<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended January 31, 1999 Commission File Number O-7607
---------------- ------
FAIR GROUNDS CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-0361770
- --------------------------------------------------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
1751 Gentilly Blvd., New Orleans, LA 70119
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (504) 944-5515
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
---- ----
468,580 Common Shares were outstanding as of March 1, 1999.
<PAGE> 2
FAIR GROUNDS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, January 31, 1999 (Unaudited)
and Balance Sheet, October 31, 1998 ..................... 2
Statements of Operations and Retained
Earnings for the Three Months Ended
January 31, 1999 and 1998 (Unaudited) ................... 4
Statements of Cash Flows for the Three
Months Ended January 31, 1999 and 1998
(Unaudited) ............................................. 7
Notes to Financial Statements for the Three
Months Ended January 31, 1999 and 1998 (Unaudited)....... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 25
Item 6. Exhibits and Reports on Form 8-K......................... 25
SIGNATURES ................................................................. 26
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
-1-
<PAGE> 4
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,107,940 $ 7,577,730
Cash and cash equivalents
- restricted 125,665 118,218
Accounts receivable 4,278,790 1,078,638
Mutuel settlements 444,621 139,964
Inventory 172,690 118,357
Prepaid expenses 1,657,558 437,322
Deferred Taxes 59,940 59,940
------------ ------------
Total Current Assets 10,847,204 9,530,169
------------ ------------
OTHER ASSETS 279,761 283,411
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 43,870,295 43,870,295
Land improvements 4,348,135 4,348,135
Automotive equipment 931,424 931,424
Machinery and equipment 2,542,942 2,432,433
Furniture and fixtures 382,868 366,575
------------ ------------
Total 52,075,879 51,948,862
Less: accumulated depreciation
and amortization (16,400,522) (15,904,346)
------------ ------------
Depreciable property - net 35,675,142 36,044,516
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 38,961,423 39,330,797
------------ ------------
TOTAL ASSETS $ 50,088,388 $ 49,144,377
============ ============
</TABLE>
(Continued)
-2-
<PAGE> 5
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 1,168,578 $ 46,894
Accounts payable 267,878 1,493,409
Construction contract payable -- 58,732
Accrued liabilities:
Deferred purses 6,830,787 7,930,825
Host track fees 512,266 374,251
Uncashed mutuel tickets 550,431 446,786
Other 501,899 369,135
Deferred revenues 147,182 275,701
Income taxes payable 1,175,654 450,185
------------ ------------
Total Current Liabilities 11,154,675 11,445,918
------------ ------------
DEFERRED INCOME TAXES 7,043,865 7,043,865
------------ ------------
Total Liabilities 18,198,540 18,489,783
------------ ------------
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 28,463,579 27,228,325
------------ ------------
Total 31,925,373 30,690,119
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 31,889,848 30,654,594
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 50,088,388 $ 49,144,377
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 6
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 7,529,071 $ 6,809,274
Breakage 203,958 142,005
Uncashed mutuel tickets 83,177 70,948
----------- -----------
Total 7,816,206 7,022,227
Less: pari-mutuel tax 927,646 888,660
----------- -----------
Commission income 6,888,560 6,133,567
Host track fees 5,167,045 4,201,058
----------- -----------
Total Mutuel Income 12,055,605 10,334,625
Concessions 881,344 824,618
Video poker (net) 433,064 402,701
Admissions (net of taxes) 296,129 447,122
Parking 30,634 23,370
Programs and forms 430,147 461,550
Miscellaneous 373,413 148,245
----------- -----------
Total Operating Revenues 14,500,336 12,642,231
----------- -----------
RACING EXPENSES
Purses 5,377,051 4,756,470
Salaries and related taxes
and benefits 2,184,820 2,325,050
Contracts and services 734,000 735,836
Host track fees 763,755 599,097
Depreciation 496,176 510,410
Cost of sales - concessions 240,391 265,724
Utilities 199,870 255,654
Repairs and maintenance 245,214 214,875
Program paper, forms and other
supplies 587,879 580,453
Advertising and promotion 453,689 337,268
Rent 78,758 96,456
Miscellaneous 216,093 133,091
----------- -----------
Total Racing Expenses $11,577,696 $10,810,384
----------- -----------
</TABLE>
(Continued)
-4-
<PAGE> 7
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 307,013 $ 281,400
Insurance 227,611 219,118
Property taxes 233,403 142,216
Legal, audit and director fees 107,624 187,675
Loan closing costs -- 24,042
Contracts and services 53,457 91,214
Office expenses 126,338 142,378
Miscellaneous 105,071 86,111
------------ -----------
Total General and
Administrative Expenses 1,160,517 1,174,154
------------ -----------
NET INCOME FROM OPERATIONS 1,762,123 657,693
OTHER INCOME (EXPENSE)
Interest expense (9,789) --
Interest income 13,387 54,013
------------ -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 1,765,721 711,706
Provision for income taxes 653,317 263,331
------------ -----------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 1999 - $2.37,
1998 - $.96) 1,112,404 448,375
Extraordinary item - gain from fire
(net of $72,150 and $2,849,000 122,850 4,851,000
of taxes in 1999 and 1998, ------------ -----------
respectively)
NET INCOME (per share
1999 - $2.64, 1998 - $11.31) $ 1,235,254 $ 5,299,375
RETAINED EARNINGS, BEGINNING OF
PERIOD 27,228,325 18,254,654
------------ -----------
RETAINED EARNINGS, END OF PERIOD $ 28,463,579 $23,554,029
============ ===========
CASH DIVIDENDS PER SHARE $ NONE $ NONE
============ ===========
</TABLE>
-5-
<PAGE> 8
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
======= =======
</TABLE>
See accompanying notes to financial statements
-6-
<PAGE> 9
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,235,254 $ 5,299,375
----------- -----------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (195,000) (7,700,000)
Depreciation 496,176 510,410
Deferred income taxes -- 3,162,332
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,504,809) (2,870,496)
Inventory (54,333) (104,583)
Prepaid expenses (1,220,236) (1,028,312)
Restricted cash (7,447) 2,640,021
Increase (decrease) in
Accounts payable and
accrued liabilities (954,752) 883,236
Deferred revenue (128,519) 727,703
Deferred purses (1,100,038) (1,312,917)
Income taxes payable 725,469 --
Uncashed Mutuel Tickets 103,645 (1,156,726)
Contracts Payable (58,732) --
Total adjustments (5,898,576) (6,249,332)
----------- -----------
Net cash used for operating
activities (4,663,322) (949,957)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from litigation
settlement 195,000 7,700,000
Capital expenditures (126,802) (1,265,601)
Decrease in Deposits 3,650 2,504
Proceeds provided by sale of
investment securities -- 500,000
----------- -----------
Net cash provided by investing
activities 71,848 6,936,903
----------- -----------
</TABLE>
(Continued)
-7-
<PAGE> 10
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 200,627 $ 2,133,740
Principal repayments on loans (78,943) (7,298,178)
Advances from third party 1,000,000 1,000,000
Repayments to third party -- (166,667)
----------- -----------
Net cash provided by (used for)
financing activities 1,121,684 (4,331,105)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,469,790) 1,655,841
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,577,730 5,192,756
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,107,940 $ 6,848,597
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 9,789 $ --
=========== ===========
</TABLE>
(Continued)
-8-
<PAGE> 11
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES
Fire Related Litigation
The Company has been a party to a number of legal proceedings which have arisen
as a result of the December 1993 fire or in connection with the Company's
efforts to collect insurance proceeds after the fire. The following is a brief
description of such fire-related proceedings that were concluded during the
quarter ended January 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
-9-
<PAGE> 12
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 favor of the
Company and against Travelers, awarding the Company an additional
$2,410,905 in business interruption insurance, legal interest on that
sum from May 13, 1994 until paid, statutory penalties in the amount
of $222,128 and attorney's fees in an amount to be set by the Court.
In August 1998, the Court denied all post trial motions and certified
the judgment as being immediately appealable. 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 agreement referenced above, the liability
insurers of the agent and broker are entitled to share in any
recovery from Travelers.
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
-10-
<PAGE> 13
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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
-11-
<PAGE> 14
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, and such funds are not reflected as
an asset on the Company's balance sheet as of January 31, 1999.
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, from the funds
held in escrow.
-12-
<PAGE> 15
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
United National Litigation
The Company was a defendant, along with its general liability
insurance carrier, United National Insurance Company ("United
National"), in a civil action filed in December 1994 in the United
States District Court for the Eastern District of Louisiana by St.
Paul Mercury Insurance Company ("St. Paul"), the insurer of the
computerized betting equipment at the race track. St. Paul alleged
that it was subrogated to its insured's rights to collect damages and
that it paid approximately $1,175,000 to its insured for the loss of
equipment in the fire.
Subsequently, United National filed a declaratory judgment action
against the Company, wherein it sought to deny coverage for St.
Paul's subrogation claim. The Company filed a counterclaim against
United National, seeking coverage for the St. Paul claim as well as
payment for various other fire-related claims previously denied by
United National. This action was consolidated for trial with the suit
filed by St. Paul against the Company.
Both United National and the Company moved for summary judgment on
the question of whether the exclusion relied on by United National to
deny coverage for the various claims applied or not. In 1996, the
District Court ruled that the policy exclusions relied upon by United
National did not apply to the claim asserted by St. Paul and to
claims made by various jockeys and valets that were previously paid
by the Company. United National subsequently appealed this decision
to the United States Fifth Circuit Court of Appeals, which held that
the claims were covered.
-13-
<PAGE> 16
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In May 1997, the St. Paul suit was settled pursuant to an agreement
whereby ADT agreed to pay an undisclosed sum and United National, as
the Company's insurer, agreed to pay $275,000. In February 1998,
United National tendered $56,553 to the Company for claims which it
acknowledged were covered under the policy. In November 1998, United
National tendered an additional $11,818 to the Company for claims
which it acknowledged were covered under the policy. In December 1998,
the Company settled the balance of its claims against United National
for an additional $140,000 which has been paid by United National.
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. Management of the
Company believes the action is without merit. Livingston had
previously filed a series of other legal actions against the Company
which were resolved in the Company's favor. The amount in question in
this action has not yet been determined but could be substantial.
A suit was also filed in 1996 by Livingston against the Company and
the State of Louisiana seeking a judgment that the State off-track
betting law is unconstitutional. The trial court ruled in the
plaintiff's favor. The Louisiana Supreme Court reversed the trial
court's decision, holding that the off-track betting statute is
constitutional. Livingston's request for rehearing was subsequently
denied.
-14-
<PAGE> 17
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended January 31, 1999 and 1998
(Unaudited)
NOTE 1 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
A suit was filed in 1996 by the Louisiana Horsemen's Benevolent and
Protective Association ("HBPA") against the Company, the State of
Louisiana, and all other pari-mutuel wagering facilities operating in
Louisiana. The HBPA is seeking a larger portion of video poker
proceeds. The Company believes it is currently in compliance with the
guidelines established by the Louisiana State Police Gaming Division,
which regulates compliance with the State of Louisiana video poker
law.
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 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 pursuant to which the Company will pay 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.,
-15-
<PAGE> 18
to be repaid in six equal monthly installments beginning in February
1999. The advance is included in notes payable in the financial
statements.
NOTE 3 - RECLASSIFICATION
In the current fiscal quarter, host track fee income was reported at
its contractual rate of approximately 3% of the betting handle. In the
prior comparable fiscal quarter, host track fee income was shown net
of related purse expenses. The January 31, 1998 host track fees and
related purse expenses have been reclassified to conform to the
current fiscal quarter presentation. This reclassification has no
effect on the earnings for the quarter ended January 31, 1998.
-16-
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
Revenues. During the fiscal quarters ended January 31, 1999 and 1998,
the Company derived its pari-mutuel income by conducting live racing
47 and 46 days, respectively, during each fiscal quarter and in the
operation of its tele-tracks for off-track wagering. In both fiscal
quarters, the Company utilized its new grandstand and clubhouse
facilities, which were completed in November 1997. During each such
fiscal quarter, the Company operated tele-tracks in New Orleans at the
Fair Grounds Race Course and on Bourbon Street, and at locations in
Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana.
Through Finish Line Management Corporation, an affiliated company, the
Company operated tele-track facilities in Terrebonne, St. Tammany, and
Jefferson Parishes, Louisiana.
For the fiscal quarter ended January 31, 1999, the Company reported
total in-state pari-mutuel wagering of $32,521,065 compared to
$30,270,439 in the same quarter in fiscal 1998.
Comparative pari-mutuel wagering and attendance figures for the
quarters ended January 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 14,285,631 $ 13,211,435
Off-track handle 18,235,434 17,059,004
------------ ------------
Total in-state wagering $ 32,521,065 $ 30,270,439
============ ============
Out-of-state simulcast handle $164,697,790 $120,829,901
============ ============
Total On-Track Attendance 133,729 127,617
============ ============
</TABLE>
-17-
<PAGE> 20
The Company attributes the $1,074,196, or 8.1%, increase in the
on-track handle in the current year quarter primarily to the amenities
provided by the new racing facility and the improved quality of racing
resulting from increased purses paid in the current fiscal year
quarter.
The Company believes that the $1,176,430, or 6.9%, increase in
off-track handle is primarily due to the Company transmitting better
simulcasting signals and higher quality horses currently racing in the
Company's live racing meet. The $43,867,889, or 36.3%, increase in
out-of-state handle is believed to be the result of those same
factors. In addition, 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 January 31, 1999, the Company experienced significant
handle increases from Florida and New York. These two markets
accounted for approximately $17.3 million of the handle increase.
As a result of the increases in total handle, the Company's operating
revenues in the quarter ended January 31, 1999 increased by
$1,858,105, or 14.7%, from the prior comparable fiscal year quarter.
This included increases of $719,797, or 10.6%, in pari-mutuel
commissions, $61,958, or 43.6%, in breakage, $12,229, or 17.2%, in
uncashed mutuel tickets, $965,987, or 23%, in host track fees,
$30,363, or 7.5%, in video poker revenues, $7,264, or 31.1%, in
parking revenues and $225,168, or 152%, in miscellaneous revenues,
which included $133,500 of promotional fee revenues paid by third
parties who advertise in the Company's racing program.
These increases are partially offset by decreases of $31,403 of
programs and forms revenues and $150,993 in admissions revenues.
Approximately $147,000 of
-18-
<PAGE> 21
admissions revenues has been deferred in the current fiscal quarter to
be recognized in the second fiscal quarter of 1999 when earned. This
relates to grandstand and clubhouse box seats and parterre box
admissions that are prorated over the live racing season. In fiscal
1998, all box admissions were recognized in the quarter ended January
31, 1998. As a result, the decrease in admissions during the current
fiscal quarter relates only to a timing of revenue recognition.
Racing Expenses. Total racing expenses increased $767,312, or 7.1%,
over prior comparable fiscal year quarter, primarily as a result of
the increased pari-mutuel activities. These included increases of
$620,581, or 13.05%, in purses, and $164,658, or 27.5%, in host track
fee expenses. Other increases included repair and maintenance,
advertising and promotions, and miscellaneous racing expenses. These
were partially offset by decreases in racing salaries and related
taxes and benefits, and utilities.
General and Administrative Expenses. General and Administrative
expenses decreased by $13,637, or 1.1%, in the current fiscal quarter
primarily as a result of decreased legal fees relating to the
conclusion of much of the Company's fire litigation, partially offset
by increases in property taxes due to higher property assessments by
Orleans Parish.
Other Income (Expenses). Other income decreased by $44,367, or 92.5%,
as a result of decreased investment earnings of the Company in the
current fiscal quarter. The Company utilized its funds for the payment
of purses thereby reducing the amount of funds available to generate
investment income.
Extraordinary Items. During fiscal quarter ended January 31, 1998, the
Company received settlement payments in connection with the fire
related litigation previously reported in the aggregate of $7.7
million. These proceeds were reported net of related taxes of
-19-
<PAGE> 22
approximately $2.85 million. In the current fiscal quarter,
settlements received were $195,000 and are reported net of $72,150 of
income taxes.
Income Taxes. In addition to the components of net income previously
discussed, the net income for the fiscal quarter ended January 31,
1999 included income tax expense of $653,317 compared to income tax
expense of $263,331 in the comparable quarter in fiscal 1998. The
difference between the two quarters is attributable to the difference
in pre-tax income between the quarters.
Net Income. The Company reported net income of $1,235,254 for the
fiscal quarter ended January 31, 1999 compared to $5,299,375 for the
fiscal quarter ended January 31, 1998. In the fiscal quarter ended
January 31, 1998, the Company reported a net extraordinary gain of
$4,851,000 relating to the receipt of fire litigation settlements
previously reported. During the fiscal quarter ended January 31, 1999,
the Company received only $195,000 of litigation settlements.
Excluding the extraordinary gains, net income in the current year
quarter was $1,112,404 compared to $448,375 in the quarter ended
January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents decreased $3,469,790 during the fiscal
quarter ended January 31, 1999, compared to an increase of $1,655,841
during the fiscal quarter ended January 31, 1998. The decrease in cash
and cash equivalents in fiscal 1999 was the result of cash used by
operations of $4,663,322, partially offset by cash provided by
investing activities of $71,848, and cash provided by financing
activities of $1,121,684.
Cash used in operations was primarily due to the payment of purses and
the increase in host track fees and other
-20-
<PAGE> 23
receivables. Cash provided by financing was primarily the result of an
advance of $1 million from the Company's video poker operator.
As of January 31, 1999, the Company had received cumulatively, since
the December 1993 fire, approximately $44.2 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 January
31, 1999 was in excess of $35 million.
The Company has a working capital line of credit agreement with Bank
One. The line of credit is for $2.5 million with interest at 8% on
amounts outstanding. In addition to monthly interest payments on
outstanding balances, any amounts outstanding plus unpaid accrued
interest are due on April 14, 1999. There were no amounts drawn down
or outstanding on this line of credit during the fiscal year ended
October 31, 1998.
In January 1999, the Company received a $1.0 million non-interest
bearing advance from its video poker operator which it will repay in
six equal installments beginning 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 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 $1.0 million advance from the Company's video poker operator.
-21-
<PAGE> 24
As a result of the fire insurance and other litigation settlements
received, the Company has a total net deferred tax liability of
approximately $7.08 million at January 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 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 certain of
those providers, including electrical and telephone services, are
essential to the Company's ability to operate. The
-22-
<PAGE> 25
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. Autotote has contracted with a third party
consultant to attain such compliance. If Autotote does not become
compliant, the Company's operations could be adversely affected until
another provider of the totalisator function can be found. The video
services provided by another third party provider 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.
To date, the Company has incurred costs of approximately $35,000,
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
addressing its year 2000 transition will not have a material adverse
effect on the Company's financial condition or business operations.
The Company has not yet 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.
-23-
<PAGE> 26
PART II
OTHER INFORMATION
<PAGE> 27
Item 1. Legal Proceedings.
There were no material developments during the first quarter of fiscal 1999 in
any of the Company's legal proceedings as described in the Form 10-K for the
fiscal year ended October 31, 1998, except that in December 1998 the Company
settled its remaining claims against United National in the case filed in the
United States District Court for the Eastern District of Louisiana by St. Paul
Mercury Insurance Company, with United National's payment of an additional
$140,000 to the Company. In February and March 1999, in the Company's action
filed against ADT Security Systems, Mid-South, Inc., the Company received
additional funds totaling $3.79 million, net of litigation expenses, from the
funds held in escrow. No material legal proceeding was instituted during the
first quarter to which the Company is a party or of which any of its property is
subject.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (Filed electronically only)
-25-
<PAGE> 28
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: March 16, 1999 By: /s/ Bryan G. Krantz
-------------------- ------------------------------
Bryan G. Krantz
President
Date: March 16, 1999 By: /s/ Gordon M. Robertson
-------------------- ------------------------------
Gordon M. Robertson
Chief Financial Officer
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FAIR GROUNDS CORPORATION FOR THE THREE MONTH PERIOD
ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 4,234
<SECURITIES> 0
<RECEIVABLES> 1,079
<ALLOWANCES> 0
<INVENTORY> 173
<CURRENT-ASSETS> 10,847
<PP&E> 52,067
<DEPRECIATION> 16,392
<TOTAL-ASSETS> 50,088
<CURRENT-LIABILITIES> 11,155
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 30,365
<TOTAL-LIABILITY-AND-EQUITY> 50,088
<SALES> 12,056
<TOTAL-REVENUES> 14,500
<CGS> 0
<TOTAL-COSTS> 11,578
<OTHER-EXPENSES> 1,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1,766
<INCOME-TAX> 653
<INCOME-CONTINUING> 1,112
<DISCONTINUED> 0
<EXTRAORDINARY> 123
<CHANGES> 0
<NET-INCOME> 1,235
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.64
</TABLE>
