<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended July 31, 1996 Commission File Number O-7607
------------- -------
FAIR GROUNDS CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Louisiana 72-0361770
- -----------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1751 Gentilly Blvd., New Orleans, LA 70119
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number including area code (504) 944-5515
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
x Yes No
----- ------
468,580 Common Shares were outstanding as of September 15, 1996.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, July 31, 1996 (Unaudited)
and Balance Sheet, October 31, 1995 . . . . . . . . . . . . . . . . . 1
Statements of Operations and Retained
Earnings for the Three Months Ended
July 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . 3
Statements of Operations and Retained
Earnings for the Nine Months Ended
July 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for the Nine
Months Ended July 31, 1996 and 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements (Unaudited) . . . . . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 28
Item 5. Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,728,714 $ 1,118,590
Cash and cash equivalents -
restricted - 154,909
Accounts receivable 1,140,846 1,026,666
Investment securities -
available for sale 227,125 457,900
Inventory 80,540 80,565
Deferred income taxes 59,940 59,940
Prepaid expenses 655,958 557,033
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Total Current Assets 5,893,123 3,455,603
------------- -------------
OTHER ASSETS 69,184 71,264
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PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 13,653,283 13,881,970
Construction in progress 15,799,050 15,207,395
Land improvements 4,267,529 4,270,535
Temporary facilities 2,986,791 2,686,044
Automotive equipment 818,111 818,111
Machinery and equipment 882,177 789,347
Furniture and fixtures 171,631 171,497
------------- -------------
Total 38,578,572 37,824,899
Less: accumulated depreciation
and amortization (15,299,854) (13,683,393)
------------- ------------
Depreciation property net 23,278,718 24,141,506
Land 3,286,281 3,286,281
------------- -------------
Property - net 26,564,999 27,427,787
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TOTAL ASSETS $ 32,527,306 $ 30,954,654
============= =============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31
1996 1995
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current $ 9,763,336 $ 3,706,143
Accounts payable 1,218,089 897,016
Construction contract payable - 4,864,199
Accrued liabilities:
Deferred purses 4,111,802 5,666,212
Uncashed mutuel tickets 352,413 259,606
Other 192,299 522,967
Deferred revenues 33,750 50,149
------------ ------------
Total Current Liabilities 15,671,689 15,966,292
------------ ------------
DEFERRED INCOME TAXES 4,641,035 4,020,035
------------ ------------
Total Liabilities 20,312,724 19,986,327
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
------------ ------------
STOCKHOLDERS' EQUITY
Capital stock - no par value;
authorized 600,000 shares,
issued and outstanding
469,940 shares 1,525,092 1,525,092
Additional paid-in-capital 1,936,702 1,942,350
Retained earnings 8,812,841 7,601,742
Unrealized loss on investment
securities - available for sale (24,528) (54,884)
------------ ------------
Total 12,250,107 11,014,300
Less: treasury stock at cost,
1,360 shares (35,525) (45,973)
------------ ------------
Total Stockholders' Equity 12,214,582 10,968,327
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 32,527,306 $ 30,954,654
============ ============
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 6
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Three Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 4,233,145 $ 3,305,025
Breakage 110,340 90,690
Uncashed mutuel tickets 184,291 102,892
------------ ------------
Total 4,527,776 3,498,607
Less: pari-mutuel tax 627,033 509,144
----------- ------------
Total Mutuel Income 3,900,743 2,989,463
Concessions 257,649 239,459
Video poker (net) 275,664 163,573
Admissions (net of taxes) 90,891 102,899
Programs and forms 353,495 237,773
Miscellaneous 132,222 99,912
----------- ------------
Total Operating Revenues 5,010,664 3,833,079
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RACING EXPENSES
Purses $ 1,473,594 $ 1,216,487
Salaries and related taxes
and benefits 1,113,179 905,737
Contracts and services 369,888 261,362
Host track fees
Depreciation 532,659 517,484
Cost of sales - concessions 98,416 97,082
Utilities 153,106 141,599
Repairs and maintenance 113,767 82,403
Program paper, forms and other
supplies 286,038 318,022
Advertising and promotion 82,422 72,562
Rent 67,050 66,798
Miscellaneous 79,786 98,722
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Total Racing Expenses 5,039,696 4,289,487
----------- ------------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 337,665 $ 299,784
Insurance 182,718 211,494
Property taxes 102,679 86,702
Legal, audit and director fees 273,810 203,615
Loan closing fees 52,788 -
Contract services 47,656 33,452
Office expenses 44,690 77,210
Miscellaneous 55,441 45,251
------------ ------------
Total General and
Administrative Expenses 1,097,447 957,508
------------ ------------
LOSS FROM OPERATIONS (1,126,479) (1,413,916)
------------ ------------
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival income 869,676 679,492
Gain on sale of equity investments - 3,036
Interest expense (222,280) (50,259)
Interest income 6,438 5,934
Video poker tax relief 679,108 -
Gain on sale of property 91,963 -
Insurance settlements - 829
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 298,426 (774,884)
Provision for income taxes 101,000 -
------------ ------------
NET INCOME (LOSS) per share -
1996 $.42, 1995 ($1.66) $ 197,426 $ (774,884)
RETAINED EARNINGS,
BEGINNING OF PERIOD 8,615,415 8,721,917
------------ ------------
RETAINED EARNINGS,
END OF PERIOD $ 8,812,841 $ 7,947,033
============ ============
CASH DIVIDENDS PER SHARE $ - $ -
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
============ ============
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
88 Days of 88 Days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 15,237,381 $ 12,902,948
Breakage 348,231 283,107
Uncashed mutuel tickets 281,411 215,638
------------ ------------
Total 15,867,023 13,401,693
Less: pari-mutuel tax 2,057,959 1,808,138
------------ ------------
Commission income 13,809,064 11,593,555
Host track fees 2,653,055 2,549,567
------------ ------------
Total Mutuel Income 16,462,119 14,143,122
Concessions 1,246,345 1,387,169
Video poker (net) 855,536 539,485
Admissions (net of taxes) 278,128 258,666
Parking 14,967 14,401
Programs and forms 1,158,827 1,012,862
Miscellaneous 606,616 498,078
------------ ------------
Total Operating Revenues $ 20,622,538 $ 17,853,783
------------ ------------
RACING EXPENSES
Purses $ 5,680,253 $ 4,947,293
Salaries and related taxes
and benefits 4,134,471 4,015,209
Contracts and services 1,710,737 1,637,396
Host track fees 1,576,857 1,011,072
Depreciation 1,617,379 1,545,787
Cost of sales - concessions 457,277 602,413
Utilities 541,822 469,506
Repairs and maintenance 286,277 268,842
Program paper, forms and other
supplies 1,126,165 1,016,823
Advertising and promotion 645,193 565,623
Rent 225,696 192,696
Miscellaneous 492,503 392,153
------------ ------------
Total Racing Expenses $ 18,494,630 $ 16,664,813
------------ ------------
</TABLE>
(Continued)
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
88 Days of 88 Days of
Live Racing Live Racing
------------ -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 935,704 $ 957,635
Insurance 768,900 644,800
Property taxes 295,402 153,761
Legal, audit and director fees 641,288 722,271
Loan closing fees 110,164 -
Contracts and services 120,335 135,983
Office expenses 230,840 260,939
Litigation judgment - (188,109)
Miscellaneous 148,062 235,016
------------ ------------
Total General and
Administrative Expenses 3,250,695 2,922,296
------------ ------------
INCOME LOSS FROM OPERATIONS (1,122,787) (1,733,326)
------------ ------------
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival income 1,529,774 1,153,083
Video poker tax relief 1,964,518 -
Interest expense (610,600) (147,968)
Interest income 15,595 87,756
Insurance related settlements - 366,594
Gain (loss) on sale of investments (36,364) 3,036
Gain on sale of property 91,963 -
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,832,099 (270,825)
Provision for income taxes 621,000
CHARGE FOR CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
FOR INVESTMENTS $ - $ 104,000
------------ ------------
NET INCOME (LOSS) per share - 1996
$2.58, 1995 $ (.35) 1,211,099 (166,825)
RETAINED EARNINGS,
BEGINNING OF PERIOD 7,601,742 8,113,858
------------ ------------
RETAINED EARNINGS,
END OF PERIOD $ 8,812,841 $ 7,947,033
============ ============
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
88 Days of 88 Days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
CASH DIVIDENDS PER SHARE $ - $ -
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
============ ============
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE> 11
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,211,099 $ (166,825)
------------ -----------
Adjustments to reconcile net income
(loss) to net cash used for
operating activities:
Depreciation 1,617,379 1,545,787
Gain on sale of property (91,963) -
Loss on sale of securities 36,363 -
Deferred income taxes 621,000 83,951
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (104,848) (29,645)
Inventory 25 (2,969)
Refundable income taxes - 566,289
Accounts receivable - insurance
proceeds - 487,341
Prepaid expenses (98,925) (266,926)
Restricted cash 154,909 (150,000)
Increase (decrease) in
Accounts payable and
accrued liabilities 78,680 (6,173)
Contracts payable (4,864,199) (4,100)
Deferred revenue (16,399) -
Deferred purses (1,554,410) (2,071,935)
------------ ------------
Total adjustments (4,222,388) 151,620
------------ ------------
Net cash used for
operating activities (3,011,289) (15,205)
------------ ------------
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES
Capital expenditures (755,243) (7,986,887)
Proceeds from sale of securities 225,420 414,784
Proceeds from sale of property 91,963 -
Deposits 2,080 (1,175)
------------ -----------
Net cash used for
investing activities (435,780) (7,573,278)
------------ ----------
</TABLE>
(Continued)
-8-
<PAGE> 12
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 8,822,695 $ 2,150,000
Principal repayments on
short term borrowings (2,765,502) -
Advances from third party 1,000,000 1,000,000
Repayments to third party (1,000,000) (1,000,000)
------------ -------------
Net cash provided by
financing activities 6,057,193 2,150,000
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,610,124 (5,438,483)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,118,590 8,039,310
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,728,714 $ 2,600,827
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 610,600 $ 147,968
============ ============
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
FIRE RELATED LITIGATION
The Company is a party to a number of legal proceedings which have arisen as a
result of the December 1993 fire or in connection with the Company's efforts to
collect insurance proceeds after the fire. The following is a brief
description of such fire related proceedings:
1. On May 14, 1994, the Company filed an action in the 24th Judicial Court in
the State of Louisiana against Travelers Indemnity Company of Illinois
("Travelers"), and others. The Company contends that the insurance policy
provided by Travelers provides the Company with blanket coverage in the
amount of $24.1 million in excess of the $10 million of underlying
coverage provided by Allianz Underwriters Insurance Company ("Allianz")
and Royal Indemnity Company ("Royal"); accordingly, the Company maintains
that Travelers is liable for the difference between $24.1 million and the
amount already paid (approximately $9.3 million), plus statutory penalties
of 10% of the amount not paid, interest, attorney's fees and costs. The
Company further contends the insurance agent and the insurance broker who
arranged for the insurance are liable to the Company for any damages
sustained including any damages sustained because the amount of coverage
is less than that claimed by the Company. Travelers' position is that the
excess policy did not provide blanket coverage, and that its liability
under such policy is limited to the amount which it has already paid. The
case is set for trial in November 1996.
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
2. The Company filed an action in December 1994, in the Civil District Court
for Orleans Parish, against ADT Security Systems, the company which
provided and maintained the fire alarm system at the Fair Grounds Race
Course, and other defendants. The complaint seeks unspecified damages,
not otherwise compensated for by insurance, that were allegedly caused by
the negligence of one or more of the defendants. This case is set for
trial in March 1997.
3. The Company is a defendant, along with its general liability insurance
carrier, United National Insurance Company ("United National"), in a civil
action filed in December 1994 in the United States District Court for the
Eastern District of Louisiana by St. Paul Mercury Insurance Company ("St.
Paul"), the insurer of the computerized betting equipment at the
racetrack. The complaint alleges that St. Paul is subrogated to its
insured's rights to collect damages and that it has paid in excess of $1
million for the loss of equipment in the fire. Subsequently, United
National filed suit against the Company seeking to deny coverage for such
subrogation claim. The two suits have been consolidated and are set for
trial in May 1997.
Subsequent to July 31, 1996, a suit was filed in U.S. District Court in Baton
Rouge by Livingston Downs Racing Association ("Livingston") naming the Company
and other defendants in an antitrust suit. Management of the Company believes
the suit is without merit.
Livingston had previously filed a series of other legal actions against the
Company which were resolved in the Company's favor.
As to the pending matters described above, there can be no assurance that the
Company will be successful in any of its claims or defenses. Accordingly, no
assurance can be given that additional recoveries of insurance proceeds, if
any, will reimburse the Company adequately for the loss or destruction of its
property in the fire.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
STATUS OF CONSTRUCTION OF FACILITIES
A new tele-track facility and temporary clubhouse area were opened
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
on December 22, 1994. The total cost for debris removal and the construction
of the tele-track was approximately $3.2 million.
During the summer of 1994, the Company approved the plans for a new main
facility. The total cost of the facility, together with furniture, fixtures,
equipment and certain fees and permit costs, was anticipated to be
approximately $24.3 million at the time construction commenced.
As of July 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of approximately
$15.8 million. Insurance proceeds recovered to date and interim bank financing
provided the source of funds used in such construction. However, for the
reasons described below, further construction work on the project has been
halted. As a result, the cost and timing to complete the project cannot now be
determined with any certainty.
CONSTRUCTION FINANCING
As previously reported, the Company received and accepted a commitment letter
dated February 6, 1995 from First National Bank of Commerce of New Orleans
("FNBC") for a non-revolving line of credit to be used as an interim
construction loan, convertible to a term loan. The aggregate principal amount
of such loan under the terms of such commitment was to have been $17.5 million.
The commitment from FNBC provided that the interim construction loan was to
have closed on or before March 31, 1995. However, the parties agreed to
various extensions of such closing date. FNBC indicated that the principal
reason for the delay was FNBC's concern with restrictions on and the possible
elimination of video poker gaming in Louisiana. Inasmuch as video poker
franchise tax monies generated by the Company and its tele-tracks were to be
used for the repayment of the FNBC loan, in accordance with the tax relief
legislation described below, any changes in the video poker gaming laws which
restricts or limits video poker as a source of revenue may have an adverse
impact on such source of repayment.
In 1994, legislation was adopted which provides that owners of video poker
devices that are located in licensed establishments owned or operated by
licensed racing associations eligible for emergency relief under the statute
are exempt from the franchise payment otherwise due under the Video Draw Poker
Devices Control Law for a period not to exceed 15 years. The amount of the
franchise payment which otherwise would have been paid to the State of
Louisiana during the exemption period is to be remitted directly to the
licensed racing association, in an amount up to $2.5 million
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
annually, and such funds are to be used for providing emergency relief to the
licensed racing association. The use of funds by the licensed racing
association is subject to review and oversight by a legislative committee,
which may reduce the amount of the authorized exemption if the racing
association cannot satisfy the committee that the exemption is necessary for
its ongoing economic viability. The legislation also provides that at such
time, as the emergency relief granted under the act exceeds the required annual
debt service on any indebtedness incurred to address the emergency situation,
such indebtedness not to exceed $25 million, the excess of such funds is to be
remitted to the state treasury. During 1995, the Joint Legislative Committee
on the Budget approved the dedication of funds received from the franchise tax
relief described above toward the exclusive use by the Company for making
principal and interest payments to FNBC.
INTERIM FINANCING
FNBC provided the Company with a short-term interim construction loan of $2.15
million on July 17, 1995. In addition, as further described in Note 4, FNBC
provided the Company with an additional $4 million on November 7, 1995, and $1
million on November 30, 1995. As also described in Note 4, all of such
financing was then reflected in a Loan Agreement dated December 18, 1995
between the Company and FNBC, pursuant to which the Company borrowed an
aggregate amount of $9,493,050 and utilized a portion of such funds to repay
the principal amount of the prior loans that was outstanding on December 18,
1995. The remaining amount borrowed was utilized to pay construction costs.
POSSIBLE FUTURE FINANCING
The Company believes that it was unable during 1995 to obtain the full amount
of financing originally committed by FNBC due to the refusal of the Company's
fire insurer to pay the full amount of the Company's claim, the refusal of
various defendants to compensate the Company for the losses it sustained in the
fire, and the uncertainty regarding the future of video poker as a continuing
source of revenue. In a special session held in March, 1996, the legislature
passed legislation requiring local elections to be held in November 1996 as a
condition to the continuation of video poker operations in Louisiana. The
Company's ability to obtain future financing will depend the outcome of the
Company's lawsuit against its fire insurer and insurance brokers and its
lawsuit against the parties alleged to be responsible for the cause and/or
spread of the fire, as well as the outcome of these elections.
-13-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
If the November election results in the elimination of video poker in various
parishes where the Company operates its facilities, the Company, under a sunset
clause provision, can continue to operate its video poker machines in these
parishes for a period of 30 months after the local referendum.
The Company has received a commitment from VSI to provide a non-interest
bearing loan in the principal amount of $1.5 million, in consideration for
which the Company is to agree to extend both the term of its agreement with VSI
and the term of the option period thereunder by two years. The loan from VSI
is conditioned upon the receipt of the long-term bank financing.
In addition to the foregoing, Marie G. Krantz (Chairman of the Board of
Directors and Treasurer of the Company) has committed to make a $1 million loan
to the Company, which would be subordinate in right to payment to the permanent
FNBC financing. Although specific terms of such loan have not been discussed,
it is likely that the loan would be interest-bearing, and that payments would
be made after the repayment of the FNBC financing. The Company is also engaged
in discussions with AutoTote concerning a possible commitment by AutoTote to
lend or advance $2.5 million to the Company, such amount to be repaid through a
subordinate loan arrangement or through an extension of the lease terms
relating to the totalisator equipment.
NOTE 3 - CONTINGENCIES - GOING CONCERN
The accompanying financial statements for the nine months ended July 31, 1996
have been prepared assuming that the Company will continue as a going concern.
In view of the cessation of construction and the additional expense which is
likely to be incurred as a result of construction delays, it is not certain
that if all of the financing, as described in Note 2, is consummated, including
the long-term financing by FNBC in accordance with the terms of the original
commitment, the Company will be able to complete the construction of its new
facility as presently planned. In order to complete such construction, it may
be necessary to (i) obtain funds from other sources, (ii) attempt to increase
the amount of long-term financing from FNBC, or (iii) seek to effect savings in
the construction costs related to the completion of the facility. The Company
has had no discussions with any other possible source of such financing, nor
has it reached any understanding with FNBC regarding any increase in the
financing which the Company hopes to obtain from FNBC as originally committed
by FNBC. Accordingly, the Company is presently unable to determine whether any
of the foregoing alternatives will be available to it.
-14-
<PAGE> 18
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 3 - CONTINGENCIES - GOING CONCERN (CONTINUED)
FNBC and the Company have had discussions concerning an extension of the
October 31, 1996 due date for payment in full under the Loan Agreement, and
FNBC has informally agreed to extend such date to April 30, 1997. However, in
the event that (i) long-term financing is not completed by the due date under
the Loan Agreement or (ii) funds provided through all sources of financing are
insufficient to meet the Company's needs, the foregoing uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
NOTE 4 - NOTES PAYABLE
On December 18, 1995, First National Bank of Commerce of New Orleans ("FNBC")
provided the Company with a short-term interim construction loan in the amount
of $9,493,050, which included approximately $921,300 of the remaining principal
balance of the $2,150,000 previously loaned to the Company in July 1995 and
approximately $5,000,000 loaned to the Company in November 1995, for
construction costs relating to the rebuilding of the grandstand and clubhouse
facilities.
Pursuant to the loan agreement, FNBC agreed to extend credit to the Company up
to an aggregate principal amount of $9,493,050 until October 31, 1996. The
loan agreement states that such commitment is not a revolving credit facility,
and the commitment is only to make loans up to such aggregate principal amount.
Accordingly, FNBC has no obligation under the loan agreement to lend additional
funds to the Company.
Payment of the principal and interest under the loan agreement is to be made on
demand, or if no demand is made, then in 10 monthly installments of $52,740
principal plus interest, beginning January 17, 1996, and one final payment of
all principal plus accrued interest on October 31, 1996. The loan bears
interest at 9% per annum. On each monthly payment date, payment of principal
and interest is to be made from the proceeds of the funds received as a result
of the video poker tax relief legislation, which funds are to be on deposit in
a separate lockbox, in accordance with a Disbursement Agreement entered into
among the Company, FNBC and Video Services, Inc. ("VSI") dated July 17, 1995.
The Disbursement Agreement provides that VSI acknowledges that the first $2.5
-15-
<PAGE> 19
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 4 - NOTES PAYABLE (CONTINUED)
million in video poker franchise fee payments otherwise due annually to the
State of Louisiana are to be remitted to the Company under the terms of the tax
relief legislation. For each annual period from July 1 through June 30, such
funds are to be debited from VSI's bank account and deposited into a lockbox at
FNBC. Such proceeds are to be used solely for the purpose of making payments
of principal and interest from time to time due under the terms of the loan
agreement. Any amount in excess of the amount of debt service, up to $2.5
million annually, is to be applied as a prepayment of the principal amount of
the loan, and any excess of the debt service is to be returned to the Treasury
of the State of Louisiana. The loan agreement also provides that any fire
insurance proceeds, as defined in the loan agreement, received by the Company
are to be used to prepay the loan.
The indebtedness under the loan agreement is secured by (i) a second mortgage
by the Company of all of its real property; (ii) a mortgage by Marie G. Krantz
of all the real property formerly constituting the Jefferson Downs Race Course;
(iii) a security interest in all the Company's accounts, inventory, equipment,
fire insurance proceeds, tax relief monies, construction property, material
contracts and all deposit accounts; (iv) a security interest in certain
investment securities owned by Marie G. Krantz; (v) a security interest in all
furniture, fixtures and equipment owned by the Company, Finish Line and
Jefferson Downs; (vi) a pledge by Richard Katcher, as Trustee u/t/a between
John G. Masoni and John G. Masoni, Trustee, pursuant to a restatement of his
Trust Agreement dated April 19, 1991 as modified on October 24, 1992 (the
"Trust"), Marie G. Krantz, individually and as Voting Trustee, Bryan G. Krantz,
Vickie Krantz and Jefferson Downs of an aggregate of 342,584 shares of common
stock of the Company beneficially owned by them; (vii) a limited guaranty of
such indebtedness by Marie G. Krantz and Finish Line; and (viii) a guaranty of
such indebtedness by Finish Line. As further discussed in Note 5, effective
April 24, 1996, the Trust mentioned in "vi" above transferred 339,604 shares of
common stock to Bryan G. Krantz.
The loan agreement provides that, commencing January 20, 1996, the Company will
deposit monthly into an account at FNBC all "Excess Cash Flow" generated during
the immediately preceding month. Excess Cash Flow is defined as all net income
for the month; plus or minus non-cash-items such as depreciation and
amortization; plus or minus the changes in accounts receivable, inventory,
prepaid expenses, accounts payable and accrued expenses, and any other
operating balance sheet related activity affecting the cash position; and plus
or minus capital expenditures. This obligation ceases if the 1996 regular
session of the Louisiana Legislature
-16-
<PAGE> 20
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 4 - NOTES PAYABLE (CONTINUED)
adjourns without having passed any statute that adversely affects the status of
the video poker tax relief or the existing video poker operations of the
Company or Finish Line, or that would allow for or require local elections as a
condition to the continuation of video poker operations; or if there is any
such legislation requiring local elections, the voters fail to approve any
such adverse change. Prior to the cessation of such obligation, the Company
may not withdraw any funds in such account, and FNBC has a security interest in
such funds.
The loan agreement contains certain negative covenants pursuant to which the
Company has agreed that it will not (i) resume construction activities without
first providing FNBC with satisfactory evidence of the source of funding for
the balance of such construction; (ii) enter into any agreement with any
affiliate except to the extent that such agreements are commercially reasonable
and provide for terms which would normally be obtainable in an arm's length
transaction with an unrelated third party; and (iii) incur capital expenditures
during any fiscal year in excess of $200,000 without the consent of FNBC.
On December 26, 1995, the Company paid $1,000,000 of principal on the
$2,000,000 remaining balances related to its promissory notes held by Louis J.
Roussel, III and agreed to pay the remaining $1,000,000 of principal on October
31, 1996. Marie G. Krantz has agreed to lend to the Company the funds
necessary to repay the outstanding balance owed to Mr. Roussel, III on such
date. It is anticipated that Ms. Krantz will be repaid in January 1997 from a
$1 million advance to be received by the Company from VSI.
In January 1996, the Company received an advance of $1,000,000 from VSI, which
the Company repaid in six equal monthly installments beginning in February
1996.
NOTE 5 - MAJORITY STOCK TRANSFER
Effective April 24, 1996, the Masoni Trust transferred 339,604 shares of common
stock to Bryan G. Krantz for consideration of $9,984,358. A promissory note
was executed by Byran G. Krantz in favor of the Trust for $9,984,358 with
interest at 5.76% per year. The note is due in April 2005 and cannot be
prepaid in whole or in part. The note is secured by a Stock Pledge Agreement
executed by Byran G. Krantz and Marie G. Krantz, in her capacity as Voting
Trustee under the Voting Trust Agreement, in favor of the Trust. The Stock
Pledge Agreement is subject to the Pledge Agreements executed in favor of FNBC.
-17-
<PAGE> 21
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 1996 and 1995
(Unaudited)
NOTE 6 - TREASURY STOCK REISSUANCE
In June 1996, a Director of the Company purchased 400 shares of treasury stock
from the Company at a cost of $4,800, the market of the stock at that time.
Because the Company accounts for treasury stock using the cost method, the
Company incurred a loss on sale of treasury stock of $5,648 which has been
charged to additional paid in capital in accordance with generally accepted
accounting principles.
-18-
<PAGE> 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 1996 AND 1995
GENERAL NOTE
As previously reported, on the night of Friday, December 17, 1993, the 17th
racing day in the Company's 87 racing day schedule for 1993-1994, after the
conclusion of live racing for the day at the Fair Grounds Race Course, a fire
swept through and destroyed the main grandstand building and all of its
contents. Included in that area was the grandstand and clubhouse with a
seating capacity of approximately 10,000, the racing paddock, and substantially
all of the administrative, racing operations, and other offices of the Company.
As a result of the fire, racing operations at the Fair Grounds Race Course, and
all operations at the Company's tele-track facilities, were temporarily
suspended.
Immediately after the fire, management determined that it would be in the
Company's best interest to attempt to reopen the Fair Grounds Race Course, in
order to continue the live racing schedule, as soon as possible. Accordingly,
during the remainder of December 1993, the Company made arrangements for the
installation of temporary racing and patron facilities. During the two and
one-half week period from the date of the fire to January 5, 1994, the
temporary facilities were installed and the property was readied for the
reopening of racing. Tele-track operations were reopened on December 29, 1993,
and the Fair Grounds Race Course was reopened for live racing on January 5,
1994.
REVENUES
During the quarters ended July 31, 1996 and 1995, the Company derived its
pari-mutuel income and other operating revenues by operating tele-tracks for
off-track wagering. For the quarters ended July 31, 1996 and 1995, the Company
operated tele-tracks in New Orleans at the Fair Grounds Race Course and on
Bourbon Street, and at locations in Lafourche, St. Bernard and St. John
Parishes, Louisiana. In October 1995, the Company opened a tele-track facility
in Jefferson Parish, Louisiana. Through Finish Line Management Corporation
("Finish Line"), an affiliate, the Company operated tele-track facilities in
Terrebonne, St. Tammany and Jefferson Parishes, Louisiana, which were formerly
operated by Jefferson Downs Corporation.
The Company's income before income taxes for the quarter ended July 31, 1996
was $197,426 compared to a loss before income tax benefit of $(774,884) for the
quarter ended July 31, 1995. The significant increase in income before income
taxes is primarily the result of the Company's recognition of video poker tax
relief income in the current quarter (as described below) and an increase in
net Jazz and Heritage Festival income over the previous comparable quarter
ended July 31, 1995.
-19-
<PAGE> 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
For the quarter ended July 31, 1996, the Company experienced an increase in
off-track pari-mutuel wagering of $4,546,256 or 27.2% from the previous
comparable quarter. The increase in off-track wagering is primarily the result
of the operations of the Company's new tele-track facility in Jefferson,
Parish, Louisiana.
Comparative off-track pari-mutuel wagering activity for the quarters ended July
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
1996 1996
---- ----
<S> <C> <C>
Off-track wagering $21,248,722 $16,702,466
----------- -----------
</TABLE>
As a result of the increase in total off-track pari-mutuel wagering in the
current quarter, the Company's total operating revenue increased $1,177,585 or
30.7% from the quarter ended July 31, 1995. The operations of the Company's
new tele-track facility contributed significantly to the increase in operating
revenues.
Race related expenses for the quarter ended July 31, 1996 increased $750,209 or
17.5% from the previous comparable quarter primarily due to the increase in
operations of the new Jefferson Parish tele-track.
General and administrative expenses increased $139,939 or $14.6% from the
previous comparable quarter primarily due to an increase in salaries and
related taxes and benefits, an increase in legal audit and director fees, and
an increase in loan closing fees. These increases were partially offset by a
decline in insurance expense and a decline in office expense. Legal, audit and
director fees increased $70,195 or 34.5% due to an increase in litigation
related expenses in the current quarter. Salaries and related taxes and
benefits increased $37,881 or 12.6% primarily as a result of an increase in
health insurance and claims in the current quarter.
Loan closing fees in the current quarter in the amount of $52,788 are the
result of the fees associated with the Company's loan closing with First
National Bank of Commerce in December 1995. Insurance expense declined in the
current quarter $28,776 or 13.6% as a result of declines in the Company's
property and general liability premiums which were renewed in May 1996.
OTHER INCOME (EXPENSES)
Other income for the quarter ended July 31, 1996 increased $785,873 or 123%
from the quarter ended July 31, 1995 primarily due to the Company's recognition
of video poker tax relief of $679,108 and an increase in net Jazz and Heritage
Festival income of $190,184 from the fiscal 1995 quarter. The video poker tax
relief provides that owners of video poker devices that are located in licensed
-20-
<PAGE> 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
establishments owned or operated by licensed racing associations are eligible
for emergency relief under the Statute and are exempt from the franchise
payment otherwise due under the Video Draw Poker Devices Control Law.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1996 AND 1995
REVENUES
During the nine months ended July 31, 1996 and 1995, the Company derived its
pari-mutuel income by conducting live racing meets of 88 days and in the
operation of the tele-tracks for off-track wagering.
For the nine months ended July 31, 1996, the Company reported income before
income taxes of $1,832,099 compared to a loss before income tax benefit of
$(270,825) in the prior period. The significant increase in income before
income taxes is the result of several factors, the most significant of which
are the increase in operating income, a significant increase in net Jazz and
Heritage Festival income and the recognition of video poker tax relief in the
current 1996 fiscal period.
For the nine months ended July 31, 1996, the Company reported a loss from
operations of ($1,122,787) as compared to a loss from operations of
($1,733,326) for the period ended July 31, 1995. The favorable variance of
$610,539 or 35% is the result of an increase in total pari-mutuel wagering and
a significant increase in net video poker revenue in the current period.
For the nine months ended July 31, 1996, the Company reported total pari-mutuel
wagering of $77,782,571 compared to $64,297,217 for the nine months ended July
31, 1995, an increase of 20.9%. The increase in total pari-mutuel wagering in
the current period is the result of the impact of operations of the Company's
new tele-track facility as well as the implementation of full card simulcasting
in January. A comparison of pari-mutuel wagering for both on-track and off-
track activity is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
1996 1995
---- ----
<S> <C> <C>
On-track wagering $20,180,889 $25,134,326
Off-track wagering 57,601,682 39,162,891
----------- -----------
Total Wagering $77,782,571 $64,297,217
=========== ===========
</TABLE>
As a result of the increase in total pari-mutuel wagering, the Company's total
operating revenues for the nine months ended July 31, 1996, increased
$2,768,755 or 15.5% from the previous fiscal 1995 period. All of the
components of the Company's operating revenues increased with the exception of
concessions revenues. For
-21-
<PAGE> 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
the nine months ended July 31, 1996, concessions revenue declined $140,824 or
10.2% due to the Company's elimination of its track kitchen operations. Net
video poker revenue increased significantly in the current fiscal period as a
result of the video poker operations at the Company's new tele-track facility.
RACE RELATED EXPENSES
For the nine months ended July 31, 1996, the Company's race related expenses
increased $1,829,187 or 10% from the previous fiscal period ended July 31, 1996
primarily due to an increase in pari-mutuel activity at the new tele-track
facility.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended July 31, 1996
increased $328,399 or 11.2% from the nine months ended July 31, 1995, primarily
due to the Company's recognition in the fiscal 1995 period of a favorable
litigation settlement in the amount of $188,109, an increase in insurance
expense of $124,100 or 19.2% in the current period, an increase in property tax
expense of $141,641 or 92.1%, and the recognition of loan closing fees in the
current period of $110,164. These increases were partially offset by a
decrease in legal, audit and director fees of $80,983 or 11.2% and a decrease
in miscellaneous expense of $86,954 or 36.9%
During the nine months ended July 31, 1995, the Company received settlement
monies totalling $188,109 from one of its former insurance carriers. The
monies represent the Company's pro-rata distribution for claims paid by the
Company as a result of the insolvency of this insurance carrier.
For the nine months ended July 31, 1996, property taxes of $295,402 are based
upon the pro-rata portion of the current tax assessment. In the prior fiscal
period, property tax expense included the result of a partial reversal of an
estimated amount of property tax expense for the fiscal year ended October 31,
1994. As of the date of issuance of the Company's fiscal 1994 financial
statements, the City of New Orleans had not finalized the Company's 1994
property tax bill due to complications with assessed values as a result of the
December 1993 fire. The Company accrued and reported for the fiscal year ended
October 31, 1994 an estimated $300,000 in property tax liability. In February
1995, the city of New Orleans determined that the Company's property tax
liability for 1994 would be $217,000, resulting in income of $83,000 in the
period ended July 31, 1995.
Loan closing fees in the current fiscal period in the amount of $110,164 are
the result of the fees associated with the Company's loan closing with First
National Bank of Commerce in December 1995.
-22-
<PAGE> 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
OTHER INCOME (EXPENSE)
For the nine months ended July 31, 1996, other income was $2,954,886 compared
to $1,462,501 for the nine months ended July 31, 1995. The $1,492,385 or 102%
increase is the result of an increase in net Jazz and Heritage Festival income
of $376,691 or 32.7%, the recognition in the current period of video poker tax
relief of $1,964,518 offset by an increase in interest expense in the current
period of $610,600, primarily related to interim financing, and the Company's
recognition of insurance related settlement of $366,594 in the previous
comparable period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash and cash equivalents increased $2,610,124 during the nine months ended
July 31, 1996 compared to a decrease of $5,438,483 during the nine months ended
July 31, 1995. The increase in cash and cash equivalents in the first nine
months of fiscal 1996 was the result of cash provided from financing activities
of $6,057,193 offset by cash used for operating activities of $3,011,289 and
cash used for investing activities of $435,780. The cash provided from
financing activities was primarily the result of $8,571,725 short term interim
construction loan borrowings from FNBC. The cash used for operating activities
was primarily the result of cash used to pay purses during the Company's live
racing season, as well as cash used to pay construction costs on the new
facility.
As of July 31, 1996, the Company had received $19,478,791 in insurance proceeds
resulting from fire loss claims submitted to the Company's insurance carriers.
The Company has filed suit against one of its insurance carriers, as described
elsewhere herein, seeking to recover an additional $14.7 million under its
insurance policy with such carrier.
The Company's new tele-track facility at the Fair Grounds Race Course, which
also serves as a temporary clubhouse area, was opened on December 22, 1994.
The total cost for debris removal and the construction of the tele-track
facility was approximately $3.2 million.
During the Summer of 1994, the Company approved the plans for a new racing
facility and commenced construction thereof in August 1994. The total cost of
the facility, together with furniture, fixtures, equipment and certain fees and
permit costs, was anticipated to be approximately $24.3 million at the time
construction commenced, which is in addition to the $3.2 million relating to
debris removal and construction of the tele-track facility, as described.
As of July 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of
-23-
<PAGE> 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
approximately $15.8 million. Insurance proceeds recovered to date and interim
financing provided by FNBC, as described below, provided the source of funds
used in such construction. However, for the reasons described below, further
construction work on the project has been halted. As a result, (i) the cost to
complete the project cannot now be determined with any certainty and (ii) the
Company will utilize the temporary tent facilities and the tele-track facility
during the next racing season.
As previously reported, the Company received and accepted a commitment letter
dated February 6, 1995 from FNBC for a non-revolving line of credit to be used
as an interim construction loan, convertible to a term loan. The aggregate
principal amount of such loan under the terms of such commitment was to have
been $17.5 million. The commitment from FNBC provided that the interim
construction loan was to have closed on or before March 31, 1995. However, the
parties agreed to various extensions of such closing date. FNBC indicated that
the principal reason for the delay was FNBC's concern with restrictions on and
the possible elimination of video poker gaming in Louisiana. Inasmuch as video
poker franchise tax monies generated by the Company and its tele-tracks were to
be used as a source for the repayment of the FNBC loan, in accordance with the
tax relief legislation described herein, any change in the video poker gaming
laws which restricts or limits video poker as a source of revenue may have an
adverse impact on such source of repayment.
During 1995 FNBC provided the Company with short-term interim construction
loans of $2.15 million on July 17, 1995, $4 million on November 7, 1995 and $1
million on November 30, 1995. All of such financing was then consolidated
under the Loan Agreement dated December 18, 1995, pursuant to which the Company
borrowed an aggregate amount of $9,493,050, including funds previously
borrowed, and utilized a portion of such funds to repay the principal amount of
the prior loans that was outstanding on December 18, 1995. The remaining
amount borrowed was utilized to pay construction costs.
Pursuant to the Loan Agreement, FNBC agreed to extend credit to the Company up
to aggregate principal amount of $9,493,050 until October 31, 1996. The Loan
Agreement states that such commitment is not a revolving credit facility, and
the commitment is only to make loans up to such principal amount. Accordingly,
FNBC has no obligation under the Loan Agreement to lend additional funds to the
Company.
The Loan Agreement provides for the payment of the principal and interest on
demand, or if no demand is made, then in 10 monthly installments of $52,740
principal plus interest, beginning January 17, 1996, and one final payment of
all principal plus accrued interest on October 31, 1996. The loan bears
interest at 9% per annum. The Loan Agreement provides that on each monthly
payment
-24-
<PAGE> 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
date, payment of principal and interest is to be made from the proceeds of the
funds received as a result of the video poker tax relief legislation, which
funds are to be on deposit in a separate lockbox, in accordance with a
Disbursement Agreement and from the fire insurance proceeds as defined in the
Loan Agreement. Through September 30, 1996, the Company had made principal and
interest payments in the aggregate amount of $2,553,199 and the outstanding
principal balance under the Loan Agreement was approximately $8,041,000 on
September 30, 1996.
In December 1995, the Company made a payment to Louie J. Roussel, III of $1
million of the remaining $2 million principal balance owed to him and agreed
that the outstanding principal balance of $1 million will be due and payable on
October 31, 1996. Marie G. Krantz has agreed to lend to the Company the funds
necessary to repay the outstanding balance owed to Mr. Roussel, III on such
date. It is anticipated that Ms. Krantz will be repaid in January 1997 from a
$1 million advance to be received by the Company from VSI.
There is considerable uncertainty in Louisiana at the present time regarding
the future of the gaming industry. The cessation of operations of the
temporary land-based casino in New Orleans in November 1995 has adversely
affected tax revenue for both the State of Louisiana and the City of New
Orleans. Notwithstanding that loss of revenue, the legislature, in a special
session held in March 1996, passed legislation calling for local elections to
be held in November 1996 to determine the future of casinos, riverboats and
video poker in Louisiana. The Company's ability to obtain future financing
will depend in part on the outcome of these elections.
If the November election results in the elimination of video poker in any of
the parishes where the Company operates its facilities, the Company, under a
sunset clause provision, can continue to operate video poker machines in such
parishes for a period of 30 months after the local referendum.
The Company has received a commitment from VSI to provide a non-interest
bearing loan in the principal amount of $1.5 million, in consideration for
which the Company is to agree to extend both the term of its agreement with VSI
and the term of the option period. The loan is conditioned upon the closing of
the anticipated long-term bank financing.
In addition to the foregoing, Marie G. Krantz has committed to make a $1
million loan to the Company, which would be conditioned upon the closing of,
and subordinate in right of payment to, the long-term FNBC financing. Although
specific terms of such loan have not been discussed, it is likely that the loan
would be interest-bearing, and that payments would be made after the repayment
of the FNBC financing. The Company has also engaged in discussions with
-25-
<PAGE> 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
AutoTote to lend or advance $2.5 million to the Company, such amount to be
repaid through a subordinate loan arrangement or through an extension of the
lease terms relating to the totalisator equipment.
In view of the cessation of construction and the additional expense which is
likely to be incurred as a result of construction delays, it is not certain
that, even if all of such financing is consummated, including the long-term
financing by FNBC in accordance with the terms of the original commitment, the
Company will be able to complete the construction of its new facility as
presently planned. In order to complete such construction, it may be necessary
to (i) obtain funds from other sources, (ii) attempt to increase the amount of
long-term financing from FNBC or (iii) seek to effect savings in the
construction costs related to the completion of the facility. The Company has
had no discussions with any other potential lender, nor has it reached any
understanding with FNBC regarding any increase in the financing which the
Company hopes to obtain from FNBC as originally committed by FNBC.
Accordingly, the Company is presently unable to determine whether any of the
foregoing alternatives will be available to it.
FNBC and the Company have had discussions concerning an extension of the
October 31, 1996 due date for payment in full under the Loan Agreement, and
FNBC has informally agreed to extend such date to April 30, 1997. However, in
the event that (i) long-term financing is not completed by the due date under
the Loan Agreement or (ii) funds provided through all sources of financing are
insufficient to meet the Company's needs, the Company may, among other
alternatives, seek protection from creditors under the United States Bankruptcy
Code.
IMPACT OF INFLATION
To date, inflation has not had a material effect on the Company's operations.
-26-
<PAGE> 30
PART II
OTHER INFORMATION
-27-
<PAGE> 31
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on June 4, 1996, the Company's
shareholders elected directors and also ratified the Board of Directors'
appointment of Rebowe & Company, Certified Public Accountants (A Professional
Corporation), as independent accountants, with 347,646 shares voted for
ratification, 480 shares voted against and no abstentions. The voting with
respect to the nominees for election as directors was as follows:
<TABLE>
<CAPTION>
Votes Abstentions
------------------------- -----------
Nominee For Withheld
--- --------
<S> <C> <C> <C>
Katherine F. Duncan 348,606 0 0
Bryan G. Krantz 348,606 0 0
Marie G. Krantz 348,606 0 0
Ronald S. Maestri 348,606 0 0
Charmaine R. Morel 348,606 0 0
Donald L. Peltier 348,606 0 0
</TABLE>
Item 5. Other Events
On August 13, 1996, the Board of Directors of the Company elected Wayne Thomas
to the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (Filed electronically only)
(b) Reports on Form 8-K
On May 9, 1996, the Company filed a Form 8-K, reporting certain information
concerning Item 1, Change in Control of Registrant. The Form 8-K describes the
transaction, effective April 24, 1996, pursuant to which Richard Katcher,
Trustee u/t/a/ between John G. Masoni and John G. Masoni, Trustee, pursuant to
a restatement of his Trust Agreement dated April 19, 1991, as modified (the
"Trust"), transferred the 339,604 common shares of the Company previously owned
by the Trust to Bryan G. Krantz for an aggregate consideration of $9,984,358.
-28-
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR GROUNDS CORPORATION
------------------------------
(Registrant)
Date: 10/28/96 By: /s/ Bryan G. Krantz
--------------------- ------------------------------
Bryan G. Krantz
President
Date: 10/28/96 By: /s/ Gordon M. Robertson
--------------------- ------------------------------
Gordon M. Robertson
Chief Financial Officer
-29-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FAIR GROUNDS CORPORATION AND FOR THE NINE MONTHS ENDED
JULY 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 3,728
<SECURITIES> 227
<RECEIVABLES> 1,141
<ALLOWANCES> 0
<INVENTORY> 81
<CURRENT-ASSETS> 5,893
<PP&E> 38,579
<DEPRECIATION> 15,300
<TOTAL-ASSETS> 32,527
<CURRENT-LIABILITIES> 14,916
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 12,215
<TOTAL-LIABILITY-AND-EQUITY> 32,527
<SALES> 3,901
<TOTAL-REVENUES> 5,011
<CGS> 0
<TOTAL-COSTS> 5,040
<OTHER-EXPENSES> 1,097
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> 298
<INCOME-TAX> 101
<INCOME-CONTINUING> 197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
