UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 0-26741
FIRST AMERICAN RAILWAYS, INC.
-----------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED 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
----------------------------------------
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court. Yes No NOT APPLICABLE
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date:
AT AUGUST 18, 1998 25,524,020 SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
FIRST AMERICAN RAILWAYS, INC.
INDEX
(SIX MONTHS ENDED JUNE 30, 1998)
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
CURRENT:
Cash $ 96,386 $ 1,711,927
Restricted cash 100,000 100,000
--------------------------------------
Cash and cash items 196,386 1,811,927
Inventories 180,413 1,017,557
Prepaids and other 454,134 1,734,746
Net assets held for sale 4,359,439 -
--------------------------------------
Total current assets 5,190,372 4,564,230
--------------------------------------
Fixed assets, net 12,911,995 41,668,275
Deferred loan costs, goodwill and other, net 2,283,947 4,316,953
--------------------------------------
$ 20,386,314 $ 50,549,458
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued liabilities $ 4,085,589 $ 4,812,626
Unearned revenue 159,465 377,749
Short term debt and current maturities of long-term debt 2,420,589 1,896,000
Reserve for loss on sale of net assets 1,841,000 -
--------------------------------------
Total current liabilities 8,506,643 7,086,375
--------------------------------------
Long-term debt 16,968,680 33,573,157
Deferred income taxes and other long-term liabilities - 8,258,788
--------------------------------------
Total liabilities $ 25,475,323 $ 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),
25,524,020 and 11,243,911 shares issued and outstanding 25,524 11,244
Additional Paid-in capital 15,729,350 12,524,286
Accumulated deficit (20,843,883) (10,904,392)
--------------------------------------
Total stockholders' equity (5,089,009) 1,631,138
--------------------------------------
$ 20,386,314 $ 50,549,458
======================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue $ 313,062 $ 2,633,585 $ 507,726 $ 2,633,585
Cost of revenue 2,161,280 1,186,004 4,460,353 1,186,004
-------------------------------------------------------------------------
Gross profit (1,848,218) 1,447,581 (3,952,627) 1,447,581
-------------------------------------------------------------------------
Selling, general and administrative 583,576 525,153 1,567,194 525,153
Development of Florida Fun-Train - 1,149,491 - 1,883,276
-------------------------------------------------------------------------
Operating loss (2,431,794) (227,063) (5,519,821) (960,848)
-------------------------------------------------------------------------
Interest expense, net 633,324 553,418 1,257,734 593,019
Amortization of loan costs 128,253 92,428 256,507 142,090
Other Income - - - -
-------------------------------------------------------------------------
Loss from continuing operations (3,193,371) (872,909) (7,034,062) (1,695,957)
-------------------------------------------------------------------------
Discontinued operations:
Loss from operations of
Durango & Silverton NGRR (1,064,429) - (1,064,429) -
Estimated loss on disposal of
Durango & Silverton NGRR (1,841,000) - (1,841,000) -
-------------------------------------------------------------------------
Loss from discontinued operations (2,905,429) - (2,905,429) -
-------------------------------------------------------------------------
Net income (loss) $ (6,098,800) $ (872,909) $ (9,939,491) $ (1,695,957)
=========================================================================
Weighted average number of
common shares outstanding 21,984,930 9,691,663 20,131,403 9,405,875
Net loss per common share
Basic
Loss from continuing operations (0.15) (0.09) (0.35) (0.18)
Income (loss) from discontinued operations (0.05) - (0.05) -
Estimated loss on disposal of D&SNG (0.08) - (0.09) -
-------------------------------------------------------------------------
(0.28) (0.09) (0.49) (0.18)
-------------------------------------------------------------------------
Diluted
Loss from continuing operations (0.15) (0.09) (0.35) (0.18)
Income (loss) from discontinued operations (0.05) - (0.05) -
Estimated loss on disposal of D&SNG (0.08) - (0.09) -
-------------------------------------------------------------------------
$ (0.28) $ (0.09) $ (0.49) $ (0.18)
-------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
---- ----
OPERATING ACTIVITIES:
Net Loss $ (9,939,491) $ (1,695,957)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 315,237 97,583
Amortization 265,832 159,526
Reserve for loss on sale assets 1,841,000 -
Assets held for sale 1,147,451 -
Original issue discount 324,600 -
Salaries and consulting fees paid in common stock 406,060 44,014
Interest payments paid in common stock 436,872 -
Decrease in restricted cash - 409,131
Decrease in inventories 19,404 (304,915)
Decrease in prepaids and others 1,628,566 (429,407)
Decrease in accounts payable and accrued liabilties (510,718) 185,249
Increase in unearned revenue 42,083 1,049,475
Increase in other long-term liabilities - -
-------------------------------------------
Total adjustments 5,916,387 1,210,656
-------------------------------------------
Net cash used in operating activities (4,023,104) (485,301)
-------------------------------------------
Investing activities
Capital expenditures 136,013 (5,365,785)
Cash paid for acquisition - (3,481,582)
Decrease in other assets 120,846 (378,207)
-------------------------------------------
Net cash provided by (used in) investing activities 256,859 (9,225,574)
-------------------------------------------
Financing activities:
Proceeds from issuance of notes payable and line of credit 1,500,000 16,406,500
Repayment of notes payable (19,235) (4,567,342)
Payment of loan costs (50,000) (1,629,125)
Proceeds from issuance of common stock 2,607,790 3,736,710
Payment of offering costs (389,067) (504,570)
-------------------------------------------
Net cash provided by financing activities 3,649,488 13,442,173
-------------------------------------------
Net decrease in cash (116,757) 3,731,298
Cash at beginning of period 313,143 7,174,020
-------------------------------------------
Cash at end of period $ 196,386 10,905,318
===========================================
Supplemental Disclosures:
Cash paid for interest $ 410 $ 867,587
Accrued fees and salaries paid in common stock - 102,188
Prepaids paid in common stock - 91,500
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL The consolidated financial information
STATEMENTS included herein is unaudited. Certain
information and footnote disclosures
normally included in the consolidated
financial statements have been condensed or
omitted pursuant to the rules and
regulations of the Securities and Exchange
Commission, although the Company believes
that the disclosures made are adequate to
make the information presented not
misleading. These consolidated financial
statements should be read in conjunction
with the financial statements and related
notes contained in the Company's 1997 Annual
Report on Form 10-KSB. Other than as
indicated herein, there have been no
significant changes from the financial data
published in said report. In the opinion of
Management, such unaudited information
reflects all adjustments, consisting only of
normal recurring accruals, necessary for a
fair presentation of the unaudited
information shown.
Results for the interim periods presented
herein are not necessarily indicative of
results expected for the full year.
2. GOING CONCERN The Company has incurred annual operating
CONSIDERATIONS losses since its inception and at June 30,
1998, the Company had a working capital
deficiency of approximately $3,316,271.
Additionally, the Company will have to
obtain the necessary funds to either
complete the four railcars currently in
various stages of completion or obtain other
railcars from a third party.
From January through June 1998, the Company
sold in private placements an aggregate of
8,029,500 shares of common stock receiving
net proceeds of approximately $2,218,723. An
additional $500,000 was advanced as a
short-term note by HEC Asset Management in
partial funding of an investment option of
up to $4,000,000. HEC elected not to invest
additional funds. In addition, a $1,000,000
equity investment made between March 30, and
April 15, 1998 was converted to debt
bringing the 1998 HEC investment to an
aggregate of $1,500,000.
The Company has implemented cost reduction
programs including reducing 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. This has resulted in a
significant increase in ridership but is
still far short of generating sufficient
income.
6
3. SALE OF A MAJOR On July 2, 1998, the Company sold all of the
SUBSIDIARY common stock of its subsidiary which
operates the Durango & Silverton Narrow
Gauge Railroad ("D&SNG") to a corporation
controlled by the Company's former Chairman
and Chief Executive Officer. The sales price
was $2,500,000, which was paid in cash at
closing. In connection with the sale, the
parties also agreed that the Company would
provide certain marketing, accounting and
support services to the D&SNG for a period
of five years at a total fee of $1,500,000
payable in monthly installments of $25,000.
In addition, the purchaser has granted the
Company a five-year right of first refusal
if the purchaser sells a controlling
interest in the D&SNG during such period.
Upon completion of the sale, Mr. Harper
resigned as the Company's Chairman and CEO.
An estimated loss on the disposal of the
discontinued operation of $1,841,000
represents the estimated loss on the
disposal of the net assets of the D&SNG. Net
operating results of the D&SNG for the six
months ended June 30, 1998 are shown
separately in the accompanying statements of
operations. Revenues of the D&SNG for
the first six months of 1998 were $1,780,867
These amounts are not included in
revenue in the accompanying statements of
operations. The 1997 comparative financial
statements did not present discontinued
operations. This will be adjusted at a
subsequent date.
4. ISSUANCE OF For the period January 1, 1998
EQUITY through June 30, 1998 the Company sold
SECURITIES in private offerings approximately
8,029,500 shares of its common stock for
total consideration of $2,274,375. In
addition, 750,000 shares and 17,155 warrants
were issued to International Capital Growth
Ltd., the Company's placement agent as
partial compensation to the placement agent.
The total placement agent's fees paid in
connection with the sale of these shares
were approximately $143,600 along with a
non-accountable expense allowance of
$31,200. Of these offerings, approximately
5,447,640 shares were sold for cash to
non-"US Persons" in an "offshore
transaction" as defined in Regulation S.,
with the balance of approximately 2,581,860
shares being sold for cash to U.S.
investors.
In addition, 25,336 shares were issued under
the Company's employee stock purchase plan
for total consideration of $7,970.
5. 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% June
30, 1998). 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
7
$881,000), (ii) to grant 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 certain future financings.
During the quarter ended June 30, 1998 the
Company received $500,000 in new funds from
HEC Asset Management, LLC ("HEC"), an
affiliate of an existing investor, in
partial funding of an investment option of
up to $4,000,000. HEC elected not to invest
additional funds under this option. In
addition, a $1,000,000 equity investment
made by HEC between March 30, and April 15,
1998 was converted to debt bringing the 1998
HEC investment to an aggregate of
$1,500,000. In connection with this funding,
HEC acquired an aggregate of $589,850 in
convertible, secured promissory notes by
assignment from original noteholders who
will receive common stock from the Company
in lieu of their notes and accrued interest.
6. LONG-TERM DEBT At June 30, 1998 the Company's long-term
debt consisted of the following:
8% convertible subordinated notes
due June 2002 less unamortized original
issue discount of $2,560,267 $ 8,592,233
10% convertible notes due in April and May
2001 and secured by all non D&SNG assets of
the Company (A) 8,235,682
Capital lease with principal and
interest payable monthly through July 2002
secured by equipment 180,765
-----------
17,008,680
Less current maturities (40,000)
-----------
$16,968,680
===========
(A) At August 18, 1998 the Company was in
default of the April 30, 1998 interest
payment of $382,291 due to the noteholders
of the 10% secured convertible notes, as
well as $223,050 due to the noteholders of
the 8% unsecured convertible notes on June
30, 1998. The Company is in the process of
negotiating with these noteholders to accept
these interest payments in additional shares
of common stock. These same noteholders may
be requested to convert their notes to
equity in connection with the anticipated
new funding.
8
ITEM 2. 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 (which
should be read in conjunction with the financial statements and related notes
contained in the Company's 1997 Annual Report on Form 10-KSB) 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." 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 will continue to pursue its strategy of acquiring and managing Scenic
Destination Railroads.
On July 2, 1998, the Company sold all of the common stock of its Durango and
Silverton subsidiary for $2,500,000 in cash proceeds. In connection with the
sale, the Company will provide certain marketing, accounting, and support
services to D&SNG for a period of five years at a total fee of $1,500,000
payable in monthly installments of $25,000. The Company has also been granted a
five-year right of first refusal if the purchaser sells a controlling interest
in the D&SNG during such period.
For purposes of a meaningful comparison, the revenue, cost of revenue, and
selling, general and administrative expenses for the three and six months ended
1998 have been analyzed for the current period only since in 1997 the Company
was a startup operation and had no revenues during the period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
The Company generated revenues of approximately $313,062 for the three months
ended June 30, 1998. Revenues were significantly below expectations because
ridership levels were below the projections for this start-up period.
Ridership was below expectations 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 promotional activities until late 1998.
Cost of revenue for the three months ended June 30, 1998 were approximately
$2,200,000, consisting primarily of the costs of the train operating agreement
with the National Passenger Railroad Corporation, the track rights fees with CSX
Transportation, Inc. and Florida Department of Transportation, liability and
other insurance, equipment leases, depreciation expense, train security and
salaries and benefits for on board personnel and operations management.
Selling, general and administrative expenses for the three months ended June 30,
1998 were approximately
9
$584,000, an increase of approximately $59,000 as compared to the same period in
1997 and results from the Company's commencement of operations. This amount also
represents a decrease of over $400,000 when compared to the three months ended
March 31, 1998. This decrease is reflective of the Company's cost cutting
measures for 1998 as well as its lack of capital to continue a comprehensive
marketing program.
The Company's net interest expense for the three months ended June 30, 1998 were
$633,324, an increase of approximately $80,000 when compared to the same period
in 1997, and primarily related to the issuance of additional debt securities.
Amortization of deferred loan costs increased by approximately $36,000 for the
three months ended June 30, 1998 as compared to the same period in 1997 due to
loan costs originating from the additional debt securities issued in June 1997.
The Company reported a net loss of approximately $6,100,000 or $.28 per share
for the three months ended June 30, 1998 as a result of the factors discussed
above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company generated revenues of approximately $507,726 for the six months
ended June 30, 1998. Revenues were significantly below expectations for this
period because ridership levels were below the projections for this start-up
period.
Cost of revenue for the six months ended June 30, 1998 was approximately
$4,400,000. Cost of revenues consist primarily of the costs of the train
operating agreement with the National Passenger Railroad Corporation, the track
rights fees with CSX Transportation, Inc. and Florida Department of
Transportation, liability and other insurance, equipment leases, depreciation
expense, train security and salaries and benefits for on-board personnel and
operations management.
Selling, general and administrative expenses were approximately $1,600,000 for
the six months ended June 30, 1998, a significant increase from approximately
$525,000 for the six months ended June 30, 1997. During the early months of
1998, the Company had begun its advertising and marketing campaign in an effort
to promote the train and increase its ridership. During the six months ended
June 30, 1998, the Company's financing was not completed and marketing expenses
were cut back significantly.
The Company's net interest expense were approximately $1,258,000 for the six
months ended June 30, 1998, an increase of approximately $707,000, which is
attributable to the issuance by the Company of additional debt securities in
June and December 1997.
Amortization of deferred loan costs was approximately $257,000 for the six
months ended June 30, 1998. This represents an increase of approximately
$115,000 due to the additional debt securities issued in June 1997.
The Company reported a net loss of approximately $9,900,000 or $.49 per share
for the six months ended June 30, 1998 as a result of the factors discussed
above.
10
LIQUIDITY AND CAPITAL RESOURCES
Overall, for the second quarter of 1998, available cash decreased by
approximately $1,615,000 primarily due to ongoing operating expenses and the
less than anticipated ridership on the Florida Fun-Train, as well as the
impending sale of the Company's major subsidiary.
More specifically, for the six months ended June 30, 1998, net cash used in
operating activities was approximately $4.0 million compared to approximately
$485,000 for the six months ended June 30, 1997. The increase was largely due to
the operation of the Florida Fun-Train despite its reduced (4 days per week)
schedule and ridership levels significantly below projections.
The Company's investing activities provided approximately $257,000 in the six
months ended June 30, 1998, compared to approximately $9.2 million used in the
six months ended June 30, 1997. The investing activity in 1997 was principally
due to capital expenditures for the construction of the railcars for the Florida
Fun-Train of approximately $1.6 million and the acquisition of D&SNG which
required approximately $3.5 million in cash
For the six months ended June 30, 1998, financing activities generated
approximately $3.6 million as compared to $13.4 million for the six months ended
June 30, 1997. Cash flows from financing activities were due to a private
placement of debt securities and related conversion of other debt to equity
completed in June 1998. At June 30, 1998 the Company had stockholders' equity of
approximately $5 million as compared to equity of approximately $1.6 million at
December 31, 1997.
During the quarter ended June 30, 1998 the Company received $500,000 in new
funds from HEC Asset Management, LLC ("HEC"), an affiliate of an existing
investor, in partial funding of an investment option of up to $4,000,000. HEC
elected not to invest the additional funds. In addition, a $1 million equity
investment made by HEC between March 30 and April 15, 1998, was converted to
debt bringing the 1998 HEC investment to an aggregate of $1.5 million. In
connection with this funding, HEC acquired an aggregate of $589,850 in
convertible, second promissory notes by assignment from original noteholders who
will receive an aggregate of 3,932,333 shares of common stock from the Company
in lieu of their notes and accrued interest.
The HEC representative elected, in connection with the financing to serve as the
sole director of Fun-Trains, Inc., the Company's wholly owned subsidiary that
operates the Florida Fun Train, has resigned and has been replaced by a
representative of the Company. In addition, the $50,000 invested by the
Company's investment advisor, in connection with the proposed investment by HEC
of up to $4 million, has been rescinded.
On April 1, 1998, the Nasdaq Stock Market, Inc. notified the Company that it no
longer met the minimum requirements for continued listing on the Nasdaq SmallCap
Market ("Nasdaq") as a result of the Company's net tangible assets being below
$2 million and the stock price being
11
below $1.00 per share. The Company had been notified that it would be delisted
and applied for a hearing. At a hearing on June 18, 1998, the Company presented
its plan to correct its deficiencies and its plan for continued listing on
Nasdaq. This plan would include converting a portion of its existing debt to
equity to meet the net tangible asset requirement and a reverse stock split of
the Company's common stock in order to address the bid price deficiency. The
Company was given an extension until August 3, 1998 to meet Nasdaq's
requirements and was unable to do so. On August 12, 1998 the Company was
delisted.
The Company's immediate cash requirements for the Florida Fun-Train are
significant. 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.
In July and August, the Florida Fun-Train's schedule was increased to 6 days per
week including 4 days between Ft. Lauderdale and Orlando. An aggressive
advertising and marketing campaign has resulted in a significant increase in
ridership but it is still far short of generating sufficient income to cover
current expenses. Continuation of the advertising and marketing program will
require substantial additional working capital, and there can be no assurance
that such funds will continue to be available. At June 30, 1998, the Company's
available cash balance was approximately $96,000. The Company believes that its
existing cash resources and financing commitments will not be sufficient to fund
the operations for the Florida Fun-Train beyond the end of August 1998. 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 external financing. The Company is in
discussions with its investment advisors and potential investors concerning
additional financing as well as pursuing various marketing opportunities to
increase passenger ridership on the Florida Fun-Train. There is no assurance,
however, that the Company will obtain the additional financing or the necessary
ridership to sustain operations or its new marketing program in the near future.
Failure to obtain sufficient working capital could result in the immediate
suspension of Florida Fun-Train operations.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Form 10-QSB, 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 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 a
continuing 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 unscheduled repairs to the Company's
12
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. Actual
results could differ materially from the forward-looking statements as a result
of the foregoing factors.
13
PART II - OTHER INFORMATION
ITEM 1. 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 statutes 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.
CARNIVAL
As previously reported, 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
alleging various trademark infringements related to the Company's
use of the word "FUN". Carnival and the Company settled the
lawsuit on August 14, 1998 pursuant to a consent agreement
recognizing the right of the Company to operate under the mark
"FUN Train" with the name "First American Railways" identified in
conjunction with the use of the mark.
DAKOTAH RESERVATIONS SERVICES
On March 6, 1998, Dakotah Reservation Services, Inc. ("Dakotah"),
filed an action against the Company in the United States District
Court for the District of Colorado for breach of contract arising
from an agreement for the provision of reservation services. The
Company had previously terminated the reservation agreement with
Dakotah (the "Agreement") pursuant to a letter dated December 30,
1997, for non-performance by Dakotah of material provisions of
such agreement. The Company
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believes it has a basis on which to deny liability, and has filed
a counterclaim against Dakotah for failure to perform under the
Agreement.
DAVID GILMARTIN
On May 8, 1998, David Gilmartin filed an action in the Douglas
County, Colorado District Court against the Company 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. The Company believes it has a basis to deny
liability under the complaint and will file a response to the
complaint in the near future.
TRAIN ACCIDENT
On August 1, 1998, the Florida Fun Train, which is owned and
operated by the Company, was involved in a grade crossing accident
with a truck. There were no injuries aboard the Fun Train;
however, the driver of the truck was pronounced dead at the scene
of the accident. To date, no litigation has been commenced against
the Company. However, the Company recently received a notice, as
required under Florida Statutes, from the attorney for the family
of the driver requesting information regarding the Company's
insurance. The Company does maintain liability insurance and has
turned this matter over to its insurance carrier. The Company
cannot determine at this time whether it has any liability with
respect to this matter or whether the amounts which may be claimed
will exceed the Company's policy limits. Therefore, management at
this time is unable to determine whether this matter will have a
material adverse effect on the Company, its business of financial
condition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 30,1998, the Company failed to pay a semi-annual interest
payment ($382,291 in the aggregate) which was due on the Company's
10% Secured Convertible Notes. On June 30, 1998, the Company
failed to pay a semi-annual interest payment of $223,050 in the
aggregate which was due on the Company's 8% unsecured convertible
notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K:
On April 13, 1998, the Company filed a current report on
Form 8-K with respect to changes in its Board of Directors
and officers. Notification from the Nasdaq Stock Market
Inc., that the Company no longer met the requirements for
continued listing, and a sale of its equity securities in a
Private offering.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this Form 10-QSB report to be signed on its behalf by the undersigned
hereunto duly authorized.
FIRST AMERICAN RAILWAYS, INC.
By: /s/ Alan L. Jacobs
-------------------------------------------
Alan L. Jacobs, Chairman of the
Board of Directors and Chief Executive Officer
By: /s/ Loretta A. Murphy
-------------------------------------------
Loretta A. Murphy, Vice President
and Chief Financial Officer
DATED: August 21, 1998
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule