AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997
REGISTRATION STATEMENT NO. 333-9601
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST AMERICAN RAILWAYS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 4011 87-0443800
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ALLEN C. HARPER, CHAIRMAN OF
THE BOARD AND CHIEF EXECUTIVE
OFFICER OF FIRST AMERICAN
FIRST AMERICAN RAILWAYS, INC. RAILWAYS, INC.
3700 N. 29TH AVENUE, STE. 202 3700 N. 29TH AVENUE, STE. 202
HOLLYWOOD, FLORIDA 33020 HOLLYWOOD, FLORIDA 33020
(954) 920-0606 (954) 920-0606
(ADDRESS AND TELEPHONE NUMBER (NAME, ADDRESS AND TELEPHONE
OF PRINCIPAL EXECUTIVE OFFICES NUMBER OF AGENT FOR SERVICE)
OR INTENDED PRINCIPAL PLACE OF
BUSINESS)
COPIES TO:
DENNIS J. OLLE, ESQ.
OLLE, MACAULAY & ZORRILLA, P.A.
1402 MIAMI CENTER
201 SOUTH BISCAYNE BOULEVARD
MIAMI, FLORIDA 33131
(305) 358-9200
(305) 358-9617 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
CALCULATION OF REGISTRATION FEE
-------------------------------
AMOUNT PROPOSED PROPOSED
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ------------------------------ ---------- --------- -------------- ----------------
Common Stock, $.001 par value....................... 4,702,572 $2.75 $12,932,073.00 $3,918.81(1)
--------- ----- -------------- ---------
Series A Warrants................................... 3,962,773 -- -- --
--------- -- -- --
Financial Advisory Warrants......................... 100,000 -- -- --
------- -- -- --
Common Stock, $.001 Par Value, Underlying
Outstanding Series A Warrants(2).................... 3,962,773 $3.50 $13,869,705.50 $4,782.66
--------- ----- -------------- ---------
Common Stock, $.001 Par Value, Underlying
Outstanding Financial Advisory Warrants............. 100,000 $2.50 $ 250,000.00 $ 86.21
------- ----- -------------- ---------
Common Stock, $.001 Par Value, Underlying
Outstanding Bradshaw Warrants....................... 1,610,000 $3.50 $ 5,635,000.00 $1,707.58
--------- ----- -------------- ---------
Common Stock, $.001 par value, Underlying
Outstanding Convertible Secured Notes ("Notes") 3,295,976 $3.50 $11,535,916.00 $3,495.73
--------- ----- -------------- ---------
Series A Warrants to be Issued in Connection with
Prepayment of the Notes............................. 2,353,052 -- -- --
--------- -- -- --
Common Stock, $.001 par value, Underlying Series
A Warrants to be Issued in Connection with
Prepayment of the Notes(2).......................... 2,353,052 $3.50 $ 8,235,682.00 $2,495.65
--------- ----- -------------- ---------
Total Registration Fee(2)........................... $16,486.65(3)
=============
<FN>
- ----------
(1) Based on $2.75 per share at June 23, 1997.
(2) Pursuant to Rule 416, this Registration Statement also covers such
indeterminate number of shares of Common Stock as may be issuable pursuant to
the anti-dilution provisions of the Warrants.
(3) Filing fee previously paid.
</FN>
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
FIRST AMERICAN RAILWAYS, INC.
(CROSS REFERENCE SHEET)
FORM SB-2
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
- ----------------------- ---------------------
1. Front of Registration Statement
Outside Front Cover of Prospectus........................ Cover Page
2. Inside Front Cover and Outside Inside Front and Outside Back;
Back Cover Pages of Prospectus........................... Back Cover Pages
3. Summary Information and Risk Factors....................... Prospectus Summary; Risk Factors
4. Use of Proceeds............................................ Use of Proceeds
5. Determination of Offering Price............................ Not Applicable
6. Dilution................................................... Not Applicable
7. Selling Security Holders................................... Principal and Selling Shareholders
8. Plan of Distribution....................................... Plan of Distribution
9. Legal Proceedings.......................................... Business--Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons............................ Management
11. Security Ownership of Certain
Beneficial Owners and Management......................... Principal and Selling Shareholders
12. Description of Securities.................................. Description of Capital Stock
13. Interest of Named Experts and Counsel...................... Experts; Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Not Applicable
15. Organization Within Last Five Years........................ Not Applicable
16. Description of Business.................................... Business
Management's Discussion and Analysis
17. Management's Discussion and Analysis of the Results of Operations and Financial
or Plan of Operation..................................... Condition and Plan of Operation
18. Description of Property.................................... Business
19. Certain Relationships and Related Transactions............. Certain Transactions
20. Market for Common Equity and Risk Factors; Price Range of Common
Related Stockholder Matters.............................. Stock; Principal and Selling
Shareholders
21. Executive Compensation..................................... Management
22. Financial Statements....................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure..................................... Experts
13,671,321 SHARES OF COMMON STOCK
6,320,111 SERIES A REDEEMABLE WARRANTS
100,000 FINANCIAL ADVISORY WARRANTS
[LOGO]
This Prospectus relates to the offering of 13,671,321 shares of Common Stock,
$.001 par value (the "Shares"), along with 6,315,825 Series A Redeemable
Warrants ("Series A Warrants") and 100,000 financial advisory warrants
("Advisory Warrants"), (collectively the "Warrants") of First American Railways,
Inc. (the "Company"), by certain securityholders of the Company (collectively,
the "Selling Shareholders"). A total of 4,702,572 Shares offered hereby are
owned of record by the Selling Shareholders, including 200,000 shares owned by
Charles E. Bradshaw, Jr., a director and the principal warrantholder of the
Company, 52,500 shares owned by International Capital Growth Ltd. ("Capital
Growth"), the Company's financial advisor and its placement agent in certain
prior private placements made by the Company, 10,800 shares owned by Raymond
Monteleone, the President and Chief Operating Officer and a director of the
Company and 9,700 shares owned by Atlantic Equity Corporation. In addition,
7,263,046 shares offered hereby represent Common Stock underlying outstanding
Warrants and Common Stock underlying outstanding convertible secured notes (the
"Notes"), which securities were issued in connection with several private
placements by the Company (collectively, the "Private Placements"). Also
included in the Common Stock offered hereby are 2,353,052 Shares underlying
certain additional Series A Warrants which may be issued in the future, as
described below, and 100,000 Shares underlying the Financial Advisory Warrants,
described below.
The outstanding Series A Warrants are held as follows: (i) warrants to purchase
an aggregate of 650,000 Shares that expire in April 1998 and have an exercise
price of $3.50 per share are held by Capital Growth; (ii) warrants to purchase
3,312,773 Shares which are exercisable until April or May 1998 at an exercise
price of $3.50 per share are held by the Selling Shareholders who participated
in the Private Placements; and (iii) 2,353,052 warrants that would expire in
April and May 1998 and have an exercise price of $3.50 per share which may be
issued to the holders of the Notes in certain circumstances in connection with
the prepayment of the Notes. The Series A Warrants may be redeemed under certain
circumstances. The remaining warrants offered hereby consist of 100,000 Advisory
Warrants that expire in February 2001, which are not redeemable and are
exercisable at $2.50 per share. See "Description of Securities."
The Company will not receive any proceeds from this offering; however, the
maximum gross proceeds payable to the Company from the exercise of all of the
outstanding Warrants would be $14,119,705, and an additional $8,235,683 would be
payable to the Company if the Warrants that may be issued in certain
circumstances in repayment of the Notes are exercised in full.
The Company's Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq")
under the symbol FTRN. On June 17, 1997, the last reported sales price of the
Common Stock was $2.75 per share. See "Price Range of Common Stock." Currently
there is no public market for the Warrants, nor is one expected to develop.
The Company is unaware of any specific plan of distribution of the Selling
Shareholders with respect to the Shares or the Warrants; however, it believes
that the Shares will be sold from time to time by such Selling Shareholders or
by their pledgees, donees, transferees or other successors in interest, to or
through underwriters or directly to other purchasers or through brokers or
agents in one or more transactions at varying prices determined at the time of
sale or at a fixed or negotiated price. See "Plan of Distribution." The
aggregate net proceeds to the Selling Shareholders from the sale of the Shares
or Warrants pursuant to this Prospectus will be the sale price of such Shares or
Warrants less any commissions. The Company is paying all of the expenses in
connection with the preparation of this Prospectus and the related registration
statement and the qualification of the shares under applicable state securities
laws.
This offering is being made without using the services of an underwriter. The
Selling Shareholders and any broker-dealers, agents or underwriters that
participate with the Selling Shareholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), in which event any commission received by
such broker-dealers, agents or underwriters and any profit on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK. ONLY THOSE PERSONS ABLE TO
LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE THESE SECURITIES.
SEE "RISKS FACTORS" BEGINNING ON PAGE 5.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS JUNE ____, 1997.
1
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS.
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING
"RISK FACTORS."
THE COMPANY
First American Railways, Inc., a Nevada corporation (the "Company") was
organized in the State of Nevada in 1987. On April 26, 1996, the Company merged
with First American Railways, Inc., a Florida corporation (First
American-Florida) and the Company was the surviving entity. As a result of the
Merger the Company assumed all of the contractual rights, privileges and duties
of First American-Florida. In connection with the Merger the Company amended its
Articles of Incorporation to, among other things, change its name and create a
series of "blank check" preferred stock.
The Company is currently pursuing its strategy of becoming the recognized leader
in providing innovative, quality entertainment-based passenger rail service
through the development of "Fun Trains" and the acquisition of "Scenic
Destination Railroads." The Company is currently developing its first Fun Train
(the "Florida Fun-Train"), an entertainment-based rail service which is
anticipated to commence operations in the fall of 1997 between South and Central
Florida. In March 1997, the Company acquired its first Scenic Destination
Railroad, The Durango & Silverton Narrow Gauge Railroad Company (the "D&SNG"),
described below.
The Florida Fun-Train's goal is to provide an enjoyable and entertaining
alternative to other means of transportation between South and Central Florida
by maximizing the entertainment value of its passengers' travel time while
providing an efficient, safe and reliable form of transportation at a reasonable
price. The Company intends to provide passengers with an exciting, unique,
fun-filled overland leisure excursion through the use of a variety of
entertainment-based services, including video and virtual reality games, as well
as dining, dancing and lounge cars offering different types of live
entertainment. The Company expects that most of its passengers will be tourists
and plans to market, in part, the Company's service as an extension of its
passengers' vacations.
The Company has taken significant steps to commence the operation of the Florida
Fun-Train. The Company has: purchased its first passenger car and entered into
an agreement for the manufacture of the remaining railcars; entered into the
requisite track rights agreements; selected prospective train terminal sites in
Orlando and South Florida and, where applicable, is negotiating for the
construction of such terminals; entered into an agreement with the National
Railroad Passenger Corporation ("Amtrak") for the operation of the Florida
Fun-Train; and entered into an agreement with Universal Studios for joint
marketing efforts in connection with Florida Fun-Train services.
The Company's initial marketing efforts for the Florida Fun-Train have shown
positive results which, in the opinion of management, validates the Company's
business plan. The Company has received significant "commitments" (both written
and oral) to deliver passengers to
the Florida Fun-Train. The above-described
commitments are for travel between October 1, 1997 through December 31, 1998.
These commitments are from various travel companies, tour operators, wholesalers
and travel agents. See "Business - The Florida Fun-Train - Marketing." In
addition, the Company has entered into a marketing agreement with Universal
Studios Florida for joint promotional activities, joint advertising and other
joint publicity activities.
The Company is also actively pursuing its strategy of acquiring Scenic
Destination Railroads. In March 1997, the Company purchased D&SNG, the owner and
operator of a privately held, scenic railroad which the Company believes is
among the country's largest and best-known Scenic Destination Railroads (the
"Durango Acquisition"). D&SNG operates an historic railroad which was built
between 1881-82 by the Denver & Rio Grande Railway Company. D&SNG has been
carrying passengers for more than 114 years, has been declared a registered
National Historic Landmark. The antique, steam-operated locomotives that power
the trains are coal-fired. These locomotives were manufactured between 1923 and
1925. In addition, many of the coaches used by the railroad are the railroad's
original coaches dating back to the 1880s. D&SNG's operations have combined
strict adherence to historical authenticity and exacting standards of
replication to provide a historically authentic railroad service. The railroad
operates between Durango and Silverton, Colorado, a 90-mile round trip, which
takes approximately nine hours. Since 1993, the D&SNG railroad has carried
approximately 200,000 passengers annually. The railroad is located entirely
within the State of Colorado near the "Four Corners" region, where the borders
of Colorado, Utah, New Mexico and Arizona meet.
For the fiscal year ended December 31, 1996, the D&SNG generated revenues,
operating cash flow and pre-tax income of approximately $9 million, $3 million,
and $2 million, respectively. As a result, the operations of D&SNG are currently
generating cash flow in advance of the launch of the Florida Fun-Train. Further,
the Company believes that there are potential opportunities to increase the
revenues and earnings of the D&SNG by (i) initiating a formal marketing plan in
conjunction with marketing efforts on behalf of the Florida Fun-Train designed
to increase ridership; (ii) potentially realizing revenue gains from the
implementation of a 15% fare increase (which has been approved by the Colorado
authorities); (iii) potentially realizing revenue gains from price increases in
the prices for and sale of "on-board" products; and (iv) reducing expenses
resulting from the elimination of various corporate expenses related to the
operation of a corporate jet, third party management fees and the lease of an
apartment totaling approximately $900,000, the operating costs for which are
included in the financial results.
Historically, the operations of D&SNG have been the subject of limited marketing
efforts. The Company believes that the great majority of D&SNG's passengers have
learned of D&SNG's railroad by "word-of-mouth," or other indirect forms of
contact with the public, such as billboards and newsprint
2
articles. In an attempt to broaden the passenger base for D&SNG's railroad in
the future, the Company intends to concentrate its marketing efforts for the
railroad on the broad-based , travel-related industry. The Company expects to
establish relationships in coordination with the Florida Fun-Train's marketing
efforts in international and domestic areas through direct contact with
distributors and general sales agents having knowledge and experience in the
development of contractual arrangements. Further, the Company anticipates
expanding the railroad's on-board concessions.
Finally, the Company's objective is to develop other Fun-Trains and acquire
additional Scenic Destination Railroads to further diversify its operations by
capitalizing on potential economies of scale that may result from consolidations
in this highly-fragmented industry.
* * * *
The Company maintains offices at 3700 North 29th Avenue, Hollywood, Florida
33020. Its telephone number is (954) 920-0606. All references to the Company
herein include its predecessor by merger, First American Railways, Inc., a
Florida corporation.
3
THE OFFERING
THE OFFERING:
Maximum Common Stock Offered by the Selling
Shareholders Assuming Exercise of Warrants and
Conversion of Notes(1).................................... 13,671,321 Shares
Maximum Common Stock Outstanding after the
Offering Assuming Exercise of All Warrants and
Conversion of Notes(1).................................... 23,285,095 Shares
Nasdaq Small Cap Symbol for Common Stock.................. FTRN
Series A Warrants Offered
by Selling Shareholders(2)................................ 6,315,825 Warrants
Advisory Warrants Offered by Selling Shareholders......... 100,000 Warrants
Use of Proceeds........................................... The Company will not receive any proceeds from the
sale of the Shares or Warrants by the Selling
Shareholders. Any proceeds received by the Company,
from time to time, upon exercise of the Warrants
will be used for working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors.............................................. The securities offered hereby involve a substantial
degree of risk and should not be purchased by anyone
who cannot afford the loss of their entire investment.
See "Risk Factors."
<FN>
(1) Includes common stock to be issued upon the exercise of the Warrants and
outstanding stock options, as well as upon the conversion of the various
convertible notes; also includes common stock to be issued to Charles E.
Bradshaw, Jr., in connection with the exercise of 1,610,000 common stock
purchase warrants; as a result an additional maximum 12,558,770 shares will be
outstanding. Excludes shares to be issued in connection with Mr. Bradshaw's
conversion of a $4.2 million (principal amount) convertible note, and shares to
be issued upon the exercise of 475,000 common stock purchase warrants to be
issued to CSX Transportation.
(2) No public market exists for the Warrants. Includes 2,353,052 Series A
Warrants that may be issued, in certain circumstances, in connection with the
prepayment of the Notes.
</FN>
PLAN OF DISTRIBUTION:
The Company is unaware of any specific plan of distribution of the Selling
Shareholders with respect to the Shares or the Warrants, but believes that the
Shares will be sold at prevailing market prices on Nasdaq, without payment of
any underwriting commissions or discounts other than ordinary brokerage
transaction fees. See "Plan of Distribution." The aggregate net proceeds to the
Selling Shareholders from the sale of the Shares or Warrants pursuant to this
Prospectus will be the sale price of such Shares or Warrants less any
commissions. The Company is paying all of the expenses in connection with the
preparation of this Prospectus and the related registration statement.
4
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE THESE
SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION,
SHOULD CAREFULLY READ THIS OFFERING DOCUMENT AND CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
NO MATERIAL REVENUE; ACCUMULATED DEFICIT. The Company (excluding its D&SNG
subsidiary) has not had any material revenue from operations, and it had an
accumulated deficit at March 31, 1997, of approximately $4.8 million. The
Company expects such losses to continue at least through the commencement of the
operations of the Florida Fun-Train which is anticipated to be in the fall of
1997, and perhaps thereafter.
NEW BUSINESS; SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF MARKET. The
Company acquired D&SNG in March 1997 and it has no experience or history in
managing D&SNG's operations. The Company's Florida Fun-Train is in development.
The Florida Fun-Train has not begun actual passenger rail operations, has
generated no revenues to date and will not generate any revenues until it is
placed into service. Nevertheless, the Company has incurred and will continue to
incur substantial expenses prior to the commencement of passenger rail
operations for the Florida Fun-Train, which is scheduled to begin in the fall of
1997. As a result, the Company is also subject to substantially all of the risks
inherent in the creation of a new business. The Company's ability to deliver its
new service with good quality at a reasonable price cannot be assured; and as a
result, there can be no assurance that the Company's efforts will result in a
commercially viable business or that the Company will ever operate at a profit.
Further, there can be no assurance that the Company will be able to continue to
operate D&SNG on a profitable basis. Further, even if D&SNG generates revenues,
operating cash flow and pre-tax income for the Company in advance of the launch
of the Florida Fun-Train, there are significant restrictions on the upstreaming
of any such cash flow or income to the corporate parent. The level of acceptance
of the Company's services by consumers and the travel/tourism industry cannot be
predicted. As a result of its small size and capitalization and lack of
operating history, the Company is particularly susceptible to adverse effects of
changing economic conditions and consumer tastes, competition, technological
developments and other contingencies beyond the control of the Company. Due to
changing circumstances, the Company may be forced to change dramatically, or
even terminate, its planned operations.
CERTAIN ASSUMPTIONS WITH RESPECT TO THE COMPANY'S EXISTING AND PROPOSED
OPERATIONS. The Company's existing and proposed rail operations are based on
assumptions that are inherently subject to significant economic and competitive
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. These assumptions are also based on
information about circumstances and conditions existing at the time the
prospective information was prepared. There can be no assurance that any of the
prospective information can be realized or that the actual results will not be
materially higher or lower than assumed herein.
REQUIREMENTS FOR ADDITIONAL FINANCING. The Company believes that its current
funds, and the interest earned thereon, will be sufficient to allow the Company
to operate D&SNG and commence full revenue service of the Florida Fun-Train in
the fall of 1997; however, additional financing(s) may be required to cover
future operating and capital expenditures if the Company's revenues do not
materially exceed anticipated operating and capital expenditures. Moreover,
expansion of the Company's present and currently proposed passenger rail
operations will require substantial additional financing, and the Company has
made no arrangements in this regard; there can be no assurance that such
financings will be available on acceptable terms, or at all. Any additional
equity financings could result in substantial dilution to existing shareholders.
BANK LOAN RESTRICTIONS. There are a number of affirmative and negative covenants
in the existing term loan agreement between the Company's subsidiary, D&SNG, and
its principal institutional lender, which covenants, among other things,
restrict D&SNG's ability to "up-stream" profits to the corporate parent. As a
result, despite profitable operations of D&SNG, funds may not be available to
the Company to repay the Company's financial obligations, from time to time, as
they come due.
PLEDGE OF REVENUE-PRODUCING ASSETS. All of the assets of D&SNG (presently
operated as a subsidiary of the Company) are subject to a "first" position
pledge to D&SNG's institutional lender and a "second" position pledge
(subordinate to the pledge to the institutional lender) to the seller of D&SNG.
These assets represent substantially all of the revenue-producing assets of the
Company. A default in either obligation, which results in a default of both
obligations, could result in the loss of the major assets of the Company to the
Company's creditors. If such assets are lost, there would be significant
material adverse consequences to the operations of the Company, including the
loss of the operations of D&SNG.
LIMITED AND CONTINGENT TRACK RIGHTS FOR THE FLORIDA FUN-TRAIN. With regard to
the Florida Fun-Train, the Company has negotiated an agreement with CSX
Transportation, Inc. ("CSXT") for the use of the track between West Palm Beach
and Orlando, Florida. Among other things, this five-year agreement calls for
significant payments to CSXT. This agreement also contemplates the requirement
of a significant amount of comprehensive general liability insurance insuring
the Company and CSXT. Failure to comply with these and other obligations under
the agreement with CSXT could result in loss of such track rights without which
the Company could not operate the Florida Fun-Train.
The Company has entered into a letter of intent with the Florida Department of
Transportation ("FDOT") for use of track rights in Dade, Broward and Palm Beach
Counties, Florida, and use of a terminal in Broward County for the Florida
Fun-Train.
The contractual payments by the Company to the track owners as contemplated by
the above-described agreements and understandings are significant, and such
payments are based on the use of track and/or certain Florida Fun-Train revenue
(whichever is greater), and not on the Company's profitability. Further, there
can be no assurance that these contractual arrangements will be renewed after
the expiration of the applicable terms and the failure to renew any such
agreement could materially adversely affect the financial prospects of the
Company.
5
CONSTRUCTION AND INDUSTRY RISKS ASSOCIATED WITH THE FLORIDA FUN-TRAIN. The
railcars for the Florida Fun-Train must be constructed. This construction is
being done in Denver, Colorado, by Rader Railcar II, Inc. ("RRI"), a company
controlled by Thomas G. Rader, a director and the largest shareholder of the
Company. The Company expects certain Florida Fun-Train railcars to be ready for
delivery to the Company beginning in July 1997. There can be no assurance,
however, that construction and remodeling of the railcars will be completed on a
timely basis. Delays may be caused by technical difficulties, strikes, financial
wherewithal and many other factors which RRI may experience and are beyond the
Company's control. In the event of a delay, the Company's Florida Fun-Train
operations could subsequently be delayed which could have a material adverse
effect on the Company's financial condition.
Further, the Company has made its preliminary terminal site selections for the
Florida Fun-Train, but has not made the final arrangements regarding its
ownership interests in such terminals. One or more terminal buildings may have
to be constructed on the terminal sites once final selections have been made.
The Company is currently negotiating with various third parties in this regard;
however, there can be no assurance that these negotiations will be successful,
and there can be no assurance that the terminals will be timely constructed. If
such delays occur, there can be no assurance that the Florida Fun-Train service
will commence in the fall of 1997.
The Company's operations may be adversely affected by general economic
conditions and by numerous other factors, some of which are common to all
businesses and some of which are unique to the passenger rail industry. Such
factors include, among others: labor disturbances or strikes, either by
"on-board" employees or land-based personnel, which could delay trains or force
their cancellation; government regulatory orders or rules which could adversely
affect the Company's operations; accidents causing damage to or resulting in the
impounding of the Company's railcars or delaying train service, which could
result from a variety of natural or man-made causes and could temporarily or
permanently prevent the Company's train(s) from operating; and insurance, which
may be insufficient to cover losses from the cessation of operations or the
replacement or repair of lost or damaged property.
RELIANCE ON FLORIDA AND COLORADO TOURISM MARKETS. The Company's initial Florida
service, the Florida Fun-Train, will target tourists visiting central and
southeastern Florida. Tourists visiting the "Four Corners" area of the United
States, particularly southwestern Colorado, compose the principal market for
D&SNG. These planned operations may be materially adversely affected by
declining growth or absolute declines in the number of tourists visiting Florida
or Colorado. From time to time these tourism markets have experienced slowdowns
(declines in growth or absolute declines). There can be no assurance that any
such declines in Florida or Colorado tourism will not occur in the future, or
that such declines would not have a direct and adverse impact on the Company's
business.
The Company's Florida Fun-Train business may also be subject to certain
seasonal fluctuations, depending on the tourist seasons in Florida, particularly
in South Florida (Miami/Ft. Lauderdale) and the Orlando area. D&SNG's business
is highly seasonal; historically, at least 60% of the total annual number of
passengers who ride on D&SNG's railroad do so during the months of June, July
and August.
MARKETING/DEPENDENCE ON WHOLESALE TOUR OPERATORS. The Company's passenger
railroad operations, particularly the introduction of the Florida Fun-Train
service, will depend on the Company's ability to successfully implement a
marketing program. Initially, the Company expects to rely on wholesale tour
operators and travel agents to sell tickets for its passenger train service as
part of a travel package. The Company's present internal marketing and sales
capabilities are limited due to financial resources allocated for advertising,
and the Company will be dependent, in large part, upon independent
representatives of tour operators in the wholesale and retail travel trade for
the marketing and sales of its services. Such persons also market competing
tourist services and entertainment attractions. Failure of the Company to
establish the necessary marketing and distribution network or to generate
profitable sales of tickets for the Company's new railway service will have a
material adverse effect on the Company's results of operations and its financial
condition.
HIGH OPERATING COSTS; RISKS ASSOCIATED WITH FUEL PRICES AND MAINTENANCE OF
RAILROAD EQUIPMENT. The passenger rail industry is characterized by a high
degree of operating leverage. Specifically, fixed costs represent the major
portion of a railroad's operating expenses and cannot be significantly reduced
when competition or any of various other factors causes a reduction in load
factors (passenger occupancy as a percentage of capacity) or passenger fares or
"on-board" revenues. Since railcar purchase or lease installment payments, train
operating expenses (including fuel, insurance, track usage charges and wages)
and corporate overhead will represent the vast majority of the Company's
expenses, the Company may not be able to reduce or decrease these costs on a
timely basis in the event that passenger levels drop or fares or en route prices
must be lowered because of competitive pressures. Accordingly, there is no
assurance that the Company will be able to operate profitably. Future increases
in the cost of diesel fuel, a major anticipated expense of train operations, are
difficult to predict given the continued economic and political uncertainties in
certain areas of the world. There can be no assurance that a significant amount
of maintenance will not be required on the Company's rail equipment; this is
particularly true for the operations of D&SNG which uses steam locomotives.
RISK OF OPERATING A RAILWAY SERVICE; POTENTIAL FOR LIABILITY CLAIMS. The Company
faces an inherent risk of exposure to liability claims in the event that the
operation of its trains results in accidents or other adverse effects. Further,
the Company's track usage agreements with the track owners require (or are
expected to require) that the Company maintain certain levels of liability
insurance protecting the track owners. There can be no assurance that the
Company will not be faced with exposure to material liability claims. The track
rights agreements with respect to the Florida Fun-Train require substantial
general comprehensive liability insurance (up to $300,000,000 in coverage) and
the premiums for such insurance will be significant. The Company has not
obtained any commitment for liability insurance for the operation of the Florida
Fun-Train. There can be no assurance that such assurance will be available to
the Company, or that the Company will be able to maintain such insurance at
reasonable rates. Failure to maintain adequate insurance could place the Company
at great financial risk in the event of accidents and adversely affect the
Company's ability to do business. Further, even if the Company were to maintain
adequate insurance, adverse publicity from accidents could have a material
adverse effect on the Company's business.
6
COMPETITION. Generally, the Company faces extensive competition for the spending
of leisure time and dollars from numerous attractions in the tourist
entertainment sector. The Company's success will depend primarily on its ability
to operate an entertaining, high-quality, efficient, safe and reliable service,
as well as its ability to market the service and secure consumer acceptance. It
is highly uncertain whether the Company will be successful in these efforts.
With regard to the Company's proposed Fun-Train operations, numerous companies,
most of which are substantially larger than the Company and have much greater
financial and other resources, offer alternative modes of transportation over
the routes where the Company intends to operate. These alternative modes of
transportation, principally private motor vehicles, bus service and passenger
air service, offer transportation that is less expensive and/or faster than the
Company's proposed rail service. Most of these competitors already enjoy an
established presence in the Florida and United States transportation and tourism
markets. The Company expects to compete on the basis of what it believes to be
its unique combination package of transportation and entertainment.
With respect to D&SNG, there is at least one other narrow gauge railroad which
offers train trips in southern Colorado. Further, since Durango and Silverton
are almost exclusively tourist destinations, the Company competes with
non-transportation oriented attractions for tourists. To the extent tourists
require transportation in the Durango/Silverton corridor, the automobile is the
principal alternative.
GOVERNMENTAL REGULATION. The Company's present and contemplated railroad
operations are strictly intrastate and therefore not regulated by the federal
government except for various safety regulations promulgated by the Federal
Railroad Administration.
The operations of the Florida Fun-Train will be regulated by the Florida
Department of Transportation's application of federal safety rules. The Florida
Fun-Train will be required to have a safety inspection by the U.S. Department of
Transportation, Federal Railroad Administration and the Florida Department of
Transportation before rail operations commence (and periodically thereafter).
The failure to "pass" safety inspections both before operations commence and
periodically thereafter would result in the railroad operations ceasing until
such time as the reason(s) for failure are remedied.
D&SNG's operations are subject to rate, administrative, environmental and safety
regulation by the Colorado Public Utilities Commission. D&SNG's operations are
required to maintain a state liquor license and a special alcohol tax stamp
issued by the Federal Bureau of Alcohol, Tobacco and Firearms, and are subject
to health and other regulations promulgated by federal, state and local
authorities. When the Florida Fun-Train commences operations it will be required
to have various state and federal liquor licenses and approvals similar to those
required of D&SNG.
The Company's operations will also be subject to environmental regulation by
federal and state agencies, as well as liquor licensing, health regulations and
other regulations promulgated by state and local authorities. There can be no
assurance that future regulatory compliance will not materially adversely affect
the Company's operations and profitability.
Delay in the commencement or cessation of the operations of either the Florida
Fun-Train or D&SNG due to non-compliance with applicable governmental
regulations would materially, adversely affect the Company.
CONTROL OF THE COMPANY. The executive officers and directors of the Company
(twelve persons) jointly own an aggregate of 31.19% of the issued and
outstanding Common Stock of the Company (excluding Shares to be issued upon
exercise of stock options, warrants or conversion of outstanding convertible
notes), which is the only outstanding class of capital stock of the Company and
which has one vote per share. Thomas Rader, a director of the Company, is the
single largest shareholder of the Company with 15.05% of the Common Stock.
Therefore, management of the Company should be able to control virtually all
matters requiring approval of the shareholders of the Company, including the
election of all of the directors.
In addition, the Company has a "staggered" board consisting of eight directors
each elected to three year terms in three separate classes.
POTENTIAL CONFLICTS OF INTEREST. A significant portion of the Company's
available cash (approximately $2.2, million exclusive of applicable sales taxes)
is expected to be used to purchase the remaining railcars for the Florida
Fun-Train from a company (RRI) which is controlled by one of the Company's
Directors, and the largest shareholder of the Company, Thomas G. Rader. The
Company also expects to satisfy its future needs for railcars through agreements
with RRI. There can be no assurance that there will not be material adverse
consequences to the Company from the inherent conflict of interest and lack of
arm's-length negotiations in connection with any agreement with RRI. Further, in
the event that disputes arise between Mr. Rader or RRI and the Company,
resolution of such disputes, whether through legal action or otherwise, could be
severely complicated by Mr. Rader's status with the Company.
The Company's agreement with CSXT for track rights usage allows CSXT to
designate a member of the Board of Directors of the Company (currently, Mr.
Albert B. Aftoora). This could give rise to a conflict of interest between the
Company and CSXT.
In connection with the Company's purchase of D&SNG, Mr. Charles E. Bradshaw, Jr.
became a director, shareholder and the principal warrantholder and creditor of
the Company. Mr. Bradshaw's interest as a creditor may put him in conflict with
the interests of the Company and its Board of Directors on which he serves.
OFFICER AND DIRECTOR INDEMNIFICATION. Pursuant to the Company's Bylaws, the
Company is obligated to indemnify each of its officers and directors to the
fullest extent permitted by law with respect to all liability and loss suffered,
and reasonable expense incurred, by such person
7
in any action, suit or proceeding in which such person was or is made or
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was a director or officer of the Company. The Company is
also obligated to pay the reasonable expenses of indemnified directors or
officers in defending such proceedings if the indemnified party agrees to repay
all amounts advanced should it be ultimately determined that such person is not
entitled to indemnification.
Further, Article XII of the Company's Articles of Incorporation, as amended,
provides that the Company's officers and directors shall not be personally
liable to the Company for monetary damages for any breach of their fiduciary
duty by such person as an officer or director, except officers and directors
shall be liable for (i) their intentional misconduct, breach or knowing
violation of law, or (ii) the payment of dividends in violation of applicable
state law.
NO PAYMENT OF CASH DIVIDENDS. The Company has not paid any cash dividends to
holders of its Common Stock nor does it intend to declare any cash dividends
with respect thereto in the near future. Instead, the Company intends to retain
future earnings, if any, for use in its business operations. Further, the
Company's outstanding convertible secured notes prohibit the payment of any
dividends on the Common Stock.
EXERCISE OF THE OUTSTANDING WARRANTS AND/OR THE CONVERSION OF THE OUTSTANDING
NOTES INTO COMMON STOCK WILL HAVE DILUTIVE EFFECT. The Company's outstanding
common stock purchase warrants will provide an opportunity for the holders
thereof to profit from a rise in the market price of the Common Stock, of which
there is no assurance, with resulting dilution in the ownership interest in the
Company held by the then present shareholders. Holders of the outstanding
warrants or the outstanding Notes most likely would exercise such warrants or
convert such notes and purchase the Common Stock underlying such securities at a
time when the Company may be able to obtain capital by a new offering of
securities on terms more favorable than those provided by such warrants or
notes, in which event the terms on which the Company may be able to obtain
additional capital would be affected adversely.
SHARES ELIGIBLE FOR FUTURE SALE. All but 350,000 of the Company's current
outstanding shares of Common Stock (10,726,325 Shares) are "restricted
securities." These "restricted securities" may be sold upon compliance with Rule
144, adopted under the Act. Rule 144 provides, in essence, that a person holding
"restricted securities" for a period of one year may sell only an amount every
three months equal to the greater of (a) one percent of the Company's issued and
outstanding Common Stock, or (b) the average weekly volume of sales during the
four calendar weeks preceding the sale. The amount of "restricted securities"
which a person who is not an affiliate of the Company may sell is not so
limited, since generally non-affiliates may sell without volume limitation their
Shares held for two years. During each three-month period, beginning April 29,
1997, a holder of "restricted securities" who has held them for at least the
one-year period may sell under Rule 144 a number of Shares up to approximately
107,263 Shares (assuming no exercise of outstanding common stock purchase
warrants or conversion of convertible notes). Non-affiliated persons who hold
for the two-year period as described above may sell an unlimited number of
Shares once their holding period is met.
DILUTION; FUTURE SALES OF STOCK BY THE COMPANY. After reserving Common Stock for
issuance upon the exercise of the outstanding common stock purchase warrants and
stock options, and the conversion of the outstanding Notes, the Company will
have in excess of 75,000,000 Shares of authorized but unissued Common Stock
available for issuance without further shareholder approval. As a result, any
issuance of additional Shares of Common Stock may cause current shareholders of
the Company to suffer significant dilution which may adversely affect the market
for the securities of the Company.
Prospective investors should be aware that the possibility of sales may, in the
future, depress the price of the Common Stock in any market which may develop
and, therefore, the ability of any investor to market his/her Shares may be
dependent directly upon the number of Shares that are offered and sold.
Affiliates of the Company may sell their Shares during a favorable movement in
the market price of the Common Stock which may have a negative effect on its
price per share.
NO ASSURANCE OF CONTINUED NASDAQ LISTING AND "PENNY STOCK" REGULATIONS MAY
IMPOSE CERTAIN RESTRICTIONS. The Company's Common Stock began trading on the
Nasdaq SmallCap Market on September 12, 1996. The Board of Governors of the
National Association of Securities Dealers, Inc., has established certain
standards for the continued listing of a security on Nasdaq and has proposed the
modifications of the existing standards to make them more stringent. The current
maintenance standards require, among other things, that an issuer have total
assets of at least $2,000,000 and capital and surplus of at least $1,000,000;
that the minimum bid price for the listed securities be $1.00 per share; that
the minimum market value of the "public float" be at least $1,000,000; and that
there be at least two market makers for the issuer's securities. A deficiency in
either the market value of the public float or the bid price maintenance
standard will be deemed to exist if the issuer fails the individual stated
requirement for ten consecutive trading days. If an issuer falls below the bid
price maintenance standard, it may remain on Nasdaq if the market value of the
public float is at least $1,000,000 and the issuer has $2,000,000 in equity.
There can be no assurance that the Company will continue to satisfy the current,
or, if approved, the more stringent requirements for maintaining the Nasdaq
listing. If the Company's securities were to be excluded from Nasdaq, it would
adversely affect the prices of such securities and the ability of holders to
sell them, and the Company would be required to comply with the initial listing
requirements to be relisted on Nasdaq. Should the Company's Common Stock be
delisted by Nasdaq then the only likely public market for the Company's Common
Stock would be the OTC Bulletin Board.
If the Company is unable to satisfy Nasdaq's maintenance requirements and the
price per share were to be below $5.00, then unless the Company satisfied
certain net asset tests, the Company's securities would become subject to
certain penny stock rules promulgated by the Securities and Exchange Commission.
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the
8
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Company's Common Stock
becomes subject to the penny stock rules, investors in the Offering may find it
more difficult to sell their shares.
POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK ON MARKET PRICE AND
RIGHTS OF COMMON STOCK. The Company's Articles of Incorporation authorize the
issuance of 500,000 shares of "blank check" preferred stock ("Preferred Stock")
with such designations, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. The issuance of
any series of Preferred Stock having rights superior to those of the Common
Stock may result in a decrease in the value or market price of the Common Stock.
Holders of Preferred Stock to be issued in the future may have the right to
receive dividends and certain preferences in liquidation and conversion rights.
The issuance of such Preferred Stock could make the possible takeover of the
Company or the removal of management of the Company more difficult, discourage
hostile bids for control of the Company in which shareholders may receive
premiums for their Common Stock and adversely affect the voting and other rights
of the holders of the Common Stock. The Company may in the future issue
additional shares of its Preferred Stock.
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF SERIES A WARRANTS. Upon redemption of
the outstanding Series A Warrants, the holders thereof would be required to (i)
exercise such warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, or (ii) accept the redemption price which is
likely to be substantially less than the market value of such warrants at the
time of redemption. See "Description of Securities."
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION
WITH THE EXERCISE OF THE WARRANTS. The Company will be able to issue the Shares
issuable upon the exercise of the Warrants only if (i) there is a current
Prospectus relating to the securities offered under an effective Registration
Statement filed with the Commission, and (ii) such Common Stock is then
qualified for sale or exempt therefrom under applicable state securities laws of
the jurisdictions in which the various holders of such Warrants reside. While
this Prospectus relates to a current, effective registration statement, there
can be no assurance, that the Company will be successful in maintaining a
current Registration Statement. After a Registration Statement becomes
effective, it may require updating by the filing of post-effective amendments.
9
THE MERGER
GENERAL. On April 26, 1996, (See "Management's Discussion and Analysis of the
Results of Operations and Financial Condition and Plan of Operation"), the
Company merged with First American-Florida, a Florida corporation (the
"Merger"). The Company was the surviving entity in the Merger, and as part of
the Merger the Company issued one share of Common Stock for each share of common
stock of First American-Florida then outstanding, and changed its name to "First
American Railways, Inc." By virtue of the Merger, the Company has succeeded to
all of the contractual rights, duties and obligations of First American-Florida,
including, but not limited to, those arising under the Warrants and other
obligations incurred executed in connection with the Private Placement. See
"Certain Transactions."
The Company, formerly known as Asia-America Corporation and prior to that Barona
Enterprises, Inc., was formed in March 1987 for the purpose of acquiring
suitable property, assets or businesses by means of completing a merger with or
the acquisition of a privately held business enterprise seeking to obtain the
perceived advantages of being a public company. In March 1988, Barona
Enterprises, Inc. completed a public offering of its securities.
REVERSE STOCK SPLIT. Prior to completion of the Merger, the Company effectuated
a reverse stock split on a 1-for-108 basis which reduced its issued and
outstanding shares of common stock to 350,000 shares. All fractional shares were
rounded up to the nearest whole share. A pre-Merger shareholder of the Company
contributed sufficient shares to the Company for cancellation to offset whole
shares issued in lieu of fractional shares and to round off the exact number of
issued and outstanding shares to 350,000.
AMENDMENT TO THE ARTICLES OF INCORPORATION. At the time of the Merger, the
Company amended its Articles of Incorporation to (i) change its corporate name,
(ii) authorize 500,000 shares of preferred stock, $.001 par value, to be issued
in such series and with such rights, preferences and designations as determined
by the Company's Board of Directors, and (iii) to provide that officers and
directors of the Company shall have no liability for breach of fiduciary duty
except as provided under Nevada law.
The State of Nevada has amended its corporation law subsequent to the
incorporation of the Company in 1987 to provide that directors and officers of a
Nevada corporation, if so stated in the Articles of Incorporation, shall not be
personally liable to the corporation or its stockholders for a breach of
fiduciary duty except in the instance of intentional misconduct, fraud, knowing
violation of law, or the improper payment of dividends. By amending its Articles
of Incorporation, the Company intended to include a provision in its Articles of
Incorporation to take advantage of this provision in the law so as to be able to
retain the best qualified officers and directors free from claims under spurious
and frivolous shareholders' suits.
The Company has no present intention to issue any of its preferred stock, but
management desires to have such shares available should the need arise to issue
such shares for financing or other corporate purposes in the future. All terms,
conditions, rights and preferences of such shares, including any separate series
thereof shall be determined at the sole discretion of the Company's Board of
Directors. See "Description of Securities--Preferred Stock."
The preferred stock may be issued in series from time to time with such
designation, rights, preferences and limitations as the Board of Directors of
the Company may determine by resolution. The rights, preferences and limitations
of separate series of preferred stock may differ with respect to such matters as
may be determined by the Board of Directors, including, without limitation, the
rate of dividends, method and nature of payment of dividends, terms of
redemption, amounts payable on liquidation, sinking fund provisions (if any),
conversion rights (if any) and voting rights. The potential exists that the
preferred stock could be issued which would grant dividend preferences and
liquidation preferences to preferred shareholders. See "Description of
Securities--Preferred Stock."
10
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares offered by
the Selling Shareholders. Management estimates that the aggregate expense of
this offering will be approximately $60,000, all of which will be borne by the
Company.
The gross proceeds from the exercise of all of the outstanding Warrants (which
are being offered hereby) would be $19,754,705. The Company intends to use the
proceeds from the exercise of the Warrants, if any, for working capital and
general corporate purposes. Proceeds not immediately required for such purposes
will be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "FTRN"; however, there was no active trading market for the
Common Stock until the Second Quarter of 1996, to the best knowledge of the
Company's management. The following table sets forth the high and low sale
prices of the Common Stock for the periods indicated in 1996 and 1997.
HIGH LOW
---- ---
1996:
First Quarter - -
Second Quarter $6.375 $3.00
Third Quarter 6.25 3.00
Fourth Quarter 4.75 2.00
1997:
First Quarter 2.75 1.75
Second Quarter (through
June 17, 1997) 2.9375 2.375
On June 23, 1997, the last reported sale price of the Common Stock was
$2.75 per share. As of June 1, 1997, there were approximately 400 holders of
record of the Common Stock.
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Company does not anticipate the payment of any dividends in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid. In
addition, the Notes provide that the Company will not (i) declare or pay any
dividend or make any other distribution of the Company, except dividends or
distributions payable in equity securities of the Company, or (ii) purchase,
redeem or otherwise acquire or retire for value any equity securities of the
Company, except (a) an equity security acquired upon conversion thereof into
other equity securities of the Company and (b) any equity security issued to
employees, directors or others performing services in accordance with agreements
providing for such repurchase at original cost upon termination of employment,
membership on the Board of Directors or other affiliation with the Company.
11
SELECTED FINANCIAL DATA
The following selected financial data as of and for the year ended December 31,
1996, and for the eight months ended December 31, 1995, are derived from the
Company's audited financial statements included elsewhere herein. The financial
data at March 31, 1997, and for the three months ended March 31, 1997 and 1996,
have not been audited by independent auditors; however, in the opinion of
management such financial data includes all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the information set forth
therein. Interim results are not necessarily indicative of results for the
entire year. The following data should be read in conjunction with the financial
statements of the Company, including notes thereto, and other financial
information included elsewhere herein.
STATEMENT OF OPERATIONS DATA
CUMULATIVE FROM FEBRUARY FOR THE THREE MONTHS FOR THE YEAR ENDED FOR THE EIGHT MONTHS
14, 1994 (INCORPORATION) ENDED MARCH 31 DECEMBER 31, 1996 ENDED DECEMBER 31, 1995
THROUGH MARCH 31, 1997 ---------------------- ------------------ -----------------------
------------------------ 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss $(4,758,219) $(823,048) $(191,994) $(2,595,762) $(720,413)
Net loss per
share -- $ (.09) $ (.04) $ (.34) $ (.17)
BALANCE SHEET DATA
MARCH 31, 1997 DECEMBER 31, 1996
(UNAUDITED)
-------------- -----------------
Working capital $ 3,876,226 $ 7,233,943
Property and equipment 33,528,701 2,413,320
Total assets 41,063,613 13,140,653
Total long-term debt 25,900,682 8,250,682
Total liabilities 36,828,431 8,876,965
Total shareholders' equity 4,235,182 4,263,688
12
THE DURANGO & SILVERTON NARROW GAUGE RAILROAD COMPANY
The following selected financial data as of December 31, 1996 and for each of
the two years in the period ended December 31, 1996, are derived from the
audited financial statement of D&SNG included elsewhere herein. The financial
data for the three months ended March 31, 1997 and 1996, has not been audited by
independent auditors; however, in the opinion of management such financial data
includes all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the information set forth therein. Interim results are not
necessarily indicative of results for the entire year. The following data should
be read in conjunction with the financial statements of D&SNG, including notes
thereto, and other financial information included elsewhere herein.
STATEMENT OF OPERATIONS DATA
THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31 DECEMBER 31,
---------------------------- ------------------------------
1997 1996 1996 1995
---------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues $ 291,740 $ 284,260 $ 8,946,462 $ 8,468,463
Gross profit (loss) (413,509) (415,434) 3,802,660 3,640,256
Operating income (loss) (704,786) (710,155) 1,755,294 1,582,188
Net income (loss) $(826,527) $(834,007) $ 1,703,056 $ 1,221,844
BALANCE SHEET DATA
DECEMBER 31, 1996
-----------------
Working capital (deficiency) $ (944,741)
Current assets 857,071
Property and equipment, net 6,519,201
Accounts receivable from stockholder 8,689,745
Total assets 16,318,751
Total long-term debt less current maturities 3,792,295
Total liabilities 5,660,388
Total stockholder's equity 10,658,363
13
PRO FORMA COMBINED FINANCIAL INFORMATION
INTRODUCTORY NOTE
The following tables set forth certain unaudited condensed pro forma
combined financial information for the Company after giving effect to the
Durango Acquisition using the purchase method of accounting as if such
transaction had been consummated on January 1, 1996. The information contained
in the following tables does not purport to be indicative of the results of
operations of the Company which may have been obtained had the acquisition of
D&SNG been consummated on the dates assumed.
The unaudited condensed pro forma combined financial information
reflects a preliminary allocation of the purchase price of D&SNG and,
accordingly, is subject to change upon, among other things, a final
determination of required purchase accounting adjustments including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values has not yet been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
unaudited condensed pro forma combined financial information appearing in this
Prospectus are preliminary and have been made solely for purposes of
developing such pro forma combined financial information.
The pro forma information with respect to the acquisition of D&SNG
assumes the issuance of 200,000 shares of the Company's Common Stock to the
seller of D&SNG as partial consideration for the purchase thereof. The balance
of the consideration paid to the seller included: (i) approximately $5 million
in cash; (ii) $10.05 million in seller financing consisting of two promissory
notes: a one-year note (subject to extension) for $4.2 million which bears
annual interest (payable monthly) at the 30-day commercial paper rate as
published by THE WALL STREET JOURNAL plus 650 basis points per annum; and a
five-year note for $5.85 million which bears interest at an annual rate of 9.25%
which increases in steps to 10% by year four; and (iii) a common stock purchase
warrant covering 1,610,000 shares exercisable at $3.50 per share. The Company
has agreed to register for resale the 200,000 shares (valued at $2.00 per share)
and the 1,610,000 shares (valued at $.09 per share) underlying the
aforementioned six-year warrant. The term of the $4.2 million note may be
extended by the Company, at its option, for an additional six months upon the
occurrence of certain circumstances; at maturity this note is convertible by the
holder thereof into common stock of the Company at a conversion rate equal to
the then closing sale price of the Company's common stock (not to exceed $5.00
per share); at the maturity date should the noteholder elect to receive each in
full payment of the $4.2 million note (in lieu of conversion into common stock),
then the Company may extend the maturity date for an additional eighteen months.
The obligations represented by the Notes are secured by a second position on
substantially all of the assets of D&SNG. The purchase price for the Durango
Acquisition was determined in arms' length negotiations between the Company and
the seller.
This information should be read in conjunction with the historical
financial statements and accompanying notes of the Company contained in its Form
10-KSB for the year ended December 31, 1996, its Form 10-QSB for the three
months ended March 31, 1997, and the historical financial statements and
accompanying notes of D&SNG for the years ended December 31, 1996 and 1995.
14
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
PROFORMA
FAR D&SNG ADJUSTMENTS COMBINED
--- ----- ----------- --------
Revenue $ $8,946,462 $ $ 8,946,462
Cost of Revenue 5,143,802 18,720 (2) 5,162,522
----------- ---------- ---------- -----------
3,802,660 (18,720) 3,783,940
Selling, General and
Administrative 2,208,129 1,992,224 (906,000)(3) 3,294,353
----------- ---------- ----------- -----------
Operating Income (Loss) (2,208,129) 1,810,436 887,280 489,587
Interest Expense, Net 166,911 52,238 1,722,735 (1) 1,941,884
Amortization of
Financing Items 220,722 55,142 (16,547)(1) 259,317
----------- ---------- ----------- -----------
Income (Loss) Before
Taxes (2,595,762) 1,703,056 (818,908) (1,711,614)
Income Taxes
----------- ---------- ----------- -----------
Net Income (Loss) $(2,595,762) $1,703,056 $ (818,908) $(1,711,614)
=========== ========== =========== ============
Weighted Shares
Outstanding 7,623,050 200,000 7,823,050
Earnings (Loss) Per
Share $ (0.34) $ (0.22)
=========== ===========
SEE NOTES TO UNAUDITED CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION.
15
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
PRO FORMA
FAR D&SNG ADJUSTMENTS COMBINED
--- ----- ----------- --------
REVENUE $ $ 291,740 $ $ 291,740
COST OF REVENUE 705,249 4,680(2) 709,929
--------- --------- --------- -----------
(413,509) (4,680) (418,189)
SELLING GENERAL
AND ADMINISTRATIVE 733,785 277,491 1,011,276
--------- --------- --------- -----------
OPERATING LOSS (733,785) (691,000) (4,680) (1,429,465)
INTEREST EXPENSE, NET 39,601 121,741 303,410(1) 464,752
AMORTIZATION OF FINANCING
ITEMS 49,662 13,786 (4,137)(1) 59,311
--------- --------- --------- -----------
LOSS BEFORE
TAXES (823,048) (826,527) (303,953) (1,953,528)
INCOME TAXES
NET LOSS $(823,048) $(826,527) $(303,953) $(1,953,528)
========= ========= ========= ===========
WEIGHTED SHARES O/S 9,116,911 200,000 9,316,911
LOSS PER SHARE $ (0.09) $ (0.21)
========= ===========
SEE NOTES TO UNAUDITED CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION
16
NOTES TO UNAUDITED CONDENSED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following pro forma adjustments have been made:
(1) To record additional interest expense (approximately $1.2 million and
$300,000 for the year ended December 31, 1996 and the three months
ended March 31, 1997, respectively) and reduce amortization of loan
costs (approximately $17,000 and $4,000 for the year ended December 31,
1996 and the three months ended March 31, 1997, respectively) arising
from incremental debt as a result of financing the acquisition, net of
interest income available from excess cash (approximately $13,000 and
$4,000 for the year ended December 31, 1996 and the three months ended
March 31, 1997, respectively). To eliminate interest income on loans to
affiliates (approximately $528,000 and $6,000 for the year ended
December 31, 1996 and the three months ended March 31, 1997,
respectively).
(2) To record additional depreciation expense resulting from the write-up
of depreciable fixed assets (approximately $280,000) to fair value.
This expense adjustment was approximately $19,000 and $5,000 for the
year ended December 31, 1996 and the three months ended March 31, 1997,
respectively.
(3) To record savings from the reduction or elimination of certain expenses
by the Company following the Durango Acquisition. This adjustment
consisted primarily of approximately $600,000 for the year ended
December 31, 1996 for a corporate airplane which the Company will no
longer use, approximately $274,000 for the year ended December 31, 1996
of corporate management fees which will no longer be charged to the
Company, and approximately $32,000 for the year ended December 31,
1996, of lease payments (net of termination costs) for an apartment
which the Company has discontinued leasing.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND PLAN OF OPERATION
THE COMPANY - DEVELOPMENT STAGE ACTIVITIES AND LIQUIDITY
GENERAL: Neither the Company nor its predecessor by merger, First American
Railways, Inc., a Florida corporation, have had any revenue from operations. The
Company has had accumulated losses of approximately $4.8 million for the period
from February 14, 1994 (incorporation) through March 31, 1997. The Company
expects such losses to continue at least through commencement of its full rail
operations in the fall 1997 and perhaps thereafter. Since inception through
March 31, 1997, the Company's activities (including those of its predecessor)
have been funded by the private placement of its securities and by borrowings,
the net cash proceeds from which have totaled approximately $15.2 million.
EIGHT MONTHS ENDED DECEMBER 31, 1995: The Company explored various financing
alternatives; however, no additional capital was raised during this period.
Instead, the Company borrowed an additional $270,000 in order to support its
operations. During this period, the Company had a net loss of $720,413 of which
approximately $282,000 were expenses of offerings not completed. In addition, a
significant amount of other expenses, principally the salaries of officers and
employees, were expended in connection with capital raising activities.
YEAR ENDED DECEMBER 31, 1996: In March 1996, the Company completed a private
placement of securities in which it sold an aggregate 375,004 shares of common
stock and issued $500,000 in convertible secured notes, bearing interest at 10%
per annum, for aggregate net proceeds of approximately $394,000. In April-May
1996, the Company completed a private placement of securities in which it sold
4,050,274 shares of Common Stock valued at approximately $8.25 million,
3,950,271 Series A Redeemable Warrants exercisable at $3.50 per share, and
issued approximately $8.25 million (principal amount) in convertible secured
notes, bearing interest at 10% per annum, for aggregate net proceeds of
approximately $14.2 million (of which approximately $416,000 was not cash
consideration, but represented the conversion of the principal and accrued
interest on certain secured promissory notes issued in the March 1996 private
placement into securities sold in the April-May 1996 private placement).
The Company used approximately $778,000 of the proceeds to repay approximately
$333,000 in notes payable to related parties and others, and $445,000 to repay
notes payable from the financing completed in March 1996. In addition, in June
1996 the Company made a payment of $536,000 representing the final payment (plus
interest) due on the first railcar purchased. A material portion of the proceeds
of the May 1996 private placement (approximately $830,000) were escrowed to pay
the first year's interest on the convertible secured notes sold in that private
placement, and in October 1996, the Company made its initial interest payment.
In September and October 1996, the Company advanced $1.4 million to RRI for the
commencement of construction of additional railcars.
During the year ended December 31, 1996, the Company had a net loss of
approximately $2.6 million. The major components of the loss were salary and
payroll tax expense of approximately $947,000 resulting from the hiring of nine
people (including five executives) during the year and the incurrence of
approximately $452,000 of legal, accounting, professional and consulting fees
for initial and ongoing railroad and marketing agreements, executive recruitment
and general corporate purposes. The loss for the year ended December 31, 1996,
was also impacted by net interest expense of approximately $167,000 resulting
from the April - May private placement and the amortization of approximately
$221,000 of deferred loan costs related to notes payable that were replaced in
May 1996 and the convertible notes payable resulting from that private
placement.
THREE MONTHS ENDED MARCH 31, 1997: During the three months ended March 31, 1997,
the Company had a net loss of approximately $823,000. The major components of
the loss were salary and payroll tax expense of approximately $368,000 resulting
from the addition of fourteen people (including five executives) from the
comparable period of the prior year. The loss for the three months ended March
31, 1997, was also impacted by general and administrative expenses of
approximately $266,000 resulting from the additional expenses, i.e., rent,
insurance, etc., related to the commencing of operations of the Florida
Fun-Train.
LIQUIDITY: The Company's future cash requirements will be significant. The
Company expects that its existing cash resources, along with external sources of
cash, including prospective leasing and financing opportunities which management
believes are available on commercially reasonable terms, will be sufficient to
enable the Company to commence operations of the Florida Fun-Train in the fall
1997. There can be no assurance, however, that operations
18
will in fact commence as scheduled, or that unanticipated problems will not
arise which necessitate the need for additional financing. Additionally, there
can be no assurance that the Company will be able to obtain or generate the
required capital to commence operations of the Florida Fun-Train in the Fall
1997.
On May 12, 1997, the Company commenced a private offering of up to 240 units of
its securities at $50,000 per unit, pursuant to Regulations D and S as
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
Each unit consists of (i) an 8% convertible subordinated note in the principal
amount of $50,000 and (ii) 5,000 shares of Common Stock of the Company.
Investors purchasing at least 40 units ($2,000,000) will receive an additional
2,500 shares (for a total of 7,500 shares) for each unit purchased; however, the
subordinated note(s) issued to these investors contain(s) a mandatory conversion
feature which may be exercised by the Company in certain circumstances.
The purpose of the private offering is to raise additional working capital for
the Company, and to date $10,162,500 (gross proceeds) has been raised under the
offering. The private offering is expected to be completed on or before
September 30, 1997.
The securities offered in the private offering have not been and will not be
registered under the Securities Act and may not be offered and sold in the
United States absent registration or an applicable exemption from registration
requirements.
In connection with the acquisition of D&SNG by the Company, D&SNG borrowed, and
the Company guaranteed $8.5 million from a commercial lending institution
pursuant to a five-year term loan, portions of which were used to pay a
pre-existing lender to fund a portion of the cash required to close the
acquisition. The balance was used for working capital for D&SNG's operations
(approximately $1 million). This working capital and the funds generated from
D&SNG's operations are expected to be adequate to meet D&SNG's cash requirements
(including capital expenditures and debt service) for 1997. There are no
material short-term or long-term commitments for capital expenditures; however,
the Company anticipates expenditures in 1997 for property and equipment, but has
not yet finalized its plan in this regard, and does not expect such expenditures
to be material. Additionally, D&SNG is expected to incur in excess of $2 million
of interest and principal payments in 1997 resulting from the $8.5 million term
loan and the $10.05 million seller financing. Although D&SNG's business and cash
flow are historically seasonal in nature with the peak season being the months
of June, July and August, the seasonality is not expected to have a material
adverse impact on the Company's ability to meet cash requirements from existing
cash sources.
Capital expenditures and debt service in 1998 and subsequent years are expected
to be funded from the working capital generated from D&SNG's operations. In the
event that the working capital from D&SNG is not adequate to fund D&SNG's cash
requirements in 1998 and subsequent years, D&SNG will seek to obtain unsecured
lines of credit, or will borrow funds from the Company, if available; however,
there can be no assurance that these sources of funds will be available to D&SNG
in the future.
Further, there can be no assurance that the Company will not experience adverse
changes in its business prospects, its proposed operations, in the
transportation or tourism industries, or the U.S. economy generally.
At March 31, 1997, the Company had working capital of approximately $3.8 million
and stockholders' equity of approximately $4.2 million.
FLORIDA FUN-TRAIN - PLAN OF OPERATION
The Company has taken significant steps to commence operations of the Florida
Fun-Train. In that regard, the Company has done the following: purchased its
first passenger car; entered into an agreement with Rader Railcar II, Inc.
("RRI"), a company owned by a director and shareholder, to manufacture the
remaining railcars for the Florida Fun-Train; entered into an agreement with CSX
Transportation, Inc. for track use; entered into an agreement with the Florida
Department of Transportation for certain track usage in South Florida; commenced
negotiations with a land developer and Amtrak regarding terminal locations in
Poinciana, Florida (Greater Orlando area) for a northern terminal
site; executed an agreement with Amtrak for certain technical services
(operating crew, etc.)
19
in connection with the Florida Fun-Train; completed a marketing study by an
outside consultant (which included discussions with wholesale travel and tour
companies, rental car companies, airlines and cruise lines); entered into an
agreement with Universal Studios Florida for joint marketing and sales efforts
in connection with the Florida Fun-Train services; and entered into a track
rights agreement with Florida East Coast Railway Company ("FEC") for future use.
The Company plans to use its currently available funds to pay the expenses and
capital expenditures in connection with the commencement of the operations of
the Florida Fun-Train and provide working capital from prospective leasing and
financing opportunities to support the Florida Fun-Train's initial operations to
the extent that cash flow from such operations is insufficient.
The Company has agreed to purchase additional Fun-Train railcars pursuant to a
construction agreement with RRI. The Company has contracted to spend a maximum
of approximately $8.8 million (including applicable sales taxes) to purchase up
to 11 additional railcars. The Company has leased three diesel locomotives and a
baggage car prior to commencing operations, and it estimates, based on currently
available information, that three diesel locomotives and a baggage car are
generally available for lease for approximately $45,000 per month.
The railcar construction agreement with RRI required a significant down payment
with the balance of the contract price to be paid in installments; however, this
payment schedule will vary depending on the number and delivery schedules of the
cars actually purchased. The Company expects certain of the railcars to be
completed and delivery to begin in July 1997 and it expects staggered delivery
of additional railcars to continue during the summer 1997 so that it can begin
offering promotional rail service of the Florida Fun-Train at that time. Service
is expected to begin with five passenger railcars in the fall 1997 and it is
anticipated to expand to eight passenger railcars by the Spring 1998.
Before the Florida Fun-Train rail operations can commence, the Company must
construct or otherwise obtain the use of terminals at each end of the proposed
route. The Company is currently in negotiations in this regard and it is in the
process of finalizing its cost estimates and determining the extent of
governmental support for these activities, if any. During the next 12 months the
Company expects to increase its work force from the twenty-two persons currently
employed by the Company (seven of whom are senior management). The Company will
be required to hire approximately 70 additional full-time positions (which may
be staffed with full-time or part-time personnel); however, the exact number of
employees is dependent on the Company's decision with respect to, among other
things, outsourcing its marketing operations functions.
D&SNG - RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED
TO THE YEAR ENDED DECEMBER 31, 1995:
Revenues for the year ended December 31, 1996 increased to $8.9 million (a 6%
increase over the prior year) primarily due to increased concession revenue.
This increase was the result of personnel changes and selective discounts on
merchandise. Passenger fare revenue in 1996 was comparable to that in 1995, and
1996 ridership on the D&SNG railroad remained at 1995 levels (approximately
200,000 passengers).
The cost of revenues was $5.1 million or 57% of revenue in 1996 compared to $4.8
million or 57% in 1995. This increase in costs was directly due to increased
concession revenue. Operating expenses were $2 million or 23% of revenues in
1996 as compared to $2.1 million or 24% of revenues in 1995. Other expenses in
1995 included the settlement of legal actions involving former employees of
approximately $154,000.
Interest income increased by approximately $155,000 in 1996 due to an increase
in the advances made by D&SNG to its then sole shareholder.
20
During 1995 and 1996, D&SNG was a "S" corporation under the Internal Revenue
Code. As a result, D&SNG was not required to pay corporate income taxes for
these years; as of the date of the acquisition of D&SNG by the Company this
election ceased.
As a result of the foregoing factors, D&SNG had net income of $1.7 million in
1996 compared to $1.2 million in the same period in 1995.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1996:
As discussed below, D&SNG's business is highly seasonal. Historically, the first
fiscal quarter of its operations are not profitable and the revenues therefrom
are not significant; however, the loss during this quarter is material when
compared to D&SNG's annual operating results. There was no material difference
between the financial performance of D&SNG during the first quarter of 1997 when
compared to that of the comparable period in 1996. Further, there were no
extraordinary events during either quarter, except for the acquisition of D&SNG
by the Company on March 13, 1997 (March 31, 1997 for financial reporting
purposes).
Revenues for the first quarter of 1997 increased by approximately $7,000 (a 3%
increase over the comparable period of the prior year). The operating loss for
the first quarter of 1997 of approximately $700,000 was similar to that of the
same quarterly period in 1996.
During the first quarter of 1997 and 1996, D&SNG was an "S" corporation under
the Internal Revenue Code. As a result, D&SNG was not required to pay corporate
income taxes for these periods; as of the date of the acquisition of D&SNG by
the Company this election ceased.
As a result of the foregoing factors, D&SNG had a net loss of approximately
$830,000 for both quarterly periods.
D&SNG - PLAN OF OPERATION
The Company purchased D&SNG in March 1997. For the year ended December 31, 1996,
D&SNG generated revenue, operating cash flow and pre-tax income of approximately
$9 million, $3 million and $2 million, respectively. These results were
generated by limited and local marketing and advertising efforts.
The Company believes that there is the potential to increase the revenues and
earnings of D&SNG from 1996 levels by (i) initiating a formal marketing plan in
conjunction with marketing efforts on behalf of the Florida Fun-Train designed
to increase ridership; (ii) potentially realizing revenue gains from the
implementation of a 15% fare increase (which has been approved by the Colorado
authorities); (iii) potentially realizing revenue gains from the implementation
of price increases for "on-board" products; and (iv) reducing expenses resulting
from the elimination of various corporate expenses related to the operation of a
corporate jet, third party management fees and the leasing of an apartment,
totaling approximately $900,000, the operating costs for which are included in
the financial results.
In order to broaden the passenger base, the Company intends to expand its future
marketing efforts for D&SNG into the broad-based travel-related industry. The
Company expects to establish relationships, in connection with the Florida
Fun-Train's marketing efforts, in international and domestic areas through
direct contact with distributors and general sales agents having knowledge and
experience in the development of commercial travel industry direct consumer and
retail marketing and sales efforts.
The Company will attempt to market and sell tickets of D&SNG by means of
cooperative marketing promotions with cruise lines, airlines and hotels.
Additionally, the Company intends to increase advertising and sales activity on
a global basis. Beginning in the fall of 1997 and assuming the implementation of
the marketing efforts described above, the Company believes it possible to
materially increase the annual passenger count over the 1996 levels. There can
be no assurance, however, that any material increase in the ridership of D&SNG's
railroad will occur. D&SNG's operations are highly seasonal principally due to
weather, with June - August of each year being the peak period. Commencing later
this year, the Company intends to engage in marketing efforts that are intended
to enhance ridership on D&SNG during the winter and early spring months;
however, there can be no assurance that this seasonality factor will be
materially altered.
21
Because of the high fixed costs of operating a train any additional passengers
generated by the increased marketing efforts will require no significant
incremental operating costs. The Company's subsidiary, D&SNG, generates
revenues, operating cash flow and pre-tax income for the Company in advance of
the launch of the Florida Fun-Train; however, there are significant restrictions
on the upstreaming of any such cash flow or income to the corporate parent.
The Company anticipates a $300,000 increase in 1997 capital expenditures for an
additional locomotive over 1996 levels (approximately $100,000).
FORWARD-LOOKING STATEMENTS
From time to time, the Company publishes forward-looking statements relating to
such matters as anticipated financial performance, growth strategy, business
prospects, new services, marketing activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. The
assumptions regarding the Company's operations, performance, development and
results of the its business include: the timely delivery of the Florida
Fun-Train and the prompt institution of its operations, the successful
integration of the recently-acquired operations of D&SNG, the successful
marketing of the Company's rail services in Florida and Colorado, increasing
"on-board" product revenue from D&SNG's operations, the ability of the Company
to obtain, from internal and external sources, sufficient working capital for
its future operating and capital expenditures, obtaining terminal sites and
constructing appropriate terminal facilities (if required), obtaining and
maintaining certain third-party service and supply contracts, and finalizing
various travel industry third-party commitments regarding travel on the Florida
Fun-Train. In addition, the Company's operations are affected by national and
international economic conditions, specifically those related to the Colorado
and Florida tourism markets. Actual results could differ materially from the
forward-looking statements as a result of the foregoing factors as well as the
risk factors elsewhere herein. See "Risk Factors."
22
BUSINESS
GENERAL
First American Railways, Inc., a Nevada corporation (the "Company") was
organized in the State of Nevada in 1987. On April 26, 1996, the Company merged
with First American Railways, Inc., a Florida corporation (First
American-Florida) and the Company was the surviving entity. As a result of the
Merger the Company assumed all of the contractual rights, privileges and duties
of First American-Florida. In connection with the Merger the Company amended its
Articles of Incorporation to, among other things, change its name and create a
series of "blank check" preferred stock. See "The Merger."
The Company is currently pursuing its strategy of becoming the recognized leader
in providing innovative, quality entertainment-based passenger rail service
through the development of "Fun Trains" and the acquisition of "Scenic
Destination Railroads." The Company is currently developing its first Fun Train
(the "Florida Fun-Train"), an entertainment-based rail service which is
anticipated to commence operations in the fall of 1997 between South and Central
Florida. In March 1997, the Company acquired D&SNG, its first Scenic Destination
Railroad. D&SNG operates an historic, steam-powered train between Durango and
Silverton, Colorado.
The Florida Fun-Train's goal is to provide an enjoyable and entertaining
alternative to other means of transportation between South and Central Florida
by maximizing the entertainment value of its passengers' travel time while
providing an efficient, safe and reliable form of transportation at a reasonable
price.
The Company intends to provide passengers with an exciting, unique, fun-filled
overland leisure excursion through the use of a variety of entertainment-based
services, including video and virtual reality games, as well as dining, dancing
and lounge cars offering different types of live entertainment. The Company
expects that most of its passengers will be tourists and plans to market, in
part, the Company's service as an extension of its passengers' vacation.
Over the last several years, Florida has had an annual tourist base of
approximately 40 million tourists. Florida attracts tourists from across the
world and was the top tourist destination in the United States in 1995. South
Florida offers a number of well-known tourist destinations and a climate that
allows year-round outdoor activities. South Florida is also a key entry point
into the state for cruise ships entering and leaving the Port of Miami and Port
Everglades (Fort Lauderdale), as well as tourists utilizing Miami International
and Hollywood-Fort Lauderdale Airports. Central Florida (Greater Orlando) plays
host to world renowned tourists destinations such as Universal Studios Florida,
Walt Disney World, Sea World, the John F. Kennedy Space Center (the "Kennedy
Space Center") and Port Canaveral. Approximately 14 million people traveled
between South and Central Florida in 1994.
Management believes it will be able to capture a portion of the tourist market
intent on traveling between South and Central Florida and encourage travel on
the Florida Fun-Train by tourists and residents who would not otherwise make the
trip. Currently, travel is made between South and Central Florida primarily by
either automobile or airplane. The Company believes the Florida Fun-Train will
generally offer price advantages to traveling by airplane. The Company also
believes that the most popular alternative modes of transportation (automobile
or airplane) do not offer the entertainment value anticipated to be provided on
the Florida Fun-Train.
Following the introduction of the Florida Fun-Train, the Company expects in the
future to provide Fun-Train passenger service between South Florida and the
Florida Space Coast (near the Kennedy Space Center). The Space Coast Fun-Train
is expected to provide daily round-trip service at a fixed price which is
expected to include a tour of the Kennedy Space Center. The Kennedy Space Center
is one of Florida's most popular tourist attractions, receiving over 2.1 million
visitors in 1994 and is especially popular with international tourists. The
Company expects to market the Space Coast Fun-Train as a convenient and
entertaining travel opportunity to see the Florida Space
23
Coast. The Space Coast Fun-Train is anticipated to operate over existing tracks
owned and operated by Florida East Coast Railroad.
The Company is also actively pursuing its strategy of acquiring Scenic
Destination Railroads. On March 13, 1997 (March 31, 1997 for financial reporting
purposes), the Company purchased D&SNG, the owner and operator of a
privately-held, scenic railroad which the Company believes is among the
country's largest and best-known Scenic Destination Railroads (the "Durango
Acquisition"). The purchase price of approximately $16 million was comprised of
seller financing in the amount of approximately $10 million; cash payments
totaling approximately $5 million, of which $2 million had been paid by the
Company as a deposit prior to closing and $3 million was provided by
institutional financing from NationsBank N.A. (South); 200,000 shares of the
Company's Common Stock; and common stock purchase warrants to purchase 1,610,000
shares of the Company's Common Stock exercisable at $3.50 per share. The balance
sheet of D&SNG is included in the financial statements of the Company at March
31, 1997, and the operating results of D&SNG will be included in the financial
statements of the Company beginning on April 1, 1997. The operations of D&SNG
for the period March 13, 1997 to March 31, 1997, were not material.
For the fiscal year ended December 31, 1996, the D&SNG generated revenues,
operating cash flow and pre-tax income of approximately $9 million, $3 million
(excluding a one-time $2 million tax refund), and $2 million, respectively. As a
result, the operations of D&SNG are currently generating cash flow in advance of
the launch of the Florida Fun-Train.
The Company's objective is to develop other Fun-Trains and acquire additional
Scenic Destination Railroads to further diversify its operations by capitalizing
on potential economies of scale that may result from consolidations in this
highly-fragmented industry.
THE DURANGO & SILVERTON NARROW GAUGE RAILROAD COMPANY
The Company believes that there are potential opportunities to increase the
revenues and earnings of the D&SNG by (i) initiating a formal marketing plan in
conjunction with marketing efforts on behalf of the Florida Fun-Train designed
to increase ridership; (ii) potentially realizing revenue gains from the
implementation of a 15% fare increase (which has been approved by the Colorado
authorities); (iii) potentially realizing revenue gains from price increases in
the prices for and sale of "on-board" products; and (iv) reducing expenses
resulting from the elimination of various corporate expenses related to the
operation of a corporate jet, third party management fees and the lease of an
apartment totaling approximately $900,000, the operating costs for which are
included in the financial results.
D&SNG operates an historic railroad which was built between 1881-82 by the
Denver & Rio Grande Railway Company. D&SNG's railroad, which has been carrying
passengers for more than 114 years, has been declared a registered National
Historic Landmark. The antique, steam-operated locomotives that power the trains
are coal-fired. These locomotives were manufactured between 1923 and 1925. In
addition, many of the coaches used by the railroad are the railroad's original
coaches dating back to the 1880s. D&SNG's operations have combined strict
adherence to historical authenticity and exacting standards of replication to
provide a historically authentic railroad service. Because of its historic
authenticity, this railroad has been used as the location for the shooting of
several films, including BUTCH CASSIDY AND THE SUNDANCE KID. This railroad
operates between Durango and Silverton, Colorado, a 90-mile round trip, which
takes approximately nine hours. Since 1993, the D&SNG railroad has carried
approximately 200,000 passengers annually. The railroad is located entirely
within the State of Colorado near the "Four Corners" region, where the borders
of Colorado, Utah, New Mexico and Arizona meet.
D&SNG offers a variety of train excursions to its customers. The 90-mile round
trip from Durango to Silverton is by far the most popular expedition and takes
approximately nine hours to complete. During the peak season (summer), D&SNG
offers four daily round-trip excursions. During the winter months, D&SNG offers
a five-hour excursion from Durango to Cascade Canyon, a 52-mile round trip.
D&SNG also offers one-way trips, with returns from Silverton via motor coach.
Additionally, any round-trip (with the exception of the parlor car) can consist
of a layover in Silverton for up to 15 days. D&SNG offers trains that stop at
several popular hiking trails to accommodate hikers desiring transportation.
Passengers may choose to ride in enclosed coaches, open gondola cars, authentic
parlor cars or the caboose with round-trip prices ranging from approximately $49
to approximately $85. Refreshments and snacks are available on all trains with
the parlor cars offering a full bar.
24
Historically, the operations of D&SNG have been the subject of limited marketing
efforts. The Company believes that the great majority of D&SNG's passengers have
learned of D&SNG's railroad by "word-of-mouth," or other indirect forms of
contact with the public, such as billboards and newsprint articles. In an
attempt to broaden the passenger base for D&SNG's railroad in the future, the
Company intends to concentrate its marketing efforts for the railroad on the
broad-based , travel-related industry. The Company expects to establish
relationships in coordination with the Florida Fun-Train's marketing efforts in
international and domestic areas through direct contact with distributors and
general sales agents having knowledge and experience in the development of
contractual arrangements. Further, the Company anticipates expanding the
railroad's "on-board" concessions.
PROPERTIES
The real property used by D&SNG consists of approximately 975 acres and includes
two terminals. Of the total acreage, D&SNG uses approximately 735 acres pursuant
to easements and rights-of-way, and the remainder is held in fee simple
ownership. One terminal is in Durango (La Plata County), Colorado, and is
located on approximately 40 acres of D&SNG-owned land, along with other
improvements, including various buildings and a parking lot. The second terminal
is in Silverton (San Juan County), Colorado, where D&SNG owns approximately 50
acres of land including the depot. The D&SNG terminals are connected by an
approximate 45-mile railroad right-of-way, which ranges between 100 to 200 feet
in width, approximately 30 miles of which are located on public lands within the
San Juan National Forest. The right-of-way has railroad track and various other
improvements located thereon.
The real estate improvements consist primarily of the following buildings:
SQUARE
DESCRIPTION FOOTAGE
----------- -------
Depot (Durango) 4,952
Roundhouse (Durango) 39,089
Car Shops (Durango) 9,956
Security Building (Durango) 207
Freight Depot (Durango) 2,684
Warehouse (Durango) 2,232
Garage (Rockwood) 1,100
Depot (Silverton) 2,480
In addition, the D&SNG owns other small buildings that are used for
miscellaneous storage. The condition of all of the buildings listed above would
be categorized as average to good. The administrative offices of D&SNG occupy
the second floor of the depot at Durango and are believed to be adequate for the
present operation of D&SNG.
PRODUCTS AND SERVICES
D&SNG offers a variety of train excursions to its customers with different
departure times. Covering a total of 90 miles, the round trip from Durango to
Silverton is by far the most popular expedition and takes approximately nine
hours to complete. During the peak season, D&SNG offers four round-trip trains,
with departure times ranging from 7:30 AM to 10:10 AM. During the winter, D&SNG
offers a five-hour excursion from Durango to Cascade Canyon which is a 52-mile
round-trip.
D&SNG also offers one-way trips, with return from Silverton via motor coach.
Additionally, any round-trip (with the exception of the parlor car) can consist
of a layover in Silverton for up to 15 days. To accommodate hikers desiring
transportation, D&SNG offers trains that stop at several popular hiking trails.
Passengers may choose to ride in enclosed coaches, open gondola cars, authentic
parlor cars or the caboose with round-trip prices ranging from approximately $49
to approximately $85.
Refreshments and snacks are available on all trains with the parlor cars
offering a full bar.
25
MARKETING
D&SNG's principal source of ticket sales is the consumer-direct market which is
served by its Durango-based reservation office. Approximately 86% of D&SNG's
business passengers come from the direct "sales" to consumers, with the balance
handled through travel agents and group tours. The Company compensates travel
agents through the use of commissions. Historically, the operations of D&SNG
have been the subject of limited marketing efforts. The great majority of
D&SNG's passengers come from "word-of-mouth" as well as other "indirect" forms
of contact with the public, e.g., billboards and newsprint articles. According
to a 1994 passenger survey, commissioned by D&SNG, the five major states of
origin of D&SNG passengers were Colorado, Texas, California, Arizona and New
Mexico, which account for nearly 60% of D&SNG's passenger totals.
D&SNG currently markets its services on a regional basis. Marketing efforts
consist principally of advertising in regional and local travel publications, as
well as the limited use of billboards, directories and advertising on local
radio programs. In addition, D&SNG is the subject of repeated, unsolicited
articles which appear in local and national newspapers and magazines. A
promotional brochure describing D&SNG's program and services is used to promote
ridership. The brochure is distributed by a third- party service to brochure
"racks" located in hotels, restaurants, airports and other tourist-related sites
in selected cities that have been good "feeder markets" for D&SNG ridership.
In an attempt to broaden the passenger base in the future, D&SNG intends to
concentrate its marketing efforts on the broad-based, travel-related industry.
The Company expects to establish relationships, in coordination with the Florida
Fun-Train's marketing efforts, in international and domestic areas through
direct contact with distributors and general sales agents having knowledge and
experience in the development of contractual arrangements.
EMPLOYEES
D&SNG employs approximately 70 people in the off-season (November-April), and
more than 200 people during the peak season (June-August). Seasonal employees
are added during the peak season primarily in the concession, operations and
reservation departments. The full-time staff is concentrated in the
administrative and maintenance departments where turnover is very low. The D&SNG
has no labor unions and management believes that the company's relationship with
its employees is satisfactory.
THE FLORIDA FUN-TRAIN
The Company's predecessor by merger, First American-Florida, was specifically
organized in February 1994 by persons who have experience in the passenger rail
and tourism industries in order to offer a unique passenger train service in the
Florida tourist market. The Company intends to capitalize upon the Florida
tourist base by developing and operating an entertainment-based passenger rail
service, the "Florida Fun-Train", between South and Central Florida.
Florida attracts tourists from across the world and was the top tourist
destination in the United States in 1995. Over the last several years Florida
has had an annual tourist base of approximately 40 million persons. South
Florida not only contains a number of well-known tourist destinations, but is
also a key entry point into the state for cruise ships entering and leaving the
Port of Miami and Port Everglades (Fort Lauderdale), as well as tourists
utilizing Miami International and Hollywood-Fort Lauderdale Airports. Central
Florida (Greater Orlando) plays host to world renowned tourist destinations such
as Universal Studios Florida, Walt Disney World, Sea World, Kennedy Space Center
and Port Canaveral. In 1994, approximately 14 million people traveled between
South and Central Florida.
The Fun-Train concept is to provide an enjoyable, high-quality entertainment
alternative to other means of transportation between South and Central Florida.
The Company's goal is to maximize the entertainment value of the travel time
while providing an efficient, safe and reliable form of transportation at a
reasonable price. The Florida Fun-Train is being designed to provide passengers
with a unique overland leisure excursion and the Company expects to accomplish
this through the use of various entertainment features, including "virtual
reality" and a variety of "high-tech" video games, as well as dining, dancing
and lounge cars offering a variety of live entertainment. It is anticipated that
the exterior of the Florida Fun-Train will be designed to have the appearance of
a colorful, ultra-modern train. The train's colors will be vibrant unlike the
typical passenger train in the United States. The Company intends to provide a
high level of service ("customer care") in order to accommodate its passengers;
to facilitate this the Company has hired an employee (vice president) who is
specifically charged with these duties.
26
The Company expects that most of its passengers will be tourists, and that the
Company's service will be offered as an "extension" of the passenger's vacation.
As such, management of the Company believes it will be able to capture both a
portion of the tourist market intent on travelling between South and Central
Florida while also encouraging travel on the Florida Fun-Train by tourists and
residents who would not otherwise make the trip. Currently, travel is made
between South and Central Florida primarily by either automobile or airplane.
The Company believes the Florida Fun-Train will generally offer price advantages
to travelling by airplane. Travelling by automobile or airplane does not offer
the entertainment value provided on the Florida Fun-Train.
The Company has taken significant steps to commence operations of the Florida
Fun-Train. In that regard, the Company has done the following: purchased its
first passenger car; entered into an agreement with Rader Railcar II, Inc.
("RRI"), a company owned by a director and shareholder, to manufacture the
remaining railcars for the Florida Fun-Train; entered into an agreement with CSX
Transportation, Inc., for track use; entered into an agreement with the Florida
Department of Transportation for certain track usage in South Florida; commenced
negotiations with a land developer and Amtrak regarding terminal locations in
Poinciana, Florida (Greater Orlando area) for a northern terminal site; executed
an agreement with Amtrak for certain technical services (operating crew, etc.)
in connection with the Florida Fun-Train; completed a marketing study by an
outside consultant (which included discussions with wholesale travel and tour
companies, rental car companies, airlines and cruise lines); entered into an
agreement with Universal Studios Florida for joint marketing and sales efforts
in connection with the Florida Fun-Train services; and entered into a track
rights agreement with Florida East Coast Railway Company (FEC) for future use.
FLORIDA FUN-TRAIN EQUIPMENT AND TRACK RIGHTS
The Company plans to commence operations of the Florida Fun-Train during the
Fall 1997.
8 Dome Passenger Cars Each car will provide comfortable, spacious seating and meal and beverage service
for approximately 75 passengers (which includes the initial prototype car already
owned by the Company).
4 Bilevel Entertain-
ment Cars* These cars will consist of (i) one "tropical-themed bar/lounge car" which will sell
cocktails, beverages and high-end appetizers and offer live entertainment
including music for listening and/or dancing (to be provided by musicians or a
disc jockey), (ii) one "video game and children's play area car" which will offer
a variety of high-tech video games and virtual reality, as well as a separate
children's play area and magicians and/or clowns, who will perform in all
passenger and entertainment cars, (iii) one "multi-media car" which will include
a custom designed, audio-visual presentation (the waiting area will have a
concession and video facilities) and (iv) one "promenade car" to include a 1950s
diner, a gift shop, photo area, wine bar and pub and lounge area.
1 Baggage Car This car will provide storage space for the passengers' luggage.
<FN>
- ----------
* The Fun-Train's operation will commence with less than eight passenger cars
and/or less than four entertainment cars.
</FN>
The Company intends to have all of these railcars (except the baggage car which
may be leased or purchased from a different supplier) constructed by RRI.
In addition, each Fun-Train intends to utilize two of the three leased diesel
locomotives, which will be repainted to match the color scheme and exterior
graphics of the rest of the train. It is currently contemplated that one
locomotive will be positioned on each end of the train, allowing the train to be
operated in either direction without the need to turn the train around.
The Company plans to initially operate the Florida Fun-Train between Fort
Lauderdale and Orlando on currently existing FDOT and CSXT tracks.
27
The tracks between Ft. Lauderdale and West Palm Beach which comprise part of the
proposed route of the Florida Fun-Train are controlled by FDOT. The Company has
entered into an agreement dated January 6, 1997 (the "FDOT Agreement"), with
FDOT to obtain the use of this track. Pursuant to the FDOT Agreement, the
Company will have access to and the use of that portion of the track between
mile marker ("MM") 1034 located in Hialeah, FL., and MM 965 located in West Palm
Beach, Florida. In addition, the parties have agreed to allow the Company the
use of the Sheridan Street Station (MM 1018), which is currently being used by
Tri-Rail, to be used as a southern terminal for the Florida Fun-Train. The FDOT
Agreement is for a five-year term beginning upon the commencement of the Florida
Fun-Train operations. The Company is required to pay the FDOT $500 for each
one-way trip over the foregoing route which amount increases by $50 after each
anniversary of the FDOT Agreement. The Company has negotiated with the FDOT for
the right to use various sidings along this section of the route. Compensation
for access to the railroad maintenance facility located in Hialeah, FL. is still
to be negotiated with the FDOT.
Pursuant to the FDOT Agreement, the Company has agreed to waive certain future
claims, if any, against FDOT for losses or costs arising out of the use of
FDOT's track, including those arising from the negligence or omissions of the
FDOT. Further, the Company has agreed to indemnify FDOT from third-party claims,
including but not limited to, personal injury claims, made against FDOT and
arising from the Company's operations pursuant to the FDOT Agreement. The
Company has also agreed to maintain at least $125 million in comprehensive
general liability insurance with a $100,000 deductible (or self-insurance
amount).
The FDOT Agreement may be terminated if (i) the Florida Fun-Train does not
commence operations within two years from the date of the FDOT Agreement, (ii)
the Company's operations are suspended for more than 90 days, (iii) there are
more than ten independent suspensions in such operations, (iv) there is a
material violation in the Company's obligations under the FDOT Agreement which
is not cured upon 45 days' written notice, and (v) future high-speed rail
operations are such that the route cannot be shared (in the FDOT's sole opinion,
but with three year's notice to the Company).
The CSXT Agreement dated October 31, 1996, provides for the use of CSXT's tracks
between West Palm Beach and Orlando to be used for the operation of the Florida
Fun-Train. The CSXT provides, in part, that the Company will initially pay CSXT
the greater of $20 per train-mile, or 16% of the Company's gross ticket revenue
(less discounts) from the Florida Fun-Train operations. The Company's payment
requirements under the CSXT Agreement are as follows: the per train-mile amount
is subject to various increases for inflation and other price adjustments
including, (i) an annual increase, beginning January 1, 1999, in the per
train-mile charge equal to the inflation index of the Association of American
Railroads, (ii) a $50,000 per month reduction for the aggregate train-mile
charge in 1997, 1998 and 1999, and (iii) a $2.20 increase in the per train-mile
charge along with a limit in certain circumstances on the total annual
compensation to CSXT beginning in the year 2000 and thereafter. In addition, the
Company is required to maintain at least $300 million in comprehensive general
liability insurance with a $100,000 deductible (or self-insurance).
Pursuant to the CSXT Agreement, CSXT has agreed not to grant similar access
rights to the subject rail corridor (between West Palm Beach and Orlando) to any
other private rail passenger operator or contractor which would provide
comparable conventional rail passenger service for the cruise ship market. The
exclusivity provision specifically excepts the provision of access to the
subject CSXT route by Amtrak and the Tri-County Commuter Rail Authority, as well
as other publicly-funded authorities with statutory and/or contractual rights
with respect thereto. The exclusivity also does not apply to high-speed rail
activities. In addition, the exclusivity clause will be voidable at CSXT's
option if (i) after the first year of operation, the Company does not operate at
least 16 Florida Fun-Trains a week, or (ii) management of the Company changes
significantly. The term of the agreement will be five years. In addition to the
foregoing, the Company has agreed to sell up to 475,000 warrants to CSXT,
exercisable at $4.50 per warrant with the initial installment of 75,000 warrants
being exercisable upon the commencement of operations of the Florida Fun-Train
and thereafter in four equal annual installments of 100,000 warrants each
commencing January 1, 1998; no provision has been made herein for the effect of
the issuance or exercise of these warrants when and if issued. Pursuant to the
CSXT Agreement, the Company has appointed a CSXT representative, Albert B.
Aftoora, to its Board of Directors.
The track rights agreements that the Company has or is expected to have with
track owners, will require the substantial amounts of general comprehensive
liability insurance (up to $300 million in coverage). The Company has received
proposals from various insurance brokers to assist it in obtaining the coverage.
In this regard, the Company has selected an internationally- recognized
insurance brokerage firm which has advised the Company that this type and amount
of insurance is generally available, at reasonable rates, and it believes the
Company will be able to secure a commitment for such insurance prior to the
commencement of the Florida Fun-Train's operations.
28
The initial terminal locations are planned to be in central Broward County
(which is located in the center of the metropolitan area comprising Dade,
Broward and Palm Beach Counties) and in the Greater Orlando area, the home of
Walt Disney World, Universal Studios Florida, Sea World and numerous other
attractions.
The Company has contracted with Amtrak for the provision of technical services
by the latter in connection with the operation of the Florida Fun-Train. These
technical services include the provision of train and engine crews, maintenance
of equipment and fuel as well as the leasing of locomotives and a baggage car
(with option to purchase). As part of this Amtrak contract, Amtrak has consented
to the Company's use of the CSXT track, as required by the CSXT Agreement.
Additionally, Amtrak has consented to the Company's use of FDOT track between
West Palm Beach and Hialeah, FL.
The Company is also negotiating with Amtrak and a land developer for a northern
terminal location in Poinciana, FL.; there can be no assurance that any such
negotiations will be successful. As an alternative, the Company has selected a
prospective terminal site on the Orlando International Airport property and
entered into a letter of intent with the Greater Orlando Aviation Authority and
is negotiating with the Orlando Utilities Commission in connection with that
site and for the rights to use the tracks leading thereto.
The estimated travel time for the Florida Fun-Train between Central Florida and
South Florida is just in excess of four hours. To serve the general domestic and
international tourist market, the Company plans to offer daily weekday service
origination in South Florida in the morning and in Central Florida in the
afternoon. To serve the South Florida weekend cruise market (Port Everglades and
Port of Miami) the Company plans to offer special inbound and outbound service
for cruise passengers.
MARKET
The Florida Fun-Train's principal market is approximately 40 million persons who
visit Florida each year. The Company also intends to rely on the more than 1.4
million residents of the Central Florida (Greater Orlando) metropolitan area
and the more than 3.3 million residents of the South Florida
(Miami/Ft. Lauderdale) metropolitan area, as well as on the rest of the more
than 13.4 million residents of Florida for passengers. According to a recent
study, Florida's population and tourist base are expected to continue to grow
significantly during the next decade. According to the same study, in 1994
approximately 14 million persons traveled between Central and South Florida. Of
these trips, 55% were for tourism/recreation, 24% were for family/personal
reasons, and 21% were for business. SOURCE: "1994 Florida Visitor Study,"
Florida Department of Commerce, Bureau of Economic Analysis, Tallahassee, FL
(1995).
From 1980 to 1995 the number of annual visitors to Florida increased by 105%,
from 20 million to 41.3 million. According to the Florida Department of
Transportation, approximately half of these visitors arrived without an
automobile. From 1980 to 1995, the resident population of Florida increased from
9.7 million to 14.4 million, a 49% increase. During that period, the population
of Central Florida increased by 75%, from 800,000 to 1.4 million, and the South
Florida population grew from 2.6 million to 3.5 million, a 35% increase. SOURCE:
Florida Department of Commerce, Division of Economic Development, Bureau of
Economic Analysis. The recent slowdown has been attributed, in part, to
highly-publicized criminal attacks on tourists, and increasing competition from
other tourist destinations in the U.S. and the Caribbean region as well as
economic problems in some of Florida's overseas tourism markets.
The Company's planned operations may be materially adversely affected by
declining growth or an absolute decline in the number of tourists visiting
Florida; however, the Company believes that, by offering a unique and safe
tourist attraction and service, it can attract the passenger base needed for
profitability, notwithstanding possible adverse trends in the growth of the
Florida tourist market as a whole.
Given the status of both Central Florida and South Florida as major tourist
destinations, as well as the size of the underlying metropolitan areas, the
Company sees great potential in the market for transportation between the two
areas. The Company plans to target the tourists and residents already traveling
between the two destinations, but it also plans to stimulate, through a
marketing effort, travel between the areas to be serviced by the Florida
Fun-Train
29
by persons who otherwise would not have made the trip. By providing a
convenient, entertaining and reasonably priced service between South Florida and
Central Florida, the Company's Fun-Train will be marketed as an inducement to
South Florida visitors and residents to travel to Central Florida, and vice
versa. Given the significant size of the potential market, the Company believes
that it needs to capture only a small portion in order to be successful.
According to the 1995 Department of Commerce Study, the greater Orlando area was
the fastest growing metropolitan statistical area in Florida in the early
1990's. The greater Orlando area added nearly 172,000 residents between 1990 and
1995 for an estimated population of 1.4 million. The Orlando area's rate of
growth during this period was 2.5 times the United States average.
Approximately 25 million passengers enplaned and deplaned at the Orlando
International Airport in 1996, up from approximately 22.5 million in 1994. Of
these passengers, approximately 11% were international visitors, primarily from
Europe, Canada and, to a lesser extent, Latin America.
Central Florida is filled with a number of attractions including Walt Disney
World's Magic Kingdom, Epcot Center, Disney-MGM Studios, Universal Studios
(Florida), Sea World of Florida, as well as Church Street Station, Seminole
Greyhound Park (Turf Club) and Splendid China.
Walt Disney World (and its related attractions) is one of the dominant
components of the Central Florida economy; the relative influence of the Disney
attractions has lessened with the significant development of other major tourist
facilities. Walt Disney World's 1995 attendance was approximately 35.3 million,
which was an amount over four times that for Universal Studios, Central
Florida's next most popular attraction.
One of the fastest growing components of the Central Florida economy is the
convention industry. Orlando is one of the largest convention markets (in terms
of number of delegates) in the United States. Reasons cited for the increasing
popularity of Orlando as a location for conventions and conferences include the
continuing development of area attractions, the addition of hotel rooms, and the
increased availability of transportation.
The Miami/Fort Lauderdale metropolitan area contains approximately 3.3 million
residents and is also a major tourist destination, with numerous attractions,
two major cruise ports, four major-league professional sports teams and miles of
beaches. The area attracts millions of domestic and international visitors each
year, who come for tourism, shopping, business and family visits. Miami is the
financial and trade capital of Latin America, and Miami Beach, famous for its
night life, is internationally known as a center for the fashion, music and
movie industries. Fort Lauderdale, Miami and Miami Beach are also major
convention destinations. Miami International Airport is the primary travel
connection linking the Americas, the Caribbean, Europe and Africa. Served by
approximately 135 airlines, more than any other airport in the world, Miami
International Airport logs approximately 1,400 daily departures and arrivals. In
1995, over 33.5 million (14.5 million international) passengers flew to or from
Miami.
South Florida has expanded from its traditional role as a wintertime destination
for North Americans to become a year-round destination for domestic and
international visitors. South Americans now comprise 35% of annual international
visitors, European visitors make up 27% of the annual total, visitors from
Central America and the Caribbean account for 23%, and North Americans account
for 15%.
The Port of Miami is the home port to a world-leading fleet of 17 luxury cruise
ships, including five of the world's largest passenger ships, which are
expressly outfitted for pleasure cruise vacations. The Port of Miami handles
approximately 3.2 million passengers per year from its 12 passenger terminals -
more than any other cruise port.
Port Everglades, located approximately 30 miles north of Miami in Fort
Lauderdale, received in excess of 2.4 million cruise passengers during 1996.
There are 35 cruise ships based at Port Everglades, with four cruise terminals
just a short walk from the Broward County Convention Center.
The Fort Lauderdale/Hollywood International Airport is another major
transportation destination for tourists going to South Florida. In 1995 the
airport handled approximately 8.6 million domestic passengers and 1.2 million
international passengers. There are approximately 35 major airlines serving the
Fort Lauderdale/Hollywood International Airport with 651 daily arrivals and
departures. The airport is located just one and one-half miles from Port
Everglades and the Broward County Convention Center.
30
MARKETING
The initial one-way ticket price for the Florida Fun-Train is expected to be in
the range of $65-$75, and the per-passenger en route revenue (for food,
beverages, entertainment and souvenirs) is expected to be in the range of
$20-$25.
On July 23, 1996, the Company engaged a third party to conduct a market study
for the Company for the purpose of providing recommendations with respect to
targeting market segments most likely to use the Florida Fun-Train, traffic
volume (including seasonal fluctuations), schedules that would generate the
highest volume of ridership, fare structure, types of entertainment, and key
product attributes such as classes of service, language or other special
requirements. This study includes conclusions based on discussions with
wholesale travel and tour companies, rental car companies, airline and cruise
lines. The total cost of this market study which was completed in late November
1996 (including reimbursement for professional fees and out-of-pocket expenses)
was $176,800.
During the current fiscal year the Company plans to develop and implement its
sales and marketing efforts. The Company plans to hire approximately four
employees who will begin marketing the Company to the travel and tour
industries. Among other things these employees will market and sell tickets
(passenger seats) through wholesale travel and tour operators and retail travel
agents. Wholesale tour operators have historically represented a material source
of business for the travel industry in South and Central Florida, particularly
in the cruise and lodging businesses. While the Company cannot anticipate what
percentage of its future business will be with wholesale tour operators it is
expected that wholesalers will represent approximately one-half of its business.
In addition, marketing efforts which feature the Company's services are
presently planned through various channels such as trade shows and conferences,
as well as advertising in various tour industry publications as well as to the
general public. During this stage, the Company plans to sell Fun-Train tickets
through a reservation system which is to be developed. In addition, the Company
intends to attempt to market its services and sell tickets by means of joint
arrangements with cruise lines, airlines, hotels, car rental agencies and
attractions. General advertising on radio and television and in periodicals,
newspapers and other media, is also planned as an important component of the
Company's marketing program. The Company anticipates that national and
international marketing and sales efforts will enhance business, while the
implementation and execution of a yield management system and reservations
program will increase incremental revenues.
The Company's initial marketing efforts for the Florida Fun-Train have shown
positive results which, in the opinion of management, validates the Company's
business plan. The Company has received written commitments (defined below) to
deliver 359,250 passengers which the Company believes could generate gross
revenues of $25 to $30 million. Further, the Company has also received oral
commitments for approximately 160,000 passengers which the Company believes
could generate gross revenues of $13 to $14 million. "Commitments" in the travel
industry are indications, not legally binding obligations, typically from tour
operators (either verbal or written) , to deliver passengers within a prescribed
period of time; there can be no assurance that such passengers will be
delivered. The above-described commitments are for travel between October 1,
1997 through December 31, 1998. These commitments are from various travel
companies, tour operators, wholesalers and travel agents, such as GO GO
Worldwide Vacations, DER Travel Services and American Airlines "Fly Away"
program, the last being one of the most prestigious tour programs in the
industry. In addition, the Company has entered into a marketing agreement with
Universal Studios Florida for joint promotional activities, joint advertising
and other joint publicity activities.
On October 30, 1996, the Company entered into an agreement with Universal
Studios Florida (a major Central Florida tourist attraction) for joint
advertising, promotion and publicity programs in order to form a "strategic
alliance" for on-going joint activities from November 4, 1996 to December 31,
1998.
FUTURE ENTERTAINMENT TRAINS
After the introduction of the Florida Fun-Train, and assuming the Company has
sufficient capital available, it expects to provide "Fun-Train" passenger
service between South Florida and the Florida Space Coast (near the Kennedy
Space Center). The Space Coast Fun-Train is expected to provide daily round-trip
service at a fixed price which will include a full tour of the Kennedy Space
Center. The Kennedy Space Center is one of Florida's most popular tourist
attractions, receiving over 2.1 million visitors in 1994 and is especially
popular with international tourists. The Company expects to market the Space
Coast Fun-Train as a convenient and entertaining travel opportunity to see the
Kennedy Space Center. The Space Coast Fun-Train will operate over existing
tracks owned and operated by FEC.
31
On February 28, 1995, the Company entered into an agreement with FEC for the use
of certain track rights in the Miami-Fort Lauderdale-West Palm Beach-Titusville
corridor. The ten-year term of the FEC agreement starts when the Space Coast
Fun-Train is operational and the agreement provides for a standard, per-car
mileage charge of $1.20 per car-mile (which is equivalent to $18 per train-mile
based on the minimum FEC 15-car train requirement), payable monthly, with a
minimum guaranteed annual amount of $500,000 per route to be paid by the Company
to FEC. When the Space Coast Fun-Train is operable, the minimum payment will be
$500,000 per annum. The Company will operate the Space Coast Fun-Train with
locomotives it provides subject to dispatching (and related controls) by FEC.
The agreement provides for limited exclusivity to the Company to operate
"Fun-Train" type train services and/or services to cruise lines over the
prescribed route, with certain exceptions. Further, the Company is obliged to
indemnify FEC for claims under actions arising from the operation of the Space
Coast Fun-Train, and the Company is obliged to obtain a minimum of $200 million
in comprehensive general liability insurance coverage in favor of FEC, with a
$100,000 deductible.
COMPETITION
Generally, the Company faces extensive competition for the spending of leisure
time and dollars from numerous attractions in the tourist entertainment sector.
The success of its proposed operations will depend primarily on its ability to
quickly develop an entertaining, high-quality, efficient, safe and reliable
service, as well as its ability to market such service and secure consumer
acceptance. It is uncertain whether the Company will be successful in these
efforts.
With regard to the proposed operations of the Florida Fun-Train, numerous
companies, most of which are substantially larger than the Company and have much
greater financial and other resources, offer alternative modes of transportation
over the proposed Florida Fun-Train route. In addition to the extensive
competition in the transportation sector, the Company faces extensive
competition for the spending of leisure time and dollars from numerous
attractions in the tourist entertainment sector. These alternative modes of
transportation, offer transportation that is less expensive and/or faster than
the Company's proposed rail service. Most of these competitors already enjoy an
established presence in the Florida transportation and tourism markets. The
Company expects to compete on the basis of what will be its unique product,
which will provide a combined package of transportation and entertainment.
The Company believes that the principal transportation competition for the
Florida Fun-Train will be from airlines, automobiles and inter-city buses. While
air travel is a faster means of transportation, it is generally more expensive
than the Company's proposed fares; however, there are certain low-fare air
carriers operating in the South Florida/Orlando corridor. Further the Company
believes that airline travel does not provide significantly greater convenience
within the scope of the Florida Fun-Train's projected routes. Automobile travel
is, on the other hand, less expensive, but lacks the convenience and ease of
transport expected to be provided by the Florida Fun-Train. The Company is not
aware of any other person or entity currently planning to provide a service
directly competitive with the Florida Fun-Train; however, the Company is
generally aware of the fact that Walt Disney Company has indicated from time to
time its interest in establishing a rail link between its operations in greater
Orlando and one or more cruise ports in Florida. There can be no assurance that
such a competitor will not appear before or after the Company commences Florida
Fun-Train operations. In addition, Amtrak currently operates passenger train
service between Miami/Fort Lauderdale and Orlando, Florida with numerous stops
in between. The cost of a round-trip ticket on Amtrak between Miami/Fort
Lauderdale and Orlando is currently $123 (first class service) and $55 (coach
service). Presently Amtrak service does not include the "entertainment-type"
service which the Company proposes to provide on the Florida Fun-Train, and the
Company has certain exclusive rights regarding operating "fun-trains" over the
CSX and FEC rail corridors. The Company has contracted with Amtrak for the
latter to provide certain "technical services" for the Florida Fun-Train as well
as for the leasing of locomotives and a baggage car.
With regard to the operation of D&SNG, two other noteworthy "scenic destination
railroads" exist in Colorado: the Georgetown Loop and the Cumbres & Toltec
Railroad. Located west of Denver, the Georgetown Loop is a seven-mile, 70-minute
excursion. The trains are pulled mainly by steam locomotives with the remainder
being pulled by diesel locomotives. The Cumbres & Toltec, like D&SNG and the
Georgetown Loop, is a narrow gauge scenic railroad. The Cumbres & Toltec runs
from Chama, New Mexico to Antonito, Colorado, a distance of 64 miles, its trains
are pulled mainly by steam locomotives, with the remainder being pulled by
diesel locomotives and its closest boarding point to the D&SNG is located
approximately 100 miles from Durango in Chama. Although the Cumbres & Toltec
provides scenic opportunities, it does not travel through a national forest nor
is it a registered National Historic Landmark. Owned by the States of New Mexico
and Colorado, the Cumbres & Toltec is maintained
32
primarily by volunteers. The termini of the Cumbres & Toltec are not "tourist
towns", and do not have, in the opinion of management, the same ambience as
D&SNG.
Competition could come from others entering the industry but is unlikely due to
barriers to entry. There are few authentic steam locomotives in existence today
making it very difficult to enter into competition with D&SNG. In addition, it
would be nearly impossible for anyone to obtain right-of-way through the San
Juan National Forest.
EMPLOYEES
At June 16, 1997, the Company employed 22 persons, seven of whom are senior
management and the remaining fifteen are staff members. Over the next 12 months,
the Company expects to hire approximately 70 additional full-time positions
(which may be staffed with full-time or part-time personnel). See "Management's
Discussion and Analysis of the Results of Operations and Financial Condition and
Plan of Operation." The Company also intends to rely extensively on independent
contractors and the outsourcing of certain functions, e.g. marketing. For a
description of D&SNG's employees, see "- The Durango & Silverton Narrow Gauge
Railroad Company."
Traditionally, railroad operating crews have been unionized, and with respect to
the Florida Fun-Train operations the Company may have no alternative but to use
a unionized crew. Further, while unionization among railroad passenger service
workers is less prevalent than among crew members, there can be no assurance
that the Company will not have to use unionized personnel in passenger service
positions as well. While the Company does not anticipate material labor
relations problems and believes that it can reach mutually beneficial collective
bargaining agreements with any unionized employees, there can be no assurance
that these problems will be avoided.
GOVERNMENTAL REGULATION
The Company's operations are (or will be) subject to safety regulation by the
Federal Railroad Administration (which are administered in Florida by the
Department of Transportation), as well as environmental regulation by federal
and state agencies. The Company's operations are also required to maintain a
state liquor license and a Special Tax Stamp issued by the Federal Bureau of
Alcohol, Tobacco and Firearms, and it is subject to health and other regulations
promulgated by federal, state and local authorities. D&SNG's operations are
subject to rate, administrative and safety regulation by the Colorado Public
Utilities Commission, as well as environmental regulation by federal and state
agencies. Delay or cessation of operations of either the Florida Fun-Train or
D&SNG would materially, adversely affect the Company and its financial
performance.
The Company believes that its proposed operations as well as the operations of
D&SNG are, and will be, in material compliance with all environmental laws and
regulations, and it estimates that such compliance will not have any material
adverse effect on its profitability or capital expenditures.
DESCRIPTION OF PROPERTY
The Company leases approximately 14,800 square feet of space in a facility
located at 3700 North 29th Avenue, Suite 202, Hollywood, Florida 33020, pursuant
to a ten-year lease at a monthly rental rate of $7,625. For a description of the
properties of D&SNG see " - The Durango & Silverton Narrow Gauge Railroad
Company."
LEGAL PROCEEDINGS
Neither the Company nor D&SNG is a party to any material legal proceedings or
arbitration proceedings, and to the best of the Company's knowledge and belief,
none is contemplated or threatened.
The Company is not party to any pending legal proceedings or arbitration
proceedings, and, except as described below, to the best of its knowledge and
belief, none is contemplated or threatened. The Company has been advised by
Carnival Corporation, the operator of Carnival Cruise Lines ("Carnival"), that
Carnival considers the Company's use of the "Fun-Train" mark to be an
infringement of certain marks held by Carnival. Although not determinative, the
Company has received a registered mark in the State of Florida for "Florida
Fun-Train." In addition, beginning in April 1996, the Company has applied for
the federal registration of the "Fun-Train" mark and is currently pursuing this
application. After consulting with trademark counsel, the Company has received
notification of the pending publication of the mark for public comment and
believes it will receive this federal registration; however, there can be no
assurance that such mark will be issued. Further, the issuance of a federal
registration should not materially
33
affect any prior common law rights, if any, Carnival may have with regard to the
use of the "Fun" mark in connection with rail transportation. Based on a
preliminary analysis, the Company does not believe its "Florida Fun-Train" and
"Fun-Train" marks infringe upon any of those held by Carnival; however, the
Company is reviewing its position regarding this issue with its trademark
counsel. Further, the Company expects to commence discussions in this regard
with Carnival in the near future.
34
MANAGEMENT
The directors of the Company are as follows:
NAME AGE POSITION(S)
- ---- --- -----------
Allen C. Harper 52 Chairman of the Board of Directors
Albert B. Aftoora(1) 57 Director
Charles E. Bradshaw, Jr. 66 Director
Glenn P. Michael(1) 52 Director
Raymond Monteleone 49 Director
Thomas G. Rader(2) 50 Director
David H. Rush(1)(2) 76 Director
Luigi Salvaneschi(1)(2) 67 Director
(1) Member of the Audit Committee, the Chairman of which is Mr. Aftoora.
(2) Member of the Compensation Committee, the Chairman of which is Mr. Rush.
The executive officers of the Company are as follows:
NAME AGE POSITION(S)
- ---- --- -----------
Allen C. Harper 52 Chief Executive Officer
Raymond Monteleone 49 President and Chief Operating Officer
Thomas E. Blayney 56 Vice President of Operations
Donald P. Cumming 36 Vice President, Secretary, Treasurer and
Acting Chief Financial Officer
Gordon L. Downing 53 Vice President of Marketing and Sales
Pamela S. Petcash 34 Vice President, Customer Care and
Entertainment
MR. HARPER, age 52, has been the Chairman of the Board of Directors and Chief
Executive Officer of the Company since April 1996, and prior thereto he served
in similar capacities with the Company's predecessor by merger, First American
Railways, Inc., a Florida corporation ("First American-Florida") since its
incorporation (February 1994). He has over 30 years of business experience,
principally in the areas of real estate management and development and rail
transportation. Since 1984, he has been principally employed as the Chairman,
President and principal shareholder of First Reserve, Inc., the holding company
for Esslinger-Wooten-Maxwell, Inc., a residential and commercial real estate
brokerage and management firm based in Coral Gables, FL. Since September 1989,
Mr. Harper has been a Director, and from October 1992 to October 1993, and from
July 1995 to June 1996, he served as Chairman of the Board of the Tri-County
Rail Authority. Since May 1994, he has served as a Director of Florida East
Coast Railway Co. (a railroad company based in St. Augustine, FL) and Vacation
Break U.S.A., Inc. (a travel and time-share corporation based in Fort
Lauderdale, FL).
35
MR. AFTOORA, age 57, became a Director of the Company in December 1996. Mr.
Aftoora has extensive experience in the railroad industry and is currently Vice
President of Corridor Development for CSX Transportation, Inc. ("CSXT"). Mr.
Aftoora is being appointed to the Board of the Company as CSXT's representative
pursuant to the terms of the CSXT Agreement. Mr. Aftoora joined a predecessor of
CSXT in 1966 as an internal audit officer, and he has held a variety of
financial management and planning positions during his 30-year career with the
firm, including director of regulatory economics from 1977 to 1980 and director
of financial planning from 1980 to 1984. He served as CSXT's treasurer from 1984
to 1995, when he was named to his current position.
MR. BRADSHAW, age 66, has been a Director of the Company since March 1997. He
has extensive experience in the citrus industry in Florida and in the scenic
railroad business in Colorado. He began work in the citrus industry in 1952 and
rose to become General Manager and then President of Hi-Acres, Inc. (a Florida
citrus company) in which latter capacity he continues to serve. In 1981, Mr.
Bradshaw formed The Durango & Silverton Narrow Gauge Railroad Company which
purchased from the Denver and Rio Grande Western Railroad the operation of a
narrow gauge mining railroad, which Mr. Bradshaw converted to a scenic railroad.
He is the Chairman of the Board of Trustees of Lake Highland Preparatory School
(Orlando, FL) and a former member of the Board of Trustees of the Darlington
School (Rome, GA). He is a member of the Board of Directors of the Pine Hills
Office (Orlando, FL) of SunTrust Bank.
MR. MICHAEL, age 52, has been a Director of the Company since September 1996. He
has had extensive experience in the railroad and transportation industries since
1966. In 1996, he became President and Chief Executive Officer of Novoeste
Railways, Brazil's first privatized railroad. In 1995, Mr. Michael formed G.P.M.
Associates, a railroad consulting company. Also during 1995, he served as the
railways consultant specialist for the Bosnia and Hezergovina World Bank
Mission. Mr. Michael was the Vice President of Operations of Southern Pacific
Rail Company (Denver, CO) from 1992 to 1994. Prior to that, he served as Vice
President/Chief Transportation Officer for CSX Transportation, Inc. from 1987 to
1992. From 1986 to 1987 Mr. Michael served as Senior Vice President of Sales and
Marketing, and from 1984 to 1986 he served as Vice President of Engineering of
CSX Transportation, Inc. Mr. Michael served as Vice President Labor Relations of
Chessie System (a rail transportation company headquartered in Baltimore, MD)
from 1982 to 1984. Mr Michael has served on the Board of Directors of several
rail companies and currently serves on the Board of Directors of Carolina
Apparel, Inc. He is currently on the Board of Visitors of St. Andrew College in
North Carolina.
MR. MONTELEONE, age 49, became President, Chief Operating Officer, and a
Director of the Company in July 1996. Most recently (1988-1996) Mr. Monteleone
served as the Vice President of Corporate Development, Planning, Administration,
and Acting Chief Financial Officer of Sensormatic Electronics Company (an
electronics security company). In addition, from May 1988 until January 1995 he
served as a consultant to and board member of various businesses. From 1973
until May 1988, he was a staff accountant and later a partner, and then the
Director of Taxes (three South Florida offices) of Arthur Young & Company, an
international accounting firm. Mr. Monteleone is a Certified Public Accountant
licensed in Florida, as well as other states. He graduated cum laude from the
New York Institute of Technology in 1969, and received his Masters in Business
Administration from Florida Atlantic University (Boca Raton, FL) in 1992. He
serves on the Boards of Directors of Loren Industries, Inc. (a jewelry casting
company), Pointe Financial Company (a federal savings and commercial bank
holding company) and Rexall Sundown, Inc. (a pharmaceutical company).
MR. RADER, age 50, has been a Director of the Company since the Merger, and
prior to that he served in a similar capacity with First American-Florida since
its incorporation. Since 1982, Mr. Rader has been the President and sole
shareholder of Rader Railcar, Inc., Denver, CO, which designs, builds and
operates unique rail cars. He has more than 20 years experience in both the
tourism and railroad industries. From 1970 to 1975, he served as Vice President
and director with Sheraton Hawaii (a subsidiary of ITT-Sheraton Company) and
from 1978 to 1982, he served as Vice President and General Manager of Holland
America (a division of Holland America Line, Inc.). In 1982, he founded Tour
Alaska, a privately-held Alaskan tour company which offered the first private
railcar tour through Alaska.
MR. RUSH, age 76, has been a Director of the Company since the Merger, and prior
to that he served in a similar capacity with First American-Florida since June
1994. He has extensive experience in the private and public sectors, principally
in the areas of high tech industry, economic development and rail
transportation. Mr. Rush has served as a member and chairman of the Florida High
Speed Rail Commission, and he is also a member of the Tri-County Commuter Rail
Authority. Mr. Rush was formerly Chairman of the National High Tech Council and
is a past member of the Defense Conversion and Transition Commission. Mr. Rush
was the President and Chief Executive
36
Officer of Aptek Technologies, Inc., Deerfield Beach, FL, from 1982 to April
1995, and has been President of Rush Holdings, Inc., in Deerfield Beach since
1958. He has also been President of RTX Telecom and Electro Data Corp. since
1982.
MR. SALVANESCHI, age 67, has been a Director of the Company since the Merger,
and prior to that he served in a similar capacity with First American-Florida
since June 1994. His career has been in "mass-marketing service" businesses
which are oriented toward consumers' discretionary dollars. In 1969, he became
Vice President/Real Estate Administration of McDonald's Company, and in that
position, he was instrumental in setting national standards and policies for
market development and store locations. In 1971, he was made an advisory member
of McDonald's Board of Directors. From 1983 to 1987, Mr. Salvaneschi was
employed by Kentucky Fried Chicken as senior Vice President. In January 1988, he
joined Blockbuster Entertainment Company as Executive Vice President of
Development, and in June 1988 he became President, Chief Operating Officer and a
Director of Blockbuster. He retired from Blockbuster in February 1991.
MR. BLAYNEY became Vice President of Operations in August 1996. From 1989 to
1995 Mr. Blayney served as Executive Vice President and General Manager of
Southland Greyhound Park (an Arkansas parimutuel attraction). From 1981 to 1988
he was the President of Seminole Greyhound Park in Casselberry, Florida. From
1978 to 1980 Mr. Blayney served as Vice President of Harcar Aluminum Products, a
Florida window manufacturing firm. From 1977 to 1979 Mr. Blayney served as a
Vice President of Marketing for Auto-Train Corporation in Washington, D.C. Mr.
Blayney served as Special Assistant from 1970 to 1976 to Governor Reubin O'D
Askew during two terms as Governor of Florida.
MR. CUMMING became Vice President of the Company in August 1996, and in May
1997, he was elected Secretary and Treasurer and Acting Chief Financial Officer.
Prior to May he served as Controller and Chief Accounting Officer. Mr. Cumming
served as Division Controller of Export Sales and Corporate Finance Manager for
Sensormatic Electronics Company (an electronic security corporation) from 1992
to 1996. Prior to that he served as Staff Auditor--Senior Manager for Ernst &
Young (an international accounting firm) from 1982 to 1992.
MR. DOWNING became Vice President of Marketing and Sales of the Company in
December 1996. Mr. Downing has senior level executive experience in general
management, marketing and sales. His most recent experience was as a consultant
in the areas of manufacturing, home building and trucking for the Tahitian
Government (1995- Present), and before that (1994-1995) he worked in executive
management, consulting and investment banking for Churchill and Associates Inc.,
a financial consulting and management company. Mr. Downing also served as Vice
President of Sales and Marketing for General Rent-A-Car (1991-1993) and for
National Car Rental (1987-1991). Prior to 1987, Mr. Downing held a variety of
executive positions with National Car Rental. Mr. Downing is active in the
American Society of Travel Agents and the National Passenger Traffic
Association.
MISS PETCASH, Vice President, Customer Care and Entertainment, commenced her
employment with the Company in September 1996. Miss Petcash was Cruise Director
and Senior Officer for Princess Cruises from 1995 to 1996, and Entertainment and
Cruise Director for Gold Star Cruises, LLP from 1994 to 1995. Miss Petcash was
affiliated with Kloster Cruises beginning in 1982 through 1994 working with
Norwegian Cruise Line and Royal Viking Line. She held the position of Cruise
Director between 1989 and 1994 onboard various ships operated by Kloster
Cruises.
* * * *
Directors are elected at the Company's annual meeting of shareholders to a
"staggered" Board of Directors and serve for three years or until their
successors are elected and qualified. Officers are elected by the Board of
Directors and their terms of office are at the discretion of the Board, subject
to the Company's obligation to pay any compensation required under applicable
employment agreements. All of the Company's executive officers except Mr. Harper
are full-time employees of the Company. There are no family relationships among
any of the officers or directors of the Company.
Pursuant to a financial advisory agreement with Capital Growth the Company has
agreed to use its best efforts to cause a designee of Capital Growth to be
elected to the Company's Board of Directors. In the event that Capital Growth
does not designate such Director, or if Capital Growth's designee shall not be
elected or is unavailable to serve if elected, an individual selected by Capital
Growth shall be permitted to attend all meetings of the Board of Directors. To
date no designee has been named by Capital Growth to serve on the Company's
Board of Directors. Separately, pursuant to the Agreement between the Company
and CSX Transportation, Inc. dated November 1, 1996
37
(the "CSXT Agreement"), Albert B. Aftoora, the designee of CSXT, has been
elected to the Company's Board of Directors.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the Company's Bylaws, the Company is obligated to indemnify each of
its officers and directors to the fullest extent permitted by law with respect
to all liability and loss suffered, and reasonable expense incurred, by such
person in any action, suit or proceeding in which such person was or is made or
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was a director or officer of the Company. The Company is
also obligated to pay the reasonable expenses of indemnified directors or
officers in defending such proceedings if the indemnified party agrees to repay
all amounts advanced should it be ultimately determined that such person is not
entitled to indemnification.
The Company maintains a policy of insurance under which the directors and
officers of the Company are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EMPLOYMENT AGREEMENTS
In February 1994, the Company and Mr. Harper entered into an employment
agreement for a three-year term (expiring February 1997 with an automatic
renewal for a one-year term) and provides for a base salary of $125,000 (along
with cost-of-living adjustments based on the appropriate consumer price index).
In addition, the agreement provides for certain standard employment benefits.
This agreement also contains customary non-competition provisions prohibiting
competition with the Company during the term of employment and for two years
thereafter. The agreement with Mr. Harper requires that he devote at least 30
hours per week to Company business. While the Company believes that the extent
of Mr. Harper's efforts will be sufficient, there is no assurance that an
additional time commitment will not prove necessary or that additional
management personnel will not be needed as a result of Mr. Harper's limited
availability. Effective June 1, 1996, the Company agreed to reimburse a
corporate affiliate of Mr. Harper in the amount of $5,700 per month for costs
associated with maintaining an office, e.g., secretarial, telephone and related
expenses as well as health insurance and automobile expenses.
In addition to his employment agreement, Mr. Harper also receives a guaranty fee
as described elsewhere. See "-Liability and Indemnification of Directors and
Officers of the Company."
Mr. Monteleone has been employed by the Company to be its President and Chief
Operating Officer, pursuant to an employment agreement dated July 10, 1996, the
initial term of which is three years with automatic one-year renewals
(cancelable by either party) thereafter. The agreement provides for an initial
base salary of $150,000 per annum which increased to $175,000 per annum on
January 1, 1997. He received a bonus of $51,174 in December 1996. There will be
a minimum increase in his base salary to $189,000 on January 1, 1998, and
$204,120 on January 1, 1999. In addition, he will receive an annual bonus of at
least $25,000 on January 1, 1998, January 1, 1999 and June 1, 1999. The
agreement also provides for standard life and health care insurance benefits,
which began in January 1997, along with other standard employment benefits.
Pursuant to the agreement, Mr. Monteleone received a stock grant of 10,800
shares, effective July 1, 1996, and he will be granted a minimum of 30,000
non-qualified stock options annually during the three-year employment term and
any subsequent renewal term; the first of these 30,000-share options was granted
on July 1, 1996. Mr. Monteleone receives a $500 per month car allowance, plus an
automobile mileage reimbursement for business travel of $.20 per mile. During
the initial three-year term the Company will fund an individual retirement plan
on behalf of Mr. Monteleone in the aggregate of $35,000.
In addition to these terms, at January 1, 1997, Mr. Monteleone received a stock
award of 25,000 shares and a stock option grant covering 100,000 shares.
The agreement with Mr. Monteleone provides that he may receive, in certain
circumstances, a severance package consisting of twice his current base salary
and all of the stock options which were to be granted to him during the
remaining term of his employment will become fully granted and vested. This
severance package shall be payable
38
upon the termination of the agreement and the occurrence of any of the following
events, (i) "change in control" of the Company (where more than 50% of the
Company's stock is sold to a third party), (ii) should someone other than Mr.
Monteleone or Mr. Harper (the current Chief Executive Officer) be the Company's
Chief Executive Officer, or (iii) should there be a substantial reduction in Mr.
Monteleone's duties under the agreement. The agreement also contains a
non-competition provision which prohibits Mr. Monteleone from competing with the
Company for two years following the termination of the agreement.
On March 13, 1997, Mr. Monteleone personally guaranteed $5.85 million of the
Company's indebtedness to the seller (Charles E. Bradshaw, Jr.) in connection
with the Company's purchase of The Durango & Silverton Narrow Gauge Railroad
Company ("D&SNG"). In anticipation thereof, on February 26, 1997, the Board of
Directors voted (with Mr. Monteleone abstaining) to modify Mr. Monteleone's
employment agreement to (i) extend the term of the agreement to match the
five-year term of his personal guaranty (subject to certain performance
standards for the extended period which are to be further determined between Mr.
Monteleone and the Company), (ii) increase Mr. Monteleone's severance package to
three times his then-current annualized compensation in certain circumstances,
i.e., in the event of a "change in control" of the Company and termination of
the agreement by the Company, or the material reduction or change in his
duties), (iii) grant additional stock options covering 100,000 shares,
exercisable at $1.91 per share (the then-current market price). In addition, the
Company has agreed to pay Mr. Monteleone an annual guarantee fee of $20,000 (net
of taxes).
Mr. Cumming has served as Vice President, Secretary, Treasurer and Acting Chief
Financial Officer since May 9, 1997, and prior to that he served as Vice
President, Controller and Chief Accounting Officer of the Company pursuant to an
August 1996 employment agreement with the Company. The initial term of this
agreement is one year with two, one-year extensions which will automatically
renew unless previously cancelled by either party. The agreement provides for an
initial base compensation of $85,000 per annum; in addition, Mr. Cumming is to
receive a bonus of not less than 10% and up to 25% of his base compensation
subject to the attainment of certain pre-determined goals. His 1997 base
compensation was based on $90,000 per annum through April 1997, and will be
based on $102,000 per annum thereafter and his bonus range will be the same as
that for 1996. For 1998, such compensation and bonus is to be determined by the
Company. Pursuant to the agreement, Mr. Cumming was granted non-qualified stock
options covering 13,000 shares, 6,333 of which vest immediately and the balance
will vest annually in two equal increments. The employment agreement provides
for health care insurance benefits commencing in January 1997 (until that time
he will receive a monthly allowance of $397), and participation in pension and
profit sharing plans, should such plans be instituted by the Company, as well as
other standard benefits. Beginning in January 1997, he will receive an
automobile allowance of $300 per month. Pursuant to the agreement, Mr. Cumming
may receive, in certain circumstances following a "change in control" of the
Company, a severance package consisting of one year's worth of his then current
annualized compensation (base salary plus applicable bonus, if any) along with
the acceleration of the vesting of the above-described stock option.
Mr. Downing serves as Vice President of Marketing and Sales of the Company
pursuant to a December 1996 employment agreement with the Company. The initial
term of this agreement is one year with two, one-year extensions which will
automatically renew unless previously cancelled by either party. The agreement
provides for an initial base compensation of $95,000 per annum; in addition, Mr.
Downing is to receive a bonus of not less than 5% and up to 25% of his base
compensation subject to the attainment of certain pre-determined goals.
Commencing February 1997, his base compensation will be $100,000 and bonus range
will be the same as that for 1996. For 1998, such compensation and bonus is to
be determined by the Company. Pursuant to the agreement, Mr. Downing was granted
non-qualified stock options covering 3,000 shares which vested immediately and
10,000 shares which vest annually in three equal increments. The employment
agreement provides for health care insurance benefits commencing in January 1997
(until that time he will receive a monthly allowance of $300), along with
participation in pension and/or profit sharing, should such plans be instituted
by the Company, as well as other standard benefits. Beginning on December 2,
1996, he will receive an automobile allowance of $300 per month. Pursuant to the
agreement, Mr. Downing may receive, in certain circumstances following a "change
in control" of the Company, a severance package consisting of one year's worth
of his then current annualized compensation (base salary plus applicable bonus,
if any) along with the acceleration of the vesting of the above-described stock
option.
Mr. Blayney serves as Vice President of Operations of the Company pursuant to an
August 1996 employment agreement with the Company. The initial term of this
agreement is one year with two, one-year extensions which will automatically
renew unless previously cancelled by either party. The agreement provides for an
initial base compensation of $85,000 per annum; in addition, Mr. Blayney is to
receive a bonus of not less than 10% and up to 25% of his base compensation
subject to the attainment of certain pre-determined goals. Commencing January 1,
39
1997, Mr. Blayney's base compensation was increased to $95,000. His 1997 bonus
range will be the same as that for 1996. For 1998, such compensation and bonus
is to be determined by the Company. Pursuant to the agreement, Mr. Blayney was
granted non-qualified stock options covering 10,000 shares which vest annually
in three equal increments. The employment agreement provides for health care
insurance benefits commencing in January 1997 (until that time he will receive a
monthly allowance of $300), along with participation in pension and/or profit
sharing, should such plans be instituted by the Company, as well as other
standard benefits. Beginning on August 21, 1996, he will receive an automobile
allowance of $300 per month. Pursuant to the agreement, Mr. Blayney may receive,
in certain circumstances following a "change in control" of the Company, a
severance package consisting of one year's worth of his then current annualized
compensation (base salary plus applicable bonus, if any) along with the
acceleration of the vesting of the above-described stock option.
Miss Petcash serves as Vice President, Customer Care and Entertainment of the
Company pursuant to a September 1996 employment agreement with the Company. The
initial term of this agreement is one year with two, one-year extensions which
will automatically renew unless previously cancelled by either party. The
agreement provides for an initial base compensation of $100,000 per annum; in
addition, Miss Petcash is to receive a bonus of up to 25% of her base
compensation subject to the attainment of certain pre-determined goals. Her 1997
base compensation and bonus range will be the same as that for 1996. For 1998,
her compensation and bonus is to be determined by the Company. Pursuant to the
agreement, Miss Petcash was granted non-qualified stock options covering 10,000
shares which vest annually in three equal increments. The employment agreement
provides for health care insurance benefits commencing in January 1997 (until
that time she will receive a monthly allowance of $300), along with
participation in pension and/or profit sharing plans, should such plans be
instituted by the Company, as well as other standard benefits. Beginning in
January 1997, she will receive an automobile allowance of $300 per month.
Pursuant to the agreement, Miss Petcash may receive, in certain circumstances
following a "change in control" of the Company, a severance package consisting
of one year's worth of her then current annualized compensation (base salary
plus applicable bonus, if any) along with the acceleration of the vesting of the
above-described stock option.
BOARD COMPENSATION
Employee directors of the Company are not compensated for their services as
directors. In June 1996, the Company instituted a policy whereby each
"non-management" director would receive a $5,000 annual retainer along with a
per meeting stipend ($500 for "in person" and $300 for "telephonic" attendance).
In June 1996, the Company agreed to award each of the then "non-management"
Directors with a one-time grant of stock options covering 15,000 shares; this
grant was made on January 1, 1997 at an exercise price of $2.375 per share, the
then current market price. Further, commencing January 1, 1997, each
non-management Director was granted stock options covering 3,000 shares,
pursuant to a non-qualified stock option plan. The following table sets forth
compensation to "non-management" directors for the fiscal year ended December
31, 1996:
40
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
CASH COMPENSATION SECURITY GRANTS
----------------- ---------------
NUMBER OF
ANNUAL CONSULTING NUMBER SECURITIES
RETAINER MEETING FEES/OTHER OF UNDERLYING
FEES ($) FEES ($) FEES ($) SHARES(#) OPTIONS/SARS
NAME (A) (B) (C) (D) (E) (#)(F)
- -------------------------------------------------------------------------------------------------------------
Thomas G. Rader 5,000 600 - - -
David H. Rush 5,000 800 - - -
Luigi Salvaneschi 5,000 800 - - -
Glenn P. Michael 1,330 300 15,436(2) - 20,000(2)
Albert B. Aftoora(1) - - - - -
- ---------------------
(1) Mr. Aftoora was elected to the Board of Directors in December 1996.
(2) Represents consulting fees paid to GPM Associates prior to Mr.
Michael's election to the Board of Directors.
EXECUTIVE COMPENSATION
The following table provides information with respect to the compensation paid
to Allen C. Harper, the Chairman of the Board and Chief Executive Officer of the
Company and the named executive officers. There was no executive officer whose
salary was in excess of $100,000 for any period prior to 1996. The Company did
not pay any form of compensation to any officer or Director during 1995 and
1994; however, the Company's predecessor by merger (First American-Florida) paid
salaries for those years (as described below). As a result of the April 1996
merger between First American-Florida and Asia-America Company, a Nevada
corporation, with the latter being the surviving entity, the Company's fiscal
year changed from April 30 to December 31. Therefore, for purposes of the
following table, the year 1995 represents the eight-month period ended December
31, 1995 and the year 1994 represents the twelve-month period ended April 30,
1995.
41
SUMMARY COMPENSATION TABLE
================================================================================================================
Annual Compensation Long Term
Compensation
Awards
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Other Restricted
Name and Annual Stock
Principal Compen- Award(s)
Position Year Salary($) Bonus($) sation($) ($)
- ----------------------------------------------------------------------------------------------------------------
Allen C. 1996 $100,962 - -(1) -
Harper,
Chairman 1995 $38,461 - - -
and CEO
1994 $79,775 - - -
- ----------------------------------------------------------------------------------------------------------------
Raymond 1996 $75,000 $51,174 -(2) $37,800
Monteleone,
President 1995 - -
and Chief
Operating 1994 - -
Officer
- ----------------------------------------------------------------------------------------------------------------
Eugene K. Garfield, 1996 $113,956 $25,000 $50,000(3) -
former President
and Vice-Chairman 1995 $55,756
1994 $74,789 - - -
- ----------------------------------------------------------------------------------------------------------------
42
- ----------------------------------------------------------------------------------------------------------------
Michael 1996 $99,645 $25,000 - -
Acierno, Vice-
President- 1995 $41,701 - - -
Financial Relations
and Corporate 1994 $49,940 - - -
Development
- ----------------------------------------------------------------------------------------------------------------
================================================================================================================
- --------------
(1) Commencing September 1996, the Company has agreed to pay a corporate
affiliate of Mr. Harper $5,700 per month to cover Mr. Harper's monthly
expenses, e.g. car, office rental and office expenses.
(2) Mr. Monteleone received a car allowance of $3,000 and earned a
retirement allowance of $5,000 for fiscal 1996.
(3) On November 7, 1996, Eugene K. Garfield resigned as a Director and Vice
Chairman of the Board. On November 11, 1996, the Company negotiated a
severance package with Mr. Garfield which includes, among other things,
the payment of $50,000 to Mr. Garfield which represents the balance of
his employment agreement (which expires February 16, 1997) along with
applicable vacation pay. This amount does not include $6,500 in rent
which was paid during fiscal 1995, in connection with the Company lease
of approximately 250 square feet of office space from Mr. Garfield.
43
STOCK OPTIONS PLANS
The following table provides information regarding option grants during fiscal
1996 to Mr. Harper, the Company's Chief Executive Officer, Mr. Monteleone, the
Company's President and Chief Operating Officer, Eugene K. Garfield, the
Company's former President and Vice Chairman, and Michael J. Acierno, a Vice
President of the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
INDIVIDUAL GRANTS
-----------------
% OF TOTAL
OPTIONS/SARS
NUMBER OF GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ---- ------------ ------------ ------------ ----------
Allen C. Harper - - - -
Raymond Monteleone 30,000 28.99% $3.50 July 2006
Eugene K. Garfield - - - -
Michael J. Acierno 10,000 9.66% $4.4375 October 2006
No stock options were exercised during the fiscal year ended December 31, 1996.
The following table sets forth certain information regarding unexercised options
held by the above-named executives.
44
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END ($)
------------------------- -------------------------
NUMBER OF
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Allen
C. Harper - - - - - -
Raymond
Monteleone - - 10,000 20,000 - -
Eugene K.
Garfield - - - - - -
Michael J.
Acierno - - 3,333 6,667 - -
As of July 1, 1996, the Board of Directors adopted a non-qualified stock option
plan for its employees, officers, Directors and certain consultants (the
"Plan"). The purpose of the Plan is to provide certain Directors, officers and
employees of the Company with a greater personal interest in the success of the
Company and to enhance the ability of the Company to attract and maintain the
services of qualified personnel.
The Plan provides for the issuance of up to 717,500 shares of Common Stock upon
exercise of options which do not qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The
Plan is administered by the Compensation Committee of the Board of Directors,
which determines, among other things, the persons to be granted options under
the Plan, the number of shares subject to each option and the option price.
Under the Plan, the exercise price of any stock option may not be less than the
fair market value of the shares subject to the option on the date of grant.
Options are not transferable, except upon the death of the optionee. The term of
each option granted under the Plan and the manner in which it may be exercised
is determined by the Compensation Committee, provided that no option may be
exercisable more than ten years after the date of grant. The terms of the Plan,
including the number of shares covered by the Plan, may be amended by the
Compensation Committee or the Board of Directors from time to time.
Of the 717,500 shares available for issuance under the Plan, at May 21, 1997,
options had been granted, which had not expired, with respect to 483,200 shares.
The exercise prices of these options, when granted, were equal to the market
value of the shares on the award dates, except for certain stock option grants
made to Mr. Monteleone (in July 1996) and to six consultants, all of which were
at $3.50 per share. Exercise prices for options granted under the Plan range
from $1.906 to $4.75 per share.
EMPLOYEE STOCK PURCHASE PLAN
Effective June 1, 1997, the Company implemented an employee stock purchase plan
under Section 423(b) of the Internal Revenue Code (the "IRC"). This plan is
available to substantially all employees of the Company and its subsidiaries on
a voluntary basis, and allows participants to contribute up to 15% of their
salaries (subject to certain limitations) to purchase Company stock at a
discount of up to 15% from its then current market price. This plan will be
submitted for ratification by the Company's shareholders before June 1, 1998 and
is administered by a committee appointed by the Company's President. This plan
includes approximately one million shares of common stock. The Company believes
that this plan will enhance employee investment and participation in the
Company.
45
EMPLOYEE STOCK OWNERSHIP PLAN
The Company is also considering creating an employee stock ownership plan
("ESOP") under Section 401(a) of the IRC which would be administered by the
Company's Board of Directors. This plan would cover a specific amount of shares
of the Company's common stock (which has not been determined as of this date)
and the Board would determine the aggregate annual award to the plan. If
approved by the Board of Directors, the ESOP would be submitted for ratification
by the shareholders of the Company within 12 months of its creation. An ESOP
would offer an additional retirement benefit to the Company's employees, and the
Company believes that it would improve the Company's ability to attract and
maintain qualified employees.
46
PRINCIPAL AND SELLING SHAREHOLDERS
COMMON STOCK:
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 13, 1997 (October
30, 1996 with respect to the Selling Shareholders ), and as adjusted to reflect
the sale of Shares offered by the Selling Shareholders with respect to (i) each
of the Company's executive officers and directors, (ii) all officers and
directors as a group, (iii) each person known to the Company to be the
beneficial owner of more than 5% of the Common Stock, all of whom, except Mr.
Garfield, are Selling Shareholders, and (iv) each of the Selling Shareholders.
Unless otherwise indicated, all shares of Common Stock are owned directly and of
record and the persons so indicated have voting and investment power with
respect thereto. With respect to the Selling Shareholders, it has been assumed
that all their shares so offered will be sold.
SHARES BENEFICIALLY OWNED
BEFORE AND AFTER OFFERING(1)
----------------------------
SHARES
NAME POSITION WITH COMPANY SHARES PERCENT(2) OFFERED
- ---- --------------------- ------ ---------- -------
EXECUTIVE OFFICERS AND DIRECTORS:(3)
Thomas G. Rader Director 1,632,581(4) 15.19 0
Charles E. Bradshaw, Jr. Director 1,810,000(5) 14.67 0
Allen C. Harper Chairman of the 1,380,317(6) 12.87 0
Board of Directors
and Chief Executive Officer
Raymond Monteleone President, Chief 189,133(7)(8) 1.74 10,800(7)
Operating Officer
and Director
Luigi Salvaneschi Director 103,654(4)(9) * 0
David H. Rush Director 39,414(4) * 0
Glenn P. Michael Director 23,000(4) * 0
Albert B. Aftoora Director 3,000(4) * 0
Donald P. Cumming Vice President, 10,666(8) * 0
Secretary, Treasurer and
Acting Chief Financial Officer
Thomas E. Blayney Vice President of 10,333(8) * 0
Operations
Pamela S. Petcash Vice President, Customer 7,666(8) * 0
Care and Entertainment
Gordon L. Downing Vice President of Marketing 3,333(8) * 0
and Sales
All Officers and Directors 5,213,097 41.38 0
as a Group (12 persons)
47
SHARES BENEFICIALLY OWNED
BEFORE OFFERING(1)
-------------------------
SHARES
NAME SHARES(10) PERCENT(2) OFFERED(11)
- ---- ---------- ---------- -----------
SELLING SHAREHOLDERS:
Lancer Partners L.P.
237 Park Ave., 8th Fl.
New York, NY 10017 814,286(12) 7.24 900,000
EFO Fund, Ltd.
1111 W. Mockingbird Lane, #1400
Dallas, TX 75247 732,857(13) 6.55 810,000
International Capital Growth Ltd.
666 Steamboat Road
Greenwich, Ct. 06830 605,000 5.64 605,000
Fairnoon Management Ltd.
11 Queenstreet Mayfair
London W1X 7PD, England 570,000(14) 5.14 630,000
Rush & Co.
c/o Swiss American Securities, Inc.
100 Wall Street, 4th Fl.
New York, NY 10005 548,177(15) 4.94 628,834
Eugene K. Garfield
1360 South Ocean Blvd.
Pompano Beach, FL 33062 529,343 4.93 0
Emanon Partners, L.P.
237 Park Avenue
Suite 901
New York, NY 10017 515,714(16) 4.66 570,000
Rosebud Capital Growth Fund Ltd.
c/o Euro-Dutch Trust Co. (Bahamas)
Charlotte House, Charlotte St.
Nassau, Bahamas 512,747(17) 4.65 563,267
Edgeport Nominees, Ltd. 401,888 3.75 439,625
Demachy Worms & Co. International, Ltd. 325,714 3.04 360,000
Alan L. Jacobs 299,426 2.79 299,426
Corner Bank, Ltd. 195,429 1.82 216,000
BFI Banque De Financement & D'Investissement, 162,857 1.52 180,000
Geneve
Republic National Bank of New York (Suisse) SA 162,785 1.52 178,933
Faisal Finance (Switzerland) SA 155,286 1.45 169,000
48
Republic National Bank of New York 146,571 1.37 162,000
(Luxemburg) SA
David M. Hallman, Sr. 116,286 1.08 118,000
James F. Ellis Trust DTD 4/11/89 97,281 * 101,600
Stanley Hollander IRA Cowen & Co. Custodian 89,495 * 96,942
58-03120
Cameo Trust Corporation Limited 81,429 * 90,000
The Gifford Fund Ltd. 81,429 * 90,000
Charles L. and Donna Greenberg, JTWROS 81,429 * 90,000
Napier Brown Holdings Ltd. 81,429 * 90,000
Veritas Films SA 81,429 * 90,000
Heptagon Investments Ltd. 81,356 * 88,933
Stolzoff Family Trust of 2/05/95, Martin S.
Stolzoff and Barbara R. Stolzoff, Trustees 68,123 * 74,468
Ronald Koenig 67,406 * 73,422
Phillip Bibicoff 65,143 * 72,000
Bostar A.S. 65,143 * 72,000
C.M. Investment Nominees Limited 65,143 * 72,000
David A. Rees 65,143 * 72,000
P.G. Ridgwell 65,071 * 70,933
Banque Privee Edmond De Rothschild S.A. 56,964 * 62,467
Vital Miljo AS 56,017 * 59,308
Bauer Family Limited Partnership 48,857 * 54,000
Falcon Management Ltd. 48,857 * 54,000
Fixtar Holdings, Inc. 48,857 * 54,000
Richard B. Liroff 48,857 * 54,000
Saracen International 48,857 * 54,000
Tradeco Limited 48,857 * 54,000
UOB Luxembourg S.A. 48,857 * 54,000
Gibesgelt 46,250 * 46,250
Euro Capital 45,000 * 45,000
49
Lawrence Burstein 40,695 * 44,485
Michael S. Jacobs 37,500 * 37,500
50
SHARES
BENEFICIALLY OWNED
BEFORE OFFERING(1)
------------------
SHARES
NAME SHARES(10) PERCENT(2) OFFERED(11)
- ---- ---------- ---------- -----------
Michael Schaenen 35,625 * 35,625
Christopher Fox 35,625 * 35,625
Brookbank Holdings, Ltd. 33,300 * 33,300
Gary Barnett, IRA Standard/Rollover 32,571 * 36,000
Harvey R. Brice BSSC Master Defined Contribution M/P Pension
Plan 32,571 * 36,000
Compass Investment Management Limited 32,571 * 36,000
Coutts & Co. S.A. 32,571 * 36,000
Barrie M. Damson 32,571 * 36,000
Ernest Dorner GST Non-Exempt Trust A U/T/A 5/26/94 32,571 * 36,000
Elmtree Corporation 32,571 * 36,000
Milton and Irene Geller 1985 Trust 32,571 * 36,000
Susan Greenberg 32,571 * 36,000
Alan D. Jacobson, IRA 32,571 * 36,000
Robert Katz 32,571 * 36,000
Peter Barrington Kirk 32,571 * 36,000
Lago Wernstedt 32,571 * 36,000
Morgan Steel Limited 32,571 * 36,000
John D. Murphy 32,571 * 36,000
Nicator S.A., Zurich 32,571 * 36,000
Pictet & Cie 32,571 * 36,000
Robinson Gear (Nominees) Limited A/CJ-10 32,571 * 36,000
Stoneman Investor Partnership 32,571 * 36,000
Terrier Finance, Inc. 32,571 * 36,000
Ghazi Allawi 32,499 * 34,933
Helix Investments, Ltd. 31,497 * 32,220
Dan Purjes 30,010 * 30,010
Kimberly A. Goguen 25,000 * 25,000
Christopher D. Jennings 24,409 * 26,485
51
Gary H. Stolzoff 22,768 * 25,003
Pyramid Partners, LP 21,714 * 24,000
Prime, Grieb & Co. Limited 19,286 * 21,000
Gerald Rosen 19,000 * 21,000
Sachem Corporate Finance Ltd. 16,875 * 16,875
Philip Altheim 16,286 * 18,000
Gary Barnett 16,286 * 18,000
Denis Baylin 16,286 * 18,000
I. Bibicoff, Inc., Pension Trust Fund 16,286 * 18,000
Boel AS 16,286 * 18,000
Credit Lyonnais (Suisse) SA Geneva 16,286 * 18,000
Credit Suisse Zurich 16,286 * 18,000
Owen H. Gassaway 16,286 * 18,000
David Greenberg, IRA 16,286 * 18,000
David Greenberg and Susan Greenberg,
Trustees FBO Greenberg and Panish,
a Prof. Corp. Def. Bene. Pension Plan 2/01/88 16,286 * 18,000
Haaco AS 16,286 * 18,000
Hapoalim Mayo Casa Bancaria 16,286 * 18,000
Allan B. Hechtman, Inc., Pension Plan & Trust 16,286 * 18,000
Allan B. and Linda S. Hechtman, JTWROS 16,286 * 18,000
Trustees of the Hill Oldridge Ltd. Pension Fund 16,286 * 18,000
Nils Otto Holmen 16,286 * 18,000
P.B. Hubbard/J.D. Boden as Trustees of the Vector Trust 16,286 * 18,000
Svein Huse 16,286 * 18,000
Intergalactic Growth Fund, Inc. 16,286 * 18,000
Lenard E. Jacobson, MD, PC Profit Sharing Trust 16,286 * 18,000
Robert Jones 16,286 * 18,000
Mazin Kamouna 16,286 * 18,000
52
SHARES
BENEFICIALLY OWNED
BEFORE OFFERING(1)
------------------
SHARES
NAME SHARES(8) PERCENT(2) OFFERED(9)
- ---- --------- ---------- ----------
William A. Kamke and Dorothy S. Kamke, JTWROS 16,286 * 18,000
A/S Kapitalutvikling 16,286 * 18,000
Ronald Korn, IRA 16,286 * 18,000
Pierre and Francoise Lambert 16,286 * 18,000
Metropolitan Finance Limited 16,286 * 18,000
John Bell Moran, Jr. 16,286 * 18,000
Anne P. Newman and Harry Newman, Jr. JTWROS 16,286 * 18,000
Scott Notowitz 16,286 * 18,000
Oistein Nyberg 16,286 * 18,000
RNB (France) Monaco 16,286 * 18,000
Rigel AS 16,286 * 18,000
Allan Rudnick, IRA 16,286 * 18,000
J.R.L. Smith 16,286 * 18,000
K.E. Smith 16,286 * 18,000
Ivor Spiro 16,286 * 18,000
Craig Taines 16,286 * 18,000
Taines Family Limited Partnership 16,286 * 18,000
Abraxas Partners, Ltd. 16,286 * 18,000
Michael Morris 16,247 * 16,971
Walter Prime 16,247 * 16,971
Peter R. McMullin 16,213 * 16,933
Rudnick Living Trust DTD 7/22/91 16,213 * 16,933
John VanOrdstrand 12,500 * 12,500
Joseph and Lillian Matulich JTWROS 9,375 * 9,375
Trafina Privatebank AG 9,375 * 9,375
Magne F. Aaby 8,143 * 9,000
Birger Dalen 8,143 * 9,000
John Heckler 8,143 * 9,000
Norman Leben 8,143 * 9,000
Svein A. Loken 8,143 * 9,000
Steven Millner 8,143 * 9,000
53
Asher Plaut and Evelyn Plaut, JTWROS 8,143 * 9,000
Svein-Erik Stiansen 8,143 * 9,000
Bank Julius Baer & Co. 8,107 * 8,467
Craig A. Blumberg 5,429 * 6,000
Steven H. Marvin 5,429 * 6,000
Daniel J. Marx 5,428 * 6,000
Peter Sheib 5,010 * 5,010
Lori Shepps 5,000 * 5,000
Lawrence Rice 4,990 * 4,990
Southeast Research Partners 4,500 * 4,500
Matthew Balk 3,880 * 3,880
John T. Clarke 3,750 * 3,750
Charles Roden 3,530 * 3,530
Nancy Tarlow Barrett 3,500 * 3,500
First National Fund 2,250 * 2,250
Giant Trading Company 1,500 * 1,500
Michael Loew 1,325 * 1,325
Cheviot Capital 750 * 750
Value Investing Partners 750 * 750
Joelle Jacobs 750 * 750
Scott A. Weisman 445 * 445
Brill Securities 375 * 375
Paul Fitzgerald 365 * 365
Sherwood P. Larkin 290 * 290
Richard Sichenzio 155 * 155
- -----------------
* Less than 1%
54
(1) Unless otherwise indicated, each shareholder has sole voting and investment
power with respect to the Common Stock indicated as beneficially owned thereby.
(2) In accordance with Rule 13d-2 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shares that are not outstanding, but that are
issuable pursuant to (i) outstanding stock options (ii) the exercise of
outstanding Warrants and (iii) the conversion of the Notes, all of which are
exercisable or convertible within 60 days of the date of this Prospectus, have
been deemed to be outstanding for the purpose of computing the percentage of
outstanding shares owned by the individual having such right, but have not been
deemed outstanding for the purpose of computing the percentage for any other
person. These amounts do not include the exercise of certain warrants to
purchase an aggregate of 475,000 shares of Common Stock to be issued to CSXT.
(3) Unless otherwise indicated, the address for each director is c/o First
American Railways, Inc., 3700 North 29th Avenue, Hollywood, Florida 33020.
(4) Includes 18,000 shares which are issuable upon the exercise of currently
exercisable stock options to each of Messrs. Rader, Salvaneschi and Rush,
respectively, and 23,000 and 3,000 shares which are issuable upon the exercise
of currently exercisable stock options to each of Messrs. Michael and Aftoora,
respectively.
(5) Includes 1,610,000 shares which may be issued upon the exercise of a
six-year warrant.
(6) Includes 1,379,032 shares which are owned of record by Harper Family
Partnership L.P., for which Mr. Harper and his wife, Carol E. Harper, are the
sole limited partners, and 1,285 shares which are owned of record by Harper
Partners of Miami, Ltd., a Florida limited partnership, for which Carol E.
Harper, serves as trustee.
(7) Includes 35,800 shares owned of record by Mr. Monteleone, (the balance
represents currently exercisable stock options); a total of 10,800 of these
shares are being offered hereby.
(8) Includes 153,333 shares, 9,666 shares, 8,333 shares, 3,333 shares and 6,666
shares which are issuable to Messrs. Monteleone, Cumming, Blayney, Downing and
Miss Petcash, respectively, upon the exercise of currently-exercisable stock
options.
(9) Mr. Salvaneschi serves as the trustee for a trust under an agreement dated
October 19, 1993, in which name these shares are held, and for which Mr.
Salvaneschi has sole voting and dispositive power.
(10) These share amounts include up to an aggregate of 3,300,273 shares which
may be issued either upon the conversion of the Notes or upon the exercise of
the Series A Warrants which may be issued, in certain circumstances, upon the
prepayment of the Notes.
(11) With respect to the Selling Shareholders, it has been assumed that all
their Shares so offered will be sold. Further, these amounts include shares
which may be issued to certain Selling Shareholders upon conversion of accrued
interest payable upon their Notes.
(12) Includes an aggregate of 514,286 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes; excludes 67,500 shares presently outstanding
and 128,571 shares which may be issued upon the conversion of a certain
convertible subordinated note purchased from the Company, none of which is being
offered hereby.
(13) Includes an aggregate of 462,857 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes.
(14) Includes an aggregate of 360,000 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes.
(15) Includes an aggregate of 363,440 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes.
(16) Includes an aggregate of 328,834 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes.
(17) Includes an aggregate of 303,116 shares which may be issued upon the
exercise of outstanding Warrants, and either upon the conversion of the Notes or
upon the exercise of Warrants which may be issued, in certain circumstances,
upon the prepayment of the Notes.
55
SERIES A WARRANTS:
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Series A Warrants as of
October 1, 1996, and as adjusted to reflect the sale of such Warrants offered by
the holders thereof, none of whom hold any position with the Company and six of
whom own more than 5% thereof.
BEFORE OFFERING
---------------
WARRANTS
NAME WARRANTS PERCENT* OFFERED
- ---- -------- -------- --------
Lancer Partner L.P.
237 Park Ave., 8th Fl.
New York, NY 10017 300,000 7.57 300,000
Egger & Co.
c/o The Chase Manhattan Bank N.A.
P.O. Box 1508 Church Street Station
New York, NY 10008 290,519 7.33 290,519
EFO Fund, Ltd.
1111 W. Mockingbird Lane, #1400
Dallas, TX 75247 270,000 6.81 270,000
Auric Investments Limited
24 St. Georges Street, Douglas
Isle of Man IM1 1AH 260,774 6.58 260,774
Fairnoon Management Ltd.
11 Queenstreet Mayfair
London W1X 7PD, England 210,000 5.30 210,000
Rush & Co.
c/o Swiss American Securities, Inc.
100 Wall Street, 4th Fl.
New York, NY 10005 208,799 5.27 208,799
Emanon Partners, L.P. 190,000 4.79 190,000
Rosebud Capital Growth Fund Ltd. 176,818 4.46 176,818
Edgeport Nominees, Ltd. 147,333 3.72 147,333
Demachy Worms & Co. International, Ltd. 120,000 3.03 120,000
Alan L. Jacobs 86,926 2.19 86,926
Faisal Finance (Switzerland) SA 73,000 1.84 73,000
Corner Bank, Ltd. 72,000 1.82 72,000
BFI Banque De Financement & D'Investissement, Geneve 60,000 1.51 60,000
Republic National Bank of New York (Suisse) SA 56,519 1.43 56,519
Republic National Bank of New York (Luxemburg) SA 54,000 1.36 54,000
Gibesgelt 46,250 1.17 46,250
Eurocapital 45,000 1.14 45,000
Michael Schaenen 35,625 * 35,625
Christopher Fox 35,625 * 35,625
56
Bookbank Holdings, Ltd. 33,300 * 33,300
Cameo Trust Corporation Limited 30,000 * 30,000
The Gifford Fund Ltd. 30,000 * 30,000
Charles L. and Donna Greenberg, JTWROS 30,000 * 30,000
Napier Brown Holdings Ltd. 30,000 * 30,000
Veritas Films SA 30,000 * 30,000
Vital Miljo AS 26,894 * 26,894
Heptagon Investments Ltd. 26,519 * 26,519
Stanley Hollander IRA Cowen & Co. Custodian 258-03120 26,064 * 26,064
Phillip Bibicoff 24,000 * 24,000
Bostar A.S. 24,000 * 24,000
C.M. Investment Nominees Limited 24,000 * 24,000
David A. Rees 24,000 * 24,000
Stolzoff Family Trust of 2/05/95, Martin S. Stolzoff and Barbara R.
Stolzoff, Trustees 23,023 * 23,023
Ronald Koenig 21,058 * 21,058
P.G. Ridgwell 20,519 * 20,519
Banque Privee Edmond De Rothschild S.A. 19,260 * 19,260
Bauer Family Limited Partnership 18,000 * 18,000
Falcon Management Ltd. 18,000 * 18,000
Fixtar Holdings, Inc. 18,000 * 18,000
Richard B. Liroff 18,000 * 18,000
Saracen International 18,000 * 18,000
Tradeco Limited 18,000 * 18,000
UOB Luxembourg S.A. 18,000 * 18,000
Helix Investments, Ltd. 17,782 * 17,782
James F. Ellis Trust DTD 4/11/89 15,117 * 15,117
Lawrence Burstein 13,266 * 13,266
John VanOrdstrand 12,500 * 12,500
Dean Witter Reynolds Custodian for Gary Barnett, IRA Standard/Rollover 12,000 * 12,000
Harvey R. Brice BSSC Master Defined Contribution M/P Pension Plan 12,000 * 12,000
57
Compass Investment Management Limited 12,000 * 12,000
Coutts & Co. S.A. 12,000 * 12,000
Barrie M. Damson 12,000 * 12,000
Ernest Dorner GST Non-Exempt Trust A U/T/A 5/26/94 12,000 * 12,000
Elmtree Corporation 12,000 * 12,000
Milton and Irene Geller 1985 Trust 12,000 * 12,000
Susan Greenberg 12,000 * 12,000
Jacobson, Alan D., IRA 12,000 * 12,000
Robert Katz 12,000 * 12,000
Peter Barrington Kirk 12,000 * 12,000
Lago Wernstedt 12,000 * 12,000
Morgan Steel Limited 12,000 * 12,000
John D. Murphy 12,000 * 12,000
Nicator S.A., Zurich 12,000 * 12,000
Pictet & Cie 12,000 * 12,000
Robinson Gear (Nominees) Limited A/CJ-10 12,000 * 12,000
Stoneman Investor Partnership 12,000 * 12,000
Terrier Finance, Inc. 12,000 * 12,000
Prime Grieb 9,000 * 9,000
Ghazi Allawi 8,519 * 8,519
Pyramid Partners, LP 8,000 * 8,000
Sachem Corporate Finance, Ltd. 7,500 * 7,500
Christopher D. Jennings 7,266 * 7,266
Gary H. Stolzoff 7,009 * 7,009
Gerald Rosen 7,000 * 7,000
Abraxas Partners, Ltd. 6,000 * 6,000
Philip Altheim 6,000 * 6,000
Gary Barnett 6,000 * 6,000
Denis Baylin 6,000 * 6,000
I. Bibicoff, Inc., Pension Trust Fund 6,000 * 6,000
58
Boel AS 6,000 * 6,000
Credit Lyonnais (Suisse) SA Geneva 6,000 * 6,000
Credit Suisse Zurich 6,000 * 6,000
Owen H. Gassaway Trustee, FBO Owen H. Gassaway Trust 6,000 * 6,000
David Greenberg, IRA 6,000 * 6,000
David Greenberg and Susan Greenberg, Trustees FBO Greenberg and Panish,
a Prof. Corp. Def. Bene. Pension Plan 2/01/88 6,000 * 6,000
Haaco AS 6,000 * 6,000
David M. Hallman, Sr. 6,000 * 6,000
Hapoalim Mayo Casa Bancaria 6,000 * 6,000
Allan B. Hechtman, Inc., Pension Plan & Trust 6,000 * 6,000
Allan B. and Linda S. Hechtman, JTWROS 6,000 * 6,000
Trustees of the Hill Oldridge Ltd. Pension Fund 6,000 * 6,000
Nils Otto Holmen 6,000 * 6,000
P.B. Hubbard/J.D. Boden as Trustees of the Vector Trust 6,000 * 6,000
Svein Huse 6,000 * 6,000
Intergalactic Growth Fund, Inc. 6,000 * 6,000
Lenard E. Jacobson, MD, PC Profit Sharing Trust 6,000 * 6,000
Robert Jones 6,000 * 6,000
Mazin Kamouna 6,000 * 6,000
59
William A. Kamke and Dorothy S. Kamke, JTWROS 6,000 * 6,000
A/S Kapitalutvikling 6,000 * 6,000
Ronald Korn, IRA 6,000 * 6,000
Pierre and Francoise Lambert 6,000 * 6,000
Metropolitan Finance Limited 6,000 * 6,000
John Bell Moran, Jr. 6,000 * 6,000
Anne P. Newman and Harry Newman, Jr. JTWROS 6,000 * 6,000
Scott Notowitz 6,000 * 6,000
Oistein Nyberg 6,000 * 6,000
Prime, Grieb & Co. Limited 6,000 * 6,000
RNB (France) Monaco 6,000 * 6,000
Rigel AS 6,000 * 6,000
Allan Rudnick, IRA 6,000 * 6,000
J.R.L. Smith 6,000 * 6,000
K.E. Smith 6,000 * 6,000
Ivor Spiro 6,000 * 6,000
Craig Taines 6,000 * 6,000
Taines Family Limited Partnership 6,000 * 6,000
Southeast Research Partners 4,500 * 4,500
John T. Clarke 3,750 * 3,750
Magne F. Aaby 3,000 * 3,000
Birger Dalen 3,000 * 3,000
John Heckler 3,000 * 3,000
Norman Leben 3,000 * 3,000
Svein A. Loken 3,000 * 3,000
Steven Millner 3,000 * 3,000
Asher Plaut and Evelyn Plaut, JTWROS 3,000 * 3,000
Svein-Erik Stiansen 3,000 * 3,000
First National Fund 2,250 * 2,250
Michael Morris 2,532 * 2,532
Walter Prime 2,532 * 2,532
60
Peter R. McMullin 2,519 * 2,519
Rudnick Living Trust DTD 7/22/91 2,519 * 2,519
Craig A. Blumberg 2,000 * 2,000
Steven H. Marvin 2,000 * 2,000
Daniel J. Marx 2,000 * 2,000
Giant Trading Company 1,500 * 1,500
Bank Julius Baer & Co. 1,260 * 1,260
Cheviot Capital 750 * 750
Value Investing Partners 750 * 750
Joelle Jacobs 750 * 750
Brill Securities 375 * 375
- ------------------
* Less than 1%
61
FINANCIAL ADVISORY WARRANTS:
The following table sets forth certain information with respect to the
beneficial ownership of the Advisory Warrants as of October 1, 1996, and as
adjusted to reflect the sale of such Warrants offered by the holders thereof,
none of whom hold any position with the Company nor own more than 5% of such
warrants.
BEFORE OFFERING
---------------
WARRANTS
NAME WARRANTS PERCENT OFFERED
- ---- -------- ------- --------
Dan Purjes 30,010 * 30,010
Alan Jacobs 25,000 * 25,000
Kimberly A. Goguen 25,000 * 25,000
Peter Sheib 5,010 * 5,010
Lawrence Rice 4,990 * 4,990
Mathew Balk 3,880 * 3,880
Charles Roden 3,530 * 3,530
Michael Loew 1,325 * 1,325
Scott A. Weisman 445 * 445
Paul Fitzgerald 365 * 365
Sherwood P. Larkin 290 * 290
Richard Sichenzio 155 * 155
- ----------------
* Less than 1%
62
CERTAIN TRANSACTIONS
The Company requires that transactions with affiliates be made on terms that the
Company believes are at least as favorable as those obtainable from unaffiliated
third parties, and such transactions will be approved by a majority of the
independent, disinterested directors.
1994 PRIVATE OFFERING
In October 1994, the Company completed a private offering of 420,570 shares of
its Common Stock for gross proceeds of $982,000. A total of 26 investors
purchased Common Stock in that private offering which began in July 1994, and
the two largest investors therein were Company Directors Thomas Rader (256,774
shares; $350,000) and Luigi Salvaneschi (146,728 shares; $200,000). David Rush,
one of the Company's directors, also invested in that private offering (36,683
shares; $50,000).
ACQUISITION OF RAILCARS
Rader Railcar II, Inc., a Colorado corporation ("RR-II") will be the Company's
primary source of railcars for the Florida Fun-Train. RR-II is owned by Thomas
G. Rader, a Director and currently the largest shareholder of the Company. The
Company entered into an agreement with RRI as of June 28, 1994, whereby such
company produced the initial railcar for the Company. The total purchase price
was $850,000. Title to the railcar was transferred to the Company on July 2,
1996. The Company believes the transaction for the purchase of the railcar was
no less favorable to the Company than a similar transaction conducted with an
unaffiliated third party.
On October 23, 1996 the Company contracted with RR-II for the design and
production of up to 11 additional railroad cars all of which will be used for
the Florida Fun-Train. The total cost of this equipment, including applicable
sales taxes, is approximately $8.8 million. Pursuant to the RR-II contract the
Company has made payments to RR-II of approximately $6.1 million. Delivery of
various railcars is expected over a period of several months beginning in July
1997.
The terms of the transactions between the Company and RR-II have been determined
by negotiations between RR-II and the Company's disinterested directors. Because
of Mr. Rader's involvement, there is an inherent conflict of interest in this
process; further, competitive bidding was not used for any of these railcar
purchase agreements. The Company's Board of Directors believes that the terms of
the agreements with RR-II for the construction of the Fun-Train railcars are
commercially reasonable.
Mr. Rader and RR-II have agreed that for a five-year period they will not,
directly or indirectly, engage in the design, marketing sale or lease of
passenger railcars for the purpose of operating passenger entertainment, tourism
or excursion trains in Florida.
RUSH AGREEMENTS
In June and July 1995, David Rush, a Director and shareholder of the Company,
loaned an aggregate of $125,000 to the Company. The promissory note associated
with this loan provided for simple interest at 18% and the obligation was
personally guaranteed as to collection by Allen C. Harper, the Company's
Chairman of the Board of Directors. At the time of the transaction, the Board of
Directors (with Mr. Rush abstaining) concluded that the interest rate paid on
this loan was reasonable and customary, given the financial condition of the
Company and the current business environment, and that the terms of such loan
were no less favorable than those for a similar transaction with a third party.
The loan was repaid with the proceeds from the 1996 Private Placements.
In December 1996 David Rush agreed to remove from the market a certain parcel of
real property located in Broward County, Florida, while the Company evaluated
such property as a potential headquarters site. Pursuant to an understanding
with Mr. Rush, the Company paid the mortgage expense as well as associated
insurance costs and real property taxes related to the subject property for the
period January through April 1997, which aggregated $32,922.
Separately, the Company has entered into a consulting arrangement with Mr. Rush
whereby the Company will pay him a consulting fee of $1,000 per month (plus
pre-approved travel and entertainment expenses) for consulting services which
include, (i) assisting the Company in obtaining third party financing or other
forms of financial support for the construction of the Florida Fun-Train's
northern terminal on the GOAA property (Greater Orlando), and (ii) monitoring
and facilitating appropriate contacts within the Florida state legislature with
respect to any proposed legislation which may materially affect the Company's
operations in Florida.
PURCHASE OF D&SNG FROM CHARLES E. BRADSHAW, JR.
On March 13, 1997, the Company purchased all of the capital stock of The Durango
& Silverton Narrow Gauge Railroad Company ("D&SNG") from Charles E. Bradshaw,
Jr. In connection with that transaction Mr. Bradshaw became a Director of the
Company. The Company paid Mr. Bradshaw the following: (i) approximately $5
million in cash; (ii) $10.05 million in seller financing consisting of two
promissory notes: a one-year note (subject to extension as described below) for
$4.2 million which bears annual interest (payable monthly) at the 30-day
commercial paper rate as published by THE WALL STREET JOURNAL plus 650 basis
points per annum; and a five-year note for $5.85 million which bears interest at
an annual rate of 9.25% which increases to 10%; (iii) 200,000 shares of common
stock of the Company; and (iv) a common stock purchase warrant covering
1,610,000 shares exercisable at $3.50 per share. The Company has agreed to
register for resale the 200,000 shares and the 1,610,000 shares underlying the
63
aforementioned warrant. The term of the $4.2 million note may be extended by the
Company, at its option, for an additional six months upon the occurrence of
certain circumstances; at maturity this note is convertible by the holder
thereof into common stock of the Company at a conversion rate equal to the
then-closing sales price of the Company's common stock (not to exceed $5.00 per
share); at the maturity date, should the noteholder elect to receive cash in
full payment of the $4.2 million note (in lieu of conversion into common stock),
then the Company may extend the maturity date for an additional eighteen months.
The obligations represented by the Notes are secured by a second position on
substantially all of the assets of D&SNG. The purchase price for the acquisition
of D&SNG was determined in arms-length negotiations between the Company and Mr.
Bradshaw.
In December 1996, the Board of Directors voted (with Mr. Harper abstaining) to
indemnify Mr. Harper in connection with his agreement to guaranty up to $4.2
million in Company obligations to the Seller of D&SNG. The amount of this
personal guarantee was increased to $10.05 million and delivered at the closing
of the purchase of D&SNG on March 13, 1997. In connection with this guaranty,
the Company also agreed to pay Mr. Harper an annual guarantee fee of $35,000
(net of taxes) for so long as his personal guarantee remains outstanding. In
addition, the Company has agreed to indemnify Mr. Monteleone in connection with
his personal guaranty of certain obligations of the Company as described under
"Executive Remuneration - Employment Contracts," above.
GARFIELD AGREEMENTS
On November 7, 1996, Eugene K. Garfield resigned as a Director and Vice Chairman
of the Board. On November 11, 1996, the Company negotiated a severance package
with Mr. Garfield which includes, among other things, (i) the payment of $50,000
to Mr. Garfield which represents the balance of his employment agreement (which
was to have expired February 16, 1997) along with applicable vacation pay, (ii)
mutual releases, and (iii) the modification and continuation of certain
non-disclosure and non-competition provisions of Mr. Garfield's terminated
employment agreement.
During fiscal 1995, the Company leased approximately 250 square feet of office
space from Mr. Garfield for a total annual rental of $6,500.
COMPENSATION TO PLACEMENT AGENT
In connection with the 1996 Private Placements, the Company paid Capital Growth
(as the placement agent for such Private Placements) an aggregate cash
commission of $1,352,109.17 and paid Capital Growth a nonaccountable expense
allowance of $338,027.29.
In connection with the April 1996 closing of the Private Placements, the Company
issued to Capital Growth and its designee Alan Jacobs an aggregate of 750,000
shares of the Company's Common Stock; in addition, the Company issued an
aggregate of 650,000 Series A Warrants, 260,774 warrants directly to Capital
Growth and the balance (389,226 warrants) to 22 designees. These Shares and
Series A Warrants are included in this Offering.
The Company agreed to indemnify Capital Growth against certain liabilities in
connection with the above-described private placements, including liabilities
under the Securities Act.
On April 26, 1996, the Company retained Capital Growth for a period of
twenty-four months (the "Advisory Period") at a fee of $5,000 per month, to
render various financial advisory services thereto, and specified fees for
additional financings and other transactions. Further, Capital Growth will be
paid a warrant advisory fee equal to five (5%) percent of the exercise price of
the warrants if it solicits the exercise of such warrants. The Company has
agreed not to solicit the exercise of the warrants other than through Capital
Growth. This Agreement was amended on December 5, 1996, to extend the term to
October 26, 1999, and to pay in full all monthly fees then owed or which would
be owed through the extended term with the issuance of 52,500 shares of Common
Stock. These shares were issued in February 1997, and are included as part of
this Offering.
NANOVSKY AGREEMENT
William T. Nanovsky served as Vice President, Secretary, Treasurer and Chief
Financial Officer of the Company pursuant to an August 1996 employment
agreement. On May 6, 1997, Mr. Nanovsky resigned from his position with the
Company, and the Company and Mr. Nanovsky entered into a severance package,
which includes compensation for the three-month period beyond the one-year
expiration date (August 5, 1997).
64
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized common stock of the Company consists of 100,000,000 shares of
Common Stock, $.001 par value. Each holder of Common Stock is entitled to one
vote per share on all matters on which shareholders are entitled to vote, and
the holders of the Common Stock do not have preemptive rights to purchase
additional shares of Common Stock or other subscription rights. The Common Stock
carries no conversion rights and is not subject to redemption or to any sinking
fund provisions. All shares of Common Stock are entitled to share equally in
dividends from sources legally available therefor when, as and if declared by
the Board of Directors and, upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the Company
available for distribution to shareholders after distribution of assets to
creditors and holders of securities with priority over the holders of the Common
Stock. The ability to pay dividends on the Common Stock is restricted, however,
by the terms of the Convertible Secured Notes of the Company (described below)
and the Notes offered hereby. All outstanding shares of Common Stock are validly
authorized and issued, fully paid and nonassessable, and all shares to be sold
and issued as contemplated hereby will be validly authorized and issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 500,000 shares
of Preferred Stock, $.001 par value (the "Preferred Stock"). The Preferred Stock
may be issued in series from time to time with such designation, rights,
preferences and limitations as the Board of Directors may determine by
resolution. The rights, preferences and limitations of separate series of
Preferred Stock may differ with respect to such matters as may be determined by
the Board of Directors, including, without limitation, the rate of dividends,
method and nature of payment of dividends, terms of redemption, amounts payable
on liquidation, sinking fund provisions (if any), conversion rights (if any) and
voting rights. The potential exists, therefore, that preferred stock might be
issued which would grant dividend preferences and liquidation preferences to
preferred shareholders over common shareholders. Unless the nature of a
particular transaction and applicable statute require such approval, the Board
of Directors has the authority to issue these shares without shareholder
approval. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company without any further action by
shareholders.
SERIES A REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Series A
Redeemable Warrants ("Series A Warrants"), but such summary does not purport to
be complete and is qualified in all respects by reference to the actual text of
the subject warrant certificates, a specimen of which is available at the
Company's offices. There are 3,962,773 Series A Warrants currently outstanding.
Each Series A Warrant entitles the registered holder to purchase one share of
Common Stock at an initial exercise price of $3.50 per share (subject to
adjustment for stock splits, combinations and reclassifications) at any time
prior to redemption from the date of issuance (April 26 or May 9, 1996) until
two years thereafter. The exercise price of each Series A Warrant bears no
relationship to any objective criteria of value and should in no event be
regarded as an indication of any future market price of the securities offered
hereby. Provided that the applicable Circumstances exist (described below), all,
but not less than all, of the Series A Warrants may be redeemed by the Company
at $.10 per share on thirty days' notice at any time, but only after October 26,
1996 and if the market price (as described below) for the Common Stock exceeds
$5.00 per share. The "Circumstances" shall exist if (i) the subject securities
underlying the Series A Warrants are registered under the Securities Act and
applicable state "blue sky" laws, (ii) a current Prospectus is then available
for the sale of the securities, and (iii) the closing bid price of the Common
Stock as reported by Nasdaq, the OTC Bulletin Board, or such other market on
which the Common Stock is then traded, exceeds $5.00 per share for the twenty
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption or prepayment, as the case may be.
Each Series A Warrant may be exercised by surrendering the warrant certificate,
with the subscription form attached to the warrant certificate properly
completed and executed, together with payment of the exercise price. The Series
A Warrants may be exercised in whole or from time to time in part. If less than
all of the Warrants evidenced by a warrant certificate are exercised, a new
warrant certificate will be issued for the remaining number of Series A
Warrants.
The Series A Warrants do not confer upon the holders thereof any voting,
dividend or other rights as shareholders of the Company.
The Series A Warrants are not exercisable unless, at the time of the exercise,
(i) the Company has a current Prospectus covering the shares of Common Stock
issuable upon the exercise of such warrants, and such shares have been
registered, or qualified under the securities laws of the state of residence of
the exercising holder of such warrants, unless such exercise is deemed to be
exempt under federal and applicable state securities laws.
FINANCIAL ADVISORY WARRANTS
The following is a brief summary of certain provisions of the Financial Advisory
Warrants ("Advisory Warrants"), but such summary does not purport to be complete
and is qualified in all respects by reference to the actual text of the warrant
certificates, a specimen of which is available at the Company's offices. There
are 100,000 Advisory Warrants currently outstanding.
65
Each Advisory Warrant entitles the registered holder to purchase one share of
Common Stock at an initial exercise price of $2.50 per share (subject to
adjustment for stock splits, combinations and reclassifications) at any time for
a period of five years from the date of issuance (February 1996). The exercise
price of each Advisory Warrant bears no relationship to any objective criteria
of value and should in no event be regarded as an indication of any future
market price of the securities offered hereby.
Each Advisory Warrant may be exercised by surrendering the warrant certificate,
with the subscription form attached to the warrant certificate properly
completed and executed, together with payment of the exercise price. The
Advisory Warrants may be exercised in whole or from time to time in part. If
less than all of the Warrants evidenced by a warrant certificate are exercised,
a new warrant certificate will be issued for the remaining number of Advisory
Warrants.
The Advisory Warrants do not confer upon the holders thereof any voting,
dividend or other rights as shareholders of the Company.
The Advisory Warrants are not exercisable unless, at the time of the exercise,
the Company has a current Prospectus covering the shares of Common Stock
issuable upon the exercise of such warrants, and such shares have been
registered, or qualified under the securities laws of the state of residence of
the exercising holder of such warrants, unless such exercise is deemed to be
exempt under federal and applicable state securities laws.
BRADSHAW WARRANTS
In connection with the Durango Acquisition, the seller, Charles E. Bradshaw,
Jr., was issued warrants covering 1,610,000 shares of the Company's Common
Stock. The warrants expire in March 2003; otherwise the terms thereof are
substantially similar to the terms of the Series A Warrants. A specimen of the
Bradshaw Warrants is available at the Company's offices.
CONVERTIBLE SECURED NOTES
The following is a brief summary of certain provisions of the Convertible
Secured Notes (the "Secured Notes"), but such summary does not purport to be
complete and is qualified in all respects by reference to the actual text of the
Secured Notes, a specimen of which is available at the Company's offices.
MATURITY; INTEREST - The principal amount of the Secured Notes,
together with any accrued but unpaid interest thereon, is due and payable sixty
(60) months from April 26, 1996, unless converted by the holder or prepaid by
the Company. The Secured Notes bear interest at a rate of 10% per annum.
Interest is paid semi-annually on April 30th and October 31st, which commenced
on October 31, 1996.
CONVERSION OPTION - All, but not less than all, of the principal amount
and accrued but unpaid interest on each Secured Note may be converted at the
option of the holder at any time prior to maturity or prepayment into Common
Stock at a conversion price of $3.50 per share (subject to adjustment for stock
splits, combinations and reclassifications).
PREPAYMENT - All, but not less than all, of the outstanding principal
amount of the Secured Notes may be prepaid at the option of the Company (a)
provided that the applicable Circumstances (as defined below) exist and the
threshold price is $5.00, or (b) at any time, provided that for each $3.50 in
principal amount of each Note that is prepaid, the Company shall issue to the
holder thereof one Series A Warrant (described above).
CIRCUMSTANCES - The "Circumstances" shall exist if (i) the Securities
are registered under the Act and applicable state "blue sky" laws, (ii) a
current prospectus is then available for the sale of the Securities, and (iii)
the closing bid price of the Common Stock as reported by Nasdaq, the OTC
Bulletin Board, or such other market on which the Common Stock is then traded,
exceeds the applicable threshold price for the twenty consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption or
prepayment, as the case may be. Threshold price with respect to the prepayment
of the Secured Notes shall be $5.00 per share, and with respect to the
redemption of the Series A Warrants shall be $3.50 per share.
ESCROW ACCOUNT - The Company has irrevocably deposited into an escrow
account with the Escrow Agent, to meet the Company's obligations to repay the
principal amount of the Secured Notes, (i) on the third anniversary of the
closing of the Minimum Offering, an amount equal to 33 1/3% of the aggregate
principal amount of the Secured Notes then outstanding, and (ii) quarterly
thereafter until and including maturity, an amount equal to 8 1/3% of the
aggregate principal amount of the Secured Notes then outstanding at maturity.
COLLATERALIZATION - The Company's obligations to make payments of
interest on and principal of the Secured Notes will be secured by a security
interest in all the assets of the Company pursuant to a general security
agreement.
COVENANTS - The Company has covenanted that, so long as the Secured
Notes are outstanding, to: (a) promptly pay principal and interest, when due;
(b) maintain its corporate existence and keep its various rights and franchises
in good standing; (c) keep its properties and equipment in good repair; (d)
promptly pay or discharge all taxes, assessments and governmental charges; (e)
comply with all applicable federal, state and local laws and regulations; (f)
represent as to the truth, accuracy and completeness of the disclosure set forth
in the Memorandum and that the financial information contained therein is
presented fairly and in accordance with generally accepted accounting
principles, and that there has been no material change in its business; (g) not
pay or declare any dividend or distribution on its equity securities, or
purchase, redeem or acquire such securities, except under certain circumstances;
(h) limit "insider" or affiliate transactions with the Company to those which
are on terms which are fair to the
66
Company and which are reasonably similar to, or more beneficial to the Company;
and (i) not create or incur future liens or encumbrances on its assets or
properties, except as permitted by the subject general security agreement.
EVENTS OF DEFAULT - The following events shall constitute events of
default under the Secured Notes: (a) if the Company defaults in the payment or
performance under the Secured Notes, the General Security Agreement, or the
applicable escrow agreement; (b) if any warranties or representations made in
the foregoing agreements are untrue; (c) if the subject collateral suffers an
uninsured loss or substantial damage, or is the subject of levy, seizure,
attachment or garnishment; (d) if the Company is dissolved or liquidated or
fails to maintain its corporate existence; (e) if the Company is the subject of
bankruptcy, insolvency or reorganization proceedings; (f) if the Company ceases
its usual business; (g) if an enforcement proceeding is brought against the
Company with respect to any of its property; or (h) if a receiver or trustee is
sought against the Company, or its property, which is not promptly dismissed.
CONVERTIBLE SUBORDINATED NOTES
For a brief summary of certain provisions of the convertible subordinated notes,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity."
67
PLAN OF DISTRIBUTION
This Prospectus covers the sale of Shares and Warrants by the Selling
Shareholders. See "Principal and Selling Shareholders." Any distribution of the
Shares by the Selling Shareholders, or by their pledgees, donees, transferees or
other successors in interest, may be effected from time to time in one or more
of the following transactions: (a) to underwriters who will acquire securities
for their own account and resell them in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale (any public offering price and any discount or
concessions allowed or reallowed or paid to dealers may change from time to
time); (b) through brokers, acting as principal or agent, in transactions (which
may involve block transactions) on the Nasdaq SmallCap Market or on one or more
exchanges on which the securities are then listed, in special offerings,
exchange distributions pursuant to the rules of the applicable exchanges or in
the over-the-counter market, or otherwise, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices; (c) directly or through brokers or agents in private
sales at negotiated prices; or (d) by any other legally available means.
The Company will not receive any proceeds from the sale of the Shares and
Warrants offered hereby. The aggregate proceeds to the Selling Shareholders from
the securities offered hereby will be the offering price less applicable
commissions or discounts, if any. There is no assurance that the Selling
Shareholders will sell any of the securities offered hereby.
The Selling Shareholders and such underwriters, brokers, dealers or agents, upon
effecting a sale of securities, may be considered "underwriters" as that term is
defined in the Securities Act. Sales effected through agents, brokers or dealers
will ordinarily involve payment of customary brokerage commissions although some
brokers or dealers may purchase such shares as agents for others or as
principals for their own account. The Selling Shareholders will pay any sales
commissions or other sellers' compensation applicable to such transactions. A
portion of any proceeds of sales and discounts, commissions or other sellers'
compensation may be deemed to be underwriting compensation for purposes of the
Securities Act.
Pursuant to applicable rules and regulations under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any person engaged in the distribution
of the securities offered hereby may not simultaneously engage in market making
activities for the Common Stock for a period of two business days prior to the
commencement of such distribution. In addition, each Selling Shareholder and any
other person who participates in a distribution of the securities will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Rules 10b-2, 10b-6 and 10b-7, which provisions
may limit the timing of purchases and may affect the marketability of the
securities and the ability of any person to engage in market making activities
for the Common Stock.
At the time a particular offering of securities is made, to the extent required,
a Prospectus supplement will be distributed which will set forth the number of
securities being offered and the terms of the offering, including the purchase
price or the public offering price, the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriters for securities
purchased from the Selling Shareholders, any discounts, commissions and other
items constituting compensation from the Selling Shareholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if applicable,
the securities will be sold in such jurisdictions, if required, only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless the securities have ben registered or
qualified for sale in such state or an exemption from registration or
qualification is available and the conditions of such exemption have been
satisfied.
The Company has agreed that it will bear all costs, expenses and fees in
connection with the registration or qualification of the securities under
federal and state securities laws. The Company and each Selling Shareholder have
agreed to indemnify each other and certain other persons against certain
liabilities in connection with the offering of the securities, including
liabilities arising under the Securities Act.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for the
Company by Olle, Macaulay & Zorrilla, P.A., Miami, Florida, which is the
beneficial owner of 6,440 shares of Common Stock of the Company. Dennis J. Olle,
a shareholder of that firm, is the beneficial owner of 1,714 shares of the
Common Stock of the Company.
EXPERTS
The financial statements of the Company included in this Prospectus for the year
ended December 31, 1996, eight months ended December 31, 1995, and for the
cumulative period from February 14, 1994 (incorporation) through December 31,
1996, has been audited by BDO Seidman LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and is included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
The financial statements of D&SNG included in this Prospectus for the years
ended December 31, 1996 and 1995, have been audited by BDO Seidman LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein and is included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
68
On May 6, 1996, the Company's Board of Directors voted to engage BDO Seidman,
LLP to act as the Company's independent certified public accountants, thereby
discharging Hansen, Barnett & Maxwell, P.C. (Salt Lake City, UT). The former
accountants' reports for the Company's last two fiscal years prior to their
termination did not contain any adverse opinion, or disclaimer of opinion, nor
were any such reports modified as to uncertainty, audit scope or accounting
principles. There have been no disagreements between the Company and the former
accountants with regard to any matters which would have caused such accountants
to make reference to the subject matter thereof with their report.
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Exchange Act, and
in accordance therewith files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the Commission's Regional Offices at Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661; and 13th Floor, Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Commission's public reference
facility at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
upon request at its above-described Regional Offices. Copies of the Registration
Statement may be obtained from the Commission at its public reference facility
upon payment of prescribed fees. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
where the contract or other document has been filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by
reference to the applicable documents filed with the Commission.
In addition, reports and other information concerning the Company may be
inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
69
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
===============================================================================
PAGE
--------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 2
CONSOLIDATED BALANCE SHEETS F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8
===============================================================================
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
CONTENTS
===============================================================================
PAGE
--------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT F - 22
FINANCIAL STATEMENTS
Balance sheet F - 23
Statements of operations F - 25
Statements of stockholders' equity F - 26
Statements of cash flows F - 27
Summary of accounting policies F - 28
Notes to financial statements F - 30
==============================================================================
F-1
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
First American Railways, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheet of First American Railways, Inc.
(a development stage company) as of December 31, 1996 and the related statements
of operations, stockholders' equity (deficit) and cash flows for the year then
ended, the eight months ended December 31, 1995 and the cumulative period from
February 14, 1994 (incorporation) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First American Railways, Inc.,
(a development stage company) as of December 31, 1996 and the results of its
operations and its cash flows for the year then ended, the eight months ended
December 31, 1995 and the cumulative period from February 14, 1994
(incorporation) through December 31, 1996 are in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Miami, Florida
January 14, 1997, except for Note 9
which is as of March 13, 1997
F-2
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash $ 5,087,692 $ 7,174,020
Restricted cash 434,997 430,834
- --------------------------------------------------------------------------------------------------------------
Cash and cash items 5,522,689 7,604,854
Inventories 750,000 -
Prepaids and other 202,521 255,372
- --------------------------------------------------------------------------------------------------------------
Total current assets 6,475,210 7,860,226
Fixed assets, net 33,528,701 2,413,320
Deposit for acquisition - 2,000,000
Deferred loan costs and other assets, net 1,059,702 867,107
- --------------------------------------------------------------------------------------------------------------
$ 41,063,613 $ 13,140,653
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Accounts payable $ 503,615 $ 166,722
Accrued liabilities 1,195,369 459,561
Current maturities of long-term debt 900,000 -
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 2,598,984 626,283
Long-term debt 25,900,682 8,250,682
- --------------------------------------------------------------------------------------------------------------
Deferred income taxes and other 8,328,765 -
- --------------------------------------------------------------------------------------------------------------
Total liabilities 36,828,431 8,876,965
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies - -
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Preferred stock ($.001 par value, 500,000 shares authorized) - -
Common stock ($.001 par value, 100,000,000 shares authorized),
9,355,778 and 9,061,078 shares issued and outstanding 9,355 9,061
Additional paid-in capital 8,984,046 8,189,798
Deficit accumulated during the development stage (4,758,219) (3,935,171)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,235,182 4,263,688
- --------------------------------------------------------------------------------------------------------------
$ 41,063,613 $ 13,140,653
- --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
================================================================================================================================
CUMULATIVE FROM
FEBRUARY 14, 1994 FOR THE
(INCORPORATION) FOR THE THREE MONTHS EIGHT MONTHS
THROUGH, ENDED MARCH 31, FOR THE YEAR ENDED
MARCH 31, 1997 1997 1996 ENDED DECEMBER 31, DECEMBER 31,
(UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and payroll taxes $ 1,919,554 $ 368,005 $ 69,249 $ 946,750 $ 242,007
General and administrative 989,473 265,906 73,141 522,237 125,723
Interest, net 225,591 39,601 624 166,911 19,079
Professional and consulting fees 348,563 54,690 - 234,501 46,802
Legal and accounting fees 246,477 24,829 12,450 217,733 3,464
Marketing study 176,800 - - 176,800 -
Trackage rights expenses 63,079 16,972 - 46,107 -
Amortization of deferred loan costs 270,384 49,662 - 220,722 -
Depreciation 11,735 3,383 530 6,172 1,088
Expenses from offerings not completed 506,563 - 36,000 57,829 282,250
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,758,219 823,048 191,994 2,595,762 720,413
- -------------------------------------------------------------------------------------------------------------------------------
Net loss, representing deficit
accumulated during the
development stage $ (4,758,219) $ (823,048) $ (191,994) $ (2,595,762) $ (720,413)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding - 9,116,911 4,275,000 7,623,050 4,275,000
- -------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - ($0.09) ($0.04) ($.34) ($.17)
- -------------------------------------------------------------------------------------------------------------------------------
The Company had no operating activities from February 14, 1994 (incorporation)
through April 30, 1994.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED
--------------------------------- PAID-IN DURING THE
SHARES AMOUNT CAPITAL DEVELOPMENT STAGE
===================================================================================================================================
Balance at February 14, 1994 and
April 30, 1994 - $ - $ - $ -
Initial capitalization for cash at $0.0046
per share (Note 5(b)) 3,854,430 3,854 14,146 -
Issuance of common stock for cash
at $2.29 per share, net of offering
costs of $20,965 (Note 5(c)) 420,570 421 960,614 -
Capital contribution - forgiven salaries - - 136,000 -
Net loss - - - (618,996)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1995 4,275,000 4,275 1,110,760 (618,996)
Net loss - - - (720,413)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,275,000 4,275 1,110,760 (1,339,409)
Issuance of common stock in connection
with Stage I offering, net of
offering costs of $11,692 (Note 7) 375,004 375 42,933 -
Issuance of common stock in connection
with Stage II offering, net of offering
costs of $1,247,967 (Note 7) 4,050,274 4,050 6,998,666 -
Merger with Asia-America Corporation
(Note 5(a)) 350,000 350 (350) -
Issuance of common stock to officer (Note 4(a)) 10,800 11 37,789 -
Net loss - - - (2,595,762)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,061,078 9,061 8,189,798 (3,935,171)
Issuance of common stock and warrant
for acquisition (Note 9) (unaudited) 200,000 200 544,700 -
Issuance of common stock and options for
salaries, consulting fees and deferred loan
costs (unaudited) 94,700 94 238,608 -
Reduction of stock issuance costs (unaudited) - - 10,940 -
Net loss (unaudited) - - - (823,048)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 (unaudited) 9,355,778 $ 9,355 $ 8,984,046 $ (4,758,219)
- -------------------------------------------------------------------------------------------------------------------------------
F-5
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE FROM
FEBRUARY 14, 1994
(INCORPORATION) FOR THE THREE MONTHS FOR THE EIGHT
THROUGH ENDED MARCH 31 FOR THE YEAR ENDED MONTHS ENDED
MARCH 31, 1997 1997 1996 DECEMBER 31, DECEMBER 31,
(UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (4,758,219) $ (823,048) $ (191,994) $ (2,595,762) $ (720,413)
Adjustments to reconcile net loss to
net cash used by operating activities:
Salaries forgiven 136,000 -- -- -- --
Depreciation 11,735 3,383 530 6,172 1,088
Amortization of deferred loan costs 270,384 49,662 -- 220,722 --
Write-off of deferred offering costs 25,000 -- -- -- 25,000
Salaries and consulting fees paid in
common stock 74,314 36,514 -- 37,800 --
Changes in assets and liabilities excluding
effects of acquisition:
Increase in restricted cash (434,997) (4,163) -- (430,834) --
Increase (decrease) in prepaids and other (42,521) 68,859 -- (253,692) --
Increase (decrease) in accounts payable 99,325 (67,397) (96,076) (29,354) 173,954
Increase (decrease) in accrued liabilities 304,222 (155,339) (11,925) 338,591 120,970
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 443,462 (68,481) (107,471) (110,595) 321,012
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (4,314,757) (891,529) (299,465) (2,706,357) (399,401)
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (4,075,771) (1,654,099) -- (2,063,500) --
Cash paid for acquisition (5,604,938) (3,460,946) -- (2,000,000) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,680,709) (5,115,045) -- (4,063,500) --
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings from related parties 338,388 -- -- 68,388 270,000
Repayments of notes payable to
related parties and others (338,388) -- -- (333,388) (5,000)
Net proceeds from issuance of
notes payable 17,195,682 8,500,000 445,000 8,695,682 --
Repayment of notes payable (4,795,128) (4,350,128) -- (445,000) --
Payment of loan costs and other assets (1,328,395) (240,566) (94,599) (1,087,829) --
Net proceeds from issuance of common stock 8,035,999 10,940 43,308 7,046,024 --
Payment of offering costs (25,000) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,083,158 3,920,246 393,709 13,943,877 265,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 5,087,692 (2,086,328) -- 7,174,020 (134,401)
Cash at beginning of period -- 7,174,020 -- -- 134,401
Cash at end of period $ 5,087,692 $ 5,087,692 $ 94,244 7,174,020 --
- ----------------------------------------------------------------------------------------------------------------------------------
F-6
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 542,731 $ -- $ -- $ 542,731 $ --
Fees and salaries paid in common stock 102,188 102,188 -- -- --
Prepaids paid in common stock 100,000 100,000 -- -- --
Common stock and warrant
issued for acquisition 544,900 544,900 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. SUMMARY OF ORGANIZATION AND BUSINESS
SIGNIFICANT
ACCOUNTING First American Railways, Inc. ("the Company") was
POLICIES incorporated on February 14, 1994, in the state of
Florida. The Company is a development stage entity,
organized for the purpose of constructing, acquiring and
marketing entertainment based passenger trains. Initially
the Company intends to initiate service between Ft.
Lauderdale and Orlando and subsequently to other parts of
the United States and internationally. On March 13, 1997
(March 31, 1997 for financial reporting purposes) the
Company acquired a tourist destination train ("scenic
railroad") (Note 9) and subsequently will not be a
development stage entity. The balance sheet of the scenic
railroad is included in the accompanying financial
statements and the operating results will begin to be
included in the Company's financial statements on April 1,
1997. The operations for the period from March 13, 1997 to
March 31, 1997 were not material.
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated
depreciation. Office and computer equipment are depreciated
on the straight line basis over 3 to 5 years. Assets held
for future use will be depreciated beginning at the time
they are placed into service.
F-8
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
OFFERING COSTS
Costs incurred in connection with the Company's efforts to
obtain additional financing through a public offering or
private placement of securities are deferred and offset
against the proceeds in stockholders' equity or charged to
operations if an offering or placement is unsuccessful.
IMPAIRMENT
On January 1, 1996, the Company adopted Summary of
Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires,
among other things, impairment loss of assets to be held
and gains or losses from assets that are expected to be
disposed of be included as a component of income from
continuing operations before taxes on income. During 1996
there have been no write-downs required in the accompanying
financial statements.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for by using the
intrinsic value based method in accordance with Accounting
Principles Board Opinion No 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company has adopted
Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123")
which allows companies to either continue to account for
stock-based compensation using APB 25, or to adopt a fair
value based method of accounting. The Company intends to
continue with its current method of accounting in
accordance with APB 25 for employees, but has made the
required proforma disclosures in accordance with SFAS No.
123.
FINANCIAL INSTRUMENTS
The carrying value of financial instruments including
accounts and notes payable approximate their fair value at
December 31, 1996.
F-9
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
INTEREST
Interest is capitalized to constructed assets during their
construction period and is depreciated over their useful
lives.
INCOME TAXES
The Company has no income since inception and accordingly
has not provided for income taxes.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average
number of shares of common stock outstanding, as adjusted
for the effects of the application of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No.
83. Pursuant to SAB No. 83, common stock issued by the
Company at a price less than the contemplated public
offering price is treated as outstanding for all periods
presented. Stock options and warrants outstanding are not
included since the effects of such inclusion would be
anti-dilutive.
UNAUDITED FINANCIAL STATEMENTS
The interim financial statements as of March 31, 1997 and
for the three months ended March 31, 1997 and 1996 and for
the cumulative period from February 14, 1994
(incorporation) through March 31, 1997 are unaudited. In
the opinion of management, such statements reflect all
adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the
financial position, results of operations and changes in
cash flows. The results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the
results for the entire year.
F-10
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
2. FIXED ASSETS, The Company's fixed assets at December 31, 1996 are
NET summarized as follows:
Railcar held for future use $ 810,000
Construction in process (Note 4 (b)) 1,567,203
Office and computer equipment 44,469
-----------
2,421,672
Less accumulated depreciation (8,352)
-----------
$2,413,320
===========
Pursuant to an agreement with Rader Railcar, Inc., a
company owned by a director and shareholder, the Company
had a railcar constructed at a cost of $850,000. The
Company took delivery of the railcar on April 28, 1995 and
at that time assumed the full risk of loss of such car. The
balance was paid in June 1996 at which time title passed to
the Company. In April 1996, Rader Railcar, Inc. entered
into a lease agreement with Great Canadian Railtour Co. to
lease the railcar for a period of seven months for $10,000
per month. In June 1996, the remaining proceeds of the
lease were assigned to the Company and therefore, the
Company received monthly lease payments of $10,000 through
September 1996. Since this leasing activity is not the
intended use of the railcar, the rental payments
aggregating $40,000 were recorded as a reduction in the
cost of the railcar. During 1996, interest of approximately
$92,000 was capitalized as part of the cost of construction
of the railcars (Note 4(b)).
3. INCOME TAXES At December 31, 1996, the Company had an accumulated net
loss of approximately $4,000,000 for financial reporting
purposes. In general, expenses incurred during the
development stage are capitalized for tax purposes as
pre-operating expenses and are amortizable over a 60 month
period commencing with the month in which active business
begins.
The use of the losses is limited to future taxable earnings
of the Company. For financial reporting purposes, the
deferred tax asset of approximately $1,500,000 resulting
from the future amortization of capitalized pre-operating
expenses has been entirely offset by a
F-11
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
valuation allowance.
4. COMMITMENTS a) In 1996, the Company entered into one year employment
AND agreements with seven of the officers of the Company to
CONTINGENCIES provide for annual aggregate initial base compensation of
$705,000 and payments in certain circumstances following a
"change in control" of the Company. In addition,
non-qualified stock options were granted to purchase 71,000
shares of common stock at the market price at the date of
grant (ranging from $3.06 to $4.75 per share) of which
25,665 vest immediately with the remaining 45,335 vesting
equally in two annual increments. Additionally, in July
1996, the Company entered into a three year employment
agreement with its President and Chief Operating Officer.
The agreement provides for an initial annual base salary of
$150,000 and a minimum annual bonus of $25,000 with minimum
increases in the base salary to $175,000 on January 1,
1997, $189,000 on January 1, 1998 and $204,120 on January
1, 1999. In addition, nonqualified stock options will be
granted annually to purchase a minimum of 30,000 shares of
common stock.
In connection with this agreement, in July 1996 the Company
issued 10,800 shares of common stock and granted options to
purchase 30,000 shares at $3.50 per share. In February
1997, the Board of Directors voted to amend this agreement.
(Note 9)
b) In October 1996, the Company entered into an agreement
with Rader Railcar II, Inc. ("RRI"), a company owned by a
director and shareholder, for design and production of up
to eleven additional railcars for a total cost of
approximately $8,800,000. Pursuant to the agreement the
Company made a down payment of $1,400,000 to RRI. The
agreement provides for delivery of various railcars over a
period of several months beginning June 1997.
c) In October 1996, the Company signed an agreement with
CSX Transportation, Inc. ("CSXT") for use of its tracks
between West Palm Beach and Orlando to be used for the
operation of the Florida Fun-Train. The agreement with CSXT
provides, in part, that the Company will pay CSXT the
greater of $20 per train mile, or 16% of the Company's
gross ticket revenue (less discounts) from the Florida
Fun-Train operations. The per-train mile is subject to
various
F-12
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
increases for inflation and other price adjustments. In
addition, the Company is required to maintain a minimum of
$300 million in comprehensive general liability insurance
with a minimum deductible (or self-insured). The agreement
also provides for a certain degree of exclusivity of the
Company's proposed rail operations. Specifically, CSXT has
agreed not to grant similar access rights to the subject
rail corridor (between West Palm Beach and Orlando) to any
other private rail passenger operator or contractor which
would provide comparable conventional rail passenger
service (primarily servicing the cruise ship market). This
exclusivity clause is voidable by CSXT upon the occurrence
of certain conditions. The term of the agreement is five
years. In addition, the Company has agreed to sell up to
475,000 warrants to CSXT, exercisable at $4.50 per warrant,
with 75,000 warrants being exercisable upon commencement of
operations of the Florida Fun-Train and thereafter in four
equal annual installments of 100,000 warrants each
commencing January 1, 1998. The Company has also appointed
a CSXT representative to its Board of Directors.
d) In January 1997, the Company entered into a five year
agreement with Florida Department of Transportation
("FDOT") for the right to use the tracks between Ft.
Lauderdale and West Palm Beach which comprise part of the
proposed route of the Florida Fun-Train. The track usage
fee will begin at $500 per one way trip and increase by $50
per one way trip annually. The Company and FDOT have agreed
in principle (subject to ongoing negotiations) to allow the
Company the right to use a railroad terminal in Broward
County and the track rights to an existing railroad
maintenance facility in Dade County.
e) In February 1995, the Company entered into an agreement
with the Florida East Coast Railway Company ("FEC") for the
use of FEC track in connection with the Company's proposed
rail operations. Under the agreement, the Company will pay
a fee to the FEC upon commencement of operations of no less
than either $500,000 per train, per year, or $18 per train
mile (with a stipulated train size of 15 cars). Effective
January 1 of the year in which the third anniversary of the
commencement service occurs, and January 1 in every third
year thereafter, the car mile rate and the minimum amount
payable shall, upon the request of either party, be
adjusted based on the
F-13
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
"Consumer Price Index For Urban Wage Earners and Clerical
Workers" unadjusted, as published by the Bureau of Labor
Statistics, U.S. Department of Labor. The agreement will
expire ten years from the date of commencement of service.
At the conclusion of the initial ten year term, the company
will have the right to extend the agreement for an
additional ten year period upon twelve months advance
notice to the FEC.
f) In January 1997, the Company entered into a ten year
lease for office and warehouse space requiring monthly
payments of approximately $7,200 (subject to annual
adjustment for inflation not to exceed 4%.) The lease may
be terminated after five years upon the occurrence of
certain conditions.
5. STOCKHOLDERS' a) In May 1995, the Company executed a stock split and
EQUITY (DEFICIT) exchanged the 1,996,400 then outstanding shares of its
common stock for 2,495,500 shares of common stock and
changed the par value of its common stock from $.01 to no
par. In February 1996, the Company executed a second stock
split and exchanged the 2,495,500 shares of its common
stock for 4,275,000 shares of common stock with no par
value, 10,000,000 shares authorized to be issued. On April
26, 1996, the Company merged into Asia-America Corporation,
a public company, and accounted for the transaction as a
reverse acquisition for financial statement purposes, and
was recapitalized with 9,050,278 shares of $.001 par value
stock, 100,000,000 shares authorized to be issued. In
connection with this transaction, there was no impact on
the operating results of the Company and it resulted only
in an adjustment to stockholders' equity. The components of
stockholders' equity and all per share amounts in the
accompanying financial statements have been adjusted
retroactively to reflect the stock splits and changes in
par value.
b) In 1994, the Company issued 3,854,430 shares of common
stock to its initial shareholders for cash of $18,000.
F-14
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
c) In connection with a private placement, the Company
issued 420,570 shares of common stock for cash of $961,035
net of offering costs of $20,965.
d) In 1996, the Company granted two-year warrants to
purchase 12,500 shares of common stock at $3.50 per share
to a shareholder, in consideration for extending the
repayment terms of a loan made to the Company.
e) During 1996, the Company granted three year warrants to
purchase 100,000 shares of common stock at $2.50 per share
(the market value at the date of grant) pursuant to a
consulting agreement.
f) In May 1996, the Company entered into a two year
agreement with an underwriter to provide financial advising
and consulting services. The agreement was amended in
January 1997 to extend the agreement an additional eighteen
months to October 1999 and to allow all fees through
October 1999 to be paid in full by the issuance of 52,500
shares of common stock of the Company in January 1999. The
agreement also provides for additional fees comprising of
3% to 5% of consideration paid for acquisitions or mergers
with other companies, joint ventures, license and royalty
agreements, etc., that the consultant arranges and 1.5% to
8% of the gross proceeds resulting from the sale of any
securities issued by the Company.
6. NOTES PAYABLE In June 1995, the Company entered into a loan agreement
TO RELATED with a shareholder and director for up to $125,000, with
PARTIES simple interest of 18%. As of December 31, 1995, the
AND OTHERS Company had borrowed $125,000. In addition, the Company
entered into loan agreements with two other shareholders
for a total of $140,000 with simple interest of 18%.
Subsequent to December 31, 1995, an additional $68,388 was
borrowed from related parties bearing interest of 18% per
annum. All loans were repaid with the proceeds of the
private offering that closed in May 1996 (Note 7).
F-15
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
7. STAGE I AND II In March 1996, the Company completed its Stage I financing.
FINANCING The company received gross proceeds from this private
offering of $500,000 in exchange for $500,000 in notes
payable bearing interest at 10% per annum, with a $55,000
original issue discount, and 375,004 shares of common stock
valued at $55,000. Costs associated with the offering were
$106,291.
In May 1996, the Company completed its Stage II financing.
Total consideration of $16,501,365 from this private
offering was received consisting of $16,085,000 in cash and
the conversion of $412,500 in notes payable and $3,865 in
accrued interest from Stage I financing. In connection with
this transaction, $8,250,682 in five-year convertible notes
bearing interest at 10% per annum were issued. Interest is
payable semi-annually in April and October and the notes
are convertible at $3.50 per share. In addition, 3,950,271
redeemable common stock purchase warrants and 4,050,274
shares of common stock valued at $8,250,683 were issued.
Costs associated with the offering were $1,986,460. The
Company used $778,388 of the net proceed to paydown
$333,388 in notes payable to related parties and others and
$445,000 in notes payable from the Stage I financing. In
connection with the retirement of the Stage I debt, $94,599
of deferred loan costs was charged to operations as
amortization of deferred loan costs. In addition, $55,000
of original issue discount was charged to operations as
interest expense.
Prepaid interest of $829,924 representing the first year's
interest on the Stage II debt was placed in escrow and was
included as restricted cash in the accompanying balance
sheet. The first interest payment was made in October 1996.
8. STOCK-BASED The Company has elected to follow Accounting Principles
COMPENSATION Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") in accounting for its employee stock
options. Under APB 25, because the exercise price of the
Company's employee stock options
F-16
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
issued equaled the market price of the underlying stock or
the close of grant, no compensation expense was recognized.
Under the Company's 1996 Non-Qualified Stock Option Plan,
the Company may grant options to its employees, directors
and external consultants up to 717,500 shares of the
Company's common stock. All options granted to employees
have 10 year terms and become fully exercisable at the end
of the second year. All options granted to directors and
external consultants have ten year terms and vest
immediately. Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation," ("SFAS
No. 123") requires the Company to provide proforma
information regarding net loss and loss per common share as
if compensation cost for the Company's Stock Option plan
had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option on the date of grant by
using the Black Scholes option-pricing model with the
following weighted-average assumptions for 1996: risk-free
interest rates of 6.5%; dividend yield of 0; volatility
factors of the expected market price of the Company's
common stock of .10; and weighted-average expected life of
the option of 10 years.
Under the accounting provisions of SFAS No. 123, the
Company's net loss and loss per common share for the year
ended December 31, 1996 would have been $2,633,644 and
$.35, respectively. A summary of the Company's stock option
activity, and related information for the year ended
December 31, 1996, is as follows:
F-17
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding, January 1, 1996 -- --
Granted 138,700 $3.88
Exercised -- --
Forfeited -- --
--------- -------
Outstanding, December 31, 1996 138,700 $3.88
--------- -------
Exercisable at December 31, 1996 71,698 $3.77
--------- -------
Weighted-average fair value of
options granted during 1996 $1.85
---------
Exercise prices for options outstanding and exercisable as
of December 31, 1996 ranged from $3.06 to $4.75. The
weighted average remaining contractual life of these
options is approximately 9.8 years.
Subsequent to December 31, 1996, the Company granted an
additional 332,000 ten year options at prices ranging form
$2.375 to $3.50
9. SUBSEQUENT On March 13, 1997 (March 31, 1997 for financial reporting
EVENTS purposes), the Company purchased all of the common stock of
The Durango & Silverton Narrow Gauge Railroad Company. The
purchase price consisted of the following: (i) two
promissory notes aggregating $10.05 million which are
subordinate to a purchase money loan provided by a
third-party lender in the amount of $8.5 million; (ii)
200,000 shares
F-18
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
of the common stock of the Company; (iii) a six-year
warrant to purchase 1,610,000 shares of the Company at an
exercise price of $3.50 per share; and (iv) cash of
approximately $5 million, including a $2 million deposit
which was paid in December 1996. Portions of the seller
financing are personally guaranteed by two of the Company's
officers for which the Company will pay annual guarantee
fees aggregating $55,000 to the officers. In addition, in
February 1997, the Board of Directors voted to amend the
employment agreement of one of the officers (the President
and Chief Operating Officer) to (i) extend the term of such
agreement five years from the effective date of the
personal guaranty, (ii) increase in certain circumstances,
such as employment severance package to three times his
then-current compensation; and (iii) grant additional
ten-year stock options covering 100,000 shares of common
stock, exercisable at the market price on the date of grant
upon such officer's delivery of the aforementioned personal
guaranty. This guaranty was provided in March 1997.
The acquisition was accounted for under the purchase method
for accounting purposes and based upon a preliminary
allocation of the purchase price resulted in the following
significant assets acquired and liabilities assumed and/or
incurred in the Company's March 31, 1997 balance sheet:
Fixed assets $ 29,465,000
Inventories and other assets 1,459,940
Deferred income tax liability 8,100,000
Long-term debt 17,650,000
Other liabilities 2,220,765
The Company's unaudited proforma consolidated statements of
operations for the three months ended March 31, 1997 and
the year ended December 31, 1996, assuming the acquisition
of D&SNG was effected at the beginning of each such period
are summarized as follows:
F-19
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1997 1996
Total revenues $ 291,740 $ 8,946,462
Net loss $ (1,953,528) $ 711,614
Loss per share $ (.21) $ (.22)
This proforma information does not purport to be indicative
of the results which may have been obtained had the
acquisition been consummated at the date assumed.
D&SNG's business is highly seasonal; historically, at least
60% of the total number of passengers who ride on D&SNG
annually do during the months of June, July and August.
In March 1997, the Company entered into a two year
unsecured line of credit agreement with a bank. Under the
agreement the Company is able to borrow up to $1,000,000 at
an interest rate of prime plus 2%. The agreement contains
covenants that require certain operating and equity
criteria to be met as well as other requirements customary
to loan facilities of this nature.
In April 1997, the Company entered into an agreement with
the National Railroad Passenger Corporation ("Amtrak
Agreement") for certain technical services (operating,
crew, etc.) in connection with the Company's train between
Fort Lauderdale and Orlando and the leasing of the
locomotives and a baggage car. In connection with the
Amtrak Agreement, the Company expects to pay approximately
$500,000 prior to commencing operations for leasehold
improvements and other development costs. The Amtrak
Agreement is for fifteen years and the Company will pay
approximately $4.1 million per year for the initial two
operating years. The compensation to Amtrak may be reopened
every two years.
F-20
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
In June 1997, the Company completed two closings of a
private offering. The Company received gross proceeds of
approximately $10.16 million and net proceeds of
approximately $8.85 million. The Company issued 8%
convertible subordinated notes in the principal amount of
approximately $10.16 million and also issued approximately
1.37 million shares of common stock. Additionally,
approximately 200,000 shares will be issued as additional
commission to the placement agent. The convertible
subordinated notes issued to investors purchasing a minimum
of $2.0 million contain a mandatory conversion feature
which may be exercised by the Company in certain
circumstances.
F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder
The Durango & Silverton Narrow Gauge Railroad Company
Howey-in-the-Hills, Florida
We have audited the accompanying balance sheet of The Durango & Silverton Narrow
Gauge Railroad Company as of December 31, 1996 and the related statements of
operations, stockholder's equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Durango & Silverton Narrow
Gauge Railroad Company as of December 31, 1996 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
-------------------
BDO Seidman, LLP
Orlando, Florida
April 8, 1997
F-22
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
BALANCE SHEET
===============================================================================
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
ASSETS (Note 4)
CURRENT:
Cash and cash equivalents $ 32,507
Trade accounts receivable 5,332
Inventories (Note 2) 739,530
Prepaid expenses 79,702
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 857,071
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 3) 6,519,201
- -------------------------------------------------------------------------------
OTHER ASSETS:
Deferred loan costs, net of accumulated
amortization of $125,394 252,734
Accounts receivable from stockholder (Note 8) 8,689,745
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS 8,942,479
- -------------------------------------------------------------------------------
$ 16,318,751
- -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-23
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
BALANCE SHEET
===============================================================================
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 384,225
Accrued expenses 501,511
Retirement contribution refund payable to employees (Note 1) 338,000
Current maturities of long-term debt (Note 4) 578,076
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,801,812
LONG-TERM DEBT, less current maturities (Note 4) 3,792,295
ACCRUED PENSION PLAN LIABILITY (Note 5) 66,281
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 5,660,388
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6) -
STOCKHOLDER'S EQUITY (Note 9):
Common stock, no par, 500,000 shares authorized,
100,000 shares issued and outstanding 2,750,000
Additional paid-in capital 4,694,837
Retained earnings 3,213,526
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 10,658,363
- -------------------------------------------------------------------------------
$ 16,318,751
- -------------------------------------------------------------------------------
===============================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-24
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF OPERATIONS
===================================================================================================================
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996 1996 1995
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
REVENUES $ 291,740 $ 284,260 $ 8,946,462 $ 8,468,463
COST OF REVENUES 705,249 699,694 5,143,802 4,828,207
- -------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (413,509) (415,434) 3,802,660 3,640,256
OPERATING EXPENSES (Notes 5 and 8) 291,277 294,721 2,047,366 2,058,068
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) (704,786) (710,155) 1,755,294 1,582,188
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income (Note 8) 5,922 6,588 528,487 373,455
Interest expense (127,663) (130,440) (580,725) (579,685)
Litigation settlement (Note 6) - - - (154,114)
- -------------------------------------------------------------------------------------------------------------------
(121,741) (123,852) (52,238) (360,344)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (826,527) $ (834,007) $ 1,703,056 $ 1,221,844
===================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-25
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
===================================================================================================================
COMMON STOCK
----------------------------- ADDITIONAL
STATED PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS
- -------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 100,000 $ 2,750,000 $ 4,694,837 $ 1,551,185
Dividends paid (Note 8) - - - (1,262,559)
Net income - - - 1,221,844
- -------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 100,000 2,750,000 4,694,837 1,510,470
Net income - - - 1,703,056
- -------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 100,000 $ 2,750,000 $ 4,694,837 $ 3,213,526
===================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-26
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(NOTE 7)
===================================================================================================================
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996 1996 1995
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (826,527) $ (834,007) $ 1,703,056 $ 1,221,844
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 107,734 108,785 433,093 434,344
Affiliate expense allocations credited to
accounts receivable from stockholder - - 874,270 813,086
Cash provided by (used for):
Trade accounts receivable (4,668) 4,843 7,039 (4,847)
Retirement contribution refund receivable - 2,115,677 2,115,677 -
Inventories (10,470) (17,356) 37,958 91,196
Prepaid expenses 29,702 37,552 (16,074) 8,053
Accounts payable 214,709 475,306 78,312 219,524
Accrued liabilities 53,555 (216,227) (98,114) (46,002)
Accrued pension plan liability 3,719 - (9,105) 40,715
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (432,246) 1,674,573 5,126,112 2,777,913
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (75,799) (21,213) (93,456) (441,772)
(Loans to) repayments from stockholder 680,909 (1,118,617) (4,515,335) (3,282,175)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 605,110 (1,139,830) (4,608,791) (3,723,947)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (145,371) (192,694) (521,409) (553,910)
Proceeds from the issuance of long-term debt - - - 326,940
Deferred loan costs - - - (9,303)
- -------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (145,371) (192,694) (521,409) (236,273)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27,493 342,049 (4,088) (1,182,307)
Cash and cash equivalents, beginning of period 32,507 36,595 36,595 1,218,902
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 60,000 $ 378,644 $ 32,507 $ 36,595
===================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-27
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
SUMMARY OF ACCOUNTING POLICIES
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
BUSINESS The Durango & Silverton Narrow Gauge Railroad Company (the
"Company") Was incorporated under the laws of the State of
Colorado on June 22, 1979. The Company operates a steam engine
railroad tourist attraction that carries passengers between the
towns of Durango and Silverton, Colorado, principally between
the months of May through October. The Company's administrative
headquarters are located in Howey-in-the-Hills, Florida.
INVENTORIES Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost is determined using the first-in,
first-out method.
PROPERTY, Property and equipment are stated at cost less accumulated
EQUIPMENT depreciation. Depreciation is computed over the estimated useful
AND lives of the assets using the straight-line method.
DEPRECIATION
AMORTIZATION Deferred loan costs are being amortized using the straight-line
method over the seven-year term of the loan.
TAXES ON The absence of a provision for income taxes is due to the
INCOME election by the Company and consent by its stockholder to
include his respective share of taxable income of the Company in
his individual tax return. As a result, no federal tax return is
imposed on the corporation.
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial Instruments,"
INSTRUMENTS requires disclosure of fair value information about financial
instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information
available to management as of December 31, 1996.
The respective carrying values of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and equivalents, trade
receivables, accounts payable and accrued expenses. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their
carrying amounts approximate fair values or they are receivable
or payable on
F-28
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
SUMMARY OF ACCOUNTING POLICIES
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
demand. The fair value of the Company's long-term
debt also approximates carrying value and is estimated based
upon the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same
remaining maturities.
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
NEW On January 1, 1996, the Company adopted Summary of Financial
ACCOUNTING Accounting Standards No. 121, "Accounting for the Impairment of
STANDARD Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
("SFAS No. 121"). SFAS No. 121 requires, among other things,
impairment loss of assets to be held and gains or losses from
assets that are expected to be disposed of be included as a
component of income from continuing operations before taxes on
income. During 1996, there have been no write-downs required in
the accompanying financial statements.
UNAUDITED The interim financial statements and for the three months ended
FINANCIAL March 31, 1997 and 1996 are unaudited. In the opinion of
STATEMENTS management, such statements reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the results of operations and changes in cash
flows. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results for
the entire year.
F-29
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
1. RETIREMENT Since 1981 the Company had been a covered employer under the
CONTRIBUTION Railroad Retirement Tax Act ("RRTA"). From 1981 through
REFUND December 31, 1993, the company and its employees made
RECEIVABLE contributions to the fund through recurring payroll
deductions. During 1994, the Company received notice from the
board of governors of the RRTA that it no longer met the
requirements necessary to be included in the RRTA effective
January 1, 1990. Accordingly, the Company filed for a refund
of the employer and certain employee contributions made to the
RRTA for the years ended December 31, 1990 through December
31, 1993. In 1996, the Company received a refund of
$2,115,677, which represented the amounts contributed to RRTA
net of any normal contributions necessary for the Company and
its employees to be included in the federal social security
system during the refund period. Approximately $338,000 of the
refund amount received by the Company related to employee
contributions that will be reimbursed to those employees. The
employee portion of the refund is reflected as a liability on
the December 31, 1996 balance sheet. In addition,
approximately $273,000 of federal unemployment taxes were
withheld from the refund and were paid to the Internal Revenue
Service on behalf of the Company for the years 1990 through
1993.
2. INVENTORIES Inventories consist of the following:
-------------------------------------------------------------
CONCESSION AND SOUVENIR ITEMS $ 253,635
PARTS 485,895
-------------------------------------------------------------
$ 739,530
-------------------------------------------------------------
All inventory is pledged as collateral (see Note 4).
F-30
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
3. PROPERTY AND
EQUIPMENT Property and equipment consist of the following:
USEFUL LIVES
-------------------------------------------------------------
Land $ 770,988
Land improvements 10 years 181,387
Buildings 30 years 3,457,347
Machinery and equipment 10-25 years 8,149,879
Vehicles 5 years 175,604
-------------------------------------------------------------
12,735,205
Less accumulated depreciation 6,216,004
-------------------------------------------------------------
$ 6,519,201
=============================================================
All property and equipment is pledged as collateral (see Note
4).
4. LONG-TERM
DEBT Long-term debt consists of a note payable to a bank bearing
interest at the commercial paper rate plus 5% (10.4% at
December 31, 1996). As of December 31, 1996, payments of
$48,173 plus interest were due monthly through August 2001, at
which time the remaining unpaid principal balance plus
interest was due. As of December 31, 1996, the Company was in
violation of certain debt covenants. Subsequent to December
31, 1996, the note payable was fully paid upon the sale of the
Company's stock (see Note 9). The note payable was
collateralized by substantially all the Company's assets and
was personally guaranteed by the Company stockholder prior to
its repayment.
The aggregate maturities of long-term debt are as follows as
of December 31, 1996:
-------------------------------------------------------------
1997 $ 578,076
1998 578,076
1999 578,076
2000 578,076
2001 2,058,067
-------------------------------------------------------------
F-31
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
5. EMPLOYEE DEFINED BENEFIT PENSION PLAN
BENEFIT
PLANS The Company has a noncontributory defined benefit pension plan
(the "plan") covering substantially all full-time employees.
The plan provides pension benefits that are based on the
employee's average annual compensation and their number of
years of service. The Company's funding policy for the plan is
to make at least the minimum annual contributions required by
applicable regulations.
A summary of the components of net periodic pension cost for
the plan and the total contributions charged to pension
expense for the plan follows:
1996 1995
-------------------------------------------------------------
Defined benefit plan:
Service cost $ 2,199 $ 11,916
Interest cost 20,736 17,812
Actual return on plan assets 1,788 -
Net amortization and deferral 7,412 10,987
-------------------------------------------------------------
Total pension expense $ 32,135 $ 40,715
-------------------------------------------------------------
Assumptions used in the accounting for the plan in 1996 as of
December 31, were:
1996 1995
-------------------------------------------------------------
Weighted average discount rates 9.0% 9.0%
Rates of increase in compensation levels 4.5% 4.5%
Expected long-term rate of return on assets 9.0% 9.0%
-------------------------------------------------------------
The following table sets forth the funded status and amounts
recognized in the balance sheet at December 31, 1996 for the
plan:
F-32
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
-------------------------------------------------------------
Actual present value of benefit obligations:
Vested benefit obligation $ (143,285)
-------------------------------------------------------------
Accumulated benefit obligation $ (159,328)
-------------------------------------------------------------
Projected benefit obligation $ (257,745)
Plan assets at fair value 43,028
-------------------------------------------------------------
Projected benefit obligation in
excess of plan assets (214,717)
Unrecognized net loss 16,448
Prior service cost not yet recognized in
net periodic pension cost 131,988
-------------------------------------------------------------
Net pension liability recognized in the
statement of financial position $ (66,281)
-------------------------------------------------------------
401(K) PROFIT SHARING PLAN
The Company also established a 401(k) profit sharing plan
covering substantially all employees meeting certain minimum
age and service requirements. The Company's contributions to
the plan are determined by the Board of Directors and are
limited to a maximum of 50% of the employee's contribution and
6% of the employee's compensation. Contributions to the plan
amounted to $39,871 and $47,825 for the years ended December
31, 1996 and 1995, respectively.
F-33
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
6. COMMITMENTS SALES AND TOURISM TAX ASSESSMENT
AND
CONTINGENCIES During 1994, the Company was audited by the Colorado
Department of Revenue. The audit resulted in an assessment of
$165,660 of additional sales and tourism taxes, interest and
other charges for the period June 1983 through December 1991.
The entire balance of the assessment was deposited with the
Colorado Department of Revenue and expensed in 1994. The
Company is currently appealing the assessment, and if
successful, this deposit will be refunded to the Company with
interest at prime plus 2%. If the appeal is not successful, it
will be retained by the department and applied against any
deficiency. Due to uncertainties that exist at this time,
management is unable to estimate the likelihood of an
unfavorable outcome nor the amount or range of a potential
loss, if any.
LITIGATION
During 1995, the Company signed a settlement agreement related
to a wrongful termination litigation case with two former
employees. The settlement amount of $154,114 was paid in 1995
and has been reflected in the 1995 income statement as an
other expense.
FEDERAL UNEMPLOYMENT TAX REFUND
In connection with the retirement contribution refund
receivable (see Note 1), the Company was obligated for the
payment of federal and state unemployment taxes during the
year 1990 through 1993. The federal unemployment taxes were
withheld from the refund received, and the Company paid
approximately $169,000 of state unemployment taxes. As a
result of the payment of the state unemployment taxes, the
Company has requested a credit for the amount paid to be
applied against the federal unemployment taxes previously
withheld from the RRTA refund. The refund applied for is
approximately $237,000. Management is unable to determine the
likelihood that such amounts will be received, and
accordingly, no receivable has been recorded in the
accompanying financial statements.
F-34
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
ENVIRONMENTAL MATTERS
A Phase 1 environmental site assessment was performed at the
Company's facilities in Colorado, which resulted in the
identification of various potential environmental issues. The
consulting firm that performed the site assessment is not
recommending that additional sampling (e.g., Phase 2) be
conducted at the facilities in order to identify additional
environmental issues. Certain issues identified in the Phase 1
assessment indicated that additional testing and evaluation
may be required to implement the recommended clean-up
activities and to identify additional environmental issues, if
any. The cost of the recommended clean-up activities has been
estimated by the management of the Company prior to the sale
of stock (see Note 9) to range from $50,000 to $200,000.
However, due to the various uncertainties that exist at this
time, management accrued $50,000 as of December 31, 1993.
7. SUPPLEMENTAL For purposes of the statement of cash flows, all highly
CASH FLOW liquid investments with a maturity date of three months or
INFORMATION less are considered to be cash equivalents. Cash and cash
equivalents include checking accounts and money market funds.
YEAR ENDED DECEMBER 31, 1996 1995
-------------------------------------------------------------------------
Cash paid for interest during the year $ 543,463 $ 561,500
Noncash financing and investing activities:
Distribution of accounts receivable
from stockholder as a dividend
(see Note 8) - 1,262,559
-------------------------------------------------------------------------
8. RELATED PARTY
TRANSACTIONS AFFILIATE EXPENSE ALLOCATIONS
Included in the Company's operating expenses for 1996 and 1995
are $874,270 and $813,086, respectively, of expenses allocated
from affiliated companies. The expense allocations include
amounts related to administrative and accounting functions
performed for the Company by employees of the affiliated
companies of $274,270 and $213,086 for 1996 and 1995,
respectively, and a $600,000 fee for both 1996 and 1995 for
the use of an airplane
F-35
THE DURANGO & SILVERTON
NARROW GAUGE RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
===============================================================================
owned by another related party company. The expense
allocations are recorded as a reduction of the accounts
receivable from stockholder.
ACCOUNTS RECEIVABLE FROM STOCKHOLDER
The Company's stockholder receives advances from the Company
on a periodic basis. Interest is charged on the advances at an
annual rate of 6.5%, and there are no specific repayment terms
for outstanding advances or related accrued interest. As of
December 31, 1996, advances and the related accrued interest
totaled $8,689,745. Interest income related to the advances
for the years ended December 31, 1996 and 1995 was $528,487
and $373,455, respectively. For the year ended December 31,
1995, dividends of $1,262,559 were paid and recorded as a
reduction of the accounts receivable from stockholder. Prior
to the sale of stock (see Note 9), the accounts receivable
from stockholder were satisfied in the form of a dividend.
9. SUBSEQUENT SALE OF STOCK
EVENTS
On March 13, 1997, the stockholder of the Company sold all of
the Company's outstanding shares for a total purchase price
which consisted of: approximately $5 million in cash; two
promissory notes aggregating $10.05 million; 200,000 shares of
the purchaser's common stock and a six-year warrant to
purchase 1,610,000 shares of the purchaser's common stock at
$3.50 per share.
SALE OF ASSETS
On March 12, 1997, the Company sold approximately two acres of
land to an affiliated entity. Located on the land is a slag
pile which is one of the items identified in the environmental
site assessment as a potential environmental issue (Note 6).
The Company retained the right to have reasonable access to
such property and reasonable usage of the slag pile contained
thereon. Further, the Company received a ten-year option to
repurchase the property for a nominal sum.
F-36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada General Corporation Law empowers a Nevada
corporation to indemnify any person who was or is, or is threatened to be made,
a party to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided that
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding such person had no reasonable cause
to believe his conduct was unlawful. A Nevada corporation may indemnify such
person against expenses including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by such person in connection with actions
brought by or in the right of the corporation to procure a judgment in its favor
under the same conditions, except that no indemnification is permitted in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and to the extent the court in
which such action or suit was brought or other court of competent jurisdiction,
shall determine upon application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper. To the extent such person has been
successful on the merits or otherwise in defense of any action referred to
above, or in defense of any claim, issue or matter therein, the corporation must
indemnify such person against expenses, including attorneys' fees, actually and
reasonably incurred by such person in connection therewith. The indemnification
and advancement of expenses provided for in, or granted pursuant to, Section
78.751 is not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under the articles of
incorporation of the Registrant or any by-law, agreement, vote of shareholders
or disinterested directors or otherwise. Section 78.751 also provides that a
corporation may maintain insurance against liabilities for which indemnification
is not expressly provided by the statute.
Article VII of the Registrant's Restated Bylaws provides for indemnification of
the directors, officers, employees and agents of the Company (including the
advancement of expenses) to the extent permitted by Nevada law. In addition, the
Company has contractually agreed to indemnify its directors and officers to the
fullest extent permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth various expenses to be incurred by the Company in
connection with the sale of the securities offered hereby, other than
underwriting discounts and commissions. Except for the Securities and Exchange
Commission registration fee, all of the amounts set forth in the table are
estimates.
Securities and Exchange Commission Registration fee.............. $ -
Legal fees and expenses.......................................... 30,000
Blue Sky fees and expenses....................................... 10,000
Accounting fees and expenses..................................... 10,000
Printing and engraving........................................... 7,000
Miscellaneous.................................................... 3,000
--------
Total............................................................ $ 60,000
========
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following is information regarding the Company's sales of unregistered
securities for the last three years. All shares were issued without registration
in reliance upon Section 3(b) or 4(2) of the Act, or Regulation D thereunder,
except as noted below.
AMOUNT AND TYPES CASH
OF SECURITIES DATE OF SALE PURCHASER(S) CONSIDERATION
---------------- ------------ ------------ -------------
9,991,216 shares of
Common Stock(1) 2/15/96 Lynn Dixon $ 9,991
20 Units(2) 2/27/96 Various private $ 500,000
(375,000 shares of Common Stock, and placement "accredited"
$500,000 (principal amount) convertible investors and foreign
secured notes) investors
550 Units(3) 4/26/96 & 5/9/96 Various private $16,500,000
(4,050,271 shares of Common Stock, placement "accredited"
4,050,271 Series A Redeemable Warrants, and investors and foreign
$7.5 million (principal amount) convertible investors
secured notes)
750,000 shares of Common Stock and 650,000 4/26/96 Capital Growth --(4)
Series A Redeemable Warrants International, LLC
100,000 warrants to purchase 100,000 shares 6/12/96 Josephthal Lyon & --(5)
of Common Stock Ross Incorporated
(and its designees)
10,800 shares of Common Stock 7/1/96 Raymond Monteleone --(6)
52,500 shares of Common Stock* 2/20/97 International Capital --(7)
Growth, LLC
200,000 shares of Common Stock
and 1,610,000 common stock purchase
warrants and $4.2 million (principal
amount) convertible note 3/13/97 Charles E. Bradshaw, Jr. --(8)
9,700 shares of Common Stock 3/13/97 Atlantic Equity Corporation --(9)
4,297 shares of Common Stock 5/9/97 Mazin Kamauna --(10)
203.25 Units (11) 6/2/97 & 6/11/97 Various private placement $10,162,500
1,366,250 shares of Common Stock "accredited" investors
$10,162,500 (principal amount) and foreign investors
convertible subordinated notes
- ------------------
(1) Before a 1-for-108 reverse stock split and Merger effective April 23, 1996.
(2) Each unit consisted of (a) 18,750 shares of the Company's common stock, no
par value, and (b) a convertible secured note in the principal amount of
$25,000, bearing interest at the rate of 10% per annum. A total of 8.25 units
sold in the private placement were sold without registration in reliance upon
Regulation S under the Securities Act. International Capital Growth, LLC
(formerly known as Capital Growth International, LLC) acted as placement agent
for the private placement for which it was paid a non-accountable expense
allowance of $10,000 and sales commissions of $40,000.
II-2
(3) Each unit consisted of (a) a convertible secured note in the principal
amount of $15,000, which bears interest at the rate of 10% per annum, (b) 6,000
shares of the Company's Common Stock, $.001 par value, and (c) 6,000 redeemable
Common Stock Purchase Warrants, each Warrant entitling the holder thereof to
purchase one share of Common Stock at an exercise price of $3.50 per share
(subject to adjustment under certain circumstances) at any time prior to
redemption from the date of issuance until two years thereafter. A total of
299.28 units sold in the private placement were sold without registration in
reliance upon Regulation S under the Securities Act. International Capital
Growth, LLC, acted as placement agent for the 1996 private placement for which
it was paid a non-accountable expense allowance of $330,027.29 and sales
commissions of $1,320,109.17.
(4) Issued as consideration pursuant to a Placement Agent Agreement dated April
26, 1996, between First American Railways, Inc., a Florida corporation ("First
American-Florida") and International Capital Growth, LLC.
(5) Issued as consideration pursuant to a Financial Advisory Agreement dated
February 24, 1994, between First American-Florida and Josephthal Lyon & Ross
Incorporated.
(6) Issued as part of Mr. Monteleone's employment agreement with the Company.
(7) Issued in lieu of $195,000 in cash compensation due (or to be due) under an
April 26, 1996 Financial Advisory Agreement, as amended December 5, 1996,
between the Company and International Capital Growth, LLC.
(8) Issued in connection with the Company's acquisition of The Durango &
Silverton Narrow Gauge Railroad Company ("D&SNG").
(9) Shares issued in partial consideration for a $8.5 million term loan made by
NationsBank, N.A. (South), an affiliate of Atlantic Equity Corporation, in
connection with the Company's acquisition of D&SNG.
(10) Issued upon conversion of a $15,000 (principal amount) convertible secured
note.
(11) Each unit consisted of (a) an 8% convertible subordinated note in the
principal amount of $50,000, and (b) 5,000 shares of the Company's Common Stock,
$.001 par value. A total of 181 units were sold in the private placement without
registration in reliance upon Regulation S under the Securities Act. The
placement agent for the 1997 private placement has "earned" 203,245 shares of
Common Stock as part of its compensation in connection with the placement of
securities; however, these shares have not been issued as of this date.
II-3
ITEM 27. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- --- -----------
3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form 8-A filed with the SEC on May 30, 1996.
3.2 Plan and Articles of Merger are hereby incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form 8-A filed with the SEC on May 30, 1996.
3.3 Amended Bylaws.*
4.1 Form of Common Stock Certificate is hereby incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 8-A filed with the SEC on May 30, 1996.
4.2 Form of Series A Redeemable Warrant Agreement.**
4.3 Series A Redeemable Warrant Agreement.**
4.4 Form of Financial Advisory Warrant Certificate.**
4.5 Financial Advisory Warrant Agreement.**
4.6 Common Stock Purchase Warrant Certificate held by Charles E. Bradshaw, Jr., dated March 13,
1997.*
5 Opinion of Olle, Macaulay & Zorrilla, P.A.**
10.1 Agreement effective as of June 28, 1994, between First American-Florida and Rader Railcar, Inc.,
as amended.**
10.2 Employment Agreement dated February 16, 1994, between First American- Florida and Allen C.
Harper.**
10.3 Employment Agreement dated December 2, 1996, between the Registrant and Gordon L. Downing.*
10.4 Employment Agreement dated July 1, 1994, between First American- Florida and Michael J.
Acierno, as amended.**
10.5 Employment Agreement dated July 1, 1996, between the Registrant and Raymond Monteleone, as
amended.**
10.6 Agreement dated February 28, 1995, between First American-Florida and Florida East Coast
Railway Company.**
10.7 Form of Non-Competition Agreement between Thomas G. Rader and First American-Florida.**
10.8 Railcar Construction Agreement (without appendices) between Rader Railcar II, Inc. and Fun Trains,
Inc. dated October 23, 1996.**
10.9 Financial Advisory and Consulting Agreement between the Registrant and International Capital
Growth, LLC, dated April 26, 1996**, as amended December 5, 1996.*
II-4
10.10 Note Escrow Agreement between the Registrant, Capital Growth International, LLC, and Sterling
National Bank and Trust Company of New York dated April 26, 1996.**
10.11 Form of Convertible Secured Note.**
10.12 Employment Agreement dated October 15, 1996, between the Registrant and William T.
Nanovsky.**
10.13 Employment Agreement dated October 9, 1996, between the Registrant and Donald P. Cumming.**
10.14 Employment Agreement dated August 23, 1996, between the Registrant and Thomas E. Blayney.**
10.15 Employment Agreement dated September 30, 1996, between the Registrant and Pamela S.
Petcash.**
10.16 Form of Confidentiality and Non-competition Agreement between the Registrant's executive
employees and the Registrant.**
10.17 Consulting Agreement between Management Resource Group, Inc. and the Registrant dated July 23,
1996.**
10.18 Agreement between Universal Studios Florida and the Registrant, dated October 30, 1996.**
10.19 Agreement between CSX Transportation, Inc. and the Registrant, dated October 31, 1996.**
10.20 Business Lease between Mandel Development, a Florida general partnership, and the Registrant,
dated January 15, 1997.*
10.21 Operating Agreement between the Florida Department of Transportation and the Registrant, dated
January 6, 1997.*
10.22 Form of the Registrant's 1996 Non-Qualified Stock Option Plan.*
10.23 Loan Agreement (without exhibits) between NationsBank, N.A. (South) and the Durango &
Silverton Narrow Gauge Railroad Company, dated March 13, 1997.*
10.24 Share Purchase Agreement between The Durango & Silverton Narrow Gauge Railroad Company
and the Registrant, dated December 10, 1996, and Addendum to Share Purchase Agreement, dated
February 28, 1997.*
10.25 Promissory Note in the amount of $4,200,000 from the Registrant in favor of Charles E. Bradshaw,
Jr., dated March 13, 1997.*
10.26 Promissory Note in the amount of $5,850,000 from the Registrant in favor of Charles E. Bradshaw,
Jr., dated March 13, 1997.*
10.27 Registration Rights and Price Guaranty Agreement between Charles E. Bradshaw, Jr. and the
Registrant, dated March 13, 1997.*
10.28 Transportation, Maintenance and Lease Agreement between Fun Trains, Inc. and Amtrak, dated
April 28, 1997, is incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report
on Form 10-QSB, for the period ended March 31, 1997, filed with the SEC on May 15, 1997.
10.29 Amendment to Operating Agreement between Florida Department of Transportation and the
Registrant, dated June 6, 1997.***
II-5
16 Letter dated May 10, 1996, from the Company's former accountants, Hansen, Barnett & Maxwell,
to the Registrant is hereby incorporated by reference to Exhibit 16 to the Registrant's Current
Report on Form 8-K dated May 6, 1996.
21 Subsidiaries of the Registrant.*
23.1 Consent of BDO Seidman LLP.***
23.2 Consent of Olle, Macaulay & Zorrilla, P.A., included as part of Exhibit 5.**
23.3 Consent of BDO Seidman LLP.***
24 Power of Attorney (included on Page II-5 hereof)
27 Financial Data Schedule.***
* Incorporated by reference to the comparable exhibit numbers as
contained in the Company's Annual Report on Form 10-KSB, as filed with
the Securities and Exchange Commission on March 28, 1997.
** Incorporated by reference to the comparable exhibit numbers as
contained in the Registrant's Registration Statement on Form SB-2, as
filed with the Securities and Exchange Commission on August 6, 1996.
*** Filed herewith.
ITEM 28. UNDERTAKINGS.
(a) The registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) That it will, for determining any liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities ( other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
(c) The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Coral Gables,
State of Florida, on June 24, 1997.
FIRST AMERICAN RAILWAYS, INC.
BY: /S/ ALLEN C. HARPER
------------------------------
ALLEN C. HARPER, CHAIRMAN OF
THE BOARD AND
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ ALLEN C. HARPER CHAIRMAN OF THE BOARD JUNE 24, 1997
- --------------------------- AND CHIEF EXECUTIVE
ALLEN C. HARPER OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
/S/ RAYMOND MONTELEONE PRESIDENT, CHIEF OPERATING JUNE 24, 1997
- --------------------------- OFFICER AND DIRECTOR
RAYMOND MONTELEONE
* DIRECTOR JUNE 24, 1997
- ---------------------------
THOMAS G. RADER
* DIRECTOR JUNE 24, 1997
- ---------------------------
DAVID H. RUSH
* DIRECTOR JUNE 24, 1997
- ---------------------------
LUIGI SALVANESCHI
DIRECTOR JUNE __, 1997
- ---------------------------
GLENN P. MICHAEL
DIRECTOR JUNE __, 1997
- ---------------------------
ALBERT B. AFTOORA
DIRECTOR JUNE __, 1997
- ---------------------------
CHARLES E. BRADSHAW, JR.
/S/ DONALD P. CUMMING VICE PRESIDENT, SECRETARY, JUNE 24, 1997
- --------------------------- TREASURER AND ACTING CHIEF
DONALD P. CUMMING FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
*/S/ BY: ALLEN C. HARPER
- ---------------------------
ALLEN C. HARPER
ATTORNEY-IN-FACT
II-8
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.29 Amendment to Operating Agreement between Florida Department
of Transportation and the Registrant, dated June 6, 1997.
23.1 Consent of BDO Seidman LLP.
23.3 Consent of BDO Seidman LLP.
27 Financial Data Schedule.