UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 333-43517
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.)
3700 NORTH 29TH AVENUE, SUITE 202, 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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes [ ]
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. []
The issuer's revenues for the year ended December 31, 1997, its most
recent fiscal year, were $9,895,867.
The aggregate market value of the voting stock held by non-affiliates
computed using $0.3125 per share, the closing price of the Common Stock on March
20, 1998, was approximately $ 6,012,235.
As of March 20, 1998, 21,314,648 shares of the issuer's common stock
were issued and outstanding.
<PAGE>
PART I
ITEM 1
DESCRIPTION OF BUSINESS
OVERVIEW
First American Railways, Inc., a Nevada corporation (the "Company") was
organized in the State of Nevada in 1987.
The Company provides innovative, quality entertainment passenger rail
service through the development of "Fun Trains" and the acquisition of "Scenic
Destination Railroads." The Company is currently operating its first Fun Train,
an entertainment-based train operating between two tourist destinations. This
train, the Florida Fun-Train, commenced operations October 15, 1997 and operates
between South and Central Florida. In March 1997 the Company acquired its first
"Scenic Destination Railroad," - the Durango & Silverton Narrow Gauge Railroad
(the "D&SNG").
The Florida Fun-Train provides 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 a safe, efficient and reliable form of transportation at a
reasonable price.
The Florida Fun-Train has been designed to provide passengers with an
exciting, unique, fun-filled overland leisure excursion. This is being
accomplished through the use of a variety of entertainment features, including
video games, as well as dining, dancing and lounge cars offering a variety of
live entertainment. Thus far the Florida Fun-Train's passengers have consisted
of members of the tourism and travel industries, tourists, and local residents.
The Company offers its service as an "extension" of the passenger's vacation.
Over the last several years Florida has had an annual tourist base of
greater than 41 million tourists and in 1997 had approximately 46.9 million
visitors. Florida attracts tourists from across the world and was the top
tourist destination in the United States in 1995. South Florida, including the
Florida Keys, offers a number of well-known tourist destinations and a climate
that allows year-round outdoor activities, and 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,
2
<PAGE>
Walt Disney World, Sea World, Kennedy Space Center and Port Canaveral. In 1994,
approximately 10 million people traveled between South and Central Florida. The
Florida Department of Transportation projects that by the year 2005, over 25
million people will travel that same corridor.
On March 13, 1997, the Company purchased all of the capital stock of
The Durango & Silverton Narrow Gauge Railroad Company, a Colorado corporation
("D&SNG"), and a privately-held, scenic railroad, from Charles E. Bradshaw, Jr.
D&SNG operates an antique, narrow gauge tourist railroad over a 45-mile
route between Durango and Silverton, Colorado along the Animas River. D&SNG
provides a scenic railroad excursion which is unique within the industry, and
has been operated principally as a tourist railroad since 1968. The railroad was
built between 1881 and 1882 by the Denver & Rio Grande Railway Company to
service the mining regions of the San Juan Mountains in southwestern Colorado.
The coal-fired, steam-driven locomotives were manufactured between 1923 and
1925, and the coaches, many of which are original, are of 1880s vintage. The
railroad is a registered National Historic Landmark and has exclusive rights for
passage through the San Juan National Forest. D&SNG's operations are seasonal
with peak months in June, July and August, and with up to four daily trains
except during the winter. The 90-mile round trip takes nine hours including a
two-hour layover in Silverton. From November through April, one train is
operated daily from Durango to Cascade Canyon (a 52-mile round trip of
approximately five hours). See "Plan of Operations."
With the acquisition of the D&SNG, and the commencement of the Florida
Fun-Train, the Company entered into its full operational stage in 1997; and
consequently had material operations. Although the Company anticipates
replicating the Fun-Train concept in other markets in the future as well as
acquiring additional Scenic Railroads, its primary emphasis is on developing the
Florida Fun-Train into a viable operation and enhancing the operations of the
D&SNG. See "Business -- Florida Fun-Train."
The Company maintains offices at 3700 North 29th Avenue, Hollywood,
Florida 33020. Its telephone number is (954) 920-0606.
STRATEGIC RESTRUCTURING AND OTHER STRATEGIES
The Company's revenue and cash flow from the operations of the Florida Fun-Train
from October 15, 1997 to date have been materially below expectations because of
significantly reduced ridership from the projections for this start up period.
In addition, ridership was below expectations partially due to a delay of the
railcars to the Company which precluded the Company from exhibiting and
promoting the train to various tour operators and
3
<PAGE>
travel agents. Additionally, this delay caused many tour operators to cancel
substantially all of their commitments for passenger seats for the Fall of 1997
and Winter of 1998.
As part of the Company's efforts to reduce costs and enhance revenues, the
Company has implemented a number of different strategies to that effect. The
Florida Fun-Train schedule now consists of eight segments per week, down from
its initial operating schedule of sixteen segments per week. The Company has
begun an effort to market the Fun-Train to groups and companies for charter
service on the days that the train does not operate its regularly scheduled
service. In addition, the Company has terminated the employment of approximately
twenty (20) persons as part of this cost cutting effort (the employees were cut
from a broad cross-section of the company's staff, and included all
departments). The Company is considering other routes to accommodate other
facets of the Florida tourism market, such as excursion and dinner trains.
THE DURANGO & SILVERTON NARROW GAUGE RAILROAD COMPANY
D&SNG operates a historic railroad (the "Railroad") which was built
between 1881-82 by the Denver & Rio Grande Railway Company, and is now owned by
D&SNG. The Railroad is a registered National Historic Landmark and has been
carrying passengers for more than 115 years. The Railroad operates between
Durango and Silverton, Colorado, a 90-mile round trip, which takes approximately
nine hours. The Railroad is located entirely within the State of Colorado, near
the "Four Corners" region of the United States (where the borders of Colorado,
Utah, New Mexico and Arizona come together).
The steam-operated locomotives used to pull the trains are coal-fired.
These antique locomotives were manufactured between 1923 and 1925. In addition,
many of the coaches used by the Railroad are the original coaches dating back to
the 1880s.
The Railroad has combined strict adherence to historical authenticity
and exacting standards of replication to provide a historically authentic
railroad service. Because of its historic authenticity, the Railroad has been
used as the location for the shooting of several films, including BUTCH CASSIDY
AND THE SUNDANCE KID.
The Railroad operates as a tourist railroad, carrying tourists on an
unparalleled scenic and historic excursion along the Animas River and through
the San Juan National Forest. D&SNG's business is seasonal in nature with the
peak season being in the months of June, July and August when D&SNG operates
four trains daily. In 1995, D&SNG resumed year-round operations, offering one
train during the months of November through April (the "Winter Train").
4
<PAGE>
The Winter Train consists of a 52-mile round trip to Cascade Canyon
(approximately halfway between Durango and Silverton).
The operating rolling stock of D&SNG consists of six 1920s vintage
steam locomotives, 45 passenger coaches (enclosed, open gondola and parlor
cars), and one caboose. In addition to such rolling stock used in the passenger
consists, the D&SNG owns approximately 175 additional flat cars, box cars, side
dump and hopper cars, stock cars, cabooses, maintenance equipment, etc. for use
on the line for maintenance, storage or other purposes.
The locomotives and cars are maintained at company-owned facilities
located in a state-of-the-art roundhouse and car shop. Both shops are capable of
totally rebuilding a locomotive or car. In 1989, the roundhouse was rebuilt
after a fire destroyed the building; it has 15 stalls, which can house all the
locomotives. Attached to the roundhouse is a fully equipped machine shop, which
can fabricate any locomotive part.
PROPERTIES
The real property used by D&SNG consists of approximately 975 acres and
includes two terminals. Of the total acreage, D&SNG uses approximately 735 acres
pursuant to easements and rights-of-way, and the remainder is held in fee simple
ownership. One terminal is in Durango (La Plata County), Colorado, and is
located on approximately 40 acres of D&SNG-owned land, along with other
improvements, including various buildings and a parking lot. The second terminal
is in Silverton (San Juan County), Colorado, where D&SNG owns approximately 50
acres of land including the depot. The D&SNG terminals are connected by an
approximate 45-mile railroad right-of-way, which ranges between 100 to 200 feet
in width, approximately 30 miles of which are located on public lands within the
San Juan National Forest. The right-of-way has railroad track and various other
improvements located thereon.
The real estate improvements consist primarily of the following
buildings:
SQUARE
DESCRIPTION FOOTAGE
----------- -------
Depot (Durango) 4,952
Roundhouse (Durango) 39,089
Car Shops (Durango) 9,956
Security Building (Durango) 207
Freight Depot (Durango) 2,684
Warehouse (Durango) 2,232
Garage (Rockwood) 1,100
Depot (Silverton) 2,480
5
<PAGE>
In addition, the D&SNG owns other small buildings that are used for
miscellaneous storage. The condition of all of the buildings listed above would
be categorized as average to good. The administrative offices of D&SNG occupy
the second floor of the depot at Durango and are believed to be adequate for the
present operation of D&SNG.
PRODUCTS AND SERVICES
D&SNG offers a variety of train excursions to its customers with
different departure times. Covering a total of 90 miles, the round trip from
Durango to Silverton is by far the most popular expedition and takes
approximately nine hours to complete. During the peak season, D&SNG offers four
round-trip trains, with departure times ranging from 7:30 AM to 10:10 AM. During
the winter, D&SNG offers a five-hour excursion from Durango to Cascade Canyon
which is a 52-mile round-trip.
D&SNG also offers one-way trips, with return from Silverton via motor
coach. Additionally, any round-trip (with the exception of the parlor car) can
consist of a layover in Silverton for up to 15 days. To accommodate hikers
desiring transportation, D&SNG offers trains that stop at several popular hiking
trails.
Passengers may choose to ride in enclosed coaches, open gondola cars,
authentic parlor cars or the caboose with round-trip prices ranging from
approximately $21 to approximately $85. The excursion is available on a one way
basis with a return trip available via bus for the same price as a round trip
ticket.
Refreshments and snacks are available on all trains with the parlor
cars offering a full bar.
MARKETING
D&SNG's principal source of ticket sales is the consumer-direct market,
which is served by its Durango-based reservation office. Approximately 86% of
D&SNG's passengers come from the direct "sales" to consumers, with the balance
handled through travel agents and group tours. The Company compensates travel
agents through the use of commissions. Historically, the operations of D&SNG
have been the subject of limited marketing efforts. The great majority of
D&SNG's passengers come from "word-of-mouth" as well as other "indirect" forms
of contact with the public, e.g., billboards and newsprint articles. According
to a 1994 passenger survey, commissioned by D&SNG, the five major states of
origin of D&SNG passengers were Colorado, Texas, California, Arizona and New
Mexico, which account for nearly 60% of D&SNG's passenger totals.
6
<PAGE>
D&SNG currently markets its services on a regional basis. Marketing
efforts consist principally of advertising in regional and local travel
publications, as well as the limited use of billboards, directories and
advertising on local radio programs. In addition, D&SNG is the subject of
repeated, unsolicited articles, which appear in local and national newspapers
and magazines. A promotional brochure describing D&SNG's program and services is
used to promote ridership. The brochure is distributed by a third- party service
to brochure "racks" located in hotels, restaurants, airports and other
tourist-related sites in selected cities that have been good "feeder markets"
for D&SNG ridership. In an attempt to broaden the passenger base in the future,
D&SNG intends to increase its marketing efforts on the broad-based,
travel-related industry.
COMPETITION
Two other popular railroads exist in Colorado: the Georgetown Loop and
the Cumbres & Toltec Railroad. Located approximately 40 miles west of Denver,
the Georgetown Loop is a seven-mile 70-minute excursion. The trains are pulled
mainly by steam locomotives with the remainder being pulled by diesel
locomotives. The Cumbres & Toltec, like D&SNG and the Georgetown Loop, is a
narrow gauge scenic railroad. Its trains are pulled mainly by steam locomotives,
with the remainder being pulled by diesel locomotives. The Cumbres & Toltec runs
from Chama, New Mexico to Antonito, Colorado, a distance of 64 miles. Its
closest boarding point to the D&SNG is located in Chama, approximately 100 miles
from Durango. Although the Cumbres & Toltec is scenic, it does not travel
through a national forest nor is it a registered National Historic Landmark.
Owned by the States of New Mexico and Colorado, the Cumbres & Toltec is
maintained primarily by volunteers. The termini of the Cumbres & Toltec are not
"tourist towns" and do not have the same atmosphere or appeal as those of the
D&SNG.
Competition could come from others entering the industry but is
unlikely due to barriers to entry. There are few authentic steam locomotives in
existence today making it very difficult to enter into competition with D&SNG.
In addition, it would be nearly impossible for anyone to obtain right-of-way
through the San Juan National Forest.
EMPLOYEES
D&SNG employs approximately 65 people in the off-season
(November-April), and more than 200 people during the peak season (June-August).
Seasonal employees are added during the peak season primarily in the concession,
operations and reservation departments. The full-time staff is concentrated in
the administrative and maintenance departments where turnover is very low. The
D&SNG has no labor unions and management believes that the company's
relationship with its employees is satisfactory.
7
<PAGE>
THE FLORIDA FUN-TRAIN
The Company was organized in February 1994 by persons with experience
in the passenger rail and tourism industries in order to offer a unique
passenger train service in the Florida tourist market.
Florida attracts tourists from across the world and was the top tourist
destination in the United States in 1995. Over the last several years Florida
has had an annual tourist base of approximately 40 million persons. South
Florida not only contains a number of well-known tourist destinations, but is
also a key entry point into the state for cruise ships entering and leaving the
Port of Miami and Port Everglades (Fort Lauderdale), as well as tourists
utilizing Miami International and Hollywood-Fort Lauderdale International
Airports. Central Florida (Greater Orlando) plays host to world renowned tourist
destinations such as Universal Studios Florida, Walt Disney World, Sea World,
Kennedy Space Center and Port Canaveral. In 1994, approximately 14 million
people traveled between South and Central Florida.
The Fun-Train concept is to provide an enjoyable, high-quality
entertainment alternative to other means of transportation between South and
Central Florida. The Company's goal is to maximize the entertainment value of
the travel time while providing an efficient, safe and reliable form of
transportation at a reasonable price. The Florida Fun-Train was designed to
provide passengers with a unique overland leisure excursion through the use of
various entertainment features, including "virtual reality" and a variety of
"high-tech" video games, as well as dining, dancing and lounge cars offering a
variety of live entertainment. The exterior of the Florida Fun-Train was
designed to have the appearance of a colorful, ultra-modern train. The train's
colors are vibrant and contemporary unlike the typical passenger train in the
United States. The Company provides a high level of service ("customer care") in
order to accommodate its passengers; to facilitate this, the Company has hired a
group of employees who are specifically responsible with these duties.
The Company expects that most of its passengers will be tourists, and
that the Company's service will be offered as an "extension" of the passenger's
vacation. As such, management of the Company believes it will be able to capture
both a portion of the tourist market intent on travelling between South and
Central Florida while also encouraging travel on the Florida Fun-Train by
tourists and residents who would not otherwise make the trip. Currently, travel
is made between South and Central Florida primarily by either automobile, bus or
airplane. The Company believes the Florida Fun-Train will generally offer price
advantages to travelling by airplane. Travelling by automobile, bus or airplane
does not offer the entertainment value provided on the Florida Fun-Train.
8
<PAGE>
During late 1996 and 1997, the Company completed significant steps to
launch its Florida Fun-Train service. In that regard, the Company has: entered
into an agreement with the National Railroad Passenger Corporation, "Amtrak" for
certain technical services including operating crew, train maintenance, as well
as, the leasing of three locomotives; developed its passenger boarding
facilities and ticket offices at its North Station (Poinciana) and South Station
(Hollywood); entered into an agreement with a third party to accommodate its
passengers with necessary transfers and shuttle service; entered into track
agreements with the Florida Department of Transportation ("FDOT") and CSX
Transportation, Inc.("CSXT"); built its commissary facility to handle the food
and beverage requirements of the Florida Fun-Train, which is located at its
headquarters in Hollywood, Florida; entered into wholesale, vendor agreements
with Walt Disney Attractions, Inc. and Universal Studios Florida which allow for
the marketing, selling and packaging of Orlando area Disney and other attraction
tickets in conjunction with the Florida Fun-Train (the tickets will also be
available on-board the Florida Fun-Train).
FLORIDA FUN-TRAIN EQUIPMENT AND TRACK RIGHTS
4 Operating Glass Domed Each car provides comfortable,
Guest Cars spacious seating and meal
service for approximately 75
guests.
4 Glass Domed Guest These cars, including the
Cars in Various initial prototype car already
Stages of Completion owned by the Company, are in
various stages of completion
at Rader Railcar II, Inc.'s
(RRI) manufacturing plant in
Colorado (see "Management's
Discussion and Analysis").
4 Operating Bilevel These cars consist of (i) one
Entertainment Cars "tropical-themed Tiki Railbar
bar/lounge car" which sells
cocktails, beverages and
appetizers and offers live
entertainment including music
for listening and/or dancing
(to be provided by musicians
or a disc jockey), (ii) one
"video game and kidzone car"
which offers a variety of
high-tech video games and
virtual reality, as well as
a separate children's play
area (including a roving,
close-up magician and/or
clowns, etc.), (iii) one
"lounge car" which includes a
9
<PAGE>
50's Diner, a gift shop,
Wine Bar and Pub and lounge
area, (iv) one multi-media
car which will include a
custom designed, audio-visual
presentation (the waiting area
will have a concession area and
video facilities). This
presentation will be completed
when the Company's cash flow
improves.
1 Baggage Car This car provides storage space
for the passengers' luggage,
food and beverage supplies and
work space for train management.
Excluding the baggage car all of these railcars have been constructed
by RRI. Upon increased ridership on the Florida Fun-Train, the Company will seek
to have the remaining four railcars completed and/or lease railcars from
alternative sources.
In addition, the Florida Fun-Train utilizes three leased diesel
locomotives, which have been repainted with the bright and colorful Florida
Fun-Train colors and graphics. One locomotive is 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 third locomotive serves as a backup (spare).
The Company operates the Florida Fun-Train between Hollywood and
Greater Orlando on currently existing FDOT and CSXT tracks.
The tracks between Hollywood and West Palm Beach comprise part of the
route of the Florida Fun-Train and are controlled by FDOT. The Company entered
into an agreement dated January 6, 1997 (the "FDOT Agreement"), with FDOT to
obtain the use of this track. Pursuant to the FDOT Agreement, the Company has
access to and the use of that portion of the track between mile marker ("MM")
1034 located in Hialeah, Florida, and MM 965 located in West Palm Beach,
Florida. In addition, the parties have agreed to allow the Company the use of
the Hialeah railroad maintenance facility and the Sheridan Street Station in
Hollywood, Florida to be used as the southern terminal for the Florida
Fun-Train. The FDOT Agreement is for a five-year term, which began October 15,
1997. The Company is required to pay the FDOT $500 for each one-way trip over
the foregoing route which amount increases by $50 after each anniversary of the
FDOT Agreement.
Pursuant to the FDOT Agreement, the Company has agreed to waive certain
future claims, if any, against FDOT for losses or costs arising out of the use
of FDOT's track, including those arising from the negligence or omissions of the
FDOT. Further, the Company has agreed to indemnify FDOT from third-party claims,
including but not limited to, personal injury claims, made against
10
<PAGE>
FDOT and arising from the Company's operations pursuant to the FDOT Agreement.
The Company has also agreed to maintain at least $125 million in comprehensive
general liability insurance with a $100,000 deductible (or self-insurance
amount).
The FDOT Agreement may be terminated if (i) the Company's operations
are suspended for more than 90 days, (ii) there are more than ten independent
suspensions in such operations, (iii) there is a material violation in the
Company's obligations under the FDOT Agreement which is not cured upon 45 days'
written notice, and (iv) future high-speed rail operations are such that the
route cannot be shared (in the FDOT's sole opinion, but with three year's notice
to the Company).
The CSXT Agreement dated October 31, 1996, provides for the use of
CSXT's tracks between West Palm Beach and Greater Orlando to be used for the
operation of the Florida Fun-Train. The CSXT provides, in part, that the Company
will initially pay CSXT the greater of $20 per train-mile, or 16% of the
Company's gross ticket revenue (less discounts) from the Florida Fun-Train
operations. The Company's payment requirements under the CSXT Agreement are as
follows: the per train-mile amount is subject to various increases for inflation
and other price adjustments including, (i) an annual increase, beginning January
1, 1999, in the per train-mile charge equal to the inflation index of the
Association of American Railroads, (ii) a $50,000 per month reduction for the
aggregate train-mile charge in 1997, 1998 and 1999, and (iii) a $2.20 increase
in the per train-mile charge along with a limit in certain circumstances on the
total annual compensation to CSXT beginning in the year 2000 and thereafter. In
addition, the Company is required to maintain at least $300 million in
comprehensive general liability insurance with a $100,000 deductible (or
self-insurance). In October 1997, the Company negotiated to pay track fees from
October 15, 1997 through March 31, 1998 with the Company's common stock. In
January 1998, the Company issued approximately 432,000 shares of its common
stock to CSXT for track fees between October 15, 1997 and December 31, 1997.
Pursuant to the CSXT Agreement, CSXT has agreed not to grant similar
access rights to the subject rail corridor (between West Palm Beach and Greater
Orlando) to any other private rail passenger operator or contractor which would
provide comparable conventional rail passenger service for the cruise ship
market. The exclusivity provision specifically excepts the provision of access
to the subject CSXT route by Amtrak and the Tri-County Commuter Rail Authority,
as well as other publicly-funded authorities with statutory and/or contractual
rights with respect thereto. The exclusivity also does not apply to high-speed
rail activities. In addition, the exclusivity clause will be voidable at CSXT's
option if (i) after the first year of operation, the Company does not operate at
least 16 Florida Fun-Trains a week, or (ii) management of the Company changes
significantly. The term of the agreement
11
<PAGE>
will be five years. In addition to the foregoing, the Company has agreed to sell
up to 475,000 warrants to CSXT, exercisable at $4.50 per warrant with the
initial installment of 75,000 warrants being exercisable upon the commencement
of operations of the Florida Fun-Train and thereafter in four equal annual
installments of 100,000 warrants each commencing January 1, 1998. Pursuant to
the CSXT Agreement, in January 1997, the Company appointed a CSXT
representative, Albert B. Aftoora, to its Board of Directors, who resigned in
January 1998. CSXT has elected not to replace the Board membership at this time.
The track rights agreements that the Company has with CSXT, requires
substantial amounts of general comprehensive liability insurance (up to $300
million in coverage) which the Company has obtained.
MARKET
The Florida Fun-Train's principal market is approximately 41 million
persons who visit Florida each year. The Company also relies 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. According to a recent study, Florida's
population and tourist base are expected to continue to grow significantly
during the next decade; however, the rates of growth have increased at a slower
rate. During the 1990's, the growth in portions of Florida's tourism industry
slowed, with some areas and attractions experiencing declines. According to the
same study, in 1994 approximately 14 million people traveled between Central and
South Florida. Of these trips, 55% were for tourism/recreation, 24% were for
family/personal reasons, and 21% were for business. SOURCE: "1994 Florida
Visitor Study," Florida Department of Commerce, Bureau of Economic Analysis,
Tallahassee, FL (1995).
The Company's continued operations may be materially adversely affected
by declining growth or an absolute decline in the number of tourists visiting
Florida; however, the Company believes that, by offering a unique and safe
tourist attraction and service, it can attract the passenger base needed for
profitability, notwithstanding possible adverse trends in the growth of the
Florida tourist market as a whole.
Given the status of both Central Florida and South Florida as major
tourist destinations, as well as the size of the underlying metropolitan areas,
the Company sees great potential in the market for transportation between the
two areas. As part of the Company's marketing effort, it has been targeting the
tourists and residents already traveling between the two destinations. As part
of that effort the Company is also attempting to stimulate travel between
12
<PAGE>
the areas serviced by the Florida 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 is marketed as an inducement to South Florida visitors and residents
to travel to Central Florida, and vice versa. Given the significant size of the
potential market, the Company believes that it needs to capture only a small
portion in order to be successful.
Approximately 27 million passengers enplaned and deplaned at the
Orlando International Airport in 1997, up from approximately 25.6 million in
1996 and 22.5 million in 1995. Of these passengers, approximately 11% were
international visitors, primarily from Europe, Canada and, to a lesser extent,
Latin America.
Central Florida is filled with a number of attractions including Walt
Disney World's Magic Kingdom, Epcot Center, Disney-MGM Studios, Universal
Studios Florida, Sea World of Florida, as well as Church Street Station, and
Splendid China.
Walt Disney World (and its related attractions) is one of the dominant
components of the Central Florida economy; the relative influence of the Disney
attractions has lessened with the significant development of other major tourist
facilities. Walt Disney World's 1997 attendance was approximately 41.8 million,
which was an amount over four times that for 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.
The Miami/Fort Lauderdale metropolitan area contains approximately 3.3
million residents and is also a major tourist destination, with numerous
attractions, two major cruise ports, four major-league professional sports teams
and miles of beaches. The area attracts millions of domestic and international
visitors each year, who come for tourism, shopping, business and family visits.
Miami is the financial and trade capital of Latin America, and Miami Beach,
famous for its beaches and night life, is internationally known as a center for
the fashion, music and movie industries. Fort Lauderdale, Miami and Miami Beach
are also major convention destinations. Miami International Airport is the
primary travel connection linking the Americas, the Caribbean, Europe and
Africa. Served by approximately 140 airlines, more than any other airport in the
world, Miami International Airport logs approximately 1,500 daily departures and
arrivals. In 1996, over 33.5 million (14.9 million international) passengers
flew to or from Miami.
13
<PAGE>
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 18
luxury cruise ships, including five of the world's largest passenger ships,
which are expressly outfitted for pleasure cruise vacations. In 1997, the Port
of Miami handled approximately 3.2 million passengers from its 12 passenger
terminals - more than any other cruise port in the world.
Port Everglades, located approximately 30 miles north of Miami in Fort
Lauderdale, received approximately 2.5 million cruise passengers during 1997.
There are 32 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 1997, the
airport handled approximately 12.3 million domestic and international
passengers. There are approximately 41 major airlines serving the Fort
Lauderdale/Hollywood International Airport with approximately 450 daily arrivals
and departures. The airport is located just one and one-half miles from Port
Everglades and the Broward County Convention Center.
MARKETING
The one-way ticket price for the Florida Fun-Train is $69.95 for adults
and $49.95 for children, and the per-passenger en route revenue (for food,
beverages, entertainment and souvenirs) has been approximately $10.00 per
segment.
Over the past 12 months the Company has continued to implement its
sales and marketing plan. The Company has hired five (5) employees who have been
marketing the Company to the travel and tour industries. Among other things
these employees market and sell tickets (passenger seats) through wholesale
travel and tour operators and retail travel agents. Wholesale tour operators
have historically represented a material source of business for the travel
industry in South and Central Florida, particularly in the cruise and lodging
businesses. However, the Company cannot anticipate what percentage of its future
business will be with wholesale tour operators.
14
<PAGE>
In addition, marketing efforts which feature the Company's services are
currently marketed through various channels such as trade shows and conferences,
as well as advertising in various tour industry publications and to the general
public. In March 1998, the Company brought its reservations in house after six
months of outsourcing this function. In addition, the Company is attempting to
market its services and sell tickets by means of joint arrangements with cruise
lines, airlines and hotels. The company has begun marketing short trip excursion
packages to groups and corporate sponsors on days the train does not make its
regularly scheduled trips, as well as through open-houses to the travel and
tourism industries and public relations special events. The Company has also
utilized general advertising on radio and television and in periodicals,
newspapers and other media all of which are an important component of the
Company's marketing program. The Company anticipates that national and
international marketing and sales efforts will enhance business, while the
implementation and execution of a yield management system and in house
reservations program will increase incremental revenues.
FUTURE ENTERTAINMENT TRAINS
Part of the Company's overall strategy is to replicate the Fun-Train
concept in other viable markets. After the Florida Fun-Train, is running
efficiently, with revenue to support its ongoing operation, 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 the Florida East Coast Railway Company
("FEC").
On February 28, 1995, the Company entered into an agreement with FEC
for the use of certain track rights in the Miami-Fort Lauderdale-West Palm
Beach-Titusville corridor. The ten-year term of the FEC agreement starts when
the Space Coast Fun-Train is operational and the agreement provides for a
standard, per-car mileage charge of $1.20 per car-mile (which is equivalent to
$18 per train-mile based on the minimum FEC 15-car train requirement), payable
monthly, with a minimum guaranteed annual amount of $500,000 per route to be
paid by the Company to FEC. When the Space Coast Fun-Train is operable, the
minimum payment will be $500,000 per annum. The Company will operate the Space
Coast Fun-Train with locomotives it provides subject to dispatching (and related
15
<PAGE>
controls) by FEC. The agreement provides for limited exclusivity to the Company
to operate "Fun-Train" type train services and/or services to cruise lines over
the prescribed route, with certain exceptions. Further, the Company is obliged
to indemnify FEC for claims under actions arising from the operation of the
Space Coast Fun-Train, and the Company is obliged to obtain a minimum of $200
million in comprehensive general liability insurance coverage in favor of FEC,
with a $100,000 deductible.
GENERAL
COMPETITION
Generally, the Company faces extensive competition for the spending of
leisure time and dollars from numerous attractions in the tourist entertainment
sector.
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 Florida Fun-Train route. In addition to the
extensive competition in the transportation sector, the Company faces extensive
competition for the spending of leisure time and dollars from numerous
attractions in the tourist entertainment sector. These alternative modes of
transportation offer transportation that is less expensive and/or faster than
the Company's rail service. Most of these competitors already enjoy an
established presence in the Florida transportation and tourism markets. The
Company is competing on the basis of its unique product, which provides a
combined package of transportation and entertainment.
The Company believes that the principal transportation competition for
the Florida Fun-Train is from airlines, automobiles and inter-city buses. While
air travel is a faster means of transportation, it is generally more expensive
than the Company's fares; however, there are certain low-fare air carriers
operating in the South Florida/Orlando corridor. Further the Company believes
that airline travel does not provide significantly greater convenience within
the scope of the Florida Fun-Train's routes. Automobile travel is, on the other
hand, less expensive, but lacks the convenience and ease of transport provided
by the Florida Fun-Train. The Company is not aware of any other person or entity
currently planning to provide a service directly competitive with the Florida
Fun-Train; however, the Company is generally aware of the fact that Walt Disney
Company has indicated from time to time its interest in establishing a rail link
between its operations in greater Orlando and one or more cruise ports in
Florida. There can be no assurance that such a competitor will not appear. In
addition, Amtrak currently operates passenger train service between Miami/Fort
Lauderdale and Orlando, Florida with numerous stops in between. The cost of a
round-trip ticket on Amtrak between
16
<PAGE>
Miami/Fort Lauderdale and Orlando is currently $300 (first class service) and
$58 (coach service). Presently Amtrak service does not include the
"entertainment-type" service which the Company provides on the Florida
Fun-Train; however, there can be no assurance that Amtrak will not improve its
service and offer amenities similar to those offered by the Company. Amtrak
provides certain "technical services" for the Florida Fun-Train.
GOVERNMENTAL REGULATION
The Company's operations are subject to safety regulation by the
Federal Railroad Administration (which are administered in Florida by the
Department of Transportation), as well as environmental regulation by federal
and state agencies. The Company's operations are also required to maintain a
state liquor license and a Special Tax Stamp issued by the Federal Bureau of
Alcohol, Tobacco and Firearms, and it is subject to health and other regulations
promulgated by federal, state and local authorities. D&SNG's operations are
subject to rate, administrative and safety regulation by the Colorado Public
Utilities Commission, as well as environmental regulation by federal and state
agencies.
The Company believes that the operations of the Florida Fun-Train as
well as the operations of D&SNG are in material compliance with all
environmental laws and regulations, and it estimates that such compliance will
not have any material adverse effect on its profitability or capital
expenditures.
EMPLOYEES
At March 20, 1998, the Company (excluding D&SNG) employed 60 persons,
six of whom are senior management and the remaining are full and part-time staff
members. The Company also relies on independent contractors and the outsourcing
of certain functions, e.g. marketing and rail operations. For a description of
D&SNG's employees, see "- The Durango & Silverton Narrow Gauge Railroad," above.
Traditionally, railroad operating crews have been unionized, and with
respect to the Florida Fun-Train operations the Company may have no alternative
but to use a unionized crew. Further, while unionization among railroad
passenger service workers is less prevalent than among crew members, there can
be no assurance that the Company will not have to use unionized personnel in
passenger service positions as well. While the Company does not anticipate
material labor relations problems and believes that it can reach mutually
beneficial collective bargaining agreements with any unionized employees, there
can be no assurance that these problems will be avoided.
17
<PAGE>
ITEM 2
DESCRIPTION OF PROPERTY
The Company leases approximately 14,800 square feet of space in a
facility located at 3700 North 29th Avenue, Suite 202, Hollywood, Florida 33020,
pursuant to a ten-year lease at a monthly rental rate of $7,625. For a
description of the properties of D&SNG see "Business -- The Durango & Silverton
Narrow Gauge Railroad Company."
ITEM 3
LEGAL PROCEEDINGS
MITCHELL LAKES FIRE
On July 3, 1997, the United States of America filed an action against
D&SNG in the United States District for the District of Colorado. On October 22,
1997, D&SNG was served with an Amended Complaint. This civil action arises from
a forest fire (the "Mitchell Lakes Fire") that occurred on July 5, 1994, along
the Durango/Silverton train route, which was allegedly caused by the emission of
burning particles from the exhaust of a D&SNG locomotive. The Amended Complaint
alleges that 270 acres of forest in the San Juan National Forest were burned.
The Amended Complaint alleges (i) various counts based on strict liability under
Colorado law, under various federal rules and regulations regarding the use of
federal rights-of-way, and under various alleged legal doctrines concerning the
operation of "abnormally dangerous activities" and trains, (ii) a count based on
breach of duty of care, and (iii) counts based on common law arising from the
operation of an abnormally dangerous action and operation of a train and
negligence, all arising from D&SNG's alleged actions in causing the Mitchell
Lakes Fire. The United States seeks the cost of suppressing the fire (alleged to
be $555,542) along with pre and post-judgement interest, administrative costs
and penalties under federal statues and regulations.
The Company believes it has applicable insurance coverage, as well as a
claim for indemnification from the Seller of D&SNG, which it believes will
satisfy any financial responsibility it may have as a result of this action. The
Company has filed a motion to dismiss this action and intends to vigorously
defend the action.
18
<PAGE>
CARNIVAL
On July 9, 1997, Carnival Corporation ("Carnival") commenced an action
against the Company in the United States District Court for the Southern
District of Florida. The Complaint alleges federal (Lanham Act) trademark
infringement, federal, state and common law trademark dilution, common law
unfair competition and false designation of origin, description and
representation of services under the Lanham Act, based on Carnival's alleged
ownership of a "family" of federal, state and common law service marks and
trademarks centered around the word "Fun" which relate to Carnival's business
activities including entertainment services (stage shows, nightclub shows,
contests, dances and parties), cruise ship services, cruise transportation
services, "on-line" services, on-board interactive television services and
various children's entertainment services. On July 22, 1997, Carnival filed a
Motion for Temporary Injunction seeking to enjoin the Company from (i) using the
Fun Train mark (and any related "Fun" marks), (ii) holding out the Company's
services or products as sponsored by or affiliated with Carnival, (iii)
committing acts of infringement or dilution of Carnival's marks, and (iv)
otherwise unfairly competing. On July 29, 1997, the federal court denied this
motion on the grounds that, among other things, Carnival has failed to establish
a substantial likelihood of success on the merits. Currently this action is in
discovery and this case is set for a pretrial conference on May 15, 1998. A
specific trial date has not been set.
The Company has applied for the federal registration of "Fun-Train"
mark and is currently pursuing this application; however, Carnival has opposed
this application.
DAKOTAH RESERVATIONS SERVICES
On December 31, 1997, Dakotah Reservation Services, Inc. ("Dakotah"),
sent a letter to the Company asserting a claim for breach of that certain
agreement (the "Reservation Agreement") between the Company and Dakotah dated
June 1, 1997. In March 1998 Dakotah filed an action against the Company in the
United States District Court for the District of Colorado for breach of an
agreement for the provision of reservation services. The Company had previously
terminated the Reservation Agreement with Dakotah pursuant to a letter dated
December 30, 1997, for non-performance by Dakotah of material provisions of the
Reservation Agreement. The Company believes it has a basis on which to deny
liability.
19
<PAGE>
DAVID GILMARTIN
On January 21, 1998, the Company received a letter from an attorney for
David Gilmartin demanding unpaid wages and contract damages allegedly due
pursuant to an agreement dated December 10, 1996, between Mr. Gilmartin and the
Company. The Company terminated its agreement with Mr. Gilmartin for
non-performance. In the event litigation is commenced against the Company for
breach of the Agreement, the Company intends to deny liability.
JACK MOSS
An action was filed in the 17th Judicial Circuit Court in and for
Broward County against the Company on February 19, 1998, by Jack Moss for unpaid
wages and expenses, and breach of the terms of his employment agreement with the
Company. The Company denies liability for breach of this agreement. The Company
is currently negotiating the settlement of this action.
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, 1997.
PART II
ITEM 5
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "FTRN"; however, there was no active trading market for the
Common Stock until the Second Quarter of 1996, to the best knowledge of the
company's management. The following table sets forth the high and low sale
prices of the Common Stock for the periods indicated in 1996, 1997 and 1998.
HIGH LOW
---- ---
1996:
First Quarter - -
Second Quarter 6.375 3.00
Third Quarter 6.25 3.00
Fourth Quarter 4.75 2.00
1997:
First Quarter 2.75 1.75
Second Quarter 2.9375 2.375
Third Quarter 3.5625 2.50
Fourth Quarter 3.5625 0.25
1998:
First Quarter (through
March 20, 1998) 0.5625 0.25
20
<PAGE>
On March 20, 1998, the last reported sale price of the Common Stock was $0.3125
per share. As of March 25, 1998, there were 556 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 to finance the development
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.
See "Management's Discussion and Analysis."
ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's consolidated financial statements present its
consolidated operating results. This discussion supplements the detailed
information presented in the Consolidated Financial Statements and Notes thereto
and is intended to assist the reader in understanding the financial results and
condition of the Company.
The Company is currently pursuing its strategy of becoming the
recognized leader in providing innovative, quality entertainment-based passenger
rail service through the development of "Fun-Trains" and the acquisition of
"Scenic Destination Railroads." The Company has developed its first Fun-Train
(the "Florida Fun-Train"), an entertainment-based rail service which commenced
operations on October 15, 1997 between South and Central Florida.
The Company is also pursuing its strategy of acquiring Scenic
Destination Railroads. On March 13, 1997, the Company purchased all of the
common stock of The Durango & Silverton Narrow Gauge Railroad Company ("D&SNG"),
which aggregated approximately $16.2 million and consisted of the following: (i)
two promissory notes aggregating $10.05 million which are subordinate to a
purchase money loan provided by a third-party lender in the amount of $8.5
million; (ii) 200,000 shares of the common stock of the Company; (iii) a
six-year warrant to purchase 1,610,000 shares of the Company at an exercise
price of $3.50 per share; and (iv) cash of approximately $5 million, including a
$2 million deposit which was paid in December 1996. The purchase resulted in an
allocation of approximately $1.5 million to goodwill, which is being amortized
over forty years.
21
<PAGE>
For financial statement purposes, the acquisition is assumed to have
occurred on March 31, 1997. The operations for the period from March 13, 1997 to
March 31, 1997 are not deemed to be material. Therefore, the operations of D&SNG
are included in the Company's Statements of Operations only since the date of
acquisition. However, for purposes of meaningful comparison, the revenue, cost
of revenue and selling, general and administrative expenses for the year ended
December 31, 1997 are compared to the prior year's comparable period (when D&SNG
was a stand alone entity) in Results of Operations below to provide better
insight into the results of D&SNG's operations despite the fact that the 1996
results of operations for D&SNG are not included in the Company's Statements of
Operations for 1996.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996.
The Company generated revenues of approximately $9.9 million in 1997
consisting of approximately $9.7 million from D&SNG and approximately $200,000
from the Florida Fun-Train. D&SNG's revenues increased approximately $1.2
million from the same period in 1996 when D&SNG was a stand alone entity. The
increases in revenues are due primarily to a 15% increase in ticket prices and
selective price increases in train concessions implemented in 1997, partially
offset by a 3% decrease in passengers for the year ended December 31, 1997, from
the prior year's comparable period. The Company believes the decrease in
passengers was caused primarily by poor weather in April, May, and September and
a general decline in the Colorado tourism market. The Florida Fun-Train revenues
were significantly below expectations because of significantly reduced ridership
from the projections for this start up period. In addition, ridership was below
expectations partially due to a delay in the delivery of the railcars to the
Company which precluded the Company from exhibiting and promoting the train to
various tour operators and travel agents. This delay also caused the tour
operators and travel agents to either withdraw their promotion of the Florida
Fun-Train or defer their promotion until 1998.
Cost of revenue in 1997 was approximately $4.0 million for D&SNG and
approximately $2.7 million for the Florida Fun-Train. D&SNG's cost of revenues,
which consist primarily of salaries and benefits for train operations, track
maintenance, railcar maintenance and concession personnel as well as product
costs for concessions, was consistent with costs in the comparable period in
1996. Cost of revenues for the Florida Fun-Train consist primarily of the costs
of the train operating agreement with the National Passenger Railroad
Corporation ("Amtrak"), the track rights fees with CSX Transportation, Inc.
("CSXT") and Florida Department of Transportation ("FDOT"), liability and other
insurance, equipment leases, depreciation expense, train security and salaries
and benefits for on board personnel and operations management.
22
<PAGE>
Selling, general and administrative expenses were approximately $2.0
million for D&SNG and approximately $1.6 million for the Florida Fun-Train and
the parent company. D&SNG's selling, general and administrative expenses
increased by approximately $200,000 as compared to the same period in 1996. The
increase is due to higher promotional, advertising and other marketing expenses
as well as increased expenditures for reservations, credit card fees and
salaries. These increased expenditures were partially offset by the elimination
or reduction of certain expenditures aggregating approximately $675,000 for the
year ended 1997. Eliminated expenses in 1997 include leasing of a corporate
airplane and an apartment and the allocation of management fees.
Development expenses of the Florida Fun-Train increased by
approximately $1.6 million during 1997 as compared to the year ended December
31, 1996. The increase is related primarily to an addition of approximately 20
employees subsequent to December 31, 1996, and the significant increase in 1997
of general and administrative expenses, i.e. rent, insurance, promotional
travel, and advertising related to the commencement of operations for the
Florida Fun-Train. The major components of the development expenses in 1997 were
salary and payroll tax expenses and general and administrative expenses of
approximately $1.4 million and $1.9 million, respectively.
The Company's net interest expense increased by approximately $2.2
million for 1997 as compared to 1996. The acquisition of D&SNG resulted in
additional net interest expense of approximately $1.3 million in 1997.
Additionally, the issuance by the Company of additional debt securities in June
1997 (see Note 10 of Notes to Consolidated Financial Statements) resulted in
additional interest expense of approximately $900,000 in 1997. These increases
were partially offset by an increase in capitalized interest of approximately
$300,000 in 1997.
Amortization of deferred loan costs increased by approximately $245,000
in 1997 as compared to 1996 due to loan costs originating from the debt related
to the acquisition of D&SNG and the additional debt securities issued in June
1997.
The Company reported a net loss of approximately $7.0 million or $.68
per share for 1997, as compared to a net loss of approximately $2.6 million or
$.34 per share, respectively, for 1996, as a result of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Overall, in 1997, cash decreased by approximately $5.5 million
primarily due to capital expenditures for the Florida Fun-Train, the acquisition
of D&SNG and repayment of notes payable for D&SNG whose decrease was partially
offset by proceeds from subsequent borrowings and issuance of common stock.
23
<PAGE>
More specifically, in 1997, cash flow used in operating activities was
approximately $4.2 million compared to approximately $2.7 million for 1996. The
increase in use of funds was due primarily to the large cash requirements for
operations of the Florida Fun-Train since October 15, 1997 and the increased
level of developmental activities in preparation for the commencement of
operations. This increase was partially offset by D&SNG, which generated
positive operating cash flow of approximately $1.7 million in 1997.
The Company's investing activities used approximately $15.2 million in
fiscal 1997, compared to approximately $4.1 million in the first nine months of
1996. The investing activity in 1997 was principally due to capital expenditures
of approximately $11.0 million (described below) and the acquisition of D&SNG
requiring approximately $3.5 million in cash. The capital expenditures are
primarily payments for the construction of the railcars and the two train
terminals for the Florida Fun-Train.
In 1997 and 1996 financing activities generated approximately $13.9
million. Cash flows from financing activities for 1997 were principally due to a
private placement of debt and equity securities completed in June 1997 of
approximately $9.5 million (see Note 10 of Notes to Consolidated Financial
Statements), proceeds from a note payable used to primarily finance the
acquisition of D&SNG and repay existing notes payables (net increase of cash of
approximately $3.9 million), and proceeds from a line of credit. The Company's
percentage of total debt to total capital was 96.8% on December 31, 1997
compared to 65.9% on December 31, 1996.
The Company's immediate cash requirements are significant and its
immediate sources of cash are limited. As a result, there is a question about
the Company's ablility to continue as a going concern. The Company's revenue and
cash flow from the operations of the Florida Fun-Train from October 15, 1997 to
date have been materially below expectations. Additionally, the Company lost in
excess of $5.5 million in the fourth quarter of 1997 and anticipates losing
approximately $5.0 million in the first quarter of 1998. At February 28, 1998,
the Company's cash balance was approximately $1.0 million of which approximately
$600,000 was subject to the restrictions in the loan covenant outlined in Note 6
of Notes to Consolidated Financial Statements. The Company believes that its
existing cash resources will not be sufficient to fund the operations for the
Florida Fun-Train beyond March 31, 1998. The Company requires an immediate cash
infusion of approximately $2.5 million to fund certain of its obligations
including, among other things, its operating agreement with Amtrak, the track
rights agreements with CSXT and FDOT, its insurance obligations and payroll
through May 31, 1998. On March 31, 1998 the Company received approximately
$500,000 of equity investment to partially fund this immediate cash need. In
order for the Company to continue operations of the Florida Fun-Train it must
promptly: (i) significantly increase ridership on the Florida Fun-Train and (ii)
arrange for additional sources of financing. The Company is in discussions with
its investment advisor and other third parties concerning alternative sources of
financing as well as pursuing various marketing opportunities to increase
passenger ridership on the Florida Fun-Train. There is no assurance that the
Company will obtain the additional financing or the necessary ridership to
sustain operations in the near future.
24
<PAGE>
Additionally, the Company has four railcars at various stages of
completion at Rader Railcar II ("RRI"). In accordance with a construction
agreement, approximately $681,000 will be paid to RRI after the delivery and
acceptance of all the railcars constructed by RRI. Once ridership on the Florida
Fun-Train increases, the Company will either negotiate with RRI to complete the
four railcars or obtain railcars from a third party. There can be no assurance
that funds for either option will be available on terms acceptable to the
Company or at all.
In connection with the acquisition of D&SNG by the Company, D&SNG
borrowed, and the Company guaranteed, $8.5 million from a commercial lending
institution pursuant to a five-year term loan, portions of which were used to
pay a pre-existing lender to fund a portion of the cash required to close the
acquisition. The balance was used for working capital for D&SNG's operations
(approximately $1 million). This working capital and the funds generated from
D&SNG's operations are expected to be adequate to meet D&SNG's cash requirements
(including capital expenditures and debt service) for 1998. There are no
material short-term or long-term commitments for capital expenditures for D&SNG;
however, the Company anticipates expenditures of approximately $350,000 in 1998
for property and equipment, but has not yet finalized its plan in this regard.
Additionally, D&SNG is expected to incur in excess of $2 million of interest and
principal payments in 1998 resulting from the $8.5 million term loan and the
$10.05 million seller financing. D&SNG's business and cash flow are historically
seasonal in nature with the peak season being the months of June, July and
August; however, this factor is not expected to have a material adverse impact
on D&SNG's ability to meet cash requirements.
Capital expenditures and debt service in 1998 and subsequent years are
expected to be funded from the working capital generated from D&SNG operations
and a $250,000 available line of credit. In the event that the sources are not
adequate to fund D&SNG cash requirements in 1998 and subsequent years, D&SNG
will be required to obtain additional third-party financing, e.g., unsecured
lines of credit, however, there can be no assurance that this or other sources
of funds will be available to D&SNG in the future.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Form 10-KSB, specifically the Management's Discussion and
Analysis, contains "FORWARD-LOOKING STATEMENTS" within the meaning of the
federal securities laws. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for "FORWARD-LOOKING STATEMENTS." In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the
25
<PAGE>
Company's "FORWARD-LOOKING STATEMENTS." Such factors include, among others, the
following: the ability of the Company to obtain, from internal and external
sources, sufficient additional working capital to fund its operations
(particularly those of the Florida Fun-Train) and continue as a going concern,
the prompt improvement in the Florida Fun-Train financial performance,
specifically an immediate and significant increase in ridership on the Florida
Fun-Train, reduction in the Company's outstanding indebtedness through the
conversion of existing convertible debt into equity, delivery of the remaining
railcars to complete the Florida Fun-Train, the successful marketing of the
Company's rail services in Florida and Colorado and unscheduled repairs to the
Company's railroad equipment. In addition, the Company's business prospects are
generally susceptible to national economic conditions, particularly those
affecting the Colorado and Florida tourism markets, as well as weather patterns
in Colorado and Florida. Actual results could differ materially from the
forward-looking statements as a result of the foregoing factors.
ITEM 7
FINANCIAL STATEMENTS
The financial statements are included herein beginning at page F-1.
ITEM 8
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On January 26, 1998, the Registrant's Board of Directors voted to
engage Millward & Company to act as the Registrant's independent certified
public accountants, thereby dismissing and replacing BDO Seidman, LLP. The
former accountants' reports for the Registrant's last two fiscal years did not
contain any adverse opinion, or disclaimer of opinion, nor were any such reports
modified as to uncertainty, audit scope or accounting principles. There have
been no disagreements between the Registrant 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.
On May 6, 1996, the Registrant's Board of Directors voted to engage BDO
Seidman, LLP to act as the Registrant's independent certified public
accountants, thereby dismissing and replacing Hansen, Barnett & Maxwell, P.C.
The former accountants' reports for the Registrant's last two fiscal years did
not contain any adverse opinion, or disclaimer of opinion, nor were any such
reports modified as to uncertainty, audit scope or accounting principles. There
have been no disagreements between the Registrant 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.
26
<PAGE>
PART III
ITEM 9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item with respect to the executive
officers and directors of the Company is incorporated herein by reference to the
section entitled "Compensation of Directors and Executive Officers" and
"Election of Directors" in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders (the "1998 Proxy Statement").
ITEM 10
EXECUTIVE COMPENSATION
The information required by this item with respect to the executive
compensation is incorporated herein by reference to the section entitled
"Compensation of Directors and Executive Officers" in the Company's 1998 Proxy
Statement.
ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this item with respect to security
ownership is incorporated herein by reference to the section entitled "Voting
Securities and Principal Holders Thereof" in the Company's 1998 Proxy Statement.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item with respect to security
ownership is incorporated herein by reference to the section entitled "Certain
Transactions" in the Company's 1998 Proxy Statement.
27
<PAGE>
ITEM 13
EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its
subsidiaries filed as part of this Annual Report on Form 10-KSB are listed in
Item 7 of this Annual Report on Form 10-KSB, which listing is hereby
incorporated by reference.
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation, as amended, are hereby incorporated
by reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form 8-A filed with the SEC on May 30, 1996.
3.2 Plan and Articles of Merger are hereby incorporated by
reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form 8-A filed with the SEC on May 30, 1996.
3.3 Amended Bylaws are hereby incorporated by reference to Exhibit
3.3 to Form 10-KSB for the year ended December 31, 1997.
4.1 Form of Common Stock Certificate is hereby incorporated by
reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form 8-A filed with the SEC on May 30, 1996.
4.2 Form of Series A Redeemable Warrant Agreement.*
4.3 Series A Redeemable Warrant Agreement.*
4.4 Form of Financial Advisory Warrant Certificate.*
28
<PAGE>
4.5 Financial Advisory Warrant Agreement.*
4.6 Common Stock Purchase Warrant Certificate held by Charles E.
Bradshaw, Jr., dated March 13, 1997, is hereby incorporated by
reference to Exhibit 4.6 to Form 10-KSB for the year ended
December 31, 1997.
10.1 Agreement effective as of June 28, 1994, between First
American-Florida and Rader Railcar, Inc., as amended.*
10.2 Employment Agreement dated February 16, 1994, between First
American- Florida and Allen C. Harper.*
10.3 Employment Agreement dated September 10, 1997, between the
Registrant and Ronald J. Hartman, is hereby incorporated by
reference to Exhibit 10.3 of the Registrant's Registration
Statement on Form S-3, filed December 30, 1997.
10.4 Employment Agreement dated July 1, 1994, between First
American- Florida and Michael J. Acierno, as amended.*
10.5 Settlement Agreement and General Release dated November 20,
1997, between the Registrant and Raymond Monteleone, is hereby
incorporated by reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form S-3, filed December 30, 1997.
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.*
29
<PAGE>
10.8 Railcar Construction Agreement (without appendices) between
Rader Railcar II, Inc. and Fun Trains, Inc. dated October 23,
1996.*
10.9 Financial Advisory and Consulting Agreement between the
Registrant and International Capital Growth, LLC, dated April
26, 1996*, as amended December 5, 1996, is hereby incorporated
by reference to Exhibit 10.9 to Form 10-KSB for the year ended
December 31, 1996.
10.10 Note Escrow Agreement between the Registrant, Capital Growth
Interna-tional, LLC, and Sterling National Bank and Trust
Company of New York dated April 26, 1996.*
10.11 Form of Convertible Secured Note.*
10.12 Consulting Agreement between the Registrant and C. Dawson
Buck, dated June 24, 1997, is hereby incorporated by reference
to Exhibit 10.1 of the Registrant's Registration Statement on
Form S-8, filed July 14, 1997.
10.13 Employment Agreement dated October 9, 1996, between the
Registrant and Donald P. Cumming.*
10.14 Employment Agreement dated August 23, 1996, between the
Registrant and Thomas E. Blayney.*
10.15 Employment Agreement dated September 30, 1996, between the
Registrant and Pamela S. Petcash.*
10.16 Form of Confidentiality and Non-competition Agreement between
the Registrant's executive employees and the Registrant.*
10.17 Consulting Agreement between Management Resource Group, Inc.
and the Registrant dated July 23, 1996.*
30
<PAGE>
10.18 Agreement between Universal Studios Florida and the
Registrant, dated October 30, 1996.*
10.19 Agreement between CSX Transporta-tion, Inc. and the
Registrant, dated October 31, 1996.*
10.20 Business Lease between Mandel Development, a Florida general
partnership, and the Registrant, dated January 15, 1997, is
hereby incorporated by reference to Exhibit 10.20 to Form
10-KSB for the year ended December 31, 1996.
10.21 Operating Agreement between the Florida Department of
Transportation and the Registrant, dated January 6, 1997, is
hereby incorporated by reference to Exhibit 10.21 to Form
10-KSB for the year ended December 31, 1996.
10.22 Form of the Registrant's 1996 Non-Qualified Stock Option Plan,
is hereby incorporated by reference to Exhibit 10.22 to Form
10-KSB for the year ended December 31, 1996.
10.23 Loan Agreement (without exhibits) between NationsBank, N.A.
(South) and the Durango & Silverton Narrow Gauge Railroad
Company, dated March 13, 1997, is hereby incorporated by
reference to Exhibit 10.23 to Form 10-KSB for the year ended
December 31, 1996.
10.24 Share Purchase Agreement between The Durango & Silverton
Narrow Gauge Railroad Company and the Registrant, dated
December 10, 1996, and Addendum to Share Purchase Agreement,
dated February 28, 1997, is hereby incorporated by reference
to Exhibit 10.24 to Form 10-KSB for the year ended December
31, 1996.
31
<PAGE>
10.25 Promissory Note in the amount of $4,200,000 from the
Registrant in favor of Charles E. Bradshaw, Jr., dated March
13, 1997, is hereby incorporated by reference to Exhibit 10.25
to Form 10-KSB for the year ended December 31, 1996.
10.26 Promissory Note in the amount of $5,850,000 from the
Registrant in favor of Charles E. Bradshaw, Jr., dated March
13, 1997, is hereby incorporated by reference to Exhibit 10.26
to Form 10-KSB for the year ended December 31, 1996.
10.27 Registration Rights and Price Guaranty Agreement between
Charles E. Bradshaw, Jr. and the Registrant, dated March 13,
1997, is hereby incorporated by reference to Exhibit 10.27 to
Form 10-KSB for the year ended December 31, 1996.
10.28 Amendment No. 2 To Operating Agreement between the Florida
Department of Transportation and the Registrant, dated June 6,
1997, is hereby incorporated by reference to Exhibit 10.29 of
the Registrant's Post Effective Amendment No. 1 Registration
Statement on Form SB-2, filed June 25, 1997.
10.29 Amendment No. 3 To Operating Agreement between the Florida
Department of Transportation and the Registrant, dated August
18, 1997, is hereby incorporated by reference to Exhibit 10.35
of the Registrant's Amendment No. 1 to the Registration
Statement on Form S-3/A, filed September 18, 1997.
10.30 Amendment No. 3 To Railcar Construction Agreement between
Rader Railcar II, Inc. and Fun Trains, Inc., dated August 22,
1997, is hereby incorporated by reference to Exhibit 10.33 of
the Registrant's Amendment No. 1 to the Registration Statement
on Form S-3/A, filed September 18, 1997.
32
<PAGE>
10.31 Limited Guaranty of Payment and Performance given by Thomas G.
Rader to Fun Trains, Inc., dated August 22, 1997, is hereby
incorporated by reference to Exhibit 10.34 of the Registrant's
Amendment No. 1 to the Registration Statement on Form S-3/A,
filed September 18, 1997.
10.32 Amendment No. 4 to Railcar Construction Agreement between
Rader Railcar II, Inc., Fun Trains, Inc. and Thomas G. Rader,
dated November 12, 1997, is hereby incorporated by reference
to Exhibit 10.36 of the Registrant's Registration Statement on
Form S-3, filed December 30, 1997.
10.33 Letter Agreement dated December 19, 1997, waiving default
under the Loan Agreement, dated March 10, 1997 between the
Registrant and Pointe Bank, is hereby incorporated by
reference to Exhibit 1 of the Registrant's Current Report on
Form 8-K, filed December 29, 1997.
10.34 Letter Amendment to Agreement between CSX Transportation, Inc.
and the Registrant, dated November 24, 1997. **
10.35 Placement Agent Agreement between International Capital
Growth, Ltd. and the Registrant, dated May 12, 1997. **
10.36 Placement Agent Agreement between International Capital
Growth, Ltd. and the Registrant, dated December 16, 1997. **
10.37 Consulting Agreement between the Registrant and Alan L.
Jacobs, dated March 18, 1998. **
33
<PAGE>
16.1 Letter dated January 29, 1998, from the Company's former
accountants, BDO Seidman, LLP, to the Registrant is hereby
incorporated by reference to Exhibit 16 to the Registrant's
Current Report on Form 8-K dated January 26, 1998.
16.2 Letter dated May 10, 1996, from the Company's former
accountants, Hansen, Barnett & Maxwell, to the Registrant is
hereby incorporated by reference to Exhibit 16 to the
Registrant's Current Report on Form 8-K dated May 6, 1996.
21 Subsidiaries of the Registrant.**
23.1 Consent of BDO Seidman LLP ***
27 Financial Data Schedule **
34
<PAGE>
- ----------
* Incorporated by reference to the comparable exhibit numbers as
contained in the Registrant's Registration Statement on Form SB-2, as
filed with the Securities and Exchange Commission on August 6, 1996.
** Filed herewith.
*** To be filed by amendment
(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED
DECEMBER 31, 1997
On December 29, 1997, the Company filed a Current Report on
Form 8-K with respect to the significant cash shortage being
experienced by the Company (see Note 13 of Notes to
Consolidated Financial Statements).
35
<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: MARCH 27, 1998 FIRST AMERICAN RAILWAYS, INC.
BY: /S/ ALLEN C. HARPER
--------------------------------------------
ALLEN C. HARPER, CHAIRMAN OF THE
BOARD OF DIRECTORS 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/S/ ALLEN C. HARPER CHAIRMAN OF THE BOARD MARCH 27, 1998
- ----------------------------- AND CHIEF EXECUTIVE
ALLEN C. HARPER OFFICER(PRINCIPAL)E
EXECUTIVE OFFICER)
/S/ DONALD P. CUMMING VICE PRESIDENT, SECRETARY, MARCH 27, 1998
- ----------------------------- TREASURER AND ACTING CHIEF
DONALD P. CUMMING FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
/S/ THOMAS G. RADER DIRECTOR MARCH 27, 1998
- ----------------------------
THOMAS G. RADER
/S/ DAVID RUSH DIRECTOR MARCH 27, 1998
- ----------------------------
DAVID RUSH
/S/ LUIGI SALVANESCHI DIRECTOR MARCH 27, 1998
- ----------------------------
LUIGI SALVANESCHI
</TABLE>
36
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
Index
PAGE
----
REPORT OF INDEPENDENT AUDITORS F - 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 3
CONSOLIDATED BALANCE SHEET F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
First American Railways, Inc.
We have audited the accompanying consolidated balance sheet of First American
Railways, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended.
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 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 consolidated financial position of First American
Railways, Inc. as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred annual operating
losses since its inception and in 1997 expended approximately $11,000,000 for
capital expenditures. At December 31, 1997, the Company had a working capital
deficiency of approximately $2,520,000. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of the
foregoing uncertainties.
/S/ MILLWARD & COMPANY
----------------------
Millward & Company
Fort Lauderdale, Florida
February 27, 1998
F-2
<PAGE>
TO BE FILED BY AMENDMENT
F-3
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,1997
----------------
ASSETS
CURRENT
Cash $ 1,711,927
Restricted cash 100,000
--------------
Cash and cash items 1,811,927
Inventories 1,017,557
Prepaids and other 1,734,746
--------------
Total current assets 4,564,230
Property and equipment, net 41,668,275
Deferred loan costs, goodwill and other, net 4,316,953
--------------
$ 50,549,458
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 4,812,626
Unearned revenue 377,749
Short-term debt and current maturities of long-term debt 1,896,000
--------------
Total current liabilities 7,086,375
Long-term debt 33,573,157
Deferred income taxes and other long-term liabilities 8,258,788
--------------
48,918,320
--------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Preferred stock $.001 par value, 500,000 shares authorized -
Common stock $.001 par value, 100,000,000 shares authorized
11,243,911 shares issued and outstanding 11,244
Additional paid-in capital 12,524,286
Accumulated deficit (10,904,392)
--------------
TOTAL STOCKHOLDERS' EQUITY 1,631,138
--------------
$ 50,549,458
==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 9,895,867 $ -
Cost of revenue 6,750,036 -
--------------- ----------------
Gross profit 3,145,831
Selling, general and administrative 3,566,472 -
Development of Florida Fun-Train 3,742,539 2,150,300
--------------- ---------------
Operating loss (4,163,180) (2,150,300)
Interest expense, net of $311,748 and $341,391
of interest income 2,340,188 166,911
Amortization of loan costs 465,853 220,722
Expenses from offerings not completed - 57,829
--------------- ---------------
Net loss $ (6,969,221) $ (2,595,762)
================ ================
Net loss per common share:
Basic $ (0.68) $ (0.34)
Diluted $ (0.68) $ (0.34)
Weighted average number of common shares
used to compute net loss per common share
Basic 10,284,543 7,723,050
Diluted 10,284,543 7,723,050
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 4,275,000 $ 4,275 $ 1,110,760 $ (1,339,409)
Issuance of common stock in connection
with Stage I offering, net of
offering costs of $11,692 375,004 375 42,933 -
Issuance of common stock in connection
with Stage II offering, net of offering
costs of $1,247,967 4,050,274 4,050 6,998,666 -
Merger with Asia-America Corporation 350,000 350 (350) -
Issuance of common stock to officer 10,800 11 37,789 -
Net loss - - - (2,595,762)
----------- ---------- --------------- --------------
Balance at December 31, 1996 9,061,078 9,061 8,189,798 (3,935,171)
Issuance of common stock, warrants and stock options
in connection with payment of fees to third parties 351,180 351 636,472 -
Issuance of common stock,
net of offering costs of $409,268 1,557,072 1,557 3,025,141 -
Issuance of common stock and warrants
in connection with acquisition of D&SNG 200,000 200 544,700 -
Issuance of common stock in connection
with employee benefit plans 70,284 70 113,143 -
Issuance of common stock in
connection with conversion of debt 4,297 5 15,032 -
Net loss - - - (6,969,221)
----------- ---------- -------------- --------------
Balance at December 31, 1997 11,243,911 $ 11,244 $ 12,524,286 $ (10,904,392)
=========== ========== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,969,221) $ (2,595,762)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 413,807 6,172
Amortization 474,130 220,722
Amortization of original issue discount 361,133 -
Salaries and consulting fees paid in common stock 153,773 37,800
(Increase) Decrease in restricted cash 330,834 (430,834)
Increase in inventories (260,272) -
Increase in prepaids and other (1,399,030) (253,692)
Increase in account payable and accrued liabilities 2,896,927 309,237
Decrease in unearned revenue (226,361) -
---------------- ----------------
Total adjustments 2,744,941 (110,595)
---------------- ----------------
Net cash used in operating activities (4,224,280) (2,706,357)
---------------- ----------------
INVESTING ACTIVITIES:
Capital expenditures (10,981,715) (2,063,500)
Cash paid for acquisition (3,512,058) (2,000,000)
Increase in other assets (665,324) -
---------------- ----------------
Net cash used in investing activities (15,159,097) (4,063,500)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and line of credit 17,287,500 8,695,682
Repayment of notes payable (5,138,374) (445,000)
Payment of loan costs (1,311,110) (1,087,829)
Proceeds from issuance of common stock 3,492,536 7,300,761
Payment of offering costs (409,268) (254,737)
Borrowings from related parties - 68,388
Repayments of notes payable to related parties and others - (333,388)
---------------- ----------------
Net cash provided by financing activities 13,921,284 13,943,877
---------------- ----------------
Net increase (decrease) in cash (5,462,093) 7,174,020
Cash at beginning of period 7,174,020 -
---------------- ----------------
Cash at end of period $ 1,711,927 $ 7,174,020
================ ================
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,136,516 $ 542,731
================ ================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION AND BUSINESS
SIGNIFICANT
ACCOUNTING First American Railways, Inc. and
POLICIES subsidiaries ("the Company") is organized
for the purpose of constructing,
acquiring and marketing entertainment
based passenger trains. The Company
operates a "Fun-Train" between South and
Central Florida and a scenic destination
railroad in Southwestern Colorado.
BASIS OF PRESENTATION
Certain amounts in the prior years'
financial statements have been reclassified
to conform to the current year
presentation. The Company was a development
stage entity in 1996 for financial
reporting purposes.
CONSOLIDATION
The Consolidated Financial Statements
include the accounts of First American
Railways, Inc. and all subsidiaries. All
significant intercompany balances and
transaction have been eliminated.
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.
CASH EQUIVALENTS
The Company considers all highly liquid
investments with a maturity of three months
or less when purchased to be cash
equivalents. Cash equivalents are carried
at cost, which approximates market value.
RESTRICTED CASH
Restricted cash consists of cash committed
as collateral for credit card transactions.
F-8
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories are stated at the lower of cost
or market. Cost is determined using the
first-in, first-out method.
INTANGIBLE ASSETS
Trademarks, stated at cost are amortized
using the straight-line method over ten
(10) years. Goodwill is amortized using the
straight-line method over forty (40) years.
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost and are
depreciated by the straight-line method
over the estimated useful lives of the
assets. Construction in process will be
depreciated beginning at the time those
assets are placed into service.
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 or
charged to operations if an offering or
placement is unsuccessful.
IMPAIRMENT
On January 1, 1996, the Company adopted
Statements of Financial Accounting
Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS
No. 121"). SFAS No. 121 requires, among
other things, impairment loss of assets to
be held and gains or losses from assets
that are expected to be disposed of be
included as a component of income from
continuing operations before taxes on
income. During 1997 there have been no
write-downs required in the accompanying
financial statements.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for
by using the intrinsic value based method
in accordance with Accounting Principles
Board Opinion
F-9
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has
adopted Statements of Financial Accounting
Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123")
which allows companies to either continue
to account for stock-based compensation for
employees and directors using APB 25, or to
adopt a fair value based method of
accounting. The Company intends to continue
with its current method of accounting in
accordance with APB 25 for employees, but
has made the required proforma disclosures
in accordance with SFAS No. 123.
FINANCIAL INSTRUMENTS
The carrying value of financial
instruments including accounts and notes
payable approximate their fair value at
December 31, 1997.
ADVERTISING COSTS
The Company expenses production costs of
print and radio advertisements as of the
first date the advertisement takes place.
INTEREST
Interest is capitalized to constructed
assets during their construction period and
is depreciated over their useful lives.
INCOME TAXES
The Company has no income since inception
and accordingly has not provided for income
taxes.
Income taxes are accounted for under the
asset and liability method of Statement of
Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No.
109"). Deferred tax assets and liabilities
are recognized for the future tax
consequences attributable to differences
between the financial statement carrying
amounts of existing assets and liabilities
and their respective tax bases and
operating loss and tax credit
carryforwards. Deferred tax assets and
liabilities are measured using enacted tax
rates expected to apply to taxable income
in the years in which
F-10
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
those temporary differences are expected to
be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and
liabilities or a change in tax rate is
recognized in income in the period that
includes the enactment date. Deferred tax
assets are reduced to estimated amounts to
be realized by use of a valuation allowance.
NET LOSS PER COMMON SHARE
The Financial Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share".
SFAS No. 128 supersedes Accounting
Principles Board Opinion ("APB") No. 15,
"Earnings Per Share" and various other
authoritative pronouncements regarding
earnings per share ("EPS"). SFAS No. 128
became effective for periods ending after
December 15, 1997. Accordingly, the Company
adopted SFAS No. 128 effective December 31,
1997.
Under SFAS No. 128, primary earnings per
share in accordance with APB No. 15 is
replaced with a simpler calculation called
basic earnings per share, which includes the
dilutive effect of outstanding options,
warrants and convertible securities. Diluted
earnings per share under SFAS No. 128 has
not changed significantly as compared to
fully diluted earnings per share under APB
No. 15, but has been renamed "diluted
earnings per share".
All loss per share amounts for all periods
have been presented in accordance with the
requirements of SFAS No. 128. As a result of
the adoption of SFAS No. 128, there was no
change to the Company's previously reported
calculation of primary and fully diluted
earnings per share under APB No. 15. Diluted
losses per share are the same as basic loss
per share for 1997 and 1996 as its results
are anti-dilutive.
In 1996 net loss per common share was 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.
F-11
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN The Company has incurred annual operating
CONSIDERATIONS losses since its inception and in 1997
expended approximately $11,000,000 for
capital expenditures. At December 31,
1997, the Company had a working capital
deficiency of approximately $2,520,000.
Additionally, the Company will have to
obtain the necessary funds to either
complete the four railcars currently in
various stages of completion (see Note
9(a)) or obtain other railcars from a third
party.
From January through March 1998, the Company
sold in private placements an aggregate of
10,029,502 shares of common stock receiving
net proceeds of approximately $2,507,000.
The Company has implemented cost reduction
programs including reduced corporate staff
and reducing or eliminating contracted
service agreements. Additionally, the
Company has increased its marketing efforts
to Florida residents and tourists visiting
Florida to increase attendance on the
Florida Fun-Train.
Despite these efforts, management believes
that the Company requires additional funds
through financing to ensure continued
operations. There is no assurance that
sufficient funds will be obtained or that
the marketing efforts will be successful.
The accompanying financial statements do not
include any adjustments relating to the
recoverability and classification of
recorded assets, or the amounts and
classification of liabilities that might be
necessary in the event that the Company
cannot continue in existence.
3. INVENTORIES Inventories consist of the following:
--------------------------------------------
Concession and souvenir items $ 473,978
Parts 543,579
--------------------------------------------
$ 1,017,557
--------------------------------------------
All inventory is pledged as collateral (see
Notes 6 and 7).
F-12
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
4. PROPERTY AND Property and equipment and the expected useful lives are as follows:
EQUIPMENT ---------------------------------------------------------------------
<S> <C>
Land $ 20,485,311
Railcars 25 years 11,845,264
Building and improvements 15-30 years 3,742,607
Machinery and equipment 3-15 years 2,899,402
Construction in process (see Note 9(a)) 3,117,845
---------------
42,090,429
Less accumulated depreciation 422,154
---------------
$ 41,668,275
===============
</TABLE>
All property and equipment is pledged as
collateral (See Notes 5 and 6)
Interest of approximately $416,000 and
$92,000 was capitalized as part of the
construction of the railcars during 1997 and
1996, respectively.
5. INCOME TAXES At December 31, 1997, the Company had an
accumulated net loss of approximately
$11,000,000 for financial reporting
purposes, which expire in the years 2009
through 2012. In general, expenses incurred
during the development stage have been
capitalized for tax purposes as
pre-operating expenses and are being
amortized over a 60 month period commencing
with the month in which active business
began (April 1997).
The use of the losses is limited to future
taxable earnings of the Company. For
financial reporting purposes, the deferred
tax asset of approximately $4,125,000
resulting from operating losses and the
amortization and future amortization of
capitalized pre-operating expenses has been
entirely offset by a valuation allowance.
As a result of the acquisition of the
Durango and Silverton Narrow Gauge Railroad
Company ("D&SNG") a deferred tax liability
of approximately $8,167,000 was created
primarily due to the difference in the
carrying amount of property and equipment
for financial statement and tax return
purposes. This liability will be reduced
only when the related property and equipment
is disposed by the Company.
F-13
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM DEBT In March 1997, the Company entered into a
two year unsecured line of credit agreement
with a bank. Under the agreement the Company
was able to borrow up to $1,000,000 at an
interest rate of prime plus 2% (10.5%
December 31, 1997). In December 1997, the
line of credit agreement was amended (i) to
allow no further borrowing than the
outstanding balance under the line of credit
approximately ($881,000), (ii) to grant to
the bank a "blanket" second lien on all
assets except those relating to the D&SNG,
and (iii) to not renew the loan upon its
maturity. Effectively, the approximately
$881,000 borrowed under the line of credit
is due in October 1998. Additionally, the
Company agreed to pay to the bank 10% of the
gross proceeds of a future financing
anticipated to be concluded in Spring 1998
as repayment of the line of credit.
In November 1997, the Company's D&SNG
subsidiary entered into a one year unsecured
line of credit agreement with a bank. Under
the agreement D&SNG is able to borrow up to
$250,000 at an interest rate of prime plus
1%. The agreement contains covenants that
require certain operating and equity
criteria to be met as well as other
requirements customary to loan facilities of
this nature. The Company is Guarantor under
the agreement. At December 31, 1997 there
were no amounts outstanding under this line
of credit.
<TABLE>
<S> <C>
7. LONG-TERM DEBT At December 31, 1997 the Company's long-term
debt consisted of the following:
8% convertible subordinated notes payable
due June 2002 less unamortized original
issue discount of $2,884,867 $ 8,267,633
10% convertible notes payable due
April, May 2001 and secured by all
non-D&SNG assets of the Company 8,235,682
9.17% note payable to bank, principal and
interest payable monthly through March 2002
and secured by a first interest in all
D&SNG assets (A) 7,834,842
Note payable to Charles E. Bradshaw, Jr.,
interest ranging from $9.25% to 10%,
due March 2002 and secured by a second
interest in all D&SNG assets 5,850,000
</TABLE>
F-14
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Note payable to Charles E. Bradshaw, Jr.,
interest rate is 30-day commercial paper
rate plus 650 basis points, due between
September 1998 and March 2000 depending upon
the occurrence of certain circumstances and
secured by a second interest in all D&SNG
assets (B) 4,200,000
Capital lease payable, principal and
interest Payable monthly through July 2002
secured by equipment 200,000
-----------
34,588,157
Less current maturities (1,015,000)
-----------
$33,573,157
===========
</TABLE>
(A) There is a restriction in the bank loan
agreement, which limits the Company's
ability to "upstream" the profits of D&SNG.
This restriction requires compliance by
D&SNG with covenants regarding the
maintenance of equity plus subordinated debt
and the ratio of senior debt to equity and
subordinated debt, and that D&SNG certifies
that there are no existing defaults by D&SNG
under the bank loan agreement. D&SNG
currently complies with all of these
covenants. The term loan agreement also
provides for notification and the provision
to the lender of certain current financial
statements regarding D&SNG before an
"upstreaming" of profits. At December 31,
1997, there was approximately $1,500,000 of
cash subject to the notification required by
such covenant.
(B) The maturity of the $4,200,000 note
payable to Charles E. Bradshaw was extended
in March 1998 by the Company from March 1998
to September 1998 for a fee of $42,000. The
note is payable in either common stock of
the Company or cash upon election of Mr.
Bradshaw. If Mr. Bradshaw elects to receive
payment in common stock then the Company
shall issue the number of shares of common
stock equal to $4,200,000 divided by the
closing sales price of the Company's common
stock on the date of payment. If Mr.
Bradshaw elects to receive cash payment then
the Company may elect to extend the maturity
of the note payable to March 2000.
A summary of maturities by year of the above
debt assuming the $4,200,000 note payable to
Charles E. Bradshaw, Jr. is paid in cash in
March 2000 as follows:
F-15
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
1998 $ 1,015,000
1999 1,098,000
2000 5,408,000
2001 9,578,000
2002 20,374,024
----------------
$ 37,473,024
Less unamortized original issue discount (2,884,867)
----------------
$ 34,588,157
================
</TABLE>
a) DEFINED BENEFIT PENSION PLAN
8. EMPLOYEE The Company has a noncontributory defined
BENEFIT benefit pension plan (the "plan") covering
PLANS substantially all D&SNG full-time employees.
The plan provides pension benefits that are
based on the employee's average annual
compensation and their number of years of
service. The Company's funding policy for
the plan is to make at least the minimum
annual contributions required by applicable
regulations.
A summary of the components of net periodic
pension cost for the plan and the total
contributions charged to pension expense for
the plan from April 1, 1997 (effective date
of the acquisition of D&SNG) through
December 31, 1997 is as follows:
<TABLE>
-------------------------------------------------------------------------------
<S> <C>
Defined benefit plan:
Service cost $ 1,028
Interest cost 17,242
Actual return on plan assets (3,323)
Net amortization and deferral (324)
-------------------------------------------------------------------------------
Total pension expense $ 14,623
-------------------------------------------------------------------------------
Assumptions used in the accounting for the
plan in 1997 as of December 31 were:
-------------------------------------------------------------------------------
Weighted average discount rates 9.0%
Rates of increase in compensation levels 4.5%
Expected long-term rate of return on assets 9.0%
-------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
The following table sets forth the funded
status and amounts recognized in the balance
sheet at December 31, 1997 for the plan:
-----------------------------------------------------------------------------------
Actual present value of benefit obligations:
Vested benefit obligation $ (234,945)
-----------------------------------------------------------------------------------
Accumulated benefit obligation $ (257,423)
-----------------------------------------------------------------------------------
Project benefit obligation $ (386,223)
Plan assets at fair value 181,919
-----------------------------------------------------------------------------------
Projected benefit obligation in
Excess of plan assets (204,304)
Unrecognized net loss 114,587
-----------------------------------------------------------------------------------
Net pension liability recognized in the
consolidated balance sheet $ (89,717)
-----------------------------------------------------------------------------------
</TABLE>
401(K) PROFIT SHARING PLAN
The Company maintains a 401(k) profit
sharing plan covering substantially all
D&SNG employees meeting certain minimum age
and service requirements. The Company's
contributions to the plan are determined by
the Board of Directors and are limited to a
maximum of 50% of the employee's
contribution and 6% of the employee's
compensation. Contributions to the plan
amounted to $28,325 for the nine months
ended December 31, 1997.
9. COMMITMENTS a) In October 1996, the Company entered into
AND an agreement with Rader Railcar II, Inc.
CONTINGENCIES ("RRI"), a company owned by a director and
shareholder, for design and production of
eleven railcars. Through November 1997 the
Company expended approximately $8.0 million
to RRI (exclusive of approximately $850,000
paid to an affiliate of RRI for the initial
prototype car). Eight railcars were
delivered to the Company for use in
operations. In November 1997, RRI announced
that it was temporarily suspending its
operations due to a lack of sufficient
F-17
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
working capital. Subject to the temporary
suspension of operations of RRI, the
remaining four railcars (including the
initial prototype railcar) are under
construction or refurbishment by RRI. In
accordance with the construction agreement,
approximately $681,000 will be paid to RRI
after the delivery and acceptance of all of
the railcars constructed by RRI. In addition
to the necessity for the Company to raise
additional funds (see Note 2) for the
completion of this construction and
refurbishment, the Company is relying on the
ability of RRI, who has possession of the
remaining four railcars, to complete the
construction and refurbishment of these
railcars. The failure of RRI to obtain
additional resources could have a severe
near term impact on the ability to complete
the construction and refurbishment of the
railcars.
b)In October 1996, the Company signed an
agreement with CSX Transportation, Inc.
("CSXT") for use of its tracks between West
Palm Beach and Orlando to be used for the
operation of the Florida Fun-Train. The
agreement with CSXT provides, in part, that
the Company will pay CSXT the greater of $20
per train mile, or 16% of the Company's
gross ticket revenue (less discounts) from
the Florida Fun-Train operations. The
per-train mile is subject to various
increases for inflation and other price
adjustments. In October 1997, the Company
negotiated to pay track fees from October
15, 1997 through March 31, 1998 with the
Company's common stock. In January 1998, the
Company issued approximately 432,000 shares
of its common stock to CSXT for payment of a
liability for track fees of approximately
$396,000 incurred between October 15, 1997
and December 31, 1997. In addition, the
Company is required to maintain a minimum of
$300 million in comprehensive general
liability insurance. The Company is
self-insured to the extent of a minimum
deductible in such policies. The agreement
also provides for a certain degree of
exclusivity of the Company's proposed rail
operations. Specifically, CSXT has agreed
not to grant similar access rights to the
subject rail corridor (between West Palm
Beach and Orlando) to any other private rail
passenger operator or contractor, which
would provide comparable conventional rail
passenger service (primarily servicing the
cruise ship market). This exclusivity clause
is voidable by CSXT upon the occurrence of
certain conditions. The term of the
agreement is five years. In addition, the
Company has agreed to grant 475,000 warrants
to CSXT, exercisable at $4.50 per warrant,
with 75,000 warrants granted on October 15,
1997
F-18
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and thereafter in four equal annual
installments of 100,000 warrants each
commencing January 1, 1998. The Company
appointed a CSXT representative to its Board
of Directors who resigned in January 1998.
CSXT has currently elected not to replace
the Board membership.
c) In January 1997, the Company entered into a
five year agreement with Florida Department
of Transportation ("FDOT") for the right to
use the tracks between Ft. Lauderdale and
West Palm Beach, which comprise part of the
route of the Florida Fun-Train. The track
usage fee is $500 per one way trip and will
increase by $50 per one way trip annually.
d) In February 1995, the Company entered
into an agreement with the Florida East
Coast Railway Company ("FEC") for the use of
FEC track in connection with the Company's
proposed rail operations. Under the
agreement, the Company will pay a fee to the
FEC upon commencement of operations of no
less than either $500,000 per train, per
year, or $18 per train mile (with a
stipulated train size of 15 cars). Effective
January 1 of the year in which the third
anniversary of the commencement service
occurs, and January 1 in every third year
thereafter, the car mile rate and the
minimum amount payable shall, upon the
request of either party, be adjusted based
on the "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.
e) In April 1997, the Company entered into
an agreement with the National Passenger
Railroad Corporation ("Amtrak") for certain
technical services including operating and
maintenance crew and supplies and the
leasing of three diesel locomotives. The
agreement with Amtrak expires on October 15,
2012. The agreement states there will be
monthly payments of approximately $340,000.
However, due to the reduced operating
schedule of the Florida Fun-Train and other
factors, monthly payments for the three
months ending December 31, 1997 averaged
approximately $285,000. The agreement also
included a $500,000 mobilization fee for
conversion of facilities and hiring and
training of operating and maintenance crew,
which was paid in 1997.
F-19
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
f) The Company leases certain operating
property and equipment under operating
leases. The future lease commitments for
property and equipment at December 31, 1997
aggregated at $2,074,000 and are due as
follows: 1998 - $474,000; 1999 - $407,000;
2000 - $324,000; 2001 - $209,000; 2002 -
$166,000 and $494,000 thereafter. Rent
expense charged to operations was $361,000
and $56,000 in 1997 and 1996, respectively.
g) Litigation
i) MITCHELL LAKES FIRE
On July 3, 1997, the United States of
America filed an action against D&SNG in
the United States District for the
District of Colorado. On October 22,
1997, D&SNG was served with an Amended
Complaint. This civil action arises from
a forest fire (the "Mitchell Lakes Fire")
that occurred on July 5, 1994, along the
Durango/Silverton train route, which was
allegedly caused by the emission of
burning particles from the exhaust of a
D&SNG locomotive. The Amended Complaint
alleges that 270 acres of forest in the
San Juan National Forest were burned. The
Amended Complaint alleges (i) various
counts based on strict liability under
Colorado law, under various federal rules
and regulations regarding the use of
federal rights-of-way, and under various
alleged legal doctrines concerning the
operation of "abnormally dangerous
activities" and trains, (ii) a count
based on breach of duty of care, and
(iii) counts based on common law arising
from the operation of an abnormally
dangerous action and operation of a train
and negligence, all arising from D&SNG's
alleged actions in causing the Mitchell
Lakes Fire. The United States seeks the
cost of suppressing the fire (alleged to
be $555,542) along with pre and
post-judgement interest, administrative
costs and penalties under federal statues
and regulations.
The Company believes it has applicable
insurance coverage, as well as a claim
for indemnification from the Seller of
D&SNG, which it believes will satisfy any
financial responsibility it may have as a
result of this action. The Company has
filed a motion to dismiss this action and
intends to vigorously defend the action.
F-20
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ii) CARNIVAL
On July 9, 1997, Carnival Corporation
("Carnival") commenced an action against
the Company in the United States District
Court for the Southern District of
Florida. The Complaint alleges federal
(Lanham Act) trademark infringement,
federal, state and common law trademark
dilution, common law unfair competition
and false designation of origin,
description and representation of
services under the Lanham Act, based on
Carnival's alleged ownership of a
"family" of federal, state and common law
service marks and trademarks centered
around the word "Fun" which relate to
Carnival's business activities including
entertainment services (stage shows,
nightclub shows, contests, dances and
parties), cruise ship services, cruise
transportation services, "on-line"
services, on-board interactive television
services and various children's
entertainment services. On July 22, 1997,
Carnival filed a Motion for Temporary
Injunction seeking to enjoin the Company
from (i) using the Fun Train mark (and
any related "Fun" marks), (ii) holding
out the Company's services or products as
sponsored by or affiliated with Carnival,
(iii) committing acts of infringement or
dilution of Carnival's marks, and (iv)
otherwise unfairly competing. On July 29,
1997, the federal court denied this
motion on the grounds that, among other
things, Carnival has failed to establish
a substantial likelihood of success on
the merits. Currently this action is in
discovery and this case is set for a
pretrial conference on May 15, 1998. A
specific trial date has not been set.
The Company has applied for the federal
registration of "Fun-Train" mark and is
currently pursuing this application;
however, Carnival has opposed this
application.
iii) DAKOTAH RESERVATIONS SERVICES
On December 31, 1997, Dakotah Reservation
Services, Inc. ("Dakotah"), sent a letter
to the Company asserting a claim for
breach of that certain agreement (the
"Reservation Agreement") between the
Company and Dakotah dated June 1, 1997.
In March 1998 Dakotah filed an action
against the Company in the United States
District Court for the District of
Colorado for breach of an agreement for
the provision of reservation services.
The Company had previously terminated the
Reservation Agreement
F-21
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with Dakotah pursuant to a letter dated
December 30, 1997, for non-performance by
Dakotah of material provisions of the
Reservation Agreement. The Company believes
it has a basis on which to deny liability.
iv) DAVID GILMARTIN
On January 21, 1998, the Company received a
letter from an attorney for David Gilmartin
demanding unpaid wages and contract damages
allegedly due pursuant to an agreement dated
December 10, 1996, between Mr. Gilmartin and
the Company. The Company terminated its
agreement with Mr. Gilmartin for
non-performance. In the event litigation is
commenced against the Company for breach of
the Agreement, the Company intends to deny
liability.
v) JACK MOSS
An action was filed in the 17th Judicial
Circuit Court in and for Broward County
against the Company on February 19, 1998, by
Jack Moss for unpaid wages and expenses, and
breach of the terms of his employment
agreement with the Company. The Company
denies liability for breach of this
agreement. The Company is currently
negotiating the settlement of this action.
The Company intends to vigorously defend
against the foregoing actions excluding Jack
Moss. The ultimate outcome of these actions
cannot presently be determined.
10. STOCKHOLDERS' a) In May 1995, the Company executed a stock
EQUITY split and exchanged the 1,996,400 then
outstanding shares of its common stock for
2,495,500 shares of common stock and changed
the par value of its common stock from $.01
to no par. In February 1996, the Company
executed a second stock split and exchanged
the 2,495,500 shares of its common stock for
4,275,000 shares of common stock with no
par value, 10,000,000 shares authorized
to be issued. On April 26, 1996, the
Company merged into Asia-America
Corporation, a public company, and
accounted for the transaction as a
reverse acquisition for financial
statement purposes, and was recapitalized
with 9,050,278 shares of $.001 par value
stock, 100,000,000 shares
F-22
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
authorized to be issued. In connection with
this transaction, there was no impact on the
operating results of the Company and it
resulted only in an adjustment to
stockholders' equity. The components of
stockholders' equity and all per share
amounts in the accompanying financial
statements have been adjusted retroactively
to reflect the stock splits and changes in
par value.
b) In 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) 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.
d) In May 1996, the Company entered into a
two year agreement with an underwriter to
provide financial advising and consulting
services. The agreement was amended in
January 1997 to extend the agreement an
additional eighteen months to October 1999
and to allow all fees through October 1999
to be paid in full by the issuance of 52,500
shares of common stock of the Company in
January 1997. The agreement also provides
for additional fees comprising of 3% to 5%
of consideration paid for acquisitions or
mergers with other companies, joint
ventures, license and royalty agreements,
etc., that the consultant arranges and 1.5%
to 8% of the gross proceeds resulting from
the sale of any securities issued by the
Company.
11. DEBT AND EQUITY In March 1996, the Company completed its
FINANCING Stage I financing. The company received
gross proceeds from this private offering of
$500,000 in exchange for $500,000 in notes
payable bearing interest at 10% per annum,
with a $55,000 original issue discount, and
375,004 shares of common stock valued at
$55,000. Costs associated with the offering
were $106,291.
In May 1996, the Company completed its Stage
II financing. Total consideration of
$16,501,365 from this private offering was
received consisting of $16,085,000 in cash
and the conversion of $412,500 in notes
payable and $3,865 in accrued interest from
Stage I financing.
F-23
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with this transaction,
$8,250,682 in five-year convertible notes
bearing interest at 10% per annum were
issued. Interest is payable semi-annually in
April and October and the notes are
convertible at $3.50 per share. In addition,
3,950,271 redeemable common stock purchase
warrants and 4,050,274 shares of common
stock valued at $8,250,683 were issued.
Costs associated with the offering were
$1,986,460. The Company used $778,388 of the
net proceed to paydown $333,388 in notes
payable to related parties and others and
$445,000 in notes payable from the Stage I
financing. In connection with the retirement
of the Stage I debt, $94,599 of deferred
loan costs was charged to operations as
amortization of deferred loan costs. In
addition, $55,000 of original issue discount
was charged to operations as interest
expense.
On June 30, 1997, the Company completed a
private offering of 223.05 units of its
securities at $50,000 per unit. Each unit
consists of (i) an 8% convertible
subordinated note in the principal amount of
$50,000 and (ii) 5,000 shares of common
stock of the Company. The subordinated notes
may be converted at $3.50 per share, at the
option of the holders thereof, at any time
during the five-year term thereof. Investors
who purchased at least 40 units ($2,000,000)
received an additional 2,500 shares (for a
total of 7,500 shares) for each unit
purchased, however, the subordinated note(s)
issued to these investors contain(s) a
mandatory conversion feature which may be
exercised by the Company in certain
circumstances.
The Company issued a total of $11,152,500
(principal amount) in subordinated notes and
1,465,250 shares of common stock which
yielded gross proceeds and net proceeds of
$11,152,500 and approximately $9,560,000,
respectively. Additionally, the Company
issued 223,050 shares of common stock as
partial compensation to the placement agent
and certain subplacement agents in the
private offering. The transaction resulted
in an original issue discount of
approximately $3,450,000 which is being
recorded as additional interest expense over
the five-year term of the subordinated
notes.
F-24
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK BASED The Company has elected to follow Accounting
COMPENSATION Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" ("APB 25") in
accounting for its employee stock options.
Under APB 25, because the exercise price of
the Company's employee stock options issued
equaled the market price of the underlying
stock or the close of grant, no compensation
expense was recognized.
Under the Company's 1996 Non-Qualified Stock
Option Plan, the Company may grant options
to its employees, directors and external
consultants up to 717,500 shares of the
Company's common stock. All options granted
to employees have 10 year terms and become
fully exercisable at the end of the second
or third year. All options granted to
directors and external consultants have ten
year terms and vest immediately. Statement
of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation,"
("SFAS No. 123") requires the Company to
provide proforma information regarding net
loss and loss per common share as if
compensation cost for the Company's Stock
Option plan had been determined in
accordance with the fair value based method
prescribed in SFAS No. 123. The Company
estimates the fair value of each stock
option on the date of grant by using the
Black Scholes option-pricing model with the
following weighted-average assumptions for
1997 and 1996, respectively: risk-free
interest rates of 6.1% and 6.5%; dividend
yield of 0 for both years; volatility
factors of the expected market price of the
Company's common stock of .695 and .10; and
weighted-average expected life of the option
of 9 and 10 years.
Under the accounting provisions of SFAS No.
123, the Company's net loss and loss per
common share for the years ended December
31, 1997 and 1996 would have been $7,534,829
and $.73 and $2,633,644 and $.35,
respectively. A summary of the Company's
stock option activity, and related
information for the years ended December 31,
1997 and 1996, is as follows:
F-25
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding
January 1 138,700 $3.88 - -
Granted 487,000 2.41 138,700 $3.88
Exercised - - - -
Forfeited (131,000) 2.53 - -
------- ----- ------- -----
Outstanding,
December 31 494,700 2.79 138,700 $3.88
------- ----- ------- -----
Exercisable at
December 31 396,033 2.74 71,698 $3.77
------- ----- ------- -----
</TABLE>
The weighted-average fair value of options
granted was $1.85 for each of the
years ended December 31, 1997 and 1996.
Exercise prices for options outstanding and
exercisable as of December 31, 1997 ranged
from $1.00 to $4.75. The weighted average
remaining contractual life of these options
is approximately 8.8 years.
13. ACQUITISION On March 13, 1997, the Company purchased all
of the common stock of The Durango &
Silverton Narrow Gauge Railroad Company
("D&SNG"). The purchase price, which
aggregated approximately $16.2 million
consisted of the following: (i) two
promissory notes aggregating $10.05 million
which are subordinate to a purchase money
loan provided by a third-party lender in the
amount of $8.5 million; (ii) 200,000 shares
of the common stock of the Company; (iii) a
six-year warrant to purchase 1,610,000
shares of the Company at an exercise price
of $3.50 per share; and (iv) cash of
approximately $5 million, including a $2
million deposit which was paid in December
1996. The purchase resulted in an allocation
of approximately $1.5 million to goodwill,
which is being amortized over forty years.
F-26
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial statement purposes, the
acquisition is assumed to have occurred on
March 31, 1997. The operations for the
period from March 13, 1997 to March 31, 1997
are not deemed to be material.
In connection with the acquisition of D&SNG,
the fair value of the assets acquired was as
follows:
<TABLE>
<S> <C>
Cash paid (net of cash acquired) $ 5,656,050
Liabilities assumed and/or incurred 24,158,730
Common stock and warrant issued 544,900
Fair value of assets acquired $ 30,359,680
</TABLE>
The acquisition was accounted for under the
purchase method for accounting purposes and
based upon a preliminary allocation of the
purchase price resulted in the following
significant assets acquired and liabilities
assumed and/or incurred:
<TABLE>
<S> <C>
Fixed assets $ 28,487,047
Inventories and other assets 1,872,633
Deferred income tax liability 8,167,159
Long-term debt 17,650,000
Other liabilities 2,953,234
</TABLE>
The Company's unaudited proforma
consolidated statements of operations for
the years ended December 31, 1997 and 1996,
assuming the acquisition of D&SNG was
effected at the beginning of each such
period, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Total revenues $ 10,187,607 $ 8,946,462
Net loss $ (8,100,775) $ (1,196,049)
Income loss per share $ (0.78) $ (0.15)
</TABLE>
This proforma information does not purport
to be indicative of the results which may
have been obtained had the acquisition been
consummated on the dates assumed.
D&SNG's business is highly seasonal;
historically, at least 60% of the total
number of passengers who ride on D&SNG
annually do so during the months of June,
July and August.
F-27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.34 Letter Amendment to Agreement between CSX Transportation, Inc.
and the Registrant, dated November 24, 1997.
10.35 Placement Agent Agreement between International Capital
Growth, Ltd. and the Registrant, dated May 12, 1997.
10.36 Placement Agent Agreement between International Capital
Growth, Ltd. and the Registrant, dated December 16, 1997.
10.37 Consulting Agreement between the Registrant and Alan L.
Jacobs, dated March 18, 1998.
21 Subsidiarties of the Registrant.
27 Financial Data Schedule.
EXHIBIT 10.34
[LETTER HEAD]
November 24, 1997
Mr. Alan Harper
Chairman
First American Railways, Inc.
3700 North 29th Avenue, Suite 202
Hollywood, FL 33020
Dear Alan:
This will confirm my verbal offer indicating that CSX Transportation,
Inc. is willing to accept payment for trackage fees is the form of FAR common
stock for the period beginning October, 1997, through March, 1998. That offer is
conditioned on fact that FAR stock continues to be traded publicly on the NASDAQ
exchange and that FAR remains solvent and ourside the protection of the
bankruptcy laws. If delisting or a bankruptcy filing occurs, this offer is
rescinded.
Rather than set a pre-determined conversion price for the stock, CSXT
will accepth the closing price of FAR stock on the last workday of each month,
beginning with October, 1997, and continuing through March, 1998, as the
appropriate price for determining the number of shares CSXT is entitled to as
compensation. Rather than go through the administrative chore of issuing stock
each month, please arrange to have the stock issued early in January, 1998 for
the Octover through December, 1997 period, and in April, 1998, for the January
through March, 1998 period.
If you have any questions, please don't hesitate to call.
Sincerely,
/S/ ALBERT B. AFTOORA
--------------------------------------------
Albert B. Aftoora
cc: L.L. Brown - Director Exp. Billing
EXHIBIT 10.35
PLACEMENT AGENT AGREEMENT
Dated as of: May 12, 1997
International Capital Growth, Ltd.
660 Steamboat Road
2nd Floor
Greenwich, Connecticut 06830
Attention: Michael S. Jacobs
Senior Vice President
Ladies and Gentlemen:
The undersigned, First American Railways, Inc., a Nevada corporation (the
"Company"), hereby agrees with International Capital Growth, Ltd., a Delaware
corporation ("ICG"), as follows:
1. OFFERING.
A. The Company hereby engages ICG to act as its exclusive placement agent in
connection with the issuance and sale of up to $7,500,000 of securities of the
Company (not including the over-allotment option referenced in Section 1(B)
hereof) (the "Offering").
B. In the Offering, the Company shall issue up to a maximum of 150 units
(the "Units") at $50,000 per Unit. The issuance of Units may be increased in the
discretion of the Company and ICG by up to an additional 50 Units to cover
over-allotments. Each Unit consists of (a) a convertible subordinated note (the
"Note") in the principal amount of $50,000 bearing interest at 8% per annum and
(b) 5,000 shares (the "Unit Shares") of common stock of the Company, $.001 par
value per share (the "Common Stock"). The principal amount of the Note and any
accrued but unpaid interest thereon shall be due and payable sixty (60) months
from the date of the first closing of the Offering, unless converted by the
holder thereof. The Notes may not be prepaid by the Company. Interest on the
Note shall be paid in cash semi-annually on June 30 and December 31, commencing
December 31, 1997. Each noteholder, at his option, may convert all, but not less
than all, of the principal amount of his Note, together with accrued but unpaid
interest, into shares of Common Stock (the "Note Shares") at any time prior to
maturity at a conversion price of $3.50 per share (subject to adjustment under
certain circumstances). The Company's obligations under the Notes shall be
unsecured and the Notes shall be subordinate to previously issued and future
indebtedness of the Company. The Note will be in substantially the form of an
exhibit attached to the Confidential Private Offering Memorandum, dated the date
hereof, which has been prepared by the Company (such memorandum, together with
all amendments thereof and supplements and exhibits thereto is referred to
herein as the "Memorandum").
1
<PAGE>
C. All of such securities are subject to the terms and conditions set forth
in the respective certificate representing such securities, in the Company's
charter documents and in the respective Subscription Agreements for U.S. and
Non-U.S. Persons (collectively, the "Subscription Agreements") to be executed by
each purchaser, as the case may be, and the Company. The Units, the Notes, the
Unit Shares, the Note Shares and the Placement Agent Shares (as defined in
Section 5(G) hereof), are hereinafter sometimes referred to as the "Securities."
The Units will be offered without registration under the Securities Act.
Purchasers of the Units will be granted certain registration rights with respect
to the Securities held by them, as more fully set forth in the Subscription
Agreements.
D. The 200,000 Units (including the over-allotment option) will be offered
by ICG on a "best efforts" basis. The Company will issue the appropriate
securities at the respective closing(s) for the Offering (each, a "Closing")
after subscriptions have been received and accepted by the Company and when
funds from investors have cleared the banking system in the normal course of
business. Each Closing shall take place at the offices of Orrick, Herrington &
Sutcliffe LLP, counsel to ICG, at 666 Fifth Avenue, New York, New York 10103, or
such other place as shall be agreed upon by ICG and the Company, at such time as
shall be determined by ICG.
E. The Offering shall commence on the date of the Memorandum and shall
terminate on September 30, 1997, unless extended by ICG and the Company in their
sole discretion (such date, as the same may be extended, is hereinafter referred
to as the "Termination Date"; the period commencing on the date hereof and
ending on the Termination Date is sometimes referred to herein as the "Offering
Period").
2. INFORMATION.
A. Up to 200 Units will be offered by ICG during the Offering Period. ICG
shall not be obligated to sell any Units and shall only be obligated to offer
the Units on a "best efforts" basis.
B. The Units will have the terms set forth in and will be offered by the
Company by means of the Memorandum. Payment for the Units shall be made by check
with respect to U.S. purchasers and wire transfer with respect to non-U.S.
purchasers, as more fully described in the respective Subscription Agreements.
Subscriptions for partial Units may be accepted at the discretion of the Company
and ICG. ICG and the Company agree that the Units will be offered and sold only
to qualified non-U.S. Persons in compliance with Regulation S promulgated by the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), and to "accredited investors" within
the meaning of Rule 501 of Regulation D ("Accredited Investors") promulgated by
the Commission under the Securities Act and Rule 506 of Regulation D of the
Securities Act.
C. All funds received from subscriptions will be promptly transmitted
pursuant to the terms of an escrow agreement to the escrow account designated
for the Offering at Continental Stock Transfer & Trust Company (the "Escrow
Agent"). In the event that a Closing occurs, the funds
2
<PAGE>
received in respect of the Units closed on will be forwarded to the Company,
against delivery of the appropriate amount of the securities offered, net of (i)
the placement agent commission equal to ten percent (10%) of the gross proceeds
from the sale of the Units closed on, (ii) the non-accountable expense allowance
equal to two percent (2%) of the gross proceeds from the sale of the Units
closed on, (iii) legal fees (such legal fees not to exceed $50,000, including
$35,000 from the Offering and $15,000 from a prior terminated offering of the
Company) and expenses of ICG's counsel and (iv) "Blue Sky" filing and legal fees
(such filing and legal fees not to exceed $10,000) and expenses related to each,
to the extent not previously paid.
D. At each Closing, the Company shall pay or cause to be paid by, at the
option of ICG, certified or official bank check or wire transfer, to the extent
not previously paid by the Company or the Escrow Agent to ICG or its counsel, as
applicable, (i) the placement agent commission equal to ten percent (10%) of the
gross proceeds from the sale of the aggregate number of Units closed on, (ii)
the non-accountable expense allowance equal to two percent (2%) of the gross
proceeds from the sale of the aggregate number of Units closed on, (iii) legal
fees (such legal fees not to exceed $50,000, including $35,000 from the Offering
and $15,000 from a prior terminated offering of the Company) and expenses of
ICG's counsel and (v) "Blue Sky" filing and legal fees (such filing and legal
fees not to exceed $10,000) and expenses related thereto, to the extent not
previously paid. In addition to the foregoing, the Company shall be responsible
for the fees and expenses identified in Sections 5, 6, 7, 8 and 10 hereof, which
expenses shall not be deemed to be commissions.
E. The Company reserves the right to reject any subscriber, in whole or in
part, in its sole discretion. Notwithstanding anything to the contrary contained
in this Section 2(E), the Company's right to reject a subscriber shall lapse
upon the earlier to occur of (a) acceptance of such subscription and (b) ten
(10) days after receipt by the Company or its agent of the fully completed and
duly executed subscription documents from ICG with respect to such subscriber.
Funds received by the Escrow Agent or the Company from any subscriber whose
subscription is rejected will be returned to such subscriber, without deduction
therefrom or interest thereon, but no sooner than such funds have cleared the
banking system in the normal course of business.
3. Representations, Warranties and Covenants of ICG.
A. ICG represents, warrants and covenants as follows:
(i) ICG has the necessary power to enter into this Agreement and
to consummate the transactions contemplated hereby.
(ii) ICG is a corporation duly formed and validly existing under the
laws of the State of Delaware; the execution and delivery by ICG of this
Agreement and the consummation of the transactions herein contemplated will
not result in any violation of, or be in conflict with, or constitute a
default under, any agreement or instrument to which ICG is a party or by
which ICG or its properties are bound, or any judgment, decree, order or, to
ICG's knowledge, any statute, rule or regulation applicable to ICG. This
Agreement, when
3
<PAGE>
executed and delivered by ICG, will constitute the legal, valid and binding
obligation of ICG, enforceable in accordance with its terms, except to the
extent that (a) the enforceability hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect and affecting the rights of creditors generally, (b) the
enforceability hereof is subject to general principles of equity, or (c) the
indemnification provisions hereof may be held to be violative of public
policy.
(iii) ICG will deliver to each purchaser, prior to any submission by
such person of a written offer relating to the purchase of the Units, a copy
of the Memorandum with respect to the Offering, as may have been most
recently amended or supplemented by the Company.
(iv) Upon receipt of an executed Subscription Agreement, ICG will
promptly forward copies of the subscription documents to the Company or its
counsel and shall arrange for the forwarding of all consideration received
for such Units to the Escrow Agent to be held in escrow.
(v) ICG will not deliver the Memorandum to any person it does not
reasonably believe to be an Accredited Investor or a non-U.S. Person.
(vi) ICG will not intentionally take any action which it reasonably
believes would cause the Offering to violate the provisions of the
Securities Act, the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), or the respective rules and regulations promulgated
thereunder (the "Rules and Regulations").
(vii) ICG shall use all reasonable efforts to determine (a) whether any
prospective purchaser is an Accredited Investor or a non-U.S. Person and (b)
that any information furnished by a prospective investor is true and
accurate. ICG shall have no obligation to insure that (a) any check, note,
draft or other means of payment for the Units will be honored, paid or
enforceable against the subscriber in accordance with its terms, or (b)
subject to the performance of ICG's obligations and the accuracy of ICG's
representations and warranties hereunder, (i) the Offering is not subject to
the registration requirements of the Securities Act, any applicable foreign
law or state "Blue Sky" law or (ii) any prospective purchaser is an
Accredited Investor or non-U.S. Person.
(viii) ICG is a member of the National Association of Securities
Dealers, Inc. and is a broker-dealer registered as such under the Exchange
Act and under the securi ties laws of the states in which the Units will be
offered or sold by ICG, unless an exemption for such state registration is
available to ICG. ICG is in material compliance with all material rules and
regulations applicable to ICG generally and applicable to ICG's
participation in the Offering.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. THE COMPANY REPRESENTS AND WARRANTS AS FOLLOWS:
4
<PAGE>
(i) This Agreement, the Escrow Agreement and the Subscription
Agreements have been, or will be upon execution and delivery, duly and
validly authorized by the Company and are, or with respect to the
Subscription Agreements will be, valid and binding agreements of the
Company, enforceable in accordance with their respective terms, except to
the extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time
to time in effect and affecting the rights of creditors generally, (b) the
enforceability hereof or thereof is subject to general principles of equity
or (c) the indemnification provisions hereof or thereof may be held to be
violative of public policy. The Securities have been duly authorized and,
when issued and paid for in accordance with the Memorandum, this Agreement
and the Subscription Agreements, the certificates representing each of such
securities will be valid and binding obligations of the Company, enforceable
in accordance with their respective terms, except to the extent that (a) the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect and
affecting the rights of creditors generally, and (b) the enforceability
thereof is subject to general principles of equity. All corporate action
required to be taken for the authorization, issuance and sale of the
Securities has been duly and validly taken by the Company.
(ii) When issued and paid for in accordance with the terms of the
Memorandum, this Agreement and the Subscription Agreements, the Notes will
constitute valid and binding obligations of the Company to issue and sell,
upon conversion thereof in accordance with their terms, the number and type
of security of the Company called for thereby. The Notes, the Unit Shares,
the Placement Agent Shares and, upon conversion of the Notes in accordance
with their terms, the Note Shares, will, at the time each such security is
issued by the Company, be validly issued, fully paid and non-assessable; the
holders thereof will not be subject to personal liability solely by reason
of being such holders; such securities are not and will not be subject to
the preemptive rights of any shareholder of the Company.
(iii) All issued and outstanding securities of each of the Company and
The Durango & Silverton Narrow Gauge Railroad Company, a Colorado
corporation (the "Subsidiary"), have been duly authorized and validly issued
and are fully paid and non-assessable; the holders thereof have no rights of
rescission or preemptive rights with respect thereto and are not subject to
personal liability solely by reason of being securityholders; and none of
such securities was issued in violation of the preemptive rights of any
holders of any security of the Company or the Subsidiary. The Company has
the respective number of (a) authorized and (b) issued and outstanding
shares of capital stock set forth in the Memorandum.
(iv) Each of the Company and the Subsidiary has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real
and personal property stated in the Memorandum to be owned or leased by
them, respectively, free and clear of all liens, encumbrances, claims,
security interests and defects of any material nature whatsoever, other than
those set forth in the Memorandum and liens for taxes not yet due and
payable.
5
<PAGE>
(v) Except as disclosed in the Memorandum, there is no material
litigation or governmental proceeding pending or, to the best of the
Company's knowledge, threatened against, or involving the properties or
business of the Company or the Subsidiary.
(vi) Each of the Company and the Subsidiary has been duly organized
and is validly existing as a corporation in good standing under the laws of
its respective jurisdiction of organization. The Company owns all of the
issued and outstanding voting shares of the Subsidiary free and clear of all
liens, encumbrances, claims, security interests and defects of any material
nature, except pledges and liens in favor of NationsBank N.A. (South) and
Mr. Charles E. Bradshaw, Jr. Except as disclosed in the Memorandum, neither
the Company nor the Subsidiary owns or controls, directly or indirectly, an
interest in any other corporation, limited liability company, partnership,
trust, joint venture or other business entity. Each of the Company and the
Subsidiary is duly qualified or licensed and in good standing as a foreign
corporation in each jurisdiction in which the character of its operations
requires such qualification or licensing and where failure to so qualify
would have a material adverse effect on either of the Company or the
Subsidiary. Each of the Company and the Subsidiary has all requisite
corporate power and authority, and all material and necessary
authorizations, approvals, orders, licenses, certificates and permits of and
from all governmental regulatory officials and bodies (domestic and foreign)
to conduct its businesses as described in the Memorandum; each of the
Company and the Subsidiary is doing business in strict compliance with all
such authorizations, approvals, orders, licenses, certificates and permits
and all foreign, federal, state and local laws, rules and regulations
concerning the business in which it is engaged, except where such failure to
maintain such compliance would not, individually or in the aggregate, have a
material adverse effect on the Company or the Subsidiary. Any disclosures in
the Memorandum concerning the effects of foreign, federal, state and local
regulation on the Company's or the Subsidiary's business as currently
conducted and as contemplated are correct in all material respects and do
not omit to state a material fact. The Company has all corporate power and
authority to enter into this Agreement, the Escrow Agreement and the
Subscription Agreements and to carry out the provisions and conditions
hereof and thereof, and all consents, authorizations, approvals and orders
required in connection herewith and therewith have been obtained or will
have been obtained prior to the first Closing of the Offering. No consent,
authorization or order of, and no filing with, any court, government agency
or other body is required by the Company or the Subsidiary for the issuance
of the Securities pursuant to the Memorandum or the Subscription Agreements,
except for applicable federal and state securities laws. Neither the Company
nor the Subsidiary has, since its respective inception, incurred any
liability arising under or as a result of the application of any of the
provisions of the Securities Act, the Exchange Act or the Rules and
Regulations.
(vii) To the best knowledge of the Company's officers, there has been
no material adverse change in the condition or prospects of either the
Company or the Subsidiary, either individually or as a whole, financial or
otherwise, from that on the latest dates as of which such condition or
prospects, respectively, are set forth in the Memorandum, and the
6
<PAGE>
outstanding debt, the property and the business of the Company and the
Subsidiary conforms in all material respects to the descriptions thereof
contained in the Memorandum.
(viii) Neither the Company nor the Subsidiary is in breach of, or in
default under, any term or provision of any indenture, mortgage, deed of
trust, lease, note, loan or credit agreement or any other agreement or
instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which it is a party or by which it or any of its
properties may be bound or affected. Neither the Company nor the Subsidiary
is in violation of any provision of its charter or Bylaws or in violation of
any franchise, license, permit, judgment, decree or order, or in violation
of any statute, rule or regulation. Neither the execution and delivery of
this Agreement, the Escrow Agreement or the Subscription Agreements, nor the
issuance and sale or delivery of the Securities, nor the consummation of any
of the transactions contemplated herein or in the Subscription Agreements,
nor the compliance by the Company with the terms and provisions hereof or
thereof, has conflicted with or will conflict with, or has resulted in or
will result in a breach of, any of the terms and provisions of, or has
constituted or will constitute a default under, or has resulted in or will
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or the Subsidiary or pursuant to the
terms of any indenture, mortgage, deed of trust, note, loan or credit
agreement or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company or
the Subsidiary may be bound or to which any of the property or assets of the
Company or the Subsidiary is subject, except, in each case, for which a
waiver has been obtained by the Company or the Subsidiary, as applicable,
and delivered to ICG; nor will such action result in any violation of the
provisions of the charter or the Bylaws of the Company or the Subsidiary or,
assuming the due performance by ICG of its obligations hereunder, any
statute or any order, rule or regulation applicable to the Company or the
Subsidiary of any court or of any foreign, federal, state or other
regulatory authority or other government body having jurisdiction over the
Company or the Subsidiary.
(ix) The Securities and the Subscription Agreements conform in all
material respects to all statements in relation thereto contained in the
Memorandum.
(x) Subsequent to the dates as of which information is given in the
Memorandum, and except as may otherwise be indicated or contemplated herein
or therein, neither the Company nor the Subsidiary has (a) issued any
securities or incurred any material liability or obligation, direct or
contingent, for borrowed money, or (b) entered into any transaction other
than in the ordinary course of business, or (c) declared or paid any
dividend or made any other distribution on or in respect of its capital
stock.
(xi) There are no claims for services in the nature of a finder's or
origination fee with respect to the sale of the Units.
(xii) Each of the Company and the Subsidiary owns or possesses, free
and clear of all liens or encumbrances and rights thereto or therein by
third parties, the requisite licenses or
7
<PAGE>
other rights to use all trademarks, service marks, copyrights, service
names, trade names, patents, patent applications and licenses necessary to
conduct its business (including, without limitation, any such licenses or
rights described in the Memorandum as being owned or possessed by the
Company or the Subsidiary), and, other than as set forth in the Memorandum,
there is no claim or action by any person pertaining to, or proceeding,
pending or threatened, which challenges the exclusive rights of the Company
or the Subsidiary with respect to any trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and licenses used
in the conduct of the Company's or the Subsidiary's business; and, the
Company's and the Subsidiary's current products, services and processes do
not infringe or will not infringe on the patents currently held by any third
party.
(xiii) Neither the Company nor the Subsidiary is under any obligation to
pay royalties or fees of any kind whatsoever to any third party with respect
to any trademarks, service marks, copyrights, service names, trade names,
patents, patent applications, licenses or technology it has developed, uses,
employs or intends to use or employ.
(xiv) Subject to the performance by ICG of its obligations hereunder,
the Memorandum and the offer and sale of the Securities comply, and will
continue to comply, up to the Termination Date in all material respects with
the requirements of Regulation S and Rule 506 of Regulation D, each as
promulgated by the Commission pursuant to the Securities Act and any other
applicable federal and state laws, rules, regulations and executive orders.
Neither the Memorandum nor any amendment or supplement thereto nor any
documents prepared by the Company in connection with the Offering will
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. All statements of material facts in the Memorandum are
true and correct as of the date of the Memorandum and will be true and
correct on the date of each Closing.
(xv) Neither the Company, nor the Subsidiary, or any respective
affiliate thereof, nor any person acting on its or their behalf, has
engaged, directly or indirectly, in any directed selling efforts (as
interpreted by appropriate administrative or judicial authorities under
Regulation S of the Securities Act) with respect to the Offering.
(xvi) All taxes which are due and payable from each the Company and the
Subsidiary have been paid in full and neither the Company nor the Subsidiary
has any tax deficiency or claim outstanding assessed or proposed against it.
(xvii) The financial statements of the Company and the Subsidiary and
the respective notes thereto included in the Memorandum fairly present the
financial position, income, changes in cash flow, changes in stockholders'
equity and the results of operations of the Company and the Subsidiary at
the respective dates and for the respective periods to which they apply.
Such financial statements have been prepared in conformity with generally
accepted accounting principles and the Rules and Regulations, consistently
applied throughout the periods involved. The pro forma financial information
included in the
8
<PAGE>
Memorandum (A) presents fairly, in all material respects, the information
shown therein, (B) have been prepared in all material respects, in
accordance with the requirements of Rule 11-02 of Regulation S-X promulgated
under the Exchange Act, (C) have been prepared in all material respects in
accordance with the Commission's rules and guidelines with respect to pro
forma financial information, and (D) have been properly compiled on the
bases described therein, and the assumptions used in the preparation of the
pro forma financial information and included in the Memorandum are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein. There has been no
material adverse change or development involving a material prospective
change in the condition, financial or otherwise, or in the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of operations of the Company or the Subsidiary, whether or not
arising in the ordinary course of business, since the date of the financial
statements included in the Memorandum; and the outstanding debt, the
property, both tangible and intangible, and the businesses of the Company
and the Subsidiary conform in all material respects to the descriptions
thereof contained in the Memorandum. The financial information set forth in
the Memorandum under the headings "Selected Financial Data" and "Plan of
Operations" fairly presents, on the basis stated in the Memorandum, the
information set forth therein and such financial information has been
derived from or compiled on a basis consistent with that of the audited
financial statements included in the Memorandum.
5. Certain Covenants and Agreements of the Company.
A. The Company covenants and agrees at its expense and without any expense
to ICG as follows:
B. To advise ICG of any adverse change in the Company's or the Subsidiary's
financial condition, prospects or business or of any development materially
affecting the Company or the Subsidiary or rendering untrue or misleading any
material statement in the Memorandum occurring at any time prior to the each
Closing as soon as the Company or the Subsidiary is either informed or becomes
aware thereof.
C. To use its best efforts to cause the Securities to be qualified or
registered for sale, or to obtain exemptions from such qualification or
registration requirements, on terms consistent with those stated in the
Memorandum under the securities laws of such jurisdictions as ICG shall
reasonably request, provided that such states and jurisdictions do not require
the Company to qualify as a foreign corporation. Qualification, registration and
exemption charges and fees shall be at the sole cost and expense of the Company.
ICG's counsel shall perform the required "Blue Sky" services and all filing and
legal fees (such filing and legal fees not to exceed $10,000) and expenses of
ICG's counsel relating to such "Blue Sky" matters shall be paid by the Company.
The Company shall also pay to ICG's counsel all legal fees (not to exceed
$50,000, consisting of $35,000 from this Offering and $15,000 owed to ICG's
counsel from a prior terminated offering) and expenses related thereto.
9
<PAGE>
D. To provide and to continue to provide to each holder of the Securities,
so long as such holder shall remain a security holder of the Company, for a
period ending on the earlier of (i) the registration of the Unit Shares, the
Note Shares and the Placement Agent Shares under the Securities Act and (ii)
five (5) years from the Termination Date, copies of all quarterly and audited
annual consolidated financial statements prepared by or on behalf of the
Company, other reports prepared by or on behalf of the Company for public
disclosure and all documents delivered to the Company's shareholders.
E. To deliver, with respect to the Company and the Subsidiary, on a
consolidated basis where appropriate, for a period of five (5) years following
the Termination Date, to ICG, in the manner provided in Section 11(B) of this
Agreement: (i) within forty five (45) days after the end of each of the first
three quarters of each fiscal year of the Company, commencing with the first
quarter ending after the Termination Date, a statement of its income for each
such quarterly period, and its balance sheet and a statement of changes in
shareholders' equity as of the end of such quarterly period, all in reasonable
detail, certified by its principal financial or accounting officer; (ii) within
ninety (90) days after the close of each fiscal year, its balance sheet as of
the close of such fiscal year, together with a statement of income, a statement
of changes in shareholders' equity and a statement of cash flow for such fiscal
year, such balance sheet, statement of income, statement of changes in
shareholders' equity and statement of cash flow to be in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
auditors; (iii) within ten (10) business days of the end of every month, its
balance sheet as of the close of the month, together with a statement of income,
a statement of changes in shareholder's equity and a statement of cash flow for
such month; and (iv) a copy of all documents, reports and information furnished
to its shareholders at the time that such documents, reports and information are
furnished to its shareholders.
F. To apply the proceeds of the Offering in accordance with the "Use of
Proceeds" subsection in the "Summary" section Memorandum.
G. To provide ICG with as many copies of the Memorandum as ICG may
reasonably request.
H. To issue to ICG, or ICG's designee, on the date of each Closing, one (1)
share of Common Stock (collectively, the "Placement Agent Shares") for each
$50.00 of gross proceeds of the Offering received by the Company at such
Closing; any fractional shares to be issued pursuant to this Section 5(G) shall
be rounded to the nearest full share of Common Stock.
I. To ensure that any transactions between or among the Company, the
Subsidiary, any of their respective officers or directors, and any of such
entities' or persons' respective affiliates be on terms and conditions that are
no less favorable to the Company or the Subsidiary, as the case may be, than the
terms and conditions that would be available in an "arms' length" transaction
with independent third parties.
10
<PAGE>
J. To engage an escrow agent and financial printer in connection with the
Offering, in each case acceptable to ICG.
K. To comply with the terms of the Subscription Agreements, including, but
not limited to, each subscriber's rights with respect to registration under the
Securities Act of the Unit Shares and the Note Shares.
L. Not to engage, directly, or through any affiliates, or any person acting
on its or their behalf, in any directed selling efforts (as interpreted by
appropriate administrative or judicial authorities under Regulation S of the
Securities Act) with respect to the Offering.
6. REGISTRATION RIGHTS.
A. THE COMPANY'S REGISTRATION.
As soon as practicable after the date of the first Closing of the
Offering, and in any event not later than 60 days thereafter, the Company shall
prepare and file with the Commission, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for ICG and the holders of the Placement
Agent Shares in order to comply with the provisions of the Securities Act so as
to permit a public offering and sale of the Placement Agent Shares by the
respective holders thereof (collectively, the "Registration Rights Holders") for
a consecutive period (the "Registration Period") ending at such time as, in the
written opinion of counsel for the Company, all of the Placement Agent Shares
are eligible for public resale without restriction and without registration
under the Securities Act.
B. DEMAND REGISTRATION.
(i) If the registration statement referred to in Section 6(A) does
not become effective within six months after the date of the first Closing
of the Offering or the Registration Rights Holders may not resell their
Placement Agent Shares without the availability of an exemption from
registration under the Securities Act, then Registration Rights Holders
representing a Majority (as defined in Section 6(D)(vi) hereof) of the
Placement Agent Shares shall have the right, exercisable by written notice
to the Company, to have the Company prepare and file with the Commission,
one or more registration statements and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the
Company and counsel for ICG and the Registration Rights Holders in order to
comply with the provisions of the Securities Act, so as to permit a public
offering and sale, for the Registration Period, of the Placement Agent
Shares by such Registration Rights Holders and any other Registration Rights
Holders who notify the Company within ten (10) days after receiving notice
from the Company of such registration request (as set forth below).
(ii) The Company covenants and agrees to give written notice of any
registration request under this Section 6(B) by any Registration Rights
Holder to all other Registration
11
<PAGE>
Rights Holders within ten (10) days from the date of the receipt of any such
registration request.
(iii) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor and to
have any registration statement declared effective at the earliest possible
time. The Company shall furnish each Registration Rights Holder desiring to
sell Placement Agent Shares such number of prospectuses as shall reasonably
be requested.
C. PIGGYBACK REGISTRATION.
(i) If the registration statement referred to in Section 6(A) does
not become effective within six months after the first Closing of the
Offering or the effectiveness thereof is not maintained for the duration of
the Registration Period or, if for any reason, the Placement Agent Shares
may not be resold without the availability of an exemption from registration
under the Securities Act, and the Company proposes to register any of its
securities under the Securities Act (other than in connection with a merger,
acquisition or exchange offer on Form S-4 or pursuant to Form S-8 or
successor forms), then the Company will give written notice by registered or
certified mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Registration Rights Holders of its intention
to do so. Upon the written request of any Registration Rights Holder given
within ten (10) days after receipt of any such notice of his or her desire
to include any Placement Agent Shares in such proposed registration
statement, the Company shall afford the Registration Rights Holders the
opportunity to have any such Placement Agent Shares registered under such
registration statement.
(ii) Notwithstanding the provisions of this Section 6(C), the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 6(C) (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
D. COVENANTS WITH RESPECT TO REGISTRATION.
(i) In connection with any registration under any of Sections 6(A),
6(B) and 6(C) hereof, the Company covenants and agrees as follows:
(ii) The Company shall pay all costs, (excluding fees and expenses of
Registration Rights Holder(s)' counsel and any underwriting or selling
commissions or other charges of any broker-dealer acting on behalf of
Registration Rights Holder(s)), fees and expenses in connection with all
registration statements filed pursuant to any of Sections 6(A), 6(B) and
6(C) hereof including, without limitation, the Company's legal and
accounting fees and expenses, printing expenses and blue sky fees and
expenses.
12
<PAGE>
(iii) The Company will take all necessary action which may be required
in qualifying or registering the securities included in a registration
statement for offering and sale under the securities or blue sky laws of
such states as reasonably are requested by the Registration Rights
Holder(s), provided that the Company shall not be obligated to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(iv) The Company shall indemnify the Registration Rights Holder(s) and
each person, if any, who controls such Registration Rights Holder(s) within
the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become
subject under the Securities Act, the Exchange Act or any other statute,
common law or otherwise, arising out of or based upon any untrue statement
or alleged untrue statement of a material fact contained in such
registration statement executed by the Company or based upon written
information furnished by the Company filed in any jurisdiction in order to
qualify the Placement Agent Shares under the securities laws thereof or
filed with the Commission, any state securities commission or agency, the
National Association of Securities Dealers, Inc., The Nasdaq Stock Market or
any securities exchange, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements contained therein not misleading, unless such statement or
omission was made in reliance upon and in conformity with written
information furnished to the Company by the Registration Rights Holder(s)
expressly for use in such registration statement, any amendment or
supplement thereto or any application, as the case may be. If any action is
brought against the Registration Rights Holder(s) or any controlling person
of the Registration Rights Holder(s) in respect of which indemnity may be
sought against the Company pursuant to this Section 6(D)(iii), the
Registration Rights Holder(s) or such controlling person shall, within
thirty (30) days after the receipt of a summons or complaint, notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and payment of
reasonable fees and expenses of counsel (which counsel shall be reasonably
satisfactory to the Registration Rights Holder(s) or such controlling
person), but the failure to give such notice shall not affect such
indemnified person's right to indemnification hereunder except to the extent
that the Company's defense of such action was materially adversely affected
thereby. The Registration Rights Holder(s) or such controlling person shall
have the right to employ its or their own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of the
Registration Rights Holder(s) or such controlling person unless the
employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall
not have employed counsel to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company
shall not have the right to direct the defense of such action on behalf of
the indemnified party or parties), in any of which events the fees and
expenses of attorneys for all of the Registration Rights Holder(s) and/or
such
13
<PAGE>
controlling person shall be borne by the Company. Except as expressly
provided in the previous sentence, in the event that the Company shall have
assumed the defense of any such action or claim, the Company shall not
thereafter be liable to the Registration Rights Holder(s) or such
controlling person in investigating, preparing or defending any such action
or claim. The Company agrees to notify promptly the Registration Rights
Holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in
connection with the resale of any of the Placement Agent Shares in
connection with such registration statement. The Company further agrees that
upon demand by an indemnified person, at any time or from time to time, it
will promptly reimburse such indemnified person for any loss, claim, damage,
liability, cost or expense actually and reasonably paid by the indemnified
person as to which the Company has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this Section 6(D)(iii), any such
payment or reimbursement by the Company of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final
judgment by a court of competent jurisdiction (after all appeals or the
expiration of time to appeal) is entered against any Registration Rights
Holder or such indemnified person as a direct result of any Registration
Rights Holder or such person's gross negligence or willful misfeasance will
be promptly repaid to the Company.
(v) The Registration Rights Holder(s), and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20(a) of
the Exchange Act, against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become subject
under the Securities Act, the Exchange Act or any other statute, common law
or otherwise, arising from written information furnished by or on behalf of
such Registration Rights Holder(s), or their successors or assigns,
expressly for use in such registration statement. The Registration Rights
Holder(s) further agree(s) that upon demand by an indemnified person, at any
time or from time to time, they will promptly reimburse such indemnified
person for any loss, claim, damage, liability, cost or expense actually and
reasonably paid by the indemnified person as to which the Registration
Rights Holder(s) have indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this Section 6(D) (iv), any such
payment or reimbursement by the Registration Rights Holder(s) of fees,
expenses or disbursements incurred by an indemnified person in any
proceeding in which a final judgment by a court of competent jurisdiction
(after all appeals or the expiration of time to appeal) is entered against
the Company or such indemnified person as a direct result of the Company or
such person's gross negligence or willful misfeasance will be promptly
repaid to the Registration Rights Holder(s).
(vi) In the event of registration of the Placement Agent Shares under
Sections 6(A) or 6(B)(i) hereof, the Company shall enter into an
underwriting agreement with the managing underwriter, if any, selected for
such underwriting by Registration Rights Holders holding a
14
<PAGE>
Majority of the securities requested to be included in such underwriting.
Such agreement shall be satisfactory in form and substance to the Company, a
Majority of Registration Rights Holders and such managing underwriter, and
shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Registration Rights Holders shall be
parties to any underwriting agreement relating to an underwritten sale of
their securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the
benefit of such underwriters shall also be made to and for the benefit of
such Registration Rights Holders. Such Registration Rights Holders shall not
be required to make any representations or warranties to or agreements with
the Company or the underwriters except as they may relate to such
Registration Rights Holders and their intended methods of distribution.
(vii) For purposes of this Agreement, the term "Majority" in reference
to the Placement Agent Shares shall mean in excess of fifty percent (50%) of
the then outstanding Placement Agent Shares that (i) are not held by the
Company, an affiliate (excluding, if applicable, ICG and its affiliates,
officers and directors), officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith and (ii) have not been resold to the
public either pursuant to a registration statement filed with the Commission
under the Securities Act or in reliance upon Rule 144.
7. INDEMNIFICATION.
A. The Company hereby agrees that it will indemnify and hold ICG and each
officer, director, shareholder, employee, agent or representative of ICG, and
each person controlling, controlled by or under common control of ICG within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or
the Rules and Regulations, harmless from and against any and all loss, claim,
damage, liability, cost or expense whatsoever (including, but not limited to,
any and all reasonable legal fees and other expenses and disbursements incurred
in connection with investigating, preparing to defend or defending any action,
suit or proceeding, including any inquiry or investigation, commenced or
threatened, or any claim whatsoever or in appearing or preparing for appearance
as a witness in any action, suit or proceeding, including any inquiry,
investigation or pretrial proceeding such as a deposition) to which ICG or such
indemnified person of ICG may become subject (1) as a result of claims asserted
by third parties related to or arising out of the engagements of ICG by the
Company pursuant to the terms hereof or in connection therewith and (2) under
the Securities Act, the Exchange Act, the Rules and Regulations, or any other
federal or state law or regulation, common law or otherwise, arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in (A) Section 4 and Section 5 of this Agreement, (B) the
Memorandum (except those written statements relating to ICG given by an
indemnified person for inclusion therein), (C) any application or other document
or written communication executed by the Company or based upon written
information furnished by the Company filed in any jurisdiction in order to
qualify
15
<PAGE>
the Securities under the securities laws thereof, or any state securities
commission or agency; (ii) the omission or alleged omission from documents
described in clauses (A), (B) or (C) above of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(iii) the breach of any representation, warranty, covenant or agreement made by
the Company in this Agreement. The Company further agrees that upon demand by an
indemnified person, at any time or from time to time, it will promptly reimburse
such indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which the Company
has indemnified such person pursuant hereto. Notwithstanding the foregoing
provisions of this Paragraph 7(A), any such payment or reimbursement by the
Company of fees, expenses or disbursements incurred by an indemnified person in
any proceeding in which a final judgment by a court of competent jurisdiction
(after all appeals or the expiration of time to appeal) is entered against ICG
or such indemnified person as a direct result of ICG or such person's gross
negligence or willful misfeasance will be promptly repaid to the Company.
B. ICG hereby agrees that it will indemnify and hold the Company and each
officer, director, shareholder, employee, agent or representative of the
Company, and each person controlling, controlled by or under common control with
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or the Rules and Regulations, harmless from and against any
and all loss, claim, damage, liability, cost or expense whatsoever (including,
but not limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which the Company or such indemnified person of the Company may
become subject under the Securities Act, the Exchange Act, the Rules and
Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) the conduct of ICG or its officers,
employees or representatives in its acting as placement agent for the Offering
or (ii) the breach of any representation, warranty, covenant or agreement made
by ICG in this Agreement. ICG further agrees that upon demand by an indemnified
person, at any time or from time to time, it will promptly reimburse such
indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which ICG has
indemnified such person pursuant hereto. Notwithstanding the foregoing provision
of this Paragraph 7(B), any such payment or reimbursement by ICG of fees,
expenses or disbursements incurred by an indemnified person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all appeals
or the expiration of time to appeal) is entered against the Company or such
indemnified person as a direct result of such person's gross negligence or
willful misfeasance will be promptly repaid to ICG.
C. Promptly after receipt by an indemnified party of notice of commencement
of any action cover ed by subparagraph (A) or (B) of this Section 7, the party
to be indemnified shall, within five (5) business days, notify the indemnifying
party of the commencement thereof; the omission
16
<PAGE>
by one indemnified party to so notify the indemnifying party shall not relieve
the indemnifying party of its obligation to indemnify any other indemnified
party that has given such notice and shall not relieve the indemnifying party of
any liability outside of this indemnification if not materially prejudiced
thereby. In the event that any action is brought against the indemnified party,
the indemnifying party will be entitled to participate therein and, to the
extent it may desire, to assume and control the defense thereof with counsel
chosen by it which is reasonably acceptable to the indemnified party. After
notice from the indemnifying party to such indemnified party of its election to
so assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under such paragraph 7(A) or 7(B) for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof, but the indemnified party may, at its own expense, participate
in such defense by counsel chosen by it, without, however, impairing the
indemnifying party's control of the defense. Subject to the proviso of this
sentence and notwithstanding any other statement to the contrary contained
herein, the indemnified party or parties shall have the right to choose its or
their own counsel and control the defense of any action, all at the expense of
the indemnifying party if, (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action at the expense of the indemnifying party, or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying party; provided, however, that the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstance, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for all such indemnified parties. No
settlement of any action or proceeding against an indemnified party shall be
made without the consent of the indemnifying party.
D. In order to provide for just and equitable contribution in circumstances
in which the indemnification provided for in subparagraphs (A) or (B) of this
Section 7 is due in accordance with its terms but is for any reason held by a
court to be unavailable on grounds of policy or otherwise, the Company and ICG
shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with the
investigation or defense of same) which the other may incur in such proportion
so that ICG shall be responsible for ten percent (10%) of the aggregate of such
losses, claims, damages and liabilities and the Company shall be responsible for
the balance; provided, however, that no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Securities Act
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph 7(D), any person
controlling, controlled by or under common control with ICG, or any partner,
director, officer, employee,
17
<PAGE>
representative or any agent of any thereof, shall have the same rights to
contribution as ICG and each person controlling, controlled by or under common
control with the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act and each officer of the Company and each
director of the Company shall have the same rights to contribution as the
Company. Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against the other party
under this paragraph 7(D), notify such party from whom contribution may be
sought, but the omission to so notify such party shall not relieve the party
from whom contribution may be sought from any obligation they may have hereunder
or otherwise if the party from whom contribution may be sought is not materially
prejudiced thereby. The indemnity and contribution agreements contained in this
Section 7 shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified person or any termination
of this Agreement.
8. PAYMENT OF EXPENSES.
Whether or not the Offering is successfully completed, the Company
hereby agrees to bear all of the expenses in connection with the Offering,
including, but not limited to the following: filing fees, printing and
duplicating costs, advertisements, postage and mailing expenses with respect to
the transmission of offering material and, after each Closing, the securities,
registrar and transfer agent fees, escrow agent fees and expenses, fees of the
Company's counsel and accountants, legal fees (such legal fees not to exceed
$50,000, consisting of $35,000 from the Offering, plus $15,000 from a prior
terminated offering of the Company) and expenses of ICG's counsel, issue and
transfer taxes, if any, and "Blue Sky" filing and fees (such filing and legal
fees not to exceed $10,000) and expenses. It is agreed that ICG's counsel shall
perform the required Blue Sky legal services. In this connection, Blue Sky
applications for registration of the Securities or exemption therefrom shall be
made in such states and jurisdictions as shall be reasonably requested by ICG,
provided that such states and jurisdictions do not require the Company to
qualify as a foreign corporation. In addition, the Company hereby agrees to pay
to ICG a non-accountable expense allowance equal to two percent (2%) of the
gross proceeds from the sale of the Units.
9. CONDITIONS OF THE CLOSINGS
Each Closing shall be held at the New York City offices of ICG's counsel.
The obligations of ICG hereunder shall be subject to the continuing accuracy of
the representations and warranties of the Company herein as of the date hereof
and as of each Closing with respect to the Company and the Subsidiary as if it
had been made on and as of each Closing; the accuracy on and as of each Closing
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of each Closing of its
covenants and obligations hereunder and to the following further conditions:
A. At each Closing, ICG shall receive the opinion of Olle, Macaulay &
Zorrilla, P.A., counsel to the Company, dated as of the date of such Closing,
which opinion shall be in form and substance reasonably satisfactory to counsel
for ICG, to the effect that:
18
<PAGE>
(i) The execution, delivery and performance of each of this
Agreement, the Escrow Agreement and the Subscription Agreements has been
duly and validly authorized by the Company and such agreement is valid and
binding agreement of the Company, enforceable in accordance with its terms.
The Notes constitute valid and binding obligations of the Company to issue
and sell, upon conversion thereof in accordance with their terms, the number
and type of securities of the Company called for thereby. The Securities to
be issued and sold by the Company in connection with the Memorandum, this
Agreement, the Subscription Agreements and the Notes (as the case may be)
have been duly authorized and, when issued and paid for in accordance with
the Memorandum, this Agreement, the Subscription Agreements and the Notes
(as the case may be), the certificates representing each of the Securities,
will be validly issued, fully paid and non-assessable; the holders thereof
are not and will not be subject to personal liability to third parties
solely by reason of being such holders; such securities are not and will not
be subject to the preemptive rights of any shareholder of the Company; and
all corporate action required to be taken for the authorization, issuance
and sale of such securities has been duly and validly taken by the Company.
The Securities conform in all material respects to the description thereof
contained in the Memorandum and the Subscription Agreements. No transfer tax
is payable by or on behalf of ICG or the Company in connection with the
issuance and sale of any of the Securities or the consummation of the
Company's obligations under this Agreement.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Nevada. The
Subsidiary has been duly organized and is validly existing as a corporation
in good standing under the laws of the State of Colorado. Each of the
Company and the Subsidiary is duly qualified or licensed and in good
standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing. Each of the Company and the
Subsidiary has all requisite corporate power and authority, all
authorizations, approvals, orders, licenses, certificates and permits of and
from all governmental regulatory officials and bodies to own or lease its
properties and conduct its business (or proposed business) as described in
the Memorandum and, assuming that the Company and the Subsidiary are
conducting business as described in the Memorandum, the Company and the
Subsidiary are doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates and permits and all federal, state
and local laws, rules and regulations concerning the business in which the
Company is engaged.
(iii) All issued and outstanding securities of each of the Company and
the Subsidiary have been duly authorized and validly issued and are fully
paid and non-assessable; the holders thereof have no rights of rescission or
preemptive rights with respect thereto and are not subject to personal
liability solely by reason of being securityholders; and none of such
securities was issued in violation of the preemptive rights of any holders
of any security of the Company or the Subsidiary. The Company has the
respective number of (a) authorized and (b) issued and outstanding shares of
capital stock as set forth in the Memorandum.
19
<PAGE>
(iv) There is no material litigation or governmental proceeding
pending or, to the best of the such counsel's knowledge, threatened against,
or involving the properties or businesses of the Company or the Subsidiary,
except as disclosed in the Memorandum.
(v) To the best of such counsel's knowledge, neither the Company nor
the Subsidiary is in breach of, or in default under, any term or provision
of any indenture, mortgage, deed of trust, lease, note, loan or credit
agreement or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which it is a party
or by which it or any of its properties may be bound or affected. Neither
the Company nor the Subsidiary is in violation of any provision of its
charter or Bylaws or in violation of any franchise, license, permit,
judgment, decree or order, or in violation of any statute, rule or
regulation. Neither the execution and delivery of this Agreement, the Escrow
Agreement or the Subscription Agreements, nor the issuance and sale or
delivery of the Securities, nor the consummation of any of the transactions
contemplated herein or in the Subscription Agreements, nor the compliance by
the Company with the terms and provisions hereof or thereof, has conflicted
with or will conflict with, or has resulted in or will result in a breach
of, any of the terms and provisions of, or has constituted or will
constitute a default under, or has resulted in or will result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or the Subsidiary or pursuant to the terms of any
indenture, mortgage, deed of trust, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company or the Subsidiary
may be bound or to which any of the property or assets of either of the
Company or the Subsidiary is subject, except, in each case, for which a
waiver has been obtained and delivered by the Company or the Subsidiary, as
the case may be, to ICG or liens created in favor of the holders of the
Notes; nor will such action result in any violation of the provisions of the
charter or the Bylaws of the Company or the Subsidiary or, assuming the due
performance by ICG of its obligations hereunder, any statute or any order,
rule or regulation applicable to the Company or the Subsidiary of any court
or of any foreign, federal, state or other regulatory authority or other
government body having jurisdiction over the Company or the Subsidiary.
(vi) Assuming that each U.S. Person that purchases Units is an
Accredited Investor and that each other purchaser of Units is a not a U.S.
person, that the representations made by the Company and ICG in this
Agreement are true and correct at all times during the Offering Period and
at the time of each Closing, that ICG has complied with the provisions of
this Agreement, Regulation S and of Section 502(C) of Regulation D and that
a Form D will be filed in accordance with the provisions of Section 503 of
Regulation D, no registration under the Securities Act is required in
connection with the sale and issuance of any of the Securities. The offering
and sale of the Securities in the manner contemplated by this Agreement, the
Subscription Agreement and the Memorandum will not be integrated with any
offering made before the offer and sale of such securities in a manner that
would render unavailable any exemption from registration under the
Securities Act.
20
<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to ICG's counsel) of other
counsel acceptable to ICG's counsel, familiar with the applicable laws; (B) as
to matters of fact, to the extent they deem proper, on certificates and written
statements of responsible officers of the Company or the Subsidiary and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company or the Subsidiary, provided that copies of any such
statements or certificates shall be delivered to ICG's counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that ICG and they are
justified in relying thereon. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991)
or any comparable state accord.
Such counsel shall state that it has participated in conferences with
officers and other representatives of the Company during which the contents
of the Memorandum were discussed. Although such counsel is not passing upon,
and does not assume any responsibility for, the accuracy, completeness or
fairness of any statements contained in the Memorandum, such counsel shall
state that, on the basis of the foregoing, nothing has come to such counsel's
attention to lead them to believe that the Memorandum, as of the date thereof
and the date of such opinion, contained or contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except for the
financial statements, notes thereto and other statistical and financial
information included therein or omitted therefrom, as to which such counsel
need express no opinion).
B. At or prior to each Closing, counsel for ICG shall have been furnished
such documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in this
Agreement and the Memorandum, or in order to evidence the accuracy, completeness
or satisfaction of any of the representations, warranties or conditions herein
contained.
C. At and prior to each Closing, (i) there shall have been no material
adverse change nor development involving a prospective change in the condition
or prospects or the business activities, financial or otherwise, of the Company
or the Subsidiary from the latest dates as of which such respective condition is
set forth in the Memorandum; (ii) there shall have been no transaction, not in
the ordinary course of business, entered into by the Company or the Subsidiary
which has not been disclosed in the Memorandum or to ICG in writing; (iii)
neither the Company nor the Subsidiary shall be in default under any provision
of any instrument relating to any outstanding indebtedness for which a waiver or
extension has not been otherwise received; (iv) neither the Company nor the
Subsidiary shall have issued any securities (other than those set forth in the
Memorandum) or declared or paid any dividend or made any distribution of
21
<PAGE>
its capital stock of any class and there shall not have been any material change
in the respective indebtedness (long or short term) or liabilities or
obligations of either of the Company or the Subsidiary (contingent or
otherwise), except as contemplated by the Memorandum; (v) no material amount of
the assets of the Company or the Subsidiary shall have been pledged or
mortgaged, except as indicated or contemplated in the Memorandum or otherwise in
the ordinary course of business; and (vi) no material action, suit or
proceeding, at law or in equity, against the Company or the Subsidiary or
affecting any of their respective properties or businesses shall be pending or
threatened before or by any court or federal or state commission, board or other
administrative agency, domestic or foreign, wherein an unfavorable decision,
ruling or finding could materially adversely affect the business, prospects or
financial condition or income of either the Company or the Subsidiary.
D. At each Closing, ICG shall have received a certificate of the Company and
the Subsidiary signed by their respective president and chief financial officer,
dated as of the date of such Closing, to the effect that the conditions set
forth in the preceding paragraph have been satisfied and that, as of the date of
such Closing, the representations and warranties of the Company set forth herein
are true and correct.
E. At or prior to the first Closing, the Company or the Subsidiary, as the
case may be, shall have received written consents or waivers for the issuance of
the Notes from any third parties from which such consents are required.
F. At each Closing, the Company shall have duly executed and delivered to
ICG's counsel, as agent for the respective holders thereof, the appropriate
securities underlying the Units in the names and denominations specified by ICG.
G. At each Closing, the Company shall have duly executed and delivered to
ICG, or its designees, the Placement Agent Shares in the names and denominations
specified by ICG.
10. TERMINATION.
This Agreement shall terminate if a Closing does not take place on or before
seven (7) business days following the Termination Date or as soon thereafter as
the funds received from subscriptions have cleared the banking system in the
normal course of business. Either ICG or the Company may terminate the Offering
in its sole discretion prior to any Closing hereunder. In the event that the
Company determines to terminate the Offering from and after the date hereof
through the end of the Offering Period for any reason other than ICG's breach of
the terms of this Agreement, and ICG is willing to proceed, then the Company
shall pay to ICG a fee as compensation for services and as liquidated damages,
in lieu of any and all other damages, in the amount of one hundred thousand
dollars ($100,000) together with reasonable documented expenses which shall be
reimbursed as otherwise contemplated hereunder, which amount the parties view as
a reasonable estimate of ICG's compensation for damages which might otherwise be
difficult to ascertain. Upon such termination, all Subscription Agreements and
payments for Units not previously delivered to the purchasers thereof, shall be
returned to the respective subscribers, without interest thereon or
22
<PAGE>
deduction therefrom, ICG shall have no further obligation to the Company, and
the Company shall have no obligation to ICG, except in each case as otherwise
provided herein.
11. MISCELLANEOUS.
A. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all which shall be deemed to be one
and the same instrument.
B. Any notice required or permitted to be given hereunder shall be given in
writing and shall be deemed effective when deposited in the United States mail,
postage prepaid, or when received if personally delivered or faxed, addressed as
follows:
To ICG:
International Capital Growth, Ltd.
660 Steamboat Road
2nd Floor
Greenwich, Connecticut 06830
Fax: (203) 861-7757
Attention: Michael S. Jacobs
Senior Vice President
with a copy to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
18th Floor
New York, New York 10103
Fax: (212) 506-5151
Attention: Rubi Finkelstein, Esq.
To the Company:
First American Railways, Inc.
3700 North 29th Avenue, Suite 202
Hollywood, Florida 33020
Fax: (954) 920-0602
Attention: Raymond Monteleone
President
23
<PAGE>
with a copy to:
Olle, Macaulay & Zorrilla, P.A.
1402 Miami Center
201 South Biscayne Blvd.
Miami, Florida 33131
Fax: (305) 358-9617
Attention: Dennis J. Olle, Esq.
or to such other address of which written notice is given to the others.
C. This Agreement shall be governed by and construed in all respects under
the laws of the State of New York, without reference to its conflict of laws
rules or principles. Any suit, action, proceeding or litigation arising out of
or relating to this Agreement or the transaction contemplated hereby shall be
brought and prosecuted in such federal or state court or courts located within
the State of New York as provided by law. The parties hereby irrevocably and
unconditionally consent to the jurisdiction of each such court or courts located
within the State of New York and to service of process by registered or
certified mail, return receipt requested, or by any other manner provided by
applicable law, and hereby irrevocably and unconditionally waive any right to
claim that any suit, action, proceeding or litigation so commenced has been
commenced in an inconvenient forum.
D. This Agreement and the other agreements referenced herein contain the
entire understanding between the parties hereto and may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
E. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
FIRST AMERICAN RAILWAYS, INC.
By:_____________________________
Raymond Monteleone
President
INTERNATIONAL CAPITAL GROWTH, LTD.
By:__________________________
Michael S. Jacobs
Senior Vice President
24
EXHIBIT 10.36
[LOGO]
INTERNATIONAL CAPITAL GROWTH, LTD.
December 16, 1997
Mr. Allen Harper
First American Railways, Inc.
3700 North 29th Avenue
Suite 202
Hollywood, FL 33020
Dear Allen:
This will confirm our agreement that International Capital Growth, Ltd., a
Delaware corporation ("ICG"), shall render its services to First American
Railways, Inc. ("First American" or the "Company") as its exclusive financial
advisor and exclusive investment banker regarding the Company's intention to
issue securities on a private basis (the "Financing").
1. SALE OF SECURITIES. As soon as practicable after preparation of suitable
offering materials, ICG shall use its best efforts to arrange a sale by the
Company of the Investment Units to investors, pursuant to both Regulation S
("Regulation S") and Regulation D ("Regulation D") issued under the
Securities At of 1933, as amended (the "Act"), ready, willing, and able to
purchase the Investment Units.
2. PLACEMENT FEES. The Company shall pay ICG as compensation for its services
10% of the gross proceeds received by the Company from the financing. In
addition, the company will pay ICG 5% of all debt, or other obligations
converted to or payable in stock arranged by ICG. Further, as compensation
for both its fundraising and management services the Company shall (i) issue
to ICG and/or its designess 750,000 shares of Common Stock; (ii) 25,000
sub-placement warrants for each $1.0 million raised, exercisable at the
financing price for a period of 24 months, and (iii) extend the term of the
original sub-placement agent warrants or reissue them for a term of 24 months
from their expiration in April 1998 and reduce the exercise price to $1.00.
The Company shall pay the cash and warrant placement fees due to ICG upon
each closing and the Common Stock fees on the initial closing.
[LETTERHEAD]
<PAGE>
Mr. Allen Harper
December 16, 1997
Page 2
- --------------------------------------------------------------------------------
3. COOPERATION. The Company and ICG shall cooperate with one another fully in
order to consummate the issuance and sale of the securities contemplated
herein as expeditiously as practicable. In particular, the Company will
prepare such offering materials as ICG may reasonably request.
Further, on a monthly basis, The Company will provide to ICG financial
information, the form and substance to be agreed upon in the future, but to
include cash position and cash outflows in the previous month.
4. REGISTRATION. By September 30, 1998, the Company shall file or amend one or
more Registration Statements relating to all shares (including placement and
management fee shares to be issued in connection with the Financing) and will
thereafter use its best efforts to obtain (by September 30, 1998) and
maintain the effectiveness of the Registration Statement to become effective
under the Act until January 31, 1999. The costs and expenses associated with
the preparation, filing and the prosecution of such registration statement
shall be borne by the Company.
5. EXPENSES. The Company agrees to pay ICG, on each closing, an expense
allowance on a non-accountable basis equal to two percent (2%) of the gross
proceeds derived from any placement. In addition, ICG's legal fees (up to a
maximum of $35,000) and expenses, as well as any Blue Sky legal fees (up to a
maximum of $10,000) and expenses of ICG associated therewith shall be paid by
the Company.
6. CONFIDENTIALITY. ICG will not disclose to any other person, firm or
corporation, nor use for its own benefit during or after the term of this
agreement, any trade secrets or other information designated as confidential
by the Company which is acquired by ICG in the course of performing services
hereunder. (A trade secret is information not generally known to the trade
which gives the Company an advantage over its competitors. Trade secrets can
include, by way of example, products or services under development,
production methods and processes, sources of supply, customer lists,
marketing plans, and information concerning the filing or pendency of patent
applications.) Any financial advice rendered by ICG pursuant to this
agreement may not be disclosed publicly in any manner without the prior
written approval of ICG. At the conclusion of this engagement and upon
request by the Company, ICG shall return all material deemed confidential,
supplied by the Company.
7. INDEMNIFICATION. The Company hereby agrees to indemnify, defend and hold
harmless ICG and its affiliates, the respective directors, officers, agents
and
[LETTERHEAD]
<PAGE>
Mr. Allen Harper
December 16, 1997
Page 3
- --------------------------------------------------------------------------------
employees of ICG and its affiliates and each other person, if any,
controlling ICG or any of its affiliates from and against any losses claims,
damages or liabilities (or actions, including shareholder actions, in respect
thereof) incurred as a result of claims asserted by third parties related to
or arising out of the engagement of ICG by the Company pursuant to the terms
hereof or in connection therewith, and will reimburse ICG, and any other
party entitled to be indemnified hereunder for all expenses (including
attorneys fees) as they are incurred by ICG or any other indemnified party in
connection with investigating, preparing or defending any such action or
claim, whether or not in connection with pending or threatened litigation in
which ICG or any of its affiliates is a party. The Company will not, however,
be responsible for any claims, liabilities, losses damages or expenses which
have resulted from ICG's misconduct or negligence. The Company also agrees
that neither ICG, nor any of its affiliates, nor any person controlling ICG,
or any of its affiliates, shall have any liability to the Company for or in
connection with the engagement pursuant to the terms hereof, except for any
such liability for losses, claims, damages or expenses incurred by the
company that result from ICG's misconduct or negligence. The foregoing
agreement shall be in addition to any rights that ICG or any indemnified
party may have at a common law or otherwise, including, but not limited to,
any right to contribution. The Company hereby consents to personal
jurisdiction, services or process and venue in any court in which any claim
subject to this indemnification provision is brought against ICG or any other
indemnified party, only with respect to any other claim that may be made
against the Company. The obligation to indemnify ICG pursuant to the terms of
this paragraph shall survive and remain in full force and effect following
the completion of any transaction contemplated herein or the expiration or
termination of this agreement.
ICG hereby agrees to indemnify, defend and hold harmless the Company and its
affiliates, the respective directors, officers, agents and employees of the
Company and its affiliates and each other person, if any, controlling the
Company or any of its affiliates, from and against any losses, claims,
damages or liabilities (or actions, including shareholder actions, in respect
thereof) incurred as a result of claims asserted by third parties arising out
of misconduct or negligence of ICG in connection the engagement of ICG
hereunder, and ICG will reimburse the Company and any other party entitled to
be indemnified hereunder for all expenses (including attorneys fees) as they
are incurred by the Company, or any other indemnified party in connection
with investigating, preparing or defending any such action or claim, whether
or not in connection with pending or threatened litigation in which the
Company, or any of its affiliates is a party. ICG agrees that neither
[LETTERHEAD]
<PAGE>
Mr. Allen Harper
December 16, 1997
Page 4
the Company, nor any of its affiliates, nor any person controlling the
Company, or any of its affiliates, shall have any liability to any person for
or in connection with the engagement pursuant to the terms hereof, except for
any liability for losses, claims, damages, liabilities or expenses that
result from ICG's misconduct or negligence. The foregoing agreement shall be
in addition to any rights that any indemnified party may have at common law
or otherwise including, but not limited to, any right of contribution. ICG
hereby consents to personal jurisdiction, service of process and venue in any
court in which any claim subject to this indemnification provision is brought
against the Company, or any other indemnified party, only with respect to
such claims against the Company, or another indemnified party, and not with
respect to any other claim that may be brought against ICG. ICG's obligation
to indemnify the Company, and others pursuant to the terms of this paragraph
shall survive and remain in full force and effect following the completion of
any transaction contemplated herein or the expiration or termination of this
agreement.
8. OPERATING MATTERS. As soon as the appropriate candidates are identified
utilizing the Company's best efforts, the Company shall hire a
President/Chief Operating Officer for First American Railways, Inc. as well
as a new Director of Sales and Marketing for the Florida Fun-Train Division.
Further, the Company shall immediately make available one seat on its Board
of Directors to a representative of the investor group in the Financing. In
addition, the Company shall make an additional seat on its Board of Directors
available at its next shareholders meeting currently scheduled for June 1998
to an additional representative of the investor group.
9. GOVERNING LAW. This agreement shall be governed by the internal laws of the
State of Florida. Any dispute arising out of this agreement shall be
adjudicated in the courts of the State of Florida or in the federal courts
sitting in the State of Florida, and ICG hereby agrees that service of
process upon it by registered mail at the address shown in this agreement
shall be deemed adequate and lawful.
10.DUE AUTHORITY. The Company and ICG each represents to the other that it has
due authority to enter into this agreement and that the officer executing
this agreement has full authority to do so.
11.TERMINATION. Unless extended by mutual agreement of the Company and ICG,
this agreement and all liabilities and obligations hereunder (except as to
paragraphs 6 and 7) shall terminate on March 31, 1998.
[LETTERHEAD]
<PAGE>
Mr. Allen Harper
December 16, 1997
Page 5
- --------------------------------------------------------------------------------
It is understood and agreed that at such time as ICG and the Company shall
mutually agree as to the manner, term, conditions and other more specific
provisions of the sale of securities as contemplated herein, the Company and
ICG will execute and deliver definitive agreements, which agreements will
supersede and replace this agreement in relevant part. Such agreements will
set forth such representations, warranties, indemnification provisions,
closing conditions and other matters as are customary in such agreement.
If any legal action or other proceeding is brought in connection with the
interpretation or enforcement of any of the provisions of this agreement, the
prevailing party shall be entitled to recover its reasonable attorney's fees
and other costs incurred in an action or proceeding in addition to any other
relief to which the party may be entitled.
Please confirm that the foregoing correctly sets forth our understanding by
signing the enclosed copy of this letter where provided and returning it to
us at your earliest convenience.
Very truly yours,
INTERNATIONAL CAPITAL GROWTH, LTD.
By /S/ ALAN JACOBS
------------------------------------------------
ALAN JACOBS
Accepted and agreed to on this
17 day of December, 1997
FIRST AMERICAN RAILWAYS, INC.
By /S/ ALLEN C. HARPER
------------------------------
ALLEN C. HARPER
[LETTERHEAD]
[LETTERHEAD]
March 18, 1998
Mr. Alan Jacobs
6840 Lions Head Lane
Boca Raton, Florida 33496
Dear Alan:
This is to confirm that effective January 1, 1998, you have been engaged as
Senior Advisor to First American Railways, Inc, to provide financial and
business consulting services and to be compensated at the rate of twenty-five
($25,000) thousands per month, for an initiated period, commencing with the
month of January, 1998 and continuing through April, 1998; and to continue on a
month to month basis thereafter, subject to termination on thirty days' notice
by either you or First American Railways, Inc., to be given at, or any time
after April 1, 1998.
Very truly yours,
First American Railways, Inc.
By: /S/ ALLEN C. HARPER
- -----------------------------
Allen C. Harper
CEO/Chairman
Accepted and agreed:
/S/ ALAN JACOBS Date: MARCH 18, 1998
- ---------------
Alan Jacobs
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT:
1. All Aboard Services, Inc., A Florida Corporation
2. Fun Trains, Inc., A Florida Corporation
3. Destination Railways, Inc., A Florida Corporation
4. The Durango & Silverton Narrow Gauge Railroad Company, A
Colorado Corporation
5. The Durango & Silverton Railroad Scenic Tour Bus Company, A
Florida Corporation
6. Florida Fun-Train, Inc., A Florida Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,811,927
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,017,557
<CURRENT-ASSETS> 4,564,230
<PP&E> 41,668,275
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,549,458
<CURRENT-LIABILITIES> 7,086,375
<BONDS> 33,573,157
0
0
<COMMON> 11,244
<OTHER-SE> 1,619,894
<TOTAL-LIABILITY-AND-EQUITY> 50,549,458
<SALES> 9,895,867
<TOTAL-REVENUES> 9,895,867
<CGS> 0
<TOTAL-COSTS> 6,750,036
<OTHER-EXPENSES> 7,309,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,340,188
<INCOME-PRETAX> (6,969,221)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,969,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,969,221)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
