<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 January 31, 1996 Commission File Number O-7607
---------------- ------
FAIR GROUNDS CORPORATION
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Louisiana 72-0361770
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(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
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(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
--- ---
469,940 Common Shares were outstanding as of March 7, 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 (Unaudited)
Balance Sheets, January 31, 1996
and October 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Operations and
Retained Earnings for the Three
Months Ended January 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows
for the Three Months Ended
January 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements,
January 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion
and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 31 October 31
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 865,900 $ 1,118,590
Cash and cash equivalents -
restricted 48,201 154,909
Accounts receivable 1,527,828 854,281
Mutuel settlements 584,731 172,385
Securities-available for sale 479,575 457,900
Inventory 108,575 80,565
Deferred income taxes 59,940 59,940
Prepaid expenses 693,507 557,033
------------ ------------
Total Current Assets 4,368,257 3,455,603
------------ ------------
OTHER ASSETS 63,434 71,264
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PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 13,928,053 13,881,970
Construction in progress 15,710,445 15,207,395
Land improvements 4,270,684 4,270,535
Temporary facilities 2,686,044 2,686,044
Automotive equipment 818,111 818,111
Machinery and equipment 866,971 789,347
Furniture and fixtures 171,630 171,497
------------ ------------
Total 38,451,938 37,824,899
Less: accumulated depreciation
and amortization (14,204,948) (13,683,393)
------------ ------------
Depreciable property - net 24,246,990 24,141,506
Land 3,286,281 3,286,281
------------ ------------
Property - net 27,533,271 27,427,787
------------ ------------
TOTAL ASSETS $ 31,964,962 $ 30,954,654
============ ============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
January 31 October 31
1996 1995
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 8,355,992 $ 3,706,143
Accounts payable 870,515 897,016
Contracts payable 1,004,906 4,864,199
Accrued liabilities:
Deferred purses 3,877,502 5,666,212
Host track fees 119,563 270,439
Uncashed mutuel tickets 278,354 259,606
Other 455,342 252,528
Deferred revenues 988,243 50,149
----------- -----------
Total Current Liabilities 15,950,417 15,966,292
----------- -----------
DEFERRED INCOME TAXES 4,360,035 4,020,035
----------- -----------
Total Liabilities 20,310,452 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 1,942,350 1,942,350
Retained earnings 8,266,246 7,601,742
Unrealized loss on investment
securities - available for sale (33,205) (54,884)
----------- -----------
Total 11,700,483 11,014,300
Less: treasury stock at
cost, 1,760 shares (45,973) (45,973)
----------- -----------
Total Stockholders' Equity 11,654,510 10,968,327
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $31,964,962 $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 January 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
48 Days of 48 Days of
Live Racing Live Racing
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<S> <C> <C>
REVENUES
Pari-mutuel $5,282,245 $4,643,798
Breakage 110,722 92,191
Uncashed mutuel tickets 76,089 46,088
---------- ----------
Total 5,469,056 4,782,077
Less: pari-mutuel tax 678,439 638,796
---------- ----------
Commission income 4,790,617 4,143,281
Host track fees 1,396,619 1,391,779
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Total Mutuel Income 6,187,236 5,535,060
Concessions 519,270 610,003
Admissions (net of taxes) 84,450 68,773
Parking 7,947 7,210
Video poker 271,341 290,766
Programs and forms 400,406 410,255
Miscellaneous 215,745 211,002
---------- ----------
Total Operating Revenues 7,686,395 7,133,069
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RACING EXPENSES
Purses 2,031,895 1,969,408
Salaries and related taxes
and benefits 1,549,107 1,594,579
Contracts and services 635,387 747,337
Host track fees 373,581 190,665
Depreciation 533,806 497,484
Cost of sales - concessions 185,091 286,676
Utilities 158,974 126,973
Repairs and maintenance 98,949 107,725
Program paper, forms and other
supplies 400,037 349,097
Advertising and promotion 290,560 225,311
Rent 79,098 62,700
Miscellaneous 116,015 101,147
---------- ----------
Total Racing Expenses 6,452,500 6,259,102
---------- ----------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
48 Days of 48 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 324,939 $ 338,571
Insurance 263,656 222,022
Property taxes 94,059 (23,551)
Legal, audit and director fees 161,739 220,491
Contracts and services 43,658 56,088
Litigation judgment - (188,109)
Office expenses 74,315 96,048
Miscellaneous 70,057 112,912
---------- ----------
Total General and
Administrative Expenses 1,032,423 834,472
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INCOME FROM OPERATIONS 201,472 39,495
OTHER INCOME (EXPENSE)
Video poker tax relief 941,273 -
Interest expense (141,354) (52,294)
Interest income 3,113 52,098
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
INVESTMENTS 1,004,504 39,299
PROVISION FOR INCOME TAXES 340,000 -
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INVESTMENTS 664,504 39,299
Charge for Cumulative Effect of
Change in Accounting for
Investments - 104,000
---------- ----------
NET INCOME 664,504 143,299
RETAINED EARNINGS,
BEGINNING OF PERIOD 7,601,742 8,113,858
---------- ----------
RETAINED EARNINGS, END OF PERIOD $8,266,246 $8,257,157
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
========== ==========
</TABLE>
(Continued)
-4-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
48 Days of 48 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
PER SHARE OF COMMON STOCK:
Income before cumulative
effect of change in accounting
for investments $1.41 $0.08
Charge for cumulative effect of
change in accounting for
investments .- 0.22
----- -----
Net Income $1.41 $0.30
===== =====
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 664,504 $ 39,299
----------- -----------
Adjustments to reconcile
net income to net
cash used for operating
activities:
Depreciation 533,806 497,484
Deferred income taxes 340,000 -
Unrealized loss on
marketable equity
securities - 2,025
Change in assets and
liabilities:
(Increase) decrease in:
Accounts receivable (1,085,893) (696,754)
Accounts receivable -
insurance proceeds - 487,341
Inventory (28,010) (22,628)
Prepaid expenses (136,470) (193,171)
Restricted cash 106,708 -
Increase (decrease) in:
Accounts payable and
accrued liabilities 44,185 238,494
Construction contracts
payable (3,859,293) (1,345,306)
Deferred revenues 104,761 (55,500)
Deferred purses (1,788,710) (2,011,395)
----------- -----------
Total adjustments (5,768,916) (3,099,410)
----------- -----------
Net cash used for
operating activities (5,104,412) (3,060,111)
----------- -----------
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
CASH FLOWS USED FOR
INVESTING ACTIVITIES
Capital expenditures (639,290) (2,667,723)
Deposits 7,830 (1,000)
----------- -----------
Net cash used for
investing activities (631,460) (2,668,723)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from third party 1,000,000 1,000,000
Repayments to third party (166,667) (356,777)
Proceeds from short-term
borrowings 6,735,000 -
Principal repayments on
short-term borrowings (2,085,151) -
----------- -----------
Net cash provided by
financing activities 5,483,182 643,223
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (252,690) (5,085,611)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,118,590 8,039,310
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 865,900 $ 2,953,699
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 156,217 $ 52,294
=========== ===========
Non-Cash Activity:
Unrealized loss on securities -
available for sale $ 21,679 $ -
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 11
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 1 - SUMMARY OF NEW 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 District
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 that, in the
event the court determines that the amount of coverage is less than that
claimed by the Company, then the insurance agent and the insurance broker
who arranged for the insurance are liable to the Company for any damages.
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. Travelers filed a separate action in
June 1994 in the U.S. District Court for the Eastern District of
Louisiana, asking for a declaratory judgment that the policy did not
provide blanket coverage. The federal court action has now been dismissed
and the state court action is proceeding.
-8-
<PAGE> 12
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 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.
3. The Company is a defendant, along with its general liability insurance
carrier, United National Insurance Company, 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, the insurer for
AutoTote. The complaint alleges that such insurance company is subrogated
to the rights of AutoTote to collect damages, and that it has paid
AutoTote in excess of $1 million for the loss of totalisator equipment at
the Fair Grounds Race Course which was destroyed in the fire.
Subsequently, United National Insurance Company has filed suit against the
Company seeking to deny coverage for such subrogation claim.
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 was opened 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 $25.3 million at the time construction commenced.
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (Continued)
As of January 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of approximately
$15.7 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. Accordingly, final action on the full
$17.5 million loan has been delayed until after the 1996 Louisiana regular
legislative session.
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 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
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (Continued)
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 Legislation 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 uncertainty regarding the
future of video poker as a continuing source of revenue. The Company is
hopeful that the 1996 Louisiana regular legislative session will adjourn
without having passed any statute that would adversely affect the status of the
video poker tax relief previously granted to the Company 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. No assurance can be given, however, that such legislation will not
be adopted. If adopted, such legislation will adversely affect the ability of
the Company to obtain long-term financing from FNBC in accordance with the
terms of the original commitment.
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (Continued)
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
subordinated 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 three months ended January 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. 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. It should also be noted that
FNBC and the Company are not currently engaged in any discussions concerning
the terms and conditions of the definitive agreements relating to such
long-term financing, given the uncertain legislative climate. Accordingly,
there can be no assurance that definitive agreements will be reached, or, if
reached, that they will be in accordance
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 3 - CONTINGENCIES - GOING CONCERN (Continued)
with the terms of the original commitment. The foregoing uncertainties raise
substantial doubt about the Company's ability to continue as a going concern in
the event that such long-term financing is not completed by October 31, 1996,
or that the funds provided through all sources of such financing are
insufficient, to meet the Company's needs, the Company may consider a number of
alternatives, including seeking protection from creditors under the United
States Bankruptcy Code.
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
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
-13-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 4 - NOTES PAYABLE (Continued)
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 (not
including proceeds payable to any third party), 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, constituting all 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.
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
-14-
<PAGE> 18
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended January 31, 1996 and 1995
(Unaudited)
NOTE 4 - NOTES PAYABLE (Continued)
ceases if and when the 1996 regular session of the Louisiana Legislature
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; of 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 Louie J.
Roussel, III and agreed to pay the remaining $1,000,000 in principal on October
31, 1996.
In January 1996, the Company received an advance of $1,000,000 from VSI, which
the Company plans to repay in six equal monthly installments beginning in
February 1996. The unearned portion of this advance is recorded as deferred
revenue at January 31, 1996.
-15-
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of the Three Months Ended January 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 1993-94,
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 January 31, 1996 and 1995, the Company
derived its pari-mutuel income and other operating revenues by conducting live
racing meets of 48 days, and in the operation of tele-tracks for off-track
wagering. For the quarters ended January 31, 1996 and 1995, the Company also
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 net income for the quarter ended January 31, 1996 was $664,504
compared to net income of $143,299 for the quarter ended January 31, 1995. The
significant difference in net income for the two quarters is the direct result
of the Company's recognition during the current fiscal quarter of the video
poker tax relief 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, offset by the current period provision for income taxes.
-16-
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
For the quarter ended January 31, 1996, the Company experienced a $553,326 or
7.8% increase in operating revenues from the comparable quarter in fiscal 1995.
The increase in operating revenues is primarily the result of an increase in
commission income of $647,336 offset by a decrease of $90,733 in concessions
income. The increase in commission income is due to an increase in total
off-track wagering of $5,636,809 partially offset by a decline in on-track
wagering of $1,972,649.
Comparative pari-mutuel wagering and attendance figures for the quarters ended
January 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
For the quarter ended January 31,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
PARI-MUTUEL WAGERING
On-track $11,333,541 $13,306,190
Off-track In-state 5,066,620 6,504,649
Off-track Out-of-state 10,802,968 3,728,130
----------- -----------
$27,203,129 $23,538,969
=========== ===========
Out-of-state wagering on
the Company's live races $59,470,031 $46,850,914
=========== ===========
Total on-track attendance 98,219 134,471
=========== ===========
</TABLE>
The significant increase in total off-track wagering is attributable to the
November 1995 opening of a tele-track facility in Jefferson Parish, Louisiana.
Effective December 1995, unlimited out-of-state races can now be simulcast at
the off-track facilities. As a result, off-track out-of-state wagering has
increased, but has been partially offset by a decrease in the off-track
in-state wagering. The decrease in on-track wagering is attributable to the
decrease in total on-track attendance, due to the continued limited amenities
provided by the temporary facilities, and the increase in off-track wagering as
discussed previously.
Video poker revenue declined by $19,425 or 6.7% as a result of continued
decreases in on-track attendance, partially offset by the revenue earned at the
new Jefferson Parish facility.
Race Related Expenses. For the quarter ended January 31, 1996, the Company
experienced an increase in racing expenses of $193,398 or 3.1% from the quarter
ended January 31, 1995. The increase in race related expenses is primarily the
result of increases in purses and host track fees offset by declines in
salaries and related taxes and benefits and contracts and services.
-17-
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
Purse expense for the quarter ended January 31, 1996 increased $62,487 or 3.2%
from the fiscal 1995 quarter as a result of an increase in purse supplements
provided by the increase in out-of-state handle. In addition, host track fees
for the quarter ended January 31, 1996 increased $182,916 or 96% from the
fiscal 1995 quarter as a result of the removal of the limits of out-of-state
simulcasting.
Salaries and related taxes and benefits declined $45,472 or 3% due to a
reduction in the number of employees and various salary adjustments. Contracts
and services declined $111,950 or 15% due to the decrease in various services
relating to the temporary racing facilities.
General and Administrative Expenses. General and administrative expenses for
the quarter ended January 31, 1996 increased $197,951 or 24% from the previous
comparative quarter primarily due to the Company's recognition in the fiscal
1995 quarter of a favorable litigation settlement in the amount of $188,109, an
increase in property tax expense in the current fiscal year quarter of $117,610
or 499%, partially offset by a decrease in legal, audit and director fees in
the current fiscal year quarter of $58,752 or 27%, and a decrease in office
expense and miscellaneous expense in the current fiscal year quarter of $21,733
and $42,855, respectively.
During the quarter ended January 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 quarter ended January 31, 1996, property taxes of $94,059 are based
upon the pro-rata portion of the current tax assessment. In the prior fiscal
quarter, the credit in property taxes was the result of a partial reversal in
the fiscal 1995 quarter 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 fiscal quarter ended January 31, 1995.
-18-
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
Legal, audit and director fees in the first quarter of fiscal 1996 declined
$58,752 or 27% from the previous comparable quarter primarily due to a decrease
in legal fees relating to the Company's fire insurance litigation with the
Company's insurance carrier.
Other Income (Expense). For the quarter ended January 31, 1996, other income
(expense) was $803,032, an increase of net income of $803,228 primarily due to
the increase of $941,273 related to the video poker tax relief received in the
current quarter, an increase in interest expense of $89,060 related to the
interim financing, offset by a decrease in interest income of $48,985.
Liquidity and Capital Resources
Cash Flows. Cash and cash equivalents decreased $252,690 during the quarter
ended January 31, 1996 compared to a decrease of $5,085,611 during the previous
fiscal quarter. The decrease in cash and cash equivalents in the first quarter
of fiscal 1996 was the result of cash used for operating activities of
$5,104,412, and cash used for investing activities of $631,460, partially
offset by cash provided by financing activities of $5,483,182. The cash used
for operating activities was primarily the result of cash used to pay purses
during the live racing season. The cash used for investing activities was due
to capital expenditures. Cash provided from financial activities was the
result of $6,735,000 short term interim construction loan from FNBC, and a $1
million advance received by the Company from Video Services, Inc. (VSI)
according to the terms of the Company's agreement with VSI.
As of January 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 approximate $14.8
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.
-19-
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
During the summer of 1994, the Company approved the plans for a new racing
facility and commenced construction of the foundation 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 above.
As of January 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of approximately
$15.2 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
currently anticipates that it will continue to utilize the temporary tent
facilities and the tele-track facility at least during the remainder of the
current racing season and possibly 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 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 of such source of repayment. Accordingly, final action on the full
$17.5 million loan has been delayed until after the 1996 Louisiana legislative
session.
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 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.
-20-
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
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.
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.
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.
There is considerable uncertainty in Louisiana at the present time regarding
the future of the gaming industry. The cessation of construction and
subsequent bankruptcy of the land-based casino in New Orleans in November 1995
has adversely affected tax revenues for both the State of Louisiana and the
City of New Orleans. Notwithstanding that loss of revenue, consideration is
being given by the Governor of Louisiana, who was elected in November 1995, and
other state officials to legislation which could curtail the use of video poker
gaming devices. In particular, the Governor has indicated that he will call a
special session of the legislature for the purpose of considering legislation
which would mandate local elections to approve or disapprove of gaming in a
particular parish or locality.
The Company believes that it was unable during 1995 to obtain the full amount
of financing originally committed by FNBC due to the uncertainty regarding the
future of video poker as a continuing source of revenue. The Company is
hopeful that the 1996 Louisiana legislature will adjourn without passing any
statute that would adversely affect the status of the video poker tax relief
previously granted to the Company or the existing video poker operations of the
Company of Finish Line, or that would allow for
-21-
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
or require local elections as a condition to the continuation of video poker
operations. No assurance can be given, however, that such legislation will not
be adopted. If adopted such legislation could adversely affect the ability of
the Company to obtain long-term financing from FNBC in accordance with the
terms of the original commitment.
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. VSI's agreement to
make such loan is conditioned upon the closing of the anticipated long-term
bank financing. The Company also has recently received an advance of $1
million from VSI.
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 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.
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. 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. It should also be noted that FNBC and
the Company are not currently engaged in any
-22-
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Comparison of the Three Months Ended January 31, 1996 and 1995
discussions concerning the terms and conditions of the definitive agreements
relating to such long-term financing, given the uncertain legislative climate.
Accordingly, there can be no assurance that definitive agreements will be
reached, or, if reached, that they will be in accordance with the terms of the
original commitment. The foregoing uncertainties raise substantial doubt about
the Company's ability to continue as a going concern. In the event that such
long-term financing is not completed by October 31, 1996, or that the funds
provided through all sources of such financing are insufficient to meet the
Company's needs, the Company may consider a number of alternatives, including
seeking protection from creditors under the United States Bankruptcy Code.
IMPACT OF INFLATION
To date, inflation has not had a material effect in the Company's operations.
-23-
<PAGE> 27
PART II
OTHER INFORMATION
<PAGE> 28
Item 6. Exhibits and Reports on Form 8-K
Financial Data Schedule (for SEC use only).
-25-
<PAGE> 29
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: April 3, 1996 By: /s/ Bryan G. Krantz
--------------------- -------------------------------------
Bryan G. Krantz
President
Date: April 3, 1996 By: /s/ Gordon M. Robertson
--------------------- -------------------------------------
Gordon M. Robertson
Chief Financial Officer
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 866
<SECURITIES> 480
<RECEIVABLES> 1,528
<ALLOWANCES> 0
<INVENTORY> 109
<CURRENT-ASSETS> 4,368
<PP&E> 38,452
<DEPRECIATION> 14,205
<TOTAL-ASSETS> 31,965
<CURRENT-LIABILITIES> 15,950
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 11,655
<TOTAL-LIABILITY-AND-EQUITY> 31,965
<SALES> 6,187
<TOTAL-REVENUES> 7,686
<CGS> 0
<TOTAL-COSTS> 6,453
<OTHER-EXPENSES> 1,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 1,005
<INCOME-TAX> 340
<INCOME-CONTINUING> 665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
</TABLE>
