<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 April 30, 1997 Commission File Number O-7607
-------------- ------
FAIR GROUNDS CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-0361770
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1751 Gentilly Blvd., New Orleans, LA 70119
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(Address of principal executive offices) (Zip Code)
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 June 6, 1997.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, April 30, 1997 (Unaudited)
and Balance Sheet, October 31, 1996 . . . . . . . . . . . . . . . . . 1
Statements of Operations and Retained
Earnings for the Three Months Ended
April 30, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . . . . . 3
Statements of Operations and Retained
Earnings for the Six Months Ended
April 30, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . . . . . 6
Statements of Cash Flows for the Six
Months Ended April 30, 1997 and 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Notes to Financial Statements for the Six
Months Ended April 30, 1997 (Unaudited) . . . . . . . . . . . . . . . 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 440,443 $ 6,264,934
Cash and cash equivalents
- restricted 6,167,402 133,929
Accounts receivable 1,326,829 866,816
Mutuel settlements 383,471 82,535
Securities-available for sale 189,624 188,125
Inventory 97,391 84,248
Deferred income taxes 310,940 310,940
Prepaid expenses 465,010 425,983
---------- ------------
Total Current Assets 9,381,110 8,357,510
----------- ------------
OTHER ASSETS 126,684 101,684
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 13,820,963 13,820,927
Construction in progress 16,492,504 15,841,736
Land improvements 4,270,535 4,270,535
Temporary facilities 2,686,044 2,686,044
Automotive equipment 821,220 824,720
Machinery and equipment 935,839 891,630
Furniture and fixtures 182,936 171,631
----------- ------------
Total 39,210,041 38,507,223
Less: accumulated depreciation
and amortization (16,233,734) (15,461,101)
------------ ------------
Depreciable property - net 22,976,307 23,046,122
Land 3,286,281 3,286,281
------------ ------------
Property - net 26,262,588 26,332,403
------------ ------------
TOTAL ASSETS $ 35,770,382 $ 34,791,597
============ ============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 632,880 $ 9,952,223
Accounts payable 960,345 651,621
Accrued liabilities:
Deferred purses 1,398,118 6,693,055
Host track fees 326,061 342,153
Uncashed mutuel tickets 568,663 332,016
Other 283,478 348,258
Deferred revenue 333,332 6,000
Income taxes payable - 50,000
---------- ------------
Total Current Liabilities 4,502,877 18,375,326
---------- ------------
LONG TERM DEBT 2,836,105 -
DEFERRED INCOME TAXES 8,610,355 4,525,687
---------- ----------
Total Liabilities 15,949,337 22,901,013
---------- -----------
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 1,936,702
Retained earnings 16,410,503 8,481,440
Unrealized loss on securities
available for sale (15,727) (17,125)
------------ ------------
Total 19,856,570 11,926,109
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ -----------
Total Stockholders' Equity 19,821,045 11,890,584
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 35,770,382 $ 34,791,597
============ ============
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 6
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Three Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
41 Days of 40 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 6,301,649 $ 5,721,991
Breakage 142,724 127,169
Uncashed mutuel tickets - 21,031
------------ ------------
Total 6,444,373 5,870,191
Less: pari-mutuel tax 814,184 752,487
------------ ------------
Commission income 5,630,189 5,117,704
Host track fees 1,534,413 1,256,436
------------ ------------
Total Mutuel Income 7,164,602 6,374,140
Concessions 484,204 469,426
Video poker (net) 351,267 308,531
Admissions (net of taxes) 71,101 102,787
Programs and forms 463,925 404,926
Miscellaneous 109,130 258,649
Parking 10,172 7,020
------------ ------------
Total Operating Revenues 8,654,401 7,925,479
------------ ------------
RACING EXPENSES
Purses 2,357,557 2,174,764
Salaries and related taxes
and benefits 1,612,486 1,472,185
Contracts and services 763,723 705,462
Host track fees 606,553 533,485
Depreciation 314,414 550,914
Cost of sales - concessions 196,813 173,770
Utilities 211,478 229,742
Repairs and maintenance 87,143 73,561
Program paper, forms and other
supplies 449,819 440,090
Advertising and promotion 328,835 272,211
Rent 81,157 79,548
Miscellaneous 229,453 296,702
------------ -------------
Total Racing Expenses $ 7,239,431 $ 7,002,434
------------ ------------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
41 Days of 40 days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 225,723 $ 273,100
Insurance 230,890 322,526
Property taxes 99,156 98,664
Legal, audit and director fees 259,375 205,739
Loan closing costs - 57,376
Contract services 43,430 29,021
Office expenses 103,279 111,835
Miscellaneous 76,308 22,564
----------- ----------
Total General and
Administrative Expenses 1,038,161 1,120,825
----------- ----------
INCOME (LOSS) FROM OPERATIONS 376,809 (197,780)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 172,316 660,098
Loss on sale of equity investments - (36,364)
Interest expense (153,253) (246,966)
Interest income 25,156 6,044
Video poker tax relief 6,412 344,137
------------ ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 427,440 529,169
Provision for income taxes 145,327 180,000
------------ -----------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1997 $.60,
1996 - $.74) $ 282,113 $ 349,169
Extraordinary item - gain from
fire (net of taxes) 6,600,000 -
------------ -----------
NET INCOME (per share - 1997 $14.65,
1996 - $.74) $ 6,882,113 $ 349,169
RETAINED EARNINGS, BEGINNING OF
PERIOD 9,528,390 8,266,246
------------ -----------
RETAINED EARNINGS, END OF
PERIOD $ 16,410,503 $ 8,615,415
============ ===========
CASH DIVIDENDS PER SHARE $ NONE $ NONE
============ ===========
</TABLE>
-4-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
41 Days of 40 days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
========== =======
NET INCOME PER SHARE $ 20.28 $ .74
========== =======
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
88 Days of 88 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 12,241,720 $ 11,004,236
Breakage 263,111 237,891
Uncashed mutuel tickets 87,046 97,120
------------ ------------
Total 12,591,877 11,339,247
Less: pari-mutuel tax 1,567,747 1,430,926
------------ ------------
Commission income 11,024,130 9,908,321
Host track fees 3,280,599 2,653,055
------------ ------------
Total Mutuel Income 14,304,729 12,561,376
Concessions 987,000 988,696
Video poker (net) 680,127 579,872
Admissions (net of taxes) 147,695 187,237
Parking 20,581 14,967
Programs and forms 879,105 805,332
Miscellaneous 203,642 474,394
------------ ------------
Total Operating Revenues 17,222,879 15,611,874
------------ ------------
RACING EXPENSES
Purses 4,617,959 4,206,659
Salaries and related taxes
and benefits 3,337,730 3,021,292
Contracts and services 1,492,160 1,340,849
Host track fees 1,111,153 907,066
Depreciation 772,634 1,084,720
Cost of sales - concessions 396,795 358,861
Utilities 375,164 388,716
Repairs and maintenance 196,485 172,510
Program paper, forms and other
supplies 930,719 840,127
Advertising and promotion 565,974 562,771
Rent 154,456 158,646
Miscellaneous 348,734 412,717
------------ ------------
Total Racing Expenses $ 14,299,963 $ 13,454,934
------------ ------------
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
88 Days of 88 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 468,970 $ 598,039
Insurance 469,047 586,182
Property taxes 201,259 192,723
Legal, audit and director fees 663,246 367,478
Loan closing fees - 57,376
Contracts and services 108,933 72,679
Office expenses 204,752 186,150
Miscellaneous 113,335 92,621
------------ ------------
Total General and
Administrative Expenses 2,229,542 2,153,248
------------ ------------
INCOME FROM OPERATIONS 693,374 3,692
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival income 172,316 660,098
Video poker tax relief 1,175,095 1,285,410
Litigation settlement 268,125 -
Interest expense (371,432) (388,320)
Interest income 76,250 9,157
Loss on sale of investments - (36,364)
------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 2,013,728 1,533,673
Provision for income taxes 684,668 520,000
------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1997 $2.83,
1996 $2.16) 1,329,060 1,013,673
Extraordinary item - gain from fire
(net of taxes) 6,600,000 -
------------ ------------
NET INCOME (per share 1997 $16.87,
1996 $2.16) $ 7,929,060 $ 1,013,673
RETAINED EARNINGS,
BEGINNING OF PERIOD 8,481,443 7,601,742
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 16,410,503 $ 8,615,415
============ ============
</TABLE>
(Continued)
-7-
<PAGE> 11
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
88 Days of 88 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
CASH DIVIDENDS PER SHARE $ None $ None
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
============ ============
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE> 12
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,929,060 $ 1,013,673
------------ -------------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (10,000,000) -
Depreciation 772,634 1,084,720
Deferred income taxes 4,084,668 520,000
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (760,949) (832,457)
Inventory (13,143) (11,529)
Prepaid expenses (39,027) (158,072)
Restricted cash - 112,767
Increase (decrease) in
Accounts payable and
accrued liabilities 414,499 1,194,461
Contracts payable - (4,614,304)
Deferred revenue (6,000) (50,149)
Loss on sale of securities - 36,363
Deferred purses (5,294,937) (4,254,618)
------------ -----------
Total adjustments (10,842,255) (6,972,819)
------------ -----------
Net cash used for
operating activities (2,913,195) (5,959,145)
------------ -----------
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES
Proceeds from litigation
settlement 10,000,000 -
Capital expenditures (702,917) (610,591)
Deposits (25,000) 2,330
Increase in restricted cash
for construction (6,033,473) -
Proceeds from sale of
investment securities - 225,420
------------ -----------
Net cash from (used for)
investing activities 3,238,610 (382,841)
------------ ------------
</TABLE>
(Continued)
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 6,778,275 $ 8,556,725
Principal repayments on loans (13,261,514) (2,215,346)
Advances from third party 1,000,000 1,000,000
Repayments to third party (666,667) (666,667)
------------ -----------
Net cash provided by (used for)
financing activities (6,149,906) 6,674,712
------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (5,824,491) 332,726
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 6,264,934 1,118,590
------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 440,443 $ 1,451,316
============ ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 371,432 $ 388,320
============ ===========
</TABLE>
(Continued)
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 1 - 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 contended that the insurance
policy provided by Travelers provides the Company with blanket coverage in
the amount of $24.2 million in excess of the $10 million of underlying
coverage. Accordingly, the Company maintained that Travelers is liable
for the difference between $24.2 million and the amount already paid
(approximately $9.5 million), plus statutory penalties of 10% of the
amount not paid, interest, attorney's fees and costs. The Company further
contended that the insurance agent and the insurance broker who arranged
for the insurance were 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 its
liability under such policy is limited to the amount which is already
paid.
Immediately prior to the start of trial in November 1996, the Company
entered into a joint settlement with the insurance agent and broker
pursuant to which the insurance agent and broker agreed to pay a total of
$10,000,000 to the Company. Such amount was placed in escrow until April
9, 1997, when the Company utilized such funds in connection with the
closing of its construction financing described herein. The settlement
agreement includes a "Mary Carter" provision whereby the insurance agent
and broker are entitled to share in any recovery that the Company may
eventually obtain from Travelers. Also prior to the start of trial, the
trial judge denied a motion for partial summary judgment filed by Travelers
on the grounds that the motion involved contested issues of fact.
Travelers had asked the trial court to find that its policy was a scheduled
policy and that it had already paid all scheduled amounts. Travelers
subsequently obtained a postponement of the trial in order to appeal
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES
the court's denial of its motion for summary judgment. The court of
appeals denied the appeal, finding no error in the trial court's ruling.
The matter has been remanded to the trial court, which has rescheduled the
case for trial in September 1997.
2. In December 1994, the Company filed an action in the Civil District Court
for the Parish of Orleans, State of Louisiana against ADT Security
Systems, the company which provided and maintained the fire alarm system
at the race track, and other defendants. The complaint sought damages,
not otherwise compensated for by insurance, that were allegedly caused by
the negligence of one or more of the defendants. The Company's three fire
insurers and a third insurance company, which insured the operator of the
video poker machines, intervened in the suit asserting subrogation claims
against the same defendants.
In late 1996, the Company and the three insurance companies entered into
settlements with certain defendants, specifically the manufacturer of a
lighting ballast and an architect. After division of the settlement
proceeds among the Company and the three insurance companies and the
payment of various litigation expenses, the Company received approximately
$268,000. The remainder of the case against ADT was tried in March 1997.
See Note 3 for the results of this litigation.
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 race
track. St. Paul alleges that it is subrogated to its insured's rights to
collect damages and that it has paid approximately $1,175,000 to its
insured for the loss of equipment in the fire.
Subsequently, United National filed a declaratory judgment action
against the Company, wherein it sought to deny coverage for St. Paul's
subrogation claim. The Company filed a counterclaim against United
National,
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
seeking coverage for the St. Paul claim as well as payment for
various other fire-related claims previously denied by United
National. This action was consolidated for trial with the suit filed
by St. Paul against the Company.
Both United National and the Company moved for summary judgment on
the question of whether the exclusion relied on by United National to
deny coverage for the various claims applied or not. In 1996, the
District Court ruled that the policy exclusions relied upon by United
National did not apply to the claim asserted by St. Paul and to
claims made by various jockeys and valets that were previously paid
by the Company. United National subsequently appealed this decision
to the United States Fifth Circuit Court of Appeals.
See Note 6 regarding the subsequent events relating to this
litigation.
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.
Other Litigation
In 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 action is without
merit. Livingston had previously filed a series of other legal actions against
the Company which were resolved in the Company's favor.
A suit was also filed in 1996 by Livingston against the Company and the State
of Louisiana seeking a judgment that the State off-track betting law is
unconstitutional. The trial court ruled in the plaintiff's favor. The case is
currently on appeal to the Louisiana Supreme Court. The Company believes it
has no monetary exposure in this suit.
A suit was filed in 1996 by the Louisiana Horsemen's Benevolent and Protective
Association ("HBPA") against the Company, the State of
-13-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Louisiana, and all other pari-mutuel wagering facilities operating in
Louisiana. The HBPA is seeking a larger portion of video poker proceeds in
accordance with the guidelines established by the Louisiana State Police Gaming
Division, which regulates compliance with the State video poker law. The
Company does not believe it will have any monetary exposure as a result of this
suit.
The Company was notified by the Department of Labor in 1996 of an alleged
underpayment of overtime wages to certain employees. There has yet to be a
determination of the amount, if any, that would be due from the Company if it
were found to owe such back wages. The Company currently believes the dispute
will be resolved in its favor.
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, 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 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, which is in
addition to the $3.2 million relating to debris removal and construction of the
tele-track facility, as described above. As previously reported, construction
of the new main facility was suspended from September 1995 until April 1997.
As of April 30, 1997, construction of the facility was approximately 62%
completed, and the Company had incurred construction costs of approximately
$16.5 million. Insurance proceeds recovered through April 30, 1997 and bank
financing provided the source of funds used in such construction. Primarily
because of increased costs due to the suspension of construction, the total
cost of the project, which includes the cost of the already completed
tele-track facility as well as the funds spent through April 1997 for
construction of the new main facility, is expected to be approximately $32
million.
-14-
<PAGE> 18
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 2 - NOTES PAYABLE
Construction Financing
As previously reported, the Company completed its construction financing with
First National Bank of Commerce ("FNBC") on April 9, 1997. The existing Loan
Agreement with FNBC was amended to increase the aggregate amount borrowed to
$13,512,291, which was comprised of (i) the balance outstanding under the Loan
Agreement as of the date of such closing and (ii) an additional $6,778,275
borrowed at the closing. At the time of the closing, the additional funds
borrowed were deposited into a restricted account and are being used for
purposes of completing the construction of the Company's new grandstand
facility. At the same time, the $10,000,000 which had been paid to the Company
in settlement of certain fire-related litigation described elsewhere herein,
and which had been held in escrow pending the closing of the Company's
financing with FNBC, was paid to FNBC. Accordingly, even though the amount of
restricted cash being held for construction purposes was approximately $6.2
million as of April 30, 1997, the principal balance outstanding under the Loan
Agreement as of such date was $3,468,985.
Interest on the revised FNBC loan, at the rate of 9% per annum, is to be paid
semi-monthly, and principal payments of $52,740 are to be made monthly. Such
payments of principal and interest are to be first satisfied out of the funds
received under the video poker franchise fee relief legislation. Any excess
franchise fees are to be applied as a prepayment of principal. In addition, as
required under the video poker franchise fee relief legislation, insurance
proceeds received by the Company must also be applied to reduce the principal
balance of the loan. The entire principal balance is to be due on June 30,
1999.
In addition to the existing security under the Loan Agreement, which includes
mortgages and security interests on substantially all of the Company's real and
personal property, fixtures, equipment, accounts and inventory, as well as a
security interest in the shares of common stock of the Company owned by Marie
and Bryan Krantz, the loan is secured by (i) liquid collateral with a market
value of $5.8 million, (ii) a security interest in the video poker franchise
fee relief monies; (iii) a pledge by the Company of all proceeds from disputed
claims arising out of the December 1993 fire; (iv) an assignment of the
Company's contract with the Jazz and Heritage Festival; (v) an assignment of
the Company's agreement with Finish Line regarding the operation of its
off-track facilities; and (vi) an agreement by the Company not to assign,
pledge or otherwise encumber its racing and off-track licenses.
-15-
<PAGE> 19
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 2 - NOTES PAYABLE (CONTINUED)
At the time of the closing of the loan, FNBC also agreed to lend up to
$5,221,725 to the Company, for use in completing construction. That loan will
also be secured by the same collateral that secures the first loan, except that
the second loan may not be repaid with funds received by the Company from the
video poker franchise fee relief legislation. The second loan provides for
monthly payments of interest, with the entire principal balance outstanding due
on October 31, 1998. As of April 30, 1997, no funds had been advanced to the
Company by FNBC under such loan.
The Company believes it now has sufficient funds to complete the construction
of the new grandstand facility. Construction resumed in April 1997 and it is
currently anticipated that the facility will be completed in the Fall of 1997.
NOTE 3 - ADT LITIGATION JUDGMENT
The Company's action against ADT was tried in March 1997. On March 26, 1997,
the jury returned a verdict in favor of the Company and its three fire
insurers, awarding them approximately $48.4 million in damages against ADT,
plus interest. On April 17, 1997, the Court entered judgment giving effect to
the jury's verdict and awarding damages to the Company of $31,847,157 plus
legal interest from December 14, 1994 and 85% of its taxable court costs, with
the $16.6 million balance of the $48.4 million verdict awarded to the Company's
insurers. Post-judgment motions to set aside the judgment or reduce the
amount of the judgment were denied by the trial court. The Company anticipates
that ADT will appeal the judgment.
NOTE 4 - ADVANCE
In January 1997, the Company received an advance of $1,000,000 from Video
Services, Inc., which the Company began to repay in six equal monthly
installments beginning in February 1997. The monthly repayment is made from
video poker earnings for the month. The outstanding balance is included in
deferred revenue at April 30, 1997.
-16-
<PAGE> 20
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Six Months Ended April 30, 1997 and 1996
(Unaudited)
NOTE 5 - EXTRAORDINARY ITEM
As described in Note 1, in November 1996, the Company settled with its
insurance agent and broker for $10,000,000 in connection with certain
litigation arising from the December 17, 1993 fire. The $10,000,000 was
recorded by the Company as an extraordinary item net of applicable deferred
taxes of $3,400,000. As a requirement of the March 1997 financing commitment,
the proceeds from this settlement were used to repay a portion of the total
outstanding debt to FNBC, as described in Note 2.
NOTE 6 - SUBSEQUENT EVENTS
In May 1997, the St. Paul Insurance Company claim discussed in Note 1 was
settled pursuant to an agreement whereby ADT agreed to pay an undisclosed sum
and United National, as the Company's insurer, agreed to pay $275,000. The
Company may be obligated to reimburse the $275,000 to United National depending
upon the outcome of the pending appeal in the declaratory judgment action.
-17-
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
GENERAL
Fire. As previously reported, on the night of Friday, December 17, 1993, a
fire swept through and destroyed the Company's grandstand and clubhouse
facilities and all their contents. In order to continue the live racing season
then in progress, within several weeks after the fire the Company installed
temporary racing and patron facilities.
The Company currently continues to use its temporary facilities, together with
a new tele-track facility which also serves as a temporary clubhouse during the
live racing season and, as a result of the limited amenities afforded by such
temporary facilities, attendance and handle continue to be less than the
pre-fire levels.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. During the quarters ended April 30, 1997 and 1996, the Company
derived its pari-mutuel income by conducting live racing meets of 41 and 40
days, respectively, and in the operation of its tele-tracks for off-track
wagering. During each quarter, the Company operated tele-tracks in New Orleans
at the Fair Grounds Race Course and on Bourbon Street, and at locations in
Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana. Through
Finish Line Management, the Company operates tele-track facilities in
Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana that were formerly
operated by Jefferson Downs.
For the quarter ended April 30, 1997, the Company reported total in-state
pari-mutuel wagering of $44,832,911 compared to $42,443,753 for the quarter
ended April 30, 1996.
Comparative pari-mutuel wagering and attendance figures for the quarters ended
April 30, 1997 and 1996 are as follows:
-18-
<PAGE> 22
<TABLE>
<CAPTION>
For the Quarter Ended April 30,
1997 1996
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 9,489,733 $ 8,847,348
Off-track handle 35,343,178 33,596,405
------------ ------------
Total in-state wagering $ 44,832,911 $ 42,443,753
============ ============
Out-of-state simulcast
handle $ 78,488,187 $ 57,120,141
============ ============
Total Attendance 141,341 123,682
============ ============
</TABLE>
The Company believes that the $642,385, or 7%, increase in on-track handle is
primarily the result of one more racing day in the current fiscal quarter
compared to the previous comparable quarter.
The $1,746,773, or 5%, increase in off-track handle is primarily the result of
full-card simulcasting which continued its positive effects on off-track
handle. Full-card simulcasting enables the Company to show an unlimited number
of races of an out-of-state meet. Prior to full-card simulcasting, such races
were limited when either the Company or another in-state race track was racing
live.
The $21,368,046, or 37%, increase in out-of-state handle is the result of
continued efforts to telecast the Company's races to new out-of-state markets.
During the quarter ended April 30, 1997, there were several new markets
telecasting the Company's races including Ohio, Oklahoma, Florida, Michigan and
New York.
As a result of the increase in total wagering, the Company's operating revenues
increased by $728,922, or 9%, from the comparable quarter in 1996. This
included increases of $579,658, or 10%, in pari-mutuel commissions, $277,977,
or 22%, in host track fees and $42,736, or 14%, in video poker revenue,
partially offset by decreases in admissions and miscellaneous revenue. The new
Jefferson Parish tele-track facility accounted for a significant portion of the
increase in video poker revenues.
Racing Expenses. Total racing expenses increased by $236,997, or 3.4%, over
the comparable quarter in 1996, primarily as a result of increases in purses,
racing salaries, contracts and services, host track fees, and program paper,
forms and other supplies arising out of increased pari-mutuel handle. This
increase was partially offset by a decreases in depreciation expense.
General and Administrative Expenses. General and administrative expenses for
the quarter ended April 30, 1997 decreased $82,664, or 1%, from the comparable
quarter in 1996. The decrease was a result
-19-
<PAGE> 23
of a decrease in administrative salaries during fiscal 1996. This decrease was
partially offset by an increase in legal fees resulting from the fire related
litigation.
Other Income (Expenses). Total other income decreased $726,949 from the
previous comparable quarter primarily as a result of a decrease in Jazz and
Heritage Festival income of $487,782 and a decrease in video poker tax relief
of $337,725. The substantial decrease in Jazz and Heritage Festival income for
1997 was directly attributable to lower attendance due to severe weather during
one weekend of the Jazz and Heritage Festival. This decreased revenue was
partially offset by a decrease in interest expense of $93,713 relating to the
bank financing discussed elsewhere herein.
As a result of the Company having received substantially all of the $2.5
million of annual franchise fee relief for fiscal 1997 by January 31, 1997, the
Company recorded only $6,412 in such franchise fee relief revenue in the
current fiscal quarter, compared to $344,137 of franchise fee relief revenue
recorded in the comparable quarter in fiscal 1996.
Extraordinary Item. During the quarter ended April 30, 1997, the Company
recorded revenue of $10,000,000, net of $3,400,000 of deferred income taxes, as
a result of a litigation settlement with one of its insurance agents and its
broker. See Note 1 of Notes to Financial Statements.
Net Income. For the quarter ended April 30, 1997, the Company reported net
income before income taxes and extraordinary item of $427,440 compared to net
income before income taxes and extraordinary item of $529,169 in the quarter
ended April 30, 1996. The Company reported net income of $6,882,113 in the
quarter ended April 30, 1997 compared to net income of $349,169 in the previous
comparable quarter. In addition to the components of net income previously
discussed, the net income for the quarter ended April 30, 1997 included income
tax expense of $145,327 compared to income tax expense of $180,000 in the
previous comparable quarter.
-20-
<PAGE> 24
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. During the six months ended April 30, 1997 and 1996, the Company
derived its pari-mutuel income by conducting live racing meets of 88 days,
respectively, and in the operation of its tele-tracks for off-track wagering.
During each six month period, the Company operated tele-tracks in New Orleans
at the Fair Grounds Race Course and on Bourbon Street, and at locations in
Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana. Through
Finish Line Management, the Company operates tele-track facilities in
Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana that were formerly
operated by Jefferson Downs.
For the six months ended April 30, 1997, the Company reported total in-state
pari-mutuel wagering of $90,371,291 compared to $86,445,679 for the six months
ended April 1996.
Comparative pari-mutuel wagering and attendance figures for the six months
ended April 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended April 30, 1997
1997 1996
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 20,200,754 $ 20,180,889
Off-track handle 70,170,537 $ 66,264,790
------------- ------------
Total in-state wagering $ 90,371,291 $ 86,445,679
============= ============
Out-of-state simulcast
handle $ 165,823,806 $116,590,172
============= ============
Total Attendance 282,268 253,174
============= ============
</TABLE>
As noted in the above table, the on-track handle is consistent with prior year.
The $3,905,747 increase in off-track handle is primarily due to full card
simulcasting which began in January 1996. The $49,233,634, or 42%, increase in
out-of-state handle is the result of continued efforts to telecast the
Company's races to new out-of-state markets. During the six months ended April
30, 1997, there were several new markets telecasting the Company's races
including Ohio, Oklahoma, Florida, Michigan and New York.
As a result of the increase in total wagering, the Company's operating revenues
increased by $1,611,005, or 10%, from the comparable six months in 1996. This
included increases of $1,237,484, or 11%, in pari-mutuel commissions, $627,544,
or 24%,
-21-
<PAGE> 25
in host track fees and $100,255, or 17%, in video poker revenue, partially
offset by decreases in admissions and miscellaneous revenue. The new Jefferson
Parish tele-track facility accounted for a significant portion of the increase
in video poker revenues.
Racing Expenses. Total racing expenses increased by $845,029, or 6%, over the
comparable six months in 1996, primarily as a result of increases in purses,
racing salaries, contracts and services, host track fees, and program paper,
forms and other supplies, arising out of increased pari-mutuel handle. This
increase was partially offset by a decrease in depreciation expense. The
temporary racing facilities, build after the December 17, 1993 fire, became
fully depreciated in January 1997.
General and Administrative Expenses. General and administrative expenses for
the six months ended April 30, 1997 increased $76,294, or 4%, from the previous
comparable six months. The increase was a result of an increase in legal,
audit and director fees resulting from the fire related litigation partially
offset by decreases in office salaries and insurance costs.
Other Income (Expenses). Total other income decreased $209,627 from the
previous comparable six months primarily as a result of a decrease in Jazz and
Heritage Festival income of $487,782. This decreased revenue was partially
offset by a fire litigation settlement of $268,125 during the six months ended
April 30, 1997.
Extraordinary Item. During the six months ended April 30, 1997, the Company
recorded revenue of $10,000,000, net of $3,400,000 of deferred income taxes as
a result of a litigation settlement with one of its insurance agents and
broker.
Net Income. For the six months ended April 30, 1997, the Company reported net
income before income taxes and extraordinary item of $2,013,728 compared to net
income before income taxes and extraordinary item of $1,533,673 for the six
months ended April 30, 1996. The Company reported net income of $7,929,060 for
the six months ended April 30, 1997 compared to net income of $1,013,673 for
the previous comparable six months. In addition to the components of net
income previously discussed, the net income for the six months ended April 30,
1997 included income tax expense of $684,668 compared to income tax expense of
$520,000 in the previous comparable period.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents decreased $5,824,491 during the six months ended
April 30, 1997 compared to an increase of $332,726 during the six months ended
April 30, 1996. The decrease in cash
-22-
<PAGE> 26
and cash equivalents in the current period was the result of cash used for
financing of $6,149,906, cash used for operations of $2,913,195, and cash
provided by investing activities of $3,238,610. Financing activities included
cash used to pay a portion of the Company's debts to FNBC and Marie G. Krantz.
The most significant investing activities were the litigation settlement of
$10,000,000 which, as described below, was paid to FNBC in connection with the
construction financing closed on April 9, 1997, and the approximately
$6,000,000 of restricted cash set aside by the Company and FNBC for
construction purposes.
As of April 30, 1997, the Company had received approximately $29.5 million in
insurance proceeds resulting from fire loss claims submitted to the Company's
insurance carriers, including the $10 million settlement proceeds described
below. On November 18, 1996, the Company reached an out-of-court settlement
with the insurance agent and insurance broker in certain pending litigation
described herein. The settlement provided that the settling defendants were to
pay the Company $10,000,000 in the aggregate. In addition, each such settling
defendant is to share with the Company, in accordance with an agreed-upon
formula, in any settlement with or award of damages against Travelers. The
settlement funds were deposited into an escrow account pending resolution of
certain issues, and were paid out in connection with the April 1997 financing.
The Company's 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 of the
facility 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 a result
of the cessation of construction, the Company now believes that total
construction costs, including costs already incurred, may be approximately $32
million in the aggregate. The construction of the new facility is progressing
and the temporary tent facilities are being removed.
Financing for New Facility
On April 9, 1997, the Company's existing Loan Agreement with FNBC was amended
to increase the aggregate amount borrowed to $13,512,291, which was comprised
of (i) the balance outstanding under the Loan Agreement as of the date of such
closing and (ii) an additional $6,778,275 borrowed at the closing. At the time
of the closing, the additional funds borrowed were deposited in a
-23-
<PAGE> 27
restricted account and are being used for purposes of completing the
construction of the Company's new grandstand facility. At the same time, the
$10,000,000 which had been paid to the Company in settlement of certain
fire-related litigation described elsewhere herein, and which had been held in
escrow pending the closing of the Company's financing with FNBC, was paid to
FNBC. Accordingly, even though the amount of restricted cash being held for
construction purposes was approximately $6.2 million as of April 30, 1997, the
principal balance outstanding under the Loan Agreement as of such date was
$3,468,985.
Interest on the revised FNBC loan, at the rate of 9% per annum, is to be paid
semi-monthly, and principal payments of $52,740 are to be made monthly. Such
payments of principal and interest are to be first made out of the funds
received under the video poker franchise fee relief legislation. Any excess
franchise fee relief monies are to be applied as a prepayment of principal. In
addition, as required under the video poker franchise fee relief legislation,
insurance proceeds received by the Company must also be applied to reduce the
principal balance of the loan. The entire principal balance is due on June 30,
1999.
In addition to the existing security under the Loan Agreement, which includes
mortgages and security interests on substantially all of the Company's real and
personal property, fixtures, equipment, accounts and inventory, as well as a
security interest in the shares of common stock of the Company owned by Marie
and Bryan Krantz, the loan is secured by (i) liquid collateral with a market
value of $5.8 million; (ii) a security interest in the video poker franchise
fee relief monies; (iii) a pledge by the Company of all proceeds from disputed
claims arising out of the December 1993 fire; (iv) an assignment of the
Company's contract with the Jazz and Heritage Festival; (v) an assignment of
the Company's agreement with Finish Line regarding the operation of off-track
facilities; and (vi) an agreement by the Company not to assign, pledge or
otherwise encumber its racing and off-track licenses.
At the time of the closing of the loan, FNBC also agreed to lend up to
$5,221,725 to the Company, for use in completing construction. That loan will
also be secured by the same collateral that secures the first loan, except that
the second loan provides for monthly payments of interest, with the entire
principal balance outstanding due on October 31, 1998. As of April 30, 1997,
no funds had been advanced to the Company by FNBC under such loan.
The Company believes that, apart from the restricted cash which is committed to
the construction of the facility, its existing cash and cash from operations
will be adequate to fund operations for the next twelve (12) months. The
Company believes that with its current financing, it will have sufficient funds
to complete the construction of the new grandstand facility. Construction has
-24-
<PAGE> 28
commenced and is expected to be completed in the Fall of 1997. For the longer
term, it is difficult to determine what effect the anticipated change from the
temporary tent facilities to the new permanent facility will have on both
operating income and expenses. While the Company believes that the completion
of the new facility will have a positive effect on attendance and wagering,
there can be no assurance of any increases in patronage or handle.
Other Financing
In January 1997, the Company received an advance of $1,000,000 from VSI, which
the Company has begun to repay in six equal monthly payments beginning in
February 1997.
Impact of Inflation
To date, inflation has not had a material effect in the Company's operations.
-25-
<PAGE> 29
PART II
OTHER INFORMATION
<PAGE> 30
Item 1. Legal Proceedings.
For a description of material developments during the three months ended April
30, 1997 in legal proceedings to which the Company is a party, see Note 1,
"Commitments and Contingencies," in the Notes to Financial Statements which are
set forth in Part I of this Form 10-Q and incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K.
Exhibit 27 - Financial Data Schedule - (for SEC use only).
-27-
<PAGE> 31
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: July 2, 1997 By: /s/ Bryan G. Krantz
-------------------
Bryan G. Krantz
President
Date: July 2, 1997 By: /s/ Gordon M. Robertson
----------------------------
Gordon M. Robertson
Chief Financial Officer
-28-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 440
<SECURITIES> 190
<RECEIVABLES> 1,327
<ALLOWANCES> 0
<INVENTORY> 97
<CURRENT-ASSETS> 9,381
<PP&E> 39,210
<DEPRECIATION> 16,234
<TOTAL-ASSETS> 35,770
<CURRENT-LIABILITIES> 4,503
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 19,821
<TOTAL-LIABILITY-AND-EQUITY> 35,770
<SALES> 12,592
<TOTAL-REVENUES> 17,223
<CGS> 0
<TOTAL-COSTS> 14,300
<OTHER-EXPENSES> 2,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371
<INCOME-PRETAX> 2,014
<INCOME-TAX> 685
<INCOME-CONTINUING> 1,329
<DISCONTINUED> 0
<EXTRAORDINARY> 6,600
<CHANGES> 0
<NET-INCOME> 7,929
<EPS-PRIMARY> 16.87
<EPS-DILUTED> 16.87
</TABLE>
