American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 11/02/2010 17:19:19)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
Or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission File No. 000-51728
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
     
North Dakota   43-1481791
(State of Incorporation)   (I.R.S. Employer Identification No.)
     
100 Clark Street, St. Charles, Missouri   63301
(Address of principal executive offices)   (Zip Code)
(636) 940-6000
(Registrant’s 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):
             
Large accelerated filer o   Accelerated filer þ   Non–accelerated filer o   Smaller Reporting Company o
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 registrant’s common stock, without par value, outstanding on November 1, 2010 was 21,302,296 shares.
 
 

 

 


 

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
         
Item Number   Page Number  
 
       
       
 
       
       
 
       
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    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    30  
 
       
    39  
 
       
    40  
 
       
       
 
       
    40  
 
       
    40  
 
       
    40  
 
       
    41  
 
       
    42  
 
       
  Exhibit 10.63
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32

 

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CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
                 
    As of  
    September 30,     December 31,  
    2010     2009  
    (unaudited)        
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 310,588     $ 347,290  
Short-term investments — available-for-sale securities
          3,802  
Accounts receivable, net
    19,025       11,409  
Accounts receivable, due from affiliates
    5,957       1,356  
Income taxes receivable
    937       1,768  
Inventories, net
    58,124       40,063  
Deferred tax assets
    2,855       2,018  
Prepaid expenses and other current assets
    3,866       4,898  
 
           
Total current assets
    401,352       412,604  
 
               
Property, plant and equipment, net
    185,509       199,349  
Deferred debt issuance costs
    2,105       2,568  
Interest receivable, due from affiliates
    145       982  
Goodwill
    7,169       7,169  
Investments in and loans to joint ventures
    49,390       41,155  
Deferred tax assets
    3,950        
Other assets
    201       537  
 
           
Total assets
  $ 649,821     $ 664,364  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 32,343     $ 16,874  
Accounts payable, due to affiliates
    380       576  
Accrued expenses and taxes
    6,184       4,515  
Accrued compensation
    9,307       8,799  
Accrued interest expense
    1,719       6,875  
 
           
Total current liabilities
    49,933       37,639  
 
               
Senior unsecured notes
    275,000       275,000  
Deferred tax liability
          7,120  
Pension and post-retirement liabilities
    6,197       6,279  
Other liabilities
    3,223       2,686  
 
           
Total liabilities
    334,353       328,724  
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
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
    213       213  
Additional paid-in capital
    238,687       239,617  
Retained earnings
    75,058       94,215  
Accumulated other comprehensive income
    1,510       1,595  
 
           
Total stockholders’ equity
    315,468       335,640  
 
           
Total liabilities and stockholders’ equity
  $ 649,821     $ 664,364  
 
           
See Notes to the Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
                 
    For the Three Months Ended  
    September 30,  
    2010     2009  
 
               
Revenues:
               
Manufacturing operations (including revenues from affiliates of $19,274 and $8,011 for the three months ended September 30, 2010 and 2009, respectively)
  $ 48,404     $ 62,047  
 
               
Railcar services (including revenues from affiliates of $4,263 and $3,563 for the three months ended September 30, 2010 and 2009, respectively)
    16,393       16,051  
 
           
Total revenues
    64,797       78,098  
 
               
Cost of revenue:
               
Manufacturing operations
    (49,366 )     (56,348 )
Railcar services
    (13,141 )     (12,940 )
 
           
Total cost of revenue
    (62,507 )     (69,288 )
Gross profit
    2,290       8,810  
 
               
Selling, administrative and other (including costs related to affiliates of $154 for both the three months ended September 30, 2010 and 2009)
    (6,232 )     (6,484 )
 
           
(Loss) earnings from operations
    (3,942 )     2,326  
 
               
Interest income (including income related to affiliates of $717 and $366 for the three months ended September 30, 2010 and 2009, respectively)
    1,058       1,925  
Interest expense
    (5,316 )     (5,286 )
Other income (including income related to affiliates of $4 for both the three months ended September 30, 2010 and 2009)
    4       3,121  
Loss from joint ventures
    (1,946 )     (2,217 )
 
           
Loss before income taxes
    (10,142 )     (131 )
Income tax benefit
    3,890       1,223  
 
           
Net (loss) earnings
  $ (6,252 )   $ 1,092  
 
           
 
               
Net (loss) earnings per common share — basic and diluted
  $ (0.29 )   $ 0.05  
Weighted average common shares outstanding — basic and diluted
    21,302       21,302  
 
               
Dividends declared per common share
  $     $  
See Notes to the Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
                 
    For the Nine Months Ended  
    September 30,  
    2010     2009  
 
               
Revenues:
               
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  
 
               
Railcar services (including revenues from affiliates of $10,283 and $11,548 for the nine months ended September 30, 2010 and 2009, respectively)
    51,011       43,646  
 
           
Total revenues
    178,273       344,971  
 
               
Cost of revenue:
               
Manufacturing operations
    (131,643 )     (271,552 )
Railcar services
    (40,814 )     (35,423 )
 
           
Total cost of revenue
    (172,457 )     (306,975 )
Gross profit
    5,816       37,996  
 
               
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.

 

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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.

 

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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 Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s 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 Company’s 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.

 

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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 investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ARI’s 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 Company’s 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  
 
           

 

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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 Company’s 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 Company’s 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.

 

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Income Approach
The income approach considers the subject company’s 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/Custom’s cost structure and negatively impact the projection of financial performance. If the railcar industry forecasts or ARI’s 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  
 
           

 

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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.

 

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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 Company’s investment through Castings, the note due to ARI and Ohio Castings’ subsidiary’s 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 venture’s 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, ARI’s 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 partner’s interest in Axis is greater than ARI’s 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.

 

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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 Component’s 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 )
 
                       

 

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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 ARI’s 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. ARI’s 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%. ARI’s ownership interest is determined by equity contributions. However, under the terms of the joint venture agreement, ARI is entitled to 47.5% of USRC’s 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.

 

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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 Company’s warranty liability include the number of units sold, historical and anticipated rates of claims and historical and anticipated costs per claim. Fluctuations in the Company’s 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 Company’s 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 Company’s 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 Company’s fixed charge coverage ratio, as defined and as measured on a rolling four-quarter basis, certain of these covenants, including the Company’s 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.

 

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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 Company’s tax years 2007-2009 remain open to examination. For State purposes, the Company’s tax years 2006-2009 remain open to examination by various taxing jurisdictions with the latest expiration of the statute in 2013. The Company’s 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 Company’s 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  
 
                       

 

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    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 ARI’s 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 Company’s 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 Company’s 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 Component’s 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.

 

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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 ARI’s 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. ARI’s 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  
 
                       

 

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Note 16 — (Loss) Earnings per Share
The shares used in the computation of the Company’s 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 Company’s common stock have an exercise price that is above market price, based on the closing market price of $15.68 per share of the Company’s 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 Company’s 2005 Plan. Shares issued under the 2005 Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

 

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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 Company’s 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 Company’s 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 Company’s 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%

 

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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 Company’s 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 Company’s 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.

 

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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 Company’s principal beneficial stockholder (through Icahn Enterprises L.P. (IELP)) and chairman of the Company’s 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 Company’s 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 ARI’s 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 asset’s 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 ACF’s net book value and the remaining portion of the purchase price will be a reduction to stockholder’s equity. As of September 30, 2010, all of the assets had been received and paid for in accordance with the agreement.

 

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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 Company’s principal beneficial stockholder (through IELP) and chairman of the Company’s 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 Company’s 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 Company’s 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.

 

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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 ARI’s 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 Company’s 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 Company’s 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 Component’s 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.

 

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Effective April 1, 2009, Mr. James J. Unger, the Company’s 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. Unger’s 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 Company’s 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.

 

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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:

 

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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  

 

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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 Company’s vice chairman of the board of directors. The lease is for ARI’s headquarters location in St. Charles, Missouri, that is currently leased through ARL under the Company’s services agreement with ARL, which expires December 31, 2010. The term under the new lease agreement commences at the time the Company’s current lease under the services agreement with ARL expires.

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
    the impact of the current economic downturn, adverse market conditions and restricted credit markets and the impact of the continuation of these conditions;
 
    our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
 
    the health of and prospects for the overall railcar industry;
 
    our prospects in light of the cyclical nature of our business and the current economic environment;
 
    anticipated trends relating to our shipments, revenues, financial condition or results of operations;
 
    our ability to manage overhead and variations in production rates;
 
    the highly competitive nature of the railcar manufacturing industry;
 
    fluctuating costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
 
    fluctuations in the supply of components and raw materials we use in railcar manufacturing;
 
    anticipated production schedules for our products and the anticipated financing needs, construction and production schedules of our joint ventures;
 
    risks associated with potential joint ventures or acquisitions;
 
    the risks associated with international operations and joint ventures;
 
    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;
 
    the sufficiency of our liquidity and capital resources;
 
    the conversion of our railcar backlog into revenues;
 
    compliance with covenants contained in our unsecured senior notes;
 
    the impact and anticipated benefits of any acquisitions we may complete;
 
    the impact and costs and expenses of any litigation we may be subject to now or in the future; and
 
    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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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.

 

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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.
                 
    For the Three Months Ended,  
    September 30,  
    2010     2009  
Revenues:
               
Manufacturing Operations
    74.7 %     79.4 %
Railcar services
    25.3 %     20.6 %
 
           
Total revenues
    100.0 %     100.0 %
Cost of revenue:
               
Cost of manufacturing operations
    (76.2 %)     (72.1 %)
Cost of railcar services
    (20.3 %)     (16.6 %)
 
           
Total cost of revenues
    (96.5 %)     (88.7 %)
Gross profit
    3.5 %     11.3 %
Selling, administrative and other
    (9.6 %)     (8.3 %)
 
           
(Loss) earnings from operations
    (6.1 %)     3.0 %
Interest income
    1.7 %     2.4 %
Interest expense
    (8.2 %)     (6.8 %)
Other income
    0.0 %     4.0 %
Loss from joint venture
    (3.0 %)     (2.8 %)
 
           
Loss before income tax expense
    (15.6 %)     (0.2 %)
Income tax benefit
    6.0 %     1.6 %
 
           
Net (loss) earnings
    (9.6 %)     1.4 %
 
           
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.

 

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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 Axis’s 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, LLC’s (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 Limited’s (Amtek Railcar) and US Railcar Company LLC’s (USRC) losses for the three months ended September 30, 2010.

 

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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.

 

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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.

 

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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 Axis’s 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 Railcar’s and USRC’s 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.

 

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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.

 

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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 Company’s current lease under the services agreement with ARL expires.

 

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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 Management’s 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 venture’s 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.

 

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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 Commission’s 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
ITEM 1A.   RISK FACTORS
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 Commission’s 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 ARI’s 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 Company’s 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.

 

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ITEM 6.   EXHIBITS
         
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

 

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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   

 

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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 another’s 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 Landlord’s 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 Landlord’s 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 Tenant’s 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 .
Tenant’s Share: The amount of Tenant’s pro rata share of the Excess Taxes and Operating Expenses as hereinafter defined. Tenant’s 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 Tenant’s 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 Landlord’s 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 Tenant’s Share of Landlord’s estimate of the Excess Taxes and Operating Expenses for such calendar year. If Landlord’s 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 Tenant’s 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 Tenant’s 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, Tenant’s 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. Tenant’s authorized employee or agent shall be given reasonable access within ten (10) days after receipt of Tenant’s notice (and thereafter as may be reasonably required by Tenant) to Landlord’s books and records during Tenant’s business hours at Landlord’s 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 Landlord’s books and records, such statement shall be deemed correct. If Tenant’s inspection determines that Landlord overcharged Tenant by more than three percent (3%) of the actual Taxes and Operating Expenses, Landlord agrees to pay for Tenant’s audit of Landlord’s books.
(v) No decrease in Taxes and/or Operating Expenses shall reduce Tenant’s 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 Tenant’s 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.

 

6


 

(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 Tenant’s employees leave the Building.
5. SERVICES.
(a) Landlord shall provide, at Landlord’s expense, except as otherwise provided,
(i) All utilities necessary to operate the Premises (other than telephone and other communications) for Tenant’s 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 Building’s 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 Landlord’s 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 Tenant’s use hereunder.
(ix) Security services into which the Building’s 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 ARL’s 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 Landlord’s 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 Tenant’s 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, Tenant’s 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 Tenant’s 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 Tenant’s exclusive use and install signage therefor at Landlord’s 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 Tenant’s exclusive use therein at no additional cost to Tenant.
(c) Landlord shall designate twelve (12) parking spaces adjacent to the Building for Tenant’s and American Railcar Leasing’s 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 Tenant’s 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 Landlord’s 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 Building’s plumbing, electrical, heating, air-conditioning or other systems serving, located in, or passing through the Premises. Landlord, at Landlord’s 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 Landlord’s cost.
(b) Landlord shall make commercially reasonable efforts to avoid unreasonably interfering with Tenant’s 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 Tenant’s 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 Landlord’s expense and as approved in Tenant’s 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 Tenant’s 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 Tenant’s compliance with this Section. In exercising its rights hereunder, Landlord shall use its reasonable efforts to minimize disruption of Tenant’s 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 Tenant’s 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 Tenant’s 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 Landlord’s 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 Landlord’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Landlord’s 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 Landlord’s 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 Landlord’s 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 Landlord’s 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 month’s Rent of the just-expired term for the first initial three (3) months of such holdover period. Thereafter, Tenant’s monthly rental obligation shall be 150% of the last month’s 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 Landlord’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Landlord’s 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 Tenant’s 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 Building’s 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 Tenant’s 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. LANDLORD’S 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 Tenant’s 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 Tenant’s 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 Tenant’s 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 Landlord’s 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 Landlord’s option enter into the Premises, remove Tenant’s 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 Tenant’s 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 Tenant’s 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 Tenant’s 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.

 

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(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. TENANT’S 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 Landlord’s cost and expense. Landlord agrees to reimburse Tenant for the reasonable costs and expenses incurred by Tenant within thirty (30) days after Tenant’s 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 Tenant’s personal property and equipment, or (c) unreasonably interferes with Tenant’s 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 Landlord’s default, Tenant may offset such amount from its rental payments.

 

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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 Tenant’s 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, Tenant’s 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 Tenant’s 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 Tenant’s personal property.
27. BROKER’S 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 Tenant’s actions. Landlord agrees to indemnify Tenant and hold Tenant harmless from, all liabilities arising from any such claims based on Landlord’s 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 Tenant’s 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 Landlord’s 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 Landlord’s 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.
                     
LANDLORD       TENANT    
 
                   
ST. CHARLES PROPERTIES LLC       AMERICAN RAILCAR INDUSTRIES, INC.    
 
                   
Name: 
/s/ Jim J. Unger       Name:  /s/ James Cowan    
Title: General Partner       Title: President and CEO    
Its:          Its:       
 
 
 
         
 
   

 

19


 

EXHIBIT A
[Depiction of the Premises]

 

20


 

EXHIBIT B
JANITORIAL SERVICES
I.  
Area B — Breakrooms/Coffee Areas
Daily:
  1.  
Empty all trash cans, replace liners, and remove trash to disposal area.
 
  2.  
Clean and sanitize sinks, countertops, and cabinets.
 
  3.  
Clean and sanitize coffee area.
 
  4.  
Dust mop all tile floor areas.
 
  5.  
Damp mop or wet mop all tile floor areas.
 
  6.  
Clean interior and exterior of microwaves.
Weekly:
  1.  
Wipe all doors, light switch covers, and walls to remove dust, dirt, smudges, and stains.
  2.  
Complete “low” dusting of all chair rungs, legs and sides of tables, and other surfaces.
 
  3.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
Monthly:
  1.  
Dust and clean wall and overhead vents to remove dust and dirt.
 
  2.  
Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
II.  
Area C — Cafeteria
Daily:
  1.  
Empty all trash cans, replace liners, and remove trash to disposal area.
 
  2.  
Clean and sanitize coffee area/employee station/microwave.
 
  3.  
Dust mop all tile floor areas. Sweep mop nightly.
 
4.  
Damp mop or wet mop all tile floor areas.
 
  5.  
Clean interior and exterior of microwaves/employee station/coffee area.
Weekly:
  1.  
Wipe all doors, light switch covers, walls to remove dust, dirt, smudges, and stains.
  2.  
Complete “low” dusting of all chair rungs, legs and sides of tables, and other surfaces.
 
  3.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
 
  4.  
Every Friday dump items and clean out employee refrigerator.
 
  5.  
Dust and clean overhead vents to remove dust and dirt.
III.  
Area E — Areas (Offices/Cubicles)
Daily:
  1.  
Empty all trash cans, replace liners, and remove trash to disposal area.
 
  2.  
Spot clean all glass (including glass walls and partitions).
 
  3.  
Dust mop all tile floor areas.
  4.  
Damp mop or wet mop all tile floor areas.
 
  5.  
Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots and stains.

 

21


 

3x Weekly:
  1.  
Thoroughly dust, desks, file cabinets, and other furniture and equipment.
Weekly:
  1.  
Wipe all doors, light switch covers, walls, and partitions to remove dust, dirt, smudges, and stains.
 
  2.  
Dust all windowsills, picture frames, ledges, and other exposed flat surfaces.
  3.  
Complete “low” dusting of all chair rungs, legs and sides of desks and tables, and other surfaces.
 
  4.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
Monthly:
  1.  
Sanitize all telephones.
 
  2.  
Dust and clean wall and overhead vents to remove dust and dirt.
 
  3.  
Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.
IV.  
Area P — Public Lobbies Hallways, Stairs and Elevators
Daily:
  1.  
Clean and sanitize entrance doors and lobby glass to remove dust, dirt, stains, smudges and fingerprints.
 
  2.  
Clean, disinfect and polish all drinking fountains.
  3.  
Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots and stains.
 
  4.  
Dust mop all tile floor areas.
 
  5.  
Damp mop or wet mop all tile floor areas.
 
  6.  
Sweep and damp mop elevator cab floors.
 
  7.  
Vacuum and sweep stairwells and landings.
 
  8.  
Damp mop stairwell landings.
3 x Weekly:
  1.  
Thoroughly dust, desks, file cabinets, and other furniture and equipment.
  2.  
Dust all windowsills, picture frames, ledges, exit signs, and other exposed flat surfaces that are not dusted daily.
  3.  
Clean all elevator doors, walls, switch plates and controls to remove dust, dirt, stains, smudges and fingerprints.
Weekly:
  1.  
Clean and sanitize walls, doors, and light switch covers, to remove dust, dirt, and stains.
  2.  
Dust and wipe stairwell handrails to remove dust, dirt, stains, smudges and fingerprints.
  3.  
Complete “low” dusting of all chair rungs, legs and sides of desks and tables, and other surfaces.
 
  4.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
Monthly:
  1.  
Clean, scour and polish all elevator door runner tracks to remove dust, dirt and stains.
 
  2.  
Dust and clean wall and overhead vents to remove dust and dirt.
 
  3.  
Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.

 

22


 

V.  
Area R — Restroom Area
Daily:
  1.  
Empty all wastepaper and sanitary napkin containers. Remove all refuse to trash disposal area.
  2.  
Refill soap and towel dispensers, toilet tissue holders, and sanitary napkin machines.
 
  3.  
Clean and sanitize all toilets, urinals, and urinal screens.
 
  4.  
Clean and sanitize sinks and washbasins. Polish fixtures.
 
  5.  
Wash and clean all mirrors to remove dust, dirt, smudges and fingerprints.
 
  6.  
Sweep restroom floors and damp mop with a germicidal disinfectant solution.
Weekly:
  1.  
Dust all partitions, ledges, light fixtures, and dispensers.
 
  2.  
Clean and sanitize walls to remove dust, dirt, smudges, stains and fingerprints.
 
  3.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
Monthly:
  1.  
Dust and clean overhead vents to remove dust and dirt.
 
  2.  
Clean and sanitize restroom partitions.
 
  3.  
Clean and sanitize both sides of restroom doors.
VI.  
Area V — Conference Rooms
Daily:
  1.  
Empty all trash cans, replace liners, and remove trash to disposal area.
 
  2.  
Organize chairs around table and straighten room.
 
  3.  
Spot clean all glass (including glass walls and partitions).
  4.  
Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots and stains.
3 x Weekly:
  1.  
Thoroughly dust tables, file cabinets, and other furniture and equipment.
Weekly:
  1.  
Wipe all doors, light switch covers, walls, and partitions to remove dust, dirt, smudges, and stains.
  2.  
Complete “low” dusting of all chair rungs, legs and sides of desks and tables, and other surfaces.
 
  3.  
Complete “high” dusting of all corners and ceiling edges to remove cobwebs.
Monthly:
  1.  
Sanitize all telephones.
 
  2.  
Dust and clean wall and overhead vents to remove dust and dirt.
 
  3.  
Clean all baseboards to remove dirt, dust, stains, and scuff and heel marks.

 

23


 

VII.  
Area X — Executive Offices
Daily:
  1.  
Empty all trash cans, replace liners, and remove trash to disposal area.
 
  2.  
Thoroughly dust desks, file cabinets, and other furniture and equipment.
  3.  
Vacuum all carpeted areas, spot clean carpets as needed to remove spills, spots and stains.
  4.  
Clean and sanitize coffee areas and small kitchen areas.
 
  5.  
Spot clean all glass (including glass walls and partitions).
 
  6.  
Clean and sanitize all private restrooms.
Weekly:
  1.  
Wipe all doors, light switch and receptacle covers, walls, and partitions to remove dust, dirt, smudges, and stains.
 
  2.  
Dust all windowsills, picture frames, ledges, and other exposed flat surfaces.
  3.  
Complete “low” dusting of all chair rungs, legs and sides of desks and tables, and other surfaces.
 
  4.  
Complete “high” dusting of all comers and ceiling edges to remove cobwebs.
Monthly:
  1.  
Sanitize all telephones.
 
  2.  
Dust and clean wall and overhead vents to remove dust and dirt.
Miscellaneous Services
  1.  
Carpet spotting included in contract. Complete water extraction for office will be provided at the rate of (.15) per square foot.
 
  2.  
Certificate of Insurance will be provided.
 
  3.  
Pre-employment background/police checks completed on each employee.
  4.  
Floor service can be provided upon request.

 

24


 

SCOPE OF WORK FOR PORTER
     
*  
Porter shall be available for expected and unexpected Customer needs and to keep American Railcar Industries, Inc. “Customer Ready” at all times.
I.  
Offices
Daily:
  1.  
Organize reading materials on coffee tables.
 
  2.  
Remove spots from carpet as necessary.
 
  3.  
Polish metal trim around doorways.
 
  4.  
Clean door frames and thresholds.
 
  5.  
Vacuum floor mats and runners.
 
  6.  
Remove fingerprints from entrance doors and partition glass.
II.  
Public Areas
Daily:
  1.  
Clean entrance door glass, inside and out.
 
  2.  
Clean “Building Directory” and lobby glass.
 
  3.  
Vacuum entrance mat and carpeting and spot clean as necessary.
 
  4.  
Sweep and damp mop all hard surface floors as needed.
 
  5.  
Spot clean wall in corridors.
 
  6.  
Sweep and mop stairwells and landings.
 
  7.  
Clean all door glass, inside and outside.
Monthly:
  1.  
Lobby walls to be dusted.
 
  2.  
Entrance doors to suites to be polished.
 
  3.  
Ceiling and wall vents to be dusted.
 
  4.  
Kick plates to be polished.
 
  5.  
Fixtures will be cleaned.
III.  
Restrooms
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.
VI.  
Floors
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

Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James Cowan, President & CEO of American Railcar Industries, Inc., certify that:
1.  
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: November 2, 2010  /s/ James Cowan    
  James Cowan,    
  President and Chief Executive Officer   

 

 

Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dale C. Davies, Chief Financial Officer of American Railcar Industries, Inc., certify that:
1.  
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared.
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: November 2, 2010  /s/ Dale C. Davies    
  Dale C. Davies,    
  Senior Vice President,
Chief Financial Officer and Treasurer 
 

 

 

Exhibit 32
Certification
Pursuant to Rule 13a-14 (b) and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350 (a) and (b))
I, James Cowan, President and Chief Executive Officer of American Railcar Industries, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
  1.  
the quarterly report on Form 10-Q of the Company for the three months ended September 30, 2010 (the “Quarterly Report”) fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
  2.  
the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: November 2, 2010  /s/ James Cowan    
  James Cowan,    
  President and Chief Executive Officer   
I, Dale C. Davies, Senior Vice President, and Chief Financial Officer of American Railcar Industries, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge:
  1.  
the quarterly report on Form 10-Q of the Company for the three months ended September 30, 2010 (the “Quarterly Report”) fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
  2.  
the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: November 2, 2010  /s/ Dale C. Davies    
  Dale C. Davies,    
  Senior Vice President,
Chief Financial Officer and Treasurer