<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended July 31, 1998 Commission File Number O-7607
------------- ------
FAIR GROUNDS CORPORATION
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Louisiana 72-0361770
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1751 Gentilly Blvd., New Orleans, LA 70119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (504) 944-5515
-------------------
Not Applicable
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(Former name, former address, and former fiscal year, if changed since last report)
</TABLE>
Indicate by a check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
x Yes No
------- -------
468,580 Common Shares were outstanding as of September 1, 1998.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, July 31, 1998 (Unaudited)
and Balance Sheet, October 31, 1997 ........................................ 1
Statements of Operations and Retained
Earnings for the Three Months Ended
July 31, 1998 and 1997 (Unaudited) ......................................... 3
Statements of Operations and Retained
Earnings for the Nine Months Ended
July 31, 1998 and 1997 (Unaudited).......................................... 6
Statements of Cash Flows for the Nine
Months Ended July 31, 1998 and 1997
(Unaudited) ................................................................ 9
Notes to Financial Statements for the Nine
Months Ended July 31, 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 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)
July 31, October 31,
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,205,554 $ 5,192,756
Cash and cash equivalents
- restricted 118,218 2,643,702
Accounts receivable 821,133 1,348,530
Mutuel settlements -- 38,892
Investment Securities
- available for sale -- 592,878
Inventory 81,977 95,303
Prepaid expenses 836,862 353,167
------------ ------------
Total Current Assets 10,063,744 10,265,228
------------ ------------
OTHER ASSETS 118,013 125,516
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 43,453,940 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 51,461,248 48,470,385
Less: accumulated depreciation
and amortization (15,544,499) (14,057,590)
------------ ------------
Depreciable property - net 35,916,749 34,412,795
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 39,203,030 37,699,076
------------ ------------
TOTAL ASSETS $ 49,384,787 $ 48,089,820
============ ============
</TABLE>
(Continued)
-1-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 110,650 $ 5,318,903
Accounts payable 280,406 1,097,655
Construction contract payable -- 1,156,726
Accrued liabilities:
Deferred purses 4,825,684 7,425,179
Host track fees 365,501 416,516
Uncashed mutuel tickets 484,621 364,246
Deferred income taxes 204,906 204,906
Other 265,075 319,944
Mutuel settlements 68,718 --
Deferred revenues 25,480 140,840
Income taxes payable 3,370,682 121,000
------------ ------------
Total Current Liabilities 10,001,723 16,565,915
------------ ------------
DEFERRED INCOME TAXES 10,110,950 9,846,104
------------ ------------
Total Liabilities 20,112,673 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 25,845,845 18,254,654
Unrealized loss on investment
securities - available for sale -- (3,122)
------------ ------------
Total 29,307,639 21,713,326
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 29,272,114 21,677,801
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 49,384,787 $ 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 July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
REVENUES
Pari-mutuel commissions $5,070,392 $4,533,902
Breakage 116,358 116,711
Uncashed mutuel tickets 273,736 216,482
---------- ----------
Total 5,460,486 4,867,095
Less: pari-mutuel tax 705,371 649,702
---------- ----------
Commission income 4,755,115 4,217,393
Host track fees -- 3,294
---------- ----------
Total Mutuel Income 4,755,115 4,220,687
Concessions 311,058 255,560
Video poker (net) 406,499 339,395
Admissions (net of taxes) 77,598 80,802
Programs and forms 393,507 330,325
Miscellaneous 167,595 368,210
---------- ----------
Total Operating Revenues 6,111,372 5,594,979
---------- ----------
RACING EXPENSES
Purses 1,830,360 1,578,614
Salaries and related taxes
and benefits 1,293,228 1,217,318
Contracts and services 293,121 447,255
Host track fees 799,421 727,979
Depreciation 524,480 310,408
Cost of sales - concessions 125,948 108,457
Utilities 291,923 140,199
Repairs and maintenance 196,256 228,718
Program paper, forms and other
supplies 373,140 347,533
Advertising and promotion 367,361 231,386
Rent 68,960 67,216
Miscellaneous 214,729 159,598
---------- ----------
Total Racing Expenses 6,378,927 5,564,681
---------- ----------
</TABLE>
(Continued)
-3-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 442,383 $ 267,072
Insurance 195,186 164,627
Property taxes 224,071 99,080
Legal, audit and director fees 187,625 208,499
Loan closing costs -- 151,147
Contracts and services 25,155 40,863
Office expenses 41,468 96,985
Miscellaneous 47,362 13,529
----------- ------------
Total General and
Administrative Expenses 1,163,250 1,041,802
----------- ------------
LOSS FROM OPERATIONS (1,430,805) (1,011,504)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 863,842 879,116
Interest expense -- (35,230)
Interest income 37,391 --
Video poker tax relief -- 257,745
----------- ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES AND EXTRAORDINARY ITEM (529,572) 90,127
Provision (benefit) for income taxes (580,600) 30,643
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1998 - $.11,
1997 - $.13) 51,028 59,484
Extraordinary item - gain from fire
(net of $748,000 of taxes in 1998) 1,452,000 --
------------ ------------
NET INCOME (per share - 1998 - $3.21,
1997 - $.13) $ 1,503,028 $ 59,484
RETAINED EARNINGS, BEGINNING OF
PERIOD 24,342,817 16,410,503
------------ ------------
RETAINED EARNINGS, END OF
PERIOD $ 25,845,845 $ 16,469,987
============ ============
CASH DIVIDENDS PER SHARE $ NONE $ NONE
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ============
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
88 Days of 88 days of
Live Racing Live Racing
------------ ------------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 19,463,106 $ 16,775,622
Breakage 422,432 379,822
Uncashed mutuel tickets 406,596 303,528
------------ ------------
Total 20,292,134 17,458,972
Less: pari-mutuel tax 2,579,406 2,217,449
------------ ------------
Commission income 17,712,728 15,241,523
Host track fees 4,162,464 3,283,893
------------ ------------
Total Mutuel Income 21,875,192 18,525,416
Concessions 1,949,611 1,242,560
Video poker (net) 1,248,880 1,019,522
Admissions (net of taxes) 690,959 228,497
Parking 43,287 20,581
Programs and forms 1,274,771 1,209,430
Miscellaneous 470,931 571,852
------------ ------------
Total Operating Revenues 27,553,631 22,817,858
------------ ------------
RACING EXPENSES
Purses 7,427,549 6,196,573
Salaries and related taxes
and benefits 5,642,517 4,555,048
Contracts and services 1,803,313 1,939,415
Host track fees 2,337,305 1,839,132
Depreciation 1,486,909 1,083,042
Cost of sales - concessions 667,721 505,252
Utilities 852,279 515,363
Repairs and maintenance 636,118 425,203
Program paper, forms and other
supplies 1,451,062 1,278,252
Advertising and promotion 926,752 797,360
Rent 244,232 221,672
Miscellaneous 518,653 508,332
------------ ------------
Total Racing Expenses 23,994,410 19,864,644
------------ ------------
</TABLE>
(Continued)
-5-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
88 Days of 88 days of
Live Racing Live Racing
------------ -------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE
Salaries and related taxes
and benefits $ 1,051,800 $ 736,042
Insurance 671,630 633,674
Property taxes 585,764 300,339
Legal, audit and director fees 561,356 871,745
Loan closing fees 24,042 151,147
Contracts and services 142,864 149,796
Office expenses 341,722 301,737
Miscellaneous 281,341 126,864
------------ ------------
Total General and
Administrative Expenses 3,660,519 3,271,344
------------ ------------
LOSS FROM OPERATIONS (101,298) (318,130)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival income 1,390,536 1,051,432
Video poker tax relief -- 1,432,840
Litigation settlement -- 268,125
Interest expense (12,509) (391,182)
Interest income 100,897 60,770
Insurance settlement 56,533 --
------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,434,159 2,103,855
Provision for income taxes 376,968 515,311
------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1998 - $2.26, 1,057,191 1,588,544
1997 - $3.39)
Extraordinary item - gain from fire
(net of $3,366,000 and $3,600,000
of taxes, respectively) 6,534,000 6,400,000
------------ ------------
NET INCOME (per share 1998 - $16.20,
1997 - $17.05) $ 7,591,191 $ 7,988,544
RETAINED EARNINGS,
BEGINNING OF PERIOD 18,254,654 8,481,443
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 25,845,845 $ 16,469,987
============ ============
</TABLE>
(Continued)
-6-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
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 468,580 468,580
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE> 11
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,591,191 $ 7,988,544
------------ ------------
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Extraordinary item -
gain from fire (9,900,000) (10,000,000)
Depreciation 1,486,909 1,083,042
Deferred income taxes 3,635,528 4,115,311
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 635,007 (232,310)
Inventory 13,326 (9,206)
Prepaid expenses (483,695) (142,500)
Restricted cash -- 133,929
Increase (decrease) in
Accounts payable and
accrued liabilities (923,133) 146,254
Deferred revenue (115,360) (6,000)
Deferred purses (2,599,495) (2,153,975)
Income taxes payable (121,000) --
Uncashed Mutuel Tickets 120,375 64,220
------------ ------------
Total adjustments (8,251,538) (7,001,235)
------------ ------------
Net cash provided by (used for)
operating activities (660,347) 987,309
------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from litigation
settlement 9,900,000 10,000,000
Capital expenditures (4,147,589) (5,762,780)
Decrease (increase) in:
Restricted construction cash 2,525,484 (1,180,585)
Deposits 7,503 (18,750)
Proceeds provided by sale of
investment securities 596,000 --
------------ ------------
Net cash provided by investing
activities 8,881,398 3,037,885
------------ ------------
</TABLE>
(Continued)
-8-
<PAGE> 12
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 110,650 $ 6,993,925
Principal repayments on loans (5,318,903) (13,565,316)
Advances from third party 1,000,000 1,000,000
Repayments to third party (1,000,000) (1,000,000)
------------ ------------
Net cash used for
financing activities (5,208,253) (6,571,391)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,012,798 (2,546,197)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,192,756 6,264,934
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,205,554 $ 3,718,737
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 12,509 $ 391,182
============ ============
</TABLE>
(Continued)
-9-
<PAGE> 13
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 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 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 which had been paid at that time (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
included a "Mary Carter" provision whereby the liability insurers of
the insurance agent and broker would be entitled to share in the
Company's recovery from Travelers in that litigation.
-10-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 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. In August
1998, the Court denied all post trial motions and certified the
judgment as being immediately appealable. 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 July 31, 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 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
-11-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 1998 and 1997
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, which was deposited in escrow, and agreed to indemnify
ADT and its insurers against the judgment creditor claims of the
intervening insurers. In December 1997, the Company received $7.7
million of such funds net of litigation expenses. The balance of the
settlement funds remained in escrow pending resolution of subrogation
claims. The Company received an additional $2.2 million, net of
litigation expenses, from the escrow account in July 1998 pursuant to
the settlement described below. The remaining appeals, which involve
the Company, the Company's primary property insurer and another
defendant were argued subsequent to July 31, 1998 and will determine
whether the Company receives any additional payment from the escrow
account.
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 denied that any such
contract was ever executed, but that if a contract was formed, it
was breached in numerous respects by the insurance companies. In
July 1998, the parties entered into a settlement agreement pursuant
to which Travelers, Royal and the third insurance company received
$12.65 million from the funds held in escrow in full and final
settlement of all claims in this litigation with ADT.
-12-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 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 claims
against United National are set for trial in December 1998.
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
-13-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 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. The Company believes it will prevail in this suit.
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.
-14-
<PAGE> 18
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 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 Bank One Corporation (formerly First National Bank of Commerce).
The line of credit is for $2.5 million with interest at 8% on amounts
outstanding. In addition to monthly interest payments on outstanding balances,
any amounts outstanding plus unpaid accrued interest are due on April 14, 1999.
There were no amounts drawn down or outstanding on this line of credit during
the nine months ended July 31, 1998. The line of credit is secured by a
commercial guaranty by Finish Line Management Corporation, an affiliated
company, and a collateral mortgage given by the Company dated November 30,
1995, with all related amendments.
NOTE 3 - EXTRAORDINARY ITEM
In July 1998, the Company received an additional $2.2 million payment from the
escrow account in which the ADT settlement funds were deposited, as further
described in Note 1. This payment is reported as an extraordinary item net of
applicable taxes of $748,000.
-15-
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
Revenues. During the quarters ended July 31, 1998 and 1997, the Company did not
engage in live horse racing, but rather derived its pari-mutuel income from 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.
Comparative pari-mutuel wagering and attendance figures for the quarters ended
July 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Quarter Ended July 31,
1998 1997
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
Off-track handle $ 25,026,636 $ 22,772,561
------------ ------------
Total Attendance 113,427 114,781
============ ============
</TABLE>
The Company believes the $2,254,075, or 9.9%, increase in off-track handle is
primarily the result of the Company's increased emphasis on better simulcasting
signals.
For the quarter ended July 31, 1998, the Company reported net income of
$1,503,028, including an extraordinary gain of $1,452,000, net of taxes,
attributable to fire litigation settlements received, compared to net income of
$59,484 in the quarter ended July 31, 1997. Income before extraordinary item in
the current quarter decreased by $8,456 as compared to the prior comparable
fiscal quarter further discussed below.
As a result of the increase in total wagering, the Company's operating revenues
increased by $516,393, or 9.2%, from the comparable quarter in fiscal 1997.
This included increases of $536,490, or 11.8%, in pari-mutuel commissions,
$55,498, or 21.7% in concessions and $67,104, or 19.8%, in net video poker
revenue, $57,254, or 26.4%, in uncashed mutuel ticket revenue, and $63,182,
-16-
<PAGE> 20
or 19%, in programs and forms income, partially offset by decreases in
miscellaneous operating expenses and increased pari-mutuel taxes of $55,669, or
8.6%.
Racing Expenses. Total racing expenses increased by $814,246, or 14.6%, over
the comparable quarter in 1997, primarily as a result of increases in purses,
racing salaries and benefits, utilities, advertising, host track fees, program
paper, forms and other supplies, and other miscellaneous expenses arising from
the increased pari-mutuel handle and attendance at the new racing facilities
opened in November 1997. There was also an increase in depreciation expense of
$214,072 over the prior year fiscal quarter due to the opening of such
facilities. These increases were partially offset by decreases in contracts and
services expenses and repairs and maintenance expenses.
General and Administrative Expenses. General and administrative expenses for
the quarter ended July 31, 1998 increased $121,448, or 11.6%, from the prior
year comparable quarter primarily due to an increase in administrative salaries
and property taxes for the quarter ended July 31, 1998, which was mainly the
result of the opening of the new racing facilities. This increase was partially
offset by a reduction in office expenses, contracts and services, loan closing
cost, and legal fees due to the conclusion of much of the fire litigation of
the Company as discussed elsewhere herein.
Other Income (Expense). Total other income (expense) decreased $200,398, or
18.2%, from the previous comparable quarter primarily as a result of a decrease
in video poker tax relief of $257,745. As previously reported, the decrease is
due to the Company paying off the FNBC loan in November 1997 and no longer
qualifying for the tax relief.
Extraordinary Item. During the fiscal quarter ended July 31, 1998, the Company
received a settlement payment in connection with the fire related litigation,
as described elsewhere herein, in the amount of $2,200,000, which is reported
net of $748,000 of estimated income taxes.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1998, AND 1997
Revenues. During the nine months ended July 31, 1998 and 1997, the Company
derived its pari-mutuel income by conducting live racing meets of 88 days in
each period and in the operation of its tele- tracks for off-track wagering.
During each nine 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
-17-
<PAGE> 21
in Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana that were
formerly operated by Jefferson Downs.
Comparative pari-mutuel wagering and attendance figures for the nine months
ended July 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended July 31,
1998 1997
------------- -------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 25,789,351 $ 20,200,754
Off-track handle 72,677,903 65,117,602
------------- -------------
Total in-state wagering $ 98,467,254 $ 85,318,356
============= =============
Out-of-state simulcast
handle $ 219,770,183 $ 165,823,806
============= =============
Total Attendance 479,044 397,049
============= =============
</TABLE>
The $5,588,597, or 27.7%, increase in the on-track handle is primarily due to
the opening of the new racing facilities in November 1997.
The Company believes that the $7,560,030, or 11.6%, 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 nine months ended July 31, 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 markets.
The Company reported net income of $7,591,191 for the nine months ended July
31, 1998 compared to net income of $7,988,544 for the previous comparable nine
months. In both fiscal periods, the Company received significant litigation
settlements further described elsewhere herein. In addition, in fiscal 1997,
the Company received video poker franchise fee relief of approximately $1.43
million which was not available in fiscal 1998.
As a result of the increase in total attendance and wagering at the new racing
facilities, the Company's operating revenues increased by $4,735,773, or 20.8%,
from the comparable nine months in 1997. This included increases of $2,687,484,
or 16%, in pari-mutuel commissions, $42,610, or 11.2%, in breakage, $878,571,
or 26.7%, in host track fees, $103,068, or 34%, in uncashed mutuel ticket
-18-
<PAGE> 22
revenue, $229,358, or 22.4%, in video poker revenue, and $462,462, or 202%, in
admissions revenue. Admission revenues include admissions to box seats and
suites that were unavailable prior to the opening of the new racing facilities
in November 1997. In addition, net concessions revenues increased by
approximately $545,000, or 73%, as a result of the opening of the new
facilities.
Racing Expenses. Total racing expenses increased by $4,129,766, or 20.7%, over
the comparable nine months in 1997, primarily as a result of increases in
purses, racing salaries and related benefits, host track fees, repairs and
maintenance, advertising, utilities and program paper, forms and other
supplies, arising from the increased pari-mutuel handle and attendance at the
new racing facilities opened in November 1997. Depreciation expense increased
by $403,867, or 37.2%, due to the opening of such facilities.
General and Administrative Expenses. General and administrative expenses for
the nine months ended July 31, 1998 increased $389,175, or 11.9%, from the
prior year comparable nine 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, and a decrease in loan closing fees relating to prior
financing activities.
Other Income (Expense). Total other income (expense) decreased $886,520 from
the prior year comparable nine months primarily as a result of a decrease of
$1,432,840 in video poker franchise fee relief, partially offset by an increase
of $353,378 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 of $378,673 of interest expense in the current period due to the
repayment of the FNBC loans in late 1997.
Extraordinary Items. During the nine months ended July 31, 1998, the Company
recorded an extraordinary item of $6,534,000, which was net of $3,366,000 of
income taxes, as a result of a fire litigation settlement with ADT. During the
nine months ended July 31, 1997, the Company recorded an extraordinary item of
$6,400,000, which was net of $3,600,000 of deferred income taxes, as a result
of a litigation settlement with the Company's insurance agent and broker.
-19-
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $3,012,798 during the nine months ended
July 31, 1998, compared to a decrease of $2,546,197 during the nine months
ended July 31, 1997. The increase in cash and cash equivalents in the current
period was the result of cash provided by investing activities of $8,881,398,
partially offset by cash used in operations of $660,347 and cash used for
financing activities of $5,208,253. 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 loans related to construction.
The cash provided by investing activities was primarily related to the receipt
of proceeds from a fire litigation settlement discussed elsewhere herein,
partially offset by construction expenditures for the Company's new facilities.
As of July 31, 1998, the Company had received cumulatively, since the December
1993 fire, approximately $44 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. In December 1997, the Company received $7.7 million of
such funds net of litigation expenses. The balance of the settlement funds were
to be held in escrow pending resolution of subrogation claims. The Company
received an additional $2.2 million, net of litigation expenses, from the escrow
account in July 1998, pursuant to the settlement described below. The remaining
appeals, which involve the Company, the Company's primary property insurer and
another defendant, were argued in September 1998 and will determine whether the
Company receives any additional payment from the escrow account.
In connection with the receipt of the settlement proceeds described herein, the
Company recognized an extraordinary gain for the nine months ended July 31,
1998 of approximately $6.53 million, which is net of income taxes of
approximately $3.37 million. As a result of this and other settlements
received, the Company has a total net deferred tax liability of approximately
$13.7 million. Approximately $3.6 million of this tax liability is expected to
be due within the next year. Approximately $2.9 million was prepaid
-20-
<PAGE> 24
to the IRS subsequent to July 31, 1998, in partial settlement of this tax
obligation. The remaining deferred tax liability is to be paid over
approximately 39 years in accordance with IRS regulations. These tax
obligations are expected to be funded through operations.
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. In
August 1998, the Court denied all post trial motions and certified the judgment
as being immediately appendable. 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
July 31, 1998 was approximately $31 million. Of such amount, approximately $2.5
million was spent during the nine months ended July 31, 1998. The Company has
funds 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 Bank One (formerly First National Bank of Commerce). The line of
credit is for $2.5 million with interest at 8% on amounts outstanding. In
addition to monthly interest payments on outstanding balances, any amounts
outstanding plus unpaid accrued interest are due on April 14, 1999.
There were no amounts drawn down or outstanding on this line of credit during
the nine months ended July 31, 1998. The line of credit is secured by a
commercial guarantee by Finish Line
-21-
<PAGE> 25
Management Corporation and a collateral mortgage note given by the Company
dated November 30, 1995 with all related amendments.
The Company believes that its existing cash and cash equivalents 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 and cash
equivalents, cash from operations, any additional amounts received in the
Travelers litigation, 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 its assessment of its data processing and other
equipment to determine if it is year 2000 compliant. It has also made inquiries
to third party vendors as to their compliance. The Company has recently
purchased and installed an updated version of its accounting software that its
vendor states is year 2000 compliant. The most significant third party data
processing vendor used by the Company is Autotote, which performs the
totalisator functions for the Company. The Company's most recent contract with
Autotote provides that the services are to be year 2000 compliant. Autotote has
contracted with a third party consultant to attain such compliance. If Autotote
does not become compliant, the Company's operations could be adversely affected
until another provider of the totalisator function can be found. Although the
Company has not completed its assessment of its data processing and other
equipment and, accordingly, has not determined the costs associated with its
efforts to prepare for year 2000, the Company currently believes that the costs
of addressing its year 2000 transition will not have a material adverse effect
on the Company's financial condition or business operations. The Company has
not yet developed a contingency plan addressing failure to be year 2000 ready.
Impact of Inflation
To date, inflation has not had a material effect in the Company's operations.
-22-
<PAGE> 26
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 the source of funds for
payment of its deferred tax liability, the funds to be received by the Company
from the Travelers litigation, the adequacy of its cash, cash equivalents and
borrowings available under its new working capital line of credit to fund
operations for the next 12 months, the effect of the new grandstand and
clubhouse facilities on attendance and wagering, the anticipated increases in
operating income more than offsetting the loss of the video poker franchise fee
relief, the settlement and litigation funds held in escrow being sufficient to
satisfy the Company's obligations associated with insurers' pending claims
against the Company, and the adequacy of existing cash, cash equivalents, cash
from operations, additional amounts received in the Travelers litigation and
borrowings, if necessary, to operate the Company over the longer term. 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.
-23-
<PAGE> 27
PART II
OTHER INFORMATION
-24-
<PAGE> 28
Item 1. Legal Proceedings.
For a description of material developments during the three months ended July
31, 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 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (For SEC use only)
b) Reports on Form 8-K
none
-25-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR GROUNDS CORPORATION
-------------------------------------
(Registrant)
Date: September 18, 1998 By: /s/ Bryan G. Krantz
------------------------ ----------------------------------
Bryan G. Krantz
President
Date: September 18, 1998 By: /s/ Gordon M. Robertson
------------------------ ----------------------------------
Gordon M. Robertson
Chief Financial Officer
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 8,324
<SECURITIES> 0
<RECEIVABLES> 821
<ALLOWANCES> 0
<INVENTORY> 82
<CURRENT-ASSETS> 10,064
<PP&E> 54,748
<DEPRECIATION> 15,544
<TOTAL-ASSETS> 49,385
<CURRENT-LIABILITIES> 10,002
<BONDS> 0
<COMMON> 1,525
0
0
<OTHER-SE> 29,308
<TOTAL-LIABILITY-AND-EQUITY> 49,385
<SALES> 21,875
<TOTAL-REVENUES> 27,554
<CGS> 0
<TOTAL-COSTS> 23,994
<OTHER-EXPENSES> 3,661
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 1,434
<INCOME-TAX> 377
<INCOME-CONTINUING> 1,057
<DISCONTINUED> 0
<EXTRAORDINARY> 6,534
<CHANGES> 0
<NET-INCOME> 7,591
<EPS-PRIMARY> 16.20
<EPS-DILUTED> 16.20
</TABLE>
