsRedemption of new preferred stock and
Description of capital stock.
|
|
(5)
|
Represents the underwriting
discounts and commissions and other fees and expenses related to
the offering and the transactions. This excludes a one-time
special cash bonus of $500,000 William P. Benac, our chief
financial officer, is entitled to receive on April 22, 2007
in the event we complete this offering and provided
Mr. Benac remains employed with us until that date, subject
to certain exceptions. See Management
Employment Agreements. We intend to pay
Mr. Benacs bonus with cash from operations.
|
40
Dividend policy and restrictions
Our board of directors has never declared or paid any cash
dividends on our common stock. Following this offering, we
intend to pay cash dividends on our common stock.
As of the date of this prospectus, our board of directors has
not determined the amount of any specific dividend. The
declaration and payment of dividends will be at the discretion
of our board of directors and will depend upon our operating
results, strategic plans, capital requirements, financial
condition, provisions of our borrowing arrangement and other
factors our board of directors considers relevant.
Our existing revolving credit facility provides that the payment
of dividends triggers a right in favor of the administrative
agent and our lenders to accelerate all of our obligations under
the credit facility, a demand right, unless we satisfy certain
financial covenants and provide our lenders under that facility
with advance notice of the dividend. We expect to amend and
restate our existing revolving credit facility pursuant to a
commitment letter we have received from our lenders concurrently
with the completion of this offering. The amended and restated
revolving credit facility would continue to contain provisions
that trigger a demand right if we pay dividends on our common
stock unless the payment would not cause the adjusted fixed
charge coverage ratio to be less than 1.2 to 1.0 or the adjusted
ratio of indebtedness to earnings before interest, taxes,
depreciation and amortization to be greater than 4.0 to 1.0,
each on a quarterly and/or annual basis, as defined in the
amended and restated revolving credit facility. In addition,
Delaware law imposes restrictions on our ability to pay
dividends. For example, our board of directors may declare
dividends only to the extent of our surplus (which
is defined as total assets at fair market value minus total
liabilities, minus statutory capital), or if there is no
surplus, out of our net profits for the then-current and/or
immediately preceding fiscal years. Accordingly, we may not be
able to pay dividends in any given amount in the future, or at
all.
41
Capitalization
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2005, on an actual basis
and on an adjusted basis to give effect to the Transactions,
assuming an initial offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus.
You should read this table together with Prospectus
summary The transactions, Use of
proceeds, Managements discussion and analysis
of financial condition and results of operations and the
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005
|
|
|
|
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
(in thousands, except share
|
|
|
|
information)
|
|
Cash and cash equivalents
|
|
$
|
26,201
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
Revolving credit facility(1)
|
|
|
31,294
|
|
|
|
|
|
|
Notes payable to affiliates
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
50,294
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
Industrial revenue bonds (including current portion)
|
|
|
8,340
|
|
|
|
|
|
|
Note payable for land
|
|
|
196
|
|
|
|
|
|
|
Mandatorily redeemable preferred stock, $0.01 par value,
99,000 shares authorized, 1 share issued and
outstanding, actual; no shares authorized, issued or
outstanding, as adjusted
|
|
|
1
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
New preferred stock, par value $0.01 per share,
500,000 shares authorized, 82,055 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, as adjusted
|
|
|
82,055
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, no shares authorized,
issued or outstanding, actual; shares
authorized and no shares issued or outstanding, as adjusted(2)
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 12,000 shares
authorized, 1,195 issued and outstanding,
actual; shares
authorized, shares issued and outstanding, as
adjusted(2)
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
40,125
|
|
|
|
|
|
|
Accumulated deficit(3)
|
|
|
(13,599
|
)
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(1,046
|
)
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
107,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
166,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We anticipate that our amended and restated revolving credit
facility that we intend to enter into concurrently with the
closing of this offering, pursuant to a commitment letter we
have received from our lenders, will permit us to borrow
$75 million and will mature three years after the closing
of this offering.
|
|
(2)
|
To be authorized immediately prior to the completion of the
offering.
|
|
(3)
|
As adjusted, reflects the write-off of deferred financing costs
of $0.6 million relating to the redemption of the
industrial revenue bonds.
|
42
Dilution
Purchasers of the common stock in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of shares of our common stock
exceeds the net tangible book value per share of our common
stock immediately following the completion of the offering. Net
tangible book value represents the amount of our total tangible
assets reduced by our total liabilities. Tangible assets
represents our total assets less intangible assets. Net tangible
book value per share represents our net tangible book value
divided by the number of shares of common stock outstanding. As
of September 30, 2005, prior to giving effect to the
Transactions, our net tangible book value was
$107.5 million and our net tangible book value per share,
after giving effect to the merger, was
$ .
After giving effect to the Transactions at the assumed initial
public offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus, our net tangible book value would have been
approximately
$ million,
or
$ per
share. This represents an immediate increase in net tangible
book value of
$ per
share to existing stockholders and an immediate dilution in net
tangible book value of
$ per
share to new investors purchasing shares of our common stock in
this offering. Dilution per share represents the difference
between the price per share paid by new investors for shares
issued in this offering and the net tangible book value per
share immediately after the completion of this offering. The
following table illustrates this dilution:
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
|
Net tangible book value per share as of September 30, 2005
|
|
$
|
|
|
|
|
|
|
|
Increase in net tangible book value per share attributable to
new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net tangible book value per share after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The following table presents, on an adjusted basis, after giving
effect to the Transactions, as of September 30, 2005, the
total number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by
the existing stockholders and by new investors purchasing shares
of our common stock in this offering, assuming an initial public
offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchased
|
|
|
Total consideration
|
|
|
|
|
|
|
|
|
|
|
|
Average price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per share
|
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes
the shares
that will be available for future issuance under stock options
granted under our 2005 Equity Incentive Plan on or about the
closing date of this offering
and remaining
shares that will be available for future issuance under our 2005
Equity Incentive Plan. See Management
Executive compensation Equity incentive plan.
To the extent that any of
our outstanding
options issued under our 2005 Equity Incentive Plan are
exercised, there will be further dilution to new investors.
If the underwriters exercise their over-allotment option in
full, the number of shares of common stock held by our existing
stockholders will further decrease to
approximately %
of the total number of shares of our common stock outstanding,
and the number of shares of our common stock held by new
investors will further increase
to shares,
or
approximately %
of the total number of shares of our common stock outstanding.
43
Selected consolidated financial data
The following table sets forth our summary consolidated
financial data for the periods presented. The consolidated
statements of operations and cash flow data for the years ended
December 31, 2002, 2003 and 2004 and the consolidated
balance sheet data as of December 31, 2003 and 2004 are
derived from our audited consolidated financial statements and
related notes included elsewhere in this prospectus. The
consolidated statements of operations and cash flow data for the
years ended December 31, 2000 and 2001 and the consolidated
balance sheet data as of December 31, 2000, 2001 and 2002
are derived from our historical consolidated financial
statements not included in this prospectus. The consolidated
statements of operations and cash flow data for the nine months
ended September 30, 2004 and 2005 and the consolidated
balance sheet data as of September 30, 2005 have been
derived from unaudited consolidated financial statements and
related notes included elsewhere in this prospectus and reflect
all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of management, necessary
for a fair presentation of our financial position, the results
of operations and cash flows for the periods presented.
Operating results for the nine months ended September 30,
2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005 or any other
future period.
You should read this information together with
Capitalization, Managements discussion
and analysis of financial condition and results of
operations and our consolidated financial statements and
the related notes thereto included elsewhere in this prospectus.
44
Selected consolidated financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
Years ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share data)
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations(1)
|
|
$
|
200,691
|
|
|
$
|
181,438
|
|
|
$
|
138,441
|
|
|
$
|
188,119
|
|
|
$
|
316,432
|
|
|
$
|
226,759
|
|
|
$
|
409,208
|
|
|
Railcar services(2)
|
|
|
38,093
|
|
|
|
32,703
|
|
|
|
30,387
|
|
|
|
29,875
|
|
|
|
38,624
|
|
|
|
27,572
|
|
|
|
32,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
238,784
|
|
|
|
214,141
|
|
|
|
168,828
|
|
|
|
217,994
|
|
|
|
355,056
|
|
|
|
254,331
|
|
|
|
442,148
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations(3)
|
|
|
187,375
|
|
|
|
169,952
|
|
|
|
134,363
|
|
|
|
174,629
|
|
|
|
306,283
|
|
|
|
216,027
|
|
|
|
377,181
|
|
|
Cost of railcar services(4)
|
|
|
37,111
|
|
|
|
33,255
|
|
|
|
29,533
|
|
|
|
29,762
|
|
|
|
34,473
|
|
|
|
24,585
|
|
|
|
27,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
224,486
|
|
|
|
203,207
|
|
|
|
163,896
|
|
|
|
204,391
|
|
|
|
340,756
|
|
|
|
240,612
|
|
|
|
404,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,298
|
|
|
|
10,934
|
|
|
|
4,932
|
|
|
|
13,603
|
|
|
|
14,300
|
|
|
|
13,719
|
|
|
|
37,429
|
|
Selling, administrative and other
|
|
|
8,693
|
|
|
|
9,219
|
|
|
|
9,505
|
|
|
|
10,340
|
|
|
|
10,334
|
|
|
|
8,543
|
|
|
|
11,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
|
5,605
|
|
|
|
1,715
|
|
|
|
(4,573
|
)
|
|
|
3,263
|
|
|
|
3,966
|
|
|
|
5,176
|
|
|
|
26,012
|
|
Interest income(5)
|
|
|
5,777
|
|
|
|
4,770
|
|
|
|
3,619
|
|
|
|
3,161
|
|
|
|
4,422
|
|
|
|
2,122
|
|
|
|
1,265
|
|
Interest expense(6)
|
|
|
(13,687
|
)
|
|
|
(9,525
|
)
|
|
|
(4,853
|
)
|
|
|
(3,616
|
)
|
|
|
(3,667
|
)
|
|
|
(2,216
|
)
|
|
|
(3,577
|
)
|
Income (loss) from joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(604
|
)
|
|
|
(609
|
)
|
|
|
(351
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax (benefit) expense
|
|
|
(2,305
|
)
|
|
|
(3,040
|
)
|
|
|
(5,807
|
)
|
|
|
2,204
|
|
|
|
4,112
|
|
|
|
4,731
|
|
|
|
24,143
|
|
Income tax (benefit) expense
|
|
|
(713
|
)
|
|
|
(1,074
|
)
|
|
|
(1,894
|
)
|
|
|
1,139
|
|
|
|
2,191
|
|
|
|
1,858
|
|
|
|
9,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(1,592
|
)
|
|
$
|
(1,966
|
)
|
|
$
|
(3,913
|
)
|
|
$
|
1,065
|
|
|
$
|
1,921
|
|
|
$
|
2,873
|
|
|
$
|
14,532
|
|
|
|
Less preferred dividends
|
|
|
|
|
|
|
(3,070
|
)
|
|
|
(7,139
|
)
|
|
|
(9,690
|
)
|
|
|
(13,241
|
)
|
|
|
(9,296
|
)
|
|
|
(11,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) available to common shareholders
|
|
$
|
(1,592
|
)
|
|
$
|
(5,036
|
)
|
|
$
|
(11,052
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(11,320
|
)
|
|
$
|
(6,423
|
)
|
|
$
|
3,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted(7)
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,087
|
|
|
|
1,051
|
|
|
|
1,195
|
|
Net earnings (loss) per common share basic and diluted(7)
|
|
$
|
(1,592
|
)
|
|
$
|
(5,036
|
)
|
|
$
|
(11,052
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(10,414
|
)
|
|
$
|
(6,111
|
)
|
|
$
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,342
|
|
|
$
|
1,476
|
|
|
$
|
183
|
|
|
$
|
65
|
|
|
$
|
6,943
|
|
|
$
|
50,605
|
|
|
$
|
26,201
|
|
Net working capital
|
|
|
32,096
|
|
|
|
35,172
|
|
|
|
16,065
|
|
|
|
15,084
|
|
|
|
46,565
|
|
|
|
83,355
|
|
|
|
31,197
|
|
Net property, plant and equipment
|
|
|
84,897
|
|
|
|
81,090
|
|
|
|
75,746
|
|
|
|
71,230
|
|
|
|
76,951
|
|
|
|
73,706
|
|
|
|
88,555
|
|
Total assets
|
|
|
204,764
|
|
|
|
191,229
|
|
|
|
187,590
|
|
|
|
196,508
|
|
|
|
356,840
|
|
|
|
300,764
|
|
|
|
262,024
|
|
Total liabilities
|
|
|
170,158
|
|
|
|
113,596
|
|
|
|
98,463
|
|
|
|
190,704
|
|
|
|
221,817
|
|
|
|
95,332
|
|
|
|
154,489
|
|
Total shareholders equity
|
|
$
|
34,606
|
|
|
$
|
77,633
|
|
|
$
|
89,127
|
|
|
$
|
5,804
|
|
|
$
|
135,023
|
|
|
$
|
205,432
|
|
|
$
|
107,535
|
|
Consolidated cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
5,217
|
|
|
$
|
13,434
|
|
|
$
|
10,611
|
|
|
$
|
(1,639
|
)
|
|
$
|
(17,082
|
)
|
|
$
|
1,946
|
|
|
$
|
27,831
|
|
Net cash used in investing activities
|
|
|
(8,782
|
)
|
|
|
(2,189
|
)
|
|
|
(535
|
)
|
|
|
(2,251
|
)
|
|
|
(11,037
|
)
|
|
|
(6,750
|
)
|
|
|
(16,356
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
5,490
|
|
|
$
|
(12,111
|
)
|
|
$
|
(11,369
|
)
|
|
$
|
3,772
|
|
|
$
|
34,997
|
|
|
$
|
55,344
|
|
|
$
|
7,783
|
|
45
Selected consolidated financial data
|
|
(1)
|
Includes revenues from transactions with affiliates of
$52.8 million, $64.8 million, $63.6 million,
$62.9 million and $64.4 million in 2000, 2001, 2002,
2003 and 2004, respectively and $44.6 million and
$44.5 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(2)
|
Includes revenues from transactions with affiliates of
$16.1 million, $8.6 million, $12.8 million,
$11.0 million and $19.4 million in 2000, 2001, 2002,
2003 and 2004, respectively and $12.7 million and
$16.0 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(3)
|
Including costs from transactions with affiliates of
$46.6 million, $57.6 million, $55.7 million,
$54.4 million and $59.1 million in 2000, 2001, 2002,
2003 and 2004, respectively and $40.2 million and
$41.4 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(4)
|
Includes costs from transactions with affiliates of
$12.8 million, $7.2 million, $12.2 million,
$10.1 million and $15.5 million in 2000, 2001, 2002,
2003 and 2004, respectively and $9.6 million and
$12.7 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
(5)
|
Includes interest income from affiliates of $5.6 million,
$4.3 million, $3.4 million, $3.0 million and
$3.9 million in 2000, 2001, 2002, 2003 and 2004,
respectively and $1.2 million and $0.8 million for the
nine months ended September 30, 2004 and 2005, respectively.
|
|
(6)
|
Includes interest expense to affiliates of $0.2 million in
2001, and $1.5 million in 2004 and $0.2 million and
$1.7 million for the nine months ended September 30,
2004 and 2005, respectively.
|
|
|
(7)
|
Share and per share data have not been restated to give effect
to the merger.
|
|
46
Managements discussion and analysis of financial condition
and results of operations
You should read the following discussion in conjunction with
Selected consolidated financial data and our
consolidated financial statements and related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements that are based on managements
current expectations, estimates and projections about our
business and operations. Our actual results may differ
materially from those currently anticipated and expressed in
such forward-looking statements and as a result of the factors
we describe under Risk factors and elsewhere in this
prospectus. See Special note regarding forward-looking
statements and Risk factors.
OVERVIEW
We are a leading North American manufacturer of covered hopper
and tank railcars. We also repair and refurbish railcars,
provide fleet management services and design and manufacture
certain railcar and industrial components used in the production
of our railcars as well as railcars and non-railcar industrial
products produced by others. We provide our railcar customers
with integrated solutions through a comprehensive set of high
quality products and related services.
We operate in two segments: manufacturing operations and
railcar services. Manufacturing operations consists of railcar
manufacturing and railcar and industrial component
manufacturing. Railcar services consists of railcar repair and
refurbishment services and fleet management services.
We have experienced significant growth in the last three years
with revenues growing to $355.1 million in 2004, from
$218.0 million in 2003 and $168.8 million in 2002. Our
revenues in the first nine months of 2005 were
$442.1 million, compared to $254.3 million in the
first nine months of 2004. Our revenues in 2004 included
$316.5 million from manufacturing operations and
$38.6 million from the sale of railcar services. Our
revenues in the first nine months of 2005 included
$409.2 million from manufacturing operations and
$32.9 million from the sale of railcar services.
Manufacturing operations
We manufacture all of our railcars in modern facilities located
in Paragould and Marmaduke, Arkansas, which were built in 1995
and 1999, respectively. We strategically located these
facilities in close proximity to our main shipper and railroad
customers, as well as our main suppliers of railcar components.
As of the date of this prospectus, none of our over 1,100
employees at our Paragould and Marmaduke facilities are
represented by a union. However, employees of three of our
repair facilities and one of our component manufacturing
facilities, representing 16% of our total workforce as of
September 30, 2005, are represented by a union. We
manufacture components in four other manufacturing facilities.
Our Paragould facility was designed primarily to produce covered
hopper railcars, but is also capable of producing other railcar
types. For example, in 2004 and the first nine months of 2005,
we produced centerbeam platform railcars at our Paragould
facility. This facility originally consisted of two production
tracks with an initial production capacity of approximately six
railcars per day. Changes in plant design and manufacturing
processes since 1995, along with the addition of painting and
lining capabilities in 1999, and a third production track in
December 2004, increased our production capacity. Based on our
current backlog, we plan to produce an average of approximately
24 covered hopper railcars per working day, dependent upon
product mix and the availability of raw materials and
components. The production lines at our Paragould facility are
designed to provide maximum flexibility for efficient and rapid
changeover in product mix between various types and sizes
47
Managements discussion and analysis of financial
condition and results of operations
of railcars. Currently, we are expanding our Paragould facility
through the construction of additional painting and lining
capabilities, which are scheduled to be completed by the end of
2005.
We delivered the following quantities and types of railcars in
2002, 2003 and 2004, and the first nine months of 2004 and 2005,
manufactured at our Paragould facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
Covered hoppers
|
|
|
1,053
|
|
|
|
1,343
|
|
|
|
1,507
|
|
|
|
1,081
|
|
|
|
2,759
|
|
Centerbeam platform
|
|
|
|
|
|
|
5
|
|
|
|
1,240
|
|
|
|
981
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paragould railcar deliveries
|
|
|
1,053
|
|
|
|
1,348
|
|
|
|
2,747
|
|
|
|
2,062
|
|
|
|
3,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Marmaduke facility was built in 1999 to manufacture tank
railcars. Based on our current backlog, we plan to produce an
average of approximately 7.5 tank railcars per working day at
this facility, dependent upon product mix of tank railcar types
and the availability of raw materials and components. The
facility is designed to produce both pressure and non-pressure
tank railcars.
We delivered the following quantities and types of tank railcars
in 2002, 2003 and 2004, and the first nine months of 2004 and
2005, manufactured at our Marmaduke facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
Pressure tanks
|
|
|
76
|
|
|
|
277
|
|
|
|
322
|
|
|
|
203
|
|
|
|
223
|
|
Non-pressure tanks
|
|
|
637
|
|
|
|
932
|
|
|
|
1,315
|
|
|
|
995
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Marmaduke railcar deliveries
|
|
|
713
|
|
|
|
1,209
|
|
|
|
1,637
|
|
|
|
1,198
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide components for our railcar manufacturing operations
as well as for other railcar manufacturers and other industries.
Components manufactured by us include aluminum and steel
fabricated and machined parts and carbon steel, aluminum, high
alloy and stainless steel castings, primarily for the trucking
and construction equipment and oil and gas exploration markets.
Our revenues from the sales of components exclude the components
we manufacture for use in our railcar manufacturing business. In
2004, our revenues from sales of components increased by 52% to
$50.7 million from $33.4 million in 2003. In the first
nine months of 2005, our revenues from sales of components
increased to $51.7 million from $36.6 million in the
first nine months of 2004. We attribute the increase in these
revenues primarily to an overall increase in demand for
commercial railcar components as well as the demand for steel
castings and machine components in the non-railcar industrial
sectors that we serve.
Railcar services
Our railcar services include railcar repair and refurbishment
and fleet management and engineering services. Our railcar
repair and refurbishment services are provided through our
network of six full service maintenance and repair facilities
and four mobile repair units. Our railcar service facilities are
located in strategic areas near major customers. We have
established long-term business relationships with a customer
base that includes railcar leasing companies, shippers and
railroads. In 2004, our railcar services revenues increased by
29% to $38.6 million, from $29.9 million in 2003. In
2002, our railcar services revenues were $30.4 million. In
the first nine months of 2005, our railcar services revenues
increased to $32.9 million from $27.6 million in the
first nine months of 2004. We believe
48
Managements discussion and analysis of financial
condition and results of operations
the growth in these revenues reflects the overall trend in the
United States toward increased railcar utilization, the increase
in our customer base, the increase in our service offerings and
the increase in the number of railcars under fleet management by
us. Our fleet management business complements both our railcar
repair and refurbishment and railcar manufacturing operations.
As of September 30, 2005, we managed approximately 57,000
railcars for various customers, including approximately 22,000
railcars for ARL, an affiliate of Carl C. Icahn, the chairman of
our board of directors and our principal controlling stockholder.
AMERICAN RAILCAR LEASING LLC FORMATION AND EXCHANGE
We formed ARL, a company that buys and leases railcars, as our
wholly owned subsidiary in June 2004. As part of the formation
of ARL and its further capitalization, ACF and certain of its
subsidiaries transferred to us and ARL their railcars and
related leases, as well as equity in certain of ACFs
subsidiaries that supported its leasing business, in exchange
for shares of our new preferred stock and preferred interests of
ARL. We, in turn, contributed the assets we received to ARL in
return for common equity interests in ARL. ACF is a company
beneficially owned and controlled by Mr. Icahn. On
June 30, 2005, we transferred all of our interest in ARL to
the holders of our new preferred stock, all of which are
beneficially owned and controlled by Mr. Icahn, in exchange
for the redemption of 116,116 shares of our new preferred
stock held by them plus accrued dividends. The description of
our operations and the presentation of our financial information
and consolidated financial statements has been prepared on a
standalone basis, excluding ARLs operations for all
periods, and all transactions giving effect to ARLs
formation and subsequent transfer have been eliminated from the
financial statements, with the exception of deferred tax assets
retained by us. Any differences related to the amounts
originally capitalized and the amount paid for ARL or our
subsequent transfer of ARL have been recorded through
adjustments to shareholders equity, including certain tax
benefits that we received as a result of using ARLs
previously incurred tax losses.
For further information relating to the formation of ARL, the
subsequent ARL transfer and our prior and continuing agreements
with ARL and with other affiliates of Mr. Icahn, see
Certain relationships and related party transactions
Certain transactions involving American Railcar Leasing
LLC.
FACTORS AFFECTING OPERATING RESULTS
The following is a discussion of some of the key factors that
have in the past and are likely in the future to affect our
operating results. These factors include, but are not limited
to, the cyclical nature of the North American railcar market,
our reliance on a few customers for most of our revenues, our
historical reliance on revenues from our affiliates for a
significant portion of our revenue, our reliance on large
orders, the variable purchasing patterns of our customers and
fluctuation in supplies and prices of raw materials and
components used in railcar manufacturing. See Risk
factors for a more comprehensive list of factors that
could affect our operating results.
Cyclicality of the railcar industry.
Historically, the
North American railcar market has been highly cyclical and we
expect it to continue to be highly cyclical. During the most
recent industry cycle, industry-wide railcar deliveries declined
from a peak of 75,704 in 1998 to a low of 17,714 railcars in
2002. During this downturn, our revenues dropped from
$238.8 million in 2000 to $168.8 million in 2002 and
we incurred losses of $1.6 million, $2.0 million and
$3.9 million in 2000, 2001 and 2002, respectively. We
believe that downturns in the railcar manufacturing industry
will occur in the future and will result in decreased demand for
our products and services. The cycles in our industry result
from many factors that are beyond our control, including
economic conditions in the United States. Although railcar
production has increased since 2002, industry professionals
believe demand for railcars may have reached a peak and may not
persist if favorable economic and other conditions are not
sustained. Even if a sustained economic recovery occurs in the
United States, demand for our
49
Managements discussion and analysis of financial
condition and results of operations
railcars may not match or exceed expected levels. An economic
downturn may result in increased cancellations of railcar orders
which could have a material adverse effect on our ability to
convert our railcar backlog into revenues. If industry backlog
for railcars declines below certain levels, CIT, one of our
customers which accounts for 71% of our September 30, 2005
backlog, will be permitted to cancel some or, in certain
circumstances, all its orders after 180 days written notice,
which could have a material adverse effect on our business,
financial condition and results of operations. In addition, an
economic downturn in the United States could result in lower
sales volumes, lower prices for railcars and a loss of profits
for us. Furthermore, a substantial number of the end users of
our railcars acquire railcars through leasing arrangements with
our leasing company customers. Economic conditions that result
in higher interest rates would increase the cost of new leasing
arrangements, which could cause our leasing company customers to
purchase fewer railcars.
Customer concentration.
Railcars are typically sold
pursuant to large, periodic orders, and a limited number of
customers typically represent a significant percentage of our
railcar sales in any given year. In 2004, sales to our top three
customers accounted for approximately 23%, 20% and 16%,
respectively, of our total revenues. In the nine months ended
September 30, 2005, sales to our top three customers
accounted for approximately 17%, 16% and 15%, respectively, of
our total revenues. The loss of any significant portion of our
sales to any major customer, the loss of a single major customer
or a material adverse change in the financial condition of any
one of our major customers could have a material adverse effect
on our business and financial results. Most of our individual
railcar customers do not make railcar purchases every year
because they do not need to replace or replenish their railcar
fleets on a yearly basis. Many of our customers place orders for
railcars on an as-needed basis, sometimes only once every few
years. As a result, the order levels for railcars, the mix of
railcar types ordered and the railcars ordered by any particular
customer have varied significantly from quarterly period to
quarterly period in the past and may continue to vary
significantly in the future. As railcar sales comprised 75% of
our total revenue in 2004 and 81% of our total revenue in the
nine months ended September 30, 2005, our results of
operations in any particular quarterly period may be
significantly affected by the number of railcars and the product
mix of railcars we deliver in any given quarterly period.
Additionally, because we record the sale of a railcar at the
time we complete production, the railcar is accepted by the
customer following inspection, the risk for any damage or loss
with respect to the railcar passes to the customer and title to
the railcar transfers to the customer, and not when the order is
taken, the timing of completion, delivery and acceptance of
significant customer orders will have a considerable effect on
fluctuations in our quarterly results.
Revenues from affiliates.
In 2002, 2003, 2004 and the
first nine months of 2005, our revenues from affiliates
accounted for 45%, 34%, 24% and 14% of our total revenues,
respectively. These affiliates consisted of entities
beneficially owned and controlled by Carl C. Icahn, the
chairman of our board of directors and our principal controlling
stockholder. The decline in our percentage of revenues from
affiliates is primarily attributable to the growth in our
revenues from third parties. We anticipate that our percentage
of revenues from affiliates will continue to decline if we are
successful in growing our business. Nevertheless we believe that
revenues from affiliates will continue to constitute an
important portion of our business. A significant reduction in
sales to affiliates could have a material adverse effect on our
business and financial results.
Raw material costs.
The price for steel, the primary raw
material used in the manufacture of our railcars, increased
sharply in 2004 as a result of strong worldwide demand, limited
availability of production inputs for steel, including scrap
metal, industry consolidation and import trade barriers. These
factors have caused a corresponding increase in the cost and
decrease in the availability of castings and other railcar
components constructed with steel. Costs for other railcar
manufacturers have been similarly affected by the availability
and pricing of steel and castings and other components. The
costs for raw steel, based on a Semi Finished Steel Mill Product
Index, have almost doubled during the period from October 2003
through December 2004. The availability of scrap metal has
50
Managements discussion and analysis of financial
condition and results of operations
been limited by exports of scrap metal to China and, as a
result, steel producers have charged steel and scrap metal
surcharges in excess of agreed-upon prices. Price levels for
steel have increased again in 2005 and we expect worldwide
demand for steel to increase, supplies to continue to be limited
and prices to continue to increase in 2006.
In 2004, we were unable to pass on an estimated
$7.9 million in increased raw material and component costs
to our customers under existing customer contracts. In the first
nine months of 2005, we estimate that we were unable to pass
through to our customers an estimated $1.5 million of such
increased costs. In response to the increasing cost of raw
materials and railcar components, we are working with suppliers
to reduce surcharges that they charge us, and we have entered
into variable pricing contracts with most of our railcar
customers that allow us to pass along changes in costs of
certain raw materials and components to our customers to protect
us against future changes in these costs. By September 30,
2005, we completed most of the deliveries of railcars under
contracts that did not allow us to pass through these increased
costs. Most of our current deliveries and backlog for railcars
include variable pricing to protect us against further
volatility in the price of certain raw materials and railcar
components.
Component supply constraints.
Our business depends on the
adequate supply of numerous specialty components, such as
railcar wheels, brakes, sideframes, axles, bearings, yokes,
bolsters and other heavy castings, and specialized raw
materials, such as normalized steel plate used in the production
of railcars. Over the last few years many suppliers have been
acquired or have ceased operations, which has caused the number
of alternative suppliers of specialty components and raw
materials to decline. The combination of industry consolidation
and high demand has caused recent railcar industry-wide
shortages of many critical components as many reliable suppliers
are frequently at or near production capacity. In certain cases,
such as for railcar wheels, only two significant suppliers
continue to produce the type of component we use in our
railcars. With the recent increased demand for railcars, our
remaining suppliers are facing significant challenges in
providing components and materials on a timely basis to us and
other railcar manufacturers. If our suppliers of railcar
components and raw materials were to stop or reduce the
production of railcar components and raw materials that we use,
go out of business, refuse to continue their business
relationships with us, reduce the amounts they are willing to
sell to us or become subject to work stoppages, our business
would be disrupted. Our inability to obtain components and raw
materials in required quantities or of acceptable quality could
result in significant delays or reductions in railcar shipments.
This would materially and adversely affect our operating
results. Furthermore, our ability to increase our railcar
production to expand our business depends on our ability to
obtain an adequate supply of these railcar components and raw
materials.
Our participation in the Ohio Castings joint venture has
facilitated our ability to meet some of our requirements for
heavy castings such as bolsters and sideframes. In 2005, Ohio
Castings expanded its castings production and added couplers and
yokes to its products. We believe that this expanded production
capability should help to reduce our risk of encountering supply
shortages. In 2004, we purchased $24.8 million of railcar
components produced by Ohio Castings.
Completion of our centerbeam platform railcar contract.
In 2004 we entered into an agreement with The Greenbrier
Companies to manufacture centerbeam platform railcars at our
Paragould manufacturing facility. This was the first time we
manufactured centerbeam platform railcars and, as a result of
start-up and increased production costs, we did not realize a
profit on this contract. We completed our deliveries of these
centerbeam platform railcars in July 2005 and we do not
anticipate significant sales to Greenbrier in the future. Our
revenues from our sales of centerbeam platform railcars were
$50.8 million in the first nine months of 2005 and
$53.0 million in 2004. Upon completion of production of the
centerbeam platform railcars for Greenbrier, we converted the
manufacturing line at our Paragould facility that we used to
manufacture those railcars to manufacture covered hopper
railcars. This manufacturing line, along with our two other
covered hopper railcar
51
Managements discussion and analysis of financial
condition and results of operations
manufacturing lines at our Paragould manufacturing facility have
been operating at capacity since the conversion and, as a result
of our significant backlog for covered hopper cars, we expect
those lines to continue, subject to cancellations or adjustments
in existing railcar orders in our backlog, to operate at or
close to capacity through at least 2007. We have generally been
able to achieve higher profit margins on our sale of covered
hopper railcars than we were able to achieve on our sales of the
centerbeam platform railcars to Greenbrier. Therefore, we do not
believe that the completion of our centerbeam platform railcar
contracts and the corresponding reduction of sales to Greenbrier
will have a material adverse affect on our business or results
of operations.
OUTLOOK
We believe that demand for railcars has reached a peak and
should continue at or near current levels due to generally
positive economic conditions, the current United States economic
recovery, strong industry-wide backlog for railcars, increased
rail traffic, the projected replacement of aging railcar fleets
and an increasing demand for products that are hauled and stored
in railcars. We believe that we are strategically positioned to
capitalize on the current strong demand for railcars, and that
we have growth opportunities across our broad array of product
and service offerings.
BACKLOG
Our backlog consists of orders for railcars. We define backlog
as the number and sales value of railcars that our customers
have committed in writing to purchase from us that have not been
recognized as revenues. Customer orders, however, may be subject
to cancellation, customer requests for delays in railcar
deliveries, inspection rights and other customary industry terms
and conditions. Although we generally have one to three year
contracts with most of our fleet management customers, neither
orders for our railcar repair and refurbishment services
business nor our fleet management business are included in our
backlog because we generally deliver our services in the same
period in which orders are received. Similarly, orders for our
component manufacturing business are not included in our backlog
because we generally deliver components to our customers in the
same period in which orders for the components are received. Due
to the large size of railcar orders and variations in the number
and mix of railcars ordered in any given period, the size of our
reported backlog at the end of any such period may fluctuate
significantly. See Risk factors Risks related to our
business The variable purchase patterns of our customers
and the timing of completion, delivery and acceptance of
customer orders may cause our revenues and income from
operations to vary substantially each quarter, which could
result in significant fluctuations in our quarterly
results.
Our backlog has increased from 412 railcars at the end of 2002
to 15,567 railcars at September 30, 2005. We believe this
increase is due to the current strength of the economy, the
replacement of aging railcar fleets, increasing demand for
consumer and industrial products, and an increasing demand for
covered hopper and tank railcars.
On July 29, 2005, we entered into a multi-year purchase and
sale agreement with CIT to manufacture and sell to CIT covered
hopper and tank railcars. Under this agreement, CIT has agreed
to buy a minimum of 3,000 railcars from us in each of 2006, 2007
and 2008 and we have agreed to offer to sell to CIT up to 1,000
additional railcars in each of those years. CIT may choose to
satisfy its purchase obligations from among a variety of covered
hopper and tank railcars described in the agreement. CIT may
reduce its future purchase obligations or cancel pending
purchase orders, upon prior written notice to us, under certain
conditions, including a reduction of the then current American
Railway Car Institutes most recently reported quarterly
backlog below specified levels. As of September 30, 2005, the
American Railway Car Institute reported a quarterly backlog in
excess of 60,900 railcars. If during the term of the
agreement, the levels of quarterly backlog reported by American
Railway Car Institute falls below 45,000 railcars but remains
above 35,000 railcars, CIT has
52
Managements discussion and analysis of financial
condition and results of operations
the right, on 240 days prior written notice, to cancel
pending purchase orders or reduce subsequent purchase
obligations for the then current agreement year, in either case
such that actual purchases by CIT would not fall below 50% of
that agreement years original minimum purchase
requirements. If the American Railway Car Institutes
reported quarterly backlog falls below 35,000 railcars, CIT has
the right to cancel or suspend all, or any, pending purchase
orders or remaining purchase obligations under the Agreement
upon 180 days prior written notice. If CIT elects to cancel
any pending purchase order under these provisions within
120 days of the delivery date of the order, we may require
that CIT purchase from us, at our cost, all material which we
had purchased and identified to such cancelled purchase order.
CIT also has the right to reduce its railcar orders from us if
market prices for the railcars subject to our agreement are
reduced significantly below our quoted prices and we fail to
meet such price reductions. Under the agreement, purchase prices
for railcars are subject to steel surcharges and certain other
material cost increases applicable at the time of production.
The following table shows our reported railcar backlog, in
number of railcars and estimated future value attributable to
such backlog, for the periods shown. This reported backlog
includes 9,000 railcars relating to CITs minimum purchase
obligations under its agreement with us based upon an assumed
product mix consistent with CITs orders for railcars.
Changes in product mix from that assumed would affect the dollar
amount of our backlog from CIT.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
Year ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
Railcar backlog at start of period
|
|
|
317
|
|
|
|
412
|
|
|
|
2,287
|
|
|
|
2,287
|
|
|
|
7,547
|
|
New railcars delivered
|
|
|
(1,766
|
)
|
|
|
(2,557
|
)
|
|
|
(4,384
|
)
|
|
|
(3,260
|
)
|
|
|
(4,980
|
)
|
New railcar orders
|
|
|
1,861
|
|
|
|
4,432
|
|
|
|
9,644
|
|
|
|
6,626
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railcar backlog at end of period
|
|
|
412
|
|
|
|
2,287
|
|
|
|
7,547
|
|
|
|
5,653
|
|
|
|
15,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated backlog value at end of period (in thousands of
dollars)(1)
|
|
$
|
26,906
|
|
|
$
|
129,850
|
|
|
$
|
494,107
|
|
|
$
|
365,097
|
|
|
$
|
1,132,788
|
|
|
|
(1)
|
Estimated backlog value reflects the total revenues expected to
be attributable to the backlog reported at the end of the
particular period as if such backlog were converted to actual
revenues. Estimated backlog does not reflect potential price
increases and decreases under certain customer contracts that
provide for variable pricing based on changes in the cost of
certain raw materials and railcar components, or the
cancellation or delay of railcar orders that may occur.
|
We anticipate that approximately 12% of our reported backlog as
of September 30, 2005 will be converted to revenues by the
end of 2005. Historically, we have experienced little variation
between the number of railcars ordered and the number of
railcars actually delivered. However, our backlog is not
necessarily indicative of our future results of operations as
orders may be canceled or delivery dates extended. We cannot
assure that our reported backlog will convert to revenues in any
particular period, if at all, that the actual revenues from
these orders will equal our reported backlog estimates or that
our future revenue collection efforts will be successful. See
Risk factors Risks related to our business The
level of our reported railcar backlog may not necessarily
indicate what our future revenues will be and our actual
revenues may fall short of the estimated revenue value
attributed to our railcar backlog.
We rely on supplies from third-party providers and our Ohio
Castings joint venture for steel, heavy castings, wheels and
other components for our railcars. In the event that our
suppliers were to stop or reduce their supply of steel, heavy
castings, wheels or the other railcar components that we depend
upon, our business would be disrupted and the actual sales from
our customer contracts may fall significantly short of our
reported backlog. See Risk factors Risks related to
our business Fluctuations in the supply of components and
raw materials we use in manufacturing railcars could
53
Managements discussion and analysis of financial
condition and results of operations
cause production delays or reductions in the number of railcars
we manufacture, which could adversely affect our business and
operating results.
CHARGES AND COSTS ASSOCIATED WITH OUR PUBLIC OFFERING
We expect to incur significant additional selling,
administrative and other fees and expenses in connection with
the preparation for this offering and becoming a public company.
In addition we expect to incur a number of charges in connection
with transactions contemplated in connection with this offering.
ACF employee benefit plans
In anticipation of our no longer being a part of ACFs
controlled group upon completion of this offering, we have been
discussing with ACF an appropriate arrangement for allocating
the assets and liabilities of the pension benefit plans retained
by ACF in the 1994 ACF asset transfer in which some of our
employees continue to participate, and for relieving us of our
further employee benefit reimbursement obligations to ACF under
the 1994 ACF asset transfer agreement. The principal employee
benefit plans affected by this arrangement are two ACF sponsored
pension plans, known as the ACF Employee Retirement Plan and the
ACF Shippers Car Line Pension Plan, and certain ACF sponsored
retiree medical and retiree life insurance plans. See
Certain relationships and related party
transactionsCertain transactions with ACF Industries
LLC1994 ACF asset transfer.
Under the proposed arrangement, in exchange for our agreement to
pay ACF approximately $9.2 million and to become the
sponsoring employer under the ACF Shippers Car Line Pension
Plan, including the assumption of all obligations for our and
ACFs employees under that plan, we will cease to be a
participating employer under the ACF Employee Retirement Plan
and will be relieved of all further reimbursement obligations,
including for our employees, under that plan. We estimate that
as of December 1, 2005, the ACF Shippers Car Line Pension
Plan had $4.0 million of unfunded liabilities on an
accounting basis, that will be assumed by us in connection with
this arrangement. The payment of approximately $9.2 million
to be made by us to ACF represents our and ACFs estimate
of the payment required to be made by us to achieve an
appropriate allocation of the assets and liabilities of the
benefit plans accrued after the 1994 ACF asset transfer, with
respect to each of our and ACFs employees in connection
with the two plans. This allocation will be determined in
accordance with actuarial calculations consistent with those
that would be required to be used by us and ACF in allocating
plan assets and liabilities at such time as we cease to be a
member of ACFs controlled group.
As part of this arrangement, we will also assume sponsorship of
a retiree medical and retiree life insurance plan for active and
identified former ARI employees that are covered by the ACF
sponsored medical and retiree life insurance plans, and ACF will
be relieved of all further liability under those plans with
respect to those employees. We estimate that as of
December 1, 2005, the post-retirement liability related to
this obligation was approximately $3.9 million. ACF will
pay ARI approximately $2.9 million to assume the pre 1994
portion of this liability.
In connection with the foregoing, we anticipate that we will
record an expense of approximately $10.4 million during the
period in which these transactions are completed, including
$6.3 million for the net cash payment to ACF,
$4.0 million for the unfunded liability assumed under the
Shippers Car Line pension plan and $3.9 million for the
assumption and sponsorship of an unfunded post retirement
medical and retiree life insurance plan for our employees. We
have previously accrued an estimated liability related to this
settlement of $3.8 million.
54
Managements discussion and analysis of financial
condition and results of operations
Equity incentive awards
We also expect to incur a non-cash operating expense in
connection with the issuance at the close of this offering to
James Unger, our chief executive officer, of the number of
shares of our common stock obtained by dividing
$6.0 million by the initial public offering price set forth
on the cover page of this prospectus for no consideration.
Assuming an initial offering price of
$ per
share, which represents the midpoint of the range on the cover
of this prospectus, Mr. Unger will
receive shares
of our common stock. The expense we will recognize in connection
with this grant will equal the value of the shares granted to
Mr. Unger as of the date of issuance, which we expect will
be approximately $6.0 million. We expect to recognize
$2.4 million of this expense in the quarter that we
complete this offering, when 40% of these shares will vest. We
expect to recognize the remaining $3.6 million of this
expense in the quarter that is one year after we complete the
offering, when the balance of these shares will vest. See
ManagementExecution compensationEmployment
agreements and Certain relationships and related
party transactionsCertain transactions involving James J.
UngerGrant of common stock.
We also intend to issue options to purchase up to an
estimated shares
of common stock under our 2005 equity incentive plan upon the
closing of this offering. These options will be granted at an
exercise price equal to the fair market value of the shares on
the date of the grant, have a term of five years and vest in
equal annual installments over a three-year period. Under the
terms of his employment agreement, James A. Cowan, our chief
operating officer, is entitled to receive an option to purchase
1.25% of our outstanding shares of common stock immediately
following the offering (excluding the shares that may be issued
upon the exercise, if any, of the over-allotment option). As a
result, the actual number of shares subject to the option
granted to Mr. Cowan will be proportionately adjusted if
the number of shares to be issued by us in this offering is
increased or decreased. Based on the anticipated number of
shares we will issue in this offering, Mr. Cowan would have
an option to
purchase shares
of our common stock. We have also agreed to issue options to
other of our employees to purchase up to approximately
$5.0 million of our shares, representing the balance of the
options we intend to issue upon the closing of this offering,
under our 2005 equity incentive plan. The number of shares
subject to those options will be determined by dividing the
dollar value of the shares allocated to each recipient by the
exercise price as so determined. Actual valuation of the options
and shares to be granted at the closing will be based upon a
number of factors that are not in our control, such as the fair
market value of our common stock on the closing of this offering
and the market performance of our common stock. We estimate that
our stock option expense for all these options will total
approximately $3.5 million over the next three years assuming a
Black-Scholes calculation based on the following assumptions:
stock volatility of 33.78%; 5-year term; interest rate of 4.46%;
and dividend yield of 0%.
The 2005 Equity Incentive Plan will be administered by the Board
of Directors who will be authorized to grant incentive stock
options, nonqualified stock options, stock appreciation rights
(SARs), performance shares, restricted stock, other forms of
equity-based or equity-related awards, or other cash awards.
Other additional expenses
We have agreed to pay William Benac, our chief financial
officer, a one-time special cash bonus of $500,000 on
April 22, 2007 if, prior to that date, we issue common
stock to the public in an offering registered with the SEC or
Mr. Icahn sells his controlling interest in us to a third
party in a private transaction. If at any time on or before
April 22, 2007, we terminate Mr. Benacs
employment without cause, he resigns for good reason, or a
change in control occurs, he will be entitled to receive the
special cash bonus of $500,000 upon the occurrence of such
event. Mr. Benacs right to the special cash bonus of
$500,000 and any severance immediately terminates if his
employment is terminated for cause or he resigns without good
reason. As a result of this arrangement, we expect that we will
55
Managements discussion and analysis of financial
condition and results of operations
accrue a $500,000 expense in the quarter that we complete this
offering. See Management Executive
compensation Employment agreements.
Other additional expenses that we expect to incur in connection
with this offering includes the write-off of the remaining
$0.6 million of deferred financing costs that we incurred
in connection with our industrial revenue bond financings, which
we plan to repay in full with a portion of the net proceeds of
this offering. We had previously been amortizing these expenses
over the remaining terms of the industrial revenue bonds.
RESULTS OF OPERATIONS
The following table summarizes our historical operations as a
percentage of revenues for the periods shown. Our historical
results are not necessarily indicative of operating results that
may be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
Years ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing Operations
|
|
|
82.0
|
%
|
|
|
86.3
|
%
|
|
|
89.1
|
%
|
|
|
89.2
|
%
|
|
|
92.6
|
%
|
|
Railcar Services
|
|
|
18.0
|
%
|
|
|
13.7
|
%
|
|
|
10.9
|
%
|
|
|
10.8
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing
|
|
|
79.6
|
%
|
|
|
80.1
|
%
|
|
|
86.3
|
%
|
|
|
84.9
|
%
|
|
|
85.3
|
%
|
|
Cost of railcar services
|
|
|
17.5
|
%
|
|
|
13.7
|
%
|
|
|
9.7
|
%
|
|
|
9.7
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
97.1
|
%
|
|
|
93.8
|
%
|
|
|
96.0
|
%
|
|
|
94.6
|
%
|
|
|
91.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2.9
|
%
|
|
|
6.2
|
%
|
|
|
4.0
|
%
|
|
|
5.4
|
%
|
|
|
8.5
|
%
|
Selling, administrative and other expenses
|
|
|
5.6
|
%
|
|
|
4.7
|
%
|
|
|
2.9
|
%
|
|
|
3.4
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
|
(2.7
|
)%
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
|
|
2.0
|
%
|
|
|
5.9
|
%
|
Interest income
|
|
|
2.1
|
%
|
|
|
1.5
|
%
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
0.3
|
%
|
Interest expense
|
|
|
(2.9
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.9
|
)%
|
|
|
(0.8
|
)%
|
Income (loss) from joint venture
|
|
|
0.0
|
%
|
|
|
(0.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.1
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax expense (benefit)
|
|
|
(3.4
|
)%
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
1.8
|
%
|
|
|
5.5
|
%
|
Income tax expense (benefit)
|
|
|
(1.1
|
)%
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
(2.3
|
)%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
1.1
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the nine months ended September 30, 2005
to the nine months ended September 30, 2004
Our net earnings for the nine months ended September 30,
2005 were $14.5 million, compared to $2.9 million for
the nine months ended September 30, 2004, representing an
increase of $11.6 million. In the first nine months of
2005, we sold 4,980 railcars, which is 1,720 more than the 3,260
railcars we sold in the first nine months of 2004. Most of our
revenues for the first nine months of 2005 included sales under
contracts that allowed us to adjust our sale prices to pass on
to our customers the impact of increases in the costs of certain
raw materials, particularly steel, and components. This
improvement was partially offset by increased costs associated
with outsourcing our railcar painting and lining for our new
production line at our Paragould facility and the start-up costs
for that new production line.
56
Managements discussion and analysis of financial
condition and results of operations
Revenues
Our revenues for the nine months ended September 30, 2005
increased 74% to $442.1 million from $254.3 million in
the nine months ended September 30, 2004. This increase was
primarily attributable to an increase in our revenues from sales
of railcars.
Our manufacturing operations revenues increased 81% to
$409.2 million in the first nine months of 2005 from
$226.8 million in the first nine months of 2004. This
increase was primarily attributable to the delivery of an
additional 1,720 railcars in the first nine months of 2005,
increased prices resulting from our ability to pass through a
portion of our increased raw material and component costs and
increases in the base unit price for some of our railcars. Our
revenues from sales of railcars increased $166.8 million to
$356.5 million in the first nine months of 2005 from
$189.7 million in the first nine months of 2004. The
additional deliveries of railcars in the first nine months of
2005 reflected increased sales of covered hopper and tank
railcars and a continuation of deliveries of centerbeam platform
railcars ordered in 2004. These increased sales reflected our
increased capacity at our Paragould facility supported by the
continued strong backlog of orders for our railcars. Our
manufacturing operations revenues attributable to sales of
railcar and industrial components increased by
$15.1 million in the first nine months of 2005 to
$51.7 million from $36.6 million in the first nine
months of 2004. This increase was primarily attributable to
increased unit sales reflecting increased railcar manufacturing
and industrial activity. For the first nine months of 2005, our
manufacturing operations revenues included $44.5 million,
or 10.1% of our total revenues, from transactions with
affiliates, compared to $44.6 million, or 17.5% of our
total revenues, in the first nine months of 2004. These revenues
were attributable to sales of railcars to companies controlled
by Mr. Icahn.
Our railcar services revenues increased by $5.3 million to
$32.9 million in the first nine months of 2005, from
$27.6 million in the first nine months of 2004. This
increase was primarily attributable to strong railcar repair
demand and a $2.0 million increase in leasing and other
fleet management service revenue from subsidiaries of our
affiliate, ARL, a company controlled by Mr. Icahn. The
increase in railcar services revenues from ARL was fully offset
by $2.0 million of pass through costs paid to ACF, also a
company controlled by Mr. Icahn, that was included in our
cost of railcar services. Our management agreements with the ARL
subsidiaries were terminated on June 30, 2005. However, we
continue to provide repair, maintenance and fleet management
services for those fleets. For the first nine months of 2005,
our railcar services revenues included $16.0 million, or
3.6% of our total revenues, from transactions with affiliates,
compared to $12.7 million, or 5.0% of our total revenues,
in the first nine months of 2004.
Gross profit
Our gross profit increased to $37.4 million in the first
nine months of 2005 from $13.7 million in the first nine
months of 2004. Our gross profit margin increased to 8.5% in the
first nine months of 2005 from 5.4% in the first nine months of
2004, primarily reflecting improved margins in our manufacturing
operations.
Our gross profit margin for our manufacturing operations
increased to 7.8% in the first nine months of 2005 from 4.7% in
the first nine months of 2004. This increase was primarily
attributable to the contribution from increased overhead
absorption on plant work volume and our ability to pass through
a greater portion of increased raw material and component costs
through variable pricing contracts. In the first nine months of
2005, we were unable to pass through only approximately
$1.5 million of $32.5 million of increased raw
material and component costs. In the first nine months of 2004,
we were unable to pass through approximately $5.0 million
of $7.0 million of increased raw material and component
costs. Most of our railcar manufacturing contracts providing for
deliveries after the first nine months of 2005 have variable
cost provisions that adjust the delivery price for changes in
certain raw material and component costs. As a result, changes
in steel prices and other raw material and component prices
should have little impact on our gross profits for the remainder
of the year. However, increases in
57
Managements discussion and analysis of financial
condition and results of operations
raw material and component costs would have an adverse effect on
our gross profit margin as a percentage of revenues, because we
do not earn any additional net profit margin on our price
adjustments.
Our improvement in gross profit margin in 2005 was partially
offset by a contract to manufacture centerbeam platform
railcars, a new product line for us in 2004. This was the first
time we manufactured centerbeam platform railcars and, as a
result of start-up and increased production costs, we did not
realize a profit on this contract. Our centerbeam platform
railcar contracts were completed at our Paragould facility in
July 2005 and we have since converted the manufacturing line at
that facility to manufacturing covered hopper railcars. In the
first six months of 2005, we also incurred additional costs in
connection with the completion of our new third production line
at our Paragould facility, including costs associated with
outsourcing our railcar painting and lining for the increased
railcar production from that new production line and costs of
the initial training and supplies for that production line. We
are currently constructing additional painting and lining
capabilities at our Paragould facility, which we expect to be
completed by the end of 2005. This new painting and lining
capacity should allow us to improve margins as we reduce or
eliminate outsourcing of this function.
Our gross profit margin for our railcar services increased to
16.4% in the first nine months of 2005 from 10.8% in the first
nine months of 2004. This increase was primarily attributable to
our service facilities operating at a higher volume level, which
resulted in efficiencies in labor and overhead.
Selling, administrative and other expenses
Our selling, administrative and other expenses increased by
$2.9 million in the first nine months of 2005, to
$11.4 million from $8.5 million in the first nine
months of 2004. Selling, administrative and other expenses were
2.6% of total revenues in the first nine months of 2005 as
compared to 3.4% of total revenues in the first nine months of
2004. Our increase in the amount of our selling, administrative
and other expenses was primarily attributable to an increase in
information technology costs, audit and outside professional
service fees.
Interest expense and interest income
Our interest expense in the nine months ended September 30,
2005 was $3.6 million as compared to $2.2 million for
the nine months ended September 30, 2004, representing an
increase of $1.4 million. The increase in interest expense
was primarily attributable to higher debt balances. Our interest
income in the nine months ended September 30, 2005 was
$1.3 million as compared to $2.1 million for the nine
months ended September 30, 2004, representing a decrease of
$0.8 million. The decrease in interest income was primarily
attributable to a $57.2 million loan to an affiliate that
was repaid in 2004 that was partially offset by interest income
we earned on a $165.0 million secured loan we made to
Mr. Icahn in October 2004. In January 2005, we transferred
our entire interest in this loan to ARL in exchange for
additional common interests in ARL and in satisfaction of our
$130.0 million loan from ARL. See Certain
relationships and related party transactions Certain
transactions with Mr. Icahn and other related
entities.
Income tax expense
Our income tax expense for the nine months ended
September 30, 2005 was $9.6 million, or 39.8% of our
earnings before income taxes, as compared to $1.9 million
for the nine months ended September 30, 2004, or 39.3% of
our earnings before income taxes. Our effective tax rate is
impacted by expenses included in pre-tax earnings for which we
do not receive a deduction for tax purposes. These expenses
result from the liabilities and obligations retained by ACF as
part of its transfer of assets to us in 1994. See Certain
relationships and related party transactions Certain
transactions with ACF Industries LLC. Although ACF is
responsible for any costs associated with these liabilities, we
are required to recognize these costs as expenses in order to
reflect the full cost of doing business. The entire amount of
such permanently nondeductible expenses is treated as
contribution of capital resulting in an increase to our
58
Managements discussion and analysis of financial
condition and results of operations
effective tax rate. The expenses included in pre-tax income were
$0.8 million and $0.8 million for the nine months
ended September 30, 2004 and September 30, 2005,
respectively.
Comparison of the year ended December 31, 2004 to the
year ended December 31, 2003
Our net earnings for the year ended December 31, 2004 was
$1.9 million as compared to $1.1 million for the year
ended December 31, 2003, representing an increase of
$0.8 million. In 2004, we sold 4,384 railcars, 1,827 more
than the 2,557 railcars we sold in 2003. Despite the increase in
railcar deliveries in 2004, our net earnings for 2004 was
negatively affected by dramatic increases in raw materials,
especially steel, and railcar component prices, particularly for
components manufactured from steel. Our railcar manufacturing
contracts precluded us from passing most of these increased
costs on to our customers. Our gross margins in 2004 were also
adversely affected by the losses we incurred from our
introduction and sale of centerbeam platform railcars
manufactured at our Paragould facility. Net earnings for 2003
reflected a $0.8 million write-down of the carrying value
of buildings and improvements, and equipment at our Milton,
Pennsylvania railcar repair facility, and a $0.4 million
charge to adjust inventory to the lower of cost or market. We
incurred no such write-downs in 2004.
Revenues
Our revenues in 2004 increased 63% to $355.1 million from
$218.0 million in 2003. This increase was attributable to
an increase in revenues from both manufacturing operations and
railcar services.
Our manufacturing operations revenues increased 68% to
$316.4 million in 2004 from $188.1 million in 2003.
This increase was primarily attributable to our delivery of an
additional 1,827 railcars in 2004 and, to a lesser extent, an
increase in pricing based upon our ability to pass through some
of our increased costs as well as an increase in the base price
of our railcars. Our revenues from railcar sales increased
$111.1 million to $265.8 million in 2004 from
$154.7 million in 2003. The additional deliveries of
railcars in 2004 reflected increased sales of covered hopper and
tank railcars and sales of centerbeam platform railcars. We
believe that the increases were primarily attributable to the
continuing recovery of the railcar industry which resulted in a
strong backlog of orders for delivery in 2004. In 2004,
deliveries increased by 428 tank railcars and 164 covered hopper
railcars from 2003, and our centerbeam platform railcar
deliveries totaled 1,240. We delivered five centerbeam platform
railcars in 2003. Our increase in manufacturing operations
revenues also reflected a $17.3 million increase in our
sales of railcar and industrial components. This increase was
primarily attributable to an increase in demand for castings and
components in the oil refinery and transportation markets. In
2004, our manufacturing operations revenues included
$64.4 million, or 18.1% of our total revenues, from
transactions with affiliates, compared to $62.9 million, or
28.8% of our total revenues, in 2003. These revenues were
primarily attributable to sales of railcars to companies
controlled by Mr. Icahn.
Our railcar services revenues increased 29% to
$38.6 million in 2004 from $29.9 million in 2003. This
increase was attributable to increased sales, primarily related
to repair and maintenance services provided to affiliates,
including ACF and ARL and their subsidiaries. In 2004, our
railcar services revenues included $19.4 million, or 5.5%
of our total revenues, from transactions with affiliates, as
compared to $11.0 million, or 5.1%, in 2003.
Gross profit
Our gross profit increased to $14.3 million in 2004 from
$13.6 million in 2003. Our gross profit margin decreased to
4.0% in 2004 from 6.2% in 2003. The decrease in our gross profit
margin was primarily attributable to a decrease in our gross
profit margin for our manufacturing operations that was
partially offset by an increase in our gross profit margin for
our railcar services.
Our gross profit margin for our manufacturing operations
decreased to 3.2% in 2004 from 7.2% in 2003. This decrease was
primarily attributable to an increase in the cost of raw
materials and
59
Managements discussion and analysis of financial
condition and results of operations
components, consisting primarily of steel and steel-based
components, that we were not able to pass through to our
customers due to fixed price contracts. Our cost of sales
increased by approximately $11.3 million in 2004 based upon
these increased raw material and component costs. We estimate
that we were able to pass through $3.4 million of these
costs to our customers. Our margins were also adversely affected
by the losses we incurred resulting from our introduction and
sale of centerbeam platform railcars in 2004. We completed
deliveries under our centerbeam platform railcar contract by in
July 2005 and have converted the manufacturing line we used to
manufacture these railcars to manufacture covered hopper
railcars.
Our gross profit margin for railcar services increased to 10.7%
in 2004 from 0.4% in 2003. This increase was primarily
attributable to increased sales that resulted in increased
efficiencies of labor and overhead. Our gross profit margin for
railcar services in 2003 was adversely affected by a
$0.8 million write-down of the carrying value of buildings
and improvements, and equipment at our Milton, Pennsylvania
railcar maintenance facility, which we idled during 2003, and a
$0.4 million charge to adjust inventory to the lower of
cost or market.
Selling, administrative and other expenses
Our selling, administrative and other expenses did not increase
in 2004 from the $10.3 million expense in 2003. Selling,
administrative and other expenses were 2.9% of sales in 2004 as
compared to 4.7% of sales in 2003. In 2004, we were able to use
the infrastructure we put in place in 2003 to grow our revenues
without increasing our selling, administrative and other
expenses. Our expenses in 2004 reflected an increase in
engineering and purchasing personnel, but these expenses were
offset by reduced spending in insurance, retirement, legal fees
and engineering consulting services.
Interest expense and interest income
Interest expense was $3.7 million and $3.6 million for
years ended December 31, 2004 and 2003, respectively. Our
interest income increased to $4.4 million in 2004 from
$3.2 million in 2003. The increase in interest income and
interest expense was primarily attributable to our
$165.0 million secured loan to Mr. Icahn and our
$130.0 million loan from ARL, respectively, both of which
are no longer outstanding.
Income tax expense
Income tax expense for 2004 was $2.2 million, or 53.3% of
our earnings before income taxes, as compared to
$1.1 million for 2003, or 51.7% of our earnings before
income taxes. Our income tax rates were higher than the
statutory rates in both periods because of the effect of
expenses included in pre-tax income for which we do not receive
a deduction for tax purposes. These expenses primarily relate to
the liabilities and obligations retained by ACF as part of its
transfer of assets to us in 1994.
Comparison of the year ended December 31, 2003 to the
year ended December 31, 2002
Our net earnings for the year ended December 31, 2003 was
$1.1 million as compared to a $3.9 million net loss
for the year ended December 31, 2002, representing an
increase of $5.0 million. In 2003, we sold 2,557 railcars,
791 more than the 1,766 railcars we sold in 2002. The increase
in our earnings was primarily attributable to increased gross
profit from the delivery of these additional railcars, which was
partially offset by an increase in selling, administrative and
other expenses of $0.8 million, as increased engineering
and purchasing support were added to support railcar
manufacturing. Net earnings was reduced in 2003 because we wrote
down the carrying value of buildings and improvements and
equipment for one of our railcar maintenance facilities by
$0.8 million, and an inventory value reduction of
$0.4 million.
60
Managements discussion and analysis of financial
condition and results of operations
Revenues
Our revenues increased by 29.1% to $218.0 million in 2003
from $168.8 million in 2002. This increase was attributable
to an increase in our manufacturing operations revenues that was
partially offset by a decrease in railcar services revenues.
Our manufacturing operations revenues increased 36% to
$188.1 million in 2003 from $138.4 million in 2002.
This increase was primarily attributable to our delivery of an
additional 791 railcars in 2003 and, to a lesser extent, an
increase in the base unit price of our railcars. In 2003, we
delivered 496 additional tank railcars and 290 additional
covered hopper railcars as compared to 2002. We attribute these
increased sales to the recovery of the railcar manufacturing
industry. Our revenues from railcar and industrial components
manufacturing increased $3.1 million to $33.4 million
in 2003 from $30.3 million in 2002. This increase reflected
increased demand for our railcar component products and an
increase in demand for our steel castings products in the oil,
gas and transportation markets. In 2003, our manufacturing
operations revenues included $62.9 million, or 28.8% of our
total revenues, from transactions with affiliates, compared to
$63.6 million, or 37.6% of our total revenues, in 2002.
These revenues were primarily attributable to sales of railcars
to companies controlled by Mr. Icahn.
Our revenues from railcar services decreased by
$0.5 million to $29.9 million in 2003 from
$30.4 million in 2002. This decrease is primarily
attributable to the idling of our Milton, Pennsylvania repair
facility and a corresponding loss of repair and maintenance
revenues that had historically been performed at that facility.
In 2003, our railcar services revenues included
$11.0 million, or 5.1% of our total revenues, from
transactions with affiliates, as compared to $12.8 million,
or 7.6% of our total revenues, in 2002.
Gross profit
Our gross profit increased by $8.7 million to
$13.6 million in 2003 from $4.9 million in 2002. Our
gross profit margin increased to 6.2% in 2003 from 2.9% in 2002.
The improvement in our gross profit margin was attributable to
an improved gross profit margin for our manufacturing operations
that was partially offset by a decrease in our gross profit
margin for our railcar services. Our gross profit margin for our
manufacturing operations increased to 7.2% in 2003 from 2.9% in
2002. This increase was primarily attributable to the
contribution from increased overhead absorption as plant work
volume increased. Our gross profit margin for our railcar
services was 0.4% in 2003 compared to 2.8% in 2002. This
decrease in gross profit margin was primarily attributable to
decreased revenues and the $1.2 million asset write-down in
2003 in connection with the idling of our Milton, Pennsylvania
repair and maintenance facility. We incurred a $0.2 million
write-down in connection with this facility in 2002.
Selling, administrative and other expenses
Our selling, administrative and other expenses increased 8.8% to
$10.3 million in 2003 from $9.5 million in 2002. The
increase in our selling, administrative and other expenses in
2003 was primarily attributable to increased information
technology, infrastructure, engineering and purchasing services
to support our growing operations. Selling, administrative and
other expenses decreased to 4.7% of revenues in the year ended
December 31, 2003 from 5.6% in the year ended
December 31, 2002.
Interest expense and interest income
Our interest expense was $3.6 million and $4.9 million
for the years ended December 31, 2003 and 2002,
respectively. Our interest income was $3.2 million and
$3.6 million for the years ended December 31, 2003 and
2002, respectively. The interest income was primarily from a
$57.2 million loan to an affiliate that was repaid in 2004.
The interest expense reduction was primarily due to reduction of
the average outstanding borrowings under our existing revolving
credit facility.
61
Managements discussion and analysis of financial
condition and results of operations
Income tax expense/benefit
Our income tax expense in the year ended December 31, 2003
was $1.1 million, or 51.7% of income before income taxes,
as compared to a $1.9 million tax benefit in the year ended
December 31, 2002, or 32.6% of loss before income taxes.
Our income tax rate was higher than the statutory rates in 2003,
because of the effect of expenses included in pre-tax income for
which we do not receive a deduction for tax purposes. These
expenses primarily relate to the liabilities and obligations
retained by ACF as part of its transfer of assets to us in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity have historically been the cash
generated from our operations, the sale of securities and funds
generated from borrowings. Until recently, most of our capital
needs have been satisfied by entities affiliated with
Mr. Icahn. Upon completion of this offering, we intend to
use substantially all of the net proceeds of this offering to
repay amounts outstanding under our revolving credit facility,
to pay the notes due to affiliates of Mr. Icahn, to redeem
all our industrial revenue bonds and to redeem all of the
outstanding shares of our preferred stock, all of which is held
by Mr. Icahn and his affiliates. Following this offering we
cannot guarantee that we will receive any further financial
support from Mr. Icahn or his affiliates.
Outstanding debt
Revolving credit facility.
On March 10, 2005,
we entered into a revolving credit facility with North Fork
Business Capital Corporation, as administrative agent for
various lenders. As of September 30, 2005, we had
$31.3 million in principal and interest outstanding under
this facility. We intend to repay all or a substantial portion
of this credit facility with the proceeds of this offering. We
have entered into a commitment letter with our lenders to amend
and restate our revolving credit facility in conjunction with
the closing of this offering to, among other things, extend the
term of the facility to three years from the completion of the
offering, increase our maximum borrowing amount to
$75 million with a $15 million subfacility and modify
certain covenants, including to eliminate the covenant that
requires Mr. Icahn to retain a majority interest in us.
Terms of our existing revolving credit facility are:
|
|
4
|
Maximum
borrowing.
The
revolving credit facility provides for a maximum borrowing of
the lesser of (a) $50.0 million or (b) 85% of the
eligible receivables plus 65% of the eligible inventory, which
inventory may include at the most $40.0 million, less any
reserves established by the agent in accordance with the
agreement. As of September 30, 2005, the maximum borrowing
amount eligible under this facility was $48.4 million;
|
|
4
|
Term.
The revolving credit facility expires March 10, 2006;
|
|
4
|
Interest rate and
fees.
Borrowings bear
an interest rate of a base rate less 0.25%, where the base rate
is the highest prime, base or equivalent rate of interest
published by the administrative agent, or the published
annualized rate for 90-day dealer commercial paper published in
the Wall Street Journal, or a LIBOR rate plus 2.5%. We are
required to pay an unused line fee of 0.375% per year on
the difference, if positive, of $50.0 million minus the
average daily aggregate outstanding amount of the loans. As of
September 30, 2005, the interest rate under the revolving
credit facility was 6.5%;
|
|
4
|
Collateral.
Our receivables, inventory and a pledged deposit account serve
as collateral under the existing revolving credit facility. In
addition, we are required to maintain one or more blocked
accounts to which all our collections are remitted, upon notice
from the administrative agent, if the difference between the
lesser of $50.0 million or the borrowing base and the
outstanding amount of our loans is less than $5.0 million,
or if an event of default is ongoing;
|
|
4
|
Financial
covenants.
Our existing
revolving credit facility requires us to meet a fixed charge
coverage ratio of not less that 1.2 to 1.0 for each of the
following periods: January 1, 2005
|
62
Managements discussion and analysis of financial
condition and results of operations
|
|
|
through June 30, 2005; January 1, 2005 through
September 30, 2005; January 1, 2005 through
December 31, 2005; and each 12 month period ending on
the last day of each calendar quarter thereafter; and a leverage
ratio calculated based on the outstanding amount of indebtedness
to EBITDA of not greater than 4.0 to 1.0 for each of the above
mentioned periods. As of September 30, 2005, we were in
compliance with these financial covenants; and
|
|
|
4
|
Negative
covenants.
Our existing
revolving credit facility includes certain limitations on, among
other things, our ability to incur additional indebtedness,
modify our current governing documents, sell or dispose of
collateral, grant credit and declare or pay dividends or make
distributions on common stock or other equity securities. In
addition, our existing revolving credit facility provides that
Mr. Icahn shall maintain a direct or indirect ownership of
at least 50.1% of our voting equity interest.
|
Terms of the proposed amended and restated revolving credit
facility are:
|
|
4
|
Maximum
borrowing.
Our amended
and restated revolving credit facility would provide for a
maximum borrowing of the lesser of (a) $75 million or
(b) 85% of the eligible accounts receivables plus 65% of
the eligible raw materials and finished goods inventory.
Eligible receivables would include only accounts receivable to
our customers in the United States or Canada arising from sales
in the ordinary course of business with non-affiliates. In
addition, the amended and restated revolving credit facility
would include a $15.0 million capital expenditure
sub-facility that would be based on 80% of the costs related to
capital projects we may undertake;
|
|
4
|
Term.
The amended and restated revolving credit facility would expire
three years after the closing of this offering;
|
|
4
|
Interest rate and
fees.
Borrowings would
bear an interest rate of a base rate less 0.5%, where the base
rate is the higher of the highest prime, base or equivalent rate
of interest published by the administrative agent, or the
published annualized rate for 90-day dealer commercial paper
published in the Wall Street Journal. In addition we would be
granted a 1 month, 2 month or 3 month LIBOR rate
plus 1.5%. We would be required to pay a closing fee of
$0.2 million and an unused line fee of 0.375% per year on
the unused portion of our amended and restated revolving credit
facility;
|
|
|
4
|
Collateral.
Our receivables, inventory and a pledged deposit account
together with assets we purchase with the proceeds from the
capital expenditure sub-facility would serve as collateral under
the amended and restated revolving credit facility and the
capital expenditure sub-facility. In addition, we would be
required to maintain one or more blocked accounts to which all
our collections would be remitted. Under the amended and
restated revolving credit facility, the types of collections
that would be subject to the blocked account consist of all
collections including all cash, funds, checks, notes,
instruments, any other form of remittance tendered by account
debtors in respect of payment of our receivables and any other
payments received by us with respect to any collateral. If the
funds which we can draw under the amended and restated revolving
credit facility would fall under $5 million, the proceeds
in the blocked accounts would be transferred to the
administrative agent and the administrative agent would be
required to apply all such proceeds to our loan account with the
administrative agent, conditional upon final collection,
effecting a payment of any obligations that are outstanding at
such time. The interest that the administrative agent would hold
in such proceeds (until such time as they are applied to the
obligations) would be in the nature of a collateral security
interest. Upon termination of the administrative agents
security interests in such proceeds in accordance with
applicable laws generally governing the termination of security
interests and bank deposits, the administrative agent would
return to us any proceeds it holds after satisfaction of
existing or contingent obligations owed to the administrative
agent and the other lenders. We may borrow, repay, and reborrow
revolving credit loans in accordance with the proposed terms of
the revolving credit facility;
|
|
|
4
|
Financial
covenants.
Our amended
and restated revolving credit facility would require us to meet
an adjusted fixed charge coverage ratio of not less than 1.2 to
1.0 on a quarterly and/or annual
|
63
Managements discussion and analysis of financial
condition and results of operations
|
|
|
basis and a leverage ratio calculated based on the outstanding
amount of indebtedness to EBITDA of not greater than 4.0 to 1.0
on a quarterly and/or annual basis; and
|
|
|
4
|
Negative
covenants.
Our amended
and restated revolving credit facility would include certain
limitations on, among other things, our ability to incur
additional indebtedness, modify our current governing documents,
sell or dispose of collateral, grant credit and declare or pay
dividends or make distributions on common stock or other equity
securities. The limitation on certain of the actions addressed
by the amended and restated revolving credit facility would be
in the nature of a right in favor of the administrative agent
and our lenders to accelerate all of our obligations under the
credit facility, a demand right, that is triggered by certain
actions, rather than in the nature of a negative covenant by
which we contractually agree not to take such actions. Included
among the actions that would trigger a demand right would be
certain actions to modify governing documents, sell or dispose
of collateral, grant credit, incur indebtedness, and make
dividends and distributions. An incurrence of indebtedness would
trigger a demand right if it would cause the adjusted ratio of
our indebtedness to EBITDA, as defined in the amended and
restated revolving credit facility, to be greater than 4.0 to
1.0. The direct or indirect payment of dividends or
distributions, or purchase, redemption, or retirement of capital
stock, equity interests, options or rights to purchase capital
stock or equity interests, or payments to sinking or analogous
funds, will trigger a demand right if it would cause the
adjusted fixed charge coverage ratio to be less than 1.2 to 1.0
or the ratio of adjusted indebtedness to EBITDA to be greater
than 4.0 to 1.0, each on a quarterly and/or annual basis, as
defined in the amended and restated revolving credit facility.
Our amended and restated revolving credit facility would
eliminate the requirement that Mr. Icahn maintain a direct
or indirect ownership of at least 50.1% of our voting equity
interest.
|
Industrial revenue bonds.
As of September 30,
2005, we had $8.3 million in principal amount and
$0.3 million in accrued interest on the industrial revenue
bonds outstanding. As of that date, these bonds had effective
interest rates ranging from 7.75% to 8.5%, with principal
amounts due through 2011. We intend to use a portion of the net
proceeds of this offering to repay all amounts due under these
bonds. The industrial revenue bonds are guaranteed by affiliates
of Mr. Icahn, and these affiliates will be released from
such guarantees upon repayment of the industrial revenue bonds.
In addition, James J. Unger, our president and chief executive
officer, and his wife own $0.4 million of the industrial
revenue bonds issued by Paragould, Arkansas. Mr. Unger and
his wife will receive approximately $0.4 million upon our
repayment of the amounts due under the industrial revenue bonds.
Outstanding notes to affiliates.
In December 2004,
we borrowed $7.0 million from Arnos Corp., a company
controlled by Mr. Icahn, to provide us with additional
working capital. The loan bears interest at the prime rate plus
1.75% (8.0% at September 30, 2005) and is payable on
demand. Additionally, in connection with our purchase of
Castings LLC, effective January 1, 2005, from an affiliate
of Mr. Icahn, we issued that affiliate a note payable in
the principal amount of $12.0 million. The note bears
interest at the prime rate plus 0.5% (6.75% at
September 30, 2005) and is payable on demand. We intend to
use a portion of the net proceeds of this offering to repay all
amounts due under these obligations. As of September 30,
2005, $20.0 million was outstanding under these obligations.
64
Managements discussion and analysis of financial
condition and results of operations
Cash flows
The following table summarizes our net cash provided by or used
in operating activities, investing activities and financing
activities and our capital expenditures for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
Cash flows
|
|
December 31, 2004
|
|
|
September 30, 2005
|
|
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(17,082
|
)
|
|
$
|
27,831
|
|
|
Investing activities
|
|
|
(11,037
|
)
|
|
|
(16,356
|
)
|
|
Financing activities
|
|
|
34,997
|
|
|
|
7,783
|
|
|
Capital expenditures
|
|
|
(11,441
|
)
|
|
|
(16,356
|
)
|
Operating activities.
Our net cash provided by or used in
operating activities reflects net earnings or loss, adjusted for
non-cash charges and changes in net working capital, including
non-current assets and liabilities. Cash flows from operating
activities are affected by several factors, including
fluctuations in business volume, contract terms for billings and
collections, the timing of collections on our accounts
receivables, processing of payroll and associated taxes and
payments to our suppliers. We do not typically experience
business credit losses, although a payment may be delayed
pending completion of closing documentation, and a typical order
of railcars may not yield cash proceeds until after the end of a
reporting period.
Our net cash provided by operating activities was
$27.8 million for the nine months ended September 30,
2005, which included net earnings of $14.5 million,
increased by depreciation and amortization of $5.0 million,
a provision for deferred income taxes of $8.7 million, and
$0.8 million of expenses that we incurred relating to
pre-capitalization liabilities retained and payable by ACF.
Payment of these expenses by ACF is reflected as additional paid
in capital. These increases were partially offset by
$0.4 million of earnings allocated to us as a result of our
joint venture interest in Ohio Castings. Cash provided by
operating activities attributable to changes in our current
assets and liabilities included an increase in accounts payable
of $33.4 million and an increase in accrued expenses and
taxes of $5.8 million. These sources of cash were partially
offset by an increase in inventories of $7.9 million, an
increase in accounts receivable of $23.8 million and an
increase in prepaid expenses of $8.3 million. The increase
in inventories was primarily attributable to the build-up of
inventory for our new third production line at our Paragould
facility. The increase in accounts payable and accrued expenses
was primarily due to this inventory buildup and a change in the
processing and accounting of accounts payable that had
previously been processed through affiliates. The increase in
accounts receivable was primarily attributable to the increased
volume of sales attributed to railcars manufactured at our
Paragould facility. The increase in prepaid expenses was
primarily attributable to payments for workers
compensation and general insurance coverages that benefit future
periods.
For the year ended December 31, 2004, cash used by
operating activities was $17.1 million. Our sources of cash
included net earnings of $1.9 million, increased by
depreciation and amortization of $6.2 million, expenses
relating to pre-capitalization liabilities retained by ACF of
$1.4 million, a provision for deferred income taxes of
$1.7 million and $0.6 million of non-cash loss
allocated to us as a result of our joint venture interest in
Ohio Castings. Cash used in operating activities attributable to
changes in our current assets and liabilities included an
increase in inventories of $28.7 million and an increase in
accounts receivable of $12.0 million. These uses of cash were
partially offset by an increase in accounts payable of
$12.0 million. The increase in our inventories and accounts
receivable were primarily attributable to our increased sales
and the increased cost or raw materials and
65
Managements discussion and analysis of financial
condition and results of operations
components. The increase in accounts payable was primarily
attributable to our build-up of inventory to support our
increased sales.
Investing activities.
Net cash used in investing
activities for the nine months ended September 30, 2005 was
$16.4 million, including $8.3 million for construction
of additional painting and lining capabilities at our Paragould
facility and $2.8 million for the purchase of manufacturing
equipment and leasehold improvements that we had previously been
leasing from ACF at our St. Charles, Missouri manufacturing
facility. See Certain relationships and related party
transactionsCertain transactions with ACF Industries
LLCCorbitt Equipment Lease and Purchase. Net cash
used in investing activities for the year ended
December 31, 2004 was $11.0 million, including
$9.4 million to construct an additional production line at
our Paragould facility.
Financing activities.
Cash provided by financing
activities was $7.8 million for the nine months ended
September 30, 2005, and included $31.3 million
borrowed under our existing revolving credit facility that we
obtained in March 2005, offset by payments to affiliates of
$22.2 million and debt repayments of $1.3 million. The
decrease in amounts due affiliates was primarily attributable to
the change in our financing arrangement with ACF, which was
terminated on April 1, 2005. The accumulated amounts due to
ACF under this intercompany arrangement were repaid by us from
the proceeds of our revolving credit facility that we obtained
in March 2005.
Net cash provided by financing activities was $35.0 million
for the year ended December 31, 2004. During the year ended
December 31, 2004, we received $110.0 million in
additional capital contributions, of which $25.0 million
was used for our contribution in the initial capitalization of
ARL, $137.0 million from the proceeds of notes due to
affiliates. The $137.0 million of proceeds from notes due
to affiliates primarily related to our $130.0 million loan
from ARL. The increase in amounts due to affiliates consisted of
cash advances and affiliate transactions. These sources of cash
were partially offset by a $165.0 million secured loan we
made to Mr. Icahn in October 2004 and a $40.2 million
repayment of our term loan in July 2004.
Capital expenditures.
We continuously evaluate facility
requirements based on our strategic plans, production
requirements and market demand and may elect to make capital
investments at higher or lower levels in the future. These
investments are all based on an analysis of the potential for
these additions to improve profitability and future rates of
return. In response to the current demand for our railcars, we
are pursuing opportunities to increase our production capacity
and reduce our costs through continued vertical integration of
our production capacity. From time to time, we may expand our
business by acquiring other businesses or pursuing other
strategic growth opportunities. We presently have not entered
into any agreements related to any material acquisitions.
In December 2004, we began construction of additional painting
and lining capabilities at our Paragould, Arkansas covered
hopper manufacturing facility. This will complement our
additional production line that was completed in November 2004.
We expect our capital expenditures in connection with the new
painting and lining capabilities, including the
$8.3 million paid in the first nine months of 2005, to be
approximately $13.2 million, with completion by November
2005.
We recently initiated a project that we estimate will cost
approximately $7.0 million to construct a new fabrication
shop at our Paragould facility to produce covered hopper railcar
components that are currently supplied by an outside vendor. We
have also recently initiated a project that we estimate will
cost approximately $2.0 million for additional steel
storage at our Marmaduke facility, which should result in
production efficiencies and contribute to a higher tank railcar
output at our Marmaduke facility.
As of January 1, 2005 we acquired from ACF Industries
Holding Corp., a company beneficially-owned and controlled by
Mr. Icahn, its interest in Castings LLC for total
consideration of $12.0 million, represented by a promissory
note bearing an interest rate equal to the prime rate plus 0.5%,
payable
66
Managements discussion and analysis of financial
condition and results of operations
on demand. Castings LLC owns a one-third interest in Ohio
Castings, which operates two foundries that produce heavy
castings. In connection with this transfer, we agreed to assume
certain, and indemnify all liabilities related to and arising
from ACF Industries Holding Corp.s investment in Castings
LLC, including the guarantee of Castings LLCs obligations
to Ohio Castings, the guarantee of bonds in the amount of
$10.0 million issued by the State of Ohio to one of Ohio
Castings subsidiaries, of which $8.0 million was
outstanding as of September 30, 2005, and the guarantee of
a $2.0 million state loan that provides for purchases of
capital equipment, of which $0.8 million was outstanding as
of September 30, 2005. The two other partners of Ohio
Castings have made similar guarantees of these obligations. See
Certain relationships and related party
transactionsCertain transactions involving Ohio
Castings.
We have an equipment lease expiring on January 30, 2006, the
terms of which include an option to either renew the lease or
purchase the equipment at a specified amount. Our intent is to
purchase the equipment upon expiration of the lease. The buyout
amount is estimated at $6.7 million. We expect to fund
these capital expenditures through cash provided by operating
activities and our revolving credit facility.
We anticipate that any future expansion of the business will be
financed through cash flow from operations, our amended and
restated revolving credit facility or term debt associated
directly with that expansion. Moreover, we believe that
following the completion of this offering, these sources of
funds will provide sufficient liquidity to meet our expected
operating requirements over the next twelve months.
Our long-term liquidity is contingent upon future operating
performance and our ability to continue to meet financial
covenants under our proposed amended and restated revolving
credit facility and any other indebtedness. We may also require
additional capital in the future to fund capital expenditures,
acquisitions or incur from time to time other investments and
these capital requirements could be substantial. Our operating
performance may also be affected by matters discussed under
Risk factors, and trends and uncertainties discussed
in this discussion and analysis, including those factors
discussed under Factors affecting operating results,
as well as elsewhere in this prospectus. These risks, trends and
uncertainties may also adversely affect our long-term liquidity.
Dividends.
Our board of directors has never
declared or paid any cash dividends on our common stock.
Following this offering, we intend to pay cash dividends on our
common stock. However, as of the date of this prospectus our
board of directors has not determined the amount of any specific
dividend. Our existing revolving credit facility provides that
the payment of dividends triggers a right in favor of the
administrative agent and our leaders to accelerate all of our
obligations under the credit facility, a demand right, unless we
satisfy certain financial covenants and provide our lenders
under that facility with advance notice of the dividend. Our
revolving credit facility requires us to meet a fixed charge
coverage ratio, after giving effect to the payment of the
dividend, of not less that 1.2 to 1.0 for each 12 month
period ending on the last day of each calendar quarter. We
expect to amend and restate our revolving credit facility
concurrently with the completion of this offering pursuant to a
commitment letter we have obtained from our lenders. The amended
and restated revolving credit facility would continue to contain
provisions that trigger a demand right if we pay dividends on
our common stock unless the payment would not cause the adjusted
fixed charge coverage ratio to be less than 1.2 to 1.0 or the
adjusted ratio of our indebtedness to EBITDA to be greater than
4.0 to 1.0, each on a quarterly and/or annual basis, as defined
in the amended and restated revolving credit facility. In
addition, under Delaware law, our board of directors may declare
dividends only to the extent of our surplus (which
is defined as total assets at fair market value minus total
liabilities, minus statutory capital), or if there is no
surplus, out of our net profits for the then-current and/or
immediately preceding fiscal years. Moreover, our declaration
and payment of dividends will be at the discretion of our board
of directors and will depend upon our operating results,
strategic plans, capital
67
Managements discussion and analysis of financial
condition and results of operations
requirements, financial condition, covenants under our borrowing
arrangement and other factors our board of directors considers
relevant. Accordingly, we may not pay dividends in any given
amount in the future, or at all.
Contractual obligations
The following table summarizes our contractual obligations as of
December 31, 2004, and the effect that these obligations
and commitments would be expected to have on our liquidity and
cash flow in future periods, assuming that our existing debt
remains outstanding during such periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
|
|
2-3
|
|
|
4-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
|
(in thousands)
|
|
Long-term debt obligations
|
|
$
|
9,851
|
|
|
$
|
1,334
|
|
|
$
|
3,014
|
|
|
$
|
3,353
|
|
|
$
|
2,150
|
|
Notes payable to affiliates
|
|
|
149,000
|
|
|
|
149,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
9,077
|
|
|
|
5,355
|
|
|
|
3,352
|
|
|
|
303
|
|
|
|
66
|
|
Purchase obligations
|
|
|
67,629
|
|
|
|
|
|
|
|
43,159
|
|
|
|
24,470
|
|
|
|
|
|
Pension funding(1)
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237,180
|
|
|
$
|
155,689
|
|
|
$
|
49,525
|
|
|
$
|
28,620
|
|
|
$
|
3,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes obligations under the pension plan relating to our
employees at our Bude, Mississippi repair plant and our
supplemental executive retirement plan.
|
The operating lease commitment above includes the future minimum
rental payments required under non-cancelable operating leases
for property and equipment leased by us.
In anticipation of the offering, after which we anticipate that
we will no longer be a part of ACFs control group, we have
been discussing with ACF an appropriate arrangement for
allocating the assets and liabilities of the pension benefit
plans and retiree group health and life insurance plans retained
by ACF in the 1994 ACF asset transfer, in which some of our
employees continue to participate, and for relieving us of
further employee benefit reimbursement obligations to ACF under
the 1994 ACF asset transfer agreement. In connection with the
proposed allocation of assets and liabilities of the affected
plans, which we expect to complete in the fourth quarter of
2005, we estimate the net amount that we will pay ACF is
approximately $6.3 million. In addition, in connection with
that arrangement, we estimate that we will assume unfunded post
retirement benefit liabilities totaling $7.9 million. We
have previously accrued an estimated liability related to this
settlement of $3.8 million. For a further description of the
proposed arrangement, see Charges and costs
associated with our public offeringACF employee benefit
plans and Note 13 to our Condensed Consolidated Financial
Statements.
Contractual obligations for the Bude pension plan are the
estimated minimum required contributions to be made to the Bude
pension plan at the due date of those payments. The first of
these payments is due on January 15, 2008. The amount
included for the supplemental executive retirement plan reflects
accrued benefits to be paid to James J. Unger, our chief
executive officer. These payments are included in the amounts
due after five years. See Management
Retirement plans for more information.
As of November 1, 2005, we had $135.6 million of
purchase orders outstanding, all of which is scheduled to be
delivered within one year. These purchase orders include
purchase orders relating to the commitments described below.
68
Managements discussion and analysis of financial
condition and results of operations
We entered into two vendor supply contracts with minimum volume
commitments in October 2005 with suppliers of materials used at
our railcar production facilities. The agreements have terms of
two and three years respectively. We have agreed to purchase a
combined total of $67.6 from these two suppliers over the next
three years. In 2006, 2007 and 2008 we expect to purchase $16.0
million, $27.1 million and $24.5 million respectively
under these agreements.
We entered into two supply agreements, in January 2005 and June
2005, with a steel supplier for the purchase of regular and
normalized steel plate. The agreements each have terms of five
years and may be terminated by either party at any time after
two years, upon twelve months prior notice. Each agreement
requires us to purchase the lesser of a fixed volume or 75% of
our requirements for the steel covered by that agreement at
prices that fluctuate with the market. We have no commitment
under these arrangements to buy a minimum amount of steel, other
than the minimum percentages, if our overall steel purchases
decline.
We have entered into supply agreements with an affiliate of
Amsted Industries, Inc., an affiliate of one of our Ohio
Castings joint venture partners, to purchase up to 25% and 33%
of the car sets, consisting of sideframes and bolsters, produced
at each of two foundries, respectively, being operated by
subsidiaries of Ohio Castings. Our purchase commitments under
these supply agreements are dependent upon the number of car
sets manufactured by these foundries, which are jointly
controlled by us and the other two members of Ohio Castings.
The following table summarizes our contractual obligations as of
December 31, 2004, and the effect that these obligations
and commitments are expected to have on our liquidity and cash
flow in future periods, after giving effect to this offering and
the application of the net proceeds of this offering as
described in Use of proceeds:
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|
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Payments Due By Period
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2-3
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4-5
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After
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Contractual Obligations
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Total
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1 Year
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Years
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Years
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5 Years
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|
(in thousands)
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|
Long-term debt obligations(1)
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$
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$
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$
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|
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$
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|
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$
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Notes payable to affiliates
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating lease obligations
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9,077
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|
5,355
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|
|
3,352
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|
|
|
303
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|
|
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66
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|
Purchase obligations
|
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|
67,629
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|
|
|
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43,159
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24,470
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Pension funding
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1,623
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|
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0
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|
|
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0
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494
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1,129
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|
|
|
|
|
|
|
|
|
|
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Total
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$
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78,329
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$
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5,355
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|
|
$
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46,511
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|
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$
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25,267
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|
|
$
|
1,195
|
|
|
|
|
|
|
|
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|
|
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(1)
|
We anticipate that our amended and restated revolving credit
facility that we intend to enter into concurrently with this
offering, will permit us to borrow $75.0 million and that
our amended and restated revolving credit facility will mature
three years following the closing of the offering.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Upon completion of this offering, we intend to repay and replace
our existing revolving credit facility, under which there is
presently $31.3 million outstanding, with an amended and
restated revolving credit facility. We will be exposed to
interest rate risk on the borrowings under our revolving credit
facility. However, we do not plan to enter into swaps or other
hedging arrangements to manage this risk because we do not
believe the risk is significant. On an annual basis, a 1% change
in the interest rate in our revolving credit facility will
increase or decrease our interest expense by $10,000 for every
$1.0 million of outstanding borrowings.
69
Managements discussion and analysis of financial
condition and results of operations
We are exposed to price risks associated with the purchase of
raw materials, especially steel and heavy castings. The cost of
steel, heavy castings and all other materials used in the
production of our railcars represent approximately 80-85% of our
direct manufacturing costs. Given the significant increases in
the price of raw materials since November 2003, this exposure
can affect our costs of production. We believe that the risk to
our margins and profitability has been greatly reduced by the
variable pricing contracts we now have in place. We have
negotiated most of our railcar manufacturing contracts with our
customers to adjust the purchase prices of our railcars to
reflect increases or decreases in the cost of certain raw
materials and components and, as a result, we are able to pass
on to our customers substantially all of the increased raw
material and component costs with respect to the railcars that
we will produce and deliver after the first nine months of 2005.
We believe that we currently have excellent supplier
relationships and do not anticipate that material constraints
will limit our production capacity. Such constraints may exist
if railcar production were to increase beyond current levels, or
other economic changes occur that affect the availability of our
raw materials.
We are not exposed to any significant foreign currency exchange
risks.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance
with U.S. GAAP. The preparation of our financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during
the reporting period. Our significant accounting policies are
described in the notes to our consolidated financial statements
included elsewhere in this prospectus. Some of these policies
involve a high degree of judgment in their application. The
critical accounting policies, in managements judgment, are
those described below. If different assumptions or conditions
prevail, or if our estimates and assumptions prove to be
incorrect, actual results could be materially different from
those reported.
Revenue recognition
Revenues from railcar sales are recognized following completion
of manufacturing, inspection, customer acceptance and shipment,
which is when title and risk for any damage or loss with respect
to the railcars passes to the customer. In some cases, painting
and lining work may be outsourced to an independent contractor
and, as a result, the sale will not be recorded until the
railcars are shipped from the independent contractors
facilities to our customer. Revenues from railcar and industrial
components are recorded at the time of product shipment, in
accordance with our contractual terms. Revenue for railcar
maintenance services are recognized upon completion and shipment
of railcars from our plants. Revenue for fleet management
services are recognized as performed.
We record amounts billed to customers for shipping and handling
as part of sales in accordance with Emerging Issues Task Force
(EITF) 00-10,
Accounting for Shipping and Handling Fees
and Costs
, and we record related costs in our cost of sales.
Accounts receivable
We carry our accounts receivable at cost, less an allowance for
doubtful accounts. On a quarterly basis, we evaluate our
accounts receivable and establish an allowance for doubtful
accounts, based on a history of past write-offs and collections
and current credit conditions. Accounts are placed for
collection on a limited basis once all other methods of
collection have been exhausted. Once it has been determined that
the customer is no longer in business and/or refuses to pay, the
accounts are written off. Our bad debt experience has been
minimal. Write-offs could be materially different than reserves
if economic conditions change or actual results deviate from
historical trends.
70
Managements discussion and analysis of financial
condition and results of operations
Product warranties
We record a liability for an estimate of costs that we expect to
incur under our basic limited warranty when manufacturing
revenue is recognized. Warranty terms are based on the
negotiated railcar sales contracts and typically are for periods
of up to five years. Factors affecting our warranty liability
include the number of units sold and historical and anticipated
rates of claims and costs per claim. We assess quarterly the
adequacy of our warranty liability based on changes in these
factors. We have generally experienced low warranty claims. Our
warranty claims were $0.5 million in 2003 and
$0.1 million in 2004. Actual results differing from
estimates could have a material effect on results from
operations in the event that unforeseen warranty issues were to
occur.
Inventory
Inventories are stated at the lower of average cost or market,
and include the cost of materials, direct labor and
manufacturing overhead. We evaluate our ability to realize the
value of our inventory based on a combination of factors
including historical usage rates, forecasted sales or usage,
product end of life dates, estimated current and future market
values and new product introductions. Assumptions used in
determining our estimates of future product demand may prove to
be incorrect, in which case the provision required for excess
and obsolete inventory would have to be adjusted in the future.
If inventory is determined to be overvalued, we would be
required to recognize such costs as cost of goods sold at the
time of such determination. Any significant unanticipated
changes in demand could have a significant negative impact on
the value of our inventory and our reported operating results.
Additionally, purchasing requirements and alternative usage
avenues are explored within these processes to mitigate
inventory exposure. When recorded, our reserves are intended to
reduce the carrying value of our inventory to its net realizable
value.
Long-lived assets
We evaluate long-lived assets, including property, plant and
equipment, under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
, which
addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed
of. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of assets may not be recoverable. The criteria for
determining impairment or such long-lived assets to be held and
used is determined by comparing the carrying value of these
long-lived assets to be held and used to managements best
estimate of future undiscounted cash flows expected to result
from the use of the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. The estimated fair value of the assets
is measured by estimating the present value of the future
discounted cash flows to be generated. We incurred impairment
losses in the years ended December 31, 2002 and 2003, and
reduced the carrying value of buildings and improvements and
equipment by $0.2 million and $0.8 million, respectively,
at one of our railcar maintenance facilities. Any future
determination requiring write-off of a significant portion of
long-lived assets recorded on our balance sheet could have an
adverse effect on our financial condition and results of
operations.
Income taxes
For financial reporting purposes, income tax expense is
estimated based on planned tax return filings. The amounts
anticipated to be reported in those filings may change between
the time the financial statements are prepared and the time the
tax returns are filed. Further, because tax filings are subject
to review by taxing authorities, there is also the risk that a
position on a tax return may be challenged by a taxing
authority. If the taxing authority is successful in asserting a
position different than that
71
Managements discussion and analysis of financial
condition and results of operations
taken by us, differences in a tax expense or between current and
deferred tax items may arise in future periods. Any such
differences which could have a material impact on our financial
statements would be reflected in the financial statements when
management considers them probable of occurring and the amount
reasonably estimable.
Valuation allowances reduce deferred tax assets to an amount
that will more likely than not be realized. Managements
estimates of the realization of deferred tax assets is based on
the information available at the time the financial statements
are prepared and may include estimates of future income and
other assumptions that are inherently uncertain. No valuation
allowance is currently recorded, as we expect to realize our
deferred tax assets.
Accounting for expenses paid by affiliate
In October 1994, we acquired railcar components manufacturing,
railcar maintenance and certain other assets from ACF, a company
beneficially owned and controlled by Carl C. Icahn, our
principal beneficial stockholder and the chairman of our board
of directors. In connection with that transaction, ACF retained,
and agreed to indemnify and hold us harmless for, certain
liabilities and obligations relating to the conduct of business
and ownership of the assets prior to the transfer, including
liabilities relating to employee benefit plans subject to
certain exceptions for transferred employees, workers
compensation, environmental contamination and third-party
litigation. See Certain relationships and related party
transactionsTransactions with ACF Industries LLC. At
December 31, 2004, the total liability retained by ACF was
$11.1 million, which is related primarily to pension
benefit obligations. Although ACF is responsible for any costs
associated with the retained liabilities, we have continued to
reflect the costs associated with those retained liabilities in
our financial statements as an expense in order to reflect the
full cost of doing business, and the payment by ACF of these
expenses is reflected as additional paid-in capital, as required
by Staff Accounting Bulletin Topic 5T.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, amounts due to/from affiliates and accounts payable
approximate fair values because of the short-term maturity of
these instruments. The fair value of long-term debt is
calculated by discounting cash flows through maturity using our
current rate of borrowing for similar liabilities. The fair
value of the note receivable from ACF, which was carried at face
amount plus accrued interest, could not reasonably be estimated
due to the lack of market for similar instruments. Fair value
estimates are made at a specific point in time, based on
relevant market information about the financial instrument.
These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision.
Contingencies and litigation
We periodically record the estimated impacts of various
uncertain outcomes. These events are called contingencies and
our accounting for these events is prescribed by
SFAS No. 5,
Accounting for Contingencies
.
SFAS No. 5 defines a contingency as an existing
condition, situation, or set of circumstances involving
uncertainty as to possible gain or loss to an enterprise that
will ultimately be resolved when one or more future events occur
or fail to occur. Contingent losses must be accrued if:
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4
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available information indicates it
is probable that the loss has been or will be incurred, given
the likelihood of the uncertain future events; and
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|
4
|
the amount of the loss can be
reasonably estimated.
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72
Managements discussion and analysis of financial
condition and results of operations
The accrual of a contingency involves considerable judgment on
the part of management. Legal proceedings have elements of
uncertainty, and in order to determine the amount of any
reserves required, we assess the likelihood of any adverse
judgments or outcomes to pending and threatened legal matters,
as well as potential ranges of probable losses.
We are subject to comprehensive federal, state, local and
international environmental laws and regulations relating to the
release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or
disposal of hazardous materials and wastes, or otherwise
relating to the protection of human health and the environment.
These laws and regulations not only expose us to liability for
the environmental condition of our current or formerly owned or
operated facilities, and our own negligent acts, but also may
expose us to liability for the conduct of others or for our
actions that were in compliance with all applicable laws at the
time these actions were taken. In addition, these laws may
require significant expenditures to achieve compliance, and are
frequently modified or revised to impose new obligations. Civil
and criminal fines and penalties and other sanctions may be
imposed for non-compliance with these environmental laws and
regulations. Our operations that involve hazardous materials
also raise potential risks of liability under common law. We are
involved in investigation and remediation activities at
properties that we now own or lease to address historical
contamination and potential contamination by third parties. We
are also involved with state agencies in the cleanup of two
sites under these laws. These investigations are at a
preliminary stage, and it is impossible to estimate, with any
certainty, the timing and extent of remedial actions that may be
required, and the costs that would be involved in such
remediation. Substantially all of the issues identified relate
to the use of the properties prior to their transfer to us in
1994 by ACF and for which ACF has retained liability for
environmental contamination that may have existed at the time of
transfer to us. ACF has also agreed to indemnify us for any cost
that might be incurred with those existing issues. However, if
ACF fails to honor its obligations to us, we would be
responsible for the cost of such remediation. We have been
advised that, for the remainder of 2005, ACF estimates that it
will spend approximately $0.1 million on environmental
investigation and, in each of 2006 and 2007, it will spend
approximately $0.2 million on environmental investigation,
relating to contamination that existed at properties prior to
their transfer to us and for which ACF has retained liability
and agreed to indemnify us. We believe that our operations and
facilities are in substantial compliance with applicable laws
and regulations and that any noncompliance is not likely to have
a material adverse effect on our operations or financial
condition.
Future events, such as new environmental regulations or changes
in or modified interpretations of existing laws and regulations
or enforcement policies, or further investigation or evaluation
of the potential health hazards of products or business
activities, may give rise to additional compliance and other
costs that could have a material adverse effect on our financial
conditions and operations. In addition, ACF has in the past
conducted investigation and remediation activities at properties
that we now own to address historic contamination. Although we
believe that ACF has satisfactorily addressed all known material
contamination, there can be no assurance that ACF has addressed
all historical contamination. The discovery of historical
contamination or the release of hazardous substances into the
environment at our current or formerly owned or operated
facilities could require ACF or us in the future to incur
investigative or remedial costs or other liabilities that could
be material or that could interfere with the operation of our
business.
We are currently a member of a controlled group that includes
ACF, an entity in which Mr. Icahn has an indirect ownership
of at least 80%. ACF is the sponsor of several pension plans
that are underfunded, as of December 31, 2004, by a total
of approximately $24.1 million on an ongoing actuarial
basis and $172.4 million if those plans were terminated, as
most recently reported by the plans actuaries. The
liabilities could increase or decrease, depending on a number of
factors, including future changes in promised benefits,
investment returns and the assumptions used to calculate the
73
Managements discussion and analysis of financial
condition and results of operations
liability. As members of the controlled group, we would be
jointly and severally liable for any failure of ACF to pay the
unfunded liabilities upon a termination of the ACF pension
plans. Upon completion of this offering, we believe that we
should no longer be a member of the ACF controlled group. As a
result, we should no longer be subject to ACFs pension
liabilities, unless it were determined that we were otherwise a
member of the ACF controlled group or that a principal purpose
of the offering or other transactions that resulted in our
ceasing to be a member of the ACF controlled group was to evade
pension liabilities and the termination date of the underfunded
plan was within five years after the offering or other
transactions. If such a determination were made and upheld by a
court, we could remain jointly and severally liable for pension
plan obligations of ACF, which could have a material adverse
effect on our financial condition and results of operations.
In connection with Trans World Airlines, Inc.s (or TWA)
1992 bankruptcy proceedings under Chapter 11 of the Bankruptcy
Code, the Pension Benefit Guarantee Corporation (or the PBGC)
asserted that ACF as well as the other entities in which Mr.
Icahn had a controlling interest were obligated along with TWA
to satisfy any underfunding of obligations under TWAs
defined benefit plan. Subsequently, and in response to a
petition of another member of the Icahn control group, the PBGC
terminated the TWA pension plan and obligated an affiliate of
ARI, Highcrest Investors Corp (or Highcrest) to make eight
annual termination payments of $30 million, totaling $240
million. We have been advised that as of December 31, 2004,
Highcrest had made termination payments totaling $130 million
and still owed $110 million on this obligation. The obligation
to make termination payments is non-recourse except to the
common stock of ACF Industries Holding Corp., which is also a
member of the Icahn control group. The authority of the PBGC to
enter into the settlement agreement is currently being
contested. Although ARI is a controlled entity of Mr. Icahn,
management believes this obligation will have no adverse effect
on the future liquidity, results of operations, or financial
position of ARI. See Risk Factors Risks
related to our business We could be liable for
liabilities associated with pension plans sponsored by companies
controlled by Carl C. Icahn.
We have been named a party to a suit in which the plaintiff
alleges we were responsible for the malfunction of a valve which
we manufactured, and that was negligently remanufactured in 2004
by a third party. We believe we have no responsibility for this
malfunction and have meritorious defenses against any liability.
It is not possible to estimate the expected settlement, if any,
at this time as the case is in its early stages.
We have been named the defendant in a law suit in which the
plaintiff, OCI Chemical Company, claims we were responsible
for the damage caused by allegedly defective railcars that were
manufactured by us. The lawsuit was filed on September 19,
2005 in the United States District Court, Eastern District of
Missouri. The plaintiff seeks unspecified damages in excess of
$75,000. The plaintiffs allege that the failures in certain
components caused the contents transported by these railcars to
spill out of the railcars causing property damage, clean-up
costs, monitoring costs, testing costs and other costs and
damages. We believe that we are not responsible for the damage
and have meritorious defenses against liability.
REPORT ON INTERNAL CONTROLS
Our management and auditors have identified three significant
deficiencies in our internal controls as of December 31,
2004, which, if not properly remediated could result in
misstatements in our financial statements in future periods.
Our independent auditors, Grant Thornton LLP, issued a letter to
our board of directors in which they identified three
significant deficiencies in the design and operation of our
internal controls as of December 31, 2004. A significant
deficiency is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that
a misstatement of the financial
74
Managements discussion and analysis of financial
condition and results of operations
statements that is more than inconsequential will not be
prevented or detected. A control deficiency exists when the
design or operation of a control does not allow management or
employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis.
Specifically, the significant deficiencies noted were:
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4
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Inventory
cut-off.
Our
manufacturing locations recorded inventory shipped by our
vendors to us on the date we received the inventory in our
facility, rather than on the date of shipment.
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4
|
Construction in
process.
We
transferred assets from construction in process to fixed assets
on a quarterly basis rather than at the time assets are actually
placed into service. There was insufficient documentation
authorizing the movement of assets from construction in process
to fixed assets. Certain assets were still being classified as
construction in process even though the asset was in service.
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4
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Fixed asset recording and
reconciliation.
Our
fixed asset subsidiary ledgers were not updated in a timely
manner. Supporting ledgers for depreciation schedules were
tracked using Microsoft Excel. The schedules were not reconciled
on a timely basis. The procedures surrounding the compilation of
the data was manual and subject to error.
|
In light of the noted significant deficiencies, we have
instituted control improvements that we believe will reduce the
likelihood of similar errors to less than remote or to an
inconsequential amount in the specific areas that are judged to
be most vulnerable. See Risk factors Our management
and auditors have identified three significant deficiencies in
our internal controls as of December 31, 2004, which, if
not properly remediated could result in misstatements in our
financial statements in future periods. These control
improvements include:
|
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4
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Inventory
cut-off.
Effective
March 31, 2005, we implemented procedures to track the
inventory in transit and record the receipt of such inventory
properly in our general ledger. We now follow this procedure
monthly.
|
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4
|
Construction in
process.
We are
developing a process for plant and corporate management approval
to authorize assets to be placed in service. This procedure will
entail a threshold dollar amount requiring corporate controller
approval that will include a review of the asset clarification
and depreciation rate. Under this plan, assets will be moved
from construction in process in the month the asset is placed in
service.
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4
|
Fixed asset recording and
reconciliation.
We
expect to implement a new fixed asset tracking system before the
end of 2005.
|
We do not expect to incur material incremental staffing costs
associated with these corrective actions. However, in connection
with becoming a public company, we expect to incur significant
additional staffing and infrastructure costs.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities
, which was
later amended on December 24, 2003 (FIN 46R).
FIN 46R explains how to identify variable interest entities
and how an enterprise assesses its interest in a variable
interest entity to decide whether to consolidate that entity.
FIN 46R requires unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if their
entities do not effectively disperse the risks and rewards of
ownership among their owners and other parties involved. The
provisions of FIN 46R are generally effective for periods
after December 31, 2003. The adoption of this pronouncement
has not had a material effect on us.
75
Managements discussion and analysis of financial
condition and results of operations
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
(SFAS 150), which establishes standards for how
companies classify and measure certain financial instruments
with characteristics of both liabilities and equity. It requires
companies to classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). We
classified our mandatorily redeemable payment-in-kind preferred
stock as a liability in accordance with SFAS 150 in 2003.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs-An Amendment of ARB No. 43
,
Chapter 4
, which requires the recognition of costs
of idle facilities, excessive spoilage, double freight, and
rehandling costs as a component of current-period expenses. The
provisions of SFAS No. 151 are effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. Since we produce railcars based upon specific customer
orders, management does not expect the provisions of
SFAS No. 151 to have a material impact on our
financial statements.
In December 2004, the FASB issued SFAS 123R,
Share-Based
Payments.
SFAS 123R is a revision of SFAS 123,
Accounting for Stock Based Compensation
, and supersedes
APB 25. Among other items, SFAS 123R eliminates the
use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments,
based on the grant date fair value of those awards, in the
financial statements. The effective date of SFAS 123R is
currently the beginning of the next fiscal year that begins
after June 15, 2005, which is the first quarter of our year
ending December 31, 2006.
In March 2005, the FASB issued FIN 47 as an interpretation
of FASB Statement 143,
Accounting for Asset Retirement
Obligations
(FASB 143). This interpretation clarifies that
the term conditional asset retirement obligation as used in FASB
143 and refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated.
This interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no
later than the end of fiscal years ending after
December 15, 2005. We believe that the adoption of
FIN 47 will not result in a material change in our
financial statements.
On June 1, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154)
. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements
for accounting for and reporting of a change in accounting
principle. We will adopt SFAS 154 at December 31, 2005
and do not anticipate any material change to our operating
results as a result of this adoption.
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Industry
OVERVIEW OF NORTH AMERICAN RAILCAR MANUFACTURING INDUSTRY
Many diverse industries depend on the railroad system to
transport items such as plastic pellets, chemicals and related
products, non-metallic minerals, grains and other farm products,
food products, metals and ores, coal, lumber and other building
products, petroleum products, oils, ethanol related products,
paper products, vehicles, equipment and associated parts. Demand
for railcars reflects their importance for the North American
economy in moving goods and raw materials. In periods of rising
economic activity, fleet utilization typically increases,
driving an increase in demand for new railcars, which also
increases backlog for new railcars. Conversely, during economic
slowdowns, fleet utilization typically declines, resulting in
reduced demand, deliveries and backlog for new railcars.
According to Global Insights Freight Car Outlook Third
Quarter 2005, orders for new railcars are expected to be strong
with deliveries projected to average 59,400 railcars per
year from 2005 through 2010. This compares to deliveries of
17,714 railcars in 2002, 32,184 railcars in 2003 and
46,871 railcars in 2004, as reported by the Railway Supply
Institute, or RSI. RSI reported that at the end of 2004, the
total backlog for the railcar manufacturing industry reached
58,677 railcars. This growth trend has continued through
the first nine months of 2005, with 54,134 new railcars
ordered and 50,682 railcars delivered, with total backlog
increasing to 60,986 railcars.
The primary purchasers of railcars in North America are leasing
companies, shippers and railroads. Leasing companies are
financial institutions that buy railcars from manufacturers like
us and lease these railcars to end users that include railroads
and shippers. Shippers include a variety of industrial companies
that purchase railcars for freight transport. Railroads purchase
railcars to transport goods for industrial companies and others
on their lines. The primary source of railcar orders has shifted
over time as leasing companies and shippers replace railroads as
the largest purchasers of new railcars. From 1990 to 2003,
leasing companies and shippers have increased their collective
share of the total North American railcar fleet from 37% to 53%,
respectively.
The major railcar types and primary uses of these railcars in
North America are summarized below.
|
|
|
Railcar Type
|
|
Primary Use
|
|
Covered Hopper Railcar
|
|
Transport of cargo in the plastics, chemical, oil and food
industries
|
Tank Railcar
|
|
Transport of liquids and gaseous materials, including chemicals,
petroleum products and fertilizers
|
Intermodal Flat Railcar
|
|
Transport of cargo in containers and trailers that may also be
used by trucks or ships
|
Gondola Railcar
|
|
Transport of coal and other commodities including steel products
and scrap metals
|
Open-Top Hopper Railcar
|
|
Transport of coal
|
Box Railcar
|
|
Transport of auto parts, food products, wood products and paper
products
|
Flat Railcar
|
|
Transport of bulky items including machinery, automobiles and
forest products
|
Although a railcar can be used for up to 50 years under
existing regulations in North America, we believe that the
average life of a railcar is approximately 30 to 35 years.
After that point, most railcars must either be refurbished or
replaced. Railcar designs change over time, incorporating
technical and quality improvements while adapting to the
functions required by customers. As the industry advances,
77
Industry
we generally expect that railcars will become more efficient and
capable of carrying larger loads with better ride quality and
lower repair and operating costs. We believe that as customers
replace aging fleets and expand the number of railcars in use to
meet higher shipping demand, they make new railcar purchasing
decisions based not only on price and delivery time, but also on
key performance characteristics.
The following chart identifies the composition, by percentage,
of the U.S. railcar fleet in 2003, and indicates that among
all the different railcar types, covered hopper railcars and
tank railcars represented the two largest categories of the
U.S. railcar fleet.
Composition of 2003 U.S. Railcar Fleet
|
|
Source:
|
Association of American Railroads
|
NORTH AMERICAN RAILCAR COMPONENTS AND SERVICES INDUSTRIES
Manufacturers of railcar components are primarily comprised of
railcar manufacturers, some of which produce components solely
for internal use, while others produce railcar components for
sale to outside customers, as well as non-railcar manufacturers.
Railcar support services are an important part of the railcar
industry. Railcar services include maintenance and repair,
cleaning, painting and lining, engineering services and the
management of customers railcar fleets. Maintenance and
repair facilities may be fixed locations near railroad lines or
operate as mobile units designed to service railcars at customer
locations.
NORTH AMERICAN RAILCAR INDUSTRY DYNAMICS AND TRENDS
The 1980 Staggers Rail Act ended more than 100 years of
government rail industry regulation and dramatically transformed
the railcar industry in North America. The deregulation enabled
railroads to regain market share lost to the trucking industry
over the years and resulted in a wave of industry consolidation.
The number of Class I railroads, the grouping of the
largest railroads based on operating revenue, dropped from 22 in
1980 to seven today while the volume of goods transported on the
U.S. rail system increased from 1.5 billion tons in
1980 to 1.8 billion tons in 2003, according to the
Association of American Railroads.
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Industry
Railroad industry deregulation also prompted a series of
consolidations among railcar manufacturers and more efficient
fleet management, which resulted in a reduction of the total
U.S. railcar fleet size from 1.7 million railcars in
1980 to 1.2 million railcars in 1995.
The following chart reflects the size of the railcar fleet in
the United States, which represents the majority of the North
American railcar fleet, from 1994 to 2003.
Historical U.S. Railcar Fleet
|
|
Source:
|
Association of American Railroads Railroad Facts 2004
|
Cyclical nature of the North American railcar market and
outlook for North American railcar demand
The North American railcar market is highly cyclical and trends
in the railcar manufacturing industry are directly affected by
the level of activity in the North American economy. When the
economy is in a period of sustained growth, railcar users
generally tend to increase the size of their fleets and replace
older railcars with newer railcars or railcars with greater
capacity and durability. Conversely, when the economy slows
down, these companies generally delay investment in new railcars
and increase the utilization rates of railcars already in use,
keeping them in service for longer periods. The North American
railcar market is also affected by the level of international
trade activity, as railroads are also used to transport imported
and exported goods to and from ports. In addition, supplies of
materials, such as steel, as well as key railcar components,
such as heavy castings and wheels, are constrained from time to
time, which limits the production capacity of companies in the
railcar manufacturing industry and results in further cyclical
fluctuations.
As illustrated by the chart below, railcar demand was at a high
in the late 1970s due, in particular, to the preferential tax
treatment attributed to railcars under then-existing tax laws.
The Tax Reform Act of 1981, which eliminated the preferential
tax treatment of railcars beginning in 1983, as well as the
economic recession in the early 1980s, led to low levels of
railcar production through most of the 1980s. However, during
most of the 1990s, increased general economic activity and
higher import levels led to an increase in railcar deliveries.
In addition, after a period of consolidation in the railroad
industry, railroads suffered from integration difficulties, poor
railcar utilization and aging fleets. We believe that railroads
responded by ordering additional railcars, which led to a
significant increase in railcar deliveries in 1998 and 1999.
This period of peaking orders ended in 2000 and 2001 as slowing
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Industry
economic growth, a recovery in railroad operating efficiency and
transportation disruption related to the
September 11
th
terrorist attacks pushed 2002 deliveries of new railcars down to
17,714 railcars, according to the Railway Supply Institute.
In 2003, the industry began to recover from the downturn and
demand for new railcars started to increase. A total of 46,871
railcars were delivered in 2004 and industry backlog stood at
58,677 railcars at December 31, 2004. A total of
50,682 railcars have been delivered during the first nine
months of 2005 and industry backlog stands at 60,986 railcars as
of September 30, 2005. The following chart illustrates
annual North American deliveries of railcars since 1978 and
projected annual North American railcar deliveries through 2010,
according to the Railway Supply Institute and Global
Insights Freight Car Outlook Third-Quarter, 2005,
respectively.
Railcar Annual Deliveries
|
|
Source:
|
Railway Supply Institute and Global Insights Freight Car
Outlook Third-Quarter 2005
|
Strong near term demand for railcars
Following a period of economic weakness from 2001 to 2003, we
believe leasing companies, shippers and railroads that have
deferred new railcar purchases and equipment maintenance are
poised to expand and service their fleets in response to growing
demand for railroad shipping. Global Insights Freight Car
Outlook Third-Quarter, 2005 anticipates delivery of 66,043 new
railcars in 2005 and average annual deliveries of 59,400
railcars per year from 2005 through 2010.
80
Industry
The following chart sets forth the historical backlog for the
North American railcar industry:
Historical North American Railcar Backlog by Quarter
|
|
Source:
|
Railway Supply Institute
|
Positive long term demand fundamentals
Over the long term, we expect increased U.S. economic
activity to drive growth in railroad shipment and new railcar
purchases. Global Insights Freight Car Outlook
Third-Quarter 2005 forecasts continued gains in rail freight
usage, with 1.6% growth in railcar loads during 2005, 1.7%
growth in railcar loads in 2006 and 1.7% to 0.8% annual growth
in railcar loads from 2007 to 2010. Under normal circumstances,
railcars generally need to be refurbished or replaced after 30
to 35 years of use. We believe that, historically, the
useful life of tank railcars has been shorter, ranging from 25
to 30 years of use. Railcars used at a higher than average
rate may require replacement in a shorter period of time. In
some cases, advances in technology and efficiency or new
regulations may require railcars with remaining useful life to
be replaced. We believe demand for replacement railcars will be
strong over the long term as approximately 50% of all railcars
in use are over 20 years old.
Trends impacting covered hopper railcars
Covered hopper railcars constitute the largest of all railcar
segments in terms of numbers of railcars in use. Covered hopper
railcars are used primarily to transport cargo such as cement,
plastic pellets, grain and dry fertilizer. Demand for covered
hopper railcars has shown renewed strength due to increased
shipments of a variety of products including plastics, chemicals
and foods. According to the Railway Supply Institute, 5,602
covered hopper railcars were delivered in 2004. We believe
manufacturing activity across a variety of sectors will continue
to drive demand for covered hopper railcars through 2005 and
2006. In addition, we believe increasing ethanol production will
continue to drive the volume of corn shipments transported in
covered hopper railcars. The U.S. Department of
Agricultures Baseline Projections to 2014 dated February
2005 forecasts a 9% increase in corn production from 2005 to
2010, largely attributable to demand for corn in ethanol
production.
Over the long term, Global Insights Freight Car Outlook
Third-Quarter 2005 forecasts strong demand for covered hopper
railcars driven by continued growth of the U.S. economy,
higher production for a number of consumer and business durable
goods, increasing domestic and international demand for
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Industry
U.S. agricultural products, increasing ethanol production
and replacement of aging railcars. As shown by the chart below,
Global Insights Freight Car Outlook Third-Quarter 2005
forecasts deliveries of covered hopper railcars will reach
14,927 in 2005 and 16,926 in 2006, and will average more than
15,800 deliveries per year from 2007 through 2010. These
forecasts illustrate a significant projected increase from the
5,602 covered hopper railcars delivered in 2004 and the 3,801
covered hopper railcars delivered in 2003.
Historical and Projected Covered Hopper Railcar Deliveries
|
|
Source:
|
Railway Supply Institute and Global Insight Freight Car Outlook
Third-Quarter 2005
|
Trends impacting tank railcars
Orders of tank railcars are being driven in part by the advanced
age of the current North American tank railcar fleet. In 2004,
8,939 tank railcars were delivered, according to Global
Insights Freight Car Outlook Third-Quarter 2005. Tank
railcars primarily are used to transport liquid and gaseous
products, such as chemicals, liquid fertilizers and petroleum
products. Tank railcars, like covered hopper railcars, are also
in higher demand in North America as manufacturing activity, and
the need for liquids and gases used in manufacturing, increases.
We believe expansion of the ethanol sector as well as strong
consumer demand for petrochemicals, edible oils, lubricating
oils, liquid propane and liquid food products also positively
impact tank railcar shipments.
Based on Global Insights Freight Car Outlook Third-Quarter
2005 projections, tank railcar deliveries are expected to
increase to 11,069 railcars in 2005 and
11,075 railcars in 2006 and will average approximately
9,900 deliveries per year from 2007 through 2010. In
comparison, the number of tank railcars delivered in North
America was 8,939 in 2004 and 8,176 in 2003.
The tank railcar market is a more difficult market to enter
compared to other railcar types. The manufacturing of tank
railcars is highly regulated and their production requires a
specially trained workforce and dedicated manufacturing
facilities. As a result, competition in the tank railcar market
is concentrated. Production of tank railcars is also very labor
intensive compared to production of other railcars. Due to
domestic supply constraints, tank railcar manufacturers have
experienced difficulties in obtaining normalized steel plate,
which is an essential specialty material used in the production
of many types of tank railcars.
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Industry
The following chart shows historical tank railcar deliveries in
2003 and 2004 and projected tank railcar deliveries through 2010.
Historical and Projected Tank Railcar Deliveries
|
|
Source:
|
Railway Supply Institute and Global Insight Freight Car Outlook
Third-Quarter 2005
|
83
Business
OVERVIEW
We are a leading North American manufacturer of covered hopper
and tank railcars. We also repair and refurbish railcars,
provide fleet management services and design and manufacture
certain railcar and industrial components used in the production
of our railcars as well as railcars and non-railcar industrial
products produced by others. We provide our railcar customers
with integrated solutions through a comprehensive set of high
quality products and related services.
Our primary customers include companies that purchase railcars
for lease by third parties, or leasing companies, industrial
companies that use railcars for freight transport, or shippers,
and Class I railroads. Over the past five years, our
largest leasing company customers included ACF Industries
LLC, ARL, CIT, GATX Rail Corporation, GE Capital
Corporation, The Greenbrier Companies and Union Tank Car Company
and our largest shipper customers included Dow Chemical Company,
Engelhard Corporation, Exxon Mobil Corporation, Lyondell
Chemical Company and Solvay America, Inc. Our major railroad
customers over the past five years included TTX and Union
Pacific. In servicing this customer base, we believe our
integrated railcar repair and refurbishment and fleet management
services and our railcar components manufacturing business help
us further penetrate the general railcar manufacturing market.
These products and services provide us with significant
cross-selling opportunities and insights into our
customers railcar needs that we use to improve our
products and services and enhance our reputation for high
quality. Although we build, service and manage railcars through
an integrated, complementary set of products and services, we
have chosen not to offer railcar leasing services so that we do
not compete with our leasing company customers, which represent
a significant portion of our revenues.
For the years ended December 31, 2003 and 2004, we
generated total revenues of $218.0 million and
$355.1 million and net earnings of $1.1 million and
$1.9 million, respectively. For the nine months ended
September 30, 2004 and 2005, we generated revenues of
$254.3 million and $442.1 million and net earnings of
$2.9 million and $14.5 million, respectively. As of
September 30, 2005, our total railcar backlog was
15,567 railcars, compared to a total railcar backlog of
5,653 railcars as of September 30, 2004. On
July 29, 2005, we entered into an agreement with CIT, under
which CIT has agreed to purchase from us, during the 2006 to
2008 period, 9,000 to 12,000 railcars, subject to
negotiated terms and conditions. See Backlog.
OUR HISTORY
Since our formation in 1988, we have grown our business from
being a small provider of railcar components and maintenance
services to one of North Americas leading integrated
providers of railcars, railcar components, railcar maintenance
services and fleet management services. In October 1994, we
acquired railcar components manufacturing and railcar
maintenance assets from ACF Industries, Incorporated (now
known as ACF Industries, LLC), or ACF, a company controlled
by Carl C. Icahn, our principal beneficial stockholder and the
chairman of our board of directors. Through this acquisition, we
also hired members of ACFs management, many of whom,
including our president, remain a significant part of our
current management team. These executives brought with them
established relationships with important customers and suppliers
and extensive industry knowledge, as ACF and its predecessor
companies have roots in the railcar manufacturing industry that
trace back to 1873. Led by this management team, we entered the
railcar manufacturing business through the construction of new
manufacturing facilities.
In October 1995, we produced our first railcar at our Paragould,
Arkansas manufacturing facility. We primarily manufacture
covered hopper railcars at our Paragould facility, but we have
the ability to
84
Business
manufacture many other types of railcars at this facility. The
Paragould facility initially had two railcar manufacturing
lines. We added painting and lining capabilities to this
facility in 1999 and a third manufacturing line in December
2004. We are currently constructing additional painting and
lining capabilities at our Paragould facility to increase
efficiency, which we expect to open at the end of 2005. Our
Paragould facility also features component manufacturing
capabilities. We manufactured 20,455 railcars at our
Paragould facility, mostly covered hopper railcars, through
September 30, 2005. We can manufacture up to 30 railcars a
working day at this facility.
In January 2000, we produced our first railcar at our Marmaduke,
Arkansas manufacturing facility. We manufacture tank railcars at
this facility. The design of this facility enables us to
manufacture many different types of tank railcars at the same
time. We manufactured 6,373 tank railcars at our Marmaduke
facility through September 30, 2005. We can manufacture up
to 10 railcars a working day at this facility.
Since 1994, we have significantly expanded our components
manufacturing and railcar services operations. Our operations
now include three railcar assembly, sub-assembly and fabrication
facilities, three railcar and industrial component manufacturing
facilities, six railcar repair plants and four mobile repair
units. Our services business has grown to include online access
by customers, remote fleet management, expanded painting, lining
and cleaning offerings, regulatory consulting and engineering
support. Additionally, members of our management team helped
found and develop, and continue to operate, a joint venture,
Ohio Castings Company, LLC, which we refer to as Ohio Castings,
in which we own a one-third interest and that manufactures and
sells sideframes, bolsters, couplers and yokes for distribution
to third parties and to us. We believe that our involvement in
this joint venture helps us maintain our levels of production at
competitive prices, despite industry-wide shortages of these
potentially capacity constraining components. See
Certain relationships and related party
transactions.
OUR BUSINESS STRENGTHS AND COMPETITIVE ADVANTAGES
We believe that the following key business strengths and
competitive advantages will contribute to our growth:
Leading railcar manufacturer with focus on the covered hopper
and tank railcar markets
We are a leading North American manufacturer of covered hopper
and tank railcars. Over the last three years, we believe we have
produced an estimated 33% of the covered hopper railcars and an
estimated 16% of the tank railcars delivered in North America.
Based on the Association of American Railroads Railroad Facts
2004 Report, these represent the two largest segments of the
North American railcar industry, with covered hopper railcars
representing approximately 30% and tank railcars representing
approximately 19% of the total North American railcar fleet,
based on the number of railcars in service. We believe our
railcars are differentiated by their superior quality,
innovation and reliability.
Modern non-union, low cost railcar manufacturing facilities
in strategic locations
Unlike many of our competitors, we manufacture all of our
railcars in modern facilities built in the last ten years. We
believe our Paragould and Marmaduke, Arkansas railcar production
facilities to be the newest covered hopper and tank railcar
production plants in North America. We designed these facilities
to provide manufacturing flexibility and allow for the
production of a variety of railcar sizes and types. We
strategically located these facilities in close proximity to our
main customers and suppliers. This reduces freight time and
costs for the components we purchase and the time for delivery
of completed railcars. Over the past several years, we have
increased our production capacity
85
Business
and efficiency and reduced our costs per railcar through a
number of targeted operational improvements, which has also
reduced the amount of raw materials necessary for production of
railcars. We emphasize flexibility in our employees
training and, consequently, our employees frequently move both
between locations on manufacturing lines and among our different
manufacturing facilities. Currently, none of our over 1,100
employees at our Paragould and Marmaduke facilities are
represented by a union. However, employees of three of our
repair facilities and one of our component manufacturing
facilities, representing 16% of our total workforce as of
September 30, 2005, are represented by a union.
Preferred access to components through in-house production, a
joint venture and strategic sourcing arrangements
We produce many of the components necessary to our railcar
manufacturing business ourselves and we own a one-third interest
in, and our management team operates, our Ohio Castings joint
venture from which we obtain certain other components. We
believe our in-house production capabilities and our involvement
in this joint venture help us maintain access to components at
competitive prices, despite industry-wide shortages of these
potentially capacity constraining components. We also have
developed and actively maintain strategic sourcing arrangements
and strong relationships with our suppliers. These arrangements
and relationships help ensure our continued access to critical
components and raw materials we use to produce railcars,
including steel, wheels and heavy castings. We also have
recently entered into an agreement to diversify our supply of
steel. We believe our attention to strengthening our supply
chain helps us maintain operational continuity and high
production levels.
Integrated railcar repair and refurbishment and fleet
management services complement railcar manufacturing
We provide a wide array of complementary products and services
to the railcar industry. Unlike some other railcar
manufacturers, we also repair, maintain and provide fleet
management services for existing railcars, including railcars
built by others, and manufacture railcar components for third
parties and us. We believe this diverse product and service
offering provides us with a competitive advantage relative to
other railcar manufacturers, primarily in the form of
cross-selling opportunities with respect to our repair and fleet
management services. For example, customers of our repair
business that have experienced problems with our
competitors railcars have transferred railcar orders to us
after our repair workers were able to identify the benefits of
our railcars compared to our competitors. We also believe
that our ability to address the needs of our customers
throughout the lifecycle of a railcar enhances our customer
relationships and provides us with additional growth
opportunities and unique insights into industry trends. As of
September 30, 2005, we have approximately
57,000 railcars under management.
Strong relationships with a long-term customer base
We believe that our customers value our products and services.
Many of our major customers have been doing business with us for
a number of years, including CIT, Dow Chemical Company,
GE Capital Corporation and Solvay America, Inc. Many of our
customers have demonstrated a willingness to purchase several
different types of our products and services over time. For
example, GE Capital Corporation purchases pressure and
non-pressure tank railcars, covered hopper railcars and fleet
management services from us and The CIT Group, Inc.
purchases our tank railcars as well as cement, grain, sugar and
plastic pellet covered hopper railcars. We believe we deliver
high quality products and services to our customers with low
operating and maintenance costs, while maintaining what we
believe are low levels of warranty claims.
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Business
Strong management team with long-standing industry
experience
We have an experienced senior operations management team that
has an average of over 25 years of experience in the
railcar and related manufacturing industries. Our senior
operations management team, including our president, James J.
Unger, has been with us since we began manufacturing railcars.
This team conceived and built our Paragould and Marmaduke
railcar manufacturing facilities and has been responsible for
growing our revenues from $80.9 million in 1994 to
$355.1 million in 2004. We believe our management
successfully managed our business during the most recent
cyclical downturn in the railcar manufacturing industry while
positioning us to capitalize on the current upturn in our
industry. Members of our management, in particular our
president, Mr. Unger, have risen to leadership roles on a
number of prominent industry committees and associations, which
provide us with insight into the railcar industry, trends and
customer needs. We believe our active participation in industry
committees and associations strengthens our relationships with
our customers and suppliers and increases our profile and
reputation in the North American railcar market.
OUR STRATEGY
The key elements of our business strategy are as follows:
Maintain and expand presence in covered hopper and tank
railcar markets
We intend to maintain and expand our presence in the covered
hopper and tank railcar markets by continuing to deliver high
quality and innovative products. We believe our excellent
customer relationships have enabled us to identify market
demands that we then target through our product development and
marketing efforts. We intend to continue the close collaboration
between our customers and our engineering, marketing, operations
and management personnel to meet demand and, where appropriate,
to selectively expand production capacity.
Continue to improve operating efficiencies
We intend to build on the success of our production initiatives
at our Paragould and Marmaduke railcar manufacturing facilities
and plan to continue to identify opportunities to enhance
operating efficiencies across these and our other manufacturing
facilities. These opportunities include our continued
streamlining of our manufacturing processes and our quality
control initiatives. For example, we believe the additional
painting and lining capabilities we are currently constructing
at our Paragould facility will reduce costs and further increase
our manufacturing efficiency and will speed delivery of our
products to our customers. We also intend to continue the
efforts of our design cost reduction team, formed in 2003, which
has already significantly reduced our railcar production costs
through standardization of components used in our railcars,
implemented design changes to reduce the amount of raw material
required for our railcars, and improved manufacturing techniques
that reduce our labor requirements. These efforts should allow
us to reduce our costs and maintain competitive prices.
Continue to grow railcar service and fleet management
businesses and increase sales of railcar and industrial
components
As the existing North American railcar fleet continues to age,
we anticipate increased demand for maintenance and repair
services and railcar components used in the maintenance and
repair of railcars. Additionally, we expect growing demand for
our fleet management services as ownership of railcars continues
to shift away from the railroads and toward the shippers and
leasing companies, which often outsource their fleet management
activities to third-party service providers such as us. We
intend to
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Business
capitalize on these trends and we believe we are well positioned
to provide increased services through our strategically located
network of railcar repair and service facilities.
Leverage manufacturing expertise to selectively expand
product portfolio
We may seek to expand our product portfolio to other selected
types of railcars. Our management designed and constructed our
Paragould manufacturing facility to be able to produce most
railcar types, and we believe our adaptive production lines and
flexible employees are able to shift production among various
railcar types with minimal interruption to our operations. For
example, we have in the past produced centerbeam platform
railcars and may in the future produce other types of railcars,
including various intermodal railcars, such as the innovative
platform railcar. In addition, as the existing fleet of North
American railcars is aging, expansion of our product portfolio
into new railcar types will allow us to grow our business by
capturing a portion of the natural replacement demand for
existing railcar types. Our ability to produce other types of
railcars positions us to respond to customer requests for
production outside of our traditional markets and provides us
additional manufacturing flexibility in the event the covered
hopper or tank railcar markets weaken.
Selectively pursue strategic external growth opportunities
By significantly reducing our debt through this offering and
with the establishment of a public market for our common stock,
we believe we will have increased financial flexibility to
supplement internal growth with select acquisitions, alliances
or joint ventures. We also believe our in-house fabrication of
railcar components and our Ohio Castings joint venture provide
us with competitive advantages and we intend to enhance these
advantages by selectively acquiring or establishing strategic
relationships with railcar components manufacturers and
suppliers of critical raw materials. Successful acquisitions of
or collaborations with these manufacturers and suppliers should
help mitigate the risk of supply shortages of key components and
raw materials we need for our business. While we have in the
past engaged in preliminary discussions with certain parties
regarding potential strategic acquisitions, alliances or joint
ventures, as of the date of this prospectus, we are not
currently engaged in any such discussions and do not have any
commitments to enter into any acquisition, alliance or joint
venture. We may also seek to expand our railcar components
business into international markets on an opportunistic basis.
OUR PRODUCTS AND SERVICES
We design and manufacture special, customized and general
purpose railcars and a wide range of components primarily for
the North American railcar and industrial markets. We also
support the railcar industry through a variety of integrated
railcar services, including repair, maintenance, consulting,
engineering and fleet management services.
Manufacturing
We manufacture two primary types of railcars, covered hopper
railcars and tank railcars. Our revenues attributable to our
railcar manufacturing operations were approximately
$108.2 million, $154.7 million and $265.8 million
in 2002, 2003 and 2004, respectively, and were approximately
$357.2 million for the nine months ended September 30,
2005. These revenues represented 64%, 71% and 75% of our total
revenues in 2002, 2003 and 2004, respectively, and represented
81% of our total revenues for the nine months ended
September 30, 2005.
Covered hopper railcars.
We believe we are a
leading manufacturer of covered hopper railcars in North
America. We manufacture both general service and specialty
covered hopper railcars. Our general service covered hopper
railcars have capacities ranging from 3,200 to 6,500 cubic
feet and
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Business
primarily carry plastic pellets, cement, grain and other food
products, soda ash and other dry granular products. Our
specialty covered hopper railcars, which include our
Pressureaide covered hopper railcar, have capacities ranging
from 3,300 to 5,750 cubic feet and use air pressure to
assist unloading. Our specialty covered hopper railcars
primarily carry flour, clays, food and industrial grade corn
starches. Revenues attributable to sales of our covered hopper
railcars were approximately $61.9 million,
$82.2 million and $84.8 million in 2002, 2003 and
2004, respectively, and were approximately $190.8 million
for the nine months ended September 30, 2005. These
revenues represented 37%, 38% and 24% of our total revenues in
2002, 2003 and 2004, respectively, and represented 43% of our
total revenues for the nine months ended September 30,
2005. We sold 1,053, 1,343 and 1,507 covered hopper
railcars in 2002, 2003 and 2004, respectively, and
2,759 covered hopper railcars in the nine months ended
September 30, 2005.
All of our covered hopper railcars may be equipped with varying
combinations of hatches, discharge outlets and protective
coatings to provide our customers with a railcar designed to
perform in precise operating environments. The flexible nature
of our covered hopper railcar design allows it to be quickly
modified to suit changing customer needs. This flexibility can
continue to provide value after the initial purchase because our
railcars may be converted for reassignment to other services or
customers. We provide a range of coatings to protect the railcar
and the shippers product against corrosion and product
contamination. We build carbon steel and stainless steel covered
hopper railcars.
Our covered hopper railcars are specifically designed for
shipping a variety of dry bulk products, from light density
products, such as plastic pellets, to high density products,
such as cement. Some of our covered hopper railcars have a three
curve cross section. Depending upon the equipment on the
railcars, they can operate in either a gravity or vacuum
pneumatic unloading environment. Since its introduction, we have
improved our Center Flow line of covered hopper railcars to
provide protection for a wide range of dry bulk products and to
enhance the associated loading, unloading and cleaning
processes. Examples of these improvements include new and better
design of the shape of the railcars, joint designs, outlet
mounting frames and loading hatches and discharge outlets, which
enhance the cargo loading and unloading processes.
We have several versions of our covered hopper railcar that
target specific customers and specific loads, including:
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Plastic Pellet
Railcars.
These
railcars are designed to transport, load and unload plastic
pellets under precise specifications to preserve the purity of
the load. Slight imperfections in the railcars transporting such
goods or in the components that load and unload them can ruin an
entire load. If plastic pellets within a load become tainted,
the imperfection will likely persist during the conversion of
the plastic pellets into end-products. An example of such cargo
would be food grade plastic pellets used in the production of
milk bottles and other food containers.
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Cement
Railcars.
Cement loads
are heavier than many other loads of comparable volume, and
therefore cement railcars are smaller in size to compensate for
the weight. As a consequence, we can build more cement covered
hopper railcars per day than we can any other railcar we
manufacture. Our cement railcars typically have capacities of
3,250 cubic feet and are built with two lading
compartments, compared to, for example, our plastic pellet
railcars, which typically have capacities of up to
6,224 cubic feet and are built with four compartments.
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Pressureaide
Railcars.
Our
Pressureaide railcar is targeted towards the bulk powder
markets. Pressureaide railcars typically handle products such as
clays, industrial and food grade starches and flours. We build
our Pressureaide railcars in capacities ranging from
3,300 cubic feet to as large as 5,750 cubic feet. They
operate with internal pressures up to 14.5 pounds per
square inch, which expedites unloading, and are equipped with
several safety devices, such as pressure relief valves, a
rupture disc and a vacuum relief valve.
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Tank railcars.
We manufacture non-pressure and
high pressure tank railcars. Our non-pressure tank railcars have
capacities ranging from 14,000 to 30,000 gallons and are
flexibly designed to enable the handling of a variety of
commodities including petroleum products, ethanol, asphalt,
vegetable oil, corn syrup and other food products. Our high
pressure tank railcars have capacities ranging from 13,500 to
33,600 gallons and transport products that require a
pressurized state due to their liquid, semi-gaseous or gaseous
nature, including chlorine, anhydrous ammonia, liquid propane
and butane. Most of our pressure tank railcars feature a thicker
pressure retaining inner shell that is separated from a jacketed
outer shell by layers of insulation, thermal protection or both.
Our pressure tank railcars are made from specific grades of
normalized steel that are selected for toughness and ease of
welding. Most of our tank railcars feature a sloped bottom tank
that improves the flow rate of the shipped product and provides
improved drainage. Many of our tank railcars feature coils that
are steam-heated to decrease cargo viscosity, which improves the
transported products flow rate and speeds unloading. We
can alter the design of our tank railcars to address specific
customer requirements. Revenues attributable to sales of our
tank railcars were approximately $46.2 million,
$72.2 million and $111.3 million in 2002, 2003 and
2004, respectively, and were $113.8 million for the nine
months ended September 30, 2005. These revenues represented
27%, 33% and 31% of our total revenues in 2002, 2003 and 2004,
respectively, and represented 26% of our total revenues for the
nine months ended September 30, 2005. We sold 713, 1,209
and 1,637 tank railcars in 2002, 2003 and 2004,
respectively, and 1,436 tank railcars in the nine months ended
September 30, 2005.
Component
manufacturing.
We believe
we are an industry leader in the design and manufacture of
custom and standard railcar components. We manufacture over
300 different components for the North American railcar
industry. Our products include hitches for the intermodal
market, tank railcar components and valves, discharge outlets
for covered hopper railcars, manway covers and valve body
castings, and outlet components and running boards for
industrial and railroad customers. We manufacture a variety of
outlet types for our covered hopper railcars that we also sell
to other railcar manufacturers. We use these components in our
own railcar manufacturing and also sell them to third parties,
including our competitors. Sales of our railcar components to
third parties were approximately $9.2 million,
$9.8 million and $15.0 million in 2002, 2003 and 2004,
respectively, and were approximately $21.3 million for the
nine months ended September 30, 2005. Revenues attributable
to these sales represented 5%, 4% and 4% of our total revenues
in 2002, 2003 and 2004, respectively, and represented 5% of our
total revenues for the nine months ended September 30, 2005.
We also manufacture aluminum and special alloy steel castings
that we sell primarily to industrial customers. These products
include castings for the trucking, construction, mining and oil
and gas exploration markets, as well as finished, machined
aluminum castings, other custom machined products and commercial
mixing bowls. Sales of our industrial components were
approximately $21.1 million, $23.7 million and
$35.6 million in 2002, 2003 and 2004, respectively and were
approximately $30.4 million for the nine months ended
September 30, 2005. Revenues attributable to these sales
represented 13%, 11% and 10% of our total revenues in 2002, 2003
and 2004, respectively, and represented 7% of our total revenues
for the nine months ended September 30, 2005.
Railcar services
Our primary railcar services are railcar repair and
refurbishment and railcar fleet management services. Our primary
customers for these services are leasing companies and shippers.
We can service the entire railcar fleets of our customers,
including railcars manufactured by other companies. Some of our
customers use both our railcar repair and refurbishment business
and our fleet management services. We often provide these
preferred customers with expedited repair services to strengthen
our overall customer relationships. Our railcar services provide
us insights into our customers railcar needs that we can
use to improve our products. These services create new customer
relationships and enhance
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Business
relationships with our existing customers. Our revenues from our
railcar services operations were approximately
$30.4 million, $29.9 million and $38.6 million in
2002, 2003 and 2004, respectively, and were approximately
$32.9 million for the nine months ended September 30,
2005. These revenues represented 18%, 14% and 11% of our total
revenues in 2002, 2003 and 2004, respectively, and represented
7% of our total revenues for the nine months ended
September 30, 2005.
Railcar repair and refurbishment.
Our railcar
repair and refurbishment services include light and heavy
railcar repairs, exterior painting, interior lining application
and cleaning, tank and safety valve testing, railcar
inspections, wheel replacement and conversion or reassignment of
railcars from one purpose to another. We support our railcar
repair and refurbishment services customers through a
combination of full service repair shops, mobile repair units
and mini-shop locations. Our repair shops, like our
manufacturing facilities, are strategically located near major
rail lines used by our customers and suppliers and close to some
of the major industries we serve. Revenues attributable to our
railcar repair and refurbishment service operations were
approximately $28.0 million, $26.6 million and
$33.6 million in 2002, 2003 and 2004, respectively, and
were approximately $27.6 million for the nine months ended
September 30, 2005. These revenues represented 17%, 12% and
10% of our total revenues in 2002, 2003 and 2004, respectively,
and represented 6% of our total revenues for the nine months
ended September 30, 2005.
Railcar fleet management.
As of September 30,
2005, we manage approximately 57,000 railcars for various
customers, including approximately 22,000 for ARL, a leasing
company controlled by affiliates of Carl C. Icahn. Revenues
attributable to our fleet management services were approximately
$2.4 million, $3.3 million and $5.0 million in
2002, 2003 and 2004, respectively, and were approximately
$5.3 million for the nine months ended September 30,
2005. These revenues represented 1%, 2% and 1% of our total
revenues in each of 2002, 2003 and 2004, respectively, and
represented 1% of our total revenues for the nine months ended
September 30, 2005. Some of the principal features of our
railcar fleet management services business include:
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Mileage
accounting.
Some
customers elect to receive mileage payments to offset freight
charges. Mileage is paid for loaded miles moved and calculated
based on published rates. We collect and audit the
railroads mileage calculations to ensure our customers
receive the funds they are due.
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Rolling stock
taxes.
States and
localities impose taxes on railcars calculated based upon
mileage reporting. We file the required tax forms with the state
and local taxing authorities. We audit the tax invoices received
to determine whether the assessments are accurate.
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Regulatory
compliance.
Our
regulatory compliance support services help customers maintain
their railcar fleets in compliance with applicable regulations.
As regulations change, we help our customers manage the
associated requirements and costs. We analyze new fleets for
which we provide fleet management services to identify areas of
noncompliance with applicable U.S. rail regulations and
determine corrective actions.
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Engineering
services.
Our
engineering support services help customers manage their
regulatory compliance and documentation. We provide procedures
and consultation for railcar repairs to address integrity and
compliance.
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Field engineering
services.
We provide
on-site evaluation and implementation of significant engineering
design changes for our customers.
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Online service
access.
Our web-based
systems allow our customers to view information on their railcar
fleet online. The data we maintain includes mechanical and
regulatory information, historical costs and repair detail and
the status of repairs.
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Maintenance
planning.
We forecast
our customers railcar maintenance needs and suggest
schedules for repair service and refurbishment. This helps to
ensure better fleet utilization and more effective maintenance
cycles.
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MANUFACTURING
Our principal railcar manufacturing facilities are located in
Paragould and Marmaduke, Arkansas. We built these facilities in
1995 and 1999, respectively, on previously undeveloped sites.
These facilities employ non-unionized work forces and are
strategically located in close proximity to our major customers
and suppliers, which decreases our freight costs and railcar
delivery times. These facilities provide us the flexibility to
produce a variety of railcars and enable us to quickly shift
production from one railcar type to another railcar type.
Through September 30, 2005, we have manufactured
20,455 railcars at our Paragould facility and
6,373 railcars at our Marmaduke facility.
We manufacture all of our covered hopper railcars at our
Paragould facility. We successfully launched a third
manufacturing line at Paragould in December 2004. Based on our
current backlog, we plan to produce an average of approximately
24 railcars a working day at this facility. We manufacture
all of our tank railcars at our Marmaduke, Arkansas facility.
Based on our current backlog, we plan to produce an average of
approximately 7.5 railcars a working day at this facility.
Our actual daily production at both of these facilities will
depend on the mix of railcar types being manufactured and the
availability of raw materials and components. In 2004, we
manufactured 2,747 railcars at our Paragould facility and
1,637 railcars at our Marmaduke facility. We also have the
manufacturing ability to produce other types of railcars. For
example, in the past we have manufactured centerbeam platform
railcars used to transport building products.
We believe that we sustain product quality throughout each
railcar manufacturing facility by employing uniform, quality
tools and equipment. Our production lines are able to produce a
variety of railcars to satisfy changing customer preferences and
our tooling and plant layouts were constructed to enable quick
changeover. We currently can manufacture up to three different
types of railcars simultaneously at our Paragould facilities and
many different types of tank railcars simultaneously at our
Marmaduke facility. We believe our quality products and modern
manufacturing processes contribute to our low incidence of
warranty claims. Our warranty claims for railcars produced at
our Paragould and Marmaduke facilities were approximately
$0.3 million, $0.4 million and $0.1 million in
2002, 2003 and 2004, respectively, and were approximately
$0.5 million for the nine months ended September 30,
2005.
We designed our Paragould and Marmaduke facilities to provide
manufacturing flexibility and allow for the production of a
variety of railcar sizes and types. Examples of our production
flexibility include:
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our ability to manufacture several
types of railcars at our Paragould facility; for example, the
Paragould facility recently finished an order of centerbeam
platform railcars, and quickly converted to covered hopper
railcar production upon completion of that order;
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our two parallel,
vertically-tiered manufacturing tracks at Paragould allow
workers on these two tracks to share tools and equipment and
allow multiple components of the same railcar to be produced
simultaneously;
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our welding machines, which are
purposefully smaller than many other industrial welding
machines, allow our welders greater freedom of movement, which,
in turn, we believe increases production speed;
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our automated painting lance helps
ensure proper interior coating in a single application and we
believe is faster and produces greater consistency than manual
coating;
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our grit-blasting is conducted by
automated, oscillating machinery, which we believe is superior
to and more efficient than alternative techniques, including
static manual blasting;
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our ability to rotate railcars
360 degrees eases and speeds specific steps in the
production line, such as complicated welding steps that would
otherwise need to be performed from difficult and possibly
dangerous angles;
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our horizontal manufacturing lines
at our Marmaduke facility allow individual tank railcars to be
taken in and out of the production line for additional
attention, without the need to stop the plants entire
production process;
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our proprietary outer-jacket
coiling process allows us to insulate our tank railcars at our
facility;
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our force curing technique helps
eliminate impurities, smell and residue remaining in railcars
following the painting and lining steps, which we use primarily
for railcars designed to transport food products;
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our tracked loading and unloading
points decrease the indirect labor required to move raw
materials and components into our facilities and finished
products out of our facilities; and
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our integrated painting, railcar
truck assembly and fabrication shops eliminate downtime in our
production process.
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In addition, we believe our management and operation of these
facilities help reduce our operating costs, some examples of
which include:
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our decentralized management,
including a salaried-to-hourly employee ratio of one to 14;
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our proactive safety program,
which features weekly meetings of safety sub-committees on which
our hourly and salaried employees participate and voluntarily
establish safety rules that frequently exceed regulatory and
industry minimum requirements; our safety program has helped
contribute to low incidences of accidents requiring lost
production time at our facilities; and
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our flexible workforce allows our
employees to frequently move both between locations on
production lines, such as welding and small components
fabricating positions, and among our different manufacturing
facilities.
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CUSTOMERS
We have strong long-term relationships with many large
purchasers of railcars. Long-term customers are particularly
important in the railcar industry, given the limited number of
buyers and sellers of railcars, and railcar manufacturers
desire constantly to maintain adequate backlog and manufacture
at full capacity.
Our railcar customer base consists mostly of U.S. shippers,
leasing companies and railroads. Over the past five years, our
largest leasing company customers included
ACF Industries LLC, The CIT Group, Inc., GATX
Rail Corporation, GE Capital Corporation, The Greenbrier
Companies and Union Tank Car Company and our largest shipper
customers included Solvay America, Inc., Dow Chemical Company,
Engelhard Corporation, Exxon Mobil Corporation and Lyondell
Chemical Company. Our major railroad customers over the past
five years included TTX and Union Pacific. Over the last five
years, our largest customers of railcar repair and refurbishment
services included ACF and ARL, affiliates of Carl C. Icahn, The
CIT Group, Inc., Lyondell Chemical Company and
PPG Industries, Inc. Over the last five years, our largest
fleet management services customers included ACF, ARL and
PLM Transportation. Over the last five years, our largest
customers for railcar components included ACF, GE Capital
Railcar, Olin Corporation, Trinity Industries, Inc. and
TTX Company. Over the last
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Business
five years, our largest customers for industrial parts included
ABB Vetco Gray, Dresser Industries, Inc.,
KF Industries, Inc., McKissick Products and Stream Flo
Industries, Ltd.
In 2004, The CIT Group, Inc. accounted for approximately
16% of our revenues, The Greenbrier Companies accounted for
approximately 20% of our revenues, and ACF and ARL collectively
accounted for approximately 23% of our revenues. In 2004, sales
to our top ten customers accounted for approximately 79% of our
revenues. Sales to The Greenbrier Companies, another railcar
manufacturer, were under a contract for centerbeam platform
railcars that is now complete. We do not anticipate significant
sales to The Greenbrier Companies in the future. ARL and ACF are
affiliates of Carl C. Icahn, our principal beneficial
stockholder and the chairman of our board of directors.
While we maintain strong relationships with our customers, many
customers do not purchase railcars from us every year because
railcar fleets are not necessarily replenished or augmented
every year. The size and frequency of railcar orders often
results in a small number of customers representing a
significant portion of our sales in a given year. See Risk
factors Risks related to our business We depend upon
a small number of customers that represent a large percentage of
our revenues The loss of any single customer, or a
reduction in sales to any such customer, could have a material
adverse effect on our business, financial condition and results
of operations.
SALES AND MARKETING
We sell and market our products in North America through our
sales and marketing staff, including sales representatives who
sell directly to customers, catalogs through which our customers
have access to our railcar components, and our web site, through
which customers can order specialty components. We have seven
employees devoted to sales and marketing efforts for our railcar
manufacturing, components manufacturing and fleet management
services who operate from our corporate headquarters in
St. Charles, Missouri and, for our railcar repair business,
from a service office located in Houston, Texas. In addition,
ARL and ACF, affiliates of Carl C. Icahn, in connection with
their own leasing sales activities have, from time to time,
referred their customers and contacts to us that prefer to
purchase, rather than lease, railcars. At this time, there is no
formal arrangement with, or compensation of, ARL and ACF for any
referrals that result in sales of railcars.
The sales process for our products and services is often
multi-level, involving a team comprised of individuals from
sales, marketing, engineering, operations and senior management.
Each significant customer is assigned a team that engages the
customer at different organizational levels to provide planning
and product customization and to assure open communications and
support. Our marketing activities also include participation in
trade shows, publication of articles in trade journals,
participation in industry forums and distribution of sales
literature.
There is significant overlap between our railcar manufacturing,
railcar components and fleet services customers. Our presence in
each market increases our opportunities to gain market share in
each of the other markets. Our access to competitors
railcars through our components and railcar repair and
maintenance businesses further increases our opportunities to
identify and address customer needs.
PRODUCT DEVELOPMENT
Our engineering, marketing, operations and management personnel
have developed collaborative relationships with many of their
customer counterparts and have used these relationships to
identify market demands and target our product development to
meet those demands. Our product development costs are reflected
in our general, selling and administrative expenses. From time
to time, we hire additional engineers or contract projects to
outside firms to work on specific product development projects.
Our current product development efforts focus on the development
of railcars equipped with outlets specifically designed to
target certain industries, including a through sill general
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Business
service covered hopper railcar designed for the sugar industry
and the grain and cement markets. We also have developed a
bulkheadless covered hopper railcar to address the needs of
customers that are more focused on loading, rather than
unloading, efficiency. We have built prototypes of some of these
railcars, which are currently being field tested by target
customers. With input from our customers, we continually monitor
product performance following delivery. Observation of our
products and our competitors products at various stages of
a railcars lifecycle and feedback from our repair shops,
has led to product innovations, including proprietary bulkhead
reinforcements and changes to our basic design platform. We
cannot guarantee that we will be able to develop new products
effectively, to enhance our existing products, or to respond
effectively to technological changes or new industry standards
or developments on a timely basis if at all.
BACKLOG
Our total backlog as of September 30, 2004 was
$365.1 million and as of September 30, 2005 was
$1,133 million. We estimate that approximately 12% of our
September 30, 2005 backlog will be converted to revenues in
the year ended December 31, 2005. Although we believe these
orders to be firm, customer orders may be subject to
cancellation, customer requests for delays in railcar delivery,
inspection rights and other customary industry terms and
conditions.
On July 29, 2005, we entered into a multi-year purchase and
sale agreement with CIT to manufacture and sell to CIT covered
hopper and tank railcars. Under this agreement, CIT has agreed
to buy a minimum of 3,000 railcars from us in each of 2006, 2007
and 2008 and we have agreed to offer to sell to CIT up to 1,000
additional railcars in each of those years. CIT may choose to
satisfy its purchase obligations from among a variety of covered
hopper and tank railcars described in the agreement. CIT may
reduce its future purchase obligations or cancel pending
purchase orders, upon prior written notice to us, under certain
conditions, including a reduction of the then current American
Railway Car Institutes most recently reported quarterly
backlog below specified levels. As of September 30, 2005, the
American Railway Car Institute reported a quarterly backlog of
in excess of 60,900 railcars. If during the term of the
agreement, the levels of quarterly backlog reported by American
Railway Car Institute fall below 45,000 railcars but remains
above 35,000 railcars, CIT has the right, on 240 days prior
written notice, to cancel pending purchase orders or reduce
subsequent purchase obligations for the then current agreement
year, in either case such that actual purchases by CIT would not
fall below 50% of that agreement years original minimum
purchase requirements. If the American Railway Car
Institutes reported quarterly backlog falls below 35,000
railcars, CIT has the right to cancel or suspend all, or any,
pending purchase orders or remaining purchase obligations under
the Agreement upon at least 180 days prior written notice.
If CIT elects to cancel any pending purchase order under these
provisions within at least 120 days of the delivery date of
the order, we may require that CIT purchase from us, at our
cost, all material which we had purchased and identified to such
cancelled purchase order. CIT also has the right to reduce its
railcar orders from us if market prices for the railcars subject
to our agreement are reduced significantly below our quoted
prices and we fail to meet such price reductions. Under the
agreement, purchase prices for railcars are subject to steel
surcharges and certain other material cost increases applicable
at the time of production.
Our backlog consists of orders for railcars. We define backlog
as the number and sales value of railcars that our customers
have committed in writing to purchase from us that have not been
recognized as revenues. Although we generally have one to three
year contracts with most of our fleet management customers,
neither orders for our railcar repair and refurbishment services
business nor our fleet management business are included in our
backlog because we generally deliver our services in the same
period in which orders are received. Similarly, orders for our
component manufacturing
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business are not included in our backlog because we generally
deliver components to our customers in the same period in which
orders for the components are received.
Due to the large size of railcar orders and variations in the
number and mix of railcars ordered in any given period, the size
of our reported backlog at the end of any such period may
fluctuate significantly. See Risk factors Risks
related to our business The variable purchase patterns of
our railcar customers and the timing of completion, delivery and
acceptance of customer orders may cause our revenues and income
from operations to vary substantially each quarter, which could
result in significant fluctuations in our quarterly
results.
The following table shows our reported railcar backlog, and
estimated future revenue value attributable to such backlog, at
the end of the periods shown. This reported backlog includes
9,000 railcars relating to CITs minimum purchase
obligations under its agreement with us based upon an assumed
product mix consistent with CITs orders for railcars.
Changes in product mix from that assumed would affect the dollar
amount of our backlog from CIT.
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Nine months ended
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Year ended December 31,
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September 30,
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2002
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2003
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2004
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2004
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2005
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Railcar backlog at start of period
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317
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412
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2,287
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2,287
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7,547
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New railcars delivered
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(1,766
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(2,557
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(4,384
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(3,260
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(4,980
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)
|
New railcar orders
|
|
|
1,861
|
|
|
|
4,432
|
|
|
|
9,644
|
|
|
|
6,626
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railcar backlog at end of period
|
|
|
412
|
|
|
|
2,287
|
|
|
|
7,547
|
|
|
|
5,653
|
|
|
|
15,567
|
|
Estimated railcar backlog value at end of period (in
thousands)(1)
|
|
$
|
26,906
|
|
|
$
|
129,850
|
|
|
$
|
494,107
|
|
|
$
|
365,097
|
|
|
$
|
1,132,798
|
|
|
|
(1)
|
Estimated backlog value reflects the total revenues expected to
be attributable to the backlog reported at the end of the
particular period as if such backlog were converted to actual
revenues. Estimated backlog does not reflect potential price
increases and decreases under certain customer contracts that
provide for variable pricing based on changes in the cost of
certain raw materials and railcar components or the cancellation
or delay of railcar orders that may occur.
|
Historically, we have experienced little variation between the
number of railcars ordered and the number of railcars actually
delivered, however, our backlog is not necessarily indicative of
our future results of operations. As orders may be canceled or
delivery dates extended, we cannot guarantee that our reported
railcar backlog will convert to revenue in any particular
period, if at all, nor can we guarantee that the actual revenue
from these orders will equal our reported backlog estimates or
that our future revenue efforts will be successful. See
Risk factors Risks related to our business The
level of our reported railcar backlog may not necessarily
indicate what our future revenues will be and our actual
revenues may fall short of the estimated revenue value
attributed to our railcar backlog.
SUPPLIERS AND MATERIALS
We employ a just-in-time supply strategy for our manufacturing.
We believe this strategy improves working capital efficiency,
reduces operating costs and improves our flexibility to adjust
rapidly to production capacity. Our business depends on the
adequate supply of numerous railcar components, such as railcar
wheels, brakes, sideframes, axles, bearings, yokes, tank railcar
heads, bolsters and other heavy castings, and raw materials,
such as steel and normalized steel plate, used in the production
of railcars. Over the last few years, many components and raw
materials suppliers have been acquired or ceased operations,
which has caused the number of alternative suppliers of railcar
components and raw materials to decline. The combination of
industry consolidation and high demand has caused recent
industry-wide shortages of many critical components and raw
materials as reliable suppliers are
96
Business
frequently at or near production capacity. In some cases, such
as those described below, as few as one significant supplier
produces the type of component or raw material we use in our
railcars. See Risk factors Risks related to our
business Fluctuations in the supply of components and raw
materials we use in manufacturing railcars could cause
production delays or reductions in the number of railcars we
manufacture, which could materially adversely affect our
business and results of operations.
The cost of raw materials and railcar components represents
approximately 80% to 85% of the direct manufacturing costs of
most of our railcar product lines. Prices for steel, the primary
component in railcars and railcar components, rose sharply in
2004 as a result of strong demand, limited availability of scrap
metal for steel processing, reduced capacity and import trade
barriers. As of September 30, 2005, most of our railcar
manufacturing contracts contain price variability provisions
that track fluctuations in the prices of certain raw materials
and railcar components, including steel, so that increases in
our manufacturing costs caused by increases in the prices of
these raw materials and components are passed directly on to our
customers. Conversely, if the price of those materials or
components decreases, a discount is applied to reflect the
decrease in cost. In our component manufacturing business, we
add a surcharge to every product to account for increases in
steel costs. Though we do not have similar contractual
protections in connection with the aluminum we use in our
manufacturing processes, we believe the risks are much less
significant primarily due to the overall lower amounts of
aluminum we use in our manufacturing, the relative price of
aluminum to steel and the historical range of aluminum prices.
Our customers often specify particular railcar components and
the suppliers of such components. We continually monitor
inventory levels to ensure adequate support of production. We
periodically make advance purchases to avoid possible shortages
of material due to capacity limitations of railcar component
suppliers and possible price increases. We do not typically
enter into binding long-term contracts with suppliers because we
rely on established relationships with major suppliers to ensure
the availability of raw materials and specialty items.
In 2004, no single supplier accounted for more than 12% of our
total purchases and our top ten suppliers accounted for 63% of
our total purchases. See Risk factorsRisks related
to our businessThe cost of the raw materials that we use
to manufacture railcars, particularly steel, are high and these
costs are expected to increase. Any increase in these costs or
delivery delays of these raw materials may materially adversely
affect our business, financial condition and results of
operations.
In October 2005, we entered into two vendor supply contracts
with minimum volume commitments with suppliers of materials used
at our railcar manufacturing facilities. These agreements relate
to railcar components, and have terms of two and three years,
respectively. We have agreed to purchase a combined total of
$67.6 million from these two suppliers over the next three
years. In 2006, 2007 and 2008 we expect to purchase
$16.0 million, $27.1 million and $24.5 million
respectively under these agreements.
Steel.
We use both regular and normalized steel plate to
manufacture railcars. Currently, there is only one domestic
supplier of the form and size of normalized steel plate that we
need for our manufacturing operations, and that supplier is our
only source of this product. We believe we can acquire regular
steel from other suppliers. Normalized steel plate is a special
form of heat treated steel that is stronger and can withstand
puncture better than regular steel. Normalized steel plate is
required by Federal regulations to be used in tank railcars
carrying certain types of hazardous cargo, including liquefied
petroleum gas. We use normalized steel plate in the production
of many of our tank railcars.
In June 2005, we entered into an agreement with another supplier
that is constructing a facility to manufacture normalized steel
plate, including normalized steel plate of the form and size we
need for our manufacturing operations to supply us with a
portion of our normalized steel plate requirements. We believe
construction of this normalized steel production facility is
scheduled for completion by
97
Business
early 2006. Although our arrangements with this supplier will
not satisfy all of our normalized steel requirements, we expect
this facility will provide us an alternative source of
normalized steel plate and decrease our reliance on the current
sole supplier of this critical raw material.
We also have entered into a supply agreement with this supplier
for the purchase of regular steel plate. Both agreements have a
term of five years and may be terminated by either party at any
time after two years, upon twelve months prior notice. Each
agreement requires us to purchase the lesser of a fixed volume
or 75% of our requirements for the steel plate covered by that
agreement at prices that fluctuate with the market.
Tank heads and floor sheet reinforcements.
ACF supplies
us with tank railcar heads, head blocks, head pads, floor sheet
reinforcements, wheel sets, mounting frames and sheared panels.
ACF is our sole supplier of tank railcar heads and floor sheet
reinforcements. See Risk FactorsRisks related to our
businessAfter this offering, companies affiliated with
Carl C. Icahn will continue to be important suppliers and
customers.
Castings.
Heavy castings we use in our railcar
manufacturing primarily include bolsters, sideframes, couplers
and yokes. These castings form part of the truck assemblies upon
which railcars must be placed. The companies that supply the
railcar industry with heavy castings are unable to meet current
demands of all the railcar manufacturers and, as such, the
production capacity of many railcar manufacturers is limited by
the restricted availability of these components. In 2003, our
management team helped found and develop, and continues to
operate Ohio Castings, a joint venture, in which we own a
one-third interest. The joint venture leased a foundry in
Cicero, Illinois and acquired a foundry in Alliance, Ohio and
produces sideframes, bolsters, couplers and yokes. We also have
entered into supply agreements with an affiliate of one of our
Ohio Castings joint venture partners to purchase up to 25% and
33%, respectively, of the car sets, consisting of sideframes and
bolsters, produced at each of these foundries. Our purchase
commitments under these supply agreements are dependent upon the
number of car sets manufactured by these foundries, which are
jointly controlled by us and the other two members of Ohio
Castings. We believe that our involvement in this joint venture
helps us maintain our levels of production at competitive
prices, despite industry-wide shortages of these potentially
capacity constraining components. See Risk factors
Risks related to our business Our relationships with our
partners in our Ohio Castings Company, LLC joint venture may not
be successful, which could materially adversely affect our
business, and Certain relationships and
related party transactions.
Wheels and brakes.
There also have been supply
constraints and shortages of wheels and brakes used in railcars.
Currently, there are only two domestic suppliers of each of
these components. For both wheels and brakes, we primarily rely
on one supplier. We also obtain limited quantities of
refurbished wheels from scrapped railcars. If necessary, we
believe we can also obtain railcar wheels from a Chinese
supplier at a significantly higher cost.
COMPETITION
The railcar manufacturing business is extremely competitive. We
compete primarily with Trinity Industries, Inc. and National
Steel Car Limited in the covered hopper railcar market and with
Trinity Industries and, to a lesser degree, Union Tank Car
Company in the tank railcar market. Both Trinity Industries, and
Union Tank Car Company have substantially greater resources and
produce substantially more tank railcars than us. However, Union
Tank primarily produces tank railcars for its own leased fleet.
Trinity Industries produces substantially more covered hopper
railcars than we do. For example, according to Trinity
Industries, Inc.s annual report for the year ended
December 31, 2004 and its quarterly report for the nine
months ended September 30, 2005, Trinity delivered a total
of approximately 15,100 and 17,016 railcars, respectively,
during those periods in North America. By
98
Business
comparison, for the year ended December 31, 2004 and for
the nine months ended September 30, 2005, we delivered a
total of approximately 4,384 and 4,980 railcars, respectively,
during those periods in North America.
Some of our competitors have greater financial and technological
resources than we do. They may increase their participation in
the railcar markets in which we compete and other railcar
manufacturers that currently do not manufacture covered hopper
railcars or tank railcars may choose to compete directly with
us. Railcar purchasers sensitivity to price and strong
price competition within the industry have historically limited
our ability to increase prices to obtain better margins on our
railcars.
We face intense competition in our other markets as well. Our
competition for the sale of railcar components includes our
competitors in the railcar manufacturing market as well as a
concentrated group of companies whose primary business focus is
the production of one or more specialty components. In addition,
new competitors, or alliances among existing competitors, may
emerge and rapidly gain market share. We compete with numerous
companies in our railcar services and fleet management
businesses, ranging from companies with greater resources than
we have to small, local companies. Our principal competitors in
these businesses include Rescar and Millennium Rail.
In addition to price, competition in all our markets is based on
quality, reputation, reliability of delivery, customer service
and other factors. Any of these factors as well as technological
innovation by any of our existing competitors, or new
competitors entering any of the markets in which we do business,
could put us at a competitive disadvantage. We may be unable to
compete successfully or retain our market share in our
established markets. Increased competition for the sales of our
railcar products and services could result in price reductions,
reduced margins and loss of market share, which could negatively
affect our prospects, business, financial condition and results
of operations.
INTELLECTUAL PROPERTY
We rely on a combination of investments, copyrights and patents
to protect our intellectual property. Due to the change that has
historically characterized the railcar manufacturing industry,
we believe that the improvement of existing technology and the
development of new products may be more important than patent
protection in establishing and maintaining a competitive
advantage. Nevertheless, we have obtained patents and will
continue to make efforts to obtain patents, when available, in
connection with product developments and designs. We cannot
guarantee that any patent obtained will provide protection or be
of commercial benefit to us, or that its validity will not be
challenged.
We have ten U.S. and two non-U.S. patents, two pending
non-U.S. patent applications, seven registered trademarks,
and numerous unregistered copyrights and trade names. Our
patents expire at various times from 2005 to 2021.
EMPLOYEES
As of September 30, 2005, we had 2,336 full-time employees
in various locations throughout the United States and Canada,
including 2,217 engaged in our manufacturing, railcar repair and
railcar fleet management operations and 119 in various corporate
support functions. At our Longview, Texas and North Kansas City,
Missouri repair facilities, and at our Longview, Texas steel
foundry and components manufacturing facility, 50, 45 and 289
employees, respectively, are covered by collective bargaining
agreements. These agreements expire in January 2008, September
2007 and April 2008, respectively. We are also party to a
collective bargaining agreement at our Milton, Pennsylvania
repair facility, which is currently idle. Employees at our other
locations are not covered by collective bargaining agreements.
We believe that our relations with our employees are generally
good.
99
Business
REGULATION
The Federal Railroad Administration, or FRA, administers and
enforces U.S. federal laws and regulations relating to
railroad safety. These regulations govern equipment and safety
compliance standards for railcars and other rail equipment used
in interstate commerce. The Association of American Railroads,
or AAR, promulgates a wide variety of rules and regulations
governing safety and design of equipment, relationships among
railroads with respect to railcars in interchange and other
matters. The AAR also certifies railcar manufacturers and
component manufacturers that provide equipment for use on
railroads in the United States. New products must generally
undergo AAR testing and approval processes. As a result of these
regulations, we must maintain certifications with the AAR as a
railcar manufacturer, and products that we sell must meet AAR
and FRA standards. We must comply with the rules of the
U.S. Department of Transportation, or DOT, and we are also
subject to oversight by Transport Canada. To the extent that we
expand our business internationally, we will increasingly be
subject to the regulations of other non-U.S. jurisdictions.
Due to the health and safety risks posed by several types of
hazardous cargo transported by pressure tank railcars, including
liquefied petroleum gas, chlorine and anhydrous ammonia,
pressure tank railcars are subject to regulations to which many
other types of railcars are not subject. For example, in
response to general safety and homeland security concerns, there
are currently proposals pending by governmental and
non-governmental railcar authorities that address, among other
things, the impact resistance of the steel used in the
manufacture of pressure tank railcars. These proposals may
result in additional regulation concerning the required use of
normalized steel, and the testing of its impact resistance, in
pressure tank railcars. Prior to 1989, normalized steel was not
typically used in the manufacture of pressure tank railcars and,
according to AAR and DOT data, approximately 28,000 pressure
tank railcars currently in the U.S. railcar fleet were not
manufactured with normalized steel. Because normalized steel is
used to form railcars shells, it is generally not feasible
to retrofit railcars with normalized steel. We believe we are
well positioned to take advantage of any increased demand for
new pressure tank railcars that could result from regulations
requiring the increased use of normalized steel in pressure tank
railcars or the removal of any pre-1989 pressure tank railcars
from the U.S. railcar fleet.
ENVIRONMENTAL MATTERS
We are subject to comprehensive federal, state, local and
international environmental laws and regulations relating to the
release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or
disposal of hazardous materials and wastes, or otherwise
relating to the protection of human health and the environment.
These laws and regulations expose us to liability for the
environmental condition of our current or formerly owned or
operated facilities and our own negligent acts, and also may
expose us to liability for the conduct of others or for our
actions that were in compliance with all applicable laws at the
time these actions were taken. In addition, these laws may
require significant expenditures to achieve compliance, and are
frequently modified or revised to impose new obligations. Civil
and criminal fines and penalties and other sanctions may be
imposed for non-compliance with these environmental laws and
regulations. Our operations that involve hazardous materials
also raise potential risks of liability under the common law.
Environmental operating permits are, or may be, required for our
operations under these laws and regulations. These operating
permits are subject to modification, renewal and revocation. We
regularly monitor and review our operations, procedures and
policies for compliance with permits, laws and regulations.
Despite these compliance efforts, risk of environmental
liability is inherent in the operation of our businesses, as it
is with other companies engaged in similar businesses. Many of
our properties were transferred to us by ACF in 1994. We are
involved in investigation and remediation activities at
properties that we now own or lease to address historic
contamination and potential contamination by
100
Business
third parties. We are also involved with state agencies in the
cleanup of two sites under these laws. These investigations are
at a preliminary stage, and it is impossible to estimate, with
any certainty, the timing and extent of remedial actions that
may be required, and the costs that would be involved in such
remediation. Substantially all of the issues identified relate
to the use of the properties prior to their transfer to us in
1994 by ACF and for which ACF has retained liability for
environmental problems that may have existed at the time of
their transfer to us and ACF has also agreed to indemnify us for
any cost that might be incurred with those existing problems.
However, if ACF fails to honor its obligations to us, we would
be responsible for the cost of such remediation.
In connection with its ongoing obligations, ACF, in consultation
with us, is investigating and, as appropriate, remediating those
sites that it transferred to us. We have been advised that, for
the remainder of 2005, ACF estimates that it will spend
approximately $0.1 million on environmental investigation and,
in each of 2006 and 2007, it will spend approximately $0.2
million on environmental investigation, relating to
contamination that existed at properties prior to their transfer
to us and for which ACF has retained liability and agreed to
indemnify us. We believe that our operations and facilities are
in substantial compliance with applicable laws and regulations
and that any noncompliance is not likely to have a material
adverse effect on our operations or financial condition.
Future events, such as new environmental regulations or changes
in or modified interpretations of existing laws and regulations
or enforcement policies, or further investigation or evaluation
of the potential health hazards of products or business
activities, may give rise to additional compliance and other
costs that could have a material adverse effect on our financial
conditions and operations. In addition, we have in the past
conducted investigation and remediation activities at properties
that we own to address historic contamination. To date such
costs have not been material. Although we believe we have
satisfactorily addressed all known material contamination
through our remediation activities, there can be no assurance
that these activities have addressed all historic contamination.
The discovery of historic contamination or the release of
hazardous substances into the environment at our current or
formerly owned or operated facilities could require us in the
future to incur investigative or remedial costs or other
liabilities that could be material or that could interfere with
the operation of our business.
In addition to environmental laws, the transportation of
commodities by railcar raises potential risks in the event of a
derailment or other accident. Generally, liability under
existing law in the United States for a derailment or other
accident depends on the negligence of the party, such as the
railroad, the shipper or the manufacturer of the railcar or its
components. However, for certain hazardous commodities being
shipped, strict liability concepts may apply.
PROPERTY
Our headquarters are located in St. Charles, Missouri. ARL, an
affiliate of Carl C. Icahn, leases this facility and permits us
to occupy it for a fee pursuant to a service agreement. Either
party may terminate this agreement on six months notice.
101
Business
The following table presents information about our railcar
manufacturing and components manufacturing facilities as of
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased or
|
|
Lease
|
Location
|
|
Use
|
|
Size
|
|
Owned
|
|
Expiration Date
|
|
Paragould, Arkansas
|
|
Covered hopper railcar manufacturing
|
|
546,680 square feet on 82 acres
|
|
Owned(1)
|
|
|
Marmaduke, Arkansas
|
|
Tank railcar manufacturing
|
|
441,075 square feet on 55 acres
|
|
Owned
|
|
|
St. Charles, Missouri
|
|
Aluminum foundry and machining
|
|
128,626 square feet on 3 acres
|
|
Leased
|
|
February 28, 2006
|
Jackson, Missouri
|
|
Railcar components manufacturing
|
|
110,240 square feet on 8 acres
|
|
Owned(1)
|
|
|
Kennett, Missouri
|
|
Covered hopper and tank railcar subassembly and small components
manufacturing
|
|
78,375 square feet on 9 acres
|
|
Owned(1)
|
|
|
Longview, Texas
|
|
Steel foundry and machining
|
|
155,030 square feet on 31 acres
|
|
Owned
|
|
|
|
|
(1)
|
Our manufacturing facility located in Paragould, Arkansas is
subject to a mortgage that secures the $9,500,000 industrial
revenue bonds issued on April 27, 1995 by Paragould,
Arkansas. As of September 30, 2005, approximately
$4.5 million of these bonds remain outstanding. Our
manufacturing facility located in Jackson, Missouri is subject
to a mortgage that secures the approximately $2.5 million
industrial development revenue bonds issued on July 1, 1996
by Jackson, Missouri. As of September 30, 2005,
approximately $1.5 million of these bonds remain
outstanding. Our manufacturing facility located in Kennett,
Missouri is subject to a mortgage that secures the approximately
$5.5 million industrial development revenue bonds issued on
June 22, 1995 by Kennett, Missouri. As of
September 30, 2005, approximately $2.6 million of
these bonds remain outstanding. We occupy the real property at
these facilities through lease-back arrangements. We intend to
repay all of these bonds in full with the proceeds of this
offering. Each of these properties will be re-conveyed to us
when the bonds secured by the properties are paid in full. The
industrial revenue bonds are guaranteed by affiliates of
Mr. Icahn, and these affiliates will be released from such
guarantees upon repayment of the industrial revenue bonds. In
addition, James J. Unger, our president and chief executive
officer, and his wife own $0.4 million of the industrial
revenue bonds issued by Paragould, Arkansas. Mr. Unger and
his wife will receive approximately $0.4 million upon our
repayment in full of the amounts due under the industrial
revenue bonds. See Use of proceeds, Certain
relationships and related party transactionsGuarantees of
indebtedness by ACF and other related partiesIndustrial
revenue bonds and Certain relationships and related
party transactionsCertain transactions involving James J.
UngerIndustrial revenue bonds for more details.
|
We also provide railcar repair, cleaning, maintenance and other
services at facilities we own in Longview and Goodrich, Texas;
North Kansas City, Missouri; and Tennille, Georgia; and at
facilities we lease in Gonzales, Louisiana; Green River,
Wyoming; Deer Park, Texas; Bude, Mississippi; and Sarnia,
Ontario. We also own a repair facility in Milton, Pennsylvania
that has been idle since 2003. Our facility located in Tennille,
Georgia is secured by a $0.6 million mortgage due
February 10, 2008. As of September 30, 2005,
approximately $0.2 million remained outstanding on this
mortgage.
INSURANCE
We maintain insurance on terms typical of our industry. Our
policies cover standard industry risks, including general and
products liability, workers compensation, automobile liability
and other casualty and property risks.
102
Business
LEGAL PROCEEDINGS
We have been named the defendant in a law suit in which the
plaintiff, OCI Chemical Company, claims we were responsible
for the damage caused by allegedly defective railcars that were
manufactured by us. The lawsuit was filed on September 19,
2005 in the United States District Court, Eastern District of
Missouri. The plaintiff seeks unspecified damages in excess of
$75,000. The plaintiffs allege that the failures in certain
components caused the contents transported by these railcars to
spill out of the railcars causing property damage, clean-up
costs, monitoring costs, testing costs and other costs and
damages. We believe that we are not responsible for the damage
and have meritorious defenses against liability.
We are from time to time party to various other legal
proceedings arising out of our business. Such proceedings, even
if not meritorious, could result in the expenditure of
significant financial and managerial resources. We believe that
there are no proceedings pending against us which, if determined
adversely, would have a material adverse effect on our business,
financial condition and results of operations.
103
Management
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our current directors
and executive officers, including their ages as of
September 30, 2005.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
Carl C. Icahn
|
|
|
69
|
|
|
Chairman of the Board
|
James J. Unger
|
|
|
57
|
|
|
President, Chief Executive Officer and Director
|
James A. Cowan
|
|
|
48
|
|
|
Executive Vice President and Chief Operating Officer
|
William P. Benac
|
|
|
59
|
|
|
Senior Vice President and Chief Financial Officer
|
Alan C. Lullman
|
|
|
50
|
|
|
Senior Vice President Sales, Marketing and Services
|
Vincent J. Intrieri
|
|
|
49
|
|
|
Senior Vice President, Treasurer, Secretary and Director
|
Jon F. Weber
|
|
|
46
|
|
|
Director
|
Keith Meister
|
|
|
32
|
|
|
Director
|
James C. Pontious*
|
|
|
67
|
|
|
Director
|
James M. Laisure*
|
|
|
53
|
|
|
Director
|
|
|
*
|
Mr. Pontious and Mr. Laisure have each consented to
serve as a director at such time as our common stock is listed
on the Nasdaq National Market.
|
Carl C. Icahn, chairman of the board
Mr. Icahn has been our principal beneficial stockholder and
has served as our chairman of the board and as a director since
1994. Mr. Icahn has served as chairman of the board and a
director of Starfire Holding Corporation, or Starfire, (formerly
Icahn Holding Corporation), a privately-held holding company,
and chairman of the board and a director of various subsidiaries
of Starfire, since 1984. Mr. Icahn has also been chairman
of the board and president of Icahn & Co., Inc., a
registered broker-dealer and a member of the National
Association of Securities Dealers, since 1968. Since November
1990, Mr. Icahn has been chairman of the board of American
Property Investors, Inc., the general partner of American Real
Estate Partners, L.P., a public limited partnership that invests
in real estate and holds various other interests, including the
interests in its subsidiaries that are engaged, among other
things, in the oil and gas business and casino entertainment
business. Mr. Icahn has been a director of Cadus
Pharmaceutical Corporation, a firm that holds various
biotechnology patents, since 1993. From August 1998 to August
2002, Mr. Icahn served as chairman of the board of
Maupintour Holding LLC (f/k/a/ Lowestfare.com, LLC), an
Internet travel reservations company. From October 1998 through
May 2004, Mr. Icahn was the president and a director of
Stratosphere Corporation, which operates the Stratosphere Hotel
and Casino. Since September 29, 2000, Mr. Icahn has
served as the chairman of the board of GB Holdings, Inc.,
which owns all of the outstanding stock of Atlantic Coast
Entertainment Holdings, Inc., which owns an interest in The
Sands Hotel and Casino in Atlantic City, New Jersey. In
January 2003, Mr. Icahn became chairman of the board
and a director of XO Communications, Inc., a
telecommunications company. In May 2005, Mr. Icahn became a
director of Blockbuster Inc., a provider of in-home movie rental
and game entertainment. Mr. Icahn received his B.A. from
Princeton University.
James J. Unger, president, chief executive officer and
director
Mr. Unger has served as our president and chief executive
officer since March 1995. Prior to joining us, he served ACF as
its president from 1988 to 1995, as its senior vice president
and chief financial
104
Management
officer from 1984 to 1988 and on its board of directors from
August 1993 to March 2005. After he joined us in 1995,
Mr. Unger simultaneously continued to serve as the vice
chairman of ACF until March 2005. ACF is controlled by
Mr. Icahn. Mr. Unger has served as president of Ohio
Castings, the joint venture in which we have a one-third
interest, since June 2003. Mr. Unger has been on the board
of directors of Aspen Resources Group, an oil and gas
exploration company since May 2002. Mr. Unger participates
in several industry organizations, including as an executive
committee member and board member for the Railway Supply
Institute, Inc., or RSI. He also is a board member
of the American Railway Car Institute, a member of the project
review committee for the RSI-AAR Railroad Tank Car Safety
Research Test Project, a steering committee member of the RSI
Committee on Tank Railcars, and a member of the National Freight
and Transportation Association. Mr. Unger served as a
member of the board of directors of Ranken Technical College
from 1990 to 2002. Mr. Unger received a B.S. in accounting
from the University of Missouri, Columbia and is a certified
public accountant.
James A. Cowan, executive vice president and chief operating
officer
Mr. Cowan has served as our executive vice president and
chief operating officer since December 2005. Prior to joining
us, he spent the last 26 years in various positions
involving the engineering, construction and manufacturing of
multiple steel and tubular products. From March 2003 to August
2005, Mr. Cowan served as president and chief operating
officer of Maverick Tube Corporation, a North American
manufacturer of welded tubular steel products used in the energy
industry. Prior to this position, from June 2002 to March 2003,
Mr. Cowan served as president and chief operating officer
of Vallourec & Mannesmann Star, a French, German and
Japanese joint venture and seamless manufacturer of tubular
steel products. From January 1992 to June 2002, he served as
general manager responsible for all sales and operations of
three different steel manufacturing facilities for North Star
Steel, a business previously owned by Cargill. Mr. Cowan
was responsible for the complete greenfield development,
construction and start-up of one of these facilities. From July
1979 to January 1992, he served in differing operational
capacities for Cargills steel group, North Star Steel. For
two years, during 2000 and 2001, Mr. Cowan served as the
Chairman of the Governor of Ohios Steel Council.
Mr. Cowan received his B.S. in Metallurgical Engineering
from Michigan Technological University.
William P. Benac, senior vice president and chief financial
officer
Mr. Benac has served as our senior vice president and chief
financial officer since January 2005. Prior to joining us, he
spent the last 32 years in various corporate finance,
turnaround and value creation positions. Mr. Benac
co-founded bpmx, a financial services and consulting
restructuring company, where he served as senior managing
director and chief financial officer from December 2003 to
January 2005. From August 2002 to February 2003, Mr. Benac
served Kinkos Inc., a print services company, as senior
vice president and chief financial officer. From November 2000
to November 2001, Mr. Benac was the executive vice
president and chief financial officer of Grass Valley Group, a
manufacturer of digital broadcast technology. Mr. Benac
served simultaneously as an executive vice president and chief
financial officer of UICI, a diversified financial services
company, and as chief executive officer of United Credit
National Bank, a subsidiary of UICI and a credit card bank, from
May 1999 to November 2000. Mr. Benac has held a variety of
other financial management positions, including serving
Electronic Data Systems Corporation from February 1992 to
October 1997 as global vice president and treasurer, and
numerous positions with Verizon Corporation and its predecessor
companies from 1973 to 1990, including as president of GTE
Finance Corp. from 1986 to 1990. Mr. Benac is a certified
public accountant and a certified management accountant. He has
served on the National Advisory Council of the Marriott School
of ManagementBrigham Young University since 1997.
Mr. Benac received his B.A. and his M.B.A. from Brigham
Young University and his J.D. from Pace University School of Law.
105
Management
Alan C. Lullman, senior vice president sales, marketing and
services
Mr. Lullman has served as our senior vice president sales,
marketing and services since October 2004. From August 1998 to
September 2004, he served as our vice president sales and
marketing. Prior to joining us, he served as a regional sales
manager at the Houston office of ACF from March 1989 to July
1998, where he was responsible for sales across 22 states.
From August 1987 to February 1989, Mr. Lullman was a
district sales manager at ACF. He held numerous other sales
positions at ACF sales offices in the Southwest, Midwest and
Northeast from October 1978 to July 1987. Mr. Lullman is a
member of the Transportation and Logistics Committee of the
American Plastics Council. He received a B.A. from Westminster
College. He also served in the U.S. Marine Corps Reserve
from 1973 to 1976, when he received an honorable discharge.
Vincent J. Intrieri, senior vice president, treasurer,
secretary and director
Mr. Intrieri has served as our senior vice president,
treasurer and secretary since March 2005 and has served on
our board of directors since August 2005. Mr. Intrieri is a
senior managing director of Icahn Partners LP and Icahn Partners
Master Fund LP, private investment funds controlled by
Mr. Icahn. Since January 1, 2005, Mr. Intrieri
has been senior managing director of Icahn Associates Corp. and
High River Limited Partnership, which is primarily engaged in
the business of holding and investing in securities. From March
2003 to December 2004, Mr. Intrieri served as a managing
director and from 1998 to March 2003, he served as a portfolio
manager of Icahn Associates Corp. and High River. Each of Icahn
Associates Corp. and High River are under the control of
Mr. Icahn. From 1995 to 1998, Mr. Intrieri served as
portfolio manager for distressed investments with Elliott
Associates L.P., a New York investment fund. Prior to 1995,
Mr. Intrieri was a partner at the Arthur Andersen
accounting firm. Mr. Intrieri is a certified public
accountant. Mr. Intrieri is chairman of the board of
directors and a director of Viskase Companies, Inc., a publicly
owned producer of cellulose and plastic casings used in
preparing and packaging meat products, in which Mr. Icahn
has an interest through the ownership of securities. In
addition, Mr. Intrieri has served on the board of directors
of XO Communications, Inc., a telecommunications services
company controlled by Mr. Icahn, since January 2003.
Mr. Intrieri received a B.S. in Accounting from The
Pennsylvania State University.
Jon F. Weber, director
Mr. Weber has served on our board of directors since August
2005. Since April 2005, Mr. Weber has served as the
president of American Property Investors, Inc., which is the
general partner of American Real Estate Partners, L.P., a public
limited partnership controlled by Mr. Icahn that invests in
real estate and holds various other interests, including the
interests in its subsidiaries that are engaged, among other
things, in the oil and gas business and casino entertainment
business. Mr. Weber has, since April 2003, been head of
portfolio company operations and chief financial officer at
Icahn Associates Corp., an entity controlled by Mr. Icahn.
Since May 2003, Mr. Weber has been a director of Viskase
Companies, Inc. and was the chief executive officer of Viskase
Companies, Inc. from May 2003 to October 2004. Since March 2003,
he has served as chief executive officer and a director of
Philip Services Corporation, a metal recycling and industrial
services company affiliated with Mr. Icahn. He served as
chief financial officer of venture-backed companies QuantumShift
Inc. and Alchemedia Ltd. from October 2001 to July 2002 and
November 2000 to October 2001, respectively. From May 1998 to
November 2000, Mr. Weber served as managing
directorinvestment banking for JP Morgan Chase and its
predecessor, Chase Manhattan Bank, in São Paulo, Brazil. He
has served as a director of XO Communications, Inc., since May,
2005. Previously, Mr. Weber was an investment banker at
Morgan Stanley and Salomon Brothers.
106
Management
Keith Meister, director
Mr. Meister has served on our board of directors since
August 2005. Since June 2002, Mr. Meister has been a senior
investment analyst of High River, a company owned and controlled
by Mr. Icahn that is primarily engaged in the business of
holding and investing in securities. Mr. Meister is also a
senior investment analyst of Icahn Partners LP and Icahn
Partners Master Fund LP. He is also a director of Icahn
Fund Ltd., which is the feeder fund of Icahn Partners
Master Fund LP. Icahn Partners LP and Icahn Partners Master
Fund L.P. are private investment funds controlled by
Mr. Icahn. Since August 2003, Mr. Meister has served
as the chief executive officer of American Property Investors,
Inc., or API, which is the general partner of American Real
Estate Partners, L.P., a public limited partnership controlled
by Mr. Icahn that invests in real estate and holds various
other interests, including the interests in its subsidiaries
that are engaged, among other things, in the oil and gas
business and casino entertainment business. Mr. Meister
served API as its president from August 2003 to April 2005. From
March 2000 through the end of 2001, Mr. Meister co-founded
and served as co-president of J Net Ventures, a venture capital
fund focused on investments in information technology and
enterprise software businesses. From 1997 through 1999,
Mr. Meister served as an investment professional at
Northstar Capital Partners, an opportunistic real estate
investment partnership. Prior to his work at Northstar,
Mr. Meister served as an investment analyst in the
investment banking group at Lazard Freres. Mr. Meister is a
director of XO Communications, Inc., a telecommunications
services company controlled by Mr. Icahn. Mr. Meister
also is a director of American Entertainment Properties Corp.
and American Casino & Entertainment Properties Finance
Corp., which are gaming companies, and Scientia Corporation, a
private health care venture company, all of which are companies
controlled by American Real Estate Partners, L.P. In August
2005, Mr. Meister also became a director of ADVENTRX
Pharmaceuticals, Inc., a biopharmaceutical company.
Mr. Meister received his A.B. in Government cum laude from
Harvard College.
James C. Pontious, director
Mr. Pontious has agreed to serve on our board of directors
at such time as our common stock is listed on the Nasdaq
National Market. Since May 2005, Mr. Pontious has been a
consultant in the areas of business development and acquisitions
to Wabtec Corporation, a public company that supplies air brakes
and other equipment for locomotives, freight cars and passenger
transit vehicles. In 2005, Mr. Pontious helped Wabtec found
Intermodal Trailer Express Corp, an intermodal operating company
established to focus on hauling highway trailers over the
nations railroads. Mr. Pontious is a principal of
this newly founded company. Mr. Pontious served Wabtec as
vice president of special projects from January 2003 through
April 2005 and as vice president of sales and marketing from
April 1990 to January 2003. Mr. Pontious also served as
vice president of sales and marketing at New York Air Brake
Company, a unit of General Signal Corporation, from 1977 to
1990. Prior to this, Mr. Pontious served the
Pullman-Standard division of Pullman, Inc., a freight and
passenger railcar manufacturer, from 1961 to 1977 in various
management positions in the areas of sales, marketing and
operations. Mr. Pontious currently serves as a director of
the Intermodal Transportation Institute at the University of
Denver. Mr. Pontious holds a B.B.A. from the University of
Minnesota.
James M. Laisure, director
Mr. Laisure has agreed to serve on our board of directors
at such time as our common stock is listed on the Nasdaq
National Market. Since May 2005, Mr. Laisure has been
consulting as an independent contractor for the automotive and
industrial manufacturing space. Prior to this, he spent
32 years in various corporate accounting, sales,
engineering and operational positions with Dana Corporation, a
publicly held corporation that designs, manufactures and
supplies vehicle components and technology, and its
predecessors. Mr. Laisure served as president of
Danas Automotive Systems Group from
107
Management
March 2004 to May 2005. From December 2001 to February 2004,
Mr. Laisure served as president of Danas engine and
fluid management group and, from December 1999 to November 2001,
he served as president of Danas fluid management group. In
addition, he served on the board of directors of various Dana
Corporation joint ventures, including joint ventures in Germany,
Indonesia, Mexico and Turkey. Mr. Laisure served as
director of finance of P.T. Spicer Indonesia, a manufacturer of
axles and driveshafts, from 1982 to 1984. Also, he served as
accountant, internal auditor and controller at Perfect Circle, a
manufacturer of automotive engine components, from 1973 to 1981.
Mr. Laisure received a B.A. degree in Accounting from Ball
State University and an M.B.A. from Miami (Ohio) University, and
has completed the Harvard Advanced Management Program.
KEY EMPLOYEES
Set forth below is information concerning our key employees,
including their ages as of September 30, 2005.
Jackie R. Pipkin, 56, director of railcar manufacturing
Mr. Pipkin has served as our director of railcar
manufacturing since July 1996, after serving as plant manager of
our Paragould and Kennett manufacturing facilities. Prior to
joining us, Mr. Pipkin served Thrall Car Manufacturing, a
railcar manufacturer, as manufacturing manager from January 1992
to March 1994 and as general superintendent from December 1989
to December 1992. He served ACF in various roles from February
1969 to December 1989. Mr. Pipkin has supervised or helped
supervise the launch of several new railcar manufacturing
facilities during his employment with ACF and with us, including
the original construction of our Paragould and Marmaduke
facilities and the addition of the third manufacturing line at
our Paragould facility.
Michael R. Williams, 44, vice president engineering and
manufacturing
Mr. Williams has served as our vice president engineering
and manufacturing since October 2004 and in various product and
account management roles since April 1997. Prior to joining us,
Mr. Williams served ACF as a strength analyst of covered
hopper and tank railcars from January 1991 to March 1997.
Mr. Williams served as an airframe designer and analyst at
McDonnell Douglas Corporation from May 1983 to December 1990.
Mr. Williams received his B.S. in mechanical engineering
from the University of Illinois and a M.S. in Mechanical
Engineering and a M.B.A. from Washington University.
BOARD OF DIRECTORS
Our board of directors presently consists of five members. Upon
the listing of our common stock on the Nasdaq National Market we
will expand the size of our board of directors to seven members
with the addition of Mr. Pontious and Mr. Laisure as
independent directors. Our directors are expected to serve until
the next annual meeting of our stockholders and until their
respective successors have been duly elected and qualified. We
believe that, within the one-year transition period available to
us following the completion of this offering, we will comply
with all applicable requirements of the SEC and the Nasdaq
National Market relating to director independence and the
composition of the committees of our board of directors,
including the designation of an audit committee financial
expert.
We have been advised that in December 2005 an affiliate of Carl
C. Icahn, our principal beneficial stockholder and the chairman
of our board of directors, entered into a stock purchase
agreement with our other principal stockholder, the Foundation
for a Greater Opportunity, or the Foundation, to acquire all of
our common stock held by the Foundation. The consummation of
this acquisition requires the completion of this offering and
the approval of applicable authorities of the State of New
108
Management
York. If the parties obtain this approval, we have been advised
that the parties expect that the purchase would be completed in
the first three months of 2006. Pending the closing of this
purchase, and for so long as the stock purchase agreement has
not been terminated, the Foundation has granted the affiliate of
Mr. Icahn purchasing the shares owned by the Foundation an
irrevocable proxy to vote all of the shares of our common stock
held by the Foundation. The stock purchase agreement may be
terminated by either party if the purchase does not occur by May
2006. As a result of these contemplated arrangements, we expect
that Mr. Icahn will control
approximately % of the voting
power of our outstanding common stock following the offering.
Consequently, we would be a controlled company
within the meaning of the listing standards governing companies
with stock quoted on the Nasdaq National Market. Under these
rules, a controlled company may elect not to comply
with certain Nasdaq National Market corporate governance
requirements, including requirements that (1) a majority of
the board of directors consist of independent directors,
(2) compensation of officers be determined or recommended
to the board of directors by a majority of its independent
directors or by a compensation committee that is composed
entirely of independent directors and (3) director nominees
be selected or recommended for selection by a majority of the
independent directors or by a nominating committee composed
solely of independent directors. If, at the time of this
offering, we are a controlled company under the
listing standards of the Nasdaq National Market, we intend to
avail ourselves of those exemptions and will not have a majority
of independent directors on our board. See Risk
factorsRisks related to the purchase of our common stock
in this offeringUpon the closing of this offering we may
be a controlled company within the meaning of the
Nasdaq National Market rules and you will not have the same
protections afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to
all of the Nasdaq National Market corporate governance
requirements.
COMMITTEES OF OUR BOARD OF DIRECTORS
If we are a controlled company following this
offering, we intend to use exemptions available to us under the
corporate governance listing standards of the Nasdaq National
Market. In that circumstance, we expect that we would not have a
compensation committee and we would not have a nominating
committee. If we are not a controlled company
following this offering, we intend to comply with all applicable
corporate governance requirements of the Nasdaq National Market
within the transition periods allowed companies following their
initial public offering of common stock. Accordingly, if we are
not a controlled company at the time this offering
is completed, the standing committees of our board of directors
will consist of an audit committee, a compensation committee and
a nominating committee. See Risk factorsRisks
related to the purchase of our common stock in this
offeringUpon the closing of this offering we may be a
controlled company within the meaning of the Nasdaq
National Market rules and you will not have the same protections
afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to
all of the Nasdaq National Market corporate governance
requirements.
In any event, we may establish special committees under the
direction of the board of directors when necessary to address
specific issues.
Audit committee
Our Audit Committee will be responsible for oversight of the
qualifications, independence, appointment, retention,
compensation and performance of the Companys independent
registered public accounting firm and for assisting the board of
directors in monitoring the Companys financial reporting
process, accounting functions and internal controls. It also
will be responsible for oversight of whistle-blowing
procedures and certain other compliance matters.
109
Management
The composition of the Audit Committee following the completion
of this offering will comply with applicable SEC and Nasdaq
National Market requirements, including the requirement that at
least one member of the Audit Committee qualify as a
financial expert under SEC rules and the stricter
definition of independence for audit committee members under the
rules of the Nasdaq National Market. Our board of directors will
adopt a written charter for our Audit Committee. That charter
will conform to recently adopted rules and regulations of the
SEC and the Nasdaq National Market.
Corporate governance
We believe that shortly after completion of this offering, we
will comply with all applicable Nasdaq National Market corporate
governance and listing requirements. In the interim, we will
rely on transition periods available to companies following
their initial public offering of common stock. See Risk
factorsRisks related to the purchase of our common stock
in this offeringUpon the closing of this offering we may
be a controlled company within the meaning of the
Nasdaq National Market rules and you will not have the same
protections afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to
all of the Nasdaq National Market corporate governance
requirements, ManagementBoard of
directors and ManagementCommittees of our
board of directors.
Codes of conduct and ethics
Upon completion of this offering, we will have adopted written
codes of conduct and ethics applicable to all of our directors,
executive officers and employees including, without limitation,
all of our senior financial officers, that will be designed to
deter wrongdoing and to promote:
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4
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honest and ethical conduct;
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4
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full, fair, accurate, timely and
understandable disclosure in reports and documents that we file
with the SEC and in our other public communications;
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4
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compliance with applicable laws,
rules and regulations, including insider trading
compliance; and
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4
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accountability for adherence to
the code and prompt internal report of violations of the code,
including illegal or unethical behavior regarding accounting or
auditing practices.
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Our codes of conduct and ethics will also comply with applicable
requirements of the Nasdaq National Market. The Audit Committee
of our board of directors will review our codes of conduct and
ethics on a regular basis and will propose or adopt additions or
amendments as it considers required or appropriate.
Director compensation
Each director is entitled to reimbursement for out-of-pocket
expenses incurred for each meeting of the full board or a
committee of the board attended. The annual compensation for our
independent directors is $30,000. In addition, each independent
director is entitled to receive $1,000 for each board or
committee meeting attended and an annual stipend of $5,000 if he
is a chairperson of a committee.
110
Management
EXECUTIVE COMPENSATION
The following table sets forth the compensation of our chief
executive officer and each of our other most highly compensated
executive officers during the year ended December 31, 2004.
We refer to these officers as the named executive officers. We
did not maintain any option plans through December 31,
2004, and no options were granted to or exercised by any of our
named executive officers during the year ended December 31,
2004.
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Annual Compensation
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Other Annual
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All Other
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Compensation
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Compensation
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Name and principal position
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Salary
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Bonus
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(4)
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(5)
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James J. Unger
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President and Chief Executive Officer
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$
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350,000
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$
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48,532
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$
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13,918
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James A. Cowan(1)
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Executive Vice President and Chief Operating Officer
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William P. Benac(2)
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Senior Vice President and Chief
Financial Officer
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Alan C. Lullman
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Senior Vice President Sales,
Marketing and Services
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$
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140,000
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$
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20,000
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$
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9,431
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$
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574
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William L. Finn(3)
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Senior Vice President Operations
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$
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172,917
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$
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25,287
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$
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8,218
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(1)
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Mr. Cowan started his employment with us on
December 5, 2005.
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(2)
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Mr. Benac started his employment with us on
January 31, 2005.
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(3)
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Mr. Finn retired effective May 1, 2005.
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(4)
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Includes the following payments we made on behalf of
Messrs. Unger, Lullman and Finn:
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Car
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Country
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Allowances
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Club Dues
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Mr. Unger
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$
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39,651
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$
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8,881
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Mr. Lullman
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8,820
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611
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Mr. Finn
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19,576
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5,711
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(5)
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Includes the following payments we made on behalf of
Messrs. Unger, Lullman and Finn.
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Life Insurance*
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401(k) Matching
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Premiums
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Contributions**
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Mr. Unger
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$
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7,768
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$
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6,150
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Mr. Lullman
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574
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Mr. Finn
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3,030
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5,188
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*
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These amounts represent the taxable income related to payment of
premiums for group term life insurance and executive survivor
insurance for the benefit of the employee.
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**
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These amounts represent matching contributions to each
employees 401(k) plan equal to 50% of the employees
deferrals up to a maximum of 6% of each employees
compensation.
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111
Management
Employment agreements
James J. Unger.
In November 2005, we entered
into a new employment agreement with Mr. Unger. Upon the
closing of this offering, this new employment agreement will
supersede our original agreement with Mr. Unger which we entered
into in 1994. The original agreement with Mr. Unger,
provided that Mr. Unger shall be granted an option to
purchase 2.0% of our outstanding common shares at a price equal
to 2.0% of the common equity contribution by Carl C. Icahn
at our formation. The agreement provided that this option shall
be exercisable at the time of our initial public offering, and
should we be sold to parties other than in a public offering,
Mr. Unger shall receive 2.0% of the sales price, net of the
preferred interest established at our formation, and net of the
contribution for common stock. The original agreement further
provided that the above options and or rights shall remain in
effect as long as Mr. Unger is employed by us, and that
should we go public with an offering and Mr. Unger exercise
his stock option, Mr. Unger will agree, if we or our board
of directors so desires, to a three-year employment contract
providing no reductions in salary or fringe benefits.
Mr. Ungers term as our president and chief executive
officer under the new employment agreement is effective for one
year following the completion of this offering and may be
extended for two additional one-year terms at the sole option of
our board of directors.
Under the terms of the new employment agreement, Mr. Unger
receives a base salary of $350,000. In addition, Mr. Unger is
eligible to receive an annual bonus, as determined by our board
of directors from year to year. The new employment agreement
also provides that Mr. Unger is entitled to receive healthcare,
vacation, 401(k) participation, transportation and other similar
benefits we offer our senior employees.
Under the terms of the new employment agreement, if Mr. Unger is
terminated without cause (as defined in the new employment
agreement) or resigns for good reason (as defined in the new
employment agreement), then we shall pay him, in addition to any
unpaid and earned base salary and bonus, the base salary Mr.
Unger would have earned through the end of his term, as
extended, if applicable, by our board of directors.
Mr. Ungers new employment agreement contains
non-competition, non-solicitation and confidentiality
provisions. The non-competition and non-solicitation provisions
prohibit Mr. Unger from directly or indirectly competing with
us, or soliciting our employees as long as he is our employee
and generally for a one-year period thereafter.
In connection with the new employment agreement, we also entered
into a letter agreement with Mr. Unger that replaces any
option grants to Mr. Unger under the original agreement. Upon
the closing of this offering, we are required to issue Mr. Unger
such number of shares of our common stock obtained by dividing
$6 million by the public offering price per share as set
forth on the cover page of this prospectus (assuming an initial
public offering price of
$ ,
which represents the midpoint of the range on the cover page of
this prospectus, Mr. Unger will
receive shares
of our common stock). Of these shares, 40% will be transferable
without contractual restrictions by Mr. Unger after
180 days from the closing of this offering, 30% will be
transferable without contractual restrictions by Mr. Unger one
year after the closing of this offering and the remaining 30%
will be freely transferable 540 days after the closing of this
offering. If Mr. Unger is terminated for cause (as defined in
the letter agreement), or resigns without good reason (as
defined in the letter agreement) within one year from the
closing date of this offering, Mr. Unger shall return to us 60%
of the shares of our common stock we granted to him. We have
agreed to use commercially reasonable efforts to file a
registration statement on Form S-8 with the SEC to cover the
registration of 40% of these shares. We have agreed to include
the balance of these shares in any registration statement we
file on behalf of Mr. Icahn with regard to the registration for
sale of our shares held by Mr. Icahn, provided the contractual
restrictions and applicable lock-up period of these shares have
lapsed.
112
Management
William P. Benac.
In July 2005, we entered into an
employment agreement with William P. Benac to serve as our chief
financial officer for a period of one year. The agreement is
effective as of April 22, 2005, and automatically renews
for successive one-year terms unless terminated by either party
at least 180 days before the expiration of the then
applicable term.
Under the terms of the agreement, Mr. Benac will receive a
minimum annual base salary of $250,000. Mr. Benac is also
entitled to a non-prorated cash bonus of at least $150,000 for
the 2005 fiscal year. Criteria for cash bonuses that may be
awarded for each year the agreement is extended are subject to
negotiation and will be determined during the first quarter of
each calendar year the agreement is renewed. It is expected that
the target bonus amounts during such years will not be less than
$150,000.
In addition to the salary and bonus compensation described
above, Mr. Benac will receive a one-time special cash bonus
of $500,000 on April 22, 2007 if, prior to that date, we
issue common stock to the public in an offering registered with
the SEC or Mr. Icahn sells his controlling interest in us
to a third party in a private transaction. If at any time on or
before April 22, 2007, we terminate Mr. Benacs
employment without cause, he resigns for good reason, or a
change in control occurs, he will be entitled to receive the
special cash bonus of $500,000 upon the occurrence of such
event. In addition, if we terminate Mr. Benacs
employment other than for cause, death or disability, or if he
terminates his employment for good reason, he is entitled to
receive a lump sum severance payment of $200,000.
Mr. Benacs right to the special cash bonus of
$500,000 and any severance immediately terminates if his
employment is terminated for cause or he resigns without good
reason.
Mr. Benac will be reimbursed for reasonable and necessary
business related expenses, including those expenses associated
with commuting from Dallas to our headquarters in St. Charles,
Missouri, such as air and car travel and reasonable living
expenses. He is eligible to participate in all health, medical,
retirement and other employee benefit plans we generally provide
to our senior executives. Mr. Benacs employment
agreement also contains provisions requiring him to protect our
confidential information during his employment and at all times
thereafter.
Mr. Benac may terminate his employment for good reason upon
at least 30 days prior written notice to us, or without
good reason upon at least 60 days prior written notice to
us. We may terminate Mr. Benacs employment without
cause upon 30 days written notice or immediately for cause
or upon his death or disability.
James A. Cowan.
In December 2005, we entered into
an employment agreement with Mr. Cowan to serve as our
chief operating officer through December 31, 2008, unless
earlier terminated pursuant to the agreement.
Under the terms of the agreement, Mr. Cowan receives a base
salary at an annual rate of $300,000 per year.
Mr. Cowan is also entitled to an annual bonus for each
calendar year of employment ending on or after December 31,
2006 of up to 50% of his then applicable base salary, provided
certain performance targets established by our board of
directors are achieved.
In addition to the compensation described above, we have agreed
to grant to Mr. Cowan, on the closing date of our initial
public offering of common stock registered with the SEC, an
option to purchase 1.25% of our outstanding shares of
common stock immediately following the offering, assuming the
over-allotment option is not exercised. The exercise price of
the option will be equal to the fair market value of the common
stock at the time of grant.
Mr. Cowan is eligible to participate in all health,
medical, retirement and other employee benefit plans we
generally provide to our senior executives. In addition, he will
be reimbursed for the reasonable use of an automobile and for
the payment of reasonable country club dues (excluding
initiation fees) on terms consistent with our other senior
executives.
113
Management
Mr. Cowan may terminate the agreement upon 30 days
written notice. We may terminate Mr. Cowans
employment at any time, with or without cause. If
Mr. Cowans employment is terminated due to death or
disability, he is entitled to receive earned and accrued base
salary and unreimbursed business expenses due and unpaid as of
the date of his termination, bonus compensation earned and due
with respect to a completed calendar year but not paid as of the
date of termination, and a pro-rated portion of his bonus
compensation payable for any incomplete calendar year. If
Mr. Cowan is terminated without cause, he is entitled to
receive earned and accrued base salary and unreimbursed business
expenses due and unpaid as of the date of his termination, bonus
compensation earned and due with respect to a completed calendar
year but not paid as of the date of termination, a pro-rated
portion of his bonus compensation payable for any incomplete
calendar year and, in addition, a continuation of the payment of
the base salary he would have earned through December 31,
2008 had he continued to be employed by us through such date. If
Mr. Cowan resigns or if we terminate Mr. Cowan for
cause, he is entitled to receive earned and accrued base salary
and unreimbursed business expenses due and unpaid as of the date
of his termination.
Mr. Cowans employment agreement contains
non-competition and non-solicitation provisions that prohibit
Mr. Cowan from directly or indirectly competing with us
during the term of his employment and generally for a one-year
period thereafter. Mr. Cowans employment agreement
also contains provisions requiring him to protect confidential
information during his employment and at all times thereafter.
Equity incentive plan
2005 Equity Incentive Plan.
We expect to adopt prior to
the completion of this offering, our 2005 equity incentive plan
to provide long-term incentives and rewards to our employees,
officers, directors, consultants and advisors. The 2005 plan
permits us to issue stock and grant stock options, restricted
stock, stock units and other equity interests to purchase or
acquire up
to shares
of our common stock. Awards covering no more
than shares
may be granted to any person during any fiscal year. If any
award expires, or is terminated, surrendered or forfeited, then
shares of common stock covered by the award will again be
available for grant under the 2005 plan. The 2005 plan is
administered by our board of directors or a committee of the
board. The board or committee has broad discretion to determine
the terms of an award granted under the 2005 plan, including, to
the extent applicable, the vesting schedule, purchase or grant
price, option exercise price, or the term of the option or other
award; provided that the exercise price of any options granted
under the 2005 plan may not be less than the fair market value
of the common stock on the date of grant. The board or committee
also has discretion to implement an option exchange program,
whereby outstanding stock options are exchanged for stock
options with a lower exercise price, substitute another award of
the same or different type for an outstanding award, and
accelerate the vesting of, including, as applicable, lapse of
restrictions with respect to, stock options and other awards at
any time. The terms and conditions of stock options or other
awards granted under the 2005 plan will be set forth in a
separate agreement between us and the recipient of the award.
Concurrently with the closing of this offering, we intend to
grant a total of
approximately options
to purchase shares of our common stock under our 2005 equity
incentive plan, including the following estimated number of
shares to our executive officers and key employees:
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Estimated
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Number of
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Executive Officer/Key Employee
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Shares
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James A. Cowan
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Jackie R. Pipkin
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Alan C. Lullman
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Michael R. Williams
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114
Management
Under the terms of his employment agreement, James A. Cowan
is entitled to receive an option to purchase 1.25% of our
outstanding shares of common stock immediately following the
offering (excluding the shares that may be issued upon the
exercise, if any, of the over-allotment option). As a result,
the actual number of shares subject to the option granted to
Mr. Cowan will be proportionately adjusted if the number of
shares to be issued by us in this offering is increased or
decreased. The actual number of shares to be subject to the
options granted to Mssrs. Pipkin, Lullman and Williams will
be determined by dividing the dollar value of the shares
allocated to each of them by the exercise price as so
determined. For the purpose of estimating the number of shares
to be subject to these options, the table above assumes an
exercise price of $ per
share, which represents the midpoint of the range on the cover
of this prospectus. All of the options will be issued at an
exercise price equal to the fair market value of the shares on
the date of the grant. The options will have a term of five
years and vest in equal annual installments over a three year
period.
Retirement plans
Supplemental Executive Retirement Plan.
Mr. Unger is
entitled to benefits from a supplemental executive retirement
plan, or SERP. The SERP benefit is generally equal to the
benefit that would be provided under the Employees
Retirement Plan of ACF Industries LLC, if certain Internal
Revenue Code limits and exclusions from compensation under the
retirement plan did not apply, less the actual benefit payable
under the ACF retirement plan. ACF is responsible for payment of
that portion of Mr. Ungers SERP benefit related to
service with ACF prior to the 1994 ACF asset transfer and we are
responsible for payment of that portion of the benefit related
to service with us after that transfer. The SERP benefits were
frozen effective as of March 31, 2004. As a result, no
further benefits are accruing under the SERP. These benefits are
generally paid at the same time and in the same form as the
participants benefit under the retirement plan. No funds
have been set aside for the benefits payable under the SERP. The
estimated annual SERP benefit for Mr. Unger is $117,799, of
which $106,769 is payable by us and $11,030 is payable by ACF.
Pension Plan.
We provide pension benefits to certain of
our salaried employees, including Mr. Unger, Mr. Finn
and Mr. Lullman, under the Employees Retirement Plan
of ACF Industries, LLC. Each executives benefit under the
retirement plan is based on 2.25% of average annual compensation
for each year of service after April 30, 1981; plus the
highest of the executives annual compensation for five
consecutive years of employment prior to May 1, 1981 that
results in the highest such average multiplied by number of
years of service completed prior to May 1, 1981; plus a
fixed dollar amount. This fixed dollar amount is $12,800 for
Mr. Unger, $15,600 for Mr. Finn and $6,108 for
Mr. Lullman. For purposes of this plan, years of service
include years of service with both ACF and us. This total is
then reduced by an amount equal to 0.5% of the executives
final average compensation multiplied by the number of years of
service up to 35. The benefits under this plan were frozen
effective as of March 31, 2004. As a result, no additional
benefits are accruing under this plan.
The benefits under the ACF retirement plan are generally paid
monthly for the life of the executive, following retirement in
the form of a joint and survivor annuity. As most recently
determined by the actuaries for the retirement plan, based on
current years of service with us and ACF, the estimated annual
pension commencing at age 65 for each of the named
executives is as follows: Mr. Unger: $99,633;
Mr. Finn: $72,966; and Mr. Lullman: $49,752. These
named executives are fully vested in their retirement plan
benefits.
Postretirement Obligations.
We also provide
postretirement health and life insurance benefits for certain of
our salaried employees under plans sponsored by ACF. Our named
executive officers may become eligible for these benefits if
they retire after attaining specified age and service
requirements. In anticipation of this offering, we will be
assuming sponsorship of these benefits for our employees.
Executive Survivor Insurance Plan.
We provide an
executive survivor insurance plan for certain of our salaried
employees, including the named executive officers. This plan
provides life insurance
115
Management
benefits to the qualified spouse of a named executive officer
upon his death during his employment or following retirement at
or after age 55. We have purchased a group term life
insurance policy to off-set the cost of providing this benefit.
Benefits payable under this plan are separate from any benefit
payable under our retirement plans. If the named executive
officer retires and dies after attaining age 55, then his
qualified spouse is entitled to a monthly benefit equal to what
would have been payable under our retirement plan if the named
executive officer had retired with a 50% joint and survivor
benefit. If the named executive officer dies while actively
employed and before attaining age 55, then his qualified
spouse is entitled to a monthly benefit equal to 20% of the
named executive officers salary, reduced by any amount
payable under the survivor provisions of our retirement plan. If
the named executive officer dies while actively employed and on
or after attaining age 55, then his qualified spouse is
entitled to a benefit equal to the greater of (a) the
benefit described in the preceding sentence (for death while
employed and not yet 55) and (b) the amount determined as
if the named executive officer had retired on the first day of
the month coincident with or next following the date of death.
In no event may the amounts paid under this plan exceed
$6,500 per month. We have reserved the right to amend,
modify or terminate this plan.
Executive incentive plan
2005 Executive Incentive Plan.
We established our 2005
executive incentive plan to provide additional compensation to
eligible participants for their contribution to the achievement
of our objectives, to encourage and stimulate superior
performance, and to assist in attracting and retaining highly
qualified key employees. Our key managers, other than James J.
Unger and William P. Benac, are eligible to participate in the
2005 executive incentive plan. The plan permits us to make cash
awards to participants based upon a percentage of each
participants base salary, as measured against each
participants personal performance and our financial
performance. Personal performance goals are established by each
participant and his or her supervisor at the beginning of each
fiscal year. Our financial performance goals are based on
certain EBITDA targets relating to our performance at each of
our facilities, Ohio Castings and us as a whole, as established
by our board of directors based on our annual business plan.
Participants are entitled to payment of a partial award if,
during a fiscal year, a participant, among other things, dies,
retires or becomes permanently disabled, provided that the
participant was an active employee for a minimum of 30
consecutive calendar days during such fiscal year. The plan is
subject to the control and supervision of our chief executive
officer and our board of directors.
116
Certain relationships and related party transactions
Other than the transactions described below, for the last three
full fiscal years there has not been, nor is there currently
proposed, any transaction or series of similar transactions to
which we are or will be a party:
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in which the amount involved
exceeded or will exceed $60,000; and
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in which any director, executive
officer, holder of more than 5% of our common stock on an
as-converted basis or any member of their immediate family has
or will have a direct or indirect material interest.
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We believe that each of the transactions described below that is
to remain in effect following the completion of this offering is
on terms no less favorable to us than could have been obtained
from unaffiliated third parties. Although we do not have a
separate conflicts policy, we intend to comply with Delaware law
with respect to transactions involving potential conflicts.
Delaware law requires that all transactions between us and any
director or executive officer are subject to full disclosure and
approval of the majority of the disinterested members of our
board of directors, approval of the majority of our stockholders
or the determination that the contract or transaction is
intrinsically fair to us.
TRANSACTIONS WITH CARL C. ICAHN AND ENTITIES AFFILIATED WITH
CARL C. ICAHN
Overview
Our company was formed in 1988 as a company beneficially owned
by Carl C. Icahn. Mr. Icahn is our principal beneficial
stockholder and is the chairman of our board of directors. We
grew our company through the transfer of certain assets to us
from ACF, a company also beneficially owned by Mr. Icahn.
Since our formation, we have entered into agreements relating to
the acquisition of assets from and disposition of assets to
entities controlled by Mr. Icahn, the provision of goods
and services to us by entities controlled by Mr. Icahn, the
provision of goods and services by us to entities affiliated
with Mr. Icahn and other matters involving entities
controlled by Mr. Icahn. We receive substantial benefit
from these agreements and we expect that in the future, we will
continue to conduct business with entities affiliated with or
controlled by Mr. Icahn. In addition, we receive other
benefits from our affiliation with Mr. Icahn and companies
controlled by Mr. Icahn, such as financial and advisory
support, sales support and our participation in buying groups
and other arrangements with entities controlled by
Mr. Icahn. Until recently, most of our capital needs have
been provided by entities controlled by Mr. Icahn. Lease
sales agents of ARL, a company beneficially owned by
Mr. Icahn, and ACF, in connection with their own leasing
sales activities, have, from time to time, referred their
customers or contacts to us that prefer to purchase rather than
lease railcars, which has, in some cases, led to us selling
railcars to these customers or contacts. At this time there is
no formal arrangement under which these referrals are provided
and we do not compensate ARL, ACF or any of their leasing sales
agents for any railcar sales that we make as a result of these
referrals. As an accommodation to some of their customers and
contacts that they referred to us, ARL and ACF from time to time
accepted orders to purchase our railcars and then assigned those
orders to us. ARL and ACF have discontinued accepting orders to
sell railcars on our behalf. See Risk factorsRisks
related to our businessAfter this offering, companies
affiliated with Carl C. Icahn will continue to be important
suppliers and customers, Risk factorsRisks
related to our businessServices being provided to us by
ARL, an entity controlled by Carl C. Icahn, may not be
sufficient to meet our needs, which may require us to incur
additional costs, Risk factorsRisks related to
our businessAfter this offering, we may have reduced
access to resources of, and benefits provided by, entities
affiliated with Carl C. Icahn and Risk
factorsRisks related to our businessWe could be
liable for liabilities associated
117
Certain relationships and related party transactions
with pension plans sponsored by companies controlled by Carl C.
Icahn for a description of certain risks associated with
our affiliation with Mr. Icahn and entities affiliated with
Mr. Icahn.
We describe below the material arrangements and other
relationships that we are, or have been, a party to with
Mr. Icahn and entities affiliated with Mr. Icahn since
January 1, 2002. As noted below, some of these arrangements
and relationships have been terminated or otherwise will no
longer be in effect following the completion, and the
application of the net proceeds of, this offering.
Application of the net proceeds of this offering
We intend to use the net proceeds of this offering to, among
other things, repay certain indebtedness that we owe to entities
controlled by Mr. Icahn and to redeem all of the
outstanding shares of our preferred stock, all of which are held
by Mr. Icahn and his affiliates. As of September 30,
2005, the total amount of this indebtedness outstanding was
approximately $60.1 million, including accrued interest of
$1.3 million. As a result, entities controlled by Mr. Icahn
will receive approximately $20.0 million of the net
proceeds of this offering. We also intend to use the net
proceeds of this offering to repay in full amounts due under our
industrial revenue bonds. As of September 30, 2005, the
total amount of this indebtedness outstanding was approximately
$8.3 million in principal amount and $0.3 million in
accrued interest. The industrial revenue bonds are guaranteed by
affiliates of Mr. Icahn and these affiliates will be
released from such guarantees upon the repayment of the bonds.
In addition James J. Unger, our president and chief executive
officer, and his wife own $0.4 million of the industrial
revenue bonds. See Use of proceeds,
Guarantees of indebtedness by ACF and other related
partiesIndustrial revenue bonds and Certain
transactions involving James J. UngerIndustrial revenue
bonds and the transactions described below for more
information.
REDEMPTION OF NEW PREFERRED STOCK
Concurrently with the closing of this offering, we intend to use
approximately $91.3 million of the net proceeds of this
offering to redeem our new preferred stock, including all
accumulated and unpaid dividends due on our new preferred stock.
See Certain Transactions Involving American Railcar
Leasing LLCThe ARL exchange for more information. We
will redeem each outstanding share of new preferred stock for an
amount equal to the liquidation preference of each share of new
preferred stock, which is $1,000 per share, plus all
accumulated and unpaid dividends on each share of new preferred
stock through the date of the redemption. Assuming the
redemption occurred on September 30, 2005, the aggregate
amount required to redeem all of the outstanding shares of our
new preferred stock, including accumulated and unpaid dividends,
would have been $91.3 million. All of our new preferred
stock is held by entities beneficially owned and controlled by
Mr. Icahn.
REDEMPTION OF MANDATORILY REDEEMABLE PREFERRED STOCK
On or before the closing of this offering, we intend to redeem
our one outstanding share of mandatorily redeemable preferred
stock, which is held by Mr. Icahn. As of September 30,
2005, there was $770 of accumulated and unpaid dividends on that
stock. This share became mandatorily redeemable for $1,000 on
February 1, 2005.
CERTAIN TRANSACTIONS WITH ACF INDUSTRIES LLC AND AMERICAN
RAILCAR LEASING LLC
Overview
We have entered into a variety of agreements and transactions
with ACF Industries LLC (which we refer to, along with its
predecessor ACF Industries, Inc., as ACF), American Railcar
Leasing LLC (which we refer to as ARL) and certain other parties
related to these companies. These transactions and agreements
are described in further detail below. During the periods
discussed, ACF and ARL
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Certain relationships and related party transactions
were beneficially owned and controlled by Mr. Icahn, and
they continue to be so owned and controlled.
On October 1, 1994, under an asset transfer agreement with
ACF, we acquired from ACF, properties and assets used in its
railcar components manufacturing business and its railcar
servicing business at specified locations, and certain
intellectual property rights associated with the transferred
assets and businesses, as well as specified assets used in the
manufacture and sale of industrial size mixing bowls. We refer
to this transaction as the 1994 ACF asset transfer.
In 2004, ACF and its subsidiaries, through a series of
transactions, transferred some of the railcar fleets that they
then owned and held primarily for lease to third parties, to ARL
and its subsidiaries. At the time, we owned all the common
interests of ARL. As of June 30, 2005, we transferred our
entire interest in ARL in exchange for the redemption of shares
of our new preferred stock, in a transaction we refer to as the
ARL exchange. All of our shares of new preferred stock were and
continue to be owned by entities beneficially owned and
controlled by Mr. Icahn.
Manufacturing Operations
Prior to the transfer of ACFs and its subsidiaries
railcar fleets to ARL and its subsidiaries in 2004, we sold
railcars and railcar components to ACF and its subsidiaries for
use in their railcar fleets. Since the transfer of these fleets
to ARL, we sell railcars to ARL. We believe that since
ARLs formation in 2004, we have been the only supplier of
railcars to ARL, although ARL is not precluded from purchasing
railcars from others. In 2002, 2003 and 2004, our revenues from
manufacturing operations included $63.6 million,
$62.9 million and $64.4 million, respectively, from
transactions with affiliates. In the nine months ended
September 30, 2005, our revenues from manufacturing
operations included $44.5 million from transactions with
affiliates. Most of these revenues were attributable to railcars
and railcar components that we sold to ACF, ARL and their
respective subsidiaries. As of September 30, 2005, our
backlog included $44.1 million for railcar orders by ARL.
These orders are on substantially the same terms as we provide
to our other customers.
ACF has also been a significant supplier of components for our
business. Components supplied to us by ACF include tank railcar
heads, wheel sets and various structural components. In 2002,
2003 and 2004, we purchased inventory of $15.7 million,
$19.0 million, and $31.3 million, respectively, of
components from ACF. In the nine months ended September 30,
2005, we purchased inventory of $56.2 million from ACF. As
of September 30, 2005, we had outstanding purchase orders
for $8.7 million of inventory from ACF.
During 2003 and 2004, Castings LLC, a joint venture partner in
Ohio Castings, was a wholly owned subsidiary of ACF Industries
Holding Corp., an indirect parent of ACF that is beneficially
owned and controlled by Mr. Icahn. Effective
January 1, 2005, we acquired Castings LLC from ACF
Industries Holding Corp. as described under Certain
Transactions Involving Ohio Castings. Our cost of railcar
manufacturing for the years ended December 31, 2003 and
2004, and the nine months ended September 30, 2005 included
$3.0 million, $19.9 million and $14.0 million,
respectively, in railcar components produced by Ohio Castings.
Expenses of $0.4 million and $3.2 million paid to
Castings LLC under a supply agreement are also included in the
cost of railcar manufacturing for the years ended
December 31, 2003 and 2004, respectively. We also have been
charged $0.2 million in the year ended December 31,
2003 relating to certain costs incurred by Castings LLC in the
establishment of Ohio Castings. In the first nine months of
2005, we purchased $15.0 million in railcar components
produced by Ohio Castings. Inventory at December 31, 2003,
2004 and September 30, 2005 includes approximately
$0.3 million, $5.3 million and $2.3 million,
respectively, of purchases from Ohio Castings. In September
2003, Castings LLC loaned Ohio Castings $3.0 million under
a promissory note which was due in January 2004. The note was
renegotiated for $2.2 million and bears interest at
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Certain relationships and related party transactions
4.0%. Payments are made in quarterly installments with the last
payment due in November 2008. As of September 30, 2005,
$2.2 million was outstanding under this note.
Railcar services
We have provided railcar repair and maintenance services and
fleet management services to ACF and ARL and we continue to
provide these services to ARL. As of September 30, 2005, we
managed approximately 22,000 railcars for ARL, and we also
provide repair and maintenance services for these railcars. In
2002, 2003 and 2004, our revenues from railcar repair and
refurbishment and fleet management services included
$12.8 million, $11.0 million and $18.2 million,
respectively, from transactions with affiliates. In the nine
months ended September 30, 2005, our revenues from railcar
repair and refurbishment and fleet management services included
$16.0 million from transactions with affiliates. Almost all
of these revenues were attributable to services we provided to
ACF, ARL and their subsidiaries.
Cost of railcar services
Through September 30, 2005, ACF and ARL have provided
certain leasing and other fleet management services that we were
required to provide to subsidiaries of ARL, under management
agreements we entered into with those companies in July and
October 2004. Through March 31, 2005, we paid to ACF and,
from March 31, 2005 through September 30, 2005, we
paid to ARL, the leasing and management fees we received under
those management agreements. In 2004 and the nine months ended
September 30, 2005, we incurred $1.2 million and
$2.0 million, respectively, of cost of railcar services in
connection with these arrangements. These arrangements were
terminated on June 30, 2005, when we assigned our
management agreements to ARL.
Administrative and other support expenses
During the current and last three fiscal years, ACF and ARL have
provided us outsourced services related to our information
technology needs as well as other administrative and support
services. We incurred $0.3 million of expenses in each of
2002, 2003 and 2004 in connection with these arrangements, and
in the first nine months of 2005, we incurred $1.1 million
of such expenses. The increased expenses in 2005 reflect
additional information technology services not provided in
previous years. Until October 2004, ACF received the majority of
our cash receipts and disbursed our cash on our behalf. We
maintained a receivable/payable from affiliates bearing interest
at ACFs internal cost of funds in accordance with an
administration agreement between ACF and us, which is described
below. Under this arrangement, ACF provided financing to us
based on our cash flow needs. We have also subleased our
headquarters facility which is located in St. Charles, Missouri,
from affiliates. The St. Charles property is owned by an
affiliate of James Unger, our chief executive officer. In each
of 2002, 2003 and 2004, our expenses included $0.1 million
of rent and $0.4 million of related facility expense
payments required to be made to affiliates associated with our
lease of the St. Charles headquarters facility. In the nine
months ended September 30, 2005, our expenses included
$0.1 million of rent and $0.2 million of related
expense for these facilities.
Amounts due to affiliates
As of September 30, 2005, net amounts due to affiliates
were $22.1 million relating to the above referenced
transactions and included:
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an amount payable to ACF of
$2.1 million;
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an amount payable of
$7.4 million to Arnos Corp., a company beneficially owned
and controlled by Mr. Icahn, representing the principal and
interest due under a demand note in the principal amount of
$7.0 million that we issued in connection with a working
capital loan from Arnos Corp.; and
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Certain relationships and related party transactions
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an amount payable of
$12.6 million to ACF Industries Holding Corp., a company
beneficially owned and controlled by Mr. Icahn,
representing the principal and interest due under a demand note
in the principal amount of $12.0 million that we issued in
connection with our purchase of Castings LLC from ACF Industries
Holding Corp.
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We intend to use a portion of the net proceeds of this offering
to repay in full the notes to Arnos Corp. and ACF Industries
Holding Corp.
CERTAIN TRANSACTIONS WITH ACF INDUSTRIES LLC
1994 ACF asset transfer
On October 1, 1994, under an asset transfer agreement with
ACF, we acquired properties and assets used in ACFs
railcar components manufacturing business and its railcar
servicing business at specified locations, and certain
intellectual property rights associated with the transferred
assets and businesses, as well as specified assets used in the
manufacture and sale of industrial size mixing bowls. We refer
to this transaction as the 1994 ACF asset transfer. The
properties covered by this agreement included the following:
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Component manufacturing
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Repair plants
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plant and warehouse
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Mobile units
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Bude, Mississippi
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Jackson, Missouri
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Addis, Louisiana
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Milton, Pennsylvania
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Convent, Louisiana
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Tennille, Georgia
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Ingleside, Texas
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North Kansas City,
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Deer Park, Texas
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Missouri
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Taft, Louisiana
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Longview, Texas
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Pursuant to the 1994 ACF asset transfer, ACF retained and agreed
to indemnify us for certain liabilities and obligations relating
to ACFs conduct of business and ownership of the assets at
these locations prior to their transfer to us, including
liabilities relating to employee benefit plans, subject to
exceptions for transferred employees described below, workers
compensation, environmental contamination and third-party
litigation. As part of the 1994 ACF asset transfer, we agreed
that the ACF employees transferred to us would continue to be
permitted to participate in ACFs employee benefit plans
for so long as we remained a part of ACFs controlled
group, and we further agreed to assume the ongoing expense for
such employees continued participation in those plans. In
the event that we cease to be a member of ACFs controlled
group, ACF is required to terminate the further accrual of
benefits by our transferred employees under its benefit plans,
and we and ACF are required to cooperate to achieve an
allocation of the assets and liabilities of the benefits plans
accrued after the 1994 ACF asset transfer with respect to each
of our and ACFs employees as we and ACF deem appropriate.
Upon completion of the offering, we will no longer be a part of
ACFs controlled group. As of December 31, 2004, we
estimate that the total retained liabilities of ACF under the
asset transfer agreement were $11.1 million, primarily
relating to pension and postretirement liabilities. In 2002,
2003 and 2004, ACF paid $0.7 million, $0.6 million and
$1.4 million, respectively, relating to the retained
liabilities. In the nine months ended September 30, 2005,
ACF paid $0.8 million relating to the retained liabilities.
In anticipation of our no longer being a part of ACFs
controlled group upon completion of this offering, we have been
discussing with ACF an appropriate arrangement for allocating
the assets and liabilities of the pension benefit plans retained
by ACF in the 1994 ACF asset transfer in which some of our
employees continue to participate, and for relieving us of our
further employee benefit reimbursement obligations to ACF under
the 1994 ACF asset transfer agreement. The principal employee
benefit plans affected by this arrangement are two ACF sponsored
pension plans, known as
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Certain relationships and related party transactions
the ACF Employee Retirement Plan and the ACF Shippers Car Line
Pension Plan, and certain ACF sponsored retiree medical and
retiree life insurance plans.
Under the proposed arrangement, in exchange for our agreement to
pay ACF approximately $9.2 million and to become the
sponsoring employer under the ACF Shippers Car Line Pension
Plan, including the assumption of all obligations for our and
ACFs employees under that plan, we will cease to be a
participating employer under the ACF Employee Retirement Plan
and will be relieved of all further reimbursement obligations,
including for our employees, under that plan. We estimate that
as of December 1, 2005, the ACF Shippers Car Line Pension
Plan had $4.0 million of unfunded liabilities on an
accounting basis, that will be assumed by us in connection with
this arrangement. The payment of approximately $9.2 million
to be made by us to ACF represents our and ACFs estimate
of the payment required to be made by us to achieve an
appropriate allocation of the assets and liabilities of the
benefit plans accrued after the 1994 ACF asset transfer, with
respect to each of our and ACFs employees in connection
with the two plans. This allocation will be determined in
accordance with the actuarial calculations that would be
required to used by us and ACF in allocating plan assets and
liabilities at such time as we cease to be a member of
ACFs controlled group.
As part of this arrangement, we will also assume sponsorship of
a retiree medical and retiree life insurance plan for active and
identified former ARI employees that are covered by the ACF
sponsored medical and retiree life insurance plans, and ACF will
be relieved of all further liability under those plans with
respect to those employees. We estimate that as of
December 1, 2005, the post-retirement liability related to
this obligation was approximately $3.9 million. ACF will
pay us approximately $2.9 million to assume the pre-1994
portion of this liability.
In connection with the foregoing, we anticipate that we will
record an expense of approximately $10.4 million during the
period in which these transactions are completed, including
$6.3 million for the net cash payment to ACF,
$4.0 million for the unfunded liability assumed under the
Shippers Car Line pension plan and $3.9 million for the
assumption and sponsorship of an unfunded post retirement
medical and retiree life insurance plan for our employees. We
have previously accrued an estimated liability related to this
settlement of $3.8 million.
In connection with the 1994 ACF asset transfer, certain of our
employees, including Mr. Unger, our president, continued to
participate in the ACF supplemental executive retirement plan,
or SERP. The SERP benefit is generally equal to the benefit that
would be provided under the Employees Retirement Plan of
ACF Industries LLC, if certain Internal Revenue Code limits and
exclusions from compensation under the retirement plan did not
apply, less the actual benefit payable under the ACF retirement
plan. ACF remained responsible for payment of that portion of
those employees SERP benefit related to service with ACF
prior to the 1994 ACF asset transfer and we are responsible for
payment of that portion of the benefit related to service with
us after that transfer. The SERP benefits were frozen effective
as of March 31, 2004. As a result, no further benefits are
accruing under the SERP. In anticipation of our no longer being
a part of ACFs control group upon completion of this
offering, we are adopting a separate SERP to cover our allocable
portion of the SERP obligations to those of our employees who
participated in ACFs SERP. ACF will remain obligated to
pay that portion of any liability associated with the SERP
related to service of those employees performed prior to the
1994 ACF asset transfer. See Management
Retirement plans.
Also in connection with the 1994 ACF asset transfer, we entered
into the following administrative and operating agreements with
ACF, effective as of October 1, 1994:
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manufacturing services agreement;
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license agreement from ACF;
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license agreement to ACF;
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Certain relationships and related party transactions
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administration agreement;
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railcar servicing
agreement; and
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supply agreement.
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Only the manufacturing services agreement and the two license
agreements remain in effect. The other agreements were all
terminated as of April 1, 2005.
Manufacturing Services Agreement.
Under the
manufacturing services agreement, ACF has agreed to manufacture
and, upon our instruction, to distribute various railcar
components and industrial size mixing bowls, using assets that
we acquired pursuant to the 1994 ACF asset transfer, but were
retained by ACF at its Milton, Pennsylvania and Huntington, West
Virginia manufacturing facilities. This equipment included
presses and related equipment that were impracticable to move to
our premises. ACF transferred its Milton, Pennsylvania repair
facility, but not its Milton, Pennsylvania manufacturing
facility, to us under the 1994 asset transfer. Under our
manufacturing services agreement, ACF is required to maintain
and insure the equipment during the term of the manufacturing
services agreement and is permitted to use the equipment for its
own purposes in the ordinary course of business, provided that
it does not interfere with ACFs timely performance of the
manufacturing services under this agreement. Upon termination of
the agreement, ACF is required, at our expense, to remove and
deliver the equipment to any site designated by us in the
continental U.S. As payment for these services, we agreed
to pay ACF its direct costs, including the cost of all raw
materials not supplied by us, and a reasonable allocation of
overhead expenses attributable to the services, including the
cost of maintaining employees to provide the services. We
believe that payments to ACF under this arrangement are
comparable to the cost we would have paid to an independent
third party to manufacture such components. This agreement
remains in effect and automatically renews on an annual basis
unless we provide six months prior written notice of
termination. There is no right of termination for ACF under this
agreement.
License Agreement from ACF.
Under a license
agreement with ACF, ACF granted us a non-exclusive, perpetual,
royalty-free license to the patents and other intellectual
property owned by it, which could be used by us in the conduct
of our business, but did not exclusively relate to our business,
including the 12 patents and one patent application, now issued
as a patent, listed in that agreement. Of these patents, ten
patents have expired and the remaining three patents have
expiration dates ranging from 2012 to 2013. These remaining
patents primarily relate to pneumatic outlets and railcar hopper
gaskets. Under this agreement, we could not use the licensed
patents for the production of railcar components for third
parties without the consent of ACF. In 1997, ACF transferred the
patents covered by this license to us. This license is not
assignable by either party, without the prior consent of the
other, except in connection with the sale of substantially all
of either partys business. This agreement remains in
effect.
License Agreement to ACF.
Under a license
agreement with ACF, we granted ACF a non-exclusive, perpetual,
royalty-free license to the intellectual property exclusively
relating to our business that was transferred to us in the 1994
asset transfer. There are no restrictions on ACFs use of
the information licensed under this agreement. This license is
not assignable by either party, without the prior consent of the
other, except in connection with the sale of substantially all
of either partys business. This agreement remains in
effect.
Administration Agreement.
Under an administration
agreement with ACF, ACF agreed to provide us information
technology services and other administrative services. We agreed
to pay ACF its direct costs, including a reasonable allocation
of overhead expenses attributable to providing the services,
including the cost of maintaining employees to provide the
services. Until October 2004, under this agreement, ACF received
the majority of our cash receipts and disbursed our cash on our
behalf. We maintained a receivable/payable from affiliates
bearing interest at ACFs internal cost of funds. Under
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Certain relationships and related party transactions
this arrangement, ACF provided financing to us based upon our
cash flow needs. We also subleased our headquarters facility in
St. Charles Missouri from ACF under this agreement. This
agreement was terminated on April 1, 2005.
Railcar Servicing Agreement.
Under a railcar
servicing agreement with ACF, we agreed to provide railcar
repair and maintenance services for railcars owned or managed by
ACF and leased or held for lease by ACF, to provide ACF with
fleet management services, and to provide ACF with consulting
services on safety and environmental matters. For maintenance
services, ACF paid us for components at our actual costs plus
15% and for our labor at a fixed rate that has been adjusted
from time to time to reflect market conditions. Painting, lining
and cleaning services were billed at current market rates, and
fleet management services were billed at a monthly fee per
railcar serviced. Other services were billed at our direct costs
plus 5.0%. Our direct costs included a reasonable allocation of
overhead expenses attributable to providing the services,
including the cost of maintaining employees to provide the
services. This agreement was terminated on April 1, 2005.
Supply Agreement.
Under a supply agreement with
ACF, we agreed to manufacture and sell to ACF specified
components. In addition, under this agreement, we agreed to sell
ACF other components manufactured by us on terms not less
favorable than the terms on which we sell those products to
third parties. We sold specified components under the agreement
for a price equal to the then current market price or our cost
plus a gross profit percentage. This gross profit percentage has
been revised annually and has ranged from 5.0% to 25.0%,
depending upon the component and which one of our facilities
manufactured the product. This agreement was terminated on
April 1, 2005.
2005 Consulting agreements
On April 1, 2005, we entered into two business consultation
agreements with ACF, whereby each of us has agreed to provide
services to the other. ACF has agreed to assist us in labor
litigation, labor relations support and consultation, and labor
contract interpretation and negotiation. In 2005, we anticipate
that we will require the services of at least one ACF employee
for no more than 20 hours a week under this agreement. We
pay $150 per hour for these services. We have agreed to
provide ACF with engineering consultation and advice. In 2005,
we anticipate that ACF will require the services of at least one
of our employees for no more than 20 hours a week under
this agreement. ACF is required to pay $150 per hour for
these services. We do not believe that either party will be
required to pay more than $60,000 per year under either of
these agreements. These agreements remain in effect through
March 2015, subject to the right of either party to terminate
the agreement on 30 days notice.
1998 Loan to ACF
In October 1998, we loaned $57.2 million to ACF. This loan
accrued interest at a variable rate, adjusted quarterly, equal
to LIBOR plus 3.0% or the base rate of the Industrial Bank of
Japan plus 1.5%, as elected by ACF. This loan was repaid in full
in 2004 in connection with the formation and capitalization of
ARL. See Certain Transactions Involving American Railcar
Leasing LLCFormation of ARL and Related
Contributions. In 2002, 2003 and 2004, we recorded
interest income relating to this loan of $2.8 million,
$2.5 million and $1.8 million, respectively.
Guarantees of indebtedness by ACF and other related
parties
Industrial Revenue Bonds.
ACF and ACF Industries
Holding Corp., an indirect parent of ACF, have guaranteed our
obligations under our industrial revenue bonds. As of
September 30, 2005, $8.3 million was outstanding under
these bonds. These bonds are payable through 2011 and, as of
September 30, 2005, bear interest at rates ranging from
7.75% to 8.5%. We intend to use a portion of the net proceeds of
this offering to repay these bonds in full. ACF and ACF
Industries Holding Corp. will be released from their guarantees
upon the repayment of the bonds.
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Certain relationships and related party transactions
Senior Secured Credit Facility.
In 1998, we
obtained a senior secured credit facility from the Industrial
Bank of Japan, as administrative agent, with a total
availability of $150 million. This facility was guaranteed
by ACF, ACF Industries Holding Corp., an indirect parent of ACF,
and NMI Holding Corp., a wholly owned subsidiary of ACF
Industries Holding Corp. This facility was repaid in full in
July 2004.
Subordinated Note.
In 1998, we obtained a
$10.0 million loan from Boeing Financial under a promissory
note. This note was guaranteed by ACF and ACF Industries Holding
Corp. and was repaid in full in July 2004.
CIT Equipment Lease.
In 1999, we entered into a
master equipment lease agreement with CIT that was guaranteed by
ACF. This lease relates to equipment that we use to manufacture
railcars and railcar components at our Paragould, Marmaduke,
Jackson and Kennett facilities. The interest rate on the lease
is LIBOR plus 2.75% (6.1% at September 30, 2005). As of
September 30, 2005, a balance of $7.4 million was
outstanding under this lease, including amounts subject to our
purchase option at the expiration of the lease term. The lease
expires in November 2005. While we are not committed to do so,
we currently intend to exercise our purchase option under this
lease.
Interest rate swap contract
In 2001, we entered into a derivative instrument in the form of
an interest rate swap contract with an underlying notional
amount of $49.0 million. We assigned this contract to ACF,
effective as of the date of its execution, and all rights and
obligations of this contract were passed through to ACF. This
contract expired on February 28, 2005.
Raw material and other product purchase agreements
We, together with ACF, have entered into agreements for the
purchase of products by each of us, including steel and gas.
Under these agreements, we and ACF are entitled to favorable
pricing based upon the aggregate amount of our purchases. We
allocate the benefits under these purchase agreements
proportionally based upon the amount of products that each of us
purchases during the applicable period.
Corbitt equipment lease and purchase
We leased from ACF, leasehold improvements and equipment that we
placed in service at our Corbitt manufacturing facility in St.
Charles, Missouri from July 1, 2001 through June 1,
2003. During 2002, 2003 and 2004, we paid ACF $0.3 million,
$0.3 million and $0.4 million, respectively, for the
use of these leasehold improvements and equipment. We did not
pay any rent for these assets in 2005. Rather, on March 31,
2005, we purchased these assets from ACF for $2.8 million.
CERTAIN TRANSACTIONS INVOLVING AMERICAN RAILCAR LEASING
LLC
Formation of ARL and related contributions
We formed ARL as our wholly owned subsidiary in June 2004. As
part of the formation of ARL and its further capitalization, ACF
and certain of its subsidiaries transferred to us and ARL
railcars and related leases, as well as equity in certain of
ACFs subsidiaries that supported ACFs leasing
business, in exchange for shares of our new preferred stock and
preferred interests of ARL. We, in turn, contributed the assets
we so received to ARL and made a cash investment in ARL of
$25.0 million.
In connection with these transactions, all of which occurred in
2004:
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we were issued all of the common
interests in ARL;
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ACF and its subsidiaries were
issued all of ARLs B-1 preferred interests;
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Vegas Financial Subsidiary Corp.,
a company beneficially owned and controlled by Mr. Icahn,
was issued all of ARLs B-2 preferred interests in exchange
for an investment of $40 million;
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we issued 34,500 shares of
our new preferred stock to ACF and its subsidiaries; and
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our $57.2 million loan to ACF
was repaid in full.
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The B-1 and B-2 preferred interests of ARL were convertible into
shares of our new preferred stock. On June 30, 2005, the
terms of these interests were modified, among other things, to
eliminate this conversion feature.
The ARL exchange
On June 30, 2005, we transferred all our interest in ARL,
consisting of all its outstanding common A units, pro rata, to
the holders of our new preferred stock in exchange for the
redemption of 116,116 shares of our new preferred stock
held by them, including all dividends accumulated on those
shares. The value of the total liquidation preference and
accumulated dividends on the shares of new preferred stock
redeemed in this transaction was $125.0 million. All of the
shares of our new preferred stock are held by companies
beneficially owned and controlled by Mr. Icahn. We refer to
this transaction as the ARL exchange.
Agreements relating to ARL and its subsidiaries
In 2004 and 2005, we entered into the following agreements
relating to ARL and its subsidiaries:
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railcar management agreements with
ARI First LLC and ARI Third LLC;
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ACF administration agreement;
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ARL railcar services agreement;
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ARL railcar servicing agreement;
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ARL services agreement; and
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guarantee of ARI Second LLC loan
agreement.
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The ARL railcar servicing agreement and the ARL services
agreement remain in effect. All other agreements were terminated
or assigned to ARL at various times during 2005, as described
below.
Railcar Management Agreements with ARI First LLC and ARI
Third LLC.
On July 20, 2004, we entered into a
railcar management agreement with ARI First LLC and on
October 7, 2004, we entered into a railcar management
agreement with ARI Third LLC. ARI First LLC and ARI Third LLC
are wholly owned subsidiaries of ARL that hold railcars forming
a portion of the railcar lease fleet owned by ARL and its
subsidiaries. Under these railcar management agreements, we
provided ARI First and ARI Third with marketing, leasing,
administration, maintenance, recordkeeping and insurance
services for the railcars owned by ARI First and ARI Third. ARI
First and ARI Third paid us a monthly management fee, based upon
the number of railcars covered, and reimbursed us for all costs
incurred in performing these services. We assigned this
agreement to ARL effective June 30, 2005.
ACF Administration Agreement.
On July 20,
2004, we entered into an ACF administration agreement with ACF
and ARL. Under this agreement, ACF agreed to provide us with
railcar management services which we were required to provide
under the management agreements with ARI First LLC and ARI Third
LLC described above (except maintenance, insurance and risk
management services). In addition, ACF provided us with lease
administration services for the railcars owned by ARI First LLC
and ARI Third LLC, respectively. Under this agreement, we were
required to pay ACF a per railcar monthly fee equal to the per
railcar fee that we were receiving under our railcar
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Certain relationships and related party transactions
management agreements with ARI First LLC and ARI Third LLC. This
Agreement terminated on March 31, 2005.
ARL Railcar Services Agreement.
On April 1,
2005, we entered into a railcar services agreement with ARL.
Under this agreement, ARL provided us with railcar services
which we were required to provide to ARI First LLC and ARI Third
LLC under our railcar management agreements with ARI First LLC
and ARI Third LLC. Under this agreement, we were required to pay
ARL all compensation that we received from ARI First LLC and ARI
Third LLC under our railcar management agreements with them.
This agreement was terminated July 1, 2005 when we assigned
our railcar management agreements with ARI First LLC and ARI
Third LLC to ARL.
ARL Railcar Servicing Agreement.
On April 1,
2005, we entered into a railcar servicing agreement with ARL.
Under this agreement, we provide ARL with substantially the same
services that we had previously provided to ACF under our 1994
railcar servicing agreement with ACF described above under
Certain Transactions with ACF Industries, LLC1994
ACF Asset TransferRailcar Servicing Agreement, for
railcars that ARL or its affiliates own or manage. Under the
agreement with ARL, ARL is required to pay us a monthly fee,
based upon the number of railcars covered, plus a charge for
labor, components and materials. For materials and components we
manufacture, ARL pays us our current market price, and for
materials and components we purchase, ARL pays us our purchasing
costs plus 15%. For painting, lining and cleaning services, ARL
pays the then current market rate. For other labor costs, ARL
pays us a fixed hourly fee. We have further agreed that the
charges for our services will be on at least as favorable terms
as our terms with any other party for similar purposes. The per
railcar fees paid to us through September 30, 2005 under
the railcar management agreements for ARI First LLC and ARI
Third LLC are credited against the amounts due us under the ARL
railcar servicing agreement. This agreement extends through
June 30, 2006, and is automatically renewable for
additional one year periods unless either party gives at least
six months prior notice of termination. If we elect to terminate
this agreement, we must pay a termination fee of
$0.5 million.
ARL Services Agreement.
On April 1, 2005, we
entered into a services agreement with ARL. Under this
agreement, ARL has agreed to provide us certain information
technology services, rent and building services and limited
administrative services. The rent and building services includes
our use of our headquarters space which is leased by ARL from an
affiliate of James J. Unger, our President and Chief Executive
Officer. See Certain Transactions Involving James J.
Unger. Also under this agreement, we have agreed to
provide purchasing and engineering services to ARL. Each party
is required to pay the other a fixed annual fee for each of the
listed services under this agreement. The total annual fees that
we are required to pay ARL for all services that ARL is
providing us, under this agreement is $2.2 million, and the
total annual fees that ARL is required to pay us for all
services that we are providing ARL under this agreement is
$0.2 million. The annual fees under our services agreements
with ARI and ARL were determined in the following manner: first,
we allocated for the cost of each department of ARL providing
services to us; second, we calculated these costs based on the
number of employees providing these services and the attendant
cost associated with them; third, we applied the same formula to
value the services we provided to ARL; and finally, we
calculated the fee allocations relating to rent and building
services using an agreed upon percentage of space utilized and
headcount between the two companies. Either party may terminate
any of these services, and the associated costs for those
services, on at least six months prior notice at any time prior
to the termination of the agreement on December 31, 2007.
Guarantee of ARI Second LLC Loan Agreement.
On
July 20, 2004, ARI Second LLC, a subsidiary of ARL, entered
into a loan agreement with HSH Nordbank AG, under which ARI
Second borrowed $64.3 million. We guaranteed ARI Second
LLCs obligations under this loan agreement. This loan was
repaid in full in October 2004.
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Certain relationships and related party transactions
Health and welfare benefit plans
Employees of ARL participate in our 401(k) plan and certain of
our health and welfare benefit plans. ARL is responsible for the
costs and benefits for its employees under these plans. As part
of the ARL Exchange, ARL is in the process of establishing its
own 401(k) and health and welfare benefit plans.
CERTAIN TRANSACTIONS INVOLVING OHIO CASTINGS
In February 2003, Castings LLC, a wholly owned subsidiary of ACF
Industries Holding Corp., a company beneficially owned and
controlled by Mr. Icahn, acquired a one-third ownership
interest in Ohio Castings Company, LLC, a joint venture with
affiliates of two established railcar industry companies, Amsted
Industries, Inc. and The Greenbrier Companies, Inc. Ohio
Castings operates two foundries that produce heavy castings.
Effective as of January 1, 2005, ACF Industries Holding
Corp. transferred its interest in Castings LLC to us for total
consideration of $12.0 million, represented by a promissory
note bearing an interest rate equal to the prime rate plus 0.5%,
payable on demand. In connection with this transfer, we agreed
to assume certain, and indemnify all liabilities related to and
arising from ACF Industries Holding Corp.s investment in
Castings LLC, including the guarantee of Castings LLCs
obligations to Ohio Castings, the guarantee of bonds in the
amount of $10.0 million issued by the State of Ohio to one
of Ohio Castings subsidiaries, of which $8.0 million
was outstanding as of September 30, 2005, and the guarantee
of a $2.0 million state loan that provides for purchases of
capital equipment, of which $0.8 million was outstanding as
of September 30, 2005. The two other partners of Ohio
Castings have made similar guarantees of these obligations.
We have entered into supply agreements with an affiliate of
Amsted Industries, Inc., an affiliate of one of our Ohio
Castings joint venture partners, to purchase up to 25% and 33%,
respectively, of the products produced at each of two foundries
being operated by Ohio Castings. We pay Castings LLC a fee in
connection with those purchases. Our purchases and payments
relating to these purchases and fees are set forth above under
Certain Transactions with ACF Industries LLC and
American Railcar Leasing LLCManufacturing Operations.
CERTAIN TRANSACTIONS WITH MR. ICAHN AND OTHER RELATED
ENTITIES
Carl C. Icahn and ARL loans
In October 2004, we advanced Mr. Icahn $165.0 million
under a secured promissory note due in 2007 and bearing interest
at the prime plus 1.75%. At the same time, we borrowed
$130.0 million from ARL represented by a promissory note
due in 2007 and bearing interest at the prime rate plus 1.5%. In
January 2005, we transferred our entire interest in the Icahn
note to ARL in exchange for additional common interests in ARL
and in satisfaction of our obligations under the ARL note. In
2004 and the nine months ended September 30, 2005, we
recorded interest income of $2.0 million and
$0.8 million, respectively, and interest expense of
$1.5 million and $0.6 million, respectively, relating
to these notes.
Arnos Corp. note payable
In December 2004, we borrowed $7.0 million from Arnos
Corp., a company beneficially owned and controlled by
Mr. Icahn, under a promissory note. The note bears interest
at the prime rate plus 1.75% (8.0% at September 30, 2005)
and is payable on demand. We intend to use a portion of the net
proceeds of this offering to repay this loan in full.
Transactions with Vegas Financial Corp.
Purchase of Mandatorily Redeemable Payment-in-Kind
Preferred Stock.
We issued to Vegas Financial Corp., a
company beneficially owned and controlled by Mr. Icahn,
15,000 shares of our
128
Certain relationships and related party transactions
mandatorily redeemable payment-in-kind preferred stock, known as
PIK preferred stock, for $15.0 million in June 2002, and
10,000 shares of PIK preferred stock for $10.0 million
in June 2003.
Conversion into and Purchase of New Preferred
Stock.
In July 2004, Vegas Financial Corp. converted all
of its PIK preferred stock, consisting of 95,517.04 shares
of PIK preferred stock, representing all of the shares of PIK
preferred stock outstanding, into 96,171 shares of our new
preferred stock. In addition, Vegas Financial Corp.
simultaneously purchased an additional 67,500 shares of new
preferred stock for $67.5 million. We intend to use the net
proceeds of this offering to, among other things, redeem all of
the outstanding shares and pay all accrued dividends on our new
preferred stock, including those held by Vegas Financial Corp.
As a result, Vegas Financial Corp, will receive
$89.2 million of the net proceeds of this offering. See
Redemption of New Preferred Stock.
Transactions with Hopper Investments LLC
In 2004, Hopper Investments LLC, a company beneficially owned
and controlled by Mr. Icahn, paid $42.5 million for
195 shares of our common stock.
Transactions with Philip Environmental Services Corp.
We engaged Philip Environmental Services Corp., an environmental
consulting company beneficially owned and controlled by
Mr. Icahn, to provide environmental consulting services to
us. In the nine months ended September 30, 2005 we incurred
$0.2 million of expenses associated with that engagement.
We have continued to use Philip Environmental Services Corp. to
assist us in our environmental compliance.
CERTAIN TRANSACTIONS INVOLVING JAMES J. UNGER
Facilities leasing arrangements
Our headquarters facilities and our Corbitt manufacturing
facilities in St. Charles, Missouri are owned by St. Charles
Properties, an entity controlled by James J. Unger, our
President and Chief Executive Officer. Under two leases dated
May 1, 1995 and March 1, 2001, St. Charles Properties
leased these facilities to ACF. We reimbursed ACF for our
proportionate share of the cost of renting these facilities
through April 1, 2005. On that date, ACF assigned the
March 1, 2001 lease, covering our Corbitt manufacturing
facilities, to us and the May 1, 1995 lease, covering our
and ARLs headquarters facility, to ARL. We continue to
maintain our headquarters in the space that has been leased to
ARL. Under our services agreement with ARL, we pay ARL
$0.5 million per year, which represents the estimate of our
proportionate share of ARLs costs for the space that we
use under the lease, including rent and building services. The
terms of the underlying leases are as follows.
Under the terms of the lease agreement assigned to ARL, ARL has
leased approximately 78,000 square feet of office space.
The lease expires on December 31, 2005 with an option to
renew the lease for one additional five-year term. Rent is
payable monthly in the amount of $20,833. If ARL exercises its
option to renew the lease, the monthly rent will be $25,000.
Under the terms of the lease, ARL pays one-tenth of the property
tax and insurance expenses levied upon the property. In
addition, ARL must pay 17% and 54% of any increase in taxes and
property insurances costs, respectively. ARL is also required to
repair and maintain the facility at its costs and expense. We
use approximately 46% of the office space leased by ARL under
this agreement.
Under the terms of the lease agreement assigned to us, we occupy
approximately 128,000 square feet of space which we use for
our Corbitt manufacturing facility. The lease expires on
February 28, 2006 with an option to renew the lease for two
successive five-year terms. Rent is payable monthly in the
amount of $27,083. The maximum monthly rent for the first and
second renewal periods is $29,763
129
Certain relationships and related party transactions
and $32,442 per month, respectively. We are required to pay
27% of all tax increases assessed or levied upon the property
and the cost of the utilities we use, as well as repair and
maintain the facility at our expense.
In 2002, 2003 and 2004, we incurred $0.8 million of costs
to affiliates in each of 2002, 2003 and 2004, under these two
leasing arrangements, and in the nine months ended
September 30, 2005, we incurred $0.6 million of such
costs.
Grant of common stock
Upon completion of this offering, we will issue Mr. Unger
that number of shares of our common stock obtained by dividing
$6.0 million by the public offering price set forth on the
cover page of this prospectus (assuming an initial public
offering price of $ ,
which represents the midpoint of the range on the cover page of
this prospectus, Mr. Unger will
receive shares
of our common stock). See Management Executive
compensation Employment agreements for more
information.
Industrial revenue bonds
Mr. Unger and his wife own $0.4 million of the
industrial revenue bonds issued by Paragould, Arkansas.
Mr. Unger and his wife purchased these bonds at the time of
their original issuance on the same terms that all
non-affiliated entities purchased the bonds. We intend to use
the net proceeds of this offering to repay in full the amounts
due under all of our industrial revenue bonds. Mr. Unger
and his wife will receive approximately $0.4 million upon
our repayment of the amounts due under the industrial revenue
bonds.
REGISTRATION RIGHTS
We intend to enter into a new registration rights agreement,
which will become effective upon the completion of this
offering, with certain of our existing stockholders as of
immediately prior to the completion of this offering. The
stockholders that are party to the new registration rights
agreement will have the right to require us, subject to certain
terms and conditions, to register their shares of our common
stock under the Securities Act of 1933, as amended, at any time
following expiration of the lock-up period as described under
the caption Shares eligible for future saleLock-up
Agreements. These stockholders collectively will have an
aggregate of five demand registration rights, three of which
relate solely to registration on a short-form registration
statement, such as a Form S-3. In addition, if we propose
to register any additional shares of our capital stock under the
Securities Act, these stockholders will be entitled to customary
piggyback registration rights, which will entitle
them to include their shares of common stock in a registration
of our securities for sale by us or by other security holders.
The registration rights granted under the new registration
rights agreement will be subject to customary exceptions and
qualifications and compliance with certain registration
procedures. Following completion of this offering,
shares
of common stock, representing
%
of our outstanding shares of common stock following completion
of this offering, will be entitled to the benefits of these
registration rights.
SHARES PURCHASED BY CERTAIN RELATED PARTIES IN THIS
OFFERING
The underwriters have reserved a portion of the shares of our
common stock for sale in this offering for purchase by certain
related parties through a directed share program. In connection
with the directed share program, any of our directors, officers,
nominees for election as director or an immediate family member
of any of these individuals may purchase shares of our common
stock with a value in excess of $60,000. See
Underwriting Directed Share Program for more
information on the directed share program.
130
Certain relationships and related party transactions
FUTURE TRANSACTIONS
All future transactions, if any, between us and any of our
officers, directors and principal stockholders and their
affiliates, as well as any transactions between us and any
entity with which our officers, directors or principal
stockholders are affiliated, will be approved in accordance with
the then-current SEC rules and regulations, Nasdaq stock market
rules and applicable law governing the approval of the
transactions.
131
Principal stockholders
The following table sets forth information known to us regarding
the beneficial ownership of our common stock calculated as of
September 30, 2005, and as adjusted to reflect the
Transactions and the sale of the common stock offered hereby, by:
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each stockholder who is known by
us to own beneficially more than 5% of our common stock;
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our chief executive officer and
our other most highly compensated executive officers;
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4
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each of our directors and director
nominees; and
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all of our executive officers and
directors as a group.
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The number of shares beneficially owned by each stockholder,
director or officer is determined according to the rules of the
SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The number of shares
and the percentage ownership of each stockholder prior to this
offering is calculated based
on shares
of our common stock outstanding immediately after the merger.
The percentage ownership of each stockholder after the offering
is calculated based
on shares
of our common stock outstanding, which is derived from
the shares
of our common stock outstanding after the merger and prior to
this offering, plus
the shares
of our common stock that we intend to issue in this offering
and shares
of our common stock that we expect to issue to James J. Unger,
our president and chief executive officer (based on an initial
public offering price of
$ ,
which represents the midpoint of the range on the cover of this
prospectus), but without giving effect to the underwriters
exercise of the over-allotment option. See
Management Executive compensation Employment
agreements for more information on the calculation of the
number of shares we will issue to Mr. Unger. To the extent
that the over-allotment is exercised, we will sell up to an
aggregate
of additional
shares of our common stock.
The underwriters have reserved a portion of the shares of our
common stock for sale in this offering for purchase by certain
related parties through a directed share program. In connection
with the directed share program, any of our directors, officers,
nominees for election as director or an immediate family member
of any of these individuals may purchase shares of our common
stock with a value in excess of $60,000. See Certain
relationships and related party transactions Shares
purchased by certain related parties in this offering and
Underwriting Directed Share Program for
132
Principal stockholders
more information on the directed share program. The table below
does not reflect any potential purchases under the directed
share program.
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Shares of Common
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Stock Beneficially Owned
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Shares of Common
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Shares of Common
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After this Offering
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Stock Beneficially
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Stock Beneficially
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Assuming Full Exercise
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Owned Prior to this
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Owned After this
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of the Over-Allotment
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Offering
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Offering
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Option
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Name of beneficial owner
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Number
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Percent
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Number
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Percent
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Number
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Percent
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Carl C.
Icahn
(1)(2)(3)
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100.0%
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Foundation for a Greater
Opportunity
(1)(3)
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38.5%
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James J.
Unger
(4)
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James A.
Cowan
(4)
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William P.
Benac
(4)
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Alan C.
Lullman
(4)
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Vincent J.
Intrieri
(1)
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Jon F.
Weber
(1)
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Keith
Meister
(1)
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William L.
Finn
(5)
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James C.
Pontious
(4)(6)
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James M.
Laisure
(4)(6)
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All directors, director nominees and executive officers as a
group
(7)
(10 persons)
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100.0%
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* Represents beneficial ownership of less
than 1%.
(1) The address of such person is c/o Icahn Associates
Corp. and Affiliated Companies, 767 Fifth Avenue,
47th Floor, New York, New York 10153.
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(2)
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Mr. Icahn beneficially owns 540 of these shares directly
and an additional 195 of these shares are owned by Hopper
Investments, LLC, which is a Delaware limited liability company
that is wholly owned by Barberry Corp., which is a Delaware
corporation that is wholly owned by Mr. Icahn. The
remaining shares are owned by the Foundation for a Greater
Opportunity, or the Foundation, subject to certain agreements
with an affiliate of Mr. Icahn as described in
footnote 3.
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(3)
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In December 2005 Modal LLC, which is a Delaware limited
liability company that is wholly owned by Mr. Icahn,
entered into a stock purchase agreement with the Foundation to
acquire all of our common stock held by the Foundation. Pending
the closing of this acquisition, the Foundation has granted
Modal LLC an irrevocable proxy to vote these shares. These
agreements are described under Icahn agreement to
purchase Foundation shares set forth below. See also
Risk FactorsRisks related to the purchase of our
common stock in the offeringUpon the closing of this
offering we may be a controlled company within the
meaning of the Nasdaq National Market rules and you will not
have the same protections afforded to shareholders of other
companies that are subject to all of the Nasdaq National Market
corporate governance requirements.
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(4)
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The address of such person is c/o American Railcar
Industries, Inc., 100 Clark Street, St. Charles, Missouri 63301.
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Mr. Finn retired effective May 1, 2005.
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(6)
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Mr. Pontious and Mr. Laisure have each consented to
serve as a director at such time as our common stock is listed
on the Nasdaq National Market.
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(7)
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Includes Mr. Pontious and Mr. Laisure, each of whom
has consented to serve as a director at such time as our common
stock is listed on the Nasdaq National Market.
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133
Principal stockholders
Icahn agreement to purchase Foundation shares
We have been advised that in December 2005 Modal LLC, an
affiliate of Mr. Icahn, entered into a stock purchase
agreement with the Foundation to acquire the 460 shares of
our common stock held by the Foundation for a purchase price
equal to the greater of $100 million or the fair market
value of the shares on the date of purchase. If the purchase
takes place on the date of, or within five days of the closing
of this offering, the fair market value will be the initial
public offering price. If the purchase takes place after this
five day period, the fair market value will be equal to the
average of the closing price of our common stock on the Nasdaq
National Market for the five days immediately preceding the
acquisition. The purchase price will be payable
$10.0 million in cash and the balance in a five year
interest-only promissory note with monthly payments of interest
at the prime rate. The note may be prepaid without penalty and
will be secured by a pledge of all of the shares sold in the
transaction. The note also will be secured by the guarantee of
High Coast Limited Partnership, which is also an affiliate of
Mr. Icahn. The Foundation will be able to accelerate
repayment of the principal due under the note based on its cash
needs under terms outlined in the note.
The consummation of this acquisition requires the completion of
this offering and the approval of applicable authorities of the
State of New York. If the parties obtain this approval, we have
been advised that the parties expect that the acquisition would
be completed in the first three months of 2006. Pending the
closing of this acquisition, and for so long as the stock
purchase agreement has not been terminated, the Foundation has
granted Modal LLC an irrevocable proxy to vote all of the shares
of our common stock held by the Foundation. The stock purchase
agreement may be terminated by either party if the acquisition
does not occur by May 2006.
134
Description of capital stock
The following description of our capital stock is only a
summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, which
are included as exhibits to the registration statement of which
this prospectus is a part. See Where you can find more
information.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock as of September 30, 2005
consisted of 12,000 shares of common stock, with a par
value of $0.01 per share, 99,000 shares of preferred
stock, with a par value of $0.01 per share, which we refer
to as our mandatorily redeemable preferred stock,
150,000 shares of payment-in-kind preferred stock, with a
par value of $0.01 per share, which we refer to as our PIK
preferred stock, and 500,000 shares of new preferred stock,
with a par value of $0.01 per share. As of
September 30, 2005, there were 1,195 shares of our
common stock outstanding, one share of our mandatorily
redeemable preferred stock outstanding, no shares of our PIK
preferred stock outstanding and 82,055 shares of our new
preferred stock outstanding. As of September 30, 2005, our
shares of common stock were held of record by a total of three
stockholders.
Prior to the closing of this offering, we will reincorporate in
Delaware through a merger with and into our wholly owned
Delaware subsidiary. Upon completion of that merger our
certificate of incorporation will authorize us to issue up
to shares
of common stock, with a par value of $0.01 per share, and
up
to shares
of preferred stock, with a par value of $0.01 per share.
In connection with this merger, we will exchange all of our
shares of common stock for shares of common stock on a
one-for- basis.
Following this merger, and prior to our issuance of shares of
common stock in this
offering, shares
of our common stock will be outstanding.
After giving effect to our issuance
of shares
of common stock in this offering, we will
have shares
of common stock outstanding
and shares
of common stock outstanding if the underwriters exercise their
over-allotment option in full.
In connection with the merger, we will exchange one share of new
preferred stock, with substantially the same terms of our
existing new preferred stock, for each of the 82,055 shares of
new preferred stock then outstanding. We intend to use a portion
of the net proceeds of this offering to redeem all of the
outstanding shares of our new preferred stock. Immediately prior
to the merger, we will also redeem our one share of mandatorily
redeemable preferred stock. Following the closing of this
offering, we will be authorized to issue 1,000,000 shares of
preferred stock, with a par value of $0.01 per share, and there
will be no shares of any series of preferred stock designated or
outstanding.
Common stock
The holders of our common stock are entitled to one vote for
each share held of record on the applicable record date on all
matters voted on by our shareholders. Except as otherwise
required by law or provided in any resolution adopted by our
board of directors with respect to any series of preferred
stock, the holders of our common stock exclusively possess all
voting power. All holders of our common stock have the same
voting rights and vote together as a single class. Our
certificate of incorporation does not provide for cumulative
voting in the election of directors or any preemptive rights to
purchase or subscribe for any stock or other securities, and
there are no conversion rights or sinking fund or redemption
provisions with respect to our common stock. Consequently,
holders of more than 50% of the shares of our common stock are
able to elect all directors eligible for election each year.
Holders of our common stock are entitled to dividends and other
distributions out of assets legally available if and when
declared by our board of directors. Upon our liquidation,
dissolution or winding up, the holders of our common stock are
entitled to share pro rata in the distribution of all of
135
Description of capital stock
our assets remaining available for distribution after
satisfaction of all liabilities, including any prior rights of
any preferred stock which may be outstanding.
Preferred stock
Upon completion of this offering, our board of directors,
subject to limitations prescribed by law, will be permitted to
establish one or more series of preferred stock and to
determine, with respect to any series of preferred stock, the
terms and rights of that series, including:
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the designation of the series;
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the number of shares of the
series, which our board may, except where otherwise provided in
the preferred stock designation, increase and decrease, but not
below the number of shares then outstanding;
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whether dividends, if any, will be
cumulative or non-cumulative and the dividend rate of the series;
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the dividend rate, if any, and the
dates at which dividends, if any, will be payable;
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the redemption rights and price or
prices, if any, for shares of the series;
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the terms and amounts of any
sinking fund provided for the purchase or redemption of shares
of the series;
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the amounts payable on shares of
the series in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of our
company;
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whether the shares of the series
will be convertible into shares of any other class or series, or
any other security, of our company or any other corporation,
and, if so, the specification of the other class or series or
other security, the conversion price or prices or rate or rates,
any rate adjustments, the date or dates as of which the shares
will be convertible and all other terms and conditions upon
which the conversion may be made;
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restrictions on the issuance of
shares of the same series or of any other class or series;
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the voting rights, if any, of the
holders of the series;
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the limitations, if any, on
payment of dividends or making contributions on and on purchase
and redemption of, common stock or shares ranking junior to such
series; and
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restrictions, if any, on the
creation of indebtedness.
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The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisition and other
corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of our outstanding voting
stock. Our board of directors may issue preferred stock with
voting and conversion rights that could adversely affect the
voting power of the holders of our common stock. There are no
current agreements or understandings for the issuance of
preferred stock, and our board of directors has no present
intention to issue any shares of preferred stock.
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that none of
Mr. Icahn or entities controlled by him (referred to as the
Founding Stockholders), or any director, officer, member,
partner, stockholder or employee of a Founding Stockholder (each
referred to as a Specified Party), will have any duty to refrain
from engaging directly or indirectly in the same or similar
business activities or lines of business as we do. In the event
that any Founding Stockholder or Specified Party acquires
knowledge of a potential transaction or matter that may be a
corporate opportunity for any Founding Stockholder or Specified
Party, as applicable, and us, none of the Founding Stockholders
or Specified Parties has any duty to communicate or offer such
corporate opportunity to us, and any Founding Stockholder or
Specified Party is entitled to pursue or acquire such corporate
opportunity for itself or to direct such corporate
136
Description of capital stock
opportunity to another person or entity and we have no right in
or to such corporate opportunity or to any income or proceeds
derived therefrom.
In the event that one of our directors, officers or employees
who is also a Founding Stockholder or a Specified Party acquires
knowledge of a potential transaction or matter which may be a
corporate opportunity or otherwise is then exploiting any
corporate opportunity, subject to the following paragraph, we
will have no interest in such corporate opportunity and no
expectation that such corporate opportunity be offered to us, so
that such Specified Party will have no duty to communicate or
present such corporate opportunity to us, will have the right to
hold such corporate opportunity for its own account or to
recommend, sell, assign or transfer such corporate opportunity
to persons other than us and will not breach any fiduciary duty
to us by reason of the fact that such Specified Party pursues or
acquires such corporate opportunity for itself, directs, sells,
assigns or transfers such corporate opportunity to another
person or does not communicate information regarding such
corporate opportunity to us.
Notwithstanding the foregoing, our certificate of incorporation
will provide that we do not renounce any interest or expectation
we may have in any corporate opportunity that is offered to any
Founding Stockholder or Specified Party, if such opportunity is
expressly offered to such Founding Stockholder or Specified
Party solely in, and as a direct result of, his or her capacity
as our director, officer or employee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS
Our bylaws will require us to indemnify each of our directors
and officers to the fullest extent permitted by law. Our bylaws
will also provide that an amendment to the indemnification
provisions of our bylaws will not affect the liability of any
director or officer for any act or omission occurring prior to
the effective time of such amendment.
OTHER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Board of directors
Our certificate of incorporation will provide that the number of
directors shall be determined in the manner specified by our
bylaws, and may be increased or decreased from time to time in
the manner prescribed by our bylaws. Our certificate of
incorporation will further provide that we may not adopt or
approve the classification of our directors for staggered terms
other than by an amendment to the certificate of incorporation
duly adopted by our stockholders. Currently, our board of
directors consists of five directors.
Prohibition against certain anti-takover defenses.
Our certificate of incorporation will provide that we shall not,
other than by an amendment to our certificate of incorporation
duly adopted by our stockholders, adopt or approve any so called
rights plan, poison pill or other similar plan, agreement or
device designed to prevent or make more difficult a hostile
takeover of us by increasing the cost to a potential acquirer of
such a takeover either through the issuance of new rights,
shares of common stock or preferred stock or any other security
or device that may be issued to our stockholders, other than all
our stockholders, that carry severe redemption provisions,
favorable purchase provisions or otherwise.
Amendment of bylaws
Our Board of Directors and stockholders will be authorized and
empowered to adopt, amend and repeal our bylaws.
137
Description of capital stock
Inapplicability of Delawares antitakeover statute
Our certificate of incorporation will make the anti-takeover
protection of Section 203 of The Delaware General
Corporation Law, which we refer to as the DGCL, inapplicable to
us. Generally, Section 203 of the DGCL provides that any
person who acquires direct or indirect beneficial ownership of
15% or more of the outstanding voting stock of a Delaware
corporation becomes an interested shareholder.
Section 203 prohibits a corporation from engaging in any
business combination with an interested shareholder
for a period of three years following the date that such
interested shareholder becomes an interested shareholder, unless
certain conditions are satisfied. Generally, a business
combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested
stockholder.
The listing requirements of the Nasdaq National Market, which
will apply to us while our common stock is listed on the Nasdaq
National Market, require stockholder approval of certain
issuances equal to or in excess of 20% of the voting power or
the number of shares of common stock. These additional shares
may be used for a variety of corporate purposes, including
future public offerings, to raise additional capital or to
facilitate acquisitions.
One of the effects of the existence of unissued and unreserved
common stock or preferred stock may be to enable our board of
directors to issue shares to persons friendly to current
management, which issuance could render more difficult or
discourage an attempt to obtain control of our company by means
of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly
deprive the stockholders of opportunities to sell their shares
of common stock at prices higher than prevailing market prices.
REGISTRATION RIGHTS
We intend to enter into a new registration rights agreement,
which will become effective upon the completion of this
offering, with certain of our existing stockholders as of
immediately prior to the completion of this offering. The
stockholders that are party to the new registration rights
agreement will have the right to require us, subject to certain
terms and conditions, to register their shares of our common
stock under the Securities Act of 1933, as amended, at any time
following expiration of the lock-up period as described under
the caption Shares eligible for future saleLock-up
Agreements.. These stockholders collectively will have an
aggregate of five demand registration rights, three of which
relate solely to registration on a short-form registration
statement, such as a Form S-3. In addition, if we propose to
register any of our capital stock under the Securities Act, our
stockholders will be entitled to customary piggyback
registration rights which will entitle our stockholders to
include their shares of common stock in a registration of our
securities for sale by us or by other security holders. The
registration rights granted under the new registration rights
agreement are subject to customary exceptions and qualifications
and compliance with certain registration procedures. Following
the completion of this
offering, shares
of common stock,
representing %
of our outstanding shares of common stock following completion
of this offering, will be entitled to the benefits of these
registration rights.
QUOTATION OF OUR COMMON STOCK
We expect to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol ARII.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
138
Shares eligible for future sale
Prior to this offering, there has not been a public market for
our common stock. Future sales of substantial amounts of our
common stock in the public market, or the possibility of these
sales, could adversely affect the trading price of the common
stock and could impair our future ability to raise capital
through the sale of our equity at a time and price we deem
appropriate.
Upon completion of this offering and the merger, we will have
outstanding shares
of common stock. Of these shares,
the shares
sold in this offering,
or shares
if the underwriters over-allotment option is exercised in
full, will be freely tradable without restriction or further
registration under the Securities Act, except for any shares
purchased by our affiliates, as defined in
Rule 144 under the Securities Act, which would be subject
to the limitations and restrictions described below.
The
remaining shares
of common stock outstanding upon completion of this offering
will be restricted securities as defined in
Rule 144. Restricted securities may be sold in the public
market only if they are registered or if they qualify for an
exemption from registration such as the exemption provided by
Rule 144.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rules 144 and 144(k) promulgated under the Securities
Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144
and 144(k), additional shares will be available for sale in the
public market as follows:
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Number of Shares
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Date
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After the date of this prospectus.
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After 180 days from the date of this prospectus.
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All of these restricted securities will be eligible for sale in
the public market, subject in all cases to the volume
limitations and other restrictions of Rule 144, beginning
upon expiration of the lock-up agreements described below.
RULE 144
In general, under Rule 144 as currently in effect,
beginning 90 days after this offering, a person (or persons
whose shares are required to be aggregated), including an
affiliate, who has beneficially owned shares of our common stock
for at least one year is entitled to sell in any three-month
period a number of shares that does not exceed the greater of:
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4
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1% of then-outstanding shares of
our common stock, which is
approximately shares
of our common stock immediately after the completion of this
offering; or
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4
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the average weekly reported
trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a
Form 144 with respect to the sale, subject to certain
restrictions.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us.
RULE 144(K)
In addition, a person who is not deemed to have been an
affiliate of ours at any time during the 90 days preceding
a sale and who has beneficially owned the shares proposed to be
sold for at least two years, would be entitled to sell those
shares under Rule 144(k) without regard to the manner of
sale, public information, volume limitation or notice
requirements of Rule 144.
139
Shares eligible for future sale
LOCK-UP AGREEMENTS
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the SEC a registration statement under the Securities Act
relating to any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, or publicly disclose the intention to make
any offer, sale, pledge, disposition or filing, without the
prior written consent of UBS Securities LLC and Bear,
Stearns & Co. Inc. for a period of
180 days after the date of this prospectus. Our officers,
directors, all of our existing stockholders have also agreed,
and certain individuals who purchase shares of our common stock
through the directed share program may agree, that they will not
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock (other
than shares they may sell in this offering) or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, enter into a transaction that would have
the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or
publicly disclose the intention to make any offer, sale, pledge
or disposition, or to enter into any transaction, swap, hedge or
other arrangement, without, in each case, the prior written
consent of UBS Securities LLC and Bear,
Stearns & Co. Inc. until 180 days after
the date of this prospectus. UBS Securities LLC and Bear,
Stearns & Co. Inc. may, in their sole
discretion at any time without notice, release all or any
portion of the shares of our common stock held by our officers,
directors, existing stockholders and certain individuals who
have purchased shares of our common stock in the directed share
program, subject to these lock-up agreements.
140
Material U.S. income tax considerations for
non-U.S. holders
The following summary describes material United States federal
income tax consequences of the ownership and disposition of
common stock by a Non-U.S. Holder (as defined below) as of
the date of this prospectus. This discussion does not address
all aspects of United States federal income taxation and does
not deal with estate, gift, foreign, state and local tax
consequences that may be relevant to such Non-U.S. Holders
in light of their personal circumstances. Special U.S. tax
rules may apply to certain Non-U.S. Holders, such as
controlled foreign corporations, passive
foreign investment companies, corporations that accumulate
earnings to avoid U.S. federal income tax, investors in
partnerships or other pass-through entities for
U.S. federal income tax purposes, dealers in securities,
holders of securities held as part of a straddle,
hedge, conversion transaction or other
risk reduction transaction, and certain former citizens or
long-term residents of the United States that are subject to
special treatment under the Internal Revenue Code of 1986, as
amended (which we also refer to as the Code). Such entities and
persons should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to them. Furthermore, the discussion below is
based upon the provisions of the Code, and regulations,
administrative pronouncements of the Internal Revenue Service
(which we also refer to as the IRS) and judicial decisions
thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified with or without retroactive effect
so as to result in United States federal income tax consequences
different from those discussed below.
If a partnership (or an entity treated as a partnership for
U.S. federal income tax purposes) holds the common stock,
the tax treatment of a partner will generally depend on the
status of the partner and the activities of the partnership.
Persons who are partners in partnerships holding the common
stock should consult their tax advisors.
The authorities on which this summary is based are subject to
various interpretations, and any views expressed within this
summary are not binding on the IRS or the courts. No assurance
can be given that the IRS or the courts will agree with the tax
consequences described in this prospectus.
As used herein, a Non-U.S. Holder means a
beneficial owner of our common stock that is not any of the
following for U.S. federal income tax purposes:
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4
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a citizen or resident of the
United States,
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4
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a corporation, or other entity
treated as a corporation for United States federal income tax
purposes, created or organized in or under the laws of the
United States, any state thereof or the District of Columbia,
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4
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an estate the income of which is
subject to United States federal income taxation regardless of
its source, or
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4
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a trust (i) which is subject
to primary supervision by a court situated within the United
States and as to which one or more United States persons have
the authority to control all substantial decisions of the trust,
or (ii) that has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a
United States person.
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141
Material U.S. income tax considerations for
non-U.S. holders
Prospective purchasers are urged to consult their own tax
advisors regarding the U.S. federal income tax
consequences, as well as other U.S. federal, state, and
local income and estate tax consequences, and non-U.S. tax
consequences, to them of acquiring, owning, and disposing of our
common stock.
DIVIDENDS
If we make distributions on our common stock, such distributions
paid to a Non-U.S. Holder will generally constitute
dividends for U.S. federal income tax purposes to the
extent such distributions are paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. If a distribution
exceeds our current and accumulated earnings and profits, the
excess will be treated as a tax-free return of the
Non-U.S. Holders investment to the extent of the
Non-U.S. Holders adjusted tax basis in our common
stock. Any remaining excess will be treated as capital gain.
Dividends paid to a Non-U.S. Holder generally will be
subject to withholding of United States federal income tax at a
30% rate or such lower rate as may be specified by an applicable
income tax treaty. A Non-U.S. Holder of common stock who
wishes to claim the benefit of an applicable treaty rate for
dividends will be required to (a) properly complete IRS
Form W-8BEN (or appropriate substitute form) and certify,
under penalties of perjury, that such holder is not a
U.S. person and is eligible for the benefits with respect
to dividends allowed by such treaty or (b) hold common
stock through certain foreign intermediaries and satisfy the
certification requirements for treaty benefits of applicable
Treasury regulations. A Non-U.S. Holder eligible for a
reduced rate of United States withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts
withheld by timely filing an appropriate claim for refund with
the IRS.
This United States withholding tax generally will not apply to
dividends that are effectively connected with the conduct of a
trade or business by the Non-U.S. Holder within the United
States, and, if a treaty applies, attributable to a United
States permanent establishment or fixed base of the
Non-U.S. Holder. Dividends effectively connected with the
conduct of a trade or business, as well as those attributable to
a United States permanent establishment or fixed base of the
Non-U.S. Holder under an applicable treaty, are subject to
United States federal income tax generally in the same manner as
if the Non-U.S. Holder were a U.S. person, as defined
under the Code. Certain IRS certification and disclosure
requirements must be complied with in order for effectively
connected income to be exempt from withholding. Any such
effectively connected dividends received by a
Non-U.S. Holder that is a foreign corporation may, under
certain circumstances, be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United
States federal income tax (or any withholding thereof) with
respect to gain recognized on a sale or other disposition of
common stock unless:
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4
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The Non-U.S. Holder is an
individual who is present in the United States for 183 or more
days in the taxable year of the disposition and certain other
conditions are met,
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4
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the gain is effectively connected
with a trade or business of the Non-U.S. Holder in the
United States and, where a tax treaty applies, is attributable
to a United States permanent establishment or fixed base of the
Non-U.S. Holder, or
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142
Material U.S. income tax considerations for
non-U.S. holders
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4
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we are or have been a
U.S. real property holding corporation within
the meaning of Section 897(c)(2) of the Code, also referred
to as a USRPHC, for United States federal income tax purposes at
any time within the five-year period preceding the disposition
(or, if shorter, the Non-U.S. Holders holding period
for the common stock).
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Gain recognized on the sale or other disposition of common stock
and effectively connected with a United States trade or
business, or attributable to a United States permanent
establishment or fixed base of the Non-U.S. Holder under an
applicable treaty, is subject to United States federal income
tax on a net income basis generally in the same manner as if the
Non-U.S. Holder were a U.S. person, as defined under
the Code. Any such effectively connected gain from the sale or
disposition of common stock received by a Non-U.S. Holder
that is a foreign corporation may, under certain circumstances,
be subject to an additional branch profits tax at a
30% rate or such lower rate as may be specified by an applicable
income tax treaty.
In general, a corporation is a USRPHC if the fair market value
of its U.S. real property interests equals or
exceeds 50% of the sum of the fair market value of its worldwide
(domestic and foreign) real property interests and its other
assets used or held for use in a trade or business. For this
purpose, real property interests include land, improvements, and
associated personal property. We believe that we currently are
not a USRPHC. In addition, based on these financial statements
and current expectations regarding the value and nature of our
assets and other relevant data, we do not anticipate becoming a
USRPHC.
If we become a USRPHC, a Non-U.S. Holder nevertheless will
not be subject to United States federal income tax if our common
stock is regularly traded on an established securities market,
within the meaning of applicable Treasury regulations, and the
Non-U.S. Holder holds no more than five percent of our
outstanding common stock, directly or indirectly, during the
five-year testing period identified in the third bullet point
immediately above. We expect that our common stock will be
quoted on the Nasdaq National Market and may be regularly traded
on an established securities market in the United States so long
as it is so quoted.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the IRS and to each
Non-U.S. Holder the amount of dividends paid to such holder
and the tax withheld with respect to such dividends, regardless
of whether withholding was required. Copies of the information
returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which
the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty.
The United States imposes a backup withholding tax on dividends
and certain other types of payments to United States persons
(currently at a rate of 28%) of the gross amount. Dividends paid
to a Non-U.S. Holder will not be subject to backup
withholding if proper certification of foreign status (usually
on an IRS Form W-8BEN) is provided, and the payor does not
have actual knowledge or reason to know that the beneficial
owner is a United States person, or the holder is a corporation
or one of several types of entities and organizations that
qualify for exemption, also referred to as an exempt recipient.
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale or other disposition of shares of common stock by a
Non-U.S. Holder outside the United States through a foreign
office of a foreign broker that does not have certain specified
connections to the United States. However, if a
Non-U.S. Holder sells or otherwise disposes of shares of
common stock through the U.S. office of a United States or
foreign broker, the broker will be required to report the amount
of proceeds paid to such holder to the IRS and to apply the
backup
143
Material U.S. income tax considerations for
non-U.S. holders
withholding tax (currently at a rate of 28%) to the amount of
such proceeds unless appropriate certification (usually on an
IRS Form W-8BEN) is provided to the broker of the
holders status as either an exempt recipient or a
non-U.S. person, and the payor does not have actual
knowledge or reason to know that the beneficial owner is a
United States person. Information reporting also applies if a
Non-U.S. Holder sells or otherwise disposes of its shares
of common stock through the foreign office of a broker deriving
more than a specified percentage of its income from United
States sources or having certain other connections to the United
States and the foreign broker does not have certain documentary
evidence in its files of the Non-U.S. Holders foreign
status.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against such holders
U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
144
Underwriting
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC and Bear, Stearns & Co. Inc. are the
representatives of the underwriters and joint book-running
managers of this offering. We have entered into an underwriting
agreement with the underwriters. Subject to the terms and
conditions of the underwriting agreement, each of the
underwriters has severally agreed to purchase the number of
shares of common stock from us listed next to its name in the
following table:
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Number of
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Underwriters
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shares
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UBS Securities LLC
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Bear, Stearns & Co. Inc.
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BB&T Capital Markets, a division of Scott &
Stringfellow, Inc.
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CIBC World Markets Corp.
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Morgan Keegan & Company, Inc.
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Total
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The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
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4
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receipt and acceptance of our
common stock by the underwriters; and
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4
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the underwriters right to
reject orders in whole or in part.
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We have been advised by the representatives that the
underwriters intend to make a market in our common stock but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option to buy up to an
aggregate
of additional
shares of our common stock. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with this offering. The underwriters
have 30 days from the date of this prospectus to exercise
this option. If the underwriters exercise this option, they will
each purchase additional shares on a pro rata basis in
approximately the same proportion to the amounts specified in
the table above.
Directed Share Program
At our request, the underwriters have reserved up
to % of the shares of common stock for sale at the
public offering price set forth on the cover page of this
prospectus to persons who are directors, officers, employees,
and certain vendors, suppliers, customers and business
associates, or who are otherwise associated with us through a
directed share program. The number of shares of common stock
available for sale to the general public will be reduced by the
number of directed shares purchased by participants in the
directed share program. Any directed shares not purchased will be
145
Underwriting
offered by the underwriters to the general public on the same
basis as all other shares of common stock offered. We have
agreed to indemnify the underwriters against certain liabilities
and expenses, including liabilities under the Securities Act, in
connection with the sales of the directed shares. We have been
advised by UBS Securities LLC that any participants in the
directed share program who purchase more than $100,000 of our
common stock will be required to sign a lock-up agreement, the
form of which will be the same as that of the lock-up agreements
to be entered into by all of our directors, officers and
existing stockholders. See Shares eligible for future
sale Lock-up agreements for a description of the
material terms of these agreements.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the initial offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per
share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to
$ per
share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms. Sales of shares made outside of the United States
may be made by affiliates of the underwriters. Upon execution of
the underwriting agreement, the underwriters will be obligated
to purchase the shares at the prices and upon the terms stated
in the underwriting agreement and, as a result, will thereafter
bear any risk associated with changing the offering price to the
public or other selling terms.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters option to purchase up to an
additional shares.
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No exercise
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Full exercise
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Per share
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$
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$
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Total
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$
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$
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We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately
$ .
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and all of our existing
stockholders have entered, and certain individuals who purchase
shares of our common stock in this offering through the directed
share program may enter, into lock-up agreements with the
underwriters. Under these agreements, subject to certain
exceptions, we and each of these persons may not, without the
prior written approval of UBS Securities LLC and Bear,
Stearns & Co. Inc., offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, or hedge
our common stock or securities convertible into or exchangeable
for our common stock. These restrictions will be in effect for a
period of 180 days after the date of this prospectus. At
any time and without public notice, UBS Securities LLC and Bear,
Stearns & Co. Inc. may, in their sole
discretion, release all or some of the securities from these
lock-up agreements. Notwithstanding the foregoing, if
(1) during the last 17 days of the 180-day lock-up
period we issue an earnings release or material news or a
material event relating to us occurs or (2) prior to the
expiration of the 180-day lock-up period, we announce that we
will release earnings results during the 16-day period beginning
on the last day of the 180-day lock-up period, then the
restrictions described above will continue to apply until the
expiration of the 18-day period beginning on the issuance of the
earnings release or the occurrence of the material news or
material event.
146
Underwriting
INDEMNIFICATION
We have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities
Act. If we are unable to provide this indemnification, we have
agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities.
LISTING
We expect to apply to have our common stock approved for
quotation on the Nasdaq National Market under the trading symbol
ARII.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
PRICE STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
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4
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stabilizing transactions;
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4
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short sales;
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4
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purchases to cover positions
created by short sales;
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4
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imposition of penalty
bids; and
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4
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syndicate covering transactions.
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Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of common
stock in the open market to cover positions created by short
sales. Short sales may be covered short sales, which
are short positions in an amount not greater than the
underwriters over-allotment option referred to above, or
may be naked short sales, which are short positions
in excess of that amount.
The underwriters may close out any covered short position by
either exercising their over-allotment option, in whole or in
part, or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
Naked short sales are sales made in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market that could adversely affect investors
who purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have
147
Underwriting
repurchased shares sold by or for the account of that
underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for our
common stock. The initial public offering price was determined
by negotiation by us and the representatives of the
underwriters. The principal factors considered in determining
the initial public offering price include:
|
|
4
|
the information set forth in this
prospectus and otherwise available to representatives;
|
|
4
|
our history and prospects and the
history and prospects for the industry in which we compete;
|
|
4
|
our past and present financial
performance and an assessment of our management;
|
|
4
|
our prospects for future earnings
and the present state of our development;
|
|
4
|
the general condition of the
securities markets at the time of this offering;
|
|
4
|
the recent market prices of, and
demand for, publicly traded common stock of generally comparable
companies; and
|
|
4
|
other factors deemed relevant by
the underwriters and us.
|
AFFILIATIONS
Certain of the underwriters and their affiliates have provided
in the past and may provide from time to time in the future
certain commercial banking, financial advisory, investment
banking and other services for us for which they will be
entitled to receive customary fees.
148
Legal matters
An opinion regarding the legality of the shares of common stock
being offered in this offering is being provided by Brown
Rudnick Berlack Israels LLP, New York, New York. The
underwriters have been represented by Shearman &
Sterling LLP, New York, New York.
Experts
Our consolidated financial statements as of and for the year
ended December 31, 2004 included in this prospectus were
audited by Grant Thornton LLP (Grant Thornton), our independent
registered public accounting firm, as stated in their report
appearing therein. Our consolidated financial statements as of
December 31, 2003 and for each of the years in the two year
period ended December 31, 2003 have been included in this
prospectus in reliance upon the report of KPMG LLP (KPMG), our
former independent registered public accounting firm, appearing
elsewhere herein and upon the authority of said firm as experts
in accounting and auditing. KPMGs reports on our
consolidated financial statements as of December 31, 2003
and for each of the years in the two year period ended
December 31, 2003 contained no adverse opinion or
disclaimer of opinion and were not otherwise qualified or
modified as to uncertainty, audit scope or accounting
principles. On August 11, 2004, we terminated KPMG. In
connection with its audits of our financial statements as of and
for the years ended December 31, 2002 and 2003, and through
August 11, 2004, there were no disagreements with KPMG on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG,
would have caused KPMG to make reference thereto in its report
on such statements for such periods.
Following KPMGs termination, we engaged Grant Thornton as
our independent certified public accountants effective
August 12, 2004. The decision to hire Grant Thornton was
unanimously approved by our board of directors. We did not
consult with Grant Thornton with respect to the application of
accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might
be rendered on our financial statements, or a disagreement with
KPMG and there were no reportable events as defined
in Item 304(a)(1)(v) of Regulation S-K promulgated
under the Exchange Act during this time frame. Grant Thornton
has been given access to prior years work papers by KPMG without
limitation in accordance with Statement on Auditing Standard
No. 84, Communications Between Predecessor and Successor
Auditors.
Where you can find more information
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act with respect to the
shares to be sold in this offering. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information set forth in the registration
statement and the exhibits, schedules and amendments to the
registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For
further information about us and the shares to be sold in this
offering, please refer to the registration statement.
Statements contained in this prospectus as to the contents of
any contract, agreement or other document that we make reference
to, are not necessarily complete, and in each instance, where
applicable, please refer to the copy of the contract, agreement
or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by
this reference.
149
Where you can find more information
Upon completion of this offering, we will become subject to the
reporting and information requirements of the Exchange Act and,
as a result, we will file periodic and current reports, proxy
statements and other information with the SEC.
You may read and copy all or any portion of the registration
statement or any reports, statements or other information we
file with the SEC following the completion of this offering at
the public reference room maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for more information on the public reference
rooms. Copies of such material are also available by mail from
the SEC at prescribed rates. You can also find our SEC filings
at the SECs website at www.sec.gov.
We intend to provide our stockholders with annual reports
containing consolidated financial statements that have been
examined and reported on, with an opinion expressed by, an
independent registered public accounting firm.
150
Index to financial statements
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Page
|
|
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|
|
Audited Consolidated Financial Statements of American Railcar
Industries, Inc.
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
Unaudited Condensed Consolidated Financial Statements of
American Railcar Industries, Inc.
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
|
Audited Consolidated Financial Statements of Ohio Castings
Company, LLC
|
|
|
|
|
Report of Grant Thornton LLP Independent Registered Public
Accounting Firm
|
|
|
F-53
|
|
Consolidated Balance Sheets as of August 31, 2003, 2004 and
2005
|
|
|
F-54
|
|
Consolidated Statements of Operations for the period from
June 20, 2003 to August 31, 2003 and for the years
ended August 31, 2004 and 2005
|
|
|
F-55
|
|
Consolidated Statements of Cash Flows for the period from
June 20, 2003 to August 31, 2003 and for the years
ended August 31, 2004 and 2005
|
|
|
F-56
|
|
Consolidated Statements of Members Equity for the period
from June 20, 2003 to August 31, 2003 and for the
years ended August 31, 2004 and 2005
|
|
|
F-57
|
|
Notes to Consolidated Financial Statements
|
|
|
F-58
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
American Railcar Industries, Inc.
We have audited the accompanying consolidated balance sheet of
the manufacturing and railcar services operations of American
Railcar Industries, Inc. and subsidiaries (the
Company) as of December 31, 2004, and the
related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for the period then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the manufacturing and railcar services operations of American
Railcar Industries, Inc. and subsidiaries as of
December 31, 2004, and the consolidated results of its
operations and cash flows for the period then ended, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Chicago, Illinois
September 30, 2005
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors
American Railcar Industries, Inc.:
We have audited the accompanying consolidated balance sheet of
American Railcar Industries, Inc. and subsidiaries as of
December 31, 2003, and the consolidated statements of
operations, shareholders equity and comprehensive income
(loss), and cash flows for each of the years in the two-year
period ended December 31, 2003. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of American Railcar Industries, Inc. and subsidiaries
as of December 31, 2003, and the results of their
operations and their cash flows for each of the years in the
two-year period ended December 31, 2003, in conformity with
U.S. generally accepted accounting principles.
|
|
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/s/ KPMG LLP
|
|
|
|
St. Louis, Missouri
|
|
April 23, 2004
|
F-3
American Railcar Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
65
|
|
|
$
|
6,943
|
|
|
Accounts receivable, net
|
|
|
13,409
|
|
|
|
25,183
|
|
|
Inventories, net
|
|
|
45,207
|
|
|
|
73,925
|
|
|
Amounts due from affiliates current
|
|
|
404
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
62
|
|
|
|
244
|
|
|
Deferred tax asset
|
|
|
1,423
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
60,570
|
|
|
|
108,360
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,977
|
|
|
|
1,977
|
|
|
Buildings
|
|
|
66,199
|
|
|
|
66,350
|
|
|
Machinery and equipment
|
|
|
56,152
|
|
|
|
58,816
|
|
|
Construction in process
|
|
|
|
|
|
|
8,686
|
|
|
|
|
|
|
|
|
|
|
|
124,328
|
|
|
|
135,829
|
|
|
Less accumulated depreciation
|
|
|
53,098
|
|
|
|
58,878
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
71,230
|
|
|
|
76,951
|
|
Notes receivable from affiliates and interest thereon
|
|
|
57,170
|
|
|
|
165,000
|
|
Deferred tax asset
|
|
|
|
|
|
|
663
|
|
Debt issuance costs and other assets
|
|
|
905
|
|
|
|
615
|
|
Investment in joint venture
|
|
|
6,633
|
|
|
|
5,251
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
196,508
|
|
|
$
|
356,840
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
14,738
|
|
|
$
|
1,334
|
|
|
Accounts payable
|
|
|
10,752
|
|
|
|
22,800
|
|
|
Accrued expenses and taxes
|
|
|
7,997
|
|
|
|
13,524
|
|
|
Note payable to affiliate current
|
|
|
12,000
|
|
|
|
19,000
|
|
|
Other amounts due to affiliates current
|
|
|
|
|
|
|
5,137
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,487
|
|
|
|
61,795
|
|
Long-term debt, net of current portion
|
|
|
35,335
|
|
|
|
8,517
|
|
Note payable to affiliate noncurrent
|
|
|
|
|
|
|
130,000
|
|
Other amounts due to affiliates noncurrent
|
|
|
4,028
|
|
|
|
17,109
|
|
Deferred tax liability
|
|
|
9,583
|
|
|
|
|
|
Mandatorily redeemable payment-in-kind preferred stock,
$.01 par value, 150,000 shares authorized,
89,899 shares issued and outstanding at December 31,
2003, $1,000 liquidation price per share
|
|
|
89,899
|
|
|
|
|
|
Mandatorily redeemable preferred stock, stated value $1,000,
99,000 shares authorized, 1 share issued and
outstanding at December 31, 2003 and 2004, respectively
|
|
|
1
|
|
|
|
1
|
|
Other liabilities
|
|
|
6,371
|
|
|
|
4,395
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
190,704
|
|
|
|
221,817
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
New Preferred Stock, $.01 par value per share, stated value
$1,000 per share, 500,000 shares authorized,
111,685 shares issued and outstanding at December 31,
2004
|
|
|
|
|
|
|
111,685
|
|
Common stock, $.01 par value, 12,000 shares
authorized, 1,000 and 1,195 shares issued and outstanding at
December 31, 2003 and 2004, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
11,577
|
|
|
|
41,360
|
|
Accumulated deficit
|
|
|
(4,889
|
)
|
|
|
(16,959
|
)
|
Accumulated other comprehensive loss
|
|
|
(884
|
)
|
|
|
(1,063
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
5,804
|
|
|
|
135,023
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
196,508
|
|
|
$
|
356,840
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-4
American Railcar Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from affiliates of
$63,561, $62,882 and $64,372 in 2002, 2003 and 2004,
respectively)
|
|
$
|
138,441
|
|
|
$
|
188,119
|
|
|
$
|
316,432
|
|
|
Railcar services (including revenues from affiliates of $12,838,
$11,012 and $19,429 in 2002, 2003 and 2004, respectively)
|
|
|
30,387
|
|
|
|
29,875
|
|
|
|
38,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
168,828
|
|
|
|
217,994
|
|
|
|
355,056
|
|
Costs of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations (including costs related to
affiliates of $55,679, $54,394 and $59,052 in 2002, 2003 and
2004, respectively)
|
|
|
134,363
|
|
|
|
174,629
|
|
|
|
306,283
|
|
|
Cost of railcar services (including costs related to sales to
affiliates of $12,152, $10,136 and $15,539 in 2002, 2003 and
2004, respectively)
|
|
|
29,533
|
|
|
|
29,762
|
|
|
|
34,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of goods sold
|
|
|
163,896
|
|
|
|
204,391
|
|
|
|
340,756
|
|
|
|
Gross profit
|
|
|
4,932
|
|
|
|
13,603
|
|
|
|
14,300
|
|
Selling, administrative and other
|
|
|
9,505
|
|
|
|
10,340
|
|
|
|
10,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
|
(4,573
|
)
|
|
|
3,263
|
|
|
|
3,966
|
|
Interest income (includes interest income from affiliates of
$3,379, $2,998 and $3,885 in 2002, 2003 and 2004, respectively)
|
|
|
3,619
|
|
|
|
3,161
|
|
|
|
4,422
|
|
Interest expense including interest expense to affiliates of
$1,524 in 2004
|
|
|
4,853
|
|
|
|
3,616
|
|
|
|
3,667
|
|
Loss from joint venture
|
|
|
|
|
|
|
(604
|
)
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax expense (benefit)
|
|
|
(5,807
|
)
|
|
|
2,204
|
|
|
|
4,112
|
|
Income tax expense (benefit)
|
|
|
(1,894
|
)
|
|
|
1,139
|
|
|
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(3,913
|
)
|
|
$
|
1,065
|
|
|
$
|
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred dividends
|
|
|
(7,139
|
)
|
|
|
(9,690
|
)
|
|
|
(13,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
|
(11,052
|
)
|
|
|
(8,625
|
)
|
|
|
(11,320
|
)
|
Weighted average common shares outstanding basic and
diluted
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted
|
|
$
|
(11,052
|
)
|
|
$
|
(8,625
|
)
|
|
$
|
(10,414
|
)
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-5
American Railcar Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(3,913
|
)
|
|
$
|
1,065
|
|
|
$
|
1,921
|
|
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,271
|
|
|
|
6,408
|
|
|
|
6,247
|
|
|
Change in joint venture investment as a result of loss
|
|
|
|
|
|
|
604
|
|
|
|
609
|
|
|
Expenses relating to pre-recapitalization liabilities
|
|
|
668
|
|
|
|
583
|
|
|
|
1,431
|
|
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
Provision for deferred income taxes (benefits)
|
|
|
(2,349
|
)
|
|
|
963
|
|
|
|
1,740
|
|
|
Provision for losses on accounts receivable
|
|
|
159
|
|
|
|
254
|
|
|
|
209
|
|
|
Long-lived asset impairment and other charges
|
|
|
193
|
|
|
|
801
|
|
|
|
|
|
|
(Gain) loss on the disposition of property, plant and equipment
|
|
|
(19
|
)
|
|
|
73
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,489
|
|
|
|
(4,509
|
)
|
|
|
(11,983
|
)
|
|
|
Inventories
|
|
|
(469
|
)
|
|
|
(11,835
|
)
|
|
|
(28,718
|
)
|
|
|
Prepaid expenses
|
|
|
2,257
|
|
|
|
88
|
|
|
|
(365
|
)
|
|
|
Accounts payable
|
|
|
(417
|
)
|
|
|
3,999
|
|
|
|
12,048
|
|
|
|
Accrued expenses and taxes
|
|
|
808
|
|
|
|
1,183
|
|
|
|
1,966
|
|
|
|
Other
|
|
|
2,933
|
|
|
|
(1,316
|
)
|
|
|
(2,128
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
10,611
|
|
|
|
(1,639
|
)
|
|
|
(17,082
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,816
|
)
|
|
|
(2,301
|
)
|
|
|
(11,441
|
)
|
|
Proceeds from the disposition of property, plant and equipment
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
Change in note and interest receivable from ACF
|
|
|
50
|
|
|
|
50
|
|
|
|
404
|
|
|
Refund of sales tax on property, plant and equipment
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(535
|
)
|
|
|
(2,251
|
)
|
|
|
(11,037
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
42,500
|
|
|
Issuance of preferred stock
|
|
|
15,000
|
|
|
|
10,000
|
|
|
|
67,500
|
|
|
Effect of ARL spin off
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
|
Advance to affiliate under notes receivable
|
|
|
|
|
|
|
|
|
|
|
(165,000
|
)
|
|
Proceeds from issuance of notes payable from affiliates
|
|
|
|
|
|
|
|
|
|
|
137,000
|
|
|
(Increase) decrease in amount due from affiliate
|
|
|
(8,634
|
)
|
|
|
8,634
|
|
|
|
|
|
|
Increase (decrease) in amount due to affiliate
|
|
|
(893
|
)
|
|
|
4,028
|
|
|
|
18,219
|
|
|
Repayment of debt
|
|
|
(16,842
|
)
|
|
|
(18,890
|
)
|
|
|
(40,222
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(11,369
|
)
|
|
|
3,772
|
|
|
|
34,997
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(1,293
|
)
|
|
|
(118
|
)
|
|
|
6,878
|
|
Cash and cash equivalents at beginning of year
|
|
|
1,476
|
|
|
|
183
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
183
|
|
|
$
|
65
|
|
|
$
|
6,943
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-6
American Railcar Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
New
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Comprehensive
|
|
|
earnings
|
|
|
Preferred
|
|
|
New
|
|
|
Common
|
|
|
|
|
Additional
|
|
|
other
|
|
|
Total
|
|
|
|
income
|
|
|
(accumulated
|
|
|
Stock-
|
|
|
preferred
|
|
|
Stock-
|
|
|
Common
|
|
paid-in
|
|
|
comprehensive
|
|
|
shareholders
|
|
|
|
(loss)
|
|
|
deficit)
|
|
|
Shares
|
|
|
stock
|
|
|
Shares
|
|
|
stock
|
|
capital
|
|
|
loss
|
|
|
equity
|
|
|
|
Balance December 31, 2001
|
|
|
|
|
|
$
|
19,662
|
|
|
|
|
|
|
$
|
|
|
|
|
1,000
|
|
|
$
|
|
|
|
$
|
10,326
|
|
|
$
|
(427
|
)
|
|
$
|
29,561
|
|
Net loss
|
|
$
|
(3,913
|
)
|
|
|
(3,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,913
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of tax effect of $163
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution for expenses relating to pre-
recapitalization liabilities retained by ACF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668
|
|
|
|
|
|
|
|
668
|
|
Dividends on mandatorily redeemable payment-in-kind preferred
stock
|
|
|
|
|
|
|
(7,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
|
|
|
|
8,610
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
10,994
|
|
|
|
(687
|
)
|
|
|
18,917
|
|
Net earnings
|
|
$
|
1,065
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,065
|
|
Currency translation adjustment
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
Minimum pension liability adjustment, net of tax effect of $128
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution for expenses relating to pre-
recapitalization liabilities retained by ACF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
Excess of purchase price over book value related to transfer of
Castings from ACF
|
|
|
|
|
|
|
(4,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,874
|
)
|
Dividends on mandatorily redeemable payment-in-kind preferred
stock
|
|
|
|
|
|
|
(9,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
|
|
|
|
(4,889
|
)
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
11,577
|
|
|
|
(884
|
)
|
|
|
5,804
|
|
Net earnings
|
|
$
|
1,921
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,921
|
|
Currency translation adjustment
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
Minimum pension liability adjustment, net of taxes of $109
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
(13,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,241
|
)
|
Transfer mandatorily redeemable PIK preferred to New Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
95,517
|
|
|
|
95,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,517
|
|
Conversion of PIK Preferred Dividends
|
|
|
|
|
|
|
|
|
|
|
654
|
|
|
|
654
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
102,000
|
|
|
|
102,000
|
|
|
|
|
|
|
|
|
|
|
|
42,500
|
|
|
|
|
|
|
|
144,500
|
|
Net adjustments relating to spin off of ARL (Note 1)
|
|
|
|
|
|
|
|
|
|
|
(86,486
|
)
|
|
|
(86,486
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,148
|
)
|
|
|
|
|
|
|
(100,634
|
)
|
Deemed distribution related to decrease in Castings book value
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Capital contribution for expenses relating to pre-
capitalization liabilities retained by ACF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431
|
|
|
|
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
|
|
|
$
|
(16,959
|
)
|
|
|
111,685
|
|
|
$
|
111,685
|
|
|
|
1,195
|
|
|
$
|
|
|
|
$
|
41,360
|
|
|
$
|
(1,063
|
)
|
|
$
|
135,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-7
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2002, 2003 and 2004
Note 1Description of the Business
The accompanying consolidated financial statements include the
manufacturing and railcar services operations of American
Railcar Industries, Inc. and its wholly owned subsidiaries
(collectively the Company or ARI). As
further described below, the Company purchased Castings, LLC (or
Castings) on January 1, 2005. In accordance
with accounting principles generally accepted in the United
States of America, assets and liabilities transferred between
entities under common control are accounted for at historical
cost in a manner similar to a pooling of interests, and the
financial statements of previously separate companies for
periods prior to the acquisition are restated as if the transfer
occurred at the beginning of the year. The consolidated income
statement and statement of cash flows also include the activity
of Castings for all periods after its formation in June of 2003,
as if it were owned for these periods. All significant
intercompany balances and transactions have been eliminated.
ARI manufactures railcars, custom designed railcar parts for
industrial companies, railroads, and other industrial products,
primarily aluminum and special alloy steel castings, for
non-rail customers. ARI also provides railcar maintenance
services for railcar fleets, including that of its affiliate,
American Railcar Leasing, LLC (ARL). In addition,
ARI provides fleet management and maintenance services for
railcars owned by selected customers. Such services include
inspecting and supervising the maintenance and repair of such
railcars. The Companys operations are located in the
United States and Canada. The Company operates a small railcar
repair facility in Sarnia Ontario Canada. Canadian revenues were
0.7%, 0.5% and 0.5% of total company revenues for 2002, 2003 and
2004, respectively. Canadian assets were 0.5%, 0.5% and 0.3% of
total company assets for 2002, 2003 and 2004, respectively.
ARI was recapitalized on October 1, 1994 when ACF
Industries LLC (ACF), the former holder of
ARIs common stock, transferred to ARI the old common stock
of ARI along with the assets and liabilities of ACFs
railcar maintenance and railcar parts manufacturing businesses.
In exchange, ACF received 57,306 shares of ARIs newly
issued mandatorily redeemable preferred stock. New shares of
ARIs common stock were issued to Carl C. Icahn, Chairman
of the Board of ACF, in exchange for cash of $6.4 million.
In October 1998, ARI redeemed 57,305 shares of the
preferred stock and the remaining share of preferred stock was
transferred to Mr. Icahn.
In 2003, ACF Industries Holding Corp. (ACF Holding),
an affiliate of ARI, formed a wholly-owned subsidiary, Castings.
Castings has a one-third ownership interest in Ohio Castings
Company, LLC (Ohio Castings), a limited liability
company formed to run two foundries which cast railcar
sideframes and bolsters for use or sale by the ownership group.
Starting in the third quarter of 2003, ARI has purchased
bolsters and sideframes produced by Ohio Castings. In June 2005,
ARI completed the purchase of its one-third ownership interest
in Castings from ACF Holding. The transaction was consummated on
January 1, 2005. The cost of the acquisition was
$12.0 million represented by a demand note that the Company
expects to pay in 2005. However, as Castings was owned by an
entity with ownership common to ARI, the investment in
subsidiary is recorded at the date of Castings inception,
June, 2003 at book value. The purchase price is recorded at full
value as a payable to the affiliate and the excess of fair value
over cost, totalling $4.9 million, is presented as a
distribution from equity. Interest is accrued on the note
payable to the affiliate as of January 1, 2005 as that is
the date the purchase was agreed to.
F-8
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
On July 20, 2004, ARI formed ARL, a wholly owned
subsidiary. ARLs primary business is the leasing of
railcars. The subsidiary was capitalized through the issuance of
common and preferred stock. ARIs investment in ARL was
$116.7 million and $151.7 million at December 31, 2004 and
June 30, 2005, respectively. Preferred stock of ARL was
issued to affiliated companies in exchange for contributions of
cash or railcars totaling $102.7 million. In January 2005, ARI
obtained an additional $35 million of ARL common stock resulting
in a carrying value of $151.7 million.
On June 30, 2005, in anticipation of its public offering,
ARI sold its common interest in ARL for $125.0 million to
affiliated companies in return for the preferred stock
investment, valued at $116.1 million, plus accrued dividends of
$8.9 million that those affiliates held in ARI. At
December 31, 2004, ARIs investment in ARL was
$116.7 million. This investment was eliminated as of
December 31, 2004 in order to present ARI on a stand alone
basis. New preferred stock of $86.5 million plus accrued
dividends of $3.5 million were eliminated from ARIs
equity and a charge of $26.7 million was recorded to
additional paid in capital to reflect the difference between the
final transfer price of $125 million and the ultimate
carrying value of ARIs investment in ARL of
$151.7 million. The 2005 financial statements will reflect
a reduction of New Preferred Stock of $29.6 million plus
accrued dividends of $5.4 million to eliminate the
additional investment of $35 million made in that period.
ARI retained no liabilities or other interests in ARL as a
result of this sale. The presentation of ARIs operations
has been prepared on a standalone basis excluding ARLs
operations for all periods, and all transactions giving effect
to ARLs formation have been eliminated from the financial
statements. Any differences related to the amounts originally
capitalized and the amount paid for ARL in the sale have been
recorded through adjustments to shareholders equity,
including certain tax benefits that ARI received as a result of
utilizing ARLs previously incurred tax losses. ARI
recorded a related deferred tax asset of $12.5 million for those
net operating loss carry forwards, as ARI has the legal right to
utilize them for tax purposes.
The following table discloses the preferred stock transactions
and the effect on additional paid in capital for the year ended
December 31, 2004 required to eliminate ARIs
investment in ARL at that time.
|
|
|
|
|
|
|
|
|
|
|
New preferred
|
|
|
Additional
|
|
|
|
stock
|
|
|
paid in capital
|
|
|
|
|
|
(in thousands)
|
|
January 1, 2004
|
|
$
|
|
|
|
$
|
11,577
|
|
New preferred stock issued in exchange for mandatorily
redeemable preferred stock
|
|
|
95,517
|
|
|
|
|
|
Capital contribution
|
|
|
102,654
|
|
|
|
42,500
|
|
Exchange of common interest in ARL for new preferred stock
|
|
|
(86,486
|
)
|
|
|
(26,670
|
)
|
ARL deferred tax assets
|
|
|
|
|
|
|
12,522
|
|
Other
|
|
|
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
111,685
|
|
|
$
|
41,360
|
|
|
|
|
|
|
|
|
F-9
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Note 2Summary of Significant Accounting
Policies
Significant accounting policies are described below.
Revenue recognition
Revenues from railcar sales are recognized following completion
of manufacturing, inspection, customer acceptance and shipment,
which is when title and risk for any damage or loss with respect
to the railcars passes to the customer. In some cases, paint and
lining work may be outsourced and, as a result, the sale will
not be recorded until the railcars are shipped from the
independent contractor and accepted by the customer. Revenues
from railcar and industrial parts and components are recorded at
the time of product shipment, in accordance with our contractual
terms. Revenue for railcar maintenance services are recognized
upon completion and shipment of railcars from our plants. The
Company does not bundle railcar service contracts with new
railcar sales. Revenue for fleet management services are
recognized as performed.
The Company records amounts billed to customers for shipping and
handling as part of sales in accordance with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs,
and
records related costs in cost of sales.
Debt issuance costs
Debt issuance costs are incurred in connection with ARIs
issuance of long-term debt as described in Note 6, and are
amortized over the term of the related debt, utilizing the
effective interest method.
Inventories
Inventories are stated at the lower of average cost or market on
a first-in, first-out basis, and include the cost of materials,
direct labor and manufacturing overhead.
Accounts receivable
The Company carries its accounts receivable at cost, less an
allowance for doubtful accounts. On a periodic basis, the
Company evaluates its account receivable and establishes an
allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions.
Accounts are placed for collection on a limited basis once all
other methods of collection have been exhausted. Once it has
been determined that the customer is no longer in business
and/or refuses to pay, the accounts are written off.
Property, plant and equipment
Land, buildings, machinery and equipment are carried at cost,
including interest on funds borrowed to finance construction.
Maintenance and repair costs are charged directly to earnings.
Tooling is generally capitalized and amortized over a period of
two to five years.
Buildings are depreciated over estimated useful lives that range
from 14 to 50 years. The estimated useful lives of other
depreciable assets, including equipment, vary from 3 to
25 years. Depreciation is calculated on the straight-line
method for financial reporting purposes and on accelerated
methods for tax purposes.
F-10
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Ohio Castings joint venture
The Company uses the equity method to account for its investment
in Ohio Castings, owned by its subsidiary, Castings. Under the
equity method, the Company recognizes its share of the earnings
and losses of the joint venture as they accrue instead of when
they are realized. Advances and distributions are charged and
credited directly to the investment account. Ohio Castings
produces railcar parts that are sold to one of the joint venture
partners. The joint venture partner sells these parts to outside
third parties at current market prices and to the Company and
the other joint venture partner in Ohio Castings at cost plus a
licensing fee. The risk of loss to Castings and the Company is
limited to its investment in Ohio Castings and its one third
share of its guarantee of Ohio Castings debt which was
approximately $3.3 million at December 31, 2004. The
fair market value of the guarantee was approximately
$0.1 million at December 31, 2004.
The cost of railcar manufacturing for the years ended
December 31, 2003 and 2004 included $3.0 million and
$19.9 million, respectively, in products produced by Ohio
Castings.
The carrying amount of the investment in Ohio Castings by
Castings was $6.6 million and $5.3 million at
December 31, 2003 and 2004, respectively. Summary combined
financial information for Ohio Castings, the investee company,
as of and for the 6 months ended December 31, 2003 and as
of for the year ended December 31, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Financial position
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
18,009
|
|
|
$
|
19,111
|
|
|
Property, plant, and equipment, net
|
|
|
12,144
|
|
|
|
14,407
|
|
|
Other assets
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
30,194
|
|
|
|
33,518
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
13,806
|
|
|
|
19,674
|
|
Long-term debt
|
|
|
8,903
|
|
|
|
8,184
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,709
|
|
|
|
27,858
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
7,485
|
|
|
|
5,660
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
14,419
|
|
|
|
76,789
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,793
|
)
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,812
|
)
|
|
$
|
(1,827
|
)
|
|
|
|
|
|
|
|
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
assets may not be recoverable. The criteria for determining
impairment for such long-lived assets to be held and used is
determined by comparing the carrying value of these long-lived
assets to be held and used to managements best estimate of
future undiscounted cash flows expected to result from the use
of the assets. If the assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets. The estimated fair value of the assets is measured by
estimating the present value of the future discounted cash flows
to be generated. An impairment loss in the years
F-11
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
ended December 31, 2002 and 2003 is discussed in
Note 5. No impairment losses have been recorded in the year
ended December 31, 2004.
Pension plans and other postretirement benefits
Certain ARI employees participate in noncontributory, defined
benefit pension plans and a supplemental executive retirement
plan. Benefits for the salaried employees are based on salary
and years of service, while those for hourly employees are based
on negotiated rates and years of service.
ARI also participates in defined contribution retirement plans,
health care and life insurance plans sponsored by a related
party covering certain employees. Benefit costs are accrued
during the years the employees render service.
Income taxes
ARI accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial reporting basis and the tax
basis of ARIs assets and liabilities at enacted tax rates
expected to be in effect when such amounts are recovered or
settled. ARI files a tax return separate from other members of
the controlled group.
Statement of cash flows
For the purpose of the consolidated statement of cash flows, ARI
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. Until October 2004, ACF received the majority of
ARIs cash receipts and disbursed ARIs cash on behalf
of ARI, and maintained an intercompany receivable/payable which
bore interest at ACFs internal cost of funds in accordance
with an administration agreement between ARI and ACF, which is
described in Note 10. Since October 2004, ARI maintains its
own cash balances.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, amounts due to/from affiliates and accounts payable
approximate fair values because of the short-term maturity of
these instruments. The fair value of long-term debt is discussed
in Note 6. The fair value of the note receivable from ACF,
which is carried at face amount plus accrued interest, could not
reasonably be estimated due to the lack of market for similar
instruments. Fair value estimates are made at a specific point
in time, based on relevant market information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision.
Foreign currency translation
Balance sheet amounts from our Canadian operation are translated
at the exchange rates in effect at year-end, and operations
statement amounts are translated at the average rates of
exchange prevailing during the year. Currency translation
adjustments are included in Shareholders Equity.
F-12
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources.
Comprehensive income (loss) consists of net earnings (loss),
foreign currency translation adjustment and the Companys
minimum pension liability adjustment, which is shown net of tax.
Retained earnings
As ARI and ACF are entities under common control, accounting
principles generally accepted in the United States of America
require that ARIs initial carrying value of assets
transferred to it from ACF and the purchase of Castings be equal
to ACFs historical net book value at the time of transfer.
The excess of the fair value paid over the net book value of
assets and liabilities transferred to ARI is reflected as a
distribution of retained earnings and has the effect of reducing
shareholders equity by $24.1 million as of
December 31, 2003 and 2004. Of that amount,
$19.2 million was recorded at the formation of ARI, and
$4.9 million was recorded in 2003 from the acquisition of
Castings.
Basic earnings (loss) per share are calculated as net
earnings (loss) attributable to common shareholders divided by
the weighted-average number of common shares outstanding during
the respective period. Diluted earnings (loss) per share are
calculated by dividing net earnings (loss) attributable to
common shareholders by the weighted-average number of shares
outstanding plus dilutive potential common shares outstanding
during the year.
As of the years ended December 31, 2002 and 2003, 1,000
common shares were issued and outstanding. As indicated in Note
13, an additional 195 common shares were issued in 2004 in
connection with the capital contribution received from Hopper
Investments.
Use of estimates
Management of ARI has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of
America. Significant items subject to estimates and assumptions
include deferred taxes, workers compensation accrual, valuation
allowances for accounts receivable and inventory obsolescence,
valuation of property, plant and equipment, and the reserve for
warranty claims. Actual results could differ from those
estimates.
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. (FIN)
46,
Consolidation of Variable Interest Entities
, which
was later amended on December 24, 2003
(FIN 46R). FIN 46R explains how to
identify variable interest entities and how an enterprise
assesses its interest in a variable interest entity to decide
whether to consolidate that entity. FIN 46R requires
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries. The provisions of FIN 46R are
generally effective for periods after December 31, 2003.
The adoption of this pronouncement has not had a material effect
on the Company.
In May 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity
, (SFAS 150), which
establishes standards for how companies classify and measure
certain financial
F-13
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
instruments with characteristics of both liabilities and equity.
It requires companies to classify a financial instrument that is
within its scope as a liability (or an asset in some
circumstances). ARI re-classified the mandatorily redeemable
payment-in-kind preferred stock (see Note 12) as a
liability in accordance with SFAS 150 in 2003.
In November 2004, the FASB issued SFAS No. 151,
Inventory CostsAn Amendment of ARB No. 43
,
Chapter 4
, which requires the recognition of costs
of idle facilities, excessive spoilage, double freight, and
rehandling costs as a component of current-period expenses. The
provisions of SFAS No. 151 are effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. Since the Company produces railcars based upon specific
customer orders, management does not expect the provisions of
SFAS No. 151 to have a material impact on the
Companys financial statements.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payments.
SFAS No. 123R is a
revision of SFAS No. 123,
Accounting for Stock
Based Compensation,
and supersedes APB 25. Among other
items, SFAS 123R eliminates the use of Accounting
Principles Board (APB) 25 and the intrinsic
value method of accounting, and requires companies to recognize
the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those
awards, in the consolidated financial statements. The effective
date of SFAS 123R is the first quarter of the
Companys year ending December 31, 2006.
In March 2005, the FASB issued FIN 47 as an interpretation
of FASB Statement 143,
Accounting for Asset Retirement
Obligations
(FASB 143). This interpretation
clarifies that the term conditional asset retirement obligation
as used in FASB 143 and refers to a legal obligation to
perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. The obligation
to perform the asset retirement activity is unconditional even
though uncertainty exists about the timing and/or method of
settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
estimated. This interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the
fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after
December 15, 2005. The Company believes that the adoption
of FIN 47 will not have a material effect on the Company.
On June 1, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3
SFAS 154. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements
for accounting for and reporting of a change in accounting
principle. The Company will adopt SFAS 154 at
December 31, 2005 and does not anticipate any material
change to its operating results as a result of this adoption.
F-14
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Note 3Accounts Receivable
The allowance for doubtful accounts consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
482
|
|
|
$
|
522
|
|
|
$
|
572
|
|
|
Bad debt expense
|
|
|
159
|
|
|
|
254
|
|
|
|
209
|
|
|
Accounts written off
|
|
|
(167
|
)
|
|
|
(279
|
)
|
|
|
(271
|
)
|
|
Recoveries
|
|
|
48
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
522
|
|
|
$
|
572
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
Note 4Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
18,341
|
|
|
$
|
39,655
|
|
Work-in-process
|
|
|
20,710
|
|
|
|
25,515
|
|
Finished products
|
|
|
8,466
|
|
|
|
11,434
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
47,517
|
|
|
$
|
76,604
|
|
Less reserves
|
|
|
2,310
|
|
|
|
2,679
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
45,207
|
|
|
$
|
73,925
|
|
|
|
|
|
|
|
|
Inventory reserves consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
948
|
|
|
$
|
1,670
|
|
|
$
|
2,310
|
|
|
Provision
|
|
|
990
|
|
|
|
762
|
|
|
|
559
|
|
|
Write off
|
|
|
(268
|
)
|
|
|
(122
|
)
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,670
|
|
|
$
|
2,310
|
|
|
$
|
2,679
|
|
|
|
|
|
|
|
|
|
|
|
Note 5Long-Lived Asset Impairment and Other
Charges
The Company reduced the carrying value of building improvements
and equipment by $0.2 million and $0.8 million in 2002
and 2003, for one of its car repair plants which is reflected in
the consolidated statement of operations in the costs of railcar
services. The scope of work performed at this facility was
reduced due the economic slow-down. As a result, an impairment
charge was recorded for equipment that was no longer in use. The
facility was idled in 2003.
F-15
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Note 6Long-Term Debt
Long-term debt at December 31, 2003 and 2004 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
(in thousands)
|
|
Senior secured credit facilities, secured by all the assets of
ARI, and guaranteed by ACF, ACFs parent, NMI Holding
Corp., and ACF Holding, bearing interest at variable rates based
on LIBOR(1), payable in installments through the year 2005
|
|
$
|
28,984
|
|
|
$
|
|
|
Industrial revenue bonds secured by certain buildings and
manufacturing equipment and guaranteed by ACF and ACF Holding,
with effective interest rates ranging from 6.75% to 8.5%,
principal amounts due through the year 2011
|
|
|
10,770
|
|
|
|
9,600
|
|
Subordinated note secured by all the assets of ARI and
guaranteed by ACF and ACF Holding, bearing interest at variable
rates based on LIBOR(1), payable in 2006
|
|
|
10,000
|
|
|
|
|
|
Other
|
|
|
319
|
|
|
|
251
|
|
|
|
|
|
|
|
|
Total long-term debt, including current portion
|
|
|
50,073
|
|
|
|
9,851
|
|
Less current portion of debt
|
|
|
14,738
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
35,335
|
|
|
$
|
8,517
|
|
|
|
|
|
|
|
|
|
|
(1)
|
LIBOR was 1.1% at December 31, 2003, and 2.3% at
December 31, 2004.
|
Aggregate maturities of long-term debt over the next five years,
as of December 31, 2004, are as follows (in thousands):
|
|
|
|
|
2005
|
|
$
|
1,334
|
|
2006
|
|
|
1,441
|
|
2007
|
|
|
1,573
|
|
2008
|
|
|
1,613
|
|
2009 and thereafter
|
|
|
3,890
|
|
The senior secured credit facilities were issued for
$120.0 million in 1998. Prior to termination of the
revolver in June 2002, the credit facilities provided for an
additional $30.0 million revolving credit facility. There
were no amounts drawn on the revolving credit facility prior to
its termination in June 2002. Debt covenants require ARI to
maintain certain debt-to-earnings and coverage ratios with which
ARI was in compliance at December 31, 2003 and 2004. The
Company repaid $15.8 million, $17.7 million and
$29.0 million of the senior secured credit facilities in
2002, 2003 and 2004, respectively. On July 20, 2004, ARI
repaid in full a $10.0 million subordinated note. In
addition, the company repaid industrial revenue bonds of
$1.0 million, $1.2 million and $1.2 million in
2002, 2003 and 2004, respectively.
The fair value of long-term debt was approximately
$50.1 million and $9.9 million at December 31,
2003 and 2004, respectively, as calculated by discounting cash
flows through maturity using ARIs current rate of
borrowing for similar liabilities.
F-16
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Note 7Income Taxes
Income tax expense (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
388
|
|
|
$
|
172
|
|
|
$
|
332
|
|
|
State and local
|
|
|
61
|
|
|
|
27
|
|
|
|
46
|
|
|
Foreign
|
|
|
6
|
|
|
|
(23
|
)
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
455
|
|
|
|
176
|
|
|
|
449
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,092
|
)
|
|
|
833
|
|
|
|
1,504
|
|
|
State and local
|
|
|
(332
|
)
|
|
|
136
|
|
|
|
239
|
|
|
Foreign
|
|
|
75
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(2,349
|
)
|
|
|
963
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,894
|
)
|
|
$
|
1,139
|
|
|
$
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to earnings (loss)
from operations differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% to earnings (loss)
from operations by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
(in thousands)
|
|
Computed income tax expense (benefit)
|
|
$
|
(2,032
|
)
|
|
$
|
771
|
|
|
$
|
1,439
|
|
State and local taxes, net of federal tax benefit
|
|
|
(176
|
)
|
|
|
106
|
|
|
|
185
|
|
Non-deductible expenses
|
|
|
297
|
|
|
|
267
|
|
|
|
566
|
|
Other
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,894
|
)
|
|
$
|
1,139
|
|
|
$
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
Computed income tax expense (benefit)
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
|
(3.0
|
)
|
|
|
4.8
|
|
|
|
4.5
|
|
Non-deductible expenses
|
|
|
5.1
|
|
|
|
12.1
|
|
|
|
13.8
|
|
Other
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(32.6
|
)%
|
|
|
51.7
|
%
|
|
|
53.3
|
%
|
|
|
|
|
|
|
|
|
|
|
F-17
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
The tax effects of temporary differences that have given rise to
deferred tax assets and liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Current deferred taxes
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
Provisions not currently deductible
|
|
|
1,423
|
|
|
$
|
2,065
|
|
Non-current deferred taxes
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
Provisions not currently deductible
|
|
|
786
|
|
|
|
627
|
|
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
10,144
|
|
|
|
Pensions and post retirement
|
|
|
1,953
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
2,739
|
|
|
|
12,211
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
12,322
|
|
|
|
11,548
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax (liability) asset-net
|
|
|
(9,583
|
)
|
|
|
663
|
|
|
|
|
|
|
|
|
Total deferred tax (liability) asset
|
|
$
|
(8,160
|
)
|
|
$
|
2,728
|
|
|
|
|
|
|
|
|
The net deferred tax liability is classified in the balance
sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Deferred tax current asset
|
|
$
|
1,423
|
|
|
$
|
2,065
|
|
Deferred tax non-current (liability) asset
|
|
$
|
(9,583
|
)
|
|
$
|
663
|
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset
|
|
$
|
(8,160
|
)
|
|
$
|
2,728
|
|
|
|
|
|
|
|
|
In the consolidated balance sheets, these deferred tax assets
and liabilities are classified as either current or non-current
based on the classification of the related liability or asset
for financial reporting. A deferred tax asset or liability that
is not related to an asset or liability for financial reporting,
including deferred taxes related to carryforwards, is classified
according to the expected reversal date of the temporary
differences as of the end of the year. 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. No
valuation allowances have been recorded at December 31,
2003 and 2004 as management believes that it is more likely than
not that all deferred tax assets will be fully realized based on
the expectation of taxable income in future years. At
December 31, 2004, the Company had net operating loss
carry-forwards of $26 million which begin to expire in 2024.
Note 8Warranties
The Company records a liability for an estimate of costs that it
expects to incur under its basic limited warranty when
manufacturing revenue is recognized. Factors affecting the
Companys warranty liability include the number of units
sold and historical and anticipated rates of claims and costs
per claim. The Company periodically assesses the adequacy of its
warranty liability based on changes in these factors.
F-18
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Changes in the Companys warranty reserve, which is
reflected on the balance sheet in accrued expenses, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Liability, beginning of year
|
|
$
|
434
|
|
|
$
|
1,048
|
|
|
$
|
1,436
|
|
|
Expense for new warranties issued
|
|
|
924
|
|
|
|
893
|
|
|
|
114
|
|
|
Warranty claims
|
|
|
(310
|
)
|
|
|
(505
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
Liability, end of year
|
|
$
|
1,048
|
|
|
$
|
1,436
|
|
|
$
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
Note 9Stock Options
In 1994, the Company entered into an agreement with
Mr. Unger, currently its chief executive officer, which
provided that Mr. Unger shall be granted an option to
purchase 2.0% of the outstanding common shares of ARI at a price
equal to 2.0% of the common equity contribution by
Carl C. Icahn (ARIs chairman of the board and a
principal stockholder) at the formation of ARI. The agreement
provided that this option shall be exercisable at the time of
ARIs initial public offering, and should ARI be sold to
parties other than in a public offering, Mr. Unger shall
receive 2.0% of the sales price, net of the preferred interest
established at the formation of ARI, and net of the contribution
for common stock. The agreement further provided that the above
options and or rights shall remain in effect as long as
Mr. Unger is employed by ARI. Compensation expense under
this arrangement would be recognized when the contingency is met
at the effective date of a public offering or the completion of
a sale.
Note 10Related Party Transactions
As part of the 1994 recapitalization described in Note 1,
ACF has retained certain liabilities existing as of the
recapitalization date, including employee benefits, workers
compensation, litigation, environmental and others. If ACF were
unable to honor or meet these obligations, ARI would be
responsible for such liabilities. In the opinion of management,
ACF has the present ability to meet these obligations. This
liability totaled approximately $10.0 million and
$11.1 million at December 31, 2003 and 2004
respectively, consisting primarily of pension and postretirement
liabilities.
In connection with the 1994 ACF asset transfer, the Company
entered into the following administrative and operating
agreements with ACF, effective as of October 1, 1994:
Manufacturing services agreement
Under the manufacturing services agreement, ACF agreed to
manufacture and distribute, at the Companys instruction,
various products using certain assets that the Company acquired
pursuant to the 1994 ACF asset transfer agreement. In
consideration for these services, the Company agreed to pay ACF
based on agreed upon rates. Components supplied to ARI by ACF
include tank railcar heads, wheel sets and various structural
components. In the years ended December 31, 2002, 2003 and
2004, ARI purchased inventory of $15.7 million,
$19.0 million and $31.3 million, respectively, of
components from ACF. The agreement automatically renews unless
written notice is provided by the Company.
F-19
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Administration Agreement
Under this agreement, ACF agreed to provide the Company with
office facilities and administrative services, primarily
information technology services. In exchange for the facilities
and services, the Company agreed to pay ACF based on agreed upon
rates. Management believes that these allocation methods are
reasonable for the relevant costs. Total amounts incurred under
this agreement totaled $0.8 million, $0.8 million and
$0.8 million at December 31, 2002, 2003, and 2004,
respectively.
Until October 2004, ACF received the majority of ARIs cash
receipts and disbursed cash on its behalf. ARI maintained a
receivable/payable from affiliates bearing interest at
ACFs internal cost of funds in accordance with this
agreement.
At the time of ARIs formation in 1994, when this
Administrative Agreement was entered into, ARI and ACF
contemplated that ARI would generally need funds to build its
facilities, acquire assets and provide for working capital
needs. ACF has provided financing to ARI and ARI has repaid
these amounts through an affiliate account based on ARIs
cash flow needs from month to month. ARI has classified its
relations with ACF through its affiliate account as financing
activities on the accompanying statements of cash flows. From
time to time this account has had a due from balance but ARI
does not believe that this changes the basic nature of the
financing relationship.
Included in amounts due to affiliates was a payable to ACF of
$4.0 million as of December 31, 2003. As of
December 31, 2004, amounts due to affiliates included
$22.2 million in payables to ACF and ARL.
Railcar Servicing Agreement
Under this agreement, the Company agreed to provide ACF with
railcar repair and maintenance services, fleet management
services and consulting services on safety and environmental
matters for railcars owned or managed by ACF. ACF agreed to
compensate the Company based on agreed upon rates. Revenue
recorded under this arrangement totaled $12.8 million,
$11.0 million and $18.2 million at December 31,
2002, 2003, and 2004, respectively and is included under revenue
from affiliates on the statement of operations.
Supply Agreement
Under this agreement, we agreed to manufacture and sell to ACF
specified components at cost plus mark-up or on terms not less
favorable than the terms on which the Company sold the same
products to third parties. Revenue recorded under this
arrangement totaled $1.4 million, $0.9 million and
$0.7 million at December 31, 2002, 2003, and 2004,
respectively and is included under revenue from affiliates on
the statement of operations.
In 2004, the Company entered into the following agreements with
ARL and its subsidiaries:
|
|
|
Railcar Management Agreements with ARI First LLC and ARI
Third LLC
|
|
Under this agreement, the Company provided ARI First and
ARI Third with marketing, leasing, administration,
maintenance, record keeping and insurance services for railcars
owned by ARI First and ARI Third. In exchange for
these services ARI First and ARI Third paid the
Company a management fee which totaled $1.2 million for the
year ended December 31, 2004 which is included under
revenue from affiliates on the statement of operations.
|
F-20
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
|
|
|
ACF Administration Agreement
|
|
The ACF Administration agreement was entered into with ACF
and ARL. Under the agreement, ACF agreed to provide certain
management services which were required under the railcar
management agreement wit ARI First and ARI Third
described above. Fees paid to ACF under this agreement were
equal to the fees the Company charged to ARI First and
Third under the railcar management agreement and totaled
$1.2 million for the year ended December 31, 2004
which is included under revenue from affiliates on the statement
of operations.
|
These two arrangements were terminated on June 30, 2005,
when ARI assigned its management agreements for ARI First LLC
and ARI Third LLC to ARL.
Cost of railcar manufacturing for the years ended
December 31, 2003 and 2004 includes $3.0 million and
$19.9 million, respectively, in railcar products produced
by Ohio Castings, which is partially owned by Castings, as
described in Note 1. Expenses of $0.4 million and
$3.2 million paid to Castings under a supply agreement is
included in the cost of railcar manufacturing for the years
ended December 31, 2003 and 2004, respectively. ARI also
has been charged $0.2 million in the year ending
December 31, 2003 relating to certain costs incurred by
Castings in the establishment of Ohio Castings. Inventory at
December 31, 2003 and 2004 includes approximately
$0.3 million and $5.3 million, respectively, of
purchases from Ohio Castings.
In September 2003, Castings loaned Ohio Castings
$3.0 million under a promissory note which was due January
2004. The note was renegotiated for $2.2 million and bears
interest at 4.0% with payments made in quarterly installments
with the last payment due in November 2008.
ARIs employees participate in ACFs noncontributory,
defined benefit pension plans and other postretirement health
care and life insurance plans. As part of ARIs
recapitalization, ACF retained the liabilities for unfunded
pension and other postretirement liabilities and workers
compensation liabilities as of October 1, 1994 for
employees who transferred from ACF to ARI at that date and for
environmental liabilities as of that date. Although ACF is
responsible for any costs associated with the liabilities at the
recapitalization date, related expenses which have accrued since
the recapitalization have been reflected in ARIs financial
statements in order to reflect the full cost of doing business.
Expenses that ACF pays relating to pre-recapitalization
liabilities are recorded as capital contributions and appear as
additional paid-in capital on ARIs balance sheet. ARI
recorded total expenses relating to benefits and environmental
liabilities of $2.8 million, $2.8 million and
$4.0 million in the years ended December 31, 2002,
2003 and 2004, respectively. Included in these total expenses
were $0.7 million, $0.6 million and $1.4 million
in 2002, 2003 and 2004, respectively, which related to
pre-recapitalization liabilities retained by ACF and are
reflected as additional paid-in capital.
In October 1998, ARI advanced $57.2 million to ACF under a
promissory note secured by the stock of an affiliate.
$14.9 million of the note was assigned to an affiliate,
with the remaining $42.3 million of the note repaid in
October 2004. The Company recorded interest income on this note
of $2.8 million, $2.5 million and $1.8 million in
the years ended December 31, 2002, 2003 and 2004,
respectively. Accrued interest was $0.4 million as of
December 31, 2003.
In 2001, ARI entered into a derivative instrument in the form of
an interest rate swap contract with an underlying initial
notional amount of $49.0 million, terminating in February
2005. Concurrent with the execution of this swap agreement, ARI
assigned its rights and obligations under this contract to ACF.
ARI includes the fair value of the contract as a liability on
its balance sheet, with an equal amount included in amounts due
from ACF to reflect the assignment of the contract. The fair
value of the contract was $2.7 million, $1.5 million
and $0.1 million at December 31, 2002, 2003 and 2004,
F-21
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
respectively. Interest expense is not reflected in ARIs
results of operations due to ACFs assumption of the
contract.
ACF and ACF Holding have guaranteed the Companys
obligations under the industrial revenue bonds as described in
Note 6. In addition, ACF and ACF Holding provided
guarantees under the senior secured credit facility and
the subordinated note, also described in Note 6. The senior
secured credit facility and the subordinated note were both
repaid in July 2004.
During 2004, ARI advanced $165.0 million to Mr. Icahn
under a secured note due in 2007 and bearing interest at prime
plus
1
3
/
4
%.
Accrued interest was paid in full as of December 31, 2004.
Interest income on the note was $2.0 million for the year
ended December 31, 2004. As further discussed in
Note 17, ARI transferred its interest in the note
receivable to an affiliate on January 26, 2005.
During 2004, ARL advanced $130.0 million to ARI under a
note due in 2007 and bearing interest at prime plus
1
1
/
2
%.
Accrued interest was paid in full as of December 31, 2004.
Interest expense on the note was $1.5 million for the year
ended December 31, 2004. As further discussed in
Note 17, this note was fully satisfied on January 26,
2005.
On December 17, 2004, ARI borrowed $7.0 million under
a note payable to Arnos Corp., an affiliate. The note bears
interest at prime plus
1
3
/
4
%
and is payable on demand.
We have been advised that affiliates of Mr. Icahn are
currently negotiating with the Foundation for a Greater
Opportunity, or the Foundation, our other significant beneficial
stockholder, to enter into an agreement to acquire all of our
common stock held by the Foundation. The consummation of this
acquisition of our common stock would require the approval of
applicable authorities of the State of New York. If the parties
obtain this approval, we have been advised that the parties
expect that the purchase would be completed in the first three
months of 2006. As a result of these contemplated arrangements,
we expect that Mr. Icahn will continue to control a
majority of the voting power of our capital stock following the
offering. As a result, Mr. Icahn is, and will be, able to
exert substantial influence over us, elect our directors and
control most matters requiring board or shareholder approval.
Note 11Pension Plans
ARI is the sponsor of two defined benefit plans that cover
certain executives and employees at certain of its manufacturing
facilities. ARI uses a measurement date of October 1 for
all of its employee benefit plans. The plans assets are
held by independent trustees and consist primarily of equity and
fixed income securities.
Costs of benefits relating to current service for those
employees to whom the Company is responsible to provide benefits
are expensed currently. Pension expense for the year ended
December 31, 2004 includes a $0.1 million curtailment
gain caused by the elimination of future benefit accruals for
service credit for salaried employees as of April 1, 2004
and a reduction in service hours for hourly employees at one
plant location. The changes in benefit obligation, change in
plan assets, funded status and
F-22
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
weighted average assumptions as of December 31, 2003 and
2004, and components of net periodic benefit cost for the years
ended December 31, 2002, 2003 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
2,678
|
|
|
$
|
3,148
|
|
Service cost
|
|
|
127
|
|
|
|
34
|
|
Interest cost
|
|
|
173
|
|
|
|
188
|
|
Plan Amendments
|
|
|
|
|
|
|
(7
|
)
|
Actuarial loss
|
|
|
180
|
|
|
|
29
|
|
Benefits paid
|
|
|
(10
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
3,148
|
|
|
$
|
3,378
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
1,377
|
|
|
$
|
1,574
|
|
Actual return on plan assets
|
|
|
59
|
|
|
|
(92
|
)
|
Employer contributions
|
|
|
148
|
|
|
|
308
|
|
Benefits paid
|
|
|
(10
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
1,574
|
|
|
$
|
1,776
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets
|
|
$
|
(1,574
|
)
|
|
$
|
(1,602
|
)
|
Unrecognized prior service cost
|
|
|
(59
|
)
|
|
|
(7
|
)
|
Unrecognized net loss
|
|
|
1,584
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(49
|
)
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Amounts recognized in the balance sheets
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(2,145
|
)
|
|
$
|
(2,450
|
)
|
Prepaid pension
|
|
|
622
|
|
|
|
848
|
|
Other comprehensive income
|
|
|
909
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(614
|
)
|
|
$
|
(500
|
)
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $3.1 million and $3.4 million at
December 31, 2003 and 2004, respectively.
F-23
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
114
|
|
|
$
|
126
|
|
|
$
|
34
|
|
Interest cost
|
|
|
157
|
|
|
|
173
|
|
|
|
188
|
|
Expected return on plan assets
|
|
|
64
|
|
|
|
(58
|
)
|
|
|
92
|
|
Deferred asset gain
|
|
|
(182
|
)
|
|
|
(90
|
)
|
|
|
(236
|
)
|
Amortization of unrecognized prior service cost from plan
amendments
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
Amortization of net loss
|
|
|
28
|
|
|
|
49
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
172
|
|
|
$
|
191
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
Additional information
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
(in thousands)
|
|
Increase in minimum liability (pre-tax)
|
|
$
|
336
|
|
|
$
|
302
|
|
Weighted-average assumptions used to determine benefit
obligations at December 31
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
5.00
|
%
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for years ended
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Expected long-term return on plan assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
N/A
|
|
F-24
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
The Companys pension plan weighted-average asset
allocations by asset category at
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
51
|
%
|
|
|
68
|
%
|
Debt securities
|
|
|
49
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
The objective of the pension plan investment policy is to grow
assets in relation to liabilities, while prudently managing the
risk of a decrease in the pension plans assets. The
pension plan management committee has established a target
investment mix with upper and lower limits for investments in
equities, fixed-income and other appropriate investments. Assets
will be re-allocated among asset classes from time-to-time to
maintain the target investment mix. The committee has
established a target investment mix of 65% equities and 35%
fixed-income for the plan.
The expected return on plan assets is based on our asset
allocation mix and our historical return, taking into account
current and expected market conditions.
The Companys policy with respect to funding the qualified
plans is to fund at least the minimum required by the Employee
Retirement Income Security Act of 1974, as amended, and not more
than the maximum amount deductible for tax purposes. ARI does
not currently have minimum funding requirements, as set forth in
employee benefit and tax laws. All contributions made to the
funded pension plans for 2003 and 2004 were voluntary and were
made with cash generated from operations.
The Company also maintains qualified defined contribution plans
which provide benefits to their employees based on employee
contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these
plans were $0.5 million, $0.5 million, and
$0.7 million for the years ended December 31, 2002,
2003, and 2004, respectively. Selected ARI salaried employees
participated in the ACF Industries, Inc. Savings and Investment
Plan, and the expense is included above.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
As of 12/31/04
|
|
|
|
|
|
(in thousands)
|
|
2005
|
|
$
|
20
|
|
2006
|
|
|
23
|
|
2007
|
|
|
23
|
|
2008
|
|
|
106
|
|
2009
|
|
|
139
|
|
2010-2014
|
|
|
791
|
|
ARI is currently a member of a controlled group that includes
ACF, an entity in which Mr. Icahn has an indirect ownership
of at least 80%. ACF is the sponsor of several pension plans
that are underfunded, as of December 31, 2004, by a total
of approximately $24.1 million on an ongoing actuarial
basis and $172.4 million if those plans were terminated, as
most recently reported by the plans actuaries. The
liabilities could increase or decrease, depending on a number of
factors, including future changes in promised benefits,
investment returns and the assumptions used to calculate the
F-25
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
liability. As members of the controlled group, ARI would be
jointly and severally liable for any failure of ACF to pay the
unfunded liabilities upon a termination of the ACF pension
plans. Upon completion of this offering, ARI believes that it
should no longer be a member of the ACF controlled group. As a
result, ARI should no longer be subject to ACFs pension
liabilities, unless it were determined that ARI was otherwise a
member of the ACF controlled group or that a principal purpose
of the offering or other transactions that resulted in
ARIs ceasing to be a member of the ACF controlled group
was to evade pension liabilities and the termination date of the
underfunded plan was within five years after the offering or
other transactions. If such a determination were made and upheld
by a court, ARI could remain jointly and severally liable for
pension plan obligations of ACF, which could have a material
adverse effect on ARIs financial condition and results of
operations.
ARI employees are participants in the ACF Retirement Plan and
the ACF Shippers Hourly Plan, both of which are sponsored by
ACF. At October 1, 2003 and 2004, these plans had actuarial
liabilities in excess of assets. Presented below are the assets
and liabilities of those plans, and the liabilities attributed
to ARI participants.
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
ACF
|
|
|
Shippers
|
|
|
|
Retirement Plan
|
|
|
Hourly Plan
|
|
|
|
|
|
(in millions)
|
|
Projected benefit obligation(a)
|
|
$
|
110.4
|
|
|
$
|
11.2
|
|
Assets at fair value
|
|
|
61.4
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
Underfunded status
|
|
$
|
(49.0
|
)
|
|
$
|
(3.7
|
)
|
|
(a) Amount attributed to ARI
participants
|
|
$
|
9.1
|
|
|
$
|
1.9
|
|
Percentage of total
liabilities
|
|
|
8
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
ACF
|
|
|
Shippers
|
|
|
|
Retirement Plan
|
|
|
Hourly Plan
|
|
|
|
|
|
(in millions)
|
|
Projected benefit obligation(a)
|
|
$
|
107.4
|
|
|
$
|
11.5
|
|
Assets at fair value
|
|
|
62.7
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
Underfunded status
|
|
$
|
(44.7
|
)
|
|
$
|
(3.5
|
)
|
|
(a) Amount attributed to ARI
participants
|
|
$
|
8.8
|
|
|
$
|
2.0
|
|
Percentage of total
liabilities
|
|
|
8
|
%
|
|
|
18
|
%
|
Note 12Commitments and Contingencies
As of December 31, 2004, future minimum rental payments
required under noncancellable operating leases for property and
equipment leased by the Company with lease terms longer than one
year are as follows:
|
|
|
|
|
|
|
(in
|
|
|
|
thousands)
|
|
2005
|
|
$
|
5,355
|
|
2006
|
|
|
1,696
|
|
2007
|
|
|
1,656
|
|
2008
|
|
|
168
|
|
2009
|
|
|
135
|
|
2010 and after
|
|
|
66
|
|
F-26
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
The Company leases certain facilities from an entity owned by
its Chief Executive Officer, certain affiliates of ARI and third
parties. Total rent expense on leases were approximately
$5.4 million, $5.8 million and $6.6 million for
the years ended December 31, 2002, 2003 and 2004,
respectively. Expenses to related parties included in the
amounts above were $0.8 million, annually for the years
ended December 31, 2002, 2003 and 2004.
In connection with Trans World Airlines, Inc.s (TWA) 1992
bankruptcy proceedings under Chapter 11 of the Bankruptcy Code,
the Pension Benefit Guarantee Corporation (PBGC)
asserted that ACF as well as the other entities in which Mr.
Icahn had a controlling interest were obligated along with TWA
to satisfy any underfunding of TWAs defined benefit plan.
Subsequently, and in response to a petition of another member of
the Icahn control group, the PBGC terminated the TWA pension
plan and obligated an affiliate of ARI, Highcrest Investors Corp
(Highcrest) to make eight annual payments of $30 million
each commencing on July 1, 2002 and totaling
$240 million (termination payments). As of
December 31, 2004, Highcrest had made termination payments
totaling $130 million and still owed $110 million on
this obligation. The obligation to make termination payments is
non-recourse except to the common stock of ACF Holding (another
member of the control group). While ARI is a controlled entity
of Mr. Icahn, management believes this obligation will have no
adverse effect on the future liquidity, results of operations,
or financial position of ARI.
The Company is subject to comprehensive federal, state, local
and international environmental laws and regulations relating to
the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or
disposal of hazardous materials and wastes, or otherwise
relating to the protection of human health and the environment.
These laws and regulations not only expose ARI to liability for
the environmental condition of its current or formerly owned or
operated facilities, and its own negligent acts, but also may
expose ARI to liability for the conduct of others or for
ARIs actions that were in compliance with all applicable
laws at the time these actions were taken. In addition, these
laws may require significant expenditures to achieve compliance,
and are frequently modified or revised to impose new
obligations. Civil and criminal fines and penalties and other
sanctions may be imposed for non-compliance with these
environmental laws and regulations. ARIs operations that
involve hazardous materials also raise potential risks of
liability under common law. ARI is involved in investigation and
remediation activities at properties that it now owns or leases
to address historical contamination and potential contamination
by third parties. The Company is also involved with state
agencies in the cleanup of two sites under these laws. These
investigations are at a preliminary stage, and it is impossible
to estimate, with any certainty, the timing and extent of
remedial actions that may be required, and the costs that would
be involved in such remediation. Substantially all of the issues
identified relate to the use of the properties prior to their
transfer to ARI in 1994 by ACF and for which ACF has retained
liability for environmental contamination that may have existed
at the time of transfer to ARI. ACF has also agreed to indemnify
ARI for any cost that might be incurred with those existing
issues. However, if ACF fails to honor its obligations to ARI,
ARI would be responsible for the cost of such remediation. The
Company believes that its operations and facilities are in
substantial compliance with applicable laws and regulations and
that any noncompliance is not likely to have a material adverse
effect on its operations or financial condition.
When it is possible to make a reasonable estimate of the
liability with respect to such a matter, a provision will be
made as appropriate. Actual cost to be incurred in future
periods may vary from these estimates. Based on facts presently
known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future
liquidity, results of operations or financial position.
F-27
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against ARI.
Management believes that all such claims, suits, and complaints
arising in the ordinary course of business have been properly
reported and reflected in Companys financial statements.
The Company believes that the settlement of these claims would
not have a significant effect on the future liquidity, results
of operations or financial position of ARI.
ARI is a party to collective bargaining agreements with labor
unions at its Longview, Texas and North Kansas City, Missouri
repair facilities and at its Longview, Texas steel foundry and
components manufacturing facility. These agreements expire in
January 2008, September 2007, and April 2008, respectively. ARI
is also party to a collective bargaining agreement at our
Milton, Pennsylvania repair facility, which expired on
June 19, 2005. At the present time, there are no workers at
Milton, as the site is idled.
Note 13Mandatorily Redeemable Payment-in-Kind
Preferred Stock, New Preferred Stock and Shareholders
Equity
In January 2001, ARI issued to ACF 15,000 shares of a new
class of mandatorily redeemable payment-in-kind preferred stock
(PIK Preferred Stock) in exchange for
$15.0 million in cash. In November 2001, ACF sold these
15,000 shares to an affiliated entity, Vegas Financial
Corp. (Vegas) for $15.0 million plus accrued
dividends of $1.6 million. The PIK Preferred Stock is
redeemable within 30 days after the full repayment of
amounts outstanding under the senior secured credit facilities,
but no earlier than February 1, 2006. The PIK Preferred
Stock provides for cumulative dividends at 12.5% per year
on the liquidation price of $1,000 per share, payable in
the form of additional shares of PIK Preferred Stock.
In 2001, 2002 and 2003, ARI issued additional shares of PIK
Preferred Stock to Vegas in exchange for cash. In August 2001,
ARI issued to Vegas 30,000 shares of PIK Preferred Stock in
exchange for cash of $30.0 million. In the second quarter
of 2002, ARI issued 15,000 shares of PIK Preferred Stock in
exchange for cash of $15.0 million. In the year ended
December 31, 2003, ARI issued 10,000 shares of PIK
Preferred Stock in exchange for cash of $10.0 million.
On July 20, 2004, ARIs PIK Preferred Stock was
converted into a new issue of preferred stock (New
Preferred Stock). As a result of this conversion, 95,517
shares of PIK Preferred Stock held by Vegas, an entity owned by
Mr. Icahn were converted into New Preferred Stock. Additionally,
ARI issued Vegas 654 shares of New Preferred Stock in
consideration for accrued PIK Preferred dividends at the date of
conversion. Vegas invested an additional $67.5 million in
New Preferred Stock in exchange for cash on July 20, 2004.
On July 20, 2004, ACF transferred its ownership in ACF
Lease Administrators, Inc. to ARI in exchange for 2,000 shares
of New Preferred Stock. On the same date, ARI contributed its
ownership in ACF Lease Administrators, Inc. to ARL in exchange
for 2,000 A Units of ARL.
On December 22, 2004, Shippers Second transferred its
ownership in Shippers Third to ARI in exchange for
32,500 shares of ARI New Preferred Stock. On the same date,
ARI contributed its ownership in Shippers Third to ARL in
exchange for 32,500 A Units of ARL.
The New Preferred Stock is entitled to cumulative dividends at
the rate of 9.25% per annum, payable solely in cash on a
semi annual basis. Holders of the New Preferred Stock are
entitled to vote on matters submitted to the holders of shares
of common stock based on a percentage of the combined number of
shares of common stock and New Preferred Stock.
F-28
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
ARI issued 195 shares of common stock to Hopper Investments
LLC, an entity controlled by Mr. Icahn, in exchange for
cash of $42.5 million.
Note 14Operating Segment and Sales/ Credit
Concentrations
ARI operates in two reportable segments; manufacturing and
railcar services. The accounting policies of the segments are
the same as those described in Note 2. Performance is
evaluated based on revenue and operating profit. Intersegment
sales and transfers are accounted for as if sales or transfers
were to third parties.
The information in the following table is derived from the
segments internal financial reports used for corporate
management purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate
|
|
|
|
|
|
year ended December 31, 2002
|
|
operations
|
|
|
services
|
|
|
& all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
138,441
|
|
|
$
|
30,387
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
168,828
|
|
Intersegment revenues
|
|
|
129
|
|
|
|
409
|
|
|
|
|
|
|
|
(538
|
)
|
|
|
|
|
Cost of goods soldexternal customers
|
|
|
134,363
|
|
|
|
29,533
|
|
|
|
|
|
|
|
|
|
|
|
163,896
|
|
Cost of intersegment sales
|
|
|
110
|
|
|
|
328
|
|
|
|
|
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,097
|
|
|
|
935
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
4,932
|
|
Selling, administration and other
|
|
|
1,476
|
|
|
|
1,715
|
|
|
|
6,314
|
|
|
|
|
|
|
|
9,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
2,621
|
|
|
$
|
(780
|
)
|
|
$
|
(6,314
|
)
|
|
$
|
(100
|
)
|
|
$
|
(4,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
96,468
|
|
|
$
|
32,010
|
|
|
$
|
59,112
|
|
|
$
|
|
|
|
$
|
187,590
|
|
Capital expenditures
|
|
|
995
|
|
|
|
804
|
|
|
|
17
|
|
|
|
|
|
|
|
1,816
|
|
Depreciation and amortization
|
|
|
3,685
|
|
|
|
2,061
|
|
|
|
525
|
|
|
|
|
|
|
|
6,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate
|
|
|
|
|
|
year ended December 31, 2003
|
|
operations
|
|
|
services
|
|
|
& all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
188,119
|
|
|
$
|
29,875
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
217,994
|
|
Intersegment revenues
|
|
|
1,152
|
|
|
|
548
|
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
|
|
Cost of goods soldexternal customers
|
|
|
174,629
|
|
|
|
29,762
|
|
|
|
|
|
|
|
|
|
|
|
204,391
|
|
Cost of intersegment sales
|
|
|
1,074
|
|
|
|
539
|
|
|
|
|
|
|
|
(1,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,568
|
|
|
|
122
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
13,603
|
|
Selling, administration and other
|
|
|
3,370
|
|
|
|
1,555
|
|
|
|
5,415
|
|
|
|
|
|
|
|
10,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
10,198
|
|
|
$
|
(1,433
|
)
|
|
$
|
(5,415
|
)
|
|
$
|
(87
|
)
|
|
$
|
3,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
105,542
|
|
|
$
|
32,594
|
|
|
$
|
58,372
|
|
|
$
|
|
|
|
$
|
196,508
|
|
Capital expenditures
|
|
|
1,733
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
2,301
|
|
Depreciation and amortization
|
|
|
3,932
|
|
|
|
2,112
|
|
|
|
364
|
|
|
|
|
|
|
|
6,408
|
|
F-29
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate
|
|
|
|
|
|
year ended December 31, 2004
|
|
operations
|
|
|
services
|
|
|
& all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
316,432
|
|
|
$
|
38,624
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
355,056
|
|
Intersegment revenues
|
|
|
2,574
|
|
|
|
3,003
|
|
|
|
|
|
|
|
(5,577
|
)
|
|
|
|
|
Cost of goods soldexternal customers
|
|
|
306,283
|
|
|
|
34,473
|
|
|
|
|
|
|
|
|
|
|
|
340,756
|
|
Cost of intersegment sales
|
|
|
2,307
|
|
|
|
2,527
|
|
|
|
|
|
|
|
(4,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,416
|
|
|
|
4,627
|
|
|
|
|
|
|
|
(743
|
)
|
|
|
14,300
|
|
Selling, administration and other
|
|
|
4,210
|
|
|
|
2,225
|
|
|
|
3,899
|
|
|
|
|
|
|
|
10,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
6,206
|
|
|
$
|
2,402
|
|
|
$
|
(3,899
|
)
|
|
$
|
(743
|
)
|
|
$
|
3,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
34,606
|
|
|
$
|
33,034
|
|
|
$
|
289,200
|
|
|
$
|
|
|
|
$
|
356,840
|
|
Capital expenditures
|
|
|
11,062
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
11,441
|
|
Depreciation and amortization
|
|
|
3,955
|
|
|
|
1,959
|
|
|
|
333
|
|
|
|
|
|
|
|
6,247
|
|
Manufacturing operations
Revenues from affiliates were 38%, 29% and 18% of total revenues
for the years ended December 31, 2002, 2003 and 2004,
respectively. Revenues from one significant customer totaled
13%, 32% and 20% of total revenues for the years ended
December 31, 2002, 2003 and 2004, respectively. Revenues
from two significant customers were 17%, 35% and 36% for the
years ended December 31, 2002, 2003 and 2004, respectively.
Receivables from one significant customer were 2% and 7% of
total accounts receivable at December 31, 2003 and 2004,
respectively. Receivables from two significant customers were 2%
and 10% at December 31, 2003 and 2004, respectively.
Railcar services
Revenues from affiliates were 8%, 5% and 5% of total revenues
for the years ended December 31, 2002, 2003 and 2004,
respectively. Revenues from one significant customer totaled 3%,
1% and 1% of total revenues for the years ended
December 31, 2002, 2003 and 2004, respectively. Revenues
from two significant customers were 4%, 1% and 1% for the years
ended December 31, 2002, 2003 and 2004, respectively.
Receivables from one significant customer were 8% and 1% of
total accounts receivable at December 31, 2003 and 2004,
respectively. Receivables from two significant customers were
10% and 1% at December 31, 2003 and 2004, respectively.
Note 15Selected Quarterly Financial Data
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
|
|
|
(in thousands)
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
50,374
|
|
|
$
|
54,549
|
|
|
$
|
57,239
|
|
|
$
|
55,832
|
|
|
Gross profit
|
|
|
3,906
|
|
|
|
3,925
|
|
|
|
4,911
|
|
|
|
861
|
|
|
Net earnings (loss) available to common shareholders
|
|
|
170
|
|
|
|
433
|
|
|
|
953
|
|
|
|
(491
|
)
|
|
Net loss attributable to common shareholders, basic and diluted
|
|
$
|
(2,024
|
)
|
|
$
|
(1,775
|
)
|
|
$
|
(1,691
|
)
|
|
$
|
(3,135
|
)
|
F-30
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
|
|
|
(in thousands)
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
79,084
|
|
|
$
|
79,910
|
|
|
$
|
95,337
|
|
|
$
|
100,725
|
|
|
Gross profit
|
|
|
6,099
|
|
|
|
4,783
|
|
|
|
2,838
|
|
|
|
580
|
|
|
Net earnings (loss) available to common shareholders
|
|
|
1,016
|
|
|
|
969
|
|
|
|
889
|
|
|
|
(953
|
)
|
|
Net loss attributable to common shareholders, basic and diluted
|
|
$
|
(1,793
|
)
|
|
$
|
(1,841
|
)
|
|
$
|
(2,789
|
)
|
|
$
|
(4,897
|
)
|
Note 16Supplemental Cash Flow Information
ARI received interest income of $3.4 million,
$3.0 million and $4.4 million for the years ended
2002, 2003 and 2004, respectively.
ARI paid interest expense of $4.4 million,
$3.2 million and $1.8 million for the years ended
December 31, 2002, 2003 and 2004, respectively.
ARI was refunded taxes of $1.7 million for the year ended
December 31, 2002 and paid taxes of $0.2 million for
each year ended December 31, 2003 and 2004.
During the year ended December 31, 2004, ARI recorded a
non-cash charge to additional paid-in-capital of
$26.7 million, representing the excess of the book value of
its investment in ARL over fair market value on the date of the
transfer of the investment in ARL to its affiliates. In
addition, $12.5 million representing certain tax benefits
that ARI received as a result of utilizing ARLs previously
incurred tax losses is also being recorded through additional
paid-in-capital as ARI will receive the benefit of these tax
losses in the future. The net non-cash effect of these
transactions was a charge to additional paid-in-capital of
$14.1 million (see Note 1).
Note 17Subsequent Events
On January 26, 2005, the ARL operating agreement was
amended and an assignment and assumption agreement was executed
whereby ARI transferred its interest in a $165.0 million
secured note receivable from Mr. Icahn dated
October 28, 2004 to ARL in exchange for 35,000 A Units of
ARL and in satisfaction of its $130.0 million note issued
to ARL.
ARI entered into two supply agreements on January 28, 2005
and on June 8, 2005 with a supplier for two types of steel
plates. The agreement is for five years and is cancelable by
either party, with proper notice after two years. The agreement
commits ARI to buy the lesser of a fixed volume of steel or 75%
of its production needs from this supplier at prices that
fluctuate with market.
In March 2005, ARI entered into a $50.0 million revolving
credit facility secured by receivables and inventory. The notes
bear interest at various rates based on LIBOR and prime. The
term of the credit facility is one year. Debt covenants require
ARI to maintain certain debt-to-earnings and coverage ratios
with which ARI was in compliance. In addition, the revolving
credit facility provides that the payment of dividends triggers
a demand right in favor of ARIs lenders unless ARI meets
certain financial covenants and provides advance notice of the
dividend to its lenders. Through April 26, 2005, ARI had
drawn $30.3 million on the revolving credit facility.
In March 2005, ARI acquired certain assets of ACF for
$2.8 million. The assets were transferred between entities
under common control and, hence, have been accounted for at
historical cost.
F-31
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2002, 2003 and 2004
In April 2005, construction began on a new paint shop at the
Paragould facility. The project is expected to be completed by
November 2005 at an estimated cost of $13.2 million.
In August 2005, the company entered into an employment agreement
with its Chief Financial Officer (CFO). The agreement provides
for a bonus that will be earned upon the successful completion
of an Initial Public Offering. Under the terms of the agreement,
the CFO will receive a minimum annual base salary of
$0.25 million and a non-prorated cash bonus of at least
$0.15 million for the 2005 fiscal year. In addition to the
salary and bonus compensation, the CFO will receive a one-time
special cash bonus of $0.5 million on April 22, 2007
if, prior to that date, the Company issues common stock to the
public in an offering registered with the Securities and
Exchange Commission (SEC) or if the Company is sold
to a third party in a private transaction.
The Company is negotiating the terms of an employment contract
with its Chief Executive Officer (CEO) and expects to execute
this agreement in the fourth quarter of 2005. Significant terms
of this agreement are still being finalized.
In August 2005, the company was named a party to a suit in which
the plaintiff alleges the company was responsible for the
malfunction of a valve which was remanufactured in 2004 by a
third party. The company believes it has no responsibility for
this malfunction and has a meritorious defense against any
liability in this case. In any event, it is not possible to
estimate the expected settlement, if any, that any party might
be held accountable for at this time as the case is in its early
stages.
The Company has been named as the defendant in a lawsuit in
which the plaintiff claims that the Company is responsible for
the damage caused by allegedly defective railcars that were
manufactured by the Company. The plaintiffs allege that failures
in certain components caused the contents transported by these
railcars to spill out of the railcars causing property damage,
clean-up costs, monitoring costs, testing costs and other costs
and damages. The Company was recently served with the complaint
for this lawsuit, but Management believes that the Company is
not responsible for the spills and has meritorious defenses
against liability.
F-32
American Railcar Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,943
|
|
|
$
|
26,201
|
|
|
$
|
26,201
|
|
|
Accounts receivable, net
|
|
|
25,183
|
|
|
|
39,060
|
|
|
|
39,060
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
9,867
|
|
|
|
9,867
|
|
|
Inventories, net
|
|
|
73,925
|
|
|
|
81,864
|
|
|
|
81,864
|
|
|
Prepaid expenses
|
|
|
244
|
|
|
|
5,364
|
|
|
|
5,364
|
|
|
Deferred tax asset
|
|
|
2,065
|
|
|
|
1,837
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
108,360
|
|
|
|
164,193
|
|
|
|
164,193
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,977
|
|
|
|
1,977
|
|
|
|
1,977
|
|
|
Buildings
|
|
|
66,350
|
|
|
|
75,541
|
|
|
|
75,541
|
|
|
Machinery and equipment
|
|
|
58,816
|
|
|
|
61,178
|
|
|
|
61,178
|
|
|
Construction in process
|
|
|
8,686
|
|
|
|
13,549
|
|
|
|
13,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,829
|
|
|
|
152,245
|
|
|
|
152,245
|
|
|
Less accumulated depreciation
|
|
|
58,878
|
|
|
|
63,690
|
|
|
|
63,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
76,951
|
|
|
|
88,555
|
|
|
|
88,555
|
|
Notes receivable from affiliates and interest thereon
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
663
|
|
|
|
|
|
|
|
|
|
Debt issuance costs and other assets
|
|
|
615
|
|
|
|
3,643
|
|
|
|
3,643
|
|
Investment in joint venture
|
|
|
5,251
|
|
|
|
5,633
|
|
|
|
5,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
356,840
|
|
|
$
|
262,024
|
|
|
$
|
262,024
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,334
|
|
|
$
|
32,733
|
|
|
$
|
32,733
|
|
|
Accounts payable, including $3,073 due from affiliates in 2005
|
|
|
22,800
|
|
|
|
56,154
|
|
|
|
56,154
|
|
|
Accrued expenses and taxes
|
|
|
13,524
|
|
|
|
25,109
|
|
|
|
107,164
|
|
|
Notes payable to affiliatecurrent
|
|
|
19,000
|
|
|
|
19,000
|
|
|
|
19,000
|
|
|
Other amounts due to affiliatescurrent
|
|
|
5,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
61,795
|
|
|
|
132,996
|
|
|
|
215,051
|
|
Long-term debt, net of current portion
|
|
|
8,517
|
|
|
|
7,097
|
|
|
|
7,097
|
|
Note payable to affiliatenoncurrent
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
Other amounts due to affiliatesnoncurrent
|
|
|
17,109
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
9,853
|
|
|
|
9,853
|
|
Mandatorily redeemable preferred stock, stated value $1,000,
99,000 shares authorized, 1 share issued and
outstanding at December 31, 2004 and September 30, 2005
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Other liabilities
|
|
|
4,395
|
|
|
|
4,542
|
|
|
|
4,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
221,817
|
|
|
|
154,489
|
|
|
|
236,544
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Preferred Stock, $.01 par value per share, stated value
$1,000 per share, 500,000 shares authorized, 111,685
and 82,055 shares issued and outstanding at
December 31, 2004 and September 30, 2005, respectively
|
|
|
111,685
|
|
|
|
82,055
|
|
|
|
|
|
|
Common stock, $.01 par value, 12,000 shares
authorized, 1,195 shares issued and outstanding at
December 31, 2004 and September 30, 2005, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
41,360
|
|
|
|
40,125
|
|
|
|
40,125
|
|
|
Accumulated deficit
|
|
|
(16,959
|
)
|
|
|
(13,599
|
)
|
|
|
(13,599
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(1,063
|
)
|
|
|
(1,046
|
)
|
|
|
(1,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
135,023
|
|
|
|
107,535
|
|
|
|
25,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
356,840
|
|
|
$
|
262,024
|
|
|
$
|
262,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Proforma adjustment includes the reduction of preferred stock
of $82,055, which will be paid with IPO proceeds. A
corresponding increase of $82,055 has been included in accrued
expenses and taxes.
|
See notes to the condensed consolidated financial
statements.
F-33
American Railcar Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGSUNAUDITED
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from transactions
with affiliates of $44,590 and $44,493 in 2004 and 2005,
respectively)
|
|
$
|
226,759
|
|
|
$
|
409,208
|
|
|
Railcar services (including revenues from affiliates of $12,698
and $16,036 in 2004 and 2005, respectively)
|
|
|
27,572
|
|
|
|
32,940
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
254,331
|
|
|
|
442,148
|
|
Costs of goods sold:
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations (including costs from
transactions with affiliates of $40,178 and $41,384 in 2004 and
2005, respectively)
|
|
|
216,027
|
|
|
|
377,181
|
|
|
Cost of railcar services (including costs from transactions with
affiliates of $9,593 and $12,728 in 2004 and 2005, respectively)
|
|
|
24,585
|
|
|
|
27,538
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of goods sold
|
|
|
240,612
|
|
|
|
404,719
|
|
|
|
Gross profit
|
|
|
13,719
|
|
|
|
37,429
|
|
|
Selling, administrative and other
|
|
|
8,543
|
|
|
|
11,417
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,176
|
|
|
|
26,012
|
|
|
Interest income (includes interest income from affiliates of
$1,201 and $823 in 2004 and 2005, respectively)
|
|
|
2,122
|
|
|
|
1,265
|
|
|
Interest expense (including interest expense to affiliates of
$174 and $1,683 in 2004 and 2005, respectively)
|
|
|
2,216
|
|
|
|
3,577
|
|
|
|
Earnings(loss) income from joint venture
|
|
|
(351
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
4,731
|
|
|
|
24,143
|
|
|
Income tax expense
|
|
|
1,858
|
|
|
|
9,611
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
2,873
|
|
|
$
|
14,532
|
|
|
|
|
|
|
|
|
|
Less preferred dividends
|
|
|
(9,296
|
)
|
|
|
(11,171
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) available to common shareholders
|
|
|
(6,423
|
)
|
|
|
3,361
|
|
Weighted average shares outstanding basic and
diluted
|
|
|
1,051
|
|
|
|
1,195
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share basic and
diluted
|
|
$
|
(6,111
|
)
|
|
$
|
2,813
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements
F-34
American Railcar Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
2,873
|
|
|
$
|
14,532
|
|
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,774
|
|
|
|
4,972
|
|
|
Change in joint venture investment as a result of (earnings) loss
|
|
|
351
|
|
|
|
(443
|
)
|
|
Expenses relating to pre-capitalization liabilities retained by
ACF
|
|
|
800
|
|
|
|
794
|
|
|
Provision for deferred income taxes
|
|
|
1,485
|
|
|
|
8,721
|
|
|
Provision for losses on accounts receivable
|
|
|
86
|
|
|
|
50
|
|
|
Curtailment gain
|
|
|
(59
|
)
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(13,353
|
)
|
|
|
(23,794
|
)
|
|
|
Inventories
|
|
|
(14,204
|
)
|
|
|
(7,939
|
)
|
|
|
Prepaid expenses and other assets
|
|
|
(156
|
)
|
|
|
(8,309
|
)
|
|
|
Accounts payable
|
|
|
14,952
|
|
|
|
33,354
|
|
|
|
Accrued expenses and taxes
|
|
|
5,041
|
|
|
|
5,784
|
|
|
|
Other
|
|
|
(644
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,946
|
|
|
|
27,831
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(6,750
|
)
|
|
|
(16,356
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,750
|
)
|
|
|
(16,356
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
42,500
|
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
67,500
|
|
|
|
|
|
|
Effect of ARL spin off
|
|
|
(25,000
|
)
|
|
|
|
|
|
Increase (decrease) in amounts due to affiliates
|
|
|
10,548
|
|
|
|
(22,246
|
)
|
|
Repayment of note receivable from affiliate
|
|
|
|
|
|
|
50
|
|
|
Proceeds from debt issuance
|
|
|
|
|
|
|
31,294
|
|
|
Repayment of debt
|
|
|
(40,204
|
)
|
|
|
(1,315
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
55,344
|
|
|
|
7,783
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
50,540
|
|
|
|
19,258
|
|
Cash and cash equivalents at beginning of year
|
|
|
65
|
|
|
|
6,943
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
50,605
|
|
|
$
|
26,201
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-35
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2004 and 2005
The condensed consolidated financial statements included herein
have been prepared by American Railcar Industries, Inc. and
subsidiary (collectively the Company or
ARI), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the
SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading.
The Condensed Balance Sheet as of December 31, 2004 has
been derived from the audited consolidated balance sheets as of
that date. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Companys
latest annual report attached on Form S-1 for the year
ended December 31, 2004. In the opinion of management, the
information contained herein reflects all adjustments necessary
to make the results of operations for the interim periods a fair
statement of such operations. Due to the seasonality of the
Companys business, the results of operations of any
interim period are not necessarily indicative of the results
that may be expected for a fiscal year.
Note 1Description of the Business
The condensed consolidated financial statements of the Company
include the accounts of American Railcar Industries, Inc. and
its wholly owned subsidiaries. Through its subsidiary Castings,
LLC (Castings), the Company has a one-third
ownership interest in Ohio Castings Company, LLC (Ohio
Castings), a limited liability company formed to run two
foundries which cast railcar sideframes and bolsters for use or
sale by the ownership group. All significant intercompany
transactions and balances have been eliminated.
ARI manufactures railcars, custom designed railcar parts for
industrial companies, railroads, and other industrial products,
primarily aluminum and special alloy steel castings, for
non-rail customers. ARI also provides railcar maintenance
services for railcar fleets, including that of its affiliate,
American Railcar Leasing, LLC (ARL). In addition,
ARI provides fleet management and maintenance services for
railcars owned by selected customers. Such services include
inspecting and supervising the maintenance and repair of such
railcars. The Companys operations are located in the
United States and Canada. The Company operates a small railcar
repair facility in Sarnia Ontario Canada. Canadian revenues were
0.5% and 0.4% of total company revenues for the nine months
ended September 30, 2004 and 2005, respectively. Canadian
assets were 0.4% and 0.3% of total company assets for the nine
months ended September 30, 2004 and 2005, respectively.
ARI was recapitalized on October 1, 1994 when ACF
Industries LLC (ACF), the former holder of
ARIs common stock, transferred to ARI the old common stock
of ARI along with the assets and liabilities of ACFs
railcar maintenance and railcar parts manufacturing businesses.
In exchange, ACF received 57,306 shares of ARIs newly
issued mandatorily redeemable preferred stock. New shares of
ARIs common stock were issued to Carl C. Icahn
(Mr. Icahn), Chairman of the Board of ACF, in
exchange for cash of $6.4 million. In October 1998, ARI
redeemed 57,305 shares of the preferred stock and the
remaining share of preferred stock was transferred to
Mr. Icahn.
In 2003, ACF Industries Holding Corp. (ACF Holding),
an affiliate of ARI, formed a wholly-owned subsidiary, Castings.
In June 2005, ARI completed the purchase of Castings from ACF
Holdings. The transaction was effective January 1, 2005.
The cost of the acquisition totaled $12.0 million, which
represents the fair value of Castings equity interest in Ohio
Castings. The purchase price will be paid in 2005. However as
Castings was owned by an entity with ownership common to ARI,
the investment in subsidiary is recorded at the date of Castings
inception, June, 2003 at book value. The
F-36
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
purchase price is recorded at full value as a payable to the
affiliate and the excess of fair value over cost is presented as
a distribution from equity. Interest is accrued on the note
payable to the affiliate as of January 1, 2005 as that is
the date the purchase was agreed to.
On July 20, 2004, ARI formed ARL, a wholly owned
subsidiary. ARLs primary business is the leasing of
railcars. The subsidiary was capitalized through the issuance of
common and preferred stock. ARIs investment in ARL was
$116.7 and $151.7 million at December 31, 2004 and
just prior to June 30, 2005, respectively. Preferred stock
of ARL was issued to affiliated companies in exchange for
contributions of cash or railcars totaling $102.7 million. In
January 2005, ARI obtained an additional $35 million of ARL
common stock resulting in a carrying value of
$151.7 million.
On June 30, 2005, in anticipation of its public offering,
ARI sold its common interest in ARL for $125.0 million to
affiliated companies in return for the preferred stock
investment valued at $116.1 million plus accrued dividends of
$8.9 million that those affiliates held ARI. At
December 31, 2004, ARIs investment in ARL was
$116.7 million. This investment was eliminated as of
December 31, 2004 in order to present ARI on a stand alone
basis. New preferred stock of $86.5 million plus accrued
dividends of $3.5 million were eliminated from ARIs
equity and a charge of $26.7 million was recorded to
additional paid in capital to reflect the difference between the
final transfer price of $125 million and the ultimate
carrying value of ARIs investment in ARL of
$151.7 million. The 2005 financial statements reflect a
reduction of New Preferred Stock of $29.6 million plus
accrued dividends of $5.4 million to eliminate the
additional investment of $35 million made in that period.
ARI retained no liabilities or other interests in ARL as a
result of this sale. The presentation of ARIs operations
has been prepared on a standalone basis excluding ARLs
operations for all periods, and all transactions giving effect
to ARLs formation have been eliminated from the financial
statements. Any differences related to the amounts originally
capitalized and the amount paid for ARL in the sale have been
recorded through adjustments to shareholders equity,
including certain tax benefits that ARI received as a result of
utilizing ARLs previously incurred tax losses. ARI
recorded a related deferred tax asset of $12.5 million for those
net operating loss carry forwards as ARI has the legal right to
utilize them for tax purposes.
F-37
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
The following table discloses the preferred stock transactions
and the effect on additional paid in capital for the year ended
December 31, 2004 and nine months ended September 30,
2005 to include all of the transactions including the effect of
the spin off of ARL.
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
New preferred
|
|
|
paid in
|
|
|
|
stock
|
|
|
capital
|
|
|
|
|
|
(in thousands
|
|
January 1, 2004
|
|
$
|
|
|
|
$
|
11,577
|
|
New preferred issued for mandatorily redeemable preferred stock
|
|
|
95,517
|
|
|
|
|
|
Capital contribution
|
|
|
102,654
|
|
|
|
42,500
|
|
Exchange of common interest in ARL for new preferred stock
|
|
|
(86,486
|
)
|
|
|
(26,670
|
)
|
ARL deferred tax assets
|
|
|
|
|
|
|
12,522
|
|
Other
|
|
|
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
111,685
|
|
|
|
41,360
|
|
Exchange of common interest in ARL for new preferred stock
|
|
|
(29,630
|
)
|
|
|
|
|
ARL tax benefit
|
|
|
|
|
|
|
(2,023
|
)
|
Other
|
|
|
|
|
|
|
788
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
$
|
82,055
|
|
|
$
|
40,125
|
|
|
|
|
|
|
|
|
Note 2Summary of Significant Accounting
Policies
Significant accounting policies are described below.
Revenue recognition
Revenues from railcar sales are recognized following completion
of manufacturing, inspection, customer acceptance and shipment,
which is when title and risk for any damage or loss with respect
to the railcars passes to the customer. In some cases, paint and
lining work may be outsourced and, as a result, the sale will
not be recorded until the railcars are shipped from the
independent contractor. Revenues from railcar and industrial
parts and components are recorded at the time of product
shipment, in accordance with our contractual terms. Revenue for
railcar maintenance services are recognized upon completion and
shipment of railcars from our plants. The Company does not
bundle railcar service contracts with new car sales. Revenue for
fleet management services are recognized as performed.
The Company records amounts billed to customers for shipping and
handling as part of sales in accordance with EITF 00-10,
Accounting for Shipping and Handling Fees and Costs
, and
records related costs in cost of sales.
Debt issuance costs
Debt issuance costs were incurred in connection with ARIs
issuance of long-term debt, and are amortized over the term of
the related debt, utilizing the effective interest method.
Inventories
Inventories are stated at the lower of average cost or market on
a first in, first out basis, and include the cost of materials,
direct labor and manufacturing overhead.
F-38
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Accounts receivable
The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the
Company evaluates its account receivable and establishes an
allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions.
Accounts are placed for collection on a limited basis once all
other methods of collection have been exhausted. Once it has
been determined that the customer is no longer in business
and/or refuses to pay, the accounts are written off.
Property, plant and equipment
Land, buildings, machinery and equipment are carried at cost,
including interest on funds borrowed to finance construction.
Maintenance and repair costs are charged directly to earnings.
Tooling is generally capitalized and amortized over a period of
two to five years.
Buildings are depreciated over estimated useful lives that range
from 14 to 50 years. The estimated useful lives of other
depreciable assets, including equipment, vary from 3 to
25 years. Depreciation is calculated on the straight-line
method for financial reporting purposes and on accelerated
methods for tax purposes.
Ohio Castings joint venture
The Company uses the equity method to account for its investment
in Ohio Castings owned by its subsidiary, Castings, LLC. Under
the equity method, the Company recognizes its share of the
earnings and losses of the joint venture as they accrue instead
of when they are realized. Advances and distributions are
charged and credited directly to the investment account. Ohio
Castings produces railcar parts that are sold to one of the
joint venture partners. The joint venture partner sells these
parts to outside 3rd parties at current market prices and
to the Company and the other joint venture partner in Ohio
Castings at cost plus a licensing fee. The risk of loss to
Castings, LLC and the Company is limited to its investment in
Ohio Castings and its one third share of its guarantee of Ohio
Castings debt which was approximately $0.1 million at
September 30, 2005.
The cost of railcar manufacturing for the nine months ended
September 30, 2004 and 2005 included $14.3 million and
$19.0 million, respectively, in products produced by Ohio
Castings.
The carrying amount of the investment in Ohio Castings by
Castings LLC was $5.3 million and $6.2 million at
December 31, 2004 and September 30, 2005, respectively.
F-39
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Summary combined unaudited financial information for Ohio
Castings as of and for the years ended December 31, 2004
and nine months ended September 30, 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
19,111
|
|
|
$
|
18,000
|
|
|
Property, plant, and equipment, net
|
|
|
14,407
|
|
|
|
15,436
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
33,518
|
|
|
|
33,436
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
19,674
|
|
|
|
14,679
|
|
Long-term debt
|
|
|
8,184
|
|
|
|
11,770
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,858
|
|
|
|
26,449
|
|
|
|
|
|
|
|
|
Members equity
|
|
$
|
5,660
|
|
|
$
|
6,987
|
|
|
|
|
|
|
|
|
Summary consolidated results of operations for the nine months
ended September 30, 2004 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
53,488
|
|
|
$
|
88,324
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
|
(991
|
)
|
|
|
1,115
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(1,053
|
)
|
|
$
|
1,327
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
assets may not be recoverable. The criteria for determining
impairment for such long-lived assets to be held and used is
determined by comparing the carrying value of these long-lived
assets to be held and used to managements best estimate of
future undiscounted cash flows expected to result from the use
of the assets. If the assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets. The estimated fair value of the assets is measured by
estimating the present value of the future discounted cash flows
to be generated. There were no events or changes in
circumstances that indicate that the carrying value of assets
may not be recoverable, as such, no impairment losses have been
recorded in the year ended December 31, 2004 or for the
nine month period ended September 30, 2005.
Pension plans and other postretirement benefits
Certain ARI employees participate in noncontributory, defined
benefit pension plans sponsored by a related party. Benefits for
the salaried employees are based on salary and years of service,
while those for hourly employees are based on negotiated rates
and years of service.
ARI also participates in defined contribution retirement plans,
health care and life insurance plans sponsored by a related
party covering certain employees. Benefit costs are accrued
during the years the employees render service.
F-40
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Income taxes
ARI accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial reporting basis and the tax
basis of ARIs assets and liabilities at enacted tax rates
expected to be in effect when such amounts are recovered or
settled.
Statements of cash flows
For the purpose of the consolidated statements of cash flows,
ARI considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash
equivalents. Until October 2004, ACF received the majority of
ARIs cash receipts and disbursed ARIs cash on behalf
of ARI, and maintained an intercompany receivable/payable which
bore interest at ACFs internal cost of funds in accordance
with an administration agreement between ARI and ACF, which is
described in Note 9. Since October 2004, ARI maintains its
own cash balances.
Earnings per share
Basic earnings per share are calculated as net earnings
attributable to common shareholders divided by the
weighted-average number of common shares outstanding during the
respective period. Diluted earnings per share are calculated by
dividing net earnings attributable to common shareholders by the
weighted-average number of shares outstanding plus dilutive
potential common shares outstanding during the year.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, amounts due to/from affiliates and accounts payable
approximate fair values because of the short-term maturity of
these instruments. The fair value of long-term debt is discussed
in Note 5. The fair value of the note receivable from Ohio
Castings and Mr. Icahn, which is carried at face amount
plus accrued interest, could not reasonably be estimated due to
the lack of market for similar instruments. Fair value estimates
are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision.
Foreign currency translation
Balance sheet amounts from our Canadian operation are translated
at the exchange rates in effect at the end of the period, and
operations statement amounts are translated at the average rates
of exchange prevailing during the year. Currency translation
adjustments are included in Shareholders Equity.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources.
Comprehensive income (loss) consists of net earnings (loss),
foreign currency translation adjustment and the Companys
minimum pension liability adjustment, which is shown net of tax.
F-41
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Use of estimates
Management of ARI has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of
America. Significant items subject to estimates and assumptions
include, deferred taxes, pension obligations, workers
compensation, valuation allowances for accounts receivable and
inventory obsolescence and the reserve for warranty claims.
Actual results could differ from those estimates.
Retained earnings
As ARI and ACF are entities under common control, accounting
principles generally accepted in the United States of America
require that ARIs initial carrying value of assets
transferred to it from ACF and the sale of Castings be equal to
ACFs historical net book value at the time of transfer.
The excess of the fair value paid over the net book value of
assets and liabilities transferred to ARI is reflected as a
distribution of retained earnings due to common control and has
the effect of reducing shareholders equity by
$24.1 million at December 31, 2004 and
September 30, 2005. Of that amount, $19.2 million was
recorded at the formation of ARI, and $4.9 million was
recorded in 2003 from the acquisition of Castings.
Recent accounting pronouncements
In December 2004, the FASB revised SFAS No. 123,
Share-Based Payment, which establishes the accounting for
transactions in which an entity exchanges its equity instruments
or certain liabilities based upon the entitys equity
instruments for goods or services. The revision to SFAS
No. 123 generally requires that publicly traded companies
measure the cost of employee services received in exchange for
an award of equity instruments based on the fair value of the
award on the grant date. That cost will be recognized over the
period during which an employee is required to provide service
in exchange for the award, which is usually the vesting period.
Management expects that the revised provisions of SFAS
No. 123 will be effective for the Company after the Initial
Public Offering. Management has not yet evaluated the impact of
the revisions to SFAS No. 123 on the Companys
financial statements. After the offering, the Company will
comply with 123R and expense stock options.
In March 2005, the FASB issued FIN 47 as an interpretation
of FASB Statement 143,
Accounting for Asset Retirement
Obligations
(FASB 143). This interpretation clarifies that
the term conditional asset retirement obligation as used in FASB
143 and refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated.
This interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no
later than the end of fiscal years ending after
December 15, 2005. We believe that the adoption of
FIN 47 will not result in a material change in our
financial statements.
On June 1, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154)
. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements
for accounting for and
F-42
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
reporting of a change in accounting principle. We will adopt
SFAS 154 at December 31, 2005 and do not anticipate
any material change to our operating results as a result of this
adoption.
$19.2 million was recorded at the formation of ARI, and
$4.9 million was recorded in 2003 from the acquisition of
Castings.
Note 3Accounts Receivable
The allowance for doubtful accounts consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
572
|
|
|
$
|
510
|
|
|
Bad debt expense
|
|
|
86
|
|
|
|
35
|
|
|
Accounts written off
|
|
|
(81
|
)
|
|
|
(23
|
)
|
|
Recoveries
|
|
|
21
|
|
|
|
38
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
598
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
Note 4Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
39,655
|
|
|
$
|
37,072
|
|
Work-in-process
|
|
|
25,515
|
|
|
|
34,253
|
|
Finished products
|
|
|
11,434
|
|
|
|
13,072
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
76,604
|
|
|
$
|
84,397
|
|
Less reserves
|
|
|
2,679
|
|
|
|
2,533
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
73,925
|
|
|
$
|
81,864
|
|
|
|
|
|
|
|
|
Inventory reserves consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Beginning Balance
|
|
$
|
2,310
|
|
|
$
|
2,679
|
|
|
Provision
|
|
|
559
|
|
|
|
309
|
|
|
Write-off
|
|
|
(190
|
)
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,679
|
|
|
$
|
2,533
|
|
|
|
|
|
|
|
|
F-43
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Note 5Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Revolving line of credit
|
|
$
|
|
|
|
|
31,294
|
|
Industrial revenue bonds guaranteed by ACF and ACF Holding, with
effective interest rates ranging from 6.75% to 8.5%, principal
amounts due through the year 2011
|
|
|
9,600
|
|
|
|
8,340
|
|
Other
|
|
|
251
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
9,851
|
|
|
|
39,830
|
|
Less current portion of debt
|
|
|
1,334
|
|
|
|
32,733
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
8,517
|
|
|
$
|
7,097
|
|
|
|
|
|
|
|
|
On March 10, 2005, ARI entered into a $50.0 million
revolving credit facility secured by receivables and inventory.
The note bears interest at various rates based on LIBOR or
prime. As of September 30, 2005, the interest rate on the
borrowings under the revolving credit facility was 6.5% and was
based on the U.S. prime rate at that time. The term of the
credit facility is one year. Debt covenants require ARI to
maintain certain debt-to-earnings and coverage ratios with which
ARI was in compliance at September 30, 2005. In addition,
the revolving credit facility provides that the payment of
dividends triggers a demand right in favor of ARIs lenders
unless ARI meets certain financial covenants and provides
advance notice of the dividend to its lenders.
The fair value of long-term debt was approximately
$9.9 million and $39.8 million at December 31,
2004 and September 30, 2005, respectively, as calculated by
discounting cash flows through maturity using ARIs current
rate of borrowing for similar liabilities.
Note 6Warranties
The Company records a liability for an estimate of costs that it
expects to incur under its basic limited warranty when
manufacturing revenue is recognized. Factors affecting the
Companys warranty liability include the number of units
sold and historical and anticipated rates of claims and costs
per claim. The Company periodically assesses the adequacy of its
warranty liability based on changes in these factors.
Changes in the Companys warranty reserve are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
(in thousands)
|
|
Liability, beginning of period
|
|
$
|
1,436
|
|
|
$
|
1,630
|
|
|
Expense for new warranties issued
|
|
|
159
|
|
|
|
278
|
|
|
Warranty claims
|
|
|
(67
|
)
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
Liability, end of period
|
|
$
|
1,528
|
|
|
$
|
1,437
|
|
|
|
|
|
|
|
|
F-44
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Note 7Stock options
In 1994, the company entered into an agreement with
Mr. Unger, currently its chief executive officer, which
provided that Mr. Unger shall be granted an option to
purchase 2.0% of the outstanding common shares of ARI at a price
equal to 2.0% of the common equity contribution by
Carl C. Icahn (ARIs chairman of the board and a
principal stockholder) at the formation of ARI. The agreement
provided that this option shall be exercisable at the time of
ARIs initial public offering, and should ARI be sold to
parties other than in a public offering, Mr. Unger shall
receive 2.0% of the sales price net of the preferred interest
established at the formation of ARI and net of the contribution
for common stock. The agreement further provided that the above
options and or rights shall remain in effect as long as
Mr. Unger is employed by ARI. Compensation expense under
this arrangement would be recognized when the contingency is met
at the effective date of a public offering or the completion of
a sale.
In November 2005, ARI entered into a new agreement with
Mr. Unger. Upon the closing of an initial public offering
of ARI common stock, this new agreement will supersede the 1994
agreement and the 1994 agreement will terminate. The new
agreement provides for the issuance of $6 million of common
shares to be issued at the IPO price on the IPO date. These
shares will vest 40% upon issuance, with the remaining 60% to
vest one year after issuance.
Note 8Related Party Transactions
As part of the 1994 recapitalization described in Note 1,
ACF has retained certain liabilities existing as of the
recapitalization date, including employee benefits, workers
compensation, litigation, environmental and others. If ACF were
unable to honor or meet these obligations, ARI would be
responsible for such liabilities. In the opinion of management,
ACF has the present ability to meet these obligations.
In connection with the 1994 ACF asset transfer, the Company
entered into the following administrative and operating
agreements with ACF, effective as of October 1, 1994:
Manufacturing services agreement
|
|
|
Under the manufacturing services agreement, ACF agreed to
manufacture and distribute, at the Companys instruction,
various products using certain assets that the Company acquired
pursuant to the 1994 ACF asset transfer agreement. In
consideration for these services, the Company agreed to pay ACF
for the direct costs they incurred which totaled
$20.0 million and $56.2 million for the nine month
period ended September 30, 2004 and 2005, respectively. The
agreement automatically renews unless written notice is provided
by the Company.
|
Administration Agreement
|
|
|
Under this agreement, ACF agreed to provide the Company with
office facilities and administrative services, primarily
information technology services. In exchange for the facilities
services, the Company agreed to pay ACF based on agreed upon
cost allocations. Charges for these services represent a portion
of actual direct and overhead expenses incurred by ACF, with
direct expenses being charged based on relative time commitments
of managerial personnel and overhead based on relative numbers
of employees. Management believes that these allocation methods
are reasonable for the relevant costs. Amounts incurred under
this agreement totaled $0.6 million and $0.4 million
for the nine month period ended September 30, 2004 and
2005, respectively. The facility lease amounts, included in the
amounts incurred, have been included in the total lease expense
discussion within this footnote. The Agreement was terminated on
April 1, 2005.
|
F-45
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Railcar Servicing Agreement
|
|
|
Under this agreement, the Company agreed to provide ACF with
railcar repair and maintenance services, fleet management
services and consulting services on safety and environmental
matters for railcars owned or managed by ACF and leased or held
for lease by ACF. ACF agreed to compensate the Company based on
agreed upon rates. Revenue recorded under this arrangement
totaled $12.7 million for the nine month period ended
September 30, 2004 and is included under revenue from
affiliates on the statement of earnings. No amounts were
recorded during the nine month period ended September 30,
2005. The Agreement was terminated on April 1, 2005.
|
Supply Agreement
|
|
|
Under this agreement, we agreed to manufacture and sell to ACF
specified components at cost plus mark-up or on terms not less
favorable than the terms on which the Company sold the same
products to third parties. Revenue recorded under this
arrangement totaled $0.1 million and $0.3 million for
the nine month period ended September 30, 2005 and 2004 and
is included under revenue from affiliates on the statement of
earnings. The Agreement was terminated on April 1, 2005.
|
ACF and ACF Holding have guaranteed the Companys
obligations under the industrial revenue bonds as described in
note 5.
As of December 31, 2004, amounts due to affiliates included
$22.2 million to ACF and ARL.
As of September 30, 2005, amounts due from affiliates
included $1.8 million from ACF, $7.1 million from ARL,
$0.8 million from Mr. Icahn, and $0.2 million
from Ohio Castings. As of September 30, 2005, amounts due
to affiliates included $2.1 million to ACF,
$0.6 million to ACF Holding for interest on the Castings
note described below, and $0.4 million for interest on the
Arnos note described below.
ARIs employees participate in ACFs noncontributory,
defined benefit pension plans and other postretirement health
care and life insurance plans. As part of ARIs
recapitalization, ACF retained the liabilities for unfunded
pension and other postretirement liabilities and workers
compensation liabilities as of October 1, 1994 for
employees who transferred from ACF to ARI at that date and for
environmental liabilities as of that date. Although ACF is
responsible for any costs associated with the liabilities at the
recapitalization date, related expenses which have accrued since
the recapitalization have been reflected in ARIs financial
statements in order to reflect the full cost of doing business.
Expenses that ACF pays relating to pre-recapitalization
liabilities are recorded as capital contributions and appear as
additional paid-in capital on ARIs balance sheet.
During 2004, ARI advanced $165.0 million to Mr. Icahn
under a secured note due in 2007 and bearing interest at prime
plus 1.75%. During 2004, ARL advanced $130.0 million to ARI
under a note due in 2007 and bearing interest at prime plus
1
1
/
2
%.
On January 26, 2005, an assignment and assumption agreement
was executed whereby ARI transferred its interest in a
$165.0 million note receivable from Mr. Icahn dated
October 28, 2004 to ARL in exchange for 35,000 Units of
common ownership and in satisfaction of a $130.0 million
note issued to ARL.
The Company leases certain facilities and equipment from an
entity owned by an officer of the Company, certain affiliates of
ARI and third parties. Total rent expense on these leases were
approximately $4.8 million and $5.3 million for the
nine month period ended September 30, 2004 and 2005,
respectively. Expenses to related parties included in the
amounts above were $0.6 million and $0.3 million for
the nine month period ended September 30, 2004 and 2005,
respectively.
F-46
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
Castings has a note receivable of $2.2 million from Ohio
Castings due November, 2008. The note bears interest at 4%.
Principle and interest is payable quarterly starting
November 30, 2005.
ARI entered into a note payable with ACF Holding, an affiliate,
for $12.0 million effective January 1, 2005 in
connection with the purchase of Castings (Note 1). The note
bears interest at prime (6.75% at September 30, 2005) plus
0.5% and is due on demand.
ARI entered into a note payable with Arnos Corp., an affiliate,
for $7.0 million in December 2004.
In 2005, the Company entered into the following agreements with
ARL and its subsidiaries:
ARL Railcar Services Agreement
|
|
|
Under this agreement, ARL provided the Company with railcar
services which the Company was Required to provide to ARI First
and ARI Third under the railcar management agreement. The
Company paid ARL an amount equal to the amounts paid to the
Company by ARI First and ARI Third under the railcar management
agreement which totaled $2.0 million for the nine month
period ended September 30, 2005 and it is included under
cost to affiliates on the statement of earnings. This agreement
was terminated on July 1, 2005.
|
ARL Railcar Servicing Agreement
|
|
|
Under this agreement, the Company agreed to provide ARL with
railcar repair and maintenance services, fleet management
services and consulting services on safety and environmental
matters for railcars owned or managed by ARL and leased or held
for lease by ARL. ARL agreed to compensate the Company based on
agreed upon rates. Revenue of $16.0 million for the nine
month period ended September 30, 2005 was recorded under
this arrangement which is included under revenue from affiliates
on the statement of earnings. The agreement extends through
June 30, 2006 and is automatically renewable unless either
party provides at least six months prior notice of termination.
Termination by the Company would result in a termination fee of
$0.5 million.
|
ARL Services Agreement
|
|
|
Under this agreement, ARL agreed to provide the Company certain
information technology services, rent and building services and
limited administrative services. The rent and building services
includes the use of certain facilities owned by Mr. Unger
which is further described in note 12. Under the agreement,
the Company agreed to provide purchasing and engineering
services to ARL. Consideration exchanged between the
Companys is based on agreed upon fixed annual fees.
Total fees paid to ARL were $1.1 million for the nine month
period ended September 30, 2005. Amounts billed to ARL
totaled $0.1 million for the nine month period ended
September 30, 2005. These balances are included in revenues
and costs from affiliates on the statement of earnings. Either
party may terminate any of these services, and the associated
costs for these services, on at least six months prior notice at
any time prior to the termination of the agreement on
December 31, 2007.
|
In April 2005, the Company entered into a consulting agreement
with ACF in which both parties agreed to provide labor
litigation, labor relations support and consultation, and labor
contract interpretation and negation services to one another. In
addition, the Company has agreed to provide ACF with engineering
and consultation advice. Fees paid to one another are based on
agreed upon rates. No services were rendered and no amounts were
paid during the nine month period ended September 30, 2005.
F-47
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
ARI has been advised that in December 2005 an affiliate of
Mr. Icahn entered into an agreement with the Foundation for
a Greater Opportunity, or the Foundation, ARIs other
significant beneficial stockholder, to acquire all of ARIs
common stock held by the Foundation. The consummation of this
acquisition would require the approval of applicable authorities
of the State of New York. If the parties obtain this approval,
ARI has been advised that the parties expect that the purchase
would be completed in the first three months of 2006. Pending
the completion of this purchase, and for so long as the purchase
agreement has not been terminated, the Foundation has granted
the purchaser an irrevocable proxy to vote all the shares of ARI
common stock held by the Foundation. As a result of these
contemplated arrangements, ARI expects that Mr. Icahn will
continue to control a majority of the voting power of ARIs
capital stock following the offering. As a result,
Mr. Icahn is, and will be, able to exert substantial
influence over ARI, elect ARIs directors and control most
matters requiring board or shareholder approval.
Note 9Commitments and contingencies
The Company is currently a member of a controlled group that
includes ACF, an entity in which Mr. Icahn has an indirect
ownership of at least 80%. ACF is the sponsor of several pension
plans that are underfunded, as of December 31, 2004, by a
total of approximately $24.1 million on an ongoing
actuarial basis and $172.4 million if those plans were
terminated, as most recently reported by the plans
actuaries. The liabilities could increase or decrease, depending
on a number of factors, including future changes in promised
benefits, investment returns and the assumptions used to
calculate the liability. As a member of the controlled group,
ARI would be jointly and severally liable for any failure of ACF
to pay the unfunded liabilities upon a termination of the ACF
pension plans. Upon completion of this offering, ARI believes
that it should no longer be a member of the ACF controlled
group. As a result, ARI should no longer be subject to
ACFs pension liabilities, unless it were determined that
ARI was otherwise a member of the ACF controlled group or that a
principal purpose of the offering or other transactions that
resulted in ARIs ceasing to be a member of the ACF
controlled group was to evade pension liabilities and the
termination date of the underfunded plan was within five years
after the offering or other transactions. If such a
determination were made and upheld by a court, ARI could remain
jointly and severally liable for pension plan obligations of
ACF, which could have a material adverse effect on ARIs
financial condition and results of operations.
In connection with Trans World Airlines, Inc.s (TWA) 1992
bankruptcy proceedings under Chapter 11 of the Bankruptcy
Code, the Pension Benefit Guarantee Corporation
(PBGC) asserted that ACF as well as the other
entities in which Mr. Icahn had a controlling interest were
obligated along with TWA to satisfy any underfunding of
TWAs defined benefit plan. Subsequently, and in response
to a petition of another member of the Icahn control group, PBGC
terminated the TWA pension plan and obligated an affiliate of
ARI, Highcrest Investors Corp. (Highcrest) to make eight annual
payments of $30 million each commencing on July 1,
2002 and totaling $240 million (termination payments). As
of December 31, 2004, Highcrest had made termination
payments totaling $130 million and still owed $110 million
on this obligation. The obligation to make termination payments
is non-recourse except to the common stock of ACF Holding
(another member of the control group). While ARI is a controlled
entity of Mr. Icahn, management believes this obligation
will have no adverse effect to the future liquidity, results of
operations, or financial position of ARI.
The Company is subject to comprehensive federal, state, local
and international environmental laws and regulations relating to
the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or
disposal of hazardous materials and wastes, or otherwise
relating to the protection of human health and the environment.
These laws and regulations
F-48
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
not only expose ARI to liability for the environmental condition
of its current or formerly owned or operated facilities, and its
own negligent acts, but also may expose ARI to liability for the
conduct of others or for ARIs actions that were in
compliance with all applicable laws at the time these actions
were taken. In addition, these laws may require significant
expenditures to achieve compliance, and are frequently modified
or revised to impose new obligations. Civil and criminal fines
and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations.
ARIs operations that involve hazardous materials also
raise potential risks of liability under common law. ARI is
involved in investigation and remediation activities at
properties that it now owns or leases to address historical
contamination and potential contamination by third parties. The
Company is also involved with state agencies in the cleanup of
two sites under these laws. These investigations are at a
preliminary stage, and it is impossible to estimate, with any
certainty, the timing and extent of remedial actions that may be
required, and the costs that would be involved in such
remediation. Substantially all of the issues identified relate
to the use of the properties prior to their transfer to ARI in
1994 by ACF and for which ACF has retained liability for
environmental contamination that may have existed at the time of
transfer to ARI. ACF has also agreed to indemnify ARI for any
cost that might be incurred with those existing issues. However,
if ACF fails to honor its obligations to ARI, ARI would be
responsible for the cost of such remediation. The Company
believes that its operations and facilities are in substantial
compliance with applicable laws and regulations and that any
noncompliance is not likely to have a material adverse effect on
its operations or financial condition.
When it is possible to make a reasonable estimate of the
liability with respect to such a matter, a provision will be
made as appropriate. Actual cost to be incurred in future
periods may vary from these estimates. Based on facts presently
known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future
liquidity, results of operations or financial position.
Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against ARI.
In the opinion of management, all such claims, suits, and
complaints arising in the ordinary course of business are
without merit or would not have a significant effect on the
future liquidity, results of operations or financial position of
ARI if disposed of unfavorably.
ARI is a party to collective bargaining agreements with labor
unions at its Longview, Texas and North Kansas City, Missouri
repair facilities and at its Longview, Texas steel foundry and
components manufacturing facility. These agreements expire in
January 2008, September 2007, and April 2008, respectively. We
are also party to a collective bargaining agreement at our
Milton, Pennsylvania repair facility, which expired on June 19,
2005. At the present time, there are no workers at Milton, as
the site is idled.
The Company was named a party to a suit in which the plaintiff
alleges the Company was responsible for the malfunction of a
valve which was remanufactured in 2004 by a third party. The
Company believes it has no responsibility for this malfunction
and has a meritorious defense against any liability in this
case. In any event, it is not possible to estimate the expected
settlement, if any, that any party might be held accountable for
at this time as the case is in its early stages.
ARI entered two supply agreements on January 28, 2005 and
on June 8, 2005 with a supplier for two types of steel
plates. The agreement is for five years and is cancelable by
either party, with proper notice after two years. The agreement
commits ARI to buy 75% of its production needs from this
supplier at prices that fluctuate with market.
F-49
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
In August 2005, the company entered into employment agreement
with its Chief Financial Officer (CFO). The agreement provides
for a bonus that will be earned upon the successful completion
of an Initial Public Offering. Under the terms of the agreement,
the CFO will receive a minimum annual base salary of
$0.25 million and a non-prorated cash bonus of at least
$0.15 million for the 2005 fiscal year. In addition to the
salary and bonus compensation, the CFO will receive a one-time
special cash bonus of $0.5 million on April 22, 2007 if,
prior to that date, the Company issues common stock to the
public in an offering registered with the SEC or if the Company
is sold to a third party in a private transaction.
The Company has been named as the defendant in a lawsuit in
which the plaintiff claims that the Company is responsible for
the damage caused by allegedly defective railcars that were
manufactured by the Company. The plaintiffs allege that failures
in certain components caused the contents transported by these
railcars to spill out of the railcars causing property damage,
clean-up costs, monitoring costs, testing costs and other costs
and damages. The Company was recently served with the complaint
for this lawsuit, but Management believes that the Company is
not responsible for the spills and has meritorious defenses
against liability.
Note 10New Preferred Stock
The New Preferred Stock is entitled to cumulative dividends at
the rate of 9.25% per annum, payable solely in cash on a
semi annual basis. Holders of the New Preferred Stock are
entitled to vote on matters submitted to the holders of shares
of common stock based on a percentage of the combined number of
shares of common stock and New Preferred Stock. Dividends
declared on the New Preferred Stock for the nine months ended
September 30, 2005 were $9.3 million.
Note 11Operating Segment and Sales/ Credit
Concentrations
ARI operates in two reportable segments; manufacturing and
railcar services. The accounting policies of the segments are
the same as those described in the summary of significant
accounting policies in Note 2. Performance is evaluated
based on revenue and operating profit. Intersegment sales and
transfers are accounted for as if sales or transfers were to
third parties.
The information in the following table is derived from the
segments internal financial reports used for corporate
management purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate
|
|
|
|
|
|
nine months ended September 30, 2004
|
|
Operations
|
|
|
Services
|
|
|
& All Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
226,759
|
|
|
$
|
27,572
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
254,331
|
|
Intersegment revenues
|
|
|
2,357
|
|
|
|
2,505
|
|
|
|
|
|
|
|
(4,862
|
)
|
|
|
|
|
Cost of goods sold external customers
|
|
|
216,027
|
|
|
|
24,585
|
|
|
|
|
|
|
|
|
|
|
|
240,612
|
|
Cost of intersegment sales
|
|
|
2,103
|
|
|
|
2,135
|
|
|
|
|
|
|
|
(4,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,986
|
|
|
|
3,357
|
|
|
|
|
|
|
|
(624
|
)
|
|
|
13,719
|
|
Selling, administration and other
|
|
|
3,983
|
|
|
|
1,319
|
|
|
|
3,241
|
|
|
|
|
|
|
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
7,003
|
|
|
$
|
2,038
|
|
|
$
|
(3,241
|
)
|
|
$
|
(624
|
)
|
|
$
|
5,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
133,003
|
|
|
$
|
32,101
|
|
|
$
|
135,660
|
|
|
$
|
|
|
|
$
|
300,764
|
|
Capital expenditures
|
|
|
6,733
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
6,868
|
|
Depreciation & amortization
|
|
|
2,929
|
|
|
|
1,518
|
|
|
|
327
|
|
|
|
|
|
|
|
4,774
|
|
F-50
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate
|
|
|
|
|
|
nine months ended September 30, 2005
|
|
Operations
|
|
|
Services
|
|
|
& All Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
409,208
|
|
|
$
|
32,940
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
442,148
|
|
Intersegment revenues
|
|
|
666
|
|
|
|
1,911
|
|
|
|
|
|
|
|
(2,577
|
)
|
|
|
|
|
Cost of goods sold external customers
|
|
|
377,181
|
|
|
|
27,538
|
|
|
|
|
|
|
|
|
|
|
|
404,719
|
|
Cost of intersegment sales
|
|
|
595
|
|
|
|
1,474
|
|
|
|
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,098
|
|
|
|
5,839
|
|
|
|
|
|
|
|
(508
|
)
|
|
|
37,429
|
|
Selling, administration and other
|
|
|
4,077
|
|
|
|
1,442
|
|
|
|
5,898
|
|
|
|
|
|
|
|
11,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
28,021
|
|
|
$
|
4,397
|
|
|
$
|
(5,898
|
)
|
|
$
|
(508
|
)
|
|
$
|
26,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
175,669
|
|
|
$
|
31,888
|
|
|
$
|
54,467
|
|
|
$
|
|
|
|
$
|
262,024
|
|
Capital expenditures
|
|
|
15,595
|
|
|
|
568
|
|
|
|
193
|
|
|
|
|
|
|
|
16,356
|
|
Depreciation & amortization
|
|
|
3,372
|
|
|
|
1,453
|
|
|
|
147
|
|
|
|
|
|
|
|
4,972
|
|
Manufacturing operations
Revenues from affiliates were 20% and 11% of total manufacturing
revenues for the nine months ended September 30, 2004 and
2005, respectively. Revenues from five significant customers
totaled 18%, 17%, 15%, 11% and 11% of total manufacturing
revenues for the nine months ended September 30, 2005.
Revenues from three significant customers totaled 23%, 21% and
19% of total manufacturing revenues for the nine months ended
September 30, 2004. Receivables from these customers
totaled 26% and 40% of total receivables at September 30,
2004 and 2005, respectively.
Railcar services
Revenues from affiliates were 46% and 49% of total railcar
services revenues for the nine months ended September 30,
2004 and 2005, respectively. No customer accounted for more than
5% of railcar services revenue.
Note 12Supplemental Cash Flow Information
The Company received interest income of approximately
$2.1 million and $1.3 million for the nine months
ended September 30, 2004 and 2005, respectively.
ARI paid interest expense of $2.2 million and
$3.6 million for the nine months ended September 30,
2004 and 2005, respectively.
ARI paid taxes of $1.5 million and $0.3 million for
the nine months ended September 30, 2004 and 2005,
respectively.
In January 2005, ARI exchanged the $165.0 million secured
note with Mr. Icahn to ARL in satisfaction of the
$130.0 million note owed to ARL plus $35.0 million of
common interest in ARL.
Note 13Subsequent Events
We entered into two vendor supply contracts with minimum volume
commitments in October 2005, with suppliers of materials used at
our railcar production facilities. The agreements have terms of
two and three years respectively. We have agreed to purchase a
combined total of $67.6 million from these two suppliers
over the next three years. In 2006, 2007 and 2008 we expect to
purchase $16.0 million, $27.1 million and
$24.5 million respectively under these agreements.
F-51
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
In November 2005, ARI began discussions with ACF to release ARI
from all employee benefit reimbursement obligations under the
1994 Asset Transfer Agreement. The final settlement of all
obligations will be based on the actuarial valuation of
liabilities at December 1, 2005, which is in process, and
the market value of assets at the time of settlement.
When this transaction is completed, it is contemplated that ACF
will release ARI from all employee benefit reimbursement
obligations under the 1994 Asset Transfer Agreement in exchange
for ARI assuming sponsorship and all obligations of the
Shippers Car Line Pension Plan, including obligations
related to ACF participants in the Plan, and a cash payment to
ACF of approximately $9.2 million to settle all of its
obligations related to ARI employees included in the ACF
Retirement Plan. The Shippers Car Line Pension Plan has an
unfunded liability of $4.0 million, which will become the
obligation of ARI. ACF will continue to be responsible for the
ACF Retirement Plan and be responsible for all obligations of
that plan including obligations related to ARI employees who are
in the Plan. The ACF Retirement Plan was curtailed in April 2004.
The assets, liabilities and unfunded liability of the
Shippers Car Line Plan based on 2004 actuarial valuations
are as follows:
|
|
|
|
|
Projected benefit obligation
|
|
$
|
12.4 million
|
|
Assets at fair value
|
|
|
8.4 million
|
|
Underfunded status
|
|
|
4.0 million
|
|
The Shippers Car Line Plan assets consist mainly of equity
and debt securities.
In addition to the agreement related to pension plans, ARI will
assume sponsorship of a Retiree Medical and Retiree Life
Insurance plan for retirees of ARI and for active ARI employees
that will receive this benefit in the future. The post
retirement liability related to this obligation is estimated to
be $3.9 million based on the 2005 APBO valuation. ACF will
pay ARI approximately $2.9 million in exchange for assuming
the portion of this liability that relates to years prior to
1994. The 2006 projected expense and cash spending estimates
related to these benefits were $0.2 million and
$0.3 million, respectively.
The total amount of the obligations to be assumed by ARI is
estimated to be $14.2 million. ARI has previously accrued
an estimated liability related to this settlement of
$3.8 million. ARI will record an increase in the estimated
liability of $10.4 million and a loss on the settlement of
the same amount. The net cash payment to ACF related to this
transaction, and included in the numbers above, will be
approximately $6.3 million ($9.2 million less $2.9
million).
ARI intends to reincorporate from Missouri to Delaware in
connection with its initial public offering. To accomplish this
reincorporation, it is contemplated that, immediately prior to
the closing of the offering, ARI will merge into its wholly
owned subsidiary, American Railcar Industries, Inc., a Delaware
corporation incorporated on November 16, 2005 by ARI for
this purpose. The subsidiary will survive the merger and will be
named American Railcar Industries, Inc.
F-52
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the Nine Months Ended September 30, 2004 and 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Ohio Castings Company, LLC
We have audited the accompanying consolidated balance sheets of
Ohio Castings Company, LLC and subsidiaries (the
Company) as of August 31, 2005, 2004 and 2003,
and the related consolidated statements of operations,
members equity and cash flows for the year ended
August 31, 2005 and 2004, and the period from inception
(June 20, 2003) to August 31, 2003. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America as
established by the Auditing Standards Board of the American
Institute of Certified Public Accountants. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ohio Castings Company, LLC as of
August 31, 2005, 2004 and 2003, and the consolidated
results of their operations and their cash flows for the year
ended August 31, 2005, 2004 and the period from inception
(June 20, 2003) to August 31, 2003, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Grant Thornton LLP
Chicago, Illinois
December 1, 2005
F-53
Ohio Castings Company, LLC and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
811
|
|
|
$
|
1,922
|
|
|
$
|
2,026
|
|
|
Accounts receivable, net
|
|
|
4,808
|
|
|
|
10,802
|
|
|
|
8,522
|
|
|
Inventories
|
|
|
2,242
|
|
|
|
5,275
|
|
|
|
5,827
|
|
|
Other Assets
|
|
|
393
|
|
|
|
112
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,254
|
|
|
|
18,111
|
|
|
|
17,134
|
|
Restricted cash
|
|
|
|
|
|
|
935
|
|
|
|
800
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
|
|
|
|
2,178
|
|
|
|
2,192
|
|
|
Machinery and equipment
|
|
|
79
|
|
|
|
12,052
|
|
|
|
14,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
14,230
|
|
|
|
17,058
|
|
|
Less accumulated depreciation and amortization
|
|
|
3
|
|
|
|
854
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
13,376
|
|
|
|
15,212
|
|
|
Land
|
|
|
|
|
|
|
270
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
76
|
|
|
|
13,646
|
|
|
|
15,482
|
|
Debt issuance costs, net
|
|
|
|
|
|
|
254
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,330
|
|
|
$
|
32,946
|
|
|
$
|
33,630
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt, net of debt discount of $14
in 2005
|
|
$
|
|
|
|
$
|
2,370
|
|
|
$
|
3,700
|
|
|
Current portion of capital leases
|
|
|
20
|
|
|
|
20
|
|
|
|
16
|
|
|
Accounts payable
|
|
|
1,369
|
|
|
|
7,850
|
|
|
|
7,246
|
|
|
Accrued expenses
|
|
|
570
|
|
|
|
3,046
|
|
|
|
3,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,959
|
|
|
|
13,286
|
|
|
|
14,931
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion, net of debt discount of
$51 in 2005
|
|
|
|
|
|
|
14,725
|
|
|
|
11,838
|
|
|
Long-term portion of capital leases, net of current portion
|
|
|
38
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
38
|
|
|
|
14,741
|
|
|
|
11,838
|
|
|
|
Total liabilities
|
|
|
1,997
|
|
|
|
28,027
|
|
|
|
26,769
|
|
Members equity
|
|
|
6,333
|
|
|
|
4,919
|
|
|
|
6,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
8,330
|
|
|
$
|
32,946
|
|
|
$
|
33,630
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-54
Ohio Castings Company, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period From
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
(June 20,
|
|
|
|
|
|
2003) to
|
|
|
Years Ended August 31,
|
|
|
|
August 31,
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
Revenues
|
|
$
|
5,039
|
|
|
$
|
55,722
|
|
|
$
|
109,801
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
4,860
|
|
|
|
54,974
|
|
|
|
101,518
|
|
|
Selling, administrative and other
|
|
|
144
|
|
|
|
4,666
|
|
|
|
5,698
|
|
|
Interest expense
|
|
|
|
|
|
|
496
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,004
|
|
|
|
60,136
|
|
|
|
107,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
35
|
|
|
$
|
(4,414
|
)
|
|
$
|
1,942
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-55
Ohio Castings Company, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period From
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
(June 20,
|
|
|
|
|
|
2003) to
|
|
|
Years Ended August 31
|
|
|
|
August 31,
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
35
|
|
|
$
|
(4,414
|
)
|
|
$
|
1,942
|
|
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3
|
|
|
|
878
|
|
|
|
1,032
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,808
|
)
|
|
|
(5,994
|
)
|
|
|
2,280
|
|
|
Inventories
|
|
|
(408
|
)
|
|
|
(3,033
|
)
|
|
|
(552
|
)
|
|
Other assets
|
|
|
(393
|
)
|
|
|
281
|
|
|
|
(647
|
)
|
|
Accounts payable
|
|
|
1,369
|
|
|
|
6,481
|
|
|
|
(604
|
)
|
|
Accrued expenses
|
|
|
400
|
|
|
|
2,476
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(3,802
|
)
|
|
|
(3,325
|
)
|
|
|
4,309
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
(1,664
|
)
|
|
|
(12,000
|
)
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(17
|
)
|
|
|
(2,424
|
)
|
|
|
(2,828
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,681
|
)
|
|
|
(14,424
|
)
|
|
|
(2,828
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
17,750
|
|
|
|
|
|
|
Payments of debt
|
|
|
|
|
|
|
(655
|
)
|
|
|
(1,492
|
)
|
|
Payments of capital lease obligations
|
|
|
(4
|
)
|
|
|
(22
|
)
|
|
|
(20
|
)
|
|
Debt issuance costs
|
|
|
|
|
|
|
(278
|
)
|
|
|
|
|
|
Net change in restricted cash
|
|
|
|
|
|
|
(935
|
)
|
|
|
135
|
|
|
Investment from members
|
|
|
6,298
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
6,294
|
|
|
|
18,860
|
|
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
811
|
|
|
|
1,111
|
|
|
|
104
|
|
Cash at beginning of year
|
|
|
|
|
|
|
811
|
|
|
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
811
|
|
|
$
|
1,922
|
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-56
Ohio Castings Company, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
(Dollars in thousands)
|
|
|
|
|
Balance at inception (June 20, 2003)
|
|
$
|
|
|
Capital contributions
|
|
|
6,298
|
|
Net loss
|
|
|
35
|
|
|
|
|
|
Balance, August 31, 2003
|
|
|
6,333
|
|
Net loss
|
|
|
(4,414
|
)
|
Capital contributions
|
|
|
3,000
|
|
|
|
|
|
Balance, August 31, 2004
|
|
|
4,919
|
|
Net earnings
|
|
|
1,942
|
|
|
|
|
|
Balance, August 31, 2005
|
|
$
|
6,861
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-57
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
Note 1Basis of Presentation
The accompanying consolidated financial statements of Ohio
Castings Company, LLC and Subsidiaries (Ohio
Castings or the Company) have been prepared in
accordance with accounting principles generally accepted in the
United States of America, applied on a consistent basis
throughout the periods covered.
The consolidated financial statements include the accounts of
Ohio Castings and its subsidiaries, Alliance Castings Company,
LLC (Alliance Castings) and Chicago Castings
Company, LLC (Chicago Castings). All significant
intercompany accounts and transactions have been eliminated.
Amounts presented in thousands unless otherwise noted.
Note 2Description of the Business
Ohio Castings was formed on June 20, 2003 to acquire and
operate two steel foundries. The members of Ohio Castings, each
with a one-third ownership, are Gunderson Specialty Products,
LLC (Gunderson), an Oregon company and wholly-owned
subsidiary of Gunderson, Inc., an Oregon corporation; Castings,
LLC (Castings), a Delaware company and wholly-owned
subsidiary of American Railcar Industries, Inc.
(ARI), a Missouri corporation and ASF-Keystone, Inc.
(ASF), a Delaware corporation and wholly-owned
subsidiary of Amsted Industries, a Delaware corporation
(collectively, the members). ARI acquired its
ownership interest from ACF Industries Holding Corporation
(ACF), an affiliate of ARI, in 2005. The members
share equally in the profits and losses of Ohio Castings. The
steel foundries are operated for the purpose of casting railcar
sideframes and bolsters for use or sale by the Ohio Castings
members.
Formation and Capital Contributions
Chicago Castings was formed in June, 2003 and capitalized
through contributions of $6,298 by the members. Alliance
Castings was formed in September, 2003 and capitalized through
contributions of $3,000 by the members.
Acquisitions
On June 20, 2003, Chicago Castings purchased certain assets
from the Meridian Rail Products Corporation
(Meridian) foundry business located in Cicero,
Illinois. The effects of the transaction on the consolidated
balance sheet as of June 20, 2003, were as follows:
|
|
|
|
|
Inventory
|
|
$
|
1,834
|
|
Accrued liabilities
|
|
|
(170
|
)
|
On September 30, 2003, Alliance Castings purchased real and
personal property from Amsted Industries, Inc. and ASF for use
in the operation of a foundry in Alliance, Ohio. Total
consideration paid was $12,000; no liabilities were assumed in
the transaction. The effects of the acquisition on the
consolidated balance sheet as of September 30, 2003, were
as follows:
|
|
|
|
|
Land
|
|
$
|
270
|
|
Buildings
|
|
|
2,178
|
|
Equipment
|
|
|
9,552
|
|
F-58
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
Both transactions were accounted for using the purchase method
of accounting and the purchase price was allocated to the assets
acquired based upon relative fair values.
Note 3Summary of Significant Accounting
Policies
Significant accounting policies are described below.
Revenue Recognition
Sales are recorded when the product is shipped to the customer
and title is transferred. All shipments are made FOB shipping
point.
Debt Issuance Costs
Debt issuance costs are incurred in connection with Ohio
Castings issuance of long-term debt as described in Note 5,
and are amortized over the term of the related debt, utilizing
the straight-line method. Amortization expense of $24 and $40
was recognized for the year ended August 31, 2004, and
2005, respectively. Accumulated amortization totaled $24 and $54
at August 31, 2004 and 2005, respectively. There was no
amortization expense or accumulated amortization as of and for
the period from inception (June 20, 2003) to
August 31, 2003.
Inventories
Inventories are recorded using the first-in first-out
(FIFO) method and are stated at the lower of cost or
market. Inventory includes the cost of materials, direct labor
and manufacturing overhead.
Accounts Receivable
The Company carries its accounts receivable at cost, less an
allowance for doubtful accounts. On a periodic basis, the
Company evaluates its account receivable and establishes an
allowance for doubtful accounts, based on a history of past
write-offs, collections and current credit conditions. Accounts
are placed for collection on a limited basis once all other
methods of collection have been exhausted. Once it has been
determined that the customer is no longer in business and/or
refuses to pay, the accounts are written off. At August 31,
2005, an allowance of $85 is recorded against receivables. No
allowance was recorded at August 31, 2003 and 2004. No
amounts were written off during the period from inception
(June 20, 2003) to August 31, 2003 and the years ended
August 31, 2004 and 2005, respectively.
Property, Plant and Equipment
Land, buildings, machinery and equipment are carried at cost.
Maintenance and repair costs are charged directly to earnings.
Buildings are depreciated over estimated useful lives that range
from 14 to 50 years. The estimated useful lives of
machinery and equipment, vary from 3 to 25 years.
Depreciation is calculated on the straight-line method for
financial reporting purposes and on accelerated methods for tax
purposes. Depreciation expense of $3, $854 and $992 was
recognized for the period from inception (June 20, 2003) to
August 31, 2003 and for the years ended August 31,
2004 and 2005, respectively.
F-59
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate the carrying
amount of assets held for use may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the
asset would be compared to the assets carrying amount. If
the carrying amount of an asset is less than the future
undiscounted cash flows expected to be generated by the asset,
the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of
the asset. No impairment of long-lived assets was determined for
the period from inception (June 20, 2003) to
August 31, 2003 and for the years ended August 31,
2004 and 2005, respectively.
Income Taxes
Ohio Castings is organized as a limited liability company and is
not subject to Federal income taxes. The Companys taxable
income is reported in the tax returns of the members.
Accordingly, no liability or provision for Federal income taxes
is included in the accompanying consolidated financial
statements as of and for the periods ending August 31,
2003, 2004 and 2005.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts
payable approximate fair values because of the short-term
maturity of these instruments. The fair value of long-term debt
is discussed in Note 5. Fair value estimates are made at a
specific point in time, based on relevant market information
about the financial instrument. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Restricted Cash
Alliance Castings is required to maintain a cash balance in an
escrow account equal to 10% of the outstanding principal on the
enterprise bond described in Note 5. Alliance Castings is
entitled to interest earned on the escrow balance which totaled
$4 and $17 for the years ended August 31, 2004 and 2005,
respectively. There were no restricted cash balances or interest
recorded as of and for the period ended August 31, 2003.
Use of Estimates
Management of Ohio Castings has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets
and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the
United States of America. Significant items subject to estimates
and assumptions include property, plant and equipment, inventory
reserves and workers compensation. Actual results could
differ from those estimates.
F-60
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
Note 4Inventories
Inventories consist of the following at August 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
Raw materials
|
|
$
|
515
|
|
|
|
953
|
|
|
$
|
433
|
|
Work in process
|
|
|
1,440
|
|
|
|
3,097
|
|
|
|
4,781
|
|
Finished products
|
|
|
677
|
|
|
|
1,520
|
|
|
|
1,459
|
|
Less reserves
|
|
|
(390
|
)
|
|
|
(295
|
)
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
2,242
|
|
|
$
|
5,275
|
|
|
$
|
5,827
|
|
|
|
|
|
|
|
|
|
|
|
Note 5Long-Term Debt
Long-term debt consists of the following at August 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
|
2005
|
|
|
|
Enterprise bonds to the Director of Development of the State of
Ohio due on December 1, 2010, at 3.90% interest payable in
quarterly installments to a trustee pursuant to a payment
schedule. The bonds are guaranteed by the members
|
|
$
|
|
|
|
$
|
9,345
|
|
|
$
|
8,000
|
|
Term note payable to the State of Ohio, to be comprised of two
separate disbursements of $1,000 at 1% interest (modified from
3% in January 2005), with interest-only payments until
disbursement of the second installment and monthly payments of
principal and interest thereafter, reported net of debt discount
of $65 in 2005
|
|
|
|
|
|
|
1,000
|
|
|
|
935
|
|
Notes payable to the members, payable in quarterly principal and
interest payments at 4% interest due November 2008
|
|
|
|
|
|
|
6,750
|
|
|
|
6,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,095
|
|
|
|
15,538
|
|
Less current portion of debt
|
|
|
|
|
|
|
2,370
|
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
|
|
|
$
|
14,725
|
|
|
$
|
11,838
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate maturities of long-term debt over the next five years,
as of August 31, 2005, are as follows (in thousands):
|
|
|
|
|
2006
|
|
$
|
3,700
|
|
2007
|
|
|
3,591
|
|
2008
|
|
|
3,653
|
|
2009
|
|
|
2,233
|
|
2010
|
|
|
1,801
|
|
Thereafter
|
|
|
560
|
|
In association with the Enterprise bonds, the Company paid $15
and $20 in administration and trustee fees for the years ended
August 31, 2004 and 2005. The fees vary with costs incurred
by the trustee and changes in the outstanding principle of the
bonds. The administration fee equaled .10% and .125% at
August 31, 2004 and 2005, respectively. The trustee fee
equaled .01% and .16% at
F-61
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
August 31, 2004 and 2005, respectively. The bonds are
secured by substantially all of the assets of the Company and
subject to mandatory redemption by the state at any time. A
number of non-financial covenants under the agreement have been
met for the periods ended August 31, 2004 and 2005.
In connection with the term note, the Company shall receive two
disbursements of $1,000 from the State of Ohio. The first
installment was received in May 2004. The second installment is
expected to be received in December 2005, following the
completion of qualified capital expenditures.
The Company had no outstanding debt as of and for the period
ended August 31, 2003. Accordingly, no interest expense or
fees associated with the aforementioned debt were recorded in
the financial statements for the period ended August 31,
2003.
Note 6Capital Leases
The Company leases certain machinery and equipment for use in
the businesses. These leases have been accounted for as capital
leases and mature in 2006. Scheduled future minimum lease
payments required under the capital leases are $16 at
August 31, 2005, which are due in 2006. Machinery and
equipment include assets under capitalized leases of $58, $39
and $18 at August 31, 2003, 2004 and 2005, respectively.
Note 7Related-Party Transactions
The majority of the Companys products are sold to one of
the members through supply agreements. The supply agreements
have an original term of 5 years and expire in 2008. The
other members have supply agreements in place with this member
to purchase a defined percentage of the products produced by
Ohio Castings. These agreements also have a term of 5 years
and expire in 2008. A balance of $4,614, $8,688 and $10,534 is
due from this member as of August 31, 2003, 2004 and 2005,
respectively, which has been classified as accounts receivables.
Alliance Castings purchases a majority of its scrap steel used
in production from an affiliate of one of the members of Ohio
Castings. A balance of $1,203 and $662 is due to this affiliate
as of August 31, 2004 and 2005, respectively. No amounts
were due at August 31, 2003. The balance is included in
accounts payable.
Note 8Commitments and Contingencies
As of August 31, 2005, future minimum rental payments
required under non-cancelable operating leases for property and
equipment leased by Ohio Castings, with lease terms longer than
one year are as follows (in thousands):
|
|
|
|
|
2006
|
|
$
|
241
|
|
2007
|
|
|
67
|
|
2008
|
|
|
55
|
|
2009
|
|
|
46
|
|
2010
|
|
|
44
|
|
Rent expense on the related leases was $62, $394, and $445 for
the period from inception (June 20, 2003) to
August 31, 2003 and the years ended August 31, 2004
and 2005, respectively.
F-62
Ohio Castings Company, LLC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Period from Inception (June 20, 2003) to August 31,
2003 and the
Years Ended August 31, 2004 and 2005
A monthly rental agreement was negotiated between Chicago
Castings and Meridian for the rental of the real property at the
Cicero foundry. Rent expense under this agreement was $25, $600,
and $600 for the period from inception (June 20, 2003) to
August 31, 2003 and the years ending August 31, 2004
and 2005, respectively.
Chicago Castings currently purchases general utilities and waste
removal under negotiated service contracts from unrelated third
parties. The contracts are generally under a twelve-month
period, with a right to renewal. Under the terms of the
contracts, the cost is based on market price, and charged based
on consumption.
The Company is involved in certain matters of litigation,
substantially all of which have arisen in the ordinary course of
business. It is the opinion of management that these matters are
either adequately covered by insurance or that the resulting
liability, if any, from these actions and other pending claims
will not materially affect the Companys financial position.
Note 9Business and Credit Concentrations
The Company has an exclusive supply arrangement with one of the
members whereby 100% of the castings produced by the Company are
sold to the member, as described in Note 7.
Note 10Employee Benefit Plan
The Company maintains defined contribution plans which cover all
employees. Participants under 50 years old may elect to
defer up to $13 of eligible compensation. Participants
50 years or older may elect to defer up to $15 of eligible
compensation. Participants are fully vested in all contributions
made to the plan. Employer contributions are made to the plan
based on number of hours worked for employees covered by a
collective bargaining agreement and as a percentage of annual
salary for all other employees. Contributions of $121 and $350
were made for the years ending August 31, 2004 and 2005,
respectively. No amounts were contributed for the period from
inception (June 20, 2003) to August 31, 2003.
Note 11Supplemental Cash Flow Data
The Company incurred interest expense of $496 and $630 for the
years ended August 31, 2004 and 2005, respectively.
In 2003, the Company entered into $62 in capital lease
agreements to finance the purchase of equipment.
The Company amortized $13 of the debt discount relating to the
term loan in 2005.
F-63
Until ,
2006 (the 25th day after the date of this prospectus), all
dealers that effect transactions in our common stock, whether or
not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other expenses of issuance and distribution.
|
The following are the estimated expenses to be incurred in
connection with the issuance and distribution of the securities
registered under this Registration Statement, other than
underwriting discounts and commissions. All amounts shown are
estimates except the Securities and Exchange Commission
registration fee, the National Association of Securities
Dealers, Inc. filing fee and the Nasdaq National Market listing
fee. The following expenses will be borne solely by the
registrant.
|
|
|
|
|
|
SEC Registration Fee
|
|
$
|
17,655
|
|
NASD Filing Fee
|
|
$
|
15,500
|
|
Nasdaq Listing Fee
|
|
|
*
|
|
Transfer Agent Fees and Expenses
|
|
$
|
3,500
|
|
Costs of Printing and Engraving
|
|
|
*
|
|
Legal Fees and Expenses
|
|
|
*
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
Director and Officer Liability Insurance Premium
|
|
|
*
|
|
Blue Sky Fees and Expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
*
|
To be provided by amendment.
|
|
|
Item 14.
|
Indemnification of directors and officers.
|
Sections 145(a) and (b) of The Delaware General
Corporation Law, or the DGCL, provide that a corporation may
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnity may
include expenses, including attorneys fees, judgments,
fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful, except that, in the case of an action or
suit by or in the right of the corporation, the corporation may
not indemnify such persons against judgments and fines and no
person shall be indemnified as to any claim, issue or matter as
to which such person shall have been adjudged to be liable to
the corporation, unless and only to the extent that the court in
which the action or suit was brought determines upon application
that, despite the adjudication of liability and in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses that the
court deems proper.
Section 145(c) of the DGCL provides that, our certificate
of incorporation, to the extent a director, officer, employee or
agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to in Section 145(a) and (b) of the DGCL, or in
defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys fees,
actually and reasonably incurred by him in connection with the
action, suit or proceeding.
II-1
Part II
Our bylaws will generally provide that the corporation shall
indemnify each person (other than a party plaintiff suing on his
or her own behalf or in the right of the corporation) who at any
time is serving or has served as a director or officer of the
corporation against any claim, liability or expense incurred as
a result of such service (or as a result of any other service on
behalf of or at the request of the corporation) to the maximum
extent permitted by law. This indemnification includes, but is
not limited to, indemnification of any such person (other than a
party plaintiff suing on his or her behalf or in the right of
the corporation), who was or is a party or is threatened to be
made a party, to any threatened, pending or completed action,
suit or proceeding (including, but not limited to, an action by
or in the right of the corporation) by reason of such service
against expenses (including, without limitation, costs of
investigation and attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
him or her in connection with such action, suit or proceeding.
Our bylaws will further generally provide that the corporation
may indemnify any person (other than a party plaintiff suing on
his or her own behalf or in the right of the corporation) who at
any time is serving or has served as an employee or agent of the
corporation against any claim, liability or expense incurred as
a result of such service (or as a result of any other service on
behalf of or at the request of the corporation) to the maximum
extent permitted by law or to such lesser extent as the
corporation, in its discretion, may deem appropriate. Without
limiting the generality of the foregoing, the corporation may
indemnify any such person (other than a party plaintiff suing on
his or her own behalf or in the right of the corporation), who
was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding
(including, but not limited to, an action by or in the right of
the corporation) by reason of such service, against expenses
(including, without limitation, costs of investigation and
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding.
Our bylaws will also provide that the corporation may purchase
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any
such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to
indemnify such person against liability under the
indemnification provisions of the corporations bylaws. The
corporation has obtained director and officer liability
insurance.
The foregoing represents a summary of the general effect of the
indemnification and insurance provisions of the DGCL, the
certificate of incorporation, the bylaws and such agreements.
Additional information regarding indemnification of directors
and officers can be found in Section 145 of the DGCL, the
certificate of incorporation and the bylaws.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
or persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and
is therefore unenforceable.
|
|
Item 15.
|
Recent sales of unregistered securities.
|
The following information is furnished with regard to all
securities issued by us since July 15, 2002 that were not
registered under the Securities Act.
Prior to the closing of this offering and in connection with our
merger, we plan to effect
a for-one split of our
common stock. All references to numbers of shares and prices of
capital stock give effect to the stock split. All of the
securities issued in the following transactions were sold in
reliance
II-2
Part II
upon the exemptions from registration set forth in
Sections 3(a)(9) and 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. There were
no underwriters employed in connection with any of the
transactions set forth in this Item 15.
|
|
|
|
(1)
|
In June 2003 Vegas Financial Corp., a company beneficially owned
and controlled by Carl C. Icahn, our principal beneficial
stockholder and the chairman of our board of directors, invested
$10.0 million for 10,000 shares of our payment-in-kind
preferred stock, which we refer to as our PIK preferred stock.
|
|
|
(2)
|
During the period July 15, 2002 through December 2003, we
issued to Vegas Financial Corp., the sole owner of our PIK
preferred stock, 8,531.65 shares of PIK preferred stock as
a dividend on the PIK preferred stock.
|
|
|
(3)
|
In July 2004, Vegas Financial Corp. converted all of its PIK
preferred stock, consisting of 95,517.04 shares of PIK
preferred stock and representing all of the shares of PIK
preferred stock then outstanding and dividend accrued thereon,
into 96,171 shares of our new preferred stock. The PIK
preferred stock was valued at the liquidation preference of
95.6 million plus accrued and unpaid dividends of
0.7 million on such PIK preferred stock converted. At that
time Vegas Financial Corp. also invested $67.5 million for
an additional 67,500 shares of our new preferred stock.
|
|
|
(4)
|
In July 2004, Hopper Investments LLC, a company beneficially
owned and controlled by Mr. Icahn, invested
$42.5 million for 195 shares of our common stock.
|
|
|
(5)
|
In July 2004, we issued ACF Industries, Incorporated
2,000 shares of our new preferred stock in exchange for ACF
Industries, Incorporated transferring certain assets to us. The
assets were valued at $2 million equaling the liquidation
preference for the new preferred stock issued. The assets so
transferred to us were subsequently transferred to American
Railcar Leasing, LLC.
|
|
|
(6)
|
In December 2004, we issued 32,500 shares of our new
preferred stock to Shippers Second LLC, a subsidiary of ACF
Industries, Incorporated, in exchange for Shippers Second
transferring certain assets to us. The assets were valued at
$32.5 million equalling the liquidation preference for the new
preferred stock issued. The assets so transferred to us were
subsequently transferred to American Railcar Leasing LLC.
|
|
|
(7)
|
In July 2004, American Railcar Leasing LLC issued 40,000 B-units
of American Railcar Leasing LLC to ACF Industries, Incorporated
and its subsidiaries in consideration of the transfer of assets
to American Railcar Leasing LLC. The B-units of American Railcar
Leasing LLC were convertible into shares of our new preferred
stock. On June 30, 2005, the terms of the B-Units were
modified, among other things, to eliminate this conversion
feature. We did not issue any shares of our capital stock in
connection with these transactions.
|
|
|
Item 16.
|
Exhibits and financial statement schedules.
|
See Exhibit Index at the end of this registration statement.
|
|
(b)
|
Financial Statement Schedules
|
No financial statement schedules of the registrant are included
in Part II of the Registration Statement.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, are
inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and
therefore has been omitted.
II-3
Part II
(a) The undersigned registrant hereby undertakes to provide
to the Underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification by the registrant for
liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 14 of this
Registration Statement or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered hereunder, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
|
|
|
|
(1)
|
For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon
Rule 430A and contained in the form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared
effective.
|
|
|
(2)
|
For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be
the initial
bona fide
offering thereof.
|
II-4
Signatures
Pursuant to the requirements of the Securities Act of 1933 (as
amended, the Securities Act), American Railcar
Industries, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Charles, State of Missouri, on
December 12, 2005.
|
|
|
American Railcar Industries, Inc.
|
|
|
|
|
|
Name: James J. Unger
|
|
Title: President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
Title
|
|
Date
|
Signature
|
|
|
|
|
|
|
/s/ James J. Unger
Name:
James J. Unger
|
|
President and Chief Executive Officer (principal executive
officer) and Director
|
|
December 12, 2005
|
|
/s/ William P. Benac
Name:
William P. Benac
|
|
Chief Financial Officer (principal financial officer)
|
|
December 12, 2005
|
|
/s/ Michael E. Vaughn
Name:
Michael E. Vaughn
|
|
Controller (principal accounting officer)
|
|
December 12, 2005
|
|
/s/ Vincent J. Intrieri
Name:
Vincent J. Intrieri
|
|
Director
|
|
December 12, 2005
|
|
/s/ Jon F. Weber
Name:
Jon F. Weber
|
|
Director
|
|
December 12, 2005
|
|
/s/ Keith Meister
Name:
Keith Meister
|
|
Director
|
|
December 12, 2005
|
II-5
Exhibit index
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement by and among UBS Securities LLC,
Bear, Stearns & Co. Inc. and American Railcar
Industries, Inc.**
|
|
2
|
.1
|
|
Form of Agreement and Plan of Merger between American Railcar
Industries, Inc. (Missouri) and American Railcar Industries,
Inc. (Delaware)*
|
|
3
|
.1
|
|
Certificate of Incorporation of American Railcar Industries,
Inc. (Delaware)*
|
|
3
|
.2
|
|
Bylaws of American Railcar Industries, Inc. (Delaware)*
|
|
3
|
.3
|
|
Form of Certificate of Ownership and Merger of American Railcar
Industries, Inc. (Missouri) and American Railcar Industries,
Inc. (Delaware)*
|
|
4
|
.1
|
|
Specimen Common Stock Certificate of American Railcar
Industries, Inc. (Delaware)*
|
|
4
|
.2
|
|
Form of Registration Rights Agreement*
|
|
5
|
.1
|
|
Opinion of Brown Rudnick Berlack Israels LLP**
|
|
10
|
.1
|
|
Asset Transfer Agreement dated as of October 1, 1994 by and
among ACF Industries, Incorporated, American Railcar Industries,
Inc. and Carl C. Icahn*
|
|
10
|
.2
|
|
License Agreement dated as of October 1, 1994 by and
between ACF Industries, Incorporated and American Railcar
Industries, Inc. as Licensee*
|
|
10
|
.3
|
|
License Agreement dated as of October 1, 1994 by and
between American Railcar Industries, Inc. and ACF Industries,
Incorporated as Licensee*
|
|
10
|
.4
|
|
Manufacturing Services Agreement dated as of October 1,
1994 between ACF Industries, Incorporated and American Railcar
Industries, Inc., as ratified and amended on June 30, 2005*
|
|
10
|
.5
|
|
Amended and Restated Railcar Servicing Agreement dated as of
June 30, 2005 between American Railcar Industries, Inc. and
American Railcar Leasing LLC*
|
|
10
|
.6
|
|
Business Consultation Agreement for Human Resources Consultation
between ACF Industries LLC and American Railcar Industries, Inc.
dated April 1, 2005*
|
|
10
|
.7
|
|
Business Consultation Agreement for Engineering Services between
ACF Industries LLC and American Railcar Industries, Inc. dated
April 1, 2005*
|
|
10
|
.8
|
|
Guaranty of the Master Lease Agreement dated September 30,
1999 between The CIT Group, Inc./ Equipment Financing, Inc. and
American Railcar Industries, Inc., as amended by ACF Industries,
Incorporated for the benefit of American Railcar Industries,
Inc.*
|
|
10
|
.9
|
|
Loan Agreement dated as of July 1, 1996 between The
Industrial Development Authority of the City of Jackson,
Missouri and American Railcar Industries, Inc.*
|
|
10
|
.9.A
|
|
Bond Guaranty Agreement dated as of July 1, 1996 by and
among American Railcar Industries, Inc., ACF Industries,
Incorporated and Fleet National Bank, as Trustee*
|
|
10
|
.9.B
|
|
Deed of Trust and Security Agreement dated as of July 1,
1996 from American Railcar Industries, Inc. to E. Sid
Douglas, III, as Mortgage Trustee and The Industrial
Development Authority of The City of Jackson, Missouri as Issuer
and Secured Party*
|
|
10
|
.10
|
|
Loan Agreement dated as of June 1, 1995 between The
Industrial Development Authority of The City of Kennett,
Missouri and American Railcar Industries, Inc.*
|
|
10
|
.10.A
|
|
Bond Guaranty Agreement dated as of June 1, 1995 by and
among American Railcar Industries, Inc., ACF Industries,
Incorporated and Fleet National Bank, as Trustee*
|
|
10
|
.10.B
|
|
Deed of Trust and Security Agreement dated as of June 1,
1995 from American Railcar Industries, Inc. to E. Sid
Douglas, III as Mortgage Trustee and The Industrial
Development Authority of the City of Kennett, Missouri as Issuer
and Secured Party*
|
|
10
|
.11
|
|
Lease Agreement dated as of April 1, 1995 between the City
of Paragould, Arkansas as Lessor and American Railcar
Industries, Inc. as Lessee*
|
|
10
|
.11.A
|
|
Bond Guaranty Agreement by and among American Railcar
Industries, Inc. and ACF Industries, Incorporated and Fleet
National Bank, as Trustee*
|
|
10
|
.12
|
|
Amended and Restated Services Agreement dated as of
June 30, 2005 between American Railcar Leasing LLC and
American Railcar Industries, Inc.*
|
|
10
|
.13
|
|
Indenture of Lease between St. Charles Properties and ACF
Industries, Incorporated for the property located at Clark and
Second Streets, St. Charles, MO, dated March 1, 2001
together with the Assignment and Assumption of Lease dated
April 1, 2005 among ACF Industries LLC (as successor to ACF
Industries, Incorporated), American Railcar Industries, Inc. and
St. Charles Properties*
|
II-6
Exhibit index
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.14
|
|
Promissory Note by American Railcar Industries, Inc. in favor of
Arnos Corp. dated as of December 17, 2004*
|
|
10
|
.15
|
|
Exchange and Redemption Agreement dated as of June 30,
2005 among American Railcar Industries, Inc., Hopper
Investments, LLC, Highcrest Investors Corp., Buffalo Investors
Corp. and American Railcar Leasing, LLC*
|
|
10
|
.16
|
|
Loan and Security Agreement dated as of March 10, 2005
among American Railcar Industries, Inc. as Borrower, the lenders
from time to time party thereto, and North Fork Business Capital
Corporation, as Agent*
|
|
10
|
.17
|
|
Corbitt Equipment Acquisition Agreement*
|
|
10
|
.18
|
|
Multi-Year Purchase and Sale Agreement dated as of July 29,
2005 between American Railcar Industries, Inc. and The CIT
Group/ Equipment Financing, Inc.*
|
|
10
|
.19
|
|
American Railcar Industries, Inc. 2005 Equity Incentive Plan*
|
|
10
|
.20
|
|
Employment Agreement dated as of July 20, 2005 between
American Railcar Industries, Inc. and William P. Benac*
|
|
10
|
.21
|
|
Promissory Note by American Railcar Industries, Inc. in favor of
ACF Industries Holding Corp. dated as of January 1, 2005*
|
|
10
|
.22
|
|
Assignment and Assumption, Novation and Release dated as of
June 30, 2005 by and between ACF Industries Holding, Inc.,
American Railcar Industries, Inc., Gunderson Specialty Products,
Inc., Gunderson, Inc., Castings, LLC, ASF-Keystone, Inc., Amsted
Industries Incorporation and Ohio Castings Company, LLC*
|
|
10
|
.23
|
|
Interest Transfer Agreement dated as of June 30, 2005 by
and between ACF Industries Holding, Inc. and American Railcar
Industries, Inc.*
|
|
10
|
.24
|
|
Form of Redemption Agreement between American Railcar
Industries, Inc. and Vegas Financial Corp. *
|
|
10
|
.25
|
|
Ohio Castings Company, LLC Amended and Restated Limited
Liability Company Agreement, dated as of June 20, 2003*
|
|
10
|
.26
|
|
Employment Agreement between American Railcar Industries, Inc.
and James J. Unger, dated as of November 18, 2005*
|
|
10
|
.27
|
|
Letter Agreement between American Railcar Industries, Inc. and
James J. Unger, dated as of November 18, 2005*
|
|
10
|
.28
|
|
Form of Option Agreement*
|
|
10
|
.29
|
|
American Railcar Industries, Inc. 2005 Executive Incentive Plan*
|
|
10
|
.30
|
|
Employment Agreement dated as of December 1, 2005 between
American Railcar Industries, Inc. and James A. Cowan*
|
|
21
|
.1
|
|
Subsidiaries of American Railcar Industries, Inc.*
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP*
|
|
23
|
.2
|
|
Consent of Grant Thornton LLP*
|
|
23
|
.3
|
|
Consent of KPMG LLP*
|
|
23
|
.3
|
|
Consent of Brown Rudnick Berlack Israels LLP (included in
Exhibit 5.1)**
|
|
23
|
.4
|
|
Consent of Global Insight *
|
|
24
|
.1
|
|
Powers of Attorney*
|
|
99
|
.1
|
|
Consent of James M. Laisure*
|
|
99
|
.2
|
|
Consent of James C. Pontious*
|
|
|
**
|
To be filed by amendment.
|
|
|
|
Confidential treatment has been requested for the redacted
portions of this agreement. A complete copy of this agreement,
including the redacted portions, has been filed separately with
the Securities and Exchange Commission.
|
II-7
Exhibit 10.9
LOAN AGREEMENT
Dated as of July 1, 1996
Between
THE INDUSTRIAL DEVELOPMENT AUTHORITY OF
THE CITY OF JACKSON, MISSOURI
AND
AMERICAN RAILCAR INDUSTRIES, INC.
The interest of the Issuer in this Loan Agreement has been assigned to Fleet National Bank, as
Trustee, under the Trust Indenture, dated as of July 1, 1996, securing $2,500,000 The Industrial
Development Authority of the City of Jackson, Missouri, Industrial Development Revenue Bonds
(American Railcar Industries, Inc./ACF Industries, Incorporated Railcar Component Manufacturing
Project), Series 1996, as security for payment of the principal of and premium, if any, and
interest on such Bonds.
TABLE OF CONTENTS
ARTICLE
I
DEFINITIONS
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
|
|
|
|
|
|
|
Page
|
|
Section 2.1. Representations, Warranties and Covenants by Issuer
|
|
|
4
|
|
Section 2.2. Representations, Warranties and Covenants by Company
|
|
|
5
|
|
Section 2.3. Intention
|
|
|
6
|
|
|
|
|
|
|
ARTICLE III
|
|
|
|
|
|
|
|
|
|
THE LOAN
|
|
|
|
|
|
|
|
|
|
Section 3.1. Loan of Funds to the Company
|
|
|
7
|
|
Section 3.2. Use of Proceeds; Completion of the Project
|
|
|
7
|
|
Section 3.3. Project Documents
|
|
|
7
|
|
|
|
|
|
|
ARTICLE IV
|
|
|
|
|
|
|
|
|
|
PAYMENT AND SECURITY PROVISIONS
|
|
|
|
|
|
|
|
|
|
Section 4.1. Loan Payments
|
|
|
8
|
|
Section 4.2. Additional Payments
|
|
|
9
|
|
Section 4.3. Prepayment of the Note
|
|
|
10
|
|
Section 4.4. Mortgage, Pledge and Assignment Under the Deed of Trust
|
|
|
11
|
|
Section 4.5. Assignment of Authoritys Rights
|
|
|
11
|
|
Section 4.6. Place of Loan Payments
|
|
|
12
|
|
Section 4.7. Obligation of Company Hereunder Unconditional
|
|
|
12
|
|
Section 4.8. Cancellation of Note and Release of Mortgaged Property
|
|
|
13
|
|
|
|
|
|
|
ARTICLE V
|
|
|
|
|
|
|
|
|
|
ACQUISITION, CONSTRUCTION, AND EQUIPPING OF
|
|
|
|
|
THE PROJECT; ISSUANCE OF THE BONDS
|
|
|
|
|
|
|
|
|
|
Section 5.1. Agreement to Acquire, Construct, and Equip the Project
|
|
|
13
|
|
Section 5.2. Disbursements from the Construction Fund
|
|
|
13
|
|
Section 5.3. Furnishing Documents to Trustee
|
|
|
14
|
|
Section 5.4. Establishment of Completion Date
|
|
|
14
|
|
Section 5.5. Company Required to Pay in Event Construction Fund Insufficient
|
|
|
16
|
|
Section 5.6. Enforcement of Contracts
|
|
|
16
|
|
(i)
|
|
|
|
|
|
|
Page
|
|
Section 5.7. Ownership of Tax Benefits
|
|
|
16
|
|
Section 5.8. Investment of Moneys
|
|
|
16
|
|
Section 5.9. Plans and Specifications; Modifications to Mortgaged Property
|
|
|
17
|
|
Section 5.10. Agreement to Issue Bonds; Application of Bond Proceeds
|
|
|
17
|
|
|
|
|
|
|
ARTICLE VI
|
|
|
|
|
|
|
|
|
|
EFFECTIVE DATE OF THIS LOAN AGREEMENT;
|
|
|
|
|
DEFINITION OF LOAN TERM
|
|
|
|
|
|
|
|
|
|
Section 6.1. Effective Date of this Loan Agreement; Duration of Loan Term
|
|
|
17
|
|
|
|
|
|
|
ARTICLE VII
|
|
|
|
|
|
|
|
|
|
MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
|
|
|
|
|
|
|
|
|
|
Section 7.1. Maintenance and Modifications of Mortgaged Property by Company
|
|
|
18
|
|
Section 7.2. Removal of Mortgaged Equipment
|
|
|
18
|
|
Section 7.3. Impositions
|
|
|
19
|
|
Section 7.4. Insurance Required
|
|
|
20
|
|
Section 7.5. Application of Net Proceeds of Insurance
|
|
|
21
|
|
Section 7.6. Additional Provisions Regarding Insurance
|
|
|
21
|
|
Section 7.7. Advances by Issuer or Trustee
|
|
|
22
|
|
Section 7.8. Release and Indemnification Covenants
|
|
|
22
|
|
Section 7.9. Environmental Considerations
|
|
|
23
|
|
|
|
|
|
|
ARTICLE VIII
|
|
|
|
|
|
|
|
|
|
DAMAGE,
DESTRUCTION, AND CONDEMNATION;
USE OF NET PROCEEDS
|
|
|
|
|
|
|
|
|
|
Section 8.1. Damage and Destruction
|
|
|
23
|
|
Section 8.2. Application of Net Proceeds
|
|
|
23
|
|
Section 8.3. Insufficiency of Net Proceeds
|
|
|
24
|
|
Section 8.4. Cooperation of Issuer
|
|
|
24
|
|
Section 8.5. Rights of Parties in Event of Condemnation; Bonds Protected in Any
Event
|
|
|
24
|
|
Section 8.6. Company Obligated to Continue Loan Payments and Additional Loan
Payments Until Condemnation Award
Available
|
|
|
26
|
|
|
|
|
|
|
ARTICLE IX
|
|
|
|
|
|
|
|
|
|
SPECIAL COVENANTS
|
|
|
|
|
|
|
|
|
|
Section 9.1. No Warranty of Condition or Suitability by Issuer
|
|
|
26
|
|
Section 9.2. Inspection of the Mortgaged Property
|
|
|
26
|
|
Section 9.3. Company to Maintain its Corporate Existence
|
|
|
26
|
|
Section 9.4. Release of Certain Land
|
|
|
27
|
|
Section 9.5. Granting of Easements
|
|
|
28
|
|
Section 9.6. Compliance with Code
|
|
|
28
|
|
(ii)
|
|
|
|
|
|
|
Page
|
|
Section 9.7. Federal Guarantee Prohibition
|
|
|
29
|
|
Section 9.8. Limitation on Issuance Costs
|
|
|
29
|
|
Section 9.9. Limitation on Expenditure of Proceeds
|
|
|
29
|
|
Section 9.10. Limitation on Land and Certain Facilities
|
|
|
29
|
|
Section 9.11. Location of Project; Outstanding Obligations
|
|
|
29
|
|
Section 9.12. Prohibited Facilities
|
|
|
30
|
|
Section 9.13. No Arbitrage
|
|
|
30
|
|
Section 9.14. Capital Expenditure Limitation
|
|
|
30
|
|
Section 9.15, $40,000,000 Limitation
|
|
|
30
|
|
Section 9.16. Existing Facilities Limitation
|
|
|
30
|
|
Section 9.17. Compliance With Rebate Provisions
|
|
|
31
|
|
Section 9.18. Composite Issues
|
|
|
31
|
|
Section 9.19. Manufacturing Facility
|
|
|
31
|
|
Section 9.20. Notice of Default to Issuer and Trustee
|
|
|
31
|
|
Section 9.21 Non-Disturbance
|
|
|
31
|
|
|
|
|
|
|
ARTICLE X
|
|
|
|
|
|
|
|
|
|
ASSIGNMENT, LEASING, PLEDGING, AND SELLING; REDEMPTION;
|
|
|
|
|
OPTIONAL AND MANDATORY PREPAYMENT; ABATEMENT OF RENT
|
|
|
|
|
|
|
|
|
|
Section 10.1. Assignment and Leasing
|
|
|
32
|
|
Section 10.2. Restrictions on Sale, Mortgage, or other Conveyance of Mortgaged
Property by Issuer
|
|
|
32
|
|
Section 10.3. Redemption of Bonds
|
|
|
32
|
|
Section 10.4. Mandatory Prepayment of Loan Payments Upon Determination of
Taxability
|
|
|
32
|
|
Section 10.5. Reference to Bonds Ineffective After Bonds Paid
|
|
|
33
|
|
|
|
|
|
|
ARTICLE
XI
EVENTS OF DEFAULT AND REMEDIES
|
|
|
|
|
|
|
|
|
|
Section 11.1. Events of Default Defined
|
|
|
33
|
|
Section 11.2. Remedies on an Event of Default
|
|
|
34
|
|
Section 11.3. Remedies Not Exclusive
|
|
|
35
|
|
Section 11.4. Funds to Go Into Bond Fund
|
|
|
35
|
|
Section 11.5. Equitable Relief
|
|
|
35
|
|
Section 11.6. Trustee May File Proofs of Claim
|
|
|
35
|
|
|
|
|
|
|
ARTICLE
XII
MISCELLANEOUS
|
|
|
|
|
|
|
|
|
|
Section 12.1. Notices
|
|
|
36
|
|
Section 12.2. Binding Effect
|
|
|
37
|
|
Section 12.3. Severability
|
|
|
37
|
|
Section 12.4. Amendments, Changes, and Modifications
|
|
|
37
|
|
Section 12.5. Priority of Agreement
|
|
|
37
|
|
Section 12.6. Execution Counterparts
|
|
|
37
|
|
(iii)
|
|
|
|
|
|
|
Page
|
|
Section 12.7. Captions
|
|
|
37
|
|
Section 12.8. Law Governing Construction of Agreement
|
|
|
37
|
|
Section 12.9. Estoppel Certificate
|
|
|
37
|
|
|
|
|
|
|
Signatures
|
|
|
38
|
|
|
|
|
|
|
Exhibit A Form of Promissory Note
|
|
|
|
|
(iv)
LOAN AGREEMENT
THIS LOAN AGREEMENT
dated as of July 1, 1996, is between
THE INDUSTRIAL DEVELOPMENT AUTHORITY
OF THE CITY OF JACKSON, MISSOURI
(hereinafter called Issuer), an industrial development
corporation organized and existing under the laws of the State of Missouri (State), and
AMERICAN
RAILCAR INDUSTRIES, INC.
(hereinafter called Company), a corporation organized and existing
under the laws of the State of Missouri.
W I
T N E S S E T H:
WHEREAS,
Issuer is authorized by the Industrial Development Corporations Act, Chapter 349 of
the Revised Statutes of Missouri, 1986, as amended (the Act), to acquire lands, construct and
equip industrial buildings, improvements, and facilities, and incur other costs and expenses and
make other expenditures incidental to and for the securing and developing of industry; and
WHEREAS,
Issuer is authorized by the Act to issue industrial development revenue bonds
payable from revenues derived from the industrial project so acquired and constructed and secured
by a lien thereon and security interest therein; and
WHEREAS,
the necessary arrangements have been made with Company for the acquisition,
construction, and equipping of an industrial project consisting of a manufacturing facility for
railcar components or related industrial products with attached office or any other manufacturing
or industrial use provided for in Section 2.2(c) hereof; and
WHEREAS,
Company desires that Issuer issue its Industrial Development Revenue Bonds (American
Railcar Industries, Inc./ACF Industries, Incorporated Railcar Component Manufacturing Project),
Series 1996 (the Bonds), and loan the proceeds of the Bonds to the Company to provide funds to
acquire, construct, reimburse, and equip the Project, and Issuer has agreed to do the same;
WHEREAS,
pursuant to a Trust Indenture, dated as of the date hereof, between Issuer and Fleet
National Bank, a national banking association duly organized, validly existing, and in good
standing under the laws of the United States, having all requisite power and authority to act as
trustee, and having its principal corporate trust office in Providence, Rhode Island, as Trustee,
Issuer intends to assign to Trustee as security for the Bonds its interest in this Agreement
(except for the reimbursement of certain expenses and payments for indemnification of Issuer);
NOW, THEREFORE,
in consideration of the respective representations and agreements hereinafter
contained Issuer and Company agree as follows (provided, that in the performance of the agreements
of Issuer herein contained and any obligation it may thereby incur for the payment of money shall
not be a general debt on its part, but shall be payable solely out of the Loan Payments and other
amounts derived from this Loan Agreement and the Guaranty, the insurance proceeds and condemnation
awards as herein provided and the Mortgaged Property):
ARTICLE I
DEFINITIONS
All words and phrases defined in the Indenture shall have the same meanings for purposes of
this Loan Agreement. In addition, the following words and terms shall have the following meanings:
Additional Payments
means Additional Payments as defined in Section 4.2 of this Loan
Agreement.
Agreed Rate
means eight and fifty-hundredths percent (8.50%) per annum.
Authorized Issuer Representative
means the person or persons, satisfactory to Company, at
the time designated to act on behalf of Issuer by written certificate furnished to Company and
Trustee containing the specimen signature(s) of such person(s) and signed on behalf of Issuer by
its President, Vice President or Secretary. Such certificate may designate an alternate or
alternates.
Collateral
means that portion of the Mortgaged Property constituting Mortgaged Personal
Property. The term Collateral does not include any Leased Equipment.
Construction Period
means the period between July 18, 1996 and the Completion Date.
Impositions
means all impositions as defined in Section 7.3 of this Loan Agreement.
Loan Payments
means Loan Payments defined in Section 4.1(a) of this Loan Agreement.
Loan Term
means the duration of Companys obligations under this Loan Agreement as
specified in Section 6.1 of this Loan Agreement.
Official Action Date
means November 7, 1995.
Permitted Encumbrances
means, as of any particular time, (i) the Indenture and the Loan
Agreement, (ii) any easements, licenses, rights of way (including the dedication of public
highways), and other rights or privileges in the nature of easements with respect to any property
included in the Mortgaged Property, granted or conveyed prior to the date of the recording of the
Deed of Trust or in accordance with and pursuant to Section 9.5 of this Loan Agreement, (iii)
utility, access, and other easements and rights-of-way, restrictions, reservations, reversions, and
exceptions that an Independent Engineer, reasonably acceptable to Trustee and Company, certifies
will not interfere with or impair the operations being conducted in the Mortgaged Property (or, if
no operations are being conducted therein, the operations for which the Mortgaged Property was
designed or last modified), (iv) such minor defects, irregularities, encumbrances, easements,
rights-of-way, and clouds on title as normally exist with respect to properties similar in
character to the Mortgaged Property, and as do not, in the opinion of any counsel acceptable to
Trustee, materially impair the property affected thereby for the purpose for which it was acquired
or is held by Issuer, (v) any judgment lien against the Company affecting the Mortgaged Property so
long as such judgment is being contested and execution thereon is stayed, (vi) any liens on the
Mortgaged Property for taxes, payments-in-lieu of taxes, assessments, levies, fees, water and sewer
rents, other governmental and similar charges, and any liens of mechanics, materialmen, laborers,
suppliers or vendors for work or services performed or materials furnished in connection with the
Mortgaged Property, which are not due and payable or which are not delinquent, or the amount or
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validity of which, are being contested in accordance with the terms of this Loan Agreement,
(vii) any lien on accounts receivable securing or deemed to secure any indebtedness incurred or
deemed incurred by virtue of any recourse obligation or in connection with any sale or assignment
of accounts receivable, (viii) any lien or encumbrance or reservation of title affecting personalty
not constituting part of the Mortgaged Property, and (ix) all encumbrances set forth in the
mortgagees loan policy of title insurance insuring the Issuer, the Trustee and the Co-Trustee under the
Deed of Trust, and all other matters specified in Schedule 3 to the Deed of Trust.
Permitted Investments
means:
(a) Governmental Obligations;
(b) obligations of any of the following federal agencies which represent full faith and
credit of the United States of America: Fanners Home Administration, General Services
Administration, United States Maritime Administration, Small Business
Administration, Government National Mortgage Association, United States Department of
Housing and Urban Development, and Federal Housing Administration;
(c) U.S. dollar denominated deposit accounts fully insured to the holder by the Federal
Deposit Insurance Corporation in commercial banks;
(d) U. S. dollar denominated deposit accounts, federal funds, and bankers
acceptances with commercial banks (foreign or domestic) which have a rating on their short
term certificates of deposit on the date of purchase of A-l or A-1 + by S&P or P-l by
Moodys and maturing no more than 360 days after the date of purchase;
(e) money market funds rated in the highest rating category of S&P or Moodys
which are monitored quarterly or money market funds which are invested exclusively in
Government Obligations or cash;
(f) pre-refunded municipal obligations, which obligations shall be limited to bonds or
other obligations of any state of the United States or of any agency, instrumentality, or
local governmental unit of any such state (i) which are not callable at the option of the
obligor prior to maturity or as to which irrevocable notice has been given by the obligor to
call on the date specified in the notice; (ii) which are fully secured as to principal and
interest and redemption premium, if any, by a fund consisting only of cash or obligations
described in paragraph (a) above, which fund may be applied only to the payment of such
principal of and interest and redemption premium, if any, on such bonds or other obligations
on the maturity date or dates thereof or the specified redemption date or dates pursuant to
such irrevocable instructions, as appropriate; (iii) which fund is sufficient, as verified
by an independent accountant, to pay principal of and interest and redemption premium, if
any, on the bonds or other obligations described in this paragraph on the maturity date or
dates thereof or the redemption date or dates specified in the irrevocable instructions
referred to in subclause (i) of this paragraph, as appropriated; and (iv) which are rated,
based on the escrow, in the highest rating category of S&P or Moodys, or any successors
thereto; and
(g) U.S. dollar denominated certificates of deposit in commercial banks properly
secured at all times by collateral security described in (a) and (b) above.
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Project means the Land, the Buildings, and the Mortgaged Equipment, and any other
structure now or hereafter located on the Land, and all real property, including easements, deemed
necessary in connection therewith, as they may at any time exist, exclusive of any Land which may
from time to time be released as permitted under Section 9.4 of this Loan Agreement and subject to
easements, licenses, and other rights created in accordance with Section 9.5 of this Loan
Agreement.
Qualified Project Costs
means costs and expenses of the Project which constitute land costs
or costs for property of a character subject to the allowance for depreciation, excluding
specifically working capital and inventory costs, provided, however, that (a) costs or expenses
paid or incurred more than sixty days prior to the Official Action Date shall not be deemed to be
Qualified Project Costs; (b) Issuance Costs shall not be deemed to be Qualified Project Costs; (c)
interest during the Construction Period shall be allocated between Qualified Project Costs and
other costs and expenses to be paid from the proceeds of the Bonds; (d) interest following the
Construction Period shall not constitute a Qualified Project Cost; (e) letter of credit fees and
municipal bond insurance premiums which represent a transfer of credit risk shall be allocated
between Qualified Project Costs and other costs and expenses to be paid from the proceeds of the
Bonds; and (f) letter of credit fees and municipal bond insurance premiums which do not represent a
transfer of the credit risk shall not constitute Qualified Project Costs.
"
Yield
means yield computed under Regulation § 148-4 of the Code for the Bonds and yield
computed under Regulation § 1.148-5 for an investment.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1. Representations, Warranties and Covenants by Issuer.
Issuer makes the
following representations, warranties and covenants as the basis for the undertakings on its part
herein contained:
(a) Under the provisions of the Act and the Constitution of the State, Issuer is
authorized to enter into the transactions to be performed by it under this Loan Agreement
and the Indenture and to carry out its obligations hereunder and thereunder. Issuer has
been duly authorized to execute and deliver this Loan Agreement and the Indenture.
(b) Issuer will perform all of its obligations as specified in this Loan Agreement.
(c) Notwithstanding anything herein contained to the contrary, it is the intention of
Issuer that any obligation it may hereby incur for the payment of money shall not be a
general debt on its part but shall be payable solely from the Loan Payments and other
amounts derived from this Loan Agreement, and the insurance and condemnation awards as
herein provided and the Companys estate and interest in the Mortgaged Property.
(d) Issuer has been induced to enter into this undertaking by the promise of Company to
locate industrial facilities within or near the corporate limits of Issuer.
(e) In order to furnish necessary moneys for the payment of Costs of the Project and a
portion of the expenses of authorizing and issuing the Bonds, Issuer has authorized the
issuance of the Bonds.
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(f) The Bonds are to be issued under and secured by the Indenture, pursuant to
which Issuers interest in this Loan Agreement and the payments and income derived by Issuer
from the Note, the Deed of Trust and this Loan Agreement will be assigned to Trustee as
collateral security for payment of the principal of and premium, if any, and interest on the
Bonds, and the Bonds will be secured by a security interest in the Note, this Loan Agreement
and the Deed of Trust, which constitutes a lien upon, and security interest in, the
Mortgaged Property (provided that in the performance of the agreements of the Issuer herein
contained, any obligation that Issuer may thereby incur for the payment of money shall be
limited to the Issuers lien upon the Mortgaged Property and the proceeds thereof and shall
not be a general debt on its part, but shall be payable solely out of the proceeds derived
from this Agreement, the sale of the Bonds referred to in Section 2.1 herein, and the
insurance proceeds and condemnation awards as herein provided) and provided further that the
obligations of Company to pay principal and premium and interest on the Bonds are guaranteed
by the Guarantor and the Company pursuant to the Guaranty.
(g) Not later than the 15th day of the second calendar month after the close of the
calendar quarter in which the Bonds are delivered by Issuer pursuant to Article II of the
Indenture, Issuer covenants to satisfy the information reporting requirement of Section
149(e) of the Code.
(h) Issuer shall not take any action to condemn or cause any condemnation of the
Project or any part thereof.
(i) Issuer shall not take any action to interfere with the direct payment by the
Company to the Trustee of any Loan Payments due to Issuer or otherwise under the Note, the
Loan Agreement or the Deed of Trust, which pursuant to the Loan Agreement and Indenture are
to paid by Company directly to Trustee and not to modify, alter or rescind Issuers
instruction to Company to such effect.
Section 2.2. Representations, Warranties and Covenants by Company.
Company makes the
following representations, warranties and covenants as the basis for the undertakings on its part
herein contained:
(a) Company is a corporation duly incorporated under the laws of the State of Missouri,
is in good standing under the laws of the State of Missouri, and has power to enter into
this Loan Agreement, the Hazardous Substance Certification and Indemnification, and the
Guaranty, and to perform all obligations contained herein and therein, and by proper
corporate action, has been duly authorized to execute and deliver this Loan Agreement, the
Hazardous Substance Certification and Indemnification, and the Guaranty.
(b) Company intends to acquire, construct, and equip an industrial enterprise within
the corporate limits of Issuer consisting of the Project.
(c) Company will operate the Mortgaged Property upon its completion as (i) a
manufacturing facility for railcar components or related industrial products with attached
office or (ii) any other manufacturing or industrial use provided that such use (a) is
consistent with the Act and with a Manufacturing Facility (as such term is defined in
Section 144 (a) (12) of the Code, and (b) does not violate any other requirements of the
Code and applicable Regulations so that interest on the Bonds shall at any time cease to be
excluded from gross income for federal income tax purposes, until the expiration or earlier
termination of the Loan Term as provided herein, all to the extent that such operation is,
in Companys judgment, commercially desirable.
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(d) Neither the execution and delivery of this Loan Agreement, the Hazardous
Substance Certification and Indemnification, and the Guaranty, the consummation of
the transactions contemplated hereby and thereby, nor the fulfillment of or compliance
with the terms and conditions hereof and thereof conflicts with or results in a
material breach of the terms, conditions, or provisions of the Articles of
Incorporation or bylaws of Company or any agreement or instrument to which Company
is now a party or by which Company is bound, or constitutes a material default
under any of the foregoing, or results in the creation or imposition of any lien,
charge, or encumbrance whatsoever upon any of the property or assets of Company
under the terms of any instrument or agreement except as provided herein.
(e) There is no action, suit, proceeding, inquiry, or investigation, at law
or in equity, before or by any court or public board or body, known to be pending
or threatened against or affecting Company, nor to the best of the knowledge of
Company is there any basis therefor, wherein an unfavorable decision, ruling, or
finding would materially adversely affect the transactions contemplated by this
Loan Agreement or which, in any way, would materially adversely affect the
validity or enforceability of the Bonds, this Loan Agreement, the Hazardous
Substance Certification and Indemnification, the Guaranty, or any other agreement
or instrument, to which Company is a party, used or contemplated for use in the
consummation of the transactions contemplated hereby.
(f) The Net Proceeds from the sale of the Bonds which shall have been
advanced to the Company will be used only for the payment of Cost of the Project.
(g) The Mortgaged Property complies, or will comply upon completion of
construction, with all presently applicable building and zoning ordinances where
failure to comply
would have a materially adverse effect on Companys ability to utilize the Mortgaged
Property
for the purposes intended.
(h) Company agrees to cooperate with Issuer in the performance of Issuers
obligations under the Indenture.
(i) No changes shall be made in the Project and no actions will be taken by
Company which shall in any way impair the exemption of interest on any of the
Bonds from federal income taxation.
(j) Company will comply with and fulfill all other requirements and
conditions of the Code and regulations and rulings issued pursuant thereto in the
acquisition, construction, equipping, and operation of the Project to the end
that the interest on the Bonds shall at all times be free from federal income
taxation.
(k) The Project is substantially the same in all material respects to that
described in the notice of public hearing published in the
Cash-Book Journal
on
January 31, 1996.
Section 2.3.
Intention.
It is intended by the parties hereto that this Loan
Agreement and all actions taken hereunder be consistent with and pursuant to the
ordinances of Issuer relating to the Bonds, and that the interest on the Bonds be
excluded from the gross income of the recipients thereof for federal income tax purposes
by reasons of the provisions of Section 144(a) of the Code or any substantially similar
successor provision hereinafter enacted.
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ARTICLE III
THE LOAN
Section 3.1. Loan of Funds to the Company.
(a) Concurrently with the execution and delivery of this Loan Agreement, Issuer shall loan to
Company the amount of $2,500,000, and Company shall receive such loan from the Issuer, for the
purposes and upon the terms and conditions provided in this Loan Agreement.
(b) The loan shall be evidenced by the Note in the principal amount of $2,500,000, which shall
be in substantially the form attached hereto as
Exhibit A,
shall be executed by the Company and
made payable to the order of Issuer, and shall be endorsed and assigned by Issuer, without
recourse, to the Trustee as collateral security for the obligations of the Issuer pursuant to the
Indenture and the Bonds.
Section 3.2. Use of Proceeds; Completion of the Project.
(a) The Net Proceeds of the Bonds shall be deposited with the Trustee and shall be disbursed
by the Trustee to or on behalf of the Company for completion of the Project, all in the manner as
provided in the Indenture and in this Loan Agreement.
(b) The Company agrees to cause the Project to be diligently and continuously pursued and to
be completed with reasonable dispatch, and to provide (from its own funds if required) all moneys
necessary to complete the Project substantially in accordance with the plans and specifications for
the Project.
(c) In the event the moneys on deposit in the Construction Fund (together with other funds
available to the Company for the Project) are at any time insufficient to pay for the completion of
the Project, the Company agrees to pay the amount of such deficiency forthwith to the Trustee for
deposit in the Construction Fund.
Section 3.3. Project Documents.
The Company, at its own cost and expense, will deliver to the
Trustee copies of the following documents (which shall be collectively referred to herein as the
Project Documents) concurrently with the initial issuance and delivery of the Bonds or at such
time as such documents become available and in any event by such time as work is commenced on the
portion of the Project to which they relate:
(a)
Title Insurance.
A standard ALTA mortgage loan policy or policies of title
insurance, or a commitment therefor, showing the Issuer, the Trustee and the Co-Trustee as
the insured parties, with respect to the Mortgaged Real Property of the Company that
constitutes real property Mortgaged Real Property, together with an endorsement equivalent
to ALTA 100, and subject to exceptions for pending disbursement endorsements in an
aggregate amount not less than the principal amount of the Bonds, which policy or policies
shall insure that the Company holds good and marketable fee simple title to the Mortgaged
Real Property and the Issuer has a first lien pursuant to the Deed of Trust on the
Mortgaged Real Property, subject only to Permitted Encumbrances and to the limitations upon
such insurance provided by the terms of the pending disbursements endorsement.
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(b)
Survey.
A perimeter survey of the Companys Mortgaged Property
constituting real property, prepared by a surveyor licensed in the State of Missouri.
ARTICLE IV
PAYMENT AND SECURITY PROVISIONS
Section 4.1. Loan Payments.
(a)
Loan Payments on the Note.
The Company will duly and punctually pay the principal of,
premium, if any, and interest on the Note in accordance with the terms of the Note and this Loan
Agreement. The Company covenants and agrees that it will make the following payments on the Note
(Loan Payments) directly to the Trustee, for the account of the Issuer, for deposit in the Bond
Fund, with the understanding that the Trustee will apply such payment to the payment of the
principal of, premium, if any, of, and interest on the Bonds, on the following dates, and otherwise
as set out below:
On or before two Business Days prior to each Interest Payment Date, and on or before two
Business Days prior to any date on which any or all of the Bonds shall be declared to be and shall
become due and payable prior to their stated maturity pursuant to the provisions of the Indenture,
by redemption or otherwise, Company shall pay directly to Trustee in immediately available funds
or tendered Bonds an amount equal to the aggregate amount of principal, premium, if any, and
interest becoming due and payable on the Bonds on such Interest Payment Date or such other date.
Anything herein to the contrary notwithstanding, any amount (whether in cash or tendered
Bonds) at any time held by Trustee in the Bond Fund shall reduce any Loan Payment required to be
made by Company and the outstanding balance of the Note to the extent such amount is in excess of
the amount required for payment of Bonds theretofore matured or called for redemption and past due
interest in all cases where such Bonds have not been presented for payment; and further, if the
amount held by Trustee in the Bond Fund should be sufficient to pay at the times required the
principal of and premium, if any, and interest on the Bonds then remaining unpaid, Company shall
not be obligated to make any further Loan Payments.
By acceptance of the direction to make payments to the Trustee for the account of the Issuer,
all Loan Payments will reduce the outstanding balance of the Note in accordance with Section
4.1(b). To the extent that cash or Bonds tendered by the Company to the Trustee in accordance with
Section 4.1(b) are sufficient to cover the next succeeding Loan Payment(s), the Loan Payment(s)
will be paid from those funds and there will be no obligation on the part of the Company to pay
such Loan Payment(s).
It is understood and agreed that all payments payable by Company under this Section 4.1 are
assigned by Issuer to Trustee as collateral security for the benefit of the owners of the Bonds,
Company assents to such assignment.
(b)
Credits on Loan Payments.
Notwithstanding any provision contained in this Loan Agreement
or in the Indenture to the contrary, in addition to any credits on the Note resulting from the
payment or prepayment of Loan Payments from other sources:
(1) any moneys deposited by the Trustee or the Company in the Bond Fund as interest
(including moneys received as accrued interest from the sale of Bonds and any initial
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deposit made from the proceeds of the sale of any Bonds) shall be credited against the
obligation of the Company to pay interest on the Note as the same become due;
(2) any moneys deposited by the Trustee or the Company in the Bond Fund as principal
shall be credited against the obligation of the Company to pay the principal of the Note as
the same becomes due in the order of maturity thereof, except that prepayments for purposes
of making an optional deposit into the Bond Fund for an optional redemption of Bonds shall
be credited against the obligation of the Company to pay the principal of the Note, but
shall be applied to the maturities of principal of the Note corresponding to the maturities
of the Bonds to be redeemed from the proceeds of such optional prepayment;
(3) the amount of any moneys transferred by the Trustee from any other fund held under
the Indenture and deposited in the Bond Fund as interest or principal shall be credited as
interest or principal, as the case may be, against the obligation of the Company to pay
interest or principal, as the case may be, next becoming due as the same become due;
(4) Company and the Guarantor shall have the right to surrender Bonds acquired by it to
Trustee and all such Bonds so surrendered shall be forthwith cancelled and the principal
amounts thereof upon the instructions by the Company to the Trustee shall be applied as (i)
credits against mandatory sinking fund requirements pursuant to the Indenture corresponding
to the maturities of the Bonds so surrendered, (ii) credits or prepayments upon the
principal portion of the Loan Payments due and payable with respect to the respective
maturity dates or redemption dates of such Bonds in accordance with the instructions of the
Company and the terms of the Indenture, or (iii) full payment of the Note pursuant to the
Loan Agreement; and any unpaid interest allocable thereto shall be applied as credits or
prepayments of the interest portion of the Loan Payments next becoming due as the same
becomes due; and
(5) Subject to the provisions of the foregoing subparagraph (4), amounts, whether in
cash held by the Trustee in the Bond Fund or in tendered Bonds, shall reduce the Loan
Payments required to be made by the Company to the extent such amount is in excess of the
amount required for payment of Bonds theretofore matured or called for redemption and past
due interest.
Section 4.2. Additional Payments.
The Company agrees to make the following additional
payments (Additional Payments):
(a)
Issuer Fees.
The Company shall pay to the Issuer upon demand, all reasonable
expenses, including reasonable attorneys fees, incurred by the Issuer in relation to the
Bonds and the transactions contemplated by this Loan Agreement and the Indenture.
(b)
Trustee Fees and Professional Fees.
The Company shall pay to the Trustee and any
co-trustee, paying agent, bond registrar, counsel, accountants, engineers and other Persons
when due, all reasonable fees, charges and expenses of such Persons for services rendered
under the Indenture, the Loan Agreement, the Deed of Trust, the Guaranty or the Hazardous
Substance Certification and Indemnification and expenses incurred in the performance of such
services under the foregoing agreements for which such Persons are entitled to payment or
reimbursement, including expenses of compliance with the Arbitrage Instructions.
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(c)
Rebate Payments.
The Company shall pay to the Trustee all rebate payments
required under Section 148(f) of the Code, to the extent such amounts are not available to
the Trustee in the Rebate Fund held under the Indenture.
(d)
Costs of Enforcement.
In the event the Company should default under any of the
provisions of this Loan Agreement and the Trustee should employ attorneys or incur other
expenses for the collection of required payments or the enforcement of performance or
observance of any obligation or agreement on the part of the Company contained in this Loan
Agreement, the Company shall pay on demand therefor, without duplication, to the Trustee the
reasonable fees of such attorneys and such other expenses so incurred by the Trustee. The
Company also shall pay, without duplication, and shall indemnify the Issuer and the Trustee
from and against, all costs, expenses and charges, including reasonable counsel fees,
incurred for the collection of payments due or for the enforcement or performance or
observance of any covenant or agreement of the Company under this Loan Agreement, the Note,
the Deed of Trust, the Guaranty and the Hazardous Substance Certification and
Indemnification.
(e)
Taxes and Assessments.
The Company also covenants and agrees, at its expense, to
pay all Impositions imposed on the Mortgaged Property; provided, however, that the Company
shall have the right to protest any such Impositions, as the case may be, at the Companys
expense, to protest and contest any such Impositions assessed or levied upon the Mortgaged
Property and that the Company shall have the right to withhold payment of any such
Impositions pending disposition of any such protest or contest unless such withholding,
protest, or contest would materially adversely affect the rights or interests of the Issuer
or the Trustee.
(f)
Other Amounts Payable.
The Company shall pay to the person or persons entitled
thereto, any other amounts which the Company has agreed to pay under this Loan Agreement.
In the event Company should fail to make any of the payments required in this Section, the
item or installment so in default shall continue as an obligation of Company until the amount in
default shall have been fully paid, and Company agrees to pay the same with interest thereon or
with respect to payments to Trustee or Issuer with interest thereon, to the extent permitted by
law, from the date thereof at the Agreed Rate.
Payments made on account of the indebtedness evidenced by the Note and secured by the Deed of
Trust, or as otherwise required to be paid pursuant to the provisions of the Indenture or this
Loan Agreement, whether made to the Trustee or otherwise, by the Company or by the Guarantor,
shall constitute Loan Payments and/or Additional Payments, as the case may be, under Section 4.1
and 4.2 of this Loan Agreement.
Section 4.3. Prepayment of the Note.
(a) Optional Prepayment.
The Company shall have and is granted the option to prepay from time
to time the amounts payable under this Loan Agreement in sums sufficient to redeem or to pay or
cause to be paid all or part of the Bonds in accordance with the provisions of the Indenture. Upon
the deposit by the Company of moneys and/or Bonds (which are cancelled and no longer Outstanding
under the Indenture) in the Bond Fund in an amount sufficient to redeem Bonds subject to
redemption taking into account any available funds in the Bond Fund, the Issuer, at the request of
the Company, shall forthwith take all steps (other than the payment of the money required for such
redemption) necessary under the applicable redemption provisions of the Indenture to effect
redemption of all or part of the then
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Outstanding Bonds, as may be specified by the Company, on the date established for such redemption.
The Company may prepay all or any portion of its indebtedness on the Note by providing for the
payment of all or any portion of the Bonds in accordance with
Article IX
of the Indenture. Such
prepayments are credited against Loan Payments at the time such prepayment is deposited into the
Bond Fund.
(b) Mandatory Prepayment.
Whenever any Bonds shall have been called for redemption under any
provision of the Indenture, the Company shall prepay the Note in such amounts required and at such
times to redeem such Bonds, including the principal, redemption premium, if any, and accrued
interest thereon to the redemption date and such prepayment may include tender of Bonds by the
Company or Guarantor for cancellation in total or partial payment. The Company further agrees that
in the event the payment of principal of and interest on the Bonds is accelerated upon the
occurrence of an event of default under the Indenture, all Loan Payments payable for the remainder
of the term of this Loan Agreement shall be accelerated and prepayment shall be made on the Note in
such amounts. Any such prepayments shall be deposited in the Bond Fund, and applied by the Trustee
in accordance with the provisions of the Indenture. Any such prepayment shall be credited against
Loan Payments to become due on the Note at the time such prepayment is deposited into the Bond
Fund.
Section 4.4. Mortgage, Pledge and Assignment Under the Deed of Trust.
(a) In order to secure the payment of the Note and the performance of the duties and
obligations of the Company under the Note, Deed of Trust, and this Loan Agreement, the Company
pursuant to the Deed of Trust has pledged and assigned unto the Issuer and its successors and
assigns forever, and granted a security interest to the Issuer in and to the Mortgaged Property.
(b) The Company shall, at its own expense, take all necessary action to maintain and preserve
the security interest in Mortgaged Property granted by (and as defined in) the Deed of Trust so
long as the Note is outstanding and obligations of the Company to the Issuer and the Trustee under
the Loan Agreement are outstanding. In addition, the Company shall, immediately after the execution
and delivery of this Loan Agreement and thereafter from time to time, cause the Deed of Trust and
any financing statements in respect thereof to be filed, registered and recorded in such manner and
in such places as may be required by law in order to fully perfect and protect such security
interest and from time to time will perform or cause to be performed any other act as provided by
law and will execute or cause to be executed any and all continuation statements and further
instruments that may be requested by the Trustee for such perfection and protection. Except to the
extent it is exempt therefrom, the Company shall pay or cause to be paid all filing, registration
and recording fees and all expenses incident to the preparation, execution and acknowledgment of
such instruments of perfection, and all federal or state fees and other similar fees, duties,
imposts, assessments and charges arising out of or in connection with the execution and delivery of
the Deed of Trust and such instruments of perfection. In the event that the Company fails to
execute any of such instruments within ten (10) days after demand to do so, the Company does hereby
make, constitute and irrevocably appoint the Trustee as its attorney-in-fact and in its name, place
and stead so to do, .
Section 4.5. Assignment of Authoritys Rights.
Under the Indenture, the Issuer will, as
security for the Bonds, pledge, assign, transfer and grant a security interest in certain of its
rights, title and interest under this Loan Agreement, the Deed of Trust, and the Note to the
Trustee. The Company agrees that this Loan Agreement, the Deed of Trust, and the Note, and all of
the rights, interests, powers, privileges and benefits accruing to or vested in the Issuer may be
protected and enforced in conformity with the Indenture and (except for Issuer fees and expenses
and the Issuers right to indemnification in certain circumstances and as otherwise expressly set
forth herein) may be thereby assigned by the Issuer
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to the Trustee as security for the Bonds and may be exercised, protected and enforced for or on
behalf of the Bondowners in conformity with this Loan Agreement and the Indenture. The Trustee is
hereby given the right to enforce, as collateral assignee of the Issuer, the performance of the
obligations of the Company, and the Company hereby consents to the same and agrees that the
Trustee may enforce such rights as provided in this Loan Agreement, in the Deed of Trust, and in
the Indenture.
Section 4.6.
Place of Loan Payments.
Issuer hereby directs Company and Company hereby agrees
to pay to Trustee at Trustees principal corporate trust office all Loan Payments payable by
Company pursuant to subsections 4.1. All Additional Payments required to be made pursuant to
Section 4.2 shall be paid to the respective party at their principal office.
Section 4.7. Obligation of Company Hereunder Unconditional.
The obligations of Company to
make the payments required in Section 4.1 hereof and to perform and observe the other agreements
on its part contained herein shall be absolute and unconditional, and the payments required in
Section 4.1 shall be payable on the dates and at the times specified without notice or demand, and
without abatement or set-off, and regardless of any contingencies whatsoever, and notwithstanding
any circumstances or occurrences that may now exist or that may hereafter arise or take place,
including, but without limiting the generality of the foregoing:
(a) The unavailability of the Mortgaged Property or any part thereof for use by Company
at any time by reason of the failure to complete the overall industrial project by any
particular time or at all or by reason of any other contingency, occurrence, or circumstance
whatsoever;
(b) Damage to or destruction of the Mortgaged Property or any part thereof;
(c) Legal curtailment of Companys use of the Mortgaged Property or any part thereof;
(d) Change in Issuers legal organization or status;
(e) The taking of title to or the temporary use of the whole or any part of the
Mortgaged Property by condemnation;
(f) Any termination of this Loan Agreement for any reason whatsoever;
(g) Failure of consideration or commercial frustration of purposes not
arising out of or related to acts of the Issuer;
(h) Any change in the tax or other laws of the United States of America or of
the State; and
(i) Any default of Issuer under this Loan Agreement or any other default or
failure of Issuer whatsoever.
Nothing contained in this Section shall be construed to release Issuer from the performance of
any of the provisions of this Loan Agreement on its part to be performed.
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Company covenants that it will not enter into any contract, indenture, or agreement of any
nature whatsoever which shall in any way limit, restrict, or prevent Company from performing any
of its obligations under this Loan Agreement.
Section 4.8. Cancellation of Note and Release of Mortgaged Property.
Issuer shall cancel the
Note, deliver a deed of release in respect of the Deed of Trust, cancel the Loan Agreement and
execute and deliver UCC-3 termination statements covering all financing statements filed to
evidence the security interest created in the Mortgaged Property or any part thereof, upon the
payment or deposit by the Company or the Guarantor of money in the Bond Fund or tendered Bonds in
an amount sufficient, when added to the available funds then on hand in the Bond Fund, to redeem the
Bonds and to pay all sums at the date of such payment or deposit due to the Issuer, Trustee or any
Co-Trustee pursuant to the Loan Agreement, the Note, the Deed of Trust, and the Indenture.
ARTICLE V
ACQUISITION, CONSTRUCTION, AND EQUIPPING OF
THE PROJECT; ISSUANCE OF THE BONDS
Section 5.1. Agreement to Acquire, Construct, and Equip the Project.
All payments
necessary to acquire, construct, and equip the Project shall be made out of the Construction Fund
or other funds provided by the Company whether or not pursuant to Section 5.5 hereof, and Company
shall be reimbursed out of the Construction Fund, for all expenditures made by it in connection
with the Project in accordance with the provisions of this Loan Agreement and the Indenture, in
respect of expenditures paid not more than 60 days prior to Official Action Date. Title to all
machinery, equipment and personal property of every nature paid for out of the Construction Fund
or other funds provided by the Company pursuant to Section 5.5 of this Agreement (either by direct
payment or by virtue of reimbursement to Company) shall be vested in, or be transferred to,
Company. The Collateral does not include any Leased Equipment. The obligations of Issuer hereunder
are subject to the provisions of this Loan Agreement limiting the obligations of Issuer to the
extent of moneys in the Construction Fund.
Company shall obtain all necessary approvals from any and all governmental agencies requisite
to the constructing and equipping of the Project, and the Project shall be constructed and
equipped in compliance with all federal, State, and local laws, ordinances, and regulations
applicable thereto.
All requests, approvals, and agreements required on the part of Company shall be in writing,
signed by the Authorized Company Representative, as appropriate, granting such approval or
entering into such agreement. Issuer and Company shall, concurrently with the delivery of this
Loan Agreement, notify Trustee of the Authorized Company Representative. It is agreed that the
Company may have more than one Authorized Company Representative and may change the Authorized
Company Representative or Representatives from time to time, with each such change to be in
writing forwarded to the Trustee. The Authorized Company Representative so designated shall be
authorized to enter into and execute any contracts or agreements or to grant any approvals or to
take any action for and on behalf of the party hereto represented by him, and the other party to
this Loan Agreement shall be entitled to rely upon the duly designated Authorized Representative
as having full authority to bind the party hereto represented by him.
Section 5.2. Disbursements from the Construction Fund.
Issuer has, in the Indenture,
authorized and directed Trustee to make disbursements from the Construction Fund to pay the Cost
of the Project or to reimburse Company for any Cost of the Project paid by Company.
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Trustee shall make disbursements upon receipt of a requisition signed by an Authorized
Company Representative:
(a) stating with respect to each disbursement to be made: (i) the requisition number,
(ii) the name and address of the person, firm, or corporation to whom payment is due, (iii)
the amount to be disbursed, (iv) that each obligation mentioned therein has been properly
incurred, is a proper charge against the Construction Fund, and has not been the basis of any
previous disbursement, (v) with respect to any requisition for payment for work, material, or
supplies, that such obligation was incurred for work, materials or supplies in connection
with the acquisition, construction, and equipping of the Project, (vi) that at least 95% of
the amount requested for disbursement will be used for the payment of Qualified Project
Costs, (vii) that all property to be acquired with the proceeds of the disbursement will be
owned by Company, (viii) that no portion of the amount requested for disbursement will be
used in the manner prohibited in Sections 9.10 or 9.12 of this Loan Agreement, and (ix) that
no portion of the amount requested for disbursement will be used for the acquisition of
existing property except upon compliance with Section 9.16 of this Loan Agreement;
(b) specifying in reasonable detail the nature and purpose of the obligation, including
(i) that such obligation has been properly incurred, is a proper charge against the
Construction Fund, is a proper cost of the Project as defined in the Act and has not been the
basis of any previous withdrawal, (ii) that the Authorized Company Representative has no
written notice of any mechanics, materialmens, or other liens or rights to liens or other
obligations (other than those being contested in good faith or covered by title insurance)
which should be satisfied or discharged before payment of such obligation is made, (iii) that
such payment does not include any amount which is then entitled to be retained under any
holdbacks or retainages provided for in any agreement, (iv) that there exists no event of
default;
(c) with respect to the first disbursement to be made for Costs of the Project, Company
shall provide Trustee with a certificate of the Authorized Company Representative that the
Project, as designed, complies with all presently applicable building and zoning ordinances
applicable to the Project; and
(d) accompanied by a pending disbursement endorsement in the amount of the disbursement
issued by First American Title Insurance Company or any successor or replacement to First
American Title Insurance Company approved by the Trustee.
In making any payment from the Construction Fund, Trustee may rely conclusively on
requisitions and certificates delivered to it pursuant to this Section, and Trustee and Issuer
shall be relieved of all liability with respect to the accuracy of such requisitions and
certificates and the making of such payments in accordance with such requisitions and certificates
and all liability to see to the proper application thereof by Company.
Section 5.3. Furnishing Documents to Trustee.
Company agrees to cause such requisitions to be
directed to Trustee as may be necessary to effect payments out of the Construction Fund in
accordance with Section 5.2 hereof. Trustee shall retain a record of all such requisitions.
Section 5.4. Establishment of Completion Date.
The Completion Date shall be evidenced to
Issuer and Trustee by (a) a certificate signed by an Authorized Company Representative stating
that, except for amounts retained by Trustee at Companys direction for any Cost of the Project
not then due and payable, (i) acquisition and construction of the Project has been substantially
completed and all costs
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of labor, services, materials, and supplies used in such acquisition and construction have
been paid, except for punch list items, for which adequate reserves shall have been established
(ii) all equipment for the Project has been installed to Companys satisfaction, such equipment so
installed is suitable and sufficient for the operation of the Project, and substantially all costs
and expenses incurred in the acquisition and installation of such equipment have been paid, except
to the extent any such equipment is Leased Equipment, and (iii) all other facilities necessary in
connection with the Project have been acquired, constructed, and equipped and all costs and
expenses incurred in connection therewith have been paid and (b) a certificate signed by an
Authorized Company Representative stating that the Project has been substantially completed in
accordance with all plans and specifications for the Project and to the best knowledge of the
Authorized Company Representative, after inquiry of the Projects architect, the Project complies
with all applicable federal, State, and local laws, regulations, and other governmental
requirements (including, without limitation, the federal Americans with Disabilities Act).
Notwithstanding the foregoing, the certificate required by clause (a) above shall state that it is
given without prejudice to any rights against third parties which exist at the date of such
certificate or which may subsequently come into being. Forthwith upon substantial completion of the
acquisition, construction, and equipping of the Project, Company agrees to cause such certificates
to be furnished to Issuer and Trustee.
Any moneys in the Construction Fund remaining after the Completion Date and payment, or
provision for payment, of the costs of financing the Project described above, at the direction of
the Authorized Company Representative, promptly, and in all events on or before July 1, 1998,
shall be:
(i) used to acquire, construct, equip and install such additional real or personal
property in connection with the Project, in accordance with the applicable provisions of
the Code (including the public notice requirements therein), as is designated by the
Authorized Company Representative and the acquisition, construction, equipping and
installation of which will be permitted under the Act, provided that any such use shall be
accompanied by evidence satisfactory to the Trustee that the average reasonably expected
economic life of such additional property, together with the other property theretofore
acquired with the proceeds of the Bonds, will not be less than 5/6ths of the average
maturity of the Bonds or, if such evidence is not presented with the direction, an opinion
of Bond Counsel to the effect that the acquisition of such additional property will not
result in the interest on the Bonds becoming subject to federal income taxation, and
provided further that any such additional real or personal property shall be Mortgaged
Property or Collateral, as applicable, pursuant to the terms of this Loan Agreement and the
Indenture;
(ii) used to redeem Bonds in accordance with the terms of the Indenture; or
(iii) used to accomplish a combination of the foregoing as is provided in that
direction.
Any amounts transferred from the Construction Fund to the Bond Fund shall be treated as a
separate, restricted fund within the Bond Fund and may be invested and reinvested at the written
direction of the Authorized Company Representative by Trustee only in investments designated by
the Authorized Company Representative and permitted by the Indenture. The Authorized Company
Representative shall in no event direct such investment such that the Yield on such investments
would, in the aggregate, be in excess of the Yield on the Bonds. Trustee shall, to the extent of
the funds available, apply such transferred funds to the redemption of Bonds (not including
interest, except to the extent that such funds so transferred from the Construction Fund to the
Bond Fund constitute interest earned on funds in the Construction Fund, which funds so
constituting interest earned shall be applied to the payment of principal of or interest earned on
the Bonds as the Authorized Company Representative shall direct as
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and to the extent provided in Section 5.8 of this Loan Agreement) on the earliest date that such
Bonds are subject to redemption in accordance with and in the manner provided in the Indenture.
Section 5.5. Company Required to Pay in Event Construction Fund Insufficient.
In the
event the moneys in the Construction Fund available for payment of the Cost of the Project should
not be sufficient to pay the Cost of the Project in full, Company agrees to complete the Project
and to pay that portion of the Cost of the Project in excess of the moneys available therefor in
the Construction Fund or to lease Leased Equipment to complete the Project. Issuer does not make
any warranty, either express or implied, that the moneys paid into the Construction Fund and
available for payment of the Cost of the Project will be sufficient to pay all of the Cost of the
Project. Company agrees that if, after exhaustion of the moneys in the Construction Fund, Company
should pay any portion of the Cost of the Project pursuant to the provisions of this Section,
Company shall not be entitled to any reimbursement therefor from Issuer, Trustee, or the owners of
any of the Bonds, nor shall Company be entitled to any limitation of the amounts payable under
Sections 4.1 and 4.2 hereof.
Section 5.6. Enforcement of Contracts.
Company covenants that it will take any action and
institute any proceedings to cause and require all contractors and material suppliers to complete
their contracts diligently in accordance with the terms of said contracts, including, without
limitation, the correcting of any defective work. All expenses incurred by Company in connection
with the performance of its obligations under this Section 5.6 may be considered part of the Cost
of the Project, and Issuer agrees that Company may, from time to time, in its own name, take such
action as may be necessary or advisable, as determined by Company, to insure the construction of
the Project in accordance with the terms of the construction contract and the installation of
machinery and equipment in accordance with any applicable contract pertaining thereto, to insure
the peaceable and quiet enjoyment of the Mortgaged Property for the term of this Loan Agreement.
Section 5.7. Ownership of Tax Benefits.
It is the intention of the parties that any tax
benefits resulting from ownership of the Mortgaged Property and any tax credit or comparable credit
which may ever be available shall accrue to the benefit of Company, and Company shall, and Issuer
upon advice of counsel shall, make any election and take other action in accordance with the Code
and the regulations promulgated thereunder as may be necessary to entitle Company to have such
benefit and credit.
Section 5.8. Investment of Moneys.
Money held for the credit of any fund or account created
in the Indenture shall, to the extent practicable, be invested and reinvested by Trustee as
directed in writing by the Authorized Company Representative in Permitted Investments which shall
mature not later than the date or dates on which the money held for credit of the particular fund
shall be required for the purposes intended. All investment earnings on the Bond Fund,
Construction Fund, Rebate Fund or any other fund held by the Trustee shall be credited to such
fund. The Company shall be entitled to a credit for Loan Payments due on the Note to the extent
such funds are part of or are transferred into the Bond Fund and thereupon applied to interest or
principal on the Bonds, to be applied against Loan Payments in the same amounts as such funds are
applied against interest or principal, as the case may be, on the Bonds. Trustee shall sell or
reduce to cash a sufficient amount of such investments in the Construction Fund whenever the cash
balance in the Construction Fund is insufficient to pay a requisition when presented, and such
investments in the Bond Fund whenever the cash balance in the Bond Fund is insufficient to pay the
principal of and premium, if any, and interest on the Bonds when due. The Trustee shall have no
liability for any loss on such sale or reduction to cash absent gross negligence or wilful
misconduct.
Trustee may make any and all such investments through its own investment department or the
investment department of any bank or trust company under common control with Trustee. Issuer shall
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have no responsibility for control of or directing such investments and shall not be held
accountable for any losses resulting from any such investments. All such investments and the
income thereon shall at all times be a part of the fund (the Construction Fund, the Bond Fund, or
such other fund, as the case may be) from which the moneys used to acquire such investments shall
have come, and all losses on such investments shall be charged against such fund. All investments
shall be registered in the name of Trustee, as Trustee under the Indenture.
Section 5.9. Plans and Specifications; Modifications to Mortgaged Property.
Company agrees to
maintain plans and specifications for the Mortgaged Property. Company may make any changes in or
modifications of the plans and specifications, and may make any deletions from or substitutions or
additions to the Mortgaged Property without the prior consent of Issuer so long as such changes or
modifications in the plans and specifications, or deletions from or substitutions or additions to
the Mortgaged Property, do not materially alter the size, scope, or character of the Mortgaged
Property or impair the structural integrity and utility of the Mortgaged Property. If any such
changes in or modifications of the plans and specifications, or if any such deletions from or
substitutions or additions to the Mortgaged Property, materially alter the size, scope, or
character of the Mortgaged Property or impair the structural integrity and utility of the
Mortgaged Property then, and in such event, no such changes, modifications, substitutions,
deletions, or additions shall be made without the express written consent of Issuer, which consent
shall not be unreasonably withheld. Company covenants and agrees that no changes, modifications,
substitutions, deletions, or additions shall be made with respect to the Mortgaged Property (a) if
such change disqualifies the Project under the Act or results in interest on the Bonds being
includable in the gross income of the Owners of the Bonds for federal income tax purposes, and (b)
unless there shall be on deposit with Trustee adequate moneys available therefor or Company
deposits in the Construction Fund adequate moneys to pay any additional Cost of the Project
resulting therefrom.
Section 5.10. Agreement to Issue Bonds; Application of Bond Proceeds.
In order to provide
funds for payment of the Cost of the Project, Issuer, concurrently with the execution of this Loan
Agreement, will issue, sell, and deliver the Bonds and deposit the proceeds thereof in the
Construction Fund.
ARTICLE VI
EFFECTIVE DATE OF THIS LOAN AGREEMENT;
DEFINITION OF LOAN TERM
Section 6.1. Effective Date of this Loan Agreement; Duration of Loan Term.
This Loan Agreement
shall become effective upon its delivery, and, subject to the provisions of this Loan Agreement
(including particularly Sections 4.1 and 8.5 hereof and Articles XI hereof), shall continue until
such date as payment has been made in full of the Note and all amounts due and owing under this
Loan Agreement, including, without limitation, the payment of principal, interest to the payment
date, premium, if any, Trustees fees and expenses, registrars fees and expenses, or provision for
such payment has been made as provided in the Indenture.
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ARTICLE VII
MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
Section 7.1. Maintenance and Modifications of Mortgaged Property by Company.
(a) Company agrees that during the Loan Term it will at its own expense (i) keep the Mortgaged
Property in reasonably safe condition as its operations shall permit and (ii) keep the Buildings
and the Mortgaged Equipment and all other improvements forming a part of the Mortgaged Property in
good repair and in good operating condition, making from time to time all necessary repairs thereto
and renewals and replacements thereof.
(b) Company may from time to time, in its sole discretion and at its own expense, make any
additions, modifications, or improvements at the Mortgaged Property location, including
installation of additional machinery, equipment, furniture, or fixtures in the Buildings or on the
Land, which it may deem desirable for its business purposes; provided that all such additions,
modifications, and improvements do not adversely affect the structural integrity of the
Buildings.
(c) Company, in consideration of the premises and of the issuance of the Bonds by Issuer and
the sum of $1.00, lawful money of the United States of America, to it duly paid by Issuer at or
before the execution and delivery of this Loan Agreement, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, and in order to secure the obligations
of Company under this Loan Agreement, under the Note and under the Deed of Trust, does hereby grant
a first position security interest (within the meaning of the Uniform Commercial Code in effect in
the State) in, and pledge unto Issuer, and its assigns forever the Collateral, and the proceeds and
products of the Collateral. The Collateral does not include any Leased Equipment.
(d) Company will not permit any mechanics, materialmens, or other liens to be established or
remain against the Mortgaged Property for labor or materials furnished in connection with any
addition, modifications, improvements, repairs, renewals, or replacements so made by it; provided,
that Company may provide the Issuer with a title insurance policy insuring the Mortgaged Property
without exception for the lien in question or affirmative insurance insuring against collection out
of the Mortgaged Property or, in the alternative, post a bond satisfactory to the Trustee, and may
in good faith contest any mechanics or other liens filed or established against the Mortgaged
Property, and in such event may permit the items so contested to remain undischarged and
unsatisfied during the period of such contest and any appeal therefrom unless Issuer or Trustee
shall notify Company that, in the opinion of Counsel, by nonpayment of any such items, the security
of the Bondowners, as to any part of the Mortgaged Property, will be materially endangered or the
Mortgaged Property or any substantial part thereof will be subject to loss or forfeiture, in which
event Company shall promptly pay and cause to be satisfied and discharged or bond (if legally
permissible) all such unpaid items.
Section 7.2. Removal of Mortgaged Equipment.
In any instance where Company in its sole
discretion determines that any items of Mortgaged Equipment have become inadequate, obsolete,
worn-out, unsuitable, undesirable, or unnecessary, Company may, provided no event of default shall
have occurred and be continuing, remove such items of Mortgaged Equipment from the Buildings and
the Land and (on behalf of Issuer) sell, trade-in, exchange, or otherwise dispose of them (as a
whole or in part) without any responsibility or accountability to Issuer or Trustee therefor,
provided that Company shall:
(a) Substitute (either by direct payment of the costs thereof or by advancing to
Issuer the funds necessary therefor) and install anywhere in the Buildings or on the Land,
other
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machinery or equipment having equal or greater utility (but not necessarily having the same
function) in the operation of the Buildings as a modern manufacturing facility (provided
such removal and substitution shall not impair the operating unity of the remaining
property), all of which substituted machinery or equipment shall be free of all liens and
encumbrances (other than Permitted Encumbrances) but shall become a part of the Mortgaged
Equipment provided, however, during the first three (3) years commencing from and after July
18, 1996, the Company may substitute Leased Equipment (as defined in the Indenture) leased
by the Company from any lessor in place of any Mortgaged Equipment removed from the
Mortgaged Property, which Leased Equipment shall not be or be deemed to be part of the
Mortgaged Equipment; or
(b) Not make any such substitution and installation unless, (i) in the case of the
sale of any such Mortgaged Equipment to anyone other than itself or in the case of the
scrapping thereof, Company shall pay into the Bond Fund the proceeds from such sale or the
scrap value thereof, as the case may be, (ii) in the case of the trade-in of any such
Mortgaged Equipment for other Mortgaged Equipment not to be installed in the Buildings or
on the Land, Company shall pay into the Bond Fund the amount of the credit received by it
in such trade-in, and (iii) in the case of the sale of any such Mortgaged Equipment to
Company or in the case of any other disposition thereof Company shall pay into the Bond
Fund an amount equal to the original cost thereof less depreciation at rates calculated in
accordance with generally accepted accounting principles; provided, however, that no such
payment into the Bond Fund need be made until the amount to be paid into the Bond Fund on
account of all such dispositions not previously reported aggregates at least $100,000 in
any calendar year; provided further, that Company may not fail to make any such
substitution and installation if such failure would impair the operating utility of the
remaining property.
Any Mortgaged Equipment removed from the Project by the Company pursuant to this Section
shall be released from the lien and security interest created by the Deed of Trust and may be sold
or otherwise disposed of by the Company without accounting to the Issuer. The Issuer will
promptly, upon the request of the Company, execute, acknowledge and deliver all supplemental deeds
of trust and all appropriate financing statements, including UCC-3 Termination Statements,
releases and other security instruments as may reasonably be required to evidence the removal and
replacement of any Mortgaged Equipment pursuant to the Deed of Trust.
The removal from the Mortgaged Property of any portion of the Mortgaged Equipment pursuant to
the provisions of this Section shall not entitle Company to any abatement or diminution of the
Loan Payments or Additional Payments payable to the Issuer and/or Trustee or any co-trustee
payable under Sections 4.1 and 4.2 hereof.
Company will promptly report to Trustee in writing such removal, substitution, sale, and
other disposition and will pay to Trustee such amounts, if any, as are required by the provision
of the preceding subsection (b) of this Section to be paid into the Bond Fund promptly after the
sale, trade-in, scrapping, or other disposition requiring such payment; provided, however, that no
such report need be made until the amount to be paid into the Bond Fund on account of all such
disposition aggregates at least $100,000 in any calendar year.
Section 7.3 Impositions.
Company shall, during the Loan Term, timely, except as otherwise
provided herein, bear, pay, and discharge, all taxes and assessments, general and special, if any,
which may be taxed, charged, levied, assessed, or imposed upon or against or be payable for or in
respect of the Mortgaged Property, or any part thereof, or any improvements at any time thereon or
on Companys interest in the Mortgaged Property under this Loan Agreement, including any new taxes
and assessments
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not of the kind enumerated above to the extent that the same are made, levied against real and
personal property, and further including without limitation all water and sewer charges,
assessments, and other governmental charges and impositions whatsoever, foreseen or unforeseen,
which if not paid when due would encumber the Mortgaged Property (all of the foregoing being herein
referred to as Impositions). In the event any special assessment taxes are lawfully levied and
assessed which may be paid in installments, Company shall be required to pay only such installments
thereof as become due and payable during the Loan Term as and when the same become due and payable.
Any Impositions which Company is required to bear, pay, and discharge shall be remitted directly to
the authority which is entitled to the payment thereof.
Within 30 days after the last day for payment or as soon thereafter as is reasonably
practicable, without penalty or, interest, of an Imposition which Company is required to bear, pay,
and discharge pursuant to the terms hereof, Company shall deliver to Issuer upon its written
request a reproduced copy of any statement issued therefor which has been duly receipted to show
the payment thereof.
Notwithstanding the foregoing, Company shall have the right, in its name, to contest in good
faith the validity or amount of any Imposition which Company is required to bear, pay, and
discharge pursuant to the terms of this Section by appropriate legal proceedings provided Company,
before instituting any such contest in Companys name, gives Trustee written notice of its
intention so to do and Company diligently prosecutes any such contest, at all times effectively
stays or prevents any official or judicial sale therefor, under execution or otherwise, sets aside
on its books and maintains adequate reserves for the payment of any liability therefrom in
conformity with generally accepted accounting principles, and promptly pays any final judgment
enforcing the Imposition so contested and thereafter promptly procures record release or
satisfaction thereof. Company shall hold Issuer and Trustee whole and harmless from any costs and
expenses Issuer and Trustee may reasonably incur related to any such contest.
Section 7.4. Insurance Required.
During the Construction Period and throughout the Loan Term,
Company shall keep the Mortgaged Property continuously insured against such risks as are
customarily insured against by business of like size and type, paying as the same become due all
premiums in respect thereto, including but not necessarily limited to:
(a)
Fire and Extended Coverage Insurance.
Subsequent to completion of the Project and
expiration of the builders risk policy referred to in subsection (d) below, insurance
against loss or damage by fire with standard extended coverage, vandalism, and malicious
mischief endorsement. Such insurance shall be in an amount equal to or exceeding the
lesser of (i) the full replacement value of the Mortgaged Property, or (ii) the amount
required for the full redemption or retirement of all Bonds then Outstanding; provided,
however, in any event, such insurance shall be in an amount necessary to prevent application
of any coinsurance provisions of the applicable policies. The proceeds of all such policies
shall be payable to Issuer, Company, and Trustee as their interests may appear, provided
that any such policies may be so written or endorsed as to make payments on claims for
losses not in excess of $100,000 payable directly to Company. All claims on such insurance
regardless of amount may be adjusted by Company with the insurers, subject to approval of
Trustee, which approval shall not be unreasonably withheld, as to settlement of any claim in
excess of $100,000. Issuer shall cooperate with Company in adjusting any such loss.
(b)
Public Liability Insurance.
General public liability insurance against claims for
bodily injury, death, or property damage occurring in connection with the Mortgaged
Property,
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such insurance to afford protection to Issuer and Trustee as additional insureds of not
less than $10,000,000 per occurrence.
(c)
Workers Compensation Insurance.
Workers compensation insurance, including qualified
self-insurance pursuant to the workers compensation laws of the State, covering all persons
employed by Company at the Mortgaged Property. Company will cause such insurance to be
maintained by any independent contractors engaged by Company in connection with any work
done on or about the Mortgaged Property with respect to which claims for death or bodily
injury could be asserted against Company, Issuer, Trustee or
Co-Trustee, complying with the
rules, regulations, and requirements of the State from time to time in force.
(d)
Builders Risk Insurance.
During the course of construction of the Project until
the fire and extended coverage insurance set forth in subsection (a) above is in force, a
standard form builders risk policy on a replacement cost basis, with an all risk
endorsement, a course of construction endorsement, and a collapse insurance provision, in an
amount equal to the completed value of the portion of the Project covered by a construction
contract, with loss payable to Issuer, Company, and Trustee, as their interests may appear.
(e)
Flood Insurance.
If all or part of the Mortgaged Property is located in an area
now or hereafter identified by the Secretary of Housing and Urban Development as an area
having special flood hazards and in which flood insurance has been made available under the
National Flood Insurance Act of 1968, as amended, policies of flood insurance in an amount
at least equal to the lesser of (1) the amount of the Bonds, (2) the insurable value of the
improvements, or (3) the maximum limit of coverage available under the National Flood
Insurance Act of 1968, as amended.
Company shall, upon request by the Trustee, provide Trustee with an opinion of an independent
insurance broker of recognized national standing that the insurance then in force upon the
Mortgaged Property is in compliance with the provisions of this Section 7.4.
Nothing in this Section 7.4 or any other portion of this Loan Agreement shall be construed to
prevent Company from including the Mortgaged Property under Companys blanket forms of insurance
coverage, provided that each and all of the requirements of this Section 7.4 be complied with
under such blanket coverage.
Section 7.5. Application of Net Proceeds of Insurance.
The Net Proceeds of the insurance
required in Section 7.4 hereof shall be applied as follows: (i) the Net Proceeds of the insurance
required in Sections 7.4 (a), (d), and (e) hereof shall be applied as provided in Section 8.2
hereof, and (ii) the Net Proceeds of the insurance required in Sections 7.4(b) and (c) hereof
shall be applied toward extinguishment or satisfaction of the liability with respect to which such
insurance proceeds may be paid.
Section 7.6. Additional Provisions Regarding Insurance.
All insurance required in Section 7.4
hereof shall be taken out and maintained with generally recognized responsible insurance companies
selected by Company. All policies evidencing such insurance (other than public liability insurance
and workers compensation insurance) shall provide for payment of the losses to Issuer, Company,
Trustee and Co-Trustee as their respective interests may appear, and the policies required by
Sections 7.4(a), (d), and (e) shall bear endorsements requiring that all proceeds of insurance
resulting from any claim in excess of $100,000 for loss or damage covered thereby be paid to
Trustee; provided, however, that all claims
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regardless of amount may be adjusted by Company with insurers, subject to approval of Trustee, as
to settlement of any claim in excess of $100,000, which approval shall not be unreasonably
withheld.
All policies, or a certificate or certificates of the insurers that such insurance is in
force and effect, shall be deposited with Trustee. Each such policy shall contain a provision that
such policy may not be cancelled unless Trustee is notified in writing at least 30 days prior to
the cancellation; and, at least 30 days prior to the expiration of any such policy, Company shall
furnish Trustee with written evidence satisfactory to Trustee that the policy has been renewed or
replaced or is no longer required by this Loan Agreement.
Section 7.7. Advances by Issuer or Trustee.
In the event Company shall fail to maintain the
full insurance coverage required by this Loan Agreement or shall fail to keep the Mortgaged
Property in as reasonably safe condition as its operating conditions will permit, or shall fail to
keep the Buildings and the Mortgaged Equipment in good repair and good operating condition, Trustee
may (but unless indemnified to the satisfaction of the Trustee shall be under no obligation to)
take out the required policies of insurance and pay the premiums on the same or make the required
repairs, renewals, and replacements; and all amounts so advanced therefor by Trustee shall become
an additional obligation of Company to the one making the advancement secured by the Mortgaged
Property, which amounts Company agrees to pay with interest thereon, to the extent permitted by
law, from the date thereof at the Agreed Rate.
Section 7.8. Release and Indemnification Covenants.
(a) Company shall and hereby agrees to indemnify and save Issuer (including but not
limited to past, present, and future officials, and other persons acting on Issuers
behalf), Trustee and Co-Trustee, and their officers, agents, and employees, harmless against
and from all loss, damage, cost, liability or expense, hereafter arising, by or on behalf of
any person, firm, corporation, or other legal entity arising from the conduct or management
of, or from any work or thing done on, the Mortgaged Property during the term of this Loan
Agreement, including without limitation, (i) any condition of the Mortgaged Property, (ii)
any breach or default on the part of Company in the performance of any of its obligations
under this Loan Agreement, (iii) any act or negligence of Company or of any of its agents,
contractors, servants, employees, or licensees, or (iv) any act or negligence of any
assignee or lessee of Company, or of any agents, contractors, servants, employees, or
licensees of any assignee or lessee of Company. Company shall indemnify and save Issuer and
Trustee harmless from any such claim arising as aforesaid, or in connection with any action
or proceeding brought thereon, and upon notice from Issuer or Trustee, Company shall defend
them or either of them in any such action or proceedings.
(b) It is the intention of the parties hereto that Issuer shall not incur any pecuniary
liability by reason of the terms of this Loan Agreement or the undertakings required of
Issuer hereunder, by reason of the issuance of the Bonds, by reason of the execution of the
Indenture, or by reason of the performance of any act requested of Issuer by Company,
including all claims, liabilities, or losses arising in connection with the violation of any
statutes or regulations pertaining to the foregoing; nevertheless, if Issuer should incur
any such pecuniary liability, then in such event Company shall indemnify and hold Issuer,
its officers, members, agents, and employees harmless against all claims by or on behalf of
any person, firm, or corporation or other legal entity arising out of the same and all costs
and expenses reasonably incurred in connection with any such claim or in connection with any
action or proceeding brought thereon, and upon notice from Issuer, Company shall defend
Issuer in any such action or proceeding.
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(c) Nothing contained in this Section 7.8 shall be construed to indemnify or
release Issuer from its liability in connection with the Mortgaged Property arising from the
gross negligence of or willful misconduct of Issuer, its employees, agents, or
representatives acting in their capacities as such.
Section 7.9. Environmental Considerations.
During the Loan Term, Company agrees that the
Mortgaged Property shall not be used at any time during the Loan Term to generate, manufacture,
refine, transport, treat, store, handle, dispose, transfer, produce, process, or in any manner deal
with hazardous materials except as incidental to its business or the business of any occupant of
the whole or any part of the Mortgaged Property whose occupancy of the Mortgaged Property or such
part thereof is not in violation of the terms of this Loan Agreement. Company further agrees that
it will defend, indemnify, and hold harmless Issuer and Trustee from and against any and all
liabilities, claims, damages, penalties, expenditure, losses, or charges, including but not limited
to all reasonable and necessary costs of investigation, monitoring, legal fees, remedial response,
removal, restoration, or permanent acquisition which may now or in the future be undertaken,
suffered, paid, awarded, assessed, or otherwise incurred as a result of any contamination resulting
from the disposal, storage, treatment, processing, or other handling of waste contamination, PCBs,
or other toxic or hazardous substance, which arise from Companys or any other permitted occupants
activity on or under the Mortgaged Property. Company agrees to promptly notify the Issuer and the
Trustee in writing by certified mail with return receipt requested, of the receipt of any written
environmental claim, suit, or demand by any individual, corporation, partnership, governmental
agency, or other legal entity concerning the Mortgaged Property. Issuer reserves the right to
defend against such claim, suit, or demand at its sole cost and expense, and Company will cooperate
with Issuer in such defense.
Notwithstanding anything to the contrary in this Loan Agreement, nothing in this Loan
Agreement, including without limitation this Section 7.9, shall diminish, derogate, or otherwise
limit the rights and interests of Trustee under the Hazardous Substance Certification and
Indemnification.
ARTICLE VIII
DAMAGE, DESTRUCTION, AND CONDEMNATION;
USE OF NET PROCEEDS
Section 8.1. Damage and Destruction.
Unless Company shall have exercised its option to
prepay the amounts payable under this Loan Agreement pursuant to the provisions of Section 10.4
hereof, if prior to full payment of the Bonds (or provisions for payment thereof having been made
in accordance with the provisions of the Indenture) the Mortgaged Property or any portion thereof
is destroyed (in whole or in part) or is damaged by fire or other casualty, Company shall be
obligated to continue to pay the Loan Payments and Additional Payment as specified in Section 4.1
and 4.2 hereof. Company shall give prompt written notice of any such destruction or damage in
excess of $100,000 to Issuer and Trustee.
Section 8.2. Application of Net Proceeds.
Prior to the Completion Date, Issuer, Trustee, and
Company will cause the Net Proceeds of any insurance resulting from any events described in
Section 8.1 hereof to be deposited in the Construction Fund and to be disbursed therefrom to pay
or reimburse the Company for any Cost of the Project as provided in Article V of this Loan
Agreement and the Indenture. Subsequent to the Completion Date, Issuer, Trustee, and Company will
cause the Net Proceeds of any insurance resulting from any such event described in Section 8.1
hereof to be deposited in a separate trust fund, provided that Net Proceeds in an amount less than
$100,000 shall be paid directly
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to Company. All Net Proceeds from insurance shall be applied in one or more of the
following ways as shall be elected by Company in a written notice of the Authorized Company
Representative to Issuer and Trustee:
(a) To the prompt repair, restoration, modification, or improvement of the Mortgaged
Property by Company, and Issuer does hereby authorize and direct Trustee to make
disbursements from such separate fund for such purposes or to reimburse Company for costs
paid by it in connection therewith upon receipt of a requisition acceptable to Trustee
signed by an Authorized Company Representative stating with respect to each disbursement to
be made: (1) the requisition number, (2) the name and address of the person, firm, or
corporation to whom payment is due, (3) the amount to be disbursed, and (4) that each
obligation mentioned therein has been properly incurred, is a proper charge against the
separate trust fund, and has not been the basis of any previous disbursement. Any balance
of the Net Proceeds remaining after such work has been completed shall be transferred to the
Bond Fund to be applied to the payment of principal of and premium, if any, and interest on
the Bonds, or, if the Bonds have been fully paid (or provision for payment thereof has been
made in accordance with the provisions of the Indenture and this Loan Agreement), any
balance remaining in such separate trust fund shall be paid to Company.
(b) To redemption of the Bonds on the next succeeding Interest Payment Date as
specified in a written notice by the Authorized Company Representative to Trustee; provided,
that no part of the Net Proceeds may be applied for such redemption unless (1) all of the
Bonds are to be redeemed in accordance with the Indenture upon prepayment of the amounts
payable hereunder or (2) in the event that less than all of the Bonds are to be redeemed,
Company shall furnish to Issuer and Trustee a certificate of the Authorized Company
Representative acceptable to Issuer and Trustee stating that (i) the property forming the
part of the Mortgaged Property that was damaged or destroyed by such casualty is not
essential to the use or possession of the Mortgaged Property by Company or (ii) the
Mortgaged Property has been repaired, restored, modified, or improved to operate as
designed.
Section 8.3. Insufficiency of Net Proceeds.
If the Net Proceeds of insurance are insufficient
to pay in full the cost of any repair, restoration, modification, or improvement referred to in
Section 8.2(a) hereof, Company will nonetheless complete the work and will pay any cost in excess
of the amount of the Net Proceeds held by Trustee. Company agrees that if by reason of any such
insufficiency of the Net Proceeds, Company shall make any payments pursuant to the provisions of
this Section, Company shall not be entitled to any reimbursement therefor from Issuer, Trustee, or
the Owners of any of the Bonds, nor shall Company be entitled to any diminution of the amounts
payable under Sections 4.1 and 4.2 hereof.
Section 8.4. Cooperation of Issuer.
Issuer shall cooperate fully with Company at the expense
of Company in filing any proof of loss with respect to any insurance policy covering the
casualties described in Section 8.1 hereof and will, to the extent it may lawfully do so, permit
Company to litigate in any proceeding resulting therefrom in the name and behalf of Issuer. In no
event will Issuer voluntarily settle, or consent to the settlement of, any proceeding arising out
of any insurance claim without the written consent of the Authorized Company Representative.
Section 8.5. Rights of Parties in Event of Condemnation; Bonds Protected in Any
Event.
(a) If during the Loan Term title to all or substantially all of the Mortgaged
Property shall be taken or condemned by a competent authority for any public use or purpose,
then, subject to the
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subsequent provisions of this Section, the condemnation award shall be paid to Trustee,
for the account of Issuer, and deposited into the Bond Fund (subject to the provisions of
the Indenture and this Loan Agreement) and Company hereby assigns the award to Issuer. In
the event the Net Proceeds of any condemnation award (being the gross amount awarded less
all reasonable attorneys fees and other reasonable expenses and costs in the
condemnation proceeding) together with the amount then in the Bond Fund shall be
insufficient to pay in full, on the redemption date fixed by Company pursuant to the
provisions of Section 301 of the Indenture, the amount necessary to pay all principal,
premium, if any, interest, Trustees fees and expenses, and all other costs of redemption
(all of which, for purposes of this Section, shall be called total bond redemption
expense), Company agrees to pay promptly upon payment of the condemnation award, the
amount by which the total bond redemption expense shall exceed the Net Proceeds of any
condemnation award plus the amount then on deposit in the Bond Fund. For the purposes of
this Article VIII, all or substantially all of the Mortgaged Property shall be deemed
to mean a taking of all of the Mortgaged Property or a taking of such a substantial
portion of the Mortgaged Property that Company, as determined by Company in its sole
discretion, cannot reasonably operate the remainder. In the event the Net Proceeds of any
condemnation award, together with the amount in the Bond Fund, shall be in excess of the
amount necessary to pay the total bond redemption expense and Company is not in default
in any of its other obligations hereunder, or Company is in default in any of its
obligations hereunder and the Net Proceeds of any condemnation award plus the amount then
on deposit in the Bond Fund plus any amount previously paid to the Bondowners on account
of the total bond redemption expense shall be in excess of the amount necessary to pay
the total bond redemption expense, then the appropriate excess shall belong to and be
paid to Company; provided, however, that if an event of default has occurred and is
continuing with reference to any of its other obligations hereunder, the amount necessary
to satisfy such default shall also be paid to Trustee by Company whether from such excess
or otherwise. To the extent that the sum of the Net Proceeds of any condemnation award
plus the amount then on deposit in the Bond Fund plus any amount previously paid to the
owners
of the Bonds on account of the total bond redemption expense shall be less than the total bond
redemption
expense, Company agrees to pay such deficiency to Issuer. Issuer agrees that it will not
voluntarily accept, without the prior approval of Company, any condemnation award, and
Issuer agrees that it will cooperate with Company with the end in view of obtaining the
maximum justifiable condemnation award.
(b) If less than substantially all of the Mortgaged Property shall be taken or
condemned by a competent authority for any public use or purpose, neither the term nor
any of the obligations of either party under this Loan Agreement shall be affected or
reduced in any way, and
(i) If any part of the improvements owned by Company on the Mortgaged
Property is taken, Company shall proceed to repair or rebuild the remaining part
as nearly as possible to the condition existing prior to such taking, to the
extent that the same may be feasible, subject to the right on the part of Company
to make alterations so as to improve the efficiency of the improvements; and
(ii) The entire condemnation award shall be paid to Company for the use of
Company in repairing and rebuilding as provided in (i) above. The said award
shall be transferred to Company in the same manner as is provided in Section 8.2
with respect to insurance proceeds, provided that the words Net Proceeds there
referred to shall for purposes hereof refer to net condemnation award. If the
Net Procceeds of any condemnation award is in excess of the amount necessary to
repair and rebuild as specified in (i) above, such excess shall be paid to
Trustee and deposited in the Bond Fund. If the Net Proceeds of any condemnation
award is less than the amount necessary for Company to repair and rebuild as set
forth in (i) above, Company
shall nevertheless complete the repair and rebuilding work and pay the deficiencies in the
cost thereof; and
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(iii) If no part of the improvements is taken, the Net Proceeds of any
condemnation award shall be paid to Trustee and deposited in the Bond Fund.
(c) In the event of taking under either (a) or (b) above, Company shall have the right to
participate at its own expense in, and to offer proof in, the condemnation proceedings and to
receive that portion of any award (by way of negotiation, settlement, or judgment) which may be
made for damages sustained by Company solely as a result of the interruption of Companys business
or with respect to the Companys trade fixtures, equipment, improvements and moving
expenses by reason of the condemnation; provided, however, nothing in this subsection (c)
shall be construed to diminish or impair in any way Companys obligation under subsection (a) of
this Section 8.5 to pay the amount of any insufficiency of the Net Proceeds of any condemnation
award and the funds in the Bond Fund to pay the total bond redemption expense.
(d) If the temporary use of the whole or any part of the Mortgaged Property shall be taken by
right of, or acquired pursuant to the threat of, eminent domain, this Loan Agreement shall not be
thereby terminated and the parties shall continue to be obligated under all of its terms and
provisions, and, provided that an event of default has not occurred and is continuing under this
Loan Agreement, Company shall be entitled to receive the entire amount of the award made for such
taking, whether by way of damages, rent, or otherwise.
Section 8.6. Company Obligated to Continue Loan Payments and Additional Loan Payments Until
Condemnation Award Available.
In the event of a taking of all or substantially all of the Mortgaged
Property as provided in Section 8.5(a), Company agrees to continue to make payment of the
installments due under the Loan Agreement until the condemnation award shall be actually received
by Issuer; provided, however, Company shall be repaid, solely out of the Net Proceeds of any
condemnation award, the amounts so paid after the date provided in Section 8.5(a). This agreement
to repay shall not be construed in any way to impair or diminish Companys obligations under
Section 8.5 to pay the amount of any insufficiency of the Net Proceeds of any condemnation award
and the moneys in the Bond Fund to pay the total bond redemption expense.
ARTICLE IX
SPECIAL COVENANTS
Section 9.1.
No Warranty of Condition or Suitability by Issuer.
ISSUER MAKES NO WARRANTY,
EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION OF THE MORTGAGED PROPERTY OR THAT THE MORTGAGED
PROPERTY WILL BE SUITABLE FOR COMPANYS PURPOSES OR NEEDS.
Section 9.2. Inspection of the Mortgaged Property.
Company agrees that Trustee and Issuer and
their duly authorized agents shall have the right at all reasonable times to enter upon the Land
and to examine and inspect the Mortgaged Property without interference or prejudice to Companys
operations. Company further agrees that Issuer and its duly authorized agents who are acceptable
to Company shall have such rights of access to the Mortgaged Property as may be reasonably
necessary to cause to be completed the construction and installation provided for in Section 5.1
hereof.
Section 9.3. Company to Maintain its Corporate Existence.
Company will maintain its corporate
existence and will not dissolve or otherwise dispose of all or substantially all of its assets and
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will not consolidate with or merge into another corporation or permit one or more other
corporations to consolidate with or merge into it without providing an opinion of Bond Counsel to
the Issuer and the Trustee that such a merger, dissolution or consolidation will not materially
violate the Act or cause interest on the Bonds to be includable in the gross income of the owners
thereof for federal income tax purposes.
Section 9.4. Release of Certain Land
. Notwithstanding any other provision of this Loan
Agreement, the parties hereto, with the prior written consent of Trustee, which consent shall not
be unreasonably withheld, reserve the right at any time and from time to time to amend the Deed of
Trust for the purpose of effecting the release of and removal from this Loan Agreement, the Deed of
Trust, and the Indenture (i) of any unimproved part of the Land (on which neither the Buildings nor
any Mortgaged Equipment is located but on which transportation or utility facilities may be
located) on which Company proposes to construct improvements under another and different loan
agreement or (ii) any part of the Land with respect to which Company proposes to grant an easement
or convey a fee or other title to a railroad or other public or private carrier or to any public
utility or public body in order that transportation facilities or services by rail, water, road, or
other means or utility services for the Mortgaged Property may be provided, increased, or improved;
provided, that if at the time any such amendment is made any of the Bonds are Outstanding and
unpaid there shall be deposited with Trustee the following:
(a) A copy of the said amendment as executed.
(b) A resolution of the board of directors of Company or executive committee of said
board (if permitted under Companys by-laws) authorizing the execution of such amendment
together with an Authorized Company Representatives certificate stating that Company is not
in default under any of the provisions of this Loan Agreement, the Deed of Trust, the
Guaranty or the Hazardous Substance Certification and Indemnification.
(c) A copy of the instrument granting the easement or conveying the title to a
railroad, public utility, or public body.
(d) A certificate of an Independent Engineer who is reasonably acceptable to Trustee,
dated not more than 60 days prior to the date of the release and stating that, in the
opinion of the person signing such certificate, (i) the portion of the Land so proposed to
be released is necessary or desirable, for railroad, utility service, or roads to benefit
the Mortgaged Property or is not otherwise needed for the operation of the Mortgaged
Property for the purposes hereinabove stated, (ii) the release so proposed to be made will
not impair the usefulness of the Buildings as a manufacturing facility, and (iii) the
remaining portion of Land after the release will be a legal parcel.
(e) Company and Issuer agree that all walls presently standing or hereafter erected on
or contiguous to the boundary line of the Land so proposed to be released shall be party
walls for the purpose of tying-in of new construction. If any party wall is utilized for the
purpose of tying-in new construction with the building to be utilized under common control
with the Mortgaged Property, utility facilities on the Land, including those within the
Buildings, may be interconnected for the purpose of serving the new construction to be
placed on Land so released and any non-loadbearing panels in any party wall may be removed;
provided, however, that if the Land so released and construction thereon ceases to be
operated under common control with the Buildings, non-loadbearing wall panels similar in
quality to those which have been removed will be installed and separate utility services
will be provided for the new construction.
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In the event that the conditions described in Section 9.4 (a), (b), (c), and (d) have been
fulfilled, the Issuer agrees to execute and deliver to the Company, all documents reasonably
requested by the Company to evidence the release of the portion of the Land so proposed to be
released, including, but not limited to, a deed of release in recordable form, with respect to the
Deed of Trust, evidencing the release of the Land sought to be released from the definition of
Mortgaged Property, and any UCC-3 termination statement required to evidence the release of the
Land, any fixtures and any Mortgaged Equipment situated thereon sought to be released from any
UCC-I financing statement and security agreement held by the Issuer, being, however, a partial
release, which does not release the security interest in the balance of the Mortgaged Property
covered by the corresponding UCC-1 financing statement.
No release effected under the provisions hereof shall entitle Company to any abatement or
diminution of the Loan Payments and Additional Payments payable under Section 4.1 or 4.2 hereof.
Section 9.5. Granting of Easements.
If no event of default shall have happened and be
continuing, and subject to the delivery of prior written notice to Trustee, Company may at any
time or times grant easements, licenses, rights-of-way (including the dedication of public
highways), and other rights or privileges in the nature of easements with respect to any property
included in the Mortgaged Property, free from the lien of the Indenture, or Company may release
existing easements, licenses, rights-of-way, and other rights or privileges with or without
consideration, and Issuer agrees that it shall execute and deliver and will cause and direct
Trustee to execute and deliver any instrument necessary or appropriate to confirm the release of
any such easement, license, right of way and other right or privilege in the nature of easements
when so granted from the lien of the Indenture, including, but not limited to, delivery by the
Issuer of a release of lien in recordable form and a subordination agreement in recordable form
confirming that the lien of the Indenture is subject and subordinate to such easement, license,
right of way or other right or privilege granted pursuant to this Section 9.5, and grant or
release any such easement, license, right-of-way, or other right or privilege upon receipt of: (i)
a copy of the instrument of grant or release; (ii) a written application signed by the Authorized
Company Representative requesting such instrument; and (iii) a certificate executed by the
Authorized Company Representative stating (1) that such grant or release is not detrimental to the
proper conduct of the business of Company, and (2) that such grant or release will not impair the
effective use or interfere with the operation of the Mortgaged Property and will not weaken,
diminish, or impair the security intended to be given by or under the Indenture.
Section 9.6. Compliance with Code.
Issuer and Company recognize that the Bonds are to be
issued under such circumstances that the interest thereon shall remain excludable from gross
income for federal income taxation purposes, and to that end Company represents to and covenants
with Issuer, Trustee, and each Bondowner as follows:
(a) Company will fulfill all conditions specified in Section 144(a)(4) of the
Code and applicable Regulations, to qualify the Bonds as a small issue thereunder.
(b) Company will comply with and fulfill all other requirements and conditions of the
Code and applicable Regulations in the acquisition, construction, and operation of the
Project to the end that the interest on the Bonds shall at all times be free from federal
income taxation.
(c) The average maturity of the Bonds (determined by their respective issue prices)
does not exceed 120 percent of the average reasonably expected economic life of the various
facilities to be financed with the proceeds of the Bonds (determined by taking into account
the respective costs of such facilities and by using the guideline economic life for each
respective
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facility as set forth in the ADR (asset depreciation range) midpoint life tables for
machinery and equipment and as set forth in Revenue Procedure 62-21 for structures).
(d) In accordance with Section 149 (e) of the Code, Company covenants and agrees to
furnish to Issuer not later than 5 days before the issuance and delivery of the Bonds a
fully completed Internal Revenue Service Form 8038 with respect to the Bonds. Company
further covenants and agrees that it or its agents will have the primary responsibility as
between or among any preparers for the overall substantive accuracy of the preparation of
Form 8038. Company will hold harmless Issuer, Bond Counsel, Trustee and any purchaser or
owner of the Bonds against all consequences of any material misrepresentation in or
material omission from such Form 8038.
(e) Company has delivered to Issuer a certificate in accordance with the provisions of
the Code and Regulation §1.148-2(b) stating that on the basis of the facts, estimates, and
circumstances in existence on July 18, 1996, as such facts, estimates, and circumstances
are set forth in the certificate, it is not expected that the proceeds of the Bonds will be
used in a manner that would cause the Bonds to be arbitrage bonds within the meaning of
Section 148 of the Code and the Regulations.
Section 9.7. Federal Guarantee Prohibition.
Issuer and Company covenant that neither Issuer
nor Company shall take any action or permit or suffer any action to be taken if the result of the
same would be to cause the Bonds to be federally guaranteed within the meaning of Section 19(b)
of the Code and Regulations.
Section 9.8. Limitation on Issuance Costs.
Issuer and Company covenant that, from the
proceeds of the Bonds received from the Original Purchaser on July 18, 1996 an amount not in
excess of 2% of the face amount of the Bonds shall be used to pay for, or provide for the payment
of, Issuance Costs. For this purpose, if the fees of the Original Purchaser are retained as a
discount on the purchase of the Bonds, such retention shall be deemed to be an expenditure of
proceeds of the Bonds for said fees to the extent of the amount retained.
Section 9.9. Limitation on Expenditure of Proceeds.
Issuer and Company covenant that not less
than 95% of the face amount of the Bonds, plus accrued interest and premium, if any, paid on the
purchase of the Bonds by the Original Purchaser from Issuer, less original issue discount, shall
be used to pay for Qualified Project Costs.
Section 9.10. Limitation on Land and Certain Facilities.
Issuer and Company covenant that not
more than 25 % of the face amount of the Bonds, plus accrued interest and premium, if any, paid on
the purchase of the Bonds by the Original Purchaser from Issuer, less original issue discount,
shall be used, directly or indirectly, for the acquisition of land or an interest therein or to
provide a facility the primary purpose of which is retail food and beverage services, automobile
sales and service, or the provision of recreation or entertainment.
Section 9.11. Location of Project; Outstanding Obligations.
Company covenants that proceeds
of the Bonds shall be used only with respect to facilities located within the corporate boundaries
of the City of Jackson, Missouri (City), and that there are no outstanding obligations issued
for facilities located within the City having as principal users Company or Guarantor or other
principal users of the Project or their related persons, all within the meaning of Sections
144(a)(2) and (3) of the Code and the Regulations.
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Section 9.12. Prohibited Facilities.
Issuer and Company covenant that no portion of the
proceeds of the Bonds shall be used directly or indirectly to provide residential real property
for family units, any private or commercial golf course, country club, massage parlor, tennis
club, skating facility (including roller skating, skateboard, and ice skating), racquet sport
facility (including any handball or racquetball court), hot tub facility, suntan facility,
racetrack, airplane, skybox or other private luxury box, health club facility, facility used for
gambling, or store, the principal business of which is the sale of alcoholic beverages for
consumption off premises.
Section 9.13. No Arbitrage.
Issuer and Company covenant that neither Issuer nor Company shall
take, or permit or suffer to be taken by Trustee or otherwise, any action with respect to the
proceeds of the Bonds over which Issuer or Company, as the case may be, has control, which if such
action had been reasonably expected to have been taken, or had been deliberately and intentionally
taken, on July 18, 1996 would have caused the Bonds to be arbitrage bonds within the meaning of
Section 148(a) of the Code and Regulations.
Section 9.14. Capital Expenditure Limitation.
Company covenants that the sum of the
principal amount of the Bonds, plus capital expenditures paid or incurred during the 6-year period
beginning 3 years prior to July 18, 1996 and ending 3 years after July 18, 1996, for facilities
located within the City having as principal users Company, Guarantor or other principal users of
the Project or their related persons shall not exceed $10,000,000, all within the meaning of
Section 144(a) of the Code and the Regulations. Company further covenants that it will not enter
into any lease or other arrangement, including an assignment pursuant to Section 10.1 hereof, for
use of any portion of the Project if such lease or other arrangement would cause the covenants
contained in this Section to be violated.
Section 9.15. $40,000,000 Limitation.
Company covenants that the sum of the outstanding
principal amount of the Bonds, plus the portions of the aggregate amount of outstanding tax-exempt
facility bonds as defined in Section 142 of the Code, qualified small issue bonds as defined in
Section 144(a) of the Code, qualified redevelopment bonds as defined in Section 144(c) of the
Code, and industrial development bonds as referenced in Section 144(a)(10)(B)(ii)(11) of the
Code, allocable to each test period beneficiary as defined in Section 144(a)(10) of the Code on
the later of the date the Project is placed in service or July 18, 1996 shall not exceed
$40,000,000, all within the meaning of Section 144 (a)(10) of the Code and the Regulations.
Company further covenants that it will not enter into any lease or other arrangement for ownership
or use of any portion of the Project if such lease or other arrangement would cause the covenants
contained in this Section to be violated.
Section 9.16. Existing Facilities Limitation.
(a) Company covenants to expend Rehabilitation Expenditures with respect to the
acquisition of the building (and the equipment therefor) in an amount not less than 15% of
the portion of the cost of acquiring such building (and equipment) financed with proceeds of
the Bonds by July 18, 1998.
(b) For the purpose of this section, the term Rehabilitation Expenditures means any
amount properly chargeable to the capital account of Company or a successor to Company or by
the seller under a sales contract with Company for the property acquired in connection with
the rehabilitation of such property or, in the case of property constituting equipment, in
connection with the rehabilitation of existing equipment or the replacement of such
equipment with equipment having substantially the same function, excluding, however, (A)
expenditures described
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in Section 48(g)(2)(B) of the Code and (B) amounts incurred after the date 2 years
after the later of the date of acquisition of the property in question or July 18, 1996.
Section 9.17. Compliance With Rebate Provisions.
Company covenants that it shall take any and
all actions necessary to assure compliance with Section 148(f) of the Code. In particular, it
shall directly or through independent consultants perform the calculations required to determine
what payments are due under Section 148(f) of the Code, assure the payments required by Section
148(f) of the Code are made, maintain the records required by Section 148(f) of the Code, pay all
fees, costs, and expenses incurred by Company, Issuer, or Trustee in connection with compliance
with Section 148(f) of the Code, and in accordance with Section 512 of the Indenture, including
compensation due to independent consultants, and coordinate and cooperate in any and all respects
necessary to assure compliance with Section 148 (f) of the Code.
Section 9.18. Composite Issues.
(a) The officer of Company executing this Loan Agreement is familiar with all financing
transactions undertaken and now being planned for Company, including tax-exempt financings
by or for Company or by or for any related person (within the meaning of Section 144(a)(3)
of the Code).
(b) There are no other obligations heretofore issued or to be issued by or on behalf of
any state, territory, or possession of the United States of America, or political
subdivision of any of the foregoing, or of the District of Columbia, for the benefit of
Company or any related person, which constitute private activity bonds (within the meaning
of Section 147(b) of the Code) and which (i) were or are to be sold at substantially the
same time as the Bonds, (ii) were or are to be sold pursuant to the same plan of financing
as the Bonds, and (iii) are payable from the source from which the Bonds are payable.
(c) There are no additional facts or circumstances which may further evidence that the
Bonds are part of any other issue of obligations.
Section 9.19. Manufacturing Facility.
The Project will be a manufacturing facility as defined
in Section 144 (a) (12) of the Code. The Project may include ancillary facilities which are
directly related and ancillary to the Project but any such ancillary facilities will be located on
the same site as the Project and not more than 25% of the net proceeds of the Bonds will be used
to provide such ancillary facilities.
Section 9.20. Notice of Default to Issuer and Trustee.
Company agrees to promptly provide
written notice to Issuer and Trustee of an event of default under this Loan Agreement, the Note,
the Deed of Trust, the Guaranty or the Hazardous Substance Certification and Indemnification.
Section 9.21 Non-Disturbance.
In the event a lease is permitted as provided in this Loan
Agreement, and in the event of a foreclosure under the Deed of Trust, Issuer will recognize tenant
under such permitted lease as a direct tenant of Issuer for the balance of the lease term,
provided (i) no default exists under the lease which at the time would then permit the landlord
thereunder to terminate the same or to exercise any dispossession remedy provided for therein, and
(ii)) the tenant shall deliver to Issuer an instrument confirming the agreement of such tenant to
attorn to the Issuer and to recognize the Issuer as the landlord under the lease, in accordance
with the provisions of Section 1101(xiv) of the Indenture.
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ARTICLE X
ASSIGNMENT, LEASING, PLEDGING, AND SELLING; REDEMPTION;
OPTIONAL AND MANDATORY PREPAYMENT; ABATEMENT OF RENT
Section 10.1. Assignment and Leasing.
Company may not assign this Loan Agreement or lease the
Mortgaged Property or part thereof without the prior written consent of Issuer which shall not be
unreasonably withheld. Any such assignment shall include, without limitation, an assumption in
writing by such assignee of all liabilities and obligations of Company under this Loan Agreement
from and after the effective date of such assignment, the Guaranty, the Hazardous Substance
Certification and Indemnification from and after the effective date of the assignment, and any
related documents. Notwithstanding the foregoing, no assignment or subletting and no dealings or
transactions between Issuer or Trustee and any sublessee or assignee shall relieve Company of any
of its obligations under this Loan Agreement, and Company shall remain as fully bound as though no
assignment or subletting had been made, and performance by any assignee or sublessee shall be
considered as performance pro tanto by Company.
In the event a lease is permitted as provided in this Section 10.1 of this Loan Agreement,
and in the event of a foreclosure under the Deed of Trust, Issuer will recognize tenant under such
permitted lease as a direct tenant of Issuer for the balance of the lease term, provided (i) no
default exists under the lease which at the time would then permit the landlord thereunder to
terminate the same or to exercise any dispossess remedy provided for therein and (ii) the tenant
shall deliver to Issuer an instrument confirming the agreement of such tenant to attorn to the
Issuer and to recognize the Issuer as the tenants landlord under its lease.
It is understood and agreed that this Loan Agreement (and the Mortgaged Property) will be
assigned and pledged to Trustee as security for the payment of the principal of and premium, if
any, and interest on the Bonds, but otherwise Issuer shall not, without the prior written consent
of Company and Trustee, assign, encumber, sell, or dispose of all or any part of its rights,
title, and interest in and to the Mortgaged Property, the Deed of Trust, the Note, and this Loan
Agreement, except to Company in accordance with the provisions of this Loan Agreement and to
Trustee or any other Person that takes title to any of the Mortgaged Property as a result of a
foreclosure or deed in lieu of foreclosure, transfer by any Person after a foreclosure or deed in
lieu of foreclosure, or otherwise under the Indenture or this Loan Agreement.
Section 10.2. Restrictions on Sale, Mortgage, or other Conveyance of Mortgaged Property by
Issuer.
Issuer agrees that, except for the collateral assignment and pledge of this Loan Agreement
and the grant and pledge of the Mortgaged Property to Trustee pursuant to the Indenture, it will
not sell, assign, mortgage, pledge, transfer, or convey its interest in the Mortgaged Property
during the Loan Term, except as specifically provided in this Loan Agreement.
Section 10.3. Redemption of Bonds.
Issuer, at the request at any time of Company and if the
Bonds are then callable, shall forthwith take all steps that may be necessary under the applicable
redemption provisions of the Indenture to effect redemption of all or part of the then outstanding
Bonds, as may be specified by Company, on the earliest redemption date on which such redemption
may be made under such applicable provisions.
Section 10.4. Mandatory Prepayment of Loan Payments Upon Determination of Taxability.
If, for any reason (including a change in the Code), without regard to whether such circumstances
shall
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be caused by any act or failure to act of Issuer, Company, or any other user of the Project,
there shall occur a Determination of Taxability, Issuer or Company shall immediately instruct
Trustee in writing to call the Bonds for redemption pursuant to Section 304 of the Indenture, and
Company shall immediately pay to Trustee, as prepayment of the Loan Payments, the amount necessary
to effect the redemption of the Bonds then Outstanding in accordance with the provisions of the
Indenture.
Company shall also pay to the the Issuer, Trustee or Co-Trustee any Additional Payments as
specified in Section 4.2 of this Agreement.
Section 10.5. Reference to Bonds Ineffective After Bonds Paid.
Upon payment in full of the
Bonds (or provision for payment thereof having been made in accordance with the provisions of the
Indenture) and all fees, charges and expenses of Trustee, all references in this Loan Agreement to
the Bonds and Trustee shall be ineffective and neither Trustee nor the Bondowners shall thereafter
have any rights hereunder, saving and excepting those that shall have theretofore vested.
ARTICLE XI
EVENTS OF DEFAULT AND REMEDIES
Section 11.1. Events of Default Defined.
The following are events of default under this
Loan Agreement:
(a) Failure by the Company to pay any Loan Payment, any Additional Payment payable
directly to the Issuer or Trustee, or any part thereof payable under the Loan Agreement at
the times specified therein, or any other Additional Payment for a period of 30 days after
the receipt by the Company of notices sent by certified or registered mail by the Issuer or
the Trustee, specifying such failure and requesting that it be remedied.
(b) Failure by Company or Issuer to observe and perform any covenant, condition, or
agreement on its part to be observed or performed, other than as referred to in subsection
(a) of this Section, for a period of 30 days after the receipt by Company of notices sent by
certified or registered mail by Issuer or Trustee, specifying such failure and requesting
that it be remedied, unless Issuer and Trustee shall agree in writing to an extension of
such time prior to its expiration. The provisions of this paragraph (b) are subject to the
following limitations: (i) if said default be a default that is correctable but that cannot
be corrected within 30 days it shall not constitute an event of default if corrective action
is instituted within said 30 day period and diligently pursued until the default is
corrected or (ii) if by reason of force majeure Company, after using its best efforts, is
unable in whole or in part to carry out its agreements on its part herein contained, other
than the obligations on the part of Company contained in Article V and Sections 7.3 and 7.4
hereof, Company shall not be deemed in default during the continuance of such inability.
The term force majeure as used herein shall mean, without limitation, the following: acts
of God; strikes, lockouts, or other industrial disturbances; acts of public enemies, orders
of any kind of the government of the United States or of the State or any of their
departments, agencies, or officials, or any civil or military authority; insurrections;
riots; epidemics; landslides; lightning; earthquake; fire; hurricanes; storms; floods;
washouts; droughts; arrests; restraint of government and people; civil disturbances;
explosions; breakage or accident to machinery, transmission pipes, or canals; partial or
entire failure of utilities; or any other cause or event not reasonably within the control
of Company. Company agrees, however, to remedy with all reasonable dispatch the cause or
causes preventing Company from carrying out
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its agreements; provided, that the settlement of strikes, lockouts, and other
industrial disturbances shall be entirely within the discretion of Company, and Company
shall not be required to make settlement of strikes, lockouts, and other industrial
disturbances by acceding to the demands of the opposing party or parties.
(c) An event of default shall occur under the Deed of Trust, the Guaranty or the
Hazardous Substance Certification and Indemnification; provided however, with respect to the
Hazardous Substance Certification and Indemnification, that such occurrence pursuant to the
provisions of this paragraph (c) shall not constitute an event of default until actual
notice of such default by registered or certified mail (with or without return receipt
requested) shall be given to the Company, and Company shall have 30 days after receipt of
such notice to correct said default or cause said default to be corrected, and if the
Company shall not have corrected said default or cause said default to be corrected within
said 30 day period; provided, however, if said default cannot be corrected within 30 days,
it shall not constitute an event of default if corrective action is instituted within said
30 day period and diligently pursued until the default is corrected within any applicable
period as may be required by governmental regulation or order.
(d) (i) Company (or any other Person obligated, as guarantor or otherwise, to
make payments on the Bonds or under the Loan Agreement or the Guaranty) shall (A)
apply for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, liquidator, or the like of Company (or such other
Person) or of all or any substantial part of its property, (B) commence a voluntary
case under Title 11 of the United States Code (as now or hereafter in effect), or
(C) file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of
debts; or
(ii) a proceeding or case shall be commenced, without the application or
consent of Company which case or proceeding is not discharged within ninety (90)
days (or any other Person obligated, as guarantor or otherwise, to make payments on
the Bonds or under the Loan Agreement), in any court of competent jurisdiction,
seeking (A) the liquidation, reorganization, dissolution, winding-up or composition
or adjustment of debts, of Company (or any such other Person), (B) the appointment
of a trustee, receiver, custodian, liquidator, or the like of Company (or any such
other Person) or of all or any substantial part of its respective property or (C)
similar relief in respect of Company (or any such other Person) under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts.
Upon an event of default hereunder, the Trustee shall give written notice to the Company and
the Guarantor of such event of default and request that such event of default be immediately
remedied. Any such notice related to a failure to pay any Loan Payment may be given by facsimile
transmission to the Company and Guarantor.
Section 11.2. Remedies on an Event of Default.
Whenever any event of default shall happen,
Issuer (with the consent of Trustee if the Indenture has not been discharged) or Trustee on behalf
of the Issuer may take any of the following remedial steps:
(a) Declare Loan Payments due and payable in an amount equal to the principal and
premium, if any, and interest and other amounts due and payable under the Note.
(b) Cause the appointment of a receiver for the Mortgaged Property.
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(c) Have access to and inspect, examine, and make copies of such of the books, records,
accounts, and data of Company as pertain to the Mortgaged Property.
(d) Take whatever action at law or in equity may appear necessary or desirable to
collect the Loan Payments, Additional Payments and any other amounts payable by Company
hereunder, then due and thereafter to become due, or to enforce performance and observance
of any obligation, agreement, or covenant of Company under this Loan Agreement.
(e) Cause a foreclosure on the Mortgaged Property pursuant to the Deed of Trust.
(f) Take any actions permitted to be taken upon the occurrence of such event of default
under the Guaranty, the Deed of Trust, and the Hazardous Substance Certification and
Indemnification, if applicable.
Any amounts collected pursuant to action taken under this Section, other than amounts
collected with respect to obligations of the Company under the Hazardous Substance Certification
and Indemnification, shall be paid into the Bond Fund and applied in accordance with the
provisions of the Indenture.
Section 11.3. Remedies Not Exclusive.
No remedy herein conferred upon or reserved to Issuer
or Trustee is intended to be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to every other remedy given under
this Loan Agreement or now or hereafter existing at law or in equity or by statute. No delay or
omission to exercise any right or power shall impair any such right or power or shall be construed
to be a waiver thereof, but any such right or power may be exercised from time to time as often as
may be deemed expedient.
Section 11.4. Funds to Go Into Bond Fund.
Except as otherwise provided in Section 11.2
herein, the foregoing provisions of this Article relating to the receipt of moneys by Issuer or
Trustee as the result of an acceleration, are to be construed as providing that all such payments
by Company or others shall be made into the Bond Fund referred to in Section 501 of the Indenture.
Section 11.5. Equitable Relief.
Issuer, Company, and Trustee shall each be entitled to
specific performance, injunctive, or other appropriate equitable relief for any breach or
threatened breach of any of the provisions of this Loan Agreement, notwithstanding the
availability of an adequate remedy at law, and each party hereby waives the right to raise such
defense in any proceeding in equity.
Section 11.6. Trustee May File Proofs of Claim.
In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition, or
other judicial proceeding relative to Company, the Mortgaged Property, or any other property of
Company, Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim and to file such other papers or documents as may be
necessary or advisable in order to have the claims of Trustee (including any claim for the
reasonable compensation, expenses, disbursements, and advances of Trustee, its agents and
counsel) allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or deliverable on any
such claims and to distribute the same.
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ARTICLE XII
MISCELLANEOUS
Section 12.1. Notices.
All notices, certificates, or other communications hereunder shall be
sufficiently given and shall be deemed given when mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If intended for Company:
American
Railcar Industries, Inc.
c/o ACF Industries, Incorporated
620 North Second Street
St. Charles, MO 63301-2081
Attention: Umesh Choksi,
Treasurer
with a copy to:
Gordon Altman Butowsky Weitzen Shalov & Wein
114 West 47th Street
New York, NY 10036-1510
Attn: Douglas S. Rich
If intended for Issuer:
The Industrial Development Authority of
the City of Jackson,
Missouri
P.O. Box 352
Jackson, Missouri 63755
Attention: President
If intended for Trustee:
Fleet
National Bank
111 Westminster Street, 20th Floor
Providence, Rhode Island 02903
Attention: Corporate
Trust Department
If intended for Co-Trustee:
Mark Twain Bank
8820 Ladue, 2nd Floor
Ladue, Missouri 63124
Attention: Corporate Trust Department
A duplicate copy of each notice, certificate, or other communication given hereunder by
either Issuer or Company to the other shall also be given to Trustee, Issuer, Company, and Trustee
may, by notice given hereunder, designate any further or different address to which subsequent
notices,
certificates, or other communications shall be sent. All such notices may be given by any party on
behalf
of such party by its counsel.
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Section 12.2. Binding Effect.
This Loan Agreement shall inure to the benefit of and shall
be binding upon Issuer, Company, and their respective successors and permitted assigns, subject,
however, to the limitations contained in Sections 9.3, 10.1, and 10.2 hereof.
Section 12.3. Severability.
In the event any provision of this Loan Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate
or render unenforceable any other provision hereof.
Section 12.4. Amendments, Changes, and Modifications.
Except as otherwise provided in this
Loan Agreement or in the Indenture, subsequent to the initial issuance of Bonds and prior to their
payment in full (or provision for the payment thereof having been made in accordance with the
provisions of the Indenture), this Loan Agreement may not be effectively amended, changed,
modified, altered, or terminated without the concurring written consent of Trustee given in the
manner and subject to the approval of owners of the Bonds, as provided in Article XIII of the
Indenture.
Section 12.5. Priority of Agreement.
This Loan Agreement (as it may be amended or
supplemented pursuant to the provisions hereof) and the rights of Company hereunder are and shall
continue to be superior and prior to the Indenture (as it may be amended or supplemented).
Section 12.6. Execution Counterparts.
This Loan Agreement may be executed in counterparts,
each of which shall be an original and all of which shall constitute one and the same instrument.
Section 12.7. Captions.
The captions or headings of this Loan Agreement are for convenience
only and in no way define, limit, or describe the scope or intent of any provisions of this Loan
Agreement.
Section 12.8. Law Governing Construction of Agreement. This Loan Agreement shall be governed
by, and construed in accordance with, the laws of the State.
Section 12.9. Estoppel Certificate.
Either party, upon 15 days prior notice from the
requesting party, shall execute and deliver to the requesting party a statement certifying that
this Loan Agreement is unmodified and in full force and effect (or, if there have been
modifications), that the same is in full force and effect as modified and stating the
modifications, stating the dates which the Loan Payments and Additional Payments have been paid,
and stating whether or not there exist any defaults under this Loan Agreement, and if so,
specifying each such default; provided that Issuer shall be entitled to receive from and rely
solely upon the Trustee to provide the information required by this Section 12.9.
[The remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF,
the parties hereto have executed these presents as of the day
and year first above written.
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THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY
OF JACKSON, MISSOURI,
Issuer
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By:
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/s/ [ILLEGIBLE]
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President
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Attest:
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By:
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/s/ [ILLEGIBLE]
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Secretary
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AMERICAN RAILCAR INDUSTRIES, INC.,
Company
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By:
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/s/ Umesh Choka
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Its: Assistant Treasurer
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Attest
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By:
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/s/ [ILLEGIBLE]
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Its:
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Assistant Secretary
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Loan Agreement
American Railcar Industries Inc. 1996
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Exhibit 10.10
LOAN AGREEMENT
Dated as of June 1, 1995
Between
THE INDUSTRIAL DEVELOPMENT AUTHORITY OF
THE CITY OF KENNETT, MISSOURI
AND
AMERICAN RAILCAR INDUSTRIES, INC.
The interest of the Issuer in this Loan Agreement has been assigned to Fleet National Bank, as
Trustee, under the Trust Indenture, dated as of June 1, 1995, securing $5,500,000 The Industrial
Development Authority of the City of Kennett, Missouri, Industrial Development Revenue Bonds
(American Railcar Industries, Inc./ACF Industries, Incorporated Railcar Component Manufacturing
Project), Series 1995, as security for payment of the principal of and premium, if any, and interest
on such Bonds.
TABLE OF CONTENTS
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Page
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ARTICLE I
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DEFINITIONS
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ARTICLE II
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REPRESENTATIONS, WARRANTIES AND COVENANTS
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Section 2.1.
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Representations, Warranties and Covenants by Issuer
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4
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Section 2.2.
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Representations, Warranties and Covenants by Company
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5
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Section 2.3.
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Intention
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ARTICLE III
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THE LOAN
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Section 3.1.
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Loan of Funds to the Company
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7
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Section 3.2.
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Use of Proceeds; Completion of the Project
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7
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Section 3.3.
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Project Documents
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7
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ARTICLE IV
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PAYMENT AND SECURITY PROVISIONS
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Section 4.1.
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Loan Payments
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Section 4.2.
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Additional Payments
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9
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Section 4.3.
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Prepayment of the Note
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10
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Section 4.4.
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Mortgage, Pledge and Assignment Under the Deed of Trust
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11
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Section 4.5.
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Assignment of Authoritys Rights
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11
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Section 4.6.
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Place of Loan Payments
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Section 4.7.
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Obligation of Company Hereunder Unconditional
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12
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Section 4.8.
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Cancellation of Note and Release of Mortgaged Property
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ARTICLE V
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ACQUISITION, CONSTRUCTION, AND EQUIPPING OF
THE PROJECT; ISSUANCE OF THE BONDS
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Section 5.1.
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Agreement to Acquire, Construct, and Equip the Project
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Section 5.2.
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Disbursements from the Construction Fund
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Section 5.3.
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Furnishing Documents to Trustee
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Section 5.4.
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Establishment of Completion, Date
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Section 5.5.
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Company Required to Pay in Event Construction Fund Insufficient
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Section 5.6.
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Enforcement of Contracts
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(i)
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Section 5.7.
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Ownership of Tax Benefits
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Section 5.8.
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Investment of Moneys
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Section 5.9.
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Plans and Specifications; Modifications to Mortgaged Property
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Section 5.10.
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Agreement to Issue Bonds; Application of Bond Proceeds
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ARTICLE VI
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EFFECTIVE DATE OF THIS LOAN AGREEMENT;
DEFINITION OF LOAN TERM
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Section 6.1.
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Effective Date of this Loan Agreement; Duration of Loan Term
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ARTICLE VII
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MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
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Section 7.1.
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Maintenance and Modifications of Mortgaged Property by Company
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Section 7.2.
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Removal of Mortgaged Equipment
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18
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Section 7.3.
|
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Impositions
|
|
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19
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|
Section 7.4.
|
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Insurance Required
|
|
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20
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Section 7.5.
|
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Application of Net Proceeds of Insurance
|
|
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21
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|
Section 7.6.
|
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Additional Provisions Regarding Insurance
|
|
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21
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|
Section 7.7.
|
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Advances by Issuer or Trustee
|
|
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22
|
|
Section 7.8.
|
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Release and Indemnification Covenants
|
|
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22
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Section 7.9.
|
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Environmental Considerations
|
|
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23
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ARTICLE VIII
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DAMAGE, DESTRUCTION, AND CONDEMNATION;
USE OF NET PROCEEDS
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Section 8.1.
|
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Damage and Destruction
|
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23
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Section 8.2.
|
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Application of Net Proceeds
|
|
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23
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Section 8.3.
|
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Insufficiency of Net Proceeds
|
|
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24
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Section 8.4.
|
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Cooperation of Issuer
|
|
|
24
|
|
Section 8.5.
|
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Rights of Parties in Event of Condemnation; Bonds Protected in
Any Event
|
|
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24
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Section 8.6.
|
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Company Obligated to Continue Loan Payments and Additional
Loan Payments Until Condemnation Award Available
|
|
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26
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|
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ARTICLE IX
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SPECIAL COVENANTS
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Section 9.1.
|
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No Warranty of Condition or Suitability by Issuer
|
|
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26
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|
Section 9.2.
|
|
Inspection of the Mortgaged Property
|
|
|
26
|
|
Section 9.3.
|
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Company to Maintain its Corporate Existence
|
|
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26
|
|
Section 9.4.
|
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Release of Certain Land
|
|
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27
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Section 9.5.
|
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Granting of Easements
|
|
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28
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|
Section 9.6.
|
|
Compliance with Code
|
|
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28
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(ii)
|
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Page
|
Section 9.7.
|
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Federal Guarantee Prohibition
|
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29
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Section 9.8.
|
|
Limitation on Issuance Costs
|
|
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29
|
|
Section 9.9.
|
|
Limitation on Expenditure of Proceeds
|
|
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29
|
|
Section 9.10.
|
|
Limitation on Land and Certain Facilities
|
|
|
29
|
|
Section 9.11.
|
|
Location of Project; Outstanding Obligations
|
|
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29
|
|
Section 9.12.
|
|
Prohibited Facilities
|
|
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30
|
|
Section 9.13.
|
|
No Arbitrage
|
|
|
30
|
|
Section 9.14.
|
|
Capital Expenditure Limitation
|
|
|
30
|
|
Section 9.15.
|
|
$40,000,000 Limitation
|
|
|
30
|
|
Section 9.16.
|
|
Existing Facilities Limitation
|
|
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30
|
|
Section 9.17.
|
|
Compliance With Rebate Provisions
|
|
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31
|
|
Section 9.18.
|
|
Composite Issues
|
|
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31
|
|
Section 9.19.
|
|
Manufacturing Facility
|
|
|
31
|
|
Section 9.20.
|
|
Notice of Default to Issuer and Trustee
|
|
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31
|
|
Section 9.21.
|
|
Non-Disturbance
|
|
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32
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|
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|
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ARTICLE X
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ASSIGNMENT, LEASING, PLEDGING, AND SELLING; REDEMPTION;
OPTIONAL AND MANDATORY PREPAYMENT; ABATEMENT OF RENT
|
|
|
|
|
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|
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Section 10.1.
|
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Assignment and Leasing
|
|
|
32
|
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Section 10.2.
|
|
Restrictions on Sale, Mortgage, or other Conveyance of Mortgaged
Property by Issuer
|
|
|
32
|
|
Section 10.3.
|
|
Redemption of Bonds
|
|
|
33
|
|
Section 10.4.
|
|
Mandatory Prepayment of Loan Payments Upon Determination of
Taxability
|
|
|
33
|
|
Section 10.5.
|
|
Reference to Bonds Ineffective After Bonds Paid
|
|
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33
|
|
|
|
|
|
|
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|
|
ARTICLE XI
|
|
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|
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EVENTS OF DEFAULT AND REMEDIES
|
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Section 11.1.
|
|
Events of Default Defined
|
|
|
33
|
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Section 11.2.
|
|
Remedies on an Event of Default
|
|
|
35
|
|
Section 11.3.
|
|
Remedies Not Exclusive
|
|
|
35
|
|
Section 11.4.
|
|
Funds to Go Into Bond Fund
|
|
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35
|
|
Section 11.5.
|
|
Equitable Relief
|
|
|
35
|
|
Section 11.6.
|
|
Trustee May File Proofs of Claim
|
|
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35
|
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|
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|
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ARTICLE XII
|
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|
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MISCELLANEOUS
|
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Section 12.1.
|
|
Notices
|
|
|
36
|
|
Section 12.2.
|
|
Binding Effect
|
|
|
37
|
|
Section 12.3.
|
|
Severability
|
|
|
37
|
|
Section 12.4.
|
|
Amendments, Changes, and Modifications
|
|
|
37
|
|
Section 12.5.
|
|
Priority of Agreement
|
|
|
37
|
|
Section 12.6.
|
|
Execution Counterparts
|
|
|
37
|
|
(iii)
|
|
|
|
|
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|
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|
|
Page
|
Section 12.7.
|
|
Captions
|
|
|
37
|
|
Section 12.8.
|
|
Law Governing Construction of Agreement
|
|
|
37
|
|
Section 12.9.
|
|
Estoppel Certificate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Signatures
|
|
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39
|
|
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|
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|
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|
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|
|
Exhibit AForm of Promissory Note
|
|
|
|
|
(iv)
LOAN AGREEMENT
THIS
LOAN AGREEMENT
dated as of June 1, 1995, is between
THE INDUSTRIAL DEVELOPMENT
AUTHORITY OF THE CITY OF KENNETT, MISSOURI
(hereinafter called Issuer), an industrial development
corporation organized and existing under the laws of the State of
Missouri (State), and
AMERICAN RAILCAR INDUSTRIES, INC.
(hereinafter called Company), a corporation organized and existing under
the laws of the State of Missouri.
W I T N E S S E T H:
WHEREAS,
Issuer is authorized by the Industrial Development Corporations Act, Chapter
349 of the Revised Statutes of Missouri, 1986, as amended (the Act), to acquire lands, construct
and equip industrial buildings, improvements, and facilities, and incur other costs and expenses
and make other expenditures incidental to and for the securing and developing of industry; and
WHEREAS,
Issuer is authorized by the Act to issue industrial development revenue bonds
payable from revenues derived from the industrial project so acquired and constructed and secured
by a lien thereon and security interest therein; and
WHEREAS,
the necessary arrangements have been made with Company for the acquisition,
construction, and equipping of an industrial project consisting of a manufacturing facility for
railcar components or related industrial products with attached office or any other manufacturing
or industrial use provided for in Section 2.2(c) hereof; and
WHEREAS,
Company desires that Issuer issue its Industrial Development Revenue Bonds (American
Railcar Industries, Inc./ACF Industries, Incorporated Railcar Component Manufacturing Project),
Series 1995 (the Bonds), and loan the proceeds of the Bonds to the Company to provide funds to
acquire, construct, reimburse, and equip the Project, and Issuer has agreed to do the same;
WHEREAS,
pursuant to a Trust Indenture, dated as of the date hereof, between Issuer and Fleet
National Bank, a national banking association duly organized, validly existing, and in good
standing under the laws of the United States, having all requisite power and authority to act as
trustee, and having its principal corporate trust office in Providence, Rhode Island, as Trustee,
Issuer intends to assign to Trustee as security for the Bonds its interest in this Agreement
(except for the reimbursement of certain expenses and payments for indemnification of Issuer);
NOW, THEREFORE,
in consideration of the respective representations and agreements hereinafter
contained Issuer and Company agree as follows (provided, that in the performance of the agreements
of Issuer herein contained and any obligation it may thereby incur for the payment of money shall
not be a general debt on its part, but shall be payable solely out of the Loan Payments and other
amounts derived from this Loan Agreement and the Guaranty, the insurance proceeds and condemnation
awards as herein provided and the Mortgaged Property):
ARTICLE I
DEFINITIONS
All words and phrases defined in the Indenture shall have the same meanings for purposes of
this Loan Agreement. In addition, the following words and terms shall have the following meanings:
Additional Payments
means Additional Payments as defined in Section 4.2 of this Loan
Agreement.
Agreed Rate
means eight and fifty-hundredths percent (8.50%) per annum.
Authorized Issuer Representative
means the person or persons, satisfactory to Company, at
the time designated to act on behalf of Issuer by written certificate furnished to Company and
Trustee containing the specimen signature(s) of such person(s) and signed on behalf of Issuer by
its President, Vice President or Secretary. Such certificate may designate an alternate or
alternates.
Collateral
means that portion of the Mortgaged Property constituting Mortgaged Personal
Property. The term Collateral does not include any Leased Equipment.
Construction Period
means the period between February 20, 1995 and the Completion Date.
Impositions
means all impositions as defined in Section 7.3 of this Loan Agreement.
Loan Payments
means Loan Payments defined in Section 4.1 (a) of this Loan Agreement.
Loan Term
means the duration of Companys obligations under this Loan Agreement as
specified in Section 6.1 of this Loan Agreement.
Official Action Date
means April 20, 1995.
Permitted Encumbrances
means, as of any particular time, (i) the Indenture and the Loan
Agreement, (ii) any easements, licenses, rights of way (including the dedication of public
highways), and other rights or privileges in the nature of easements with respect to any property
included in the Mortgaged Property, granted or conveyed prior to the date of the recording of the
Deed of Trust or in accordance with and pursuant to Section 9.5 of this Loan Agreement, (iii)
utility, access, and other easements and rights-of- way, restrictions, reservations, reversions,
and exceptions that an Independent Engineer, reasonably acceptable to Trustee and Company,
certifies will not interfere with or impair the operations being conducted in the Mortgaged
Property (or, if no operations are being conducted therein, the operations for which the Mortgaged
Property was designed or last modified), (iv) such minor defects, irregularities, encumbrances,
easements, rights-of-way, and clouds on title as normally exist with respect to properties similar
in character to the Mortgaged Property, and as do not, in the opinion of any counsel acceptable to
Trustee, materially impair the property affected thereby for the purpose for which it was acquired
or is held by Issuer, (v) any judgment lien against the Company affecting the Mortgaged Property
so long as such judgment is being contested and execution thereon is stayed, (vi) any liens on the
Mortgaged Property for taxes, payments-in-lieu of taxes, assessments, levies, fees, water and
sewer rents, other governmental and similar charges, and any liens of mechanics, materialmen,
laborers, suppliers or vendors for work or services performed or materials furnished in connection
with the Mortgaged Property, which are not due and payable or which are not delinquent, or the
amount or validity of which, are being contested in
-2-
accordance with the terms of this Loan Agreement, (vii) any lien on accounts receivable securing
or deemed to secure any indebtedness incurred or deemed incurred by virtue of any recourse
obligation or in connection with any sale or assignment of accounts receivable, (viii) any lien or
encumbrance or reservation of title affecting personalty not constituting part of the Mortgaged
Property, and (ix) all encumbrances set forth in the mortgagees loan policy of title insurance
insuring the Issuer, the Trustee and the Co-Trustee under the Deed of Trust, and all other matters
specified in Schedule 3 to the Deed of Trust.
Permitted Investments
means:
(a) Governmental Obligations;
(b) obligations of any of the following federal agencies which represent full faith and
credit of the United States of America: Farmers Home Administration, General Services
Administration, United States Maritime Administration, Small Business
Administration, Government National Mortgage Association, United States Department of
Housing and Urban Development, and Federal Housing Administration;
(c)
U.S. dollar denominated deposit accounts fully insured to the holder
by the Federal
Deposit Insurance Corporation in commercial banks;
(d) U. S. dollar denominated deposit accounts, federal funds, and bankers acceptances
with commercial banks (foreign or domestic) which have a rating on their short term
certificates of deposit on the date of purchase of A-l or A-1+ by S&P or P-l by
Moodys and maturing no more than 360 days after the date of purchase;
(e) money market funds rated in the highest rating category of S&P or Moodys which are
monitored quarterly or money market funds which are invested exclusively in Government
Obligations or cash;
(f) pre-refunded municipal obligations, which obligations shall be limited to bonds or
other obligations of any state of the United States or of any agency, instrumentality, or
local governmental unit of any such state (i) which are not callable at the option of the
obligor prior to maturity or as to which irrevocable notice has been given by the obligor to
call on the date specified in the notice; (ii) which are fully secured as to principal and
interest and redemption premium, if any, by a fund consisting only of cash or obligations
described in paragraph (a) above, which fund may be applied only to the payment of such
principal of and interest and redemption premium, if any, on such bonds or other obligations
on the maturity date or dates thereof or the specified redemption date or dates pursuant to
such irrevocable instructions, as appropriate; (iii) which fund is sufficient, as verified
by an independent accountant, to pay principal of and interest and redemption premium, if
any, on the bonds or other obligations described in this paragraph on the maturity date or
dates thereof or the redemption date or dates specified in the irrevocable instructions
referred to in subclause (i) of this paragraph, as appropriated; and (iv) which are rated,
based on the escrow, in the highest rating category of S&P or Moodys, or any successors
thereto; and
(g) U.S. dollar denominated certificates of deposit in commercial banks properly
secured at all times by collateral security described in (a) and (b) above.
-3-
Project
means the Land, the Buildings, and the Mortgaged Equipment, and any other
structure now or hereafter located on the Land, and all real property, including easements, deemed
necessary in connection therewith, as they may at any time exist, exclusive of any Land which may
from time to time be released as permitted under Section 9.4 of this Loan Agreement and subject to
easements, licenses, and other rights created in accordance with Section 9.5 of this Loan Agreement
Qualified Project Costs
means costs and expenses of the Project which constitute land costs
or costs for property of a character subject to the allowance for depreciation, excluding
specifically working capital and inventory costs, provided, however, that (a) costs or expenses
paid or incurred more than sixty days prior to the Official Action Date shall not be deemed to be
Qualified Project Costs; (b) Issuance Costs shall not be deemed to be Qualified Project Costs; (c)
interest during the Construction Period shall be allocated between Qualified Project Costs and
other costs and expenses to be paid from the proceeds of the Bonds; (d) interest following the
Construction Period shall not constitute a Qualified Project Cost; (e) letter of credit fees and
municipal bond insurance premiums which represent a transfer of credit risk shall be allocated
between Qualified Project Costs and other costs and expenses to be paid from the proceeds of the
Bonds; and (f) letter of credit fees and municipal bond insurance premiums which do not represent
a transfer of the credit risk shall not constitute Qualified Project Costs.
Yield
means yield computed under Regulation § 148-4 of the Code for the Bonds and yield
computed under Regulation § 1.148-5 for an investment.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1. Representations, Warranties and Covenants by Issuer.
Issuer makes the
following representations, warranties and covenants as the basis for the undertakings on its part
herein contained:
(a) Under the provisions of the Act and the Constitution of the State, Issuer is
authorized to enter into the transactions to be performed by it under this Loan Agreement
and the Indenture and to carry out its obligations hereunder and thereunder. Issuer has
been duly authorized to execute and deliver this Loan Agreement and the Indenture.
(b) Issuer will perform all of its obligations as specified in this Loan Agreement.
(c) Notwithstanding anything herein contained to the contrary, it is the intention of
Issuer that any obligation it may hereby incur for the payment of money shall not be a
general debt on its part but shall be payable solely from the Loan Payments and other
amounts derived from this Loan Agreement, and the insurance and condemnation awards as
herein provided and the Companys estate and interest in the Mortgaged Property.
(d) Issuer has been induced to enter into this undertaking by the promise of Company to
locate industrial facilities within or near the corporate limits of Issuer.
(e) In order to furnish necessary moneys for the payment of Costs of the Project and a
portion of the expenses of authorizing and issuing the Bonds, Issuer has authorized the
issuance of the Bonds.
-4-
(f) The Bonds are to be issued under and secured by the Indenture, pursuant to
which Issuers interest in this Loan Agreement and the payments and income derived by Issuer
from the Note, the Deed of Trust and this Loan Agreement will be assigned to Trustee as
collateral security for payment of the principal of and premium, if any, and interest on the
Bonds, and the Bonds will be secured by a security interest in the Note, this Loan Agreement
and the Deed of Trust, which constitutes a lien upon, and security interest in, the
Mortgaged Property (provided that in the performance of the agreements of the Issuer herein
contained, any obligation that Issuer may thereby incur for the payment of money shall be
limited to the Issuers lien upon the Mortgaged Property and the proceeds thereof and shall
not be a general debt on its part, but shall be payable solely out of the proceeds derived
from this Agreement, the sale of the Bonds referred to in
Section 2. l. herein, and the
insurance proceeds and condemnation awards as herein provided) and provided further that the
obligations of Company to pay principal and premium and interest on the Bonds are guaranteed
by the Guarantor and the Company pursuant to the Guaranty.
(g) Not later than the 15th day of the second calendar month after the close of the
calendar quarter in which the Bonds are delivered by Issuer pursuant to Article II of the
Indenture, Issuer covenants to satisfy the information reporting requirement of Section
149(e) of the Code.
(h) Issuer shall not take any action to condemn or cause any condemnation of the
Project or any part thereof.
(i) Issuer shall not take any action to interfere with the direct payment by
the Company to the Trustee of any Loan Payments due to Issuer or otherwise under the Note,
the Loan Agreement or the Deed of Trust, which pursuant to the Loan Agreement and Indenture
are to paid by Company directly to Trustee and not to modify, alter or rescind Issuers
instruction to Company to such effect.
Section 2.2. Representations, Warranties and Covenants by Company.
Company makes the following
representations, warranties and covenants as the basis for the undertakings on its part herein
contained:
(a) Company is a corporation duly incorporated under the laws of the State of Missouri,
is in good standing under the laws of the State of Missouri, and has power to enter into
this Loan Agreement, the Hazardous Substance Certification and Indemnification, and the
Guaranty, and to perform all obligations contained herein and therein, and by proper
corporate action, has been duly authorized to execute and deliver this Loan Agreement, the
Hazardous Substance Certification and Indemnification, and the Guaranty.
(b) Company intends to acquire, construct, and equip an industrial enterprise
within the corporate limits of Issuer consisting of the Project.
(c) Company will operate the Mortgaged Property upon its completion as (i) a
manufacturing facility for railcar components or related industrial products with attached
office or (ii) any other manufacturing or industrial use provided that such use (a) is
consistent with the Act and with a Manufacturing Facility (as such term is defined in
Section 144 (a) (12) of the Code, and (b) does not violate any other requirements of the
Code and applicable Regulations so that interest on the Bonds shall at any time cease to be
excluded from gross income for federal income tax purposes, until the expiration or earlier
termination of the Loan Term as provided herein, all to the extent that such operation is,
in Companys judgment, commercially desirable.
-5-
(d) Neither the execution and delivery of this Loan Agreement, the Hazardous Substance
Certification and Indemnification, and the Guaranty, the consummation of the transactions
contemplated hereby and thereby, nor the fulfillment of or compliance with the terms and
conditions hereof and thereof conflicts with or results in a material breach of the terms,
conditions, or provisions of the Articles of Incorporation or bylaws of Company or any
agreement or instrument to which Company is now a party or by which Company is bound, or
constitutes a material default under any of the foregoing, or results in the creation or
imposition of any lien, charge, or encumbrance whatsoever upon any of the property or assets
of Company under the terms of any instrument or agreement except as provided herein.
(e) There is no action, suit, proceeding, inquiry, or investigation, at law or in
equity, before or by any court or public board or body, known to be pending or threatened
against or affecting Company, nor to the best of the knowledge of Company is there any basis
therefor, wherein an unfavorable decision, ruling, or finding would materially adversely
affect the transactions contemplated by this Loan Agreement or which, in any way, would
materially adversely affect the validity or enforceability of the Bonds, this Loan
Agreement, the Hazardous Substance Certification and Indemnification, the Guaranty, or any
other agreement or instrument, to which Company is a party, used or contemplated for use in
the consummation of the transactions contemplated hereby.
(f) The Net Proceeds from the sale of the Bonds which shall have been advanced to the
Company will be used only for the payment of Cost of the Project.
(g) The Mortgaged Property complies, or will comply upon completion of
construction, with all presently applicable building and zoning ordinances where failure to
comply would have a materially adverse effect on Companys ability to utilize the Mortgaged
Property for the purposes intended.
(h) Company agrees to cooperate with Issuer in the performance of Issuers obligations
under the Indenture.
(i) No changes shall be made in the Project and no actions will be taken by Company
which shall in any way impair the exemption of interest on any of the Bonds from federal
income taxation.
(j) Company will comply with and fulfill all other requirements and conditions of the
Code and regulations and rulings issued pursuant thereto in the acquisition, construction,
equipping, and operation of the Project to the end that the interest on the Bonds shall at
all times be free from federal income taxation.
(k) The Project is substantially the same in all material respects to that described
in the notice of public hearing published in
The Daily Dunklin Democrat
on May 31, 1995.
Section 2.3. Intention.
It is intended by the parties hereto that this Loan Agreement and all
actions taken hereunder be consistent with and pursuant to the ordinances of Issuer relating to
the Bonds, and that the interest on the Bonds be excluded from the gross income of the recipients
thereof for federal income tax purposes by reasons of the provisions of Section 144(a) of the Code
or any substantially similar successor provision hereinafter enacted.
-6-
ARTICLE III
THE LOAN
Section 3.1. Loan of Funds to the Company.
(a) Concurrently with the execution and delivery of this Loan Agreement, Issuer shall loan to
Company, the Net Proceeds of the sale of the Bonds in the amount of $5,500,000, and Company shall
receive such loan from the Issuer, for the purposes and upon the terms and conditions provided in
this Loan Agreement.
(b) The loan shall be evidenced by the Note in the principal amount of $5,500,000, which shall
be in substantially the form attached hereto as
Exhibit A,
shall be executed by the Company and
made payable to the order of Issuer, and shall be endorsed and assigned by Issuer, without
recourse, to the Trustee as collateral security for the obligations of the Issuer pursuant to the
Indenture and the Bonds.
Section 3.2. Use of Proceeds; Completion of the Project.
(a) The Net Proceeds of the Bonds loaned to the Company shall be deposited with the Trustee
and shall be disbursed by the Trustee to or on behalf of the Company for completion of the Project,
all in the manner as provided in the Indenture and in this Loan Agreement.
(b) The Company agrees to cause the Project to be diligently and continuously pursued and to
be completed with reasonable dispatch, and to provide (from its own funds if required) all moneys
necessary to complete the Project substantially in accordance with the plans and specifications for
the Project.
(c) In the event the moneys on deposit in the Construction Fund (together with other funds
available to the Company for the Project) are at any time insufficient to pay for the completion of
the Project, the Company agrees to pay the amount of such deficiency forthwith to the Trustee for
deposit in the Construction Fund.
Section 3.3. Project Documents.
The Company, at its own cost and expense, will deliver to the
Trustee copies of the following documents (which shall be collectively referred to herein as the
Project Documents) concurrently with the initial issuance and delivery of the Bonds or at such
time as such documents become available and in any event by such time as work is commenced on the
portion of the Project to which they relate:
(a)
Title Insurance.
A standard ALTA mortgage loan policy or policies of title
insurance, or a commitment therefor, showing the Issuer, the Trustee and the Co-Trustee as
the insured parties, with respect to the Mortgaged Property of the Company that constitutes
real property Mortgaged Property, together with an endorsement equivalent to ALTA 100, and
subject to exceptions for pending disbursement endorsements in an aggregate amount not less
than the principal amount of the Bonds, which policy or policies shall insure that the
Company holds good and marketable fee simple title to the Mortgaged Property and the Issuer
has a first lien pursuant to the Deed of Trust on the Mortgaged Property, subject only to
Permitted Encumbrances and to the limitations upon such insurance provided by the terms of
the pending disbursements endorsement.
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(b)
Survey.
A perimeter survey of the Companys Mortgaged Property constituting
real property, prepared by a surveyor licensed in the State of Missouri.
ARTICLE IV
PAYMENT AND SECURITY PROVISIONS
Section 4.1. Loan Payments.
(a)
Loan Payments on the Note.
The Company will duly and punctually pay the principal of,
premium, if any, and interest on the Note in accordance with the terms of the Note and this Loan
Agreement. The Company covenants and agrees that it will make the following payments on the Note
(Loan Payments) directly to the Trustee, for the account of the Issuer, for deposit in the Bond
Fund, with the understanding that the Trustee will apply such payment to the payment of the
principal of, premium, if any, of, and interest on the Bonds, on the following dates, and otherwise
as set out below:
On or before two Business Days prior to each Interest Payment Date, and on or before two
Business Days prior to any date on which any or all of the Bonds shall be declared to be and shall
become due and payable prior to their stated maturity pursuant to the provisions of the Indenture,
by redemption or otherwise, Company shall pay directly to Trustee in immediately available funds
or tendered Bonds an amount equal to the aggregate amount of principal, premium, if any, and
interest becoming due and payable on the Bonds on such Interest Payment Date or such other date.
Anything herein to the contrary notwithstanding, any amount (whether in cash or tendered
Bonds) at any time held by Trustee in the Bond Fund shall reduce any Loan Payment required to be
made by Company and the outstanding balance of the Note to the extent such amount is in excess of
the amount required for payment of Bonds theretofore matured or called for redemption and past due
interest in all cases where such Bonds have not been presented for payment; and further, if the
amount held by Trustee in the Bond Fund should be sufficient to pay at the times required the
principal of and premium, if any, and interest on the Bonds then remaining unpaid, Company shall
not be obligated to make any further Loan Payments.
By acceptance of the direction to make payments to the Trustee for the account of the Issuer,
all Loan Payments will reduce the outstanding balance of the Note in accordance with Section 4.
l(b). To the extent that cash or Bonds tendered by the Company to the Trustee in accordance with
Section 4.1(b) are sufficient to cover the next succeeding Loan Payment(s), the Loan Payment(s)
will be paid from those funds and there will be no obligation on the part of the Company to pay
such Loan Payment(s).
It is understood and agreed that all payments payable by Company under this Section 4.1 are
assigned by Issuer to Trustee as collateral security for the benefit of the owners of the Bonds.
Company assents to such assignment.
(b)
Credits on Loan Payments.
Notwithstanding any provision contained in this Loan
Agreement or in the Indenture to the contrary, in addition to any credits on the Note resulting
from the payment or prepayment of Loan Payments from other sources:
(1) any moneys deposited by the Trustee or the Company in the Bond Fund as
interest (including moneys received as accrued interest from the sale of Bonds and any
initial deposit made
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from the proceeds of the sale of any Bonds) shall be credited against the obligation
of the Company to pay interest on the Note as the same become due;
(2) any moneys deposited by the Trustee or the Company in the Bond Fund as
principal shall be credited against the obligation of the Company to pay the principal of
the Note as the same becomes due in the order of maturity thereof, except that prepayments
for purposes of making an optional deposit into the Bond Fund for an optional redemption of
Bonds shall be credited against the obligation of the Company to pay the principal of the
Note, but shall be applied to the maturities of principal of the Note corresponding to the
maturities of the Bonds to be redeemed from the proceeds of such optional prepayment;
(3) the amount of any moneys transferred by the Trustee from any other fund held under
the Indenture and deposited in the Bond Fund as interest or principal shall be credited as
interest or principal, as the case may be, against the obligation of the Company to pay
interest or principal, as the case may be, next becoming due as the same become due;
(4) Company and the Guarantor shall have the right to surrender Bonds acquired by it to
Trustee and all such Bonds so surrendered shall be forthwith cancelled and the principal
amounts thereof upon the instructions by the Company to the Trustee shall be applied as (i)
credits against mandatory sinking fund requirements pursuant to the Indenture corresponding
to the maturities of the Bonds so surrendered, (ii) credits or prepayments upon the
principal portion of the Loan Payments due and payable with respect to the respective
maturity dates or redemption dates of such Bonds in accordance with the instructions of the
Company and the terms of the Indenture, or (iii) full payment of the Note pursuant to the
Loan Agreement; and any unpaid interest allocable thereto shall be applied as credits or
prepayments of the interest portion of the Loan Payments next becoming due as the same
becomes due; and
(5) Subject to the provisions of the foregoing subparagraph (4), amounts, whether in
cash held by the Trustee in the Bond Fund or in tendered Bonds, shall reduce the Loan
Payments required to be made by the Company to the extent such amount is in excess of the
amount required for payment of Bonds theretofore matured or called for redemption and past
due interest.
Section. 4.2. Additional Payments.
The Company agrees to make the following additional
payments (Additional Payments):
(a)
Issuer
Fees.
The Company shall pay to the Issuer upon demand, all reasonable
expenses, including reasonable attorneys fees, incurred by the Issuer in relation to the
Bonds and the transactions contemplated by this Loan Agreement and the Indenture.
(b)
Trustee Fees and Professional Fees.
The Company shall pay to the Trustee and any
co-trustee, paying agent, bond registrar, counsel, accountants, engineers and other Persons
when due, all reasonable fees, charges and expenses of such Persons for services rendered
under the Indenture, the Loan Agreement, the Deed of Trust, the Guaranty or the Hazardous
Substance Certification and Indemnification and expenses incurred in the performance of such
services under the foregoing agreements for which such Persons are entitled to payment or
reimbursement, including expenses of compliance with the Arbitrage Instructions.
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(c)
Rebate Payments.
The Company shall pay to the Trustee all rebate payments
required under Section 148(f) of the Code, to the extent such amounts are not available to
the Trustee in the Rebate Fund held under the Indenture.
(d)
Costs of Enforcement.
In the event the Company should default under any of the
provisions of this Loan Agreement and the Trustee should employ attorneys or incur other
expenses for the collection of required payments or the enforcement of performance or
observance of any obligation or agreement on the part of the Company contained in this Loan
Agreement, the Company shall pay on demand therefor, without duplication, to the Trustee the
reasonable fees of such attorneys and such other expenses so incurred by the Trustee. The
Company also shall pay, without duplication, and shall indemnify the Issuer and the Trustee
from and against, all costs, expenses and charges, including reasonable counsel fees,
incurred for the collection of payments due or for the enforcement or performance or
observance of any covenant or agreement of the Company under this Loan Agreement, the Note,
the Deed of Trust, the Guaranty and the Hazardous Substance Certification and
Indemnification.
(e)
Taxes and Assessments.
The Company also covenants and agrees, at its expense, to
pay all Impositions imposed on the Mortgaged Property; provided, however, that the Company
shall have the right to protest any such Impositions, as the case may be, at the Companys
expense, to protest and contest any such Impositions assessed or levied upon the Mortgaged
Property and that the Company shall have the right to withhold payment of any such
Impositions pending disposition of any such protest or contest unless such withholding,
protest, or contest would materially adversely affect the rights or interests of the Issuer
or the Trustee.
(f)
Other Amounts Payable.
The Company shall pay to the person or persons entitled
thereto, any other amounts which the Company has agreed to pay under this Loan Agreement.
In the event Company should fail to make any of the payments required in this Section, the
item or installment so in default shall continue as an obligation of Company until the amount in
default shall have been fully paid, and Company agrees to pay the same with interest thereon or
with respect to payments to Trustee or Issuer with interest thereon, to the extent permitted by
law, from the date thereof at the Agreed Rate.
Payments made on account of the indebtedness evidenced by the Note and secured by the Deed of
Trust, or as otherwise required to be paid pursuant to the provisions of the Indenture or this
Loan Agreement, whether made to the Trustee or otherwise, by the Company or by the Guarantor,
shall constitute Loan Payments and/or Additional Payments, as the case may be, under Section 4.1
and 4.2 of this Loan Agreement.
Section 4.3. Prepayment of the Note.
(a)
Optional Prepayment.
The Company shall have and is granted the option to prepay from time
to time the amounts payable under this Loan Agreement in sums sufficient to redeem or to pay or
cause to be paid all or part of the Bonds in accordance with the provisions of the Indenture. Upon
the deposit by the Company of moneys and/or Bonds (which are cancelled and no longer Outstanding
under the Indenture) in the Bond Fund in an amount sufficient to redeem Bonds subject to
redemption taking into account any available funds in the Bond Fund, the Issuer, at the request of
the Company, shall forthwith take all steps (other than the payment of the money required for such
redemption) necessary under the applicable redemption provisions of the Indenture to effect
redemption of all or part of the then
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Outstanding Bonds, as may be specified by the Company, on the date established for such
redemption. The Company may prepay all or any portion of its indebtedness on the Note by
providing for the payment of all or any portion of the Bonds in accordance with
Article
IX
of the Indenture. Such prepayments are credited against Loan Payments at the time such
prepayment is deposited into the Bond Fund.
(b)
Mandatory Prepayment.
Whenever any Bonds shall have been called for redemption
under any provision of the Indenture, the Company shall prepay the Note in such amounts
required and at such times to redeem such Bonds, including the principal, redemption
premium, if any, and accrued interest thereon to the redemption date and such prepayment
may include tender of Bonds by the Company or Guarantor for cancellation in total or
partial payment. The Company further agrees that in the event the payment of principal of
and interest on the Bonds is accelerated upon the occurrence of an event of default under
the Indenture, all Loan Payments payable for the remainder of the term of this Loan
Agreement shall be accelerated and prepayment shall be made on the Note in such amounts.
Any such prepayments shall be deposited in the Bond Fund, and applied by the Trustee in
accordance with the provisions of the Indenture. Any such prepayment shall be credited
against Loan Payments to become due on the Note at the time such prepayment is deposited
into the Bond Fund.
Section 4.4. Mortgage, Pledge and Assignment Under the Deed of Trust.
(a) In order to secure the payment of the Note and the performance of the duties and
obligations of the Company under the Note, Deed of Trust, and this Loan Agreement, the
Company pursuant to the Deed of Trust has pledged and assigned unto the Issuer and its
successors and assigns forever, and granted a security interest to the Issuer in and to
the Mortgaged Property.
(b) The Company shall, at its own expense, take all necessary action to maintain and
preserve the security interest in Mortgaged Property granted by (and as defined in) the Deed of
Trust so long as the Note is outstanding and obligations of the Company to the Issuer and
the Trustee under the Loan Agreement are outstanding. In addition, the Company shall,
immediately after the execution and delivery of this Loan Agreement and thereafter from
time to time, cause the Deed of Trust and any financing statements in respect thereof to
be filed, registered and recorded in such manner and in such places as may be required by
law in order to fully perfect and protect such security interest and from time to time
will perform or cause to be performed any other act as provided by law and will execute
or cause to be executed any and all continuation statements and further instruments that
may be requested by the Trustee for such perfection and protection. Except to the extent
it is exempt therefrom, the Company shall pay or cause to be paid all filing,
registration and recording fees and all expenses incident to the preparation, execution
and acknowledgment of such instruments of perfection, and all federal or state fees and
other similar fees, duties, imposts, assessments and charges arising out of or in
connection with the execution and delivery of the Deed of Trust and such instruments of
perfection. In the event that the Company fails to execute any of such instruments within
ten (10) days after demand to do so, the Company does hereby make, constitute and
irrevocably appoint the Trustee as its attorney-in-fact and in its name, place and stead
so to do.
Section 4.5. Assignment of Authoritys Rights.
Under the Indenture, the Issuer will, as
security for the Bonds, pledge, assign, transfer and grant a security interest in certain of its
rights, title and interest under this Loan Agreement, the Deed of Trust, and the Note to the
Trustee. The Company agrees that this Loan Agreement, the Deed of Trust, and the Note, and all of
the rights, interests, powers, privileges and benefits accruing to or vested in the Issuer may be
protected and enforced in conformity with the Indenture and (except for Issuer fees and
expenses and the Issuers right to indemnification in certain circumstances and as otherwise
expressly set forth herein) may be thereby assigned by the Issuer
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to the Trustee as security for the Bonds and may be exercised, protected and enforced for or on
behalf of the Bondowners in conformity with this Loan Agreement and the Indenture. The Trustee is
hereby given the right to enforce, as collateral assignee of the Issuer, the performance of the
obligations of the Company, and the Company hereby consents to the same and agrees that the
Trustee may enforce such rights as provided in this Loan Agreement, in the Deed of Trust, and in
the Indenture.
Section 4.6. Place of Loan Payments.
Issuer hereby directs Company and Company hereby agrees
to pay to Trustee at Trustees principal corporate trust office all Loan Payments payable by
Company pursuant to subsections 4.1. All Additional Payments required to be made pursuant to
Section 4.2 shall be paid to the respective party at their principal office.
Section 4.7. Obligation of Company Hereunder Unconditional.
The obligations of Company to make
the payments required in Section 4.1 hereof and to perform and observe the other agreements on its
part contained herein shall be absolute and unconditional, and the payments required in Section 4.1
shall be payable on the dates and at the times specified without notice or demand, and without
abatement or set-off, and regardless of any contingencies whatsoever, and notwithstanding any
circumstances or occurrences that may now exist or that may hereafter arise or take place,
including, but without limiting the generality of the foregoing:
(a) The unavailability of the Mortgaged Property or any part thereof for use by Company
at any time by reason of the failure to complete the overall industrial project by any
particular time or at all or by reason of any other contingency, occurrence, or circumstance
whatsoever;
(b) Damage to or destruction of the Mortgaged Property or any part thereof;
(c) Legal curtailment of Companys use of the Mortgaged Property or any part thereof;
(d) Change in Issuers legal organization or status;
(e) The taking of title to or the temporary use of the whole or any part of the
Mortgaged Property by condemnation;
(f) Any termination of this Loan Agreement for any reason whatsoever;
(g) Failure of consideration or commercial frustration of purposes not arising out of
or related to acts of the Issuer;
(h) Any change in the tax or other laws of the United States of America or of
the State; and
(i) Any default of Issuer under this Loan Agreement or any other default or
failure of Issuer whatsoever.
Nothing contained in this Section shall be construed to release Issuer from the performance
of any of the provisions of this Loan Agreement on its part to be performed.
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Company covenants that it will not enter into any contract, indenture, or agreement of any
nature whatsoever which shall in any way limit, restrict, or prevent Company from performing any
of its obligations under this Loan Agreement.
Section 4.8. Cancellation of Note and Release of Mortgaged Property.
Issuer shall cancel the
Note, deliver a deed of release in respect of the Deed of Trust, cancel the Loan Agreement and
execute and deliver UCC-3 termination statements covering all financing statements filed to
evidence the security interest created in the Mortgaged Property or any part thereof, upon the
payment or deposit by the Company or the Guarantor of money in the Bond Fund or tendered Bonds in
an amount sufficient, when added to the available funds then on hand in the Bond Fund, to redeem
the Bonds and to pay all sums at the date of such payment or deposit due to the Issuer, Trustee or
any Co-Trustee pursuant to the Loan Agreement, the Note, the Deed of Trust, and the Indenture.
ARTICLE V
ACQUISITION, CONSTRUCTION, AND EQUIPPING OF
THE PROJECT; ISSUANCE OF THE BONDS
Section 5.1. Agreement to Acquire, Construct, and Equip the Project.
All payments
necessary to acquire, construct, and equip the Project shall be made out of the Construction Fund
or other funds provided by the Company whether or not pursuant to Section 5.5 hereof, and Company
shall be reimbursed out of the Construction Fund, for all expenditures made by it in connection
with the Project in accordance with the provisions of mis Loan Agreement and the Indenture, in
respect of expenditures paid not more than 60 days prior to Official Action Date. Title to all
machinery, equipment and personal property of every nature paid for out of the Construction Fund
or other funds provided by the Company pursuant to Section 5.5 of this Agreement (either by direct
payment or by virtue of reimbursement to Company) shall be vested in, or be transferred to,
Company. The Collateral does not include any Leased Equipment. The obligations of Issuer hereunder
are subject to the provisions of this Loan Agreement limiting the obligations of Issuer to the
extent of moneys in the Construction Fund.
Company shall obtain all necessary approvals from any and all governmental agencies requisite
to the constructing and equipping of the Project, and the Project shall be constructed and
equipped in compliance with all federal, State, and local laws, ordinances, and regulations
applicable thereto.
All requests, approvals, and agreements required on the part Company shall be in writing,
signed by the Authorized Company Representative, as appropriate, granting such approval or
entering into such agreement. Issuer and Company shall, concurrently with the delivery of this
Loan Agreement, notify Trustee of the Authorized Company Representative. It is agreed that the
Company may have more than one Authorized Company Representative and may change the Authorized
Company Representative or Representatives from time to time, with each such change to be in
writing forwarded to the Trustee. The Authorized Company Representative so designated shall be
authorized to enter into and execute any contracts or agreements or to grant any approvals or to
take any action for and on behalf of the party hereto represented by him, and the other party to
this Loan Agreement shall be entitled to rely upon the duly designated Authorized Representative
as having full authority to bind the party hereto represented by him.
Section 5.2. Disbursements from the Construction Fund.
Issuer has, in the Indenture,
authorized and directed Trustee to make disbursements from the Construction Fund to pay the Cost
of the Project or to reimburse Company for any Cost of the Project paid by Company.
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Trustee shall make disbursements upon receipt of a requisition signed by an Authorized
Company Representative:
(a) stating with respect to each disbursement to be made: (i) the requisition number,
(ii) the name and address of the person, firm, or corporation to whom payment is due, (iii)
the amount to be disbursed, (iv) that each obligation mentioned therein has been properly
incurred, is a proper charge against the Construction Fund, and has not been the basis of
any previous disbursement, (v) with respect to any requisition for payment for work,
material, or supplies, that such obligation was incurred for work, materials or supplies in
connection with the acquisition, construction, and equipping of the Project, (vi) that at
least 95% of the amount requested for disbursement will be used for the payment of Qualified
Project Costs, (vii) that all property to be acquired with the proceeds of the disbursement
will be owned by Company, (viii) that no portion of the amount requested for disbursement
will be used in the manner prohibited in Sections 9.10 or 9.12 of this Loan Agreement, and
(ix) that no portion of the amount requested for disbursement will be used for the
acquisition of existing property except upon compliance with Section 9.16 of this Loan
Agreement;
(b) specifying in reasonable detail the nature and purpose of the obligation, including
(i) that such obligation has been properly incurred, is a proper charge against the
Construction Fund, is a proper cost of the Project as defined in the Act and has not been
the basis of any previous withdrawal, (ii) that the Authorized Company Representative has no
written notice of any mechanics, materialmens, or other liens or rights to liens or other
obligations (other than those being contested in good faith or covered by title insurance)
which should be satisfied or discharged before payment of such obligation is made, (iii)
that such payment does not include any amount which is then entitled to be retained under
any holdbacks or retainages provided for in any agreement, (iv) that there exists no event
of default;
(c) with respect to the first disbursement to be made for Costs of the Project, Company
shall provide Trustee with a certificate of the Authorized Company Representative that the
Project, as designed, complies with all presently applicable building and zoning ordinances
applicable to the Project; and
(d) accompanied by a pending disbursement endorsement in the amount of the disbursement
issued by Chicago Title Insurance Company or any successor or replacement to Chicago Title
Insurance Company approved by the Trustee.
In making any payment from the Construction Fund, Trustee may rely conclusively on
requisitions and certificates delivered to it pursuant to this Section, and Trustee and Issuer
shall be relieved of all liability with respect to the accuracy of such requisitions and
certificates and the making of such payments in accordance with such requisitions and certificates
and all liability to see to the proper application thereof by Company.
Section 5.3. Furnishing Documents to Trustee.
Company agrees to cause such requisitions to be
directed to Trustee as may be necessary to effect payments out of the Construction Fund in
accordance with Section 5.2 hereof. Trustee shall retain a record of all such requisitions.
Section 5.4. Establishment of Completion Date.
The Completion Date shall be evidenced to
Issuer and Trustee by (a) a certificate signed by an Authorized Company Representative stating
that, except for amounts retained by Trustee at Companys direction for any Cost of the Project
not then due and payable, (i) acquisition and construction of the Project has been substantially
completed and all costs
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of labor, services, materials, and supplies used in such acquisition and construction have been
paid, except for punch list items, for which adequate reserves shall have been established (ii) all
equipment for the Project has been installed to Companys satisfaction, such equipment so installed
is suitable and sufficient for the operation of the Project, and substantially all costs and
expenses incurred in the acquisition and installation of such equipment have been paid, except to
the extent any such equipment is Leased Equipment, and (iii) all other facilities necessary in
connection with the Project have been acquired, constructed, and equipped and all costs and
expenses incurred in connection therewith have been paid and (b) a certificate signed by an
Authorized Company Representative stating that the Project has been substantially completed in
accordance with all plans and specifications for the Project and to the best knowledge of the
Authorized Company Representative, after inquiry of the Projects architect, the Project complies
with all applicable federal, State, and local laws, regulations, and other governmental
requirements (including, without limitation, the federal Americans with Disabilities Act).
Notwithstanding the foregoing, the certificate required by clause (a) above shall state that it is
given without prejudice to any rights against third parties which exist at the date of such
certificate or which may subsequently come into being. Forthwith upon substantial completion of the
acquisition, construction, and equipping of the Project, Company agrees to cause such certificates
to be furnished to Issuer and Trustee.
Any moneys in the Construction Fund remaining after the Completion Date and payment, or
provision for payment, of the costs of financing the Project described above, at the direction of
the Authorized Company Representative, promptly, and in all events on or before June 1, 1998,
shall be:
(i) used to acquire, construct, equip and install such additional real or personal
property in connection with the Project, in accordance with the applicable provisions of
the Code (including the public notice requirements therein), as is designated by the
Authorized Company Representative and the acquisition, construction, equipping and
installation of which will be permitted under the Act, provided that any such use shall be
accompanied by evidence satisfactory to the Trustee that the average reasonably expected
economic life of such additional property, together with the other property theretofore
acquired with the proceeds of the Bonds, will not be less than 5/6ths of the average
maturity of the Bonds or, if such evidence is not presented with the direction, an opinion
of Bond Counsel to the effect that the acquisition of such additional property will not
result in the interest on the Bonds becoming subject to federal income taxation, and
provided further that any such additional real or personal property shall be Mortgaged
Property or Collateral, as applicable, pursuant to the terms of this Loan Agreement and the
Indenture;
(ii) used to redeem Bonds in accordance with the terms of the Indenture; or
(iii) used to accomplish a combination of the foregoing as is provided in that
direction.
Any amounts transferred from the Construction Fund to the Bond Fund shall be treated as a
separate, restricted fund within the Bond Fund and may be invested and reinvested at the written
direction of the Authorized Company Representative by Trustee only in investments designated by
the Authorized Company Representative and permitted by the Indenture. The Authorized Company
Representative shall in no event direct such investment such that the Yield on such investments
would, in the aggregate, be in excess of the Yield on the Bonds. Trustee shall, to the extent of
the funds available, apply such transferred funds to the redemption of Bonds (not including
interest, except to the extent that such funds so transferred from the Construction Fund to the
Bond Fund constitute interest earned on funds in the Construction Fund, which funds so
constituting interest earned shall be applied to the payment of principal of or interest earned on
the Bonds as the Authorized Company Representative shall direct as
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and to the extent provided in Section 5.8 of this Loan Agreement) on the earliest date that such
Bonds are subject to redemption in accordance with and in the manner provided in the Indenture.
Section 5.5. Company Required to Pay in Event Construction Fund Insufficient.
In the event the moneys in the Construction Fund available for payment of the Cost of the Project
should not be sufficient to pay the Cost of the Project in full, Company agrees to complete the
Project and to pay that portion of the Cost of the Project in excess of the moneys available
therefor in the Construction Fund or to lease Leased Equipment to complete the Project. Issuer does
not make any warranty, either express or implied, that the moneys paid into the Construction Fund
and available for payment of the Cost of the Project will be sufficient to pay all of the Cost of
the Project. Company agrees that if, after exhaustion of the moneys in the Construction Fund,
Company should pay any portion of the Cost of the Project pursuant to the provisions of this
Section, Company shall not be entitled to any reimbursement therefor from Issuer, Trustee, or the
owners of any of the Bonds, nor shall Company be entitled to any limitation of the amounts payable
under Sections 4.1 and 4.2 hereof.
Section 5.6. Enforcement of Contracts.
Company covenants that it will take any action and
institute any proceedings to cause and require all contractors and material suppliers to complete
their contracts diligently in accordance with the terms of said contracts, including, without
limitation, the correcting of any defective work. All expenses incurred by Company in connection
with the performance of its obligations under this Section 5.6 may be considered part of the Cost
of the Project, and Issuer agrees that Company may, from time to time, in its own name, take such
action as may be necessary or advisable, as determined by Company, to insure the construction of
the Project in accordance with the terms of the construction contract and the installation of
machinery and equipment in accordance with any applicable contract pertaining thereto, to insure
the peaceable and quiet enjoyment of the Mortgaged Property for the term of this Loan Agreement.
Section 5.7. Ownership of Tax Benefits.
it is the intention of the parties that any tax
benefits resulting from ownership of the Mortgaged Property and any tax credit or comparable
credit which may ever be available shall accrue to the benefit of Company, and Company shall, and
Issuer upon advice of counsel shall, make any election and take other action in accordance with
the Code and the regulations promulgated thereunder as may be necessary to entitle Company to have
such benefit and credit.
Section 5.8. Investment of Moneys.
Money held for the credit of any fund or account created
in the Indenture shall, to the extent practicable, be invested and reinvested by Trustee as
directed in writing by the Authorized Company Representative in Permitted Investments which shall
mature not later than the date or dates on which the money held for credit of the particular fund
shall be required for the purposes intended. All investment earnings on the Bond Fund,
Construction Fund, Rebate Fund or any other fund held by the Trustee shall be credited to such
fund. The Company shall be entitled to a credit for Loan Payments due on the Note to the extent
such funds are part of or are transferred into the Bond Fund and thereupon applied to interest or
principal on the Bonds, to be applied against Loan Payments in the same amounts as such funds are
applied against interest or principal, as the case may be, on the Bonds. Trustee shall sell or
reduce to cash a sufficient amount of such investments in the Construction Fund whenever the cash
balance in the Construction Fund is insufficient to pay a requisition when presented, and such
investments in the Bond Fund whenever the cash balance in the Bond Fund is insufficient to pay the
principal of and premium, if any, and interest on the Bonds when due. The Trustee shall have no
liability for any loss on such sale or reduction to cash absent gross negligence or wilful
misconduct.
Trustee may make any and all such investments through its own investment department or the
investment department of any bank or trust company under common control with Trustee. Issuer shall
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have no responsibility for control of or directing such investments and shall not be held
accountable for any losses resulting from any such investments. All such investments and the
income thereon shall at all times be a part of the fund (the Construction Fund, the Bond Fund, or
such other fund, as the case may be) from which the moneys used to acquire such investments shall
have come, and all losses on such investments shall be charged against such fund. All investments
shall be registered in the name of Trustee, as Trustee under the Indenture.
Section 5.9. Plans and Specifications; Modifications to Mortgaged Property.
Company agrees to
maintain plans and specifications for the Mortgaged Property. Company may make any changes in or
modifications of the plans and specifications, and may make any deletions from or substitutions or
additions to the Mortgaged Property without the prior consent of Issuer so long as such changes or
modifications in the plans and specifications, or deletions from or substitutions or additions to
the Mortgaged Property, do not materially alter the size, scope, or character of the Mortgaged
Property or impair the structural integrity and utility of the Mortgaged Property. If any such
changes in or modifications of the plans and specifications, or if any such deletions from or
substitutions or additions to the Mortgaged Property, materially alter the size, scope, or
character of the Mortgaged Property or impair the structural integrity and utility of the Mortgaged
Property then, and in such event, no such changes, modifications, substitutions, deletions, or
additions shall be made without the express written consent of Issuer, which consent shall not be
unreasonably withheld. Company covenants and agrees that no changes, modifications, substitutions,
deletions, or additions shall be made with respect to the Mortgaged Property (a) if such change
disqualifies the Project under the Act or results in interest on the Bonds being includable in the
gross income of the Owners of the Bonds for federal income tax purposes, and (b) unless there
shall be on deposit with Trustee adequate moneys available therefor or Company deposits in the
Construction Fund adequate moneys to pay any additional Cost of the Project resulting therefrom.
Section 5.10. Agreement to Issue Bonds; Application of Bond Proceeds.
In order to provide
funds for payment of the Cost of the Project, Issuer, concurrently with the execution of this
Loan Agreement, will issue, sell, and deliver the Bonds and deposit the proceeds thereof in the
Construction Fund.
ARTICLE VI
EFFECTIVE DATE OF THIS LOAN AGREEMENT;
DEFINITION OF LOAN TERM
Section 6.1. Effective Date of this Loan Agreement; Duration of Loan Term.
This Loan
Agreement shall become effective upon its delivery, and, subject to the provisions of this Loan
Agreement (including particularly Sections 4.1 and 8.5 hereof and Articles XI hereof), shall
continue until such date as payment has been made in full of the Note and all amounts due and
owing under this Loan Agreement, including, without limitation, the payment of principal, interest
to the payment date, premium, if any, Trustees fees and expenses, registrars fees and expenses,
or provision for such payment has been made as provided in the Indenture.
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ARTICLE VII
MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
Section 7.1. Maintenance and
Modifications of Mortgaged Property by Company.
(a) Company agrees that during the Loan Term it will at its own expense (i) keep the Mortgaged
Property in reasonably safe condition as its operations shall permit and (ii) keep the Buildings
and the Mortgaged Equipment and all other improvements forming a part of the Mortgaged Property in
good repair and in good operating condition, making from time to time all necessary repairs thereto
and renewals and replacements thereof.
(b) Company may from time to time, in its sole discretion and at its own expense, make any
additions, modifications, or improvements at the Mortgaged Property location, including
installation of additional machinery, equipment, furniture, or fixtures in the Buildings or on the
Land, which it may deem desirable for its business purposes; provided that all such additions,
modifications, and improvements do not adversely affect the structural integrity of the Buildings.
(c) Company, in consideration of the premises and of the issuance of the Bonds by Issuer and
the sum of $1.00, lawful money of the United States of America, to it duly paid by Issuer at or
before the execution and delivery of this Loan Agreement, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, and in order to secure the obligations
of Company under this Loan Agreement, under the Note and under the Deed of Trust, does hereby grant
a first position security interest (within the meaning of the Uniform Commercial Code in effect in
the State) in, and pledge unto Issuer, and its assigns forever the Collateral, and the proceeds and
products of the Collateral. The Collateral does not include any Leased Equipment.
(d) Company will not permit any mechanics, materialmens, or other liens to be established or
remain against the Mortgaged Property for labor or materials furnished in connection with any
addition, modifications, improvements, repairs, renewals, or replacements so made by it; provided,
that Company may provide the Issuer with a title insurance policy insuring the Mortgaged Property
without exception for the lien in question or affirmative insurance insuring against collection out
of the Mortgaged Property or, in the alternative, post a bond satisfactory to the Trustee, and may
in good faith contest any mechanics or other liens filed or established against the Mortgaged
Property, and in such event may permit the items so contested to remain undischarged and
unsatisfied during the period of such contest and any appeal therefrom unless Issuer or Trustee
shall notify Company that, in the opinion of Counsel, by nonpayment of any such items, the security
of the Bondowners, as to any part of the Mortgaged Property, will be materially endangered or the
Mortgaged Property or any substantial part thereof will be subject to loss or forfeiture, in which
event Company shall promptly pay and cause to be satisfied and discharged or bond (if legally
permissible) all such unpaid items.
Section 7.2. Removal of Mortgaged Equipment.
In any instance where Company in its sole
discretion determines that any items of Mortgaged Equipment have become inadequate, obsolete,
worn-out, unsuitable, undesirable, or unnecessary, Company may, provided no event of default shall
have occurred and be continuing, remove such items of Mortgaged Equipment from the Buildings and
the Land and (on behalf of Issuer) sell, trade-in, exchange, or otherwise dispose of them (as a
whole or in part) without any responsibility or accountability to Issuer or Trustee therefor,
provided that Company shall:
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(a) Substitute (either by direct payment of the costs thereof or by advancing to Issuer
the funds necessary therefor) and install anywhere in the Buildings or on the Land, other
machinery or equipment having equal or greater utility (but not necessarily having the same
function) in the operation of the Buildings as a modern manufacturing facility (provided
such removal and substitution shall not impair the operating unity of the remaining
property), all of which substituted machinery or equipment shall be free of all liens and
encumbrances (other than Permitted Encumbrances) but shall become a part of the Mortgaged
Equipment provided, however, during the first three (3) years commencing from and after June
22, 1995, the Company may substitute Leased Equipment (as defined in the Indenture) leased
by the Company from any lessor in place of any Mortgaged Equipment removed from the
Mortgaged Property, which Leased Equipment shall not be or be deemed to be part of the
Mortgaged Equipment; or
(b) Not make any such substitution and installation unless, (i) in the case of the sale
of any such Mortgaged Equipment to anyone other than itself or in the case of the scrapping
thereof, Company shall pay into the Bond Fund the proceeds from such sale or the scrap value
thereof, as the case may be, (ii) in the case of the trade-in of any such Mortgaged
Equipment for other Mortgaged Equipment not to be installed in the Buildings or on the Land,
Company shall pay into the Bond Fund the amount of the credit received by it in such
trade-in, and (iii) in the case of the sale of any such Mortgaged Equipment to Company or in
the case of any other disposition thereof Company shall pay into the Bond Fund an amount
equal to the original cost thereof less depreciation at rates calculated in accordance with
generally accepted accounting principles; provided, however, that no such payment into the
Bond Fund need be made until the amount to be paid into the Bond Fund on account of all such
dispositions not previously reported aggregates at least $100,000 in any calendar year;
provided further, that Company may not fail to make any such substitution and installation
if such failure would impair the operating utility of the remaining property.
Any Mortgaged Equipment removed from the Project by the Company pursuant to this Section
shall be released from the lien and security interest created by the Deed of Trust and may be sold
or otherwise disposed of by the Company without accounting to the Issuer. The Issuer will
promptly, upon the request of the Company, execute, acknowledge and deliver all supplemental deeds
of trust and all appropriate financing statements, including UCC-3 Termination Statements,
releases and other security instruments as may reasonably be required to evidence the removal and
replacement of any Mortgaged Equipment pursuant to the Deed of Trust.
The removal from the Mortgaged Property of any portion of the Mortgaged Equipment pursuant to
the provisions of this Section shall not entitle Company to any abatement or diminution of the
Loan Payments or Additional Payments payable to the Issuer and/or Trustee or any co-trustee
payable under Sections 4.1 and 4.2 hereof.
Company will promptly report to Trustee in writing such removal, substitution, sale, and
other disposition and will pay to Trustee such amounts, if any, as are required by the provision
of the preceding subsection (b) of this Section to be paid into the Bond Fund promptly after the
sale, trade-in, scrapping, or other disposition requiring such payment; provided, however, that no
such report need be made until the amount to be paid into the Bond Fund on account of all such
disposition aggregates at least $100,000 in any calendar year.
Section 7.3. Impositions.
Company shall, during the Loan Term, timely, except as otherwise
provided herein, bear, pay, and discharge, all taxes and assessments, general and special, if any,
which
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may be taxed, charged, levied, assessed, or imposed upon or against or be payable for or in
respect of the Mortgaged Property, or any part thereof, or any improvements at any time thereon or
on Companys interest in the Mortgaged Property under this Loan Agreement, including any new taxes
and assessments not of the kind enumerated above to the extent that the same are made, levied
against real and personal property, and further including without limitation all water and sewer
charges, assessments, and other governmental charges and impositions whatsoever, foreseen or
unforeseen, which if not paid when due would encumber the Mortgaged Property (all of the foregoing
being herein referred to as Impositions). In the event any special assessment taxes are lawfully
levied and assessed which may be paid in installments, Company shall be required to pay only such
installments thereof as become due and payable during the Loan Term as and when the same become
due and payable. Any Impositions which Company is required to bear, pay, and discharge shall be
remitted directly to the authority which is entitled to the payment thereof.
Within 30 days after the last day for payment or as soon thereafter as is reasonably
practicable, without penalty or, interest, of an Imposition which Company is required to bear,
pay, and discharge pursuant to the terms hereof, Company shall deliver to Issuer upon its written
request a reproduced copy of any statement issued therefor which has been duly receipted to show
the payment thereof.
Notwithstanding the foregoing, Company shall have the right, in its name, to contest in good
faith the validity or amount of any Imposition which Company is required to bear, pay, and
discharge pursuant to the terms of this Section by appropriate legal proceedings provided Company,
before instituting any such contest in Companys name, gives Trustee written notice of its
intention so to do and Company diligently prosecutes any such contest, at all times effectively
stays or prevents any official or judicial sale therefor, under execution or otherwise, sets aside
on its books and maintains adequate reserves for the payment of any liability therefrom in
conformity with generally accepted accounting principles, and promptly pays any final judgment
enforcing the Imposition so contested and thereafter promptly procures record release or
satisfaction thereof. Company shall hold Issuer and Trustee whole and harmless from any costs and
expenses Issuer and Trustee may reasonably incur related to any such contest.
Section 7.4. Insurance Required.
During the Construction Period and throughout the Loan Term,
Company shall keep the Mortgaged Property continuously insured against such risks as are
customarily insured against by business of like size and type, paying as the same become due all
premiums in respect thereto, including but not necessarily limited to:
(a)
Fire and Extended Coverage Insurance.
Subsequent to completion of the Project and
expiration of the builders risk policy referred to in subsection (d) below, insurance
against loss or damage by fire with standard extended coverage, vandalism, and malicious
mischief endorsement. Such insurance shall be in an amount equal to or exceeding the lesser
of (i) the full replacement value of the Mortgaged Property, or (ii) the amount required
for the full redemption or retirement of all Bonds then Outstanding; provided, however, in
any event, such insurance shall be in an amount necessary to prevent application of any
coinsurance provisions of the applicable policies. The proceeds of all such policies shall
be payable to Issuer, Company, and Trustee as their interests may appear, provided that any
such policies may be so written or endorsed as to make payments on claims for losses not in
excess of $100,000 payable directly to Company. All claims on such insurance regardless of
amount may be adjusted by Company with the insurers, subject to approval of Trustee, which
approval shall not be unreasonably withheld, as to settlement of any claim in excess of
$100,000. Issuer shall cooperate with Company in adjusting any such loss.
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(b) Public Liability Insurance.
General public liability insurance against claims for
bodily injury, death, or property damage occurring in connection with the Mortgaged
Property, such insurance to afford protection to Issuer and Trustee as additional insureds
of not less than $10,000,000 per occurrence.
(c) Workers Compensation Insurance.
Workers compensation insurance, including
qualified self-insurance pursuant to the workers compensation laws of the State, covering
all persons employed by Company at the Mortgaged Property. Company will cause such insurance
to be maintained by any independent contractors engaged by Company in connection with any
work done on or about the Mortgaged Property with respect to which claims for death or
bodily injury could be asserted against Company, Issuer, Trustee or Co-Trustee, complying
with the rules, regulations, and requirements of the State from time to time in force.
(d) Builders Risk Insurance.
During the course of construction of the Project until
the fire and extended coverage insurance set forth in subsection (a) above is in force, a
standard form builders risk policy on a replacement cost basis, with an all risk
endorsement, a course of construction endorsement, and a collapse insurance provision, in an
amount equal to the completed value of the portion of the Project covered by a construction
contract, with loss payable to Issuer, Company, and Trustee, as their interests may appear.
(e) Flood Insurance.
If all or part of the Mortgaged Property is located in an area now
or hereafter identified by the Secretary of Housing and Urban Development as an area having
special flood hazards and in which flood insurance has been made available under the
National Flood Insurance Act of 1968, as amended, policies of flood insurance in an amount
at least equal to the lesser of (1) the amount of the Bonds, (2) the insurable value of the
improvements, or (3) the maximum limit of coverage available under the National Flood
Insurance Act of 1968, as amended.
Company shall, upon request by the Trustee, provide Trustee with an opinion of an independent
insurance broker of recognized national standing that the insurance then in force upon the
Mortgaged Property is in compliance with the provisions of this Section 7.4.
Nothing in this Section 7.4 or any other portion of this Loan Agreement shall be construed to
prevent Company from including the Mortgaged Property under Companys blanket forms of insurance
coverage, provided that each and all of the requirements of this Section 7.4 be complied with
under such blanket coverage.
Section 7.5. Application of Net Proceeds of Insurance.
The Net Proceeds of the insurance
required in Section 7.4 hereof shall be applied as follows: (i) the Net Proceeds of the insurance
required in Sections 7.4 (a), (d), and (e) hereof shall be applied as provided in Section 8.2
hereof, and (ii) the Net Proceeds of the insurance required in Sections 7.4(b) and (c) hereof
shall be applied toward extinguishment or satisfaction of the liability with respect to which such
insurance proceeds may be paid.
Section 7.6. Additional Provisions Regarding Insurance.
All insurance required in Section 7.4
hereof shall be taken out and maintained with generally recognized responsible insurance companies
selected by Company. All policies evidencing such insurance (other than public liability insurance
and workers compensation insurance) shall provide for payment of the losses to Issuer, Company,
Trustee and Co-Trustee as their respective interests may appear, and the policies required by
Sections 7.4(a), (d), and (e) shall bear endorsements requiring that all proceeds of insurance
resulting from any claim in excess of
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$100,000 for loss or damage covered thereby be paid to Trustee; provided, however, that all claims
regardless of amount may be adjusted by Company with insurers, subject to approval of Trustee, as
to settlement of any claim in excess of $100,000, which approval shall not be unreasonably
withheld.
All policies, or a certificate or certificates of the insurers that such insurance is in force
and effect, shall be deposited with Trustee. Each such policy shall contain a provision that such
policy may not be cancelled unless Trustee is notified in writing at least 30 days prior to the
cancellation; and, at least 30 days prior to the expiration of any such policy, Company shall
furnish Trustee with written evidence satisfactory to Trustee that the policy has been renewed or
replaced or is no longer required by this Loan Agreement.
Section 7.7. Advances by Issuer or Trustee.
In the event Company shall fail to maintain the
full insurance coverage required by this Loan Agreement or shall fail to keep the Mortgaged
Property in as reasonably safe condition as its operating conditions will permit, or shall fail to
keep the Buildings and the Mortgaged Equipment in good repair and good operating condition, Trustee
may (but unless indemnified to the satisfaction of the Trustee shall be under no obligation to)
take out the required policies of insurance and pay the premiums on the same or make the required
repairs, renewals, and replacements; and all amounts so advanced therefor by Trustee shall become
an additional obligation of Company to the one making the advancement secured by the Mortgaged
Property, which amounts Company agrees to pay with interest thereon, to the extent permitted by
law, from the date thereof at the Agreed Rate.
Section 7.8. Release and Indemnification Covenants.
(a) Company shall and hereby agrees to indemnify and save Issuer (including but not
limited to past, present, and future officials, and other persons acting on Issuers
behalf), Trustee and Co-Trustee, and their officers, agents, and employees, harmless against
and from all loss, damage, cost, liability or expense, hereafter arising, by or on behalf of
any person, firm, corporation, or other legal entity arising from the conduct or management
of, or from any work or thing done on, the Mortgaged Property during the term of this Loan
Agreement, including without limitation, (i) any condition of the Mortgaged Property, (ii)
any breach or default on the part of Company in the performance of any of its obligations
under this Loan Agreement, (iii) any act or negligence of Company or of any of its agents,
contractors, servants, employees, or licensees, or (iv) any act or negligence of any
assignee or lessee of Company, or of any agents, contractors, servants, employees, or
licensees of any assignee or lessee of Company. Company shall indemnify and save Issuer and
Trustee harmless from any such claim arising as aforesaid, or in connection with any action
or proceeding brought thereon, and upon notice from Issuer or Trustee, Company shall defend
them or either of them in any such action or proceedings.
(b) It is the intention of the parties hereto that Issuer shall not incur any pecuniary
liability by reason of the terms of this Loan Agreement or the undertakings required of
Issuer hereunder, by reason of the issuance of the Bonds, by reason of the execution of the
Indenture, or by reason of the performance of any act requested of Issuer by Company,
including all claims, liabilities, or losses arising in connection with the violation of any
statutes or regulations pertaining to the foregoing; nevertheless, if Issuer should incur
any such pecuniary liability, then in such event Company shall indemnify and hold Issuer,
its officers, members, agents, and employees harmless against all claims by or on behalf of
any person, firm, or corporation or other legal entity arising out of the same and all costs
and expenses reasonably incurred in connection with any such claim or in connection with any
action or proceeding brought thereon, and upon notice from Issuer, Company shall defend
Issuer in any such action or proceeding.
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(c) Nothing contained in this Section 7.8 shall be construed to indemnify or release
Issuer from its liability in connection with the Mortgaged Property arising from the gross
negligence of or willful misconduct of Issuer, its employees, agents, or representatives
acting in their capacities as such.
Section 7.9. Environmental Considerations.
During the Loan Term, Company agrees that the
Mortgaged Property shall not be used at any time during the Loan Term to generate, manufacture,
refine, transport, treat, store, handle, dispose, transfer, produce, process, or in any manner deal
with hazardous materials except as incidental to its business or the business of any occupant of
the whole or any part of the Mortgaged Property whose occupancy of the Mortgaged Property or such
part thereof is not in violation of the terms of this Loan Agreement. Company further agrees that
it will defend, indemnify, and hold harmless Issuer and Trustee from and against any and all
liabilities, claims, damages, penalties, expenditure, losses, or charges, including but not limited
to all reasonable and necessary costs of investigation, monitoring, legal fees, remedial response,
removal, restoration, or permanent acquisition which may now or in the future be undertaken,
suffered, paid, awarded, assessed, or otherwise incurred as a result of any contamination resulting
from the disposal, storage, treatment, processing, or other handling of waste contamination, PCBs,
or other toxic or hazardous substance, which arise from Companys or any other permitted occupants
activity on or under the Mortgaged Property. Company agrees to promptly notify the Issuer and the
Trustee in writing by certified mail with return receipt requested, of the receipt of any written
environmental claim, suit, or demand by any individual, corporation, partnership, governmental
agency, or other legal entity concerning the Mortgaged Property. Issuer reserves the right to
defend against such claim, suit, or demand at its sole cost and expense, and Company will cooperate
with Issuer in such defense.
Notwithstanding anything to the contrary in this Loan Agreement, nothing in this Loan
Agreement, including without limitation this Section 7.9, shall diminish, derogate, or otherwise
limit the rights and interests of Trustee under the Hazardous Substance Certification and
Indemnification.
ARTICLE VIII
DAMAGE, DESTRUCTION, AND CONDEMNATION;
USE OF NET PROCEEDS
Section 8.1. Damage and Destruction.
Unless Company shall have exercised its option to prepay
the amounts payable under this Loan Agreement pursuant to the provisions of Section 10.4 hereof,
if prior to full payment of the Bonds (or provisions for payment thereof having been made in
accordance with the provisions of the Indenture) the Mortgaged Property or any portion thereof is
destroyed (in whole or in part) or is damaged by fire or other casualty, Company shall be
obligated to continue to pay the Loan Payments and Additional Payment as specified in Section 4.1
and 4.2 hereof. Company shall give prompt written notice of any such destruction or damage in
excess of $100,000 to Issuer and Trustee.
Section 8.2. Application of Net Proceeds
. Prior to the Completion Date, Issuer, Trustee, and
Company will cause the Net Proceeds of any insurance resulting from any events described in
Section 8.1 hereof to be deposited in the Construction Fund and to be disbursed therefrom to pay
or reimburse the Company for any Cost of the Project as provided in Article V of this Loan
Agreement and the Indenture. Subsequent to the Completion Date, Issuer, Trustee, and Company will
cause the Net Proceeds of any insurance resulting from any such event described in Section 8.1
hereof to be deposited in a separate trust fund, provided that Net Proceeds in an amount less than
$100,000 shall be paid directly to Company. All
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Net Proceeds from insurance shall be applied in one or more of the following ways as shall be
elected by Company in a written notice of the Authorized Company Representative to Issuer and
Trustee:
(a) To the prompt repair, restoration, modification, or improvement of the Mortgaged
Property by Company, and Issuer does hereby authorize and direct Trustee to make
disbursements from such separate fund for such purposes or to reimburse Company for costs
paid by it in connection therewith upon receipt of a requisition acceptable to Trustee
signed by an Authorized Company Representative stating with respect to each disbursement to
be made: (1) the requisition number, (2) the name and address of the person, firm, or
corporation to whom payment is due, (3) the amount to be disbursed, and (4) that each
obligation mentioned therein has been properly incurred, is a proper charge against the
separate trust fund, and has not been the basis of any previous disbursement. Any balance
of the Net Proceeds remaining after such work has been completed shall be transferred to the
Bond Fund to be applied to the payment of principal of and premium, if any, and interest on
the Bonds, or, if the Bonds have been fully paid (or provision for payment thereof has been
made in accordance with the provisions of the Indenture and this Loan Agreement), any
balance remaining in such separate trust fund shall be paid to Company.
(b) To redemption of the Bonds on the next succeeding Interest Payment Date as
specified in a written notice by the Authorized Company Representative to Trustee; provided,
that no part of the Net Proceeds may be applied for such redemption unless (1) all of the
Bonds are to be redeemed in accordance with the Indenture upon prepayment of the amounts
payable hereunder or (2) in the event that less than all of the Bonds are to be redeemed,
Company shall furnish to Issuer and Trustee a certificate of the Authorized Company
Representative acceptable to Issuer and Trustee stating that (i) the property forming the
part of the Mortgaged Property that was damaged or destroyed by such casualty is not
essential to the use or possession of the Mortgaged Property by Company or (ii) the
Mortgaged Property has been repaired, restored, modified, or improved to operate as
designed.
Section 8.3. Insufficiency of Net Proceeds.
If the Net Proceeds of insurance are insufficient
to pay in full the cost of any repair, restoration, modification, or improvement referred to in
Section 8.2(a) hereof, Company will nonetheless complete the work and will pay any cost in excess
of the amount of the Net Proceeds held by Trustee. Company agrees that if by reason of any such
insufficiency of the Net Proceeds, Company shall make any payments pursuant to the provisions of
this Section, Company shall not be entitled to any reimbursement therefor from Issuer, Trustee, or
the Owners of any of the Bonds, nor shall Company be entitled to any diminution of the amounts
payable under Sections 4.1 and 4.2 hereof.
Section 8.4. Cooperation of Issuer.
Issuer shall cooperate fully with Company at the expense
of Company in filing any proof of loss with respect to any insurance policy covering the
casualties described in Section 8.1 hereof and will, to the extent it may lawfully do so, permit
Company to litigate in any proceeding resulting therefrom in the name and behalf of Issuer. In no
event will Issuer voluntarily settle, or consent to the settlement of, any proceeding arising out
of any insurance claim without the written consent of the Authorized Company Representative.
Section 8.5. Rights of Parties in Event of Condemnation; Bonds Protected in Any Event.
(a) If during the Loan Term title to all or substantially all of the Mortgaged Property shall
be taken or condemned by a competent authority for any public use or purpose, then, subject to the
subsequent provisions of this Section, the condemnation award shall be paid to Trustee, for the
account of Issuer, and deposited into the Bond Fund (subject to the provisions of the Indenture
and this Loan Agreement) and
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Company hereby assigns the award to Issuer. In the event the Net Proceeds of any condemnation award
(being the gross amount awarded less all reasonable attorneys fees and other reasonable expenses
and costs in the condemnation proceeding) together with the amount then in the Bond Fund shall be
insufficient to pay in full, on the redemption date fixed by Company pursuant to the provisions of
Section 301 of the Indenture, the amount necessary to pay all principal, premium, if any, interest,
Trustees fees and expenses, and all other costs of redemption (all of which, for purposes of this
Section, shall be called total bond redemption expense), Company agrees to pay promptly upon
payment of the condemnation award, the amount by which the total bond redemption expense shall
exceed the Net Proceeds of any condemnation award plus the amount then on deposit in the Bond Fund.
For the purposes of this Article VIII, all or substantially all of the Mortgaged Property shall
be deemed to mean a taking of all of the Mortgaged Property or a taking of such a substantial
portion of the Mortgaged Property that Company, as determined by Company in its sole discretion,
cannot reasonably operate the remainder. In the event the Net Proceeds of any condemnation award,
together with the amount in the Bond Fund, shall be in excess of the amount necessary to pay the
total bond redemption expense and Company is not in default in any of its other obligations
hereunder, or Company is in default in any of its obligations hereunder and the Net Proceeds of any
condemnation award plus the amount then on deposit in the Bond Fund plus any amount previously paid
to the Bondowners on account of the total bond redemption expense shall be in excess of the amount
necessary to pay the total bond redemption expense, then the appropriate excess shall belong to and
be paid to Company; provided, however, that if an event of default has occurred and is continuing
with reference to any of its other obligations hereunder, the amount necessary to satisfy such
default shall also be paid to Trustee by Company whether from such excess or otherwise. To the
extent that the sum of the Net Proceeds of any condemnation award plus the amount then on deposit
in the Bond Fund plus any amount previously paid to the owners of the Bonds on account of the total
bond redemption expense shall be less than the total bond redemption expense, Company agrees to pay
such deficiency to Issuer. Issuer agrees that it will not voluntarily accept, without the prior
approval of Company, any condemnation award, and Issuer agrees that it will cooperate with Company
with the end in view of obtaining the maximum justifiable condemnation award.
(b) If less than substantially all of the Mortgaged Property shall be taken or condemned by a
competent authority for any public use or purpose, neither the term nor any of the obligations of
either party under this Loan Agreement shall be affected or reduced in any way, and
(i) If any part of the improvements owned by Company on the Mortgaged Property is
taken; Company shall proceed to repair or rebuild the remaining part as nearly as possible
to the condition existing prior to such taking, to the extent that the same may be
feasible, subject to the right on the part of Company to make alterations so as to improve
the efficiency of the improvements; and
(ii) The entire condemnation award shall be paid to Company for the use of Company in
repairing and rebuilding as provided in (i) above. The said award shall be transferred to
Company in the same manner as is provided in Section 8.2 with respect to insurance
proceeds, provided that the words Net Proceeds there referred to shall for purposes
hereof refer to net condemnation award. If the Net Procceeds of any condemnation award is
in excess of the amount necessary to repair and rebuild as specified in (i) above, such
excess shall be paid to Trustee and deposited in the Bond Fund. If the Net Proceeds of any
condemnation award is less than the amount necessary for Company to repair and rebuild as
set forth in (i) above, Company shall nevertheless complete the repair and rebuilding work
and pay the deficiencies in the cost thereof; and
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(iii) If no part of the improvements is taken, the Net Proceeds of any
condemnation award shall be paid to Trustee and deposited in the Bond Fund.
(c) In the event of taking under either (a) or (b) above, Company shall have the
right to participate at its own expense in, and to offer proof in, the condemnation
proceedings and to receive that portion of any award (by way of negotiation, settlement,
or judgment) which may be made for damages sustained by Company solely as a result of the
interruption of Companys business or with respect to the Companys trade fixtures,
equipment, improvements and moving expenses by reason of the condemnation;
provided, however, nothing in this subsection (c) shall be construed to diminish or impair
in any way Companys obligation under subsection (a) of this Section 8.5 to pay the amount
of any insufficiency of the Net Proceeds of any condemnation award and the funds in the
Bond Fund to pay the total bond redemption expense.
(d) If the temporary use of the whole or any part of the Mortgaged Property shall be
taken by right of, or acquired pursuant to the threat of, eminent domain, this Loan
Agreement shall not be thereby terminated and the parties shall continue to be obligated
under all of its terms and provisions, and, provided that an event of default has not
occurred and is continuing under this Loan Agreement, Company shall be entitled to receive
the entire amount of the award made for such taking, whether by way of damages, rent, or
otherwise.
Section 8.6. Company Obligated to Continue Loan Payments and Additional Loan
Payments Until Condemnation Award Available.
In the event of a taking of all or substantially all of
the Mortgaged Property as provided in Section 8.5(a), Company agrees to continue to make payment of
the installments due under the Loan Agreement until the condemnation award shall be actually
received
by Issuer; provided, however, Company shall be repaid, solely out of the Net Proceeds of any
condemnation award, the amounts so paid after the date provided in Section 8.5(a). This agreement to
repay shall not be construed in any way to impair or diminish Companys obligations under Section
8.5
to pay the amount of any insufficiency of the Net Proceeds of any condemnation award and the moneys
in the Bond Fund to pay the total bond redemption expense.
ARTICLE IX
SPECIAL COVENANTS
Section 9.1. No Warranty of Condition or Suitability by Issuer.
ISSUER MAKES NO
WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION OF THE MORTGAGED PROPERTY OR
THAT THE MORTGAGED PROPERTY WILL BE SUITABLE FOR COMPANYS PURPOSES OR NEEDS.
Section 9.2. Inspection of the Mortgaged Property.
Company agrees that Trustee and
Issuer and their duly authorized agents shall have the right at all reasonable times to
enter upon the Land and to examine and inspect the Mortgaged Property without
interference or prejudice to Companys operations. Company further agrees that Issuer and
its duly authorized agents who are acceptable to Company shall have such rights of access
to the Mortgaged Property as may be reasonably necessary to cause to be completed the
construction and installation provided for in Section 5.1 hereof.
Section 9.3. Company to Maintain its Corporate Existence.
Company will maintain its
corporate existence and will not dissolve or otherwise dispose of all or substantially all of
its assets and
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will not consolidate with or merge into another corporation or permit one or more other
corporations to consolidate with or merge into it without providing an opinion of Bond Counsel to
the Issuer and the Trustee that such a merger, dissolution or consolidation will not materially
violate the Act or cause interest on the Bonds to be includable in the gross income of the owners
thereof for federal income tax purposes.
Section 9.4. Release of Certain Land.
Notwithstanding any other provision of this Loan
Agreement, the parties hereto, with the prior written consent of Trustee, which consent shall not
be unreasonably withheld, reserve the right at any time and from time to time to amend the Deed of
Trust for the purpose of effecting the release of and removal from this Loan Agreement, the Deed of
Trust, and the Indenture (i) of any unimproved part of the Land (on which neither the Buildings nor
any Mortgaged Equipment is located but on which transportation or utility facilities may be
located) on which Company proposes to construct improvements under another and different loan
agreement or (ii) any part of the Land with respect to which Company proposes to grant an easement
or convey a fee or other title to a railroad or other public or private carrier or to any public
utility or public body in order that transportation facilities or services by rail, water, road, or
other means or utility services for the Mortgaged Property may be provided, increased, or improved;
provided, that if at the time any such amendment is made any of the Bonds are Outstanding and
unpaid there shall be deposited with Trustee the following:
(a) A copy of the said amendment as executed.
(b). A resolution of the board of directors of Company or executive committee of said
board (if permitted under Companys by-laws) authorizing the execution of such amendment
together with an Authorized Company Representatives certificate stating that Company is
not in default under any of the provisions of this Loan Agreement, the Deed of Trust, the
Guaranty or the Hazardous Substance Certification and Indemnification.
(c) A copy of the instrument granting the easement or conveying the title to a
railroad, public utility, or public body.
(d) A certificate of an Independent Engineer who is reasonably acceptable to Trustee,
dated not more than 60 days prior to the date of the release and stating that, in the
opinion of the person signing such certificate, (i) the portion of the Land so proposed to
be released is necessary or desirable for railroad, utility service, or roads to benefit the
Mortgaged Property or is not otherwise needed for the operation of the Mortgaged Property
for the purposes hereinabove stated, (ii) the release so proposed to be made will not impair
the usefulness of the Buildings as a manufacturing facility, and (iii) the remaining portion
of Land after the release will be a legal parcel.
(e) Company and Issuer agree that all walls presently standing or hereafter erected on
or contiguous to the boundary line of the Land so proposed to be released shall be party
walls for the purpose of tying-in of new construction. If any party wall is utilized for the
purpose of tying-in new construction with the building to be utilized under common control
with the Mortgaged Property, utility facilities on the Land, including those within the
Buildings, may be interconnected for the purpose of serving the new construction to be
placed on Land so released and any non-loadbearing panels in any party wall may be removed;
provided, however, that if the Land so released and construction thereon ceases to be
operated under common control with the Buildings, non-loadbearing wall panels similar in
quality to those which have been removed will be installed and separate utility services
will be provided for the new construction.
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In the event that the conditions described in Section 9.4 (a), (b), (c), and (d)
have been fulfilled, the Issuer agrees to execute and deliver to the Company, all documents
reasonably requested by the Company to evidence the release of the portion of the Land so
proposed to be released, including, but not limited to, a deed of release in recordable
form, with respect to the Deed of Trust, evidencing the release of the Land sought to be
released from the definition of Mortgaged Property, and any UCC-3 termination statement
required to evidence the release of the Land, any fixtures and any Mortgaged Equipment
situated thereon sought to be released from any UCC-I financing statement and security
agreement held by the Issuer, being, however, a partial release, which does not release the
security interest in the balance of the Mortgaged Property covered by the corresponding
UCC-1 financing statement.
No release effected under the provisions hereof shall entitle Company to any abatement
or diminution of the Loan Payments and Additional Payments payable under Section 4.1 or 4.2
hereof.
Section 9.5. Granting of Easements.
If no event of default shall have happened and be
continuing, and subject to the delivery of prior written notice to Trustee, Company may at any time
or times grant easements, licenses, rights-of-way (including the dedication of public highways),
and other rights or privileges in the nature of easements with respect to any property included in
the Mortgaged Property, free from the lien of the Indenture, or Company may release existing
easements, licenses, rights-of-way, and other rights or privileges with or without consideration,
and Issuer agrees that it shall execute and deliver and will cause and direct Trustee to execute
and deliver any instrument necessary or appropriate to confirm the release of any such easement,
license, right of way and other right or privilege in the nature of easements when so granted from
the lien of the Indenture, including, but not limited to, delivery by the Issuer of a release of
lien in recordable form and a subordination agreement in recordable
form confirming that the lien of the Indenture is subject and subordinate to such easement,
license, right
of way or other right or privilege granted pursuant to this Section 9.5, and grant or release
any such easement, license, right-of-way, or other right or privilege upon receipt of: (i) a
copy of the instrument of grant or release; (ii) a written application signed by the
Authorized Company Representative requesting such instrument; and (iii) a certificate
executed by the Authorized Company Representative stating (1) that such grant or release is
not detrimental to the proper conduct of the business of Company, and (2) that such grant or
release will not impair the effective use or interfere with the operation of the Mortgaged
Property and will not weaken, diminish, or impair the security intended to be given by or
under the Indenture.
Section 9.6. Compliance with Code.
Issuer and Company recognize that the Bonds are to
be issued under such circumstances that the interest thereon shall remain excludable from
gross income for federal income taxation purposes, and to that end Company represents to and
covenants with Issuer, Trustee, and each Bondowner as follows:
(a) Company will fulfill all conditions specified in Section 144(a)(4) of
the Code and applicable Regulations, to qualify the Bonds as a small issue
thereunder.
(b) Company will comply with and fulfill all other requirements and conditions of
the Code and applicable Regulations in the acquisition, construction, and operation of
the Project
to the end that the interest on the Bonds shall at all times be free from federal
income taxation.
(c) No part of the Project reached a degree of completion which would permit
operation at substantially the level for which it was designed and the Project was not in
operation
at such level more than one year prior to June 22, 1995.
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(d) The average maturity of the Bonds (determined by their respective issue prices)
does not exceed 120 percent of the average reasonably expected economic life of the various
facilities to be financed with the proceeds of the Bonds (determined by taking into account
the respective costs of such facilities and by using the guideline economic life for each
respective facility as set forth in the ADR (asset depreciation range) midpoint life tables
for machinery and equipment and as set forth in Revenue Procedure 62-21 for structures).
(e) In accordance with Section 149 (e) of the Code, Company covenants and agrees to
furnish to Issuer not later than 5 days before the issuance and delivery of the Bonds a
fully completed Internal Revenue Service Form 8038 with respect to the Bonds. Company
further covenants and agrees that it or its agents will have the primary responsibility as
between or among any preparers for the overall substantive accuracy of the preparation of
Form 8038. Company will hold harmless Issuer, Bond Counsel, Trustee and any purchaser or
owner of the Bonds against all consequences of any material misrepresentation in or material
omission from such Form 8038.
(f) Company has delivered to Issuer a certificate in accordance with the provisions of
the Code and Regulation §1.148-2(b) stating that on the basis of the facts, estimates, and
circumstances in existence on June 22, 1995, as such facts, estimates, and circumstances are
set forth in the certificate, it is not expected that the proceeds of the Bonds will be used
in a manner that would cause the Bonds to be arbitrage bonds within the meaning of Section
148 of the Code and the Regulations.
Section 9.7. Federal Guarantee Prohibition.
Issuer and Company covenant that neither Issuer
nor Company shall take any action or permit or suffer any action to be taken if the result of the
same would be to cause the Bonds to be federally guaranteed within the meaning of Section 19(b)
of the Code and Regulations.
Section 9.8. Limitation on Issuance Costs.
Issuer and Company covenant that, from the
proceeds of the Bonds received from the Original Purchaser on June 22, 1995 an amount not in
excess of 2% of the face amount of the Bonds shall be used to pay for, or provide for the payment
of, Issuance Costs. For this purpose, if the fees of the Original Purchaser are retained as a
discount on the purchase of the Bonds, such retention shall be deemed to be an expenditure of
proceeds of the Bonds for said fees to the extent of the amount retained.
Section
9.9.
Limitation on Expenditure of Proceeds.
Issuer and Company covenant that not less
than 95% of the face amount of the Bonds, plus accrued interest and premium, if any, paid on the
purchase of the Bonds by the Original Purchaser from Issuer, less original issue discount, shall
be used to pay for Qualified Project Costs.
Section 9.10. Limitation on Land and Certain Facilities.
Issuer and Company covenant that not
more than 25% of the face amount of the Bonds, plus accrued interest and premium, if any, paid on
the purchase of the Bonds by the Original Purchaser from Issuer, less original issue discount,
shall be used, directly or indirectly, for the acquisition of land or an interest therein or to
provide a facility the primary purpose of which is retail food and beverage services, automobile
sales and service, or the provision of recreation or entertainment.
Section 9.11. Location of Project; Outstanding Obligations.
Company covenants that proceeds
of the Bonds shall be used only with respect to facilities located within the corporate boundaries
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of the City of Kennett, Missouri (City), and that there are no outstanding obligations issued
for facilities located within the City having as principal users Company or Guarantor or other
principal users of the Project or their related persons, all within the meaning of Sections
144(a)(2) and (3) of the Code and the Regulations.
Section 9.12. Prohibited Facilities.
Issuer and Company covenant that no portion of the
proceeds of the Bonds shall be used directly or indirectly to provide residential real properly
for family units, any private or commercial golf course, country club, massage parlor, tennis
club, skating facility (including roller skating, skateboard, and ice skating), racquet sport
facility (including any handball or racquetball court), hot tub facility, suntan facility,
racetrack, airplane, skybox or other private luxury box, health club facility, facility used for
gambling, or store, the principal business of which is the sale of alcoholic beverages for
consumption off premises.
Section 9.13. No Arbitrage.
Issuer and Company covenant that neither Issuer nor Company shall
take, or permit or suffer to be taken by Trustee or otherwise, any action with respect to the
proceeds of the Bonds over which Issuer or Company, as the case may be, has control, which if such
action had been reasonably expected to have been taken, or had been deliberately and intentionally
taken, on June 22, 1995 would have caused the Bonds to be arbitrage bonds within the meaning of
Section 148(a) of the Code and Regulations.
Section 9.14. Capital Expenditure Limitation.
Company covenants that the sum of the principal
amount of the Bonds, plus capital expenditures paid or incurred during the 6-year period beginning
3 years prior to June 22, 1995 and ending 3 years after June 22, 1995, for facilities located
within the City having as principal users Company, Guarantor or other principal users of the
Project or their related persons shall not exceed $10,000,000, all within the meaning of Section
144(a) of the Code and the Regulations. Company further covenants that it will not enter into any
lease or other arrangement, including an assignment pursuant to Section 10.1 hereof, for use of
any portion of the Project if such lease or other arrangement would cause the covenants contained
in this Section to be violated.
Section 9.15. $40,000,000 Limitation.
Company covenants that the sum of the outstanding
principal amount of the Bonds, plus the portions of the aggregate amount of outstanding tax-exempt
facility bonds as defined in Section 142 of the Code, qualified small issue bonds as defined in
Section 144(a) of the Code, qualified redevelopment bonds as defined in Section 144(c) of the
Code, and industrial development bonds as referenced in Section 144(a)(10)(B)(ii)(11) of the Code,
allocable to each test period beneficiary as defined in Section 144(a)(10) of the Code on the
later of the date the Project is placed in service or June 22, 1995 shall not exceed $40,000,000,
all within the meaning of Section 144 (a)(10) of the Code and the Regulations. Company further
covenants that it will not enter into any lease or other arrangement for ownership or use of any
portion of the Project if such lease or other arrangement would cause the covenants contained in
this Section to be violated.
Section 9.16. Existing Facilities Limitation.
(a) Company covenants that no proceeds of the Bonds shall be used for the acquisition
of any tangible property or an interest therein, other than land or an interest in land,
unless the first use of such property is pursuant to such acquisition; provided, however,
that this limitation shall not apply with respect to any building (and the equipment
therefor) if Rehabilitation Expenditures with respect to such building equal or exceed 15%
of the portion of the cost of acquiring such building (and equipment) financed with
proceeds of the Bonds; and provided, further, that this limitation shall not apply with
respect to any structure other than a
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building if Rehabilitation Expenditures with respect to such structure equal or exceed
100 percent of the portion of the cost of acquiring such structure financed with the
proceeds of the Bonds.
(b) For the purpose of this section, the term Rehabilitation Expenditures means any
amount properly chargeable to the capital account of Company or a successor to Company or
by the seller under a sales contract with Company for the property acquired in connection
with the rehabilitation of such property or, in the case of property constituting
equipment, in connection with the replacement of such equipment with equipment having
substantially the same function, excluding, however, (A) expenditures described in Section
48(g)(2)(B) of the Code and (B) amounts incurred after the date 2 years after the later of
the date of acquisition of the property in question or June 22, 1995.
Section 9.17. Compliance With Rebate Provisions.
Company covenants that it shall take any and
all actions necessary to assure compliance with Section 148(f) of the Code. In particular, it
shall directly or through independent consultants perform the calculations required to determine
what payments are due under Section 148(f) of the Code, assure the payments required by Section
148(f) of the Code are made, maintain the records required by Section 148(f) of the Code, pay all
fees, costs, and expenses incurred by Company, Issuer, or Trustee in connection with compliance
with Section 148(f) of the Code, and in accordance with Section 512 of the Indenture, including
compensation due to independent consultants, and coordinate and cooperate in any and all respects
necessary to assure compliance with Section 148 (f) of the Code.
Section 9.18. Composite Issues.
(a) The officer of Company executing this Loan Agreement is familiar with all
financing transactions undertaken and now being planned for Company, including tax-exempt
financings by or for Company or by or for any related person (within the meaning of Section
144(a)(3) of the Code).
(b) There are no other obligations heretofore issued or to be issued by or on behalf of
any state, territory, or possession of the United States of America, or political
subdivision of any of the foregoing, or of the District of Columbia, for the benefit of
Company or any related person, which constitute private activity bonds (within the meaning
of Section 147(b) of the Code) and which (i) were or are to be sold at substantially the
same time as the Bonds, (ii) were or are to be sold pursuant to the same plan of financing
as the Bonds, and (iii) are payable from the source from which the Bonds are payable.
(c) There are no additional facts or circumstances which may further evidence that the
Bonds are part of any other issue of obligations.
Section 9.19. Manufacturing Facility.
The Project will be a manufacturing facility as defined
in Section 144 (a) (12) of the Code. The Project may include ancillary facilities which are
directly related and ancillary to the Project but any such ancillary facilities will be located on
the same site as the Project and not more than 25% of the net proceeds of the Bonds will be used
to provide such ancillary facilities.
Section 9.20. Notice of Default to Issuer and Trustee.
Company agrees to promptly provide
written notice to Issuer and Trustee of an event of default under this Loan Agreement, the Note,
the Deed of Trust, the Guaranty or the Hazardous Substance Certification and Indemnification.
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Section 9.21 Non-Disturbance.
In the event a lease is permitted as provided in this Loan
Agreement, and in the event of a foreclosure under the Deed of Trust, Issuer will recognize tenant
under such permitted lease as a direct tenant of Issuer for the balance of the lease term, provided
(i) no default exists under the lease which at the time would then permit the landlord hereunder to
terminate the same or to exercise any dispossession remedy provided for therein, and (ii)) the
tenant shall deliver to Issuer an instrument confirming the agreement of such tenant to attorn to
the Issuer and to recognize the Issuer as the landlord under the lease, in accordance with the
provisions of Section 1101(xiv) of the Indenture.
ARTICLE X
ASSIGNMENT, LEASING, PLEDGING, AND SELLING; REDEMPTION;
OPTIONAL AND MANDATORY PREPAYMENT; ABATEMENT OF RENT
Section 10.1. Assignment and Leasing.
Company may not assign this Loan Agreement or
lease the Mortgaged Property or part thereof without the prior written consent of Issuer which
shall not be unreasonably withheld. Any such assignment shall include, without limitation, an
assumption in writing by such assignee of all liabilities and obligations of Company under this
Loan Agreement from and after the effective date of such assignment, the Guaranty, the Hazardous
Substance Certification and Indemnification from and after the effective date of the assignment,
and any related documents. Notwithstanding the foregoing, no assignment or subletting and no
dealings or transactions between Issuer or Trustee and any sublessee or assignee shall relieve
Company of any of its obligations under this Loan Agreement, and Company shall remain as fully
bound as though no assignment or subletting had been made, and performance by any assignee or
sublessee shall be considered as performance pro tanto by Company.
In the event a lease is permitted as provided in this Section 10.1 of this Loan Agreement,
and in the event of a foreclosure under the Deed of Trust, Issuer will recognize tenant under such
permitted lease as a direct tenant of Issuer for the balance of the lease term, provided (i) no
default exists under the lease which at the time would then permit
the landlord thereunder to
terminate the same or to exercise any dispossess remedy provided for therein and (ii) the tenant
shall deliver to Issuer an instrument confirming the agreement of such tenant to attorn to the
Issuer and to recognize the Issuer as the tenants landlord under its lease.
It is understood and agreed that this Loan Agreement (and the Mortgaged Property) will be
assigned and pledged to Trustee as security for the payment of the principal of and premium, if
any, and interest on the Bonds, but otherwise Issuer shall not, without the prior written consent
of Company and Trustee, assign, encumber, sell, or dispose of all or any part of its rights,
title, and interest in and to the Mortgaged Property, the Deed of Trust, the Note, and this Loan
Agreement, except to Company in accordance with the provisions of this Loan Agreement and to
Trustee or any other Person that takes title to any of the Mortgaged Property as a result of a
foreclosure or deed in lieu of foreclosure, transfer by any Person after a foreclosure or deed in
lieu of foreclosure, or otherwise under the Indenture or this Loan Agreement.
Section 10.2. Restrictions on Sale, Mortgage, or other Conveyance of Mortgaged Property by
Issuer.
Issuer agrees that, except for the collateral assignment and pledge of this Loan Agreement
and the grant and pledge of the Mortgaged Property to Trustee pursuant to the Indenture, it will
not sell, assign, mortgage, pledge, transfer, or convey its interest in the Mortgaged Property
during the Loan Term, except as specifically provided in this Loan Agreement.
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Section 10.3. Redemption of Bonds.
Issuer, at the request at any time of Company
and if the Bonds are then callable, shall forthwith take all steps that may be necessary
under the applicable redemption provisions of the Indenture to effect redemption of all or
part of the then outstanding Bonds, as may be specified by Company, on the earliest
redemption date on which such redemption may be made under such applicable provisions.
Section 10.4. Mandatory Prepayment of Loan Payments Upon Determination of Taxability.
If, for any reason (including a change in the Code), without regard to whether such
circumstances shall be caused by any act or failure to act of Issuer, Company, or any other
user of the Project, there shall occur a Determination of Taxability, Issuer or Company shall
immediately instruct Trustee in writing to call the Bonds for redemption pursuant to Section
304 of the Indenture, and Company shall immediately pay to Trustee, as prepayment of the Loan
Payments, the amount necessary to effect the redemption of the Bonds then Outstanding in
accordance with the provisions of the Indenture.
Company shall also pay to the the Issuer, Trustee or Co-Trustee any Additional Payments
as specified in Section 4.2 of this Agreement.
Section 10.5. Reference to Bonds Ineffective After Bonds Paid.
Upon payment in full of
the Bonds (or provision for payment thereof having been made in accordance with the
provisions of the Indenture) and all fees, charges and expenses of Trustee, all references in
this Loan Agreement to the Bonds and Trustee shall be ineffective and neither Trustee nor the
Bondowners shall thereafter have any rights hereunder, saving and excepting those that shall
have theretofore vested.
ARTICLE XI
EVENTS OF DEFAULT AND REMEDIES
Section 11.1. Events of Default Defined.
The following are events of default
under this Loan Agreement:
(a) Failure by the Company to pay any Loan Payment, any Additional Payment payable
directly to the Issuer or Trustee, or any part thereof payable under the Loan Agreement
at the times specified therein, or any other Additional Payment for a period of 30 days
after the receipt by the Company of notices sent by certified or registered mail by the
Issuer or the Trustee, specifying such failure and requesting that it be remedied.
(b) Failure by Company or Issuer to observe and perform any covenant, condition,
or agreement on its part to be observed or performed, other than as referred to in
subsection (a) of this Section, for a period of 30 days after the receipt by Company of
notices sent by certified or registered mail by Issuer or Trustee, specifying such
failure and requesting that it be remedied, unless Issuer and Trustee shall agree in
writing to an extension of such time prior to its expiration. The provisions of this
paragraph (b) are subject to the following limitations: (i) if said default be a
default that is correctable but that cannot be corrected within 30 days it shall not
constitute an event of default if corrective action is instituted within said 30 day
period and diligently pursued until the default is corrected or (ii) if by reason of
force majeure Company, after using its best efforts, is unable in whole or in part to
carry out its agreements on its part herein contained, other than the obligations on the part of Company contained in Article V and
Sections 7.3 and 7.4 hereof, Company shall not be deemed in default during the continuance of
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such inability. The term force majeure as used herein shall mean, without limitation, the
following: acts of God; strikes, lockouts, or other industrial disturbances; acts of public
enemies, orders of any kind of the government of the United States or of the State or any of
their departments, agencies, or officials, or any civil or military authority;
insurrections; riots; epidemics; landslides; lightning; earthquake; fire; hurricanes;
storms; floods; washouts; droughts; arrests; restraint of government and people; civil
disturbances; explosions; breakage or accident to machinery, transmission pipes, or canals;
partial or entire failure of utilities; or any other cause or event not reasonably within
the control of Company. Company agrees, however, to remedy with all reasonable dispatch the
cause or causes preventing Company from carrying out its agreements; provided, that the
settlement of strikes, lockouts, and other industrial disturbances shall be entirely within
the discretion of Company, and Company shall not be required to make settlement of strikes,
lockouts, and other industrial disturbances by acceding to the demands of the opposing party
or parties.
(c) An event of default shall occur under the Deed of Trust, the Guaranty or the
Hazardous Substance Certification and Indemnification; provided however, with respect to the
Hazardous Substance Certification and Indemnification, that such occurrence pursuant to the
provisions of this paragraph (c) shall not constitute an event of default until actual
notice of such default by registered or certified mail (with or without return receipt
requested) shall be given to the Company, and Company shall have 30 days after receipt of
such notice to correct said default or cause said default to be corrected, and if the
Company shall not have corrected said default or cause said default to be corrected within
said 30 day period; provided, however, if said default cannot be corrected within 30 days,
it shall not constitute an event of default if corrective action is instituted within said
30 day period and diligently pursued until the default is corrected within any applicable
period as may be required by governmental regulation or order.
(d) (i) Company (or any other Person obligated, as guarantor or otherwise, to
make payments on the Bonds or under the Loan Agreement or the Guaranty) shall (A)
apply for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, liquidator, or the like of Company (or such other
Person) or of all or any substantial part of its property, (B) commence a voluntary
case under Title 11 of the United States Code (as now or hereafter in effect), or
(C) file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; or
(ii) a proceeding or case shall be commenced, without the application or
consent of Company which case or proceeding is not discharged within ninety (90)
days (or any other Person obligated, as guarantor or otherwise, to make payments on
the Bonds or under the Loan Agreement), in any court of competent jurisdiction,
seeking (A) the liquidation, reorganization, dissolution, winding-up or composition
or adjustment of debts, of Company (or any such other Person), (B) the appointment
of a trustee, receiver, custodian, liquidator, or the like of Company (or any such
other Person) or of all or any substantial part of its respective property or (C)
similar relief in respect of Company (or any such other Person) under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts.
Upon an event of default hereunder, the Trustee shall give written notice to the Company and
the Guarantor of such event of default and request that such event of default be immediately
remedied. Any such notice related to a failure to pay any Loan Payment may be given by facsimile
transmission to the Company and Guarantor.
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Section 11.2. Remedies on an Event of Default.
Whenever any event of default shall
happen, Issuer (with the consent of Trustee if the Indenture has not been discharged) or Trustee
on behalf of the Issuer may take any of the following remedial steps:
(a) Declare Loan Payments due and payable in an amount equal to the principal and
premium, if any, and interest and other amounts due and payable under the Note.
(b) Cause the appointment of a receiver for the Mortgaged Property.
(c) Have access to and inspect, examine, and make copies of such of the books, records,
accounts, and data of Company as pertain to the Mortgaged Property.
(d) Take whatever action at law or in equity may appear necessary or desirable to
collect the Loan Payments, Additional Payments and any other amounts payable by Company
hereunder, then due and thereafter to become due, or to enforce performance and observance
of any obligation, agreement, or covenant of Company under this Loan Agreement.
(e) Cause a foreclosure on the Mortgaged Property pursuant to the Deed of Trust.
(f) Take any actions permitted to be taken upon the occurrence of such event of default
under the Guaranty, the Deed of Trust, and the Hazardous Substance Certification and
Indemnification, if applicable.
Any amounts collected pursuant to action taken under this Section, other than amounts
collected with respect to obligations of the Company under the Hazardous Substance Certification
and Indemnification, shall be paid into the Bond Fund and applied in accordance with the
provisions of the Indenture.
Section 11.3. Remedies Not Exclusive.
No remedy herein conferred upon or reserved to Issuer
or Trustee is intended to be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to every other remedy given under
this Loan Agreement or now or hereafter existing at law or in equity or by statute. No delay or
omission to exercise any right or power shall impair any such right or power or shall be construed
to be a waiver thereof, but any such right or power may be exercised from time to time as often as
may be deemed expedient.
Section 11.4. Funds to Go Into Bond Fund.
Except as otherwise provided in Section 11.2
herein, the foregoing provisions of this Article relating to the receipt of moneys by Issuer or
Trustee as the result of an acceleration, are to be construed as providing that all such payments
by Company or others shall be made into the Bond Fund referred to in Section 501 of the Indenture.
Section 11.5. Equitable Relief.
Issuer, Company, and Trustee shall each be entitled to
specific performance, injunctive, or other appropriate equitable relief for any breach or
threatened breach of any of the provisions of this Loan Agreement, notwithstanding the
availability of an adequate remedy at law, and each party hereby waives the right to raise such
defense in any proceeding in equity.
Section 11.6. Trustee May File Proofs of Claim.
In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition, or
other
-35-
judicial proceeding relative to Company, the Mortgaged Property, or any other property of
Company, Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim and to file such other papers or documents as may be
necessary or advisable in order to have the claims of Trustee (including any claim for the
reasonable compensation, expenses, disbursements, and advances of Trustee, its agents and
counsel) allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or deliverable on any
such claims and to distribute the same.
ARTICLE XII
MISCELLANEOUS
Section 12.1. Notices.
All notices, certificates, or other communications hereunder
shall be sufficiently given and shall be deemed given when mailed by registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
If intended for Company:
American Railcar Industries, Inc.
c/o ACF Industries, Incorporated
3301 Rider Trail South
Earth City, MO 63045
Attention: Umesh Choksi, Treasurer
with a copy to:
Gordon Altman Butowsky Weitzen Shalov & Wein
114 West 47th Street
New York, NY 10036-1510
Attn: Douglas S. Rich
If intended for Issuer:
The
Industrial Development Authority of
the City of Kennett, Missouri
c/o Kennett Chamber of Commerce
1601 First Street
Kennett, Missouri 63857
Attention: President
-36-
If intended for Trustee:
Fleet National Bank
111 Westminster Street, 20th Floor
Providence, Rhode Island 02903
Attention: Corporate Trust Department
If intended for Co-Trustee:
Mark Twain Bank
8820 Ladue, 2nd Floor
Ladue, Missouri 63124
Attention: Corporate Trust Department
A duplicate copy of each notice, certificate, or other communication given hereunder by either
Issuer or Company to the other shall also be given to Trustee, Issuer, Company, and Trustee may, by
notice given hereunder, designate any further or different address to which subsequent notices,
certificates, or other communications shall be sent. All such notices may be given by any party on
behalf of such party by its counsel.
Section 12.2. Binding Effect.
This Loan Agreement shall inure to the benefit of and shall be
binding upon Issuer, Company, and their respective successors and permitted assigns, subject,
however, to the limitations contained in Sections 9.3, 10.1, and 10.2 hereof.
Section 12.3. Severability.
In the event any provision of this Loan Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate
or render unenforceable any other provision hereof.
Section 12.4. Amendments, Changes, and Modifications.
Except as otherwise provided in this
Loan Agreement or in the Indenture, subsequent to the initial issuance of Bonds and prior to their
payment in full (or provision for the payment thereof having been made in accordance with the
provisions of the Indenture), this Loan Agreement may not be effectively amended, changed,
modified, altered, or terminated without the concurring written consent of Trustee given in the
manner and subject to the approval of owners of the Bonds, as provided in Article XIII of the
Indenture.
Section 12.5. Priority
of
Agreement.
This Loan Agreement (as it may be amended or
supplemented pursuant to the provisions hereof) and the rights of Company hereunder are and shall
continue to be superior and prior to the Indenture (as it may be amended or supplemented).
Section 12.6. Execution Counterparts.
This Loan Agreement may be executed in counterparts,
each of which shall be an original and all of which shall constitute one and the same instrument.
Section 12.7. Captions.
The captions or headings of this Loan Agreement are for convenience
only and in no way define, limit, or describe the scope or intent of any provisions of this Loan
Agreement.
Section 12.8. Law Governing Construction of Agreement. This Loan Agreement shall be
governed by, and construed in accordance with, the laws of the State.
-37-
Section 12.9. Estoppel Certificate.
Either party, upon 15 days prior notice from the
requesting party, shall execute and deliver to the requesting party a statement certifying that
this Loan Agreement is unmodified and in full force and effect (or, if there have been
modifications), that the same is in full force and effect as modified and stating the
modifications, stating the dates which the Loan Payments and Additional Payments have been paid,
and stating whether or not there exist any defaults under this Loan Agreement, and if so,
specifying each such default; provided that Issuer shall be entitled to receive from and rely
solely upon the Trustee to provide the information required by this Section 12.9.
[The remainder of this page intentionally left blank.]
-38-
IN
WITNESS WHEREOF,
the parties hereto have executed these presents as of the day and year
first above written.
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THE INDUSTRIAL DEVELOPMENT AUTHORITY
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OF THE CITY OF
KENNETT, MISSOURI,
Issuer
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By:
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/s/ [ILLEGIBLE]
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, President
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Attest:
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By:
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/s/ [ILLEGIBLE]
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, Secretary
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AMERICAN RAILCAR
INDUSTRIES, INC.,
Company
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By:
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/s/ William L. Finn
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Its:
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EXECUTIVE VICE PRESIDENT
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Attest:
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By:
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/s/ Umesh Choksi
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-39-
Exhibit 10.11
CITY OF PARAGOULD, ARKANSAS
Lessor
TO
AMERICAN RAILCAR INDUSTRIES, INC.
Lessee
LEASE AGREEMENT
Dated as of April 1, 1995
This instrument also constitutes a Security Agreement under the Arkansas Uniform
Commercial Code.
The interest of the Lessor in this Lease Agreement has been assigned to Fleet National
Bank, as Trustee, under the Trust Indenture, dated as of
April 1, 1995, securing $9,500,000
City of Paragould, Arkansas, Industrial Development Revenue Bonds (American Railcar
Industries, Inc./ACF Industries, Incorporated Railcar Manufacturing Project), Series 1995, as
security for payment of the principal of and premium, if any, and interest on such Bonds.
Prepared by: .
Kephart & Fisher
41 South High Street
Suite 1685
Columbus, Ohio 43215
LEASE AGREEMENT
TABLE OF CONTENTS
ARTICLE I
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Definitions
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2
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ARTICLE II
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REPRESENTATIONS
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Section 2.1. Representations by Issuer
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5
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Section 2.2. Representations by Company
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6
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Section 2.3. Intention
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ARTICLE III
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DEMISING CLAUSES AND WARRANTY OF TITLE
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Section 3.1. Demise of the Leased Land, Buildings, and the
Leased Equipment
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8
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Section 3.2. Warranty of Title
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Section 3.3. Quiet Enjoyment
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Section 3.4. Zoning
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ARTICLE IV
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ACQUISITION, CONSTRUCTION, AND EQUIPPING OF THE PROJECT;
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ISSUANCE OF THE BONDS
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Section 4.1. Agreement to Acquire, Construct, and Equip the
Project
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9
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Section 4.2. Disbursements from the Construction Fund
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Section 4.3. Furnishing Documents to Trustee
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Section 4.4. Establishment of Completion Date
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11
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Section 4.5. Company Required to Pay in Event Construction
Fund Insufficient
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Section 4.6. Enforcement of Contracts
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13
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Section 4.7. Ownership of Tax Benefits
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Section 4.8. Investment of Moneys
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Section 4.9. Plans and Specifications; Modifications to
Mortgaged Property
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Section 4.10. Agreement to Issue Bonds; Application of
Bond Proceeds
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ARTICLE V
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EFFECTIVE DATE OF THIS LEASE AGREEMENT; DEFINITION OF
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LEASE TERM; RENTAL PROVISIONS
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Section 5.1. Effective Date of this Lease Agreement; Duration
of Lease Term
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Section 5.2. Delivery and Acceptance of Possession
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Section 5.3. Basic Rent and Additional Rent Payable
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Section 5.4. Place of Rental Payments
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Section 5.5. Obligations of Company Hereunder Unconditional
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Section 5.6. Credit for Bonds Surrendered
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ARTICLE VI
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MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
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Section 6.1. Maintenance and Modifications of Mortgaged
Property by Company
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Section 6.2. Removal of Leased Equipment
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Section 6.3. Impositions
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Section 6.4. Insurance Required
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Section 6.5. Application of Net Proceeds of Insurance
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Section 6.6. Additional Provisions Regarding Insurance
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Section 6.7. Advances by Issuer or Trustee
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Section 6.8. Release, and Indemnification Covenants
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Section 6.9. Environmental considerations
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Section 6.10. Payment in Lieu of Taxes
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ARTICLE VII
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DAMAGE, DESTRUCTION AND CONDEMNATION;
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USE OF NET PROCEEDS
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Section 7.1. Damage and Destruction
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Section 7.2. Application of Net Proceeds
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Section 7.3. Insufficiency of Net Proceeds
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Section 7.4. Cooperation of Issuer
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Section 7.5. Rights of Parties in Event of Condemnation; Bonds
Protected in Any Event
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Section 7.6. Company Obligated to Continue Basic and Additional
Rental Payments Until Condemnation Award
Available
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Section 7.7. Right of Company to Participate in Condemnation
Proceeding
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Section 7.8. Issuers Covenant Not to Condemn
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ARTICLE VIII
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SPECIAL COVENANTS
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Section 8.1. No Warranty of Condition or Suitability by
Issuer
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Section 8.2. Inspection of the Mortgaged Property
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Section 8.3. Company to Maintain its Corporate Existence
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Section 8.4. Release of Certain Land
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Section 8.5. Granting of Easements
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Section 8.6. Compliance with Code
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Section 8.7. Federal Guarantee Prohibition
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Section 8.8. Limitation on Issuance Costs
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Section 8.9. Limitation on Expenditure of Proceeds
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Section 8.10 Limitation on Land and Certain Facilities
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Section 8.11 Location of Project; Outstanding Obligations
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Section 8.12 Prohibited Facilities
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Section 8.13 No Arbitrage
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Section 8.14 Capital Expenditure Limitation
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Section 8.15 $40, 000, 000 Limitation
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Section 8.16 Existing Facilities Limitation
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Section 8.17 Compliance with Rebate Provisions
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Section 8.18 Composite Issues
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Section 8.19 Manufacturing Facility
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ARTICLE IX
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ASSIGNMENT, SUBLEASING, PLEDGING, AND SELLING; REDEMPTION;
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OPTIONAL AND MANDATORY PREPAYMENT
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OF RENT; ABATEMENT OF RENT
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Section 9.1. Assignment and Subleasing
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Section 9.2. Restrictions on Sale, Mortgage, or other
Conveyance of Mortgaged Property by Issuer
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Section 9.3. Redemption of Bonds
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Section 9.4. Prepayment of Rents
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Section 9.5. Mandatory Prepayment of Rent Upon
Determination of Taxability
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Section 9.6. Company Entitled to Certain Rent Abatement
if Bonds Paid Prior to Maturity
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Section 9.7. Reference to Bonds Ineffective After
Bonds Paid
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ARTICLE X
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EVENTS OF DEFAULT AND REMEDIES
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Section 10.1. Events of Default Defined
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Section 10.2. Remedies on Default
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Section 10.3. Remedies Not Exclusive
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Section 10.4.
Rental, Damages, and Reletting Go Into Bond Fund
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Section 10.5. Equitable Relief
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Section 10.6. Trustee May File Proofs of Claim
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ARTICLE XI
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OPTIONS IN FAVOR OF COMPANY
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Section 11.1. Option to Terminate
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Section 11.2. Option to Acquire Issuers Interest in
the Mortgaged Property Prior to Payment of
the Bonds
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47
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Section 11.3. Option to Acquire Legal Title Upon Full
Payment of Bonds
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48
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Section 11.4. Conveyance on Exercise of Option to
Acquire Legal Title
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48
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Section 11.5. Reserved ,
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Section 11.6. Reserved
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ARTICLE XII
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MISCELLANEOUS
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Section 12.1. Notices
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49
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Section 12.2. Binding Effect
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49
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Section 12.3. Severability
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49
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Section 12.4. Amendments , Changes , and
Modifications
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49
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Section 12.5. Priority of Agreement
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49
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Section 12.6. Execution Counterparts
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50
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Section 12.7. Captions
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Section 12.8. Security Agreement; Recording and Filing
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50
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Section 12.9. Law Governing Construction of Agreement
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50
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Section 12.10. Estoppel Certificate
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50
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Execution
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51
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Exhibit A
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Exhibit B
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LEASE AGREEMENT
This
Lease Agreement dated as of April 1, 1995, is between the
CITY OP PARAGOULD,
ARKANSAS
(hereinafter called Issuer), a municipal corporation organized and existing under
the laws of the State of Arkansas (State), as lessor, and
AMERICAN
RAILCAR INDUSTRIES, INC.
(hereinafter called Company) , a corporation organized and
existing under the laws of the State of Missouri as lessee.
W I T N E S S E T H:
WHEREAS, Issuer is authorized by the Municipalities and Counties
Industrial Development Revenue Bond Law, Ark. Code Ann. §§ 14-164-201 to -224
(1987) (the Act) , to acquire lands, construct and equip industrial buildings,
improvements, and facilities, and incur other costs and expenses and make
other expenditures incidental to and for the securing and developing of
industry; and
WHEREAS, Issuer is authorized by the Act to issue industrial development
revenue bonds payable from revenues derived from the industrial project so
acquired and constructed and secured by a lien thereon and security interest
therein; and
WHEREAS, the necessary arrangements have been made with Company for the
acquisition, construction, and equipping of a substantial industrial project
consisting of a manufacturing facility for railroad cars or related industrial
products with attached office or any other manufacturing or industrial
use provided for in Section 2.2(c) hereof (the Project), and to
lease the Project to Company for use in Companys business; and
WHEREAS, Company desires that Issuer issue its Industrial Development
Revenue Bonds (American Railcar Industries, Inc./ACF Industries, Incorporated
Railcar Manufacturing Project), Series 1995 (the Bonds) , to provide funds
to acquire, construct, and equip the Project, and Issuer has agreed to do the
same;
WHEREAS, pursuant to an Ordinance adopted March
27,
1995, the Issuer has
authorized the execution and delivery of this Lease Agreement; and
WHEREAS, pursuant to a Trust Indenture, dated as of the date hereof,
between Issuer and Fleet National Bank, a national banking association duly
organized, validly existing, and in good standing under the laws of the United
States, having all requisite power and authority to act as trustee, and having
its principal corporate trust office in Providence, Rhode Island, as Trustee,
Issuer intends to assign to Trustee as security for the Bonds its
interest in this Agreement (except for the reimbursement of certain
expenses, payment of the renewal option price, payment of the optional
purchase price for the Leased Land, and payments for indemnification of
Issuer);
NOW, THEREFORE, in consideration of the respective representations and agreements
hereinafter contained Issuer and Company agree as follows (provided, that in the
performance of the agreements of Issuer herein contained, any obligation it
may thereby incur for the payment of money shall not be a general debt on its part,
but shall be payable solely out of the proceeds derived from this Lease Agreement, the
sale of the bonds referred to in Section 2.1 hereof, and the insurance proceeds
and condemnation awards as herein provided and the Issuers estate and interest in
the Mortgaged Property):
ARTICLE I
DEFINITIONS
All words and phrases defined in the indenture shall have
the same meanings for purposes of this Lease Agreement. In
addition, the following words and terms shall have the following meanings:
Agreed Rate means 8 percent per annum.
AuthoriZed Issuer Representative means the person or persons,
satisfactory to Company, at the time designated to act on behalf of- Issuer
by written certificate furnished to Company and Trustee containing the
specimen, signature (s) of such person(s) and signed on behalf of Issuer by
its Mayor. Such certificate may designate an alternate or alternates.
Collateral means all machinery, equipment, furniture, and fixtures and
other personal property of every kind and nature whatever acquired by Company
and paid for or reimbursed to Company for the cost thereof out of the
Construction Fund or other funds provided by the Company pursuant to Section
4.5 of this Agreement and placed on and in the Leased Land and Buildings
including, Without limitation, all replacements and substitutions of all
of , the foregoing and the proceeds of all of the foregoing. All
such machinery, equipment, furniture, fixtures, and other
personal property shall be identified in a ledger, one copy of which
shall be filed with Trustee and one copy maintained by Company on
the Mortgaged Property. The term Collateral does not include
any equipment leased by Company from any lessor other than Issuer
(the Equipment) .
Construction Period means the period between the beginning of
construction or April 27, 1995 (whichever is earlier) and the Completion
Date.
Lease Term means the duration of Companys right to use
and occupy the Mortgaged Property as specified in Section 5.1 of
this Lease Agreement.
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Official Action Date means November 28, 1994.
Permitted Encumbrances means, as of any particular time, (i) the
Indenture and the Lease Agreement, (ii) any easements, licenses, rights of way
(including the dedication of public, highways), and other rights or privileges
in the nature of easements with respect to any property included in the
Mortgaged Property, granted or conveyed in accordance with and pursuant
to Section 8.5 of this Lease Agreement, (iii) utility, access,
and other easements and rights-of-way, restrictions,
reservations, reversions, and exceptions that an Independent Engineer,
acceptable to Trustee and Company certify will not interfere with or
impair the operations being conducted in the Mortgaged Property (or, if
no operations are being conducted therein, the operations for
which the Mortgaged Property was designed or last modified) , (iv)
such minor defects, irregularities, encumbrances,
easements, rights-of-way, and clouds on title as normally exist with
respect to properties similar in character to the Mortgaged Property,
and as do not, in the opinion of any Counsel acceptable to
Trustee, materially impair the property affected thereby for the purpose
for which it was acquired or is held by Issuer, (v) any judgment
lien against the Company so long as such judgment is being contested
and execution thereon is stayed, (vi) any liens on the
Mortgaged Property for taxes, payments-in-lieu of taxes, assessments,
levies, fees, water and sewer rents, other governmental and
similar charges, and any liens of mechanics, materialmen,
laborers, suppliers or vendors for work or services performed or
materials furnished in connection with the Mortgaged Property, which are
not due and payable or which are not delinquent, or the amount
or validity of which, are being contested in accordance with the
terms of this Lease Agreement, (vii) any lien on accounts
receivable securing or deemed to secure any indebtedness incurred or
deemed incurred by virtue of any recourse obligation associated with
any sale or assignment of accounts receivable; and (viii) any lien
or encumbrance or reservation of title affecting
personalty constituting part of the Mortgaged Property.
Permitted Investments means:
(a) Governmental Obligations;
(b) obligations of any of the following federal agencies which
represent full faith and credit of the United States
of America: Farmers Home
Administration, General Services Administration, United
States Maritime Administration,
Small Business Administration, Government National
Mortgage Association, United States Department of Housing and
Urban Development, and Federal Housing Administration;
(c) U.S. dollar denominated deposit accounts fully insured to the
holder by the Federal Deposit Insurance Corporation in commercial banks;
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(d) U.S. dollar denominated deposit accounts, federal funds,
and bankers acceptances with commercial banks (foreign or domestic)
which have a rating on their short term certificates of deposit on the
date of purchase of A-1 or A-1+ by S&P or P-l by Moodys and
maturing no more than 360 days after the date of purchase;
(e) money market funds rated in the highest rating category of S&P
or Moodys which are monitored quarterly or money market funds which
are invested exclusively in Government Obligations;
(f) pre-refunded municipal obligations,
which obligations shall be limited to bonds or other obligations
of any state of the
United States or of any agency, instrumentality, or local governmental unit of any such state (i) which are not
callable at the option of the obligor prior to maturity or as to which
irrevocable notice has been given by the obligor to call on the date
specified in the notice; (ii) which are fully secured as to principal
and interest and redemption premium, if any, by a fund consisting only
of cash or obligations described in paragraph (a) above, which
fund may be applied only to the payment of such principal of
and interest and redemption premium, if any, on such bonds
or other obligations on the maturity date or dates thereof or
the specified redemption date
or dates pursuant to such irrevocable
instructions, as appropriate; (iii) which fund is sufficient, as
verified-by an independent accountant, to pay principal of and interest
and redemption premium, if any, on the bonds or other obligations
describied in this paragraph on the maturity date or dates thereof or
the redemption date or dates specified in the irrevocable instructions
referred to in subclause (i) of this paragraph, as appropriated; and
(iv) which are rated, based on the escrow, in the highest
rating category of S&P or Moodys, or any successors thereto; and
(g) U.S. dollar denominated certificates of deposit in commercial
banks properly secured at all times by collateral security described in
(a) and (b) above.
Qualified Project Costs means costs and expenses of the Project which
constitute land costs or costs for property of a character subject to the
allowance for depreciation, excluding specifically working capital and
inventory costs, provided, however, that (a) costs or expenses paid or
incurred more than sixty days prior to the Official Action Date shall not be
deemed to be Qualified Project Costs; (b) Issuance Costs shall not be
deemed to be Qualified Project Costs; (c) interest during the
Construction Period shall be allocated between Qualified Project Costs and
other costs and expenses to be paid from the proceeds of the Bonds;
(d) interest following the Construction Period shall not constitute
a Qualified Project Cost; (e) letter of credit fees and municipal
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bond insurance premiums which represent a transfer of credit risk shall
be allocated between Qualified Project Costs and other costs and expenses to be
paid from the proceeds of the Bonds; and (f) letter of credit fees and
municipal bond insurance premiums which do not represent a transfer of the
credit risk shall not constitute Qualified Project Costs.
Yield means yield computed under Regulation §1.148-4 for the Bonds and
yield computed under Regulation for an investment.
ARTICLE II
REPRESENTATIONS
Section 2.1.
Representations by Issuer.
Issuer makes the following
representations as the basis for the undertakings on its part herein
contained:
(a) Under the provisions of the Act and the Constitution of
the State, Issuer is authorized to enter into the transactions to
be performed by it under this Lease Agreement and the Indenture and to
carry out its obligations hereunder and thereunder. Issuer has
been duly authorized to execute and deliver this Lease Agreement and the
Indenture.
(b) Issuer will perform all of its obligations with reference to
the acquiring, constructing, and equipping of the Project as specified
in Article IV of-this Lease Agreement.
(c) Notwithstanding anything herein contained to the contrary, it is the
intention of Issuer that any obligation it
may hereby incur for the payment of money shall not be a general debt
on its part but shall be payable solely from the proceeds derived from
this Lease Agreement, the sale of the Bonds, and the insurance and
condemnation awards as herein provided and the Issuers estate and
interest in the Mortgaged Property.
(d) issuer has been induced to enter into this undertaking by
the promise of Company to locate industrial facilities within or near
the corporate limits of Issuer.
(e) In order to furnish necessary moneys for. the payment of
Project Costs and a portion of the expenses of authorizing and issuing
the Bonds, Issuer has authorized the issuance of the Bonds.
(f) The Bonds are to be issued under and secured by the Indenture,
pursuant to which Issuer s interest in this Lease Agreement and the
revenues and income derived by Issuer from the leasing of the Mortgaged
Property will be. assigned to Trustee as security for payment of the
principal of and
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premium, if any, and interest on the Bonds, and the Bonds will be secured by a
mortgage on and security interest in Issuers interest in the Mortgaged Property (provided
that in the performance of the agreements of the Issuer herein contained, any obligation
that Issuer may thereby incur for the payment of money shall be limited to the Issuers
estate or interest in the Mortgaged Property and shall not be a general debt on its part,
but shall be payable solely out of the proceeds derived from this Agreement, the sale of the
Bonds referred to in Section 2.1 herein, and the insurance proceeds and condemnation awards
as herein provided) and provided further that the obligations of Company under the Bonds,
this Agreement and Indenture are guaranteed by ACF Industries, Incorporated and the Company
pursuant to the Guaranty.
(g) Not later than the 15th day of the second calendar month after the close of the
calendar quarter in which the Bonds are delivered by Issuer pursuant to Article II of the
Indenture, Issuer covenants to satisfy the information reporting requirement of Section
149(e) of the Code.
Section 2.2. Representations by Company.
Company makes the following representations as the
basis for the undertakings on its part herein contained:
(a) Company is a corporation duly incorporated under the laws of the State of
Missouri, is in good standing under the laws of the State of Missouri and the State, and
has power to enter into this Lease Agreement, the Hazardous Substance Certification and
Indemnification, and the Guaranty, and to perform all obligations contained herein and
therein, and by proper corporate action, has been duly authorized to execute and deliver
this Lease Agreement, the Hazardous Substance Certification and Indemnification, and the
Guaranty.
(b) The leasing by Issuer of the Mortgaged Property to Company will induce Company to
acquire, construct, and equip an industrial enterprise within or near the corporate limits
of Issuer.
(c) Company will operate the Mortgaged Property upon its completion as (i) a
manufacturing facility for railroad cars or related industrial products with attached
office or (ii) any other manufacturing or industrial use provided that such use (a) is
consistent with the Act and with a Manufacturing Facility (as such term is defined in
Section 144 (a) (12) of the Code and (b) does not violate any other requirements of the
Code and applicable Regulations so that interest on the Bonds shall at any time cease to be
excluded from gross income for federal income tax purposes, until the expiration or earlier
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termination of the Lease Term as provided herein, all to the extent that such operation is,
in Companys judgment, commercially desirable.
(d) Neither the execution and delivery of this Lease Agreement, the Hazardous
Substance Certification and Indemnification, and the Guaranty, the consummation of the
transactions contemplated hereby and thereby, nor the fulfillment of or compliance with the
terms and conditions hereof and thereof conflicts with or results in a material breach of the
terms, conditions, or provisions of the Articles of Incorporation or bylaws of Company or any
agreement or instrument to which Company is now a party or by which Company is bound, or
constitutes a material default under any of the foregoing, or results in the creation or
imposition of any lien, charge, or encumbrance whatsoever upon any of the property or assets of
Company under the terms of any instrument or agreement except as provided herein.
(e) There is no action, suit, proceeding, inquiry, or investigation, at law or in equity,
before or by any court or public board or body, known to be pending or threatened against or
affecting Company, nor to the best of the knowledge of Company is there any basis therefor,
wherein an unfavorable decision, ruling, or finding would materially adversely affect the
transactions contemplated by this Lease Agreement or which, in any way, would materially adversely
affect the validity or enforceability of the Bonds, this Lease Agreement, the Hazardous Substance
Certification and Indemnification the Guaranty, or any other agreement or instrument, to which
Company is a party, used or contemplated for use in the consummation of the transactions
contemplated hereby.
(f) The Project consists of land, buildings, Leased Equipment, or facilities that can be used
to secure and develop industry within or near the City of Paragould, Arkansas.
(g) The proceeds from the sale of the Bonds will be used only for the payment of Cost of the
Project and paying a portion of the costs of issuing the Bonds.
(h) The Mortgaged Property complies, or will comply upon completion of construction, with all
presently applicable building and zoning ordinances where failure to comply would have a materially
adverse effect on Companys ability to utilize the Mortgaged Property for the purposes intended.
(i) Company agrees to cooperate with Issuer in the performance of Issuers obligations
under the Indenture.
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(j) No changes shall be made in the Project and no actions will be taken by
Company which shall in any way impair the exemption of interest on any of the Bonds from
federal income taxation.
(k) Company will comply with and fulfill all other requirements and conditions of the
Code and regulations and rulings issued pursuant thereto in the acquisition, construction,
equipping, and operation of the Project to the end that the interest on the Bonds shall at
all times be free from federal income taxation.
(l) The Project is substantially the same in all material respects to that described
in the notice of public hearing published in the Paragould Daily Press on March 10, 1995
and the amended notice of public hearing published in the Paragould Daily Press on March
21, 1995.
(m) Subject to the provisions of Section 6.9, Company acknowledges that it has leased
the Leased Land as is.
Section 2.3. Intention.
It is intended by the parties hereto that this Lease Agreement and
all actions taken hereunder be consistent with and pursuant to the ordinances of Issuer relating
to the Bonds, and that the interest on the Bonds be excluded from the gross income of the
recipients thereof for federal income tax purposes by reasons of the provisions of Section 144 (a)
of the Code or any substantially similar successor provision hereinafter enacted.
ARTICLE III
DEMISING CLAUSES AND WARRANTY OF TITLE
Section 3.1. Demise of the Leased Land, Buildings, and the Leased Equipment.
Issuer
demises and leases to Company, and Company leases from Issuer, the Mortgaged Property at the
rental set forth in Section 5.3 hereof and in accordance with the provisions of this Lease
Agreement. Notwithstanding the definition of Mortgaged Property as all property and personalty
demised under the Lease Agreement, the Issuer and the Company hereby acknowledge that this Lease
Agreement is superior in lien to the lien of the Indenture.
TO HAVE AND TO HOLD the Mortgaged Property unto Company for the term of this Lease Agreement
as hereafter set forth.
Section 3.2. Warranty of Title.
Issuer warrants that it lawfully owns and is lawfully
possessed of the Leased Land and that it has good and merchantable title and estate therein, free
from all encumbrances other than Permitted Encumbrances, but it has no liability in regard
thereto. Issuer will obtain an ALTA lenders
8
extended coverage title insurance policy which runs in favor of Trustee, in form and with such
exceptions as shall be acceptable to Trustee (the cost of which is to be defrayed from the
Construction Fund), issued by a title insurance company designated by Company in the amount of
$9,500,000 with an option to increase such insurance from time to time up to the full insurable
value of the Mortgaged Property if Company shall so direct.
Section 3.3. Quiet Enjoyment.
Issuer covenants and agrees that Company, upon paying the rent
herein and upon performing and observing the covenants, conditions, and agreements hereof, shall
and may peaceably hold and enjoy the Mortgaged Property during the Lease Term without any
interruption or disturbance, subject however, to the terms of this Lease Agreement.
Section 3.4. Zoning.
Anything herein and elsewhere contained to the contrary, this Lease
Agreement and all the terms, covenants, and conditions hereof are in all respects subject and
subordinate to all zoning restrictions affecting the Leased Land and Company shall be bound by
such restrictions. Issuer represents and warrants that the intended use of the Mortgaged Property
by Company is permitted under applicable zoning laws.
ARTICLE IV
ACQUISITION, CONSTRUCTION, AND EQUIPPING OP THE PROJECT;
ISSUANCE OF THE BONDS
Section 4.1. Agreement to Acquire, Construct, and Equip the Project.
After the Bond proceeds
are available, Issuer (or Company, as agent for Issuer) will enter into or accept the assignment
of contracts or purchase orders having terms, conditions, drawings, specifications, and other
provisions designated and prescribed by Company for acquiring, constructing, and equipping the
Project. All payments necessary to acquire, construct, and equip the Project shall be made out of
the Construction, Fund or other funds provided by the Company pursuant to Section 4.5 hereof, and
Company shall be reimbursed out of the Construction Fund, for all expenditures made by it in
connection with the Project. Title to all machinery, equipment and personal property of every
nature paid for out of the Construction Fund or other funds provided by the Company pursuant to
Section 4.5 of this Agreement (either by direct payment or by virtue of reimbursement to Company)
shall be vested in, or be transferred to, Issuer. The Collateral does not include any Equipment
leased by the Company from any Lessor (as defined in the Indenture) other than the Issuer. The
obligations of Issuer hereunder are subject to the provisions of this Lease Agreement limiting the
obligations of Issuer to the extent of moneys in the Construction Fund.
9
Company, with the cooperation of Issuer when necessary, shall obtain all necessary
approvals from any and all governmental agencies requisite to the constructing and equipping of
the Project, and the Project shall be constructed and equipped in compliance with all federal,
State, and local laws, ordinances, and regulations applicable thereto.
All requests, approvals, and agreements required on the part of Issuer and Company shall be
in writing, signed by the Authorized Issuer Representative and/or the Authorized Company
Representative, as appropriate, granting such approval or entering into such agreement. Issuer
and Company shall, concurrently with the delivery of this Lease Agreement, notify each other and
Trustee of the Authorized Representative of each. It is agreed that each party may have more than
one Authorized Representative and may change the Authorized Representative or Representatives
from time to time, with each such change to be in writing forwarded to the other party and
Trustee. The Authorized Representative of each party so designated shall be authorized to enter
into and execute any contracts or agreements or to grant any approvals or to take any action for
and on behalf of the party hereto represented by him, and the other party to this Lease Agreement
shall be entitled to rely upon the duly designated Authorized Representative as having full
authority to bind the party hereto represented by him.
Section 4.2. Disbursements from the construction Fund.
Issuer has, in the Indenture, authorized and directed Trustee to make disbursements from the
Construction Fund to pay the Cost of the Project or to reimburse Company for any Cost of the
Project paid by Company.
Trustee shall make disbursements upon receipt of a requisition signed by an Authorized
Company Representative:
(a) stating with respect to each disbursement to be made: (i) the requisition number, (ii)
the name and address of the person, firm, or corporation to whom payment is due, (iii) the amount
to be disbursed, (iv) that each obligation mentioned therein has been properly incurred
,
is a
proper charge against the Construction Fund, and has not been the basis of any previous
disbursement, (v) with respect to any requisition for payment for work, material, or supplies,
that such obligation was incurred for work, materials or supplies in connection with the
acquisition, construction, and equipping of the Project, (vi) that at least 95 percent of the
amount requested for disbursement will be used for the payment of Qualified Project Costs, (vii)
that all property to be acquired with the proceeds of the disbursement will be owned by Issuer,
(viii) that no portion of the amount requested for disbursement will be used in the manner
prohibited in Sections 8.11 or 8.13 of this Lease Agreement, and (ix) that no portion of the
amount requested for disbursement will be used for the
10
acquisition of existing property except upon compliance with Section 8.16 of this
Lease Agreement;
(b) specifying in reasonable detail the nature and purpose of the obligation,
including (i) that such obligation has been properly incurred, is a proper charge against
the Construction Fund, is a proper cost of the Project as defined in the Act and has not
been the basis of any previous withdrawal, (ii) that the Authorized Company Representative
has no written notice of any mechanics, materialmens, or other liens or rights to liens
or other obligations (other than those being contested in good faith) which should be
satisfied or discharged before payment of such obligation is made, (iii) that such payment
does not include any amount which is then entitled to be retained under any holdbacks or
retainages provided for in any agreement, (iv) that there exists no event of default or any
event which, with notice or the passage of time or both, would result in any event of
default;
(c) with respect to the first disbursement to be made for Costs of the Project,
Company shall provide Trustee with a certificate of an officer of Company that the Project,
as designed, complies with all presently applicable building and zoning ordinances
applicable to the Project; and
(d) accompanied by a lien search certified by the circuit clerk or by Chicago Title
Insurance Company or any successor or replacement to Chicago Title Insurance Company
approved by the Trustee, that there are no mechanics liens or other liens or encumbrances
other than the Permitted Encumbrances recorded in the lien register against the Mortgaged
Property as of the date of such disbursement request.
In making any payment from the Construction Fund, Trustee may rely conclusively on
requisitions and certificates delivered to it pursuant to this Section, and Trustee and Issuer
shall be relieved of all liability with respect to the accuracy of such requisitions and
certificates and the making of such payments in accordance with such requisitions and
certificates and all liability to see to the proper application thereof by Company.
Section 4.3. Furnishing Documents to Trustee.
Company agrees to cause such requisitions
to be directed to Trustee as may be necessary to effect payments out of the Construction Fund in
accordance with Section 4.2 hereof. Trustee shall retain a record of all such requisitions.
Section 4.4. Establishment of Completion Date.
The Completion Date shall be evidenced to Issuer and Trustee by (a) a certificate signed by an
Authorized Company Representative stating
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that, except for amounts retained by Trustee at Companys direction for any Cost of the Project not
then due and payable, (i) acquisition and construction of the Project has been substantially
completed and all costs of labor, services, materials, and supplies used in such acquisition and
construction have been paid, except for punch list items, for which adequate reserves shall have
been established (ii) all equipment for the Project has been installed to Companys satisfaction,
such equipment so installed is suitable and sufficient for the operation of the Project, and
substantially all costs and expenses incurred in the acquisition and installation of such equipment
have been paid, and (iii) all other facilities necessary in connection with the Project have been
acquired, constructed, and equipped and all costs and expenses incurred in connection therewith
have been paid and (b) certificate signed by an Authorized Company Representative stating that the
Project has been substantially completed in accordance with all plans and specifications for the
Project and complies with all applicable federal, State, and local laws, regulations, and other
governmental requirements (including, without limitation, the federal Americans with Disabilities
Act) . Notwithstanding the foregoing, the certificate required by clause (a) above shall state that
it is given without prejudice to any rights against third parties which exist at the date of such
certificate or which may subsequently come into being. Forthwith upon substantial completion of the
acquisition, construction, and equipping of the Project, Company agrees to cause such certificates
to be furnished to Issuer and Trustee.
Any moneys in the Construction Fund remaining after the Completion Date and payment, or
provision for payment, of the costs of financing the Project described above, at the direction of
the Authorized Company Representative, promptly, and in all events on or before April 27, 1998,
shall be:
(i) used to acquire, construct, equip and install such additional real or personal
property in connection with the Project, in accordance with the applicable provisions of
the Code (including the public notice requirements therein) , as is designated by the
Authorized Company Representative and the acquisition, construction, equipping and
installation of which will be permitted under the Act, provided that any such use shall be
accompanied by evidence satisfactory to the Trustee that the average reasonably expected
economic life of such additional property, together with the other property theretofore
acquired with the proceeds of the Bonds, will not be less than 5/6ths of the average
maturity of the Bonds or, if such evidence is not presented with the direction, an opinion
of Bond Counsel to the effect that the acquisition of such additional property will not
result in the interest on the Bonds becoming subject to federal income taxation, and
provided further that any such additional real or personal property shall be Mortgaged
Property or Collateral, as applicable, pursuant to the terms of this Lease Agreement and
Indenture;
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(ii) used to redeem Bonds in accordance with the terms of the Indenture; or
(iii) used to accomplish a combination of the foregoing as is provided in that
direction.
Any amounts transferred from the Construction Fund to the Bond Fund shall be treated as a
separate, restricted fund within the Bond Fund and may be invested and reinvested at the written
direction of the Authorized Company Representative by Trustee only in investments designated by the
Authorized Company Representative and permitted by the Indenture. The Authorized Company
Representative shall in no event direct such investment such that the Yield on such investments
would be in excess of the Yield on the Bonds. Trustee shall, to the extent of the funds available,
apply such transferred funds to the redemption of Bonds (not including interest) on the earliest
date that such Bonds are subject to redemption in accordance with and in the manner provided in the
Indenture.
Section 4.5. Company Required to pay in Event Construction Fund Insufficient.
In the event
the moneys in the Construction Fund available for payment of the Cost of the Project should not be
sufficient to pay the Cost of the Project in full, Company agrees to complete the Project and to
pay that portion of the Cost of the Project in excess of the moneys available therefor in the
Construction Fund or to lease Equipment to complete the Project. Issuer does not make any
warranty, either express or implied, that the moneys paid into the Construction Fund and available
for payment of the Cost of the Project will be sufficient to pay all of the Cost of the Project.
Company agrees that if, after exhaustion of the moneys in the Construction Fund, Company should
pay any portion of the Cost of the Project pursuant to the provisions of this Section, Company
shall not be entitled to any reimbursement therefor from Issuer, Trustee, or the owners of any of
the Bonds, nor shall company be entitled to any limitation of the amounts payable under Section
5.3 hereof.
Section 4.6. Enforcement of Contracts.
(a) Issuer covenants that it will, upon request of the Company, execute and deliver to the
Company or as the Company may otherwise direct, any agreement or contract required to be signed by
the Issuer in connection with the Companys acquisition, construction, equipping and operation of
the Project, provided, however, that the execution and delivery of any such agreement(s) by the
Issuer shall not affect the status of the Bonds as limited obligations of the Issuer payable solely
out of the proceeds derived from this Lease Agreement, the sale of the Bonds referred to in Section
2.1 hereof, and the insurance proceeds and condemnation awards as herein provided.
13
(b) Issuer covenants that it will take any action and institute any proceedings
requested by Company to cause and require all contractors and material suppliers to complete
their contracts diligently in accordance with the terms of said contracts, including, without
limitation, the correcting of any defective work. All expenses incurred by Issuer in connection
with the performance of its obligations under this Subsection (a) may be considered part of the
Cost of the Project, and Issuer agrees that Company may, from time to time, in its own name, or
in the name of Issuer, take such action as may be necessary or advisable, as determined by
Company, to insure the construction of the Project in accordance with the terms of the
construction contract and the installation of machinery and equipment in accordance with any
applicable contract pertaining thereto, to insure the peaceable and quiet enjoyment of the
Mortgaged Property for the term of this Lease Agreement.
(c) The Issuer shall notify the Company of the existence of any warranties and/or guaranties
received by the Issuer in connection with the Project and if requested by Company, Issuer will
assign and extend to Company any vendors warranties received . by Issuer in connection with
machinery and equipment purchased by Issuer for the Project, together with any warranties given by
contractors, manufacturers, or service organizations who perform construction work or install any
machinery and equipment on or in the Project. If requested, Issuer will execute and deliver
instruments of assignment to Company to accomplish the foregoing.
Section 4.7. Ownership of Tax Benefits.
It is the intention of the parties that any tax
benefits resulting from ownership of the Mortgaged Property and any tax credit or comparable
credit which may ever be available shall accrue, to the benefit of Company, and Company shall,
and Issuer upon advice of counsel may, make any election and take other action in accordance
with the Code and the regulations promulgated thereunder as may be necessary to entitle Company
to have such benefit and credit.
Section 4.8. Investment of Moneys.
Money held for the credit of any fund or account created
in the Indenture shall, to the extent practicable, be invested and reinvested by Trustee as
directed in writing by the Authorized Company Representative in Permitted Investments which
shall mature not later than the date or dates on which the money held for credit of the
particular fund shall be required for the purposes intended. Trustee shall sell or reduce to
cash a sufficient amount of such investments in the Construction Fund whenever the cash balance
in the Construction Fund is insufficient to pay a requisition when presented, and such
investments in the Bond Fund whenever the cash balance in the Bond Fund is insufficient to pay
the principal of and premium, if any, and interest on the Bonds when due. The Trustee shall have
no liability for any loss on such sale or reduction to cash absent gross negligence or wilful
misconduct.
14
Trustee may make any and all such investments through its own investment department
or the investment department of any bank or trust company under common control with Trustee.
Issuer shall have no responsibility for control of or directing such investments and shall not be
held accountable for any losses resulting from any such investments. All such investments and the
income thereon shall at all times be a part of the fund (the Construction Fund the Bond Fund, or
such other fund, as the case may be) from which the moneys used to acquire such investments shall
have come, and all losses on such investments shall be charged against such fund. All investments
shall be registered in the name of Trustee, as Trustee under the Indenture.
Section 4.9. Plans and Specifications; Modifications to Mortgaged Property.
Company agrees to
maintain plans and specifications for the Mortgaged Property. Company may make any changes in or
modifications of the plans and specifications, and may make any deletions from or substitutions or
additions to the Mortgaged Property without the prior consent of Issuer so long as such changes or
modifications in the plans and specifications, or deletions from or substitutions or additions to
the Mortgaged Property, do not materially alter the size, scope, or character of the Mortgaged
Property or impair the structural integrity and utility of the Mortgaged Property. If any such
changes in or . modifications of the plans and specifications, or if any such deletions from or
substitutions or additions to the Mortgaged Property, materially alter the size, scope, or
character of the Mortgaged Property or impair the structural integrity and utility of the Mortgaged
Property then, and in such event, no such changes, modifications, substitutions, deletions, or
additions shall be made without the express written consent of Issuer, which consent shall not be
unreasonably withheld. No changes in or modifications of the plans and specifications and no
deletions from or substitutions or additions to the Mortgaged Property may be made without prior
approval of the contractors sureties if required by the terms of any indemnity bond. Company
covenants and agrees that no changes, modifications, substitutions, deletions, or additions shall
be made with respect to the Mortgaged Property (a) if such change disqualifies the Project under
the Act or results in interest on the Bonds being includable in the gross income of the Owners of
the Bonds for federal income tax purposes, and (b) unless there shall be on deposit with Trustee
adequate moneys available therefor or Company deposits in the Construction Fund adequate moneys to
pay any additional Cost of the Project resulting therefrom.
Section 4.10. Agreement to Issue Bonds; Application of Bond Proceeds.
In order to provide
funds for payment of the Cost of the Project, Issuer, concurrently with the execution of this
Lease Agreement, will issue, sell, and deliver the Bonds and deposit the proceeds thereof in the
Construction Fund.
15
ARTICLE V
EFFECTIVE DATE OF THIS LEASE AGREEMENT; DEFINITION OF
LEASE TERM; RENTAL PROVISIONS
Section 5.1. Effective Date of this Lease Agreement; Duration of Lease Term.
This Lease
Agreement shall become effective upon its delivery, and the leasehold estate created herein shall
then -begin, and, subject to the provisions of this Lease Agreement (including particularly
Sections 5.3 and 7.5 hereof and Articles X and XI hereof) , shall continue until the later of (a)
such date as payment has been made in full of the Bonds, including, without limitation, the payment
of principal, interest to the payment date, premium, if any, Trustees fees and expenses, and
registrars fees and expenses, or provision for such payment has been made as provided in the
Indenture or (b) at midnight,. Local Time April 1, 2010.
Section 5.2. Delivery and Acceptance of Possession.
Issuer agrees that Company shall have
possession of the Mortgaged Property (subject to the right of Trustee to enter thereon for
inspection purposes and to the other provisions of Section 8.2 hereof) whenever such possession is
desired by Company, provided such possession does not unreasonably interfere with the construction
of the Buildings or installation of the Leased Equipment, and Company may install, maintain, and
operate its own equipment during the Construction Period.
Section 5.3. Basic Rent and Additional Rent Payable.
(a) Basic Rent.
(i) On or before two Business Days prior to each Interest Payment Date, and on or
before two Business Days prior to any date on which any or all of the Bonds shall be
declared to be and shall become due and payable prior to their stated maturity pursuant to
the provisions of the Indenture, by redemption or otherwise, Company shall pay directly to
Trustee in immediately available funds the aggregate amount of principal, premium, if any,
and interest becoming due and payable on the Bonds on such date.
Anything herein to the contrary notwithstanding, any amount at any time held by
Trustee in the Bond Fund (except for any amounts held in any separate, restricted fund
within the Bond Fund created pursuant to Section 4.4 of this Lease Agreement) shall be
credited against the next succeeding rental payment and shall reduce the payment to be made
by Company to the extent such amount is in excess of the amount required for payment of
Bonds theretofore matured or called for redemption and past due interest in all cases where
such Bonds have not been presented for payment; and further, if the amount held by Trustee
in the Bond Fund should be sufficient to pay at the times required the principal of and
premium, if any, and interest on the Bonds then remaining unpaid, Company
16
shall not be obligated to make any further rental payments under the provisions of
this subsection (a)(i).
(ii) Company will pay the amount, if any, required to be rebated to the United
States of America pursuant to section 148(f) of the Code.
(b) Additional Rent.
(i) Company will pay the reasonable fees and expenses of Issuer related to the
issuance of the Bonds or in connection with the Project and incurred upon the written
request
of
Company.
(ii) Company will pay the reasonable fees and expenses of Trustee under the
Indenture, including the reasonable fees and expenses of the Trustees attorneys and
agents, such reasonable fees and expenses to be paid directly to Trustee for its own
account as and when such reasonable fees and expenses become due and payable, and any
reasonable expenses in connection with any redemption of the Bonds.
It is understood and agreed that all payments payable by Company under subsections 5.3(a)(i)
of this Section are assigned by Issuer to Trustee as collateral security for the benefit of the
owners of the Bonds. Company assents to such assignment.
In the event Company should fail to make any of the payments required in this Section, the
item or installment so in default shall continue as an obligation of Company until the amount in
default shall have been fully paid, and Company agrees to pay the same with interest thereon or
with respect to payments to Trustee or Issuer with interest thereon, to the extent permitted by
law, from the date thereof at the Agreed Rate.
Payments made on account of the indebtedness evidenced by the Bonds and secured by the
Indenture, or as otherwise required to be paid pursuant to the provisions of the Indenture or this
Lease Agreement, whether made to the Trustee or otherwise, by the Company or by the Guarantor,
shall constitute payments of Basic Rent and/or Additional Rent, as the case may be, under this
Lease Agreement.
Section 5.4. Place of Rental Payments.
Issuer hereby directs Company and Company hereby
agrees to pay to Trustee at Trustees principal corporate trust office all payments payable by
Company pursuant to subsections 5.3(a) and 5.3(b)(ii).
Section 5.5. Obligation of Company Hereunder Unconditional.
Subject to the provisions of Section 9.6 hereof, the obligations of Company to make the payments
required in Section 5.3 hereof and to perform and observe the other agreements on its part
contained herein shall be absolute and unconditional, and the payments required in Section 5.3
shall be certainly payable on the dates and at the times specified without notice or demand, and
without abatement or set-off, and regardless of any contingencies
17
whatsoever, and notwithstanding any circumstances or occurrences that may now exist or that
may hereafter arise or take place,including, but without limiting the generality of the foregoing:
(a) The unavailability of the Mortgaged Property or any part thereof for use by
Company at any time by reason of the failure to complete the overall industrial project by
any particular time or at all or by reason of any other contingency, occurrence, or
circumstance whatsoever;
(b) Damage to or destruction of the Mortgaged Property or any part thereof;
(c) Legal curtailment of Companys use of the Mortgaged Property or any part
thereof;
(d) Change in Issuer
s
legal organization or status;
(e) The taking of title to or the temporary use of the whole or any part of the
Mortgaged Property by condemnation;
(f) Any termination of this Lease Agreement for any reason whatsoever;
(g) Failure of consideration or commercial frustration of purposes;
(h) Any change in the tax or other laws of- the United States of America or of the
State;
(i) Any default of Issuer under this Lease Agreement or any other default or
failure of Issuer whatsoever.
Nothing contained in this Section shall be construed to release Issuer from the performance
of any of the provisions of this Lease Agreement on its part to be performed.
Company covenants that it will not enter into any contract, indenture, or agreement of any
nature whatsoever which shall in any way limit, restrict, or prevent Company from performing any
of its obligations under this Lease Agreement.
Section 5.6. Credit for Bonds Surrendered.
Company shall have the right to surrender Bonds
acquired by it to Trustee. Bonds so surrendered shall be forthwith cancelled and the principal
amounts thereof upon the instructions by the Company to the Trustee shall be applied as (a)
credits against mandatory sinking fund requirements pursuant to Section 303 of the Indenture, (b)
credits or prepayments upon the basic rent payments due and payable with respect to the respective
maturity dates or redemption dates of such Bonds in accordance with the instructions of the
Company and the terms of the Indenture or (c) full payment of the Bonds pursuant to Section 11.3
of this Agreement.
18
ARTICLE VI
MAINTENANCE, MODIFICATIONS, IMPOSITIONS, AND INSURANCE
Section 6.1. Maintenance and Modifications of Mortgaged Property by company.
(a) Company agrees that during the Lease Term it will at its own expense (i) keep
the Mortgaged Property in reasonably safe condition as its operations shall permit and
(ii) keep the Buildings and the Leased Equipment and all other
improvements forming a part of the Mortgaged Property in good repair and in
good operating condition, making from time to time all necessary repairs thereto
and renewals and replacements thereof.
(b) Company may from time to time, in its sole discretion and at its own expense,
make any additions, modifications, or improvements at the Mortgaged Property location,
including installation of additional machinery, equipment, furniture, or fixtures
in the Buildings or on the Leased Land, which it may deem desirable for its business
purposes; provided that all such additions, modifications, and improvements do not
adversely affect the structural integrity of the Buildings. The Company shall
be under no obligation to restore the Mortgaged Property to the condition it was
in immediately prior to the commencement of the Lease term.
(c) Company, in consideration of the premises and of the issuance of the Bonds by
Issuer and the sum of $1.00, lawful money of the United States of America, to it duly
paid by Issuer at or before the execution and delivery of this Lease Agreement, and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, and in order to secure the obligations of Company under this Lease
Agreement and under the Guaranty and the Hazardous Substance Certification and
Indemnification, does hereby grant a first position security interest (within the
meaning of the Uniform Commercial Code in effect in the State) in, and pledge
unto Issuer, and its assigns forever the Collateral, and the proceeds and products
of the Collateral.
(d) Company will not permit any mechanics, materialmens, or other liens to be
established or remain against the Mortgaged Property for labor or materials furnished in
connection with any addition, modifications, improvements, repairs, renewals,
or replacements so made by it; provided, that if Company shall first notify
Trustee of its intention so to do, Company may provide the Issuer with a title insurance
policy insuring the Mortgaged Property without exception for the lien in question or
affirmative insurance insuring against collection out of the Mortgaged
Property and may in good faith contest any mechanics or other liens filed or
established against the Mortgaged Property, and in such event may permit the items so
contested to remain undischarged and unsatisfied during the period of such contest and
any appeal therefrom unless Issuer or Trustee shall notify Company that, in the
opinion of Counsel, by nonpayment of any such items, the security of the Bondowners, as
to any part of the Mortgaged
19
Property, will be materially endangered or the Mortgaged Property or any substantial part
thereof will be subject to loss or forfeiture, in which event Company shall promptly pay and cause
to be satisfied and discharged or bond (if legally permissible) all such unpaid items.
Notwithstanding the foregoing, Companys right to undertake a good faith contest of mechanics and
other liens is subject to the condition that, if such contest continues for 6 months or more,
Company must maintain adequate reserves for the payment of the same in accordance with generally
accepted accounting principles. Issuer will cooperate fully with Company in any such contest.
Section 6.2. Removal of Leased Equipment.
Issuer shall not be under any obligation to renew,
repair, or replace any inadequate, obsolete, worn-out, unsuitable, undesirable, or unnecessary
Leased Equipment. In any instance where Company in its sound discretion determines that any items
of Leased Equipment have become inadequate, obsolete, worn-out, unsuitable, undesirable, or
unnecessary, Company may remove such items of Leased Equipment from the Buildings and the Leased
Land and (on behalf of Issuer) sell, trade-in, exchange, or otherwise dispose of them (as a whole
or in part) without any responsibility or accountability to Issuer or Trustee therefor, provided
that Company shall:
(a) Substitute (either by direct payment of the costs thereof or by advancing to
Issuer the funds necessary therefor) and install anywhere in the Buildings or on
the Leased Land other machinery or equipment having equal or greater utility
(but not necessarily having the same function) in the operation of the Buildings as a
modern manufacturing facility (provided such removal and substitution shall
not impair the operating unity of the remaining property) , all of which
substituted machinery or equipment shall be free of all liens and encumbrances (other
than Permitted Encumbrances) but shall become a part of the Leased Equipment
provided, however, during the first three (3) years commencing from and
after April 27, 1995, the Company may substitute Equipment (as defined in the
Indenture) , or any other equipment leased by the Company from any lessor other than
the Issuer in place of any Leased Equipment (collectively, the
Replacement Equipment) removed from the Mortgaged Property,
which Replacement Equipment shall not be or be deemed to be part of the Leased
Equipment; or
(b) Not make any such substitution and installation unless, (i) in the case of the
sale of any such machinery or equipment to anyone other than itself or in the case of
the scrapping thereof, Company shall pay into the Bond Fund the proceeds from
such sale or the scrap value thereof, as the case may be, (ii) in the case of the
trade-in of any such machinery or equipment for other machinery or equipment not
to be installed in the Buildings or on the Leased Land, Company shall pay into
the Bond Fund the amount of the credit received by it in such trade-in, and (iii) in
the case of the sale of any such machinery or equipment to Company or in the case of
20
any other disposition thereof Company shall pay into the Bond Fund an amount equal to the
original cost thereof less depreciation at rates calculated in accordance with generally
accepted accounting practice; provided, however, that no such payment into the Bond Fund need
be made until the amount to be paid into the Bond Fund on account of all such dispositions not
previously reported aggregates at least $100,000 in any calendar year; provided further, that
Company may not fail to make any such substitution and installation if such failure would
impair the operating unity of the remaining property.
The removal from the Mortgaged Property of any portion of the Leased Equipment pursuant to
the provisions of this Section shall not entitle Company to any abatement or diminution of the
rents payable under Section 5.3 hereof.
Company will promptly report to Trustee in writing such removal, substitution, sale, and
other disposition and will pay to Trustee such amounts, if any, as are required by the provision
of the preceding subsection (b) of this Section to be paid into the Bond Fund promptly after the
sale, trade-in, scrapping, or other disposition requiring such payment; provided, however, that no
such report need be made until the amount to be paid into the Bond Fund on account of all such
disposition aggregates at least $100,000 in any calendar year.
Section 6.3. Impositions.
Company shall, during the Lease Term, timely, except as otherwise
provided herein, bear, pay, and discharge, all taxes and assessments, general and special, if any,
which may be taxed, charged, levied, assessed, or imposed upon or against or be payable for or in
respect of the Mortgaged Property, or any part thereof, or any improvements at any time thereon or
Companys interest in the Mortgaged Property under this Lease Agreement, including any new taxes
and assessments not of the kind enumerated above to the extent that the same are made, levied
against real and personal property, and further including without limitation all water and sewer
charges, assessments, and other governmental charges and impositions whatsoever, foreseen or
unforeseen, which if not paid when due would encumber Issuers title to the Mortgaged Property
(all of the foregoing being herein referred to as Impositions) . In the event any special
assessment taxes are lawfully levied and assessed which may be paid in installments, Company shall
be required to pay only such installments thereof as become due and payable during the Lease Term
as and when the same become due and payable. Any Impositions which Company is required to bear,
pay, and discharge shall be remitted directly to the authority which is entitled to the payment
thereof. In no event shall Company consent to any new special taxes without the prior written
consent of Trustee.
Within 30 days after the last day for payment or as soon thereafter as is reasonably
practicable, without penalty or interest, of an Imposition which Company is required to bear, pay,
and discharge pursuant to the terms hereof, Company shall deliver to Issuer upon its written
request a reproduced copy of any
21
statement issued therefor which has been duly receipted to show the payment thereof.
Notwithstanding the foregoing, Company shall have the right, in its or Issuers name, to
contest in good faith the validity or amount of any Imposition which Company is required to bear,
pay, and discharge pursuant to the terms of this Section by appropriate legal proceedings provided
Company, before instituting any such contest in Issuers name, gives Issuer written notice of its
intention so to do and Company diligently prosecutes any such contest, at all times effectively
stays or prevents any official or judicial sale therefor, under execution or otherwise, sets aside
on its books and maintains adequate reserves for the payment of any liability therefrom in
conformity with generally accepted accounting principles, and promptly pays any final judgment
enforcing the Imposition so contested and thereafter promptly procures record release or
satisfaction thereof. Company shall hold Issuer whole and harmless from any costs and expenses
Issuer may incur related to any such contest.
Issuer covenants that it will not part with title to the Mortgaged Property or any part
thereof during the Lease Term, except as authorized in this Lease Agreement, or take any other
affirmative action which may reasonably be construed as tending to cause or induce the levy or
assessment of ad valorem taxes on the Mortgaged Property. Issuer and Company acknowledge that
under present law no part of the Mortgaged Property will be subject to ad valorem taxation by the
State or by any political or taxing subdivision thereof.
Section 6.4. Insurance Required.
During the Construction Period and throughout the Lease
Term, Company shall keep the Mortgaged Property continuously insured against such risks as are
customarily insured against by business of like size and type, paying as the same become due all
premiums in respect thereto, including but not necessarily limited to:
(a)
Fire and Extended Coverage Insurance.
Subsequent to completion of the Project and
expiration of the builders risk policy referred to in subsection (d) below, insurance
against loss or damage by fire with standard extended coverage, vandalism, and malicious
mischief endorsement. Such insurance shall be in an amount equal to or exceeding the lesser
of (i) the full replacement value of the Mortgaged Property, or (ii) the amount required
for the full redemption or retirement of all Bonds then outstanding; provided, however, in
any event, such insurance shall be in an amount necessary to prevent application of any
coinsurance provisions of the applicable policies. The proceeds of all such policies shall
be payable to Issuer, Company, and Trustee as their interests may appear, provided that any
such policies may be so written or endorsed as to make payments on claims for losses not in
excess of
22
$100,000 payable directly to Company. All claims on such insurance regardless
of amount may be adjusted by Company with the insurers, subject to approval of
Trustee, which approval shall not be unreasonably withheld, as to settlement of any
claim in excess of $100,000. Issuer shall cooperate with Company in adjusting any
such loss.
(b)
Public Liability Insurance.
General public liability insurance
against claims for bodily injury, death,
or property damage occurring in connection with the Mortgaged Property, such
insurance to afford protection to Issuer and Trustee as additional insureds of not
less than $10,000,000 per occurrence.
(c) Workers Compensation Insurance.
Workers compensation insurance,
including qualified self-insurance pursuant to the workers compensation laws of
the State, covering all persons employed by Company at the
Mortgaged Property. Company will cause such insurance to be maintained by
any independent contractors engaged by Company in connection with any work done
on or about the Mortgaged Property with respect to which claims for death or
bodily injury could be asserted against Company, Issuer, or
Trustee, complying with the rules, regulations, and requirements of
the State from time to time in force.
(d)
Builders Risk Insurance.
During the course of construction of the
Project until the fire and extended coverage insurance set forth in subsection (a)
above is in force, a standard form builders risk policy on a
replacement cost basis, with an all risk endorsement, a course
of construction endorsement, and a collapse insurance provision, in an
amount equal to the completed value of the portion of the Project covered by a
construction contract, with loss payable to Issuer, Company, and Trustee, as their
interests may appear.
(e)
Flood Insurance.
If all or part of the Mortgaged Property is located in
an area now or hereafter identified by the Secretary of Housing and Urban
Development as an area having special flood hazards and in which flood insurance
has been made available under the National Flood Insurance Act of 1968, as
amended, policies of flood insurance in an amount at least equal to the lesser of
(1) the amount of the Bonds, (2) the insurable value of the improvements, or (3)
the maximum limit of coverage available under the National Flood
Insurance Act of 1968, as amended.
Company shall annually provide Trustee with an opinion of an independent insurance broker
of recognized national standing that
23
the insurance then in force upon the Mortgaged Property is in compliance with the
provisions of this Section 6.4.
Nothing in this Section 6.4 or any other portion of this Lease Agreement shall be construed to
prevent Company from including the Mortgaged Property under Companys blanket forms of insurance
coverage, provided that each and all of the requirements of this Section 6.4 be complied with under
such blanket coverage.
Section 6.5. Application of Net Proceeds of Insurance.
The Net Proceeds of the insurance
required in Section 6.4 hereof shall be applied as follows: (i) the Net Proceeds of the insurance
required in Sections 6.4 (a), (d), and (e) hereof shall be applied as provided in Section 7.2
hereof, and (ii) the Net Proceeds of the insurance required in Sections 6.4(b) and (c) hereof shall
be applied toward extinguishment or satisfaction of the liability with respect to which such
insurance proceeds may be paid.
Section 6.6. Additional Provisions Regarding Insurance.
All insurance required in Section 6.4
hereof shall be taken out and maintained with generally recognized responsible insurance companies
selected by Company. All policies evidencing such insurance shall provide for payment of the
losses to Issuer, Company, and Trustee as their respective interests may appear, and the policies
required by Sections 6.4 (a), (d), and (e) shall bear endorsements requiring that all proceeds of
insurance resulting from any claim in excess of $100,000 for loss or damage covered thereby be
paid to Trustee; provided, however, that all claims regardless of amount may be adjusted by
Company with insurers, subject to approval of Trustee, as to settlement of any claim in excess of
$100,000, which approval shall not be unreasonably withheld.
All policies, or a certificate or certificates of the insurers that such insurance is in
force and effect, shall be deposited with Trustee, with a copy to Issuer. Each such policy shall
contain a provision that such policy may not be cancelled unless Trustee is notified in writing at
least 30 days prior to the cancellation; and, at least 30 days prior to the expiration of any such
policy, Company shall furnish Trustee with written evidence satisfactory to Trustee that the
policy has been renewed or replaced or is no longer required by this Lease Agreement.
Section 6.7. Advances by Issuer or Trustee.
In the event Company shall fail to maintain the
full insurance coverage required by this Lease Agreement or shall fail to keep the Mortgaged
Property in as reasonably safe condition as its operating conditions will permit, or shall fail to
keep the Buildings and the Leased Equipment in good repair and good operating condition, Issuer or
Trustee may (but unless satisfactorily indemnified shall be under no obligation to) take out the
required policies of insurance and pay the premiums on the same or make the required
24
repairs, renewals, and replacements; and all amounts so advanced therefor by Issuer or
Trustee shall become an additional obligation of Company to the one making the advancement
secured by the Mortgaged Property, which amounts Company agrees to pay with interest
thereon, to the extent permitted by law, from. the date thereof at the Agreed Rate.
Section 6.8. Release and Indemnification Covenants.
(a) Company shall and hereby agrees to indemnify and save Issuer (including but not
limited to past, present, and future aldermen, officials, and other persons acting on
Issuers behalf) and Trustee, and their officers, agents, and employees,
harmless against and from all claims by or on behalf of any person,
firm, corporation, or other legal entity arising from the conduct or management
of, or from any work or thing done on, the Mortgaged Property during the term of this
Lease Agreement, including without limitation, (i) any condition of the Mortgaged
Property, (ii) any breach or default on the part of Company in the performance of
any of its obligations under this Lease Agreement, (iii) any act or negligence of
Company or of any of its agents, contractors, servants, employees, or licensees, or (iv)
any act or negligence of any assignee or lessee of Company, or of any agents,
contractors, servants, employees, or licensees of any assignee or lessee
of Company. Company shall indemnify and save Issuer and Trustee harmless from any
such claim arising as aforesaid, or in connection with any action or proceeding brought
thereon, and upon notice from Issuer or Trustee, Company shall defend them or either of
them in any such action or proceedings.
(b) It is the intention of the parties hereto that Issuer shall not incur any
pecuniary liability by reason of the terms of this Lease Agreement or the undertakings
required of Issuer hereunder, by reason of the issuance of the Bonds, by reason of
the execution of the Indenture, or by reason of the performance of any act
requested of Issuer by Company, including all claims, liabilities, or losses arising in
connection with the violation of any statutes or regulations pertaining to the
foregoing; nevertheless, if Issuer should incur any such pecuniary liability, then
in such event Company shall indemnify and hold Issuer, its officers, members, agents,
and employees harmless against all claims by or on behalf of any person, firm, or
corporation or other legal entity arising out of the same and all costs and
expenses reasonably incurred in connection with any such claim or in connection
with any action or proceeding brought thereon, and upon notice from Issuer, Company
shall defend Issuer in any such action or proceeding.
(c) Nothing contained in this Section 6.8 shall be construed to indemnify or
release Issuer from its liability in connection with the Mortgaged Property arising from
the wanton negligence or intentional acts or failure to act on the part of Issuer, its
25
employees, agents, or representatives acting in their capacities as such.
Section 6.9. Environmental Considerations.
During the Lease Term, Company agrees that the
Mortgaged Property shall not be used at any time during the Lease Term to generate, manufacture,
refine, transport, treat, store, handle, dispose, transfer, produce, process, or in any manner
deal with hazardous materials except as incidental to its business or
the business of any occupant of the whole or any part of the Mortgaged Property whose occupancy of the Mortgaged
Property or such part thereof is not in violation of the terms of this Lease Agreement (which
includes the occupancy with the consent of the Issuer). Company further agrees that it will
defend, indemnify, and hold harmless Issuer from and against any and all liabilities, claims,
damages, penalties, expenditure, losses, or charges, including but not limited to all reasonable
and necessary costs of investigation, monitoring, legal fees, remedial response, removal,
restoration, or permanent acquisition which may now or in the future be undertaken, suffered,
paid, awarded, assessed, or otherwise incurred as a result of any contamination resulting from
the disposal, storage, treatment, processing, or other handling of waste contamination, PCBs, or
other toxic or hazardous substance, which arise from Companys or any other permitted occupants
activity after April 27, 1995 on or under the Mortgaged Property. Company and Issuer each agree
to promptly notify the other and the Trustee in writing by certified mail with return receipt
requested, of the receipt of any written environmental claim, suit, or demand by any individual,
corporation, partnership, governmental agency, or other legal entity concerning the Mortgaged
Property. Issuer reserves the right to defend against such claim, suit, or demand at its sole cost
and expense, and Company will cooperate with Issuer in such defense.
Notwithstanding anything to the contrary in this Lease Agreement, nothing in this Lease
Agreement, including without limitation this Section 6.9, shall diminish, derogate, or otherwise
limit the rights and interests of Trustee under the Hazardous Substance Certification and
Indemnification.
Section 6.10. Payments in Lieu of Taxes.
Section 6.3 provides that Company is obligated to
pay all taxes and assessments levied and assessed on the Project during the term of this Lease.
Company is informed and understands that, notwithstanding the provisions of Section 6.3, under
Article 16, Section 5 of the Constitution of the State, as interpreted by the Arkansas Supreme
Court in
Wayland v. Snapp,
233 Ark. 57, 334 S.W.2d 633 (1960) , and Ark. Code Ann. §§ 14-164-701
to -703 (1987 & Supp. 1993), the Project will be exempt from ad valorem taxes because it is
owned by Issuer and used for a public purpose within the meaning of the applicable
Constitutional and statutory provisions affording the exemption.
26
Thus, Company understands that it, as lessee of the Project owned by Issuer, will, in
fact, pay no ad valorem taxes on the Project under the provisions of Section 6.3. Issuer has
indicated a reluctance to lose all tax revenues which would otherwise be received by it if the
property involved was privately owned.
Therefore, to induce Issuer to proceed with the issuance of the Bonds for the purpose
indicated, which will inure to the benefit of Company, and for other valuable consideration, the
receipt of which is hereby acknowledged, Company agrees with Issuer as follows:
(a) In lieu of ad valorem property taxes, Company will pay to Issuer the
percentage set forth below of an annual sum equal to the amount which would be payable
as ad valorem taxes on Companys interest in the Project were the Project
not exempt from ad valorem taxation, payable not later than October 10 each
year:
|
|
|
|
|
|
|
Payment Date
|
|
Tax
|
|
Percentage
|
(October 10)
|
|
Year
|
|
Payable
|
1996
|
|
1995
|
|
|
50
|
|
1997
|
|
1996
|
|
|
60
|
|
1998
|
|
1997
|
|
|
70
|
|
1999
|
|
1998
|
|
|
80
|
|
2000
|
|
1999
|
|
|
90
|
|
2001
|
|
2000 and thereafter
|
|
|
100
|
|
(b) Company representatives will meet annually with the Assessor of Greene
County and determine the assessed valuation of the real and personal properties
comprising the Project. The determination shall be made by mutual agreement
if possible, and if not, shall be made by the Assessor as though the Project
properties were privately owned. Company shall have all rights granted to property
owners under Arkansas law to appeal assessments to the county equalization board and
to appeal decisions of the county equalization board to the county court. The
amount to be paid each year shall be determined by applying the millage rates of the
taxing authorities that would be applicable to the Project properties for that
year if the Project properties were privately owned.
(c) Payments hereunder are not intended to be in lieu of (i) any licenses,
occupation or privilege tax or fee imposed upon Company for or with respect to its
right to carry
on its business in the State, (ii) any special benefit or local improvement
tax or assessment or (iii) fees or charges for utility services rendered, such as for
water or sewer services.
27
(d) The payments to be made hereunder are intended to be in lieu of all ad
valorem taxes that would have to be paid on the Project to the State of Arkansas,
Greene County, Issuer, school districts, and/or other political subdivisions of
the State if the Project were not exempt from ad valorem taxes under the
provisions of Article 16, Section 5 of the Constitution of the State and Ark. Code Ann.
§§ 14-164-701 to -703 (1987 & Supp. 1993) (the taxing authorities) .
(e) Issuer agrees to distribute each payment under this Section 6.10 among the
taxing authorities in the proportion that the millage collected by each bears to the
total millage collected by all during the year of distribution.
(f) If by reason of a change in the Constitution of the State, a change by the
Supreme Court of the State in its interpretation of the Constitution, a change by the
General Assembly of the State, or otherwise Company is required to pay any tax
for which the payments specified in paragraph (a) are intended to be in lieu, Company
may deduct the aggregate of any such payments made by it from any amount herein agreed
to be paid under paragraph (a) .
(g) The agreement in this Section 6.10 made by Company shall terminate and be of
no further force and effect from and after the date that this Lease Agreement shall
terminate for any purpose. If such termination shall be at a point constituting
a portion of a year, Company shall pay for the year in which termination occurred that
portion of the specified annual payment that the number of days in such year that
the Project was exempt prior to the terminations bears to 365 days (366 days in a leap
year).
(h) This Section 6.10 shall be binding upon the successors and assigns of Company, but
no assignment shall be effective to relieve Company of any of its obligations hereunder
unless expressly authorized and approved in writing by Issuer.
ARTICLE VII
DAMAGE, DESTRUCTION, AND CONDEMNATION;
USE OF NET PROCEEDS
Section 7.1. Damage and Destruction.
Unless Company shall have exercised its option to
prepay the amounts payable under this Agreement pursuant to the provisions of Section 11.2 (a)
hereof, if prior to full payment of the Bonds (or provisions for payment thereof having been made
in accordance with the provisions of the Indenture) the Mortgaged Property or any portion thereof
is destroyed (in whole or in part) or is damaged by fire or other casualty, Company shall be
obligated to continue to pay the amounts
28
specified in Section 5.3 hereof. Company shall give prompt written notice of
any such destruction or damage in excess of $100,000 to Issuer and Trustee.
Section 7.2. Application of Net Proceeds.
Prior to the Completion Date, Issuer,
Trustee, and Company will cause the Net Proceeds of any insurance proceeds
resulting from any events described in Section 7.1 hereof to be deposited in the
Construction Fund and to be disbursed therefrom as provided in Article IV of this
Lease Agreement and the Indenture. Subsequent to the Completion Date, Issuer,
Trustee, and Company will cause the Net Proceeds of any insurance proceeds resulting
from any event described in Section 7.1 hereof to be deposited in a separate trust
fund, provided that Net Proceeds in an amount less than $100,000 shall be paid
directly to Company. All Net Proceeds shall be applied in one or more of the
following ways as shall be elected by Company in a written notice to Issuer and
Trustee:
(a) To the prompt repair, restoration, modification, or improvement of the
Mortgaged Property by Company, and Issuer does hereby authorize and direct Trustee to
make disbursements from such separate fund for such purposes or to
reimburse Company for costs paid by it in connection therewith upon receipt of a
requisition acceptable to Trustee signed by an Authorized Company Representative stating
with respect to each disbursement to be made: (1) the requisition number, (2) the
name and address of the person, firm, or corporation to whom payment is due,
(3) the amount to be disbursed, and (4) that
each obligation mentioned therein has been properly incurred, is a proper
charge against the separate trust fund, and has not been the basis of any
previous disbursement. Any balance of the Net Proceeds remaining after such
work has been completed shall be transferred to the Bond Fund to be applied to
the payment of principal of and premium, if any, and interest on the Bonds,
or, if the Bonds have been fully paid (or provision for payment thereof has
been made in accordance with the provisions of the Indenture), any balance
remaining in such separate trust fund shall be paid to Company.
(b) To redemption of the Bonds on the next succeeding interest payment
date as specified in a written notice by Company to Trustee; provided, that
no part of the Net Proceeds may be applied for such redemption unless (1)
all of the Bonds are to be redeemed in accordance with the Indenture
upon prepayment of the amounts payable hereunder pursuant to Section
11.2(a) hereof or (2) in the event that less than all of the Bonds are to
be redeemed, Company shall furnish to Issuer and Trustee a certificate of
the Authorized Company Representative acceptable to Issuer and Trustee
stating that (i) the property forming the part of the Mortgaged
Property that was damaged or destroyed by such casualty is
not essential to the use or possession of the Mortgaged Property
29
by Company or (ii) the Mortgaged Property has been repaired restored, modified, or
improved to operate as designed.
Section 7.3. Insufficiency of Net Proceeds.
If the Net Proceeds are insufficient to pay in
full the cost of any repair, restoration, modification, or improvement referred to in Section
7.2(a) hereof, Company will nonetheless complete the work and will pay any cost in excess of the
amount of the Net Proceeds held by Trustee. Company agrees that if by reason of any such
insufficiency of the Net Proceeds, Company shall make any payments pursuant to the provisions of
this Section, Company shall not be entitled to any reimbursement therefor from Issuer, Trustee, or
the Owners of any of the Bonds, nor shall Company be entitled to any diminution of the amounts
payable under Section 5.3 hereof.
Section 7.4. Cooperation of Issuer.
Issuer shall cooperate fully with Company at the expense
of Company in filing any proof of loss with respect to any insurance policy covering the
casualties described in Section 7.1 hereof and will, to the extent it may lawfully do so, permit
Company to litigate in any proceeding resulting therefrom in the name and behalf of Issuer. In no
event will Issuer voluntarily settle, or consent to the settlement of, any proceeding arising out
of any insurance claim without the written consent of the Authorized Company Representative.
Section 7.5. Rights of Parties in Event of Condemnation; Bonds Protected in Any Event.
A. If during the Lease Term title to all or substantially all of the Mortgaged Property shall
be taken or condemned by a competent authority for any public use or purpose, then this Lease
Agreement shall terminate at midnight on the 15th day after the vesting of title in such authority
and rent shall be paid to and adjusted as of that day. In that event, subject to the subsequent
provisions of this Section, the condemnation award shall belong to Issuer and shall be paid to
Trustee and deposited into the Bond Fund (subject to the provisions of the Indenture and this
Lease Agreement) and Company hereby assigns the award to Issuer. In the event the net condemnation
award (being the gross amount awarded less all reasonable attorneys fees and other reasonable
expenses and costs in the condemnation proceeding) together with the amount then in the Bond Fund
shall be insufficient to pay in full, on the redemption date fixed by Company pursuant to the
provisions of Section 301 of the Indenture, the amount necessary to pay all principal, premium, if
any, interest, Trustees fees, and all other costs of redemption (all of which, for purposes of
this Section, shall be called total bond redemption expense), Company agrees to pay promptly
upon payment of the condemnation award, as additional rent under this Lease Agreement, the amount
by which the total bond redemption expense shall exceed the net condemnation award plus the amount
then on deposit in the Bond Fund. Companys agreement to pay additional rent pursuant to this
Section 7.5 shall survive any
30
termination of the Lease Agreement under this Section 7.5. For the purposes of this
Article VII, all or substantially all of the Mortgaged Property shall be deemed to mean a
taking of all of the Mortgaged Property or a taking of such a substantial portion of the
Mortgaged Property that Company, as determined by Company in its sole discretion, cannot
reasonably operate the remainder in substantially the same manner as before. In the event
the net condemnation award, together with the amount in the Bond Fund, shall be in excess
of the amount necessary to pay the total bond redemption expense and Company is not in
default in any of its other obligations hereunder, or Company is in default in any of its
obligations hereunder and the net condemnation award plus the amount then on deposit in the
Bond Fund plus any amount previously paid to the Bondowners on account of the total bond
redemption expense shall be in excess of the amount necessary to pay the total bond
redemption expense, then the appropriate excess shall belong to and be paid to Company;
provided, however, that if Company is in default with reference to any of its other
obligations hereunder, the amount necessary to satisfy such default shall have been
previously paid to Trustee by Company. To the extent that the sum of the net condemnation
award plus the amount then on deposit in the Bond Fund plus any amount previously paid to
the owners of the Bonds on account of the total bond redemption expense shall be less than
the total bond redemption expense, Company agrees to pay such
deficiency to Issuer as
additional rent hereunder. If less than all of the Mortgaged Property shall be so taken or
condemned and this Lease shall terminate as provided in this Section 7.5 (A), then the part
of the Mortgaged Property not so taken or condemned shall be sold at a public auction (at
which auction the Company, the Guarantor, the Issuer and the Trustee shall have the right
to bid), and the net proceeds of such sale shall be deemed to be included in and be part of
the award or awards, to be disposed of as set forth in this subdivision (A). Issuer agrees
that it will not voluntarily accept, without the prior approval of Company, any
condemnation award, and Issuer agrees that it will cooperate with Company with the end in
view of obtaining the maximum justifiable condemnation award.
B. If less than substantially all of the Mortgaged Property shall be taken or
condemned by a competent authority for any public use or purpose, neither the term nor any
of the obligations of either party under this Lease Agreement shall be affected or reduced
in any way, and
(i) If any part of the improvements owned by Issuer on the Mortgaged Property
(improvements as used herein shall include any item of Issuers equipment) is taken,
Company shall proceed to repair or rebuild (repair or rebuild shall include
replacement of any item of Issuers equipment) the remaining part as nearly as
possible to the condition existing prior to such taking, to the extent that the same
may be feasible, subject to the right on the part of Company to make
31
alterations so as to improve the efficiency of the improvements; and
(ii) The entire condemnation award shall be paid to Company, and Issuer hereby
assigns the same to Company for the use of Company in repairing and rebuilding as
provided in (i) above. The said award shall be transferred to Company in the same manner
as is provided in Section 7.2 with respect to insurance proceeds, provided that the words
Net Proceeds there referred to shall for purposes hereof refer to net condemnation
award. If the net condemnation award is in excess of the amount
necessary to repair and rebuild as specified in (i) above, such excess shall be paid to Trustee and deposited in
the Bond Fund. If such excess is more than the remaining total basic rent obligations of
Company hereunder, and if at that time Company is not in default with respect to any of
its obligations, the amount of excess over and above the amount necessary to satisfy the
obligations with reference to which Company is in default shall be paid to Company. If
the net condemnation award is less than the amount necessary for Company to repair and
rebuild as set forth in (i) above,. Company shall nevertheless complete the repair and
rebuilding work and pay the cost thereof; and
(iii) If no part of the improvements is taken, the net condemnation award shall be
paid to Trustee and deposited in the Bond Fund.
C. In the event of taking under either A or B above, Company shall have the right to
participate at its own expense in, and to offer proof in, the condemnation proceedings and
to receive that portion of any award (by way of negotiation, settlement,
or judgment) which may be made for damages sustained by Company solely as a result
of the interruption of Companys business or with respect to the Companys trade fixtures,
equipment, improvements and moving expenses by reason of the condemnation;
provided, however, nothing in this subsection C shall be construed to diminish or
impair in any way Companys obligation under subsection A of this Section 7.5 to pay as
additional rent the amount of any insufficiency of the net condemnation award and the
funds in the Bond Fund to pay the total bond redemption expense.
D. If the temporary use of the whole or any part of the Mortgaged Property shall be
taken by right of, or acquired pursuant to the threat of, eminent domain, this Lease
Agreement shall not be thereby terminated and the parties shall continue to be
obligated under all of its terms and provisions, and, provided that an Event of
Default has not occurred and is continuing under this Lease Agreement, Company shall be
entitled to receive the entire amount of the award made for such taking, whether by way of
damages, rent, or otherwise.
Section 7.6.
Company Obligated to Continue Basic and Additional Rental Payments Until
Condemnation Award Available.
In the event of a taking of all or substantially all of the Mortgaged
32
Property as provided in Section 7.5 A, notwithstanding the provision therein
that the rent shall be paid to and adjusted as of the vesting of title in the taking
authority, Company agrees to continue to make payment of the basic rent and the
additional rent until the condemnation award shall be actually received by Issuer;
provided, however, Company shall be repaid, solely out of the net condemnation award,
the amount of rent so paid after the date provided in Section 7.5 A for the
adjustment of rent. This agreement to repay shall not be construed in any way to
impair or diminish Companys obligations under Section 7.5
to pay as additional
rent the amount of any insufficiency of the net condemnation award and the moneys in
the Bond Fund to pay the total bond redemption expense.
Section 7.7.
Right of Company to Participate in Condemnation Proceedings.
Company shall have the right to participate in its own name in any negotiations or
condemnation proceedings, but at its own expense, to resist or defend condemnation,
and to make any presentation or conduct any proceeding which in its discretion is
necessary or desirable to obtain any proper relief and, if the condemnation is
concluded, to obtain the maximum award justified by the taking, subject, however, at
all times to the prior rights of Issuer and Trustee with respect to the indebtedness
represented by the Bonds.
Section 7.8.
Issuers Covenant Not to Condemn.
Issuer covenants that it will not
take or condemn any part of the Mortgaged Property, or attempt to do so.
ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. No Warranty of Condition or Suitability by
Issuer.
ISSUER MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE
CONDITION OP THE MORTGAGED PROPERTY OR THAT THE MORTGAGED PROPERTY WILL BE SUITABLE
FOR COMPANYS PURPOSES OR NEEDS OTHER THAN THE REPRESENTATION AND WARRANTY THAT THE
MORTGAGED PROPERTY HAS THE PROPER ZONING DESIGNATION FOR THE PURPOSES OF THE
COMPANY.
Section 8.2. Inspection of the Mortgaged Property.
Company agrees that
Trustee and Issuer and their duly authorized agents shall have the right at all
reasonable times during business hours to enter upon the Leased Land and to examine
and inspect the Mortgaged Property without interference or prejudice to Companys
operations. Company further agrees that Issuer and its duly authorized agents who
are acceptable to Company shall have such rights of access to the Mortgaged Property
as may be reasonably necessary to cause to be completed the construction and
installation provided for in Section 4.1 hereof.
33
Section 8.3. Company to Maintain its Corporate Existence.
Company will maintain its
corporate existence and will not dissolve or otherwise dispose of all or substantially all of its
assets and will not consolidate with or merge into another corporation or permit one or more other
corporations to consolidate with or merge into it without providing an opinion of Bond Counsel to
the Issuer and the Trustee that such a merger, dissolution or consolidation will not materially
violate the Act or cause interest on the Bonds to be includable in the gross income of the owners
thereof for federal income tax purposes.
Section 8.4. Release of Certain Land.
Notwithstanding any other provision of this Lease
Agreement, the parties hereto
,
with the prior written consent of Trustee, which consent shall not
be unreasonably withheld, reserve the right at any time and from time to time to amend this Lease
Agreement for the purpose of effecting the release of and removal from this Lease Agreement and
the leasehold estate created hereby (i) of any unimproved part of the Leased Land (on which
neither the Buildings nor any Leased Equipment is located but on which transportation or utility
facilities may be located) on which Issuer proposes to construct improvements for lease to Company
under another and different lease agreement or (ii) any part of the Leased Land with respect to
which Issuer proposes to grant an easement or convey a fee or other title to a railroad or other
public or private carrier or to any public utility or public body in order that transportation
facilities or services by rail, water, road, or other means or utility services for the Mortgaged
Property may be provided, increased, or improved; provided, that if at the time any such amendment
is made any of the Bonds are outstanding and unpaid there shall be deposited with Trustee the
following:
(a) A copy of the said amendment as executed.
(b) A resolution of Issuer (i) stating that Issuer is not in default under any of the
provisions of the Indenture and Company is not, to the knowledge of Issuer, in default under
any of the provisions of this Lease Agreement or the Guaranty, (ii) giving an adequate legal
description of that portion of the Leased Land to be released, (iii) stating the purpose for
which Issuer desires the release, (iv) stating that the said improvements which will be
constructed on the said Leased Land and the services which will be provided, increased, or
improved will be such as will promote the continued industrial development of Issuer, and
(v) requesting such release.
(c) A resolution of the board of directors of Company or executive committee of said
board (if permitted under Companys by-laws) authorizing the execution of such amendment
together with an officers certificate stating that Company is
34
not in default under any of the provisions of this Lease Agreement.
(d) A copy of the agreement between Issuer and Company wherein Issuer agrees to
construct improvements on the portion of the Leased Land so requested to be released and
agrees to lease the same to Company, and wherein Company agrees to lease the same from
Issuer, or a copy of the instrument granting the easement or conveying the title to a
railroad, public utility, or public body.
(e) A certificate of an Independent Engineer who is acceptable to Trustee, dated not
more than 60 days prior to the date of the release and stating that, in the opinion of the
person signing such certificate, (i) the portion of the Leased Land so proposed to be
released is necessary or desirable for railroad, utility service, or roads to benefit the
Mortgaged Property or is not otherwise needed for the operation of the Mortgaged Property
for the purposes hereinabove stated, (ii) the release so proposed to be made will not impair
the usefulness of the Buildings as a manufacturing facility, and (iii) the remaining portion
of Leased Land after the release will be a legal parcel.
(f) Company and Issuer agree that all walls presently standing or hereafter erected on
or contiguous to the boundary line of the Leased Land so proposed to be released shall be
party walls-for the purpose of tying-in of new construction. If any party wall is utilized
for the purpose of tying-in new construction with the building to be utilized under common
control with the Mortgaged Property, utility facilities on the Leased Land, including those
within the Buildings, may be interconnected for the purpose of serving the new construction
to be placed on Leased Land so released and any non-loadbearing panels in any party
wall may be removed; provided, however, that if the Leased Land so released and construction
thereon ceases to be operated under common control with the Buildings, non-loadbearing wall
panels similar in quality to those which have been removed will be installed and separate
utility services will be provided for the new construction.
In the event that the conditions described in Section 8.4(a), (b), (c), (d), (e) and (f) have
been fulfilled, the Issuer agrees to execute and deliver to the Company, all documents reasonably
requested by the Company to evidence the release of the portion of the Leased Land so proposed to
be released, including, but not limited to, a release of lien in recordable form, from the lien of
the Indenture, an amendment to this Lease Agreement in recordable form, evidencing the release of
the Leased Land sought to be released from this demise and from the definition of Mortgaged
Property, and any UCC-3 termination statement required to evidence
35
the release of the Leased Land and any Leased Equipment situated thereon sought to be
released from any UCC-1 financing statement and security agreement held by the Issuer, being,
however, a partial release, which does not release the security interest in the balance of the
Mortgaged Property covered by the corresponding UCC-1 financing statement.
No release effected under the provisions hereof shall entitle Company to any abatement or
diminution of the rents payable under Section 5.3 hereof.
Section 8.5. Granting of Easements.
If no event of default shall have happened and be
continuing, and subject to the prior written consent of Trustee, which consent shall not be
unreasonably withheld, Company may at any time or times grant easements, licenses, rights-of-way
(including the dedication of public highways) , and other rights or privileges in the nature of
easements with respect to any property included in the Mortgaged Property, free from the lien of
the Indenture, or Company may release existing easements, licenses, rights-of-way, and other
rights or privileges with or without consideration, and Issuer agrees that it shall execute and
deliver and will cause and direct Trustee to execute and deliver any instrument necessary or
appropriate to confirm the release of any such easement, license, right of way and other right or
privilege in the nature of easements when so granted from the lien of the Indenture, including,
but not limited to, delivery by the Issuer of a release of lien in recordable-form and a
subordination agreement in recordable form confirming that the lien of the Indenture is subject
and subordinate to such easement, license, right of way or other right or privilege granted
pursuant to this Section 8.5, and grant or release any such easement, license, right-of-way, or
other right or privilege upon receipt of: (i) a copy of the instrument of grant or release; (ii) a
written application signed by the president or any vice president of Company requesting such
instrument; and (iii) a certificate executed by the president or any vice president of Company
stating (1) that such grant or release is not detrimental to the proper conduct of the business of
Company, and (2) that such grant or release will not impair the effective use or interfere with
the operation of the Mortgaged Property and will not weaken, diminish, or impair the security
intended to be given by or under the Indenture.
Section 8.6. Compliance with Code.
Issuer and Company recognize that the Bonds are to be
issued under such circumstances that the interest thereon shall remain excludable from gross
income for federal income taxation purposes, and to that end Company represents to and covenants
with Issuer, Trustee, and each Bondowner as follows:
36
(a) Company will fulfill all conditions specified in section 144 (a) (4) of the
Code and applicable Regulations, to qualify the Bonds as a small issue thereunder.
(b) Company will comply with and fulfill all other requirements and conditions of the
Code and applicable Regulations in the acquisition, construction, and operation of the
Project to the end that the interest on the Bonds shall at all times be free from federal
income taxation.
(c) No part of the Project reached a degree of completion which would permit operation
at substantially the level for which it was designed and was, in fact, in operation at such
level more than one year prior to April 27, 1995.
(d) The average maturity of the Bonds (determined by their respective issue prices)
does not exceed 120 percent of the average reasonably expected economic life of the various
facilities to be financed with the proceeds of the Bonds (determined by taking into account
the respective costs of such facilities and by using the guideline economic life for each
respective facility as set forth in the ADR [asset depreciation range] midpoint life tables
for machinery and equipment and as set forth in Revenue Procedure 62-21 for structures).
(e) In accordance with section 149 (e) of the Code, Company covenants and agrees to
furnish to Issuer not later than 5 days before the issuance and delivery of the Bonds a
fully completed Internal Revenue Service Form 8038 with respect to the Bonds. Company
further covenants and agrees that it or its agents will have the primary responsibility as
between or among any preparers for the overall substantive accuracy of the preparation of
Form 8038. Company will hold harmless Issuer, Bond Counsel, Trustee and any purchaser or
owner of the Bonds against all consequences of any material misrepresentation in or material
omission from such Form 8038.
(f) Company has delivered to Issuer a certificate in accordance with the provisions of
the Code and Regulation §1.148-2(b) stating that on the basis of the facts, estimates, and
circumstances in existence on April 27, 1995, as such facts, estimates, and circumstances
are set forth in the certificate, it is not expected that the proceeds of the Bonds will be
used in a manner that would cause the Bonds to be arbitrage bonds within the meaning of
section 148 of the Code and the Regulations.
Section 8.7. Federal Guarantee Prohibition.
Issuer and Company covenant that neither Issuer
nor Company shall take any action or permit or suffer any action to be taken if the result of
37
the same would be to cause the Bonds to be federally guaranteed within the meaning of
section 149(b) of the Code and Regulations.
Section 8.8. Limitation on Issuance Costs.
Issuer and Company covenant that, from the proceeds
of the Bonds received from the Original Purchaser on April 27, 1995 an amount not in excess of 2
percent of the face amount of the Bonds shall be used to pay for, or provide for the payment of,
Issuance Costs. For this purpose, if the fees of the Original Purchaser are retained as a discount
on the purchase of the Bonds, such retention shall be deemed to be an expenditure of proceeds of
the Bonds for said fees to the extent of the amount retained.
Section 8.9. Limitation on Expenditure of Proceeds.
Issuer and Company covenant that not less
than 95 percent of the face amount of the Bonds, plus accrued interest and premium, if any, paid
on the purchase of the Bonds by the Original Purchaser from Issuer, less original issue discount,
shall be used to pay for Qualified Project Costs.
Section 8.10. Limitation on Land and Certain Facilities.
Issuer and Company covenant that not more than 25 percent of the face amount of the Bonds, plus
accrued interest and premium, if any, paid on the purchase of the Bonds by the Original Purchaser
from Issuer, less original issue discount, shall be used, directly or indirectly, for the
acquisition of land or an interest therein or to provide a facility the primary purpose of which
is retail food and beverage services, automobile sales and service, or the provision of recreation
or entertainment.
Section 8.11. Location of Project; Outstanding Obligations.
Company covenants that proceeds of the Bonds shall be used only with respect to facilities located
within the corporate boundaries of the City of Paragould, Arkansas (City), and that there are no
outstanding obligations issued for facilities located within the City having as principal users
Company or Guarantor or other principal users of the Project or their related persons, all within
the meaning of sections 144(a) (2) and (3) of the Code and the Regulations.
Section 8.12. Prohibited Facilities.
Issuer and Company covenant that no portion of the
proceeds of the Bonds shall be used directly or indirectly to provide residential real property
for family units, any private or commercial golf course, country club, massage parlor, tennis
club, skating facility (including roller skating, skateboard, and ice skating), racquet sport
facility (including any handball or racquetball court) , hot tub facility, suntan facility,
racetrack, airplane, skybox or other private luxury box, health club facility, facility used for
gambling, or store, the principal business of which is the sale of alcoholic beverages for
consumption off premises.
38
Section 8.13. No Arbitrage.
Issuer and Company covenant that neither Issuer nor Company
shall take, or permit or suffer to be taken by Trustee or otherwise, any action with respect to
the proceeds of the Bonds over which Issuer or Company, as the case may be, has control, which if
such action had been reasonably expected to have been taken, or had been deliberately and
intentionally taken, on April 27, 1995 would have caused the Bonds to be arbitrage bonds within
the meaning of section 148(a) of the Code and Regulations.
Section 8.14. Capital Expenditure Limitation.
Company covenants that the sum of the principal
amount of the Bonds, plus capital expenditures paid or incurred during the 6-year period beginning
3 years prior to April 27, 1995 and ending 3 years after April 27, 1995, for facilities located
within the City having as principal users Company, Guarantor or other principal users of the
Project or their related persons shall not exceed $10,000,000, all within the meaning of section
144 (a) of the Code and the Regulations. Company further covenants that it will not enter into any
lease or other arrangement, including a sublease or assignment pursuant to Section 9.1 hereof,
for use of any portion of the Project if such lease or other arrangement would cause the covenants
contained in this Section to be violated.
Section 8.15.
$40,000,000 Limitation.
Company covenants that the sum of the outstanding
principal amount of the Bonds, plus the portions of the aggregate amount of outstanding
tax-exempt facility bonds as defined in section 142 of the Code, qualified small issue bonds as
defined in section 144 (a) of the Code, qualified redevelopment bonds as defined in section
144(c) of the Code, and industrial development bonds as referenced in section
144(a)(10)(B)(ii)(11) of the Code, allocable to each test period beneficiary as defined in
Section 144 (a) (10) of the Code on the later of the date the Project is placed in service or
April 27, 1995 shall not exceed $40,000,000, all within the meaning of section 144 (a) (10) of
the Code and the Regulations. Company further covenants that it will not enter into any lease or
other arrangement for ownership or use of any portion of the Project if such lease or other
arrangement would cause the covenants contained in this Section to be violated.
Section 8.16. Existing Facilities Limitation.
(a) Company covenants that no proceeds of the Bonds shall be used for the acquisition of
any tangible property or an interest therein, other than land or an
interest in land, unless the
first use of such property is pursuant to such acquisition; provided, however, that this
limitation shall not apply with respect to any building (and the equipment therefor) if
Rehabilitation Expenditures with respect to such building equal or exceed 15 percent of the portion
of the cost of acquiring such building (and equipment) financed with proceeds of the Bonds; and
provided,
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further, that this limitation shall not apply with respect to any structure other than a
building if Rehabilitation Expenditures with respect to such structure equal or exceed 100 percent
of the portion of the cost of acquiring such structure financed with the proceeds of the Bonds.
(b) For the purpose of this section, the term Rehabilitation Expenditures means any amount
properly chargeable to the capital account of Company or a successor to Company or by the seller
under a sales contract with Company for the property acquired in connection with the
rehabilitation of such property or, in the case of property constituting equipment, in connection
with the replacement of such equipment with equipment having substantially the same function,
excluding, however, (A) expenditures described in section 48(g)(2)(B) of the Code and (B) amounts
incurred after the date 2 years after the later of the date of acquisition of the property in
question or April 27, 1995.
Section 8.17. Compliance With Rebate Provisions.
Company covenants that it shall take any and
all actions necessary to assure compliance with section 148 (f) of the Code. In particular, it
shall directly or through independent consultants perform the calculations required to determine
what payments are due under section 148 (f) of the Code, assure the payments required by section
148 (f) of the Code are made, maintain the records required by
section 148 (f) of the Code, pay all
fees, costs, and expenses incurred by Company, Issuer, or Trustee in connection with compliance
with section 148 (f) of the Code, including compensation due to independent consultants, and
coordinate and cooperate in any and all respects necessary to assure compliance with section 148
(f) of the Code.
Section 8.18. Composite Issues.
(a) The officer of Company executing this Lease Agreement is familiar with all financing
transactions undertaken and now being planned for Company, including tax-exempt financings by or
for Company or by or for any related person (within the meaning of section 144(a)(3) of the Code).
(b) There are no other obligations heretofore issued or to be issued by or on behalf of any
state, territory, or possession of the United States of America, or political subdivision of any of
the foregoing, or of the District of Columbia, for the benefit of Company or any related person,
which constitute private activity bonds within the meaning of section 147 (b) of the Code) and
which (i) were or are to be sold at substantially the same time as the Bonds, (ii) were or are to
be sold pursuant to the same plan of financing as the Bonds, and (iii) are payable from the source
from which the Bonds are payable.
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(c) There are no additional facts or circumstances which may further evidence that the
Bonds are part of any other issue of obligations.
Section 8.19. Manufacturing Facility.
The Project will be a manufacturing facility as
defined in Section 144(a)(12) of the Code. The Project may include ancillary facilities which are
directly related and ancillary to the Project but any such ancillary facilities will be located on
the same site as the Project and not more than 25% of the net proceeds of the Bonds will be used
to provide such ancillary facilities.
ARTICLE IX
ASSIGNMENT, SUBLEASING, PLEDGING, AND SELLING;
REDEMPTION; OPTIONAL AND MANDATORY
PREPAYMENT OF RENT; ABATEMENT OF RENT
Section 9.1. Assignment and Subleasing.
Company may not assign this Lease Agreement or
sublet the Mortgaged Property or part thereof without the prior written consent of Issuer which
shall not be unreasonably withheld. Any such assignment shall include, without limitation, an
assumption in writing by such assignee of all liabilities and obligations of Company under this
Lease Agreement from and after the effective date of such assignment, the Guaranty, the Hazardous
Substance Certification and Indemnification from and after the effective date of the assignment,
and any related documents. Notwithstanding the foregoing, no assignment or subletting and no
dealings or transactions between Issuer or Trustee and any sublessee or assignee shall relieve
Company of any of its obligations under this Lease Agreement, and Company shall remain as fully
bound as though no assignment or subletting had been made, and performance by any assignee or
sublessee shall be considered as performance pro tanto by Company.
In the event a sublease is permitted as provided in this Section 9.1 of the Lease Agreement,
and in the event of the termination of this Lease Agreement pursuant to an event of default as
defined herein, Issuer will recognize the subtenant under such permitted sublease as the direct
tenant of Issuer for the balance of the sublease term; and provided, however, that at the time of
the termination of this Lease Agreement (i) no default exists under the sublease which at the time
would then permit the landlord thereunder to terminate the same or to exercise any dispossess
remedy provided for them and (ii) the subtenant shall deliver to Issuer an instrument confirming
the agreement of such subtenant to attorn to the Issuer and to recognize the Issuer as the
subtenants landlord under its sublease.
It is understood and agreed that this Lease Agreement (and the Mortgaged Property) will be
assigned and pledged to Trustee as
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security for the payment of the principal of and premium, if any, and interest on the Bonds,
but otherwise Issuer shall not, without the prior written consent of company and Trustee, assign,
encumber, sell, or dispose of all or any part of its rights, title, and interest in and to the
Mortgaged Property and this Lease Agreement, except to Company in accordance with the provisions of
this Lease Agreement and to Trustee or any other Person that takes title to any of the Mortgaged
Property as a result of a foreclosure or deed in lieu of foreclosure, transfer by any Person after
a foreclosure or deed in lieu of foreclosure, or otherwise under the Indenture or this Lease
Agreement.
Section 9.2. Restrictions on Sale, Mortgage, or other Conveyance of Mortgaged Property by
Issuer.
Issuer agrees that, except for the assignment and pledge of this Lease Agreement and the
grant and pledge of the Mortgaged Property to Trustee pursuant to the Indenture, it will not sell,
assign, mortgage, pledge, transfer, or convey the Mortgaged Property during the Lease Term, except
as specifically provided in this Lease Agreement.
Section 9.3. Redemption of Bonds.
Issuer, at the request at any time of Company and if the
Bonds are then callable, shall forthwith take all steps that may be necessary under the applicable
redemption provisions of the Indenture to effect redemption of all or part of the then outstanding
Bonds, as may be specified by Company, on the earliest redemption date on which such redemption
may be made under such applicable provisions or upon the date set for the redemption by Company
pursuant to Section 11.2 hereof.
Section 9.4. Prepayment of Rents.
To permit the redemption of Bonds pursuant to the exercise
of any options of company hereunder, and solely for that purpose, there is expressly reserved to
Company the right, and Company is authorized and permitted, at any time it may choose, to prepay
all or any part of the rents payable under Section 5.3 hereof, and Issuer agrees that Trustee may
accept such prepayment of rents when the same are tendered by Company. All rents so prepaid shall
be credited on the rental payments specified in Section 5.3 hereof, in the order of their
maturities, and shall be used for the redemption of the Bonds in accordance with the Indenture.
Section 9.5. Mandatory Prepayment of Rent Upon Determination of Taxability.
If, for any
reason (including a change in the Code) , without regard to whether such circumstances shall be
caused by any act or failure to act of Issuer, Company, or any other user of the Project, there
shall occur a Determination of Taxability, Issuer or Company shall immediately instruct Trustee to
call the Bonds for redemption pursuant to Section 304 of the Indenture, and Company shall
immediately pay to Trustee, as prepayment of the basic rent, the amount necessary to effect the
redemption of the Bonds then Outstanding in accordance with the provisions of the Indenture.
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Company shall also pay to Trustee the additional rent in the amounts specified in Section
5.3 of this Agreement.
Section 9.6. Company Entitled to Certain Rent Abatement if Bonds Paid Prior to Maturity.
If at
any time the moneys in the Bond Fund shall be sufficient to retire, in accordance with the
provisions of the Indenture, all of the Bonds at the time outstanding, and to pay all fees and
charges of Trustee due or to become due through the date on which the last of the Bonds is retired,
under circumstances not resulting in termination of the Lease Term, and if Company is not at the
time otherwise in default hereunder, Company shall be entitled to use and occupy the Mortgaged
Property from the date on which such aggregate moneys are in the hands of Trustee to and including
the date on which the last of the Bonds is retired, without the payment of rent during the interval
(but otherwise on the terms and conditions hereof, in the absence of exercise of the purchase
option provided for in Section 11.4 hereof).
Section 9.7. Reference to Bonds Ineffective After Bonds Paid.
Upon payment in full of the Bonds (or provision for payment thereof having been made in
accordance with the provisions of the Indenture) and all fees and charges of Trustee, all
references in this Lease Agreement to the Bonds and Trustee shall be ineffective and neither
Trustee nor the Bondowners shall thereafter have any rights hereunder, saving and excepting those
that shall have theretofore vested.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined.
The following shall be events of default
under this Lease Agreement and the terms event of default or default shall mean, whenever they
are used in this Lease Agreement, any one or more of the following events:
(a) Failure by Company to pay the basic rent or any part thereof payable hereunder at
the times specified herein.
(b) Failure by Company or Issuer to observe and perform any covenant, condition, or
agreement on its part to be observed or, performed, other than as referred to in subsection
(a) of this Section, for a period of 30 days after the receipt by Company of notices sent by
certified or registered mail by Issuer or Trustee, specifying such failure and requesting
that it be remedied, unless Issuer and Trustee shall agree in writing to an extension of such
time prior to its expiration.
(c) An event of default shall occur under the Guaranty or the Hazardous Substance
Certification and Indemnification provided however, with respect to the Hazardous Substance
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Certification and Indemnification, the provisions of this paragraph (c) shall not
constitute an event of default until actual notice of such default by registered or
certified mail (with or without return receipt requested) shall be given to the Company,
and Company shall have 30 days after receipt of such notice to correct said default or
cause said default to be corrected, and if the Company shall not have corrected said
default or cause said default to be corrected within said 30 day period; provided, however,
if said default cannot be corrected within 30 days, it shall not constitute an event of
default if corrective action is instituted within said 30 day period and diligently pursued
until the default is corrected within any applicable period as may be required by
governmental regulation or order.
(d) (i) Company (or any other Person obligated, as guarantor or otherwise, to make
payments on the Bonds or under the Lease Agreement or the Guaranty) shall (A) apply for or
consent to the appointment of, or the taking of possession by, a receiver, custodian,
trustee, liquidator, or the like of Company (or such other Person) or of all or any
substantial part of its property, (B) commence a voluntary case under the United States
Bankruptcy Code (as now or hereafter in effect), or (C) file a petition seeking to take
advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or adjustment of debts; or (ii) a proceeding or case shall be commenced,
without the application or consent of Company which case or proceeding is not discharged
within ninety (90) days (or any other Person obligated, as guarantor or otherwise, to make
payments on the Bonds or under the Lease Agreement), in any court of competent
jurisdiction, seeking (A) the liquidation, reorganization, dissolution, winding-up or
composition or adjustment of debts, of Company (or any such other Person), (B) the
appointment of a trustee, receiver, custodian, liquidator, or the like of Company (or any
such other Person) or of all or any substantial part of its respective property or (C)
similar relief in respect of Company (or any such other Person) under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts.
The provisions of paragraph (b) above are subject to the following limitations: (a) If said
default be a default that is correctable but that cannot be corrected within 30 days it shall not
constitute an event of default if corrective action is instituted within said 30 day period and
diligently pursued until the default is corrected or (b) If by reason of force majeure Company,
after using its best efforts, is unable in whole or in part to carry out its agreements on its
part herein contained, other than the obligations on the part of Company contained in Article v
and Sections 6.1(d), 6.3, 6.4 and 6.10 hereof, Company shall not be deemed in default during the
continuance of such
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inability. The term force majeure as used herein shall mean, without limitation, the
following: acts of God; strikes, lockouts, or other industrial disturbances; acts of public
enemies, orders of any kind of the government of the United States or of the State or any of their
departments, agencies, or officials, or any civil or military authority; insurrections; riots;
epidemics; landslides; lightning; earthquake; fire; hurricanes; storms; floods; washouts; droughts;
arrests; restraint of government and people; civil disturbances; explosions; breakage or accident
to machinery, transmission pipes, or canals; partial or entire failure of utilities; or any other
cause or event not reasonably within the control of Company. Company agrees, however, to remedy
with all reasonable dispatch the cause or causes preventing Company from carrying out its
agreements; provided, that the settlement of strikes, lockouts, and other industrial disturbances
shall be entirely within the discretion of Company, and Company shall not be required to make
settlement of strikes, lockouts, and other industrial disturbances by acceding to the demands of
the opposing party or parties.
Section 10.2. Remedies on Default.
Whenever any event of default shall happen, Issuer (with
the consent of Trustee if the Indenture has not been discharged) or Trustee may take any of the
following remedial steps:
(a) Declare rent due and payable in an amount equal to the principal and premium, if
any, and interest and other amounts due and payable under the Indenture.
(b) Re-enter and take possession of the Mortgaged Property without terminating this
Agreement and sublease the Mortgaged Property for the account of Company, holding Company
liable for the difference in the rent and other amounts payable by such sublessee in such
subleasing and the basic and additional rent payable by Company hereunder.
(c) Terminate the Lease Term, exclude Company from possession of the Mortgaged
Property, and use its commercially reasonable efforts to lease the Mortgaged Property to
another for the account of Company.
(d) Have access to and inspect, examine, and make copies of such of the books, records,
accounts, and data of Company as pertain to the Mortgaged Property.
(e) Take whatever action at law or in equity may appear necessary or desirable to
collect the rent and any other amounts payable by Company hereunder, then due and thereafter
to become due, or to enforce performance and observance of any obligation, agreement, or
covenant of Company under this Lease Agreement.
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Any amounts collected pursuant to action taken under this Section shall be paid into
the Bond Fund and applied in accordance with the provisions of the Indenture.
Section 10.3. Remedies Not Exclusive.
No remedy herein conferred upon or reserved to Issuer
or Trustee is intended to be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to every other remedy given under
this Lease Agreement or now or hereafter existing at law or in equity or by statute. No delay or
omission to exercise any right or power shall impair any such right or power or shall be construed
to be a waiver thereof, but any such right or power may be exercised from time to time as often as
may be deemed expedient.
Section 10.4. Rental, Damages, and Reletting Go Into Bond Fund.
The foregoing provisions of
this Article relating to the receipt of moneys by Issuer or Trustee as the result of an
acceleration, upon a reletting, or otherwise, are each to be construed as providing that all such
payments by Company or others shall be made into the Bond Fund referred to in Section 501 of the
Indenture.
Section 10.5. Equitable Relief.
Issuer, Company, and Trustee shall each be entitled to
specific performance, injunctive, or other appropriate equitable relief for any breach or
threatened breach of any of the provisions of this Lease Agreement, notwithstanding the
availability of an adequate remedy at law, and each party hereby waives the right to raise such
defense in any proceeding in equity.
Section 10.6.
Trustee May File Proofs of Claim.
In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition, or
other judicial proceeding relative to Company, the Mortgaged Property, or any other property of
Company, Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim and to file such other papers or documents as may be
necessary or advisable in order to have the claims of Trustee (including any claim for the
reasonable compensation, expenses, disbursements, and advances of Trustee, its agents and
counsel) allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or deliverable on any
such claims and to distribute the same.
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ARTICLE XI
OPTIONS IN FAVOR OF COMPANY
Section
11.1. Option to Terminate.
Company shall have the following options to cancel
or terminate the term of this Lease Agreement:
(a) At any time prior to full payment of the Bonds (or provision for payment thereof
having been made in accordance with the provisions of Article IX of the Indenture), Company
may terminate the Lease Term by giving Issuer and Trustee 60 days notice in writing of such
termination and by paying to Trustee an amount which, when added to the amount on deposit in
the Bond Fund, will be sufficient to pay, retire, and redeem all the outstanding Bonds in
accordance with the provisions of the Indenture (including, without limiting the generality
of the foregoing, principal, interest to maturity or earliest applicable redemption date, as
the case may be, premium, if any, expenses of redemption, Trustees and paying agents fees,
and registrars fees and expenses), and, in case of redemption, making arrangements
satisfactory to Trustee for the giving of the required notice of redemption. Upon any such
redemption and repayment, any surplus moneys shall be paid to Company.
(b) At any time after full payment of the Bonds, including without limiting the
generality of the foregoing, principal, interest to maturity or earliest redemption date, as
the case may be, premium, if any, expenses of redemption, Trustees and paying agents fees,
and registrars fees and expenses (or provision for payment thereof having been made in
accordance with the provisions of the Indenture), Company may terminate the Lease Term by
giving Issuer notice in writing of such termination and such termination shall forthwith
become effective.
Section 11.2. Option to Acquire Issuers Interest in the Mortgaged Property Prior to Payment
of the Bonds.
Company shall have, and is hereby granted, the option to acquire legal title to the
Mortgaged Property (including, at the option of Company, legal title to the Leased Land) prior to
the scheduled maturity of the Bonds (or provision for payment thereof having been made in
accordance with the provisions of the Indenture), if any of the following events shall have
occurred:
(a) The Buildings or the Leased Equipment shall have been damaged or destroyed as set
forth in Section 7.1 hereof to such extent that in the judgment of Company (i) it cannot be
reasonably restored within a period of 4 months to the condition thereof immediately
preceding such damage or destruction, or (ii) Company is thereby prevented from carrying on
its normal operation of the Mortgaged Property for a period of 4 months, or (iii) the cost
of restoration thereof would exceed the Net Proceeds of insurance carried thereon pursuant
to the requirements of Section 6.4 hereof, plus the
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granted in this Section any Net Proceeds of insurance or condemnation shall be paid to
Company.
Section 11.3. Option to Acquire Legal Title Upon Full Payment of the Bonds.
Company shall have
and is hereby granted an option to purchase and acquire legal title to and Issuer agrees to sell
the Mortgaged Property (including, at the option of Company, legal title to the Leased Land) at or
at any time after the expiration or sooner termination of the Lease Term (including in the event of
any default), following full payment of the Bonds, including without limiting the generality of the
foregoing, principal, interest to maturity or earliest redemption date, as the case may be,
premium, if any, expenses of redemption, Trustees and paying agents fees, and registrars fees
and expenses (or provision for payment thereof having been made in accordance with the provisions
of the Indenture), for a price of $1.
Section 11.4. Conveyance on Exercise of Option to Acquire Legal Title.
(a)
Conveyance on Exercise of Option to Acquire Legal Title.
At the closing of the purchase
pursuant to the exercise of any option to acquire legal title granted pursuant to Sections 11.2 or
11.3 of this Lease Agreement and, in each case, the payment in full of the Bonds, including
without limiting the generality of the foregoing, principal, interest to maturity or earliest
redemption date, as the case may be, premium, if any, expenses of redemption, Trustees and paying
agents fees, and registrars fees and expenses (or provision for payment thereof having been made
in accordance with the provisions of the Indenture) Issuer will upon receipt of the purchase
price deliver or cause to be delivered to Company the following:
(i) If the Indenture shall not at the time have been satisfied in full, a release
from Trustee of the property being acquired.
(ii) A bill of sale to all items of personal property being acquired, subject to no
liens or encumbrances other than: (A) those liens and encumbrances created by Company or to
the creation of which Company consented pursuant to Section 8.5 of this Lease Agreement;
(B) those liens and encumbrances resulting from the failure of Company to perform or
observe any of the agreements on its part contained in this Lease Agreement; (C) Permitted
Encumbrances other than the Indenture and this Agreement; and
(D) the rights and title of
the condemning authority with respect to Section 7.5 A hereof.
(iii) A general warranty deed conveying to Company good and marketable title to the
real property being acquired, subject to no liens or encumbrances other than: (A) those
liens and encumbrances created by Company or to the creation of which Company consented
pursuant to Section 8.5 of this Lease Agreement; (B) those liens and encumbrances resulting
from the failure of Company to perform or observe any of the
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If intended for Issuer:
City of Paragould, Arkansas
Office of the Mayor
City Hall
301 West Court Street
Paragould, Arkansas 72450
If intended for Trustee:
Fleet National Bank
111 Westminster Street
20th Floor
Providence, Rhode Island 02903
Attention: Corporate Trust Department
A duplicate copy of each notice, certificate, or other communication given hereunder by either
Issuer or Company to the other shall also be given to Trustee, Issuer, Company, and Trustee may, by
notice given hereunder, designate any further or different address to which subsequent notices,
certificates, or other communications shall be sent.
Section 12.2. Binding Effect.
This Lease Agreement shall inure to the benefit of and shall be
binding upon Issuer, Company, and their respective successors and permitted assigns, subject,
however, to the limitations contained in Sections 8.3, 9.1, and 9.2 hereof.
Section 12.3. Severability.
In the event any provision of this Lease Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate
or render unenforceable any other provision hereof.
Section 12.4. Amendments, Changes, and Modifications.
Except as otherwise provided in this
Lease Agreement or in the Indenture, subsequent to the initial issuance of Bonds and prior to
their payment in full (or provision for the payment thereof having been made in accordance with
the provisions of the Indenture) , this Lease Agreement may not be effectively amended, changed,
modified, altered, or terminated without the concurring written consent of Trustee given in the
manner and subject to the approval of owners of the Bonds, as provided in Article XIII of the
Indenture.
Section 12.5. Priority of Agreement.
This Lease Agreement (as it may be amended or
supplemented pursuant to the provisions hereof) and the estate of Company hereunder are and shall
continue to be superior and prior to the Indenture (as it may be amended or supplemented).
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Section 12.6. Execution Counterparts.
This Lease Agreement may be executed in
counterparts, each of which shall be an original and all of which shall constitute one and the same
instrument.
Section 12.7. Captions.
The captions or headings of this Lease Agreement are for convenience
only and in no way define, limit, or describe the scope or intent of any provisions of this Lease
Agreement.
Section 12.8. Security Agreement; Recording and Filing.
(a) This Lease Agreement is also a security agreement under the Uniform Commercial Code of the
State, and it is contemplated by the parties that a security interest (i) in the rentals and other
money due from Company to Issuer hereunder, (ii) the Leased Equipment, (iii) the Collateral, and
(iv) certain other interests of Issuer, will be granted to Trustee pursuant to the Indenture.
(b) This Lease Agreement or a memorandum thereof and the Indenture shall be recorded in the
Office of the Circuit Clerk and Ex-Officio Recorder of Greene County, Arkansas, or in such other
office as may at the time be provided by law as the proper place for the recordation thereof.
(c) Company hereby agrees to execute one or more fixture filings and financing statements and
renewals thereof with respect to the security interests granted by this Lease Agreement and to file
such statements or renewals thereof in any appropriate public office.
Section 12.9. Law Governing Construction of Agreement.
This Lease Agreement shall be governed
by, and construed in accordance with, the laws of the State.
Section 12.10. Estoppel Certificate.
Either party, upon 15 days prior notice from the
requesting party, shall execute and deliver to the requesting party a statement certifying that
this Lease Agreement is unmodified and in full force and effect (or, if there have been
modifications) , that the same is in full force and effect as modified and stating the
modifications, stating the dates which the Basic Rent and Additional Rent have been paid, and
stating whether or not there exists any defaults under this Lease Agreement, and if so, specifying
each such default; provided that Issuer shall be entitled to receive from and rely solely upon the
Trustee to provide the information required by this Section 12.10.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written.
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CITY OF PARAGOULD,
ARKANSAS,
Issuer
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By:
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/s/ Charles R. Partlow
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Charles R. Partlow, Mayor
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Attest:
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By:
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/s/ Goldie Wise
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Goldie Wise, City Clerk
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AMERICAN RAILCAR
INDUSTRIES, INC.,
Company
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By:
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/s/ James J. Unger
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Its:
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President
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Attest:
ACKNOWLEDGMENT
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STATE OF ARKANSAS
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)
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) ss:
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COUNTY OF Greene
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)
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On this 26th day of April, 1995, before me, a Notary Public duly commissioned,
qualified and acting, within and for the County and State aforesaid, appeared in person
the within named Charles R. Partlow and Goldie Wise, Mayor and City Clerk, respectively, of the
city of Paragould, Arkansas, a municipality of the State of
Arkansas, to me personally known, who stated that they were duly
authorized in their respective capacities to execute the foregoing
instrument for and in the name of the City, and further stated and
acknowledged that they had signed, executed, and delivered the
foregoing instrument for the consideration, uses, and purposes
therein mentioned and set forth.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal on the date first above written.
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/s/ Harry Truman Moore
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Notary Public
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My commission expires:
6-1-2001
NOTARY PUBLIC
Greene County, Arkansas
HARRY TRUMAN MOORE
Commission Expires: June 1, 2001
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ACKNOWLEDGMENT
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STATE OF Missouri
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)
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) ss:
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COUNTY OF St. Charles
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)
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On this 24th day of April, 1995, before me, a Notary Public duly commissioned, qualified and acting within and for the County
and State aforesaid, appeared in person the within named James J. Unger and Umesh Choksi, President and
Asst. Treasurer, respectively, of American Railcar Industries,
Inc., a Missouri corporation, to me personally known, who stated
that they were duly authorized in their respective capacities to
execute the foregoing instrument for and in the name and behalf of
the corporation, and further stated and acknowledged that they had
so signed, executed, and delivered the foregoing instrument for the
consideration, uses, and purposes therein mentioned and set forth.
IN TESTIMONY WHEREOF, I have hereunto set my hand and Official
seal on the date first above written.
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/s/ Nancy Collins
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Notary Public
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My commission expires:
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NANCY COLLINS
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NOTARY PUBLICSTATE OF MISSOURI
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8/2/96
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ST. CHARLES COUNTY
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MY COMMISSION EXPIRES AUG. 2, 1996
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(SEAL)
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By
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/s/ Becky Clifton
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State of ARKANSAS
County of GREENE
I hereby certify that this instrument was
FILED FOR RECORD and is RECORDED on the
Date and Time and in the Book and Page as
stamped hereon.
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ELLEN JOHNSON
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Recorder of Greene County
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By
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/s/ Becky Clifton
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Deputy
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52
Exhibit 10.16
LOAN AND SECURITY AGREEMENT
among
AMERICAN RAILCAR INDUSTRIES, INC.
as Borrower,
the
Lenders from time to time party there to,
and
NORTH FORK BUSINESS CAPITAL CORPORATION,
as Agent
Dated as of March 10,2005
TABLE OF CONTENTS
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Page
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ARTICLE I. DEFINITIONS
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1
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SECTION 1.1 General Definitions
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1
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SECTION 1.2 Accounting Terms and Determinations
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16
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SECTION 1.3 Other Terms; Headings
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16
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ARTICLE II. THE CREDIT FACILITIES
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17
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SECTION 2.1 The Revolving Credit Loans
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17
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SECTION 2.2 Procedure for Borrowing; Notices of Borrowing; Notices of
Continuation; Notices of Conversion; Settlement
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18
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SECTION 2.3 Application of Proceeds
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22
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SECTION 2.4 Maximum Amount of the Facility; Mandatory Prepayments;
Optional Prepayments
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23
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SECTION 2.5 Maintenance of Loan Account; Statements of Account
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23
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SECTION 2.6 Collection of Receivables
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23
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SECTION 2.7 Term
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24
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SECTION 2.8 Payment Procedures
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24
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SECTION 2. 9 Defaulting Lenders
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25
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SECTION 2.10
Sharing of Payments, Etc
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26
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SECTION 2.11 Publicity
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26
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ARTICLE III. SECURITY
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27
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SECTION 3.1 General
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27
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SECTION 3.2 Recourse to Security
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27
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SECTION 3.3 Special Provisions Relating to Inventory
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27
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SECTION 3.4 Special Provisions Relating to Receivables
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28
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SECTION 3.5
Continuation of Liens, Etc
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29
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SECTION 3.6 Power of Attorney
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29
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ARTICLE IV. INTEREST, FEES AND EXPENSES
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30
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SECTION 4.1 Interest
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30
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SECTION 4.2 Interest After Event of Default
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30
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SECTION 4.3 Closing Fee
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30
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SECTION 4.4 Unused Line Fee
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30
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SECTION 4.5 Calculations
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30
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SECTION 4.6 Indemnification in Certain Events
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30
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SECTION 4.7 Taxes
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31
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-i-
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Page
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ARTICLE V. CONDITIONS OF LENDING
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33
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SECTION 5.1 Conditions to Initial Loan
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33
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SECTION 5.2 Conditions Precedent to Each Loan
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36
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ARTICLE VI. REPRESENTATIONS AND WARRANTIES
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36
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SECTION 6.1 Representations and Warranties of the Borrower;
Reliance by the Lenders
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36
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ARTICLE VII. COVENANTS OF THE BORROWER
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42
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SECTION 7.1 Affirmative Covenants
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42
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SECTION 7.2 Negative Covenants
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48
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ARTICLE VIII. FINANCIAL COVENANTS
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49
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SECTION 8.1 Fixed Charge Coverage Ratio
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49
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SECTION 8.2 Leverage Ratio
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49
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SECTION 8.3 Business Plan
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49
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ARTICLE IX. EVENTS OF DEFAULT
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50
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SECTION 9.1 Events of Default
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50
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SECTION 9.2 Acceleration, Termination and Demand Rights
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51
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SECTION 9.3 Other Remedies
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54
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SECTION 9.4 License for Use of Software and Other Intellectual Property
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55
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SECTION 9.5 No Marshalling; Deficiencies; Remedies Cumulative
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55
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SECTION 9.6 Waivers
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56
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SECTION 9.7 Further Rights of the Agent
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56
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SECTION 9.8 Interest After Event of Default
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56
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ARTICLE X. THE AGENT
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57
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SECTION 10.1 Appointment of Agent
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57
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SECTION 10.2 Nature of Duties of Agent
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57
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SECTION 10.3 Lack of Reliance on Agent
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57
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SECTION 10.4 Certain Rights of the Agent
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58
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SECTION 10.5 Reliance by Agent
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58
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SECTION 10.6 Indemnification of Agent
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58
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SECTION 10.7 The Agent in Its Individual Capacity
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58
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SECTION 10.8 Holders of Notes
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58
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SECTION 10.9 Successor Agent
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59
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SECTION 10.10 Collateral Matters
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59
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SECTION 10.11 Actions with Respect to Defaults
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60
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SECTION 10.12 Delivery of Information
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60
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-ii-
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Page
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ARTICLE XI. GENERAL PROVISIONS
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60
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SECTION 11.1 Notices
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60
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SECTION 11.2 Delays; Partial Exercise of Remedies
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61
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SECTION 11.3 Right of Setoff
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61
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SECTION 11.4 Indemnification; Reimbursement of
Expenses of Collection
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61
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SECTION 11.5 Amendments, Waivers and Consents
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62
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SECTION 11.6 Nonliability of Agent and Lenders
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63
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SECTION 11.7 Assignments and Participations
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63
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SECTION 11.8 Counterparts; Telecopied Signatures
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65
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SECTION 11.9 Severability
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65
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SECTION 11.10 Maximum Rate
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65
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SECTION 11.11 Entire Agreement; Successors and
Assigns; Interpretation
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66
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SECTION 11.12 LIMITATION OF LIABILITY
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66
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SECTION 11.13. GOVERNING LAW
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66
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SECTION 11.14 SUBMISSION TO JURISDICTION
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67
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SECTION 11.15 SERVICE OF PROCESS
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67
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SECTION 11.16 JURY TRIAL
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67
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-iii-
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Schedules
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Schedule 1
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Commitments of Lenders
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Schedule 2
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Pledged Deposit Accounts
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Schedule 6.1 (a)
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Foreign Jurisdictions
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Schedule 6. l(b)
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Locations of Collateral
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Schedule 6. 1(g)
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Ownership; Subsidiaries
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Exhibits
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Exhibit A
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Note
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Exhibit B
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Assignment and Acceptance
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Exhibit C
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Compliance Certificate
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Exhibit D
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Notice of Borrowing
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Exhibit E
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Notice of Continuation
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Exhibit F
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Notice of Conversion
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Exhibit G
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Borrowing Base Certificate
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Exhibit H
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Perfection Certificate
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Exhibit I
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Collateral Access Agreement
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-iv-
LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT,
dated as of March 10,2005, among American Railcar
Industries, Inc., a Missouri corporation (the Borrower), each of the financial institutions
identified as a Lender on Schedule 1 (together with each of their respective direct and indirect
successors and assigns, each, a Lender, and collectively, the Lenders), and NORTH FORK BUSINESS
CAPITAL CORPORATION, a New York corporation (NFBC), as agent for the Lenders (the Agent).
W
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T
N
E
S
S
E
T
H
:
WHEREAS,
the Borrower wishes to obtain a revolving credit facility; and
WHEREAS,
upon the terms and subject to the conditions set forth herein, the Lenders are
willing to make revolving loans to the Borrower in an aggregate amount not to exceed $50,000,000;
NOW, THEREFORE,
the Borrower, the Lenders and the Agent hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1
General Definitions.
As used herein, the following terms shall
have the meanings herein specified (to be equally applicable to both the singular and plural
forms of the terms defined):
Advance
means a Base Rate Advance or a LIBOR Rate Advance.
Affiliate
means, as to any Person, any other Person who directly or indirectly controls, is
under common control with, is controlled by or is a director, officer, manager or general partner
of such Person. As used in this definition, control (including its correlative meanings,
controlled by and under common control with) means possession, directly or indirectly, of the
power to direct or cause the direction of management or policies (whether through ownership of
voting securities or partnership or other ownership interests, by contract or otherwise),
provided
that any public company that does not conduct business in any material respect in
or with the railcar industry shall not be an Affiliate hereunder except for purposes of Section 6.1(cc). For the avoidance of doubt, a Subsidiary of the Borrower shall be deemed to be an Affiliate
of the Borrower.
Agent
has the meaning specified in the introductory paragraph.
Agent
Loan
has the meaning specified in Section 2.2(h).
Agents Payment Account
means the account of the Agent at North Fork Bank in
Melville, New York, account number 3124059415, or such other account of the Agent or any of its
Affiliates in the United States as the Agent may from time to time designate in writing to the
Borrower and the Lenders.
Agreement
means this Loan and Security Agreement, as amended, supplemented or
otherwise modified from time to time.
Assignment and Acceptance
means an assignment and acceptance entered into
by a Lender and its assignee, and accepted by the Agent, and substantially in the form of
Exhibit B.
Auditors
means a nationally recognized firm of independent public accountants
selected by the Borrower and reasonably satisfactory to the Agent;
Availability Event
means that the difference between (i) the lesser of (A) the
Borrowing Base and (B) the Maximum Amount of the Facility and (ii) the aggregate outstanding
amount of the Loans, is less than $5,000,000.
Bankruptcy Code
means Title 11 of the United States Code entitled
Bankruptcy, as that title may be amended from time to time, or any successor statute.
Base Rate
means the higher of (i) the highest prime, base or equivalent rate of interest
publicly announced from time to time by North Fork Bank or any successor thereto (which may not be
the lowest rate of interest charged by such bank) and (ii) the published annualized rate for
ninety-day dealer commercial paper that appears in the Money
Rates section of
The Wall Street
Journal.
Base Rate Advance
means an Advance that bears interest as provided in Section
4.1 (a).
Blocked Account
has the meaning specified in Section 2.6.
Blocked Account Agreement
has the meaning specified in Section 2.6.
Blocked Account Bank
means Citibank, N.A., Bank of America, N.A. or U.S.
Bank National Association or any successor or any other bank acceptable to the Agent to
act as such.
Borrower
has the meaning specified in the introductory paragraph.
Borrowers Account
means the account maintained by the Borrower at North Fork Bank
in Melville, New York or such other account as the Borrower may from time to time designate in
writing to the Agent.
Borrowing
has the meaning specified in Section 2.2(a).
Borrowing Base
has the meaning specified in Section 2.1 (a).
-2-
Borrowing Base Certificate
has the meaning specified in Section
7.1 (k)(v).
Borrowing
Date
means the date on which a Borrowing is
obtained.
Business Day
means any day other than a Saturday, a Sunday or any other day on
which commercial banks in New York, New York are required or permitted by law to close. When
used in connection with any LIBOR Rate Advance, a Business Day shall also exclude any day on
which commercial banks are not open for dealings in Dollar deposits in the London interbank
market.
Business Plan
means a business plan of the Borrower and its Subsidiaries,
consisting of consolidated and consolidating projected balance sheets, related cash flow
statements and related profit and loss statements, and availability forecasts, together
with appropriate supporting details and a statement of the underlying assumptions, which
covers a three-year period and which is prepared on a monthly basis for the first year
and on an annual basis thereafter and in a manner consistent with GAAP and with the
Financial Statements.
Capital Expenditures
means expenditures for any fixed assets or improvements,
replacements, substitutions or additions thereto or therefor which have a useful life of more
than one year, and shall include all commitments, payments in respect of Capitalized Lease
Obligations and leasehold improvements.
Capitalized Lease Obligations
means any rental obligation which, under GAAP,
is or will be required to be capitalized on the books of the lessee, taken at the amount
thereof
accounted for as Indebtedness (net of Interest Expense) in accordance with GAAP.
Cash Equivalents
means (i) securities issued, guaranteed or insured by the
United States or any of its agencies with maturities of not more than one year from the date
acquired; (ii) securities issued, guaranteed or insured by any state of the United States or
any public instrumentality thereof with maturities of not more than
one year from the date
acquired and, at the time of acquisition, having one of the three highest ratings obtainable
from either Standard & Poors Ratings Services or Moodys Investors Service, Inc.; (iii) time
deposits, term deposits and certificates of deposit with maturities of not more than one year
from the date acquired, issued by (A) the Agent or any Lender or any of their respective
Affiliates, (B) any U.S. federal or state chartered commercial bank of recognized standing
which has capital and unimpaired surplus in excess of $500,000,000 or (C) any bank or its
holding company that has a short-term commercial paper rating of at least A-1 or the
equivalent by Standard & Poors Ratings Services or at least P-1 or the equivalent by Moodys
Investors Service, Inc.; (iv) repurchase agreements and reverse repurchase agreements with
terms of not more than thirty days from the date acquired, for securities of the type
described in clause (i) or (ii) above and entered into only with commercial banks having the
qualifications described in clause (iii) above or such other financial institutions with a
short-term commercial paper rating of at least A-1 or the equivalent by Standard & Poors
Ratings Services or at least P-1 or the equivalent by Moodys Investors Service, Inc.; (v)
commercial paper issued by any Person incorporated under the laws of the United States or any
state thereof and rated at least A-1 or the equivalent thereof by Standard & Poors Ratings
Services or at least P-1 or the equivalent thereof by Moodys Investors Service, Inc., in each
case with maturities of not more than one year from the date
-3-
acquired; and (vi) investments in money market funds registered under the Investment Company
Act of 1940, which have net assets of at least $500,000,000 and at least eighty-five percent (85%)
of whose assets consist of securities and other obligations of the type described in clauses (i)
through (v) above.
Closing Date
means the date of execution and delivery of this Agreement.
Code
has the meaning specified in Section 1.3.
Collateral
means all Receivables of the Borrower (other than Excluded Receivables), all
Inventory of the Borrower and the Pledged Deposit Accounts of the Borrower.
Collateral Access Agreements
means a landlord waiver, mortgagee waiver,
bailee letter or similar acknowledgment of any lessor, warehouseman or processor in possession
of any Collateral or on whose property any Collateral is located, substantially in the form of
Exhibit I.
Collections
means all cash, funds, checks, notes, instruments, any other form of remittance
tendered by account debtors in respect of payment of Receivables of the Borrower and any other
payments received by the Borrower with respect to any Collateral.
Commitment
means, with respect to any Lender, its commitment to make Loans up to the
amount set forth opposite its name on Schedule 1.
Compliance Certificate
has the meaning specified in Section 7.1 (k)(iv).
Contingent Obligation
means any direct, indirect, contingent or non-contingent
guaranty or obligation for the Indebtedness of another Person, except endorsements in the ordinary
course of business.
Continuation
has the meaning specified in Section 2.2(b).
Convert. Conversion
and
Converted
each refers to conversion of Advances of one Type
into Advances of another Type pursuant to Section 2.2(c).
Default
means any of the events specified in Section 9.1, whether or not any of the
requirements for the giving of notice, the lapse of time, or both, or any other condition, has been
satisfied.
Defaulting Lender
has the meaning specified in Section 2.9(a).
Dollars
and the sign
$
means freely transferable lawful currency of the United
States.
EBITDA
means, for any period, with respect to the Borrower (i) net income (as
that term is determined in accordance with GAAP) for such period,
plus
(ii) the amount of
depreciation and amortization of fixed and intangible assets deducted in determining such net
income for such period,
plus
(iii) all Interest Expense arid all fees for the use of money
or the
-4-
availability of money, including commitment, facility and like fees and charges upon Indebtedness
(including Indebtedness to the Lenders) paid or payable during such period,
plus
(iv) all
tax liabilities paid or accrued during such period,
less
(v) the; amount of all
extraordinary gains (or
plus
the amount of all extraordinary losses) realized during such
period including, without limitation, gains (or losses) realized upon the sale or other disposition
of property or assets that are sold or otherwise disposed of outside the ordinary course of
business, in each case, to the extent that the amount specified in clause (ii), (iii), (iv) or (v)
hereof is included in the calculation of net income for such period.
Eligible Assignee
means (i) a Lender or any Affiliate thereof; (ii) a commercial
bank organized or licensed under the laws of the United States or a state thereof having total
assets in excess of $500,000,000; (iii) a finance company, insurance company or other financial
institution or fund, which is regularly engaged in making, purchasing or investing in loans and
having total assets in excess of $500,000,000; or (iv) a savings
and loan association or savings
bank organized under the laws of the United States or a state thereof which has a net worth,
determined in accordance with GAAP, in excess of $500,000,000;
provided,
however,
that (A)
each Eligible Assignee under clauses (ii) through (iv) hereof shall be reasonably acceptable to the
Agent and, so long as no Event of Default is continuing, the Borrower and (B) nothing herein shall
restrict or require the consent of any Person to the pledge by any Lender of all or any portion of
its rights and interests under this Agreement, its Notes or any other Loan Document to any Federal
Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve
System or U.S. Treasury Regulation 31 CFR 203.14, and such Federal Reserve Bank may enforce such
pledge in any manner permitted by applicable law.
Eligible Inventory
means only such Inventory of the Borrower located in the United
States consisting of raw materials or finished goods, which is free from any claim of title or Lien
in favor of any Person (other than Liens in favor of the Agent) and with respect to which no event
has occurred and no condition exists which could reasonably be expected to impair substantially the
Borrowers ability to use or sell such Inventory in the ordinary course of its business. No
Inventory of the Borrower shall be Eligible Inventory unless the Agent has a perfected first
priority Lien thereon. The value of Eligible Inventory shall be computed at the lower of cost
(computed on a first in, first out basis) or market. Any Inventory of the Borrower that is not in
the control or possession of the Borrower and is covered by a warehouse receipt, a bill of lading
or other document of title shall in no event be Eligible Inventory unless such warehouse receipt,
bill of lading or document of title is in the name of or held by the Agent. No Inventory of the
Borrower shall be Eligible Inventory unless (i) it is located on property owned by the Borrower; or
(ii) it is located on property leased by the Borrower or in a contract warehouse (A) which is
subject to a Collateral Access Agreement executed by the mortgagee, lessor or contract
warehouseman, as the case may be, or (B) with respect to which the Agent has established a reserve
from the Borrowing Base in an amount equal to the rent or fees payable to the applicable lessor or
warehouseman for a three-month period and, in either case such Inventory is segregated or otherwise
separately identifiable from goods of others, if any, stored on the premises. No Inventory of the
Borrower shall be Eligible Inventory if it is in transit or it is consigned to or from the
Borrower. In addition, and without limitation of the foregoing, the Agent may treat any Inventory
as ineligible if:
-5-
(a) it is not owned solely by the Borrower or the Borrower does not have sole
and good, valid and marketable title thereto; or
(b) it is packing or shipping materials or maintenance supplies; or
(c) it is goods returned or rejected by the Borrowers customer; or
(d) it (i) is excess (as so reserved by the Borrower from time to time), (ii) is
obsolete, defective, damaged, unmerchantable or consists of an amount of Inventory in excess
of
a two-year supply, (iii) is samples or inventory on hand which is used for promotional and
other
sales activities, or (iv) does not otherwise conform to the representations and warranties
contained in the Loan Documents; or
(e) it is repossessed, attached, seized, made subject to a writ or distress
warrant, levied upon or brought within the possession of any receiver, trustee,
custodian or
assignee for the benefit of creditors; or
(f) it is Inventory acquired by the Borrower in or as part of (i) a bulk
transfer or sale of assets and such acquisition is not consummated in the ordinary course of
business unless the Borrower has complied with all applicable bulk sales or bulk transfer laws
in
connection with such acquisition or (ii) any acquisition of assets from another Person other
than
in the ordinary course of business and such Inventory is not satisfactory to the Required
Lenders
or has not been inspected by the Agent in a collateral audit examination.
Eligible Receivables
means and includes only those unpaid Receivables of the
Borrower, without duplication, which (i) arise out of a bona
fide sale of goods or rendition of
services of the kind ordinarily sold or rendered by the Borrower in the ordinary course of its
business, (ii) are owed by a Person competent to contract for such goods or services that is not an
Affiliate or an employee of the Borrower and is not controlled by an Affiliate of the Borrower,
(iii) are not subject to renegotiation or redating, (iv) are free and clear of any Lien in favor of
any Person other than Liens in favor of the Agent and (v) mature as stated in the invoice or other
supporting data covering such sale or services. No Receivable of the Borrower shall be an Eligible
Receivable (i) unless the Agent has a perfected first priority Lien thereon, (ii) if it is more
than ninety days past the date of the original invoice therefor or (iii) unless the delivery of the
goods or the rendition of the services giving rise to such Receivable has been completed. The Agent
may treat any Receivable as ineligible if:
(a) any warranty contained in this Agreement or in any other Loan Document
with respect to such Receivable or in any assignment or statement of warranties or
representations relating to such Receivable delivered by the Borrower to the Agent has been
breached or is untrue in any material respect or the Borrower is not in compliance with all
applicable laws with respect to such Receivable; or
(b) the account debtor has disputed liability, has asserted a right of setoff or
has made any claim with respect to any other Receivable due from such account debtor to the
Borrower, to the extent of the amount of such dispute or claim, or the amount of such actual
or
asserted right of setoff, as the case may be; or
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(c) the account debtor or any of its assets is the subject of an Insolvency Event
or is reasonably likely to become the subject of an Insolvency Event; or
(d) the account debtor has called a meeting of its creditors to obtain any
general financial accommodation; or
(e) the account debtor is also a supplier to the Borrower, to the extent of the
aggregate amount owed by the Borrower to the account debtor; or
(f) the sale or rendition of services is to an account debtor outside the United
States of America or Canada, unless it is on letter of credit, acceptance or other terms
reasonably
acceptable to the Required Lenders; or
(g) twenty-five percent (25%) or more of the accounts of any account debtor
to the Borrower are unpaid more than ninety days past the date of the original invoices
therefor;
or
(h) the amount owed by the account debtor under such Receivable and under all other
Receivables owed by such account debtor exceeds twenty percent (20%) of all Eligible
Receivables, but only to the extent of such excess; or
(i) the account debtor is the United States of America or any department,
agency or instrumentality thereof, unless the applicable Borrower assigns its right to payment
under such Receivable to the Agent as collateral hereunder in full compliance with (including,
without limitation, the filing of a written notice of the assignment and a copy of the
assignment
with, and receipt of acknowledgment thereof by, the appropriate contracting and
disbursing offices pursuant to) the Assignment of Claims Act of 1940, as amended
(U.S.C. § 3727; 41 U.S.C. § 15); or
(j) it was acquired by the Borrower in or as part of an acquisition of
assets from another Person and such Receivable is not satisfactory to the Required
Lenders or has not been reviewed by the Agent in a collateral examination audit.
Environmental Laws
means all federal, state and local statutes, laws (including common
or case law), regulations or orders applicable to the business or property of a Person
relating to pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface strata)
including, without limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Materials.
Equipment
means all machinery, equipment, furniture, fixtures,
leasehold
improvements, conveyors, tools, materials, storage and handling equipment, hydraulic
presses, cutting equipment, computer equipment and hardware, including central processing
units, terminals, drives, memory units, embedded computer programs and supporting
information, printers, keyboards, screens, peripherals and input or output devices,
molds, dies, stamps, and other equipment of every kind and nature and wherever situated
now or hereafter owned by a person or in which a Person may have any interest as lessee
or otherwise (to the extent of such
-7-
interest), together with all additions and accessions thereto, all replacements and all
accessories and parts therefor, all manuals, blueprints, know-how, warranties and records in
connection therewith and all rights against suppliers, warrantors, manufacturers, and sellers or
others in connection therewith, together with all substitutes for any of the foregoing.
ERISA
means the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1000 et
seq., amendments thereto, successor statutes, and regulations or guidelines promulgated
thereunder.
ERISA Affiliate
means any entity required to be aggregated with the Borrower under Section
414(b), (c), (m) or (o) of the Internal Revenue Code.
Event of Default
means the occurrence of any of the events specified in Section 9.1.
Excluded Receivables
means Receivables (i) with respect to which the account
debtors are Affiliates of the Borrower and (ii) that do not arise from the sale of Inventory.
Expiration Date
means the earlier of (i) March 10, 2006 and (ii) the date of termination
of the Commitments.
Federal Funds Rate
means, for any period, a fluctuating interest rate
per annum
equal, for each day during such period, to the weighted average of the rates on overnight
Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds
brokers, as published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal Funds brokers of recognized standing
selected by it.
Federal Reserve Board
means the Board of Governors of the Federal Reserve
System or any Person succeeding to the functions thereof.
Financial Covenants
means the covenants set forth in Article VIII.
Financial Statements
means, with respect to the Borrower and its Subsidiaries,
the balance sheets, profit and loss statements, statements of cash flow, and statements of
changes in intercompany accounts, if any, for the period specified, prepared in accordance with
GAAP and consistent with prior practices applied to the Borrowers financial statements.
Fixed Charge Coverage Ratio
means (without duplication), for any period, with
respect to the Borrower, as of the date of determination thereof, the ratio of (X) (i) EBITDA for
such period,
less
(ii) all Capital Expenditures (other than (A) Capital Expenditures
financed by Persons other than the Lenders and (B) Capital Expenditures, not to exceed $10,000,000
in the aggregate for all periods, relating to the construction of a paint line at the Borrowers
facility in Paragould, Arkansas and for which the Borrower shall thereafter seek financing
from Persons other than the Lenders) paid or payable during such period,
less
(iii) all tax
liabilities paid during such period to (Y) (i) all scheduled principal amounts of Indebtedness paid
or scheduled to be paid during such period,
plus
(ii) all Interest Expense and all fees for
the use of money or the
-8-
availability of money, including commitment, facility and like fees and charges upon
Indebtedness (including Indebtedness to the Lenders) paid or payable during such period,
plus
(iii) without limitation of Section 7.2(d) or 9.2, all
loans and Investments to any Person
(including, without limitation, any Affiliate of the Borrower) made during such period
plus
(iv) without limitation of Section 9.2, all dividends, stock repurchases or other
distributions paid
or payable in cash on account of the Borrowers capital stock or other equity interests during
such period.
GAAP
means generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting Standards Board that are
applicable to the circumstances as of the date of determination.
Governing Documents
means, with respect to any Person, the certificate of
incorporation and bylaws or similar organizational documents of such Person.
Governmental
Authority
means any nation or government, any state or other political
subdivision thereof or any entity exercising executive, legislative, judicial, regulatory or
administrative functions thereof or pertaining thereto.
Hazardous Materials
means any and all pollutants, contaminants and toxic, caustic,
radioactive and hazardous materials, substances and wastes including, without limitation,
petroleum or petroleum distillates, asbestos or urea formaldehyde foam insulation or
asbestos-containing materials, whether or not friable, polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any nature, that are regulated
under any Environmental Laws.
Hedging Agreement
means any interest rate protection agreement, foreign
currency exchange agreement, commodity price protection agreement or other interest or
currency exchange rate or commodity price hedging agreement.
Indebtedness
means, with respect to the Borrower or any other Person, as of the date of
determination thereof (without duplication), (i) all obligations of such Person for borrowed money
of any kind or nature, including funded and unfunded debt, and any Hedging Agreements or
arrangements therefor, regardless of whether the same is evidenced by any note, debenture, bond or
other instrument, (ii) all obligations of such Person to pay the deferred purchase price of
property or services (other than current trade accounts payable under normal trade terms and which
arise in the ordinary course of business), (iii) all obligations of such Person to acquire or for
the acquisition or use of any fixed asset, including Capitalized Lease Obligations (other than, in
any such case, any portion thereof representing interest or deemed interest or payments in respect
of taxes, insurance, maintenance or service), or improvements which are payable over a period
longer than one year, regardless of the term thereof or the person or Persons to whom the same are
payable, (iv) the then outstanding amount of withdrawal or termination liability incurred by or
imposed on the Borrower or its Subsidiaries under ERISA, (v) all Indebtedness of others secured by
(or for which the holder of such Indebtedness has an existing right to be secured) a Lien on any
asset of such Person whether or not the Indebtedness is assumed by such Person,
provided
that, for the purpose of determining the amount of
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Indebtedness of the type described in this clause (v), if recourse with respect to such
Indebtedness is limited to the assets of such Person, then the amount of Indebtedness shall be
limited to the fair market value of such assets, (vi) all Indebtedness of others to the extent
guaranteed by such Person and (vii) all obligations of such Person in respect of letters of credit,
bankers acceptances or similar instruments issued or accepted by banks or other financial
institutions for the account of such Person. For the avoidance of doubt, (A) Indebtedness as
defined herein shall include all Indebtedness of a Person owing to an Affiliate of such Person and
(B) obligations of a Person under an Operating Lease shall not constitute Indebtedness.
Insolvency Event
means, with respect to any Person, the occurrence of any of the following:
(i) such Person shall be adjudicated insolvent or bankrupt or institutes proceedings to be
adjudicated insolvent or bankrupt, or shall generally fail to pay or admit in writing its inability
to pay its debts as they become due, (ii) such Person shall seek dissolution or reorganization or
the appointment of a receiver, trustee, custodian or liquidator for it or a substantial portion of
its property, assets or business or to effect a plan or other arrangement with its creditors, (iii)
such Person shall make a general assignment for the benefit of its creditors, or consent to or
acquiesce in the appointment of a receiver, trustee, custodian or liquidator for a substantial
portion of its property, assets or business, (iv) such Person shall file a voluntary petition under
any bankruptcy, insolvency or similar law, (v) such Person shall take any corporate or similar act
in furtherance of any of the foregoing, or (vi) such Person, of a substantial portion of its
property, assets or business, shall become the subject of an involuntary proceeding or petition for
(A) its dissolution or reorganization or (B) the appointment of a receiver, trustee, custodian or
liquidator, and (I) such proceeding shall not be dismissed or stayed within ninety days or (II)
such receiver, trustee, custodian or liquidator shall be appointed;
provided
,
however,
that
the Lender shall have no obligation to make any Advance during the pendency of any ninety-day
period described in clauses (A) and (B).
Interest Expense
means, for any period, all interest with respect to Indebtedness
(including, without limitation, the interest component of Capitalized Lease Obligations) accrued or
capitalized during such period (whether or not actually paid during such period) determined in
accordance with GAAP.
Interest Period
means the period commencing on the date of a LIBOR Rate , Advance and ending
one, two or three months thereafter;
provided
,
however
, that (i) the Borrower may not
select any Interest Period that ends after the Expiration Date; (ii) whenever the last day of an
Interest Period would otherwise occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next succeeding Business Day, except that, if
such extension would cause the last day of such Interest Period to occur in the next following
calendar month, then the last day of such Interest Period shall occur on the next preceding
Business Day; and (iii) if there is no corresponding date of the month that is one, two or three
months, as the case may be, after the first day of an Interest period, such Interest Period shall
end on the last Business Day of such first, second or third month, as the case may be.
Internal Revenue Code
means the Internal Revenue Code of 1986, any
amendments thereto, any successor statute and any regulations and guidelines promulgated
thereunder.
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Internal Revenue Service
or IRS means the United States Internal Revenue
Service and any successor agency.
Inventory
means all present and future goods intended for sale, lease or other disposition
including, without limitation, all raw materials, work in process, finished goods and other retail
inventory, goods in the possession of outside processors or other third parties, consigned goods
(to the extent of the consignees interest therein), materials and supplies of any kind, nature or
description which are or might be used in connection with the manufacture, packing, shipping,
advertising, selling or finishing of any such goods, all documents of title or documents
representing the same and all records, files and writings with respect thereto.
Investment
in any Person means, as of the date of determination thereof, (i) any payment or
contribution, or commitment to make a payment or contribution, by a Person including, without
limitation, property contributed or committed to be contributed by such Person for or in connection
with its acquisition of any stock, bonds, notes, debentures, partnership or other ownership
interest or any other security of the Person in whom such Investment is made or (ii) any loan,
advance or other extension of credit or guaranty of or other surety obligation for any Indebtedness
of such Person in whom the Investment is made. In determining the aggregate amount of Investments
outstanding at any particular time, (i) a guaranty (or other surety obligation) shall be valued at
not less than the principal outstanding amount of the primary obligation; (ii) returns of capital
(but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating
distribution) shall be deducted; (iii) earnings, whether as dividends, interest or otherwise, shall
not be deducted; and (iv) decreases in the market value shall not be deducted unless such decreases
are computed in accordance with GAAP.
Lender
or
Lenders
has the meaning specified in the introductory paragraph and shall
include the Agent with respect to any Agent Loan.
Liabilities
of a Person as of the date of determination thereof means the
liabilities of such Person on such date as determined in accordance with GAAP. Liabilities to
Affiliates of such Person shall be treated in accordance with GAAP or as otherwise provided
herein.
LIBOR Rate
means, with respect to each Interest Period, the reserve adjusted rate
per
annum
equal to the one, two or three-month London Interbank Offered Rate, as applicable, that
appears in the Money Rates section of
The Wall Streel Journal
on the first day of such Interest
Period;
provided
,
however
, that if
The Wall Street Journal
no longer publishes such one,
two or three-month London Interbank Offered Rate, reference shall be made to the Dow Jones Market
Service (formerly Telerate) page 3750 for such London Interbank Offered Rate.
LIBOR Rate Advance
means an Advance that bears interest as provided in Section
4. 1(b).
Lien
means any lien, claim, charge, pledge, security interest, assignment,
hypothecation, deed of trust, mortgage, lease, conditional sale, retention of title or other
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preferential arrangement having substantially the same economic effect as any of the foregoing,
whether voluntary or imposed by law.
Loan Account
has the meaning specified in Section 2.5.
Loan Documents
means this Agreement and all documents and instruments executed and
delivered by the Borrower under or in connection with this Agreement, as each of the same may be
amended, supplemented or otherwise modified from time to time, including, without limitation, the
Notes and the Blocked Account Agreements.
Loans
means the Revolving Credit Loans and the Agent Loans.
Material Adverse Effect
means (i) a material adverse effect on the business,
prospects, operations, results of operations, assets, liabilities or condition (financial or
otherwise) of the Borrower, (ii) the impairment of (A) the Borrowers ability to perform in any
material respect its obligations under the Loan Documents to which it is a party or (B) the ability
of the Agent or the Lenders to enforce the Obligations or realize upon the Collateral or (iii) a
material adverse effect on the value of the Collateral or the amount that the Agent or the Lenders
would be likely to receive (after giving consideration to delays in payment and costs of
enforcement) in the liquidation of the Collateral;
provided, however,
that (A) a material
adverse change in (I) the global, United States or regional economy generally, (II) railcar
manufacturing or leasing conditions generally or (III) global or United States securities markets,
(B) a change in laws, rules or regulations applicable to the Borrower or its business or (C) a
change caused by any announcement of the transactions contemplated by this Agreement shall not, in
and of itself, be deemed to have a Material Adverse Effect.
Material Indebtedness
means Indebtedness (other than the Loans), or obligations in
respect of one or more Hedging Agreements, of the Borrower in an aggregate principal amount
exceeding $20,000,000. For purposes of this definition, the principal amount of the obligations
of the Borrower in respect of any Hedging Agreement at any time shall be the maximum aggregate
amount (giving effect to any netting agreements) that the Borrower would be required to pay if such
Hedging Agreement were terminated at such time.
Maximum
Amount of the Facility
means Fifty Million Dollars ($50,000,000).
Multiemployer Plan
means a multiemployer plan, as defined in Section 4001 (a)(3) of
ERISA, to which the Borrower or any ERISA Affiliate has contributed within the past six years.
NFBC
has the meaning specified in the introductory paragraph.
Notes
has the meaning specified in Section 2. l(c).
Obligations
means and includes all loans (including the Loans), advances (including the
Advances), debts, liabilities, obligations, covenants and duties owing by the Borrower to the Agent
or the Lenders of any kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, which may arise under, out of, or in connection with, this Agreement,
the Notes, the other Loan Documents or any other agreement
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executed in connection herewith or therewith, whether or not for the payment of money,
whether arising by reason of an extension of credit, opening, guaranteeing or confirming of a
letter of credit, loan, guaranty, indemnification or in any other manner, whether direct or
indirect (including those acquired by assignment, purchase, discount or otherwise), whether
absolute or contingent, due or to become due, and however acquired. The term includes, without
limitation, all Loans made in excess of the Borrowing Base or of the
Maximum Amount of the
Facility and all interest (including interest accruing on or after an Insolvency Event, whether or
not such interest constitutes an allowed claim), charges, expenses, commitment, facility, closing
and collateral management fees, attorneys fees, and any other sum properly chargeable to the
Borrower under this Agreement, the Notes, the other Loan Documents or any other agreement executed
in connection herewith or therewith.
Operating Lease
means a lease treated as an operating lease in accordance with GAAP.
PBGC
means the Pension Benefit Guaranty Corporation and any Person
succeeding to the functions thereof.
Pension Plan
means a pension plan (as defined in Section 3(2) of ERISA) subject to
Title IV of ERISA (other than a Multiemployer Plan) which the Borrower or any ERISA Affiliate
sponsors or maintains, or to which it makes, is making, or is obligated to make contributions, or,
in the case of a multiple employer plan (as described in Section 4064(a) of ERISA), has made
contributions at any time during the immediately preceding five plan years.
Permitted Liens
means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced and be
continuing (unless such enforcement, collection, levy or foreclosure is being contested by the
Borrower in good faith by appropriate proceedings diligently conducted and for which adequate
reserves are being maintained in accordance with GAAP): (i) Liens for taxes, assessments and
other governmental charges or levies or the claims or demands of landlords, carriers,
warehousemen, mechanics, laborers, materialmen and other like Persons arising by operation of
law in the ordinary course of business for sums which are not yet due and payable, (ii)
deposits
or pledges (other than Liens on Collateral) to secure the payment of workers compensation,
unemployment insurance or other social security benefits or obligations, public or statutory
obligations, surety or appeal bonds, bid or performance bonds, or other obligations of a like
nature incurred in the ordinary course of business, (iii) zoning restrictions, easements,
encroachments, licenses, restrictions or covenants on the use of any Property which do not
materially impair either the use of such Property in the operation of the business of the
Borrower
or the value of such Property, (iv) inchoate Liens arising under ERISA to secure current
service
pension liabilities as they are incurred under the provisions of employee benefit plans from
time
to time in effect, and (v) rights of general application reserved to or vested in any
Governmental
Authority to control or regulate any Property, or to use any Property in a manner which does
not
materially impair the use of such Property for the purposes for which it is held by the
Borrower,
provided
that the foregoing Liens under clauses (i) through (v) hereof do not secure
liabilities in
excess of $5,000,000 in the aggregate at any time,
and provided,
further that
Permitted Liens
shall not include any Lien securing Indebtedness.
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Person
means any individual, sole proprietorship, partnership, limited liability
company, joint venture, trust, unincorporated organization, joint stock company, association,
corporation, institution, entity, party or government (including any division, agency or
department thereof) or any other legal entity, whether acting in an individual, fiduciary or
other capacity, and, as applicable, the successors, heirs and assigns of each. For the
avoidance of doubt, a Subsidiary or other Affiliate of the Borrower shall constitute a
separate Person.
Plan
means any employee benefit plan, as defined in Section 3(3) of ERISA, maintained
or contributed to by the Borrower or any Subsidiary (other than a Multiemployer Plan) or with
respect to which any of them may incur liability even if such plan is not covered by ERISA
pursuant to Section 4(b)(4) thereof.
Pledged Deposit Accounts
means the deposit accounts specified in Schedule 2,
any other Blocked Accounts and any other deposit account of the Borrower in which any
proceeds of any Collateral are on deposit from time to time.
Prohibited
Transaction
means a prohibited transaction Within the meaning of
Section 406 of ERISA or Section 4975 of the Internal Revenue Code for which a statutory or
class exemption is not available or a private exemption has not previously been obtained from
the Department of Labor.
Property
means any real property owned, leased or controlled by the Borrower.
Pro Rata Share
of any amount means, with respect to any Lender, a fraction
(expressed as a percentage) (i) at any time before the Expiration Date, the numerator of
which is the Commitment of such Lender and the denominator of which is the aggregate amount
of the Commitments of all the Lenders, and (ii) at any time on and after the Expiration Date,
the numerator of which is the aggregate unpaid principal amount of the Revolving Credit Loans
made by such Lender and the denominator of which is the aggregate unpaid principal amount of
all Revolving Credit Loans, at such time.
Qualification
or
Qualified
means, with respect to any report of independent public
accountants covering Financial Statements, a material qualification to such report (i)
resulting from a limitation on the scope of examination of such Financial Statements or the
underlying data, (ii) as to the capability of the Borrower to continue operations as a going
concern or (iii) which could be eliminated by changes in Financial Statements or notes
thereto covered by such report (such as by the creation of or increase in a reserve or a
decrease in the carrying value of assets) and which if so eliminated by the making of any
such change and after giving effect thereto would result in a Default
or an Event of Default.
Receivables
means all present and future accounts, leases, instruments and chattel
paper and all claims against third parties, drafts, acceptances, letters of credit, rights to
receive payments under letters of credit, book accounts, credits, reserves, computer tapes,
programs, discs, software, books, ledgers, files and records relating to such accounts,
leases, instruments and chattel paper, together with all supporting obligations and all
right, title, security and guaranties with respect to any of the foregoing, including any
right of stoppage in transit.
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Replacement Lender
means a financial institution proposed by the Borrower in
accordance with Section 2.9(d) that is reasonably satisfactory to the Agent and which has agreed
to acquire and assume all or a part of a Defaulting Lenders Loans and Commitments under Section
2.9(d).
Reportable Event
means any of the events described in Section 4043 of ERISA
and the regulations thereunder, other than a reportable event for which the thirty-day
notice
requirement to the PBGC has been waived.
Required Lenders
means (i) before the Expiration Date, the Lenders holding
more than fifty percent of the aggregate Commitments at such time and (ii) on and after the
Expiration Date, the Lenders holding more than fifty percent of the aggregate unpaid principal
amount of the Loans at such time.
Requirement of Law
means (i) the Governing Documents, (ii) any law, treaty, rule,
regulation, order or determination of an arbitrator, court or other Governmental Authority or
(iii) any franchise, license, lease, permit, certificate, authorization, qualification, easement,
right of way, or other right or approval binding on the Borrower or
any of its property.
Responsible
Officer
means the Chairman of the Board, the President, the Chief
Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Treasurer or the
Assistant Treasurer of the Borrower, as each such term is defined or otherwise used in the bylaws
of the Borrower or in any resolution of the Borrowers board of directors, or any other individual
designated in writing by the Chairman of the Board, the President, the Chief Executive Officer
or the Chief Financial Officer of the Borrower as a Responsible Officer for purposes hereof.
Revolving Credit Loans
has the meaning specified in Section
2.l(a).
Settlement
has the meaning specified in Section 2.2(i).
Settlement Date
has the meaning specified in Section 2.2(i).
Solvent
means, when used with respect to any Person, that as of the date as to which such
Persons solvency is to be measured:
(i) the fair saleable value of its assets is in excess of (A) the total
amount of its liabilities (including contingent, subordinated, absolute, fixed,
matured, unmatured, liquidated and unliquidated liabilities) and (B) the amount
that will be required to pay the probable liability of such Person on its debts as
such debts become absolute and matured;
(ii) it has sufficient capital to conduct its business; and
(iii) it is able to meet its debts as they mature.
Subsidiary
means a corporation or other entity in which the Borrower directly or
indirectly owns or controls the shares of stock or other ownership interests having ordinary
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voting power to elect a majority of the board of directors or other governing body, or to
appoint the majority of the managers of, such corporation or other entity.
Termination Event
means (i) a Reportable Event with respect to any Pension
Plan; (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan during a plan
year in which it was a substantial employer (as defined in Section 4001 (a)(2) of ERISA); (iii)
the providing of notice of intent to terminate a Pension Plan in a distress termination (as
described in Section 4041(c) of ERISA); (iv) the institution by the PBGC of proceedings to
terminate or appoint a trustee to administer a Pension Plan;
(v) the receipt by the Borrower or any
ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvent under
Section 4241 or 4245 of ERISA or that intends to terminate or has terminated under Section 4041A of
ERISA; or (vi) the partial or complete withdrawal, within the meaning of Sections 4203 and 4205 of
ERISA, of the Borrower or any ERISA Affiliate from a Multiemployer Plan.
Type
means a Base Rate Advance or a LIBOR Rate Advance.
SECTION
1.2
Accounting Terms and Determinations.
Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed in accordance with
GAAP, applied on a basis consistent in all material respects with the Financial Statements
delivered to the Agent on or before the Closing Date. All accounting determinations for purposes of
determining compliance with Article VIII shall be made in accordance with GAAP as in effect on the
Closing Date and applied on a basis consistent in all material respects with the audited Financial
Statements delivered to the Agent on or before the Closing Date. The Financial Statements required
to be delivered hereunder from and after the Closing Date, and all financial records, shall be
maintained in accordance with GAAP. If GAAP shall change from the basis used in preparing the
audited Financial Statements delivered to the Agent on or before the Closing Date, the Compliance
Certificates required to be delivered pursuant to Section 7.1 shall include calculations setting
forth the adjustments necessary to demonstrate how the Borrower is in compliance with the Financial
Covenants based upon GAAP as in effect on the Closing Date.
SECTION
1.3
Other Terms; Headings.
Unless otherwise defined herein, terms used herein
that are defined in the Uniform Commercial Code, from time to time in effect in the State of New
York (the Code), shall have the meanings given in the Code. An Event of Default shall continue
or be continuing unless and until such Event of Default has been waived or cured within any grace
period specified therefor under Section 9.1. The headings and the Table of Contents are for
convenience only and shall not affect the meaning or construction of any provision of this
Agreement. Whenever the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words include, includes and including shall be deemed to be
followed by the phrase without limitation. The word will shall be construed to have the same
meaning and effect as the word shall. Unless the context requires otherwise (i) any definition of
or reference to any agreement, instrument or other document herein or
in any other Loan
Document shall be construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any
reference
-16-
herein to any Person shall be construed to include such Persons successors and
assigns, (iii) the words herein, hereof and hereunder, and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular provision hereof,
(iv) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to
refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (v) the words
asset and property shall be construed to have the same meaning and effect and to refer to any
and all tangible and intangible assets and properties, including cash, securities, accounts and
contract rights.
ARTICLE II.
THE CREDIT FACILITIES
SECTION 2.1
The Revolving Credit Loans.
(a) Each Lender severally agrees, subject to Section 2.4(a) and the other terms and conditions
of this Agreement, to make revolving credit loans (the Revolving Credit Loans) to the Borrower,
from time to time from the Closing Date to but excluding the Expiration Date, at the Borrowers
request to the Agent, in an aggregate principal amount which, after giving effect thereto, would
not cause the aggregate principal amount of all outstanding Loans made by such Lender to exceed
such Lenders Commitment reduced by such Lenders Pro Rata Share of the amount, if any, by which
the Maximum Amount of the Facility exceeds (i) 85% of Eligible Receivables
plus
(ii) 65% of
Eligible Inventory (not to exceed $40,000,000)
less
(iii) any reserves established by the
Agent in accordance with the terms of this Agreement (the
Borrowing Base);
provided
,
however,
that in no event shall the aggregate amount of the Revolving Credit Loans of all the
Lenders outstanding at any time exceed the Maximum Amount of the Facility.
(b) The Agent, at any time in the exercise of its commercially reasonable discretion, may (i)
establish and increase (or decrease) reserves against Eligible Receivables and Eligible Inventory
for variances in collateral reporting based on tests conducted during examinations of the
Collateral and (ii) impose additional restrictions (or eliminate the same) to the standards of
eligibility set forth in the definitions of Eligible Receivables and Eligible Inventory based
on information obtained by the Agent from its examination of the Collateral, the books and records
of the Borrower, public information and information furnished to the Agent by the Borrower or its
Affiliates.
(c) The Revolving Credit Loans made by each Lender shall be evidenced by a promissory note
payable to the order of such Lender, substantially in the form of Exhibit A (as amended,
supplemented or otherwise modified from time to time, a Note), executed by the Borrower and
delivered to the Agent on the Closing Date. The Note payable to the order of a Lender shall be in a
stated maximum principal amount equal to such Lenders Pro Rata Share of the Maximum Amount of the
Facility.
(d) The Revolving Credit Loans shall be payable in full, with all interest accrued
thereon, on the Expiration Date. The Borrower may borrow, repay and reborrow Revolving Credit
Loans, in whole or in part, in accordance with the terms hereof.
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SECTION 2.2
Procedure for Borrowing: Notices of Borrowing: Notices of Continuation: Notices of Conversion: Settlement.
(a) Each borrowing of Revolving Credit Loans (each, a Borrowing) shall be made on
notice, given not later than 12:00 Noon (New York time) on the third Business Day prior to the date
of the proposed Borrowing in the case of a LIBOR Rate Advance, and not later than 12:00 Noon (New
York time) on the date of the proposed Borrowing in the case of a Base Rate Advance, by the
Borrower to the Agent. Each such notice of a Borrowing shall be by telecopier, substantially in the
form of Exhibit D (a Notice of Borrowing), specifying therein the requested (i) date of such
Borrowing, (ii) Type of Advance comprising such Borrowing, (iii) aggregate principal amount of such
Borrowing and (iv) Interest Period, in the case of a LIBOR Rate Advance.
(b) With respect to any Borrowing consisting of a LIBOR Rate Advance, the Borrower may,
subject to the provisions of Section 2.2(d) and so long as all the conditions set forth in Article
V have been fulfilled, elect to maintain such Borrowing or any portion thereof as a LIBOR Rate
Advance by selecting a new Interest Period for such Borrowing, which new Interest Period shall
commence on the last day of the Interest Period then ending. Each selection of a new Interest
Period (a Continuation) shall be made by notice given not later than 12:00 Noon (New York time)
on the third Business Day prior to the date of any such Continuation by the Borrower to the Agent.
Each such notice of a Continuation shall be by telecopier, substantially in the form of Exhibit E
(a Notice of Continuation), specifying whether the Advance subject to the requested Continuation
comprises part (or all) of the Revolving Credit Loans and the requested (i) date of such
Continuation, (ii) Interest Period and (iii) aggregate amount of the Advance subject to such
Continuation, which shall comply with all limitations on Loans hereunder. Upon the Agents receipt
of a Notice of Continuation, the Agent shall promptly notify each Lender thereof. Unless, on or
before 12:00 Noon (New York time) of the third Business Day prior to the expiration of an Interest
Period, the Agent shall have received a Notice of Continuation from the Borrower for the entire
Borrowing consisting of the LIBOR Rate Advance outstanding during such Interest Period, any amount
of such Advance comprising such Borrowing remaining outstanding at the end of such Interest Period
(or any unpaid portion of such Advance not covered by a timely Notice of Continuation) shall, upon
the expiration of such Interest Period, be Converted to a Base Rate Advance.
(c) The Borrower may on any Business Day upon notice (each such notice, a Notice of
Conversion) given by the Borrower to the Agent, and subject to the provisions of Section 2.2(d),
Convert the entire amount of or a portion of an Advance of one Type into an Advance of another
Type;
provided
,
however,
that any Conversion of a LIBOR Rate Advance into a Base Rate
Advance shall be made on, and only on, the last day of an Interest Period for such LIBOR Rate
Advance. Each such Notice of Conversion shall be given not later than 12:00 Noon (New York time) on
the Business Day prior to the date of any proposed Conversion into a Base Rate Advance and on the third Business Day prior to the date of any proposed Conversion into
a LIBOR Rate Advance. Subject to the restrictions specified above, each Notice of Conversion shall
be by telecopier, substantially in the form of Exhibit F, specifying (i) the requested date of such
Conversion, (ii) the Type of Advance to be Converted, (iii) the requested Interest Period, in the
case of a Conversion into a LIBOR Rate Advance, and (iv) the amount of such Advance to be
Converted and whether such amount comprises part (or all) of the Revolving
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Credit Loans. Upon the Agents receipt of a Notice of Conversion, the Agent shall
promptly notify each Lender thereof. Each Conversion shall be in an aggregate amount not less
than $1,000,000 or an integral multiple of $500,000 in excess thereof.
(d) Anything in subsection (b) or (c) above to the contrary notwithstanding,
(i) if, at least one Business Day before the date of any requested LIBOR
Rate Advance, the introduction of or any change in or in the interpretation of any
law or regulation makes it unlawful, or any central bank or other Governmental
Authority asserts that it is unlawful, for any Lender to perform its obligations
hereunder to make a LIBOR Rate Advance or to fund or maintain a LIBOR Rate Advance
hereunder (including in the case of a Continuation or a Conversion), such Lender
shall promptly deliver written notice of such circumstance to the Agent, and the
Agent shall promptly deliver such notice to the Borrower, and the right of the
Borrower to select a LIBOR Rate Advance for such Borrowing or any subsequent
Borrowing (including a Continuation or a Conversion) shall be suspended until the
circumstances causing such suspension no longer exist, and any Advance comprising
such requested Borrowing shall be a Base Rate Advance;
(ii) if, at least one Business Day before the first day of any Interest
Period, the Agent is unable to determine the LIBOR Rate for LIBOR Rate Advances
comprising any requested Borrowing, Continuation or Conversion, the Agent shall
promptly give written notice of such circumstance to the Borrower, and the right of
the Borrower to select or maintain LIBOR Rate Advances for such Borrowing or any
subsequent Borrowing shall be suspended until the Agent shall notify the Borrower
that the circumstances causing such suspension no longer exist, and any Advance
comprising such Borrowing shall be a Base Rate Advance;
(iii) if any Lender shall, at least one Business Day before the date of
any requested Borrowing or Continuation of, or Conversion into, a LIBOR Rate
Advance, notify the Agent, which notice the Agent shall promptly deliver to the
Borrower, that the LIBOR Rate for Advances comprising such Borrowing, Continuation
or Conversion will not adequately reflect the cost to such Lender of making or
funding Advances for such Borrowing, the right of the Borrower to select LIBOR Rate
Advances shall be suspended until such Lender shall notify the Borrower that the
circumstances causing such suspension no longer exist, and any Advance comprising
such Borrowing shall be a Base Rate Advance;
(iv) there shall not be outstanding at any time more than three
Borrowings which consist of LIBOR Rate Advances;
(v) each Borrowing which consists of LIBOR Rate Advances shall be in
an amount equal to $1,000,000 or a whole multiple of $500,000 in excess thereof;
- 19 -
(vi) not more than 80% of the principal amount of Revolving Credit
Loans outstanding at any time shall consist of LIBOR Rate Advances; and
(vii) if a Default has occurred and is continuing, no LIBOR Rate Advances
may be borrowed or continued as such and no Base Rate Advance may be Converted into
a LIBOR Rate Advance.
(e) Each Notice of Borrowing, Notice of Continuation and Notice of
Conversion shall be irrevocable and binding on the Borrower. The Borrower agrees to pay to the
Agent for the account of the Lenders $300 for each and any (i) default by the Borrower in making
a Borrowing of, Conversion into or Continuation of a LIBOR Rate Advance after the Borrower has
given notice requesting the same, (ii) default by the Borrower in payment when due of the
principal amount of or interest on any LIBOR Rate Advance or (iii) making of a payment or
prepayment of a LIBOR Rate Advance on a day which is not the last day of an Interest Period with
respect thereto.
(f) Promptly after its receipt of a Notice of Borrowing under Section 2.2(a), the Agent
shall elect, in its sole and absolute discretion, (i) to have the terms of Section 2.2(g)
apply to the requested Borrowing or (ii) to make a Loan under Section 2.2(h) to the Borrower in
the amount of the requested Borrowing.
(g) (i) If the Agent shall elect to have the terms of this Section 2.2(g) apply to a
requested Borrowing as described in Section.2.2(f)(i), then, promptly after its receipt of a
Notice of Borrowing under Section 2.2(a), the Agent shall notify the Lenders in writing (by
telecopier or otherwise as permitted hereunder) of the requested Borrowing. Each Lender shall make
the amount of such Lenders Pro Rata Share of the requested Borrowing available to the Agent in
same day funds, for the account of the Borrower, at the Agents Payment Account prior to 2:00 P.M.
(New York time), on the Borrowing Date requested by the Borrower. The proceeds of such Borrowing
will then be made available to the Borrower by the Agent wire transferring to the Borrowers
Account the aggregate of the amounts made available to the Agent by the Lenders, and in like funds
as received by the Agent by 2:00 P.M. (New York time), on the requested Borrowing Date.
(ii) Unless the Agent receives contrary written notice prior to the date of any proposed
Borrowing, the Agent is entitled to assume that each Lender will make available its Pro Rata Share
of such Borrowing and, in reliance upon that assumption, but without any obligation to do so, may
advance such Pro Rata Share on behalf of such Lender. If and to the extent that such Lender shall
not have made such amount available to the Agent, but the Agent has made such amount available to
the Borrower, such Lender and the Borrower jointly and severally agree to pay and repay the Agent
forthwith on demand such corresponding amount and to pay interest thereon, for each day from the
date such amount is transferred by the Agent to the Borrowers Account until the date such amount
is paid or repaid to the Agent, at (A) in the case of the Borrower, the interest rate applicable at
such time to such Loan and (B) in the case of each Lender, for the period from the date such amount
was wire transferred to the Borrowers Account to (and including) three days after demand therefor
by the Agent to such Lender, at the Federal Funds Rate and, following such third day, at the
interest rate applicable at such time to such Loan together with all costs and expenses incurred by
the Agent in connection therewith. If
- 20 -
a Lender shall pay to the Agent any or all of such amount, such amount so paid
shall constitute a Revolving Credit Loan by such Lender to the Borrower for purposes of this
Agreement.
(h) If the Agent shall elect, in its sole and absolute discretion, to have the
terms of this Section 2.2(h) apply to a requested Borrowing of Revolving Credit Loans (as
described in Section 2.2(f)(ii)), the Agent shall make a Loan in the amount of such requested
Borrowing (any such Loan made solely by NFBC under this Section 2.2(h) being referred to as an
Agent Loan) available to the Borrower in same day funds by wire transferring such amount to the
Borrowers Account by 2:00 P.M. (New York time) on the requested Borrowing Date. Each Agent Loan
shall be subject to all the terms and conditions applicable hereunder to the Revolving Credit
Loans except that all payments thereon shall be payable to the Agent solely for its own account
(and for the account of the holder of any participation interest with respect to such Agent
Loan). The Agent shall not make any Agent Loan if (i) my one or more of the conditions precedent
specified in Section 5.2 will not be satisfied on the requested Borrowing Date for the applicable
Borrowing unless the Agent, in its reasonable business judgment, deems the making of such Loan
necessary or desirable (A) to preserve or protect the Collateral or any portion thereof, (B) to
enhance the likelihood of, or maximize the amount of, repayment of the Loans and the other
Obligations, or (C) to pay any other amount chargeable to the Borrower under this Agreement or
any other Loan Document including, without limitation, costs, fees and expenses as described in
Section 11.4 or (ii) the requested Borrowing would cause the aggregate outstanding amount of
Revolving Credit Loans and Agent Loans to exceed the Maximum Amount of the Facility or the
Borrowing Base on such Borrowing Date, except that the Agent may, in its discretion and without
the consent of any of the Lenders, voluntarily permit, for periods of up to thirty consecutive
Business Days, the aggregate outstanding amount of the Revolving Credit Loans and the Agent Loans
at any time and from time to time to exceed the Borrowing Base by an amount up to the lesser of
(A) ten percent (10%) of the Borrowing Base and (B) $2,500,000. For purposes of the preceding
sentence, the discretion granted to the Agent hereunder shall not preclude involuntary
overadvances that may result from time to time due to the fact that the Borrowing Base was
unintentionally exceeded for any reason, including, without limitation, Collateral previously
deemed to be either Eligible Receivables or Eligible Inventory, as applicable, becomes
ineligible, Collections of Receivables applied to reduce outstanding Loans are thereafter
returned for insufficient funds or overadvances are made to protect or preserve the Collateral,
all of which involuntary overadvances shall be repaid by the Borrower on demand. The Agent Loans
shall be secured by the Collateral, shall constitute Loans and Obligations hereunder and shall
bear interest at the rate in effect from time to time applicable to the Revolving Credit Loans
comprised of Base Rate Advances, including any increase in such rate that is applicable under
Section 4.2. The Agent shall notify each Lender in writing of each Agent Loan.
(i) Each Lenders funded portion of any Loan is intended to be equal at all times to
such Lenders Pro Rata Share of all outstanding Loans. Notwithstanding such agreement, the Agent
and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by the
Borrower) that, to facilitate the administration of this Agreement and the other Loan
Documents, settlement among them as to the Loans and the Agent Loans shall take place on a periodic
basis in accordance with the following provision:
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(i) The Agent shall request settlement (Settlement) with the Lenders on a
weekly basis, or on a more frequent basis if so determined by the Agent, with
respect to (A) each outstanding Agent Loan and (B) all payments made by the
Borrower on account of the Loans, in each case by notifying the Lenders of such
requested Settlement by telephone, confirmed immediately in writing (by telecopier
or otherwise as permitted hereunder), prior to 12:00 Noon (New York time) on the
date of such requested Settlement (any such date being a
Settlement Date).
(ii) Each Lender shall make the amount of such Lenders Pro Rata
Share of the outstanding principal amount of the Agent Loan with respect to which
Settlement is requested available to the Agent in same day funds, for itself or for
the account of NFBC, to the Agents Payment Account prior to 2:00 P.M. (New York
time), on the Settlement Date applicable thereto, regardless of whether the
conditions precedent specified in Section 5.2 have then been satisfied. Such amounts
made available to the Agent shall be applied against the amounts of the applicable
Agent Loan and, together with the portion of such Agent Loan representing NFBCs Pro
Rata Share thereof, shall constitute Loans of such Lenders. If any such amount is
not made available to the Agent by any Lender on the Settlement Date applicable
thereto, the Agent shall be entitled to recover such amount on demand from such
Lender together with interest thereon at the Federal Funds Rate for the first three
days from and after such Settlement Date and thereafter at the interest rate then
applicable to Base Rate Loans.
(iii) Notwithstanding the foregoing, not more than one Business Day after
demand is made by the Agent (whether before or after the occurrence of a Default or
an Event of Default), each Lender (other than NFBC) shall irrevocably and
unconditionally purchase and receive from the Agent, without recourse or warranty,
an undivided interest and participation in such Agent Loan to the extent of such
Lenders Pro Rata Share thereof, by paying to the Agent, in same day funds, an
amount equal to such Lenders Pro Rata Share of such Agent Loan, regardless of
whether the conditions precedent specified in Section 5.2 have then been satisfied.
If such amount is not made available to the Agent by any Lender, the Agent shall be
entitled to recover such amount on demand from such Lender together with interest
thereon at the Federal Funds Rate for the first three days from and after such
demand and thereafter at the interest rate then applicable to the Revolving Credit
Loans for Base Rate Advances, including any increase in such rate that is applicable
under Section 4.2.
(iv)
From and after the date, if any, on which any Lender purchases an undivided interest and participation in an Agent Loan under clause (iii) above, the
Agent shall promptly distribute to such Lender such Lenders Pro Rata Share of
all payments of principal and interest received by the Agent in respect of such
Agent Loan.
SECTION 2.3
Application of Proceeds.
The proceeds of the Loans shall be used by
the Borrower for its general working capital purposes, to make capital expenditures, to
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fund loans to and investments in Affiliates of the Borrower and to pay expenses
incurred by the Borrower in connection herewith.
SECTION 2.4
Maximum Amount of the Facility; Mandatory Prepayments:
Optional Prepayments.
(a) In no event shall the sum of the aggregate outstanding principal balances of the Loans
exceed the lesser of (i) the Borrowing Base and (ii) the Maximum Amount of the Facility.
(b) In addition to any prepayment required as a result of an Event of Default
hereunder, the Loans shall be subject to mandatory prepayment as follows:
(i) immediately upon discovery by or notice to the Borrower that any of
the lending limits set forth in Section 2.1 (a) or Section 2.4(a) has been
exceeded, the Borrower shall pay the Agent an amount sufficient to reduce the
outstanding balances of the Loans to the applicable maximum allowed amount shall
become due and payable by the Borrower without the necessity of a demand by the
Agent or any Lender; and
(ii) the entire outstanding principal amount of the Loans, together with all
accrued and unpaid interest thereon and all fees, costs and expenses payable by
the Borrower hereunder, shall become due and payable on the Expiration Date.
(c) The Borrower may prepay any or all of the Loans, without penalty or premium, subject to
Section 2.2(e)(iii).
SECTION 2.5
Maintenance of Loan Account: Statements of Account.
The Agent shall
maintain an account on its books in the name of the Borrower (the Loan Account) in which the
Borrower will be charged with all Loans and Advances made by each Lender to the Borrower or for
the Borrowers account, including the Revolving Credit Loans, the Agent Loans, interest, fees,
expenses and any other Obligations. The Loan Account will be credited with all amounts received
by the Agent from the Borrower or for the Borrowers account, including, as set forth below, all
amounts received from the Blocked Account Banks. The Agent shall send the Borrower a monthly
statement reflecting the activity in the Loan Account. Each such statement shall be an account
stated and shall be final, conclusive and binding on the Borrower, absent manifest error.
SECTION 2.6
Collection of Receivables.
The Borrower shall at all times maintain
one or more blocked accounts (each, a Blocked Account) Upon notice given by the Agent to the
Borrower at any time after the occurrence of an Availability Event or, in the Agents discretion,
during the continuation of an Event of Default (a Blocked Account Notice), unless and until the
Agent revokes such Blocked Account Notice in writing, the Borrower shall promptly remit to a
Blocked Account all Collections including all checks, drafts and other documents and
instruments evidencing remittances in payment (collectively, Items of Payment). The Borrower, the
Agent and a Blocked Account Bank shall enter into an agreement, in form and substance satisfactory
to the Agent, the Borrower and such Blocked Account Bank (as amended, supplemented or otherwise
modified from time to time, a Blocked
- 23 -
Account Agreement), which, among other things, shall provide for the opening of a
Blocked Account for the deposit of Collections at such Blocked Account Bank. At all times after
the delivery of a Blocked Account Notice (unless and until the Agent revokes such Blocked Account
Notice in writing), all Collections and other amounts received by the Borrower from any account
debtor, in addition to all other cash proceeds of the Collateral, shall upon receipt be deposited
into a Blocked Account. The Agent will credit all such payments to the Loan Account, conditional
upon final collection; credit will be given only for cleared funds received prior to 2:00 P.M. (New
York time) by the Agent at its account at North Fork Bank, Melville, New York (Account
#3124059415), or such other bank as the Agent may designate;
provided
,
however,
that for
purposes of calculating interest due to the Lenders, credit will be given to collections one
Business Day after receipt of cleared funds. In all cases, the Loan Account will be credited only
with the net amounts actually received in payment of their Receivables. The Borrower will not
commingle any Items of Payment with any of its other funds or property, but will segregate them
from its other assets and will hold them in trust and for the account and as the property of the
Agent. At any time (i) after the delivery of a Blocked Account Notice (unless and until the Agent
revokes such Blocked Account Notice in writing) or (ii) during the continuation of an Event of
Default, the Borrower shall endorse any Items of Payment upon the request of the Agent. Items of
Payment will be processed in accordance with the Blocked Account Agreements.
SECTION 2.7
Term.
The term of this Agreement shall be for a period from the
Closing Date to but not including March 10, 2006 unless sooner terminated in accordance with the
terms of this Agreement. Notwithstanding the foregoing, the Borrower shall have no right
to terminate this Agreement at any time that any principal of or interest on any of the Loans is
outstanding, except upon prepayment of all Obligations.
SECTION 2.8
Payment Procedures.
(a) The Borrower hereby authorizes the Agent to charge the Loan Account with the
amount of all principal, interest, fees, expenses and other payments to be made hereunder and
under the other Loan Documents. The Agent may, but shall not be obligated to, discharge the
Borrowers payment obligations hereunder by so charging the Loan Account.
(b) Each payment by the Borrower on account of principal, interest, fees or expenses
hereunder shall be made to the Agent for the benefit of the Agent and the Lenders according to the
their respective rights thereto. All payments to be made by the Borrower hereunder and under the
Notes, whether on account of principal, interest, fees or otherwise, shall be made without setoff,
deduction or counterclaim and shall be made prior to 2:00 P.M. (New York time) on the due date
thereof to the Agent, for the account of the Lenders according to their Pro Rata Shares (except as
expressly otherwise provided), at the Agents Payment Account in immediately available funds.
Except for payments which are expressly provided to be made (i) for the account of the Agent only
or (ii) under the settlement provisions of Section 2.2(i), the Agent shall distribute all payments
to the Lenders on the Business Day following receipt in like funds as received. Notwithstanding
anything to the contrary contained in this Agreement, if a Lender exercises its right of setoff
under Section 11.3 or otherwise, any amounts so recovered shall promptly be shared by such Lender
with the other Lenders according to their respective Pro Rata Shares.
- 24 -
(c) The Agent shall apply all amounts received by it on account of the
Obligations from the Borrower, from the Blocked Account Banks or from
any other source
First
, to fees, costs and expenses,
second,
to interest and
third
, to the principal amount of
the Obligations, except that, during the continuance of an Event of Default, the Agent may, with
the consent of the Required Lenders, apply such amounts to such of the Obligations and in such
order as it may elect in its sole and absolute discretion.
(d) Whenever any payment to be made hereunder shall be stated to be due on a day that is
not a Business Day, the payment may be made on the next succeeding Business Day (except as
specified in clause (ii) of the definition of Interest Period) and such extension of time shall be
included in the computation of the amount of interest due hereunder.
SECTION 2.9
Defaulting Lenders.
(a) A Lender that (i) fails to pay the Agent its Pro Rata Share of any Loans made available by
the Agent on such Lenders behalf or (ii) fails to pay any other amount owing by it to the Agent
hereunder, is a defaulting lender (a Defaulting Lender). The Agent may recover all such amounts
owing by a Defaulting Lender on demand.
(b) The failure of any Lender to fund its Pro Rata Share of any Borrowing shall not relieve
any other Lender of its obligation to fund its Pro Rata Share of such Borrowing. Conversely, no
Lender shall be responsible for the failure of another Lender to fund such other Lenders Pro Rata
Share of a Borrowing.
(c) The Agent shall not be obligated to transfer to a Defaulting Lender any payments made by
the Borrower to the Agent for the Defaulting Lenders benefit; nor shall a Defaulting Lender be
entitled to the sharing of any payments hereunder. Amounts payable to a Defaulting Lender shall
instead be paid to or retained by the Agent. The Agent may hold and, in its discretion, re-lend to
the Borrower the amount of all such payments received or retained by it for the account of such
Defaulting Lender. For purposes of voting or consenting to matters with respect to the Loan
Documents and determining Pro Rata Shares, such Defaulting Lender shall be deemed not to be a
Lender and such Lenders Commitment or Loans made by it, as applicable, for such purposes shall be
deemed to be zero. This Section shall remain effective with respect to such Lender until (i) the
Defaulting Lender has paid all amounts required to be paid to the Agent hereunder or (ii) the
Required Lenders, the Agent and the Borrower shall have waived such Lenders default in writing.
The operation of this Section shall not be construed to increase or otherwise affect the Commitment
of any Lender or to relieve or excuse the performance by any of the Borrower of its duties and
obligations hereunder.
(d) The Borrower may, by notice (a Replacement Notice) in writing to the Agent and a
Defaulting Lender, (i) request such Defaulting Lender to cooperate with the Borrower in obtaining a
Replacement Lender for such Defaulting Lender; (ii) request the
non-Defaulting Lenders to acquire
and assume all or a portion of such Defaulting Lenders Loans and Commitment, but none of such
Lenders shall he obligated to do so; or (iii) propose a Replacement Lender, If a Replacement Lender
shall be accepted by he Agent or one or more of he non-Defaulting Lenders shall agree to acquire
and assume all or part of a Defaulting Lenders Loans and Commitment, then such Defaulting Lender
shall assign, in accordance with Section
- 25 -
11.7, all or part, as the case may be, of its Loans, Commitment, Note and other
rights and obligations under this Agreement and all other Loan Documents to such Replacement Lender
or non-Defaulting Lenders, as the case may be, in exchange for payment of the principal amount of
the Loans so assigned and all interest and fees accrued on such
amount so assigned;
provided
,
however,
that (i) such assignment shall be on the terms and conditions set forth in Section
11.7, and (ii) prior to any such assignment, the Borrower shall have (A) paid to such Defaulting
Lender all amounts properly demanded and theretofore unpaid by the Borrower under the second
sentence of Section 2.2(e) (less costs and expenses incurred by the Borrower directly as a result
of the actions of the Defaulting Lender in violation of this Agreement) and (B) paid to the Agent
all amounts properly demanded and theretofore unpaid by the Borrower under Article IV. If the
Replacement Lender and the non-Defaulting Lenders shall only be willing to acquire less than all of
a Defaulting Lenders outstanding Loans and Commitment, the Commitment of such Defaulting Lender
shall not terminate, but shall be reduced proportionately, and such Defaulting Lender shall
continue to be a Lender hereunder with a reduced Commitment and Pro Rata Share. Upon the
effective date of such assignment, the Borrower shall issue replacement Notes to such Replacement
Lender, non-Defaulting Lenders and Defaulting Lender, as the case may be, in exchange for the Note
of such Defaulting Lender theretofore outstanding, and such Replacement Lender shall, if not
already a Lender, become a Lender for all purposes under this Agreement and the other Loan
Documents.
SECTION 2.10
Sharing of Payments. Etc.
If any Lender shall obtain at any time any
payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise)
on account of Obligations payable to such Lender hereunder at such time in excess of its ratable
share (according to the proportion of (i) the amount of such Obligations to (ii) the aggregate
amount of the Obligations payable to all Lenders hereunder at such time), such Lender shall
forthwith purchase from the other Lenders such participations in the Obligations payable to them as
shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of
them;
provided
,
however,
that, if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each other Lender shall be rescinded and
such other Lender shall repay to the purchasing Lender the purchase price to the extent of such
other Lenders ratable share (according to the proportion of (i) the purchase price paid to such
Lender to (ii) the aggregate purchase price paid to all Lenders) of such recovery together with an
amount equal to such Lenders ratable share (according to the proportion of (i) the amount of such
other Lenders required repayment to (ii) the total amount so recovered from the purchasing Lender)
of any interest or other amount paid or payable by the purchasing Lender in respect of the total
amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another
Lender pursuant to this Section 2.10 may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of setoff) with respect to such participation as fully as if
such Lender were the direct creditor of the Borrower in the amount of such participation.
SECTION 2.11
Publicity.
The Agent or any Lender may, with the consent of he
Borrower (which shall not be unreasonably withheld or delayed), publish a tombstone or similar
advertising material relating to the financing transactions contemplated by this Agreement. The
Agent or such Lender shall provide a draft of any such tombstone or similar advertising material to
the Borrower for review and comment before the publication thereof.
- 26 -
The Agent reserves the right to provide to industry trade organizations information
necessary and customary for inclusion in league table measurements.
ARTICLE III.
SECURITY
SECTION 3.1
General
. To secure the prompt and complete payment and
performance when due (whether at stated maturity, by acceleration or otherwise) of all of the Obligations, the Borrower hereby grants to the Agent for the ratable benefit of the Lenders a lien
on and security interest in all of its right, title and interest in and to the Collateral, wherever
located, whether now owned or hereafter acquired, and all additions and accessions thereto and
substitutions and replacements therefor and improvements thereon, and all proceeds (whether in the
form of cash or other property) and products thereof including, without limitation, all proceeds
of insurance covering the same and all tort claims in connection therewith. As further security for
the Obligations, and to provide other assurances to the Agent and the Lenders, the Agent and the
Lenders shall receive, among other things, the Blocked Account Agreements. This Agreement shall
constitute a security agreement for purposes of the Code.
SECTION 3.2
Recourse to Security
. Recourse to security shall not be required
for any Obligation hereunder and the Borrower hereby waives any requirement that the Agent or
the Lenders exhaust any right or take any action against any of the Collateral before proceeding
to enforce the Obligations against the Borrower.
SECTION 3.3
Special Provisions Relating to Inventory
.
(a)
All Inventory
. The security interest in the Inventory granted to the Agent
hereunder shall continue through all steps of manufacture and sale and attach without further act
to raw materials, work in process, finished goods, returned goods, documents of title and
warehouse receipts, and to proceeds resulting from the sale or other disposition of such
Inventory. Until all of the Obligations have been satisfied and the Commitments have been
terminated, the Agents security interest in such Inventory and in all proceeds thereof shall
continue in full force and effect and, if an Event of Default is continuing, the Agent shall have
the right to take physical possession of such Inventory and to maintain it on the premises of the
Borrower, in a public warehouse, or at such other place as the Agent may deem appropriate. If the
Agent exercises such right to take possession of such Inventory, the Borrower will, upon demand,
and at the Borrowers cost and expense, assemble such Inventory and make it available to the
Agent at a place or places convenient to the Agent.
(b)
No Liens
. All Inventory of the Borrower shall be maintained at the locations
therefor shown on Schedule 6.1 (b), except for Inventory moved from such locations solely for the
purpose of sale in the ordinary course of the Borrowers business and Inventory in transit in the
ordinary course of the Borrowers business.
(c)
Further Assurances
. The Borrower will, upon the Agents request,
perform any and all steps that are necessary to perfect the Agents security interests in the
Borrowers Inventory including, without limitation, placing and maintaining signs, executing and
filing financing or continuation statements in form and substance satisfactory to the Agent,
- 27 -
maintaining stock records and conducting lien searches. In each case, the Borrower
shall take such action as promptly as possible after requested by the Agent but in any event
within five Business Days after any such request is made except that the Borrower shall take such
action immediately upon the Agents request following the occurrence of an Event of Default. If the
Borrowers Inventory is in the possession or control of any Person other than a purchaser in the
ordinary course of business or a public warehouseman where the warehouse receipt is in the name of
or held by the Agent, the Borrower shall notify such Person of the Agents security interest
therein and, upon request, instruct such Person to acknowledge in writing its agreement to hold all
such Inventory for the benefit of the Agent and subject to the Agents instructions. If so
requested by the Agent, the Borrower (as promptly as possible after requested by the Agent but in
any event within five Business Days after any such request is made) will deliver (i) to the Agent
warehouse receipts covering any of the Borrowers Inventory located in warehouses showing the Agent
as the beneficiary thereof and (ii) to the warehouseman such agreements relating to the release of
warehouse Inventory as the Agent may request. If so requested by the Agent, the Borrower shall
execute and deliver to the Agent a confirmatory written instrument, in form and substance
satisfactory to the Agent, listing all its Inventory, but any failure to execute or deliver the
same shall not limit or otherwise affect the Agents security interest in and to such Inventory.
(d)
Inventory Records
. The Borrower shall maintain full, accurate and complete
records of its Inventory describing the kind, type and quantity of such Inventory and the
Borrowers cost therefor, withdrawals therefrom and additions thereto, including a perpetual
inventory for raw materials, work in process and finished goods.
SECTION 3.4
Special Provisions Relating to Receivables
.
(a)
Invoices, Etc
. If an Event of Default is continuing, on the Agents request
therefor, the Borrower shall furnish to the Agent (i) the originals of all promissory notes and
other instruments in favor of the Borrower, (ii) copies of invoices to customers and shipping and
delivery receipts or warehouse receipts thereof, (iii) the originals of all letters of credit in
its favor, (iv) such endorsements or assignments related to such
letters of credit, notes, and
instruments as the Agent may reasonably request and (v) the written consent of the issuer of any
letter of credit to the assignment of the proceeds of such letter of credit by the Borrower to the
Agent.
(b)
Records, Collections. Etc
. The Borrower shall promptly report all customer credits
to the Agent. The Borrower shall notify the Agent of all returns and of all claims asserted with
respect to merchandise, in each case with a value in excess of $5,000,000. The Borrower shall
promptly report to the Agent each such return, providing the Agent with a description of the
returned item. The Borrower shall not, without the Agents prior written consent, settle or adjust
any dispute or claim, or grant any discount (except ordinary trade discounts), credit or allowance
or accept any return of merchandise, except in the ordinary course of its business. During the
continuance of an Event of Default, the Agent may (i) settle or adjust disputes or claims directly
with account debtors for amounts and upon terms which it considers advisable and (ii) notify
account debtors on the Borrowers Receivables that such Receivables have been assigned to the
Agent, and that payments in respect thereof shall be made directly to the Agent. Where the Borrower
receives collateral of any kind or nature by reason of
- 28 -
transactions between itself and its customers or account debtors, the Borrower
will hold the same on the Agents behalf, subject to the Agents instructions, and as property
forming part of the Borrowers Receivables. Where the Borrower sells goods or services to a
customer which also sells goods or services to it or which may have other claims against it, the
Borrower will so advise the Agent immediately to permit the Agent to establish a reserve therefor.
The Borrower shall maintain a record of its electronic chattel paper that identifies the Agent as
the assignee thereof and otherwise in a manner such that the Agent has control over such chattel
paper for purposes of the Code.
(c)
Excluded Receivables
. Excluded Receivables shall not be governed by
this Section 3.4.
SECTION
3.5
Continuation of Liens, Etc
. The Borrower shall defend the
Collateral against all claims and demands of all Persons at any time claiming any interest therein,
other than claims relating to Liens permitted by the Loan Documents. The Borrower agrees to comply
with the requirements of all state and federal laws to grant to the Agent valid and perfected first
priority security interests in the Collateral, subject only to Permitted Liens. The Agent is
hereby authorized by the Borrower, during the continuance of an Event of Default, to sign the
Borrowers name on any document or instrument as may be necessary or desirable to establish and
maintain the Liens covering the Collateral and the priority and continued perfection thereof or
file any financing or continuation statements or similar documents or instruments covering the
Collateral whether or not the Borrowers signature appears thereon. The Borrower agrees, from time
to time, at the Agents request, to file notices of Liens, financing statements, similar documents
or instruments, and amendments, renewals and continuations thereof, and cooperate with the
Agents representatives, in connection with the continued perfection (and the priority status
thereof) and protection of the Collateral and the Agents Liens thereon. The Borrower agrees that
the Agent may file a carbon, photographic or other reproduction of this Agreement (or any financing
statement related hereto) as a financing statement.
SECTION 3.6
Power of Attorney
. In addition to all of the powers granted to the
Agent in this Article III, the Borrower hereby appoints and constitutes the Agent as the Borrowers
attorney-in-fact to sign the Borrowers name on any of the documents, instruments and other items
described in Section 3.5, to make any filings under the Uniform Commercial Code covering any of the
Collateral, and to request at any time from customers indebted on its Receivables verification of
information concerning such Receivables and the amount owing thereon (provided that any
verification prior to an Event of Default shall not contain the Agents name), and, during the
continuance of an Event of Default, (i) to convey any item of Collateral to any purchaser thereof
and (ii) to make any payment or take any act necessary or desirable to protect or preserve any
Collateral. The Agents authority hereunder shall include, without limitation, the authority to
execute and give receipt for any certificate of ownership or any document, to transfer title to any
item of Collateral and to take any other actions arising from or incident to the powers granted to
the Agent under this Agreement. This power of attorney is coupled with an interest and is
irrevocable.
- 29 -
ARTICLE IV.
INTEREST, FEES AND EXPENSES
SECTION 4.1
Interest
. The Borrower shall pay to the Agent for the ratable
benefit of the Lenders, interest on the Advances, payable monthly in arrears on the first day of
each month, commencing with the month immediately following the Closing Date, and on the
Expiration Date, at the following rates
per
annum:
(a)
Base Rate Advances
. If such Advance is a Base Rate Advance, at a fluctuating rate
which is equal to (i) the Base Rate then in effect
less
(ii) 0.25%, each change in such
fluctuating rate to take effect simultaneously with the corresponding
change in the Base Rate.
(b)
LIBOR Rate Advances
. If such Advance is a LIBOR Rate Advance, at a rate
which is equal at all times during the Interest Period for such LIBOR Rate Advance to (i) the
LIBOR Rate
plus
(ii) 2.50%.
SECTION 4.2
Interest After Event of Default
. From the date of occurrence
of any Event of Default until the earlier of the date upon which (i) all Obligations shall have
been paid and satisfied in full or (ii) such Event of Default shall have been waived, interest on
the Loans shall be payable on demand at a rate
per
annum
equal to the rate that would be otherwise
applicable thereto under Section 4.1
plus
up to an additional two percent (2%).
SECTION
4.3
Closing Fee
. On the Closing Date, the Borrower shall pay to the Agent
for the ratable benefit of the Lenders, a non-refundable closing fee in the amount of $125,000.
SECTION 4.4
Unused Line Fee
. The Borrower shall pay to the Agent for the ratable
benefit of the Lenders on the first day of each month, commencing with the month immediately
following the Closing Date, and on the Expiration Date, in arrears, an unused line fee equal to
three-eighths of one percent (.375%)
per
annum
of the difference, if positive, between (i)
the Maximum Amount of the Facility and (ii) the average daily aggregate outstanding amount of the
Loans.
SECTION 4.5
Calculations
. All calculations of interest and fees hereunder shall
be made by the Agent on the basis of a year of 360 days for the actual number of days elapsed in
the period for which such interest or fees are payable. Each determination by the Agent of an
interest rate, fee or other payment hereunder shall be conclusive and binding for all purposes,
absent manifest error.
SECTION 4.6
Indemnification in Certain Events
. If, after the Closing Date, (i)
any change in or in the interpretation of any law or regulation is introduced including, without
limitation, with respect to reserve requirements, applicable to any Lender or any other banking or
financial institution from which any Lender borrows funds or obtains credit, (ii) any Lender
complies with any future guideline or request from any central bank or other Governmental Authority
or (iii) any Lender determines that the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable agency
- 30 -
charged with the interpretation or administration thereof has or would have the
effect described below, or any Lender complies with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central bank or comparable
agency, and in the case of any event set forth in this clause (iii), such adoption, change or
compliance has or would have the direct or indirect effect of reducing the rate of return on such
Lenders capital as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking into consideration
such Lenders policies as the case may be with respect to capital adequacy) by an amount deemed by
such Lender to be material, and any of the foregoing events described in clauses (i), (ii) and
(iii) increases the cost to such Lender of funding or maintaining the Loans, or reduces the amount
receivable in respect thereof by such Lender, then the Borrower shall, upon demand by the Agent,
pay to the Agent for the benefit of such Lender additional amounts sufficient to indemnify such
Lender against such increase in cost or reduction in amount receivable. Each Lender agrees that, if
it becomes aware of the occurrence of any such event or condition that would cause it to incur any
material increased cost to fund or maintain the Loans or that would reduce the amount receivable in
respect thereof in any material respect, it will notify the Agent (and the Agent will notify the
Borrower) as promptly as practicable of such event or condition and will use its reasonable efforts
to make, fund or maintain the affected Loans of such Lender in a manner such that the additional
amounts which would otherwise be required to be paid hereunder would be materially reduced, in each
case so long as, in such Lenders reasonable discretion, the making, funding or maintaining of such
Loans in such other manner would not otherwise materially adversely affect such Loans or such
Lender. If the Borrower shall receive notice from the Agent that amounts are due to a Lender
hereunder, the Borrower may, upon at least five Business Days prior written notice to such Lender
and the Agent, but not more than sixty days after receipt of notice from the Agent, identify to the
Agent an Eligible Assignee acceptable to the Borrower and the Agent, which will purchase from such
Lender the Commitment, the amount of outstanding Loans, and the Note held by such Lender and such
Lender shall thereupon assign its Commitment, any Loans owing to such Lender, and the Note held by
such Lender to such Eligible Assignee in accordance with Section 2.9.
SECTION 4.7
Taxes
.
(a) Subject to Section 4.7(e), any and all payments by the Borrower hereunder or under
the Notes shall be made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings and penalties, interest and all other
liabilities with respect thereto (Taxes), excluding any taxes imposed on the net income of the
recipient of such payment (including, without limitation, any taxes imposed on branch profits) and
franchise taxes imposed on such recipient by any applicable jurisdiction. If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any
Loan to or for the benefit of the Agent or any Lender, (A) the sum payable shall be increased as
may be necessary so that after making all required deductions of Taxes (including deductions of
Taxes applicable to additional sums payable under this Section 4.7) the Agent or such Lender
receives an amount equal to the sum it would have received had no such deductions been made, (B)
the Borrower shall make such deductions and (C) the Borrower shall pay the full amount so deducted
to the relevant taxation authority or other authority in accordance with applicable law.
- 31 -
(b) In addition, the Borrower agrees to pay any present or future stamp,
documentary, excise, privilege, intangible or similar taxes or levies that arise at any time or
from time to time (i) from any payment made under any and all Loan Documents, or (ii) from the
execution or delivery by the Borrower of, or from the filing or recording or maintenance of, or
otherwise with respect to the exercise by the Agent of its rights under, any and all Loan Documents
(hereinafter referred to as Other Taxes).
(c) Within thirty days after the date of any payment of Taxes or Other Taxes, the Borrower
will, upon request, furnish to the Agent the original or a certified copy of a receipt evidencing
payment thereof.
(d) Without prejudice to the survival of any other agreement of the Borrower hereunder,
the agreements and obligations of the Borrower contained in this Section 4.7 shall survive the
indefeasible payment in full of the Obligations.
(e) Each Person which acquires (including as a result of the entering into of this Agreement
or the making of a Loan) an interest in this Agreement or any Loan, on or prior to the effective
date of such acquisition, will deliver to the Borrower and the Agent two valid, duly completed
copies of such documentation (including, without limitation, IRS Form W-9, W- 8BEN or W-8EC1 or any
applicable successor form), as is required to establish that such Person is entitled to receive
payments under this Agreement and the Notes payable to it without deduction or withholding of
United States federal income tax and to establish an exemption from United States backup
withholding tax. Each Person that delivers to the Borrower and the Agent a Form W-9, W-8BEN or
W-8EC1, or any other required form, pursuant to the preceding sentence, further undertakes to
deliver two further copies of such Form
,
or applicable successor forms, or other manner of
required certification, as the case may be, on or before the date that any such form expires or
becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an
exemption from a required withholding of United States federal income tax or after the occurrence
of any event requiring a change in the most recent form previously delivered by it to the Borrower
and the Agent, and such extensions or renewals thereof as may reasonably be requested by the
Borrower and the Agent, certifying (A) in the case of a Form W- 8BEN or W-8EC1, that such Tax
Transferee is entitled to receive payments under this Agreement without deduction or withholding of
any United States federal income taxes, unless any change in treaty, law or regulation or official
interpretation thereof has occurred after the effective date of such acquisition or change and
prior to the date on which any such delivery would otherwise be required that renders all such
forms inapplicable or that would prevent such Person from duly completing and delivering any such
form with respect to it, and such Person advises the Borrower and the Agent that it is not capable
of receiving payments without any deduction or withholding of United States federal income tax or
(B) in the case of a Form W-9, establishing an exemption from United States backup withholding tax.
If the Agent, a Lender or any other Person fails to comply with this Section 4.7(e), such Person
shall not be entitled to the benefits of Section 4.7(a).
- 32 -
ARTICLE V.
CONDITIONS OF LENDING
SECTION
5.1
Conditions to Initial Loan
. The obligation of the Lenders to
make the initial Loan is subject to the satisfaction of the following conditions prior to or
concurrent with such initial Loan:
(a) the Agent shall have received the following, each dated the date of the initial
Loan or as of an earlier date acceptable to the Agent, in form and substance satisfactory to the
Agent and its counsel:
(i) the Notes, each duly executed by the Borrower;
(ii) each Blocked Account Agreement, duly executed by the Borrower
and the Blocked Account Bank party thereto;
(iii) acknowledgment copies of Uniform Commercial Code financing
statements (naming the Agent as secured party and the Borrower as debtor) and duly
authorized release or termination statements, duly filed in all jurisdictions that
the Agent deems necessary or desirable to perfect and protect the Liens created
hereunder;
(iv) completed requests for information, dated on or before the date of
the initial Loan, listing all effective financing statements filed in the
jurisdictions referred to in clause (iii) above and in all other jurisdictions
that the Agent deems necessary or desirable to confirm the priority of the Liens
created hereunder, that name the Borrower as debtor, together with copies of such
financing statements;
(v) a completed perfection certificate, substantially in the form of
Exhibit H, signed by a Responsible Officer of the Borrower;
(vi) an initial Borrowing Base Certificate, duly executed by a
Responsible Officer;
(vii) (A) the audited Financial Statements for the fiscal year ended
December 31, 2003, certified by the Auditors, and unaudited Financial Statements of
the Borrower for the eleven-month period ended November 30, 2004, certified by a
Responsible Officer, and (B) a certificate executed by a Responsible Officer
certifying that, from November 30, 2004 until the Closing Date, no change, event,
occurrence or development or event involving a prospective change in the business,
prospects, operations, results of operations, assets, liabilities or condition
(financial or otherwise) of the Borrower has occurred which has had or could
reasonably be expected to have a Material Adverse Effect, and that all information
provided by or on behalf of the Borrower to the Agent hereunder or in connection
herewith is true and correct in all respects;
(viii) an opinion of counsel for the Borrower covering such matters
incident to the transactions contemplated by this Agreement as the Agent may
- 33 -
reasonably require, which such counsel is hereby requested by the Borrower to provide;
(ix) certified copies of all policies of insurance required by this Agreement and the
other Loan Documents, together with loss payee endorsement for all such policies naming the Agent
as lender loss payee and an additional insured;
(x) a copy of the Business Plan for the period commencing January 1, 2005, accompanied by
a certificate executed by a Responsible Officer of the Borrower
certifying to the Agent that the
Business Plan has been prepared in good faith based upon the assumptions contained therein and all
information available at the time of preparation thereof and, as of the date of such certificate,
such Chief Financial Officer is not aware of any information contained in the Business Plan which
is false or misleading or of any omission of information which causes the Business Plan to be false
or misleading;
(xi) copies of the Governing Documents of the Borrower and a copy of the resolutions of
the Board of Directors (or similar evidence of authorization) of the Borrower authorizing the
execution, delivery and performance of this Agreement, the other Loan Documents to which the
Borrower is or is to be a party, and the transactions contemplated hereby and thereby, attached to
which is a certificate of the Secretary or an Assistant Secretary of the Borrower certifying
(A) that such copies of the Governing Documents and resolutions (or similar evidence of
authorization) relating to the Borrower are true, complete and accurate copies thereof, have not
been amended or modified since the date of such certificate and are in full force and effect and
(B) the incumbency, names and true signatures of the officers of the Borrower authorized to sign
the Loan Documents to which it is a party;
(xii) a certified copy of a certificate of the Secretary of State of the state of
incorporation of the Borrower, dated within two days of the Closing Date, listing the certificate
of incorporation of the Borrower and each amendment thereto on file in such officials office and
certifying that (A) such amendments are the only amendments to such certificate of incorporation on
file in that office, (B) the Borrower has paid all franchise taxes to the date of such certificate and
(C) the Borrower is in good standing in that jurisdiction;
(xiii) a good standing certificate from the Secretary of State of each state in
which the Borrower is qualified as a foreign corporation, each dated within ten days of the Closing
Date;
(xiv) a Collateral Access Agreement for each parcel of Property specified in Schedule
6.1 (b) and with respect to any Collateral in the possession of any Person other than the Borrower
(in each case other than with respect to which the Agent has established a reserve as provided in
the definition of
- 34 -
Eligible Inventory), duly executed by each Person in possession of such
Collateral or with a Lien on or other interest in such parcel of Property;
(xv) the letter agreement as to the payment of a certain fee payable
to the Agent, duly executed by the Borrower; and
(xvi) such other agreements, instruments, documents and evidence as
the Agent deems necessary in its reasonable discretion in connection with the
transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower after due inquiry,
threatened litigation, proceeding, inquiry or other action (i) seeking an injunction or other
restraining order, damages or other relief with respect to the transactions contemplated by this
Agreement or the other Loan Documents or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities or condition (financial or otherwise) of the Borrower,
except, in the case of clause (ii), where such litigation, proceeding, inquiry or other action
could not reasonably be expected to have a Material Adverse Effect.
(c) The Borrower shall have paid (i) all reasonable legal, audit and background investigation
fees of the Agent in connection with the negotiation, preparation, execution and delivery of the
Loan Documents and (ii) the closing fee payable under Section 4.3 and all other fees referred to in
this Agreement (including, without limitation, under Section 5.1 (a)(xv)) that are required to be paid on the Closing Date.
(d) Except for the filing of the financing and termination statements under the Code specified
in Section 5.1 (a)(iii), no consent or authorization of, filing with or other act by or in respect
of any Governmental Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement, the Notes or the other Loan
Documents or the consummation of the transactions contemplated hereby or thereby or the continuing
operations of the Borrower following the consummation of such transactions.
(e) No change, occurrence, event or development or event involving a prospective change that
could reasonably be expected to have a Material Adverse Effect shall have occurred and be
continuing.
(f) The Agent and its counsel shall have performed (i) a review satisfactory to the Agent of
all of the material contracts and other assets (including, without limitation, leases of operating
facilities) of the Borrower, the financial condition of the Borrower, including all of its tax,
litigation, environmental and other potential contingent liabilities, the corporate and capital
structure of the Borrower and the cash management and management information systems of the
Borrower, (ii) a pre-closing audit and collateral review and (iii) reviews and investigations of
such other matters as the Agent and its counsel deem appropriate, in each case with results
satisfactory to the Agent.
(g) The Borrower shall be in compliance with all Requirements of Law and its material
contracts, other than such noncompliance that could not reasonably be expected to have a Material
Adverse Effect.
- 35 -
(h) The Liens in favor of the Agent shall have been duly perfected and shall
constitute first priority Liens, and the Collateral shall be free and clear of all Liens other than
Liens in favor of the Agent and Permitted Liens.
(i) After giving effect to all Revolving Credit Loans to be made on the Closing Date,
the difference between (i) the lesser of (A) the Borrowing Base and (B) the Maximum Amount of the
Facility and (ii) the aggregate outstanding amount of such Revolving Credit Loans shall exceed $
10,000,000.
SECTION 5.2
Conditions Precedent to Each Loan
. The obligation of the Lenders to
make any Loan is subject to the satisfaction of the following conditions precedent:
(a) all representations and warranties contained in this Agreement (other than under Section
6.1(g)) and the other Loan Documents shall be true and correct in all material respects on and as
of the date of such Loan as if then made;
(b) no Default or Event of Default shall have occurred and be continuing or would result from
the making of the requested Loan as of the date of such request; and
(c) no Material Adverse Effect shall have occurred.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES
SECTION
6.1
Representations and Warranties of the Borrower; Reliance by the
Lenders
. The Borrower represents and warrants as of the date hereof (or as of any date
hereafter as contemplated in subsection (j) hereof) as follows:
(a)
Organization, Good Standing and Qualification
. The Borrower (i) is a corporation
duly organized, validly existing and in good standing under the laws of the state of its
organization, (ii) has the corporate power and authority to own its properties and assets and to
transact the businesses in which it presently is, or proposes to be, engaged and (iii) is duly
qualified, authorized to do business and in good standing in each jurisdiction where it presently
is, or proposes to be, engaged in business, except to the extent that the failure to so qualify or
be in good standing could not reasonably be expected to have a Material Adverse Effect. Schedule
6.1 (a) specifies the jurisdiction in which the Borrower is organized and all jurisdictions in
which the Borrower is qualified to do business as a foreign corporation as of the Closing Date and
sets forth the exact correct legal name of the Borrower as specified in the public record of the
State of Missouri.
(b)
Locations of Offices, Records and Collateral
. The address of the principal place
of business and chief executive office of the Borrower is, and the books and records of the
Borrower and all of its chattel paper and records of Receivables are maintained exclusively in the
possession of the Borrower at, the address of the Borrower specified in Schedule 6.1(b). There is
no location at which the Borrower maintains any Collateral other than the locations specified for
it in Schedule 6.1(b). Schedule 6.1(b) specifies all Property of the Borrower, and indicates
whether each location specified therein is leased or owned by the Borrower.
- 36 -
(c)
Authority.
It has the requisite corporate power and authority to execute,
deliver and perform its obligations under each of the Loan Documents to which it is a party. All
corporate action necessary for the execution, delivery and performance by it of the Loan Documents
to which it is a party (including the consent of shareholders where required) has been taken.
(d)
Enforceability.
This Agreement is and, when executed and delivered, each other
Loan Document to which it is a party, will be, the legal, valid and binding obligation of the
Borrower enforceable in accordance with its terms, except as enforceability may be limited by (i)
bankruptcy, insolvency or similar laws affecting creditors rights generally and (ii) general
principles of equity.
(e)
No Conflict.
The execution, delivery and performance by it of each Loan Document
to which it is a party do not and will not contravene (i) any of the Governing Documents of the
Borrower, (ii) any Requirement of Law or (iii) any material contract of the Borrower and will not
result in the imposition of any Liens upon any of its properties except in favor of the Agent.
(f)
Consents and Filings.
No consent, authorization or approval of, or filing with or
other act by, any shareholders of the Borrower, any Governmental Authority or any other Person is
required in connection with the execution, delivery, performance, validity or enforceability of
this Agreement or any other Loan Document, the consummation of the transactions contemplated hereby
or thereby or the continuing operations of the Borrower following such consummation, except for the
filing of financing and termination statements under the Code.
(g) Ownership; Subsidiaries. The capital stock of each of the Borrower and its Subsidiaries is
owned by the Persons and in the amounts specified in Schedule 6.1(g).
(h)
Solvency.
It is Solvent and will be Solvent upon the completion of all
transactions contemplated to occur on or before the Closing Date (including, without limitation,
the Loans to be made on the Closing Date).
(i)
Financial Data.
It has provided to the Agent complete and accurate
copies of its annual audited Financial Statements for the fiscal year ended December 31, 2003,
and unaudited Financial Statements for the eleven-month period ended November 30, 2004. Such
Financial Statements have been prepared in accordance with GAAP consistently applied throughout the
periods involved and fairly present the financial position, results of operations and cash flows of
the Borrower for each of the periods covered. It has no Contingent Obligation or liability for
taxes, unrealized losses, unusual forward or long-term commitments or long-term leases, which is
not reflected in such Financial Statements or the footnotes thereto. During the period from
November 30, 2004 to and including the date hereof, there has been no sale, transfer or other
disposition by the Borrower of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of any other Person)
material in relation to the financial condition of the Borrower at November 30, 2004. Since
November 30, 2004, (i) there has been no change, occurrence, development or event which has had or
could reasonably be expected to have a Material Adverse Effect and (ii) none
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of the capital stock of the Borrower has been redeemed, retired, purchased or otherwise
acquired for value by the Borrower.
(j)
Accuracy and Completeness of Information.
All data, reports and information
(other than preliminary or draft data, reports or information) heretofore, contemporaneously or
hereafter furnished by or on behalf of the Borrower in writing to the Agent or the Auditors for
purposes of or in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material respects on the
date as of which such data, reports and information are dated or certified and not incomplete by
omitting to state any material fact necessary to make such data, reports and information not
misleading at such time. There are no facts now known to any Responsible Officer of the Borrower
which individually or in the aggregate could reasonably be expected to have a Material Adverse
Effect and which have not been specified herein, in the Financial Statements, or in any
certificate, opinion or other written statement previously furnished by the Borrower to the Agent.
(k)
No Joint Ventures or Partnerships.
It is not engaged in any joint venture or
partnership with any other Person.
(l)
Corporate and Trade Name.
During the past five years, the Borrower has not
been known by or used any other corporate trade or fictitious name except for its name as set forth
in the introductory paragraph and on the signature page of this Agreement, which is the exact
correct legal name of the Borrower.
(m)
No Actual or Pending Material Modification of Business.
There exists no actual
or, to the best of the Borrowers knowledge after due inquiry, threatened termination, cancellation
or limitation of, or any modification or change in, the business relationship of the Borrower with
any customer or group of customers which individually or in the aggregate could reasonably be
expected to have a Material Adverse Effect.
(n)
Investment Company.
It is not an investment company, or an affiliated
person of, or promoter or principal underwriter for, an investment company, as such terms
are defined in the Investment Company Act of 1940, as amended. Neither the making of any Loans or
the application of the proceeds or repayment thereof by the Borrower, nor the consummation of the
other transactions contemplated by this Agreement or the other Loan Documents, will violate any
provision of such Act or any rule, regulation or order of the Securities and Exchange Commission
thereunder.
(o)
Margin Stock.
It does not own any margin stock as that term is
defined in Regulation U of the Federal Reserve Board.
-38-
(p)
Taxes and Tax Returns.
(i) It has properly completed and timely filed all income tax returns
it is required to file. The information filed is complete and accurate in all
material respects. All deductions taken in such income tax returns are
appropriate and in accordance with applicable laws and regulations, except
deductions that may have been disallowed but are being challenged in good faith
and for which adequate reserves have been established in accordance with GAAP.
(ii) All taxes, assessments, fees and other governmental charges
for periods beginning prior to the date hereof, in each case which involve an
amount in excess of $100,000, have been timely paid (or, if not yet due,
adequate reserves therefor have been established) by it and the Borrower has no
liability for taxes in excess of the amounts so paid or reserves so
established.
(iii) No deficiencies for taxes have been claimed, proposed or assessed by
any taxing or other Governmental Authority against the Borrower and no tax Liens
have been filed with respect thereto. There are no pending or threatened audits,
investigations or claims for or relating to any liability of the Borrower for taxes
and there are no matters under discussion with any Governmental Authority which could
result in an additional liability for taxes, in each case which involve taxes in
excess of $100,000. The federal income tax returns of the Borrower have never been
audited by the Internal Revenue Service. No extension of a statute of limitations
relating to taxes, assessments, fees or other governmental charges is in effect with
respect to the Borrower.
(iv) It is not a party to, and has no obligations under, any
written tax sharing agreement or agreement regarding payments in lieu of
taxes.
(q)
No Judgments or Litigation.
No judgments, orders, writs or decrees
are outstanding against it, nor is there now pending or, to its knowledge after due inquiry,
threatened litigation, contested claim, investigation, arbitration, or governmental
proceeding by or against the Borrower that (i) individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect or (ii) purports to affect the
legality, validity or enforceability of this Agreement, the Notes, any other Loan Document or
the consummation of the transactions contemplated hereby or thereby.
(r)
Title to Property.
It has (i) good and marketable fee simple title to
or valid leasehold interests in all of its Property and (ii) good and marketable title to all
of its other property, in each case free and clear of Liens other than (A) Liens in favor of
the Agent, (B) Permitted Liens and (C) Liens securing Indebtedness reflected in the Financial
Statements delivered under Section 5.1(a)(vii).
(s)
No Other Indebtedness.
On the Closing Date and after giving effect to
the transactions contemplated hereby, it has no Indebtedness other than Indebtedness
reflected in the Financial Statements delivered under Section 5.1(a)(vii) to the extent
required by GAAP to be included therein or in footnotes thereto.
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(t)
Compliance with Laws.
On the Closing Date, after giving effect to the
transactions contemplated hereby, it is not in default under any term of any Requirement of Law
other than any default which, when taken together with all other similar defaults, could not
reasonably be expected to have a Material Adverse Effect.
(u)
Rights in Collateral; Priority of Liens.
All of the Collateral of the
Borrower is owned or leased by it free and clear of any and all Liens in favor of third parties,
other than Liens in favor of the Agent and Permitted Liens. Upon the proper filing of the
financing and termination statements specified in Section 5.1(a)(iii), the Liens granted by the
Borrower under this Agreement constitute valid, enforceable and perfected first priority Liens on
the Collateral.
(v)
ERISA.
(i) Each of the Borrower and its ERISA Affiliates has fulfilled its
respective contribution obligations under the minimum funding standards of Section
302 of ERISA and Section 412 of the Internal Revenue Code with respect to each
Pension Plan, and no application for a waiver of such minimum funding standards is
currently outstanding with respect to any Pension Plan.
(ii) No Termination Event has occurred which could reasonably be expected
to have a Material Adverse Effect. Neither it nor any ERISA Affiliate has incurred
any liability to the PBGC or any Pension Plan or Multiemployer Plan, except for
ordinary funding obligations and the payment of PBGC premiums which are not past
due, and except for any such liability which could not reasonably be expected to
have a Material Adverse Effect.
(iii) Neither it nor any ERISA Affiliate is required to or reasonably
expects to be required to provide security to any Pension Plan under Section 307 of
ERISA or Section 401(a)(29) of the Internal Revenue Code.
(iv) Each of the Borrower and its Subsidiaries is in compliance in all
respects with all applicable provisions of ERISA and the Internal Revenue Code with
respect to the Plans, and no Person has engaged in a Prohibited Transaction with
respect to any Plan, except for any such noncompliance or Prohibited Transaction
which, individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
(w)
Labor Matters.
There are no existing or threatened strikes, lockouts or
other disputes relating to any collective bargaining or similar agreement to which the Borrower is
a party which, individually or in the aggregate, could reasonably be expected to have a Material
Adverse Effect.
(x)
Compliance with Environmental Laws.
(i) It is not the subject of
any judicial or administrative proceeding or investigation relating to the violation of any
Environmental Law or asserting potential liability arising from the release or disposal by any
Person of any Hazardous Materials, (ii) it has not received from any Governmental Authority or
other Person any notice, order, stipulation or directive under any Environmental Law, nor is it
-40-
aware of any pending discussions within any Governmental Authority, concerning the
treatment, storage, disposal, spill or release or threatened release of any Hazardous Materials at, on,
beneath or adjacent to Property owned or leased by it, or the release or threatened release at any other
location of any Hazardous Material generated, used, stored, treated, transported or released by or
on behalf of the Borrower, (iii) during the period that Affiliates of Carl C. Icahn have
controlled the Borrower, it has disposed of all its waste in accordance with all Applicable laws and it has
not improperly stored or disposed of any waste at, on, beneath or adjacent to any of its Property,
(iv) it has no knowledge of any actual or potential liability for any release of any Hazardous
Materials, and there has been no spill or release of any Hazardous Materials at any of its
Property in violation of Environmental Laws, (v) all of its Property (including, without limitation, its
Equipment) is free, and has at all times been free, of Hazardous Materials, except as such
materials may be part of such Equipment, and underground storage tanks and (vi) to the
knowledge of the Borrower, none of its Property has ever been used as a waste disposal site,
whether registered or unregistered, where any of the foregoing could reasonably be expected
to have a Material Adverse Effect.
(y)
Licenses and Permits.
It has obtained and holds in full force
and effect all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which are necessary
or advisable for the operation of its business as presently conducted and as proposed to be
conducted, except where the failure to possess any of the foregoing (individually or in the
aggregate) could not reasonably be expected to have a Material Adverse Effect.
(z)
Government Regulation.
It is not subject to regulation under the
Public Utility Holding Company, Act of 1935, the Federal Power Act, the Interstate Commerce Act or
any other Requirement of Law that limits its ability to incur Indebtedness or to consummate
the transactions contemplated by this Agreement and the other Loan Documents.
(aa)
Business and Properties.
No business of the Borrower is affected by any
fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God or of the
public enemy or other casualty (whether or not covered by insurance) that could reasonably be
expected to have a Material Adverse Effect.
(bb)
Business Plan.
The Business Plan and the Financial Statements delivered
to the Agent on the Closing Date were prepared in good faith on the basis of assumptions
which were fair in the context of the conditions existing at the time of delivery thereof,
and, with respect to the Business Plan, represented, at the time of delivery, the Borrowers
best estimate of its future financial performance.
(cc)
Affiliate Transactions.
The Borrower is not a party to or bound by any
agreement or arrangement (whether oral or written) relating to any of the Collateral to which
any Affiliate of the Borrower is a party except (i) in the ordinary course of and pursuant to
the reasonable requirements of the business of the Borrower and (ii) upon fair and reasonable
terms no less favorable to the Borrower than it could obtain in a comparable arms-length
transaction with an unaffiliated Person.
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(dd)
Compliance with
Anti-Terrorism Laws.
The Borrower is and will remain
in full compliance with all laws and regulations applicable to it including, without limitation,
(i) ensuring that no Person who owns a controlling interest in or otherwise controls the Borrower
is or shall be (A) listed on the Specially Designated Nationals and Blocked Person List
maintained by the Office of Foreign Assets Control (OFAC), Department of the Treasury, or
any other similar list maintained by the OFAC under any authorizing statute, Executive Order
or regulation or (B) a Person designated under Section 1 (b), (c) or (d) of Executive Order
No. 13224 (September 23, 2001), any related enabling legislation or any similar Executive
Order and (ii) compliance with all applicable Bank Secrecy Act (BSA) laws, regulations and
government guidance on BSA compliance and on the prevention and detection of money laundering
violations. The Borrower acknowledges that each of the Agent and the Lenders have notified the
Borrower that the Agent and the Lenders are required, under the USA Patriot Act, 31 U.S.C.
§5318 (the Patriot Act), to obtain, verify and record information that identifies the
Borrower including, without limitation, the name and address of the Borrower and such other
information that will allow the Agent and the Lenders to identify the Borrower in accordance
with the Patriot Act.
All representations and warranties made by the Borrower in this Agreement and in each other Loan
Document to which it is a party shall survive the execution and delivery hereof and thereof and
the closing of the transactions contemplated hereby and thereby. The Borrower acknowledges and
confirms that the Lenders are relying on such representations and warranties without independent
inquiry in entering into this Agreement.
ARTICLE VII.
COVENANTS OF THE BORROWER
SECTION 7.1
Affirmative Covenants.
Until termination of the Commitments and
payment and satisfaction of all Obligations in full:
(a)
Corporate Existence.
The Borrower shall (i) maintain its corporate existence, (ii)
maintain in full force and effect all material licenses, bonds, franchises, leases, trademarks,
qualifications and authorizations to do business, and all material patents, contracts and other
rights necessary or advisable to the profitable conduct of its businesses, and
(iii) continue in the same lines of business as presently conducted by it.
(b)
Maintenance of Property.
The Borrower shall keep all property useful and necessary
to its business in good working order and condition (ordinary wear and tear excepted) in accordance
with its past operating practices.
(c)
Environmental Matters.
The Borrower shall, and shall cause each of its
Subsidiaries to, conduct its business so as to comply in all material respects with all applicable
Environmental Laws including, without limitation, compliance in all material respects with the
terms and conditions of all permits and governmental authorizations,
provided
that the
Borrower shall not be deemed in violation hereof if the Borrowers or any such Subsidiarys failure
to comply with any of the foregoing could not reasonably be expected to have a Material Adverse
Effect.
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(d)
Taxes.
The Borrower shall pay, when due, (i) all tax assessments, and
other governmental charges and levies imposed against it or any of its property and (ii) all
lawful claims that, if unpaid, might by law become a Lien upon its property;
provided,
however,
that, unless such tax assessment, charge, levy or claim has become a Lien on any of
the property of the Borrower need not be paid if it is being contested in good faith, by
appropriate proceedings diligently conducted and an adequate reserve or other appropriate provision shall have been
established therefor as required in accordance with GAAP.
(e)
Requirements of Law.
The Borrower shall comply with all Requirements of Law
applicable to it, including, without limitation, all applicable federal, state, local or foreign
laws and regulations, including, without limitation, those relating to environmental and employee
matters (including the collection, payment and deposit of employees income, unemployment, Social
Security and Medicare hospital insurance taxes) and with respect to pension liabilities, provided
that the Borrower shall not be deemed in violation hereof if the Borrowers failure to comply with
any of the foregoing could not reasonably be expected to have a Material Adverse Effect.
(f)
Insurance.
The Borrower shall maintain public liability insurance,
business interruption insurance, third party property damage insurance and replacement value
insurance on its assets (including the Collateral) under such policies of insurance, with such
insurance companies, in such amounts and covering such risks as are in effect (and copies of which
have been provided to the Agent) immediately before the Closing Date, all of which policies
covering the Collateral shall name the Agent as an additional insured and the lender loss payee in
case of loss, and contain other provisions as the Agent may require to protect fully the Agents
interest in the Collateral and any payments to be made under such policies.
(g)
Books and Records; Inspections.
The Borrower shall (i) maintain books and
records (including computer records and programs) of account pertaining to the assets, liabilities
and financial transactions of the Borrower in such detail, form and scope as is consistent with
good business practice and (ii) provide the Agent and its agents and one representative of each of
the Lenders access to the premises of the Borrower at any time and from time to time, during normal
business hours and upon reasonable notice under the circumstances, and at any time after the
occurrence and during the continuance of a Default or Event of Default, for the purposes of (A)
inspecting and verifying the Collateral, (B) inspecting and copying (at the Borrower expense) any
and all records pertaining thereto, and (C) discussing the affairs, finances and business of the
Borrower with any officer, employee or director thereof or with the Auditors, all of whom are
hereby authorized to disclose to the Agent and the Lenders all financial statements, work papers,
and other information relating to such affairs, finances or business. The Borrower shall reimburse
the Agent for the reasonable expenses of a third party examiner or accountant retained by the
Agent to verify or inspect Collateral and the records or documents related thereto (I) up to three
times in any twelve-month period (and more frequently in the Agents discretion at any time that an
Event of Default has occurred and is continuing) or (II) in connection with the inspection of any
Inventory acquired from another Person other than in the ordinary course of business if the value
thereof is greater than $5,000,000. If the Agents own employees are used to conduct any such
verification or inspection, the Borrower shall not be required to reimburse the Agent for the
expense thereof. All such Obligations may be charged to the Loan Account or any other account of
the Borrower
-43-
with the Agent or any of its Affiliates. The Borrower hereby authorizes the Agent to communicate
directly with the Auditors to disclose to the Agent any and all financial information regarding the
Borrower including, without limitation, matters relating to any audit and copies of any letters,
memoranda or other correspondence related to the business, financial condition or other affairs of
the Borrower.
(h)
Notification Requirements.
The Borrower shall timely give the Agent the
following notices and other documents:
(i)
Notice of Defaults.
Promptly, and in any event within two
Business Days after becoming aware of the occurrence of a Default or Event of
Default, a certificate of a Responsible Officer specifying the nature thereof and
the Borrowers proposed response thereto, each in reasonable detail.
(ii)
Proceedings or Changes.
Promptly, and in any event within
five Business Days after the Borrower becomes aware of (A) any proceeding including,
without limitation, any proceeding the subject of which is based in whole or in part
on a commercial tort claim being instituted or threatened to be instituted by or
against the Borrower in any federal, state, local or foreign court or before any
commission or other regulatory body (federal, state, local or foreign) involving a
sum, together with the sum involved in all other similar proceedings, in a stated
amount in excess of $500,000 in the aggregate, (B) any order, judgment or decree
involving a sum, together with the sum of all other orders, judgments or decrees, in
excess of $500,000 in the aggregate being entered against the Borrower or any of its
property or assets, (C) any notice or correspondence issued to the Borrower by a
Governmental Authority warning, threatening or advising of the commencement of any
investigation involving the Borrower or any of its property or assets, (D) any
actual or prospective change, development or event which has had or could reasonably
be expected to have a Material Adverse Effect, (E) a change in the location of any
Collateral from the locations specified in Schedule 6.1(b) or (F) a proposed or
actual change of the name, identity, mailing address, chief executive office,
principal place of business, corporate structure or jurisdiction of organization of
the Borrower, a written statement describing such proceeding, order, judgment,
decree, change, development or event and any action being taken by the Borrower with
respect thereto.
(iii)
ERISA Notices.
(A) Promptly, and in any event within Business Days after the occurrence thereof, notice
of any of the following events which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, including with such notice a written statement of a
Responsible Officer describing the event and any action that is being
taken with respect thereto by the Borrower or ERISA Affiliate, and any
action taken or threatened by the Internal Revenue Service, the
Department of Labor or the PBGC;
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(1) a Termination Event;
(2) the failure to satisfy the minimum funding standards of Section 302
of ERISA or Section 412 of the Internal Revenue Code with respect to any
Pension Plan or the filing or a waiver request with the Internal Revenue
Service with respect to such minimum funding standards for any Pension Plan;
(3) the occurrence of a Prohibited Transaction with respect to a
Plan;
(4) a failure by the Borrower or ERISA Affiliate to make a payment to a
Pension Plan required to avoid imposition of a Lien under Section 302(f) of
ERISA or Section 412(n) of the Internal Revenue Code;
(5) the adoption of an amendment to a Pension Plan requiring the
provision of security to such Pension Plan pursuant to Section 307 of ERISA
or Section 401(a)(29) of the Internal Revenue Code;
(6) receipt by the Borrower or any Subsidiary of notice from the
Department of Labor of any penalty with respect to a Plan;
(7) receipt by the Borrower or any Subsidiary of notice from the
Internal Revenue Service or the Treasury Department of any income tax
deficiency or delinquency or excise tax penalty with respect to a Plan; and
(8) receipt by the Borrower or any Subsidiary of notice of the entry of
a judgment, award or settlement agreement with respect to a Plan; and
(B) Promptly upon the request of the Agent, each annual report (IRS Form
5500 series) and all accompanying) schedules, the most recent actuarial reports, the
most recent financial information concerning the financial status of each Pension
Plan.
(iv)
Environmental Matters.
Promptly, and in any event within ten days after
receipt by the Borrower thereof, copies of each (A) written notice that any violation of any
Environmental Law may have been committed or is about to be committed by the Borrower which
violation could reasonably be expected to result in liability or involve remediation costs that
could reasonably be expected to have a Material Adverse Effect, (B) written notice that any
administrative or judicial complaint or order has been filed or is about to be filed against the
Borrower alleging violations of any Environmental Law or requiring the Borrower to take any action
in connection with the release of toxic or Hazardous
-45-
Materials into the environment which violation or action could reasonably be
expected to result in liability or involve remediation costs that could reasonably
be expected to have a Material Adverse Effect, (C) written notice from a
Governmental Authority or other Person alleging that the Borrower may be liable or
responsible for costs associated with a response to or cleanup of a release of a
Hazardous Material into the environment or any damages caused thereby which costs
could reasonably be expected to have a Material Adverse Effect, or (D)
Environmental Law adopted, enacted or issued after the date hereof of which the
Borrower becomes aware which could reasonably be expected to have a Material
Adverse Effect.
(i)
Casualty Loss.
The Borrower shall (i) provide written notice to the Agent,
within ten Business Days, of any material damage to, the destruction of or any other material loss
to any of the Borrowers Inventory or any other asset or property owned or used by the Borrower to
manufacture, repair or store any item of Collateral other than any such asset or property with a
net book value (individually or in the aggregate) less than $5,000,000 or any condemnation,
confiscation or other taking, in whole or in part, or any event that otherwise diminishes so as to
render impracticable or unreasonable the use of such asset or property owned or used by the
Borrower together with a statement of the amount of the damage, destruction, loss or diminution in
value (a Casualty Loss) and (ii) diligently file and prosecute its claim for any award or
payment in connection with a Casualty Loss.
(j)
Qualify to Transact Business.
The Borrower shall, and shall cause each of
its Subsidiaries to, qualify to transact business as a foreign corporation, limited partnership or
limited liability company, as the case may be, in each jurisdiction where the nature or extent of
its business or the ownership of its property requires it to be so qualified or authorized and
where failure to qualify or be authorized could reasonably be expected to have a Material Adverse
Effect.
(k)
Financial Reporting.
The Borrower shall deliver to the Agent the
following:
(i)
Annual Financial Statements.
As soon as available, but not
later than 120 days after the end of each fiscal year, beginning with the fiscal
year ended December 31, 2004, (A) the Borrower annual audited and certified
consolidated and consolidating Financial Statements; (B) a comparison in reasonable
detail to the prior years audited Financial Statements; and (C) if available, the
Auditors opinion without Qualification, a Management Letter and a statement
indicating that the Auditors have not obtained knowledge of the existence of any
Default or Event of Default during their audit.
(ii)
Projections.
Not later than sixty days after the end of each fiscal year
of the Borrower, the Business Plan of the Borrower certified by the Chief
Financial Officer of the Borrower for the three-year period commencing with the
following fiscal year.
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(iii)
Monthly Financial Statements.
As soon as available, (A) the
Borrowers interim consolidated and consolidating Financial Statements as of the end of each month
(beginning with the month in which the Closing Date occurs) and for the fiscal year to date and (B)
a certification by the Borrowers Chief Financial Officer that such Financial Statements have been
prepared in accordance with GAAP and are fairly stated in all material respects (subject to normal
year-end audit adjustments).
(iv)
Quarterly Financial Statements and Compliance Certificate.
As soon as
available, but not later than sixty days after the end of each fiscal quarter, beginning with the
fiscal quarter ending March 31, 2005, (A) the Borrowers interim consolidated and consolidating
Financial Statements as of the end of such quarter and for the fiscal year to date and (B) a
compliance certificate, substantially in the form of Exhibit C (a Compliance Certificate),
signed by the Borrowers Chief Financial Officer, with an attached schedule of calculations
demonstrating compliance with the Financial Covenants as of the end of such quarter.
(v)
Borrowing Base Certificate.
Weekly (or, if the difference between (A) the
lesser of (I) the Borrowing Base and (II) the Maximum Amount of the Facility and (B) the aggregate
outstanding amount of the Loans is greater than $5,000,000, monthly), not later than the second
Business Day of each week (or the fifth Business Day of each month, as the case may be), a
borrowing base certificate, substantially in the form of Exhibit G, detailing the Eligible
Receivables and the Eligible Inventory, containing a calculation of availability and reflecting
all sales, collections, and debit and credit adjustments, as of the last day of (or for) the
preceding week (or month, as the case may be), which shall be prepared by or under the supervision
of the Chief Financial Officer of the Borrower and certified by such officer (a Borrowing Base
Certificate).
(vi)
Agings.
Monthly, not later than the fifth Business Day of each month, agings
of the Borrower Receivables and accounts payable, in scope and detail satisfactory to the Agent,
as of the last day of the preceding month.
(vii)
Inventory Reports.
(A) Monthly, not later than the fifth Business Day of
each month, a report of the Borrowers Inventory, based upon a perpetual inventory, describing such
Inventory by category, item (in reasonable detail), location and current appraised value (at the
lower of cost or market).
(B) Within 120 days after the end of each fiscal year, a report of the annual
physical Inventory of the Borrower as observed and tested by its public accountants
in accordance with generally accepted auditing standards and GAAP.
(viii).
Shareholder and SEC Reports.
As soon as available, but not later than
five days after the same are sent or filed, as the case may be, copies of all financial statements
and reports that the Borrower sends to the shareholders of the
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Borrower (other than financial statements and reports specifically requested by
Carl C. Icahn or any of his Affiliates) or files with the Securities and Exchange
Commission or any other Governmental Authority.
(ix)
Other Financial Information.
Promptly after the request by
the Agent therefor, such additional financial statements and other related data and
information as to the business, prospects, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of the Borrower as the
Agent may from time to time reasonably request.
(l)
Payment of Liabilities.
The Borrower shall pay and discharge, in the
ordinary course of business, all obligations and liabilities (including, without limitation, tax
liabilities and other governmental charges), except where the same may be contested in good faith
by appropriate proceedings and for which adequate reserves with respect thereto have been
established in accordance with GAAP.
SECTION 7.2
Negative Covenants.
Until termination of the Commitments and payment
and satisfaction of all Obligations in full:
(a)
Deposit Accounts.
The Borrower will not establish or maintain any deposit
account in which proceeds of Collateral are on deposit unless the Agent shall have received
a Blocked Account Agreement, duly executed by the Borrower and the applicable depository
bank, covering such deposit account.
(b)
Use of Proceeds.
The Borrower will not (i) use any portion of the proceeds of any
Loan in violation of Section 2.3 or for the purpose of purchasing or carrying any margin stock
(as defined in Regulation U of the Federal Reserve Board) in any manner which violates the
provisions of Regulation T, U or X of the Federal Reserve Board or for any other purpose in
violation of any applicable statute or regulation, or of the terms and conditions of this
Agreement, or (ii) take, or permit any Person acting on its behalf to take, any action which could
reasonably be expected to cause this Agreement or any other Loan Document to violate any regulation
of the Federal Reserve Board.
(c)
Cancellation of Debt.
The Borrower will not cancel any liability or debt
owed to it in respect of any item of Collateral other than for consideration in the ordinary course
of business.
(d)
Investments.
Other than as governed by Section 9.2(c)(I), the Borrower will not,
directly or indirectly, at any time use any funds included in the Collateral to make or hold any
Investment in any Person (whether in cash, securities or other property of any kind) other than
(i) Investments in Cash Equivalents and (ii) so long as no Blocked Account Notice is in effect and
no Event of Default is continuing, Investments in Affiliates of the Borrower.
(e)
Fiscal Year.
The Borrower will not change its fiscal year from a year ending
December 31.
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(f)
Accounting Changes.
The Borrower will not at any time make or permit
any change in accounting policies or reporting practices, except as required or allowed by
GAAP.
ARTICLE VIII.
FINANCIAL COVENANTS
Until termination of the Commitments and the payment and satisfaction of all
Obligations in full:
SECTION 8.1
Fixed
Charge Coverage Ratio.
The Fixed Charge Coverage Ratio for
each period set forth below shall not be less than 1.2 to 1.0:
Period
January 1, 2005 through March 31, 2005
January 1, 2005 through June 30, 2005
January 1, 2005 through September 30, 2005
January 1, 2005 through December 31, 2005 and each twelve-month
period ending on the last day of each calendar quarter thereafter
SECTION 8.2
Leverage Ratio.
The ratio of (a) the outstanding amount of all the
Borrowers Indebtedness to (b) EBITDA, determined for each period set forth below, shall not be
greater than 4.0 to 1.0:
Period
January 1, 2005 through March 31, 2005
January 1, 2005 through June 30, 2005
January 1, 2005 through September 30, 2005
January 1, 2005 through December 31, 2005 and each twelve-month period ending on
the last day of each calendar quarter thereafter
For purposes of determining the ratio hereunder for any period of less than twelve months,
EBITDA shall be annualized by (i) dividing the cumulative EBITDA for such period by the
number of months in such period and (ii) multiplying the quotient obtained in clause (i) by
twelve.
SECTION 8.3
Business Plan.
The Agent and the Borrower acknowledge that the
foregoing financial covenants were established by the Agent and the Borrower on the basis of
the Business Plan delivered to the Agent on the Closing Date, after leaving a margin in favor of
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the Borrower which the Agent and the Borrower have agreed is fair. Accordingly, the Agent and
the Borrower have agreed that any failure by the Borrower to comply with the terms of any Financial
Covenant shall be deemed material for purposes of this Agreement.
ARTICLE IX.
EVENTS OF DEFAULT
SECTION 9.1
Events of Default.
The occurrence of any of the following
events shall constitute an Event of Default:
(a) the Borrower shall fail to pay (i) any principal, interest, or unused line fees when
payable, whether at stated maturity, by acceleration, or otherwise, or (ii) any other Obligations
within fifteen Business Days of demand therefor; or
(b) the Borrower shall (i) default in the performance or observance of any agreement,
covenant, condition, provision or term contained in Section 2.3, 2.4, 2.6, 7.1(a)(i), 7.1(f),
7.1(g)(ii), 7.1(h), 7.1(k), 7.2, 8.1, 8.2, 11.4 or 11.7(a) hereof; or (ii) default in the
performance or observance of any agreement, covenant, condition, provision or term contained in
this Agreement or any other Loan Document (other than those referred to in Sections 9.1 (a) and
(b)(i)) and such failure continues for a period of thirty days from the earlier of the date on
which (A) the Borrower has received notice of such failure in accordance with Section 11.1 and (B)
a Responsible Officer of the Borrower has knowledge of such failure or, if such default is capable
of being cured and the Borrower has undertaken to cure such default within such thirty- day period
and is diligently prosecuting and pursuing such cure thereafter, such failure continues for a
period of sixty days from such date of initial notice or knowledge; or
(c) the Borrower shall dissolve, wind up or otherwise cease to conduct its business; or
(d) the Borrower shall become the subject of an Insolvency Event; or
(e) (i) the Borrower shall fail to make any payment (whether of principal, interest or
otherwise and regardless of amount) in respect of any Material Indebtedness when due (whether at
scheduled maturity or by required prepayment, acceleration, demand or otherwise), or (ii) any event
or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits the holder or holders (or a trustee or agent on behalf of such
holder or holders) to declare any Material Indebtedness to be due, or to require the prepayment,
repurchase, redemption or defeasance thereof, prior to its scheduled maturity; or
(f) any representation or warranty made by the Borrower under or in connection with any
Loan Document or amendment or waiver thereof, or in any Financial Statement, report or
certificate delivered in connection therewith, shall prove to have been incorrect in any
material respect when made or deemed made; or
(g) any judgment or order for the payment of money which, when taken together with all other
judgments and orders rendered against the Borrower, exceeds $1,000,000 in the aggregate shall be
rendered against the Borrower and shall not be stayed, vacated, bonded or discharged within thirty
days; or
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(h) less than 50.1% in the aggregate of the shares of the voting stock or other voting
equity interests of the Borrower shall be directly or indirectly owned or controlled by Carl C.
Icahn, or any of such shares or equity interests shall become subject to any contractual, judicial
or statutory Lien (other than a Permitted Lien or a pledge in favor of an Affiliate of the
Borrower); or
(i) any of the events specified in clauses (1) through (8) of Section 7.1(h)(iii)(A)
shall occur and such event, together with any other of such events, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect; or
(j) any covenant, agreement or obligation of the Borrower contained in or evidenced by
any of the Loan Documents shall cease to be enforceable in any material respect, or shall be
determined to be unenforceable in any material respect, in accordance with its terms; the Borrower
shall deny or disaffirm its obligations under any of the Loan Documents or any Liens granted in
connection therewith or shall otherwise challenge any of its obligations under any of the Loan
Documents; or any Liens granted on any of the Collateral shall be determined to be void, voidable
or invalid, are subordinated or are not given the priority contemplated by this Agreement or any
other Loan Document; or
(k) this Agreement shall for any reason cease to create a valid and perfected
first priority Lien on the Collateral purported to be covered thereby; or
(l) the independent public accountants for the Borrower shall deliver a
Qualified opinion on any Financial Statement; or
(m) the occurrence of any event or condition that has a Material Adverse
Effect.
SECTION 9.2
Acceleration, Termination and Demand Rights.
During the continuance
of an Event of Default, the Agent may, or upon the request of the Required Lenders, the Agent shall
take any or all of the following actions, without prejudice to the rights of the Agent to enforce
its claims against the Borrower:
(a)
Acceleration.
To declare all Obligations immediately due and payable (except with
respect to any Event of Default with respect to the Borrower specified in Section 9.1(d), in which
case all Obligations shall automatically become immediately due and payable) without presentment,
demand, protest or any other action or obligation of the agent or any Lender.
(b)
Termination of Commitments.
To declare the Commitments immediately terminated
(except with respect to any Event of Default with respect to the Borrower set forth in Section
9.1(d), in which case the Commitments shall automatically terminate) and, at all times thereafter,
any Loan made by a Lender or the Agent shall be in such Lenders or the Agents sole and absolute
discretion. Notwithstanding any such termination, until all Obligations shall have been fully and
indefeasibly paid and satisfied, the Agent shall retain all security in existing and future
Receivables included in the Collateral and existing and future Inventory of the Borrower and all
other Collateral held by it hereunder.
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(c)
Demand Rights
. Notwithstanding anything herein to the contrary, the
Borrower shall, immediately upon the Borrowers decision to take any of the following actions (and
in any event, not less than ten days before the taking of any such action), deliver to the Agent
written notice of such proposed action (together with, in the case of any action specified in
clause (A), (F), (H) or (I) hereof, such financial information as is necessary to determine the
Borrowers compliance, on a pro forma basis giving effect to such action, with Section 8.1 or 8.2,
as the case may be), and, upon the giving of such notice (or, if such notice is not given for any
reason, the occurrence of any such action), the Agent may, or upon the request of the Required
Lenders, the Agent shall (i) declare all Obligations immediately due and payable without
presentment, demand, protest or any other action or obligation of the Agent or any Lender or
(ii) declare the Commitments immediately terminated and, notwithstanding any such termination,
until all the Obligations shall have been fully and indefeasibly paid and satisfied, the Agent
shall retain all security in existing and future Collateral:
(A)
Indebtedness
. The Borrower shall, directly or indirectly, at
any time create, incur, assume or permit to exist any Indebtedness that
causes the ratio of (1) the aggregate outstanding amount of the Borrowers
Indebtedness to (2) EBITDA, determined on a year-to-date basis (or, if
after December 31,2005, the twelve-month period) ending on the last day of
the month preceding the month in which such Indebtedness is created,
incurred, assumed or permitted to exist (which determination shall be
made, if before December 31,2005, by annualizing EBITDA in a manner
consistent with the second sentence of Section 8.2), to be greater than 4.0
to 1.0.
(B)
Contingent Obligations
. Except as relates to the
Indebtedness reflected in the Financial Statements delivered under Section
5.1 (a)(vii), the Borrower shall, directly or indirectly, incur, assume, or
suffer to exist any Contingent Obligation, excluding indemnities given in
connection with (1) the Indebtedness reflected in the Financial Statements
delivered under Section 5.1(a)(vii) and (2) this Agreement or the other Loan
Documents in favor of the Agent and the Lenders.
(C)
Corporate Changes, Etc
. The Borrower shall, directly or
indirectly, merge or consolidate with any Person or amend, alter or modify
its Governing Documents in a manner adverse to the Agent or the Lenders, or
liquidate or dissolve itself (or suffer any liquidation or
dissolution).
(D)
Change in Nature of Business
. The Borrower shall make any
material change in the nature of its business as carried on at the date
hereof or enter into any new line of business that is materially adverse to
the Agent and the Lenders.
(E)
Sales. Etc. of Assets
. The Borrower shall, directly or
indirectly, in any fiscal year, sell, transfer or otherwise dispose of, or
grant
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any option or other right to purchase or otherwise acquire, (1) any of the Collateral (other
than sales of Inventory in the ordinary course of business) or (2) all or substantially all of its
assets.
(F)
Loans to Other Persons
. The Borrower shall make any loan or advance any credit to
any Affiliate or other Person that causes the Fixed Charge Coverage Ratio, determined on a
year-to-date basis (or, if after December 31, 2005, the twelve-month period) ended on the last day
of the month preceding the month in which such loan is made or such credit is advanced, to be less
than 1.2 to 1.0.
(G)
Liens, Etc
. The Borrower shall incur, assume or suffer to exist any Lien on or
with respect to any of the Collateral, other than:
(1) Liens created hereunder; and
(2) Permitted Liens.
(H)
Dividends, Stock Redemptions, Distributions, Etc
. The Borrower shall directly
or indirectly, pay any dividends or distributions on, purchase, redeem or retire any shares of any
class of its capital stock or other equity interests or any warrants, options or rights to purchase
any such capital stock or other equity interests, whether now or hereafter outstanding (Stock),
or make any payment on account of or set apart assets for a sinking or other analogous fund for,
the purchase, redemption, defeasance, retirement or other acquisition of its Stock, or make any
other distribution in respect thereof, either directly or indirectly, whether in cash or property
or in obligations of the Borrower, in each case that causes the Fixed Charge Coverage Ratio,
determined on a year-to-date basis (or, if after December 31, 2005, the twelve-month period) ending
on the last day of the month preceding the month in which such payment, purchase, redemption,
defeasance, retirement, acquisition or distribution is made, to be less than 1.2 to 1.0.
(I)
Acquisition of Stock or Assets
. The Borrower shall acquire or commit or
agree to acquire any stock, securities or assets of any other Person other than
(1) acquisitions of Equipment and Inventory acquired in the ordinary course of
business;
(2) acquisitions of securities in Affiliates of the Borrower;
(3) acquisitions of Cash Equivalents;
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(4) acquisitions of securities that do not violate Regulation T,
U or X of the Federal Reserve Board or any other
Requirement of Law;
(5) acquisitions that would not result in a material
adverse change in the nature of the Borrowers business as carried on
at the date hereof or that would result in the operation of a new
line of business that is materially adverse to the Agent and the
Lenders;
(6) acquisitions of Equipment to replace existing
Equipment; and
(7) other acquisitions which, after giving effect thereto, would
not have a Material Adverse Effect, result in a default under Section
8.1 or 8.2 on a pro forma basis or otherwise result in a Default or
an Event of Default.
The Borrowers failure to repay all the Obligations upon a demand hereunder shall constitute an
Event of Default. Any failure of the Agent to declare the Obligations immediately due and payable
following the delivery of a notice by the Borrower under clause (A), (F), (H) or (I) hereof shall
not be deemed to waive any Default or Event of Default arising under Section 8.1 or 8.2 as a result
of the action specified in such notice.
SECTION
9.3
Other Remedies
.
(a) During
the continuance of an Event of Default, the Agent shall have all rights and
remedies with respect to the Obligations and the Collateral under applicable law and the Loan
Documents, and the Agent may do any or all of the following:
(i) remove for copying all documents, instruments, files and records
(including the copying of any computer records) relating to the Borrowers
Receivables or use (at the expense of the Borrower) such supplies or space of the
Borrower at the Borrowers places of business necessary to administer, enforce and
collect such Receivables including, without limitation, any supporting obligations;
(ii)
accelerate or extend the time of payment, compromise, issue credits,
or bring suit on a Borrowers Receivables (in the name of the Borrower or the Agent)
and otherwise administer and collect such Receivables;
(iii) sell, assign and deliver the Borrowers Receivables with or without
advertisement, at public or private sale, for cash, on credit or otherwise, subject
to applicable law; and
(iv) foreclose the security interests created pursuant to the Loan
Documents by any available procedure, or take possession of any or all of the
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Collateral, without judicial process and enter any premises where any Collateral
may be located for the purpose of taking possession of or removing the same.
This subsection (a) shall govern only those Receivables of the Borrower included in the
Collateral.
(b) The Agent may bid or become a purchaser at any sale, free from any right of
redemption, which right is expressly waived by the Borrower. If notice of intended disposition of
any Collateral is required by law, it is agreed that ten days notice shall constitute reasonable
notification. The Borrower will assemble the Collateral in its possession and make it available at
such locations as the Agent may specify, whether at the premises of the Borrower or elsewhere, and
will make available to the Agent the premises and facilities of the Borrower for the purpose of the
Agents taking possession of or removing the Collateral or putting the Collateral in saleable form.
The Agent may sell the Collateral or any part thereof in one or more parcels at public or private
sale, at any exchange, brokers board or at any of the Agents offices or elsewhere, for cash, on
credit or for future delivery, and upon such other terms as the Agent may deem commercially
reasonable. The Agent shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. The Borrower hereby grants the Agent a
license, during the continuation of an Event of Default, to enter and occupy any of the Borrowers
leased or owned premises and facilities, without charge, to exercise any of the Agents rights or
remedies.
SECTION
9.4
License for Use of Software and Other Intellectual Property
. The
Borrower hereby grants to the Agent a license or other right to use, during the continuation of an
Event of Default, without charge, all computer software programs, data bases, processes,
trademarks, tradenames, copyrights, labels, trade secrets, service marks, advertising materials and
other rights, assets and materials used by the Borrower in connection with its businesses or in
connection with the Collateral.
SECTION
9.5
No Marshalling; Deficiencies; Remedies Cumulative
. The Agent shall
have no obligation to marshal any Collateral or to seek recourse against or satisfaction of any of
the Obligations from one source of Collateral or from the Borrower before seeking recourse against
or satisfaction from another source of Collateral or from the Borrower. The net cash proceeds
resulting from the Agents exercise of any of the foregoing rights to liquidate all or
substantially all of the Collateral, including any and all Collections (after deducting all of the
Agents expenses related thereto), shall be applied by the Agent to such of the Obligations and in
such order as the Agent shall elect in its sole and absolute discretion, whether due or to become
due. The Borrower shall remain liable to the Agent and the Lenders for any deficiencies, and the
Agent and the Lenders in turn agree to remit to the Borrower or its successor or assign any surplus
resulting therefrom. All of the Agents and the Lenders remedies under the Loan Documents shall
be cumulative, may be exercised simultaneously against any Collateral and the Borrower or in such
order and with respect to such Collateral or the Borrower as the Agent may deem desirable, and are
not intended to be exhaustive.
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SECTION
9.6
Waivers
. Except as may be otherwise specifically provided
herein or in any other Loan Document, the Borrower hereby waives any right to a judicial or other
hearing with respect to any action or prejudgment remedy or proceeding by the Agent to take
possession, exercise control over, or dispose of any item of Collateral in any instance
(regardless of where the same may be located) where such action is permitted under the terms of
this Agreement or any other Loan Document or by applicable law or of the time, place or terms of
sale in connection with the exercise of the Agents rights hereunder and also waives any bonds,
security or sureties required by any statute, rule or other law as an incident to any taking of
possession by the Agent of any Collateral. The Borrower also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of the Agents rights under this
Agreement or any other Loan Document including the taking of possession of any Collateral or the
giving of notice to any account debtor or the collection of any Receivable of the Borrower. The
Borrower also consents that the Agent may, during the continuation of an Event of Default, enter
upon any premises owned by or leased to it without obligations to pay rent or for use and
occupancy, through self-help, without judicial process and without having first obtained an order
of any court. These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been negotiated by the parties, and the Borrower acknowledges that it has been
represented by counsel of its own choice, has consulted such counsel with respect to its rights
hereunder and has freely and voluntarily entered into this Agreement and the other Loan Documents
as the result of arms-length negotiations.
SECTION
9.7
Further Rights of the Agent
.
(a)
Further Assurances
. The Borrower shall do all things and shall execute and
deliver all documents and instruments reasonably requested by the Agent to protect or perfect any
Lien (and the priority thereof other than with respect to Permitted Liens) of the Agent on the
Collateral.
(b)
Insurance; Etc
. If the Borrower shall fail to purchase or maintain insurance
(where applicable), or to pay any tax, assessment, governmental charge or levy, except as the same
may be otherwise permitted hereunder or which is being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in accordance with GAAP, or if
any Lien prohibited hereby shall not be paid in full and discharged or if the Borrower shall fail
to perform or comply with any other covenant, promise or obligation to the Agent or the Lenders
hereunder or under any other Loan Document, the Agent may (but shall not be required to), if the
Borrower has not done so within ten days of the Agents written request, perform, pay, satisfy,
discharge or bond the same for the account of the Borrower, and all amounts so paid by the Agent
or the Lenders shall be treated as an Agent Loan or a Revolving Credit Loan, as the case may be,
comprised of Base Rate Advances hereunder and shall
constitute part of the Obligations.
SECTION 9.8
Interest After Event of Default.
The Borrower agrees and acknowledges
that the additional interest and fees that may be charged under Section 4.2 (a) are an inducement
to the Agent and the Lenders to make Advances and that the Agent and the Lenders would not
consummate the transactions contemplated by this Agreement without the inclusion of such
provisions, (b) are fair and reasonable estimates of the Agents and the
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Lenders costs of administering the credit facility upon an Event of Default, and (c) are
intended to estimate the Agents and the Lenders increased risks upon an Event of Default.
ARTICLE X.
THE AGENT
SECTION
10.1
Appointment of Agent
.
(a) Each Lender hereby designates NFBC as its agent and irrevocably authorizes it to take
action on such Lenders behalf under the Loan Documents and to exercise the powers and to perform
the duties described therein and to exercise such other powers as are reasonably incidental
thereto. The Agent may perform any of its duties by or through its agents or employees.
(b) The provisions of this Article are solely for the benefit of the Agent and the Lenders,
and the Borrower shall not have any rights as third party beneficiaries of any of the provisions
hereof. The Agent shall act solely as agent of the Lenders and assume no obligation toward or
relationship of agency or trust with or for the Borrower.
SECTION
10.2
Nature of Duties of Agent
. The Agent shall have no duties or
responsibilities except those expressly set forth in the Loan Documents. Neither the Agent nor any
of its officers, directors, employees or agents shall be liable for any action taken or omitted by
it or them as such hereunder or in connection herewith, unless caused by its or their gross
negligence or willful misconduct. The duties of the Agent shall be mechanical and. administrative
in nature. The Agent does not have a fiduciary relationship with or any implied duties to any
Lender or any participant of any Lender.
SECTION
10.3
Lack of Reliance on Agent
.
(a) Independently and without reliance upon the Agent, each Lender, to the extent it deems
appropriate, has made and shall continue to make (i) its own independent investigation of the
financial or other condition and affairs of the Borrower in connection with taking or not taking
any action related hereto and (ii) its own appraisal of the creditworthiness of the Borrower, and,
except as expressly provided in this Agreement, the Agent shall have
no duty or responsibility,
either initially or on a continuing basis, to provide any Lender with any credit
or other information with respect thereto, whether coming into its possession before the making of
the initial Loans or at any time or times thereafter.
(b) The Agent shall not be responsible to any Lender for any recitals, statements,
information, representations or warranties herein or in any document, certificate or other writing
delivered in connection herewith or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility, priority or sufficiency of this Agreement or the Notes or the
financial or other condition of the Borrower. The Agent shall not be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Loan Document, the financial condition of the Borrower, or the
existence or possible existence of any Default or Event of Default.
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SECTION
10.4
Certain Rights of the Agent
. The Agent may request instructions from the
Required Lenders at any time. If the Agent requests instructions from the Required Lenders with
respect to any action or inaction, it shall be entitled to await instructions from the Required
Lenders. No Lender shall have any right of action based upon the Agents action or inaction in
response to instructions from the Required Lenders.
SECTION
10.5
Reliance by Agent
. The Agent may rely upon any written or telephonic
communication it believes to be genuine and to have been signed, sent or made by the proper Person.
The Agent may obtain the advice of legal counsel (including counsel for the Borrower with respect
to matters concerning the Borrower), independent public accountants and other experts selected by
it and shall have no liability for any action or inaction taken or omitted to be taken by it in
good faith based upon such advice.
SECTION
10.6
Indemnification of Agent
. To the extent the Agent is not
reimbursed and indemnified by the Borrower, each Lender will reimburse and indemnify the Agent to
the extent of such Lenders Pro Rata Share (determined as of the time that such indemnity payment
is sought) for any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in
performing its duties hereunder or otherwise relating to the Loan Documents unless resulting from
the Agents gross negligence or willful misconduct. The agreements contained in this Section shall
survive any termination of this Agreement and the other Loan Documents and the payment in full of
the Obligations.
SECTION
10.7
The Agent in Its Individual Capacity
. In its individual capacity, the
Agent shall have the same rights and powers hereunder as any other Lender or holder of a Note or
participation interest and may exercise the same as though it was not performing the duties
specified herein. The terms Lenders, Required Lenders, holders of Notes, or any similar terms
shall, unless the context clearly otherwise indicates, include NFBC in its individual capacity. The
Agent and its Affiliates may accept deposits from, lend money to, acquire equity interests in, and
generally engage in any kind of banking, trust, financial advisory or other business with the
Borrower or any Affiliate of the Borrower as if it were not performing the duties specified herein,
and may accept fees and other consideration from the Borrower for services in connection with this
Agreement and otherwise without having to account for the same to the Lenders.
SECTION
10.8
Holders of Notes
. The Agent may deem and treat the payee of any Note
as the owner thereof for all purposes hereof unless and until a written notice of the assignment or
transfer thereof shall have been filed with the Agent. Any request, authority or consent of any
Person who, at the time of making such request or giving such authority or consent, is the holder
of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of
such Note or of any Note or Notes issued in exchange therefor.
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SECTION
10.9
Successor Agent
.
(a) The Agent may, upon twenty Business Days notice to the Lenders and the
Borrower, resign by giving written notice thereof to the Lenders and the Borrower. Any such
resignation shall be effective upon the appointment of a successor Agent.
(b) Upon receipt of notice of resignation by the Agent, the Required Lenders
may appoint a successor agent which shall also be a Lender. If a successor agent has not
accepted its appointment within fifteen Business Days, then the retiring agent may, on behalf of
the Lenders, appoint a successor agent which shall be subject to the written approval of the
Borrower, which approval shall not be unreasonably withheld and shall be delivered to the Required
Lenders within ten Business Days after the Borrowers receipt of notice of a proposed
successor agent.
(c) Upon its acceptance of the agency hereunder, such successor agent shall succeed to
and become vested with all the rights, powers, privileges and duties of the retiring agent, and the
retiring agent shall be discharged from its duties and obligations under this Agreement. The
retiring agent shall continue to have the benefit of the provisions of this Article for any action
or inaction while it was agent.
SECTION
10.10
Collateral Matters
.
(a) Except as otherwise set forth herein, any action or exercise of powers by the Agent
provided under the Loan Documents, together with such other powers as are reasonably incidental
thereto, shall be deemed authorized by and binding upon all of the Lenders. At any time and without
notice to or consent from any Lender, the Agent may take any action necessary or advisable to
perfect and maintain the perfection of the Liens upon the Collateral.
(b) The Agent is authorized to release any Lien granted to or held by it upon any Collateral
(i) upon termination of the Commitments and payment and satisfaction of all of the Obligations,
(ii) required to be delivered from permitted sales of Collateral hereunder, if any, upon receipt of
the proceeds by the Agent (or, if permitted hereunder, the applicable Borrower) or (iii) if the
release can be and is approved by the Required Lenders (or all the Lenders, if so required under
Section 11.5). The Agent may request and the Lenders will provide confirmation of the Agents
authority to release particular types or items of Collateral.
(c) Upon any sale or transfer of Collateral which is expressly permitted pursuant to the terms
of this Agreement, or consented to in writing by the Required Lenders or all of the Lenders, as
applicable, and upon at least five Business Days prior written request by the Borrower, the Agent
shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be
necessary to evidence the release of the Liens granted to the Agent for the benefit of the Lenders
herein or pursuant hereto upon the Collateral that was sold or transferred,
provided
that
(i) the Agent shall not be required to execute any such document on terms which, in the Agents
reasonable opinion, would expose the Agent to liability or create any obligation or entail any
consequence other than the release of such Liens without recourse or warranty and (ii) such release
shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or
obligations of the Borrower in respect of) all interests retained by the
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Borrower, including (without limitation) the proceeds of the sale, all of which shall continue to
constitute part of the Collateral. In the event of any sale or transfer of Collateral, or any
foreclosure with respect to any of the Collateral, the Agent shall be authorized to deduct all of
the expenses reasonably incurred by the Agent from the proceeds of any such sale, transfer or
foreclosure.
(d) The Agent shall not have any obligation to assure that the Collateral exists or is
owned by the Borrower, that the Collateral is cared for, protected or insured, or that the Liens
on the Collateral have been created or perfected or have any particular priority. With respect to
the Collateral, the Agent may act in any manner it may deem appropriate, in its sole discretion,
given NFBCs own interest in the Collateral as one of the Lenders, and it shall have no duty or
liability whatsoever to the Lenders with respect thereto, except for its gross
negligence or willful misconduct.
SECTION
10.11
Actions with Respect to Defaults
. In addition to the Agents right
to take actions on its own accord as permitted under this Agreement, the Agent shall take such
action with respect to an Event of Default as shall be directed by the Required Lenders. Until the
Agent shall have received such directions, the Agent may act or not act as it deems advisable and
in the best interests of the Lenders.
SECTION
10.12
Delivery of Information
. The Agent shall not be required to deliver to
any Lender originals or copies of any documents, instruments, notices, communications or other
information received by the Agent from the Borrower, the Required Lenders, any Lender or any other
Person under or in connection with this Agreement or any other Loan Document except (i) for the
Financial Statements, Business Plans, certificates and reports received by the Agent from the
Borrower under Section 7.1(k)(i), (ii), (iii), (iv), (v) or (viii); (ii) for any notice of the
occurrence of a Default or an Event of Default received by the Agent from the Borrower under
Section 7.2(h)(i); (iii) as otherwise specifically provided in this Agreement or any other Loan
Document; and (iv) as specifically requested from time to time in writing by any Lender with
respect to a specific document, instrument, notice or other written communication received by and
in the possession of the Agent at the time of receipt of such request and then only in accordance
with such specific request.
ARTICLE XI.
GENERAL PROVISIONS
SECTION
11.1
Notices
. Except as otherwise provided herein, all notices and other
communications hereunder shall be in writing and sent by certified or registered mail, return
receipt requested, by overnight delivery service, with all charges prepaid, by hand delivery, or
by telecopier followed by a hard copy sent by regular mail, if to the Agent, then to North Fork
Business Capital Corporation, 1415 West 22
nd
Street, Suite 750E, Oak Brook, Illinois
60523, Telecopy: (630) 684-0228, Attn.: Regional Manager, with a
copy to North Fork Business
Capital Corporation, 275 Broadhollow Road, P.O. Box 8914, Melville, New York 11747, Telecopy:
(631) 501-5524, Attn.: General Counsel, if to any Lender, then to its address specified in
Schedule 1 or in the Assignment and Acceptance under which it became a party hereto, and if to the
Borrower, then to 100 Clark Street, St. Charles, Missouri 63301, Telecopy: (636) 940-5109, Attn.:
Mr. Umesh Choksi, with a copy to Icahn Associates Corp., 767 Fifth
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Avenue, 47
th
Floor, New York, New York 10153, Telecopy: (212) 668-1158, Attn.: Jesse A.
Lynn, Esq., or, in each case, to such other address as the Borrower, a Lender or the Agent may
specify to the other parties in the manner required hereunder. All such notices and
correspondence shall be deemed given (i) if sent by certified or registered mail, three Business
Days after being postmarked, (ii) if sent by overnight delivery service or by hand delivery, when
received at the above stated addresses or when delivery is refused and (iii) if sent by telecopier
transmission, when such transmission is confirmed.
SECTION
11.2
Delays; Partial Exercise of Remedies
. No delay or omission of the
Agent or any Lender to exercise any right or remedy hereunder shall impair any such right or
operate as a waiver thereof. No single or partial exercise by the Agent or any Lender of any right
or remedy shall preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 11.3
Right of Setoff
. In addition to and not in limitation of all rights
of offset that the Agent, any Lender or any of their respective Affiliates may have under
applicable law, while an Event of Default is continuing, the Agent, the Lenders and their
respective Affiliates shall have the right to set off and apply any and all deposits (general or
special, time or demand, provisional or final, or any other type) at any time held and any other
Indebtedness at any time owing by the Agent, the Lenders or any of their respective Affiliates to
or for the credit or the account of the Borrower or the Borrowers Subsidiaries against any and all
of the Obligations. In the event that the Agent or any Lender exercises any of its rights under
this Section 11.3, the Agent or such Lender shall provide notice to the Borrower of such exercise,
provided
that, without prejudice to the Borrowers right to assert a claim for any damages
it may incur as a result of any failure by the Agent or such Lender to give such notice, the
failure to give such notice shall not affect the validity of the exercise of such rights.
SECTION
11.4
Indemnification; Reimbursement of Expenses of Collection
.
(a) The Borrower hereby agrees that, whether or not any of the transactions contemplated
by this Agreement or the other Loan Documents are consummated, the Borrower will indemnify, defend
and hold harmless (on an after-tax basis) the Agent, the Lenders and their respective successors,
assigns, directors, officers, agents, employees advisors, shareholders and attorneys (each, an
Indemnified Party) from and against any and all losses, claims, damages, liabilities,
deficiencies, obligations, fines, penalties, actions (whether threatened or existing), judgments,
suits (whether threatened or existing) or expenses (including, without limitation, reasonable fees
and disbursements of counsel, experts, consultants and other professionals) incurred by any of them
(collectively, Claims) (except, in the case of each Indemnified Party, to the extent that any
Claim is determined in a final and non-appealable judgment by a court of (competent jurisdiction to
have directly resulted from such Indemnified Partys gross negligence or willful misconduct)
arising out of or by reason of (i) any litigation, investigation, claim or proceeding related to
(A) this Agreement, any other Loan Document or the transactions contemplated hereby or thereby, (B)
any actual or proposed use by the Borrower of the proceeds of the Loans or (C) the Agents or any
Lenders entering into this Agreement, the other Loan Documents or any other agreements and
documents relating hereto (other than consequential damages and loss of anticipated profits or
earnings), including, without limitation, amounts paid in settlement (provided that any such
settlement has been approved by the Borrower), court costs
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and the fees and disbursements of counsel incurred in connection with any such litigation,
investigation, claim or proceeding, (ii) any remedial or other action taken or required to be taken
by the Borrower in connection with compliance by the Borrower, or any of its properties, with any
federal, state or local Environmental Laws and (iii) any pending, threatened or actual action,
claim, proceeding or suit by any shareholder or director of the Borrower or any actual or purported
violation of the Borrowers Governing Documents or any other agreement or instrument to which the
Borrower is a party or by which any of its properties is bound. In addition, the Borrower shall,
upon demand, pay to the Agent all costs and expenses incurred by the Agent (including the
reasonable fees and disbursements of counsel and other professionals) in connection with the
preparation, execution, delivery, administration, modification and amendment of the Loan Documents,
and pay to the Agent and each Lender all costs and expenses (including the reasonable fees and
disbursements of counsel and other professionals) paid or incurred by the Agent or such Lender in
(A) enforcing or defending its rights under or in respect of this Agreement, the other Loan
Documents or any other document or instrument now or hereafter executed and delivered in
connection herewith, (B) collecting the Obligations or otherwise administering this Agreement and
(C) foreclosing or otherwise realizing upon the Collateral or any part thereof. If and to the
extent that the obligations of the Borrower hereunder are unenforceable for any reason, the
Borrower hereby agree to make the maximum contribution to the payment and satisfaction of such
obligations that is permissible under applicable law.
(b) The Borrower obligations under Sections 4.6 and 4.7 and this Section 11.4 shall
survive any termination of this Agreement and the other Loan Documents, the termination and the
payment in full of the Obligations, and are in addition to, and not in substitution of, any of the
other Obligations.
SECTION
11.5
Amendments, Waivers and Consents
. No amendment or waiver of any provision of
this Agreement or any other Loan Document, or consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed by the Borrower and
the Required Lenders (or by the Agent on their behalf) without taking into account the Commitments
or Loans held by Defaulting Lenders or the Borrower or any of its Affiliates (determined without
giving effect to the proviso to the definition of Affiliates), and then such amendment, waiver
or consent shall be effective only in the specific instance and for the specific purpose for which
given;
provided
,
however
, that no amendment, waiver or consent shall, unless in writing
and signed by the Borrower and all the Lenders (other than any Defaulting Lender or the Borrower
or any of its Affiliates (determined without giving effect to the proviso to the definition of
Affiliates)), do any of the following at any time: (a) change the number of Lenders that shall
be required for the Lenders or any of them to take any action hereunder; (b) amend the definition
of Required Lenders; (c) amend this Section 11.5; (d) reduce the amount of principal of, or
interest on, or the interest rate applicable to, the Loans or any fees or other amounts payable
hereunder, (e) postpone any date on which any payment of principal of, or interest on, the Loans
or any fees or other amounts payable hereunder is required to be made; (f) release all or
substantially all the Collateral; or (g) amend the definition of Borrowing Base if the effect
thereof would be to increase the amount of Loans available to the
Borrower;
provided
,
further
that no amendment, waiver or consent shall, unless in writing and signed by (i) a
Lender, change the Pro Rata Share or increase the Commitment of such Lender, and (ii) the Agent,
in addition to the Lenders required above, to
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take any such action that affects the rights or duties of the Agent under this Agreement
or any other Loan Document.
SECTION
11.6
Nonliability of Agent and Lenders
. The relationship among the
Borrower and each Lender shall be solely that of borrower and lender. Neither the Agent nor any
Lender shall have any fiduciary responsibilities to the Borrower, Neither the Agent nor any Lender
undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in
connection with any phase of the Borrower business or operations.
SECTION 11.7
Assignments and Participations
.
(a)
Borrower Assignment
. None of the Borrower) shall assign this Agreement or any of
its rights or obligations hereunder without the prior written consent of the Agent and the Required
Lenders.
(b)
Lender Assignments
. Each Lender may, with the consent of the Agent (not to be
unreasonably withheld), assign to one or more Eligible Assignees (or, if an Event of Default has
occurred and is continuing, to one or more other Persons) all or a portion of its rights and
obligations under this Agreement, the Notes and the other Loan Documents upon execution and
delivery to the Agent, for its acceptance and recording in the Register, of an Assignment and
Acceptance, together with surrender of any Note or Notes subject to such assignment and a
processing and recordation fee payable to the Agent for its account of $3,500. No such assignment
shall be for less than $5,000,000 of the Commitments or Loans unless it is to another Lender, and
each such assignment shall be of a uniform, and not a varying, percentage of all rights and
obligations in respect of the Commitments and the Revolving Credit Loans. Upon the execution and
delivery to the Agent of an Assignment and Acceptance and the payment of the recordation fee to the
Agent, from and after the date specified as the effective date in the Assignment and Acceptance
(the Acceptance Date), (i) the assignee thereunder shall be a party hereto, and, to the extent
that rights and obligations hereunder have been assigned to it under such Assignment and
Acceptance, such assignee shall have the rights and obligations of a Lender hereunder and (ii) the
assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned
by it under such Assignment and Acceptance, relinquish its rights (other than any rights it may
have under Sections 4.6, 4.7 and 11.4, which shall survive such assignment) and be released from
its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all
or the remaining portion of an assigning Lenders rights and obligations under this Agreement, such
Lender shall cease to be a party hereto).
(c)
Agreements of Assignee
. By executing and delivering an Assignment and Acceptance,
the assignee thereunder confirms and agrees as follows: (i) other than as provided in such
Assignment and Acceptance, the assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations made in or in
connection with this Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement, the Notes or any other Loan Documents, (ii) such assigning
Lender makes no representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or the performance or observance by the Borrower of any of its
obligations under this Agreement or any other Loan Document, (iii) such assignee confirms that it
is an Eligible Assignee and has received a copy of this Agreement,
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together with copies of the Financial Statements referred to in Section 6.1(i), the Financial
Statements delivered pursuant to Section 7.1(k), if any, and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance, (iv) such assignee will, independently and without reliance upon the
Agent, such assigning Lender or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in taking or not
taking action under this Agreement, (v) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental
thereto, and (vi) such assignee agrees that it will perform in accordance with their terms all of
the obligations which by the terms of this Agreement are required to be performed by it as a
Lender.
(d)
Agents Register
. The Agent shall maintain a register of the names and addresses
of the Lenders, their Commitments and the principal amount of their Loans (the Register). The
Agent shall also maintain a copy of each Assignment and Acceptance delivered to and accepted by it
and modify the Register to give effect to each Assignment and Acceptance. The entries in the
Register shall be conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register
as a Lender hereunder for all purposes of this Agreement. The Register and copies of each
Assignment and Acceptance shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice. Upon its receipt of each
Assignment and Acceptance and surrender of the affected Note or Notes subject to such assignment,
the Agent will give prompt notice thereof to the Borrower. Within five Business Days after its
receipt of such notice, the Borrower shall execute and deliver to the Agent a new Note to the
order of the assignee in the amount of the applicable Commitment or Loans assumed by it and to the
assignor in the amount of the applicable Commitment or Loans retained by it, if any. Such new Note
or Notes shall re-evidence the indebtedness outstanding under the surrendered Note or Notes, shall
be in an aggregate principal amount equal to the aggregate principal amount of such surrendered
Note or Notes and shall be dated as of the Acceptance Date. The Agent shall be entitled to rely
upon the Register exclusively for purposes of identifying the Lenders hereunder.
(e)
Lender Participations
. Each Lender may sell participations to one or more parties
(each, a Participant) in or to all or a portion of its rights and obligations under this
Agreement, the Notes and the other Loan Documents. Notwithstanding a Lenders sale of a
participation interest, such Lenders obligations hereunder shall remain unchanged. The
Borrower, the Agent, and the other Lenders shall continue to deal solely and directly with such
Lender. No Lender shall grant any Participant the right to approve any amendment or waiver of this
Agreement except to the extent such amendment or waiver would (i) increase the Commitment of the
Lender from which the Participant purchased its participation interest; (ii) reduce the principal
of, or rate or amount of interest on, the Loans subject to such participation interest; or (iii)
postpone any date fixed for any payment of principal of, or interest on, the Loans subject to such
participation interest. To the extent permitted by applicable law, each Participant shall also be
entitled to the benefits of Section 11.3 as if it were a Lender,
provided
that such
Participant agrees to be subject to the last sentence of Section 2.8(b) as if it were a Lender.
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(f)
Securities Laws
. Each Lender agrees that it will not make any
assignment hereunder in any manner or under any circumstances that would require registration or
qualification of, or filings in respect of, any Loan, Note or other Obligation under the securities
laws of the United States or of any other jurisdiction.
(g)
Information
. In connection with their efforts to assign their rights or
obligations or sell participations pursuant to Sections 11.7(b) and (e), the Agent and the Lenders
may disclose any information they have, now or in the future, with respect to the business of the
Borrower to prospective assignees or purchasers,
provided
that such disclosure is subject
to written confidentiality arrangements customary for assignment or participation transactions of
such type.
(h)
Pledge to Federal Reserve Bank
. Any Lender may at any time pledge or assign a
security interest in all or any portion of its rights under this Agreement to secure obligations of
such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank,
and this Section shall not apply to any such pledge or assignment of a security interest,
provided
that no such pledge or assignment of a security interest shall release a Lender
from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as
a party hereto.
SECTION
11.8
Counterparts; Telecopied Signature
s. This Agreement and any waiver or
amendment hereto may be executed in counterparts and by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. This Agreement and each of the other Loan
Documents may be executed and delivered by telecopier or other facsimile transmission all with the
same force and effect as if the same was a fully executed and delivered original manual
counterpart.
SECTION 11.9
Severability
. In case any provision in or obligation under this
Agreement, any Note or any other Loan Document shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations,
or of such provision or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
SECTION 11.10
Maximum Rate
. Notwithstanding anything to the contrary contained
elsewhere in this Agreement or in any other Loan Document, the parties hereto hereby agree that all
agreements between them under this Agreement and the other Loan Documents, whether now existing or
hereafter arising and whether written or oral, are expressly limited so that in no contingency or
event whatsoever shall the amount paid, or agreed to be paid, to the Agent or any Lender for the
use, forbearance, or detention of the money loaned to the Borrower and evidenced hereby or thereby
or for the performance or payment of any covenant or obligation contained herein or therein, exceed
the maximum non-usurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Obligations, under the laws of the
State of New York (or the laws of any other jurisdiction whose laws may be mandatorily applicable
notwithstanding other provisions of this Agreement and the other Loan Documents), or under
applicable federal laws which may presently or hereafter be in effect and which allow a higher
maximum non-usurious interest rate than under
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the laws of the State of New York (or such other jurisdiction), in any case after taking into
account, to the extent permitted by applicable law, any and all relevant payments or charges under
this Agreement and the other Loan Documents executed in connection herewith, and any available
exemptions, exceptions and exclusions (the Highest Lawful Rate). If due to any circumstance
whatsoever, fulfillment of any provision of this Agreement or any of the other Loan Documents
at the time performance of such provision shall be due shall exceed the Highest Lawful Rate, then,
automatically, the obligation to be fulfilled shall be modified or reduced to the extent necessary
to limit such interest to the Highest Lawful Rate, and if from any such circumstance any Lender
should ever receive anything of value deemed interest by applicable law which would exceed the
Highest Lawful Rate, such excessive interest shall be applied to the reduction of the principal
amount then outstanding hereunder or on account of any other then outstanding Obligations and not
to the payment of interest, or if such excessive interest exceeds the principal unpaid balance then
outstanding hereunder and such other then outstanding Obligations, such excess shall be refunded to
the Borrower. All sums paid or agreed to be paid to the Lenders for the use, forbearance, or
detention of the Obligations and other Indebtedness of the Borrower to the Lenders shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the
full term of such Indebtedness, until payment in full thereof, so that the actual rate of interest
on account of all such Indebtedness does not exceed the Highest Lawful Rate throughout the entire
term of such Indebtedness. The terms and provisions of this Section shall control every other
provision of this Agreement, the other Loan Documents and all other agreements among the parties
hereto.
SECTION
11.11
Entire Agreement; Successors and Assigns; Interpretation.
This
Agreement and the other Loan Documents constitute the entire agreement among the parties,
supersede any prior written and verbal agreements among them, and shall bind and benefit the
parties and their respective successors and permitted assigns. This Agreement shall be deemed to
have been jointly drafted, and no provision of it shall be interpreted or construed for or
against a party because such party purportedly prepared or requested such provision, any other
provision, or this Agreement as a whole.
SECTION 11.12
LIMITATION OF LIABILITY.
NEITHER THE AGENT NOR ANY LENDER SHALL HAVE
ANY LIABILITY TO THE BORROWER (WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE) FOR
LOSSES SUFFERED BY THE BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT
OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT
OR COURT ORDER BINDING ON THE AGENT OR SUCH LENDER THAT THE LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT OR SUCH LENDER. THE
BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST THE AGENT AND EACH LENDER FOR SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES.
SECTION 11.13
GOVERNING LAW.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT
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OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE,
SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE STATE OF NEW YORK.
SECTION 11.14
SUBMISSION TO JURISDICTION.
ALL DISPUTES BETWEEN OR AMONG THE
BORROWER, THE AGENT OR ANY LENDER BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO (I) THIS
AGREEMENT; (II) ANY OTHER LOAN DOCUMENT OR OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
OR AMONG THE BORROWER, THE AGENT AND A LENDER; OR (III) ANY CONDUCT, ACT OR OMISSION OF THE
BORROWER, THE AGENT, A LENDER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR OTHER AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR
OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK AND THE
COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN;
PROVIDED
,
HOWEVER
, THAT THE AGENT SHALL
HAVE THE RIGHT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE BORROWER
OR ITS PROPERTY IN (A) ANY COURTS OF COMPETENT JURISDICTION AND VENUE AND (B) ANY LOCATION SELECTED
BY THE AGENT TO ENABLE THE AGENT TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF THE AGENT. THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE
COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY THE AGENT. THE BORROWER WAIVES
ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE AGENT HAS COMMENCED A
PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM
NON CONVENIENS.
SECTION 11.15
SERVICE OF PROCESS.
THE BORROWER HEREBY IRREVOCABLY DESIGNATES
CORPORATION SERVICE COMPANY, 1133 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10036 OR ITS SUCCESSOR
AS THE DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE BORROWER, SERVICE OF
PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE
PROMPTLY FORWARDED BY MAIL TO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY
SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE AGENT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
SECTION 11.16
JURY TRIAL.
EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO (I) THIS AGREEMENT; (II) ANY
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OTHER LOAN DOCUMENT OR OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN OR AMONG THE
BORROWER, THE AGENT AND A LENDER; OR (III) ANY CONDUCT, ACT OR OMISSION OF THE BORROWER, THE AGENT,
A LENDER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR OTHER
AFFILIATES, IN EACH CASE WHETHER SOUNDING IN CONTRACT, TORT OR EQUITY OR OTHERWISE.
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IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed by their
proper and duly authorized officers as of the date first set forth above.
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BORROWER
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AMERICAN RAILCAR INDUSTRIES, INC.
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By:
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/s/ Umesh Choksi
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Umesh Choksi
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Assistant Treasurer
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LENDERS
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NORTH FORK BUSINESS CAPITAL
CORPORATION
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By:
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/s/ Robert L. Heinz
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Robert L. Heinz
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Senior Vice President
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FIRST BANK
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By:
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/s/ Ed Dehner
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Ed Dehner
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Assistant Vice President
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HEARTLAND BANK
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By:
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/s/ Bruce G. Forster
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Bruce G. Forster
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Vice President
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THE CIT GROUP/BUSINESS CREDIT, INC.
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By:
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/s/ Barry ONeall
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Barry ONeall
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Vice President
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AGENT
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NORTH FORK BUSINESS CAPITAL
CORPORATION
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By:
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/s/ Robert L. Heinz
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Robert L. Heinz
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Senior Vice President
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