<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, 1998 Commission File Number O-7607
---------------- ------
FAIR GROUNDS CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-0361770
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1751 Gentilly Blvd., New Orleans, LA 70119
- -------------------------------------------------------------------------------
(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 March 1, 1998.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Balance Sheet, January 31, 1998 (Unaudited)
and Balance Sheet, October 31, 1997 ......................................... 1
Statements of Operations and Retained
Earnings for the Three Months Ended
January 31, 1998 and 1997 (Unaudited) ....................................... 3
Statements of Cash Flows for the Three
Months Ended January 31, 1998 and 1997
(Unaudited) ................................................................. 6
Notes to Financial Statements for the Three
Months Ended January 31, 1998 (Unaudited).................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................ 20
SIGNATURES ............................................................................ 21
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,848,597 $ 5,192,756
Cash and cash equivalents
- restricted 3,681 2,643,702
Accounts receivable 3,369,459 1,348,530
Mutuel settlements 888,459 38,892
Investment Securities
- available for sale 95,128 592,878
Inventory 199,886 95,303
Prepaid expenses 1,381,479 353,167
------------ ------------
Total Current Assets 12,786,689 10,265,228
------------ ------------
OTHER ASSETS 123,012 125,516
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 41,868,309 40,587,514
Land improvements 4,340,935 4,340,935
Automotive equipment 863,701 849,201
Machinery and equipment 2,336,143 2,365,837
Furniture and fixtures 326,898 326,898
------------ ------------
Total 49,735,986 48,470,385
Less: accumulated depreciation
and amortization (14,568,000) (14,057,590)
------------ ------------
Depreciable property - net 35,167,986 34,412,795
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 38,454,267 37,699,076
------------ ------------
TOTAL ASSETS $ 51,363,968 $ 48,089,820
============ ============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1998 1997
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 987,799 $ 5,318,903
Accounts payable 1,770,972 1,097,655
Construction contract payable -- 1,156,726
Accrued liabilities:
Deferred purses 6,112,262 7,425,179
Host track fees 519,318 416,516
Uncashed mutuel tickets 484,368 364,246
Deferred income taxes 204,906 204,906
Other 306,938 319,944
Deferred revenues 868,543 140,840
Income taxes payable 121,000 121,000
Total Current Liabilities 11,376,106 16,565,915
------------ ------------
DEFERRED INCOME TAXES 13,008,436 9,846,104
------------ ------------
Total Liabilities 24,384,542 26,412,019
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY
Capital stock - no par value;
authorized 600,000 shares,
469,940 shares issued and
468,580 shares outstanding 1,525,092 1,525,092
Additional paid-in-capital 1,936,702 1,936,702
Retained earnings 23,554,029 18,254,654
Unrealized loss on investment
securities - available for sale (872) (3,122)
------------ ------------
Total 27,014,951 21,713,326
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 26,979,426 21,677,801
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 51,363,968 $ 48,089,820
============ ============
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
46 Days of 47 Days of
Live Racing Live Racing
----------- ------------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 6,809,274 $ 5,940,071
Breakage 142,005 120,387
Uncashed mutuel tickets 70,948 87,046
------------ ------------
Total 7,022,227 6,147,504
Less: pari-mutuel tax 888,660 753,563
------------ ------------
Commission income 6,133,567 5,393,941
Host track fees 2,100,529 1,746,186
------------ ------------
Total Mutuel Income 8,234,096 7,140,127
Concessions 824,618 502,796
Video poker (net) 402,701 328,860
Admissions (net of taxes) 447,122 76,594
Programs and forms 461,550 415,180
Miscellaneous 148,245 94,512
Parking 23,370 10,409
------------ ------------
Total Operating Revenues 10,541,702 8,568,478
------------ ------------
RACING EXPENSES
Purses 2,655,941 2,260,402
Salaries and related taxes
and benefits 2,325,050 1,753,970
Contracts and services 735,836 728,437
Host track fees 599,097 504,600
Depreciation 510,410 458,220
Cost of sales - concessions 265,724 199,982
Utilities 255,654 163,686
Repairs and maintenance 214,875 109,342
Program paper, forms and other
supplies 580,453 480,900
Advertising and promotion 337,268 237,139
Rent 96,456 73,299
Miscellaneous 133,091 90,555
------------ ------------
Total Racing Expenses 8,709,855 7,060,532
------------ ------------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
46 Days of 47 days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 281,400 $ 243,247
Insurance 219,118 238,157
Property taxes 142,216 102,103
Legal, audit and director fees 187,675 403,871
Contract services 91,214 65,503
Office expenses 142,378 101,473
Loan closing fees 24,042 -
Miscellaneous 86,111 37,027
------------ ------------
Total General and
Administrative Expenses 1,174,154 1,191,381
------------ ------------
INCOME FROM OPERATIONS 657,693 316,565
OTHER INCOME (EXPENSE)
Interest expense 3,024 (218,179)
Interest income 50,989 24,539
Litigation settlement - 268,125
Video poker tax relief - 1,195,238
------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES 711,706 1,586,288
Provision for income taxes 263,331 539,338
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 448,375 1,046,950
EXTRAORDINARY ITEM - GAIN FROM FIRE
(NET OF $2,849,000 OF RELATED
DEFERRED INCOME TAXES IN 1998) 4,851,000 -
------------ ------------
NET INCOME $ 5,299,375 $ 1,046,950
RETAINED EARNINGS, BEGINNING OF
PERIOD 18,254,654 8,481,440
------------ ------------
RETAINED EARNINGS, END OF
PERIOD $ 23,554,029 $ 9,528,390
============ ============
</TABLE>
-4-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
46 Days of 47 days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
CASH DIVIDENDS PER SHARE $ - $ -
============ ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING $ 468,580 $ 468,580
============ ===========
NET INCOME PER SHARE $ 11.31 $ 2.23
============ ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,299,375 $ 1,046,950
------------ ------------
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation 510,410 458,220
Deferred income taxes 3,162,332 520,001
Gain from fire (7,700,000) -
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,870,496) (2,735,080)
Inventory (104,583) (28,222)
Refundable income taxes
Accounts receivable
- insurance proceeds
Prepaid expenses (1,028,312) (152,619)
Restricted cash 2,640,021 5,830
Increase (decrease) in
Accounts payable and
accrued liabilities 883,236 688,912
Contracts payable (1,156,726) -
Deferred revenue 727,703 829,733
Deferred purses (1,312,917) (1,402,409)
------------ ------------
Total adjustments (6,249,332) (1,815,634)
------------ ------------
Net cash used for
operating activities (949,957) (768,684)
------------ ------------
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES
Capital expenditures (1,265,601) (64,812)
Deposits 2,504 (20,000)
Proceeds from maturity of
securities-available for sale 500,000 -
Purchase of investment
securities - (3,681)
Proceeds from fire litigation
settlements 7,700,000 -
------------ ------------
Net cash provided by (used for)
investing activities 6,936,903 (88,493)
------------ ------------
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Three Months Ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 2,133,740 $ -
Principal repayments on loans (7,298,178) (3,968,416)
Advances from third party 1,000,000 1,000,000
Repayments to third party (166,667) (166,667)
------------ ------------
Net cash used for
financing activities (4,331,105) (3,135,083)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,655,841 (3,992,260)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,192,756 6,264,934
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 6,848,597 $ 2,272,674
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 23,058 $ 218,179
============ ============
</TABLE>
(Continued)
-7-
<PAGE> 11
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES
Fire Related Litigation
The Company has been 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:
Travelers Litigation
On May 14, 1994, the Company filed an action in the 24th Judicial
Court in the State of Louisiana against Travelers Indemnity Company
of Illinois ("Travelers") and others. The Company contends that the
insurance policy provided by Travelers provides the Company with
blanket coverage in the amount of $24.2 million in excess of the $10
million of underlying coverage. Accordingly, the Company maintains
that Travelers is liable for the difference between $24.2 million and
the approximately $9.5 million already paid, 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 has already been paid.
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 previously reported. 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 in that litigation.
-8-
<PAGE> 12
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited) (Continued)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's action against Travelers was tried in September 1997
and the trial court has taken the matter under advisement.
ADT Litigation
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, Mid-South, Inc., the company which provided and
maintained the fire alarm system at the race track, and other
defendants. The complaint sought unspecified 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 party's 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 was tried
before a jury commencing in March 1997 and resulted in an award in
favor of the Company and the intervening insurance companies of
approximately $49.8 million in the aggregate against ADT, plus
interest. The Company was awarded approximately $31.8 million plus
interest. The judgment was appealed by ADT. In June 1997, the
insurance company that insured the first layer of ADT's liability
tendered approximately $9.3 million in partial settlement of the
action. In August 1997, after a dispute with the intervening insurers
over the division of these funds was resolved, the Company received
approximately $4 million after litigation expenses. In December 1997,
the Company received another $7.7 million in partial settlement of
this action.
Travelers, Royal, and the insurance company which insured the
operator of the video poker machines at the
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited) (Continued)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Fair Grounds Race Course filed an action in April 1997 in the U.S.
District Court for the Eastern District of Louisiana against the
Company, seeking a declaratory judgment that a contract existed among
the parties governing the distribution of funds recovered in the
litigation against ADT described above. The Company denies that any
such contract was ever executed, but that if a contract was formed,
it was breached in numerous respects by the insurance companies.
During 1997, the parties entered into a partial settlement agreement
pursuant to which they agreed, among other things, that the matter
would be heard in state court in April 1998. The Company believes
that the amount of funds held in escrow as a result of the settlement
in the ADT litigation described above will be sufficient to fund any
obligations of the Company which may arise in connection with the
foregoing litigation.
United National Litigation
The Company was 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 alleged
that it was subrogated to its insured's rights to collect damages and
that it 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, 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
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited) (Continued)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, which held that the claim was covered.
In May 1997, the St. Paul suit 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.
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 filed in U.S. District Court in Baton Rouge by Livingston Downs
Racing Association ("Livingston") naming the Company and other defendants in an
antitrust/civil RICO suit alleging the Company participated in a conspiracy to
prevent the plaintiff from entering the live racing, off-track betting and video
poker markets. This suit is currently in early discovery stages. 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 was
appealed to the Louisiana Supreme Court which overturned the ruling on December
2, 1997. Livingston Downs has requested a rehearing which has not yet been ruled
upon. 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 Louisiana, and all other
pari-mutuel wagering facilities operating in Louisiana. The HBPA is seeking a
larger portion of video poker
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited) (Continued)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
proceeds. The Company believes it is currently in compliance with the guidelines
established by the Louisiana State Police Gaming Division which regulates
compliance with the State video poker law. The Company believes it will prevail
in this suit. The amounts in question in this suit have not yet been calculated,
but amounts could be substantial.
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.
NOTE 2 - NOTES PAYABLE
In April 1997, the Company and FNBC agreed to a loan of $5,221,725 for use in
completing construction. This loan provided for monthly payments of interest,
with the entire principal balance outstanding due on October 31, 1998. From
August 1997 through October 1997, the Company borrowed a portion of such funds
and utilized the loan proceeds for construction. The balance, which represents
the difference between the aggregate loan amount and amounts disbursed for
construction purposes, remained in a restricted escrow account maintained by
FNBC at October 31, 1997. In December 1997, the loan was repaid in full using
additional proceeds received from ADT settlements as further discussed in Note
4.
When the loan was repaid, all restricted escrowed balances were released by
FNBC. Certain unrestricted funds are still on deposit with FNBC and will be used
for future construction and retainage payments.
NOTE 3 - ADVANCE
In January 1998, 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 January 1998. Such amount is included in notes payable
at January 31, 1998.
NOTE 4 - LITIGATION SETTLEMENT
In December 1997, the Company reached a settlement with ADT and subsequently
received $7.7 million. Such amount has been recorded as an extraordinary item,
net of applicable income taxes, for the three months ended January 31, 1998. See
Note 1 for additional discussion of the ADT litigation.
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1998 and 1997
(Unaudited) (Continued)
NOTE 5 - LEASE
The Company entered into a new agreement with Autotote Limited on November 21,
1997 whereby Autotote Limited is to provide wagering services for the Company
until November 20, 2002, including all computer and other related services to
carry out the totalisator function for the Company. The Company has agreed to
pay Autotote Limited 0.0039% of the total pari-mutuel handle of the Company,
plus fixed equipment rental fees for certain equipment provided by Autotote. The
minimum to be paid to Autotote during each year of the agreement is $200,000.
NOTE 6 - NEW BUILDING FACILITIES
In November 1997, the Company substantially completed and opened its new
grandstand and clubhouse facilities in time for the commencement of the current
racing season. The building had a cost in excess of $30 million and will be
depreciated over its expected useful life.
-13-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
GENERAL
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. During the quarters ended January 31, 1998 and 1997, the Company
derived its pari-mutuel income by conducting live racing meets of 46 and 47 days
during each quarter, respectively, and in the operation of its tele-tracks for
off-track wagering. During each such 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 January 31, 1998, the Company reported total in-state
pari-mutuel wagering of $30,270,439 compared to $30,536,974 for the quarter
ended January 31, 1997.
Comparative pari-mutuel wagering and attendance figures for the quarters ended
January 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended January 31,
1998 1997
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 13,211,435 $ 10,711,021
Off-track handle 17,059,004 19,825,953
------------ ------------
Total in-state wagering $ 30,270,439 $ 30,536,974
============ ============
Out-of-state simulcast
handle $120,829,901 $ 87,339,414
============ ============
Total Attendance 127,617 140,927
============ ============
</TABLE>
The $2,500,414, or 23%, increase in on-track handle is the result of the opening
of the Company's new grandstand and clubhouse facilities in November 1997,
immedicately prior to the start of the current racing meet. In the prior year,
the Company utilized temporary facilities built after the December 1993 fire.
-14-
<PAGE> 18
The Company believes the $2,766,949, or 14%, decrease in off-track handle is
primarily the result of some patrons who formerly attended the Company's
tele-tracks now attending the Company's new racing facilities, therefore
shifting the handle on-track where the Company earns higher revenues.
The $33,490,487 or 38.3% 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 January 31, 1998, New York increased its simulcasting
of the Company's races with a handle of approximately $22 million in the current
fiscal quarter compared to only $3 million in fiscal 1997. This accounted for
most of the increase.
For the quarter ended January 31, 1998, the Company reported net income of
$5,299,375 compared to net income of $1,046,950 in the quarter ended January 31,
1997. This increase is primarily the result of additional litigation settlements
received and an increase in mutuel income compared to the quarter ended January
31, 1997, partially offset by an increase in racing expenses over the previous
comparable quarter. In addition, no video poker tax relief was received in the
quarter ended January 31, 1998. These are described in more detail below.
As a result of the increase in total wagering, the Company's operating revenues
increased by $1,973,224, or 23%, from the comparable quarter in 1997. This
included increases of $869,203, or 14.6%, in pari-mutuel commissions, $370,528,
or 483.8%, in admissions, $354,343, or 20.3%, in host track fees, $321,822, or
64%, in concessions, $73,841, or 22.5%, in net video poker revenues, and
$118,584 or 16.3%, in various other operating revenues. The grand opening of the
Company's new grandstand and clubhouse facility in November 1997, prior to the
commencment of the current racing meet, accounted for a significant portion of
the increases in such operating revenues. This increase was partially offset by
increased pari-mutuel taxes of $135,097, or 17.9%.
Racing Expenses. Total racing expenses increased by $1,649,323, or 23.4%, over
the comparable quarter in 1997, primarily as a result of increases in purses,
racing salaries and benefits, cost of sales-concessions, utilities, host track
fees, repairs and maintenance, advertising and promotion and program paper,
forms and other supplies, arising from the increased pari-mutuel handle and
attendance at the new racing facilities. There was also an increase in
depreciation expense of $52,190 over the prior fiscal quarter due to the opening
of the new racing facilities.
General and Administrative Expenses. General and administrative expenses for the
quarter ended January 31, 1998 decreased $17,227,
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<PAGE> 19
or 1.4%, from the previous comparable quarter primarily due to a decrease in
legal fees resulting from the conclusion of certain fire related litigation and
a decrease in insurance expense as a result of renegotiated premiums and
coverages. This decrease was partially offset by an increase in administrative
salaries, property taxes, contract services, office expense, and other expenses
for the quarter ended January 31, 1998 which was primarily the result of the
opening of the new racing facilities.
Other Income (Expenses). Total other income (expense) decreased $1,215,710, or
95.7% primarily as a result of the loss of video poker franchise fee relief in
fiscal 1998. In the fiscal 1997 quarter, such relief totaled $1,195,238. Because
the Company has paid the balance outstanding under the Loan Agreement previously
described, there will be no franchise fee relief available to the Company in the
current fiscal year and thereafter.
Extraordinary Item. During the fiscal quarter ended January 31, 1998, the
Company received settlement payments in connection with the fire related
litigation described herein in the aggregate of $7.7 million. These proceeds are
reported net of related deferred income taxes of $2,849,000.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $1,665,841 during the quarter ended January
31, 1998 compared to a decrease of $3,992,260 during the quarter ended January
31, 1997. The increase in cash and cash equivalents in the current quarter was
the result of cash provided by investing activities of $6,936,903, partially
offset by cash used for financing activities of $4,331,105, and cash used for
operating activities of $949,957. Investing activities were primarily related to
the fire litigation proceeds received and the payment of the Company's
construction obligations. Financing activities were primarily related to the
receipt and repayment of the Company's short-term borrowings related to
construction.
As of January 31, 1998, the Company had received cumulatively, since the
December 1993 fire, approximately $41.8 million of insurance proceeds resulting
from fire loss claims submitted to the Company's insurance carriers or in
litigation settlements, including the settlement that is subject to the Mary
Carter agreement discussed elsewhere herein.
In December 1997, the Company entered into a settlement with ADT and its excess
coverage insurers, pursuant to which the Company was paid $37 million and agreed
to indemnify ADT and its insurers
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<PAGE> 20
against the judgment creditor claims of the intervening insurers. A portion of
this money was released from escrow and has been recorded as revenue by the
Company. The remaining portion of the settlement funds remains in escrow pending
resolution of the insurer's claims.
In connection with the receipt of the settlement proceeds described herein, the
Company recognized an extraordinary gain for the quarter ended January 31, 1998
of $4.85 million, which is net of deferred income taxes of $2.85 million. As a
result of this and other settlements received, the Company has a total deferred
tax liability of approximately $13.3 million. This deferred tax liability is to
be paid over approximately 39 years in accordance with IRS regulations.
The Company's new main grandstand and racing facility was substantially
completed in November 1997 and was opened for the start of its current race
meet. The total cost of constructing the facility through January 31, 1998 was
approximately $30 million. Of such amount, approximately $1.3 million was spent
during the quarter ended January 31, 1998. Funds to complete the construction
are being provided by litigation settlements and operations. No further
financing needs are expected for building construction.
All of the Company's indebtedness to FNBC, which was incurred in connection with
the construction of the new facility, has been repaid. As a result, the video
poker franchise fee relief which was made available to the Company by
legislation enacted in 1994, is no longer available to the Company. During the
last four fiscal years, the Company received approximately $5.5 million in the
aggregate in franchise fee relief.
The Company believes that its existing cash and cash from operations will be
adequate to fund operations for the next 12 months. 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's new facility will have a positive effect on
attendance and wagering on track, there can be no assurance as to continued
increases in patronage or handle. The Company has engaged in discussions with
FNBC concerning entering into an ongoing credit facility; however, no such
facility has been obtained, and there can be no assurance that any such
financing will be available on terms acceptable to the Company.
Year 2000 Compliance
The Company has commenced a review of its data processing and other equipment to
determine if it is currently year 2000 compliant. It
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<PAGE> 21
has also made inquiries to third party vendors as to their compliance. The
Company's accounting software is not yet year 2000 compliant, but the Company
has received verbal commitments from its vendor that a compliant version is
available. The most significant third party data processing vendor used by the
Company is Autotote, which carries out the totalisator function. Autotote has
not yet communicated to the Company as to its year 2000 compliance. The Company
does not currently believe it will require significant financial resources to
become year 2000 compliant.
Impact of Inflation
To date, inflation has not had a material effect in the Company's operations.
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<PAGE> 22
PART II
OTHER INFORMATION
<PAGE> 23
Item 1. Legal Proceedings.
For a description of material developments during the quarter ended January 31,
1998 in legal proceedings to which the Company is a party, see Note 1,
"Commitments and Contingencies," and Note 5, "Subsequent Events," 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
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule (filed electronically only)
</TABLE>
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<PAGE> 24
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 6, 1998 By: /s/ Bryan G. Krantz
---------------------- ----------------------------------
Bryan G. Krantz
President
Date: April 6, 1998 By: /s/ Gordon M. Robertson
---------------------- ---------------------------------
Gordon M. Robertson
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FAIR GROUNDS CORPORATION FOR THE THREE MONTHS ENDED
JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 6,849
<SECURITIES> 95
<RECEIVABLES> 3,369
<ALLOWANCES> 0
<INVENTORY> 200
<CURRENT-ASSETS> 12,787
<PP&E> 49,736
<DEPRECIATION> 14,568
<TOTAL-ASSETS> 51,364
<CURRENT-LIABILITIES> 11,376
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 26,979
<TOTAL-LIABILITY-AND-EQUITY> 51,364
<SALES> 7,022
<TOTAL-REVENUES> 10,542
<CGS> 0
<TOTAL-COSTS> 8,710
<OTHER-EXPENSES> 1,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 712
<INCOME-TAX> 263
<INCOME-CONTINUING> 448
<DISCONTINUED> 0
<EXTRAORDINARY> 4,851
<CHANGES> 0
<NET-INCOME> 5,299
<EPS-PRIMARY> 11.31
<EPS-DILUTED> 11.31
</TABLE>
