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Dreamstar Lines, Inc.

Business Plan
May 2018: Single-Level Version
TABLE OF CONTENTS

Page

I. EXECUTIVE SUMMARY.................................................................................................1
II. DESCRIPTION OF BUSINESS.......................................................................................2
A. Mission Statement...............................................................................................2
B. Summary of Business..........................................................................................2
C. Company Ownership/Legal Entity.......................................................................3
D. Description of Service..........................................................................................3
E. Location............................................................................................................... 4
F. Capital Equipment...............................................................................................6
1. Train Sets................................................................................................6
2. Other........................................................................................................6
3. RRIF Financing........................................................................................6
III. COMPETITIVE ADVANTAGE..........................................................................................7
A. Advantage........................................................................................................... 7
1. Airline.......................................................................................................8
2. Private Passenger Car.............................................................................8
3. Intercity Bus.............................................................................................9
4. Amtrak.....................................................................................................9
5. Duplicate Overnight Rail Service.............................................................9
6. California High-Speed Rail.......................................................................9
IV. MARKETING................................................................................................................. 10
V. INCOME AND EXPENSE MODEL................................................................................10
VI. MANAGEMENT............................................................................................................ 12
VII. DEVELOPMENT PLAN.................................................................................................12
A. Capital Funding.................................................................................................12
1. Phase 1: Formation, Market Research, Initial Negotiations with
Host Railroads ......................................................................................12
2. Phase 2: RRIF Application ...................................................................13
3. Phase 3: Acquisition of Equipment .......................................................13
4. Phase 4: Launch ..................................................................................13

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I. EXECUTIVE SUMMARY

Dreamstar Lines will operate overnight passenger rail service, offering several classes of
comfortable sleeping accommodations ranging from economy to luxury, between pairs of major
cities approximately 500 miles apart. This service will fill a niche where passenger rail offers
distinctive advantages of comfort, economy and time over the existing alternatives of air,
existing passenger rail, or highway travel.

Travelers will spend most of the eight to ten hour duration of each trip asleep, and arrive
at their destination in the morning, prior to the beginning of a business or recreational day.
Based on initial market research (primarily Internet surveys), the actual waking hours spent in
transit, coupled with the greater comfort of travel, make this an attractive alternative to a six-
hour highway trip over the same distance, or an airline journey which (when travel to and
processing through airports is included) can take up to four hours. Approximately 75% of those
surveyed indicated they would potentially choose Dreamstar rail service over a short-haul flight.

The average load factor (i.e., percentage of available seats sold) of a passenger airline
is approximately 79%. The Dreamstar service, based on current estimates of capital and
operations costs, is expected to be profitable at a load factor of 46%. Our market research
(which indicates that up to 75% of the traveling public would be inclined to use the Dreamstar
service as an alternative to air travel for the target markets) indicates that sufficient demand
exists for the service to be self-sustaining, both operationally and with regard to the cost of
capital. The most closely comparable existing service – Amtrak’s Coast Starlight train – attracts
approximately 75,000 sleeping-car passengers, achieving a load factor of about 85%, despite
extremely high prices (well in excess of comparable airfare), reliability problems, and an
overnight section that does not terminate in a major metropolitan area.1

Dreamstar has initially focused on California-based routes, including Los Angeles-San


Francisco, San Diego/Orange County – San Francisco, Los Angeles-Las Vegas-Salt Lake City,
Los Angeles-Sacramento, and Los Angeles-Phoenix. Dreamstar has also identified 18 other
routes that potentially fall within the target parameters, or are otherwise potentially viable, and
has performed preliminary analysis regarding the logistical details of establishing several of
those routes.

Dreamstar expects to avoid certain factors which prevent Amtrak’s long-distance routes
from being profitable. The proposed service will “cherry-pick” routes in the roughly 400-600
mile, 8-12 hour “sweet spot” where Amtrak is not currently providing overnight service. Amtrak’s
current long-distance routes typically have endpoints significantly farther apart than 500 miles.
Because of this, traveling between those routes’ major-city endpoints involves significant
waking-hour travel, which is relatively uncompetitive with other transportation alternatives. In
addition, because of the need to accommodate multi-day train travel, Amtrak’s existing sleeping
car equipment does not maximize revenue space as well as Dreamstar’s car layouts can. Also,
because the Dreamstar trips are not anticipated to overlap mealtimes, Dreamstar’s trains will
not include dining cars, which (on Amtrak long-distance routes) greatly increase operating and
labor costs with relatively little enhancement to revenues. Dreamstar’s profit and loss
calculations are based on prices not greater than, and frequently less than, Amtrak’s current
sleeping-car prices, at which Amtrak’s sleeping accommodations are frequently sold out
significantly in advance.
1
The Coast Starlight’s overnight section begins in Oakland, CA at 9:39 p.m. The first morning stop is at Klamath
Falls, Oregon (population about 20,000). Arrival in the next major metropolitan area (Portland, Oregon) is not until
3:30 p.m., after a full 8 hours of daytime travel.

1
Track access rights must be negotiated with Class 1 railroads and/or public-agency
operators of commuter rail services. For rolling stock, Dreamstar is simultaneously pursuing
multiple alternatives, including (1) acquiring and reconstructing existing equipment; (2)
purchasing new railcars from established manufacturers, either complete, or as basic shells with
interiors to be completed by a specialized manufacturer. Locomotives will either be purchased
or leased.

Furnishing of furnish train crews and maintainance of locomotives and rolling stock will
be contracted out to established operators, allowing the company to operate with a relatively
small number of employees, chiefly for management and administration.

Key steps necessary for the commencement of service are:

 Negotiating track-access agreements with the owners of the track over which
the service will operate, at acceptable cost.

 Securing sufficient insurance coverage.

 Negotiating agreements for use of station stops.

 Securing Federal Railroad Administration or other financing for acquisition


and modification or lease of passenger rail cars.

 Negotiating the acquisition, at acceptable cost, of either existing passenger


rail cars for reconstruction (a potential reconstruction manufacturer has been
identified) or new rolling stock.

 Finalizing agreements with vendors for train operations and maintenance.

 Arrange for miscellaneous administrative and marketing requirements.

 Securing sufficient capital to facilitate the above (including funding any


reserves necessary for the acquisition or leasing of rolling stock, or applying
for Federal Railroad Administration financing, as set forth in greater detail
below), as well as to finance operations during the service’s ramp-up period.

II. DESCRIPTION OF BUSINESS

A. Mission Statement

To deliver efficient, comfortable and economical overnight passenger rail service


between city pairs selected to maximize the service’s competitive advantage over existing
transportation alternatives.

B. Summary of Business

Dreamstar Lines will operate overnight passenger service, offering comfortable sleeping
accommodations, between pairs of major cities approximately 500 miles apart. As set forth in
greater detail below, this service will fill a niche where passenger rail offers distinctive
advantages of comfort, economy and time over the existing alternatives of air or highway travel
– and where existing passenger rail service, for reasons primarily involving the political and

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financial limitations of the largest rail passenger carrier (Amtrak), is not currently providing
service.

As described in further detail in Section (V), below, the service’s break-even load factor
(i.e. percentage of seats sold) is 46%, with 68,167 total annual passengers.2 At 65% load factor
(the target used for the calculations herein) the anticipated profit could be approximately $5
million on revenues of approximately $18 million. 3 At 79% (the average airline load factor) the
profit could be approximately $7.3 million, and at 85% (the average load factor of possibly the
most closely comparable existing Amtrak service), it could be up to $8.8 million.4 Beyond that,
the train could be expanded to 15 cars or more as demand warranted, potentially increasing
revenue still further at relatively low incremental cost.

C. Description of Service

Dreamstar anticipates its service to commence over the route between Los Angeles and
San Francisco. The description of this route can serve as a proxy for other future routes, which
will follow the same general model.

In essence, the service consists of two daily passenger trains, one departing each
evening from each end of the route and arriving the following morning.

Endpoints for the service are planned to be the Los Angeles Union Passenger Terminal
and the Caltrain San Francisco Station, with intermediate stops at (from south to north)
Burbank, Van Nuys, Simi Valley, Oxnard, Santa Barbara, San Luis Obispo, San Jose,
Sunnyvale/Mountain View, Palo Alto, and Millbrae.

The total distance of the route is 474 miles, over tracks owned by (from south to north)
Metrolink, Union Pacific Railroad, and Caltrain. The duration of the trip would be approximately
10.5 hours, which works out to an average speed of about 45 mph, including stops. Departure
will preferably be at or around 9:30 p.m. with arrival at 8:00 a.m. the following morning.

Each train will consist (initially) of up to 6 single-level sleeping cars (4 of a standard


design and 2 first-class cars), or in the alternative a number of bi-level cars with a roughly equal
number of accommodations. There will also be a food and beverage car (divided between a
bar/tavern car, a small kitchen, and a coffee bar/soda fountain). The layouts of the cars have
been reviewed by a potential manufacturer and tentatively determined to be technically feasible.

The following classes of accommodations will be offered:

2
This is lower than Amtrak’s system-wide load-factor of approximately 53%, which includes some routes, portions
of routes, and departure times with extraordinarily low load factors due to geographical isolation, inconvenient
departure times, or other factor (such as the need, in commuter-oriented corridors, to have trains return relatively
empty to departure points where more passengers will board).
3
The average load factor of Amtrak’s long-distance trains is approximately 64%. This includes both coach and
sleeper passengers.
4
The average load factor of probably the best comparison – the sleeping car accommodations on Amtrak’s “Coast
Starlight” service from Los Angeles to Seattle – is approximately 85% (based on the capacity of its typical
maximum sleeping-car consist of four Superliner sleeping cars) attracting about 75,000 riders per year. This high
level of ridership is achieved despite that (1) the prices are significantly higher on Amtrak than Dreamstar’s
proposed prices; and (2) the overnight section of this route is roughly from Oakland, California to southern Oregon,
with arrival at the nearest large metropolitan area – Portland, Oregon – not until 3:30 p.m., i.e., after at least 8 hours
of additional waking travel.

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1. Couchette. A European-style compartment with six individual berths, which can
be purchased singly or as a group accommodation. Target price = $80, just over half of typical
airfare (estimated at $150).

2. Roomette. These accommodations are separate, partitioned compartments, with


a seat that converts into a full bed. As with the economy lie-flat seats, these accommodations
are served by common toilet and shower facilities. The target price point for these
accommodations ($150) will be comparable to a typical airfare, and lower than a typical Amtrak
sleeping-car roomette accommodation. The Roomette accommodations would be modeled on
luxury first-class private compartments on transoceanic airlines like Emirates, Etihad or
Singapore (but at a fraction of the price).

3. Business-Class Bedroom. These accommodations are separate, partitioned


compartments, with seating and sleeping accommodations designed for two people but capable
of up to three. These accommodations have private toilet and shower facilities. The target price
point for these accommodations ($350) will be less than the cost of a typical airfare for one
person plus a hotel room, or alternatively approximately the cost of airfare for two. (It’s
contemplated that two passengers could ride in a bedroom for the base price; a third person,
such as a child, could join them for an additional charge.) Both the bedrooms and drawing
rooms (see item #4, below) are significantly less expensive than comparable accommodations
on Amtrak trains.

4. Queen Stateroom. These accommodations are larger, more upscale versions of


the Bedroom accommodations, with convertible queen beds, and are targeted to be priced at
$500.

5. Family suite. One Queen Stateroom in each first-class car is designed with a
connecting door to an adjacent bedroom. Combined, these accommodations can sleep up to six
people, with private toilet and shower facilities. The target price point of these accommodations
($850) is intended to be less than airfare for six people.

7. Tycoon Suite. Top of the line luxury accommodation, with a fixed king-size bed
and private bathroom with jetted bathtub. In our most recent design concept, it’s a split-level
room that occupies the back third of the car as well as a second-level dome.

The car layouts are being worked up in conjunction with Avalon Rail, Inc. and Rail Plan
International. At present the maximum passenger capacity is 164, which (if the train were
completely occupied) would yield a maximum revenue per trip of $31,560.

Staff will be assigned to assist with converting seats to beds, delivering drinks, desserts
and snacks, and other services as needed.

All of the accommodations will have flat-screen monitors, with entertainment available
and also linked to a company app, enabling passengers to order food and drink items, check
arrival times, etc. Free wi-fi will be available.

Ticketing is expected to be primarily Internet-based, and potentially with automated


ticketing machines at stations. Part-time staff would be assigned to each station within
approximately 30 minutes of departure time to assist with boarding and ticketing.

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D. Location

The initial route is planned to be Los Angeles-San Francisco. After the basic business
model proves viable, there is room for significant expansion.

The critical characteristics of routes are generally (1) they have two major travel markets
where diversion of 1% or less of the total travel market5 would suffice to generate sufficient
ridership for Dreamstar’s service to be profitable; (2) within approximately eight to ten hours of
each other, at moderate passenger train speeds, (3) over relatively uncongested railroad track
in good condition, which are (4) not served by current overnight intercity passenger rail.

Routes identified that may fit these criteria include the following:

Los Angeles – San Francisco San Diego/Orange County – Los Angeles – Las Vegas –
San Francisco Salt Lake City

Los Angeles – Sacramento Los Angeles – Phoenix Atlanta – Orlando, FL

Atlanta – Tampa Bay, FL Atlanta – New Orleans Atlanta – Nashville – Chicago

Houston – New Orleans Dallas/Fort Worth – Austin – Dallas/Fort Worth – Kansas


San Antonio City

Dallas/Fort Worth – St. Louis Chicago – Kansas City Chicago – St.


Paul/Minneapolis

Kansas City – Denver, CO Denver – Salt Lake City Salt Lake City – Boise, ID –
Portland, OR

Boston – Washington, D.C. New York City – Philadelphia Denver – Albuquerque – El


– Charlotte, NC Paso, TX

Mexico City – Monterrey, NL

Additional routes may be feasible if ridership on the first routes exceeds the modeled
assumptions.

As the system grows, “network effects” – the increased ability of this transportation mode
to interconnect with existing passenger rail and place even larger populations within reach –
may increase the ridership and revenue of existing routes. The ultimate objective would be to
place a significant proportion of the American traveling public within two hours from a Dreamstar
endpoint. In addition, some of the above routes may support longer trains (which would
significantly increase revenue without increasing costs by the same amount, due to crew, fuel
and track-access efficiencies), or even additional “sections,” i.e., additional trains.

On the Los Angeles-Bay Area route, the track that will be used is owned by three
5
On routes of these distances (400-600 miles), the ration of air to highway travelers is typically about 1:10; thus, by
calculating the air traffic between two travel markets (from publicly available sources) and multiplying by ten, a
reasonably accurate estimate of overall traffic can be obtained.

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entities. From south to north, they are Metrolink, Union Pacific Railroad, and Caltrain.
Agreements will have to be negotiated with each entity for track access. The Union Pacific’s
Coast Route (from Moorpark, California to San Jose) comprises the majority of the route. It is a
secondary freight route, hosting roughly two through freight trains per day, plus some local
freight service to businesses along the route. (Most of UP’s through freight traffic runs through
the Central Valley.) Adding the proposed Dreamstar service (which will run at relatively low
speeds, under 60 mph) should not create any significant conflict with freight service. Although
Metrolink uses a portion of this route for commuter train service, the times the Dreamstar train
will traverse the route (late evening or very early morning) should not conflict with Metrolink’s
commuter-driven schedule.

In addition to securing access to the tracks, there will have to be agreements with the
owners of the various stations on the route. We would expect to have to pay more to access
the major stations at each end of the route (Los Angeles Union Station and the Caltrain
Downtown San Francisco station) than the intermediate stations. We have tentatively confirmed
with the first two stations on the route (Los Angeles and Downtown Burbank) that the right-of-
access costs are in line with our estimates.

Stations are planned for (from south to north):

 Los Angeles Union Passenger Terminal


 Glendale (Pasadena, Los Feliz, Silver Lake, Hollywood)
 Downtown Burbank (Hollywood, Eastern San Fernando Valley)
 Chatsworth (Western San Fernando Valley)
 Camarillo (Conejo Valley, Simi Valley, Oxnard, Ventura)
 Santa Barbara
 San Luis Obispo (crew change point)
 San Jose
 Sunnyvale/Mountain View
 Palo Alto
 Millbrae (access to SFO with car rental)
 San Francisco (Caltrain 4th Street Station or Transbay Terminal)

Departure is targeted to be around 10:00 p.m., with arrival at 8:30 a.m.

E. Capital Equipment

1. Train Sets

The primary physical assets of the Dreamstar service will be its train sets. Dreamstar is
currently evaluating multiple options for these, including a current primary focus of a trainset
with 7 to 8 single-level cars hauled by a leased diesel-electric locomotive. This configuration is
used for the revenue and cost estimates in this Business Plan.

2. Other

Other capital assets of the service will include an Internet- and smartphone-based
reservations and ticketing system, a general Dreamstar website, and potentially automated
ticketing machines at stations.

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3. RRIF Financing

The initial acquisition cost for the Dreamstar passenger train sets is significant. We
expect it to be in the range of $36-50 million for the two train sets (including spare two spare
units). One potential financing source is the Federal Railroad Administration’s Railroad
Rehabilitation & Improvement Financing (RRIF). Under this program the FRA Administrator is
authorized to provide direct loans and loan guarantees up to $35 billion (of which only
approximately $2 billion has yet been loaned) to finance development of railroad infrastructure.
These direct loans can fund up to 100% of a railroad project with repayment periods of up to 35
years and interest rates equal to the cost of borrowing to the government (currently at 3.2% for
30-year Treasury bonds).

Eligible borrowers include railroads, state and local governments, government-


sponsored authorities and corporations, joint ventures that include at least one railroad, and
limited option freight shippers who intend to construct a new rail connection. As an operator of
passenger rail service (even over tracks owned by other entities), Dreamstar Lines could qualify
for this financing as a “railroad,” as that term is defined for purposes of law.

Since the RRIF program does not have funds appropriated to process applications, the
costs of an application and the FRA’s investigation of it are paid by the applicant. At present,
the FRA requires a $250,000 deposit to cover these expenses. If more funds are required, the
FRA may request additional funds; if less than the entire deposit is used, the balance is returned
to the applicant.

The RRIF also requires an up-front payment of a refundable Credit Risk Premium, to
reduce the risk of a default. The premium is specially established for each application. For one
recent local project (the Alameda Corridor freight rail project), the credit risk premium was set at
1.88% of the amount disbursed. Generally, it would not be more than 5%. The amount of the
credit risk premium, with interest, is returned to the borrower upon repayment of the loaned
funds.

The advantage of the RRIF program (as opposed to conventional financing) is its lesser
cost. One potential disadvantage is that it is a government program, and may take up to 200
days or longer for an application to be prepared to the satisfaction of the FRA. The FRA is
officially required to act on the application within 90 days, but often takes longer to issue a
decision.

Our plan is to start the initial service using the RRIF loan mechanism, and then use the
service’s success to leverage private funding for later expansions of the service. We have had
initial consultations with the FRA and the Build America Bureau (“BAB”), which oversees RRIF
funding, to begin establishing the parameters for our application.

Other options, being pursued concurrently, include lease financing, or outright purchase
of the rolling stock with investment capital.

III. COMPETITIVE ADVANTAGE

A. Advantage

As set forth in the Executive Summary, above, the advantages of the Dreamstar
overnight rail service will be comfort, economy, and time. Sleeping cars allow enhancements to

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passenger comfort that are not physically possible in virtually any other mode of travel (with the
possible exception of cruise ships, or first-class transoceanic airline accommodations that cost
several thousands of dollars). That, in turn, allows an overnight train trip to utilize the time a
person would otherwise spend asleep.

Although Amtrak is currently able to sell out its sleeping-car accommodations at


significantly higher prices than Dreamstar’s, Dreamstar will be able to charge less, due to the
more efficient designs of its sleeping cars, which (unlike Amtrak’s equipment, based on
decades-old designs) are optimized for simple overnight and not multi-day travel. This allows
Dreamstar to operate with more revenue space than Amtrak, and also dispense with
extraordinarily expensive dining-car service.

Emerging demographics are favorable to high demand for Dreamstar’s service.


Millennial travelers drive significantly less than previous generations. As California’s population
continues to increase – and with airports in the Los Angeles area and the Bay Area in particular
approaching capacity – so will the demand for Dreamstar’s distinctive travel alternative.

B. Comparison to Alternatives

There is currently no existing counterpart to the service Dreamstar intends to provide.


Its competitors include (1) airlines; (2) private passenger car; (3) long-distance bus; (4) existing
Amtrak passenger rail; and (5) potentially, attempts to duplicate Dreamstar service. The relative
advantages and disadvantages of each are addressed below.

1. Airline

The primary advantage of an airliner is speed. Over a true long-distance route, this
advantage is virtually impossible to overcome. The value of a person’s time is generally such
that faced with a choice between four hours on an airplane or three days on a train (i.e.,
approximately the respective travel times for air and rail between Los Angeles and Chicago),
only people with a personal aversion to air travel typically elect a train.

However, over a shorter distance, the advantage of an airliner’s speed diminishes –


because a lesser proportion of the overall travel time is spent actually flying between the trip’s
endpoints. In the post-9/11 aviation environment, passengers are advised to arrive at an airport
at least one hour before departure to enable their processing through check-in and security. In
addition, a major city’s airport is often located relatively far from people’s ultimate travel
destinations in that city, with the result that travelers may spend an hour or more each in
traveling to their departure airport and from their destination airport. As a result, a short-hop
flight of 500 miles, which might take only about an hour’s actual flying time, may take up to three
hours or more.

In addition, airline travel is not notoriously comfortable, particularly outside business- and
first-class accommodations that cost substantially more. This, as well as the added discomfort
of being processed through an airport, may magnify the overall fatigue involved in a relatively
short air journey.

Finally, in the specific case of when a morning arrival at a destination is necessary or


desired, a 500-mile, three-hour air journey requires a relatively early rising, which many people
find unpleasant. As a practical matter, many people tend to travel to their destination the night
before, which increases the overall time they are away from home and adds the cost of a hotel

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stay.

2. Private Auto

A private automobile trip of 500 miles, beginning and ending in major cities, can be
expected to take anywhere between 7 and 10 hours, depending on traffic. That can be an
uncomfortable trip, particularly if a morning arrival is required. Again, as a practical matter, this
often means a trip the day before and the expense of lodging.

In addition, between the cost of fuel and wear on a vehicle, the real cost of a 500-mile
car trip (at $.50 per mile) amounts to $250. Dreamstar anticipates charging significantly less
than this amount for its most economical accommodation.

3. Intercity Bus

A bus trip may be the most economical alternative. The lowest intercity bus fare for a
comparable distance to a Dreamstar route is typically lower than Dreamstar’s most economical
fare. However, intercity buses have a reputation for being less than comfortable, particularly on
a 7 to 10 hour trip, and even more so if the trip is overnight.

4. Amtrak

Amtrak operates sleeping-car service on many of its existing routes. However, for
logistical reasons (i.e., the need for convenient departure and arrival times at the far endpoints
of its multi-day routes), very few routes in the “sweet spot” (i.e., a roughly 500-mile distance
between two major travel destinations) are currently served on overnight schedules. For
instance, Amtrak’s Coast Starlight long-distance train operates on a daytime schedule between
Los Angeles and the San Francisco Bay area (serving the East Bay, not San Francisco itself).
Dreamstar does not anticipate competing head-to-head with Amtrak for overnight travel on any
“sweet spot” routes where it is currently provided.

5. Duplicate Overnight Rail Service

As stated above, no comparable overnight rail service to that contemplated by


Dreamstar is presently operating. It is possible that, if the Dreamstar service is successful,
other firms might try to commence a similar service. Any track-access agreement between
Dreamstar and host railroads would need to provide for Dreamstar’s exclusive right, for a certain
period, to operate its service over that line. Since, after a trend of consolidation, a very few
Class 1 railroads control most of the track over which Dreamstar contemplates operating its
initial and expanded service, it might be possible, by these agreements, to lock up a significant
proportion of the potentially profitable routes.

6. California High-Speed Rail

The State of California has approved construction of a high-speed rail network which will
ultimately connect Los Angeles and San Francisco, installing entirely new dedicated high-speed
rail infrastructure at a total cost currently estimated at between $77 billion and $98 billion. Of this
amount, only $12 billion in funding has yet been dedicated (or even identified).

The system (running via the Central Valley, Tehachapi Pass, and Palmdale – not the
Coast Route of the proposed Dreamstar service) is planned to be completed in 2033; however,

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environmental and other legal challenges, and other delays, may extend this date. In addition,
only a fraction of the funding for construction of the system has yet been identified or allocated.
The only segment of the route currently under construction is the line between Merced and
Bakersfield in the San Joaquin Valley, which would not compete with the Dreamstar Los
Angeles-Bay Area route.

The current official goal of the HSR service is to enable a trip between downtown Los
Angeles and San Francisco in two hours and 40 minutes (2:40). However, this objective may be
unrealistic (in light of the geography of the route and the proposed number of stops). The
current (2012) HSR business plan discusses a 2:40 travel time over the initial segment (San
Jose-San Fernando Valley). A travel time of 3:40 to six hours has been suggested as being
more realistic for the overall Los Angeles-San Francisco route.

The projected price of a HSR fare has increased since the project was initially proposed,
from approximately $50 (in 2008) to $93 currently. The HSR project is (currently) required by
law to operate without a taxpayer subsidy. The currently projected fare is based on ridership
projections for the HSR system of 18 to 31 million riders per year that have been criticized as
being overly optimistic. If ridership on the HSR system is lower than projected, fares would
have to be significantly higher for the system to break even without a subsidy. Currently,
Amtrak’s Acela Express – the only high-speed rail route currently operating in the United States
– has per-mile fares that are 250% of the projected California HSR fare. If the California HSR
fare followed the Acela model, the fare would be $215.

Realistically, the California HSR system may likely not differ significantly from the pricing
and travel time of airline travel. Accordingly, HSR would probably not offer any greater
competition to the Dreamstar service than airline travel, as addressed above. Again, the overall
waking time spent travelling will be less for a Dreamstar trip than a HSR trip.

In any event, the HSR system will not be operational, even under the most optimistic
projections, for more than a decade. The two services may be different enough to be
complementary, not directly competitive to each other. If the HSR did prove to offer
unsustainable competition to the Dreamstar service, the service could be shifted to another of
Dreamstar’s planned expansion city pairs not served by high-speed rail.

IV. MARKETING

Marketing will be targeted at the travelling public at both endpoints of the route, as well
as lesser marketing to sources of tourism travel to those locations. Some of this secondary,
remote-market marketing will be aimed at creating demand for further expansions of the service.
(For example, advertising in the Phoenix, Las Vegas and Salt Lake City markets – all of which
generate tourist travel to Southern California – will also create interest in expansions of the
service to those locations.)

Los Angeles and the Bay Area already have a large number of rail customers, chiefly
commuters. Fixed visual advertising in or near large stations heavily used by rail customers
would generate significant interest at relatively low cost.

Other advertising will include Internet advertising, promotions, publicity in travel-oriented


publications, and television and radio ads. Intensive marketing will commence several months
in advance of the beginning of service.

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Ticketing will be primarily e-ticketing accessed via the Internet or mobile phone apps.
Reservations could also be taken and tickets sold through outsourced call centers, potentially
subject to a surcharge to cover the increased cost.

V. INCOME AND EXPENSE MODEL

The following model annual profit and loss statement is based on a load factor of 70%,
reflecting ridership of 115 out of a maximum capacity of 164 per train with a maximum (full-load)
revenue of $31,560.

REVENUE
Overnight Ticket Sales6 $ 16,127,160
Local Ticket Sales7 $ 1,076,750
Onboard Sales (bar, coffee etc.)8 $ 335,800
Express $ 384,621
TOTAL REVENUE $ 17,924,331

EXPENSES
Operations & Maintenance
Fuel9 ($ 1,522,488)
Locomotive Lease10 ($ 365,000)
Labor11 ($ 1,938,150)
Maintenance12 ($ 1,400,000)
Track Access Fees13 ($ 2,595,150)
Departure Preparation14 ($ 182,500)
Cost of goods sold (onboard bar/coffee etc.)15 ($ 67,160)
Miscellaneous/Contingency ($ 250,000)

Capital Cost
Equipment (Interest & Principal)16 ($ 2,023,944)
Administrative and Other
Insurance17 ($ 1,183,388)
6
Maximum overnight revenue as configured of $31,560 (at 100% occupancy = 164 passengers) x 70%; assumes .75
checked bags (at $20 each) per passenger (comparable with airlines)
7
Based on $1,475 in local revenue per train, assuming roughly 20% ridership per station of one Pacific Surfliner train
(fares $10 LA-Simi Valley, $20 Oxnard, $30 Santa Barbara, $40 SLO, + 20 passengers @ $7.75 San Jose-San
Francisco.)
8
Assumes 115 passengers spend an average of $4/trip = $460 x 730 trips.
9
@$2.00 per gallon non-road No. 2 diesel x 2.2 gallon/mile [see Amtrak FY2014 Budget and Business Plan, p. 80] x
474 miles x 730 annual trips
10
$500/day per locomotive
11
See Labor Model (Table 2)
12
@ $100,000 annual maintenance cost per vehicle. [Note: Metrolink’s annual maintenance costs per vehicle –
including locomotives and cars combined – are approximately $80,000, so the figures used here for locomotive and
car maintenance may be conservative.]
13
@$7.50/mile x 474 miles x 730 annual trips.
14
Labor and fuel costs incidental to preparing train for departure, estimated at $250 per departure
15
Based on 500% markup of the $372 average of goods sold (see note 1), so cost of goods per trip = $65 x 730.
16
Principal and interest on $39 million of equipment [14 reconditioned lightweight cars at $3 million each] financed at
3.2% over 30 years with a RRIF loan. (Principal repayment would ordinarily not be included as an expense item, but
is included here to reflect the company’s actual cash flow. A more formal profit and loss statement would account for
it differently.)

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Station maintenance contribution/rent18 ($ 170,000)
Sales & marketing19 ($ 1,254,703)
Administrative overhead20 ($ 1,433,945)
Commissions (credit card etc.)21 ($ 448,108)

TOTAL EXPENSE** ($14,834,536)


NET CASH FLOW $ 3,089,795

VI. DEVELOPMENT PLAN

As set forth in the Executive Summary, key steps necessary for the commencement of
service are:

 Negotiating track-access agreements with the owners of the track over which
the service will operate, at acceptable cost.

 Securing sufficient insurance coverage.

 Negotiating agreements for use of station stops.

 Securing Federal Railroad Administration or other financing for rolling stock.

 Negotiating the acquisition, at acceptable cost, of either existing passenger


rail cars for reconstruction (a potential reconstruction manufacturer has been
identified) or new rolling stock.

 Negotiating agreements with vendors for train operations and maintenance.

 Arrange for miscellaneous administrative and marketing requirements.

 Complete investment financing rounds necessary for the above (including


funding any reserves necessary for the acquisition or leasing of rolling stock,
or applying for Federal Railroad Administration financing, as set forth in
greater detail below), as well as to finance operations during the service’s
ramp-up period.

A. Capital Funding

1. Phase 1: Formation, Initial Market Research, Initial Negotiations with


Host Railroads ($30,000; self-funded/family & friends). COMPLETED.

The first phase of Dreamstar’s development has not required extensive financial capital.
Costs include travel, deposits, consulting fees, local travel, corporate filing fees and taxes, basic
17
@ $.03 per passenger mile (derived from other rail service feasibility studies.)
18
@ 2 Endpoint terminals at $30,000 annually + 11 secondary stations at $10,000 annually; consistent with
discussions with City of Burbank and LA Metro.
19
Calculated at 7% of revenue.
20
Calculated at 8% of revenue
21
2.5% of revenue.

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computer and Internet services, etc.

During this period, Dreamstar has initiated discussions with UP, Metrolink, and Caltrain,
with the objective of (1) establishing a willingness in principle to proceed further with the project;
(2) confirming that the range of track-access fees that the Dreamstar financial model can
support are within the ballpark of what may be acceptable to the host railroads; and (3)
establishing milestones for formal agreements with the railroads (i.e., upon Dreamstar’s
securing financing for equipment, obtaining satisfactory insurance, etc.)

The company has also begun, and will continue, engaging with potential key vendors for
train crews, locomotive leasing and maintenance, and other services during this phase.

In addition, the company has been evaluating alternatives and contacting potential
sellers of either pre-owned or new rolling stock. We are working with two primary, competing
manufacturers: Stadler, a major Swiss railcar manufacturer proposing to build completely new
cars, and Avalon Rail, a U.S. manufacturer that has performed rebuilds of existing passenger
rail cars for (among others) VIA Rail (Canada’s equivalent of Amtrak), and RailPlan
International. Avalon has done a large amount of preliminary engineering and cost work on our
cars.

2. Phase 2: Track Access, RRIF Application ($750,000)

Metrolink has requested a deposit of $20,000 to pay for staff time for evaluation of our
proposed terms. It is likely that similar expenses will be required to finalize track access
agreements with Union Pacific and Caltrain, bringing the total for this stage of work to a
minimum of $100,000.

$250,000 will be required as a deposit to the FRA for staff time, environmental review
and other items related to the RRIF application More funds may be required if the FRA requires
Dreamstar to obtain more formal ridership and capacity studies as part of its RRIF application.
Discussions are underway with public agencies, including LOSSAN, to explore the possibility of
cooperating with those agencies to secure grant funding for studies, to the extent the items
studied may overlap with the agencies’ own needs. We have obtained estimates for feasibility
studies in the range of $50,000 to $200,000. We believe the $50,000 feasibility study will be the
minimum required; it should also help with Phase 3 financing.

During this phase, we will necessarily have to expand the Company’s footprint beyond
the extremely lean model it has used to date. We will require a physical office (small at this
phase) and will have to pay for at least part-time salaries for key managers, since the time
commitment will have expanded beyond what can be done under the current model. We
anticipate this stage will last approximately 12 to 18 months, with associated overhead
expenses of approximately $200,000.

During this phase, the company may also explore other sources of debt financing,
grants, or other funding sources, as back-up or alternatives to a RRIF loan.

3. Phase 3: Acquisition of Equipment ($1,800,000)

If Dreamstar’s application for an RRIF loan is approved, Dreamstar will have to pay the
refundable credit risk premium referenced in section (II)(F)(3), above, in the amount determined
by the FRA. A 5% credit risk premium, which must be paid before the funds are disbursed,

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would be $1,800,000.

Alternatively, if the company found other sources of funding, this or a similar amount
might be paid directly to the manufacturer to reduce the amount that must be financed.

Before payment of this significant amount and undertaking the significant indebtedness
of financing the rail cars, Dreamstar would have to (1) have all the key agreements secured with
the host railroads and station owners, as well as (2) sufficient funding to launch the service.
(See Phase 4, below.)

4. Phase 4: Launch ($6,000,000+)

Upon completion, testing and acceptance of the equipment, and finalization of all the
necessary agreements with the host railroads and other partners, Dreamstar’s service would
commence. Prior to the opening of service, the company will have conducted an intensive
advertising campaign. Although customers will pay for service roughly contemporaneously with
it being provided, it will be necessary to have a significant cash reserve to fund the operation of
the service as ridership ramps up – preferably sufficient to fund at least two quarters’ worth of
operation with low patronage.

5. Phase 5: Expansion

After the first route is operational and validated, we plan to move quickly to expand.
First, we anticipate significant growth in the initial Los Angeles – San Francisco market beyond
that originally targeted. The trains may be expanded to up to 14 cars (with that limit dictated by
train station platform lengths), significantly increasing revenue without corresponding increases
in several key expenses (such as track access payments, fuel, train operator compensation,
overhead and marketing). An additional possibility, if demand warrants, might to be run the
service in “sections,” that is, having a second train closely follow behind the first (as was
common with popular trains in the past).

We plan to begin work on the San Diego/Orange County – San Francisco extension
even before beginning service of the first route, since most of the route is the same, and we
already have working relationships with most of the key parties involved. Ideally, Dreamstar
would launch the San Diego/Orange County service no more than one year after launch of the
first route, the Los Angeles – Las Vegas – Salt Lake, Los Angeles – Phoenix, and Los Angeles –
Sacramento routes the year after that, and then proceed to launch multiple services in each
successive year.

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