Skunk Railroad Going Direct to Raise Cash for Restoration

By DEBORA VRANA

Aug. 31, 1998 12 AM PT

TIMES STAFF WRITER

Interested in riding the rails? How about owning them?

Mendocino County’s biggest tourist attraction, the 113-year-old Skunk Train, is offering investors a chance to buy a chunk of California history.

Strapped for cash to rehabilitate the train and tracks, the train’s 21 owners--a grass-roots collection of local businesspeople and train workers--are hoping to raise $4.6 million in what is called a DPO, or direct public offering, by selling stock through its Web site, https://www.skunktrain.com.

Increasingly popular, this new type of public offering, at less than $5 million, avoids the expenses and regulatory scrutiny of stock sales filed with the Securities and Exchange Commission, but can mean less disclosure--and safety--for investors.

In a DPO, investors buy stock directly over the Internet, without the assistance (or commission charges) of underwriters and brokers. Sometimes the company will set up its own “virtual exchange” or “digital market,” where investors can buy and sell shares. Often DPOs are from risky start-up companies with a high chance of failure.

Still, in a time when just about anything can be “securitized” and sold to investors (including, recently, the future earnings from David Bowie’s first 25 albums), why not the Skunk Train?

Named for its smelly gas engines, the Skunk Train was built for moving redwood logs to Mendocino coast sawmills from California’s backcountry. With several different lines, including an old steam engine, a diesel-powered locomotive and vintage 1925 and 1935 motorcars, the train crosses more than 30 bridges and two deep mountain tunnels on its 40-mile route along the coastal redwoods.

“The original investors saved a historic artifact. Now we need more investors to ensure its survival,” said railroad President Gary Milliman, who organized the group’s purchase of the railroad two years ago when locals feared it would be sold to out-of-towners.

Milliman, who served as Fort Bragg’s city manager for 18 years, said the investors came up with the DPO idea after watching Mendocino Brewery, another local company, go public via the Internet.

But buying Skunk Train shares isn’t likely to make anyone rich, Milliman said. “What you’ve got here is a chance to own a piece of railroad history. We’re not paying dividends.”

The train’s parent company, California Western Railroad Inc. of Fort Bragg, intends to sell a 49.5% stake or 614,000 shares, for $7.50 a share, with a 100-share minimum.

About 350 direct public offerings are sold on the Internet each year, ranging in size from $1 million to $5 million, analysts estimate. Still, this market is difficult to track and remains just a sliver of the $30.9 billion of initial public offerings, or first-time stock deals, that have been sold this year, according to Securities Data Co., a New Jersey data tracker.

“It’s a very unique deal,” said Clay H. Womack, president of Santa Monica-based Direct Stock Market, which helps companies raise money through the Internet. “It’s the kind of affinity, or community-oriented, offering that will have good success. But it’s good they are being honest about its prospects--people won’t necessarily make money.”

Burdened with a $1-million bank loan and problems due to El Nino, the train was closed for more than 60 days last winter because of mudslides, fallen trees and washed-out track. That follows on the heels of a mudslide in January 1997 that buried the west entrance of a tunnel along the route.

Since buying the train in August 1996, the owners have lost more than $1.2 million, leaving them with only $84,200 in reserve, according to the company’s latest financial statements.

Owners plan to use about $2.1 million from the offering to replace several miles of track, install 30,000 new rail ties and rehabilitate 13 bridges. Milliman said he plans to spend an additional $630,000 to buy additional steam and diesel locomotives and refurbish existing passenger cars.

If the money is not raised, Milliman said, the train may have to be sold.

Meanwhile, the California capital-raising market is suffering from the dog days of summer and the broad downturn, as no IPOs from California-based companies were priced last week, according to analysts.

“If anyone needed an excuse to go on vacation, the market surely provided that last week,” said David Menlow, president of IPO Financial Network Corp., a New Jersey researcher. “This week is going to be a period of hibernation. Underwriters aren’t going to take a chance of bringing an IPO in a market with these kinds of conditions.”

Times staff writer Debora Vrana covers investment banking. She can be reached via e-mail at [email protected].