-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VULaSxrpr882JXGTE0zTSyYf7uvlT1XsavyZ60DhFltG5hX1Vx02Nn4Ptdif+fFf vCCt/2l957eKb0gbY89yKA== 0000950144-99-011165.txt : 19990915 0000950144-99-011165.hdr.sgml : 19990915 ACCESSION NUMBER: 0000950144-99-011165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIR GROUNDS CORP CENTRAL INDEX KEY: 0000034236 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 720361770 STATE OF INCORPORATION: LA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07607 FILM NUMBER: 99711018 BUSINESS ADDRESS: STREET 1: 1751 GENTILLY BLVD CITY: NEW ORLEANS STATE: LA ZIP: 70119 BUSINESS PHONE: 5049445515 MAIL ADDRESS: STREET 1: 1751 GENTILLY BLVD CITY: NEW ORLEANS STATE: LA ZIP: 70119 10-Q 1 FAIR GROUNDS CORPORATION 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 ------------- ------ FAIR GROUNDS CORPORATION ---------------------------------------------------- (Exact name of registrant as specified in its charter) Louisiana 72-0361770 - ------------------------------------------------------------- ----------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 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 September 1, 1999. 2 FAIR GROUNDS CORPORATION INDEX
Page ----- 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
-1- 3 PART I FINANCIAL INFORMATION -2- 4 FAIR GROUNDS CORPORATION BALANCE SHEETS
(Unaudited) July 31, October 31, 1999 1998 ------------ ------------ 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 ------------ ------------ Total Current Assets 10,469,467 9,530,169 ------------ ------------ OTHER ASSETS 271,802 283,411 ------------ ------------ 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 ------------ ------------ Total 52,412,673 51,948,862 Less: accumulated depreciation and amortization (17,372,131) (15,904,346) ------------ ------------ Depreciable property - net 35,040,542 36,044,516 Land 3,286,281 3,286,281 ------------ ------------ Property, plant and equipment - net 38,326,823 39,330,797 ------------ ------------ TOTAL ASSETS $ 49,068,092 $ 49,144,377 ============ ============
(Continued) -3- 5 FAIR GROUNDS CORPORATION BALANCE SHEETS (CONTINUED)
(Unaudited) July 31, October 31, 1999 1998 ------------ ------------ 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 ------------ ------------ Total Current Liabilities 8,951,401 11,445,918 ------------ ------------ DEFERRED INCOME TAXES 7,043,865 7,043,865 ------------ ------------ Total Liabilities 15,995,266 18,489,783 ------------ ------------ 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 ------------ ------------ Total 33,108,351 30,690,119 Less: treasury stock at cost, 1,360 shares (35,525) (35,525) ------------ ------------ Total Stockholders' Equity 33,072,826 30,654,594 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,068,092 $ 49,144,377 ============ ============
See accompanying notes to financial statements. -4- 6 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS For the Three Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ REVENUES Pari-mutuel commissions $ 5,202,953 $ 5,070,392 Breakage 141,970 116,358 Uncashed mutuel tickets 267,610 273,736 ------------ ------------ Total 5,612,533 5,460,486 Less: pari-mutuel tax 678,765 705,371 ------------ ------------ 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 ------------ ------------ Total Operating Revenues 6,320,597 6,111,372 ------------ ------------ 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 ------------ ------------ Total Racing Expenses $ 6,747,001 $ 6,378,927 ------------ ------------
(Continued) -5- 7 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED) For the Three Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ 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 ------------ ------------ Total General and Administrative Expenses 1,432,480 1,163,250 ------------ ------------ 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 ------------ ------------ Loss Before Benefit For Income Taxes and Extraordinary Item (1,626,519) (529,572) Benefit for income taxes (662,994) (580,600) ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (per share - 1999 - ($2.06), 1998 - $.11) (963,525) 51,028 Extraordinary item - gain from fire -- 1,452,000 ------------ ------------ (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 ============ ============
-6- 8 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED) For the Three Months Ended July 31, 1999 and 1998 (Unaudited) CASH DIVIDENDS PER SHARE $ NONE $ NONE ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 468,580 468,580 ============ ============
-7- 9 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS For the Nine Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ REVENUES Pari-mutuel commissions $ 20,881,549 $ 19,463,106 Breakage 578,369 422,432 Uncashed mutuel tickets 441,634 406,596 ------------ ------------ Total 21,901,552 20,292,134 Less: pari-mutuel tax (2,626,526) (2,579,406) ------------ ------------ Commission income 19,275,026 17,712,728 Host track fees 10,311,004 7,284,312 ------------ ------------ 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 ------------ ------------ Total Operating Revenues 35,755,616 30,612,479 ------------ ------------ 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 ------------ ------------ Total Racing Expenses $ 30,713,792 $ 27,116,258 ------------ ------------
(Continued) -8- 10 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED) For the Nine Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ 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 ------------ ------------ Total General and Administrative Expenses 5,379,526 3,660,519 ------------ ------------ 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 ------------ ------------ 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 ------------ ------------ 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
-9- 11 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (CONTINUED) For the Nine Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ 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 ============ ============
See accompanying notes to financial statements -10- 12 FAIR GROUNDS CORPORATION STATEMENTS OF CASH FLOWS For the Nine Months Ended April 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,886,812 $ 7,591,191 ------------ ------------ 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) ------------ ------------ Net cash used for operating activities (3,127,451) (660,347) ------------ ------------ 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 ------------ ------------ Net cash provided by investing activities 3,534,006 8,881,398 ------------ ------------
(Continued) -11- 13 FAIR GROUNDS CORPORATION STATEMENTS OF CASH FLOWS (CONTINUED) For the Nine Months Ended July 31, 1999 and 1998 (Unaudited)
1999 1998 ------------ ------------ 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 $ -- ============ ============
-12- 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 -13- 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 -14- 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- 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- 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- 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- 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:
1999 1998 ---------- ---------- Pari-mutuel wagering: Off-track handle 25,835,364 25,026,636 ---------- ---------- Total Attendance 117,459 113,427 ========== ==========
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- 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- 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- 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:
1999 1998 ------------ ------------ 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 ============ ============
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- 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- 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- 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- 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- 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- 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- 30 PART II OTHER INFORMATION -29- 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- 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- EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS OCT-31-1999 NOV-01-1998 JUL-31-1999 7,788 0 632 0 122 10,469 52,413 17,372 49,068 8,951 0 0 0 1,525 31,548 49,068 29,586 35,756 0 30,714 5,380 0 17 1,009 512 497 0 2,390 0 2,887 6.16 6.16
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