<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, 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 Identification No.)
of 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 1, 1998.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, April 30, 1998 (Unaudited)
and Balance Sheet, October 31, 1997 ........................................ 1
Statements of Operations and Retained
Earnings for the Three Months Ended
April 30, 1998 and 1997 (Unaudited) ........................................ 3
Statements of Operations and Retained
Earnings for the Six Months Ended
April 30, 1998 and 1997 (Unaudited)......................................... 6
Statements of Cash Flows for the Six
Months Ended April 30, 1998 and 1997
(Unaudited) ................................................................ 9
Notes to Financial Statements for the Six
Months Ended April 30, 1998 (Unaudited)..................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 25
Item 4. Submission of Matters to a Vote of Security
Holders..................................................................... 25
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)
April 30, October 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,680,784 $ 5,192,756
Cash and cash equivalents
- restricted 89,988 2,643,702
Accounts receivable 1,753,507 1,348,530
Mutuel settlements 328,721 38,892
Investment Securities
- available for sale 204,569 592,878
Inventory 163,214 95,303
Prepaid expenses 940,600 353,167
------------ ------------
Total Current Assets 6,161,383 10,265,228
------------ ------------
OTHER ASSETS 123,012 125,516
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 42,923,776 40,587,514
Land improvements 4,340,935 4,340,935
Automotive equipment 863,701 849,201
Machinery and equipment 2,475,774 2,365,837
Furniture and fixtures 326,898 326,898
------------ ------------
Total 50,931,084 48,470,385
Less: accumulated depreciation
and amortization (15,020,017) (14,057,590)
------------ ------------
Depreciable property - net 35,911,067 34,412,795
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 39,197,348 37,699,076
------------ ------------
TOTAL ASSETS $ 45,481,743 $ 48,089,820
============ ============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 94,341 $ 5,318,903
Accounts payable 748,224 1,097,655
Construction contract payable -- 1,156,726
Accrued liabilities:
Deferred purses 1,252,703 7,425,179
Host track fees 453,832 416,516
Uncashed mutuel tickets 595,040 364,246
Deferred income taxes 2,975,906 204,906
Other 321,297 319,944
Deferred revenues 500,000 140,840
Income taxes payable 121,000 121,000
------------ ------------
Total Current Liabilities 7,062,343 16,565,915
------------ ------------
DEFERRED INCOME TAXES 10,650,692 9,846,104
------------ ------------
Total Liabilities 17,713,035 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 24,342,817 18,254,654
Unrealized loss on investment
securities - available for sale (378) (3,122)
------------ ------------
Total 27,804,233 21,713,326
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 27,768,708 21,677,801
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 45,481,743 $ 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 April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
42 Days of 41 Days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 7,583,440 $ 6,301,649
Breakage 164,069 142,724
Uncashed mutuel tickets 61,912 --
----------- -----------
Total 7,809,421 6,444,373
Less: pari-mutuel tax 985,375 814,184
----------- -----------
Commission income 6,824,046 5,630,189
Host track fees 2,061,935 1,534,413
----------- -----------
Total Mutuel Income 8,885,981 7,164,602
Concessions 813,935 484,204
Video poker (net) 439,680 351,267
Admissions (net of taxes) 166,239 71,101
Programs and forms 419,714 463,925
Miscellaneous 154,503 109,130
Parking 20,505 10,172
----------- -----------
Total Operating Revenues 10,900,557 8,654,401
----------- -----------
RACING EXPENSES
Purses 2,941,248 2,357,557
Salaries and related taxes
and benefits 2,024,239 1,612,486
Contracts and services 774,356 763,723
Host track fees 938,787 606,553
Depreciation 453,129 314,414
Cost of sales - concessions 276,049 196,813
Utilities 304,702 211,478
Repairs and maintenance 224,987 87,143
Program paper, forms and other
supplies 497,469 449,819
Advertising and promotion 222,123 328,835
Rent 78,816 81,157
Miscellaneous 169,723 229,453
----------- -----------
Total Racing Expenses 8,905,628 7,239,431
----------- -----------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
42 Days of 41 days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 328,017 $ 225,723
Insurance 257,326 230,890
Property taxes 219,477 99,156
Legal, audit and director fees 186,056 259,375
Loan closing costs -- --
Contract services 26,495 43,430
Office expenses 157,876 103,279
Miscellaneous 147,868 76,308
------------ ------------
Total General and
Administrative Expenses 1,323,115 1,038,161
------------ ------------
INCOME FROM OPERATIONS 671,814 376,809
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 526,694 172,316
Loss on sale of equity investments -- --
Interest expense (20,239) (153,253)
Interest income 17,223 25,156
Video poker tax relief -- 6,412
Insurance settlement 56,553 --
------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 1,252,045 427,440
Provision for income taxes 463,257 145,327
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1998 - $1.68,
1997 - $.60) 788,788 282,113
EXTRAORDINARY ITEM - GAIN FROM FIRE
(NET OF TAXES) -- 6,600,000
------------ ------------
NET INCOME (per share - 1998 - $1.68,
1997 - $14.64) $ 788,788 $ 6,882,113
RETAINED EARNINGS, BEGINNING OF
PERIOD 23,554,029 9,528,390
------------ ------------
RETAINED EARNINGS, END OF
PERIOD $ 24,342,817 $ 16,410,503
============ ============
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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
42 Days of 41 days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 469,940 469,940
============ ============
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
87 Days of 88 days of
Live Racing Live Racing
----------- -----------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $14,392,714 $12,241,720
Breakage 306,074 263,111
Uncashed mutuel tickets 132,860 87,046
----------- -----------
Total 14,831,648 12,591,877
Less: pari-mutuel tax 1,874,035 1,567,747
----------- -----------
Commission income 12,957,613 11,024,130
Host track fees 4,162,464 3,280,599
----------- -----------
Total Mutuel Income 17,120,077 14,304,729
Concessions 1,638,553 987,000
Video poker (net) 842,381 680,127
Admissions (net of taxes) 613,361 147,695
Parking 43,875 20,581
Programs and forms 881,264 879,105
Miscellaneous 302,748 203,642
----------- -----------
Total Operating Revenues 21,442,259 17,222,879
----------- -----------
RACING EXPENSES
Purses 5,597,189 4,617,959
Salaries and related taxes
and benefits 4,349,289 3,337,730
Contracts and services 1,510,192 1,492,160
Host track fees 1,537,884 1,111,153
Depreciation 963,539 772,634
Cost of sales - concessions 541,773 396,795
Utilities 560,356 375,164
Repairs and maintenance 439,862 196,485
Program paper, forms and other
supplies 1,077,922 930,719
Advertising and promotion 559,391 565,974
Rent 175,272 154,456
Miscellaneous 302,814 348,734
----------- -----------
Total Racing Expenses 17,615,483 14,299,963
----------- -----------
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
87 Days of 88 days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE
Salaries and related taxes
and benefits $ 609,417 $ 468,970
Insurance 476,444 469,047
Property taxes 361,693 201,259
Legal, audit and director fees 373,731 663,246
Loan closing fees 24,042 --
Contracts and services 117,709 108,933
Office expenses 300,254 204,752
Miscellaneous 233,979 113,335
------------ ------------
Total General and
Administrative Expenses 2,497,269 2,229,542
------------ ------------
INCOME FROM OPERATIONS 1,329,507 693,374
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival income 526,694 172,316
Video poker tax relief -- 1,175,095
Litigation settlement -- 268,125
Interest expense (17,215) (371,432)
Interest income 68,212 76,250
Insurance settlement 56,553 --
------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,963,751 2,013,728
Provision for income taxes 726,588 684,668
------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1998 - $2.63, 1,237,163 1,329,060
1997 - $2.83)
Extraordinary item - gain from fire
(net of $2,849,000 and $3,400,000
of taxes, respectively 4,851,000 6,600,000
------------ ------------
NET INCOME (per share 1998 - $12.96,
1997 - $16.87) $ 6,088,163 $ 7,929,060
RETAINED EARNINGS,
BEGINNING OF PERIOD 18,254,654 8,481,443
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 24,342,817 $ 16,410,503
============ ============
</TABLE>
(Continued)
-7-
<PAGE> 11
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Six Months Ended April 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
87 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 January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,088,163 $ 7,929,060
------------ ------------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (7,700,000) (10,000,000)
Depreciation 963,539 772,634
Deferred income taxes 3,575,588 4,084,668
Change in assets and liabilities:
Increase in:
Accounts receivable (694,806) (760,949)
Inventory (67,911) (13,143)
Prepaid expenses (587,433) (39,027)
Increase (decrease) in
Accounts payable and
accrued liabilities (79,968) 414,499
Deferred revenue -- (6,000)
Deferred purses (6,172,476) (5,294,937)
------------ ------------
Total adjustments (10,763,467) (10,842,255)
------------ ------------
Net cash used for
operating activities (4,675,304) (2,913,195)
------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from litigation
settlement 7,700,000 10,000,000
Capital expenditures (3,618,537) (702,917)
Deposits 2,504 (25,000)
Decrease (increase) in restricted
cash for construction 2,553,714 (6,033,473)
Proceeds provided by sale of
investment securities 391,053 --
------------ ------------
Net cash provided by investing
activities 7,028,734 3,238,610
------------ ------------
</TABLE>
(Continued)
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months Ended January 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ -- $ 6,778,275
Principal repayments on loans (5,224,562) (13,261,514)
Advances from third party 1,000,000 1,000,000
Repayments to third party (640,840) (666,667)
------------ ------------
Net cash used for
financing activities (4,865,402) (6,149,906)
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,511,972) (5,824,491)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,192,756 6,264,934
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,680,784 $ 440,443
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 17,215 $ 371,432
============ ============
</TABLE>
(Continued)
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 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 contended that the
insurance policy provided by Travelers provided 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 was 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 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 liability insurers of
the insurance agent and broker are entitled to share in any recovery
that the Company may eventually obtain from Travelers in that
litigation.
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In April 1998, the Court entered judgment in favor of the Company and
against Travelers, awarding the Company an additional $2,410,905 in
business interruption insurance, legal interest on that sum from May
13, 1994 until paid, statutory penalties in the amount of $222,128
and attorney's fees in an amount to be set by the Court. Both the
Company and Travelers have filed post-trial motions, which are
presently pending. Under the Mary Carter agreement referenced above,
the liability insurers of the agent and broker are entitled to share
in this award. The Company estimates that its portion of the award,
when paid, will be approximately $1.5 million to $2 million,
depending upon the amount of interest accrued and attorney's fees
awarded. However, due to the uncertainty of the amount and timing of
the receipt of this award, no accrual has been recorded in the April
30, 1998 financial statements.
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. ("ADT"), the company which provided
and maintained the fire alarm system at the race track, 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. 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
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, the
Company and three of the intervening property insurers. 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. After a dispute with the intervening insurers over the
division of these funds was resolved, in August 1997, the Company
received approximately $4 million after litigation expenses.
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 against the
judgment creditor claims of the intervening insurers. A substantial
portion of such settlement funds has been placed in escrow pending
resolution of such insurers' claims; however, the Company received
another $7.7 million of such funds in December 1997.
Travelers, Royal, and the insurance company which insured the
operator of the video poker machines at the 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.
-13-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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. The Company's claim
against United National is presently awaiting assignment of a trial
date.
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
-14-
<PAGE> 18
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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/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 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 of Louisiana video poker
law. While the Company believes it will prevail in this suit, the amounts in
question in this suit have not yet been calculated but 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.
-15-
<PAGE> 19
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS For the
Six Months Ended April 30, 1998 and 1997
(Unaudited)
NOTE 2 - LINE OF CREDIT
On April 14, 1998, the Company entered into a working capital line of credit
agreement with First National Bank of Commerce. The line of credit is for $2.5
million with interest at 8% on amounts outstanding. All amounts outstanding plus
accrued interest are due on April 14, 1999. In addition, the Company is to make
monthly payments of accrued unpaid interest on May 14, 1998 and monthly
thereafter until paid in full.
There were no amounts drawn down or outstanding on this line of credit during
the six months ended April 30, 1998.
The line of credit is secured by a commercial guaranty by Finish Line Management
Corporation and a collateral mortgage given by the Company dated November 30,
1995, with all related amendments.
-16-
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997
Revenues. During the quarters ended April 30, 1998 and 1997, the Company derived
its pari-mutuel income by conducting live racing meets of 42 and 41 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 April 30, 1998, the Company reported total in-state
pari-mutuel wagering of $50,980,608 compared to $44,832,911 for the quarter
ended April 30, 1997.
Comparative pari-mutuel wagering and attendance figures for the quarters ended
April 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended April 30,
1998 1997
----------- -----------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $12,577,916 $ 9,489,733
Off-track handle 38,402,692 35,343,178
----------- -----------
Total in-state wagering $50,980,608 $44,832,911
=========== ===========
Out-of-state simulcast
handle $98,940,282 $78,488,187
=========== ===========
Total Attendance 179,022 141,341
=========== ===========
</TABLE>
The $3,088,183, or 33%, increase in on-track handle is the result of the opening
of the Company's new grandstand and clubhouse facilities in November 1997,
immediately prior to the start of the current fiscal year live racing meet. In
the prior year, the Company utilized temporary facilities built after the
December 1993 fire.
The Company believes the $3,059,514, or 8.7%, increase in off-track
-17-
<PAGE> 21
handle is primarily the result of the Company's increased emphasis on better
simulcasting signals.
The $20,452,095, or 26%, increase in out-of-state handle is the result, in part,
of continued efforts to telecast the Company's races to new out-of-state
markets. During the quarter ended April 30, 1998, significant increases in
handle from Kentucky, Pennsylvania, Texas and Las Vegas were recorded. The
Company believes that such increases indicate an appreciation of the improved
quality of the Company's racing in those markets.
For the quarter ended April 30, 1998, the Company reported net income of
$788,788 compared to net income of $6,882,113, including an extraordinary gain
of $6,600,000, net of taxes, attributable to fire litigation settlements, in the
quarter ended April 30, 1997. Income before extraordinary item in the current
quarter increased $506,675 over income before extraordinary item in the previous
fiscal quarter primarily as a result of increased pari-mutuel activities further
discussed below.
As a result of the increase in total wagering, the Company's operating revenues
increased by $2,246,156, or 26%, from the comparable quarter in fiscal 1997.
This included increases of $1,281,791, or 20.3%, in pari-mutuel commissions,
$527,522, or 34.4%, in host track fees, $329,731, or 68.9%, in concessions, and
$88,413, or 25.2%, in net video poker revenues. The opening of the Company's new
grandstand and clubhouse facility in November 1997, prior to the start of the
current fiscal year live 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 $171,191, or 21.0%.
Racing Expenses. Total racing expenses increased by $1,666,197, or 23%, over the
comparable quarter in fiscal 1997, primarily as a result of increases in purses,
racing salaries and benefits, cost of sales-concessions, utilities, host track
fees, repairs and maintenance, 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 $138,715 over
the prior year fiscal quarter due to the opening of the new grandstand and
clubhouse facilities. These increases were partially offset by decreases in
advertising and miscellaneous expenses.
General and Administrative Expenses. General and administrative expenses for the
quarter ended April 30, 1998 increased $284,954, or 27.4%, from the prior year
comparable quarter primarily due to an increase in administrative salaries,
property taxes, office expenses, and miscellaneous expenses for the quarter
ended April
-18-
<PAGE> 22
30, 1998, which was primarily the result of the opening of the new racing
facilities. This was partially offset by a reduction of legal fees due to the
conclusion of much of the fire litigation of the Company as also discussed
elsewhere herein.
Other Income (Expense). Total other income (expense) increased $529,600, or
104.6%, primarily as a result of increased Jazz and Heritage Festival income,
due to good weather during the current year's festival compared to a rainy
weekend in the prior year's festival. In addition, there was a reduction of
interest expense in the current fiscal quarter due to the FNBC loan being
repaid.
Extraordinary Item. During the fiscal quarter ended April 30, 1997, the Company
received settlement payments in connection with the fire related litigation, as
described elsewhere herein, in the aggregate of $6,600,000 million, which was
net of deferred income taxes of $3.4 million. There were no extraordinary items
reported in the current fiscal quarter.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1998 AND 1997
Revenues. During the six months ended April 30, 1998 and 1997, the Company
derived its pari-mutuel income by conducting live racing meets of 87 and 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, 1998, the Company reported total in-state
pari-mutuel wagering of $99,302,551 compared to $90,371,291 for the six months
ended April 30, 1997.
Comparative pari-mutuel wagering and attendance figures for the six months ended
April 30, 1998 and 1997 are as follows:
-19-
<PAGE> 23
<TABLE>
<CAPTION>
For the Six Months Ended April 30
1998 1997
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 25,789,351 $ 20,200,754
Off-track handle 73,513,200 70,170,537
------------ ------------
Total in-state wagering $ 99,302,551 $ 90,371,291
============ ============
Out-of-state simulcast
handle $219,770,183 $165,823,806
============ ============
Total Attendance 365,617 282,268
============ ============
</TABLE>
The $5,588,597 increase in the on-track handle is primarily due to the opening
of the new facility in November 1997.
The Company believes that the $3,342,663 increase in off-track handle is
primarily due to an increased emphasis on better simulcasting signals. The
$53,946,377, or 32.5%, increase in out-of-state handle is the result, in part,
of continued efforts to telecast the Company's races to new out-of-state
markets. During the six months ended April 30, 1998, New York took full cards
from the Company through the end of January increasing the New York handle by
$21 million over the same period last year plus significant handle increases
from Kentucky, Pennsylvania, Texas and Las Vegas.
For the six months ended April 30, 1998, the Company reported net income before
income taxes and extraordinary item of $1,963,751 compared to net income before
income taxes and extraordinary item of $2,013,728, including video poker
franchise fee relief of $1,175,095, for the six months ended April 30, 1997. The
Company reported net income of $6,088,163 for the six months ended April 30,
1998 compared to net income of $7,929,060 for the previous comparable six
months. These operations are further discussed below.
As a result of the increase in total wagering, the Company's operating revenues
increased by $4,219,380, or 24.5%, from the comparable six months in 1997. This
included increases of $2,150,994, or 17.6%, in pari-mutuel commissions,
$881,865, or 26.9%, in host track fees, $162,254, or 23.9%, in video poker
revenue, and $465,666, or 31.5%, in admissions revenue.
Racing Expenses. Total racing expenses increased by $3,315,520, or 23.2%, over
the comparable six months in 1997, primarily as a result of increases in purses,
racing salaries, contracts and services, host track fees, and program paper,
forms and other
-20-
<PAGE> 24
supplies, arising out of increased pari-mutuel handle. Depreciation expense
increased by of $190,905, or 24.7%, due to the opening of the grandstand and
clubhouse facilities.
General and Administrative Expenses. General and administrative expenses for the
six months ended April 30, 1998 increased $267,727, or 12%, from the prior year
comparable six months. The increase was a result of an increase in salaries and
related taxes and benefits, property taxes, miscellaneous expenses, and office
expenses primarily due to the opening of the new grandstand and clubhouse
facilities, partially offset by a decrease in legal, audit and directors fees
resulting from settling most of the Company's fire related litigation.
Other Income (Expenses). Total other income decreased $533,610 from the prior
year comparable six months primarily as a result of a decrease of $1,175,095 in
video poker franchise fee relief, as discussed elsewhere herein, partially
offset by an increase in the current year period of $354,378 in Jazz and
Heritage Festival income due to the improved weather during this year's festival
compared to the prior year's festival and a decrease in the current year period
of $354,217 of interest expense due to the repayment of the FNBC loans.
Extraordinary Items. During the six months ended April 30, 1998, the Company
recorded an extraordinary item of $4,851,000, which was net of $2,849,000 of
deferred income taxes, as a result of a fire litigation settlement with ADT.
During the six months ended April 30, 1997, the Company recorded an
extraordinary item of $6,600,000, which was net of $3,400,000 of deferred income
taxes, as a result of a litigation settlement with the Company's insurance agent
and broker.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents decreased $2,511,972 during the six months ended April
30, 1998, compared to a decrease of $5,824,491 during the six months ended April
30, 1997. The decrease in cash and cash equivalents in the current period was
the result of cash used in operations of $4,675,304 and cash used for financing
activities of $4,865,402, partially offset by cash provided from investing
activities of $7,828,734. Cash used in operations was primarily due to the
payment of purses during the live racing meet. Cash used in financing activities
related primarily to the repayment of short-term borrowings related to
construction. The cash provided by investing activities was primarily related to
the receipt of proceeds from a fire litigation settlement discussed
-21-
<PAGE> 25
elsewhere herein, partially offset by construction expenditures for the
Company's new facilities.
As of April 30, 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 addition to such payments, 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, which was deposited in escrow, and agreed to
indemnify ADT and its insurers 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 insurers' claims.
In connection with the receipt of the settlement proceeds described herein, the
Company recognized an extraordinary gain for the six months ended April 30, 1998
of approximately $4.85 million, which is net of deferred income taxes of
approximately $2.85 million. As a result of this and other settlements received,
the Company has a total deferred tax liability of approximately $13.6 million.
This deferred tax liability is to be paid over approximately 39 years in
accordance with IRS regulations.
In April 1998, in connection with the ongoing fire litigation, the court entered
judgment in favor of the Company and against Travelers, awarding the Company an
additional $2,410,905 in business interruption insurance, legal interest on the
sum from May 13, 1994 until paid, statutory penalties in the amount of $222,128
and attorney's fees in an amount to be set by the court. Both the Company and
Travelers have filed post-trial motions, which are presently pending. Under the
Mary Carter agreement referred to above, the liability insurers of the agent and
broker are entitled to share in this award. The Company estimates that its
portion of the award, when paid, will be approximately $1.5 million to $2
million, depending upon the amount of interest accrued and attorney's fees
awarded.
The Company's new main grandstand and racing facility was substantially
completed in November 1997 and was opened for the start of the Company's 1997-98
live racing meet. The total cost of constructing the facility through April 30,
1998 was approximately $31 million. Of such amount, approximately $2.5 million
was spent during the six months ended April 30, 1998. The Company has funds
-22-
<PAGE> 26
on hand to pay for final construction settlements. 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 and the Company has no
significant indebtedness remaining relating to construction of those facilities.
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.
On April 14, 1998, the Company entered into a working capital line of credit
agreement with First National Bank of Commerce. The line of credit is for $2.5
million with interest at 8% on amounts outstanding. All amounts outstanding plus
accrued interest are due on April 14, 1999. In addition, the Company will make
monthly payments of accrued unpaid interest on May 14, 1998 and monthly
thereafter until paid in full.
There were no amounts drawn down or outstanding on this line of credit during
the six months ended April 30, 1998. The line of credit is secured by a
commercial guarantee by Finish Line Management Corporation and a collateral
mortgage note dated November 30, 1995 with all related amendments.
The Company believes that its existing cash and cash from operations, together,
if necessary, with funds drawn under the Company's new working capital line of
credit, will be adequate to fund operations for the next 12 months. The Company
believes that the operation of its new grandstand and clubhouse facilities will
continue to have a positive effect on attendance and wagering on- track and that
anticipated increases in operating income will more than offset the loss of the
video poker franchise fee relief. In addition, the Company believes that the
funds held in escrow, as a result of certain litigation settlements, will be
sufficient to satisfy the Company's obligations associated with the insurers'
pending claims against the Company. Accordingly, the Company believes that the
combination of existing cash, cash from operations, the funds now held in escrow
which remain after the satisfaction of the insurers' pending claims and the
Company's increased capacity to incur short-term or long-term indebtedness, if
necessary, will be sufficient to operate the Company over the longer term.
Year 2000 Compliance
The Company is continuing to review its data processing and other
-23-
<PAGE> 27
equipment to determine if it is currently year 2000 compliant. It has also made
inquiries to third party vendors as to their compliance. The Company has
recently purchased an updated version of its accounting software that its vendor
claims is year 2000 compliant. Such system will be tested once it is installed.
The most significant third party data processing vendor used by the Company is
Autotote, which carries out the totalisator function.
The Company's most recent contract with Autotote indicates that the services
will be year 2000 compliant. 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.
FORWARD-LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results may
differ materially. Therefore, the inclusion of such forward-looking information
should not be regarded as a representation by the Company that the objectives or
plans of the Company will be achieved. Such statements include, but are not
limited to, the Company's expectations regarding attendance, in-state and out-of
state handle, simulcasting, future revenues, future expenses, future operating
income and net income, the outcome of pending litigation and future liquidity
and capital resources. Words such as "anticipates," "believes," "expects,"
"estimated" and variations of such words and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements contained
herein involve numerous risks and uncertainties, and there are a number of
factors that could cause actual results to differ materially including, but not
limited to, the following: changing economic, market and business conditions,
the ability of the Company to compete effectively for top horses and trainers
necessary to field high-quality horse racing; the ability of the Company to grow
its share of the interstate simulcast market; a substantial change in allocation
of live racing days; the impact of competition from alternative gaming
(including riverboat casinos and lotteries) and other sports and entertainment
options in those markets in which the Company operates; and the Company's
success in attracting new patrons and generating additional revenue for purses.
-24-
<PAGE> 28
PART II
OTHER INFORMATION
<PAGE> 29
Item 1. Legal Proceedings.
For a description of material developments during the three months ended April
30, 1998 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 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on March 17, 1998, the Company's
shareholders elected directors and also ratified the Board of Directors'
appointment of Rebowe & Company, Certified Public Accountants (A Professional
Corporation), as independent accountants, with 350,384 shares voted for
ratification, no shares voted against and no abstentions. The voting with
respect to the nominees for election as directors was as follows:
<TABLE>
<CAPTION>
Votes
-----------------
Nominee For Withheld Abstentions
- ------- --- -------- -----------
<S> <C> <C> <C>
Katherine F. Duncan 349,784 120 0
Richard Katcher 349,904 0 0
Bryan G. Krantz 349,904 0 0
Marie G. Krantz 349,904 0 0
Ronald S. Maestri 349,784 120 0
Charmaine R. Morel 349,904 0 0
Wayne E. Thomas 349,784 120 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (Filed electronically only)
-25-
<PAGE> 30
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: June 12, 1998 By: /s/ Bryan G. Krantz
---------------------------- --------------------------------------
Bryan G. Krantz
President
Date: June 12, 1998 By: /s/ Gordon M. Robertson
---------------------------- --------------------------------------
Gordon M. Robertson
Chief Financial Officer
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FAIR GROUNDS CORPORATION FOR THE 6 MONTHS ENDED APRIL
30, 1998 AND IS QUALIFILIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 2,681
<SECURITIES> 205
<RECEIVABLES> 1,754
<ALLOWANCES> 0
<INVENTORY> 163
<CURRENT-ASSETS> 6,161
<PP&E> 50,931
<DEPRECIATION> 15,020
<TOTAL-ASSETS> 45,482
<CURRENT-LIABILITIES> 7,062
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 27,804
<TOTAL-LIABILITY-AND-EQUITY> 45,482
<SALES> 14,832
<TOTAL-REVENUES> 21,442
<CGS> 0
<TOTAL-COSTS> 17,615
<OTHER-EXPENSES> 2,497
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 1,964
<INCOME-TAX> 727
<INCOME-CONTINUING> 1,237
<DISCONTINUED> 0
<EXTRAORDINARY> 4,851
<CHANGES> 0
<NET-INCOME> 6,088
<EPS-PRIMARY> 12.96
<EPS-DILUTED> 12.96
</TABLE>
