UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO_____________
COMMISSION FILE NUMBER 33-14751-D
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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER (954) 920-0606
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(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 NOVEMBER 5, 1997 11,153,984 SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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FIRST AMERICAN RAILWAYS, INC.
INDEX
(NINE MONTHS ENDED SEPTEMBER 30, 1997)
PART I - FINANCIAL INFORMATION
PAGE
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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
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2
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FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED)
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ASSETS
CURRENT:
Cash $ 6,829,788 $ 7,174,020
Restricted cash 100,000 430,834
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Cash and cash items 6,929,788 7,604,854
Inventories 1,114,021 -
Prepaids and other 1,453,962 255,372
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Total current assets 9,497,771 7,860,226
Fixed assets, net 40,704,705 2,413,320
Deposit for acquisition - 2,000,000
Deferred loan costs and other assets, net 2,874,708 867,107
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$ 53,077,184 $ 13,140,653
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 1,196,671 $ 166,722
Accrued liabilities 1,564,995 459,561
Unearned revenue 277,188 -
Current maturities of long-term debt 900,000 -
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Total current liabilities 3,938,854 626,283
Long-term debt 33,477,513 8,250,682
Deferred income taxes and other long-term liabilities 8,251,876 -
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Total liabilities 45,668,243 8,876,965
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Commitments and contingencies - -
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Stockholders' equity
Preferred stock ($.001 par value, 500,000 shares authorized) - -
Common stock ($.001 par value, 100,000,000 shares authorized),
11,153,984 and 9,061,078 shares issued and outstanding 11,154 9,061
Additional paid-in capital 12,424,105 8,189,798
Accumulated deficit (5,026,318) (3,935,171)
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Total stockholders' equity 7,408,941 4,263,688
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$ 53,077,184 $ 13,140,653
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenue $6,177,291 - $8,810,876 -
Cost of revenue 1,684,498 - 2,870,502 -
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Gross profit 4,492,793 - 5,940,374 -
Selling, general and administrative 1,127,747 - 1,652,900 -
Developmental of Florida Fun-Train 1,859,261 745,078 3,742,539 1,136,972
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Operating income (loss) 1,505,785 (745,078) 544,935 (1,136,972)
Interest expense, (income) net 740,702 (16,090) 1,333,721 171,995
Amortization of loan costs 160,273 49,662 302,363 171,061
Expenses from offerings not completed - - - 57,829
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Net income (loss) $ 604,810 $ (778,650) $ (1,091,149) $ (1,537,857)
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Weighted average number of
common shares outstanding 11,129,617 9,061,078 9,986,770 7,149,329
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Net income (loss) per common share $ 0.05 $ (0.09) $ (0.11) $ (0.22)
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
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OPERATING ACTIVITIES:
Net loss $ (1,091,149) $ (1,537,857)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 198,054 1,583
Amortization 302,363 171,061
Original issue discount 198,833 -
Salaries and consulting fees paid in common stock 51,514 18,750
(Increase) Decrease in restricted cash 330,834 (849,924)
Increase in inventories (356,736) -
Increase in prepaids and other (1,184,131) (222,834)
Increase (Decrease) in accounts payable 464,565 (17,387)
Increase in accrued liabilities 461,613 343,829
Decrease in unearned revenue (326,922) -
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Total adjustments 139,987 (554,922)
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Net cash used in operating activities (951,162) (2,092,779)
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Investing Activities:
Capital expenditures (8,505,401) (923,666)
Cash paid for acquisition (3,509,049) -
Increase in other assets (569,249) -
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Net cash used in investing activities (12,583,699) (923,666)
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Financing Activities:
Proceeds from issuance of notes payable 16,406,500 8,695,682
Repayment of notes payable (4,993,630) (445,000)
Payment of loan costs (1,660,715) (1,087,829)
Proceeds from issuance of common stock 3,953,544 7,300,761
Payment of offering costs (515,070) (97,305)
Borrowings from related parties - 68,388
Repayments of notes payable to related parties and others - (333,388)
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Net cash provided by financing activities 13,190,629 14,101,309
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Net increase (decrease) in cash (344,232) 11,084,864
Cash at beginning of period 7,174,020 -
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Cash at end of period $ 6,829,788 $ 11,084,864
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Supplemental Disclosures:
Cash paid for interest $ 1,324,146 $ 125,341
Accrued fees and salaries paid in common stock 109,688 -
Prepaids paid in common stock 83,000 -
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL The consolidated financial information included herein is
STATEMENTS 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 1996 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. ACQUISITION 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 and did not result in an
allocation to goodwill, 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.
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:
Cash paid (net of cash acquired) $ 5,653,041
Liabilities assumed and/or incurred 25,666,864
Common stock and warrant issued 544,900
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$ 31,864,805
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FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
Fixed assets $30,019,846
Inventories and other assets 1,689,087
Deferred income tax liability 8,167,159
Long-term debt 17,650,000
Other liabilities 2,868,094
The Company's unaudited proforma consolidated statements of
operations for the nine months ended September 30, 1997 and
1996, assuming the acquisition of D&SNG was effected at the
beginning of each such period, are summarized as follows:
1997 1996
Total revenues $ 9,102,616 $ 8,132,055
Net income (loss) $ (2,222,703) $ 160,196
Income (Loss) per share $ (.22) $ .02
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.
3. ISSUANCE OF On June 30, 1997, the Company completed a private offering
DEBT AND of 223.05 units of its securities at $50,000 per unit. Each
EQUITY unit consists of (i) an 8% convertible subordinated note in
SECURITIES 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 $3.45 million
which will be recorded as additional interest expense over
the five-year term of the subordinated notes.
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FIRST AMERICAN RAILWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. LONG-TERM At September 30, 1997 the Company's long-term debt
DEBT consisted of the following:
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10% convertible notes payable due
April, May 2001 8,235,682
8% convertible subordinated notes payable
due June 2002 less unamortized original
issue discount of $3,047,167 8,105,333
9.17% note payable to bank, principal and
interest payable monthly through March
2002 $ 7,986,498 (A)
Note payable to Charles E. Bradshaw, Jr.,
interest ranging from $9.25% to 10%,
due March 2002 5,850,000
Note payable to Charles E. Bradshaw, Jr.,
interest rate is 30-day commercial
paper rate plus 650 basis points, due
between March 1998 and March 2000
depending upon the occurrence
of certain circumstances 4,200,000
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$34,377,513
Less current maturities (900,000)
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$33,477,513
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(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 September 30, 1997, there was approximately $2.3
million of cash subject to the notification required by such
covenant.
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:
1997 $ 158,000
1998 972,000
1999 1,062,000
2000 5,367,000
2001 9,530,000
2002 20,335,680
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$ 37,424,680
Less unamortized original issue discount (3,047,167)
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$ 34,377,513
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8
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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 1996 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" 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, did not result in any allocation to
goodwill 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.
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 three and
nine months ended September 30, 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 - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996.
Revenues of approximately $6.2 million and $8.8 million for the third quarter
and first nine months of 1997 reflect an increase of approximately $800,000 from
the previous year when D&SNG was a stand alone entity. All of these revenues
were generated by D&SNG. 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 2% and 3% decrease in passengers for
the three and nine months ended September 30, 1997, respectively, from the prior
year's comparable periods. The Company believes the decrease in passengers was
caused
9
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primarily by poor weather in April, May, and September and a general decline in
the Colorado tourism market. The Florida Fun-Train was not operating during
these periods and no revenue was generated therefrom.
Operating expenses consisting of cost of revenues and selling, general and
administrative expenses aggregating approximately $2.8 million and $4.5 million
for the third quarter and first nine months of 1997, respectively, were
approximately $600,000 and $200,000 higher than the comparable periods 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
$225,000 and $450,000 for the third quarter and first nine months of 1997,
respectively, following the acquisition. Eliminated expenses in 1997 include
leasing of a corporate airplane and an apartment and the allocation of
management fees.
Developmental expenses of the Florida Fun-Train increased by approximately $1.1
million and $2.6 million, respectively, for the third quarter and first nine
months of 1997 as compared to the same periods in 1996. The increase is related
primarily to an addition of approximately 20 employees subsequent to September
30, 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 developmental expenses for the three and nine months ended September 30,
1997 were salary and payroll tax expenses of approximately $600,000 and $1.4
million, respectively, and general and administrative expenses of approximately
$1.1 million and $1.9 million, respectively.
The Company's net interest expense increased by approximately $757,000 and $1.2
million for the third quarter and first nine months of 1997, respectively, as
compared to the same periods in 1996. The acquisition of D&SNG resulted in
additional net interest expense of approximately $450,000 and $900,000 for the
third quarter and first nine months of 1997, respectively. Additionally, the
issuance by the Company of additional debt securities in June 1997 (see Note 3
of Notes to Consolidated Financial Statements) resulted in additional interest
expense of approximately $385,000 and $470,000 in the third quarter and first
nine months of 1997, respectively. These increases were partially offset by
capitalized interest of approximately $190,000 and $418,000 in the three and
nine months ended September 30, 1997.
The Company reported net income of approximately $605,000 or $.05 per share and
a net loss of approximately $1.1 million or $.11 per share, for the third
quarter and first nine months of fiscal 1997, respectively, as compared to net
losses of approximately $779,000, or $.09 per share and approximately $1.5
million or $.22 per share, respectively, for the same periods of 1996, as a
result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Overall, for the nine months of 1997, cash decreased by approximately $340,000
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.
10
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More specifically, for the nine months ended September 30, 1997, cash flow used
in operating activities was approximately $951,000 compared to approximately
$2.1 million for the nine month period ended September 30, 1996. The improvement
in 1997 was due primarily to the acquisition of D&SNG which generated positive
operating cash flow of approximately $2.2 million partially offset by higher
cash usage by the Florida Fun-Train due to an increased level of developmental
activities in preparation for the commencement of operations (net of restricted
cash transactions).
The Company's investing activities used approximately $12.6 million in the first
nine months of fiscal 1997, compared to approximately $924,000 in the first nine
months of 1996. The investing activity in 1997 was principally due to capital
expenditures of approximately $8.5 million 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 for the Florida
Fun-Train.
For the nine months period ended September 30, 1997, financing activities
generated approximately $13.2 million as compared to $14.1 million in the nine
months period ended September 30, 1996. 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 3 of Notes to
Consolidated Financial Statements) and 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). The Company's percentage
of total debt to total capital was 82.0% on September 30, 1997 compared to 65.9%
on December 31, 1996.
More recently, during the fourth quarter of 1997, the Company has paid
approximately $400,000 to Rader Railcar II, Inc. (RRII) in payment for the
railcars (to date approximately $8.0 million has been paid to RRII). In
addition, there have been significant cash payments in connection with the
construction of the two train terminals, the train operating agreement with the
National Railroad Passenger Corporation ("Amtrak") and insurance, and only
minimal revenue has been generated by the operations of the Florida Fun-Train.
The Company's immediate cash requirements are significant for the Florida
Fun-Train. 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, 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. At October 31, 1997, the Company's
cash balance was approximately $4.5 million of which approximately $2.3 million
was subject to the restrictions in the loan covenant outlined in Note 4 of Notes
to Consolidated Financial Statements. The Company believes that its existing
cash resources along with a $1 million available line of credit will not be
sufficient to fund the operations for the Florida Fun-Train beyond December 31,
1997. 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 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. Failure to obtain this additional working
capital will have a material adverse effect on the Company.
11
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In connection with the acquisition of D&SNG by the Company, D&SNG borrowed, and
the Company guaranteed, $8.5 million from a commercial lending institution
pursuant to a five-year term loan, portions of which were used to pay a
pre-existing lender to fund a portion of the cash required to close the
acquisition. The balance was used for working capital for D&SNG's operations
(approximately $1 million). This working capital and the funds generated from
D&SNG's operations are expected to be adequate to meet D&SNG's cash requirements
(including capital expenditures and debt service) for 1997. There are no
material short-term or long-term commitments for capital expenditures 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. Although D&SNG's business and cash flow are
historically seasonal in nature with the peak season being the months of June,
July and August; however, this is not expected to have a material adverse impact
on the 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. In the
event that the working capital from D&SNG is not adequate to fund D&SNG cash
requirements in 1998 and subsequent years, D&SNG will be required to obtain
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-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 successful presentation of the Florida Fun-Train operations, including the
need for immediate and significant increase in ridership on the Florida
Fun-Train, the timely completion of manufacture and delivery of the remaining
railcars comprising the Florida Fun-Train, the prompt completion of construction
of the southern terminal of the Florida Fun-Train, the successful marketing of
the Company's rail services in Florida and Colorado and the ability of the
Company to obtain, from internal and external sources, sufficient additional
working capital to fund its operations, 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.
12
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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 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 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. 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
13
<PAGE>
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.
As previously reported, the Company has applied for the federal
registration of "Fun-Train" mark and is currently pursuing this
application; however, Carnival has opposed this application.
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:
There were no reports on Form 8-K filed for the three month
period ended September 30, 1997
14
<PAGE>
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/ Allen C. Harper
----------------------------------------------
Allen C. Harper, Chairman of the
Board of Directors and Chief Executive Officer
By: /s/ Donald P. Cumming
----------------------------------------------
Donald P. Cumming, Vice President
and Acting Chief Financial Officer
(Principal Financial Officer)
DATED: November 12, 1997
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,929,788
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,114,021
<CURRENT-ASSETS> 9,497,771
<PP&E> 40,704,705
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,077,184
<CURRENT-LIABILITIES> 3,938,854
<BONDS> 33,477,513
0
0
<COMMON> 11,154
<OTHER-SE> 7,397,787
<TOTAL-LIABILITY-AND-EQUITY> 53,077,184
<SALES> 8,810,876
<TOTAL-REVENUES> 8,810,876
<CGS> 0
<TOTAL-COSTS> 2,870,502
<OTHER-EXPENSES> 5,395,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,333,721
<INCOME-PRETAX> (1,091,149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,091,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,091,149)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
