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 MARCH 31, 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 333-43517
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
(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 MAY 13, 1998 21,544,095 SHARES OF COMMON STOCK, PAR
VALUE $.001 PER SHARE
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
INDEX
(THREE MONTHS ENDED MARCH 31, 1998)
PART I - FINANCIAL INFORMATION
PAGE
----
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 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
<TABLE>
<CAPTION>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
CURRENT:
Cash $ 995,604 $ 1,711,927
Restricted cash 100,000 100,000
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Cash and cash items 1,095,604 1,811,927
Inventories 1,028,376 1,017,557
Prepaids and other 1,277,456 1,734,746
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Total current assets 3,401,436 4,564,230
Fixed assets, net 41,279,020 41,668,275
Deferred loan costs, goodwill and other, net 4,055,106 4, 316,953
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$ 48,735,562 $ 50,549,458
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued liabilities $ 4,371,269 $ 4,812,626
Unearned revenue 1,038,983 377,749
Short term debt and current maturities of long-term debt 2,542,590 1,896,000
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Total current liabilities 7,952,842 7,086,375
Long-term debt 33,399,337 33,573,157
Deferred income taxes and other long-term liabilities 8,270,788 8,258,788
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Total liabilities 49,622,967 48,918,320
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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),
21,544,095 and 11,243,911 shares issued and outstanding 21,544 11,244
Additional paid-in capital 15,197,260 12,524,286
Accumulated deficit (16,106,209) (10,904,392)
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Total stockholders' equity (887,405) 1,631,138
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$ 48,735,562 $ 50,549,458
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 521,310 --
Cost of revenue 3,171,008 --
- ----------------------------------------------------------------------------------------------------------------------------
Gross deficit (2,649,698) --
Selling, general and administrative 1,364,806 733,785
- ----------------------------------------------------------------------------------------------------------------------------
Operating loss (4,014,504) (733,785)
Interest expense, net 1,031,322 39,601
Amortization of loan costs 155,991 49,662
- ----------------------------------------------------------------------------------------------------------------------------
Net loss $ (5,201,817) $ (823,048)
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Weighted average number of
common shares outstanding
Basic 18,259,832 9,116,911
Diluted 18,259,832 9,116,911
- ----------------------------------------------------------------------------------------------------------------------------
Net loss per common share
Basic $ (0.28) $ (0.09)
Diluted $ (0.28) $ (0.09)
- ----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
FIRST AMERICAN RAILWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,201,817) $ (823,048)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 276,431 3,383
Amortization 193,528 49,662
Original issue discount 162,300 --
Salaries and consulting fees paid in common stock 406,060 36,514
Interest payments paid in common stock 436,872 --
Increase in restricted cash -- (4,163)
Increase in inventories (10,819) --
Decrease in prepaids and other 457,290 68,859
Decrease in accounts payable and accrued liabilities (294,562) (222,736)
Increase in unearned revenue 661,235 --
Increase in other long-term liabilities 12,000 --
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Total adjustments 2,300,335 (68,481)
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Net cash used in operating activities (2,901,482) (891,529)
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Investing Activities:
Capital expenditures (33,879) (1,654,099)
Cash paid for acquisition -- (3,460,946)
Increase in other assets 68,319 --
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Net cash provided by (used in) investing activities 34,440 (5,115,045)
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Financing Activities:
Proceeds from issuance of notes payable and line of credit 650,000 8,500,000
Repayment of notes payable (339,531) (4,350,128)
Payment of loan costs (50,000) (240,566)
Proceeds from issuance of common stock 2,279,317 10,940
Payment of offering costs (389,067) --
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Net cash provided by financing activities 2,150,719 3,920,246
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Net decrease in cash (716,323) (2,086,328)
Cash at beginning of period 1,711,927 7,174,020
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Cash at end of period $ 995,604 $ 5,087,692
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Supplemental Disclosures:
Cash paid for interest $ 434,032 $ --
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
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.
For the period January 1, 1997 through
March 31, 1997, the Company had no
revenues for the period and reported as
a development stage entity.
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
CONSIDERATIONS operating losses since its inception and
in 1997 expended approximately
$11,000,000 for capital expenditures.
At March 31, 1998, the Company had a
working capital deficiency of
approximately $4,551,400. 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 March 1998, the
Company sold in private placements an
aggregate of 8,029,500 shares of common
stock receiving net proceeds of
approximately $2,274,375. In addition,
$500,000 was advanced as a short-term
note by HEC Asset Management pending
completion of a $ 4 million funding by
June 30, 1998, which is subject to
numerous contingencies.
The Company has implemented cost
reduction programs including reduced
corporate staff and reducing or
eliminating contracted service
agreements. Additionally, the Company
has increased its marketing efforts to
Florida residents and tourists visiting
Florida to increase attendance on the
Florida Fun-Train.
6
<PAGE>
Despite these efforts, management
believes that the Company requires
additional funds through financing to
ensure continued operations. There is no
assurance that sufficient funds will be
obtained or that the marketing efforts
will be successful. The accompanying
financial statements do not include any
adjustments relating to the
recoverability and classification of
recorded assets, or the amounts and
classification of liabilities that might
be necessary in the event that the
Company cannot continue in existence.
3. 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 ,
consisted of the following: (i) two
promissory notes aggregating $10.05
million which are subordinate to a
purchase money loan provided by a
third-party lender in the amount of $8.5
million; (ii) 200,000 shares of the
common stock of the Company; (iii) a
six-year warrant to purchase 1,610,000
shares of the Company at an exercise
price of $3.50 per share; and (iv) cash
of approximately $5 million, including a
$2 million deposit which was paid in
December 1996. The purchase resulted in
an allocation of approximately $1.5
million to goodwill which is being
amortized over forty years.
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.
The Company's unaudited proforma
consolidated statements of operations
for three months ended March 31, 1997,
assuming the acquistion of D&SNG was
affected at the beginning of the period,
are summarized as follows:
1997
--------------
Total revenues 305,298
Net loss $ (1,983,674)
Loss per share $ (.22)
This proforma information does not
purport to be indicative of the results
which may have been obtained had the
acquisition been consummated on the date
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.
7
<PAGE>
4. ISSUANCE OF For the period January 1, 1998 through
EQUITY March 31, 1998 the Company sold in
SECURITIES private offerings ("the 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 underwriting commissions paid on
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 being sold for
cash to U.S. Investors.
In addition, 6,409 shares were issued
under the Company's employee stock
purchase plan for total considerations
of $4,942.
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% March 31, 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 $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 a future financing.
In November 1997, the Company's D&SNG
subsidiary entered into a one year
unsecured line of credit agreement with
a bank. Under the agreement D&SNG is
able to borrow up to $250,000 at an
interest rate of prime plus 1%. The
agreement contains covenants that
require certain operating and equity
criteria to be met as well as other
requirements customary to loan
facilities of this nature. The Company
is Guarantor under the agreement. At
March 31, 1998 there was $150,000
outstanding under this line of credit.
At March 30, 1998, $500,000 was provided
to the Company by HEC Asset Management,
LLC an affiliate of an existing
investor. Originally anticipated as an
equity investment, this $500,000 is
being included with an additional $3.5
million to be invested in the Company
over the next 60 days by HEC Asset
Management subject to certain
conditions.
6. LONG-TERM DEBT At March 31, 1998 the Company's
long-term debt consisted of the
following:
8
<PAGE>
<TABLE>
<S> <C>
8% convertible subordinated notes
payable due June 2002 less unamortized
original issue discount of $ 2,722,567 $8,429,933
10% convertible notes payable due April,
May 2001 and secured by all non D&SNG
assets of the Company (A) 8,235,682
9.17% note payable to bank, principal
and interest payable monthly through
March 2002 and secured by a first
interest in all D&SNG assets (B) 7,507,549
Note payable to Charles E. Bradshaw Jr.
interest ranging from $9.25% to 10%, due
March 2002 and secured by a second
interest in all D&SNG assets 5,850,000
Note payable to Charles E. Bradshaw Jr.,
interest is 30-day commercial paper rate
plus 650 basis points, due between
September 1998 and March 2000 depending
upon the occurrence of certain
circumstances and secured by a second
interest in all D&SNG assets (C) 4,200,000
Capital lease payable, principal and
interest payable monthly through July
2002 secured by equipment 188,173
-----------
34,411,337
Less current maturities (1,012,000)
-----------
$ 33,399,337
===========
</TABLE>
(A) At May 18, 1998 the Company was in
default of the April 30, 1998 interest
payment due to the noteholders of the
10% secured convertible notes. The total
amount of interest due on April 30, was
$411,784. The Company is in the process
of negotiating with these noteholders to
accept this interest payment in
additional shares of common stock. These
same noteholders are being requested to
convert their notes to equity in
connection with new funding by HEC Asset
Management.
(B) 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 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 March
9
<PAGE>
31, 1998, there was approximately
$629,000 of cash subject to the
notification required by such covenant.
(C) The maturity of the $4,200,000 note
payable to Charles E. Bradshaw was
extended in March 1998 by the Company
from March 1998 to September 1998 for a
fee of $ 42,000. The note is payable in
either common stock of the Company or
cash upon election of Mr. Bradshaw. If
Mr. Bradshaw elects to receive payment
in common stock then the Company shall
issue the number of shares of common
stock equal to $4,200,000 divided by the
closing sales price of the Company's
common stock on the date of payment. If
Mr. Bradshaw elects to receive cash
payment then the Company may elect to
extend the maturity of the note payable
to March 2000.
A summary of maturities by year of the
above debt assuming the $4,200,000 note
payable to Charles E. Bradshaw, Jr. is
paid in cash in March 2000 is as
follows:
<TABLE>
<S> <C> <C>
1998 $ 1,012,000
1999 1,098,000
2000 5,408,000
2001 9,578,000
2002 20,037,904
----------
37,133,904
Less unamortized original issue discount (2,722,567)
----------
$34,411,337
==========
</TABLE>
10
<PAGE>
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" 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
31, 1997, the Company purchased all of the common stock of The Durango &
Silverton Narrow Gauge Railroad Company ("D&SNG").
For financial statement purposes, the acquisition of D&SNG 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 months
ended March 31, 1998 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 1997
results of operations for D&SNG for the three months ended March 31, 1997 are
not included in the Company's Statements of Operations for 1997.
The Company's unaudited proforma consolidated statements of operations for three
months ended March 31, 1997, assuming the acquisition of D&SNG was affected at
the beginning of the period, are summarized as follows:
1997
-------------
Total revenues 305,298
Net loss $ (1,983,674)
Loss per share $ (.22)
This proforma information does not purport to be indicative of the results which
may have been obtained had the acquisition been consummated on the date assumed.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997.
The Company generated revenues of approximately $521,000 for the first three
months of 1998 consisting of approximately $327,000 from D&SNG and approximately
$194,000 from the Florida Fun-Train. D&SNG's revenues increased approximately
$21,000 from the same period in 1997 when D&SNG was an unaffiliated entity. The
Florida Fun-Train revenues were significantly below expectations because of
ridership levels which were significantly below the projections for this
start-up period. In addition, ridership was below expectations partially due to
a delay in the delivery of the railcars to the Company which precluded the
Company from exhibiting and promoting the train to various tour operators and
travel agents. This delay also caused the tour operators and travel agents to
either withdraw their promotion of the Florida Fun-Train or defer their
promotional activities until late 1998.
Cost of revenue for the first three months of 1998 was approximately $.9 million
for D&SNG and approximately $2.3 million for the Florida Fun-Train. D&SNG's cost
of revenues, which consist primarily of salaries and benefits for train
operations, track maintenance, railcar
11
<PAGE>
maintenance and concession personnel, as well as product costs for concessions,
increased by approximately $.1 million as compared to the same period in 1997.
The increase was primarily attributable to repairs to locomotives and other
railcars and depreciation expense due to the write up of asset values resulting
from the acquisition of D&SNG. Cost of revenues for the Florida Fun-Train
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 $381,000 for
D&SNG and approximately $984,000 for the Florida Fun-Train and the parent
company. D&SNG's selling, general and administrative expenses were consistent
with such costs in the comparable period in 1997. Selling, general and
administrative expenses for the Florida Fun-Train and the parent company
increased by approximately $250,000 as compared to the same period in 1997. The
increase was primarily due to the start up of the Florida Fun-Train operations.
The Company's net interest expense increased by approximately $706,000 for the
first three months of 1998 as compared to 1997. The acquisition of D&SNG
resulted in additional net interest expense of approximately $123,000 for the
first three months of 1998. Of the remaining $583,000 increase for the first
three months of 1998, $473,000 was attributable to the issuance by the Company
of additional debt securities in June and December 1997. The balance of the
increase was due to a reduction in the offsetting interest income and the line
of credit entered into in March 1997.
Amortization of deferred loan costs increased by approximately $106,000 for the
first three months of 1998 as compared to the same period in 1997 due to loan
costs originating from the debt related to the acquisition of D&SNG and the
additional debt securities issued in June 1997.
The Company reported a net loss of approximately $5.2 million or $.28 per share
for the first three months of 1998 as compared to a net loss of approximately
$.8 million or $.09 per share for the same period in 1997 as a result of the
factors discussed above.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Overall, for the first three months of 1998, cash decreased by approximately
$716,300 primarily due to the lack of ridership on the Florida Fun-Train and the
slower (winter) season in Durango.
More specifically, for the three months ended March 31, 1998, cash flow used in
operating activities was approximately $2.9 million compared to approximately
$891,500 for the three month period ended March 31, 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. In
addition, the D&SNG operated at a reduced schedule during the seasonal winter
months.
The Company's investing activities provided approximately $34,000 in the first
three months of fiscal 1998, compared to approximately $5.1 million used in the
first three months of 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 three month period ended March 31, 1998, financing activities generated
approximately $2.2 million as compared to $3.9 million for the three month
period ended March 31, 1997. Cash flows from financing activities for 1998 were
principally due to a private placement of debt and equity securities completed
in March 1998 of approximately $2.7 million, proceeds from a note payable of
$500,000, and proceeds from a line of credit of $150,000. At March 31, 1998 the
Company had a shareholders' deficiency of $887,405 as compared to equity of
$1,631,138 at December 31, 1997.
Between March 30, 1998 and April 15, 1998, an aggregate of $1 million was
provided (of which $500,000 is included in short-term debt in the March 31, 1998
financial statements) to the Company by HEC Asset Management, LLC ("HEC"), an
affiliate of an existing investor. Originally anticipated as an equity
investment, this $1 million is part of an aggregate of $4 million which may be
funded by HEC. In connection with this funding HEC is acquiring certain
convertible secured promissory notes by assignment from the original
noteholders, and the assigning noteholders have been allowed to purchase shares
of the Company's common stock at $.375 per share for the principal and accrued
interest amounts due on the assigned notes. In connection with this financing,
as of May 15, 1998, $400,000 of the additional financing has been received from
HEC. In addition, International Capital Growth, Ltd., the Company's investment
advisor, invested $50,000 for the purchase of 133,334 shares at $.375 per share.
The balance of the above-described funding is expected over the next 60 days and
is subject, among other things, to certain conditions including continued due
diligence by the investor and the conversion of substantially all of the
Company's convertible secured notes into equity. As a further condition to the
investment, the Company has elected a representative of that investor to serve
as the sole director of Fun-Trains, Inc., the Company's wholly owned subsidiary
that operates the Florida Fun-Train. The Company has also agreed not to alter
the Board of Directors of this subsidiary
13
<PAGE>
without the consent of the investor. Proceeds from the financing will be used
for working capital and general corporate purposes, as well as a more aggressive
sales and marketing program for the Florida Fun-Train.
On April 1, 1998, the Nasdaq Stock Market, Inc. ("NASDAQ") notified the Company
that it no longer met the minimum requirements for continued listing on the
NASDAQ SmallCap Market as a result of the Company's net tangible assets being
below $2 million and the stock price being below $1.00 per share. The Company
had been notified that it would subsequently be delisted and has applied for a
hearing. A hearing date has been set for June 18, 1998, where the Company will
present its plan to correct its deficiencies and its plan for continued listing
on NASDAQ. The Company is currently in the process of converting a portion of
its existing debt to equity to meet the net tangible asset requirement. In
addition, the board of directors is considering a reverse stock split of the
Company's Common Stock in order to address the bid price deficiency.
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. The Company hopes to address this shortfall by instituting a new
marketing program; however this will require substantial additional working
capital, and there can be no assurance that such funds will be available. At May
15, 1998, the Company's cash balance was approximately $650,000 of which
approximately $ 550,000 was subject to restrictions in the loan covenant which
limits the Durango subsidiary's ability to "upstream" the profits of D&SNG. 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 June 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 concerning additional
sources of 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 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 an
immediate and significant increase in ridership on the Florida Fun-Train,
reduction in the
14
<PAGE>
Company's outstanding indebtedness through the conversion of existing
convertible debt into equity, delivery of the remaining railcars to complete the
Florida Fun-Train, the successful marketing of the Company's rail services in
Florida and Colorado and unscheduled repairs to the Company's railroad
equipment. In addition, the Company's business prospects are generally
susceptible to national economic conditions, particularly those affecting the
Colorado and Florida tourism markets, as well as weather patterns in Colorado
and Florida. Actual results could differ materially from the forward-looking
statements as a result of the foregoing factors.
15
<PAGE>
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 recently agreed in
principle to settle the lawsuit; however, settlement documents
have not yet been executed. The Company believes that the ultimate
result of the settlement of the lawsuit will be that the Company
will continue to operate under the mark "FUN Train" with the name
"First American Railways" preceding or following the mark. The
Company has tentatively agreed to transfer any right it has to the
"FUN Train" mark to Carnival in return for Carnival's agreement to
license the Company's continued use of the mark as described
above.
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
16
<PAGE>
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 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.
JACK MOSS
An action was filed in the 17th Judicial Circuit Court in and for
Broward County against the Company on February 19, 1998, by Jack
Moss for unpaid wages and expenses, and breach of the terms of his
employment agreement with the Company. The Company denies
liability for breach of this agreement. The Company has entered
into a settlement agreement dated April 6, 1998, wherein the
Company has agreed to a severance payment of 4 months' salary,
which has been accrued at March 31, 1998, reimbursement of
outstanding business expenses, as well as the issuance of 10,000
shares of the Company's common stock as provided in the employment
agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 30, 1998, the Company failed to pay a semi-annual interest
payment ($411,784 in the aggregate) which was due on the Company's
10% Secured Convertible Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit 10.1 - Financing Agreement Between HEC Asset
Management LLC, and the Registrant
et al, dated May 8, 1998. (without
exhibits)
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) REPORTS ON FORM 8-K:
On February 2, 1998, the Company filed a current report on
Form 8-K with respect to the change in its certifying
accountant, as well as the sale of its securities in a
private placement offering.
On February 25, 1998, the Company filed a current report on
Form 8-K with respect to a sale of its equity securities
pursuant to Regulation S.
17
<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/ LORETTA A. MURPHY
-----------------------------------------------
Loretta A. Murphy, Vice President
and Chief Financial Officer
DATED: May 20, 1998
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Financing Agreement Between HEC Asset Management LLC, and
the Registrant et al, dated May 8, 1998.
27 Financial Data Schedule
FINANCING AGREEMENT
First American Railways, Inc. ("FAR"), Fun Trains, Inc. ("FTI" and
together with FAR, the "Borrowers"), Allen C. Harper ("Harper"), Alan Jacobs
("Jacobs"), International Capital Growth, Ltd. ("ICG") and HEC Asset Management,
LLC, a Delaware limited liability company ("HEC" or the "Lender") enter into
this Financing Agreement (the "Agreement"), dated as of May 8, 1998.
WITNESSETH:
WHEREAS, FTI, which is a wholly-owned subsidiary of FAR, is engaged in
the business of operating the Florida Fun Train;
WHEREAS, the Borrowers required $1,000,000 of additional working capital
to continue operating FTI's business during the month of April 1998 and to avoid
the immediate and irreparable harm that the Borrowers would suffer from an
interruption in FTI's business operations;
WHEREAS, HEC Asset Management GmbH ("HAMG"), an affiliate of HEC,
advanced to the Borrowers in April 1998 the $1,000,000 required to continue
operating FTI's business (the "April Advance"), substantially all of which
amount was utilized to pay operating expenses of FTI in the month of April;
WHEREAS, HAMG has assigned all of its rights, claims and interests in
respect of the April Advance to HEC;
WHEREAS, FTI is presently in need of approximately $3,000,000 of
additional working capital to continue operating its business; approximately
$2,000,000 of which is necessary to pay operating expenses incurred during the
months of May and June 1998, and approximately $1,000,000 of which is needed to
fund FTI's proposed advertising campaign;
WHEREAS, if FTI does not obtain appro~mately $450,000 in immediately
available working capital on or before May 8 1998, an additional $1,550,000 on
or before May 15, 1998, and an additional $1,000,000 on or before June 1, 1998,
FTI will be forced to terminate its ongoing business operations, resulting in
immediate and irreparable harm to FTI and its prospects;
WHEREAS, in reliance upon the representations and agreements of FA~ FTI,
Harper, Jacobs, and ICG as set forth in this Agreement, including, without
limitation, the representation that HEC will be able to acquire at least 80% of
the $8,250,000 in face amount of 10% secured convertible notes issued by FAR on
March 11, 1996 (the "Secured Notes"), the payment of which is secured by, among
other things, a first priority security interest in and to substantially all of
the assets of FAR and FTI, HEC is willing (a) immediately to pay to FTI the
amount of $400,000, (b) to make additional payments to FTI up to the total
amount of $2,550,000 (in excess of the initial $400,000 payment), and (c) to
relieve the borrower of any obligation to repay or issue common stock in respect
of the April Advance, in each case on the terms and subject to the conditions
specified in this Agreement;
<PAGE>
NOW, THEREFORE, for and in consideration of the agreements and covenants
of the parties set forth herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties covenant
and agree as follows:
1. ICG INVESTMENT. On May 8 1 99S, ICG shall invest $50,000 in
immediately available funds in FAR by purchasing 133,334 shares of
common stock of FAR for a price of $0.375 per share (the "ICG
Investment").
2. INITIAL MAY PAYMENT. On May 11, 1998, HEC will pay to FTI the amount
of $400,000 in immediately available funds (the "Initial May Payment") upon the
satisfaction of the following conditions; provided, that HEC shall have no
obligation to make such payment, or any part thereof, if such conditions have
not been satisfied by the close of business on May 11, 1998:
(a) EXECUTION AND DELIVERY OF APRIL ADVANCE NOTE. The Borrowers
shall have executed and delivered to HEC the promissory note in
substantially the form attached hereto as Exhibit "A" (the "April Advance
Note"). The April Advance Note shall be made payable to HEC in the amount
of $1,000,000, which shall evidence the obligation of the Borrowers to
repay the April Advance.
(b) INITIAL ASSIGNMENT OF SECURED NOTES. Holders of Secured Notes
shall have assigned and transferred to HEC $467,000 face amount of
Secured Notes (the "Initial Assigned Secured Notes") in compliance with
all applicable laws and directed~ HEC to pay the $400,000 of
consideration therefor to FTI. The assignment shall be effected by the
execution and delivery of one or more assignments in substantially the
form attached hereto as Exhibit "B" (the "Assignment") by the holders of
the Initial Assigned Secured Notes.
(c) FTI BOARD OF DIRECTORS. All currently serving directors of FTI
shall have resigned effective as of May 8, 1998. FAR, acting as the sole
stockholder of FTI, shall have elected an individual selected by HEC to
serve as FTI's sole director (the "HEC Director"). FAR, FTI, Harper,
Jacobs, and ICG shall not take any action to remove, replace, or diminish
the authority of the HEC Director so long as any ofthe obligations owed
to HEC hereunder or under the Assigned Notes (as defined below) remain
outstanding, except as provided in paragraph 4(e) hereof.
(d) ESTOPPEL LETTER. The Borrowers shall have executed and
delivered to HEC a letter in the form of Schedule 2 to Exhibit "B"
("Estoppel Letter") agreeing to and acknowledging the existence,
validity, amount, and priority of the Initial Assigned Secured Notes and
waiving any and all defenses, offsets, counterclaims and remedies with
respect thereto.
(e) THE ICG INVESTMENT. The ICG Investment shall have been made
and fully funded.
-2-
<PAGE>
(f) AUTHORIZATIONS. HEC shall have been provided with evidence
satisfactory to it, in its sole discretion, that the transactions
contemplated by this Agreement, including, without limitation, the
execution and delivery of the April Advance Note and the election of the
HEC Director have been duly and properly authorized and are valid and
binding on their respective terms as to FAR and FTI.
(g) SEPARATE AGREEMENTS WITH JACOBS AND HARPER. Jacobs and Harper
shall have entered into separate letter agreements with HEC modifying the
terms of their employment on terms satisfactory to HEC (respectively, the
"Jacobs Letter" and "Harper Letter").
3. SECOND MAY PAYMENT. HEC will pay to FTI an additional $1,550,000 (the
"Second May Payment") on the first business day after the date on which the
following conditions have been satisfied; PROVIDED, that HEC shall have no
obligation to make such additional payment, or any part thereof, if such
conditions have not been satisfied by the close of business on May 15, 1998:
(a) EXECUTION AND DELIVERY OF DEFINITIVE DOCUMENTATION. The
Borrowers shall have executed and delivered to HEC definitive
documentation evidencing the obligations contemplated hereby, which
documentation shall be satisfactory to HEC, in its sole discretion. Such
documentation shall include, without limitation, a credit agreement (the
"Credit Agreement") specifying, among other things,?the terms on which
(i) HEC will release the Borrowers from their obligations under the April
Advance Note, (ii) HEC will make the Second May Payment and the June
Payment (as defined below), (iii) FAR shall arrange for the assignment
and transfer to HEC of at least 80% of the Secured Notes, (iv) the
obligations owed under the Assigned Notes (as defined below) will be
amended and modified, and (v) the obligations owed to HEC may be
converted into common stoclc of FAR
(b) SECOND ASSIGNMENT OF SECURED NOTES. Holders of Secured Notes
shall have assigned and transferred to HEC at least an additional
$2,133,000 face amount of such Secured Notes (the "Second Assigned
Secured Notes") in compliance with all applicable laws and directed HEC
to pay the $1,550,000 consideration therefor to FTI. The assignment shall
be effected by the execution and delivery of one or more Assignments by
the holders of the Second Assigned Secured Nctes.
(c) POINTE BANK CONSENT. Pointe Bank shall have consented in
writing to the transactions contemplated by this Agreement, the form and
content of such consent being acceptable to HEC, in its sole discretion.
(d) ESTOPPEL LETTER. The Borrowers shall have executed and
delivered to HEC an Estoppel Agreement.
(e) NO MATERIAL ADVERSE CHANGE. No material adverse change, as
determined by HEC, in its sole discretion, shall have occurred with
respect to the business assets, financial condition or prospect of FAR or
FTI.
-3-
<PAGE>
(f) NO BREACHES. FAR, FTI, Harper, Jacobs and ICG shall not be in
breach of any of their obligations under this Agreement and neither
Harper nor Jacobs shall be in breach of any of his obligations under the
Harper Letter and Jacobs Letter, respectively.
(g) DUE DILIGENCE. HEC shall have completed its due diligence of
the Borrowers, their assets and liabilities, their financial condition,
and the Secured Notes and all documents, agreements and instruments
executed in connection therewith, and shall be satisfied, in its sole
discretion with the results of such due diligence.
4. JUNE PAYMENT. On June 1, 1998, HEC will pay to FTI an
additional $1,000,000 and cancel the April Advance Note on the terms
specified in the Credit Agreement (the "June Payment"), subject to the
satisfaction of, among other things, the following conditions; provided,
that HEC shall have no obligation to make such additional payment, or any
part thereof, unless all conditions to the payment have not been
satisfied by the close of business on June 1, 1998:
(a) THIRD ASSIGNMENT OF SECURED NOTES. Holders of Secured
Notes shall have assigned and transferred to HEC at least an
additional $4,100,000 face amount of Secured Notes (the "Third
Assigned Secured Notes") in compliance with all applicable laws
and directed HEC to pay the consideration therefor ($1,000,000 in
immediately available funds and the April Advance Note) to FTI The
assignmenct shall be effected by the execution and delivery of one
or more Assignments by the holders of the Third Assigned Secured
Notes.
(b) NO DEFAULTS OR BREACHES. No events of default shall
have occurred under the Credit Agreement and FAR, FTI, Harper,
Jacobs and ICG shall not be in breach of any of their obligations
under this Agreement.
(c) NO MATERIAL ADVERSE CHANGE. No material adverse change,
as determined by HEC in its sole discretion, shall have occurred
with respect to the business, assets, financial condition or
prospects of FAR or FTI shall have occurred.
(d) ESTOPPEL LETTER. The Borrowers shall have executed and
delivered to HEC an Estoppel Agreement.
(e) CORPORATE GOVERNANCE OF FTI. FTI shall have adopted
amendments to its Certificate of Incorporation and By-laws, in
form and substance acceptable to HEC in its sole discretion, which
will provide HEC with control over FTI's Board of Directors (i.e.,
two of three Board positions) until all of the obligations owed
under the Assigned Notes and this Agreement have been satisfied in
full. Such amendments shall have been approved by not less than
80% of the Secured Notes that do not become Assigned Notes land
HEC shall have been provided with evidence satisfactory to HEC in
its sole discretion that such amendments are valid and have been
duly and properly adopted.
-4-
<PAGE>
5. MODIFICATIONS TO THE TERMS OF THE ASSIGNED NOTES. On terms to be
specified in the Credit Agreement, various terms and provisions of the Initial
Assigned Secured Notes, the Second Assigned Secured Notes and the Third Assigned
Secured Notes (collectively, the "Assigned Notes") shall be amended and
modified, including, without limitation, as follows:
(a) PRINCIPAL AMOUNT. The principal face amount of the Assigned Notes
would be reduced to $5,000,000.00 provided, that if the assets that
collateralize the Secured Notes are sold or otherwise disposed of to pay the
Secured Notes, and the proceeds are insufficient to pay the outstanding Secured
Notes in full, any EQ rata distribution to HEC shall be determined on the basis
of the original face amount of the Assigned Notes and as a percentage of the
outstanding Secured Notes.
(b) TERM. The Assigned Notes shall mature and be payable in full on
November 8, 2000, unless they mature as a result of an event of default prior to
that date. The Assigned Notes shall not be prepayable, except as provided in
paragraph 5(d) hereof.
(c) INTEREST. The Assigned Notes shall bear interest at the rate of 10%
per annum payable quarterly in arrears, with the first interest payment being
due on November 8, 1998.
(d) CONVERSION. Upon the earlier to occur of (i) an event of default
under the Credit Agreement, (ii) a breach of the obligations of FAR, FTI,
Harper, Jacobs or ICG under this Agreement, or (iii) May 8, 2000, HEC shall have
the right to give notice of its intent to convert the Assigned Notes into shares
of common stock of FAR at a price equivalent to the lowest price at which any of
the Secured Notes or FAR's unsecured notes (the "Unsecured Notes") were
converted to shares of common stock of FAR. The Assigned Notes shall be
converted to common shares 60 days after the delivery of notice, unless prior to
the expiration of such period HEC receives cash payment in an amount equivalent
to the sum of (i) the amount of full unpaid obligations under the Assigned
Notes, and (ii) $750,000.00.
(e) REMEDIES/COLLATERAL AGENT. HEC shall have the right to (i) exercise
all of the remedies provided under the collateral, security and pledge documents
and agreements executed with respect to the Secured Notes to collect the amounts
due under the Assigned Notes, (ii) to cause ICG to resign as collateraVpledge
agent and replace ICG with an agent of ~C's choosing or (iii) to instruct ICG to
exercise remedies under the collateral, security and pledge documents and
agreements in order to collect the amounts due under the Assigned Notes.
6. ADJUSTMENT OF UNSECURED DEBT CONVERSION PRICE. As additional
consideration for HEC's payments as contemplated hereby, the Unsecured Notes
issued to E~C and/or its affiliates by FAR in the amount of $5,000,000 shall be
convertible to common stock of FAR at a price that is equivalent to the lowest
puce accepted by the holders of the Secured Notes or the Unsecured Notes.
-5-
<PAGE>
7. ICG FEES. ICG shall not be paid any fee for the payments made by HEC
as contemplated hereby or the conversion of any debt held by HEC to common stock
of FAR. Except as provided in the preceding sentence, ICG shall be entitled to
receive its fees at the contract rate in connection with conversion of any debt
of FAR into common stock of FAR or the purchase of stock of FAR. The agreements
in place between FAR, FTI and their affiliates, and ICG may only be amended or
modified with the consent of HEC.
8. SELECTION OF NEW CEO. On or before October 31, 1998, the board of FAR
shall select a new CEO reasonably acceptable to HEC.
9. BEST EFFORTS. FAR and ICG shall use their best efforts to (a) obtain
the assignment to HEC of at least $467,000 of Secured Notes on May 8, 1998; (b)
obtain the assignment to HEC of at least $2,500,000 of Secured Notes on or
before May 15, 1998 (inclusive ofthe Secured Notes Assigned to HEC on May 8,
1998); (c) obtain the assignment to HEC of at least $6,600,000 of Secured Notes
on or before June 1, 1998 (inclusive of the Secured Notes assigned to HEC
between May 8, 1998 and May 15, 1998); (d) obtain the conversion of at least 85%
ofthe Unsecured Notes to co~nmon stock on or before July 1, 1998; (e) obtain the
Pointe Bank Consent on or before May 15, 1998, and (f) to obtain approvals of
the amendments to the FTI charter and by-laws contemplated by paragraph 4(e),
hereof from at least 80% of the Secured Notes that do not become Assigned Notes.
10. ENTIRE AGREEMENT/MODIFICATION. This Agreement, together with the
exhibits and attachments hereto, the Jacobs Letter and the Harper Letter,
constitutes the entire agreement of the parties with respect to the subject
matter hereof. This Agreement may only be modified or amended by a written
document signed by the parties to be bound.
11. SUCCESSORS AND ASSIGNS. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof may be assigned by
any party to this Agreement without the prior written consent of all other
parties to this Agreement; provided that HEC may assign this Agreement to one of
its affiliates. Notwithstanding anything else in this Agreement to the contrary,
HEC-shall have the right to sell, transfer or assign all or any portion of its
interest in the Assigned Notes.
12. EFFECTIVENESS/SIGNATURES. This Agreement shall become effective only
when signed by all parties hereto. This Agreement may be signed in counterparts,
all of which taken together shall constitute one instrument, and any of the
parties hereto may execute this Agreement by signing any such counterpart. A
facsimile copy shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first indicated above.
-6-
<PAGE>
First American Railways, Inc.
By: /S/ ALLEN C. HARPER
--------------------------------
Allen C. Harper
Chairman of the Board
Fun Trains, Inc.
By: /S/ ALLEN C. HARPER
--------------------------------
Allen C. Harper
President
/S/ ALLEN C. HARPER
-------------------------------
Allen C. Harper, individually
/S/ ALAN JACOBS
-------------------------------
Alan Jacobs
INTERNATIONAL CAPITAL GROWTH,
LTD.
By: /S/ MICHAEL S. JACOBS
-------------------------------
Michael S. Jacobs
Its: MANAGING DIRECTOR
-------------------------
HEC ASSIGNMENT, LLC
By: /S/ HEIDRUM ECKES-CHANTRE
-------------------------------
Its:
-------------------
-11-
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<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,095,604
<SECURITIES> 0
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<INVENTORY> 1,028,376
<CURRENT-ASSETS> 3,401,436
<PP&E> 41,953,811
<DEPRECIATION> (674,791)
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0
0
<COMMON> 21,544
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<TOTAL-LIABILITY-AND-EQUITY> 48,735,562
<SALES> 521,310
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<CGS> 3,171,008
<TOTAL-COSTS> 0
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