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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996 Commission file number 0-7607
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FAIR GROUNDS CORPORATION
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(Exact name of registrant as specified in its charter)
Louisiana 72-0361770
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1751 Gentilly Blvd., New Orleans LA 70119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 504/944-5515
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Not applicable NONE
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
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(Title of Class)
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.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $1,551,950 computed by reference to the average bid and asked
prices of such stock on March 5, 1997.
The number of shares outstanding of the issuer's single class of common
stock was 468,580 as of March 5, 1997.
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EXHIBIT INDEX ON PAGE 82
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW OF BUSINESS
Fair Grounds Corporation (the "Company"), which was incorporated in 1941, is the
owner of the Fair Grounds Race Course in New Orleans, Louisiana, at which
thoroughbred horse racing, off-track betting and video poker gaming are
conducted. The Fair Grounds Race Course currently is in its 125th racing season,
making it the third oldest thoroughbred racing track in the United States. In
addition to its live racing operations, the Company currently operates five
off-track betting facilities, referred to herein as tele-tracks, at locations in
St. Bernard, Orleans, Jefferson, St. John and LaFourche Parishes, Louisiana, as
well as a tele-track facility located at the Fair Grounds Race Course. Through
Finish Line Management Corporation ("Finish Line"), an affiliate, the Company
operates five tele-track facilities in Terrebonne, St. Tammany and Jefferson
Parishes, Louisiana. At each location, the Company makes available pari-mutuel
and video poker wagering and food and beverage services to the public and
receives revenues from such services. The Company conducts its annual live
racing meet and operates its tele-tracks for off-track betting pursuant to the
rules and under the authority of the Louisiana State Racing Commission (the
"Racing Commission"), a statutory body, the members of which are appointed by
the Governor of Louisiana. The Company's live races are simulcasted to its
tele-tracks and to other facilities located both inside and outside Louisiana.
Since 1992 the Company also has operated video poker gaming devices at the Fair
Grounds Race Course and each of the Company's tele-track facilities.
DEVELOPMENTS DURING 1996
Louisiana Referendum on Gaming
As previously reported by the Company, one of the impediments to the Company's
ability to obtain long-term financing or other sources of funds for the
completion of construction of its new racing facility has been the uncertainty
in Louisiana concerning the future of the gaming industry. The Company derives
significant revenue from the operation of video poker devices and, in addition,
is authorized to utilize up to $2.5 million annually from video poker franchise
fees to repay indebtedness used in the rebuilding of its racing facility. Such
authorization arises from legislation adopted in 1994 which provides that owners
of video poker devices that are located in licensed establishments owned or
operated by licensed racing associations eligible for emergency relief under the
statute are exempt from the franchise payment otherwise due under the Video Draw
Poker Devices Control Law for a period not to exceed 15 years. The amount of the
franchise fee payment which
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otherwise would have been paid to the State of Louisiana during the exemption
period is to be remitted directly to the licensed racing association, in an
amount up to $2.5 million annually, and such funds are to be used solely for
providing emergency relief to the licensed racing association. The use of funds
by the licensed racing association is subject to review and oversight by a
legislative committee which may reduce the amount of the authorized exemption if
the racing association cannot satisfy the committee that the exemption is
necessary for its ongoing economic viability. The legislation also provides that
at such time as the emergency relief granted under the act exceeds the required
annual debt service on any indebtedness incurred to address the emergency
situation, such indebtedness not to exceed $25 million, the excess of such funds
is to be remitted to the state treasury. During 1995, the Joint Legislative
Committee on the Budget approved the dedication of funds received from the
franchise tax relief described above toward the exclusive use by the Company for
making payments of principal and interest to First National Bank of Commerce
("FNBC") on interim construction financing provided to the Company. See
"Financing for New Facility," below.
In connection with general elections held on November 5, 1996, special
elections were held in each parish in Louisiana to approve or disapprove, on a
parish-by-parish basis, video poker and other forms of gaming. In such local
elections, the voters in every parish in which the Company maintains tele-track
facilities, with one exception, approved the continued operation of video poker
devices. The one exception was St. Tammany Parish, where the Company maintains
two facilities; however, the Company does not believe that the loss of video
poker revenue from such locations will have a material adverse effect on the
Company's results of operations or on the amount of video poker franchise fee
relief available annually to the Company. In addition, notwithstanding the
results of such local election in St. Tammany Parish, the Company may continue
to operate video poker devices in St. Tammany Parish for 30 months after the
date of the local referendum.
Litigation Settlement
The Company has also previously reported that it had filed an action in the 24th
Judicial Court in the State of Louisiana against Travelers Indemnity Company of
Illinois ("Travelers"), and others, arising out of the Company's efforts to
collect insurance proceeds following the December 1993 fire at the Fair Grounds
Race Course, and that such action was scheduled for trial in November 1996. The
Company has contended in such lawsuit that the insurance policy issued by
Travelers provided the Company with blanket coverage in the approximate amount
of $24.2 million in excess of the $10 million of underlying coverage provided by
Allianz Underwriters Insurance Company and Royal Indemnity Company; accordingly,
the Company has asserted that Travelers is liable for the difference between
$24.2 million and the approximately $9.5 million already paid
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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 if the amount of coverage was less than that claimed by
the Company. Travelers has asserted that the excess policy did not provide
blanket coverage and that its liability under such policy is limited to the
amount which it has already paid.
On November 18, 1996, the Company reached a settlement in such action with the
insurance agent and insurance broker. The settlement provided that the settling
defendants were to pay the Company $10 million in the aggregate, subject to an
agreement pursuant to which the settling defendants are to share with the
Company, in accordance with an agreed-upon formula, in any settlement with or
award against Travelers. Such funds currently are being held in escrow pending
the execution of certain documents relating to such settlement.
Also on November 18, 1996, the trial court denied Travelers' motion for summary
judgment, and at the same time granted leave to Travelers to appeal such denial
on an interlocutory basis. The Louisiana Fifth Circuit Court of Appeals denied
Travelers' appeal in January 1997 and remanded the case to the trial court,
where it has been set for trial in June 1997. For a description of the Company's
pending legal proceedings in connection with the December 1993 fire, see Item 3,
"Legal Proceedings."
Progress of Construction
As previously reported, on December 17, 1993, a fire destroyed the main
clubhouse and grandstand building and all of its contents at the Fair Grounds
Race Course. During the remainder of December 1993, the Company made
arrangements for the installation of temporary racing and patron facilities and
contracted with equipment vendors, suppliers and contractors for the
installation of totalisator, television, lighting and other equipment necessary
to continue the live racing meet. The Company incurred expenses of $2.68 million
in the aggregate in preparing the temporary facilities for the reopening of live
racing at the Fair Grounds.
Since January 1994, the temporary facilities have been utilized during the
racing seasons and continue to be used at the present time. In addition, the
Company's new tele-track facility at the Fair Grounds Race Course, which also
serves as a temporary clubhouse area, was opened on December 22, 1994. It is a
two-story building of concrete and steel construction, aggregating approximately
20,000 square feet. The lower level contains tables and chairs, a concessions
area, mutuel machines and an area set aside for video poker machines. The second
floor contains an area of tables and chairs which is currently being used as the
clubhouse
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area. The new facility was constructed on part of the area previously occupied
by the old main grandstand and clubhouse, and the glass-enclosed front of the
building overlooks the track. Those parts of the main grandstand and clubhouse
which were not totally destroyed by the fire have been torn down and all of the
debris has been removed. The total cost for debris removal and the construction
of the tele-track facility was approximately $3.2 million.
During the Summer of 1994, the Company approved the plans for a new main racing
facility and commenced construction of the foundation thereof in August 1994.
The plans call for the facility to be principally a multi-tiered concrete and
steel structure, with a total seating capacity of approximately 5,000 people. It
is anticipated that the size of the new facility, together with the new
tele-track building just completed, to which the new grandstand will be
connected, will be approximately 217,000 square feet in the aggregate. The old
facility contained approximately 321,000 square feet. It is anticipated that
there will be general seating in a bleacher area in the front of the grandstand,
with reserved seating, including the new clubhouse area, to be located in tiered
areas above the grandstand. In a significant change from the design of the old
building, it is anticipated that the paddock will be located in the middle of
the grandstand and may be viewed through a glass area from all levels of the
grandstand. The total cost of the facility, together with furniture, fixtures,
equipment and certain fees and permit costs, was anticipated to be approximately
$24.3 million at the time construction commenced, which is in addition to the
$3.2 million relating to debris removal and construction of the tele-track
facility, as described above.
At the time construction was halted in September 1995 for the reasons described
herein, construction of the facility was approximately 60% completed. The
Company has incurred construction costs for the grandstand facility of
approximately $15.8 million. Insurance proceeds recovered and interim financing
provided by FNBC, as described below, provided the source of funds used in such
construction. As a result of the passage of time from the cessation of
construction, (i) the Company now believes that total construction costs,
including costs already incurred, may be approximately $32 million in the
aggregate and (ii) the Company anticipates that it will continue to utilize the
temporary tent facilities and the tele-track facility until late 1997.
Financing for New Facility
Original Financing. The Company received and accepted a commitment letter dated
February 6, 1995 from FNBC for a non-revolving line of credit to be used as an
interim construction loan, convertible to a term loan. The aggregate principal
amount of such loan under the
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terms of such commitment was to have been $17.5 million. The commitment from
FNBC provided that the interim construction loan was to have closed on or before
March 31, 1995. However, the parties agreed to various extensions of such
closing date. FNBC indicated that the principal reason for the delay was FNBC's
concern with restrictions on and the possible elimination of video poker gaming
in Louisiana. Inasmuch as video poker franchise fees generated by the Company
and its tele-tracks were to be used for the repayment of the FNBC loan, in
accordance with the franchise fee relief legislation described herein, any
change in the video poker gaming laws which restricted or limited video poker as
a source of revenue would have had an adverse impact on such source of
repayment. Accordingly, final action on the full $17.5 million loan was delayed.
During 1995 FNBC provided the Company with short-term interim construction loans
$7.15 million in the aggregate. However, such interim construction advances
ceased during the Fall of 1995, primarily due to FNBC's concerns regarding the
future of video poker and other forms of gaming in Louisiana. All of such
interim financing was consolidated under a Loan Agreement dated as of December
18, 1995 between the Company and FNBC (the "Loan Agreement"), which reflected
aggregate borrowings (net of the amount repaid to such date) of $9,493,050. The
amounts borrowed were utilized to pay construction costs.
Pursuant to the Loan Agreement, FNBC agreed to extend credit to the Company up
to aggregate principal amount of $9,493,050 until October 31, 1996. The Loan
Agreement states that such commitment is not a revolving credit facility, and
the commitment is only to make loans up to such aggregate principal amount.
Accordingly, FNBC has no obligation under the Loan Agreement to lend additional
funds to the Company.
Payment of the principal and interest under the Loan Agreement was made during
1996 in 10 monthly installments of $52,740 principal plus interest, which
commenced January 17, 1996, and one final payment of all principal plus accrued
interest was to be made on October 31, 1996. The Company reached an
understanding with FNBC in October 1996 to extend the term of the Loan
Agreement for 90 days and the term of the Loan Agreement was subsequently
extended through April 15, 1997. For a description of the terms of the revised
financing commitment from FNBC see "March 1997 Financing Commitment, below.
The loan provided for interest at 9% per annum. On each monthly payment date
described above, payment of principal and interest was to be made from the
proceeds of the funds received as a result of the video poker franchise fee
relief legislation, which funds were to be deposited in a separate lockbox, in
accordance with a Disbursement Agreement entered into among Company, FNBC and
Video Services, Inc. ("VSI") dated July 17, 1995. The Disbursement Agreement
provided that the first $2.5 million in video poker
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franchise fee payments otherwise due annually to the State of Louisiana was to
be remitted to the Company under the terms of the tax relief legislation. For
each annual period from July 1 through June 30, such funds were to be debited
from VSI's bank account and deposited into a lockbox at FNBC. Such proceeds
were to be used solely for the purpose of making payments of principal and
interest from time to time due under the terms of the Loan Agreement. Any
amount in excess of the amount of debt service, up to $2.5 million annually,
was to be applied as a prepayment of the principal amount of the loan, and any
excess was to be returned to the treasury of the State of Louisiana. The Loan
Agreement also provided that any fire insurance proceeds (not including
proceeds payable to any third party) received by the Company were to be used to
prepay the loan.
The indebtedness under the Loan Agreement is secured by (i) a mortgage by the
Company of all of its real property; (ii) a mortgage by Marie G. Krantz of all
the real property formerly constituting the Jefferson Downs Race Course; (iii)
a security interest in all the Company's accounts, inventory, equipment, fire
insurance proceeds, franchise fee relief monies, construction property,
material contracts and all deposit accounts; (iv) a security interest in
certain investment securities owned by Marie G. Krantz; (v) a security interest
in all furniture, fixtures and equipment owned by the Company, Finish Line and
Jefferson Downs; (vi) pledges by Marie G. Krantz, individually and as Voting
Trustee, Bryan G. Krantz, Vickie Krantz, and Richard Katcher of an aggregate of
342,584 shares of common stock of the Company, constituting all shares of
common stock of the Company beneficially owned by them (see Item 12, "Security
Ownership of Certain Beneficial Owners and Management" herein for a description
of the amount of such shares and the terms and conditions of such pledge
agreements); (vii) a limited guaranty of such indebtedness by Marie G. Krantz;
and (viii) a guaranty of such indebtedness by Finish Line.
The Loan Agreement provided that, commencing January 20, 1996, the Company would
deposit monthly into an account at FNBC all "Excess Cash Flow" generated during
the immediately preceding month. Excess Cash Flow is defined as all net income
for the month; plus or minus non-cash items such as depreciation and
amortization; plus or minus the changes in accounts receivable, inventory,
prepaid expenses, accounts payable and accrued expenses, and any other operating
balance sheet related activity affecting the cash position; and plus or minus
capital expenditures. The Loan Agreement further provided that this obligation
would cease if and when the 1996 Louisiana regular legislative session adjourned
without having theretofore passed any statute that adversely affects the status
of the video poker franchise fee relief or the existing video poker operations
of the Company, Finish Line, or Jefferson Downs, or that would allow for or
require local elections as a condition to the continuation of video poker
operations; or if there is any such legislation requiring local elections, the
voters
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fail to approve any such adverse change. See "Louisiana Referendum on Gaming,"
described above. Prior to the cessation of such obligation, the Company could
not withdraw any funds in such account, and FNBC has a security interest in such
funds.
The Loan Agreement contains certain negative covenants pursuant to which the
Company has agreed that it will not (i) resume construction activities without
first providing FNBC with satisfactory evidence of the source of funding for the
balance of such construction; (ii) enter into any agreement with any affiliate
except to the extent that such agreements are commercially reasonable and
provide for terms which would normally be obtainable in arm's length transaction
with an unrelated third party; and (iii) incur capital expenditures during any
fiscal year in excess of $200,000 without the consent of FNBC.
In connection with the Loan Agreement, the Company made a payment to Louie J.
Roussel, III of $1 million of the remaining $2 million principal balance owed to
him and agreed that the outstanding principal balance of $1 million would be due
and payable on October 31, 1996. Such remaining payment was made by the Company
in November 1996, utilizing funds borrowed on a short-term basis from Marie G.
Krantz. The mortgage on the Company's property which served such indebtedness
owed to Mr. Roussel has been canceled.
March 1997 Financing Commitment. As described above, the Company was unable
during 1995 and 1996 to obtain the full amount of financing originally committed
by FNBC, due primarily to the uncertainty regarding the future of video poker as
a continuing source of revenue. As a result, no further progress was made on the
construction of the Company's new facility during 1996.
After the favorable results of the November 1996 referendum concerning gaming
in Louisiana, the Company and FNBC began discussing possible terms and
conditions for new or additional construction and permanent financing. On
January 9, 1997, the Company accepted a commitment letter from FNBC providing
for additional financing under, and an amendment to certain terms and
conditions of, the Loan Agreement. After further discussions, a new commitment
letter was accepted on March 13, 1997 (the "March 1997 Commitment"). The March
1997 Commitment provides that the principal amount outstanding under the Loan
Agreement will be increased by $6,778,275 for use in completing construction of
the Company's new grandstand facility and refinancing the principal balance
under the Loan Agreement. It is a condition to the closing of such financing
that the $10 million currently held in escrow be applied toward the repayment
of the outstanding principal balance under the Loan Agreement.
Interest on the new FNBC loan, at the rate of 9% per annum, is to be paid
semi-monthly, and principal payments of $52,740 are to be made monthly. Such
payments of principal and interest are to be first made out of the funds
received under the video poker franchise fee relief legislation. Any excess
franchise fee relief monies are to be applied as a prepayment of principal. In
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addition, as required under the video poker franchise fee relief legislation,
insurance proceeds received by the Company must also be applied to reduce the
principal balance of the loan. The entire principal balance is to be due on
June 30, 1999.
The March 1997 Commitment provides that, in addition to the existing security
under the Loan Agreement, the loan is to be secured by (i) liquid collateral
with a market value of $5.8 million; (ii) a security interest in the
video poker franchise fee relief monies; (iii) a pledge by the Company of all
proceeds from disputed claims arising out of the December 1993 fire; (iv) an
assignment of the Company's contract with the Jazz and Heritage Festival; (v)
an assignment of the Company's agreement with Finish Line regarding the
operation of off-track facilities; and (vi) an agreement by the Company not to
assign, pledge or otherwise encumber its racing and off-track licenses.
The March 1997 Commitment also provices for a second loan of $5,221,725 that
will be secured by the same collateral that secures the first loan, except that
the second loan may not be repaid with funds received by the Company from the
video poker franchise fee relief legislation. The second loan is to provide
for monthly payments of interest, with the entire principal balance due one
October 31, 1998. The closing of the financing under the March 1997 Commitment
is to occur on or before April 15, 1997.
If the financing described above is consummated, the Company believes that it
will have sufficient funds to complete the construction of the new grandstand
facility. It is currently anticipated that, subject to the consummation of such
financing, construction will recommence during the Spring of 1997 and that the
facility will be completed during the Fall of 1997.
DESCRIPTION OF BUSINESS
Live Racing Meet
Live Racing at the Fair Grounds Race Course. Annually, upon application and
after hearing, the Racing Commission grants to each of the horse racing tracks
operating in Louisiana certain dates during which live racing meets may be
conducted. Currently four
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licensees, including the Company, operate live racing meets in Louisiana at
various times during the year.
The Company's live racing meet generally is conducted annually from Thanksgiving
Day to late March. One other track in Louisiana, Delta Downs, conducts its live
racing meet during the same time period as the Company conducts its live meet.
Such track is smaller and conducts its live racing meet approximately two
hundred miles from New Orleans. Delta Downs also simulcasts to and allows
wagering to be accepted on its live races at the tele-tracks to which the
Company simulcasts its live races and at which wagering on the Company's live
races is accepted.
The Company's live racing meet for the fiscal year ended October 31, 1996 was
conducted over 88 racing days. The total on-track handle, which is the amount of
money handled during the live racing meet through the Company's mutuel machines
at the Fair Grounds Race Course, was $20,180,889 in fiscal 1996, $25,134,326 in
fiscal 1995, and $26,110,964 in fiscal 1994. See "Sources of Revenue."
During its annual live racing meet, the Company attracts thoroughbred horses
from racing stables located in Louisiana and from nationally known racing
stables in Kentucky and elsewhere. Approximately 40% of the thoroughbred
starters at the Fair Grounds Race Course during the its live racing meet, are
Louisiana-bred. The live racing meet features races with guaranteed purses in
excess of $300,000, and average purses of approximately $16,000 per race.
For the fiscal year ending October 31, 1997, the Racing Commission has granted
the Company a license to conduct its live racing meet during the period from
November 28, 1996 through March 31, 1997, a total of 88 racing days, with live
racing being conducted generally five days a week (Wednesday through Sunday) and
with ten to eleven races during each racing day.
Simulcasting of Live Races. In addition to conducting live horse racing during
the live racing meet, the Company simulcasts its live races to, and allows
wagering to be accepted at, the tele-tracks which it operates in Orleans, St.
Bernard, St. John and LaFourche Parishes, Louisiana, the tele-tracks which are
licensed to the Company and operated by Finish Line, and tele-tracks operated by
the other horse racing tracks in Louisiana. The Company also simulcasts live
races to certain other wagering facilities located outside of Louisiana. The
Company has continued to experience significant increases in the demand for the
Company's races from out-of-state markets. Total handle from such out-of-state
markets during the fiscal 1996 racing season was approximately $117 million, a
32% increase over the previous racing season. The Company earns a net commission
(after payment of purses) of approximately 1.5% of out-of-state handle.
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Off-Track Betting
Ownership and Operation of Tele-Track Facilities. Legislation which was adopted
in 1987 in Louisiana authorizes off-track wagering, and such legislation
regulates the licensure by the Racing Commission of tele-tracks, the ownership
of such facilities, the commissions which can be earned on wagers and other
related matters. Pursuant to such legislation, in 1988 each of the horse racing
tracks then operating in Louisiana was granted a license to operate tele-tracks
at its racetrack and also within a 55-mile radius of its racetrack, provided
that the voters of the parish where the tele-track was to be located approved
the establishment of such a facility. The legislation also provides that when
two pari-mutuel racetracks are located within the same 55-mile radius, any
tele-tracks opened in such areas are to be jointly owned unless one of the
eligible racetracks does not wish to participate. In 1987, the Company and
Jefferson Downs, which is now an affiliate of the Company and which through 1992
conducted live racing at a facility located approximately 12 miles west of the
Fair Grounds Race Course, reached an understanding with respect to the operation
of tele-tracks in the parishes located within the 55-mile radius of their
respective horse racing tracks. When Jefferson Downs ceased its live racing in
1992, the Company and Jefferson Downs reached an agreement whereby the Company,
through Finish Line, operates the tele-tracks formerly operated by Jefferson
Downs. Total paid attendance at the Company's tele-tracks (excluding the former
Jefferson Downs tele-tracks) during the fiscal year ended October 31, 1996 was
318,831, compared to 314,426 during fiscal 1995 and 345,905 during fiscal 1994,
and the total off-track handle at such facilities during the 1996 fiscal year
was $76,293,113, compared to $53,664,907 during fiscal 1995 and $55,713,253
during fiscal 1994. See "Sources of Revenue" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
During 1992 Jefferson Downs did not renew its license application with the
Racing Commission and, accordingly, did not conduct live racing in 1993. In
August 1992, Jefferson Downs assigned to the Company all of its right, title and
interest in and to the leases on its tele-track facilities in Terrebonne, St.
Tammany and Jefferson Parishes, Louisiana, and such assignment was effective in
May 1993, when the Racing Commission approved the transfer to the Company of all
licenses necessary for the operation of such tele-tracks.
The Company is a party to a Management Agreement (the "Management Agreement")
with Finish Line, which provides that Finish Line is to operate the tele-track
facilities owned by Jefferson Downs and transferred to the Company, as described
above. The Management Agreement is for a term of ten years, which commenced on
November 1, 1992, with the option granted to Finish Line to extend the term for
two additional five-year periods. The Management Agreement provides that Finish
Line is to have the exclusive responsibility
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for the direction, supervision, management and operation of such facilities, is
to collect all monies from such operation and is to pay all expenses in
connection therewith. The Company is to receive 0.1% of the gross pari-mutuel
handle at such facilities, and Finish Line is to receive monthly compensation
equal to the difference between the gross receipts collected at such facilities
less all expenses (including the guaranteed payment to the Company) paid by
Finish Line. In addition, Finish Line is to indemnify the Company for, among
other things, all obligations under the leases assigned by Jefferson Downs to
the Company. The Company believes that this arrangement benefits the Company by,
among other things, providing additional funds to be set aside to supplement
purses for live racing at the Fair Grounds Race Course. See "Purse Supplements,"
below.
Simulcasting to Tele-Track Facilities. When a live racing meet is not in
progress at the Fair Grounds Race Course, horse races are simulcasted from other
tracks then conducting live racing in Louisiana as well as from various race
tracks throughout the United States hosting races of national prominence to the
Company's tele-tracks, to the tele-track facility located at the Fair Grounds
Race Course and to other off-track tele-tracks. The Company generally is
required to make payments in the form of host track fees and purse supplements
to those tracks conducting live races which are simulcasted to the Company's
tele-tracks. The Company's tele-tracks generally are open daily, depending on
patron demands and race offerings, for afternoon and evening racing programs
which are simulcasted to the tele-tracks.
Purse Supplements. A portion of the handle generated at tele-track facilities is
required by Louisiana law to be set aside and used to supplement purses at live
racing facilities. Purse supplements are computed on a sliding scale of 5.5%, 6%
and 6.5% on the tele-tracks' daily handle. Additionally, purse supplements of
6.5% of handle are required on all wagers when off-track betting is conducted at
the racing facility of the primary licensee and an additional 1.5% of all
"exotic" wagers at tele-track facilities is to be paid as purse supplements.
Race tracks are also allowed to retain the proceeds from uncashed winning
pari-mutuel tickets, up to $250,000 for each licensee's meet. Uncashed
pari-mutuel tickets exceeding $250,000 per race meet are to be remitted to the
State of Louisiana. During the year ended October 31, 1996, the Company retained
approximately $331,000 in proceeds of such uncashed mutuel tickets as compared
to approximately $229,000 in fiscal 1995 and $300,000 in fiscal 1994.
Video Poker Operations
In June 1991, the Louisiana legislature enacted the Video Draw Poker Devices
Control Law, which grants pari-mutuel facilities the right to install and
operate an unlimited number of video poker machines. Such legislation also
allows other types of businesses,
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such as bars, truck stops and restaurants, to operate video poker machines, but
restricts the number of machines at those establishments. See "Regulation." The
law requires owners of pari-mutuel wagering facilities such as the Company to
set aside one-half of the net revenues from such devices in excess of certain
amounts and to use such amounts which are set aside to supplement purses for
live racing or, if live racing is not then being conducted, to place such
amounts in an interest-bearing account and utilize them to supplement purses
during the next live racing meet. Any such funds which are earned from devices
located at a tele-track are to be used for purse supplements by the owner of the
tele-track or, if it is jointly owned, to be divided among the owners in
proportion to their ownership interests.
In February 1992, the Company, Jefferson Downs and Finish Line entered into an
agreement with VSI, whereby VSI was granted the exclusive right and license by
the Company to install, maintain and operate video draw poker devices at the
Fair Grounds Race Course and Jefferson Downs Race Course and at the tele-tracks
operated by the Company, Jefferson Downs and Finish Line. Such agreement is for
an initial term of five years, with an option by VSI to extend the term for an
additional five years, which option has been exercised. The agreement provides
that the Company is to receive a percentage of the revenues from the operation
of the devices installed at the Company's facilities. Such percentage is to be
calculated on the basis of the average amount collected daily from each device
during each month, after the payment of prizes, taxes and fees. See "Sources of
Revenue." The devices installed by VSI pursuant to such agreement remain the
property of VSI. As of October 31, 1996, there were a total of 234 devices in
operation at the Company's facilities (not including tele-tracks operated by
Finish Line). In addition, there were a total of 419 devices at the tele-tracks
operated by Finish Line as of October 31, 1996.
The agreement also provides for the Company and Finish Line to share in an
annual promotional fee of $270,000 paid by VSI. During fiscal 1996, by agreement
between the Company and Finish Line, the total amount of such promotional fee
was retained by the Company. Of such amount, $135,000 was set aside for purse
supplements to be paid during the Company's 1996-97 racing meet.
SOURCES OF REVENUE
General
During the last several fiscal years, off-track betting in connection with live
racing meets has had a substantial impact on horse racing and pari-mutuel
wagering in Louisiana. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Through the development and operation of
the tele-tracks described herein, the Company has endeavored to
13
<PAGE> 14
create additional revenue producing sites, the revenues from which have
partially offset declines in on-track attendance and handle and related revenues
since those off-track facilities began operation.
The Company's business continues to be seasonal as a result of the Company's
live racing season. The Company has received and should continue to receive a
majority of its revenues during the first and second quarters of its fiscal year
when its live racing meet is held. Prior to the commencement of off-track
wagering, the Company did not earn significant revenues in the third and fourth
quarters of its fiscal year. Because the Company's tele-tracks are now operated
year-round, the Company earns revenues throughout the fiscal year, but on a
smaller scale in the third and fourth quarters than in the first and second
quarters of its fiscal year. In addition, video poker operations are conducted
year-round; however, revenue from video poker operations generally is higher
during the months when live racing is conducted at the Company's race track,
since attendance there is higher during such period.
For information regarding the Company's operating revenues, income or loss from
operations, other income, net income or loss and total assets, see "Selected
Financial Data."
Income from Wagering
The principal component of the Company's revenue is generated from pari-mutuel
wagering, both on-track and off-track. In pari-mutuel wagering on horses, those
who wager on the first, second and third place horses share the total stakes, or
pool, less a percentage retained by the Company. The term "pool" means the total
amount wagered to win (first place), to place (second place), or to show (third
place) on every horse in a given race, or exacta and trifecta wagers on certain
combinations of horses. Under the pari-mutuel system, bettors wager against each
other and not against the racing facility, which has no interest in which horse
wins or loses. Racing facilities are authorized under Louisiana law to retain a
stated percentage of the total money handled through the mutuel machines located
at such racing facilities and their tele-tracks on each racing day. Mutuel
commissions range from 17% to 25% of money handled depending upon the type of
wager. For the fiscal year ended October 31, 1996, the Company received
pari-mutuel commissions and related income of $18.9 million, compared to $15.8
million for fiscal 1995 and $16.2 million for fiscal 1994. Total commission
income less pari-mutuel taxes was $17.1 million for fiscal 1996, $14.1 million
for fiscal 1995 and $14.5 million for fiscal 1994.
The Company also receives, during its live racing meet, a percentage of the
handle from all tele-tracks to which its races are simulcasted, in the form of
host track fees as compensation for the simulcasting of its races to such
facilities.
14
<PAGE> 15
The Company also pays host track fees to other racing facilities for the
simulcasting of races to the Company's tele-tracks. For the fiscal year ended
October 31, 1996, the Company received host track fees of $4.4 million and paid
host track fees of $2.2 million. During fiscal 1995 the Company received host
track fees of $3.9 million and paid host track fees of $1.5 million and during
fiscal 1994 the Company received host track fees of $2.5 million and paid host
track fees of $1.5 million.
Breakage, which is the residual amounts remaining in the betting pool after
winnings are paid out to the nearest dime, is retained by the racing facility
and tele-tracks as revenue; however, one-half of such amount must be paid out
as purses.
Income from Video Poker Operations
For the fiscal year ended October 31, 1996, revenue from video poker operations
was $1.95 million. In addition, the Company received $2.9 million in video poker
franchise fee relief revenues. As previously described, there were a total of
234 devices in operation at the Company's facilities (not including the
tele-tracks operated by Finish Line) as of October 31, 1996.
Other Sources of Revenue
Additional revenue to the Company is generated from program sales, admission
charges collected by the racing facility and tele-tracks, parking, and food and
beverage services, all of which are operated directly by the Company. Pursuant
to its agreement with the publisher of the Daily Racing Form, the Company is the
wholesaler for sales of the Daily Racing Form in the greater New Orleans area.
For two weekends each year, after the live racing meet has concluded, the
infield of the Fair Grounds Race Course is used by a non-profit organization in
New Orleans to host a Jazz and Heritage Festival. As compensation for the use of
its facilities, the Company receives all revenues from beverage concessions
during the Jazz and Heritage Festival. The Company and the sponsor of the Jazz
and Heritage Festival have entered into an agreement for the use of the
Company's facilities through the year 2001. Revenues from the 1996 Festival were
$1.5 million, compared to $1.2 million for 1995 and $1.1 million for 1994.
COMPETITION
The Company continues to face intense competition from other companies in the
gaming industry, including those which offer pari-mutuel wagering. Activities
which compete or which have the potential for competing with the Company's
racing facility, tele-tracks and video poker operations include riverboat and
dockside gambling, casinos operated on Indian reservations, state-sponsored
lotteries and video poker in restaurants, bars, hotels and truck
15
<PAGE> 16
stops. All such activities are present in the State of Louisiana or the
Mississippi Gulf Coast area.
Pari-mutuel wagering for live races has experienced declining revenues for the
last several years, not only at the Fair Grounds Race Course but also at other
facilities located in Louisiana. The growth of gaming in the United States in
recent years has been reflected in various forms, including riverboats,
dockside gaming facilities, Native American gaming ventures, land-based
casinos, state-sponsored lotteries, and expanded off-track wagering
opportunities. The impact of the lottery, video poker, and casinos or
riverboats on live racing in Louisiana has been felt by all of the existing
tracks. Additional forms of gaming which may be introduced in the future, as
well as future expansions, additions and enhancements to existing facilities
by the Company's competitors, could result in additional funds being directed
away from the Company's on-track and off-track facilities.
Horse Racing
The Company's racing facility and tele-tracks compete for patrons with a number
of sporting events and leisure time and entertainment activities in the New
Orleans area and throughout Louisiana, including race tracks and tele-tracks
owned and operated by three other licensees.
The Company also competes with other racetracks in Louisiana and throughout the
United States in securing high caliber thoroughbred horses to run at the
Company's racetrack. As a result of increased purses which should continue to be
available because of increased purse supplements to the Company, the Company
believes that the quality of racing at the Fair Grounds Race Course has improved
and will continue to improve.
Other Forms of Legalized Gaming
Louisiana Lottery. A state-wide lottery began operations in Louisiana in
September 1991. The Company believes that at its inception the Louisiana lottery
contributed significantly to a decline in the Company's average daily
pari-mutuel handle (consisting of both on-track and off-track wagering);
however, the lottery has had little impact during the last several fiscal years.
Casino Gambling. A number of dockside casinos are currently operating in or near
Biloxi, Mississippi, located on the Mississippi Gulf Coast approximately 60
miles east of New Orleans.
16
<PAGE> 17
Several other such casinos have been proposed for the same area, and a
substantial number of dockside gaming facilities are in operation in Vicksburg,
Greenville, Natchez, Coahoma County and Tunica County, Mississippi.
The Louisiana Riverboat Economic Development and Gaming Control Act, which
became effective in July 1991, approved the conduct of riverboat gaming
activities on 12 separate waterways in Louisiana. The legislation authorizes the
issuance of up to 15 licenses to operate riverboat casinos within the State,
with no more than six in any one Parish. As of January 1, 1997, 14 licenses had
been granted and there were 12 licensed riverboats in operation in Louisiana,
four of which were operating in the New Orleans area.
In 1992, the Louisiana legislature approved a single land-based casino to be
developed in downtown New Orleans. Such legislation provided that the casino is
to be the only such authorized casino in the State of Louisiana. The City of New
Orleans awarded contracts for the development and operation of such casino
project, and in May 1995 temporary gambling operations commenced and
construction on the permanent casino facility was begun. Construction was halted
in the Fall of 1995 when the casino filed for bankruptcy and all gambling and
construction operations have ceased.
Video Poker Operations. As described herein, the Video Draw Poker Devices
Control Law allows pari-mutuel facilities to have an unlimited number of video
poker devices at such facilities. Any person who has been granted a license to
sell alcoholic beverages for consumption on the premises may be granted a
license for the placement of devices on such premises; however, with the
exception of pari-mutuel facilities and truck stop facilities, a licensee may
not have more than three such devices. Truck stop facilities may have no more
than 50 devices. Devices which are placed in restaurants are to be operated only
in designated areas which are separate from the dining area of such restaurants.
The Company believes that there are numerous establishments throughout the New
Orleans area at which video poker devices are located; however, the Company does
not believe that the placement of such devices at such other establishments has
had a material adverse effect on the revenue which has been generated from the
operation of such devices at the Company's racetrack and tele-tracks.
REGULATION
The Company's operation of pari-mutuel wagering at its racetrack and tele-tracks
is subject to extensive regulation pursuant to Louisiana law and the rules and
regulations of the Racing Commission, which govern, among other things, (i) the
awarding of licenses for the conduct of live racing meets; (ii) the conduct of
thoroughbred horse racing; (iii) the types of wagering which may be offered by
the Company and other pari-mutuel facilities; and (iv)
17
<PAGE> 18
the disposition of revenue generated from wagering. Off-track wagering is also
regulated by the Racing Commission. Such legislation, and subsequent regulations
adopted by the Racing Commission, govern the ownership and operation of
off-track wagering facilities, the commissions which facilities may earn on
wagers and the amounts which must be set aside as purse supplements, as
described elsewhere herein.
The Video Draw Poker Devices Control Law is subject to regulation by the gaming
enforcement division of the Louisiana State Police. Such legislation describes
the specifications which must be met before devices can be utilized in
Louisiana, and also sets forth certain licensing, accounting and reporting
requirements.
EMPLOYEES
During its live racing season the Company employed on-track approximately 400
persons, including 111 in the mutuel department, 67 in the concessions
department, 43 in the security department and 179 in the administrative, racing,
parking, maintenance and publicity departments.
In connection with tele-track operations, the Company currently employs
approximately 144 persons including 51 in the mutuel department, 37 in the
catering department, 27 in the security department and 29 in the administrative,
admissions, maintenance and publicity departments, some of whom are employed
on-track during the live racing season and are included in the total employees
referred to above.
ITEM 2. PROPERTIES
The Company owns its racetrack site which consists of approximately 145 acres
of land, situated within a fenced area adjacent to Gentilly Boulevard in the
New Orleans city limits, and within ten minutes drive from downtown New
Orleans. Located on such property is a one-mile oval, sandy loam race track and
a seven-furlong turf track inside the main track.
The Company currently leases its temporary facilities, consisting of the large
main tent previously described, as well as certain modular buildings containing
executive and administrative offices, and totalisator equipment.
The Company owns the clubhouse and tele-track facility described herein, as well
as the new grandstand facility as to which construction commenced during 1995
but has been curtailed, as described herein.
The Company also owns 50 modern concrete barns with supporting buildings and
facilities which are located on the property and are
18
<PAGE> 19
capable of quartering approximately 2,000 horses. There is an all-concrete
parking lot which can accommodate approximately 4,000 vehicles within the fenced
area.
Substantially all of the real property and equipment of the Company is subject
to a collateral mortgage in the aggregate amount of $17.5 million, and all of
the Company's furniture, fixtures, equipment, and other items of personal
property are subject to a security interest, which secure the Company's
indebtedness to FNBC under the Loan Agreement, as described herein.
The Company leases the facilities for its tele-tracks under lease agreements
with various terms. The tele-tracks formerly licensed to Jefferson Downs and now
licensed to the Company are also leased; however, as described herein, Finish
Line has agreed to indemnify the Company for, among other things, all
obligations under the leases assigned by Jefferson Downs to the Company. See
Note 9 of Notes to the Financial Statements included elsewhere herein for a
description of the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is 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:
1. On May 14, 1994 the Company filed an action in the 24th Judicial District
Court in the State of Louisiana against Travelers Indemnity Company of
Illinois ("Travelers") and others. The Company has contended in such
lawsuit that the insurance policy provided by Travelers provides the
Company with blanket coverage in the approximate amount of $24.2 million in
excess of the $10 million of underlying coverage. Accordingly, the Company
has asserted that Travelers is liable for the difference between $24.2
million and the approximately $9.5 million already paid, 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, liable to the Company
for any damages sustained including any damages sustained if the amount of
coverage is less than that claimed by the Company. Travelers has asserted
that the excess policy did not provide blanket coverage, and that its
liability under such policy is limited to the amount which it has already
paid. On November 18, 1996, the Company reached a settlement in such action
with the insurance agent and insurance broker. The settlement provided that
the settling defendants were to pay the Company $10 million in the
aggregate, subject to an agreement pursuant to which
19
<PAGE> 20
each such settling defendant will share with the Company, in accordance
with an agreed-upon formula, in any settlement with or award of damages
against Travelers. Such amount has been paid but is being held in escrow,
as described elsewhere herein.
Also in November 1996, the trial judge denied a motion for partial summary
judgment filed by Travelers on the grounds that the motion involved
contested issues of fact. Travelers had asked the trial court to find that
its policy was a scheduled policy and that it had already paid all
scheduled amounts. Travelers subsequently obtained a postponement of the
trial in order to appeal the court's denial of its motion for summary
judgment. The court of appeals denied the appeal, finding no error in the
trial court's ruling. The matter has been remanded to the trial court,
which has rescheduled the case for trial in June 1997.
2. 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, the company which provided and maintained the fire alarm system at
the race track, and other defendants. The complaint seeks unspecified
damages, not otherwise compensated for by insurance, that were allegedly
caused by the negligence of one or more of the defendants. The
Company's three fire insurers and a fourth insurance company, which
insured the operator of the video poker machines, intervened in the suit
asserting subrogation claims against the same defendants.
In late 1996, the Company and three of the insurance companies entered into
settlements with two of the other defendants, 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 netted approximately
$268,000.
The remainder of the case was tried before a jury commencing in March
1997. On March 26, 1997, the jury returned a verdict in favor of the
Company, awarding the Company approximately $48.4 million in damages
against ADT, plus interest, subject to certain subrogation rights in
favor of the Company's property insurers. The Company anticipates
that ADT will challenge the jury verdict through post-trial motions
and on appeal.
3. The Company is 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 alleges that it is subrogated to its insured's rights to
collect damages and that it has paid approximately $1,175,000 to its
insured for the loss of equipment in the fire.
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<PAGE> 21
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 exclusions 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 appeal is pending.
The St. Paul case is set for trial in May 1997. The effect of United
National's appeal on the consolidation of the two cases and the May 1997
trial date is unknown at the present time.
4. An action was filed in 1996 in the United States District Court in Baton
Rouge by Livingston Downs Racing Association ("Livingston") against the
Company and other defendants. The complaint alleges certain violations of
federal antitrust law. Livingston previously has filed similar actions
against the Company which have been resolved in the Company's favor, and
the Company believes that the current action is without merit.
The action is pending.
5. Livingston also filed a lawsuit in 1996 against the Company and the State
of Louisiana seeking a judgment declaring the Louisiana off-track betting
laws to be unconstitutional. The trial court ruled in favor of Livingston
and the case is on appeal to the Louisiana Supreme Court.
6. The Louisiana Horsemen's Benevolent and Protective Association filed a
lawsuit in 1996 against the State of Louisiana, the Company and all other
pari-mutual wagering facilities in the State of Louisiana, seeking recovery
of a portion of video poker revenues. The action is pending.
As to the pending matters described above, there can be no assurance that the
Company will be successful in any of its claims or defenses. Accordingly, no
assurance can be given that additional recoveries of insurance proceeds, if any,
will reimburse the Company adequately for the loss or destruction of its
property in the fire.
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common shares of the Company are not listed on the Nasdaq Stock Market or
any other established trading market. Trading in the common shares of the
Company generally has been sporadic and trading volume generally is very low.
The range of high and low bid quotations for the 1995 fiscal year by quarters as
set forth below does not necessarily reflect actual trades, but represents
inter-dealer quotations without mark-up, mark-down or commission. The quotations
for the 1996 fiscal year represent the bid quotations at the end of each fiscal
quarter.
<TABLE>
<CAPTION>
Fiscal 1995 1995 1996 1996
Quarter Ended Low Bid High Bid Low Bid High Bid
- ------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
January 31 $16.00 $24.00 $ 16.00 $ 16.00
April 30 $16.00 $24.00 $ 14.00 $ 14.00
July 31 $20.00 $25.00 $ 16.00 $ 16.00
October 31 $20.00 $25.00 $ 15.00 $ 15.00
</TABLE>
As of January 17, 1997, there were 430 shareholders of record of the 468,580
issued and outstanding common shares of the Company.
There were no cash dividends declared or paid during fiscal 1996, 1995 or 1994.
The Company is not subject to any restrictions (other than non-contractual
business considerations) affecting its present or future ability to pay
dividends with respect to its common shares, except that the provisions of the
Loan Agreement dated December 18, 1995 effectively preclude the Company from
declaring and paying dividends without the consent of FNBC.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
FAIR GROUNDS CORPORATION
SELECTED FINANCIAL DATA
For the Five Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $27,496,500 $23,031,031 $22,371,571 $30,718,482 $32,667,468
OPERATING EXPENSES 29,809,843 26,394,452 26,094,568 34,308,263 32,192,537
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (2,313,343) (3,363,421) (3,722,997) (3,589,781) 474,931
INTEREST EXPENSE 791,566 12,318 284,926 502,624 661,092
OTHER INCOME 4,279,503 2,459,163 605,553 651,950 1,068,874
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY
ITEM, AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES 1,174,594 (916,576) (3,402,370) (3,440,455) 882,713
PROVISION (BENEFIT)
FOR INCOME TAXES 294,896 (300,460) (1,878,635) (383,787) 123,509
MINORITY INTEREST - - - 142,661 575,831
EXTRAORDINARY ITEM - GAIN
FROM FIRE (net of taxes) - - 9,312,758 - -
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES - 104,000 (75,094) - -
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 879,698 $ (512,116) $ 7,713,929 $(3,199,329) $ 183,373
=========== =========== =========== =========== ===========
COMMON SHARES OUTSTANDING 469,940 469,940 469,940 469,940 469,940
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE $ 1.87 $ (1.09) $ 16.48 $ (6.83) $ 0.39
=========== =========== =========== =========== ===========
CASH DIVIDENDS DECLARED
PER SHARE $ None. $ None. $ None. $ 0.20 $ 0.15
=========== =========== =========== =========== ===========
TOTAL ASSETS $34,791,597 $30,954,654 $26,470,322 $20,496,529 $20,919,257
=========== =========== =========== =========== ===========
NOTES PAYABLE (EXCLUDING
CURRENT PORTION) $ - $ - $ 1,000,000 $ 6,000,000 $ 7,000,000
=========== =========== =========== =========== ===========
</TABLE>
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<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Fire. As previously reported, on the night of Friday, December 17, 1993, a fire
swept through and destroyed the grandstand and clubhouse facilities and all
their contents.
Immediately after the fire, management determined that it would be in the
Company's best interest to reopen the Fair Grounds Race Course and continue the
live racing schedule as soon as possible. Accordingly, the Company made
arrangements for the installation of temporary racing and patron facilities.
The Company currently continues to use its temporary facilities and, as a result
of the limited amenities afforded by such temporary facilities, attendance and
handle continue to be less than the pre-fire levels. In addition, the Company's
operations continue to be affected by competition from other gaming venues in
the greater New Orleans and surrounding areas.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. During the fiscal years ended October 31, 1996 and 1995, the Company
derived its pari-mutuel income by conducting live racing meets of 88 days, each
fiscal year, and in the operation of its tele-tracks for off-track wagering.
During each such fiscal year, the Company operated tele-tracks in New Orleans at
the Fair Grounds Race Course and on Bourbon Street, and at locations in
Lafourche, St. Bernard and St. John Parishes, Louisiana. On October 26, 1995,
the Company opened a new tele-track facility in Jefferson Parish. Through Finish
Line, the Company operated tele-track facilities in Terrebonne, St. Tammany, and
Jefferson Parishes, Louisiana that were formerly operated by Jefferson Downs.
For the fiscal year ended October 31, 1996, the Company reported total in-state
pari-mutuel wagering of $96,474,002 compared to $78,799,233 in fiscal 1995.
Comparative pari-mutuel wagering and attendance figures for the fiscal years
ended October 31, 1996 and 1995 are as follows:
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<PAGE> 25
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 20,180,889 $25,134,326
Off-track handle 76,293,113 53,664,907
------------ -----------
Total in-state wagering $ 96,474,002 $78,799,233
------------ -----------
Out-of-state simulcast
handle $116,590,172 $88,588,953
============ ===========
Total Attendance 426,849 445,480
============ ===========
</TABLE>
The Company believes that the $4,953,437 or 20% decline in on-track handle is
primarily the result of the limited amenities afforded by the temporary
facilities as well as continued competition from other forms of gaming.
The $22,628,206 or 42% increase in off-track handle is primarily the result of
the Jefferson Parish tele-track facility opened in October 1995 as well as the
implementation of full card simulcasting in January 1996. Full card simulcasting
enables the Company to show an unlimited number of races of an out-of-state
meet. Prior to full card simulcasting, such races were limited when either the
Company or another in-state race track was racing live.
The $28,001,219 or 32% increase in out-of-state handle is the result of
continued efforts to telecast the Company's races to new out-of-state markets.
During the fiscal 1996 race meet, there were 20 new markets telecasting the
Company's races including various Illinois tracks which accounted for
approximately $21.4 million or 76% of the handle increase.
For the fiscal year ended October 31, 1996, the Company reported net income
before income taxes of $1,174,594 compared to a net loss of $916,576 in fiscal
1995. This increase is primarily the result of increases in mutuel income and
video poker franchise fee relief compared to fiscal 1995 partially offset by an
increase in general and administrative expenses over the prior fiscal year.
These are described in more detail below.
As a result of the increase in total wagering, the Company's operating revenues
have increased by $4,465,469 or 19% from fiscal 1995. This included increases of
$3,177,756, or 20%, in pari-mutuel commissions, $101,936 or 44% in uncashed
mutuel tickets $532,327 or 14% in host track fees and $823,424 or 73% in video
poker revenue. The new Jefferson Parish tele-track facility accounted for a
significant portion of the increase in video poker revenues.
Racing Expenses. Total racing expenses increased by $3,140,850, or 14%, over
fiscal 1995, primarily as a result of increases in
25
<PAGE> 26
purses, racing salaries, host track fees, advertising, rent and utilities
arising out of increased pari-mutuel handle and the opening of the Jefferson
Parish tele-track in October 1995. This increase was partially offset by a
decrease in cost of concessions due to lower on-track attendance.
General and Administrative Expenses. General and administrative expenses for
the fiscal year ended October 31, 1996 increased $274,336, or 6.6%, from
fiscal 1995 primarily due to an increase in property taxes on the new tele-track
facility completed in December 1994 and increased legal fees resulting from the
ongoing fire related litigation. This increase was partially offset by a
decrease in administrative salaries in fiscal 1996 due to a reduction in staff.
Other Income (Expenses). Total other income increased $1,040,887 or 43% from
fiscal 1995 primarily as a result of an increase in Jazz and Heritage Festival
revenue, and an increase in video poker franchise fee relief revenue. This
increased revenue is partially offset by a decrease of $618,182 in fire
insurance settlements from the fire litigation discussed elsewhere herein and an
increase in interest expense of $779,248 relating to the bank financing
discussed elsewhere herein.
The Jazz and Heritage Festival revenue increased $381,427 or 33% due to record
festival crowds in fiscal 1996. The Company receives revenues on the sale of
beverages during the seven-day festival held at the Fair Grounds Racecourse.
Video Poker franchise fee relief revenue increased $2,185,474 or 310% over
fiscal 1995. The revenue provided by the franchise fee relief legislation
described elsewhere herein was available for the entire 12 months in fiscal 1996
compared to only 5 months in fiscal 1995.
Net Income. The Company reported net income of $879,698 in fiscal 1996 compared
to a net loss of $512,116 in fiscal 1995. In addition to the components of net
income previously discussed, the net income for fiscal 1996 included income tax
expense of $294,896 compared to an income tax benefit of $300,460 in fiscal
1995. The Company also recognized a benefit of $104,000 in fiscal 1995 relating
to its change in accounting methods for investments.
Fiscal 1995 Compared to Fiscal 1994
Revenues. During the fiscal years ended October 31, 1995 and 1994, the Company
derived its pari-mutuel income by conducting live racing meets of 88 and 77
days, respectively, and in the operation of its tele-tracks for off-track
wagering. During each such fiscal year, the Company operated tele-tracks in New
Orleans at the Fair Grounds Race Course and on Bourbon Street, and at locations
in Lafourche, St. Bernard and St. John Parishes, Louisiana. On
26
<PAGE> 27
October 26, 1995, the Company opened a new tele-track facility in Jefferson
Parish. Through Finish Line, the Company operated tele-track facilities in
Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana, that were formerly
operated by Jefferson Downs Corporation.
For the fiscal year ended October 31, 1995, the Company reported a net loss of
$512,116, compared to net income of $7,713,929 for the fiscal year ended October
31, 1994. The net income for the fiscal 1994 year was the direct result of the
Company's recognition of an extraordinary gain attributable to the December 17,
1993 fire. As a result of the fire in fiscal 1994, the Company recorded an
extraordinary gain of $9.3 million, net of related income taxes of $5.4 million.
The extraordinary gain is equal to insurance proceeds received in excess of the
net book value of the destroyed property, plant and equipment. The extraordinary
gain is also net of approximately $145,000 paid to third party vendors in fiscal
1994 for losses to their property caused by the fire. The Company had no
extraordinary gain during fiscal 1995.
The Company's losses before the extraordinary gain and charge for cumulative
effect of change in accounting for income taxes were $616,116 and $1,523,735 for
fiscal years 1995 and 1994, respectively. The significant decrease in the loss
from 1994 to 1995 was primarily the result of an increase in other income during
fiscal 1995.
For the fiscal year ended October 31, 1995, the Company experienced an increase
in operating revenues of $659,460, or 3.0%, from the previous fiscal year. The
increase in operating revenues during fiscal 1995 was the result of a
significant increase in host track fee revenue partially offset by declines in
most other categories of operating revenue. Host track fees increased
$1,391,530, or 55.9%, from fiscal 1994 due to a significant increase in
out-of-state simulcasting of the Company's live races. For the 1995 fiscal year
racing meet, the Company reported $88.6 million in handle from out-of-state
simulcasting, compared to $37.5 million in handle for fiscal 1994.
While host track fees increased significantly, most other components of
operating revenue, including commissions, concessions, admissions, parking,
video poker and programs and forms, declined. Such declines were the direct
result of further decreases in attendance and pari-mutuel wagering from 1994.
Comparative in-state pari-mutuel wagering and attendance figures for the fiscal
years ended October 31, 1995 and 1994 are as follows:
27
<PAGE> 28
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $25,134,326 $ 26,110,964
Off-track handle 53,664,907 55,713,253
----------- ------------
Total in-state wagering $78,799,233 $ 81,824,217
=========== ============
Out-of-state simulcast handle $88,588,953 $ 37,454,222
=========== ============
Total Attendance 445,480 475,557*
=========== ============
</TABLE>
* Note: Attendance figures for fiscal year ended October 31, 1994 are
estimated.
The decline in total wagering and attendance was primarily the result of the
limited amenities afforded by the temporary facilities as well as increasing
competition from other forms of gaming.
Racing Expenses. Racing expenses for the fiscal year ended October 31, 1995
remained constant, increasing by only $58,262 from the prior fiscal year. Many
components of such racing expenses fluctuated significantly, including an
increase of $449,387,or 6.2%, in purse expense, primarily due to the increase in
out-of-state simulcasting, partially offset by declines in on-track and
off-track wagering. Contracts and services declined by $224,822, or 10.1%, from
the previous fiscal year, due to the decrease in various services and relating
to the temporary racing facilities.
Utility expenses decreased by $142,371, or 19.7%, from fiscal 1994, primarily
due to a change in pari-mutuel scheduling for some of the Company's smaller
tele-track facilities. During 1995, the Company implemented a four-day racing
schedule at such facilities, compared to a five-day schedule during 1994 and
previous years. The Company also received during 1995 certain utility refunds
relating to excess charges from prior fiscal years.
General and Administrative Expenses. General and administrative expenses for the
fiscal year ended October 31, 1995 increased by $241,622, or 6.0%, from the
previous fiscal year, primarily as a result of increases in legal, audit and
director fees and an increase in office expense, partially offset by a reduction
in property taxes. Legal, audit and director fees increased $227,356, or 30.5%,
primarily due to the fire-related litigation. Office expense increased $81,272,
or 31.3%, due to increases in telephone expense relating to increased
out-of-state activity. Property tax expense declined by $231,737, or 49.3%.
Other Income and Expenses. For the fiscal year ended October 31, 1995, other
income increased $2,126,218, or 636%, from the 1994 fiscal year due primarily to
$703,488 from video poker franchise tax exemptions and insurance proceeds in the
amount of $430,073.
28
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $5,146,344 during fiscal 1996 compared to a
decrease of $6,920,720 during fiscal 1995. The increase in cash and cash
equivalents in fiscal 1996 was the result of cash provided from financing of
$6,246,081 and cash provided by operations of $4,218,936, partially offset by
cash used in investing activities of $5,318,673. The primary source of financing
was the FNBC construction loan which was closed in December 1995. Investing
activities were primarily cash used to pay the Company's construction
obligations.
As of January 31, 1997, the Company had received approximately $29.5 million in
insurance and related proceeds resulting from fire loss claims submitted to the
Company's insurance carriers, including the $10 million settlement proceeds
described below. On November 18, 1996, the Company reached an out-of-court
settlement with the insurance agent and insurance broker in certain pending
litigation described herein. The settlement provided that the settling
defendants were to pay the Company $10 million in the aggregate. In addition,
each such settling defendant is to share with the Company, in accordance with an
agreed-upon formula, in any settlement with or award of damages against
Travelers. The settlement funds have been deposited into an escrow account
pending resolution of certain issues. See related discussions in Item 3,
"Legal Proceedings".
The Company's tele-track facility at the Fair Grounds Race Course, which also
serves as a temporary clubhouse area, was opened on December 22, 1994. The total
cost for debris removal and the construction of the tele-track facility was
approximately $3.2 million.
During the Summer of 1994, the Company approved the plans for a new racing
facility and commenced construction of the foundation thereof in August 1994.
The total cost of the facility, together with furniture, fixtures, equipment and
certain fees and permit costs, was anticipated to be approximately $24.3 million
at the time construction commenced, which is in addition to the $3.2 million
relating to debris removal and construction of the tele-track facility, as
described above. As a result of the passage of time from the cessation of
construction, (i) the Company now believes that the total consruction costs,
including costs already incurred, may be approximately $32 million in the
aggregate and (ii) the Company anticipates that it will continue to utilize the
temporary tent facilities and the tele-track facility until late 1997.
Financing for New Facility
Original Financing. At the time construction was halted in September, 1995,
construction of the facility was approximately 60% completed. The Company had
incurred aggregate construction costs for such facility of approximately $15.2
million as of such time. In the several months immediately following the
construction halt,
29
<PAGE> 30
the Company incurred additional construction costs of approximately $600,000
while retainage and other obligations were settled. Insurance proceeds recovered
to date and interim financing provided by FNBC, as described herein, have
provided the source of funds used in such construction. However, for the reasons
described below, further construction work on the project has not been
undertaken. As a result, Company currently anticipates that it will continue to
utilize the temporary tent facilities and the tele-track facility during the
remainder of the current racing season.
As previously reported, the Company, had received and accepted a commitment
letter dated February 6, 1995 from FNBC for a non-revolving line of credit to be
used as an interim construction loan, convertible to a term loan. The aggregate
principal amount of such loan under the terms of such commitment was to have
been $17.5 million. The commitment from FNBC provided that the interim
construction loan was to have closed on or before March 31, 1995. However, the
parties agreed to various extensions of such closing date. FNBC indicated that
the principal reason for the delay was FNBC's concern with restrictions on and
the possible elimination of video poker gaming in Louisiana. Inasmuch as video
poker franchise fees generated by the Company and its tele-tracks were to be
used for the repayment of the FNBC loan, in accordance with the franchise fee
relief legislation described herein, any change in the video poker gaming laws
which restricted or limited video poker as a source of revenue may have had an
adverse impact on such source of repayment. Accordingly, final action on the
full $17.5 million loan was delayed.
During 1995, FNBC provided the Company with short-term interim construction
loans totaling $7.15 million. However, such interim construction advances ceased
during the Fall of 1995 primarily due to FNBC's concerns regarding the future of
video poker and other forms of gaming in Louisiana. All interim financing was
then consolidated under the Loan Agreement between the Company and FNBC.
Pursuant to the Loan Agreement, FNBC agreed to extend credit to the Company up
to aggregate principal amount of $9,493,050 (all of which had been previously
advanced) until October 31, 1996. The Loan Agreement states that such commitment
is not a revolving credit facility, and the commitment is only to make loans up
to such aggregate principal amount. Accordingly, FNBC has no obligation under
the Loan Agreement to lend additional funds to the Company.
Payment of the principal and interest under the Loan Agreement was made in 10
monthly installments of $52,740 principal plus interest, beginning January 17,
1996, and one final payment of all principal plus accrued interest was to be
made on October 31, 1996. As of October 31, 1996, the outstanding principal
balance under the Loan Agreement was $7,799,044. The Company reached an
understanding
30
<PAGE> 31
with FNBC in October 1996 to extend the term of the Loan Agreement for 90
days. The term of the Loan Agreement was subsequently extended through April
15, 1997.
In connection with the Loan Agreement, the Company made a payment to Louie J.
Roussel, III of $1 million of the remaining $2 million principal balance owed to
him and agreed that the outstanding principal balance of $1 million would be due
and payable on October 31, 1996. Such remaining payment was made by the Company
on November 4, 1996, utilizing funds borrowed on a short-term basis from Marie
G. Krantz.
March 1997 Financing Commitment. As described above, the Company was unable
during 1995 and 1996 to obtain the full amount of financing originally committed
by FNBC, due primarily to the uncertainty regarding the future of video poker as
a continuing source of revenue. As a result, no further progress was made on the
construction of the Company's new facility during fiscal 1996.
After the favorable results of the November 1996 referendum concerning gaming
in Louisiana, the Company and FNBC began discussing possible terms and
conditions for new or additional construction and permanent financing. On
January 9, 1997, the Company accepted a commitment letter from FNBC providing
for additional financing under, and an amendment to certain terms and
conditions of, the Loan Agreement. After further discussions, a new commitment
letter was accepted on March 13, 1997 (the "March 1997 Commitment"). The March
1997 Commitment provides that the principal amount outstanding under the Loan
Agreement will be increased by $6,778,275 for use is completing construction of
the Company's new grandstand facility and refinancing the principal balance
under the Loan Agreement. It is a condition to the closing of such financing
that the $10 million currently being held in escrow be applied toward the
repayment of the outstanding principal balance under the Loan Agreement.
Interest on the new FNBC loan, at the rate of 9% per annum, is to be paid
semi-monthly, and principal payments of $52,740 are to be made monthly. Such
payments of principal and interest are to be first made out of the funds
received under the video poker franchise fee relief legislation. Any excess
franchise fees relief monies are to be applied as a prepayment of principal. In
addition, as required under the video poker franchise fee relief legislation,
insurance proceeds received by the Company must also be applied to reduce the
principal balance of the loan. The entire principal balance is to be due on
June 30, 1999.
The March 1997 Commitment provides that, in addition to the existing security
under the Loan Agreement, the loan is to be secured by (i) liquid collateral
with a market value of $5.8 million. (ii) a security interest in the video
poker franchise fee relief monies; (iii) a pledge by the Company of all
proceeds from disputed claims arising
31
<PAGE> 32
out of the December 1993 fire; (iv) an assignment of the Company's contract with
the Jazz and Heritage Festival; (v) an assignment of the Company's agreement
with Finish Line regarding the operation of its off-track facilities; and (vi)
an agreement by the Company not to assign, pledge or otherwise encumber its
racing and off-track licenses. The loan also is to be guaranteed by Finish Line.
The March 1997 Commitment also provides for a second loan of $5,221,725 that
will be secured by the same collateral that serves the first loan, except that
the second loan may not be repaid with funds received by the Company from the
video poker franchise fee relief legislation. The second loan is to provide
for monthly payments of interest, with the entire principal balance due on
October 31, 1998. The closing of the financing under the March 1997 Commitment
is to occur on or before April 15, 1997.
The Company believes that, apart from the funds needed to complete construction
of the facility, its existing cash and cash from operations will be adequate to
fund operations for the balance of the fiscal year. If the financing described
above is consummated, the Company believes that it will have sufficient funds
to complete the construction of the new grandstand facility. It is currently
anticipated that, if the revised financing is consummated, construction will
recommence in the Spring of 1997 and that the facility will be completed in the
Fall of 1997. If such financing is not consummated, the Company believes that
other sources of financing will be available. For the longer term, it is
difficult to determine what effect the anticipated change from the temporary
tent facilities to the new permanent facility will have on both operating
income and expenses. While the Company believes that the completion of the
new facility will have a positive effect on attendance and wagering. There can
be no assurance of any increases in patronage or handle.
Other Financing
On October 31, 1996, Marie G. Krantz loaned the Company $1,000,000. The loan was
payable on demand and bore interest equal to the New York prime rate. The
interest rate at October 31, 1996 was 8.25%. This note, together with all
accrued interest, were repaid in full in January 1997.
In January 1997, the Company received an advance of $1,000,000 from VSI, which
the Company has begun to repay in six equal monthly payments beginning in
February 1997.
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of the Company, including the notes thereto,
and the Report of Independent Certified Public Accountants are included
herewith:
Report of Independent Certified Public Accountants
Balance Sheets, October 31, 1996 and 1995
Statements of Operations for the Three Years Ended October 31, 1996
Statements of Changes in Stockholders' Equity for the Three Years Ended
October 31, 1996
Statements of Cash Flows for the Three Years Ended October 31, 1996
33
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of the
Fair Grounds Corporation
We have audited the accompanying balance sheets of the Fair Grounds Corporation
as of October 31, 1996 and 1995, and the related statements of operations, of
changes in stockholders' equity, and of cash flows for each of the three years
in the period ended October 31, 1996. These financial statements and the
supplemental schedules discussed below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of October 31,
1996, and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended October 31, 1996 in conformity with
generally accepted accounting principles.
January 24, 1997, except for Note 12, as to which the date is March 26, 1997.
34
<PAGE> 35
FAIR GROUNDS CORPORATION
BALANCE SHEETS
October 31
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,264,934 $ 1,118,590
Cash and cash
equivalents - restricted 133,929 154,909
Accounts receivable 866,816 854,281
Mutuel settlements 82,535 172,385
Securities available for sale 188,125 457,900
Inventory 84,248 80,565
Deferred income taxes 310,940 59,940
Prepaid expenses 425,983 557,033
----------- -----------
Total Current Assets 8,357,510 3,455,603
----------- -----------
OTHER ASSETS 101,684 71,264
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 13,820,927 13,881,970
Construction in progress 15,841,736 15,207,395
Land improvements 4,270,535 4,270,535
Temporary facilities 2,686,044 2,686,044
Automotive equipment 824,720 818,111
Machinery and equipment 891,630 789,347
Furniture and fixtures 171,631 171,497
----------- -----------
Total 38,507,223 37,824,899
Less: accumulated depreciation
and amortization (15,461,101) (13,683,393)
----------- -----------
Depreciable property - net 23,046,122 24,141,506
Land 3,286,281 3,286,281
----------- -----------
Property - net 26,332,403 27,427,787
----------- -----------
TOTAL ASSETS $34,791,597 $30,954,654
=========== ===========
</TABLE>
(Continued)
35
<PAGE> 36
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
October 31
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 9,952,223 $ 3,706,143
Accounts payable 651,621 897,016
Construction contract
payable -- 4,864,199
Accrued liabilities:
Deferred purses 6,693,055 5,666,212
Host track fees 342,153 270,439
Uncashed mutuel tickets 332,016 259,606
Other 348,258 252,528
Deferred revenues 6,000 50,149
Income taxes payable 50,000 --
------------ ------------
Total Current Liabilities 18,375,326 15,966,292
------------ ------------
DEFERRED INCOME TAXES 4,525,687 4,020,035
------------ ------------
Total Liabilities 22,901,013 19,986,327
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY
Capital stock - no par value;
authorized 600,000 shares,
issued and outstanding
469,940 shares 1,525,092 1,525,092
Additional paid-in capital 1,936,702 1,942,350
Retained earnings 8,481,440 7,601,742
Unrealized loss on securities
available for sale (17,125) (54,884)
------------ ------------
Total 11,926,109 11,014,300
Less: treasury stock at cost,
1,360 (1996) and 1,760 (1995)
shares (35,525) (45,973)
------------ ------------
Total Stockholders' Equity 11,890,584 10,968,327
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,791,597 $ 30,954,654
============ ============
</TABLE>
See accompanying notes to financial statements.
36
<PAGE> 37
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Pari-mutuel
commissions $ 18,944,758 $ 15,766,962 $ 16,236,356
Breakage 439,204 355,283 345,219
Uncashed mutuel tickets 330,754 229,358 299,586
------------ ------------ ------------
Total 19,714,716 16,351,603 16,881,161
Less: pari-mutuel tax (2,570,018) (2,204,735) (2,425,262)
------------ ------------ ------------
Commission income 17,144,698 14,146,868 14,455,899
Host track fees 4,410,727 3,878,400 2,486,870
------------ ------------ ------------
Total Mutuel Income $ 21,555,425 $ 18,025,268 $ 16,942,769
Concessions 1,467,187 1,596,941 1,627,681
Admissions (net of taxes) 351,569 339,319 458,825
Parking 14,967 14,401 36,992
Video poker 1,955,551 1,132,127 1,354,792
Programs and forms 1,474,947 1,317,547 1,462,243
Miscellaneous 676,854 605,428 488,269
------------ ------------ ------------
Total Operating
Revenues $ 27,496,500 $ 23,031,031 $ 22,371,571
------------ ------------ ------------
RACING EXPENSES
Purses 9,558,545 7,754,856 7,305,469
Salaries and related
taxes and benefits 5,092,149 4,895,632 4,960,205
Contracts and services 2,069,396 1,997,706 2,222,528
Depreciation 1,810,257 1,797,256 1,856,388
Host track fees 2,178,478 1,481,528 1,454,358
Program paper, forms and
other supplies 1,545,963 1,250,947 1,392,729
Utilities 711,022 580,424 722,795
Advertising and promotion 781,935 701,860 636,834
Cost of sales -
concessions 541,691 688,965 634,943
Repairs and maintenance 300,332 317,102 336,781
Rent 303,006 271,794 256,923
Miscellaneous 497,736 511,590 411,445
------------ ------------ ------------
Total Racing
Expenses $ 25,390,510 $ 22,249,660 $ 22,191,398
------------ ------------ ------------
</TABLE>
(Continued)
37
<PAGE> 38
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and related
taxes and benefits $ 1,225,683 $ 1,287,744 $ 1,261,149
Insurance 950,882 918,356 900,513
Property taxes 395,863 238,570 470,307
Legal, audit and director
fees 1,203,501 973,249 745,893
Contracts and services 159,521 163,972 154,356
Office expenses 303,398 340,923 259,651
Litigation settlement -- -- (200,000)
Miscellaneous 180,485 221,978 311,301
------------ ------------ ------------
Total General and
Administrative
Expenses $ 4,419,333 $ 4,144,792 $ 3,903,170
------------ ------------ ------------
LOSS FROM OPERATIONS (2,313,343) (3,363,421) (3,722,997)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Jazz and Heritage Festi-
val income - net $ 1,534,971 $ 1,153,749 $ 1,112,887
Video poker franchise fee
relief 2,888,962 703,488 --
Insurance settlements -- 618,182 --
Losses on sale and write-
down of partnership
investments -- -- (604,363)
Interest expense (791,566) (12,318) (284,926)
Interest income 31,990 95,825 179,376
Short-term loan closing
costs (159,702) --
Unrealized loss on
securities -- -- (104,000)
Equity in earnings from
unconsolidated invest-
ments in affiliates -- -- 59,849
Gain (Loss) on sale of
property, plant and
equipment 20,362 -- (4,119)
Loss on sale of securities
available for sale (37,080) (10,282) (34,077)
------------ ------------ ------------
Total Other Income $ 3,487,937 $ 2,446,845 $ 320,627
------------ ------------ ------------
</TABLE>
(Continued)
38
<PAGE> 39
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE
INCOME TAXES,
EXTRAORDINARY ITEM, AND
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES $ 1,174,594 $ (916,576) $ (3,402,370)
PROVISION (BENEFIT)
FOR INCOME TAXES 294,896 (300,460) (1,878,635)
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES 879,698 (616,116) (1,523,735)
EXTRAORDINARY ITEM -
GAIN FROM FIRE (net
of $5,363,801 of related
income taxes in 1994) -- -- 9,312,758
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING FOR INVEST-
MENTS IN 1995 AND
INCOME TAXES IN 1994 -- 104,000 (75,094)
------------ ------------ ------------
NET INCOME (LOSS) $ 879,698 $ (512,116) $ 7,713,929
============ ============ ============
</TABLE>
(Continued)
39
<PAGE> 40
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
PER SHARE OF COMMON STOCK:
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES $ 1.87 $ (1.32) $ (3.25)
EXTRAORDINARY ITEM,
NET OF INCOME TAXES - - 19.89
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES $ - .23 (.16)
------- -------- -------
NET INCOME (LOSS)
PER SHARE $ 1.87 $ (1.09) $ 16.48
======= ======== =======
</TABLE>
See accompanying notes to financial statements.
40
<PAGE> 41
FAIR GROUNDS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended October 31
<TABLE>
<CAPTION>
Unrealized
Loss On
Additional Securities Total
Capital Paid-In Retained Available Treasury Stockholders'
Stock Capital Earnings For Sale Stock Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1993
(unaudited) $ 1,525,092 $ 1,942,350 $ 399,929 $ -- $ (45,973) $ 3,821,398
Net income -- -- 7,713,929 -- -- 7,713,929
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 1994 1,525,092 1,942,350 8,113,858 -- (45,973) 11,535,327
Net loss -- -- (512,116) -- -- (512,116)
Unrealized loss on
securities available
for sale -- -- -- (54,884) -- (54,884)
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 1995 $ 1,525,092 $ 1,942,350 $ 7,601,742 $ (54,884) $ (45,973) $ 10,968,327
Net income -- -- 879,698 -- -- 879,698
Change in unrealized loss
on securities available
for sale -- -- -- 37,759 -- 37,759
Loss on sale of treasury
stock (5,648) -- -- -- -- --
Treasury stock sold
(400) shares -- -- -- -- 10,448 10,448
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 1996 $ 1,525,092 $ 1,936,702 $ 8,481,440 $ (17,125) $ (35,525) $ 11,890,584
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
41
<PAGE> 42
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 879,698 $ (512,116) $ 7,713,929
Adjustments to reconcile
net income (loss) to net
cash provided by (used for)
operating activities:
Extraordinary item -
gain from fire - - (9,312,758)
Depreciation 1,810,257 1,797,256 1,856,388
(Gain) loss on sale
of property (20,363) - 4,119
Equity in earnings
from unconsolidated
investments in
affiliates - - (59,849)
Provision for deferred
income taxes 244,896 (218,851) (1,312,346)
Loss on sale and write-
down of partnership - - 604,363
Unrealized loss on
marketable securities - - 104,000
Charge for cumulative
effect of changes in
accounting for income
taxes and investment
securities - (104,000) 75,094
Loss on sale of investment
securities 37,077 10,282 34,077
Loss on advance to
affiliate - - 7,500
Litigation settlement - - (200,000)
Change in assets and
liabilities:
(Increase) decrease in:
Accounts receivable 91,871 (328,198) (2,617)
Insurance proceeds
receivable - 487,341 -
Inventory (3,683) (6,707) 55,392
Refundable income taxes - 566,289 (504,810)
Prepaid expenses 131,050 (196,646) 41,172
Cash and cash equivalents-
restricted 20,980 (154,909) -
</TABLE>
(Continued)
42
<PAGE> 43
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Increase (decrease) in:
Accounts payable and
accrued liabilities (5,541) 3,582,759 (476,787)
Deferred purses 1,026,843 165,727 496,343
Deferred revenues (44,149) (3,431) (93,129)
Income taxes payable 50,000 - -
Minority interest - - (73,859)
---------- ----------- ----------
Total Adjustments 3,339,238 5,596,912 (8,757,707)
---------- ----------- ----------
Net cash provided by
(used for) operating
activities 4,218,936 5,084,796 (1,043,778)
---------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures (5,650,671) (14,625,149) (8,130,250)
Proceeds from insurance
claims - - 18,838,556
Payments to third parties
on insurance claims - - (145,052)
Proceeds from sale of
equity investments
in affiliates - - 535,000
Investment proceeds paid
to affiliate - - (214,000)
Purchase of securities
available for sale - (763,872) (1,445,287)
Proceeds from sale of
securities available
for sale 270,454 1,714,052 1,860,983
Repayments on loans to
affiliates - - 2,802
Deposits (30,420) (36,690) (2,089)
Proceeds from sale of
property 91,964 - -
---------- ----------- ----------
Net cash provided by
(used for) investing
activities (5,318,673) (13,711,659) 11,300,663
---------- ----------- ----------
</TABLE>
(Continued)
43
<PAGE> 44
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term
borrowings 10,307,260 3,533,443 1,000,000
Video poker franchise fee
relief payments (2,888,962) (703,488) -
Principal repayments
of short-term borrowings (1,172,217) (1,123,812) (1,000,000)
Principal repayments of
long-term borrowings - - (5,000,000)
----------- ---------- ------------
Net cash provided by
(used for) financing
activities 6,246,081 1,706,143 (5,000,000)
----------- ---------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 5,146,344 (6,920,720) 5,256,885
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,118,590 8,039,310 2,782,425
----------- ---------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,264,934 $1,118,590 $ 8,039,310
=========== ========== ============
</TABLE>
See accompanying notes to financial statements.
44
<PAGE> 45
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company conducts a live fall/spring race meeting for thoroughbred horses and
participates in inter-track wagering as a host track and as a receiving track.
In addition, the Company currently operates five off-track betting facilities
located in Southeast Louisiana, as well as a tele-track facility located at the
Fair Grounds Race Course.
Uninsured Cash Deposits
As of October 31, 1996 and 1995, the Company had deposits in various financial
institutions in the aggregate of $7,195,692 and $1,718,335, respectively. Such
deposits exceeded insured limits as of October 31, 1996 and 1995 by $1,850,588
and $1,206,763, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Cash and Cash Equivalents - Restricted
As of October 31, 1996, restricted assets totalled $133,929 which included cash
of approximately $24,000 restricted to pay certain future loan related costs in
accordance with the terms of the bank financing obtained in fiscal 1995, and a
certificate of deposit of approximately $110,000 pledged as a security deposit
for the Company's worker's compensation program. As of October 31, 1995, such
restricted assets totalled $154,909.
Inventory
Inventory consists primarily of food and beverage items and is stated at the
lower of cost or market. Cost is determined by the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided by the
straight-line method. The estimated useful lives of the buildings range from 20
to 40 years. Lives of other depreciable assets range from approximately 3 to 20
years. Depreciation on the Company's temporary facilities is provided by the
straight-line method over an estimated useful life of 3 years. For financial
reporting purposes, leasehold improvements are
45
<PAGE> 46
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized over the lesser of the term of the related lease or the estimated
useful lives of the assets.
Deferred Revenues
Promotional fees received by the Company are deferred and recognized as income
over the following racing meet.
Securities Available for Sale
Effective November 1, 1994, the Company adopted a new accounting standard for
investment securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". This accounting standard requires the Company to classify
its securities as held to maturity, available for sale, or trading. The Company
has classified all of its securities as available for sale and accounts for them
at fair value with the unrealized gain or loss shown as a separate component of
stockholders' equity. The effect of this accounting change is applied
prospectively; therefore, there is no restatement of prior year amounts. Prior
to November 1, 1994, the Company accounted for investment securities in
accordance with SFAS No. 12, and, accordingly, investment securities were
carried at the lower of aggregate cost or market. The Company has reported the
cumulative effect of the change in its method of accounting for investment
securities of $104,000 in its Statement of Operations for the year ended October
31, 1995. The Company records realized gains and losses on investment securities
as they are sold, using the specific identification method.
Fair Value Disclosures
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures about
Fair Value of Financial Instruments", effective December 31, 1995, requires
disclosures of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. The following methods
and assumptions
46
<PAGE> 47
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
were used in estimating the fair value disclosures for financial
instruments.
Cash and Cash Equivalents - The carrying amount for cash and cash equivalents
at October 31, 1996 approximates fair value.
Investment Securities - The fair value of stocks and bonds is quoted market
price. At October 31, 1996, all of the Company's investment securities are
classified as available for sale and are carried on the balance sheet at their
quoted market price.
Notes Payable - The fair value of demand notes is the amount payable on demand
at the balance sheet date. The fair value of debt that is not payable on demand
is estimated by discounting the future cash flows using the market rates
offered as of October 31, 1996 for similar debt with the same remaining
maturities. The fair value of the Company's notes payable approximated the
amounts recorded in the balance sheet at October 31, 1996.
Uncashed Mutuel Tickets
Holders of uncashed winning pari-mutuel tickets have until 90 days after the end
of a given race meet to cash their winning tickets. Tickets that expire become
revenues of the Company, up to a maximum of $250,000 per race meet. Uncashed
pari-mutuel tickets exceeding $250,000 per race meet are remitted to the State
of Louisiana.
Income Taxes
Effective November 1, 1993, the Company adopted Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") 109, "Accounting
for Income Taxes". Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement amounts of assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that included the enactment date.
47
<PAGE> 48
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has reported the cumulative effect of the change in its method of
accounting for income taxes of approximately $75,000 in its Statement of
Operations for the year ended October 31, 1994.
Deferred Purses
Deferred purses include those amounts required by Louisiana law to be withheld
from commissions earned by an off-track betting licensee and paid as purse
supplements during the licensee's succeeding live racing meet.
Net Income (Loss) Per Share
Net income (loss) per share is determined by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Per
share amounts were determined using 468,580 common shares outstanding for fiscal
1996 and 468,180 common shares outstanding for fiscal 1995 and 1994.
Use of Estimates
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
NOTE 2 - EXTRAORDINARY ITEM - DECEMBER 17, 1993 FIRE
On December 17, 1993, a fire destroyed the grandstand and clubhouse areas at the
Fair Grounds Race Course. The net book value of assets destroyed in the fire was
approximately $4.5 million. The Company believes that its property and casualty
insurance policies provide coverage in the aggregate amount of approximately
$34.2 million for buildings, contents, fixtures, equipment, items of personal
property, loss of income from operations ("business interruption"), and loss of
works of art. The Company has submitted claims to its insurance carriers and
through October 31, 1996 had recovered an aggregate of $19,478,790, of which the
Company has paid approximately $298,000 to certain third parties as a result of
claims filed for property owned by them and destroyed by the fire. The Company
has filed a civil action against one of its insurance carriers in an attempt to
recover an additional approximate $14.7 million. Also see Note 12 - "Subsequent
Events" regarding additional insurance settlements subsequent to October 31,
1996.
48
<PAGE> 49
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 2 - EXTRAORDINARY ITEM - DECEMBER 17, 1993 FIRE (CONTINUED)
The Company and its tele-tracks were forced to cease operations for ten racing
days in fiscal 1994 as a result of the fire until temporary facilities could be
built. Temporary facilities were built at an aggregate cost of $2.7 million. The
Company reopened its tele-track facilities on December 29, 1993 and resumed live
racing operations on January 5, 1994.
As a result of the fire and the recovery of insurance proceeds, the Company
recorded for the fiscal year ended October 31, 1994, an extraordinary gain of
$9.3 million, net of related income taxes of $5.4 million. The extraordinary
gain is equal to insurance proceeds, which includes $1,500,000 of business
interruption insurance proceeds, in excess of the $4.5 million net book value of
the destroyed property, plant and equipment.
NOTE 3 - STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Cash was paid during the following fiscal years for:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest $802,797 $245,296 $312,121
======== ======== ========
</TABLE>
The 1995 cash paid for interest includes capitalized interest of $232,979, which
is included in Construction in Progress. The Company halted construction of its
facilities in September 1995, as a result, in accordance with generally accepted
accounting principles, no construction interest was capitalized in fiscal 1996.
There were no noncash investing or financing activities for fiscal years ended
October 31, 1996, 1995, and 1994.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
At October 31, 1996 and 1995, securities were classified as available for sale
and consisted of the following:
<TABLE>
<CAPTION>
1996 1996 Gross
Amortized Market Unrealized
Cost Value Loss
--------- -------- ----------
<S> <C> <C> <C>
Preferred and common stocks $205,250 $188,125 $ (17,125)
======== ======== ==========
</TABLE>
49
<PAGE> 50
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 4 - SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
1995 1995 Gross
Amortized Market Unrealized
Cost Value Loss
-------- -------- --------
<S> <C> <C> <C>
Preferred and common stocks $303,534 $269,900 $(33,634)
Municipal bond funds 209,250 188,000 (21,250)
-------- -------- --------
$512,784 $457,900 $(54,884)
======== ======== ========
</TABLE>
During fiscal years ending October 31, 1996 and 1995, proceeds from sales of
securities available for sale were $269,949 and $1,714,052 respectively, and
gross realized losses from such sales were $37,080 and $10,282, respectively.
NOTE 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
October 31
---------------------------
1996 1995
----------- -------------
<S> <C> <C>
Louie J. Roussel, III;
(Assignment by Victory Life
Insurance Company in 1996);
Demand note, variable based on
the prime interest rate, 8.25% at
October 31, 1996, secured by a
first mortgage note on certain
property. $ 500,000 $ 1,500,000
Louie J. Roussel, III;
Demand note, variable based on
the prime interest rate,
8.25% at October 31, 1996,
secured by a first mortgage note
on certain property. 500,000 500,000
Marie G. Krantz; Demand note,
variable based on the prime
interest rate, 8.25% at
October 31, 1996. 1,000,000 -
First National Bank of Commerce
("FNBC"); Note, interest at
9% secured by a second mortgage
note on certain property, and
342,584 common shares of the
Company owned in the aggregate
by the Krantzes and
</TABLE>
50
<PAGE> 51
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 5 - NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C> <C>
Jefferson Downs Corporation, due
October 31, 1996. 7,799,044 1,494,477
INAC Corp.; Installment note -
insurance premium financing;
interest at 7%, due October
1997. 153,179 211,666
----------- -----------
$ 9,952,223 $ 3,706,143
=========== ===========
</TABLE>
FNBC has provided short-term loans to the Company for construction costs
relating to the rebuilding of the grandstand and clubhouse facilities. As a
result of these loans, the Company is eligible to receive the benefit of the
video poker franchise fee exemption which was signed into law in 1994 under the
Video Poker Emergency Relief Act. During fiscal 1996 and 1995, the Company
recognized $2,888,962 and $703,488, respectively, in video poker franchise fee
relief pertaining to the exemption. These monies were applied to the FNBC loan
and related interest.
See Note 12 regarding subsequent events affecting notes payable.
NOTE 6 - INCOME TAXES
As discussed in Note 1, effective November 1, 1993, the Company adopted SFAS No.
109. The cumulative effect of the adoption of SFAS No. 109 of $75,094, as
determined as of November 1, 1993, is included as a reduction of income in the
accompanying fiscal year 1994 Statement of Operations.
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
October 31
----------------------------------------
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal $ 50,000 $ - $ (469,048)
State - - (97,241)
---------- ----------- -----------
Total 50,000 - (566,289)
Deferred 244,896 (300,460) (1,312,346)
---------- ----------- -----------
Total $ 294,896 $ (300,460) $(1,878,635)
========== =========== ===========
</TABLE>
For the fiscal years ended October 31, 1996 and 1995, the tax effects of
temporary differences that gave rise to significant
51
<PAGE> 52
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 6 - INCOME TAXES (CONTINUED)
portions of the deferred tax assets and deferred tax liabilities are presented
below along with a summary of activity in the valuation allowance.
<TABLE>
<CAPTION>
October 31
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Current deferred tax assets:
General liability insurance $ 59,940 $ 59,940
Net operating loss carryforwards 251,000 -
----------- -----------
Total current deferred tax
assets 310,940 59,940
=========== ===========
Non-current deferred tax assets:
Property $ 392,241 $ 118,787
Net operating loss carryforward - 765,122
Capital loss carryforward - 24,110
----------- -----------
Total non-current deferred
tax assets 392,241 908,019
Non-current deferred tax liability
Deferred tax gain on fire (4,917,928) (4,808,801)
----------- -----------
Net non-current deferred
tax liability $(4,525,687) $(3,900,782)
=========== ===========
Valuation allowance
Beginning of year $ 119,253 $ 107,187
Change
during the year (119,253) 12,066)
----------- -----------
Valuation allowance,
end of year - 119,253
=========== ===========
</TABLE>
52
<PAGE> 53
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 6 - INCOME TAXES (CONTINUED)
A reconciliation of the provision (benefit) for taxes on income at the Company's
federal statutory income tax rate to the tax provision (benefit) for financial
reporting purposes for fiscal years ending October 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
October 31
---------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Expected tax provision
(benefit) $ 399,362 $ (276,276) $(1,156,806)
State income taxes 35,238 (24,377) (102,071)
Change in valuation
allowance (119,253) 12,066 (764,903)
Additional realizable
carryback credits - (81,609) -
Additional realizable
carryforward net
operating losses - (89,620) -
Current statutory rate
in excess of effective
carryback rate - - 74,850
Other (20,451) 159,356 70,295
---------- ----------- ----------
Actual tax provision
(benefit) $ 294,896 $ (300,460) $1,878,635
========== =========== ==========
</TABLE>
As of October 31, 1996, the Company has a net operating loss carryforward of
approximately $678,000 which, if unused, begins to expire in 2009.
SFAS 109 requires an evaluation of the future realization of a tax benefit of
existing deductible temporary differences or a net operating loss carryforward.
This realization ultimately depends on sufficient taxable income of the
appropriate character, including reversals of existing taxable temporary
differences.
In future years, the Company will have reversals of taxable temporary
differences or taxable income that will offset the net operating loss
carryforwards of approximately $678,000, therefore, no valuation allowance is
considered necessary at October 31, 1996.
As of October 31, 1996, the Company has recorded a deferred tax liability of
$4,917,928 as a result of the deferred gain on the fire for income tax purposes.
The Company intends to reinvest all fire insurance proceeds into its new
facilities within the allowable two year replacement period, but due to the
halting of construction in September 1995, the Company has requested an
extension of the replacement period. Once constructed, the Company will have a
difference between the book and tax basis of such
53
<PAGE> 54
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 6 - INCOME TAXES (CONTINUED)
facilities. This taxable difference will reverse with the scheduled
depreciation of such assets.
At October 31, 1994 current income taxes of $555,000 related to the $1.5 million
of business interruption insurance received are included net of the
extraordinary gain from the fire.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Fire Related Litigation
The Company is 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:
1. 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 contends that the
insurance policy provided by Travelers provides the Company with
blanket coverage in the amount of $24.2 million in excess of the $10
million of underlying coverage. Accordingly, the Company maintains that
Travelers is liable for the difference between $24.2 million and the
approximately $9.5 million already paid plus statutory penalties of
10% of the amount not paid, interest, attorney's fees and costs. The
Company further contends the insurance agent and the insurance broker
who arranged for the insurance are 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 the excess policy did not provide blanket coverage,
and that its liability under such policy is limited to the amount
which is already paid.
As also discussed in Note 12, immediately prior to the start of trial
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. The
settlement agreement includes a "Mary Carter" provision whereby the
insurance agent and broker are entitled to share in any recovery that
the Company may eventually obtain from Travelers. Also prior to the
start of trial, the trial judge denied a motion for partial summary
judgment filed by Travelers on the
54
<PAGE> 55
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
grounds that the motion involved contested issues of fact. Travelers
had asked the trial court to find that its policy was a scheduled
policy and that it had already paid all scheduled amounts. Travelers
subsequently obtained a postponement of the trial in order to
appeal the court's denial of its motion for summary judgment. The court
of appeals denied the appeal finding no error in the trial court's
ruling. The matter has been remanded to the trial court, which has
rescheduled the case for trial in June 1997.
2. 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, the company which provided and maintained the fire
alarm system at the race track, and other defendants. The complaint
seeks unspecified damages, not otherwise compensated for by insurance,
that were allegedly caused by the negligence of one or more of the
defendants. The Company's three fire insurers and a fourth insurance
company, which insured the operator of the video poker machines,
intervened in the suit asserting subrogation claims against the same
defendants.
In late 1996, the Company and the three insurance companies entered
into settlements with certain defendants, specifically the manufacturer
of a lighting ballast and an architect. After division of the
settlement proceeds among the Company and the three insurance companies
and the payment of various litigation expenses, the Company received
approximately $268,000.
The remainder of the case was tried before a jury commencing in March
1997. See Note 12-- "Subsequent Events" for additional information
regarding such litigation.
3. The Company is 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 alleges that it is subrogated to its
insured's rights to collect damages and that it has 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
55
<PAGE> 56
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 exclusions 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.
The United National policy has a $1,000,000 limit. However, the Company
has placed its excess liability insurer on notice.
The St. Paul proceeding is scheduled for trial in May 1997. The effect
of United National's appeal on the consolidation of the two proceedings
and the May 1997 trial date is unknown at present.
As to the pending matters described above, there can be no assurance that the
Company ultimately will be successful in any of its claims or defenses.
Accordingly, no assurance can be given that additional recoveries of insurance
proceeds, if any, will reimburse the Company adequately for the loss or
destruction of its property in the fire.
Other Litigation
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust suit. Management of the Company believes the action is without
merit. Livingston had previously filed a series of other legal actions against
the Company which were resolved in the Company's favor.
A suit was also filed in 1996 by Livingston against the Company and the State of
Louisiana seeking a judgment that the State off-track betting law is
unconstitutional. The trial court ruled in the plaintiffs' favor. The case is
currently on appeal with the Louisiana Supreme Court. The Company believes it
has no monetary exposure in this suit.
56
<PAGE> 57
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
A suit was filed in 1996 by the Louisiana Horseman'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 based upon their
interpretation of the current law. The Company currently is recording the video
poker proceeds in accordance with the guidelines established by the Louisiana
State Police Gaming Division which regulates compliance with the State video
poker law. The Company does not believe it will have any monetary exposure as a
result of this suit.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
The Company was notified by the Department of Labor in 1996 of an alleged
underpayment of overtime wages to certain employees. There has yet to be a
determination of the amount, if any, that would be due from the Company if it
were found to owe such back wages. The Company currently believes the dispute
will be resolved in its favor.
Status of Construction of Facilities
A new tele-track facility and temporary clubhouse area was opened on December
22, 1994. The total cost for debris removal and the construction of the
tele-track was approximately $3.2 million.
During the Summer of 1994, the Company approved the plans for a new main
facility. The total cost of the facility, together with furniture, fixtures,
equipment and certain fees and permit costs, was anticipated to be approximately
$24.3 million at the time construction commenced.
As of October 31, 1996, construction of the facility is approximately 60%
completed, and the Company has incurred construction costs of approximately
$15.8 million. Insurance proceeds recovered to date and bank financing provided
the source of funds used in such construction. However, for the reasons
described below, further construction work on the project has been halted. It is
currently estimated that the cost to complete the project, which includes the
cost of the already completed tele-track facility, will be approximately $32
million.
57
<PAGE> 58
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Construction Financing
As previously reported, the Company received and accepted a commitment letter
dated February 6, 1995 from FNBC for a non-revolving line of credit to be used
as an interim construction loan, convertible to a term loan. The aggregate
principal amount of such loan under the terms of such commitment was to have
been $17.5 million. The commitment from FNBC provided that the interim
construction loan was to have closed on or before March 31, 1995. However,
the parties agreed to various extensions of such closing date. FNBC indicated
that the principal reason for the delay was FNBC's concern with restrictions
on and the possible elimination of video poker gaming in Louisiana. Inasmuch
as video poker franchise fees generated by the Company and its tele-tracks were
to be used for the repayment of the FNBC loan, in accordance with the
franchise fee relief legislation granted to the Company, any changes in the
video poker gaming laws which restricts or limits video poker as a source of
revenue may have an adverse impact on such source of repayment. Accordingly,
final action on the full $17.5 million loan was delayed by FNBC.
During 1995, FNBC provided the Company with short-term interim construction
loans of $2.15 million on July 17, 1995, $4 million on November 7, 1995, and $1
million on November 30, 1995. However, such interim construction advances ceased
during the Fall of 1995, primarily due to FNBC's concerns regarding the future
of the video poker gaming law in Louisiana. All of such financing was then
consolidated in a Loan Agreement dated December 18, 1995 between the Company and
FNBC, pursuant to which the Company borrowed an aggregate amount of $9,493,050,
which represented amounts loaned to the Company less repayments provided by
video poker franchise fees as of that date, and utilized a portion of such funds
to repay the principal amount of prior FNBC loans that was outstanding on
December 18, 1995. The remaining amount borrowed was utilized to pay
construction costs.
As further described in Note 12, the Company has received a commitment letter
from FNBC dated March 13, 1997 providing for additional financing, and an
amendment to certain terms and conditions of the FNBC Loan Agreement dated
December 18, 1995.
NOTE 8 - RELATED PARTY TRANSACTIONS
In April 1996, Bryan G. Krantz, President and General Manager, purchased all
339,604 common shares of the Company previously owned by the Masoni Trust for an
aggregate consideration of $9,984,358. A promissory note was executed by Bryan
G. Krantz in favor of the Trust for $9,984,358 with interest at 5.76% per year.
The note is
58
<PAGE> 59
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
due in April 2005 and cannot be prepaid in whole or in part. The note is secured
by a Stock Pledge Agreement executed by Bryan G. Krantz and Marie G. Krantz, in
her capacity as Voting Trustee under a Voting Trust Agreement, in favor of the
Trust. The Stock Pledge Agreement is subordinate to the Pledge Agreements
executed in favor of FNBC.
Marie G. Krantz, Chairman of the Board of Directors and Treasurer of the
Company, has voting control over 339,604 shares of common stock of the Company
(72.27% of the outstanding common stock of the Company) owned by Bryan G.
Krantz.
Marie G. Krantz and Bryan G. Krantz together are the beneficial owners of 100%
of the outstanding shares of Jefferson Downs Corporation.
On October 31, 1996, Marie G. Krantz loaned the Company $1 million payable on
demand at the prime interest rate, which was 8.25% at October 31, 1996. Such
loan, together with interest, was repaid in January 1997.
In August 1992, the Company entered into a Management Agreement with Finish Line
Management Corporation ("Finish Line"), which is beneficially owned by Marie G.
Krantz and Bryan G. Krantz, to operate five tele-track facilities previously
operated by Jefferson Downs for a period of ten years, commencing November 1,
1992, with the option granted to Finish Line to extend the term of the
Management Agreement for two additional five year periods. The Management
Agreement provides that Finish Line is to have the exclusive responsibility for
the direction, supervision, management and operation of such facilities, is to
collect all monies from such operation and is to pay all expenses in connection
therewith. The Company is to receive a monthly payment of 0.1% of the gross
pari-mutuel handle at such facilities plus purse supplements, and Finish Line is
to receive monthly compensation equal to the difference between the gross
receipts collected at such facilities less all expenses (including the payment
to the Company described herein) paid by Finish Line. In addition, Finish Line
is to indemnify the Company for, among other things, all obligations under the
leases assigned by Jefferson Downs to the Company. During the fiscal years ended
October 31, 1996, 1995 and 1994, the Company received $88,835, $67,593 and
$87,788, respectively, from Finish Line in accordance with the Management
Agreement.
Accounts receivable (payable) from Finish Line were $(88,227) and $237,632 at
October 31, 1996 and 1995, respectively.
59
<PAGE> 60
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
The following table reflects the host track fees and purse supplement receipts
from Finish Line for the fiscal years ended October 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Received by the Company
and Paid by Finish Line
for the Years Ended October 31
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Host track fees $ 363,275 $ 520,267 $ 483,294
========== ========== ==========
Purse supplement
receipts $4,337,179 $3,861,674 $3,619,292
========== ========== ==========
</TABLE>
Marie G. Krantz and Bryan G. Krantz are each 50% owners of Continental
Advertising, Inc. ("Continental"). During fiscal years ended October 31, 1996,
1995 and 1994, the Company made advances to Continental of $341,000, $462,321
and $394,000, respectively, for advertising services rendered by Continental. As
of October 31, 1996 and 1995, the Company was due and included in accounts
receivable $64,800 and $28,575 from Continental, respectively.
In February 1992, the Company, Jefferson Downs and Finish Line entered into an
agreement with Video Services, Inc. ("VSI"), whereby VSI was granted the
exclusive right and license by the Company to install, maintain and operate
video draw poker devices at the Fair Grounds Race Course, Jefferson Downs Race
Course and at the tele-tracks then operated by the Company, Jefferson Downs and
Finish Line. Such agreement is for an initial term of five years, with an option
by VSI to extend the term for an additional five years, which option has been
exercised. The agreement provides that the Company is to receive a percentage of
the revenues from the operation of the devices installed at the Company's
facilities (not including the facilities operated for the Company by Finish
Line). Such percentage is to be calculated on the basis of the average amount
collected daily from each device during each month, after the payment of prizes,
taxes and fees. One-half of the net revenues from such devices, after deduction
of certain amounts, are required by state statute to be paid as purse
supplements during the live racing meet. In addition, this agreement entitles
the Company and Finish Line to share in a $270,000 annual promotional fee paid
by VSI. In fiscal 1996, 1995 and 1994, upon agreement of the Company and Finish
Line, the Company received the total promotional fee of $270,000. Of this
amount, $135,000 was set aside each year as purse supplements to be paid during
the upcoming racing season.
60
<PAGE> 61
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
The video poker draw devices which have been installed and are to be installed
by VSI remain the property of VSI. As of October 31, 1996, 1995 and 1994, there
were a total of 234, 250, and 182 devices, respectively, in operation at all of
the Company's facilities. In addition, there were a total of 419, 449 and 508
devices in operation at the Finish Line facilities as of October 31, 1996, 1995
and 1994, respectively.
Gross video poker revenues and related purse supplements for the years ended
October 31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Gross video poker revenue $1,955,551 $1,132,127 $1,354,792
========== ========== ==========
Purse supplements $ 821,973 $ 433,443 $ 540,258
========== ========== ==========
</TABLE>
NOTE 9 - LEASES
The Company has various operating leases for the use of buildings and parking
facilities to operate off-track betting facilities in Louisiana. The location,
lease terms, and monthly payments are as follows:
<TABLE>
<CAPTION>
================================================================================
Location Lease Term Monthly Payment
- --------------------------------------------------------------------------------
<S> <C> <C>
St. Bernard Parish, January 1, 1995 to
Louisiana January 31, 1999 $ 6,000
- --------------------------------------------------------------------------------
LaPlace, Louisiana February 1, 1996 to
January 31, 1997 $ 4,166
- --------------------------------------------------------------------------------
Bourbon Street - March 15, 1991 to
New Orleans, March 14, 1999 $10,000
Louisiana
- --------------------------------------------------------------------------------
Thibodaux, May 1, 1996 to
Louisiana April 30, 1997 $ 2,300
- --------------------------------------------------------------------------------
Metairie, August 1, 1995 to
Louisiana January 31, 1996 $ 8,200
February 1, 1996 to
January 31, 1997 $ 8,500
================================================================================
</TABLE>
The tele-tracks formerly licensed to Jefferson Downs and now licensed to the
Company are also leased; however, as described
61
<PAGE> 62
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 9 - LEASES (CONTINUED)
herein, Finish Line has agreed to indemnify the Company for, among other things,
all obligations under the leases assigned by Jefferson Downs to the Company.
In December 1993, the Company entered into a three year lease on the modular
buildings that house the executive, administrative, and operations personnel and
the totalisator equipment being used by the Company. Rent expense relating to
this lease for the years ended October 31, 1996, 1995 and 1994 was approximately
$72,000, $71,000 and $49,000, respectively.
Future obligations over the primary lease terms, not including renewal periods,
of the Company's long-term leases (other than the leases assigned by Jefferson
Downs to the Company) as of October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ending
October 31
----------
<S> <C>
1997 $ 255,666
1998 192,000
1999 63,000
Thereafter -
----------
Total $ 510,666
==========
</TABLE>
The Company has entered into an agreement with Autotote Limited whereby Autotote
Limited is to provide wagering services for the Company until November 1997,
including all computer and other related services to carry out the totalisator
function for the Company. The Company has agreed to pay Autotote Limited 0.0045%
of the total on-track pari-mutuel handle of the Company, plus fixed equipment
rental fees for its off-track betting facilities. The minimum to be paid to
Autotote Limited for each year of the agreement is $200,000. No estimates of
future obligations under this agreement have been included in the above table.
For the fiscal years ended October 31, 1996, 1995, and 1994, the Company
incurred $200,000 in minimum rental fees and $575,390, $503,175 and $346,383,
respectively, in equipment and contingent rental fees in connection with its
agreement with Autotote Limited. Such rental fees were recorded as racing
expenses - contracts and services.
NOTE 10 - STOCK OPTIONS
The Company has a stock option plan where all incentive stock options granted
under the Plan are intended to qualify as incentive stock options under Section
422(b) of the Internal Revenue Code. Under the Plan, the option price per share
must be at least equal
62
<PAGE> 63
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 10 - STOCK OPTIONS (CONTINUED)
to 100% of the fair market value per share of the common shares of the Company
on the date of the grant. An aggregate of 20,000 common shares have been
reserved for issue and may be granted up to February 28, 2001. No options were
granted or exercised during fiscal years ending October 31, 1996, 1995 or 1994.
No options were outstanding at October 31, 1996.
NOTE 11 - DEFINED CONTRIBUTION PLAN
During fiscal year ending October 31, 1995, the Company implemented a 401(k)
plan for its employees. The Plan is a defined contribution plan covering all
full-time employees that have at least one year of service and are age
twenty-one or older.
Plan participants may contribute to the plan and the Company may make matching
contributions subject to the provisions of the Employees Retirement Income
Security Act.
The Company did not make any matching contributions to the Plan during the years
ended October 31, 1996 and 1995.
NOTE 12 - SUBSEQUENT EVENTS
On November 4, 1996, the Company paid the remaining $1,000,000 of principal
related to its promissory notes held by Louie J. Roussel, III.
In January 1997, the Company received an advance of $1,000,000 from VSI, which
the Company plans to repay in six equal monthly installments beginning in
February 1997.
In January 1997, the Company repaid the $1 million loan from Marie G. Krantz
dated October 31, 1996 in full along with the interest due thereon.
In connection with the general elections held in Louisiana on November 5, 1996,
special elections were held in each parish in Louisiana to approve or
disapprove, on a parish-by-parish basis, video poker and other forms of gaming.
In such local elections, the voters in every parish in which the Company does
business except one approved of the operation of video poker devices. The one
exception was St. Tammany Parish, where the Company maintains two facilities;
however, the Company does not believe that the loss of video poker revenue from
such locations will have a material adverse effect on the Company's results of
operations or on the amount of video poker franchise fee relief available
annually to the Company. In addition, notwithstanding the results of such local
election in
63
<PAGE> 64
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1996, 1995 and 1994
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
St. Tammany Parish, the Company may continue to operate video poker devices in
St. Tammany Parish for 30 months after the date of the local referendum.
After the favorable results of the November 1996 referendum concerning gaming in
Louisiana, the Company and FNBC began discussing possible terms and conditions
for new or additional construction and permanent financing. On January 9, 1997,
the Company accepted a commitment letter from FNBC providing for additional
financing under, and an amendment to certain terms and conditions of the Loan
Agreement. After further discussions, a new commitment letter was accepted on
March 13, 1997 (the "March 1997 Commitment"). The March 1997 Commitment
provides that the principal amount outstanding under the Loan Agreement will be
increased by $6,778,275 for use in completing construction of the Company's
new grandstand facility and refinancing the principal balance under the Loan
Agreement. It is a condition to the closing of such financing that the $10
million currently being held in escrow be applied toward the repayment of the
outstanding principal balance under the Loan Agreement.
Interest on the new FNBC loan, at the rate of 9% per annum, is to be paid
semi-monthly, and principal payments of $52,740 are to be made monthly. Such
payments of principal and interest are to be first made out of the funds
received under the video poker franchise fee relief legislation. Any excess
franchise fee relief monies are to be applied as a mandatory prepayment of
principal. In addition, as required under the video poker franchise fee relief
legislation, insurance proceeds received by the Company must also be applied to
reduce the principal balance of the loan. The entire principal balance is to be
due on June 30, 1999.
If the financing described above is consummated, the Company believes that it
will have sufficient funds to complete the construction of the new grandstand
facility. It is currently anticipated that construction will recommence as soon
as practicable after the end of the current racing season, and that the facility
will be completed in the Fall of 1997.
The March 1997 Commitment provides that, in addition to the existing security
under the Loan Agreement, the loan is to be secured by (i) liquid collateral
with a market value of $5.8 million; (ii) a security interest in the video
poker franchise fee relief monies; (iii) a pledge by the Company of all
proceeds from disputed claims arising out of the contract with the Jazz and
Heritage Festival; (v) an assignment of the Company's agreement with Finish
Line regarding the operation of off-track facilities; and (vi) an agreement by
the Company not to assign, pledge or otherwise encumber its racing and
off-track licenses.
The March 1997 Commitment also provides for a second loan of $5,221,725 that
will be secured by the same collateral that securest the first loan, except
that the second loan may not be repaid with funds received by the Company from
the video poker franchise fee relief legislation. The second loan is to
provide for monthly payments of interest, with the entire principal balance due
on October 31, 1998. The closing of the financing under the Mar ch 1997
Commitment is to occur on or before April 15, 1997.
As previously discussed in Note 7, on November 18, 1996, the Company reached a
settlement in its litigation with its insurance agent and insurance broker. The
settlement provided that the settling defendants were to pay the Company $10
million in the aggregate. Such amount has been paid and deposited into an
escrow account. In addition, each such settling defendant will share with the
Company, in accordance with an agreed-upon formula, in any settlement with or
award of damages against Travelers.
Also as previously described in Note 7, the remainder of the Company's action
ADT was tried beginning in March 1997. On March 26, 1997, the jury return a
verdict in favor of the Company, awarding the Company approximately 448.4
million in damages against ADT, plust interest, subject to certain subrogation
rights in favor of the Company's property insurers. The Company anticipates
that ADT will challenge the jury verdict through post-trial motions and an
appeal.
64
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows each director and executive officer of the Company,
his or her age, present positions and offices with the Company, principal
occupation and the name and principal business of the corporation or other
organization in which such occupation has been carried on, and, with respect to
each director, the year he or she first became a director of the Company and
directorships in certain other corporations, based upon information furnished to
the Company by each such director and executive officer or otherwise available
to the Company. Unless otherwise indicated, each director and executive officer
has engaged in the occupations stated below for at least the last five years. No
family relationships exist between or among any director or executive officer of
the Company, except that Bryan G. Krantz is the son of Marie G. Krantz.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
---- --- -----
<S> <C> <C>
Directors
KATHERINE F. DUNCAN 69 1991
Private investor; Director of Planned
Giving of Audubon Institute, Inc.,
which operates the Audubon Zoo and the
Aquarium of the Americas.
RICHARD KATCHER 78 1994
Practicing attorney with Baker and
Hostetler, Cleveland, Ohio
BRYAN G. KRANTZ 36 1990
President and General Manager of the
Company; Vice President of Jefferson
Downs Corporation, a company which
owns a racing track that was used
until November 1992 to conduct live
horse racing; President of Finish Line
Management Corporation, which operates
certain off-track betting facilities
in Louisiana.
</TABLE>
65
<PAGE> 66
<TABLE>
<S> <C> <C>
MARIE G. KRANTZ 61 1990
Chairman of the Board of Directors
and Treasurer of the Company; Chairman
of the Board and President of Jefferson
Downs Corporation; Secretary/Treasurer of
Finish Line Management Corporation.
RONALD J. MAESTRI 56 1991
Athletic Director, University of New
Orleans.
CHARMAINE R. MOREL Assistant to the 62 1987
Financial Manager, Mike's on the
Avenue, a restaurant in New Orleans;
Secretary/Treasurer of Victory
Management Group, Inc., an insurance
holding company, from January 1993
to December 1995.
WAYNE E. THOMAS 49 1996
Self-employed insurance agent.
Executive Officers (In Addition to
Those Listed Above
MERVIN MUNIZ, JR. 54 -
Vice President of the Company; Racing
Secretary
GORDON M. ROBERTSON Vice President 55 -
of the Company since February 1992; Chief
Financial Officer since August 1990;
General Manager of Jefferson Downs prior to
November 1992.
JOAN B. STEWART 63 -
Secretary of the Company
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended October 31, 1996, October 31, 1995 and October 31, 1994, for
the chief executive officer of the Company. No executive officer of
66
<PAGE> 67
the Company received salary and bonus totalling more than $100,000 for the
fiscal year ended October 31, 1996.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Other
Name and Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
BRYAN G. KRANTZ 1996 $75,000 0 $3,600(1)
President and General 1995 75,000 0 3,600
Manager 1994 75,000 0 3,600
</TABLE>
(1) Consists of the annual retainer paid to Mr. Krantz as a director.
INFORMATION CONCERNING STOCK OPTION PLAN
In 1991, the Board of Directors of the Company adopted, and the shareholders
ratified, the Fair Grounds Corporation Stock Option Plan (the "Stock Option
Plan"). The Stock Option Plan, which is administered by a committee of the Board
of Directors, provides that options to purchase up to 20,000 common shares of
the Company may be granted to key employees, as determined by the committee. Key
employees may be granted options for common shares of any value; however, the
aggregate fair market value of common shares with respect to which incentive
stock options are exercisable by an optionee during any calendar year may not
exceed $100,000. The committee has the authority to determine the number of
common shares that an optionee may purchase upon exercise of an option. The
exercise price per share may not be less than the fair market value per share of
the Company's common shares at the time an option is granted. Each option
granted will be exercisable only during the term fixed by the committee, and may
not be exercisable prior to the expiration of six months from the date of the
grant. Options granted under the Stock Option Plan may be either "incentive
stock options" for purposes of the Internal Revenue Code or nonqualified stock
options. During the fiscal year ended October 31, 1996, no options were granted
or exercised under the Stock Option Plan. There are currently no options
outstanding under the Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following non-employee directors served on the Compensation Committee of the
Board of Directors of the Company during the
67
<PAGE> 68
fiscal year ended October 31, 1996: Richard Katcher, Charmaine R. Morel and
Donald L. Peltier, who resigned from the Board of Directors during 1996. For a
description of the purchase by Bryan G. Krantz during 1996 of 339,604 common
shares of the Company from Richard Katcher, as trustee of the Trust described
herein, see Item 12, "Security Ownership of Certain Beneficial owners and
Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of common shares of the Company, as of January 1, 1997, of (i) each
person who, to the knowledge of the Company, owns beneficially more than 5% of
the outstanding common shares of the Company, (ii) each director and nominee for
election as a director, (iii) the executive officer listed in the summary
compensation table and (iv) all directors and executive officers of the Company
as a group. The information set forth in the following table is based upon
statements filed by such persons with the Securities and Exchange Commission and
information otherwise available to the Company. Unless otherwise indicated, each
person has sole voting and investment power of the common shares of the Company
beneficially owned by him or her.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS(A)
---------------- ----------------------- -----------
<S> <C> <C>
Katherine F. Duncan 480 *
Richard Katcher 400 *
Bryan G. Krantz 342,204 (b)(d) 73.1%
Marie G. Krantz 340,584 (c)(d) 72.7%
Ronald J. Maestri 480 *
Charmaine R. Morel 480 *
Wayne E. Thomas 0 *
All Directors and
Executive Officers as
a Group 344,424 (e) 73.6%
</TABLE>
* Less than 1% of Class
(a) For purposes of this table, the percentage of class beneficially owned has
been computed,in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, on the basis of 468,580 common shares outstanding on
January 1, 1996.
68
<PAGE> 69
(b) In April 1996, Richard Katcher, Trustee u/t/a/ between John G. Masoni and
John G. Masoni, Trustee, pursuant to a restatement of his Trust Agreement
dated April 19, 1991, as modified (the "Trust"), transferred the 339,604
common shares of the Company previously owned by the Trust to Bryan G.
Krantz for the consideration described in "Change in Control; Pledge of
Common Shares to FNBC," below. Bryan G. Krantz has reported to the
Commission that he is the beneficial owner of 340,104 common shares held by
Marie G. Krantz as Voting Trustee under the Voting Trust Agreement described
below, constituting 72.6% of the common shares outstanding; 2,000 common
shares held jointly by him and his wife, constituting less than 1% of the
common shares outstanding; and 100 shares held by Jefferson Downs,
constituting less than 1% of the common shares outstanding. Bryan G. Krantz
has the sole power to dispose or direct the disposition of the 340,104
common shares held by Marie G. Krantz as Voting Trustee, and shares with his
wife the power to vote or direct the vote and to dispose or direct the
disposition of the 2,000 common shares held jointly with her. He may be
deemed to share with Marie G. Krantz the power to vote or direct the vote
and the power to dispose or direct the disposition of the 100 common shares
held by Jefferson Downs. Mr. Krantz's address is 1751 Gentilly Boulevard,
New Orleans, Louisiana 70119.
(c) Marie G. Krantz has reported to the Commission that she is the beneficial
owner of 380 common shares held directly by her, constituting less than 1%
of the common shares outstanding; and of 100 common shares held by Jefferson
Downs, constituting less than 1% of the common shares outstanding; and that
she may be deemed to be the beneficial owner of the 340,104 common shares
held by her as Voting Trustee under the Voting Trust Agreement described
below, constituting 72.6% of the common shares outstanding. In such capacity
as Voting Trustee, Ms. Krantz has the sole power to vote or direct the vote
of the 340,104 common shares held by her as Voting Trustee. She also has the
sole power to vote or direct the vote and the sole power to dispose or
direct the disposition of the 380 common shares held by her directly. She
may be deemed to share with Bryan G. Krantz the power to vote or direct the
vote and the power to dispose or direct the disposition of the 100 common
shares held by Jefferson Downs. The Voting Trust Agreement, to which Bryan
G. Krantz, Richard Katcher and Marie G. Krantz are parties, provides that
title to the 340,104 common shares is vested in Marie G. Krantz as Voting
Trustee during the term of the Voting Trust Agreement, and that in such
capacity she may exercise all rights of a holder of common shares of the
Company, including the right to vote such common shares. Bryan G. Krantz is
not entitled during the term of the Voting Trust Agreement to vote the
common shares subject to the Voting Trust Agreement or to take any other
action that holders of common shares are entitled to take in their
capacities as shareholders; however, he does have the right to receive any
and all dividends and distributions made by the Company to the holders of
common shares. The Voting Trust Agreement is for an initial term of 15
years, is irrevocable during its term, and is to survive the death of the
grantors under the Voting Trust Agreement. It may be extended for an
additional 10 years at the written request of such grantors. The common
shares which are subject to the Voting Trust Agreement may not be
transferred, sold, assigned or otherwise disposed of by Marie G. Krantz
during the term of the Voting Trust Agreement, other than in connection with
any corporate event or action which affects common shares other than the
common shares subject to the Voting Trust Agreement. Ms. Krantz's address is
1751 Gentilly Boulevard, New Orleans, Louisiana 70119.
(d) Bryan G. Krantz and Marie G. Krantz, who together are the beneficial owners
of an aggregate of 342,584 common shares, constituting approximately 73.2%
of the common shares outstanding, have reported to the Commission that they
constitute a "group" within the meaning of section 13(d)(3) of the Exchange
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<PAGE> 70
Act. By virtue of their beneficial ownership of common shares of the Company
and the matters set forth in filings made by them under Section 13(d) of the
Exchange Act, Marie G. Krantz and Bryan G. Krantz may be deemed to be
controlling persons of the Company.
(e) See notes (b)-(d) above. The number of common shares shown as beneficially
owned includes any directors qualifying shares held by each director.
Change in Control; Pledge of Common Shares to FNBC
In April 1996, Richard Katcher, Trustee u/t/a/ between John G. Masoni and John
G. Masoni, Trustee, pursuant to a restatement of his Trust Agreement dated April
19, 1991, as modified (the "Trust"), transferred the 339,604 common shares of
the Company then owned by the Trust to Bryan G. Krantz for an aggregate
consideration of $9,984,358. Such purchase price was evidenced by a promissory
note (the "Note") in the principal amount of $9,984,358, bearing interest at the
rate of 5.76% per annum. Interest accrues on the Note until the first to occur
of (i) the expiration of three years from the date of the Note or (ii) the death
of Helen Masoni, whereupon such accrued interest is due and payable. Thereafter,
interest is due and payable quarterly. The principal balance of the Note is due
and payable in full nine years from the date of the Note. The Note may not be
prepaid in whole or in part.
The Note is a nonrecourse obligation, but is secured by a Stock Pledge Agreement
executed by Bryan G. Krantz and Marie G. Krantz, in her capacity as Voting
Trustee under the Agreement described below, in favor of the Trust. Accordingly,
in the event of a default on the Note, the Trust is limited to foreclosure of
the common shares which are the subject of such Stock Pledge Agreement, although
such rights are subordinate to the security interest of the First National Bank
of Commerce, as described below.
Simultaneously with the transfer of such common shares from the Trust to Bryan
G. Krantz, as described above, Bryan G. Krantz and the Trust entered into an
Amendment to Voting Trust Agreement with Marie G. Krantz as Voting Trustee,
pursuant to which the parties, among other things, (i) agreed to the
cancellation of a voting trust certificate previously issued to the Trust and
the issuance of a new voting trust certificate to Bryan G. Krantz relating to
the 339,604 common shares acquired from the Trust; (ii) confirmed that such
common shares remain subject to the terms and conditions of the Voting Trust
established pursuant to the Voting Trust Agreement; and (iii) confirmed that the
common shares transferred to Bryan G. Krantz by the Trust remain subject to the
pledge agreement described below in favor of the First National Bank of
Commerce.
All of the 342,584 common shares of the Company owned in the aggregate by Marie
Krantz, Bryan Krantz, Vickie Krantz and Jefferson Downs are subject to pledge
agreements (the "Pledge
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<PAGE> 71
Agreements") in favor of the First National Bank of Commerce ("FNBC"), as
security for the Company's obligations under a Loan Agreement entered into with
FNBC in 1995. Pursuant to the Pledge Agreements, each such shareholder has
granted to FNBC a security interest in all common shares of the Company owned by
such shareholder, and in any additional common shares which may be received. So
long as the Company's indebtedness under the Loan Agreement remains outstanding,
the common shares subject to the Pledge Agreements may not be sold, transferred
or disposed of in any way. Unless and until an event of default occurs, each
shareholder is entitled to exercise all voting rights and receive all dividends
with respect to such shares. In the event of a default, including a default
under any other guaranty or security agreement entered into in connection with
the Loan Agreement, FNBC will be entitled, among other things, to transfer all
or part of the pledged shares into its name, exercise all voting rights and sell
all or any part of such shares. Any such sale of all or a substantial portion of
the common shares subject to the Pledge Agreements would result in a change of
control of the Company.
Item 13. Certain Relationships and Related Transactions
During 1992 Jefferson Downs, a corporation owned by Marie G. Krantz and Bryan G.
Krantz, did not renew its license application with the Louisiana Racing
Commission for live racing and, accordingly, did not conduct live racing in
1993. In August 1992, Jefferson Downs assigned to the Company all of its right,
title and interest in and to the leases on its tele-track facilities in
Terrebonne, St. Tammany and Jefferson Parishes, Louisiana. Such assignment was
effective on May 27, 1993, the date the Louisiana Racing Commission approved the
transfer to the Company of all licenses necessary for the operation of such
tele-tracks.
During 1992 the Company entered into a Management Agreement (the "Management
Agreement") with Finish Line. The Management Agreement provides that Finish Line
is to operate the former Jefferson Downs tele-track facilities described above
for a period of ten years, commencing November 1, 1992, with the option granted
to Finish Line to extend the term of the Management Agreement for two additional
five-year periods. The Management Agreement provides that Finish Line is to have
the exclusive responsibility for the direction, supervision, management and
operation of such facilities, is to collect all monies from such operation and
is to pay all expenses in connection therewith. The Company is to receive 0.1%
of the gross pari-mutuel handle at such facilities, and Finish Line is to
receive monthly compensation equal to the difference between the gross receipts
collected at such facilities less all expenses (including the payment to the
Company described above) paid by Finish Line. In addition, Finish Line is to
indemnify the Company for, among other things, all obligations under the leases
assigned by Jefferson Downs to the Company. During the fiscal year ended October
31, 1996, Finish Line paid the Company $88,835 under the Management Agreement,
host track fees of $363,275 and purse
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<PAGE> 72
supplements of $4,337,179. As of October 31, 1996, the Company had accounts
payable to Finish Line in the aggregate amount of $88,229.
The Company, Jefferson Downs and Finish Line are parties to an agreement with
VSI, whereby VSI has the exclusive right and license to install, maintain and
operate video draw poker devices at the Fair Grounds Race Course and Jefferson
Downs Race Course and at the tele-tracks operated by the Company, Jefferson
Downs and Finish Line. Such agreement was entered into in November 1992 for an
initial term of five years, with an option by VSI to extend the term for an
additional five years, which option has been exercised. The agreement provides
that the Company is to receive a percentage of the revenues from the operation
of the devices installed at the Company's facilities. Such percentage is to be
calculated on the basis of the average amount collected daily from each device
during each month, after the payment of prizes, taxes and fees. The devices
which have been installed and are to be installed by VSI pursuant to such
agreement remain the property of VSI. As of October 31, 1996, there were a total
of 234 devices in operation at all of the Company's facilities (excluding the
tele-tracks operated for the Company by Finish Line) and 419 devices in
operation at facilities managed by Finish Line. In fiscal 1996, the Company
received gross video poker revenue of $1,955,551, including amounts to be paid
as purse supplements of $821,973. In addition, such agreement provides that the
Company, Jefferson Downs and Finish Line are entitled to receive an annual
promotional allowance from VSI in the aggregate amount of $270,000, which for
the fiscal year ended October 31, 1996 was paid in full to the Company. The
agreement also provides for advances annually from VSI against future revenues
of up to $1 million in the aggregate to the Company, Jefferson Downs and Finish
Line. The Company received all of such advance during the year ended October 31,
1996 and has also received such an advance during the current fiscal year. The
Company anticipates that it will continue to receive revenues pursuant to the
agreement with VSI.
Marie Krantz is a director, the President and the owner of 66 2/3% of the
outstanding common stock, and Bryan Krantz is a director, Vice President and the
owner of 33 1/3% of the outstanding common stock, of Jefferson Downs. Marie
Krantz is a director, executive officer and the owner of 66 2/3% of the
outstanding common stock, and Bryan Krantz is a director, executive officer and
the owner of 33 1/3% of the outstanding common stock, of Finish Line. By virtue
of such positions and ownership and their positions with and relationship with
such entities, the Company, Finish Line and Jefferson Downs may be deemed to be
affiliates.
Marie Krantz and Bryan Krantz each own 50% of the outstanding common stock of
Continental Advertising, Inc. ("Continental"), an advertising agency which
provided advertising services to the Company during the last fiscal year. During
the 1996 fiscal year, the Company made advances to Continental of $341,000. As
of October 31, 1996, the Company was due $64,800 from Continental.
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<PAGE> 73
The Company expects to continue to utilize Continental's services during the
current fiscal year.
As described elsewhere herein, the Company and FNBC are parties to the Loan
Agreement, and the Company's indebtedness thereunder has been guaranteed by
Marie Krantz and Finish Line. In addition, Marie G. Krantz has granted FNBC a
security interest in certain investment securities held by her, and Finish Line
and Jefferson Downs have granted to FNBC a security interest in substantially
all of the property, furniture, fixtures and equipment owned by each such
corporation. For a description of the terms and conditions of the Loan Agreement
and the security interests granted to FNBC, see Item 1, "Business." Also in
connection with the Loan Agreement, each of Marie Krantz, Bryan Krantz, Vickie
Krantz, Richard Katcher and Jefferson Downs has pledged to FNBC all of the
common shares of the Company owned by such shareholder. For a description of the
terms and conditions of the pledge agreements relating to such shares, see Item
12, "Securities Ownership of Certain Beneficial Owners and Management."
In connection with the payment by the Company during 1996 of the remaining
principal balance of the mortgage loan due to Louie J. Roussel, III, Marie G.
Krantz made a short-term loan of $1 million to the Company in October 1996. The
loan bore interest at the rate of 8.25%, and was repaid in full together with
all accrued interest, in January 1997. Total interest paid to Marie G. Krantz
under such short-term loan was approximately $15,000.
From time to time, persons who are officers, directors or principal shareholders
of the Company own or have interests in horses racing at the Company's race
track. Such races are conducted under the rules and regulations of the Louisiana
Racing Commission, and no officer, director or principal shareholder receives
any extra or special benefits not shared by all others so racing.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following unaudited financial statements are included in Part II,
Item 8:
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- ----
<S> <C>
Report of Independent Certified Public
Accountant 35
Balance Sheets, October 31, 1996 and 1995 36
Statements of Operations for the Three Years
Ended October 31, 1996 38
</TABLE>
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<TABLE>
<S> <C> <C>
Statements of Changes in Stockholder's
Equity for the Three Years Ended
October 31, 1996 42
Statements of Cash Flows for the Three
Years Ended October 31, 1996 43
Notes to Financial Statements 46
(b) Report on Form 8-K: None
(c) Exhibits: The following exhibits are filed as part of this report. Those
exhibits which have been previously filed and incorporated herein by
reference are identified by reference to the previous filing.
(3)(a) *
Articles of Incorporation of Fair
Grounds Corporation, as amended
(incorporated herein by reference to
Exhibit (3)(a) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1991, filed on January 29,
1992).
(3)(b) *
Amended and Restated By-Laws of Fair
Grounds Corporation (incorporated
herein by reference to Exhibit (3)(b)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1990).
(9) *
Voting Trust Agreement dated as of
August 31, 1993, by and among Bryan G.
Krantz and Richard Katcher, Trustee, as
grantors, and Marie G. Krantz as Voting
Trustee (incorporated herein by
reference to exhibit 2 to Amendment No.
3 to Schedule 13D filed by such persons
on October 13, 1993).
(10)(a) *
Agreement dated December 1, 1987,
between Fair Grounds Corporation and
Jefferson Downs, Inc. (incorporated
herein by reference to Exhibit (10)(a)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1988).
(10)(b) *
Agreement dated March 30, 1988, between
Fair Grounds Corporation and Jefferson
Downs, Inc. (incorporated herein by
</TABLE>
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<TABLE>
<S> <C> <C>
reference to Exhibit (10)(b) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1988).
(10)(c) *
Agreement dated March 29, 1989, between
Fair Grounds Corporation and Jefferson
Downs, Inc. (incorporated herein by
reference to Exhibit (10)(c) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
(10)(d) *
Agreement dated November 3, 1989,
between Fair Grounds Corporation and
Jefferson Downs, Inc. (incorporated
herein by reference to Exhibit (10)(d)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(e) *
Net Commercial Lease Agreement dated
November 10, 1988, between Pelican
Homestead and Savings Association and
Fair Grounds Corporation (incorporated
herein by reference to Exhibit (10)(e)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(f) *
Lease of Commercial Property dated
February 1, 1989, between Mereaux and
Nunez, Inc. and Fair Grounds
Corporation (incorporated herein by
reference to Exhibit (10)(f) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
(10)(g) *
Lease Agreement dated March 8, 1989,
between Richard F. Keyworth and Fair
Grounds Corporation (incorporated
herein by reference to Exhibit (10)(g)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(h) *
Promissory Note dated November 19,
1989, in the principal amount of
$5,000,000 from Fair Grounds
Corporation to National Savings Life
Insurance Company (incorporated herein
by reference to Exhibit (10)(h) to the
</TABLE>
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<PAGE> 76
<TABLE>
<S> <C> <C>
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
(10)(i) *
Promissory Note dated November 19,
1989, in the principal amount of
$4,980,000 from Fair Grounds
Corporation to Louie J. Roussel, III
(incorporated herein by reference to
Exhibit (10)(i) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1989).
(10)(j) *
Promissory Note dated December 27,
1990, in the principal amount of
$4,980,000 from Fair Grounds
Corporation to Louie J. Roussel, III
(incorporated herein by reference to
Exhibit (10)(j) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1990).
(10)(k) *
Promissory Note dated December 27,
1990, in the principal amount of
$5,000,000 from Fair Grounds
Corporation to Victory Life Insurance
Company (incorporated herein by
reference to Exhibit (10)(k) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1990).
(10)(l) *
Fair Grounds Corporation Stock Option
Plan (incorporated herein by reference to
Appendix A to the definitive Information
Statement of the Company dated February
26, 1991).
(10)(m) *
Commercial Lease Agreement dated April
1, 1991 between Blake's Superette, Inc.
and Fair Grounds Corporation
(incorporated herein by reference to
Exhibit (10)(m) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1991, filed on January 29,
1992).
(10)(n) *
Lease Agreement dated November 21, 1991
between Jefferson Downs Corporation and
Fair Grounds Corporation (incorporated
</TABLE>
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<PAGE> 77
<TABLE>
<S> <C> <C>
herein by reference to Exhibit (10)(n)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1991,
filed on January 29, 1992).
(10)(o) *
Agreements regarding Purchase and Sale
of Partnership Interests by and between
Jefferson Downs Corporation and Fair
Grounds Corporation, dated as of August
11, 1992. (Incorporated herein by
reference to Exhibit (10)(o) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1992, filed on
February 15, 1993.)
(10)(p) *
Assignments of Lease by Jefferson Downs
Corporation to Fair Grounds
Corporation, dated as of August 31,
1992. (Incorporated herein by reference
to Exhibit (10)(p) to the Form 10-K of
the Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
(10)(q)
Management Agreement by and between
Finish Line Management Corp. and
Fair Grounds Corporation, dated
October 9, 1992. (Incorporated
herein by reference to Exhibit (10)(q)
to the Form 10-K of the Company for
the fiscal year ended October 31, 1992,
filed on February 15, 1993.)
(10)(r) *
Letter of Intent between K-III
Information Group and Fair Grounds
Corporation, dated November 20, 1992.
(Incorporated herein by reference to
Exhibit (10)(r) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
(10)(s) *
Incentive Stock Option Agreement
between Fair Grounds Corporation and
William H. Kurtz, dated as of February
4, 1992. (Incorporated herein by
reference to Exhibit (10)(s) to the
Form 10-K of the Company for the fiscal
</TABLE>
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<PAGE> 78
<TABLE>
<S> <C> <C>
year ended October 31, 1992, filed on
February 15, 1993.)
(10)(t) *
Agreement dated February 28, 1992, by
and between Video Services, Inc., Fair
Grounds Corporation, Jefferson Downs
Corporation and Finish Line Management
Corp. (Incorporated herein by reference
to Exhibit (10)(t) to the Form 10-K of
the Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
(10)(u) *
Loan Agreement dated as of December 18,
1995, between Fair Grounds Corporation
and First National Bank of Commerce
(Incorporated herein by reference to
Exhibit 10(u) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1995, filed on February 16,
1996).
(10)(v) *
Disbursement Agreement dated as of July
17, 1995 by and among Fair Grounds
Corporation, Vide Services, Inc. and
First National Bank of Commerce
(Incorporated herein by reference to
Exhibit 10(v) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1995, filed on February 16,
1996).
(10)(w) *
Commercial Security Agreement dated as
of July 17, 1995 between Fair Grounds
Corporation and First National Bank of
Commerce (Incorporated herein by
reference to Exhibit 10(w) to the Form
10-K of the Company for the fiscal year
ended October 31, 1995, filed on
February 16, 1996).
27 Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated herein by reference as indicated.
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<PAGE> 79
SIGNATURES
Pursuant to the requirements of Section 12 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
By: /s/ Bryan G. Krantz
----------------------------
Date: April 11, 1997 Bryan G. Krantz, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ----------- -------- --------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Bryan G. Krantz
- ------------------------------
Bryan G. Krantz President April 11, 1997
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Gordon M. Robertson
- -------------------------------
Gordon M. Robertson Vice President and
Chief Financial April 11, 1997
Officer
</TABLE>
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<PAGE> 80
Directors:
<TABLE>
<S> <C> <C>
/s/ Marie G. Krantz
- ----------------------------
Marie G. Krantz Director April 11, 1997
and Chairman
of the Board
/s/ Bryan G. Krantz
- ----------------------------
Bryan G. Krantz Director April 11, 1997
and President
/s/ Katherine F. Duncan
- ----------------------------
Katherine F. Duncan Director April 11, 1997
/s/ Ronald J. Maestri
- ----------------------------
Ronald J. Maestri Director April 11, 1997
/s/ Charmaine R. Morel
- ----------------------------
Charmaine R. Morel Director April 11, 1997
/s/ Wayne E. Thomas
- ----------------------------
Wayne E. Thomas Director April 11, 1997
</TABLE>
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<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
(3)(a) *
Articles of Incorporation of Fair
Grounds Corporation, as amended
(incorporated herein by reference to
Exhibit (3)(a) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1991, filed on January 29,
1992).
(3)(b) *
Amended and Restated By-Laws of Fair
Grounds Corporation (incorporated
herein by reference to Exhibit (3)(b)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1990).
(9) *
Voting Trust Agreement dated as of
August 31, 1993, by and among Bryan G.
Krantz and Richard Katcher, Trustee, as
grantors, and Marie G. Krantz as Voting
Trustee (incorporated herein by
reference to exhibit 2 to Amendment No.
3 to Schedule 13D filed by such persons
on October 13, 1993).
(10)(a) *
Agreement dated December 1, 1987,
between Fair Grounds Corporation and
Jefferson Downs, Inc. (incorporated
herein by reference to Exhibit (10)(a)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1988).
(10)(b) *
Agreement dated March 30, 1988, between
Fair Grounds Corporation and Jefferson
Downs, Inc. (incorporated herein by
reference to Exhibit (10)(b) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1988).
(10)(c) *
Agreement dated March 29, 1989, between
Fair Grounds Corporation and Jefferson
Downs, Inc. (incorporated herein by
reference to Exhibit (10)(c) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
</TABLE>
81
<PAGE> 82
<TABLE>
<C> <C> <C>
(10)(d) *
Agreement dated November 3, 1989,
between Fair Grounds Corporation and
Jefferson Downs, Inc. (incorporated
herein by reference to Exhibit (10)(d)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(e) *
Net Commercial Lease Agreement dated
November 10, 1988, between Pelican
Homestead and Savings Association and
Fair Grounds Corporation (incorporated
herein by reference to Exhibit (10)(e)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(f) *
Lease of Commercial Property dated
February 1, 1989, between Mereaux and
Nunez, Inc. and Fair Grounds
Corporation (incorporated herein by
reference to Exhibit (10)(f) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
(10)(g) *
Lease Agreement dated March 8, 1989,
between Richard F. Keyworth and Fair
Grounds Corporation (incorporated
herein by reference to Exhibit (10)(g)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1989).
(10)(h) *
Promissory Note dated November 19,
1989, in the principal amount of
$5,000,000 from Fair Grounds
Corporation to National Savings Life
Insurance Company (incorporated herein
by reference to Exhibit (10)(h) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1989).
(10)(i) *
Promissory Note dated November 19,
1989, in the principal amount of
$4,980,000 from Fair Grounds
Corporation to Louie J. Roussel, III
(incorporated herein by reference to
Exhibit (10)(i) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1989).
</TABLE>
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<TABLE>
<C> <C> <C>
(10)(j) *
Promissory Note dated December 27,
1990, in the principal amount of
$4,980,000 from Fair Grounds
Corporation to Louie J. Roussel, III
(incorporated herein by reference to
Exhibit (10)(j) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1990).
(10)(k) *
Promissory Note dated December 27,
1990, in the principal amount of
$5,000,000 from Fair Grounds
Corporation to Victory Life Insurance
Company (incorporated herein by
reference to Exhibit (10)(k) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1990).
(10)(l) *
Fair Grounds Corporation Stock Option
Plan (incorporated herein by reference
to Appendix A to the definitive Information
Statement of the Company dated February
26, 1991).
(10)(m) *
Commercial Lease Agreement dated April
1, 1991 between Blake's Superette, Inc.
and Fair Grounds Corporation
(incorporated herein by reference to
Exhibit (10)(m) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1991, filed on January 29,
1992).
(10)(n) *
Lease Agreement dated November 21, 1991
between Jefferson Downs Corporation and
Fair Grounds Corporation (incorporated
herein by reference to Exhibit (10)(n)
to the Form 10-K of the Company for the
fiscal year ended October 31, 1991,
filed on January 29, 1992).
(10)(o) *
Agreements regarding Purchase and Sale
of Partnership Interests by and between
Jefferson Downs Corporation and Fair
Grounds Corporation, dated as of August
11, 1992. (Incorporated herein by
reference to Exhibit (10)(o) to the
Form 10-K of the Company for the fiscal
</TABLE>
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<TABLE>
<S> <C> <C>
year ended October 31, 1992, filed on
February 15, 1993.)
(10)(p) *
Assignments of Lease by Jefferson Downs
Corporation to Fair Grounds
Corporation, dated as of August 31,
1992. (Incorporated herein by reference
to Exhibit (10)(p) to the Form 10-K of
the Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
(10)(q)
Management Agreement by and between Finish
Line Management Corp. and Fair Grounds
Corporation, dated October 9, 1992.
(Incorporated herein by reference to
Exhibit (10)(q) to the Form 10-K of the
Company for the fiscal year ended October
31, 1992, filed on February 15, 1993.)
(10)(r) *
Letter of Intent between K-III
Information Group and Fair Grounds
Corporation, dated November 20, 1992.
(Incorporated herein by reference to
Exhibit (10)(r) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
(10)(s) *
Incentive Stock Option Agreement
between Fair Grounds Corporation and
William H. Kurtz, dated as of February
4, 1992. (Incorporated herein by
reference to Exhibit (10)(s) to the
Form 10-K of the Company for the fiscal
year ended October 31, 1992, filed on
February 15, 1993.)
(10)(t) *
Agreement dated February 28, 1992, by
and between Video Services, Inc., Fair
Grounds Corporation, Jefferson Downs
Corporation and Finish Line Management
Corp. (Incorporated herein by reference
to Exhibit (10)(t) to the Form 10-K of
the Company for the fiscal year ended
October 31, 1992, filed on February 15,
1993.)
</TABLE>
84
<PAGE> 85
<TABLE>
<S> <C> <C>
(10)(u) *
Loan Agreement dated as of December 18,
1995, between Fair Grounds Corporation
and First National Bank of Commerce
(Incorporated herein by reference to
Exhibit 10(u) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1995, filed on February 16,
1996).
(10)(v) *
Disbursement Agreement dated as of July
17, 1995 by and among Fair Grounds
Corporation, Vide Services, Inc. and
First National Bank of Commerce
(Incorporated herein by reference to
Exhibit 10(v) to the Form 10-K of the
Company for the fiscal year ended
October 31, 1995, filed on February 16,
1996).
(10)(w) *
Commercial Security Agreement dated as
of July 17, 1995 between Fair Grounds
Corporation and First National Bank of
Commerce (Incorporated herein by
reference to Exhibit 10(w) to the Form
10-K of the Company for the fiscal year
ended October 31, 1995, filed on
February 16, 1996).
27 Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated herein by reference as indicated.
85
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT OF FAIR GROUNDS CORPORATION FOR THE YEAR ENDED OCTOBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 6,265
<SECURITIES> 188
<RECEIVABLES> 867
<ALLOWANCES> 0
<INVENTORY> 84
<CURRENT-ASSETS> 8,358
<PP&E> 38,507
<DEPRECIATION> 15,461
<TOTAL-ASSETS> 34,792
<CURRENT-LIABILITIES> 18,375
<BONDS> 0
0
0
<COMMON> 1,525
<OTHER-SE> 11,926
<TOTAL-LIABILITY-AND-EQUITY> 34,792
<SALES> 19,714
<TOTAL-REVENUES> 27,497
<CGS> 0
<TOTAL-COSTS> 25,391
<OTHER-EXPENSES> 4,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 792
<INCOME-PRETAX> 1,175
<INCOME-TAX> 295
<INCOME-CONTINUING> 880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 880
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.87
</TABLE>
