<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, 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)
<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)
</TABLE>
Registrant's telephone number including area code (504) 944-5515
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Not Applicable
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(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days.
[X] Yes [ ] No
468,580 Common Shares were outstanding as of September 1, 1999.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
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<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, July 31, 1999 (Unaudited)
and Balance Sheet, October 31, 1998 3
Statements of Operations and Retained
Earnings for the Three Months Ended
July 31, 1999 and 1998 (Unaudited) 5
Statements of Operations and Retained
Earnings for the Nine Months Ended
July 31, 1999 and 1998 (Unaudited) 8
Statements of Cash Flows for the Nine
Months Ended July 31, 1999 and 1998
(Unaudited) 11
Notes to Financial Statements for the Nine
Months Ended July 31, 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. None
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES
</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)
July 31, October 31,
1999 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,662,561 $ 7,577,730
Cash and cash equivalents
- restricted 125,665 118,218
Accounts receivable 631,969 1,078,638
Mutuel settlements -- 139,964
Inventory 121,983 118,357
Prepaid expenses 1,867,349 437,322
Deferred Taxes 59,940 59,940
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Total Current Assets 10,469,467 9,530,169
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OTHER ASSETS 271,802 283,411
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PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 44,054,580 43,870,295
Land improvements 4,321,672 4,348,135
Automotive equipment 963,243 931,424
Machinery and equipment 2,679,060 2,432,433
Furniture and fixtures 394,118 366,575
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Total 52,412,673 51,948,862
Less: accumulated depreciation
and amortization (17,372,131) (15,904,346)
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Depreciable property - net 35,040,542 36,044,516
Land 3,286,281 3,286,281
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Property, plant and
equipment - net 38,326,823 39,330,797
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TOTAL ASSETS $ 49,068,092 $ 49,144,377
============ ============
</TABLE>
(Continued)
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<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
1999 1998
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 193,750 $ 46,894
Accounts payable 187,227 1,493,409
Construction contract payable -- 58,732
Accrued liabilities:
Deferred purses 4,991,134 7,930,825
Host track fees 429,372 374,251
Mutuel settlements 171,563 --
Uncashed mutuel tickets 475,612 446,786
Other 268,413 369,135
Deferred revenues 237,610 275,701
Income taxes payable 1,996,720 450,185
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Total Current Liabilities 8,951,401 11,445,918
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DEFERRED INCOME TAXES 7,043,865 7,043,865
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Total Liabilities 15,995,266 18,489,783
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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 29,646,557 27,228,325
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Total 33,108,351 30,690,119
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
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Total Stockholders' Equity 33,072,826 30,654,594
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 49,068,092 $ 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 July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 5,202,953 $ 5,070,392
Breakage 141,970 116,358
Uncashed mutuel tickets 267,610 273,736
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Total 5,612,533 5,460,486
Less: pari-mutuel tax 678,765 705,371
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Total Mutuel Income 4,933,768 4,755,115
Concessions 295,583 311,058
Video poker (net) 416,584 406,499
Admissions(net of taxes) 73,032 77,598
Programs and forms 318,532 393,507
Miscellaneous 283,098 167,595
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Total Operating Revenues 6,320,597 6,111,372
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RACING EXPENSES
Purses 1,936,626 1,830,360
Salaries and related taxes
and benefits 1,730,864 1,293,228
Contracts and services 437,302 293,121
Host track fees 831,271 799,421
Depreciation 484,341 524,480
Cost of sales - concessions 89,431 125,948
Utilities 223,855 291,923
Repairs and maintenance 145,506 196,256
Programs, forms and other
supplies 324,599 373,140
Advertising and promotion 373,885 367,361
Rent 101,579 68,960
Miscellaneous 67,742 214,729
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Total Racing Expenses $ 6,747,001 $ 6,378,927
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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 July 31, 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 $ 373,965 $ 442,383
Insurance 241,632 195,186
Property taxes 244,680 224,071
Legal, audit and director fees 359,250 187,625
Contracts and services 33,027 25,155
Office expenses 96,458 41,468
Miscellaneous 83,468 47,362
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Total General and
Administrative Expenses 1,432,480 1,163,250
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NET LOSS FROM OPERATIONS (1,858,884) (1,430,805)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 193,674 863,842
Interest expense (6,712) --
Interest income 45,403 37,391
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Loss Before Benefit For Income Taxes
and Extraordinary Item (1,626,519) (529,572)
Benefit for income taxes (662,994) (580,600)
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
(per share - 1999 - ($2.06),
1998 - $.11) (963,525) 51,028
Extraordinary item - gain from fire -- 1,452,000
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(net of $748,000 taxes in 1998)
NET INCOME (Loss) (per share
1999 - ($2.06), 1998 - $3.21) $ (963,525) $ 1,503,028
RETAINED EARNINGS, BEGINNING OF
PERIOD $ 30,610,082 $ 24,342,817
RETAINED EARNINGS, END OF PERIOD $ 29,646,557 $ 25,845,845
============ ============
</TABLE>
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<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<S> <C> <C>
CASH DIVIDENDS PER SHARE $ NONE $ NONE
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ============
</TABLE>
-7-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Nine Months Ended July 31,
1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 20,881,549 $ 19,463,106
Breakage 578,369 422,432
Uncashed mutuel tickets 441,634 406,596
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Total 21,901,552 20,292,134
Less: pari-mutuel tax (2,626,526) (2,579,406)
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Commission income 19,275,026 17,712,728
Host track fees 10,311,004 7,284,312
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Total Mutuel Income 29,586,030 24,997,040
Concessions 2,045,898 1,949,611
Video poker (net) 1,295,708 1,248,880
Admissions(net of taxes) 647,019 690,959
Parking 56,606 43,287
Programs and forms 1,188,800 1,274,771
Miscellaneous 935,555 470,931
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Total Operating Revenues 35,755,616 30,612,479
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RACING EXPENSES
Purses 12,748,240 10,549,397
Salaries and related taxes
and benefits 6,403,511 5,642,517
Contracts and services 2,331,287 1,803,313
Host track fees 2,477,603 2,337,305
Depreciation 1,464,857 1,486,909
Cost of sales - concessions 659,576 667,721
Utilities 722,611 852,279
Repairs and maintenance 520,760 636,118
Programs, forms and other
supplies 1,486,922 1,451,062
Advertising and promotion 1,105,582 926,752
Rent 266,292 244,232
Miscellaneous 526,551 518,653
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Total Racing Expenses $ 30,713,792 $ 27,116,258
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</TABLE>
(Continued)
-8-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 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 $ 1,577,235 $ 1,051,800
Insurance 657,713 671,630
Property taxes 724,550 585,764
Legal, audit and director fees 795,897 561,356
Loan closing costs -- 24,042
Contracts and services 97,321 142,864
Office expenses 252,726 341,722
Miscellaneous 1,274,084 281,341
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Total General and
Administrative Expenses 5,379,526 3,660,519
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NET LOSS FROM OPERATIONS (337,702) (101,298)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 1,248,320 1,390,536
Interest expense (17,021) (12,509)
Interest income 114,923 100,897
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 1,008,520 1,434,159
Provision for income taxes 511,676 376,968
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INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1999 - $1.06,
1998 - $2.26) 496,844 1,057,191
Extraordinary item - gain from fire
(net of $1,593,312 and $3,366,000
of taxes in 1999 and 1998,
respectively) 2,389,968 6,534,000
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NET INCOME (per share
1999 - $6.16, 1998 - $16.20) $ 2,886,812 $ 7,591,191
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 Nine Months Ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
DIVIDENDS PAID (468,580) --
RETAINED EARNINGS, END OF PERIOD $ 29,646,557 $ 25,845,845
============ ============
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 Nine Months Ended April 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,886,812 $ 7,591,191
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Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (3,983,280) (9,900,000)
Depreciation 1,464,857 1,486,909
Deferred income taxes -- 3,635,528
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 586,633 635,007
Inventory (3,656) 13,326
Prepaid expenses (1,429,997) (483,695)
Restricted cash (7,447) --
Increase (decrease) in
Accounts payable and
accrued liabilities (1,180,220) (923,133)
Deferred revenue (38,091) (155,360)
Deferred purses (2,939,691) (2,599,495)
Income taxes payable 1,546,535 (121,000)
Uncashed mutuel tickets 28,826 120,375
Contracts payable (58,732) --
Total adjustments (6,041,263) (8,251,538)
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Net cash used for operating
activities (3,127,451) (660,347)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from litigation
settlement 3,983,280 9,900,000
Capital expenditures (460,883) (4,147,589)
Decrease in deposits 11,609 7,503
Proceeds provided by sale of
investment securities -- 596,000
Decrease in restricted cash -- 2,525,484
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Net cash provided by investing
activities 3,534,006 8,881,398
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</TABLE>
(Continued)
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<PAGE> 13
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Nine Months Ended July 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 346,131 $ 110,650
Principal repayments on loans (199,275) (5,318,903)
Advances from third party 1,000,000 1,000,000
Repayments to third party (1,000,000) (1,000,000)
Dividends paid (468,580) --
------------ ------------
Net cash used for
financing activities (321,724) (6,571,391)
------------ ------------
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS 84,831 (2,546,197)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,577,730 6,264,934
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 7,662,561 $ 3,718,737
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 17,021 $ 391,182
============ ============
Income taxes paid $ 1,283,000 $ --
============ ============
</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 nine
months ended July 31, 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.
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<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 grounds 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. In August 1999, the plaintiffs
were awarded attorneys fees in the amount of $65,000 which have been paid by the
Company.
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. This advance was repaid in full in six
equal monthly installments beginning in February 1999.
-17-
<PAGE> 19
NOTE 3 - RECLASSIFICATION
In the three months and the nine months ended July 31, 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 July 31, 1998 host track fees and related purse
expenses have been reclassified to conform to the current three months and nine
months presentations. This reclassification has no effect on the earnings for
the three months or nine months ended July 31, 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 nine months ended July 31, 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 JULY 31, 1999 AND 1998
Revenues. During the fiscal quarters ended July 31, 1999 and 1998, the
Company derived its pari-mutuel income from the operation of its
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 July 31, 1999, the Company reported total
pari-mutuel wagering of $25,835,364 compared to $25,026,636 in the same
quarter in fiscal 1998.
Comparative pari-mutuel wagering and attendance figures for the
quarters ended July 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Pari-mutuel wagering:
Off-track handle 25,835,364 25,026,636
---------- ----------
Total Attendance 117,459 113,427
========== ==========
</TABLE>
The Company attributes the $808,728, or 3.2%, increase in off-track
handle primarily to increased attendance at the teletracks.
With the increase in off-track teletrack handle, the Company's
operating revenues in the quarter ended July 31, 1999 increased by
$209,225, or 3.4%, from the prior comparable fiscal quarter. This
included increases of $132,561, or 2.6%, in pari-mutuel commissions,
$25,612, or 22%, in breakage, $10,085, or 2.5%, in video poker
revenues, $21,042, or 6.8%, in net concession sales, and $115,503, or
68.9%, in miscellaneous revenues.
-19-
<PAGE> 21
Miscellaneous revenue increased primarily as a result of additional
promotional fee revenue received in the current fiscal quarter. In
addition, the Company also reported approximately $30,000 in special
event sales that did not occur in the prior comparable fiscal quarter.
These increases were partially offset by decreases in concessions,
admissions, and forms and programs revenues. Admissions are no longer
being collected at the Company's teletrack in Lafourche Parish.
Programs and forms sales and related costs decreased as a result of the
continued decline of racing forms sales. Management believes racing
form sales are being replaced by the sales of less expensive racing
programs.
Racing Expenses. Total racing expenses for the quarter ended July 31,
1999 increased $368,074, or 5.8%, over the prior comparable fiscal
quarter, partially as a result of the increased pari-mutuel activities.
These included an increase of $106,266, or 5.8%, in purses. Other
increases included salaries and related taxes and benefits, contracts
and services, host track fees, advertising and promotions, and rent.
Salaries and related taxes and benefits increased, in part, due to the
payment of approximately $130,000 in back wages in connection with the
previously reported settlement of claims for overtime pay. The increase
was also due, in part, to salary adjustments made during the current
year period. These increases were partially offset by decreases in
utilities, repairs and maintenance, programs, forms and other supplies
and miscellaneous expenses. Certain repairs and maintenance costs were
higher in the prior comparable fiscal quarter due to costs associated
with the move to, and the first year operations in, the new facilities.
The rent increase in the current fiscal quarter represents a
retroactive rent increase at the Bourbon Street teletrack.
In the prior comparable fiscal quarter, miscellaneous expense included
breeders' awards of approximately $130,000. The breeders' awards this
year were approximately $122,000 and were included in the fiscal
quarter ended April 30, 1999.
-20-
<PAGE> 22
General and Administrative Expenses. General and administrative
expenses increased by $269,230, or 23.1%, in the current fiscal quarter
primarily as a result of an increase in insurance, property taxes,
contracts and services, office expenses, miscellaneous expenses and
legal fees relating to ongoing litigation discussed elsewhere herein.
These increases were partially offset by a decrease in salaries and
related taxes and benefits.
Other Income (Expense). Other income decreased in the current fiscal
quarter by $655,481, or 72.7%, primarily as a result of a $670,168
decrease in Jazz and Heritage Festival income. The decrease in Jazz and
Heritage Festival income was primarily attributable to a timing
difference, with two days of the 1999 Jazz and Heritage Festival
falling in the third quarter of fiscal 1999 compared to four days of
the 1998 Jazz and Heritage Festival falling in the third quarter of
fiscal 1998.
Extraordinary Item. During fiscal quarter ended July 31, 1998, the
Company received settlement payments in connection with the fire
related litigation previously reported in the aggregate amount of $2.2
million. These proceeds were reported net of related taxes of
approximately $748,000. No settlement proceeds were received in the
quarter ended July 31, 1999.
Income Taxes. For the fiscal quarter ended July 31, 1999 income tax
benefit was $662,994 compared to an income tax benefit of $580,600 in
the comparable quarter in fiscal 1998. The difference between periods
reflects changes in pretax income and changes in deferred tax assets
and liabilities between the respective periods.
Net Income (Loss). The Company reported a loss of ($963,525) for the
fiscal quarter ended July 31, 1999 compared to net income of $1,503,028
for the fiscal quarter ended July 31, 1998. Excluding the extraordinary
item discussed above, net income in the quarter ended July 31, 1998 was
$51,028.
-21-
<PAGE> 23
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
Revenues. During the nine months ended July 31, 1999 and 1998, the
Company derived its pari-mutuel income by conducting live racing 88
days during each nine 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.
For the nine months ended July 31, 1999, the Company reported total
in-state pari-mutuel wagering of $104,372,668 compared to $98,467,254
in the same period in fiscal 1998.
Comparative pari-mutuel wagering and attendance figures for the nine
months ended July 31, 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 76,960,106 72,677,903
------------ ------------
Total in-state wagering $104,372,668 $ 98,467,254
============ ============
Out-of-state simulcast handle $321,342,925 $219,770,183
============ ============
Total On-Track Attendance 453,925 479,044
============ ============
</TABLE>
The Company attributes the $1,623,211, or 6.3%, increase in the
on-track handle in the current nine 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 during the
fiscal 1999 race meet.
The Company believes that the $4,282,203, or 5.9%, increase in
off-track handle is primarily due to the Company transmitting better
simulcasting signals and to
-22-
<PAGE> 24
higher quality horses racing in the Company's fiscal 1999 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 fiscal 1999 race meet the Company's races were sometimes
simulcasted to locations that do not generally receive simulcasts of
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 nine months ended July 31, 1999, the
Company experienced significant handle increases from California and
New York. These two markets accounted for approximately $46.4 million
or 46% of the handle increase.
With the increase in total handle, the Company's operating revenues in
the nine months ended July 31, 1999 increased by $5,143,137, or 16.8%,
from the prior period. This included increases of $1,418,443 or 7.3%,
in pari-mutuel commissions, $155,937, or 36.9%, in breakage, $96,287,
or 4.9%, in concessions, $3,026,692, or 41.5%, in host track fees,
$46,828, or 3.7%, in video poker revenues, $13,319, or 30.8%, in
parking revenues, and $527,624, or 1.29%, in miscellaneous revenues,
which included approximately $150,000 of promotional fee revenues paid
by third parties who advertise in the Company's racing program plus
$135,000 of promotional fees paid to the Company by its video poker
operator. In addition, also included in miscellaneous revenues is group
sales and special events revenues held at the Company's facilities
which are approximately $88,000 more than the prior comparable fiscal
quarter. These increases were partially offset by a $43,940, or 6.4%,
decrease in admissions revenues and a $85,971, or 6.7%, decrease in
programs and forms revenue. Admissions are no longer collected at the
Company's teletrack in Lafourche Parish. Programs and forms revenues
have decreased as a result of a continued decline of racing form sales.
Management believes racing form sales are being replaced by the sales
of less expensive racing programs.
-23-
<PAGE> 25
Racing Expenses. Total racing expenses increased $3,597,534, or 13.3%,
over the prior period, primarily as a result of the increased
pari-mutuel activities. This increase included an increase of
$2,198,843, or 20.8%, 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 $1,719,007, or 46.9%, in the current nine month
period primarily as a result of increased salaries due to performance
bonuses paid in the second fiscal quarter to key personnel, increased
property taxes, and increased legal fees relating to ongoing litigation
discussed elsewhere herein. Miscellaneous expenses increased in the
current nine 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, decreased contracts and services, and decreased
office expenses.
Other Income (Expense). Other income decreased in the nine months ended
July 31, 1999 by $132,702, or 9%, as a result of a $142,216 decrease in
Jazz and Heritage Festival income. The decrease in Jazz and Heritage
Festival income was primarily attributable to a $25,000 increase of the
festival sponsorship fee, a decrease in infield food sales compared to
the 1998 festival, and increased cost of goods sold at the 1999
festival.
Extraordinary Items. During the nine months ended July 31, 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
-24-
<PAGE> 26
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 nine months ended July 31, 1999 income tax
expense was $511,676, compared to income tax expense of $376,968 for
the comparable nine months in fiscal 1998. The difference between
periods reflects changes in pretax income and deferred tax assets and
liabilities between the respective periods.
Net Income. The Company reported net income of $2,886,812 for the nine
months ended July 31, 1999 compared to $7,591,191 for the nine months
ended July 31, 1998. Excluding the extraordinary items discussed above,
net income in the current nine month period was $496,844 compared to
$1,057,191 in the nine month period ended July 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $84,831 during the nine months
ended July 31, 1999, compared to a decrease of $2,546,197 during the
nine months ended July 31, 1998. The increase in cash and cash
equivalents in fiscal 1999 was the result of cash provided by investing
activities of $3,534,006, partially offset by cash used in operating
activities of $3,127,451, and cash used for financing activities of
$321,724.
Cash provided from investing was primarily from proceeds from fire
litigation settlements described elsewhere herein. Cash used in
operations was primarily due to the payment of purses during the
Company's live racing meet. Cash used by financing was primarily the
result of dividends paid on the Company's stock partially offset by
short term financing proceeds.
As of July 31, 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
-25-
<PAGE> 27
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 July 31,
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 a new credit agreement has not been
entered into with Bank One. The Company has had discussions with other
lenders about entering into a credit agreement with them. There is no
assurance that the Company will enter into a new credit agreement with
Bank One or any other lender. There were no amounts drawn down or
outstanding on this line of credit during the nine months ended July
31, 1999.
The Company believes that the combination of existing cash, cash from
future operations, any additional amounts received in the fire-related
litigation, funds 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. 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 July
31, 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
-26-
<PAGE> 28
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 has now substantially completed,
its assessment of its data processing functions to determine if they
are year 2000 compliant. The Company formed a task force which has
assisted 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 has now substantially completed the process of
testing that compliance.
The Company has also made inquiries to third party providers as to
their compliance and has obtained 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, have also been
questioned to determine whether they are year 2000 ready. The services
of those providers, including electrical and 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 the totalisator functions
provided by Autotote are year 2000 compliant. However, if, in fact,
Autotote is not 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
-27-
<PAGE> 29
within and outside Louisiana. The Company has worked 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 Company has been informed that most of
those applications are year 2000 compliant and has been assured that
the remaining applications will soon be year 2000 ready. The video
poker devices at the Company's facilities are provided by another third
party provider. The Company has been advised that such equipment is now
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 $50,000,
including the cost and time of Company employees, to address year 2000
issues. The Company has substantially completed its assessment of its
facility, data processing and other equipment and believes that the
total costs associated with its efforts to prepare for year 2000 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 the end of September 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.
-28-
<PAGE> 30
PART II
OTHER INFORMATION
-29-
<PAGE> 31
Item 1. Legal Proceedings.
For a description of material developments during the quarter ended July 31,
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 two quarters of
fiscal 1999 in the Company's legal proceedings, see the Company's Forms 10-Q for
the quarters ended January 31, 1999 and April 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (Filed electronically only)
-30-
<PAGE> 32
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 14, 1999 By: /s/ Bryan G. Krantz
----------------------- ---------------------------------
Bryan G. Krantz
President
Date: September 14, 1999 By: /s/ Gordon M. Robertson
----------------------- --------------------------------
Gordon M. Robertson
Chief Financial Officer
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE FAIR GROUNDS CORPORATION FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 7,788
<SECURITIES> 0
<RECEIVABLES> 632
<ALLOWANCES> 0
<INVENTORY> 122
<CURRENT-ASSETS> 10,469
<PP&E> 52,413
<DEPRECIATION> 17,372
<TOTAL-ASSETS> 49,068
<CURRENT-LIABILITIES> 8,951
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 31,548
<TOTAL-LIABILITY-AND-EQUITY> 49,068
<SALES> 29,586
<TOTAL-REVENUES> 35,756
<CGS> 0
<TOTAL-COSTS> 30,714
<OTHER-EXPENSES> 5,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 1,009
<INCOME-TAX> 512
<INCOME-CONTINUING> 497
<DISCONTINUED> 0
<EXTRAORDINARY> 2,390
<CHANGES> 0
<NET-INCOME> 2,887
<EPS-BASIC> 6.16
<EPS-DILUTED> 6.16
</TABLE>
