<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, 1999 Commission File Number O-7607
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FAIR GROUNDS CORPORATION
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(Exact name of registrant as specified in its charter)
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<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)
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Registrant's telephone number including area code (504) 944-5515
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<S> <C>
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
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468,580 Common Shares were outstanding as of June 1, 1999.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, April 30, 1999 (Unaudited)
and Balance Sheet, October 31, 1998 3
Statements of Operations and Retained
Earnings for the Three Months Ended
April 30, 1999 and 1998 (Unaudited) 5
Statements of Operations and Retained
Earnings for the Six Months Ended
April 30, 1999 and 1998 (Unaudited) 8
Statements of Cash Flows for the Six
Months Ended April 30, 1999 and 1998
(Unaudited) 11
Notes to Financial Statements for the Six
Months Ended April 30, 1999 and 1998 (Unaudited) 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security
Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
</TABLE>
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<PAGE> 3
PART I
FINANCIAL INFORMATION
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<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1999 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,370,628 $ 7,577,730
Cash and cash equivalents
- restricted 125,665 118,218
Accounts receivable 1,593,220 1,078,638
Mutuel settlements 389,990 139,964
Inventory 127,529 118,357
Prepaid expenses 1,815,138 437,322
Deferred Taxes 59,940 59,940
------------ ------------
Total Current Assets 8,482,110 9,530,169
------------ ------------
OTHER ASSETS 277,760 283,411
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 43,957,399 43,870,295
Land improvements 4,348,135 4,348,135
Automotive equipment 963,243 931,424
Machinery and equipment 2,548,797 2,432,433
Furniture and fixtures 394,118 366,575
------------ ------------
Total 52,211,692 51,948,862
Less: accumulated depreciation
and amortization (16,887,790) (15,904,346)
------------ ------------
Depreciable property - net 35,323,902 36,044,516
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 38,610,183 39,330,797
------------ ------------
TOTAL ASSETS $ 47,370,053 $ 49,144,377
============ ============
</TABLE>
(Continued)
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<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
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(Unaudited)
April 30, October 31,
1999 1998
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 635,985 $ 46,894
Accounts payable 209,725 1,493,409
Construction contract payable -- 58,732
Accrued liabilities:
Deferred purses 1,381,968 7,930,825
Host track fees 544,068 374,251
Uncashed mutuel tickets 624,048 446,786
Other 246,715 369,135
Deferred revenues - 275,701
Income taxes payable 2,647,328 450,185
------------ ------------
Total Current Liabilities 6,289,837 11,445,918
------------ ------------
DEFERRED INCOME TAXES 7,043,865 7,043,865
------------ ------------
Total Liabilities 13,333,702 18,489,783
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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 30,610,082 27,228,325
------------ ------------
Total 34,071,876 30,690,119
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 34,036,351 30,654,594
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 47,370,053 $ 49,144,377
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 6
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Three Months Ended April 30, 1999 and 1998
(Unaudited)
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1999 1998
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REVENUES
Pari-mutuel commissions $ 8,525,023 $ 7,583,440
Breakage 232,441 164,069
Uncashed mutuel tickets 90,847 61,912
----------- -----------
Total 8,848,311 7,809,421
Less: pari-mutuel tax 1,020,115 985,375
----------- -----------
Commission income 7,828,196 6,824,046
Host track fees 4,768,461 3,257,958
----------- -----------
Total Mutuel Income 12,596,657 10,082,004
Concessions 868,971 813,935
Video poker (net) 446,060 439,680
Admissions(net of taxes) 277,838 166,239
Parking 25,994 20,505
Programs and forms 440,121 419,714
Miscellaneous 279,044 154,503
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Total Operating Revenues 14,934,685 12,096,580
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RACING EXPENSES
Purses 5,434,563 4,137,271
Salaries and related taxes
and benefits 2,487,827 2,024,239
Contracts and services 979,985 774,356
Host track fees 882,577 938,787
Depreciation 484,340 453,129
Cost of sales - concessions 329,754 276,049
Utilities 298,886 304,702
Repairs and maintenance 130,040 224,987
Programs, forms and other
supplies 574,444 497,469
Advertising and promotion 278,008 222,123
Rent 85,955 78,816
Miscellaneous 242,716 169,723
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Total Racing Expenses $12,209,095 $10,101,651
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</TABLE>
(Continued)
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<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 896,257 $ 328,017
Insurance 188,470 257,326
Property taxes 246,467 219,477
Legal, audit and director fees 329,023 186,056
Contracts and services 10,837 26,495
Office expenses 209,930 157,876
Miscellaneous 1,085,547 147,868
------------ ------------
Total General and
Administrative Expenses 2,966,531 1,323,115
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NET INCOME (LOSS) FROM OPERATIONS (240,941) 671,814
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 1,054,646 526,694
Interest expense (520) (20,239)
Interest income 56,133 17,223
Insurance settlement -- 56,553
------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 869,318 1,252,045
Provision for income taxes 521,353 463,257
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INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1999 - $ .74,
1998 - $1.68) 347,965 788,788
Extraordinary item - gain from fire
(net of $1,521,162 of taxes 2,267,118 --
in 1999.) ------------ ------------
NET INCOME (per share
1999 - $5.58, 1998 - $1.68) $ 2,615,083 $ 788,788
RETAINED EARNINGS, BEGINNING OF
PERIOD $ 28,463,579 $ 23,554,029
</TABLE>
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<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
DIVIDENDS PAID (468,580) --
RETAINED EARNINGS, END OF PERIOD $ 30,610,082 $24,342,817
============ ===========
CASH DIVIDENDS PER SHARE $ 1.00 $ NONE
============ ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ===========
</TABLE>
See accompanying notes to financial statements
-7-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Six Months Ended April 30, 1999 and 1998
(Unaudited)
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1999 1998
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REVENUES
Pari-mutuel commissions $16,054,094 $14,392,714
Breakage 436,399 306,074
Uncashed mutuel tickets 174,024 132,860
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Total 16,664,517 14,831,648
Less: pari-mutuel tax 1,947,761 1,874,035
----------- -----------
Commission income 14,716,756 12,957,613
Host track fees 9,935,506 7,459,016
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Total Mutuel Income 24,652,262 20,416,629
Concessions 1,750,315 1,638,553
Video poker (net) 879,124 842,381
Admissions(net of taxes) 573,967 613,361
Parking 56,628 43,875
Programs and forms 870,268 881,264
Miscellaneous 652,457 302,748
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Total Operating Revenues 29,435,021 24,738,811
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RACING EXPENSES
Purses 10,811,614 8,893,741
Salaries and related taxes
and benefits 4,672,647 4,349,289
Contracts and services 1,713,985 1,510,192
Host track fees 1,646,332 1,537,884
Depreciation 980,516 963,539
Cost of sales - concessions 570,145 541,773
Utilities 498,756 560,356
Repairs and maintenance 375,254 439,862
Programs, forms and other
supplies 1,162,323 1,077,922
Advertising and promotion 731,697 559,391
Rent 164,713 175,272
Miscellaneous 458,809 302,814
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Total Racing Expenses $23,786,791 $20,912,035
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</TABLE>
(Continued)
-8-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 1,203,270 $ 609,417
Insurance 416,081 476,444
Property taxes 479,870 361,693
Legal, audit and director fees 436,647 373,731
Loan closing costs -- 24,042
Contracts and services 64,294 117,709
Office expenses 336,268 300,254
Miscellaneous 1,190,618 233,979
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Total General and
Administrative Expenses 4,127,048 2,497,269
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NET INCOME FROM OPERATIONS 1,521,182 1,329,507
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 1,054,646 526,694
Interest expense (10,309) (17,215)
Interest income 69,520 68,212
Insurance settlement -- 56,553
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INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 2,635,039 1,963,751
Provision for income taxes 1,174,670 726,588
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INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1999 - $3.12,
1998 - $2.64) 1,460,369 1,237,163
Extraordinary item - gain from fire
(net of $1,593,312 and $2,849,000
of taxes in 1999 and 1998,
respectively) 2,389,968 4,851,000
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NET INCOME (per share
1999 - $8.22, 1998 - $12.99) $ 3,850,337 $ 6,088,163
RETAINED EARNINGS, BEGINNING OF
PERIOD $ 27,228,325 $ 18,254,654
</TABLE>
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<PAGE> 11
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Six Months Ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
DIVIDENDS PAID (468,580) --
RETAINED EARNINGS, END OF PERIOD $ 30,610,082 $24,342,817
============ ===========
CASH DIVIDENDS PER SHARE $ 1.00 $ NONE
============ ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ===========
</TABLE>
See accompanying notes to financial statements
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<PAGE> 12
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Six Months Ended April 30, 1999 and 1998
(Unaudited)
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<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,850,337 $ 6,088,163
------------ ------------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (3,983,280) (7,700,000)
Depreciation 980,516 963,539
Deferred income taxes -- 3,575,588
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (761,680) (694,806)
Inventory (9,172) (67,911)
Prepaid expenses (1,377,816) (587,433)
Restricted cash (7,447) --
Increase (decrease) in
Accounts payable and
accrued liabilities (1,236,287) (79,968)
Deferred revenue (275,701) --
Deferred purses (6,548,857) (6,172,476)
Income taxes payable 2,197,143 --
Uncashed mutuel tickets 177,262 --
Contracts Payable (58,732) --
Total adjustments (10,904,051) (10,763,467)
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Net cash used for operating
activities (7,053,714) (4,675,304)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from litigation
settlement 3,983,280 7,700,000
Capital expenditures (262,830) (3,618,537)
Decrease in deposits 5,651 2,504
Proceeds provided by sale of
investment securities -- 391,053
Decrease in restricted cash -- 2,553,714
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Net cash provided by investing
activities 3,726,101 7,028,734
------------ ------------
</TABLE>
(Continued)
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<PAGE> 13
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months Ended April 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 200,627 $ --
Principal repayments on loans (111,536) (5,224,562)
Advances from third party 1,000,000 1,000,000
Repayments to third party (500,000) (640,840)
Dividends Paid (468,580) --
----------- -----------
Net cash provided by (used for)
financing activities 120,511 (4,865,402)
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (3,207,102) (2,511,972)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,577,730 5,192,756
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,370,628 $ 2,680,784
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 10,309 $ 17,215
=========== ===========
Income taxes paid $ 1,112,000 $ --
=========== ===========
</TABLE>
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<PAGE> 14
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 that were concluded during the six
months ended April 30, 1999 or have not yet been concluded:
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 it had
previously 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.
The Company's action against Travelers was tried in September 1997, and in April
1998, the trial court entered judgment in
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<PAGE> 15
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
favor of the Company and against Travelers, awarding the Company $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. The
court later fixed the amount of attorney's fees at $75,000. Appeals by both the
Company and Travelers are now pending before the state court of appeals. Under
the Mary Carter provision, the Company is entitled to the following: (i) 100% of
the first $1.0 million recovered and 100% of any recovery from $3.0 million to
$4.0 million; (ii) 57.214437% of any recovery from $10.0 million to $14,674,474;
and (iii) 85% of any recovery in excess of $14,674,474.
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
damages 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 destroyed in the
fire, 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 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. In March 1997, a jury trial was held on the remaining
claims and resulted in an award in favor of the Company and the subrogated
insurance companies of approximately $49.8 million in the aggregate in damages
against ADT, plus interest, of which approximately $31.8 million, plus interest,
was awarded to the Company and the balance to the subrogated insurance
companies, including approximately $4.25 million to the Company's primary
property insurer. The judgment was appealed to the Court of Appeals of
Louisiana, Fourth Circuit, by ADT, the Company and
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<PAGE> 16
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
three of the subrogated insurance companies. In June 1997, the insurance company
that insured the initial layer of ADT's liability tendered approximately $9.3
million in partial settlement of the action. After a dispute with the subrogated
insurers over the division of these funds was resolved in August 1997, the
Company received approximately $4 million of those proceeds after litigation
expenses.
In December 1997, the Company entered into a settlement with ADT and ADT's
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 four subrogated insurers. In December 1997, the Company received $7.7
million of such funds net of litigation expenses, and the balance of the
settlement funds was placed in escrow pending resolution of the subrogation
claims. In July 1998, the Company settled the subrogation claims of three of the
four insurers, as well as an action filed in April 1997 in United States
District Court for the Eastern District of Louisiana by those three insurers
against the Company seeking a declaratory judgement that a contract had been
entered into by the parties respecting the distribution of funds recovered in
the ADT litigation. Under the terms of this settlement, the three insurers
received a total of $12.97 million from the funds in escrow. At that time, the
Company received an additional $2.2 million from the funds in escrow, net of
litigation expenses. Approximately $6.3 million was held in escrow pending
resolution of the claims between the Company and its primary property insurer.
In September 1998, the Court of Appeals, among other things, reversed the trial
court's award of $4.25 million to the Company's primary property insurer on its
subrogation claim, concluding that the trial court had erred in making that
award to the insurer when the Company had not been fully compensated for its
property loss. This decision rendered moot the remainder of the appeals. The
insurer appealed this decision to the Louisiana Supreme Court which denied the
appeal. In February and March 1999, the Company received additional funds
totaling $3.79 million, net of litigation expenses, constituting the final
distribution of the funds held in escrow.
-15-
<PAGE> 17
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 the discovery stages,
and the Company has filed a motion for summary judgment. Livingston had
previously filed a series of other legal actions against the Company which were
resolved in the Company's favor. Management believes that Livingston's claims in
this case are without merit. However, there is no assurance that the Company
will successfully defend all of Livingston's claims. Because the amount in
question has not yet been determined but could be substantial and because there
is no assurance that there will be insurance coverage or that it will be
adequate, as discussed below, the failure of the Company to prevail in this
lawsuit could have a material adverse effect on the Company's operations,
financial condition and cash flows.
In a declaratory judgment action related to the Livingston suit brought by
insurers for the Company and several of its affiliates, which case has been
consolidated with the suit filed by Livingston, on January 14, 1999 the U. S.
District Court granted the Company's motion for summary judgment, finding that
coverage exists under certain of the Company's insurance policies for claims
asserted by Livingston and that the insurers have a duty to defend. The insurers
have filed a motion for new trial that is pending in the U. S. District Court.
There is no assurance that the motion for new trial will be denied or, if
denied, that the decision of the U. S. District Court will be affirmed on appeal
or that the insurance policies will provide sufficient coverage to indemnify the
Company fully.
A suit was filed in 1996 by the Louisiana Horsemen's Benevolent and Protective
Association ("LHBPA"), an association of horsemen organized to promote the
dissemination of information on issues critical to horsemen and the exchange of
ideas and information, against the Company, the State of Louisiana, and all
other pari-mutuel wagering facilities operating in Louisiana. The LHBPA is
seeking a larger portion of video poker proceeds on the ground that the State of
Louisiana and the horse racing tracks in
-16-
<PAGE> 18
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Louisiana have misinterpreted a Louisiana statute specifying the amount of
revenues from video poker machines at pari-mutuel wagering facilities that are
to be used as purse supplements. Management believes that the Company is in
compliance with the Louisiana statute and the guidelines established by the
Louisiana State Police Gaming Division, which regulates compliance with the
State of Louisiana video poker law, and that the Company has sufficient defenses
to all claims. However, there is no assurance that the Company will successfully
defend the LHBPA's claims. Because the amount in question could be substantial,
the failure by the Company to prevail in this lawsuit could have a material
adverse effect on the Company's operations, financial condition and cash flows.
In July 1997, Evelyn Allen and other present or former security or concessions
employees of the Company filed an action in the United States District Court in
New Orleans claiming that the plaintiffs were entitled, under the Fair Labor
Standards Act, to overtime differential pay for hours worked over 40 in each
work week from July 1994 to July 1997. Two of the plaintiffs also sought to
recover damages for alleged retaliatory discharge. In December 1998, the Company
and the plaintiffs reached a settlement agreement and in May 1999 the Company
paid the plaintiffs $100,000 in full settlement of all claims for overtime pay.
The retaliatory discharge claims were tried in December 1998. At the conclusion
of evidence, the court dismissed those claims. The plaintiffs' claim for
attorneys fees has not yet been resolved.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
NOTE 2 - ADVANCE
In January 1999, the Company received a non-interest bearing advance of
$1,000,000 from Video Services, Inc., and is being repaid in six equal monthly
installments beginning in February 1999. The unpaid balance of the advance is
included in notes payable in the financial statements.
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<PAGE> 19
NOTE 3 - RECLASSIFICATION
In the three months and the six months ended April 30, 1999, host track fee
income was reported at its contractual rate of approximately 3% of the betting
handle. In the prior comparable periods, host track fee income was shown net of
related purse expenses. The April 30, 1998 host track fees and related purse
expenses have been reclassified to conform to the current three months and six
months presentations. This reclassification has no effect on the earnings for
the three months or six months ended April 30, 1998.
NOTE 4 - GUARANTY FEE
In March 1999, the Company, as approved by its Board of Directors, paid to Marie
G. Krantz a guaranty fee in the amount of $988,789, which was computed on the
basis of the Company's outstanding reconstruction indebtedness during the period
set forth below, for her guaranty of, and pledge of personal assets to secure,
the Company's reconstruction debt from 1995 through completion of construction
in late 1997. Such fee is included General and Administrative Expenses -
Miscellaneous for the three months and six months ended April 30, 1999.
-18-
<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, 1999 AND 1998
Revenues. During the fiscal quarters ended April 30, 1999 and 1998,
the Company derived its pari-mutuel income by conducting live racing
41 and 42 days, respectively, during each fiscal quarter and in the
operation of its tele-tracks for off-track wagering. During each
such fiscal quarter, in addition to live racing conducted at the
Fair Grounds Race Course in New Orleans, 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 Corporation, an affiliated company, the Company operated
tele-track facilities in Terrebonne, St. Tammany, and Jefferson
Parishes, Louisiana.
For the fiscal quarter ended April 30, 1999, the Company reported
total in-state pari-mutuel wagering of $40,852,671 compared to
$38,402,692 in the same quarter in fiscal 1998.
Comparative pari-mutuel wagering and attendance figures for the
quarters ended April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 13,126,751 $12,577,916
Off-track handle 27,725,920 25,824,776
------------ -----------
Total in-state wagering $ 40,852,671 $38,402,692
============ ===========
Out-of-state simulcast handle $156,644,135 $98,940,282
============ ===========
Total On-Track Attendance 163,551 179,022
============ ===========
</TABLE>
The Company attributes the $548,835, or 4.4%, increase in the
on-track handle in the current fiscal quarter primarily to additions
to the amenities provided by the new racing facility and the
improved quality of racing
-19-
<PAGE> 21
resulting from increased purses paid in the current fiscal quarter.
The Company believes that the $1,901,144, or 7.3%, increase in
off-track handle is primarily due to the Company transmitting better
simulcasting signals and to higher quality horses racing in the
Company's 1998-99 live racing meet. The $57,703,853, or 58.3%,
increase in out-of-state handle is believed to be the result of
those same factors. In addition, during the second quarter of fiscal
1999 the Company's races were sometimes simulcasted to some
locations that do not generally simulcast the Company's races
because certain other tracks were unable to race due to severe
winter weather, thus increasing the Company's simulcasting handle.
During the quarter ended April 30, 1999, the Company experienced
significant handle increases from California and New York. These two
markets accounted for approximately $35.9 million of the handle
increase.
With the increase in total handle, the Company's operating revenues
in the quarter ended April 30, 1999 increased by $2,838,105, or
23.5%, from the prior comparable fiscal quarter. This included
increases of $941,583, or 12.4%, in pari-mutuel commissions,
$68,372, or 41.7%, in breakage, $28,935, or 46.7%, in uncashed
mutuel tickets, $1,510,503, or 46.4%, in host track fees, $6,380, or
1.5%, in video poker revenues, $5,439, or 26.5%, in parking
revenues, $20,407, or 4.9% in programs and forms revenue, $111,599,
or 67.1% in admissions revenue, and $124,541, or 81%, in
miscellaneous revenues.
As previously reported, in fiscal 1998, all box and suite admissions
revenues were recognized in the quarter ended January 31, 1998,
rather than pro-rated over the racing season as is being done in
fiscal 1999. As a result, the increase in admissions during the
current fiscal quarter is attributable to the timing of revenue
recognition.
Racing Expenses. Total racing expenses for the quarter ended April
30, 1999 increased $2,107,444, or 20.9%, over the prior comparable
fiscal quarter, primarily as a result of the increased pari-mutuel
activities.
-20-
<PAGE> 22
These included an increase of $1,297,292, or 31.4%, in purses. Other
increases included salaries and related taxes and benefits, contracts
and services, programs, forms and other supplies, advertising and
promotions, and miscellaneous racing expenses. These increases were
partially offset by decreases in host track fees paid by the Company
and repairs and maintenance. Maintenance costs were higher in the prior
comparable fiscal quarter due to certain costs associated with the move
to the new facilities.
General and Administrative Expenses. General and administrative
expenses increased by $1,643,416, or 124%, in the current fiscal
quarter primarily as a result of an increase in salaries due to
performance bonuses paid to key personnel, increased office expenses,
and increased legal fees relating to ongoing litigation discussed
elsewhere herein. Miscellaneous expenses increased in the current
fiscal quarter as a result of payment of a guaranty fee of $988,789
paid to Marie G. Krantz for her guaranty of, and pledge of personal
assets to secure, the Company's reconstruction debt from 1995 through
completion of construction in late 1997. These increases were partially
offset by decreases in insurance costs due to lower property and
general liability premiums.
Other Income (Expense). Other income increased in the current fiscal
quarter by $530,028, or 91.3%, primarily as a result of a $527, 952
increase in Jazz and Heritage Festival income. The increase in Jazz and
Heritage Festival income was primarily attributable to a timing
difference, with five days of the 1999 Jazz and Heritage Festival
falling in the second quarter of fiscal 1999 compared to three days of
the 1998 Jazz and Heritage Festival falling in the second quarter of
fiscal 1998.
-21-
<PAGE> 23
Extraordinary Items. During fiscal quarter ended April 30, 1999, the
Company received settlement payments in connection with the fire
related litigation previously reported in the aggregate amount of
$3.79 million. These proceeds were reported net of related taxes of
approximately $1.52 million. In the prior comparable fiscal quarter,
no settlement proceeds were received.
Income Taxes. For the fiscal quarter ended April 30, 1999 income tax
expense was $521,353 compared to income tax expense of $463,257 in
the comparable quarter in fiscal 1998. The difference between
periods reflects changes in pretax income between the respective
periods, as well as the inclusion in the income tax expense for the
current year period of an adjustment for the under accrual of income
taxes for the quarter ended January 31, 1999.
Net Income. The Company reported net income of $2,615,083 for the
fiscal quarter ended April 30, 1999 compared to $788,788 for the
fiscal quarter ended April 30, 1998. Excluding the extraordinary
items discussed above, net income in the current year quarter was
$347,965 compared to $788,788 in the quarter ended April 30, 1998.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1999 AND 1998
Revenues. During the six months ended April 30, 1999 and 1998, the
Company derived its pari-mutuel income by conducting live racing 88
days during each six month period and in the operation of its
tele-tracks for off-track wagering. During each such period, in
addition to live racing conducted at the Fair Grounds Race Course in
New Orleans, 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 Corporation, an affiliated company,
the Company operated tele-track facilities in Terrebonne, St.
Tammany, and Jefferson Parishes, Louisiana.
-22-
<PAGE> 24
For the six months ended April 30, 1999, the Company reported total
in-state pari-mutuel wagering of $78,537,304 compared to $73,513,200 in
the same period in fiscal 1998.
Comparative pari-mutuel wagering and attendance figures for the six
months ended April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 27,412,562 $ 25,789,351
Off-track handle 51,124,742 47,723,849
------------ ------------
Total in-state wagering $ 78,537,304 $ 73,513,200
============ ============
Out-of-state simulcast handle $321,342,925 $219,770,183
============ ============
Total On-Track Attendance 336,466 365,617
============ ============
</TABLE>
The Company attributes the $1,623,211, or 6.3%, increase in the
on-track handle in the current six month period primarily to
additions to the amenities provided by the new racing facility and
the improved quality of racing resulting from increased purses paid
in the current six month period.
The Company believes that the $3,400,893, or 7.1%, increase in
off-track handle is primarily due to the Company transmitting better
simulcasting signals and to higher quality horses racing in the
Company's 1998-99 live racing meet. The $101,572,742, or 46.2%,
increase in out-of-state handle is believed to be the result of
those same factors. In addition, during the first six months of
fiscal 1999 the Company's races were sometimes simulcasted to some
locations that do not generally simulcast the Company's races
because certain other tracks were unable to race due to severe
winter weather, thus increasing the Company's simulcasting handle.
During the six months ended April 30, 1999, the Company experienced
significant handle increases from California and New York. These two
markets accounted for approximately $46.4 million of the handle
increase.
With the increase in total handle, the Company's operating revenues
in the six months ended April 30, 1999 increased by $4,696,210, or
19%, from the prior
-23-
<PAGE> 25
period. This included increases of $1,661,380, or 11.5%, in pari-mutuel
commissions, $130,32, or 42.6%, in breakage, $41,164, or 31%, in
uncashed mutuel tickets, $2,476,490, or 33.2%, in host track fees,
$36,473, or 4.3%, in video poker revenues, $12,753, or 29.1%, in
parking revenues, and $349,709, or 115%, in miscellaneous revenues,
which included approximately $150,000 of promotional fee revenues paid
by third parties who advertise in the Company's racing program,
partially offset by a $39,394, or 6.4%, decrease in admissions revenues
and a $10,996, or 1.2%, decrease in programs and forms revenue.
Racing Expenses. Total racing expenses increased $2,874,756, or 13.7%,
over the prior period, primarily as a result of the increased
pari-mutuel activities. These included an increase of $1,917,873, or
21.5%, in purses. Other increases included salaries and related taxes
and benefits, contracts and services, programs, forms and other
supplies, advertising and promotions, host track fees paid by the
Company and miscellaneous racing expenses. These increases were
partially offset by decreases in utilities and repairs and maintenance,
which were higher in the prior period as a result of the move to the
new facilities.
General and Administrative Expenses. General and administrative
expenses increased by $1,629,779, or 65.3%, in the current six month
period primarily as a result of increased salaries due to performance
bonuses paid to key personnel, increased office expenses, increased
property taxes, and increased legal fees relating to ongoing litigation
discussed elsewhere herein. Miscellaneous expenses increased in the
current six month period as a result of a payment of guaranty fee of
$988,789 paid to Marie G. Krantz for her guaranty of, and pledge of
personal assets to secure, the Company's reconstruction debt from 1995
through completion in late 1997. These increases were partially offset
by decreases in insurance costs due to lower property and general
liability premiums, and decreased contracts and services.
Other Income (Expense). Other income increased in the six months ended
April 30, 1999 by $479,613, or 75.6%,
-24-
<PAGE> 26
as a result of a $527,952 increase in Jazz and Heritage Festival
income. The increase in Jazz and Heritage Festival income was
primarily attributable to a timing difference, with five days of the
1999 Jazz and Heritage Festival falling in the current fiscal year
period compared to three days of the 1998 Jazz and Heritage Festival
falling in the comparable prior fiscal year period.
Extraordinary Items. During the six months ended April 30, 1999, the
Company received settlement payments in connection with the fire
related litigation previously reported in the aggregate amount of
$3.98 million. These proceeds were reported net of related taxes of
approximately $1.59 million. In the comparable prior fiscal year
period, settlements totaled $7.7 million and were reported net of
$2.85 million of related taxes.
Income Taxes. For the six months ended April 30, 1999 income tax
expense was $1,174,670, compared to income tax expense of $726,588
for the comparable six months in fiscal 1998. The difference between
periods reflects changes in pretax income between the respective
periods.
Net Income. The Company reported net income of $3,850,337 for the
six months ended April 30, 1999 compared to $6,088,163 for the six
months ended April 30, 1998. Excluding the extraordinary items
discussed above, net income in the current six month period was
$1,460,369 compared to $1,237,163 in the six month period ended
April 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents decreased $3,207,102 during the six months
ended April 30, 1999, compared to a decrease of $2,511,972 during
the six months ended April 30, 1998. The decrease in cash and cash
equivalents in fiscal 1999 was the result of cash used by operations
of $7,053,714, partially offset by cash
-25-
<PAGE> 27
provided by investing activities of $3,726,101, and cash provided by
financing activities of $120,511.
Cash used in operations was primarily due to the payment of purses
during the Company's live racing meet. Cash provided by financing
was primarily the result of an advance of $1 million from the
Company's video poker operator less amounts repaid to date. Cash
provided from investing was primarily from proceeds from fire
litigation settlements described elsewhere herein.
As of April 30, 1999, the Company had received cumulatively, since
the December 1993 fire, approximately $48 million, before taxes, of
insurance proceeds resulting from fire loss claims submitted to the
Company's insurance carriers or in litigation settlements. 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
and furnishing the facility, including the tele-track facility at
the Fair Grounds Race Course that was completed in late 1994,
through April 30, 1999 was in excess of $35 million.
On April 14, 1998, the Company entered into a working capital line
of credit agreement with First National Bank of Commerce (now Bank
One) for a term of one year. The line of credit is for $2.5 million
with interest at 8% on amounts outstanding. The credit agreement has
been extended beyond April 14, 1999 but terms have not yet been
finalized. There were no amounts drawn down or outstanding on this
line of credit during the six months ended April 30, 1999.
In January 1999, the Company received a $1.0 million non-interest
bearing advance from its video poker operator which was repayable in
six equal monthly installments. The Company began repaying such
advance in February 1999.
The Company believes that the combination of existing cash, cash
from future operations, any additional amounts received in the
fire-related litigation, funds
-26-
<PAGE> 28
available under its working capital line of credit, and the
Company's increased capacity to incur short-term and long-term
indebtedness, if necessary, will be sufficient to fund the Company's
cash requirements for the foreseeable future, including the
repayment of the remaining balance of the $1.0 million advance from
the Company's video poker operator. As a result of the fire
insurance and other litigation settlements received, the Company has
a total net deferred tax liability of approximately $7.04 million at
April 30, 1999. The deferred tax liability is to be paid over
approximately 39 years in accordance with Internal Revenue Service
regulations. The Company intends to fund these future tax
obligations through operations.
Year 2000 Compliance
A significant part of the Company's operations are dependent on
computer systems and applications. These systems are either owned by
the Company or are provided under contract by third party technology
or other service providers. If these systems are not year 2000
compliant, the Company could experience system failures or
miscalculations leading to disruption of business operations.
In fiscal 1998 the Company began, and is now continuing, its
assessment of its data processing functions to determine if they are
year 2000 compliant. The Company has a task force which is assisting
in its assessment of year 2000 readiness. Based in part on that
assessment, in fiscal 1998 the Company purchased and installed an
updated version of its accounting software that its vendor states is
year 2000 compliant and is now in the process of testing that
compliance. The Company has also made, and is continuing to make,
inquiries to third party providers as to their compliance and is in
the process of obtaining written assurances from certain vendors, as
well as other race tracks with which the Company interfaces, as to
their year 2000 readiness. The Company's plant and equipment, as
well as the providers of services to the plant and equipment, are
also being reviewed to determine whether they are year 2000 ready.
The services of those providers, including electrical and
-27-
<PAGE> 29
telephone services, are essential to the Company's ability to
operate. The Company's most significant third party technology
services provider is Autotote, which performs the totalisator
functions for the Company. The Company's contract with Autotote
provides that the services are to be year 2000 compliant. The
Company has been advised that Autotote has contracted with a third
party consultant to attain such compliance. The Company has also
been advised that Autotote is currently conducting year 2000
compliance testing and that Autotote believes it has completed most
of the steps required for it to be year 2000 compliant. If Autotote
does not become compliant, the Company's operations could be
adversely affected until another provider of the totalisator
function can be found. The Company's video services are provided by
a third party provider, which is an affiliate of Autotote, and are
also important to the Company's operations. These services include
the production of the telecast signal at the Fair Grounds Race
Course and distribution to the Company's tele-tracks and to other
wagering facilities within and outside Louisiana. The Company is
working with such provider to ensure that the software applications
that provide the graphical enhancements and other distinguishing
features to the telecast signals are year 2000 compliant. The video
poker devices at the Company's facilities are provided by another
third party provider. The Company is working with that provider to
ensure that such equipment is year 2000 compliant. The failure of
certain third party providers to complete their year 2000 resolution
process could materially impact the Company. As a result, the
Company will consider developing business relationships with
alternative providers as necessary and if available.
To date, the Company has incurred costs of approximately $45,000,
including the cost and time of Company employees, to address year
2000 issues. Although the Company has not completed its assessment
of its facility, data processing and other equipment and,
accordingly, has not determined the total costs associated with its
efforts to prepare for year 2000, the Company currently believes
that the costs of
-28-
<PAGE> 30
addressing its year 2000 transition will not have a material adverse
effect on the Company's financial condition or business operations.
The Company expects to complete its assessment of year 2000
compliance by August 1999 and to complete any necessary remediation
of critical systems by October 31, 1999. The Company has not yet
completed 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.
-29-
<PAGE> 31
PART II
OTHER INFORMATION
-30-
<PAGE> 32
Item 1. Legal Proceedings.
For a description of material developments during the quarter ended April 30,
1999 in the Company's legal proceedings 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.
For a description of material developments during the first quarter of fiscal
1999 in the Company's legal proceedings, see the Company's Form 10-Q for the
quarter ended January 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on March 17, 1999, 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 355,606 shares voted for
ratification, no shares voted against and 760 abstentions. The voting with
respect to the nominees for election as directors was as follows:
<TABLE>
<CAPTION>
Nominee Vote Abstentions
----------------- -----------
For Withheld
--- --------
<S> <C> <C> <C>
Katherine F. Duncan 355,606 0 760
Richard Katcher 355,606 0 760
Bryan G. Krantz 355,606 0 760
Marie G. Krantz 355,606 0 760
Ronald S. Maestri 355,606 0 760
Charmaine R. Morel 355,606 0 760
Wayne E. Thomas 355,606 0 760
</TABLE>
-31-
<PAGE> 33
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (Filed electronically only)
-32-
<PAGE> 34
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 11, 1999 By: /s/ Bryan G. Krantz
----------------------- ------------------------------
President
Date: June 11, 1999 By: /s/ Gordon M. Robertson
----------------------- ------------------------------
Chief Financial Officer
-33-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 4,496
<SECURITIES> 0
<RECEIVABLES> 1,593
<ALLOWANCES> 0
<INVENTORY> 128
<CURRENT-ASSETS> 8,482
<PP&E> 52,212
<DEPRECIATION> 16,888
<TOTAL-ASSETS> 47,370
<CURRENT-LIABILITIES> 6,290
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 32,511
<TOTAL-LIABILITY-AND-EQUITY> 47,370
<SALES> 12,597
<TOTAL-REVENUES> 14,935
<CGS> 0
<TOTAL-COSTS> 12,209
<OTHER-EXPENSES> 2,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 869
<INCOME-TAX> 521
<INCOME-CONTINUING> 348
<DISCONTINUED> 0
<EXTRAORDINARY> 2,267
<CHANGES> 0
<NET-INCOME> 2,615
<EPS-BASIC> 5.58
<EPS-DILUTED> 5.58
</TABLE>
