UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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for the transition period from
to
Commission File No. 000-51728
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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North Dakota
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43-1481791
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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100 Clark Street, St. Charles, Missouri
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63301
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(Address of principal executive offices)
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(Zip Code)
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(636) 940-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Nonaccelerated filer
o
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Smaller Reporting Company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The number of shares of the registrants common stock, without par value, outstanding on November
1, 2010 was 21,302,296 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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As of
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September 30,
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December 31,
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2010
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2009
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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310,588
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$
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347,290
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Short-term investments available-for-sale securities
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3,802
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Accounts receivable, net
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19,025
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11,409
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Accounts receivable, due from affiliates
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5,957
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1,356
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Income taxes receivable
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937
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1,768
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Inventories, net
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58,124
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40,063
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Deferred tax assets
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2,855
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2,018
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Prepaid expenses and other current assets
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3,866
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4,898
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Total current assets
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401,352
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412,604
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Property, plant and equipment, net
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185,509
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199,349
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Deferred debt issuance costs
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2,105
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2,568
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Interest receivable, due from affiliates
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145
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982
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Goodwill
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7,169
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7,169
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Investments in and loans to joint ventures
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49,390
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41,155
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Deferred tax assets
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3,950
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Other assets
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201
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537
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Total assets
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$
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649,821
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$
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664,364
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Liabilities and Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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32,343
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$
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16,874
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Accounts payable, due to affiliates
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380
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576
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Accrued expenses and taxes
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6,184
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4,515
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Accrued compensation
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9,307
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8,799
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Accrued interest expense
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1,719
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6,875
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Total current liabilities
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49,933
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37,639
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Senior unsecured notes
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275,000
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275,000
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Deferred tax liability
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7,120
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Pension and post-retirement liabilities
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6,197
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6,279
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Other liabilities
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3,223
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2,686
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|
|
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|
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Total liabilities
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334,353
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328,724
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Commitments and contingencies
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Stockholders equity:
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Common stock, $.01 par value, 50,000,000 shares
authorized, 21,302,296 shares issued and outstanding
at September 30, 2010 and December 31, 2009
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213
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213
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Additional paid-in capital
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238,687
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239,617
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Retained earnings
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75,058
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94,215
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Accumulated other comprehensive income
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1,510
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1,595
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Total stockholders equity
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315,468
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335,640
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Total liabilities and stockholders equity
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$
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649,821
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$
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664,364
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See Notes to the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
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For the Three Months Ended
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September 30,
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2010
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2009
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Revenues:
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Manufacturing operations (including revenues from
affiliates of $19,274 and $8,011 for the three months
ended September 30, 2010 and 2009, respectively)
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$
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48,404
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$
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62,047
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Railcar services (including revenues from affiliates of
$4,263 and $3,563 for the three months ended September
30, 2010 and 2009, respectively)
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16,393
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16,051
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Total revenues
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64,797
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78,098
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Cost of revenue:
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Manufacturing operations
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(49,366
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)
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(56,348
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)
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Railcar services
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(13,141
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)
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(12,940
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)
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Total cost of revenue
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(62,507
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)
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(69,288
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)
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Gross profit
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2,290
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8,810
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Selling, administrative and other (including costs
related to affiliates of $154 for both the three months
ended September 30, 2010 and 2009)
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(6,232
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)
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(6,484
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)
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(Loss) earnings from operations
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(3,942
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)
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2,326
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Interest income (including income related to affiliates
of $717 and $366 for the three months ended September
30, 2010 and 2009, respectively)
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1,058
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1,925
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Interest expense
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(5,316
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)
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(5,286
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)
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Other income (including income related to affiliates of
$4 for both the three months ended September 30, 2010
and 2009)
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4
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3,121
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Loss from joint ventures
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(1,946
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)
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(2,217
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)
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Loss before income taxes
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(10,142
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)
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(131
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)
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Income tax benefit
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3,890
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1,223
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|
|
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|
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Net (loss) earnings
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$
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(6,252
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)
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|
$
|
1,092
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|
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|
|
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|
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|
|
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Net (loss) earnings per common share basic and diluted
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$
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(0.29
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)
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$
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0.05
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Weighted average common shares outstanding basic and
diluted
|
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21,302
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21,302
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|
|
|
|
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Dividends declared per common share
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$
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|
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|
$
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|
|
See Notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
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|
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For the Nine Months Ended
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September 30,
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2010
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2009
|
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|
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Revenues:
|
|
|
|
|
|
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Manufacturing operations (including revenues from
affiliates of $65,401 and $93,770 for the nine months
ended September 30, 2010 and 2009, respectively)
|
|
$
|
127,262
|
|
|
$
|
301,325
|
|
|
|
|
|
|
|
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Railcar services (including revenues from affiliates of
$10,283 and $11,548 for the nine months ended September
30, 2010 and 2009, respectively)
|
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|
51,011
|
|
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|
43,646
|
|
|
|
|
|
|
|
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Total revenues
|
|
|
178,273
|
|
|
|
344,971
|
|
|
|
|
|
|
|
|
|
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Cost of revenue:
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
(131,643
|
)
|
|
|
(271,552
|
)
|
Railcar services
|
|
|
(40,814
|
)
|
|
|
(35,423
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)
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
(172,457
|
)
|
|
|
(306,975
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)
|
Gross profit
|
|
|
5,816
|
|
|
|
37,996
|
|
|
|
|
|
|
|
|
|
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Selling, administrative and other (including costs
related to affiliates of $462 for both the nine months
ended September 30, 2010 and 2009)
|
|
|
(17,925
|
)
|
|
|
(19,158
|
)
|
|
|
|
|
|
|
|
(Loss) earnings from operations
|
|
|
(12,109
|
)
|
|
|
18,838
|
|
|
|
|
|
|
|
|
|
|
Interest income (including income related to affiliates
of $1,938 and $376 for the nine months ended September
30, 2010 and 2009, respectively)
|
|
|
2,557
|
|
|
|
4,910
|
|
Interest expense
|
|
|
(15,956
|
)
|
|
|
(15,562
|
)
|
Other income (including income related to affiliates of
$12 and $4 for the nine months ended September 30, 2010
and 2009, respectively)
|
|
|
381
|
|
|
|
3,038
|
|
Loss from joint ventures
|
|
|
(5,999
|
)
|
|
|
(5,030
|
)
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes
|
|
|
(31,126
|
)
|
|
|
6,194
|
|
Income tax benefit (expense)
|
|
|
11,969
|
|
|
|
(1,244
|
)
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(19,157
|
)
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share basic and diluted
|
|
$
|
(0.90
|
)
|
|
$
|
0.23
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
21,302
|
|
|
|
21,302
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
|
|
|
$
|
0.06
|
|
See Notes to the Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(19,157
|
)
|
|
$
|
4,950
|
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
17,777
|
|
|
|
17,477
|
|
Amortization of deferred costs
|
|
|
524
|
|
|
|
513
|
|
Loss on disposal of property, plant and equipment
|
|
|
34
|
|
|
|
223
|
|
Stock based compensation
|
|
|
2,353
|
|
|
|
852
|
|
Change in interest receivable, due from affiliates
|
|
|
837
|
|
|
|
|
|
Change in investments in joint ventures as a result of loss
|
|
|
5,999
|
|
|
|
5,030
|
|
Unrealized loss on derivatives
|
|
|
|
|
|
|
88
|
|
(Benefit) provision for deferred income taxes
|
|
|
(12,320
|
)
|
|
|
1,626
|
|
Provision (recovery) for doubtful accounts receivable
|
|
|
68
|
|
|
|
(117
|
)
|
Investing activities reclassified from operating activities:
|
|
|
|
|
|
|
|
|
Interest income on short-term investments available-for-sale securities
|
|
|
|
|
|
|
(3,653
|
)
|
Realized loss on derivatives
|
|
|
|
|
|
|
10
|
|
Realized gain on short-term investments available-for-sale securities
|
|
|
(379
|
)
|
|
|
(3,115
|
)
|
Dividends received from short-term investments available-for-sale securities
|
|
|
|
|
|
|
(15
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(7,663
|
)
|
|
|
23,068
|
|
Accounts receivable, due from affiliate
|
|
|
(4,601
|
)
|
|
|
8,268
|
|
Income taxes receivable
|
|
|
831
|
|
|
|
|
|
Inventories, net
|
|
|
(18,049
|
)
|
|
|
40,638
|
|
Prepaid expenses and other current assets
|
|
|
1,032
|
|
|
|
1,211
|
|
Accounts payable
|
|
|
15,462
|
|
|
|
(19,548
|
)
|
Accounts payable, due to affiliate
|
|
|
(196
|
)
|
|
|
(4,867
|
)
|
Accrued expenses and taxes
|
|
|
(4,408
|
)
|
|
|
(9,767
|
)
|
Other
|
|
|
19
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(21,837
|
)
|
|
|
62,052
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(4,852
|
)
|
|
|
(13,170
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
104
|
|
|
|
69
|
|
Sale (purchase) of short-term investments available-for-sale securities
|
|
|
4,180
|
|
|
|
(36,841
|
)
|
Sales of short-term investments available-for-sale securities
|
|
|
|
|
|
|
15,450
|
|
Interest income on short-term investments available-for-sale securities
|
|
|
|
|
|
|
3,653
|
|
Realized loss on derivatives
|
|
|
|
|
|
|
(10
|
)
|
Dividends received from short-term investments available-for-sale securities
|
|
|
|
|
|
|
15
|
|
Investments in and loans to joint ventures
|
|
|
(14,298
|
)
|
|
|
(34,115
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,866
|
)
|
|
|
(64,949
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
|
|
|
|
(1,917
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(1,917
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1
|
|
|
|
117
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(36,702
|
)
|
|
|
(4,697
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
347,290
|
|
|
|
291,788
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
310,588
|
|
|
$
|
287,091
|
|
|
|
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. (a North Dakota corporation) and subsidiaries (collectively the Company or
ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosure 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 consolidated balance sheet as of December 31, 2009 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 on Form 10-K for the year ended December 31, 2009.
In the opinion of management, the information contained herein reflects all adjustments necessary
to make the results of operations for the interim periods fairly stated. The results of operations
of any interim period are not necessarily indicative of the results that may be expected for a
fiscal year.
Note 1 Description of the Business
ARI manufactures railcars, custom designed railcar parts and other industrial products, primarily
aluminum and special alloy steel castings. These products are sold to various types of companies
including leasing companies, railroads, industrial companies and other non-rail companies. ARI also
provides railcar maintenance services for railcar fleets. In addition, ARI provides fleet
management and maintenance services for railcars owned by certain customers. Such services include
inspecting and supervising the maintenance and repair of such railcars.
The condensed consolidated financial statements of the Company include the accounts of ARI and its
wholly-owned subsidiaries. Through its wholly-owned 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 produce various steel railcar parts for use or sale by the ownership
group. Through its wholly-owned subsidiary, ARI Component Venture, LLC (ARI Component), the Company
has a 41.9% ownership interest in Axis, LLC (Axis), which in turn has a 100.0% interest in Axis
Operating Company, LLC, a limited liability company formed to produce railcar axles, for use or
sale by the ownership group. The Company has a wholly-owned subsidiary, American Railcar Mauritius
I (ARM I) that wholly-owns American Railcar Mauritius II (ARM II). Through ARM II, the Company has
a 50.0% ownership interest in Amtek Railcar Industries Private Limited (Amtek Railcar), a joint
venture in India that was formed to produce railcars and railcar components in India for sale by
the joint venture. Through its wholly-owned subsidiary, ARI DMU LLC, the Company has a 3.8%
ownership interest in US Railcar Company LLC (USRC), a joint venture that the Company expects will
design, manufacture and sell Diesel Multiple Units (DMUs) to public transportation authorities and
communities upon order. Through its wholly-owned subsidiary, ARI Longtrain, Inc. (Longtrain), the
Company makes investments from time to time. All intercompany transactions and balances have been
eliminated.
The Company operates a railcar repair facility in Sarnia, Ontario Canada. Canadian revenues were
2.0% and 1.0% of total consolidated revenues for the three months ended September 30, 2010 and
2009, respectively. Canadian revenues were 2.3% and 0.6% of total consolidated revenues for the
nine months ended September 30, 2010 and 2009, respectively. Canadian assets were 1.8% and 1.6% of
total consolidated assets as of September 30, 2010 and December 31, 2009, respectively. In
addition, the Companys subsidiaries ARM I and ARM II are located in Mauritius. Assets held by ARM
I and ARM II were 1.5% and less than 0.1% of total consolidated assets as of September 30, 2010 and
December 31, 2009, respectively. ARM I and ARM II have not had any revenues to date.
Note 2 Summary of Accounting Policies
Reclassifications
Certain reclassifications of prior year presentations that are of a normal recurring nature have
been made to conform to the 2010 presentation.
7
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board issued authoritative guidance to amend the
accounting and disclosure requirements for variable interest entities (VIE). The new guidance
requires on-going assessments to determine the primary beneficiary of a VIE and amends the primary
beneficiary assessment and disclosure requirements. This guidance is effective for the first
interim and annual reporting period that begins after November 15, 2009. This guidance did not have
a material impact on the condensed consolidated financial statements.
Note 3 Short-term Investments Available-for-Sale Securities
During January 2008, Longtrain purchased approximately 1.5 million shares of common stock of The
Greenbrier Companies, Inc. (GBX) in the open market for $27.9 million. During the second half of
2008, Longtrain sold a majority of the GBX shares it owned. This investment was classified as a
short-term investment available-for-sale security as the Company did not intend on holding this
investment long-term.
The Company performed a review of its investment in GBX common stock as of December 31, 2009 to
determine if an other-than-temporary impairment existed. Factors considered in the assessment
included, but were not limited to, the following: the Companys ability and intent to hold the
security until loss recovery, the sale of shares at a loss, the number of quarters in an unrealized
loss position and other market conditions. Based on this analysis, the Company recorded an
impairment charge of $2.9 million related to the investment. As such, there were no unrealized
losses as of December 31, 2009. The market value of the approximately 0.4 million shares of GBX
common stock owned by the Company at December 31, 2009 was $3.8 million.
During the nine months ended September 30, 2010, the remaining approximately 0.4 million shares of
GBX common stock were sold for proceeds of $4.1 million and realized gains totaling $0.4 million.
As the shares were sold in the first half of 2010, there was no effect on the three months ended
September 30, 2010. The cost basis of the shares sold was determined through specific
identification.
During the first quarter of 2009, Longtrain purchased corporate bonds for a total of $36.8 million.
For both the three and nine months ended September 30, 2009, the Company sold $20.0 million of
corporate bonds, par value, resulting in realized gains of $3.1 million. The remainder of these
bonds were sold in the fourth quarter of 2009.
Note 4 Foreign Currency Option
The Company accounted for its foreign currency option as either an asset or liability in the
balance sheet at fair value. As the foreign currency option did not qualify for hedge accounting,
all unrealized gains and losses were reflected in the Companys condensed consolidated statements
of operations and the fair value was recorded on the balance sheet.
The Company entered into a foreign currency option in October 2008, to purchase Canadian Dollars
(CAD) for $5.3 million U.S. Dollars (USD) from October 2008 through April 2009, with fixed exchange
rates and exchange limits each month. ARI entered into this option agreement to reduce the exposure
to foreign currency exchange risk related to capital expenditures for the expansion of the
Companys Canadian repair facility. During the second quarter of 2009, the final portion of the
option was exercised, thus nothing was recorded related to this option for the three months ended
September 30, 2009. This option resulted in a realized loss of less than $0.1 million for the nine
months ended September 30, 2009, based on the exchange spot rate on the various exercise dates.
Note 5 Fair Value Measurements
The fair value hierarchal disclosure framework prioritizes and ranks the level of market price
observability used in measuring investments and non-recurring nonfinancial assets and nonfinancial
liabilities at fair value. Market price observability is impacted by a number of factors, including
the type of investment and the characteristics specific to the investment or nonfinancial assets
and liabilities. Investments with readily available active quoted prices or for
which fair value can be measured from actively quoted prices generally will have a higher degree of
market price observability and a lesser degree of judgment used in measuring fair value.
8
Financial assets and liabilities measured and reported at fair value are classified and disclosed
in one of the following categories:
|
|
|
Level 1 Quoted prices are available in active markets for identical financial
assets and/or liabilities as of the reporting date. The type of financial assets and/or
liabilities included in Level 1 include listed equities and listed derivatives. The
Company does not adjust the quoted price for these financial assets and/or liabilities,
even in situations where they hold a large position and a sale could reasonably impact
the quoted price.
|
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair value is
determined through the use of models or other valuation methodologies. Financial assets
and/or liabilities that are generally included in this category include corporate bonds
and loans, less liquid and restricted equity securities and certain over-the-counter
derivatives.
|
|
|
|
Level 3 Pricing inputs are unobservable for the financial assets and/or
liabilities and include situations where there is little, if any, market activity for
the financial assets and/or liabilities. The inputs into the determination of fair
value require significant management judgment or estimation.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an investments level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement. ARIs assessment of
the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the investment.
The Company has no financial assets or liabilities that were accounted for at fair value as of
September 30, 2010.
The following table summarizes the valuation of the Companys financial assets by the above fair
value hierarchy levels as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
available-for-sale
securities
|
|
$
|
3,802
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,802
|
|
Note 6 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
31,312
|
|
|
$
|
21,307
|
|
Work-in-process
|
|
|
21,944
|
|
|
|
8,411
|
|
Finished products
|
|
|
7,578
|
|
|
|
12,271
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
60,834
|
|
|
|
41,989
|
|
Less reserves
|
|
|
(2,710
|
)
|
|
|
(1,926
|
)
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
58,124
|
|
|
$
|
40,063
|
|
|
|
|
|
|
|
|
9
Note 7 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
147,613
|
|
|
$
|
146,064
|
|
Machinery and equipment
|
|
|
176,293
|
|
|
|
174,021
|
|
|
|
|
|
|
|
|
|
|
|
323,906
|
|
|
|
320,085
|
|
Less accumulated depreciation
|
|
|
(143,528
|
)
|
|
|
(126,074
|
)
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
180,378
|
|
|
|
194,011
|
|
Land
|
|
|
3,335
|
|
|
|
3,306
|
|
Construction in process
|
|
|
1,796
|
|
|
|
2,032
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
$
|
185,509
|
|
|
$
|
199,349
|
|
|
|
|
|
|
|
|
Depreciation expense
Depreciation expense for both the three months ended September 30, 2010 and 2009 was $5.9 million.
Depreciation expense for the nine months ended September 30, 2010 and 2009 was $17.8 million and
$17.5 million, respectively.
Capitalized interest
In conjunction with the interest costs incurred related to the Unsecured Senior Fixed Rate Notes
offering described in Note 11, the Company has been recording capitalized interest on certain
property, plant and equipment capital projects. ARI also capitalized interest related to the
investment in Axis during its developmental stage. The amount of interest capitalized for the three
months ended September 30, 2010 and 2009 was less than $0.1 million and $0.1 million, respectively.
The amount of interest capitalized for the nine months ended September 30, 2010 and 2009 was less
than $0.1 million and $0.7 million, respectively.
Lease agreements
During 2008, the Company entered into two agreements to lease a fixed number of railcars to third
parties for multiple years. One of the leases includes a provision that allows the lessee to
purchase any portion of the leased railcars at any time during the lease term for a stated market
price, which approximates fair value. These agreements have been classified as operating leases and
the leased railcars have been included in machinery and equipment and are depreciated in accordance
with the Companys depreciation policy.
Note 8 Goodwill
Goodwill is not amortized but it is tested for impairment at least annually by comparing the fair
value of the asset to its carrying value. The Company has $7.2 million of goodwill related to the
acquisition of Custom Steel in 2006, all of which is allocated to our Kennett and Custom railcar
sub-assembly plants reporting unit (Kennett/Custom) that is part of the Companys manufacturing
operations segment.
The Company performs an annual goodwill impairment test as of March 1 of each year utilizing the
market and income approaches and significant assumptions discussed below:
Market Approach
The market approach produces indications of value by applying multiples of enterprise value to
revenue as well as enterprise value to earnings before depreciation, amortization, interest and
taxes. The multiples indicate what investors are willing to pay for comparable publicly held
companies. When adjusted for the risk level and growth potential of the subject company relative to
the guideline companies, these multiples are a reasonable indication of the value an investor would
attribute to the subject company.
10
Income Approach
The income approach considers the subject companys future sales and earnings growth potential as
the primary source of future cash flow. We prepared a five year financial projection for
Kennett/Custom and used a discounted net cash flow method to determine the fair value. Net cash
flow consists of after-tax operating income, plus depreciation, less capital expenditures and
working capital needs. The discounted cash flow method considers a five-year projection of net cash
flow and adds to those cash flows a residual value at the end of the projection period.
Significant estimates and assumptions used in the evaluation were forecasted revenues and profits,
the weighted average cost of capital and tax rates. Forecasted revenues of Kennett/Custom were
estimated based on historical trends of the ARI plants that the reporting unit supplies parts to,
which are driven by the railcar market forecast. Forecasted margins were based on historical
experience. Kennett/Custom does not have a selling, administrative or executive staff, therefore,
an estimate of salaries and benefits for key employees was added to selling, administrative and
other costs. The weighted average cost of capital was calculated using our estimated cost of equity
and debt.
All of the above estimates and assumptions were determined by management to be reasonable based on
the knowledge and information at the time of the evaluation. As such, this carries a risk of
uncertainty. There could be significant fluctuations in the cost of raw materials, unionization of
our workforce or other factors that might significantly affect Kennett/Customs cost structure and
negatively impact the projection of financial performance. If the railcar industry forecasts or
ARIs market share were to change significantly, the fair value of Kennett/Custom would be
materially adversely impacted. Other events that might occur that could have a negative effect
would be a natural disaster that would render the facility unusable, a significant litigation
settlement, a significant workers compensation claim or other event that would result in a
production shut down or significant expense to the reporting unit.
The March 1, 2010 evaluation equally weighted the values derived from each approach to arrive at
the fair value of Kennett/Custom. The resulting fair value exceeded the carrying value by over 20%
resulting in no impairment.
Note 9 Investments in and Loans to Joint Ventures
The Company is party to four joint ventures; Ohio Castings, Axis, Amtek Railcar and USRC, which are
accounted for using the equity method. Under the equity method, the Company recognizes its share of
the earnings and losses of the joint ventures as they accrue. Advances and distributions are
charged and credited directly to the investment accounts.
The carrying amount of investments in and loans to joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Carrying amount of investments in and loans to joint ventures
|
|
|
|
|
|
|
|
|
Ohio Castings
|
|
$
|
5,514
|
|
|
$
|
5,644
|
|
Axis
|
|
|
34,239
|
|
|
|
35,511
|
|
Amtek Railcar
|
|
|
9,637
|
|
|
|
|
|
USRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in and loans to joint ventures
|
|
$
|
49,390
|
|
|
$
|
41,155
|
|
|
|
|
|
|
|
|
11
The following are the current balances representing the loss exposure as a result of investments in
and loans to joint ventures:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Loss exposure by joint venture
|
|
|
|
|
Ohio Castings
|
|
|
|
|
Investment
|
|
$
|
5,017
|
|
Loan guarantee
|
|
|
3
|
|
Note and accrued interest receivable
1
|
|
|
525
|
|
|
|
|
|
Total Ohio Castings exposure
|
|
|
5,545
|
|
Axis
|
|
|
|
|
Investment
|
|
|
|
|
Loans and accrued interest receivable
1
|
|
|
34,353
|
|
|
|
|
|
Total Axis exposure
|
|
|
34,353
|
|
|
|
|
|
Amtek Railcar Investment
|
|
|
9,637
|
|
|
|
|
|
USRC Investment
|
|
|
|
|
|
|
|
|
Loss exposure due to joint ventures
|
|
$
|
49,535
|
|
|
|
|
|
|
|
|
1
|
|
Accrued interest receivable is included in interest receivable, due from affiliates
and not investments in and loans to joint ventures on the condensed consolidated balance sheet.
|
Ohio Castings
In June 2009, Ohio Castings temporarily idled its manufacturing facility. In conjunction with the
temporary idling, Ohio Castings performed an analysis of long-lived assets. Based on this analysis,
Ohio Castings concluded that its long-lived assets were not impaired. In turn, ARI evaluated its
investment in Ohio Castings and determined there was no impairment. As of August 31, 2010, Ohio
Castings re-evaluated its analysis of its long-lived assets and concluded that no impairment
exists.
ARI
updated its evaluation of its investment in Ohio Castings and
determined that the decrease in value was temporary and there was no
impairment as of September 30, 2010. Ohio Castings first reported a loss in the first quarter of 2009
and subsequently the facility was temporarily idled in the second quarter of 2009 due to the
decline in the railcar industry. Ohio Castings has continued to report losses due to its idled
state. ARI obtained Ohio Castings long-lived asset impairment analysis and reviewed it for
reasonableness. Based on that evaluation, ARI currently expects that the joint venture, pending the
approval of all joint venture partners, will restart production when the demand for new railcars
returns to sufficient levels. The assumptions used in the impairment analysis are consistent with
the market data reported by an independent third party analyst and historical financial results.
The current decline in earnings capacity is consistent with industry forecasts, as reported by an
independent third party analyst, and is considered temporary. The Company and Ohio Castings will
continue to monitor for impairment.
Ohio Castings has equal notes payable to ARI and the other two partners, with a current balance of
$0.5 million, each, that are due February 2012. Interest will continue to accrue but interest
payments have been deferred until August 2011. Accrued interest for this note as of September 30,
2010 and December 31, 2009 was less than $0.1 million.
The Company and the other members of Ohio Castings, have equally guaranteed bonds payable and a
state loan issued to Ohio Castings by the State of Ohio, as further discussed in Note 14. The value
of the guarantee was less than $0.1 million at both September 30, 2010 and December 31, 2009. It is
anticipated that Ohio Castings will continue to make principal and interest payments while its
facility is temporarily idled, through equity contributions by ARI and the other partners. In 2010,
ARI made capital contributions to Ohio Castings totaling $0.6 million to fund expenses including
debt payments during the temporary plant idling. The other two partners made matching
contributions.
12
The Company accounts for its investment in Ohio Castings using the equity method. The Company has
determined that, although the joint venture is a VIE, this method is appropriate given that the
Company is not the primary beneficiary, does not have a controlling financial interest and does not
have the ability to individually direct the activities of Ohio Castings that most significantly
impact its economic performance. The significant factors in this determination were that no
partner, including the Company and Castings, has rights to the majority of returns, losses or
votes, Ohio Castings operations are temporarily idled and the risk of loss to Castings and the
Company is limited to the Companys investment through Castings, the note due to ARI and Ohio
Castings subsidiarys debt with the State of Ohio, which the Company has guaranteed.
See Note 19 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
Summary financial results for Ohio Castings, the investee company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Financial results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
10,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
(745
|
)
|
|
|
|
|
|
|
(2,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest
|
|
|
(915
|
)
|
|
|
(1,166
|
)
|
|
|
(2,126
|
)
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(918
|
)
|
|
$
|
(1,201
|
)
|
|
$
|
(2,185
|
)
|
|
$
|
(4,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axis
In June 2007, ARI, through a wholly-owned subsidiary, entered into an agreement with another
partner to form a joint venture, Axis, to manufacture and sell railcar axles. In February 2008, the
two original partners sold equal equity interests in Axis to two new minority partners. Production
began and the joint venture ceased classification as a development stage enterprise in the third
quarter of 2009.
Under the terms of the joint venture agreement, ARI and the other initial partner are required, and
the other member is entitled, to contribute additional capital to the joint venture, on a pro rata
basis, of any amounts approved by the joint ventures executive committee, as and when called by
the executive committee. Further, until the seventh anniversary of completion of the axle
manufacturing facility, and subject to other terms, conditions and limitations of the joint venture
agreement, ARI and the other initial partner are also required, in the event production at the
facility has been curtailed, to contribute capital to the joint venture, on a pro rata basis, in
order to maintain adequate working capital.
During 2010, the executive committee of Axis issued a capital call. The minority partners elected
not to participate in the capital call and ARI and the other initial partner have equally
contributed the necessary capital, which amounted to $0.5 million for each as of September 30,
2010. The capital contributions are utilized to provide working capital. The partners ownership
percentages have been adjusted accordingly. As a result, as of September 30, 2010, ARIs ownership
interest has been adjusted to 41.9%. During the third quarter 2010, one of the minority partners
sold its interest to the other initial partner. Although the other initial partners interest in
Axis is greater than ARIs as a result of the sale, the sale did not result in the other initial
partner gaining a controlling interest in Axis.
Under a credit agreement entered into in December 2007 among Axis, Bank of America, as
administrative agent (Axis Agent), and the lenders party thereto (as amended, the Axis Credit
Agreement), the original lenders made financing available to Axis in an aggregate amount of up to
$70.0 million, consisting of up to $60.0 million in term loans and up to $10.0 million in revolving
loans. In July 2009, the Axis Agent alleged that Axis was in default under the Axis Credit
Agreement and in connection therewith proposed certain amendments to the Axis Credit Agreement.
Axis disputed the alleged default. Following discussions with the Axis Agent and Axis, effective
August 5, 2009, ARI Component and a wholly-owned subsidiary of the other initial partner acquired
the Axis Credit Agreement, with each party acquiring a 50.0% interest in the loan. The purchase
price paid by the Company for its 50.0%
interest was approximately $29.5 million, which equaled the then outstanding principal amount of
the portion of the loan acquired by the Company. In connection with the purchase of the Axis loan,
the associated guarantees of the Company and the other initial partner were canceled and certain
modifications were made, including to the interest rate.
13
Subject to certain limitations, at the election of Axis, the interest rate for the loans under the
Axis Credit Agreement is based on LIBOR or the prime rate. For LIBOR-based loans, the interest rate
is equal to the greater of 7.75% or adjusted LIBOR plus 4.75%. For prime-based loans, the interest
rate is equal to the greater of 7.75% or the prime rate plus 2.5%. In either case, the interest
rate is subject to increase upon the occurrence of certain events of default. Interest on
LIBOR-based loans is due and payable, at the election of Axis, every one, two, three or six months,
and interest on prime-based loans is due and payable quarterly. In accordance with the terms of the
agreement, in the third quarter 2010, Axis elected to satisfy interest on the term loan as of
September 30, 2010 by increasing the outstanding principal amount of the term loan by the amount of
interest otherwise due and payable in cash.
The commitment to make term loans under the Axis Credit Agreement expires on December 31, 2010.
Beginning on March 31, 2011, the term loans will become due and payable on the last day of each
fiscal quarter in twenty-two equal installments, with the last payment to become due on June 26,
2016. The commitment to make revolving loans under the Axis Credit Agreement will expire and the
revolving loans will become due and payable on December 28, 2012. Upon certain events described
more fully in the Axis Credit Agreement, principal and interest may become due and payable sooner
than described above.
Axis may borrow revolving loans up to $10.0 million, as described above, of which $7.0 million is
subject to borrowing base availability and the remaining $3.0 million may be borrowed without
restriction until December 31, 2010. At January 1, 2011, the $3.0 million becomes subject to
borrowing base availability.
The balance outstanding on these loans, due to ARI Component, was $34.7 million in principal and
$0.1 million of accrued interest as of September 30, 2010 and $31.5 million in principal and $1.0
million of accrued interest as of December 31, 2009. ARI Component is responsible for funding 50.0%
of the loan commitments. ARI Components share of the remaining commitment on these loans, term and
revolving, was $3.1 million as of September 30, 2010.
The Company accounts for its investment in Axis using the equity method. The Company has determined
that, although the joint venture is a VIE, this method is appropriate given that the Company is not
the primary beneficiary, does not have a controlling financial interest and does not have the
ability to individually direct the activities of Axis that most significantly impact its economic
performance. The significant factors in this determination were that no partner, including the
Company and its wholly-owned subsidiary, has rights to the majority of votes, the Company does not
have the rights to the majority of returns or losses, the executive committee and board of
directors of the joint venture are comprised of one representative from each initial partner with
equal voting rights and the risk of loss to the Company and subsidiary is limited to its investment
in Axis and the loans and accrued interest due to the Company under the Axis Credit Agreement. The
Company also considered the factors that most significantly impact Axis economic performance and
determined that ARI does not have the power to individually direct the majority of those
activities.
See Note 19 for information regarding financial transactions among the Company, ARI Component and
Axis.
Summary financial results for Axis, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
5,681
|
|
|
$
|
324
|
|
|
$
|
11,849
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(1,723
|
)
|
|
|
(2,765
|
)
|
|
$
|
(7,125
|
)
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,000
|
)
|
|
|
(2,950
|
)
|
|
|
(7,749
|
)
|
|
|
(6,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,438
|
)
|
|
$
|
(4,394
|
)
|
|
$
|
(11,633
|
)
|
|
$
|
(8,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Axis is in its early stages and has been operating at low levels for 16 months. As a result, Axis
has incurred losses since starting production in the third quarter of 2009. The new railcar axle
market is directly related to the new railcar market and the current weakness in the railcar market
is causing the axle volumes to remain low. The current downturn is consistent with industry
forecasts, as reported by an independent third party analyst, and is considered temporary. As such,
Axis has not performed a long-lived asset impairment analysis.
In the third quarter of 2010, an increase in volume resulted in an improvement in financial
results. As of September 30, 2010, the investment in Axis was comprised entirely of ARIs term loan
and revolver to Axis. Based on the discussion above, this loan has been evaluated to currently be
fully recoverable. The Company will continue to monitor Axis for
impairment.
Amtek Railcar
In June 2008, the Company, through ARM I and ARM II, entered into an agreement with a partner in
India to form a joint venture company to manufacture, sell and supply freight railcars and their
components in India and other countries to be agreed upon at a facility to be constructed in India
by the joint venture. In March 2010, the Company made a $9.8 million equity contribution to Amtek
Railcar. ARIs ownership in this joint venture is 50.0%. Amtek Railcar is considered a development
stage enterprise as it has not completed construction of its manufacturing facility nor started
production.
The Company accounts for its investment in Amtek Railcar using the equity method. The Company has
determined that, although the joint venture is a VIE, this method is appropriate given that the
Company is not the primary beneficiary and does not have a controlling financial interest and does
not have the ability to individually direct the activities of Amtek Railcar that most significantly
impact its economic performance. The significant factors in this determination were that Amtek
Railcar is a development stage enterprise, no partner, including the Company and its wholly-owned
subsidiaries, has rights to the majority of returns, losses or votes and the risk of loss to the
Company and subsidiaries is limited to its investment in Amtek Railcar.
Summary financial results for Amtek Railcar, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Financial Results
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest
|
|
|
(180
|
)
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(180
|
)
|
|
$
|
(322
|
)
|
|
|
|
|
|
|
|
USRC
In February 2010, ARI, through its wholly-owned subsidiary, ARI DMU LLC, formed USRC, a joint
venture with two other partners that the Company expects will design, manufacture and sell DMUs to
public transit authorities and communities upon order. DMUs are self-propelled passenger railcars
in both single- and bi-level configurations. As of September 30, 2010, the Company made equity
contributions totaling $0.3 million resulting in an ownership interest of 3.8%. ARIs ownership
interest is determined by equity contributions. However, under the terms of the joint venture
agreement, ARI is entitled to 47.5% of USRCs profits and losses regardless of ownership interest.
As production has not begun and USRC is in its beginning stages, the joint venture is considered a
development stage enterprise.
15
The Company accounts for its investment in USRC using the equity method. The Company has determined
that, although the joint venture is a VIE, this method is appropriate given that the Company is not
the primary beneficiary, does not have a controlling financial interest and does not have the
ability to individually direct the activities of USRC that most significantly impact its economic
performance. The significant factors in this
determination were that USRC is a development stage enterprise, no partner, including the Company
and its wholly-owned subsidiary, has rights to the majority of returns, losses or votes and the
risk of loss to the Company and subsidiary is limited to its investment in USRC.
Summary financial results for USRC, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Financial Results
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest
|
|
|
(456
|
)
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(456
|
)
|
|
$
|
(754
|
)
|
|
|
|
|
|
|
|
Note 10 Warranties
The Company typically provides limited warranties such as up to one year for parts and services and
five years for new railcars. Factors affecting the Companys warranty liability include the number
of units sold, historical and anticipated rates of claims and historical and anticipated costs per
claim. Fluctuations in the Companys warranty provision and experience of warranty claims are the
result of variations in these factors. The Company assesses the adequacy of its warranty liability
based on changes in these factors.
The overall change in the Companys warranty reserve is reflected on the condensed consolidated
balance sheet in accrued expenses and taxes and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Liability, beginning of period
|
|
$
|
1,060
|
|
|
$
|
1,591
|
|
|
$
|
1,094
|
|
|
$
|
2,595
|
|
Provision for warranties
issued during the year,
net of adjustments
|
|
|
303
|
|
|
|
234
|
|
|
|
758
|
|
|
|
953
|
|
Provision for warranties
issued in previous years,
net of adjustments
|
|
|
(109
|
)
|
|
|
(169
|
)
|
|
|
(185
|
)
|
|
|
(930
|
)
|
Warranty claims
|
|
|
(119
|
)
|
|
|
(293
|
)
|
|
|
(532
|
)
|
|
|
(1,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, end of period
|
|
$
|
1,135
|
|
|
$
|
1,363
|
|
|
$
|
1,135
|
|
|
$
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Long-term Debt
In February 2007, the Company issued $275.0 million unsecured senior fixed rate notes that were
subsequently exchanged for registered notes in March 2007 (Notes). The fair value of these Notes
was approximately $279.1 million at September 30, 2010, based on the closing market price as of
that date, which is a Level 1 input. For definition and discussion of a Level 1 input for fair
value measurement, refer to Note 5.
The Notes bear a fixed interest rate that is set at 7.5% and are due in 2014. Interest on the Notes
is payable semi-annually in arrears on March 1 and September 1. The terms of the Notes contain
restrictive covenants that limit the Companys ability to, among other things, incur additional
debt, make certain restricted payments and enter into certain significant transactions with
stockholders and affiliates. As of September 30, 2010, based on the Companys fixed charge coverage
ratio, as defined and as measured on a rolling four-quarter basis, certain of these covenants,
including the Companys ability to incur additional debt, have become further restricted. The
Company was in compliance with all of its covenants under the Notes as of September 30, 2010.
16
Prior to March 1, 2011, ARI may redeem the Notes in whole or in part at a redemption price equal to
100.0% of the principal amount, plus an applicable premium based upon a present value calculation
using an applicable treasury
rate plus 0.5%, plus accrued and unpaid interest. Commencing on March 1, 2011, the redemption price
is set at 103.75% of the principal amount of the Notes plus accrued and unpaid interest, and
declines annually until it is reduced to 100.0% of the principal amount of the Notes plus accrued
and unpaid interest from and after March 1, 2013. The Notes are due in full plus accrued unpaid
interest on March 1, 2014.
Note 12 Income Taxes
For Federal purposes, the Companys tax years 2007-2009 remain open to examination. For State
purposes, the Companys tax years 2006-2009 remain open to examination by various taxing
jurisdictions with the latest expiration of the statute in 2013. The Companys foreign tax returns
for years 2007-2009 remain open to examination.
Note 13 Employee Benefit Plans
The Company is the sponsor of two defined benefit pension plans that cover certain employees at
designated repair facilities. One plan, which covers certain salaried and hourly employees, is
frozen and no additional benefits are accruing thereunder. The second plan, which covers only
certain of the Companys union employees, is currently active and benefits will continue to accrue
thereunder until January 1, 2012, when the plan will be frozen. The assets of all funded plans are
held by independent trustees and consist primarily of equity, fixed income funds and equity funds.
The Company is also the sponsor of an unfunded, non-qualified supplemental executive retirement
plan (SERP) in which several of its current as well as former employees are participants. The SERP
is frozen and no additional benefits are accruing thereunder.
The Company also provides postretirement healthcare benefits for certain of its retired employees
and life insurance benefits for certain of its union employees. Employees may become eligible for
healthcare benefits, and union employees may become eligible for life insurance benefits, only if
they retire after attaining specified age and service requirements. These benefits are subject to
deductibles, co-payment provisions and other limitations. During 2009, postretirement healthcare
premium rates for retirees were increased. This change resulted in a decrease to the postretirement
benefit liability of $2.8 million that was recorded to accumulated other comprehensive income as of
December 31, 2009. This adjustment is being recognized over the remaining weighted-average service
period of active plan participants.
The components of net periodic benefit cost for the pension and postretirement plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
66
|
|
|
$
|
59
|
|
|
$
|
200
|
|
|
$
|
176
|
|
Interest cost
|
|
|
257
|
|
|
|
258
|
|
|
|
769
|
|
|
|
775
|
|
Expected loss on plan assets
|
|
|
(222
|
)
|
|
|
(189
|
)
|
|
|
(664
|
)
|
|
|
(567
|
)
|
Amortization of unrecognized net gain
|
|
|
86
|
|
|
|
92
|
|
|
|
258
|
|
|
|
276
|
|
Amortization of unrecognized prior
service cost
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
|
|
11
|
|
Adjustment to benefits
|
|
|
15
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized
|
|
$
|
204
|
|
|
$
|
224
|
|
|
$
|
612
|
|
|
$
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
1
|
|
|
$
|
35
|
|
Interest cost
|
|
|
1
|
|
|
|
38
|
|
|
|
4
|
|
|
|
113
|
|
Amortization of prior service cost
|
|
|
(97
|
)
|
|
|
(21
|
)
|
|
|
(293
|
)
|
|
|
(63
|
)
|
Amortization of loss
|
|
|
(25
|
)
|
|
|
(23
|
)
|
|
|
(75
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic (income) benefit cost recognized
|
|
$
|
(121
|
)
|
|
$
|
5
|
|
|
$
|
(363
|
)
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Pension
|
|
$
|
204
|
|
|
$
|
224
|
|
|
$
|
612
|
|
|
$
|
671
|
|
Postretirement
|
|
|
(121
|
)
|
|
|
5
|
|
|
|
(363
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost recognized for all plans
|
|
$
|
83
|
|
|
$
|
229
|
|
|
$
|
249
|
|
|
$
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also maintains qualified defined contribution plans, which provide benefits to ARIs
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.2 million for both the
three months ended September 30, 2010 and 2009. Expenses related to these plans were $0.6 million
for both the nine months ended September 30, 2010 and 2009.
Note 14 Commitments and Contingencies
In connection with the Companys investment in Ohio Castings, ARI has guaranteed bonds amounting to
$10.0 million issued by the State of Ohio to Ohio Castings, of which $0.3 million was outstanding
as of September 30, 2010. ARI also has guaranteed a $2.0 million state loan that was provided for
purchases of capital equipment, of which $0.3 million was outstanding as of September 30, 2010. The
two other partners of Ohio Castings have made identical guarantees of these obligations. It is
anticipated that Ohio Castings will continue to make principal and interest payments while its
facility is temporarily idled through equity contributions by ARI and the other partners. The bonds
and state loan are scheduled to be paid in full in November 2010 and June 2011, respectively.
The Companys Axis joint venture entered into a credit agreement in December 2007. Effective August
5, 2009, the Company and the other initial partner acquired this loan from the lenders party
thereto, with each party acquiring a 50.0% interest in the loan. The total commitment under the
term loan is $60.0 million with an additional $10.0 million commitment under the revolving loan.
ARI Component is responsible to fund 50.0% of the loan commitments. The balance outstanding on
these loans, due to ARI Component, was $34.7 million of principal and $0.1 million of accrued
interest, both as of September 30, 2010. ARI Components share of the remaining commitment on these
loans was $3.1 million as of September 30, 2010. In accordance with the terms of the agreement, in
the third quarter 2010, Axis elected to satisfy interest on the term loan as of September 30, 2010
by increasing the outstanding principal amount of the term loan by the amount of interest otherwise
due and payable in cash. This does not affect the remaining funding commitment on these loans. See
Note 9 for further information regarding this transaction and the terms of the underlying loan.
18
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. Management believes that there are no current environmental issues
identified that would have a material adverse affect on the Company. ARI is involved in
investigation and remediation activities at a property that it now owns to address historical
contamination and potential contamination by third parties. The Company is also involved with a
state agency in the cleanup of this site under these laws. These investigations are in process but
it is too early to be able to make a reasonable estimate, with any certainty, of the timing and
extent of remedial actions that may be required, and the costs that would be involved in such
remediation. 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 any such estimates. Substantially all of the issues identified relate to the
use of this property prior to its transfer to ARI in 1994 by ACF Industries LLC (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.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities and
one parts manufacturing facility that expire beginning April 2011 through September 2013.
ARI was named the defendant in a wrongful death lawsuit,
Nicole Lerma v. American Railcar
Industries, Inc.,
filed on August 17, 2007 in the Circuit Court of Greene County, Arkansas Civil
Division
.
The court reached a verdict in favor of ARI on May 24, 2010. The plaintiff did not appeal
the decision.
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.
In July 2007, ARI entered into an agreement with its joint venture, Axis, to purchase new railcar
axles from the joint venture. The Company has no minimum volume purchase requirements under this
agreement.
Note 15 Comprehensive (Loss) Income
The components of comprehensive (loss) income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net (loss) earnings
|
|
$
|
(6,252
|
)
|
|
$
|
1,092
|
|
|
$
|
(19,157
|
)
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale
securities and derivatives
|
|
|
|
|
|
|
16,995
|
|
|
|
|
|
|
|
23,061
|
|
Income tax expense of unrealized gain
on available-for-sale securities and
derivatives
|
|
|
|
|
|
|
(5,948
|
)
|
|
|
|
|
|
|
(8,071
|
)
|
Foreign currency translation adjustment
|
|
|
311
|
|
|
|
609
|
|
|
|
145
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(5,941
|
)
|
|
$
|
12,748
|
|
|
$
|
(19,012
|
)
|
|
$
|
20,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Note 16 (Loss) Earnings per Share
The shares used in the computation of the Companys basic and diluted (loss) earnings per common
share for the three and nine months ended September 30, 2010 and 2009 are reconciled as follows:
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
21,302,296
|
|
Dilutive effect of employee stock options
|
|
|
|
(1)
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
21,302,296
|
|
|
|
|
|
|
|
|
(1)
|
|
Stock options to purchase 390,353 shares of common stock were not included in the
calculation for diluted earnings per share for both the three and nine months ended
September 30, 2010 and 2009. These options would have resulted in an antidilutive effect to
the (loss) earnings per share calculation.
|
Note 17 Stock-Based Compensation
The Company accounts for stock-based compensation granted under the 2005 Equity Incentive Plan, as
amended (the 2005 Plan) based on the fair values calculated using the Black-Scholes-Merton
option-pricing formula. Stock-based compensation is expensed using a graded vesting method over the
vesting period of the instrument.
The following table presents the amounts for stock-based compensation expense incurred by ARI and
the corresponding line items on the condensed consolidated statement of operations that they are
classified within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
($ in thousands)
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: manufacturing operations
|
|
$
|
350
|
|
|
$
|
129
|
|
|
$
|
523
|
|
|
$
|
172
|
|
Cost of revenue: railcar services
|
|
|
59
|
|
|
|
23
|
|
|
|
88
|
|
|
|
30
|
|
Selling, administrative and other
|
|
|
1,123
|
|
|
|
499
|
|
|
|
1,742
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,532
|
|
|
$
|
651
|
|
|
$
|
2,353
|
|
|
$
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
No options were exercised in 2009 or 2010. All stock options fully vested in January 2009. As such,
the Company did not recognize any compensation expense related to stock options during both the
three and nine months ended September 30, 2010 and 2009.
The following is a summary of option activity under the 2005 Plan for January 1, 2010 through
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Grant-date
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Fair Value
|
|
|
Intrinsic
|
|
|
|
Covered by
|
|
|
Exercise
|
|
|
Contractual
|
|
|
of Options
|
|
|
Value
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
|
Granted
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
beginning of the
period, January 1,
2010
|
|
|
390,353
|
|
|
$
|
21.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and
exercisable at the
end of the period,
September 30, 2010
|
|
|
390,353
|
|
|
$
|
21.00
|
|
|
3 months
|
|
$
|
7.28
|
|
|
$
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Options to purchase 390,353 shares of the Companys common stock have an exercise price
that is above market price, based on the closing market price of $15.68 per share of the
Companys common stock on the last business day of the period ended September 30, 2010.
|
As of September 30, 2010, an aggregate of 515,124 shares were available for issuance in connection
with future
grants under the Companys 2005 Plan. Shares issued under the 2005 Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
20
Stock appreciation rights
The compensation committee of the board of directors of the Company granted awards of stock
appreciation rights (SARs) to certain employees pursuant to the 2005 Plan during April 2007, April
2008, September 2008, March 2009 and March 2010. On May 14, 2010, ARI completed an exchange offer
and exchanged 190,200 eligible SARs granted on April 4, 2007 at an exercise price per SAR of $29.49
for 95,100 SARs granted on May 14, 2010 at an exercise price per SAR of $14.12.
All of the SARs granted in 2007, 196,900 of the SARs granted in 2008 and 212,850 of the SARs
granted in 2009 vest in 25.0% increments on the first, second, third and fourth anniversaries of
the grant date. The SARs granted in March and May 2010 vest in three equal increments on the first,
second and third anniversaries of the grant date. Each holder must remain employed by the Company
through each such date in order to vest in the corresponding number of SARs.
Additionally, 77,500 of the SARs granted in 2008 and 93,250 of the SARs granted in 2009 similarly
vest in 25.0% increments on the first, second, third and fourth anniversaries of the grant date,
but only if the closing price of the Companys common stock achieves a specified price target
during the applicable twelve month period for twenty trading days during any sixty day trading day
period. If the Companys common stock does not achieve the specified price target during the
applicable twelve-month period, the related portion of these performance-based SARs will not vest.
Each holder must further remain employed by the Company through each anniversary of the grant date
in order to vest in the corresponding number of SARs.
The SARs have exercise prices that represent the closing price of the Companys common stock on the
date of grant. Upon the exercise of any SAR, the Company shall pay the holder, in cash, an amount
equal to the excess of (A) the aggregate fair market value (as defined in the 2005 Plan) in respect
of which the SARs are being exercised, over (B) the aggregate exercise price of the SARs being
exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SAR
Agreement). The SARs are subject in all respects to the terms and conditions of the 2005 Plan and
the SAR Agreement, which contain non-solicitation, non-competition and confidentiality provisions.
The following table provides an analysis of SARs granted in 2010, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2010 Grants
|
|
2009 Grant
|
|
2008 Grants
|
|
2007 Grant
|
Grant date
|
|
3/31/2010 & 5/14/2010
|
|
3/3/2009
|
|
4/28/2008 & 9/12/2008
|
|
4/4/2007
|
# SARs outstanding at September 30, 2010
|
|
236,750
|
|
296,450
|
|
189,975
|
|
12,150
|
Weighted average exercise price
|
|
$12.95
|
|
$6.71
|
|
$20.80
|
|
$29.49
|
Contractual term
|
|
7 years
|
|
7 years
|
|
7 years
|
|
7 years
|
|
|
|
|
|
|
|
|
|
September 30, 2010
SARs black scholes valuation components:
|
|
|
|
|
|
|
|
|
Stock volatility range
|
|
58.6% 62.1%
|
|
59.3% 65.0%
|
|
62.1% 67.2%
|
|
70.3%
|
Expected life range
|
|
3.5 4.6 years
|
|
2.7 3.9 years
|
|
2.3 3.4 years
|
|
1.8 2.0 years
|
Risk free interest rate range
|
|
0.6% 1.3%
|
|
0.6%
|
|
0.4% 0.6%
|
|
0.4%
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Forfeiture rate
|
|
2.0%
|
|
2.0%
|
|
2.0%
|
|
2.0%
|
21
As there was not adequate history for the stock prices of the Company at the time of
valuation, the stock volatility rate was determined using historical volatility rates for ARI and
several other similar companies within the railcar industry. The expected life ranges represent the
use of the simplified method prescribed by the SEC, which uses the average of the vesting period
and expiration period of each group of SARs that vest equally over a three or four-year period. The
interest rates used were the government Treasury bill rate on the date of valuation. Dividend yield
was based on the indefinite suspension of dividends by the Company. The forfeiture rate was based
on a Company estimate of expected forfeitures over the contractual life of each grant of SARs for
each period.
The Company recognized compensation expense of $1.5 million and $0.7 million during the three
months ended September 30, 2010 and 2009, respectively, related to SARs granted under the 2005
Plan. The Company recognized compensation expense of $2.4 million and $0.9 million during the nine
months ended September 30, 2010 and 2009, respectively, related to SARs granted under the 2005
Plan.
The following is a summary of SARs activity under the 2005 Plan for January 1, 2010 through
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Weighted
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Appreciation
|
|
|
Average
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Rights
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
(SARs)
|
|
|
Price
|
|
|
Life
|
|
|
of SARs
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the period, January 1,
2010
|
|
|
788,550
|
|
|
$
|
18.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited
|
|
|
(281,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
236,750
|
|
|
$
|
12.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,075
|
)
|
|
$
|
6.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period, September 30, 2010
|
|
|
735,325
|
|
|
$
|
14.66
|
|
|
63 months
|
|
$
|
8.08
|
|
|
$
|
3,306
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the period, September 30, 2010
|
|
|
159,950
|
|
|
$
|
15.29
|
|
|
59 months
|
|
$
|
7.19
|
|
|
$
|
614
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
SARs with an exercise price of $29.49, $20.88 and $16.46 have no intrinsic value based
on the closing market price of $15.68 for a share of the Companys common stock on
September 30, 2010. However, the SARs granted in 2009 and 2010 with an exercise price of
$6.71, $12.16 and $14.12 have an intrinsic value of $3.3 million including $0.6 million
related to the exercisable SARs granted in 2009.
|
As of September 30, 2010, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were estimated to be $2.2 million and were expected to be recognized over a
weighted average period of 29 months.
Note 18 Common Stock and Dividends on Common Stock
During each quarter from the Companys initial public offering in January 2006 until the second
quarter of 2009, the board of directors of the Company declared cash dividends of $0.03 per share
of common stock of the Company to shareholders of record as of a given date. The last dividend was
declared in May 2009 and paid in July 2009. Subsequently, in August 2009, the Company indefinitely
suspended its quarterly dividend payments.
22
Note 19 Related Party Transactions
Agreements with ACF
The Company has or had the following agreements with ACF, a company controlled by Mr. Carl Icahn,
the Companys principal beneficial stockholder (through Icahn Enterprises L.P. (IELP)) and chairman
of the Companys board of directors:
Manufacturing Services Agreement
Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to
manufacture and distribute, at the Companys instruction, various railcar components. In
consideration for these services, the Company agreed to pay ACF based on agreed upon rates. In the
three months ended September 30, 2010 and 2009, ARI purchased inventory of less than $0.1 million
and $1.9 million, respectively, of components from ACF. In the nine months ended September 30, 2010
and 2009, ARI purchased inventory of $1.1 million and $12.7 million, respectively, of components
from ACF. The agreement automatically renews unless written notice is provided by the Company.
Supply Contracts
The Company from time to time manufactures and sells specified components to ACF on a purchase
order basis. No revenue was recorded from ACF for the three and nine months ended September 30,
2010. Revenue recorded from ACF was less than $0.1 million for both the three and nine months ended
September 30, 2009. Such amounts are included under manufacturing operations revenue from
affiliates on the condensed consolidated statement of operations. Profit margins on sales to
related parties approximate the margins on sales to other large customers.
Railcar Manufacturing Agreement
In May 2007, the Company entered into a manufacturing agreement with ACF, pursuant to which the
Company agreed to purchase approximately 1,390 tank railcars from ACF. The profit realized by ARI
upon sale of the tank railcars to ARI customers was first paid to ACF to reimburse it for the
start-up costs involved in implementing the manufacturing arrangements contemplated under the
agreement and thereafter, the profit was split evenly between ARI and ACF. The commitment under
this agreement was satisfied in March 2009 and the agreement was terminated at that time.
For both the three months ended September 30, 2010 and 2009, ARI incurred no costs under this
agreement. For the nine months ended September 30, 2010, ARI incurred no costs under this
agreement. For the nine months ended September 30, 2009, ARI incurred costs under this agreement of
$4.1 million in connection with railcars that were manufactured and delivered to customers during
that period, which includes payments made to ACF for its share of the profits along with ARIs
costs. Such amounts are included under manufacturing operations cost of revenue on the statement of
operations. The Company recognized no revenue under this agreement for both the three months ended
September 30, 2010 and 2009. The Company recognized no revenue under this agreement for the nine
months ended September 30, 2010 and $19.0 million of revenue related to railcars shipped under this
agreement for the nine months ended September 30, 2009.
Asset Purchase Agreement
On January 29, 2010, ARI entered into an agreement to purchase certain assets from ACF for
approximately $0.9 million that will allow the Company to manufacture railcar components previously
purchased from ACF.
The purchase price of approximately $0.9 million was determined using various factors, including
but not limited to, independent appraisals that assessed fair market value for the purchased
assets, each assets remaining useful life and the replacement cost of each asset. Given that ACF
and ARI have the same majority stockholder, the assets purchased were recorded at ACFs net book
value and the remaining portion of the purchase price will be a reduction to stockholders equity.
As of September 30, 2010, all of the assets had been received and paid for in accordance with the
agreement.
23
Other Agreements
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 negotiation services to one another. No services were rendered and no amounts
were paid during the three and nine months ended September 30, 2009. This agreement terminated
January 5, 2010.
In addition, the Company has agreed to provide ACF with engineering and consulting advice. Fees
paid to one another are based on agreed upon rates. No services were rendered and no amounts were
paid during the three and nine months ended September 30, 2010 and 2009.
Agreements with ARL
The Company has or had the following agreements with American Railcar Leasing LLC (ARL), a company
controlled by Mr. Carl Icahn, the Companys principal beneficial stockholder (through IELP) and
chairman of the Companys board of directors:
Railcar Servicing Agreement and Fleet Services Agreement
Effective as of January 1, 2008, the Company entered into a fleet services agreement with ARL,
which replaced a 2005 railcar servicing agreement between the parties. This agreement reflects a
reduced level of fleet management services, relating primarily to logistics management services,
for which ARL now pays a fixed monthly fee. Additionally, under this agreement, the Company
continues to provide railcar repair and maintenance services to ARL for a charge of labor,
components and materials. The Company currently provides such repair and maintenance services for
approximately 27,000 railcars for ARL. This agreement extends through December 31, 2010, and is
automatically renewed for additional one-year periods unless either party gives at least sixty
days prior notice of
termination. There is no termination fee if the Company elects to terminate this agreement. For the
three months ended September 30, 2010 and 2009, revenues of $4.3 million and $3.5 million were
recorded under this agreement, respectively. For the nine months ended September 30, 2010 and 2009,
revenues of $10.3 million and $11.5 million were recorded under this agreement, respectively. Such
amounts are included under railcar services revenue from affiliates on the condensed consolidated
statement of operations. Profit margins on sales to related parties approximate the margins on
sales to other large customers.
Services Agreement, Separation Agreement and Rent and Building Services Extension Agreement
Under the Companys services agreement with ARL, 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 a facility owned by the Companys former chief
executive officer and current vice chairman of the board of directors, which is further described
later in this footnote. Under this agreement, the Company agreed to provide purchasing and
engineering services to ARL. Consideration exchanged between the companies is based upon an agreed
fixed annual fee.
On March 30, 2007, ARI and ARL agreed, pursuant to a separation agreement, to terminate, effective
December 31, 2006, all services provided to ARL by the Company under the services agreement.
Additionally, the separation agreement provided that all services provided to the Company by ARL
under the services agreement would be terminated except for rent and building services. Under the
separation agreement, ARL agreed to waive the six-month notice requirement for termination required
by the services agreement.
In February 2008, ARI and ARL agreed, pursuant to an extension agreement, that effective December
31, 2007, all rent and building services would continue unless otherwise terminated by either party
upon six months prior notice or by mutual agreement between the parties.
Total fees paid to ARL under these agreements were $0.2 million for both the three months ended
September 30, 2010 and 2009. Total fees paid to ARL under these agreements were $0.5 million for
both the nine months ended September 30, 2010 and 2009. The fees paid to ARL are included in
selling, administrative and other costs related to affiliates on the condensed consolidated
statement of operations.
24
Trademark License Agreement
Under the Trademark License Agreement, effective as of June 30, 2005, ARI granted a nonexclusive,
perpetual, worldwide license to ARL to use ARIs common law trademarks American Railcar and the
diamond shape logo. ARL may only use the licensed trademarks in connection with the railcar
leasing business. ARI is entitled to annual fees of $1,000 in exchange for this license.
Sales Contracts
The Company from time to time manufactures and sells railcars to ARL under long-term agreements as
well as on a purchase order basis. Revenue for railcars sold to ARL was $19.3 million and $8.0
million for the three months ended September 30, 2010 and 2009, respectively. Revenue for railcars
sold to ARL was $65.4 million and $93.8 million for the nine months ended September 30, 2010 and
2009, respectively. Revenue for railcars sold to ARL is included under manufacturing revenue from
affiliates on the accompanying condensed consolidated statements of operations. Profit margins on
sales to related parties approximate the margins on sales to other large customers.
Agreements with other affiliated parties
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was
due in January 2004. The note has been renegotiated resulting in a new principal amount and
interest rate of 4.0%. The note is due February 2012. Interest will continue to accrue but interest
payments have been deferred until August 2011. This note receivable is included in investment in
joint venture on the accompanying condensed consolidated balance sheet. Total amounts due from Ohio
Castings under this note were $0.5 million at both September 30, 2010 and December 31, 2009.
Accrued interest on this note as of September 30, 2010 and December 31, 2009, was less than $0.1
million. The other partners in the joint venture have made identical loans to Ohio Castings.
In connection with the Companys investment in Ohio Castings, ARI has guaranteed bonds amounting to
$10.0 million issued by the State of Ohio to one of Ohio Castings subsidiaries, of which
$0.3 million was outstanding as of September 30, 2010. ARI also has guaranteed a $2.0 million state
loan to one of Ohio Castings subsidiaries that provides for purchases of capital equipment, of
which $0.3 million was outstanding as of September 30, 2010. The two other partners of Ohio
Castings have made identical guarantees of these obligations. It is anticipated that Ohio Castings
will continue to make principal and interest payments while its facility is temporarily idled
through equity contributions by ARI and the other partners.
One of the Companys joint ventures, Axis, entered into a credit agreement in December 2007.
Effective August 5, 2009, the Company and the other initial partner acquired this loan, with each
party acquiring a 50.0% interest in the loan. The purchase price paid by the Company for its 50.0%
interest was approximately $29.5 million, which equaled the then outstanding principal amount of
the portion of the loan acquired by the Company. The total commitment under the loan is up to $70.0
million, consisting of up to $60.0 million in term loans and up to $10.0 million under the
revolving loans. The balance outstanding on the portion of these loans due to ARI Component was
$34.7 million in principal and $0.1 million of accrued interest both as of September 30, 2010 and
$31.5 million in principal and $1.0 million of accrued interest both as of December 31, 2009. ARI
Component is responsible to fund 50.0% of the loan commitments. ARI Components share of the
remaining commitment on these loans, term and revolving, was $3.1 million as of September 30, 2010.
In accordance with the terms of the agreement, in the third quarter 2010, Axis elected to satisfy
interest on the term loan as of September 30, 2010 by increasing the outstanding principal amount
of the term loan by the amount of interest otherwise due and payable in cash. This does not affect
the remaining funding commitment on these loans. See Note 9 for further information regarding this
transaction and the terms of the underlying loan.
The Company purchases railcar parts from its joint ventures under long-term contracts. During the
three and nine months ended September 30, 2010, the Company purchased $1.7 million and $3.9 million
of railcar parts from its joint ventures, respectively. During both the three and nine months ended
September 30, 2009, the Company purchased $0.4 million of railcar parts from its joint ventures.
Effective January 1, 2009, ARI entered into a services agreement with a term of one year to provide
Axis accounting, tax, human resources and information technology assistance for an annual fee of
$0.2 million. Effective January 1, 2010, this agreement was replaced by a new services agreement
for ARI to provide Axis accounting, tax, human resources, information technology and purchasing
assistance for an annual fee of $0.3 million. This agreement has a term of one year and
automatically renews for additional one-year periods unless written notice is received from either
party.
25
Effective April 1, 2009, Mr. James J. Unger, the Companys former chief executive officer, assumed
the role of vice chairman of the board of directors and became a consultant to the Company. In
exchange for these services, Mr. Unger received an annual consulting fee of $135,000 and an annual
director fee of $65,000 that were both payable quarterly, in advance. The Company also agreed to
provide Mr. Unger with an automobile allowance related to his role as vice chairman. Mr. Ungers
consulting agreement terminated in accordance with its terms as of April 1, 2010. In his role as
consultant, Mr. Unger reported to and served at the discretion of the Companys Board. Mr. Unger
continues in his role as vice chairman in connection with which he is provided an annual director
fee of $65,000 and an automobile allowance.
The Company leases one of its parts manufacturing facilities from an entity owned by its vice
chairman of the board of directors. Expenses paid for this facility were $0.1 million for both the
three months ended September 30, 2010 and 2009. Expenses paid for this facility were $0.3 million
for both the nine months ended September 30, 2010 and 2009. These costs are included in
manufacturing operations cost of revenue.
Financial information for transactions with affiliates
As of September 30, 2010 and December 31, 2009, accounts receivable of $6.0 million and $1.4
million, respectively, were due from ACF, ARL, Amtek Railcar and Axis.
As of September 30, 2010 and December 31, 2009, interest receivable of $0.1 million and $1.0
million, respectively,
were due from Ohio Castings and Axis.
As of September 30, 2010 and December 31, 2009, accounts payable of $0.4 million and $0.6 million,
respectively, were due to ACF, ARL and Axis.
Manufacturing operations cost of revenue for the three and nine months ended September 30, 2010
included $5.0 million and $9.2 million in railcar parts produced by joint ventures, respectively.
Manufacturing operations cost of revenue for the three and nine months ended September 30, 2009
included $7.4 million and $32.4 million in railcar parts produced by joint ventures, respectively.
Inventory at September 30, 2010 and December 31, 2009 included $0.6 million and $0.3 million,
respectively, of purchases from joint ventures. At September 30, 2010 and December 31, 2009, all
profit from related parties for inventory still on hand was eliminated.
26
Note 20 Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments: manufacturing operations and railcar services. 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 tables is
derived from the segments internal financial reports used for corporate management purposes:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate &
|
|
|
|
|
|
|
|
September 30, 2010
|
|
Operations
|
|
|
Services
|
|
|
all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
48,404
|
|
|
$
|
16,393
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,797
|
|
Intersegment revenues
|
|
|
449
|
|
|
|
56
|
|
|
|
|
|
|
|
(505
|
)
|
|
|
|
|
Cost of revenue external customers
|
|
|
(49,366
|
)
|
|
|
(13,141
|
)
|
|
|
|
|
|
|
|
|
|
|
(62,507
|
)
|
Cost of intersegment revenue
|
|
|
(353
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(866
|
)
|
|
|
3,247
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
2,290
|
|
Selling, administrative and other
|
|
|
(1,590
|
)
|
|
|
(638
|
)
|
|
|
(4,004
|
)
|
|
|
|
|
|
|
(6,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from operations
|
|
$
|
(2,456
|
)
|
|
$
|
2,609
|
|
|
$
|
(4,004
|
)
|
|
$
|
(91
|
)
|
|
$
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate &
|
|
|
|
|
|
|
|
September 30, 2009
|
|
Operations
|
|
|
Services
|
|
|
all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
62,047
|
|
|
$
|
16,051
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
78,098
|
|
Intersegment revenues
|
|
|
172
|
|
|
|
32
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
Cost of revenue external customers
|
|
|
(56,348
|
)
|
|
|
(12,940
|
)
|
|
|
|
|
|
|
|
|
|
|
(69,288
|
)
|
Cost of intersegment revenue
|
|
|
(119
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
5,752
|
|
|
|
3,112
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
8,810
|
|
Selling, administrative and other
|
|
|
(1,482
|
)
|
|
|
(536
|
)
|
|
|
(4,466
|
)
|
|
|
|
|
|
|
(6,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
4,270
|
|
|
$
|
2,576
|
|
|
$
|
(4,466
|
)
|
|
$
|
(54
|
)
|
|
$
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate &
|
|
|
|
|
|
|
|
September 30, 2010
|
|
Operations
|
|
|
Services
|
|
|
all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(in thousands)
|
|
Revenues from external
customers
|
|
$
|
127,262
|
|
|
$
|
51,011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
178,273
|
|
Intersegment revenues
|
|
|
833
|
|
|
|
273
|
|
|
|
|
|
|
|
(1,106
|
)
|
|
|
|
|
Cost of revenue external
customers
|
|
|
(131,643
|
)
|
|
|
(40,814
|
)
|
|
|
|
|
|
|
|
|
|
|
(172,457
|
)
|
Cost of intersegment revenue
|
|
|
(637
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(4,185
|
)
|
|
|
10,215
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
5,816
|
|
Selling, administrative and
other
|
|
|
(4,328
|
)
|
|
|
(1,722
|
)
|
|
|
(11,875
|
)
|
|
|
|
|
|
|
(17,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from
operations
|
|
$
|
(8,513
|
)
|
|
$
|
8,493
|
|
|
$
|
(11,875
|
)
|
|
$
|
(214
|
)
|
|
$
|
(12,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate &
|
|
|
|
|
|
|
|
September 30, 2009
|
|
Operations
|
|
|
Services
|
|
|
all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(in thousands)
|
|
Revenues from external customers
|
|
$
|
301,325
|
|
|
$
|
43,646
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
344,971
|
|
Intersegment revenues
|
|
|
1,185
|
|
|
|
77
|
|
|
|
|
|
|
|
(1,262
|
)
|
|
|
|
|
Cost of revenue external customers
|
|
|
(271,552
|
)
|
|
|
(35,423
|
)
|
|
|
|
|
|
|
|
|
|
|
(306,975
|
)
|
Cost of intersegment revenue
|
|
|
(990
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
1,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
29,968
|
|
|
|
8,227
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
37,996
|
|
Selling, administrative and other
|
|
|
(5,577
|
)
|
|
|
(1,578
|
)
|
|
|
(12,003
|
)
|
|
|
|
|
|
|
(19,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
24,391
|
|
|
$
|
6,649
|
|
|
$
|
(12,003
|
)
|
|
$
|
(199
|
)
|
|
$
|
18,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Railcar
|
|
|
Corporate &
|
|
|
|
|
|
|
|
As of
|
|
Operations
|
|
|
Services
|
|
|
all other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(in thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
295,405
|
|
|
$
|
48,257
|
|
|
$
|
306,159
|
|
|
$
|
|
|
|
$
|
649,821
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
271,862
|
|
|
$
|
47,283
|
|
|
$
|
345,219
|
|
|
$
|
|
|
|
$
|
664,364
|
|
28
Manufacturing operations
Manufacturing revenues from affiliates were 29.7% and 10.3% of total consolidated revenues for the
three months ended September 30, 2010 and 2009, respectively. Manufacturing revenues from
affiliates were 36.7% and 27.2% of total consolidated revenues for the nine months ended September
30, 2010 and 2009, respectively.
Manufacturing revenues from the most significant customer, an affiliate, totaled 29.7% of total
consolidated revenues for the three months ended September 30, 2010. Manufacturing revenues from
the most significant customer totaled 36.9% of total consolidated revenues for the three months
ended September 30, 2009. Manufacturing revenues from the most significant customer, an affiliate,
totaled 36.7% and 32.0% for the nine months ended September 30, 2010 and 2009, respectively.
Manufacturing revenues from the two most significant customers (including an affiliated customer)
were 58.3% and 60.6% of total consolidated revenues for the three months ended September 30, 2010
and 2009, respectively. Manufacturing revenues from the two most significant customers (including
an affiliated customer) were 47.1% and 59.2% of total consolidated revenues for the nine months
ended September 30, 2010 and 2009, respectively.
Manufacturing receivables from the most significant customer were 17.2% of total consolidated
accounts receivable including due from affiliates at September 30, 2010. Manufacturing receivables
from the two most significant customers (including an affiliated customer) were 33.3% of total
consolidated accounts receivable including due from affiliates at September 30, 2010. Manufacturing
receivables from the most significant customer were 10.8% of total consolidated accounts receivable
including due from affiliates at December 31, 2009. No other customer accounted for more than 10.0%
of total consolidated accounts receivable as of September 30, 2010 and December 31, 2009.
Railcar services
Railcar services revenues from affiliates were 6.6% and 4.6% of total consolidated revenues for the
three months ended September 30, 2010 and 2009, respectively. Railcar services revenues from
affiliates were 5.8% and 3.3% of total consolidated revenues for the nine months ended September
30, 2010 and 2009, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenues
for the three and nine months ended September 30, 2010 and 2009. No single railcar services
customer accounted for more than 10.0% of total consolidated accounts receivable as of September
30, 2010 and December 31, 2009.
Note 21 Supplemental Cash Flow Information
ARI received interest income of $3.4 million and $2.7 million for the nine months ended September
30, 2010 and 2009, respectively.
ARI paid interest expense, net of capitalized interest, of $20.6 million and $20.2 million for the
nine months ended September 30, 2010 and 2009, respectively.
ARI paid taxes of $0.3 million and $0.5 million for the nine months ended September 30, 2010 and
2009, respectively.
Note 22 Subsequent Event
On October 29, 2010, ARI entered into a lease agreement with a term of eleven years and total base
rent of $6.4 million, over the term of the agreement, with an entity owned by the Companys vice
chairman of the board of directors. The lease is for ARIs headquarters location in St. Charles,
Missouri, that is currently leased through ARL under the Companys services agreement with ARL,
which expires December 31, 2010. The term under the new lease agreement commences at the time the
Companys current lease under the services agreement with ARL expires.
29
|
|
|
ITEM 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Some of the statements contained in this report are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
(Exchange Act), including statements regarding our plans, objectives, expectations and intentions.
Such statements include, without limitation, statements regarding various estimates we have made in
preparing our financial statements, statements regarding expected future trends relating to our
industry, our results of operations and the sufficiency of our capital resources and statements
regarding anticipated production schedules for our products and the anticipated construction and
production schedules of our joint ventures. These forward-looking statements are subject to known
and unknown risks and uncertainties that could cause actual results to differ materially from those
anticipated.
Risks and uncertainties that could adversely affect our business and prospects include without
limitation:
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the impact of the current economic downturn, adverse market conditions and restricted credit markets
and the impact of the continuation of these conditions;
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our reliance upon a small number of customers that represent a large percentage of our revenues and
backlog;
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the health of and prospects for the overall railcar industry;
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our prospects in light of the cyclical nature of our business and the current economic environment;
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anticipated trends relating to our shipments, revenues, financial condition or results of operations;
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our ability to manage overhead and variations in production rates;
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the highly competitive nature of the railcar manufacturing industry;
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fluctuating costs of raw materials, including steel and railcar components, and delays in the
delivery of such raw materials and components;
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fluctuations in the supply of components and raw materials we use in railcar manufacturing;
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anticipated production schedules for our products and the anticipated financing needs, construction
and production schedules of our joint ventures;
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risks associated with potential joint ventures or acquisitions;
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the risks associated with international operations and joint ventures;
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the risk of the lack of acceptance of new railcar offerings by our customers and the risk of initial
production costs for our new railcar offerings being significantly higher than expected;
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the sufficiency of our liquidity and capital resources;
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the conversion of our railcar backlog into revenues;
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compliance with covenants contained in our unsecured senior notes;
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the impact and anticipated benefits of any acquisitions we may complete;
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the impact and costs and expenses of any litigation we may be subject to now or in the future; and
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the ongoing benefits and risks related to our relationship with Mr. Carl Icahn (the chairman of our
board of directors and, through Icahn Enterprises L.P. (IELP), our principal beneficial stockholder)
and certain of his affiliates.
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30
In some cases, you can identify forward-looking statements by terms such as may, will,
should, could, would, expects, plans, anticipates, believes, estimates, projects,
predicts, potential and similar expressions intended to identify 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 place undue
reliance on these forward-looking statements. Forward-looking statements represent our estimates
and assumptions only as of the date of this report. 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 report, 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 and under Risk Factors in our Annual Report on Form 10-K filed on March 12, 2010
(the Annual Report) and in Part II Item 1A of this report, as well as the risks and uncertainties
discussed elsewhere in the Annual Report and in this report. We qualify all of our forward-looking
statements by these cautionary statements. We caution you that these risks are not exhaustive. We
operate in a continually changing business environment and new risks emerge from time to time.
OVERVIEW
We are a leading North American designer and manufacturer of hopper and tank railcars. We also
repair and refurbish railcars, provide fleet management services and design and manufacture certain
railcar and industrial components. 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
consist of railcar manufacturing as well as railcar and industrial component manufacturing. Railcar
services consist of railcar repair and refurbishment services and fleet management services.
The North American railcar market has been, and we expect it to continue to be highly cyclical. The
recent economic downturn and restricted credit markets continue to have an adverse effect on the
railcar manufacturing market in which we compete, resulting in substantially reduced orders in the
marketplace, increased competition and significant pricing pressures. This downturn has adversely
affected the sales of our railcars and other products and has caused us to slow our production
rates significantly in the first nine months of 2010 as compared to the first nine months of 2009,
resulting in a significant decrease in comparable shipments and revenues. For the three and nine
months ended September 30, 2010 we reported net losses.
Thus far in 2010, railcar loadings have increased and the number of railcars in storage is slowly
decreasing, as reported by an independent third party industry analyst. Along with this modest
improvement, which may or may not continue, we have received an increased number of requests for
quotations and have been successful in securing several railcar orders in 2010. We believe these
improvements appear to indicate the railcar market is continuing to modestly improve, although we
cannot assure it will continue to do so.
Our railcar services segment has experienced growth primarily through expansion projects and
railcar repair projects completed at our railcar manufacturing facilities, which have generated
higher volumes. These higher volumes along with our seasoned workforce have generated additional
efficiencies in completing repair projects. We plan to continue to use available capacity at these
facilities for certain repair projects in 2010.
31
RESULTS OF OPERATIONS
Three Months ended September 30, 2010 compared to Three Months ended September 30, 2009
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.
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For the Three Months Ended,
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September 30,
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2010
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2009
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Revenues:
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Manufacturing Operations
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74.7
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%
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79.4
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%
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Railcar services
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25.3
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%
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20.6
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%
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Total revenues
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100.0
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%
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100.0
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%
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Cost of revenue:
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Cost of manufacturing operations
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(76.2
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%)
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(72.1
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%)
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Cost of railcar services
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(20.3
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%)
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(16.6
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%)
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Total cost of revenues
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(96.5
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%)
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(88.7
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%)
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Gross profit
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3.5
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%
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|
11.3
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%
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Selling, administrative and other
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(9.6
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%)
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(8.3
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%)
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(Loss) earnings from operations
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(6.1
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%)
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3.0
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%
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Interest income
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1.7
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%
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2.4
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%
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Interest expense
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(8.2
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%)
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(6.8
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%)
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Other income
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0.0
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%
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|
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4.0
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%
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Loss from joint venture
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|
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(3.0
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%)
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(2.8
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%)
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Loss before income tax expense
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(15.6
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%)
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(0.2
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%)
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Income tax benefit
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6.0
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%
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|
|
1.6
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%
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|
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|
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|
Net (loss) earnings
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(9.6
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%)
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1.4
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%
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|
|
|
|
|
|
|
Revenues
Our revenues for the three months ended September 30, 2010 decreased 17.0% to $64.8 million from
$78.1 million in the three months ended September 30, 2009. This decrease was primarily due to
decreased revenues from our manufacturing operations.
Our manufacturing operations revenues for the three months ended September 30, 2010 decreased 22.0%
to $48.4 million from $62.0 million for the three months ended September 30, 2009. The primary
reasons for the decrease in revenues were a decrease in railcar shipments and a change in product
mix. During the three months ended September 30, 2010, we shipped approximately 420 railcars
compared to approximately 610 railcars in the same period of 2009.
For the three months ended September 30, 2010, our manufacturing operations included $19.3 million,
or 29.7%, of our total consolidated revenues, from transactions with affiliates, compared to $8.0
million, or 10.3% of our total consolidated revenues in the three months ended September 30, 2009.
These revenues were attributable to sales to companies controlled by Mr. Carl Icahn.
Our railcar services revenues in the three months ended September 30, 2010 increased to $16.4
million compared to $16.1 million for the three months ended September 30, 2009. The increase was
primarily attributable to the utilization of our railcar manufacturing facilities for railcar
repair projects. For the third quarter of 2010, our railcar services revenues included $4.3
million, or 6.6% of our total consolidated revenues, from transactions with affiliates, compared to
$3.6 million, or 4.6% of our total consolidated revenues, from transactions with affiliates, in
the third quarter of 2009. These revenues were attributable to sales to companies controlled by Mr.
Carl Icahn.
Gross Profit
Our gross profit decreased to $2.3 million in the three months ended September 30, 2010 from $8.8
million in the three months ended September 30, 2009. Our gross profit margin decreased to 3.5% in
the third quarter of 2010 from 11.3% in the third quarter of 2009, driven primarily by a decrease
in our gross profit margins from our manufacturing operations.
32
Gross profit from our manufacturing operations decreased to a loss of $1.0 million for the three
months ended September 30, 2010 compared to gross profit of $5.7 million for the three months ended
September 30, 2009. Gross profit margin, for our manufacturing operations, decreased to a loss of
2.0% for the three months ended September 30, 2010 compared to a profit of 9.2% for the three
months ended September 30, 2009. These decreases are primarily attributable to lower shipments,
competitive pricing pressures and the impact of fixed costs in a low production environment.
Gross profit for our railcar services operations increased to $3.3 million for the three months
ended September 30, 2010 compared to $3.1 million for the three months ended September 30, 2009
primarily due to an increase in revenue driven by increased volume and efficiencies. Gross profit
margin for our railcar services operations increased to 19.8% in the three months ended September
30, 2010 from 19.4% in the three months ended September 30, 2009. The increase is primarily
attributable to efficiencies created by increased volume due to completed expansion projects and
repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses decreased to $6.2 million for the third
quarter of 2010, compared to $6.5 million for the third quarter of 2009. The decrease of
$0.3 million was primarily attributable to a decrease in incentive compensation and outside
services of $0.9 million, partially offset by a $0.6 million increase in stock-based compensation
expense, due to an increase in our stock price.
During the three months ended September 30, 2010, we recognized expense related to stock-based
compensation of $1.1 million, attributable to stock appreciation rights (SARs), as compared to $0.5
million for the three months ended September 30, 2009. Stock-based compensation increased due to
higher stock prices during the three months ended September 30, 2010 as compared to the same period
of 2009.
Interest Expense and Income
Net interest expense for the three months ended September 30, 2010 was $4.3 million, representing
$5.3 million of interest expense and $1.0 million of interest income, compared to $3.4 million of
net interest expense for the three months ended September 30, 2009, representing $5.3 million of
interest expense and $1.9 million of interest income.
Interest expense remained consistent in the third quarter of 2010 as compared to the same period of
2009.
During the third quarter of 2009, we held corporate bonds that generated a high yield of interest
income. The corporate bonds were sold during August, September and December of 2009 and the
proceeds were reinvested into funds with a lower rate of return. The decrease in interest income
was partially offset by a full quarter of interest income from a loan to Axis LLC (Axis) that
originated during the third quarter of 2009. As such, interest income decreased to $1.0 million in
the third quarter of 2010 as compared to $1.9 million for the same period of 2009.
Other Income
Other income of less than $0.1 million recognized in the third quarter of 2010 related to the
unused line fee on the revolving loan to Axis. Other income of $3.1 million recognized in the
third quarter of 2009 related to realized gains on the sale of a portion of our investment in
corporate bonds.
Loss from Joint Ventures
Our joint venture losses decreased to $1.9 million for the three months ended September 30, 2010
compared to a loss of $2.2 million for the three months ended September 30, 2009. This was
primarily attributable to our share of Axiss losses decreasing $0.4 million for the three months
ended September 30, 2010 as compared to the three months ended September 30, 2009 due to an
increase in shipments. We also experienced a decrease in our share of Ohio Castings Company, LLCs
(Ohio Castings) losses of $0.1 million for the three months ended September 30, 2010 as compared to
the three months ended September 30, 2009, which included one-time expenses related to the plant
idling. Partially offsetting these decreases were losses of $0.2 million related to our share of
Amtek Railcar Industries Private Limiteds (Amtek Railcar) and US Railcar Company LLCs (USRC)
losses for the three months ended September 30, 2010.
33
Income Taxes Benefit (Expense)
Our income tax benefit for the three months ended September 30, 2010 was $3.9 million or 38.4% of
our losses before income taxes, as compared to income tax benefit of $1.2 million for the three
months ended September 30, 2009, due to a one-time $1.0 million adjustment to accrued taxes due to
certain tax benefits becoming recognizable during the third quarter of 2009.
Nine Months ended September 30, 2010 compared to Nine Months ended September 30, 2009
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.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended,
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Manufacturing Operations
|
|
|
71.4
|
%
|
|
|
87.3
|
%
|
Railcar services
|
|
|
28.6
|
%
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations
|
|
|
(73.8
|
%)
|
|
|
(78.7
|
%)
|
Cost of railcar services
|
|
|
(22.9
|
%)
|
|
|
(10.3
|
%)
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
(96.7
|
%)
|
|
|
(89.0
|
%)
|
Gross profit
|
|
|
3.3
|
%
|
|
|
11.0
|
%
|
Selling, administrative and other
|
|
|
(10.1
|
%)
|
|
|
(5.5
|
%)
|
|
|
|
|
|
|
|
(Loss) earnings from operations
|
|
|
(6.8
|
%)
|
|
|
5.5
|
%
|
Interest income
|
|
|
1.5
|
%
|
|
|
1.4
|
%
|
Interest expense
|
|
|
(9.0
|
%)
|
|
|
(4.5
|
%)
|
Other income
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
Loss from joint venture
|
|
|
(3.3
|
%)
|
|
|
(1.5
|
%)
|
|
|
|
|
|
|
|
(Loss) earnings before income tax expense
|
|
|
(17.4
|
%)
|
|
|
1.8
|
%
|
Income tax benefit (expense)
|
|
|
6.7
|
%
|
|
|
(0.4
|
%)
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(10.7
|
%)
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
Revenues
Our revenues for the nine months ended September 30, 2010 decreased 48.3% to $178.3 million from
$345.0 million in the nine months ended September 30, 2009. This decrease was primarily due to
decreased revenues from our manufacturing operations, partially offset by increased revenues from
our railcar services segment.
Our manufacturing operations revenues for the nine months ended September 30, 2010 decreased 57.8%
to $127.3
million from $301.3 million for the nine months ended September 30, 2009. The primary reasons for
the decrease in revenues were a decrease in railcar shipments, an overall decrease in average
selling prices due to competitive pricing pressures and a change in product mix. During the nine
months ended September 30, 2010, we shipped approximately 1,130 railcars compared to approximately
3,080 railcars in the same period of 2009. None of our railcar shipments in 2010 related to our
railcar manufacturing agreement with ACF Industries, LLC (ACF), as compared to approximately 220
railcar shipments in 2009. Our agreement with ACF terminated effective in March 2009, as described
in Note 19 to our condensed consolidated financial statements.
34
For the nine months ended September 30, 2010, our manufacturing operations included $65.4 million,
or 36.7%, of our total consolidated revenues, from transactions with affiliates, compared to $93.8
million, or 27.2% of our total consolidated revenues in the nine months ended September 30, 2009.
These revenues were attributable to sales to companies controlled by Mr. Carl Icahn.
Our railcar services revenues in the nine months ended September 30, 2010 increased to $51.0
million compared to $43.6 million for the nine months ended September 30, 2009. The increase was
primarily attributable to higher volumes, due to the completion of expansion projects at repair
facilities and the utilization of our railcar manufacturing facilities for railcar repair projects.
For the nine months ended September 30, 2010, our railcar services revenues included $10.3 million,
or 5.8% of our total consolidated revenues, from transactions with affiliates, compared to $11.5
million, or 3.3% of our total consolidated revenues, from transactions with affiliates, for the
same period of 2009. These revenues were attributable to sales to companies controlled by Mr. Carl
Icahn.
Gross Profit
Our gross profit decreased to $5.8 million in the nine months ended September 30, 2010 from $38.0
million in the nine months ended September 30, 2009. Our gross profit margin decreased to 3.3% in
the nine months ended September 30, 2010 from 11.0% for the same period in 2009, driven primarily
by a decrease in our gross profit margins from our manufacturing operations.
Gross profit from our manufacturing operations decreased to a $4.4 million gross loss for the nine
months ended September 30, 2010 compared to gross profit of $29.8 million for the nine months ended
September 30, 2009. Gross profit margin, for our manufacturing operations, decreased to a loss of
3.4% for the nine months ended September 30, 2010 compared to a profit of 9.9% for the nine months
ended September 30, 2009. These decreases are primarily attributable to lower shipments, lower
selling prices and the impact of fixed costs in a low production environment.
Gross profit for our railcar services operations increased to $10.2 million for the nine months
ended September 30, 2010 compared to $8.2 million for the nine months ended September 30, 2009
primarily due to an increase in revenue driven by increased volume and efficiencies. Gross profit
margin for our railcar services operations increased to 20.0% in the nine months ended September
30, 2010 from 18.8% in the nine months ended September 30, 2009. The increase is primarily
attributable to efficiencies created by increased volume due to completed expansion projects and
repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses decreased to $17.9 million for the nine months
ended September 30, 2010, compared to $19.2 million for the nine months ended September 30, 2009.
The decrease of $1.3 million was primarily attributable to a decrease in incentive compensation and
outside services of $2.4 million along with a non-recurring legal settlement recorded in the first
quarter of 2009 all partially offset by a stock-based compensation expense increase of
$1.1 million, as described below.
During the nine months ended September 30, 2010, we recognized expense related to stock-based
compensation of $1.8 million, attributable to SARs, as compared to $0.7 million for the nine months
ended September 30, 2009. Stock-based compensation increased due to higher stock prices during the
nine months ended September 30, 2010 as compared to the same period of 2009.
Interest Expense and Income
Net interest expense for the nine months ended September 30, 2010 was $13.4 million, representing
$16.0 million of interest expense and $2.6 million of interest income, compared to $10.7 million of
net interest expense for the nine months ended September 30, 2009, representing $15.6 million of
interest expense and $4.9 million of interest income.
Interest expense increased due to less interest being capitalized in the nine months ended
September 30, 2010 as compared to the same period of 2009.
During the nine months ended September 30, 2009, we held corporate bonds that generated a high
yield of interest income. The corporate bonds were sold during August, September and December of
2009 and the proceeds were reinvested into funds with a lower rate of return. The decrease was
partially offset by a full quarter of interest income from a loan to Axis originated during the
third quarter of 2009. As such, interest income decreased to $2.6 million for the nine months ended
September 30, 2010 as compared to $4.9 million for the same period of 2009.
35
Other Income
Other income of $0.4 million was recognized in the nine months ended September 30, 2010 related to
realized gains on the sale of a portion of our investment in GBX common stock. Other income of
$3.0 million was recognized in the nine months ended September 30, 2009 related to the realized
gains on the sale of a portion of our investment in corporate bonds partially offset by realized
losses on a foreign currency option.
Loss from Joint Ventures
Our joint venture losses increased to $6.0 million for the nine months ended September 30, 2010
compared to $5.0 million for the nine months ended September 30, 2009. This was primarily
attributable to our share of Axiss losses increasing $1.4 million for the nine months ended
September 30, 2010 as compared to the nine months ended September 30, 2009 primarily due to
production not starting until July 2009. We also recorded a loss of $0.4 million related to our
share of Amtek Railcars and USRCs losses for the nine months ended September 30, 2010. These
increases were partially offset by our share of joint venture losses from Ohio Castings Company,
LLC decreasing $0.8 million for the nine months ended September 30, 2010 as compared to losses for
the nine months ended September 30, 2009, which included one-time expenses related to the plant
idling.
Income Taxes Benefit (Expense)
Our income tax benefit for the nine months ended September 30, 2010 was $12.0 million or 38.5% of
our losses before income taxes, as compared to income tax expense of $1.2 million for the nine
months ended September 30, 2009, or 20.1% of our earnings before income taxes, due to a one-time
$1.0 million adjustment to accrued taxes due to certain tax benefits becoming recognizable during
the third quarter of 2009.
BACKLOG
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. As of September 30, 2010,
our total backlog was approximately 1,420 railcars valued at $105.2 million. As of December 31,
2009, our total backlog was approximately 550 railcars valued at $49.5 million. We estimate that
58.0% of our September 30, 2010, backlog will be converted to revenues by the end of 2010. As of
September 30, 2010, $14.9 million of the railcars in our backlog are to be sold to our affiliate,
American Railcar Leasing LLC (ARL). Customer orders may be subject to requests for delays in
deliveries, inspection rights and other customary industry terms and conditions, which could
prevent or delay backlog from being converted into revenues. 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 delivery dates could be extended on certain orders, 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.
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
reflects known price adjustments for material cost changes but does not reflect a projection of any
future material price adjustments that are provided for in certain customer contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the nine months ended September 30, 2010 and for the
foreseeable future is cash on hand from the unsecured senior notes we sold in February 2007,
partially offset by cash used for operations, capital expenditures and investments in and loans to
our joint ventures. As of September 30, 2010, we had working capital of $351.4 million, including
$310.6 million of cash and cash equivalents.
36
In February 2007, we issued $275.0 million of unsecured senior notes that are due in 2014 (Notes).
The offering resulted in net proceeds to us of $270.7 million. The terms of the Notes contain
restrictive covenants that limit our ability to, among other things, incur additional debt, make
certain restricted payments and enter into certain significant transactions with stockholders and
affiliates. As of September 30, 2010, based on our fixed charge coverage ratio, as defined and as
measured on a rolling four-quarter basis, certain of these covenants, including our ability to
incur additional debt, have become further restricted. We were in compliance with all of our
covenants under the Notes as of September 30, 2010.
During the nine months ended September 30, 2010, we contributed $0.6 million to Ohio Castings, $0.5
million to Axis, $9.8 million to Amtek Railcar Industries Private Limited and $0.3 million to US
Railcar Company LLC. We also advanced $0.4 million to Axis through their revolving line of credit
during the nine months ended September 30, 2010. We anticipate additional capital contributions to
certain of these joint ventures in the fourth quarter of 2010.
We anticipate that any future expansion of our business will be financed through existing cash
resources. We believe that these sources of funds will provide sufficient liquidity to meet our
expected operating requirements over the next twelve months. We expect our future cash flows from
operations to be impacted by pricing pressures, the number of railcar orders, railcar shipments and
production rates along with the state of the credit markets and the overall economy.
Our long-term liquidity is contingent upon future operating performance. We may require additional
capital in the future for significant capital investments, acquisitions or other significant
transactions. These capital requirements could be substantial. Certain risks, trends and
uncertainties may adversely affect our long-term liquidity.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the nine months ended September 30:
|
|
|
|
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Net cash used in:
|
|
|
|
|
Operating activities
|
|
$
|
(21,837
|
)
|
Investing activities
|
|
|
(14,866
|
)
|
Financing activities
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
$
|
(36,702
|
)
|
|
|
|
|
Net Cash Used In Operating Activities
Our net cash used in operating activities for the nine months ended September 30, 2010 was $21.8
million. Our net loss of $19.2 million was impacted by non-cash items including but not limited to:
depreciation expense of $17.8 million, joint venture losses of $6.0 million, stock based
compensation expense of $2.4 million, deferred income
taxes of $12.3 million and other smaller adjustments. Cash used in operating activities
attributable to changes in our current assets and liabilities included an increase in total
accounts receivable, including from affiliates of $12.3 million, an increase in inventory of $18.0
million and a decrease in accrued expenses and taxes of $4.4 million. Cash provided by operating
activities attributable to changes in our current assets and current liabilities included an
overall increase in total accounts payable, including to affiliates of $15.3 million.
The increase in total accounts receivable, including from affiliates was primarily due to the
timing of railcar shipments during the nine months ended September 30, 2010. The increase in
inventory was primarily attributable to increased raw material purchases in response to increased
order activity. The increase in total accounts payable, including to affiliates related to
increased inventory purchases. Accrued expenses and taxes decreased primarily due to cost control
measures.
37
Net Cash Used In Investing Activities
Net cash used in investing activities was $14.9 million for the nine months ended September 30,
2010, including $4.9 million of capital expenditures for the purchase of property, plant and
equipment and $14.3 million related to capital contributions and loans to our joint ventures. Net
cash provided by investing activities included the sale of short-term investments for $4.2 million.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to change our level of capital investments in the
future. These investments are all based on an analysis of the estimated rates of return and impact
on our profitability. We continue to pursue opportunities to reduce our costs through continued
vertical integration of component parts. From time to time, we may expand our business,
domestically or abroad, by acquiring other businesses or pursuing other strategic growth
opportunities including, without limitation, joint ventures.
Capital expenditures for the nine months ended September 30, 2010 were $4.9 million and our current
capital expenditure plans for 2010 include projects that maintain equipment, improve efficiencies
and reduce costs. These projects may also include expenditures to further integrate our supply
chain. We cannot assure that we will be able to complete any of our projects on a timely basis or
within budget, if at all.
Dividends
During each quarter from our initial public offering in January 2006 until the second quarter of
2009, our board of directors declared cash dividends of $0.03 per share of our common stock. The
last dividend was declared in May 2009 and paid in July 2009. In the third quarter of 2009, we
indefinitely suspended the quarterly dividend.
Contingencies and Contractual Obligations
Refer to the updated status of contingencies in Note 14 to the condensed consolidated financial
statements. Except for normal operating changes, our contingencies and contractual obligations did
not materially change from the information disclosed in our Annual Report, except as noted below:
We were named the defendant in a wrongful death lawsuit,
Nicole Lerma v. American Railcar
Industries, Inc.,
filed on August 17, 2007 in the Circuit Court of Greene County, Arkansas Civil
Division
.
The court reached a verdict in our favor on May 24, 2010. The plaintiff did not appeal
the decision.
On October 29, 2010, we entered into a lease agreement with a term of eleven years and total base
rent of $6.4 million, over the term of the agreement, with an entity owned by the vice chairman of
our board of directors. The lease is for our headquarters location in St. Charles, Missouri, that
is currently leased through ARL under our services agreement with ARL, which expires December 31,
2010. The term under the new lease agreement commences at the time the Companys current lease
under the services agreement with ARL expires.
38
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements
that we believe affect our more significant judgments and estimates used in the preparation of our
condensed consolidated financial statements presented in this report are described in Managements
Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the
Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009.
Effective January 1, 2010, we adopted authoritative guidance that requires an on-going assessment
to determine the primary beneficiary of a variable interest entity and disclosure requirements. As
of September 30, 2010, we evaluated our joint ventures; Ohio Castings, Axis, Amtek Railcar and
USRC. We specifically evaluated our financial interest in each joint venture, our ability to
individually direct the activities of each joint venture and the factors that most significantly
impact each joint ventures economic performance. We concluded that we do not have a controlling
financial interest, the ability to individually direct the activities or have a significant impact
on economic performance for any of our joint ventures. We will update this analysis on a quarterly
basis.
We perform an annual goodwill impairment test as of March 1 of each year utilizing the market and
income approaches and significant assumptions discussed in Note 8 to our condensed consolidated
interim financial statements. We performed this annual impairment test as of March 1, 2010, noting
no adjustment was required. See Note 8 to our condensed consolidated interim financial statements.
We review long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the long-lived assets may not be recoverable. During the nine months
ended September 30, 2010, no triggering events have occurred.
The North American railcar market has been, and we expect it to continue to be highly cyclical,
generally fluctuating in correlation with the U.S. economy. While the economy and the railcar
market remained weak throughout 2010, we believe that this downturn is temporary, reflecting the
cyclical nature of the industry, and that railcar orders will recover in the future. Independent
third party industry analysts are also forecasting the railcar market to recover as the economy
improves. As a result, at this time, we do not believe that the decline in our shipments and
revenues, which we view as temporary, warrants an impairment analysis of our long-lived assets.
However, we intend to continue to monitor our long-lived assets for impairment in response to
events or changes in circumstances.
Other than as discussed above, there have been no material changes to the critical accounting
policies or estimates during the nine months ended September 30, 2010.
|
|
|
ITEM 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
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 represents approximately 80.0% to 85.0% of our direct manufacturing costs. Given the
significant volatility in the price of raw materials, this exposure can affect our costs of
production and gross profit margin. We believe that we currently have excellent supplier
relationships and do not currently anticipate that material constraints will limit our production
capacity. Such constraints may exist if railcar production was to increase beyond current levels or
other economic changes were to occur that affect the availability of our raw materials.
We have sold all available-for-sale investments that were held at December 31, 2009.
39
|
|
|
ITEM 4.
|
|
CONTROLS AND PROCEDURES
|
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, our management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules and forms.
There has been no change in our internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
|
|
|
ITEM 1.
|
|
LEGAL PROCEEDINGS
|
None
For a discussion of our potential risks and uncertainties, see the information in Part I, Item 1A.
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and the
information in Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2010, both filed with the SEC, and which are accessible on the Securities
and Exchange Commissions website at www.sec.gov. There have been no material changes to the risk
factors disclosed in the Annual Report on Form 10-K, as supplemented by the risk factors set forth
in the Quarterly Report on Form 10-Q.
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
On October 29, 2010, American Railcar Industries, Inc. (ARI or the Company) entered into a lease
agreement with a term of eleven years and total base rent of $6.4 million, over the term of the
agreement, with an entity owned by the vice chairman of our board of directors. The lease is for
ARIs headquarters location in St. Charles, Missouri, that is currently leased through ARL, under
our services agreement with ARL, which expires December 31, 2010. The term under the new lease
agreement commences at the time the Companys current lease under the services agreement with ARL
expires. This description of the lease agreement is a summary only and is qualified in its entirety
by the lease agreement, a copy of which is attached hereto as Exhibit 10.63 and incorporated herein
by reference.
40
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
|
|
|
10.63
|
|
|
Lease Agreement, dated as of October 29, 2010. *
|
|
|
|
|
|
|
31.1
|
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
|
|
|
|
|
|
|
31.2
|
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
|
|
|
|
|
|
|
32
|
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
*
|
|
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
|
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
AMERICAN RAILCAR INDUSTRIES, INC.
|
|
Date: November 2, 2010
|
By:
|
/s/ James Cowan
|
|
|
|
James Cowan,
President and Chief Executive Officer
|
|
|
|
|
|
|
|
By:
|
/s/ Dale C. Davies
|
|
|
|
Dale C. Davies,
Senior Vice President, Chief
|
|
|
|
Financial Officer and Treasurer
|
|
42
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
|
|
|
10.63
|
|
|
Lease
Agreement, dated as of October 29, 2010. *
|
|
|
|
|
|
|
31.1
|
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
|
|
|
|
|
|
|
31.2
|
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
|
|
|
|
|
|
|
32
|
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
*
|
|
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
|
43
Exhibit 10.63
CONFIDENTIAL TREATMENT REQUESTED:
Certain portions of this document have been omitted pursuant to a
request for confidential treatment and, where applicable, have been marked with an asterisk
([*****]) to denote where omissions have been made. The confidential material has been filed
separately with the Securities and Exchange Commission.
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the 29
th
day of October, 2010 by and
between ST. CHARLES PROPERTIES LLC, a Missouri limited liability company, with a mailing address of
625 North Main Center, St. Charles, Missouri 63301 (Landlord), and AMERICAN RAILCAR INDUSTRIES,
INC., a North Dakota corporation (Tenant).
1. PREMISES. Tenant accepts from Landlord, the premises containing [*****] square feet located on
the first, second and third floors outlined on the floor plan attached hereto as Exhibit A,
attached hereto and incorporated herein by this reference (the Premises) in the building located
at 100 Clark Street, St. Charles, Missouri 63301 (the Building) (said Building, together with the
improvements thereon and the parking areas exclusively serving Tenant being called the Property),
for the term, the rent, and subject to the conditions and covenants hereinafter provided. At any
time during the term and provided that vacant space is available in the Building and is not
otherwise subject to anothers rights, Tenant may expand the Premises into such vacant space upon
the same terms and conditions hereunder. Landlord and Tenant agree to enter into an amendment to
this Lease to memorialize any such expansion.
2. TERM; RENEWAL.
(a) The term of this Lease shall commence on January 1, 2011 (the Commencement Date) and
shall end on the date that is eleven (11) years after the Commencement Date unless sooner
terminated as provided herein, to be occupied and used by Tenant for general office use and all
other ancillary uses in connection therewith.
3. RENT.
(a) Tenant shall pay to Landlord the following as Base Rent:
|
|
|
|
|
|
|
|
|
Calendar
|
|
|
|
|
|
Monthly Installments of
|
|
Year
|
|
Annual Rent
|
|
|
Rent
|
|
2011
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2012
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2013
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2014
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2015
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2016
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2017
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2018
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2019
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2020
|
|
|
[*****]
|
|
|
|
[*****]
|
|
2021
|
|
|
[*****]
|
|
|
|
[*****]
|
|
1
If, beginning in the 2011 tax year, the city of Saint Charles does not grant a reduction of
personal property taxes of $[*****], as estimated by the Landlord, over the term of the lease to
Tenant and American Railcar Leasing, LLC, the Base Rent will be reduced consistent with Landlords
estimate of tax benefits over the term of the Lease.
Such Base Rent shall be payable to Landlord in advance promptly on the first day of every calendar
month of the term, and pro rata, in advance, for any partial month at the address first written
above or as directed from time to time upon Landlords notice. Interest at the per annum rate of
ten percent (10%) will be charged by Landlord retroactively to the first day of the month for any
Rent not paid by Tenant on or before the tenth (10
th
) day of any calendar month.
(b) It is understood that the Base Rent does not anticipate any increase in the amount of
taxes on the Property or in the cost of operations and maintenance thereof. Therefore, in order
that the rental payable throughout the term of the Lease shall reflect any such increase, the
parties agree that Tenant shall pay Tenants Share of Excess Taxes and Operating Expenses (defined
below) as hereinafter in this Section set forth. The annual Base Rent, and all other sums due
hereunder shall hereinafter be referred to as the Rent.
(i)
Definitions
.
Tenants Share:
The amount of Tenants pro rata share of the Excess Taxes and
Operating Expenses as hereinafter defined. Tenants Share is agreed to be [*****]% of such
increase, calculated as the ratio of the square footage of the Premises [*****] to the total
square footage of the Building 60,131.
Base Year:
The Base Year for Operating Expenses shall be the average of the Operating
Expenses for 2011 and 2012. Notwithstanding the foregoing, the Base Year expenses for the
[*****]% allocated to Tenant shall be:
|
|
|
|
|
Taxes
|
|
|
[*****]
|
|
|
|
|
|
|
Utility Costs (being electric, gas, water, sewer, trash, and paper
recycling)
|
|
|
[*****]
|
|
|
|
|
|
|
Janitorial Costs (being janitorial services, supplies, porter,
carpet cleaning and floor mats)
|
|
|
[*****]
|
|
|
|
|
|
|
Insurance Costs
|
|
|
[*****]
|
|
|
|
|
|
|
On-Site Maintenance Personnel (being staff providing maintenance
services to the Premises)
|
|
|
[*****]
|
|
Excess Taxes and Operating Expenses:
The amount, if any, by which Taxes and Operating
Expenses for each calendar year during the term of this Lease exceed Taxes and Operating
Expenses for the Base Year.
2
Taxes:
The total of: (i) All real estate taxes, payable (adjusted after protest or
litigation, if any) for any part of the term of this Lease, exclusive of penalties, on the
Building only, and (ii) any special assessments against the Building (except any payable in
whole or in part during the
calendar year 2011) which, for purposes of this Lease shall be deemed payable in equal
annual installments whether or not actually so payable. In no event shall any increases in
the real estate taxes attributable to improvements made to other parts of the tax parcel in
which the Building is located, be included in Taxes. Tenant shall have the right to contest
the Taxes during the term and Landlord agrees to cooperate with Tenants efforts in doing
so. Any savings shall be for the benefit of the tenants of the Building.
Operating Expenses:
Those expenses (including the premiums for the insurance required
to be carried by Landlord hereunder, except insurance against the loss of rents
(collectively, Insurance Costs)) incurred or paid on behalf of Landlord in respect of the
operation and maintenance of the Building which, in accordance with accepted principles of
sound accounting practice used by Landlord, as applied to the operation and maintenance of
first class office buildings, are properly chargeable to the operation and maintenance of
the Property.
Operating Expenses shall not include the following: (i) costs of alterations of tenant
spaces (including all tenant improvements to such spaces), including but not limited to,
costs of governmental permits; (ii) costs of repairs, replacements or improvements that
would be classified as capital items in accordance with generally accepted accounting
principles; (iii) depreciation, amortization, interest and principal payments on mortgages,
and other debt, financing or refinancing costs, if any; (iv) real estate brokers leasing
commissions or compensation and advertising and other marketing expenses; (v) costs or other
services or work performed for the singular benefit of another tenant or occupant (other
than for Common Areas); (vi) legal, space planning, construction, and other expenses
incurred in procuring tenants for the Building or renewing or amending leases with existing
tenants or occupants of the Building; (vii) costs of advertising and public relations and
promotional costs and attorneys fees associated with the sale and/or leasing of the
Building; (viii) any expense for which Landlord actually receives reimbursement from
insurance, condemnation awards, other tenants (other than through the payment of additional
rent under such tenants leases) or any other source; (ix) costs incurred in connection with
the sale, financing, refinancing, mortgaging, or other change of ownership of the Building;
(x) rental under any ground or underlying lease or leases; and (xi) Taxes. In addition,
Operating Expenses shall exclude the following:
(1) legal fees in connection with leasing, tenant disputes or enforcement of leases;
(2) any reserves, sinking funds or similar items, or any bad debt loss, rent loss or reserves
for bad debts or rent loss;
(3) the cost of repairs or maintenance which are covered by warranties, guarantees or service
contracts;
(4) any legal and auditing fees;
(5) the wages of any employee who does not devote substantially all of his or her time to the
Property other than the On-Site Maintenance Personnel;
(6) fines, penalties and interest;
(7) costs for performing any work or furnishing services, including electric current, to or
for any tenant, which is materially in excess of the work or services provided generally to tenants
of the Building without additional charge;
3
(8) administrative and management fees, as well as executive salaries above the grade of
property manager, brokers and Landlords home office overhead;
(9) costs of (a) any works of art, or (b) additions to the Building or the other improvements
subsequent to the date of original construction, or (c) correcting defects in or inadequacy of
design or construction of the Building or the other improvements, or (d) initial painting or
decorating of any part of the Building or the other improvements;
(10) the cost of any repairs, alterations, additions, changes, replacements and other items
which are pursuant to or as a result of condemnation;
(11) any expenditures for any portion of the Property that is under construction or renovation
that has not been completed on the date of this Lease;
(12) fees and expenses paid to affiliates of Landlord or any entity controlled by a person
related to Landlord in excess of commercially reasonable and customary amounts;
(13) dues to professional and lobbying organizations;
(14) expenses (e.g., costs of any judgment, settlement or arbitration award) relating to or
resulting from the negligence or willful misconduct of Landlord, its agents or employees;
(15) costs associated with the operation of the business of the partnership, corporation or
owning entity, and the cost of defending any lawsuits;
(16) costs of repairs or replacements incurred by reason of fire or other casualty or
condemnation;
(17) any profits received by Landlord on account of computations where the aggregate of the
proportionate shares for all tenants in the Building equals a number greater than 100;
(18) costs for services, which costs are materially in excess of costs for services provided
for tenants in office buildings similar to the Building and located in the county in which the
Building is situated;
(19) any compensation paid to clerks, attendants or other persons in commercial concessions
operated by Landlord;
(20) the cost of installing, operating, maintaining, and insuring any specialty facility, such
as a luncheon club, athletic or recreational club;
(21) franchise taxes, income taxes, transfer taxes, gains taxes and similar costs incurred by
Landlord and any taxes other than as expressly included in the definition of Taxes;
(22) cost of electricity consumed in any area of the Building rented or available for rent to
the extent such costs would not have been included had such space been occupied by another tenant,
and costs that would duplicate costs theretofore included in Operating Expenses;
(23) arbitration expenses unrelated to the maintenance, operation and security of the Building
and any other arbitration expenses incurred in connection with leases of space in the
Building or with default or eviction proceedings against tenants or relating in any other way
to tenant disputes;
4
(24) unless caused solely by Tenant after the Commencement Date, costs relating to, or in
connection with, the removal containment, encapsulation, disposal, repair, monitoring, testing,
venting, clean-up, remediation, or compliance with laws pertaining to (i) asbestos; or (ii) any
hazardous, toxic or regulated substance or gas;
(25) any extraordinary item of Operating Expense arising or incurred during the Lease term,
and any political or charitable contributions;
(26) rentals and other related expenses incurred in leasing HVAC systems, elevators or other
equipment ordinarily considered to be capital items, except for (a) expenses in connection with
making minor repairs on or keeping Building systems in operation while minor repairs are being
made, and (b) costs of equipment not affixed to the Building that is used in providing janitorial,
snow removal, or similar services; and
(27) any costs or expenses related to any improvements, sidewalks, driveways, parking areas or
other facilities that serve in whole or in part properties or buildings other than the Building.
All Operating Expenses shall be net of all reimbursements, credits, rebates, abatements, incentives
or other payments of any nature received by Landlord on account thereof or with respect thereto,
including, but not limited to, all revenues derived from the operation of all Common Areas or
facilities.
Uncontrollable Costs:
Those expenses for Taxes, Insurance Costs, snow and ice removal, and
Utility Costs.
(ii) Commencing January 1, 2012 for Taxes, Insurance Costs, Janitorial Costs, On-Site
Maintenance Personnel, and Utility Costs (see definitions in Base Year above), and January 1,
2013 for all other Operating Expenses, and in each calendar year thereafter during the term of this
Lease, on or before the first day of each month, Tenant shall pay to Landlord a monthly installment
equal to one-twelfth of Tenants Share of Landlords estimate of the Excess Taxes and Operating
Expenses for such calendar year. If Landlords written statement of such estimated amounts is
furnished after the commencement of the calendar year, Tenant shall also make a retroactive
lump-sum payment to Landlord equal to the monthly payment amount multiplied by the number of months
during the calendar year for which such payment was paid (with a credit given for any lesser
estimated payment made by Tenant for such months). In no event shall the Operating Expenses for
any calendar year exceed 104% of the Operating Expenses paid by the Tenant for the previous
calendar year, excluding Uncontrollable Costs.
(iii) Within sixty (60) days after the close of each calendar year, Landlord shall deliver to
Tenant a written statement setting forth the actual Taxes and Operating Expenses and Tenants Share
of the Excess Taxes and Operating Expenses during such preceding calendar year. If such Excess
Taxes and Operating Expenses for any calendar year exceed the estimated Excess Taxes and Operating
Expenses paid by Tenant to Landlord pursuant to Subparagraph (ii) above for such calendar year,
Tenant shall pay the amount of such excess to Landlord (subject to the cap set forth in
Subparagraph (ii) above) within thirty (30) days after Tenants receipt of such statement. If such
statement shows the Excess Taxes and Operating Expenses to be less than the estimated Excess Taxes
and Operating Expenses paid by Tenant to Landlord pursuant to Subparagraph (ii) above, then the
amount of such overpayment shall be paid by Landlord to Tenant within thirty (30) days following
the date of such statement.
5
(iv) Provided that Tenant has given Landlord notice of its intent to inspect within ninety
(90) days after receipt of such statement, Tenants authorized employee or agent shall have the
right to inspect the books and records of Landlord for the purpose of verifying information in such
statement. Tenants authorized employee or agent shall be given reasonable access within ten (10)
days after receipt of Tenants notice (and thereafter as may be reasonably required by Tenant) to
Landlords books and records during Tenants business hours at Landlords office in the Building.
Landlord shall ensure that all of its records pertaining to the Taxes and Operating Expenses are
located in such office. Unless Tenant asserts specific error(s) within one year of its receipt of
such statement, as such period may be extended if Tenant is not provided with sufficient access to
Landlords books and records, such statement shall be deemed correct. If Tenants inspection
determines that Landlord overcharged Tenant by more than three percent (3%) of the actual Taxes and
Operating Expenses, Landlord agrees to pay for Tenants audit of Landlords books.
(v) No decrease in Taxes and/or Operating Expenses shall reduce Tenants Rent below the annual
Base Rent.
(vi) All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this
Lease shall be deemed additional rent and, in the event of non-payment thereof, Landlord shall have
all the rights and remedies herein provided for in case of non-payment of Rent.
4. USE OF PREMISES. Tenant agrees to comply with the following rules and regulations and with such
reasonable modifications thereof and additions thereto as Landlord may hereafter from time to time
make for the Building. Landlord shall not be responsible for the non-observance by any other tenant
of any of said rules and regulations:
(a) Tenant shall not exhibit, sell or offer for sale on the Premises or in the Building any
article or thing except those articles and things essentially connected with the stated use of the
Premises by Tenant without the advance consent of Landlord.
(b) Tenant will not make or permit to be made any use of the Premises or any part thereof
which (i) would violate any of the covenants, agreements, terms, provisions and conditions of this
Lease, (ii) directly or indirectly is forbidden by public law, ordinance or governmental
regulation, or (c) may be dangerous to life, limb, or property.
(c) Tenant, at Tenants cost, may install additional signage in, on and about the Premises and
the Building provided the same has been approved by all applicable governmental entities.
(d) All keys must be returned to Landlord at the expiration or termination of this Lease.
(e) Unless Landlord gives advance written consent, Tenant shall not install or operate any
steam or internal combustion engine, or boiler in or about the Premises, or carry on any mechanical
business therein, or use the Premises for housing accommodations or lodging or sleeping purposes,
or use any illumination other than electric light, or use or permit to be brought into the Building
any inflammable fluids such as gasoline, kerosene, naphtha, and benzine, or any explosives,
radioactive materials or other articles deemed extra hazardous to life, limb or property except in
a manner which would not violate any ordinance or regulation of the City of St. Charles, Missouri
(the City) or which would result in insurance companies of good standing refusing to insure the
Building. Tenant shall not use the Premises for any illegal or immoral purpose.
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(f) Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or
substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner
offensive
or objectionable to Landlord or other occupants of the building by reason of noise, odors
and/or vibrations, or materially interfere in any way with other tenants, nor shall any animals
(other than assistance animals) or birds be brought in or kept in or about the Premises or the
Building.
(g) Tenant shall see that the doors, and windows, if operable, of the Premises are closed and
securely locked before leaving the Building and must use reasonable caution to ensure that all
water faucets or water apparatus are entirely shut off before Tenant or Tenants employees leave
the Building.
5. SERVICES.
(a) Landlord shall provide, at Landlords expense, except as otherwise provided,
(i) All utilities necessary to operate the Premises (other than telephone and other
communications) for Tenants normal business operations.
(ii) Janitorial service daily (Saturdays, Sundays and holidays excepted); such janitorial
service shall include at a minimum vacuuming, dusting, and emptying trash within the Premises, as
well as in the areas of the Building and Property that are for the common use of all of the
Buildings occupants and invitees (the Common Areas), in accordance with
Exhibit B
attached hereto;
(iii) On-Site Maintenance Personnel, to manage and maintain the Premises, equivalent to 1.5
people to support leases with Tenant and American Railcar Leasing, LLC.
(iv) Heat and air-conditioning Monday through Friday from 6:00 a.m. to 6:00 p.m., Saturdays
from 8:00 a.m. to 1:00 p.m., (Sundays and holidays excepted) (collectively, Normal Business
Hours) sufficient to maintain comfortable temperature. Tenant shall have the ability to control
the temperature for after-hours HVAC, and agrees to reimburse Landlord for Landlords charges,
based upon the utility rate paid during the Base Year, for such service.
(v) Hot and cold water for drinking, lavatory and toilet purposes.
(vi) Operatorless passenger elevator service at all times.
(vii) Refuse and rubbish removal services.
(viii) Snow and ice removal from the sidewalks and parking areas designated for Tenants use
hereunder.
(ix) Security services into which the Buildings computerized fingerprint system (or such
other security system to be reasonably approved by Tenant) is tied.
(b) Landlord will provide the following amenities for Tenant and its employees: on-site
conference facility use (for $250 per month, cancellable by either party upon six (6) months
notice); discounted fees for the sports complex, if constructed; and meeting set-up and clean-up in
ARLs private railcar.
If Tenant requests any other utilities or building services in addition to and/or at time other
than as identified in this Section, then Landlord shall use reasonable efforts to attempt to
furnish Tenant with such additional utilities or building services. If the same are furnished,
Tenant agrees that Rent may be increased by an amount equal to Landlords actual costs for such
utilities or building services.
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Notwithstanding anything to the contrary in this Lease in the event of: (a) any utility or service
interruption (but not any interruption caused solely by a utility or service provider), or (b) any
repairs, replacements, alterations or improvements undertaken by Landlord which interfere with
Tenants parking, or access to and/or use and enjoyment of Premises, or (c) any failure by Landlord
to perform its lease obligations properly and in a timely fashion, or (d) any other condition
(other than casualty or condemnation) by which the Premises are rendered untenantable due to the
direct acts or omissions of Landlord (any of the foregoing, an Adverse Condition), then (i)
Landlord shall use commercially reasonable efforts to eliminate such Adverse Condition as soon as
practicable, and (ii) if and to the extent that any such Adverse Condition renders the Premises, or
any part thereof, to be untenantable or inaccessible and Tenant does not operate in the Premises
due solely to such untenantability or inaccessibility for two (2) consecutive days after notice to
Landlord, Tenants obligations to pay Rent shall equitably abate with respect to the Premises or
such part, for the balance of the period of untenantability or inaccessibility (it being agreed
that for purposes of this paragraph, untenantability or inaccessibility for less than four (4)
Normal Business Hours on any business day shall be disregarded, and untenantability or
inaccessibility for four (4) Normal Business Hours or more shall be regarded as untenantability or
inaccessibility for the entire business day).
6. PARKING.
(a) At all times during the term of this Lease, Landlord shall provide at least five (5%)
parking spaces for each 1,000 square feet of Premises for Tenants use. Tenant shall have
exclusive use (except for use by American Railcar Leasing, LLC) of: (i) the triangular parking lot
between North Main Street and Riverside Drive; (ii) the surface lot located between the Building
and the Foundry Arts Centre; and (iii) the Clark Street hillside parking lot. Landlord further
agrees that during the Term hereof, Tenant may use the surface lot located behind the Foundry Arts
Centre.
(b) Landlord shall designate five (5) parking spaces in the courtyard for Tenants exclusive
use and install signage therefor at Landlords expense. Tenant agrees to waive the use of such
spaces should Landlord construct indoor parking in a location reasonably acceptable to Tenant, and
designate five (5) parking spaces for Tenants exclusive use therein at no additional cost to
Tenant.
(c) Landlord shall designate twelve (12) parking spaces adjacent to the Building for Tenants
and American Railcar Leasings visitors and for handicapped access. Landlord agrees to maintain
the signage designating those spaces as being reserved for such users.
Landlord represents and warrants that the above-mentioned parking rights are binding upon and
enforceable against the current owners of the properties upon which the parking spaces are located,
and their successor and assigns.
7. CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights:
(a) To name the Building and to change the name or street address of the Building.
(b) To install and maintain a sign or signs on the exterior or interior of the Building.
(c) To designate all sources furnishing sign painting and lettering, ice, drinking water,
towels, toilet supplies, and like services used on the Premises.
(d) During the last ninety (90) days of the term, if during or prior to that time Tenant
vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for
reoccupancy, without affecting Tenants obligation to pay rental for the Premises.
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(e) To constantly have pass keys to the Premises.
(f) On reasonable prior notice to Tenant, to exhibit the Premises to prospective tenants
during the last one hundred eighty (180) days of the term, and to any prospective purchaser,
mortgagee, or assignee of any mortgage of the Property and to others having a legitimate interest
at any time during the term.
(g) At any time in the event of an emergency, otherwise at reasonable times, to take any and
all measures, including inspections, repairs, alterations, additions and improvements to the
Premises or to the Building, as may be necessary or desirable for the safety, protection or
preservation of the Premises or the Building or Landlords interests, or as may be necessary or
desirable in the operation or improvement of the Building or in order to comply with all laws,
orders and requirements of governmental or other authority.
8. REPAIRS.
(a) Tenant shall give to Landlord prompt written notice of any damage to, or defective
condition in any part or appurtenance of the Buildings plumbing, electrical, heating,
air-conditioning or other systems serving, located in, or passing through the Premises. Landlord,
at Landlords expense, shall keep the Premises, the Building, and the Property, including but not
limited to the elevators, electrical lines, plumbing, heating and air-conditioning equipment,
walls, doors, windows, roof, landscaping and parking areas in good order and repair, and in
compliance with all applicable laws and regulations. Landlord acknowledges and agrees that this
Lease is a full service lease and that all costs associated with repairs, replacements and
maintenance of the Premises and the Building shall be at Landlords cost.
(b) Landlord shall make commercially reasonable efforts to avoid unreasonably interfering with
Tenants business operations in the Premises at all times when performing repairs and maintenance
on the Premises and the Building.
9. ALTERATIONS. No structural alteration, addition, improvement, service or refinishing of or to
the Premises exceeding $10.00 per square foot shall be made by Tenant without the prior written
consent of Landlord, which shall not be unreasonably withheld, conditioned, or delayed. The work
described in the prior sentence, and all other work to the Premises by Tenant (collectively,
Alterations) shall be performed strictly in accordance with all applicable building codes and
governmental authority regulations and, where required, pursuant to validly issued permits required
for such work. All such Alterations, additions or improvements and any fixtures installed by
Tenant shall become the property of Landlord upon the expiration or sooner termination of this
Lease, provided that, unless Landlord provides otherwise in writing, prior to expiration or earlier
termination of this Lease Tenant shall remove: (1) all cabling installed by Tenant or on behalf of
Tenant in the Premises and Building; and (2) any items that were expressly identified by Landlord
for removal at or prior to the time of approval of their installation, and Tenant shall repair any
damage from removal. Tenant shall not permit any mechanics liens to be filed against the Building
or Property or land on which it is located or against Tenants leasehold interest in the Premises
by reason of work, labor, services or materials supplied or claimed to have been supplied to Tenant
or anyone holding the Premises through or under Tenant, whether prior or subsequent to the
commencement of the Term hereof. If any such mechanics lien shall at any time be filed it shall
constitute a default under the provisions of this Lease.
10. LANDLORD REPAIR OBLIGATIONS. Within three (3) months after the Commencement Date, Landlord
shall either (a) install insulation under the portion of the Premises commonly known as the barn
or (b) provide heat (at Landlords expense and as approved in Tenants sole discretion) as
necessary throughout the term of the Lease to raise the average temperature near the floor of the
barn to
the same temperature as the remainder of the Premises. Landlord shall make commercially reasonable
efforts to avoid unreasonably interfering with Tenants business operations in the Premises.
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11. ENVIRONMENTAL POLLUTANTS.
(a) Tenant agrees that no Environmental Pollutants (as hereinafter defined) other than
customary office supplies, maintenance supplies, construction supplies and cleaning supplies in
amounts customary for office use and construction and maintenance of office improvements, which are
stored and handled in accordance with all applicable Environmental Laws (as hereinafter defined),
will be generated, treated, stored, released or disposed of, or otherwise placed, deposited in or
located on the Property by Tenant, its agents, employees, invitees, contractors, or any subtenants.
Landlord and its agents and representatives are hereby granted a right of entry and access to the
Premises at any reasonable time on reasonable advance notice to Tenant for purposes of ascertaining
Tenants compliance with this Section. In exercising its rights hereunder, Landlord shall use its
reasonable efforts to minimize disruption of Tenants operations in the Premises.
(b) As used herein, Environmental Pollutants shall mean, without limitation, toxic or
hazardous substances or wastes, special wastes, universal wastes, pollutants or contaminants
(including, without limitation, asbestos, urea formaldehyde, the group of organic compounds known
as polychlorinated biphenyls, petroleum products including gasoline, fuel oil, crude oil and
various constituents of such products or their by-products, radon, and any hazardous substance as
defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. 9601-9657, as amended and other applicable federal, state and local environmental laws and
regulations. Further, Environmental Laws shall mean all federal, state and municipal laws,
statutes, regulations, codes, orders, decrees, ordinances, rules and regulations or any judicial or
administrative order or judgment and all principles of common law applicable to environmental and
ecological conditions, Environmental Pollutants and the rules and regulations of the U.S.
Environmental Protection Agency, and any other federal, state or municipal agency, or governmental
board or entity relating to or concerning Environmental Pollutants, health, pollution, public
health and safety or environmental or ecological conditions. Environmental Actions refers to any
complaint, summons, citation, notice (written or oral), investigation, directive order, claim,
cause of action, action, litigation, investigation, judicial or administrative proceeding,
judgment, letter or other communication from any Governmental Authority or any third party
involving actual or alleged violations of Environmental Laws, the presence, or release into the
environment or human exposure to any Environmental Pollutant from or onto the Premises or the
environment. Environmental Liabilities means any monetary obligations, losses, liabilities
(including strict liability), damages, punitive damages, consequential damages, treble damages,
costs and expenses (including all reasonable out-of-pocket fees, disbursements and expenses of
counsel, out-of-pocket expert and consulting fees and out-of-pocket costs for environmental site
assessments, remedial investigation and feasibility studies), fines, penalties, sanctions and
interest incurred as a result of any Environmental Action.
(c) Landlord hereby agrees to defend, indemnify and hold harmless the Tenant from and against
any Environmental Liabilities and costs arising out of any release, discharge, emission, disposal
or presence of Environmental Pollutants that occurred in the Building prior to the Commencement
Date or that arise due to the acts of Landlord, other than Environmental Pollutants introduced by
Tenant to the Premises after the Commencement Date. This indemnity shall survive expiration or
termination of this Lease.
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12. INSURANCE REQUIREMENTS.
(a) Tenant, at Tenants sole cost and expense, shall maintain commercial general public
liability insurance against claims for personal injury, death or property damage occurring upon, in
or about the Premises, Building and land on which they are located, in or about the adjoining
street and pathways, such insurance to afford protection to the limits of not less than $1,000,000
in respect to injury to death to a single person, $1,000,000 in respect to any one occurrence, and
$1,000,000 in respect to property damage.
(b) Landlord agrees to carry an all risks real property insurance policy on the Building in
an amount of not less than the replacement cost.
(c) All of Tenants policies of insurance shall be in form and substance reasonably
satisfactory to Landlord, and a certificate of insurance shall be held by Landlord. Not less than
ten (10) days prior to the expiration of each policy, a notice of renewal shall be delivered to
Landlord, and not less than five (5) days after any premium on each policy shall be due and payable
there shall be delivered to Landlord evidence of such payment satisfactory to Landlord.
(d) All of Landlords policies of insurance shall be in form and substance reasonably
satisfactory to Tenant, and a certificate of insurance shall be held by Tenant. Not less than ten
(10) days prior to the expiration of each policy, a notice of renewal shall be delivered to Tenant,
and not less than five (5) days after any premium on each policy shall be due and payable there
shall be delivered to Tenant evidence of such payment satisfactory to Tenant.
(e) Neither Landlord nor Tenant (nor any subtenant or assignee of Tenant) shall be liable (by
way of subrogation or otherwise) to the other party (or to any insurance company insuring the other
party) for any loss or damage to any of the property of Landlord or Tenant, as the case may be,
with respect to their respective property, the Building, the Property or the Premises or any
addition or improvements thereto, or any contents therein, to the extent covered by insurance
carried or required to be carried by a party hereto even though such loss might have been
occasioned by the negligence or willful acts or omissions of the Landlord or Tenant or their
respective employees, agents, contractors or invitees. Landlord and Tenant shall give each
insurance company which issues policies of insurance, with respect to the items covered by this
waiver, written notice of the terms of this mutual waiver, and shall have such insurance policies
properly endorsed, if necessary, to prevent the invalidation of any of the coverage provided by
such insurance policies by reason of such mutual waiver. For the purpose of the foregoing waiver,
the amount of any deductible applicable to any loss or damage shall be deemed covered by, and
recoverable by the insured under the insurance policy to which such deductible relates.
13. INDEMNIFICATION.
(a) To the extent not expressly prohibited by law, Tenant agrees to hold harmless and
indemnify Landlord and the Landlords agents, partners, shareholders, members, officers, directors,
beneficiaries and employees (collectively, the Landlord Indemnitees) from any losses, damages,
judgments, claims, expenses, costs and liabilities imposed upon or incurred by or asserted against
the Landlord Indemnitees, including without limitation reasonable attorneys fees and expenses, for
death or injury to, or damage to property of, third parties, other than the Landlord Indemnitees,
that may arise from the negligence or willful misconduct of Tenant or any of Tenants agents,
members, partners, employees, subtenants, contractors, licensees, invitees, servants, or
representatives (collectively, Tenant Party), except to the extent resulting from the negligence
or willful misconduct of Landlord or any Landlord Indemnitee. Such third parties shall not be
deemed third party beneficiaries of this Lease. If any action, suit or proceeding is brought
against any of the Landlord Indemnitees by reason of the negligence or
willful misconduct of Tenant or any Tenant Party, then Tenant will, at Tenants sole cost and
expense and at the option of said Landlord Indemnitees, by counsel reasonably approved by said
Landlord Indemnitees (and Landlord Indemnitees shall be deemed to have approved any counsel
designated by Tenants insurance company), resist and defend such action, suit or proceeding. In
addition, to the extent not expressly prohibited by law, Tenant agrees to hold harmless and
indemnify the Landlord Indemnitees from any losses, damages, judgments, claims, expenses, costs and
liabilities imposed upon or incurred by or asserted against Landlord or the other Landlord
Indemnitees, including reasonable attorneys fees and expenses, whether by reason of, or by reason
of any claim for, any injury to, or death of, any person or persons or damage to property
(including any loss of use thereof) or otherwise arising from or in connection with the use of, or
from any work or thing whatsoever done in, any part of the Premises or by Tenant or Tenants Party,
about the Building or Property.
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(b) To the extent not expressly prohibited by law, Landlord agrees to hold harmless and
indemnify Tenant and the Tenants agents, partners, shareholders, members, officers, directors,
beneficiaries, subtenants, and employees (collectively, the Tenant Indemnitees) from any losses,
damages, judgments, claims, expenses, costs and liabilities imposed upon or incurred by or asserted
against the Tenant Indemnitees, including without limitation reasonable attorneys fees and
expenses, for death or injury to, or damage to property of, third parties, other than the Tenant
Indemnitees, that arise from the negligence or willful misconduct of Landlord or any of Landlords
agents, members, partners, employees, contractors, licensees, invitees, servants, or
representatives (collectively, Landlord Party), except to the extent resulting from the
negligence or willful misconduct of Tenant or any Tenant Indemnitee. Such third parties shall not
be deemed third party beneficiaries of this Lease. If any action, suit or proceeding is brought
against any of the Tenant Indemnitees by reason of the negligence or willful misconduct of Landlord
or any Landlord Party in the Common Area of the Building or Property, then Landlord will, at
Landlords sole cost and expense and at the option of said Tenant Indemnitees, by counsel
reasonably approved by said Tenant Indemnitees (and Tenant Indemnitees shall be deemed to have
approved any counsel designated by Landlords insurance company), resist and defend such action,
suit or proceeding. In addition, to the extent not expressly prohibited by law, Landlord agrees to
hold harmless and indemnify the Tenant Indemnitees from any losses, damages, judgments, claims,
expenses, costs and liabilities imposed upon or incurred by or asserted against Tenant or the other
Tenant Indemnitees, including reasonable attorneys fees and expenses, whether by reason of, or by
reason of any claim for, any injury to, or death of, any person or persons or damage to property
(including any loss of use thereof) or otherwise arising from or in connection with the use of, or
from any work or thing whatsoever done in, any part of the Common Area or by Landlord or Landlords
Party, about the Building or Property, or arising from any condition of the Building or the Common
Area due to or resulting from any default by Landlord in the keeping, observance or performance of
any provision contained in this Lease, except to the extent caused by the negligence or willful
misconduct of Tenant or the Tenant Indemnitees.
14. SURRENDER; HOLDING OVER. At the expiration of this Lease, Tenant shall vacate the Premises in
a broom-clean condition. If Tenant shall continue to occupy and remain in the Premises at the
expiration of the term, Tenant shall pay monthly an amount equal to 125% of the last months Rent
of the just-expired term for the first initial three (3) months of such holdover period.
Thereafter, Tenants monthly rental obligation shall be 150% of the last months Rent of the
just-expired term. During the initial three (3) months of the holdover period, Tenant shall not be
liable for any Landlord direct, indirect or consequential damages related to the holdover.
15. ASSIGNMENTS AND SUBLETTING. Tenant shall not, without Landlords prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed: (a) assign, convey, mortgage,
pledge, encumber or otherwise transfer (whether voluntarily or otherwise) this Lease or any
interest under it; (b) allow any transfer thereof or any lien upon Tenants interest by operation
of law; (c)
sublet the Premises or any part thereof, or (d) permit the use or occupancy of the Premises or any
part thereof by any one other than Tenant. Notwithstanding the foregoing, Tenant may assign or
sublease the Premises to any related entity or affiliate, or to any entity to with which Tenant
merges or combines, or to an entity to which Tenant sells substantially all of its assets.
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If this Lease be assigned or if the Premises or any part thereof be sublet or occupied by anybody
other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant
or occupant, and apply the net amount collected to the Rent herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver of any of Tenants
covenants contained in this Section or the acceptance of the assignee, subtenant or occupant as
Tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of
Tenant herein contained. Landlord and Tenant shall evenly split any portion of the sublease rent
that exceeds the Rent due from Tenant for the subleased space; provided, however that Tenant shall
receive all such excess sublease rent until the amount collected by Tenant equals Tenants expenses
incurred from its sublease of all or a portion of the Premises (e.g. commissions, legal fees, and
improvements).
16. CASUALTY. If the Premises are made untenantable in whole or in part by fire or other casualty,
the Rent, until repairs are substantially completed and the Premises are tenantable for Tenants
normal operations, or the lease terminated as hereinafter provided, shall be apportioned on a per
diem basis according to the part of the Premises which is usable by Tenant. If such damage shall be
so extensive that the Premises cannot be restored by Landlord within a period of six (6) months,
either party shall have the right to cancel this Lease by notice to the other given at any time
within thirty (30) days after the date of such damage. In the event of giving effective notice
pursuant to this Section, this Lease and the term and the estate hereby granted shall expire on the
date fifteen (15) days after the giving of such notice as fully and completely as if such date were
the date hereinbefore set for the expiration of the term of this Lease. If this Lease is not so
terminated, Landlord will promptly repair the damage at Landlords expense; provided however, such
repairs shall not take more than six (6) months. If the actual time to restore the damage exceeds
six (6) months from the date of the casualty, Tenant shall have the right to terminate this Lease
by written notice given within thirty (30) days after the expiration of such six-month period, in
which event this Lease shall terminate thirty (30) days after the date of Tenants notice unless
Landlord completes its restoration prior to the expiration of such thirty (30) day period. In all
casualty events, unless the Lease is terminated as provided above, Landlord agrees to diligently
pursue completion of the Buildings and Premises repair and restoration.
17. EMINENT DOMAIN.
(a) In the event that title to the whole or any part of the Premises shall be lawfully
condemned or taken in any manner for any public or quasi-public use, this Lease and the term and
estate hereby granted shall forthwith cease and terminate as of the date of vesting of title and
Landlord shall be entitled to receive the entire award, Tenant hereby assigning to Landlord
Tenants interest therein, if any.
(b) In the event that title to a part of the Building other than the Premises shall be so
condemned or taken and if in the opinion of Landlord, the Building should be restored in such a way
as to alter the Premises materially, Landlord or Tenant may terminate this Lease and the term and
estate hereby granted by notifying the other party of such termination within sixty (60) days
following the date of vesting of title, and this Lease and the term and estate hereby granted shall
expire on the date specified in the notice of termination, not less than sixty (60) days after the
giving of such notice, as fully and completely as if such date were the date hereinbefore set for
the expiration of the term of this Lease, and the Rent hereunder shall be apportioned as of such
date.
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18. LANDLORDS REMEDIES. All rights and remedies of Landlord herein enumerated shall be
cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the
other remedies in this Lease provided, Landlord shall be entitled to the restraint by injunction of
the violation or attempted violation of any of the covenants, agreements or conditions of this
Lease.
(a) If Tenant defaults in the payment of Rent, and such default continues for ten (10) days
after written notice by Landlord; then and in any such event Landlord may, at its election, on five
(5) days notice of such election to Tenant, either terminate the lease and Tenants right to
possession of the Premises or, without terminating this Lease, endeavor to relet the Premises.
Nothing herein shall be construed so as to relieve Tenant of any obligation, including the payment
of rental as provided in this Lease.
(b) If Tenant defaults in the performance of any other provision of this Lease, and such
failure is not cured within thirty (30) days (or immediately if the failure involves a hazardous
condition) after written notice from Landlord, however, if Tenants failure to comply cannot
reasonably be cured within thirty (30) days, Tenant shall be allowed additional time as is
reasonably necessary to cure the failure so long as Tenant begins the cure within thirty (30) days
and diligently pursues the cure to completion; then and in any such event Landlord may, at its
election, on five (5) days notice of such election to Tenant, either terminate the lease and
Tenants right to possession of the Premises or, without terminating this Lease, endeavor to relet
the Premises.
(c) Upon any termination of this Lease, whether by lapse of time or otherwise, Tenant shall
surrender possession and vacate the Premises immediately, and deliver possession thereof to
Landlord, and hereby grants to Landlord full and free license to enter into and upon the Premises
in such event with or without process of law and to repossess the Premises and to expel or remove
Tenant and any others who may be occupying or within the Premises and to remove any and all
property therefrom, using such force as may be necessary, without being deemed in any manner guilty
of trespass, eviction or forcible entry or detainer, and without relinquishing Landlords right to
Rent or any other right given to Landlord hereunder or by operation of law.
(d) If Landlord elects, without terminating the lease, to endeavor to relet the Premises,
Landlord may, at Landlords option enter into the Premises, remove Tenants signs and other
evidence of tenancy, and to take hold possession thereof without such entry and possession
terminating the lease or releasing Tenant, in whole or in part, from Tenants obligation to pay the
Rent hereunder for the full term as hereinafter provided. Upon and after entry into possession
without termination of the lease, Landlord may relet the Premises or any part thereof for the
account of Tenant to any person, firm or corporation other than Tenant for such rent, for such time
and upon such terms as Landlord shall determine, to be reasonable. In any such case, Landlord may
make repairs, alterations and additions in or to the Premises, and redecorate the same to the
extent deemed by Landlord necessary or desirable. If the consideration collected by Landlord upon
any such reletting for Tenants account is not sufficient to pay monthly the full amount of the
Rent reserved in this Lease, Tenant shall pay to Landlord the amount of each monthly deficiency
upon demand; and if the consideration so collected from any such reletting is more than sufficient
to pay the full amount of the Rent reserved herein, together with the costs and expenses of
Landlord, Landlord, at the end of the stated term of this Lease shall account to Tenant.
(e) Any and all property which may be removed from the Premises by Landlord pursuant to the
authority of the lease or of law, to which Tenant is or may be entitled, may be handled, removed or
stored by Landlord at the risk, cost and expense of Tenant, and Landlord shall in no event be
responsible for the value, preservation or safekeeping thereof. Any such property of Tenant not
removed from the Premises or retaken from storage by Tenant within thirty (30) days after the end
of the term or of Tenants right to possession of the Premises, however terminated, shall be
conclusively deemed to have been
forever abandoned by Tenant and either may be retained by Landlord as its property or may be
disposed of in such manner as Landlord may see fit.
14
(f) Tenant agrees that if it shall at any time fail to make any payment or perform any other
act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated
to, and after reasonable notice or demand and without waiving, or releasing Tenant from, any
obligation under this Lease, make such payment or perform such other act to the extent Landlord may
deem desirable, and in connection therewith to pay expenses and employ counsel. All sums so paid by
Landlord and all expenses in connection therewith, together with interest thereon at the rate of
10% per annum from the date of payment, shall be deemed additional rent hereunder and payable at
the time of any installment of Rent thereafter becoming due and Landlord shall have the same rights
and remedies for the non-payment thereof, or of any other additional rent, as in the case of
default in the payment of Rent.
(g) If Tenant shall (i) apply for consent to the appointment of a receiver, trustee or
liquidator of Tenant or of all or a substantial part of its assets, (ii) admit in writing its
inability to pay its debts as they come due, (iii) make a general assignment for the benefit of
creditors, (iv) file a petition or an answer seeking reorganization or arrangement with creditors
or to take advantage of any insolvency law other than the federal Bankruptcy Code, or (v) file an
answer admitting the material allegations of a petition filed against Tenant in any reorganization
or insolvency proceeding, other than a proceeding commenced pursuant to the federal bankruptcy
court or a federal court sitting as a bankruptcy court, adjudicating Tenant insolvent or approving
a petition seeking reorganization of Tenant or appointing a receiver, trustee or liquidator of
Tenant or of all or a substantial part of its assets, then, in any of such events, Landlord may
give to Tenant a notice of intention to end the term of this Lease specifying a day not earlier
than ten (10) days thereafter, and upon the giving of such notice the term of this Lease and all
right, title and interest of the Tenant hereunder shall expire as fully and completely on the day
so specified as if that day were the date herein specifically fixed for the expiration of the term.
(h) Notwithstanding anything to the contrary in this Lease, Landlord shall use commercially
reasonable efforts to mitigate its damages in the event of a default by Tenant.
19. TENANTS REMEDIES. All rights and remedies of Tenant herein enumerated shall be cumulative,
and none shall exclude any other right or remedy allowed by law. In addition to the other remedies
in this Lease provided, Tenant shall be entitled to the restraint by injunction of the violation or
attempted violation of any of the covenants, agreements or conditions of this Lease.
(a) If Landlord shall fail to perform any of its obligations when and as due under this Lease,
which default continues for a period of more than thirty (30) days after written notice from Tenant
specifying such default (or as to any default which requires more than thirty (30) days to remedy,
if such cure is not commenced promptly or pursued diligently and continues for more than one (1)
year) Tenant, in addition to any rights and remedies available to it under applicable law, may at
its option upon written notice: (1) sue for injunctive relief; and/or (2) sue for specific
performance; and/or (3) sue for damages, and/or (4) terminate this Lease.
(b) If Landlord fails to perform any of its obligations under this Lease, and such failure
continues for thirty (30) days after written notice, Tenant shall have the right, but not
obligation to take such actions as are reasonably necessary to cure that failure, at Landlords
cost and expense. Landlord agrees to reimburse Tenant for the reasonable costs and expenses
incurred by Tenant within thirty (30) days after Tenants presentment of paid invoices.
Notwithstanding the foregoing, in the event any failure by Landlord to perform its obligations
under this Lease (a) creates an unsafe or unhealthy condition, (b) causes or threatens to cause
damage to Tenants personal property and equipment, or (c) unreasonably interferes with Tenants
use of the Premises and other shared use areas of the Building and grounds, then
Tenant shall provide such oral or written notice as is reasonable under the circumstances and
Tenant shall give Landlord such shorter time to cure its failure as is reasonable under the
circumstances before exercising self-help. If Landlord fails to timely reimburse Tenant for its
costs to cure Landlords default, Tenant may offset such amount from its rental payments.
15
20. ESTOPPEL CERTIFICATES.
(a) Tenant agrees that from time to time upon not less than twenty (20) days prior request by
Landlord, Tenant will deliver to Landlord a statement in writing certifying (i) that this Lease 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 identifying the modifications), (ii) the dates to which the
Rent and other charges have been paid, and (iii) that, so far as the person making the certificate
knows, Landlord is not in default under any provision of this Lease, and, if Landlord is in
default, specifying each such default of which the person making the certificate may have
knowledge, it being understood that any such statement so delivered may be relied upon by any
landlord under any ground or underlying lease, or any prospective purchaser, mortgagee, or any
assignee of any mortgage, of the Property.
(b) Landlord agrees that it shall from time to time upon not less than twenty (20) days prior
request by Tenant, Landlord will deliver to Tenant a certificate signed by Landlord certifying as
to such matters as may be reasonably requested by Tenant, or Tenants designee. Any such
certificate may be relied upon by any then current or prospective subtenant, assignee, purchaser or
investor in Tenant and/or any affiliate of Tenant, or secured or unsecured lender to Tenant and/or
any affiliate of Tenant.
21. SUBORDINATION OF LEASE. The rights of Tenant under this Lease shall be and are subject and
subordinate at all times to all ground leases, and/or underlying leases, if any, now or hereafter
in force against the Property, and to the lien of any mortgage or mortgages now or hereafter in
force against such leases and/or the Property, and to all advances made or hereafter to be made
upon the security thereof, and to all renewals, modifications, consolidations, replacements and
extensions thereof, provided Tenant receives a subordination and non-disturbance agreement that is
reasonably satisfactory to Tenant.
22. QUIET ENJOYMENT. So long as Tenant shall observe and perform the covenants and agreements
binding on it hereunder, Tenant shall at all times during the term herein granted peacefully and
quietly have and enjoy possession of the Premises without any encumbrance or hindrance by, from or
through Landlord, its successors or assigns.
23. NOTICES AND CONSENTS. All notices, demands, requests, consents or approvals which may or are
required to be given by either party to the other shall be in writing and shall be deemed given
when sent by personal delivery, a recognized overnight delivery service providing evidence of
delivery, or by United States Certified Mail, postage prepaid, (a) if for Tenant, addressed to
Tenant at the Building, or at such other place as Tenant may from time to time designate by notice
to Landlord, or (b) if for Landlord, addressed to the address first written above, or at such other
place as Landlord may from time to time designate by notice to Tenant.
24. INVALIDITY OF PARTICULAR PROVISIONS. If any clause or provision of this Lease is declared
illegal, invalid, or unenforceable by a court of competent jurisdiction because of present or
future laws or any rule or regulation of any governmental body or entity, effective during its
term, the intention of the parties hereto is that the remaining parts of this Lease shall not be
affected thereby unless such invalid clause or provision is, in the determination of such court, so
essential that the parties would not have entered this Lease without it.
16
25. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties hereto against the other on any matters whatsoever
arising out of or in any way connected with this Lease, the relationship of landlord and tenant,
Tenants use or occupancy of the Premises, and any emergency statutory or any other statutory
remedy.
26. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all taxes assessed against or
levied upon the personal property of Tenant located in the Premises, if nonpayment thereof shall
give rise to a lien on the real estate, and when possible Tenant shall cause said personal property
to be assessed and billed separately from the property of Landlord. In the event any or all of
Tenants personal property shall be assessed and taxed with the property of Landlord, Tenant shall
pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord
of a statement in writing setting forth the amount of such taxes applicable to Tenants personal
property.
27. BROKERS FEE. Tenant agrees to pay its broker, CBRE, a fee with respect to this Lease. Tenant
represents and warrants that, except for the fee payable to CBRE, there are no claims for brokerage
commissions or finders fees in connection with the execution of this Lease, based on Tenants
actions. Landlord agrees to indemnify Tenant and hold Tenant harmless from, all liabilities
arising from any such claims based on Landlords actions (including, without limitation, the cost
of counsel fees and costs in connection therewith).
28. GENERATOR. Tenant shall have the right to maintain, repair and replace its generator and
related equipment located on the roof of the Building throughout the term of the Lease. Tenant, at
its option, shall remove the generator upon Tenants surrender of the Premises.
29. SECURITY. Landlord agrees to consult with Tenant to ensure that the computerized fingerprint
security system is in good working order and that all system entries are properly made. Tenant
agrees to reasonably cooperate with Landlord regarding the same.
30. MISCELLANEOUS.
(a) If any term or provision of this Lease, or the application thereof, shall, to any extent,
be invalid or unenforceable, the remainder of this Lease, or the application of such term or
provision, shall not be affected thereby, and each term and provision of this Lease shall be valid
and enforced to the fullest extent permitted by law.
(b) No waiver of any default of Landlord or Tenant hereunder shall be implied from any
omission to take any action on account of such default if such default persists or be repeated, and
no express waiver shall affect any default other than the default specified in the express waiver
and that only for the time and to the extent therein stated.
(c) The term Landlord as used in this Lease, so far as covenants or agreements on the part
of Landlord are concerned, shall be limited to mean and include only the owner or owners of
Landlords interest in this Lease at the time in question, and in the event of any transfer or
transfers of such interest Landlord herein named (and in case of any subsequent transfer, the then
transferor) shall be automatically freed and relieved from and after the date of such transfer of
all personal liability as respects the performance of any covenants or agreements on the part of
Landlord contained in this Lease thereafter to be performed so long as the transferee assumes all
of Landlords obligations hereunder.
(d) Neither party has made any representations or promise, except as contained herein, or in
some further writing signed by the party making such representation or promise.
17
(e) The term Force Majeure shall mean strikes, riots, acts of God, shortages of labor or
materials, war, acts of terrorism, governmental laws, regulations or restrictions, or any other
cause whatsoever beyond the reasonable control of Landlord or Tenant, as the case may be. Whenever
a period of time is herein prescribed for the taking of any action by Landlord or Tenant (other
than the payment of Rent and all other such sums of money as shall become due hereunder), such
party shall not be liable or responsible for, there shall be excluded from the computation of such
period of time, any delays due to events of Force Majeure; provided that the party claiming the
Force Majeure delay uses commercially reasonable efforts to minimize the extent and effect of the
delay. Further, the existence of a casualty or condemnation shall not in of themselves be deemed
to be a Force Majeure event with respect to the time for the parties to perform their respective
obligations as set forth in such sections.
(f) Except as expressly otherwise herein provided, with respect to all required acts of
Landlord or Tenant, time is of the essence of this Lease.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
18
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease as of the day and
year first above written.
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LANDLORD
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TENANT
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ST. CHARLES PROPERTIES LLC
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AMERICAN RAILCAR INDUSTRIES, INC.
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Name:
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/s/ Jim J. Unger
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Name:
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/s/ James Cowan
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Title: General Partner
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Title: President and CEO
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Its:
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Its:
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19
EXHIBIT A
[Depiction of the Premises]
20
EXHIBIT B
JANITORIAL SERVICES
I.
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Area B Breakrooms/Coffee Areas
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Daily:
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1.
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Empty all trash cans, replace liners, and remove trash to disposal area.
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2.
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Clean and sanitize sinks, countertops, and cabinets.
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3.
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Clean and sanitize coffee area.
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4.
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Dust mop all tile floor areas.
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5.
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Damp mop or wet mop all tile floor areas.
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6.
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Clean interior and exterior of microwaves.
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Weekly:
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1.
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Wipe all doors, light switch covers, and walls to remove dust, dirt, smudges,
and stains.
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2.
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Complete low dusting of all chair rungs, legs and sides of tables, and other
surfaces.
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3.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Dust and clean wall and overhead vents to remove dust and dirt.
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2.
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Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
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Daily:
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1.
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Empty all trash cans, replace liners, and remove trash to disposal area.
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2.
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Clean and sanitize coffee area/employee station/microwave.
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3.
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Dust mop all tile floor areas. Sweep mop nightly.
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4.
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Damp mop or wet mop all tile floor areas.
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5.
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Clean interior and exterior of microwaves/employee station/coffee area.
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Weekly:
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1.
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Wipe all doors, light switch covers, walls to remove dust, dirt, smudges, and
stains.
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2.
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Complete low dusting of all chair rungs, legs and sides of tables, and other
surfaces.
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3.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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4.
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Every Friday dump items and clean out employee refrigerator.
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5.
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Dust and clean overhead vents to remove dust and dirt.
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III.
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Area E Areas (Offices/Cubicles)
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Daily:
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1.
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Empty all trash cans, replace liners, and remove trash to disposal area.
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2.
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Spot clean all glass (including glass walls and partitions).
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3.
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Dust mop all tile floor areas.
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4.
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Damp mop or wet mop all tile floor areas.
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5.
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Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots
and stains.
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21
3x Weekly:
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1.
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Thoroughly dust, desks, file cabinets, and other furniture and equipment.
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Weekly:
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1.
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Wipe all doors, light switch covers, walls, and partitions to remove dust,
dirt, smudges, and stains.
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2.
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Dust all windowsills, picture frames, ledges, and other exposed flat surfaces.
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3.
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Complete low dusting of all chair rungs, legs and sides of desks and tables,
and other surfaces.
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4.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Sanitize all telephones.
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2.
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Dust and clean wall and overhead vents to remove dust and dirt.
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3.
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Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
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IV.
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Area P Public Lobbies Hallways, Stairs and Elevators
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Daily:
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1.
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Clean and sanitize entrance doors and lobby glass to remove dust, dirt, stains,
smudges and fingerprints.
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2.
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Clean, disinfect and polish all drinking fountains.
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3.
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Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots
and stains.
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4.
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Dust mop all tile floor areas.
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5.
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Damp mop or wet mop all tile floor areas.
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6.
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Sweep and damp mop elevator cab floors.
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7.
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Vacuum and sweep stairwells and landings.
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8.
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Damp mop stairwell landings.
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3 x Weekly:
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1.
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Thoroughly dust, desks, file cabinets, and other furniture and equipment.
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2.
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Dust all windowsills, picture frames, ledges, exit signs, and other exposed
flat surfaces that are not dusted daily.
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3.
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Clean all elevator doors, walls, switch plates and controls to remove dust,
dirt, stains, smudges and fingerprints.
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Weekly:
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1.
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Clean and sanitize walls, doors, and light switch covers, to remove dust, dirt,
and stains.
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2.
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Dust and wipe stairwell handrails to remove dust, dirt, stains, smudges and
fingerprints.
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3.
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Complete low dusting of all chair rungs, legs and sides of desks and tables,
and other surfaces.
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4.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Clean, scour and polish all elevator door runner tracks to remove dust, dirt
and stains.
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2.
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Dust and clean wall and overhead vents to remove dust and dirt.
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3.
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Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
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22
V.
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Area R Restroom Area
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Daily:
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1.
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Empty all wastepaper and sanitary napkin containers. Remove all refuse to
trash disposal area.
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2.
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Refill soap and towel dispensers, toilet tissue holders, and sanitary napkin
machines.
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3.
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Clean and sanitize all toilets, urinals, and urinal screens.
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4.
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Clean and sanitize sinks and washbasins. Polish fixtures.
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5.
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Wash and clean all mirrors to remove dust, dirt, smudges and fingerprints.
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6.
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Sweep restroom floors and damp mop with a germicidal disinfectant solution.
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Weekly:
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1.
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Dust all partitions, ledges, light fixtures, and dispensers.
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2.
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Clean and sanitize walls to remove dust, dirt, smudges, stains and
fingerprints.
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3.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Dust and clean overhead vents to remove dust and dirt.
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2.
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Clean and sanitize restroom partitions.
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3.
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Clean and sanitize both sides of restroom doors.
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VI.
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Area V Conference Rooms
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Daily:
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1.
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Empty all trash cans, replace liners, and remove trash to disposal area.
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2.
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Organize chairs around table and straighten room.
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3.
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Spot clean all glass (including glass walls and partitions).
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4.
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Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots
and stains.
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3 x Weekly:
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1.
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Thoroughly dust tables, file cabinets, and other furniture and equipment.
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Weekly:
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1.
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Wipe all doors, light switch covers, walls, and partitions to remove dust,
dirt, smudges, and stains.
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2.
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Complete low dusting of all chair rungs, legs and sides of desks and tables,
and other surfaces.
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3.
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Complete high dusting of all corners and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Sanitize all telephones.
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2.
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Dust and clean wall and overhead vents to remove dust and dirt.
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3.
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Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
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23
VII.
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Area X Executive Offices
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Daily:
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1.
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Empty all trash cans, replace liners, and remove trash to disposal area.
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2.
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Thoroughly dust desks, file cabinets, and other furniture and equipment.
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3.
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Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots
and stains.
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4.
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Clean and sanitize coffee areas and small kitchen areas.
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5.
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Spot clean all glass (including glass walls and partitions).
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6.
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Clean and sanitize all private restrooms.
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Weekly:
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1.
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Wipe all doors, light switch and receptacle covers, walls, and partitions to
remove dust, dirt, smudges, and stains.
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2.
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Dust all windowsills, picture frames, ledges, and other exposed flat surfaces.
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3.
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Complete low dusting of all chair rungs, legs and sides of desks and tables,
and other surfaces.
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4.
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Complete high dusting of all comers and ceiling edges to remove cobwebs.
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Monthly:
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1.
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Sanitize all telephones.
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2.
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Dust and clean wall and overhead vents to remove dust and dirt.
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Miscellaneous Services
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1.
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Carpet spotting included in contract. Complete water extraction for office
will be provided at the rate of (.15) per square foot.
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2.
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Certificate of Insurance will be provided.
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3.
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Pre-employment background/police checks completed on each employee.
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4.
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Floor service can be provided upon request.
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24
SCOPE OF WORK FOR PORTER
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*
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Porter shall be available for expected and unexpected Customer needs and to keep American Railcar
Industries, Inc. Customer Ready at all times.
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Daily:
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1.
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Organize reading materials on coffee tables.
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2.
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Remove spots from carpet as necessary.
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3.
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Polish metal trim around doorways.
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4.
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Clean door frames and thresholds.
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5.
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Vacuum floor mats and runners.
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6.
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Remove fingerprints from entrance doors and partition glass.
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Daily:
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1.
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Clean entrance door glass, inside and out.
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2.
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Clean Building Directory and lobby glass.
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3.
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Vacuum entrance mat and carpeting and spot clean as necessary.
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4.
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Sweep and damp mop all hard surface floors as needed.
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5.
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Spot clean wall in corridors.
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6.
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Sweep and mop stairwells and landings.
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7.
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Clean all door glass, inside and outside.
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Monthly:
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1.
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Lobby walls to be dusted.
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2.
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Entrance doors to suites to be polished.
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3.
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Ceiling and wall vents to be dusted.
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4.
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Kick plates to be polished.
|
|
|
5.
|
|
Fixtures will be cleaned.
|
Daily:
|
1.
|
|
Clean and disinfect all toilets, toilet seats, urinals, sinks, and counter
tops.
|
|
|
2.
|
|
Clean and polish mirrors, bright metal and other restroom fixtures.
|
|
|
3.
|
|
Spot clean all partitions, doors, and light switch covers.
|
|
|
4.
|
|
Wipe clean all paper dispensers and trash containers.
|
|
|
5.
|
|
Empty all waste receptacles replacing liners as needed.
|
|
|
6.
|
|
Restock all paper and soap dispensers.
|
|
|
7.
|
|
Fingerprints removed from door facings, light switch plates and partitions.
|
|
|
8.
|
|
Clean wall light fixtures.
|
|
|
9.
|
|
Flush any floor drain as needed.
|
|
10.
|
|
Spot clean walls around sinks.
|
|
|
11.
|
|
Sweep and damp mop floors with a sanitizer.
|
25
Weekly:
|
1.
|
|
Spot clean walls.
|
|
|
2.
|
|
Clean vents.
|
|
|
3.
|
|
High dust doors and frames.
|
|
|
4.
|
|
Clean restroom partitions and brackets.
|
|
|
5.
|
|
Dust furnishings.
|
Monthly:
|
1.
|
|
Empty soap dispensers, clean and refill.
|
A schedule to be provided by Bill Sandbothe.
Miscellaneous Services
|
1.
|
|
Arrange furniture.
|
|
|
2.
|
|
Clean janitor closet.
|
|
|
3.
|
|
Report any damage or unusual circumstances.
|
|
|
4.
|
|
Secure exterior doors, including the front door, and windows.
|
|
|
5.
|
|
Turn off lights.
|
|
|
6.
|
|
Turn on night lights.
|
|
|
7.
|
|
Carpet spotting included in contract.
|
|
|
8.
|
|
Certificate of insurance will be provided.
|
|
|
9.
|
|
Pre-employment background/police checks completed on each employee.
|
26