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Colorado Railcar DMU deal cost Portland's TriMet millions

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  • 12/14 The Oregonian
    Published Sunday, December 14, 2008, by The Oregonian Westside Express deal cost TriMet millions The agency contracted with a rail car company it knew was
    Message 1 of 1 , Dec 31, 2008
      Published Sunday, December 14, 2008, by The Oregonian

      Westside Express deal cost TriMet millions

      The agency contracted with a rail car company it knew was failing,
      and eventually had to seize control of it

      By Les Zaitz
      The Oregonian

      TriMet pumped millions of dollars into a shaky Colorado company in
      recent months, keeping it alive despite mismanagement so it could
      finish the agency's new commuter rail cars.

      The agency handed $5.5 million to the nearly bankrupt Colorado Railcar
      Manufacturing on top of $17 million awarded to the company for four
      specialized cars. TriMet expected to easily reclaim $3 million of the
      extra payments, but a court fight jeopardizes that hope.

      The mess explains in part why TriMet is late launching its new
      westside commuter service, and it shows what can happen when a public
      agency makes a risky choice to do business with an unproven vendor.

      TriMet contracted with Colorado Railcar in 2005 even though agency
      officials knew the company was losing money and had little cash. They
      said they were aware of past business troubles of the company's owner,
      Tom Rader.

      TriMet's general manager, Fred Hansen, told The Oregonian that Rader's
      past was "not a major concern" because the problems happened years
      earlier.

      Almost from the moment Colorado Railcar started work in late 2006, the
      company fell behind schedule. Company officials disguised the truth
      about why and then stalled TriMet by repeatedly claiming that new
      financing was just about in hand.

      The company's financial condition worsened through 2007, forcing
      TriMet to speed up payments to help. Company officials diverted some
      of the money to other work.

      In early 2008, TriMet took charge of Colorado Railcar's finances. It
      paid $1 million in interest to the company's lender and covered unpaid
      bills, the rent and even the company owner's $37,000-a-month salary.

      TriMet executives defend their actions, saying they aggressively
      safeguarded the agency and public money. They said circumstances
      forced tough choices to get the rail cars done and shipped to Oregon.

      Only one bidder

      TriMet's hopes for launching a new commuter service in Washington
      County hinged on finding the right vehicle.

      The Westside Express Service, now scheduled to start in February,
      is designed to carry 4,000 passengers daily between Beaverton and
      Wilsonville. They will ride on self-propelled passenger cars,
      picked by TriMet to save fuel costs over locomotive-led trains.

      In 2004, two companies said they could build what TriMet wanted,
      although neither had a customer using such cars. One international
      manufacturer quickly dropped out because it couldn't find enough
      business to justify production.

      That left TriMet with Tom Rader's undercapitalized company.

      Rader, 62, made millions in 1987 from selling a company that created
      Alaska rail tours. He moved into rail car manufacturing, starting in
      a former blimp hangar in Tillamook. Rader didn't respond to interview
      requests or written questions, but associates and records portray a
      man with a passion for railroads and a genius for spotting
      opportunity.

      One of his companies garnered notoriety in 1997, when cigarette maker
      Philip Morris canceled its order for a luxury train because it was
      behind schedule and over budget. Philip Morris paid Rader's company
      $70 million before giving up.

      His next company sputtered to a close when it couldn't finish rail
      cars for a highly publicized Florida tour train. The Florida company
      said delayed deliveries strangled its business, forcing it into
      bankruptcy.

      Rader was back in business in 1998, this time as Colorado Railcar
      Manufacturing. His opportunistic nature soon had him on a new track,
      designing rail cars for public transit.

      TriMet knew the risk

      When TriMet chose Rader's company to build its cars, his company had
      only one other order on its books for a new car. Agency officials knew
      the company had little cash on hand and had slipped into the red in
      2004.

      Jim Fronk, TriMet procurement director, said in an internal memo dated
      Feb. 23, 2005, there was "some level of risk" in doing business with
      Colorado Railcar.

      He recommended TriMet "mitigate that risk" with unusual contract
      restrictions, a lien on all parts of TriMet's cars while under
      construction and a requirement for a $3 million letter of credit.

      Fronk didn't mention Rader's business history in that memo or in an
      update he wrote seven months later.

      TriMet executives insisted in interviews that they knew of what one
      characterized as Rader's "checkered past."

      Neil McFarlane, TriMet executive director for capital projects, said
      agency officials didn't seriously consider changing course despite
      the discoveries. Colorado Railcar had the "perfect product" for the
      commuter service, he said.

      Yet, McFarlane said, "We knew that if this company got into trouble
      it did not have deep pockets to reach into."

      In contract negotiations in 2005, TriMet asked Colorado Railcar for a
      performance bond worth $8.5 million, or about half the contract. Such
      a bond could be turned into cash for TriMet if it had to take over
      rail car construction.

      Colorado Railcar executives contended such a bond was too expensive.
      TriMet backed down and agreed to a $3 million letter of credit,
      projecting it would cover even a worst-case scenario.

      Besides, Hansen said, the company said Rader was pledging his own
      assets to guarantee the letter of credit. If the company owner was
      putting his home and others assets on the line, he must mean business,
      Hansen concluded.

      Rader never made that pledge, company officials now say, but TriMet
      officials didn't know that when they signed the contract.

      A `recovery plan'

      In November 2006, Colorado Railcar went to work stitching together
      the first of 5,000 parts needed for one TriMet car.

      Within weeks, TriMet engineers visiting the plant in Fort Lupton,
      Colo., detected that tasks were being done out of sequence.
      Construction also was slower than expected. Nosing around, they picked
      up rumors that workers didn't have the parts they needed because
      unpaid vendors wouldn't ship them.

      Back in Portland, TriMet officials weren't panicked. TriMet routinely
      encounters delays in major projects and just as routinely demands a
      "recovery plan" from contractors. In its plan, Colorado Railcar said
      it was a month behind on one car.

      TriMet's notes of a Feb. 22, 2007, conference call record Rader's
      optimism that he would soon have $15 million in new financing. Vendors
      would be paid and parts would flow, Rader said. Colorado Railcar would
      catch up and make the date for a strength test of the rail cars.

      This was crucial to the Westside Express Service. By spring 2007,
      TriMet had acquired five miles of route and contractors were laying
      rail. The work would be of no use without rail cars that one TriMet
      executive described as the "heart of the project."

      McFarlane, TriMet's executive director, decided to dig deeper into
      Colorado Railcar's affairs. He wrote to Rader that "TriMet is now
      required to exercise due diligence" in examining the company. He
      demanded more detailed information than requested before the contract
      was signed. McFarlane also dispatched a high-level team to Fort
      Lupton, about a half-hour north of Denver.

      This time, Rader said he was just a week from financing. According to
      TriMet, he warned the visiting TriMet officials that if he couldn't
      get the financing, "all bets are off." Those notes characterized Rader
      and his executives as "engaging" and "candid."

      Rader didn't share that he had recently acquired another venture --
      the American Orient Express luxury train. He assumed $6 million in
      debt but didn't put up any cash. He later used Colorado Railcar money
      to operate what one accountant described as his "personal toy."

      The acquisition helped cement the big loan package Rader had been
      chasing. In May 2007, Hilco Financial, a Chicago financier of
      troubled companies, loaned Rader's companies $17 million.

      TriMet officials figured that the sophisticated lender wouldn't pour
      money down the drain.

      "We all sighed a big sigh of relief," said Tuck Wilson, TriMet special
      counsel managing the commuter project.

      The loan relaxed TriMet's vigilance.

      "It produced a little higher level of confidence than it should have,"
      Hansen said.

      An insider's tip

      Rader's companies chewed through the Hilco millions over the summer
      of 2007, and vendors once more were pounding on the door for payment.

      TriMet helped out, speeding up payments and advancing sums for parts
      on order. The agency was assured its money would be used only for
      TriMet cars. That wasn't the case.

      In fall, Wilson learned from a company insider that TriMet's money
      had been diverted to another project. He called Rader.

      "He expressed some embarrassment. I expressed frustration. It was a
      painful conversation," Wilson recalled.

      For TriMet, the company's thin credibility had evaporated.

      "Were we being lied to? The answer is yes," Hansen said.

      Wilson hired Conrad Myers, a Portland forensic accountant, to
      investigate Colorado Railcar's finances.

      Myers' confidential report in late November 2007 contained a trainload
      of bad news.

      "CRM will not survive beyond the end of the year without appropriate
      emergency action," Myers wrote.

      Wilson worked through the Thanksgiving weekend on his own recovery
      plan. He figured TriMet's best hope was to take control of Colorado
      Railcar. Otherwise, he feared, the company would go bankrupt.

      If that happened, the rail cars would be locked up in litigation and
      the commuter service would be postponed.

      He crafted a take-it-or-leave-it deal for Rader: TriMet gets control
      of your company or we cancel the contract now.

      He had backing for the unprecedented move all up the line, including
      from Hansen, the agency's general manager.

      "You have to be very flinty-eyed," Hansen said.

      In return for control, TriMet promised to pay the company's other
      costs and past-due bills unrelated to the rail cars. Another customer,
      state-run Alaska Railroad, later joined the pact and shared those
      costs.

      The deal was still being put to paper when Myers returned to Colorado
      in late December for another look. His bleak report: Colorado Railcar
      needed money immediately to cover paychecks. The next day, TriMet
      wired $545,000.

      But that was almost the good news compared to what else Myers
      reported.

      He estimated Colorado Railcar would need an additional $5 million to
      keep going. That was on top of the $17 million TriMet was under
      contract to pay.

      Trapped by circumstances, TriMet saw no choice but to pay.

      Rader kicked out

      Tom Rader didn't show much appreciation for TriMet's help.

      He was furious when he found out Wilson had called another Colorado
      Railcar customer to share the unfolding developments. He jumped Wilson
      by phone in a call Wilson vividly recalls.

      "On top of his other issues, he had an anger management problem,"
      Wilson said.

      It was the last time the two men talked.

      TriMet cinched up control of Colorado Railcar's spending, knocking
      Rader's children off the company payroll. The agency paid for power,
      phone service and factory rent.

      In April, Hilco lost patience with Rader and used its loan agreement
      to force a change in command. Rader was tossed out of his own company,
      only to preside over the collapse of his luxury railroad. He was
      replaced in Fort Lufton by a veteran of the rail car business.

      That veteran, Larry Salci, was appalled at what he encountered. The
      shop floor was a mess. Without access to the right cranes, workers
      dragged 200,000-pound rail cars across the concrete floor, gouging
      and grinding as they went.

      With Salci on board and TriMet controlling the money, work stepped up
      on TriMet's cars. Two arrived in Wilsonville in June, and two more in
      September. A TriMet lawyer sent the company a letter of "thanks and
      congratulations."

      The letter also asked Colorado Railcar to repay $5 million within 60
      days.

      Money keeps flowing

      Agency officials thought they would easily recover $3 million of
      that sum by cashing the letter of credit.

      Beyond that, Hansen said, "I didn't hold out much hope."

      But in October, a judge temporarily blocked TriMet's claim to the
      letter. The agency's expectation of a routine banking transaction
      turned into a legal fight over whether TriMet engaged in fraud. The
      agency forecasts that disputing that allegation will cost it an
      additional $100,000.

      Meanwhile, money flows from TriMet to Colorado Railcar. The agency
      explained that it needs Colorado Railcar engineers to commission
      the new cars.

      TriMet was supposed to get that service under its original contract,
      but that money is long gone. Now, TriMet has to cover engineers' pay
      and other company costs. Those additional costs so far total $653,000.

      SIDEBAR

      Tom Rader's track record

      Details about Tom Rader's troubles running two other projects are
      chronicled in publicly available documents — Philip Morris documents
      posted online and court and securities filings related to Rader's
      problems with a Florida company. TriMet officials said they knew of
      Rader's past and it was not a "major concern."

      The Philip Morris debacle

      Rattlesnake salad, lobster bisque and buffalo chili were on the lunch
      menu in 1995 as Rader hosted his customers from Philip Morris, the
      cigarette company.

      Rader was a gifted salesman, and Philip Morris the year before handed
      his company, Rader Railcar Inc., a $28 million contract to build one
      of the most luxurious trains to ride the American rails. Within months
      of that high-toned lunch, Philip Morris was suffering financial
      indigestion from its dealings with Rader. The project was behind
      schedule and costs were mounting by the millions.

      Time after time, Philip Morris executives trekked to Colorado to
      investigate the problems. They described in reports their concerns
      with the lack of controls, inadequate engineering and ever-escalating
      costs. The company finally forced Rader to hire an outside project
      monitor.

      It wasn't enough, as a brutally frank internal memo reported a year
      later. Rader and his executives "don't know how to supervise people;
      results in much of rework; engineering also stinks," the memo said.

      Evaluating manufacturing flaws, another tobacco executive wrote of
      Rader's operation that there was a "fine line between stupidity and
      dishonesty and I think we're right on it."

      By the spring of 1997, the $28 million train had become a $70 million
      train, and costs continued to mount. Philip Morris finally stopped
      the project, ordering Rader to cut the unfinished train into scrap.

      Call it Debacle II

      As the Philip Morris deal unraveled, Rader had other problems. He
      had set up a second company called Rader Railcar II. This business
      took over work unrelated to the Philip Morris project, including a
      $10 million contract with a Florida company.

      The contract was with First American Railways, a company Rader helped
      found. The company went public, raising millions to buy Rader's train
      cars. Work quickly fell behind schedule.

      "He ran out of money," said Ray Monteleone, former president of First
      American Railways. "We had to feed him hand-to-mouth."

      Monteleone sent officials to Colorado to monitor the books and help
      manage affairs.

      "We had to run his company to get those cars delivered," Monteleone
      said.

      It wasn't enough. The company reported to shareholders that Rader
      Railcar II missed one schedule and then an amended one for delivery
      of the cars.

      Rader Railcar II still owed Florida three cars when it announced in
      November 1997 that it was shutting down. The firm blamed tardy
      payments from the Florida operation.

      That was news to First American, which fired back that not only had
      Rader Railcar II been paid on time, it had received advance payments
      as well. In 1998, First American Railways went bankrupt, blaming the
      late delivery of the cars for slow business.


      [BATN: See also:

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