UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-KT
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED _________________
[X] TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from APRIL 30, 1995 to DECEMBER 31, 1995
Commission File Number 33-14751-D
FIRST AMERICAN RAILWAYS, INC.
(Name of small business issuer in its Charter)
NEVADA 87-0443800
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 HOLLYWOOD BLVD., HOLLYWOOD, FLORIDA 33020
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (954) 920-0606
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. [ ] Yes [X] No
Check if there is no disclosure of delinquent filers in response to
Items 405 of Regulation S-B in this form, and no disclosure will be contained,
to the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KT or any
amendment to this Form 10-KT. [X]
The issuer's revenues for the year ended December 31, 1995, its most
recent fiscal year, were $-0-.
The aggregate market value of the voting stock held by non-affiliates
computed using $5.75 per share, the closing price of the Common Stock on August
1, 1996, was approximately $30,036,585.
As of August 1, 1996, 9,050,278 shares of the issuer's common stock were
issued and outstanding.
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PART I
ITEM 1
DESCRIPTION OF BUSINESS
THE MERGER
GENERAL. On April 26, 1996, Asia-America Corporation, a Nevada
corporation (the "Company"), merged (the "Merger") with First American Railways,
Inc., a Florida corporation ("First American- Florida"). The Company was the
surviving entity in the Merger, and as part of the Merger 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.
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 l-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
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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 proposed new 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.
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.
NEW BUSINESS OF THE COMPANY
GENERAL. The Company was organized in the State of Nevada in 1987 and
completed a public offering of its securities in May 1987. Prior to the merger
described below, the Company's business purpose was to seek to acquire 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.
First American-Florida was organized in February 1994 with management
who has experience in the passenger rail and tourism industries. The Company
plans to offer a series of entertainment- based trains, and initially the
Company intends to capitalize upon Florida's growing tourist base of over 41
million tourists per year by developing and operating unique entertainment-based
passenger rail service, the "Florida Fun-Train", between South and Central
Florida. First American-Florida merged into the Company in April 1996.
Florida attracts tourists from across the world and was the top tourist
destination in the United States in 1995. South Florida
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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 Florida Fun-Train is being designed to provide passengers with an
exciting, unique, fun-filled overland leisure excursion. The Company expects
that this will be accomplished through the use of a variety of entertainment
features, including "virtual reality" and "high-tech" 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 an ultra-modern, colorful, sleek, high-speed train. The
train's colors will be vibrant unlike the typical passenger train in the United
States. 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. The Company intends to provide a high level of service in order to
accommodate its passengers.
In the future the Company contemplates offering another
entertainment-based passenger train in Florida to be known as the "Space Coast
Fun-Train" which is to provide passenger service between South Florida and the
Florida Space Coast near the Kennedy Space Center. The Company will be required
to seek additional financing for the Space Coast Fun-Train; there can be no
assurance that such financing will be available on terms acceptable to the
Company or that the Company will be in a position to launch the Space Coast
Fun-Train or any other rail operations at any time.
Management of the Company has extensive experience in the passenger rail
and tourism markets. The Company's Chairman of the Board is the Chairman of the
Tri-County Rail Authority (from October 1992 to October 1993). The Authority
operates a 67-mile mass transit railroad service known as "Tri-Rail" between the
metropolitan areas of Miami, Fort Lauderdale and West Palm Beach, Florida, and
carries approximately 10,000 passengers daily. The Company's Vice Chairman was
the founder and is the former Chairman of the Board of Directors of the
Auto-Train Corporation (which carries passengers and their automobiles on the
same train, between the Washington, D.C. area and the Orlando, Florida area).
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
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price. 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 offer significant
price advantages to travelling by airplane while travelling by automobile does
not offer the entertainment value provided on the Florida Fun-Train.
COMPETITION. 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. 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 and United
States transportation and tourism markets. The Company expects to compete on the
basis of what it believes to be its unique product, which will provide a
combined package of transportation and entertainment.
The Company believes its principal competition in the transportation
sector occurs from airlines, automobiles and inter- city buses. While air travel
is a faster means of transportation, it is more expensive than the Company's
proposed fares, nor does this mode of travel provide 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.
In addition, the Company also has a rail service competitor in the
South/Central Florida corridor, the National Passenger Rail System ("Amtrak").
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 between Miami/Fort Lauderdale and Orlando is currently $284 (first class
service) and $55 (coach service.) While the present Amtrak service does not
include the "entertainment-type" service which the Company proposes to provide
on the Florida Fun-Train, there can be no assurance that Amtrak will not improve
its service and offer amenities similar to those proposed to be offered by the
Company. The Company believes that its principal competition stems from air,
automobile and other railway companies. The Company is not aware of any other
person or entity currently planning to provide a service directly competitive
with the Florida Fun-Train, the Space Coast Fun-Train or any of the other trains
contemplated by the Company;
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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 operations.
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 quickly
develop 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.
FLORIDA FUN-TRAIN. The Company plans to commence operations of the
Florida Fun-Train during the Fall 1997. The Florida Fun-Train is anticipated to
consist of:
8 Full Dome Passenger Cars Each car will provide comfortable, spacious
seating and meal service for up to 80 passengers.
2 Lounge Cars The adult lounge and entertainment car will
serve cocktails and hors d'oeuvres and provide
music and live entertainment, including musicians
and disc jockeys for listening and/or dancing.
The youth lounge will provide young passengers
with food and soft drinks, as well as music and
live entertainment will be provided by musicians,
disc jockeys, magicians, comedians and clowns,
etc.
1 Space Station Arcade Car This car will allow travelers of all ages to
experience the latest high-tech video and
virtual reality games.
1 "Interactive" Car/Gift Shop Educationally oriented computer and video games
will fill one side of the car. On the other
side, a gift shop will offer interesting train
gifts and souvenirs.
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1 Power and Luggage Car This car will provide the electricity needed
for operation of the train's facilities, as well
as additional storage space for the passengers'
luggage.
The Company intends to have all of these railcars constructed by Rader
Railcar, Inc.
In addition, each Fun-Train will utilize two leased diesel locomotives,
which will be remodelled to give the appearance of a sleek, high-speed
locomotive. 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 over existing tracks. The Company may, in the
future, conduct certain operations from Miami; however, to date no arrangements
have been made for locating a terminal in Miami. Until such time, passengers
will be brought by either ferry or bus from Miami to Fort Lauderdale. The
Company intends to operate the Florida Fun-Train on currently existing FEC and
CSXT tracks.
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
either the Florida Fun-Train or 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 and if both Fun-Trains
are operable, the minimum payment will be $1 million per annum. The Company will
operate the Florida Fun-Train and/or 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 routes, with
certain exceptions. Further, the Company is obliged to indemnify FEC for claims
under actions arising from the operation of the Florida Fun-Train and 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
minimum deductible.
The CSXT Memorandum dated August 24, 1995, provides for the use of
CSXT's tracks between West Palm Beach and the Orlando
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International Airport Tradeport site to be used for the operation of the Florida
Fun-Train. The CSXT Memorandum which contains the essential terms of the
agreement between the Company and CSXT, provides, in part, that the Company will
pay CSXT the greater of $20 per train mile, or 16% of the Company's revenue from
the Florida Fun-Train operations. In addition, the Company is required to
maintain at least $300 million in comprehensive general liability insurance with
a minimal deductible (or self-assured). Pursuant to the CSXT Memorandum, 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). 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 tentatively agreed to sell up to 400,000 warrants to
CSXT, the terms of which are to be negotiated; no provision has been made herein
for the effect of the issuance or exercise of these warrants when and if issued.
Also, the Company has tentatively agreed to appoint a CSXT representative,
selected by the Company, to its Board of Directors.
The initial terminal locations are planned to be in Fort Lauderdale
(which is located in the center of the metropolitan area comprising Dade,
Broward and Palm Beach Counties) and in Greater Orlando, the home of Walt Disney
World, Universal Studios Florida, Sea World and numerous other attractions. The
Company has commenced preliminary discussions with representatives of the Port
of Miami to construct a second terminal to serve Port of Miami cruise
passengers. Until the Miami terminal is in operation, of which there can be no
assurance, the Company expects to transport its passengers from the Port of
Miami to its planned Fort Lauderdale terminal by bus, ferry or other means of
transportation.
The Company has entered into discussions with representatives of Port
Everglades which is under the authority of the Broward County commission for a
Fort Lauderdale terminal. A proposed site has been selected adjacent to the
Broward County Convention Center, which is adjacent to the piers for cruise
ships and within two miles of the Fort Lauderdale International Airport.
Representatives of Port Everglades have been supportive of the Company's plans,
and the Company's architects and engineers intent to proceed with the design
plans for the Port Everglades Terminal. Further, the Company has entered into a
Letter of Intent with the Greater Orlando
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Aviation Authority to locate a terminal at the Orlando International Airport.
Although the Company expects to obtain funding for some or all of these
facilities from State and/or local governments, final terms regarding the
construction of these facilities have not been negotiated. There can be no
assurance that any such negotiations will be successful.
The estimated travel time for the Florida Fun-Train between Central
Florida and South Florida is approximately 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.
FUTURE FUN-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.
MARKETING. The Company estimates that the initial one-way ticket price
for the Florida Fun-Train will be approximately $55 and the per-passenger en
route revenue (for food, beverages, entertainment and souvenirs) will be
approximately $14. On the Space Coast Fun-Train, the Company estimates an
initial round-trip ticket price of approximately $140, which will include
transportation and the cost of admission to the Kennedy Space Center as well as
en route revenue of approximately $20.
On July 23, 1996, the Company engaged Management Resource Group, Inc.
("MRG") 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. The total cost of this market study (including
reimbursement for professional fees and out-of-pocket expenses) will be
approximately $172,000.
Over the next 12 months the Company plans to develop and implement its
sales and marketing efforts. The Company plans to
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hire approximately five 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 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 an internal reservation system which must be developed. The Company also
may negotiate computer time-sharing or other arrangements with third parties
which operate systems for or similar to those used by the travel and tour
industries. In addition, the Company intends to attempt to market its services
and sell tickets by means of joint arrangements with cruise lines, airlines and
hotels. 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 has also entered into discussions with Universal Studios
Florida regarding joint marketing efforts in connection with the Florida
Fun-Train. Further, it is anticipated that Universal may advertise on the train
and install rides and exhibits which promote the Florida Fun-Train.
MARKET. The Company's principal market is approximately 41 million
persons who visit Florida each year. The Company also intends to rely for
passengers on the more than 1.4 million residents of the Central Florida
(principally the 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.
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. According to
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the 1994 Florida Visitor Study, Florida's population and tourist base are
expected to continue to grow significantly during the next decade; however, the
rates of growth are expected to slow somewhat.
During the 1990's, the growth in portions of Florida's tourism industry
slowed, with some areas and attractions experiencing declines. 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.
<TABLE>
<CAPTION>
VISITORS BY SOUTHEAST AND CENTRAL FLORIDA REGIONS (1989-94)(1)(4)
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Southeast(2)........ 11,788,156 12,839,327 13,386,130 13,560,302 13,419,865 13,321,071
Central(2).......... 11,614,149 11,504,725 10,554,752 10,965,330 10,713,397 9,891,095
State Estimate(3)... 38,712,303 40,970,233 39,560,874 40,536,194 41,032,560 39,883,447
</TABLE>
- --------------------
(1) Southeast region includes: Dade (including Miami), Broward (including
Ft. Lauderdale), Palm Beach, Monroe and three less populated counties.
Central region includes: Orange (including Orlando) and eight less
populated counties.
(2) These figures count survey respondents who visited both regions, in
which case they were included in both figures for the applicable year.
(3) The State estimate is not based on total of regional numbers for reasons
set forth in Note 2, above.
(4) Source: 1994 Florida Visitor Study.
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.
According to the Florida Department of Transportation, 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.
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 on the Florida Fun-Train and Space
Coast Fun-Train 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 huge size of the potential market, the
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Company believes that it needs to capture only a small portion in order to be
successful.
CENTRAL FLORIDA. 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 22.4 million passengers enplaned and deplaned at the
Orlando International Airport in 1994, up from approximately 21.5 million in
1993 and 21.1 million in 1992. These increases compare favorably to nationwide
increases in the magnitude of 2.5% (for 1992). Of these passengers, a
significant portion (approximately 24%) were international visitors, primarily
from Europe, Canada and, to a lesser extent, Latin America.
Central Florida is filled with a plethora 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 a dominant component
of the Central Florida economy and has been historically (since 1971) the single
most important generator of airline traffic at the Orlando International
Airport. The international character of Disney's EPCOT Center has had a
particularly important influence on the number of international visitors using
that airport. In recent years, the relative influence of the Disney attractions
has lessened with the significant development of other major tourist attractions
and convention facilities; however, the magnitude of Disney's importance to
Florida tourism is demonstrated by the fact that Walt Disney World's 1995
attendance total of approximately 35.3 million was over four times the total at
Central Florida's next most popular attraction (Universal Studios).
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.
SOUTH FLORIDA. 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
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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
over 100 scheduled airlines, more than any other airport in the world, Miami
International Airport logs approximately 1,400 daily departures and arrivals. In
1994, over 13 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 16 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 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 a total of 2,379,520 cruise passengers during 1993. There
are 25 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 1993, the
airport handled approximately 9.2 million domestic passengers and 1.2 million
international passengers. There are 19 major airlines serving the Fort
Lauderdale/Hollywood International Airport with 362 daily arrivals and
departures. The airport is located just one and one-half miles from Port
Everglades and the Broward County Convention Center.
EMPLOYEES. The Company currently employs six persons, four of whom are
management and two of whom are staff members. Over the next 12 months, the
Company expects to hire approximately 25 persons. The Company also intends to
rely extensively on independent contractors and the outsourcing of certain
functions, e.g., marketing and rail operations.
Traditionally, railroad operating crews have been unionized, and the
Company may have no alternative but to use a unionized crew. Further, while
unionization among railroad passenger service
13
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workers is less prevalent then 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. The Company is considering outsourcing its
rail operations.
GOVERNMENTAL REGULATION.
The Company's operations will be subject to safety regulation by the
Federal Railroad Administration and the Florida Department of Transportation
applying federal safety standards, as well as environmental regulation by
federal and state agencies. The primary responsibility for safety at crossings
will lie with the track owners, i.e., most likely CSXT in the case of the
Florida Fun-Train and FEC in the case of the Space Coast Fun-Train. The Company
also will be subject to liquor license and other regulations promulgated by
state and local authorities. Any interstate operations by the Company would
subject it to regulation by the federal Interstate Commerce Commission. The
Company does not anticipate any material regulatory problems; however, there can
be no assurance that they will not develop.
The Company's proposed intrastate railroad operations will be subject to
various federal and state environmental laws and regulations. The Company
believes that its proposed operations will be in material compliance with all
such laws and regulations, and the Company estimates that such compliance will
not have any material effect on its profitability or capital expenditures.
Nevertheless, there can be no assurance that current environmental regulatory
requirements will not change and that any such change may have a material effect
on the Company's operations.
ITEM 2
DESCRIPTION OF PROPERTY
The Company leases approximately 250 square feet of space in a facility
located at 2445 Hollywood Blvd., Hollywood, Florida 33020, for its executive
offices, pursuant to a week-to-week lease at a monthly rental rate of $1,150
(which includes various office amenities, e.g., secretarial service, conference
room, photocopying services, etc.) The existing lease is temporary; the Company
intends to lease permanent office space by the end of 1996. During fiscal 1995,
prior to this temporary arrangement, the Company leased approximately 250 square
feet of office space from Eugene K. Garfield, a director and Vice Chairman of
the Board of Directors of the Company for a total annual rental of $6,500.
14
<PAGE>
ITEM 3
LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings or arbitration
proceedings, and to the best of its knowledge and belief, none is contemplated
or threatened.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1995.
15
<PAGE>
PART II
ITEM 5
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company has applied for the listing of its Common Stock on the
Nasdaq SmallCap Market ("Nasdaq"). The Company's Common Stock is currently
quoted on the OTC Bulletin Board under the symbol FTRN. The following table sets
forth the high and low sales prices of the Common Stock for the period indicated
in 1996. Market prices have been disclosed for the post-Merger period; prior
thereto there had been no active trading market for the stock during the last
three years.
1996: HIGH LOW
- ----- ------ -----
Second Quarter (April 26 through June 30) $6.375 $3.00
Third Quarter (through July 30) $5.375 $4.75
On August 1, 1996, the last reported sales price of the Common Stock was
$5.75 per share. As of that date, there were 381 holders of record of the Common
Stock.
* * * *
The Company has not paid any dividends on its Common Stock. The Company
intends to retain all earnings for use in its operations and the expansion of
its business, and does not anticipate paying any dividends on the Common Stock
in the foreseeable future. The payment of dividends is within the discretion of
the Company's Board of Directors. Any future decision with respect to dividends
will depend on future earnings, future capital needs and the Company's operating
and financial condition, among other factors.
ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEVELOPMENT STAGE ACTIVITIES AND LIQUIDITY:
GENERAL: The Company is in its developmental stage, and it has had no
rail operations. The Company has not had any revenue
16
<PAGE>
from operations, and it has had accumulated losses of $1,339,409 for the period
from February 14, 1994 (incorporation) through December 31, 1995. 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
December 31, 1995, the Company's activities have been funded by the private
placement of its securities and by borrowings, the net cash proceeds from which
have totaled $1,219,035.
The Company anticipates commencing promotional rail service for the
Florida Fun-Train in the Summer 1997 and full rail service in the Fall 1997.
Until full service is commenced, the Company does not expect to generate any
material revenues; nevertheless, during the next twelve months the Company
expects to have significant capital expenditures for railcar construction,
terminal construction, and track and leasehold improvements, and significant
operating expenses for salaries, marketing and track use (when rail service
commences).
YEAR ENDED APRIL 30, 1995:
The Company was initially capitalized with $18,000. Thereafter, in
October 1994, the Company completed a private placement of securities in which
it sold an aggregate of 420,570 shares of common stock to 24 investors for a
total of approximately $961,000 in net proceeds. There was no placement agent
retained in connection with this private placement. These aggregate funds were
used to pay a deposit of $350,000 on the first railcar for the Florida
Fun-Train, and the balance was used to pay direct costs associated with further
capital raising, and general and administrative expenses (which were related to
the pre-commencement activities for the Florida Fun-Train and capital raising
activities).
EIGHT MONTHS ENDED DECEMBER 31, 1995:
The Company explored various financing alternatives; however, no
additional capital was raised during this period. Instead, it 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.
SUBSEQUENT TO DECEMBER 31, 1995:
In March 1996, the Company completed a private placement of securities
(the "Stage I Private Placement") in which it sold an aggregate 375,004 shares
of common stock and issued $500,000 in convertible notes, bearing interest at
10% per annum, for aggregate net proceeds of $393,709. In April-May 1996, the
Company completed
17
<PAGE>
a private placement of securities (the "Stage II Private Placement"), in which
it sold 3,950,271 Series A Warrants, exercisable at $3.50 per share, and
4,050,271 shares of Common Stock valued at $8,250,683 and issued $8,250,682
(principal amount) in Notes, bearing interest at 10% per annum, for aggregate
net proceeds of $14,514,905 (of which $416,300 was not cash consideration, but
represented the conversion of the principal and accrued interest on certain
secured notes issued in the Stage I Private Placement into securities sold in
the Stage II Private Placement).
The Company used $783,388 of the proceeds to repay $333,388 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 to RRI representing the final payment (plus interest)
due on the first railcar purchased. In addition, a significant portion of the
proceeds of the Stage II Private Placement (approximately $830,000) were
escrowed to pay the first year's interest on the Notes sold in that private
placement.
To date the Company has not generated any revenue and as of December 31,
1995 it had accumulated losses of $1,339,409. At December 31, 1995, the Company
had a deficiency in working capital of $(580,366) and a capital deficit of
$(224,374); however, as described above, the Company raised $14,514,905 in net
proceeds from private placements of its securities during the first six months
of 1996. At June 30, 1996, the Company had accumulated losses of $2,098,616
(unaudited) and working capital of $12,748,710 (unaudited).
LIQUIDITY:
The Company's future cash requirements will be significant. The Company
plans to use its current available funds (i) to pay the expenses in connection
with the commencement of the operation of the Florida Fun-Train and (ii) provide
working capital to support the Florida Fun-Train's initial operations to the
extent that cash flow from such operation is insufficient. During this
development stage, the Company intends to purchase additional Fun-Train railcars
pursuant to a construction agreement expected to be negotiated with RRI. The
Company expects to spend a maximum of approximately $9.2 million to purchase up
to 12 railcars and make exterior modifications to three diesel locomotives. The
Company expects to lease the three diesel locomotives prior to commencing
operations, and it believes that diesel locomotives are generally available for
lease for approximately $10,000/month/locomotive.
The Company expects that the proceeds from the Private Placements, in
conjunction with other leasing and financing opportunities, to be sufficient to
enable the Company to commence operations of the Florida Fun-Train in the Fall
1997. There can be
18
<PAGE>
no assurance, however, that operations will in fact commence as scheduled, nor
that unanticipated problems may arise which may necessitate the need for
additional financing until the Company can generate revenues sufficient to meet
operating expenses. Further, there can be no assurance that the Company will not
experience adverse changes in its business prospects, its proposed operations,
or in the transportation or tourism industries, or the U.S. economy, generally.
The realization of any portion of the approximate $500,000 deferred tax
asset at December 31, 1995, resulting from the future amortization of
capitalized pre-operating expenses, is not considered more likely than not and,
accordingly, a valuation allowance has been established for the full amount of
such asset.
FUTURE ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 "Accounting for 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. The Company will adopt SFAS No. 121 as of January 1, 1996 and its
implementation is not expected to have a material effect on the financial
statements.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 requires that a fair value method for accounting for
stock-based compensation plans be calculated and either recognized in the
financial statements or disclosed in the notes to the financial statements. The
Company does not presently intend to adopt the fair value based method and as
such, earnings will not be impacted by these options. However, it will disclose
in the footnotes the effects of the calculation required by the statement.
ITEM 7
FINANCIAL STATEMENTS
The financial statements are included herein beginning at page F-1.
19
<PAGE>
ITEM 8
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
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 did not
contain an 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.
20
<PAGE>
PART III
ITEM 9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors of the Company are as follows:
NAME AGE POSITION(S)
---- --- -----------
Allen C. Harper 51 Chairman of the Board of Directors
Eugene K. Garfield 60 Vice Chairman of the Board of Directors
Raymond Monteleone 48 Director
Thomas G. Rader(1) 50 Director
David H. Rush(1)(2) 75 Director
Luigi Salvaneschi(2) 65 Director
- -------------------------
(1) Member of the Audit Committee, the Chairman of which is Mr. Rader.
(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 51 Chief Executive Officer
Raymond Monteleone 48 President, Chief Operating Officer
MR. HARPER has been the Chairman of the Board of Directors and Chief
Executive Officer of the Company since the Merger (April 1996), and prior to
that he served in similar capacities with 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
beginning in September 1995 to date, he has 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
21
<PAGE>
based in St. Augustine, FL) and Vacation Break U.S.A., Inc. (a travel and
time-share corporation based in Fort Lauderdale, FL).
MR. GARFIELD has been the Vice Chairman of the Board since June 1996.
From April 1996 (date of the Merger) to June 1996 he served as the President of
the Company, and prior to that he served in a similar capacity with First
American-Florida since its incorporation. Mr. Garfield has served as a director
of the Company since the Merger and prior to that was a director of First
American-Florida since its incorporation. During the last five years, he has
held several positions, including: professor of Business Law at Miami-Dade
Community College (Miami, FL - 1990-1992), during which period he also served as
a director of the Entrepreneur-in-Residence-Program for the School of Business
and Entrepreneurship of Nova University (Fort Lauderdale, FL). Thereafter, Mr.
Garfield served as an advisor to the Florida Department of Transportation
(Office of the Governor) on the development of a high-speed rail system for the
State of Florida from January 1992 to April 1994. Since April 1993, he has been
Chairman of the Institute for Transportation Research and Education at Barry
University's Andreas School of Business (Miami Shores, FL), and since October
1993, he has been a member of the Dade County Select Committee. Mr. Garfield was
appointed by former President Gerald R. Ford to serve on the National Highway
Safety Commission from 1977 to 1981. In 1969, he was the founder and Chairman of
the Board of Directors of the Auto-Train Corporation, which operates the only
passenger railroad of its kind in the United States, carrying passengers and
their automobiles on the same train. Mr. Garfield was Assistant to the U.S.
Secretary of Transportation from 1967 to 1968, and liaison assistant to
President Lyndon B. Johnson from 1968 to 1969. In December 1995, Mr. Garfield
was appointed to the Metropolitan Orlando International Affairs Commission
(MOIAC) by the Mayor of Orlando. Mr. Garfield serves on the International
Transportation Committee of the MOIAC.
MR. MONTELEONE 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 Corporation. 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 Corporation (a federal savings
22
<PAGE>
and commercial bank holding company) and Rexall Sundown, Inc. (a pharmaceutical
company). Mr. Monteleone has also served on the Boards of Directors of numerous
civic, industrial, and professional associations, and he has received numerous
governmental appointments.
MR. RADER 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 Corporation) 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 has been a Director of the Company since the Merger, and prio
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 currently the Chairman of the Tri-County
Commuter Rail Authority. Mr. Rush was former chairman of the National High Tech
Council and is a current member of the Defense Conversion and Transition
Commission in 1993. Mr. Rush was the President and Chief Executive Officer of
Aptek Technologies, Inc., Deerfield Beach, FL, Mom 1982 to April 1995, and has
been President of Rush Holdings, Inc., in Deerfield Beach since 1958. He is also
President of RTX Telecom and Electro Data Corp. since 1982.
MR. SALVANESCHI 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, 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 Corporation 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.
* * * *
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<PAGE>
Directors are elected at the Company's annual meeting of shareholders
and serve for one year 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.
The Company has agreed to use its best efforts to cause the designee of
Capital Growth International, LLC, to be elected to the Company's Board of
Directors, for the three-year period commencing on April 26, 1996. In the event
that this designee is not elected, or is unavailable to serve if elected, an
individual selected by Capital Growth shall be permitted to attend all meetings
of the Company's Board of Directors. To date no designee has been named by the
Placement Agent to serve on the Company's Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company became a "fully reporting" company pursuant to Section 12g
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") on July
18, 1996; therefore, no beneficial ownership forms (Forms 3, 4 and 5) were
required to be filed during the year ended December 31, 1995.
ITEM 10
EXECUTIVE COMPENSATION
The following table provides information with respect to the
compensation paid by First American-Florida, the Company's predecessor by
merger, to Allen C. Harper, the Chairman of the Board and Chief Executive
Officer. There was no executive officer whose fiscal 1995 annual compensation
(salary and bonus) exceeded $100,000. During the subject periods, First
American-Florida paid no long-term compensation to any person. The Company did
not pay any form of compensation to any officer or director during its last
three full fiscal years.
24
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- --------------------------- ---- --------- --------
Allen C. Harper 8 mos. ended 12/31/95 38,461 --
Chairman and Chief
Executive Officer 12 mos. ended 4/30/95 79,775 --
COMPENSATION OF DIRECTORS
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 addition, the Company has elected to award each "non-employee" director with
a one-time grant of stock options covering 15,000 shares (at the then current
market price), and thereafter such directors are to receive an annual stock
option grant covering 3,000 shares, all of which options are to be awarded under
a stock option plan to be prepared by the Company. To date, this stock option
plan has not been developed and, to date, these options have not been granted.
EMPLOYMENT AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
The Company and Messrs. Harper and Garfield have entered into employment
agreements. These agreements are for a three-year term (expiring February 1997)
and provide for the base salaries of $175,000 and $125,000, respectively (along
with cost-of-living adjustments based on the appropriate consumer price index).
In addition, the agreements provide for health care insurance and other standard
employment benefits. These agreements also contain customary non-competition
provisions prohibiting competition with the Company during the term of
employment and for two years thereafter.
The agreement with Mr. Garfield requires his full-time efforts on behalf
of the Company; however, 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.
In addition, the Company has entered into an employment agreement with
Mr. Monteleone. Mr. Monteleone was employed by the Company to be its President
and Chief Operating Officer, pursuant to an employment agreement dated July 1,
1996, the initial term of
25
<PAGE>
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 and a minimum bonus of $12,500 on January 1, 1997. There will be a
minimum increase in his base salary to $175,000 on January 1, 1997, $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 begin in January 1997, along with other standard employment
benefits. Pursuant to the agreement, Mr. Monteleone received a stock grant of
7,500 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 will receive 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 has agreed to fund an individual
retirement plan on behalf of Mr. Monteleone in the aggregate of $35,000.
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 upon the termination of 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.
STOCK OPTION PLANS
The Company has no existing stock option plans and no stock options were
granted during the last fiscal year; however, subsequent to the end of the last
fiscal year (December 31, 1995), certain stock options have been granted. See
"Executive Compensation - Employment Agreements with Certain Executive
Officers," and "- Compensation of Directors."
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS OF THE COMPANY
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,
26
<PAGE>
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 has procured and 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 of 1933,
as amended (the "Securities Act").
ITEM 11
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 1, 1996, with
respect to (i) each of the Company's executive officers and directors, (ii) all
officers and directors as a group, and (iii) each person known to the Company to
be the beneficial owner of more than 5% of the Common Stock.
POSITION SHARES BENEFICIALLY OWNED
NAME WITH COMPANY SHARES PERCENT(1)
- ---- ------------ -------------------------
EXECUTIVE OFFICERS
AND DIRECTORS(2):
THOMAS G. RADER DIRECTOR 1,614,581 17.84
ALLEN C. HARPER CHAIRMAN OF THE 1,379,032(3) 15.24
BOARD OF DIRECTORS
AND CHIEF EXECUTIVE
OFFICER
EUGENE K. GARFIELD VICE CHAIRMAN 718,343 7.94
OF THE BOARD OF
DIRECTORS
RAYMOND MONTELEONE PRESIDENT, CHIEF 17,500(4) .19
OPERATING OFFICER
AND DIRECTOR
27
<PAGE>
LUIGI SALVANESCHI DIRECTOR 85,654(5) .95
DAVID H. RUSH DIRECTOR 21,414 .24
ALL OFFICERS AND
DIRECTORS AS A GROUP (6 PERSONS) 3,836,524(4) 42.34
BENEFICIAL OWNERS OF MORE THAN 5%:
CAPITAL GROWTH INTER-
NATIONAL, LLC 823,274 8.84
666 STEAMBOAT ROAD
GREENWICH, CT. 06830
LANCER PARTNERS 814,286 8.51
237 PARK AVENUE, 8TH FL.
NEW YORK, NY 10017
EGGER & CO. 797,928 8.36
C/O THE CHASE MANHATTAN BANK, N.A.
P.O. BOX 1508, CHURCH STREET STATION
NEW YORK, NY 10008
EFO FUND
1111 W. MOCKINGBIRD LANE 732,857 7.70
SUITE 1400
DALLAS, TEXAS 75247
RUSH & CO. 572,177 6.09
C/O SWISS AMERICAN SECURITIES, INC.
100 WALL STREET, 4TH FLOOR
NEW YORK, NY 10005
FAIRNOON MANAGEMENT LTD. 570,000 6.06
11 QUEEN STREET, MAYFAIR,
LONDON W1X 7PD, ENGLAND
EMANON PARTNERS 515,714 5.50
237 PARK AVENUE
SUITE 901
NEW YORK, NEW YORK 10017
ROSEBUD CAPITAL GROWTH FUND, LTD. 512,747 5.48
C/O EURO-DUTCH TRUST COMPANY (BAHAMAS)
CHARLOTTE HOUSE, CHARLOTTE STREET
NASSAU, BAHAMAS
- ------------------------
(1) 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 the exercise of outstanding warrants, and
outstanding convertible notes, which are exercisable or convertible
within 60 days of the date hereof, 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.
(2) Unless otherwise indicated, the address for each director is c/o First
American Railways, Inc., 2445 Hollywood Boulevard, Hollywood, Florida
33020.
28
<PAGE>
(3) Includes 1,379,032 shares which are jointly-owned with his wife, and
1,285 shares which are owned of record by Harper Partners, Ltd., a
Florida limited partnership, for which his wife, Carol E. Harper,
serves as trustee.
(4) Includes 7,500 shares owned of records, and 10,000 shares issuable upon
the exercise of currently exercisable stock options.
(5) 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.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1994 OFFERING
In October 1994, the Company closed 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
The Company expects that RRI will be its primary source of railcars for
the Florida Fun-Train and its other planned trains. RRI 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 RRI
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.
The Company anticipates entering into another agreement with RRI for the
design and production of the 12 additional railroad cars and the exterior
modification of the three leased locomotives all of which will be used for the
Florida Fun-Train (or alternatively the Space Coast Fun-Train). The proposed
total cost of this equipment is expected to be approximately $9.2 million.
The terms of the transactions between the Company and RRI have been and
are expected to be determined by negotiations between RRI and the Company's
disinterested directors. Competitive bidding has not been used nor is it
expected to be used for any of these railcar purchase agreements. The Company's
Board of Directors believes that the design and acquisition of the railcars
through RRI is and will be on commercially reasonable terms; however, there can
be no assurance that the Company will be able to negotiate a
29
<PAGE>
favorable contract with RRI for the purchase of the additional railcars, as
described above. Further, the Company believes there are several other sources
for the manufacture or remodeling of railcars which would be suitable for the
Company's intended use with the Fun-Trains.
The purchase price, along with the other terms of this agreement, were
determined by negotiations between representatives of the Company and Mr. Rader
on behalf of RRI. There is an inherent conflict of interest in this process and
no competitive bids were sought in this regard.
Should the Company contract with RRI to purchase the 12 railcars
(described above), Mr. Rader and RRI 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 LOAN
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 a portion of the proceeds from the Private Placements.
COMPENSATION TO PLACEMENT AGENT
In connection with the Stage I Private Placement and Stage II Private
Placement, the Company paid Capital Growth (as the placement agent for such
private placements) an aggregate cash commissions of $1,352,109.17 and paid
Capital Growth a non- accountable expense allowance of $338,027.29.
In connection with the April 1996 closing of the Stage II Private
Placement, 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.
30
<PAGE>
The Company agreed to indemnify Capital Growth against certain
liabilities in connection with the Private Placements, including liabilities
under the Securities Act.
The Company has retained Capital Growth for a period of twenty-four
months 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.
31
<PAGE>
PART IV
ITEM 13
EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibits required to be filed by Item 601 of Regulation S-B as
exhibits to this Form 10-KT as listed in the Exhibit Index appearing on Pages
34 and 35.
(b) REPORTS ON FORM 8-K:
No Current Reports on Form 8-K were filed with the Commission
during the quarter ended December 31, 1995.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: AUGUST 9, 1996 FIRST AMERICAN RAILWAYS, INC.
By: /S/ ALLEN C. HARPER
--------------------------------------
Allen C. Harper, Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/S/ ALLEN C. HARPER Chairman of the Board August 9, 1996
- ------------------------- (Principal Executive and
Allen C. Harper Financial Officer and
Principal Accounting
Officer)
President, Chief Operating August , 1996
- ------------------------- Officer and Director
Raymond Monteleone
/S/ EUGENE K. GARFIELD Vice Chairman of the Board August 9, 1996
- -------------------------
Eugene K. Garfield
/S/ THOMAS RADER Director August 9, 1996
- -------------------------
Thomas G. Rader
/S/ DAVID RUSH Director August 9, 1996
- -------------------------
David Rush
/S/ LUIGI SALVANESCHI Director August 9, 1996
- -------------------------
Luigi Salvaneschi
33
<PAGE>
EXHIBIT INDEX
-------------
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 20, 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 20, 1996.
3.3 Bylaws are hereby incorporated by reference to
Exhibit 3.3 of the Registrant's Registration
Statement on Form 8-A filed with the SEC on May
20, 1996.
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 20, 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.*
10.1 Agreement effective as of June 28, 1994, between
First American-Florida and Rader Railcar, Inc.*
10.2 Employment Agreement dated February 16, 1994,
between First American- Florida and Allen C.
Harper.*
10.3 Employment Agreement dated February 16, 1994,
between First American-
34
<PAGE>
Florida and Eugene K. Garfield, as amended.*
10.4 Employment Agreement dated February 16, 1994,
between First American-Florida and Michael J.
Acierno, as amended.*
10.5 Employment Agreement dated July 1, 1996, between
the Company and Raymond Monteleone.*
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 Form of Railcar Construction Agreement between
the Company and Rader Railcar, Inc.*
10.9 Financial Advisory and Consulting Agreement
between the Company and Capital Growth
International, LLC, dated April 26, 1996.*
10.10 Note Escrow Agreement between the Company and
Capital Growth International, LLC, dated April
26, 1996.*
10.11 Form of Convertible Secured Note.*
16 Letter dated May 10, 1996, from the Company's
former accountants, Hansen, Barnett & Maxwell, to
the Company is hereby incorporated by reference
to Exhibit 16 to the Registrant's Current Report
on Form 8-K dated May 6, 1996.
- --------------------------
* Incorporated by reference to the comparable exhibit numbers as contained
in the Registrant's Registration Statement on Form SB-2, as filed with
the SEC on August 6, 1996.
35
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 2
BALANCE SHEET F - 3
STATEMENTS OF OPERATIONS F - 4
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F - 5
STATEMENTS OF CASH FLOWS F - 6
NOTES TO FINANCIAL STATEMENTS F - 7
F-1
<PAGE>
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, 1995 and the related statements
of operations, stockholders' equity (deficit) and cash flows for the eight
months then ended, the year ended April 30, 1995 and for the cumulative period
from February 14, 1994 (incorporation) through December 31, 1995. 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, 1995 and the results of its
operations and its cash flows for the eight months then ended, the year ended
April 30, 1995 and for the cumulative period February 14, 1994 (incorporation)
through December 31, 1995 in conformity with generally accepted accounting
principles.
Miami, Florida BDO Seidman, LLP
July 3, 1996
F-2
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
1995
===============================================================================
ASSETS
CURRENT
Prepaids and other $ 1,680
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,680
EQUIPMENT (Note 2) 5,992
DEPOSIT TO RELATED PARTY (Note 5) 350,000
- -------------------------------------------------------------------------------
$ 357,672
===============================================================================
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT
Accounts payable $ 196,076
Accrued liabilities 120,970
Notes payable to related parties and others (Note 7) 265,000
- -------------------------------------------------------------------------------
582,046
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
- -------------------------------------------------------------------------------
CAPITAL DEFICIENCY (NOTE 4)
Preferred stock, $.001 par value, 500,000
shares authorized -
Common stock, $.001 par value, 100,000,000 shares
authorized and 4,275,000 shares issued
and outstanding 4,275
Additional paid-in capital 1,110,760
Deficit accumulated during the development stage (1,339,409)
- -------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIENCY (224,374)
- -------------------------------------------------------------------------------
$ 357,672
===============================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
CUMULATIVE FROM
FEBRUARY 14, 1994
(INCORPORATION) FOR THE
THROUGH FOR THE EIGHT MONTHS YEAR ENDED
DECEMBER 31, ENDED DECEMBER 31, APRIL 30,
1995 1995 1995
=====================================================================================================
<S> <C> <C> <C>
EXPENSES:
Salaries and payroll taxes $ 604,799 $ 242,007 $ 362,792
Professional fees 3,915 3,464 451
General and administrative 201,330 125,723 75,607
Consulting fees 59,372 46,802 12,570
Interest, net 19,079 19,079 -
Depreciation 2,180 1,088 1,092
Expenses from offerings
not completed 448,734 282,250 166,484
- -----------------------------------------------------------------------------------------------------
Total expenses 1,339,409 720,413 618,996
- -----------------------------------------------------------------------------------------------------
NET LOSS, REPRESENTING DEFICIT
ACCUMULATED DURING THE
DEVELOPMENT STAGE $ (1,339,409) $ (720,413) $ (618,996)
======================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (NOTE 1) - 4,275,000 4,275,000
=====================================================================================================
NET LOSS PER COMMON SHARE - ($.17) ($.14)
======================================================================================================
</TABLE>
The Company had no operating activities from February 14, 1994 (incorporation)
through April 30, 1994.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
===========================================================================================================
COMMON STOCK ADDITIONAL DEFICIT ACCUMULATED
------------------- PAID-IN DURING THE
SHARES AMOUNT CAPITAL DEVELOPMENT STAGE
===========================================================================================================
<S> <C> <C> <C> <C>
Balance at February 14, 1994 and
April 30, 1994 - $ - $ - $ -
Initial capitalization for cash at $0.0046
per share (Note 4(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 4(c)) 420,570 421 960,614 -
Capital contribution - forgiven
salaries (Note 5) - - 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)
===========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
FEBRUARY 14, 1994
(INCORPORATION) FOR THE EIGHT FOR THE
THROUGH MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30,
1995 1995 1995
=======================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,339,409) $(720,413) $(618,996)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Salaries forgiven 136,000 -- 136,000
Depreciation 2,180 1,088 1,092
Write-off of deferred offering costs 25,000 25,000 --
Increase in prepaids and other (1,680) -- (1,680)
Increase in accounts payable 196,076 173,954 22,122
Increase in accrued liabilities 120,970 120,970 --
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments 478,546 321,012 157,534
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (860,863) (399,401) (461,462)
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Deposit for purchase of railcar from
related party (350,000) -- (350,000)
Capital expenditures (8,172) -- (8,172)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (358,172) -- (358,172)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 979,035 -- 979,035
Payment of offering costs (25,000) -- (25,000)
Borrowings from related parties 270,000 270,000 --
Repayments of notes payable to related parties and others (5,000) (5,000) --
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,219,035 265,000 954,035
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash -- (134,401) 134,401
Cash at beginning of period -- 134,401 --
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ -- $ -- $ 134,401
=======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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.
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.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost less accumulated
depreciation. Equipment is depreciated on the straight
line basis over 5 years.
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 (deficit) or charged to operations
if an offering or placement is unsuccessful.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including
accounts payable and notes payable approximated fair
value due to the relatively short maturity.
F-7
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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.
FUTURE ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards no. 121 "Accounting for 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. The
Company will adopt SFAS No. 121 As of jJnuary 1, 1996
and its implementation is not expected to have a
material effect on the financial statements.
In October 1995, FASB issued SFAS No. 123, "Accounting
for Stock Based Compensation." SFAS No. 123 Requires
that a fair value method for accounting for stock-based
compensation plans be calculated and either recognized
in the financial statements or disclosed in the notes
to the financial statements. The Company does not
presently intend to adopt the fair value based method
and as such earnings will not be impacted by these
options. However, appropriate disclosures will be made
in the notes to the financial statements of the effects
of the calculation required by the statement.
F-8
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. EQUIPMENT THE COMPANY'S EQUIPMENT IS SUMMARIZED AS FOLLOWS:
DECEMBER 31, 1995
=======================================================
Office and computer equipment $ 8,172
Less accumulated depreciation (2,180)
-------------------------------------------------------
$ 5,992
=======================================================
Also see Note 5 for asset held for future use.
3. INCOME TAXES At December 31, 1995, the Company had an accumulated
net loss of approximately $1,340,000 for financial
reporting purposes. In general, expenses incurred
during the development stage are capitalized for tax
purposes as pre-operating expenses and may be
amortizable over a 60 month period commencing with the
month in which active business begins.
Realization of any portion of the approximate $500,000
deferred tax asset at December 31, 1995, resulting from
the future amortization of capitalized pre-operating
expenses, is not considered more likely than not and,
accordingly, a valuation allowance has been established
for the full amount of such asset.
4. CAPITAL a) In May 1995, the Company executed a stock split and
TRANSACTIONS 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. In connection with
the merger with Asia-America, the common stock was
recapitalized at $.001 par value (Note 8(c)). The
components of capital 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-9
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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.
5. COMMITMENTS a) The Company entered into employment agreements,
AND which expire by 1997, with three of its officers
CONTINGENCIES providing for aggregate annual salaries of
approximately $250,000 and for certain payments in
the event of termination. During the period from
February 14, 1994 (incorporation) to April 30, 1995,
such officers waived approximately $136,000 of
salaries due them under the terms of their
respective employment agreements. The amounts waived
were recorded as salary expense and a capital
contribution. The officers do not plan to waive
future salaries due them under the agreements. The
Company has modified certain employment agreements
and entered into others (Note 8 (g)).
b) The Company pursuant to an agreement with Rader
Railcar, Inc. ("Rader") a company owned by a
director and shareholder, had a railcar constructed
to be acquired by the Company at a total cost of
$850,000. During the year ended April 30, 1995, the
Company advanced $350,000 to Rader which is included
in deposit to related party in the accompanying
balance sheet at December 31, 1995. 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
had 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, this lease was assigned to the Company
and therefore the Company will receive monthly lease
payments of $10,000 through September 1, 1996. Since
this leasing activity is not the intended use of the
railcar, the June 1996 payment will be recorded as a
reduction in the cost of the railcar.
c) 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
F-10
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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 "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.
6. OTHER EVENTS On August 24, 1995 the Company entered into a
memorandum of understanding with CSX Transportation,
Inc. ("CSXT") for the use of its tracks between West
Palm Beach and the Orlando International Airport
tradeport site in connection with the operation of the
Florida Fun-Train. The Memorandum which contains the
essential terms of the agreement between the Company
and CSXT, provides, in part, that the Company will pay
CSXT the greater of $20 per train mile, or 16% of the
Company's ticket revenue from the Florida Fun-Train
operations. In addition, the Company is required to
maintain at least $300 million in comprehensive general
liability insurance with a minimal deductible (or self
insured). The Memorandum also provides for a certain
degree of exclusivity for 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 to the foregoing,
the Company has agreed to sell up to 400,000 warrants
to CSXT the terms of such warrants are to be
negotiated. Also, the Company has agreed to appoint a
CSXT representative, selected by the Company, to its
Board of Directors. CSXT has not yet nominated their
representative to the Board.
F-11
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. NOTES PAYABLE On June 9, 1995 the Company entered into a loan
TO RELATED agreement with a shareholder and director for up to
PARTIES AND $125,000, with simple interest of 18%. As of December
OTHERS 31, 1995, the 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.
8. SUBSEQUENT a) In March 1996, the Company completed its Stage I
EVENTS financing. The Company received gross proceeds 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 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
4,050,271 shares of common stock valued at
$8,250,683 were issued. Costs associated with the
offering were $1,986,460. The Company used $783,388
of the net proceeds 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.
F-12
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
b) 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.
c) On April 26, 1996, the Company merged into
Asia-America Corporation (Asia) a public company and
accounted for the transaction as a reverse
acquisition for financial statement purposes, and
was recapitalized with 9,050,271 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.
d) 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.
e) In May 1996, the Company entered into a two year
agreement with an underwriting firm to provide
financial advisory and consulting services. The
agreement provides for annual fees of $60,000. It
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.
f) In July 1996, the Company entered into a three year
employment agreement with its new 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 7,500 shares of common stock and
granted options to purchase 30,000 shares at $3.50
per share.
F-13
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
g) In June 1996, the employment agreements previously
entered into with the officers of the Company were
modified to provide for aggregate annual base
salaries of approximately $300,000. (Note 5(a)).
h) In July 1996, the Company entered into a consulting
agreement to undertake a market study designed to
evaluate the target market segments most likely to
use the Company's trains. The cost of the study will
be approximately $172,000.
F-14
