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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, 1998 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
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 X No
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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 $3,341,412 computed by reference to the average bid and asked
prices of such stock on January 28, 1999.
The number of shares outstanding of the issuer's single class of common stock
was 468,580 as of January 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Information Statement for the 1998 Annual Meeting
of Shareholders are incorporated by reference into Part III.
PAGE 1 OF 69 PAGES
EXHIBIT INDEX ON PAGE 60
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TABLE OF CONTENTS
<TABLE>
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Item Page
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<S> <C> <C>
ITEM 1. BUSINESS............................................................................. 3
ITEM 2. PROPERTIES........................................................................... 11
ITEM 3. LEGAL PROCEEDINGS.................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................................................. 16
Executive Officers of the Registrant................................................. 16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................................................... 16
ITEM 6. SELECTED FINANCIAL DATA.............................................................. 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK................................................................................. 26
ITEM 8. FINANCIAL STATEMENTS................................................................. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................................. 54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................................................... 54
ITEM 11. EXECUTIVE COMPENSATION............................................................... 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .......................................................................... 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................................... 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................................................... 55
SIGNATURES............................................................................................. 58
EXHIBIT INDEX.......................................................................................... 60
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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 127th racing season,
making it the third oldest thoroughbred racing track in the United States. In
addition to its live racing operations, the Company 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.
The Company's fiscal year ends on October 31; accordingly, unless otherwise
indicated, references herein to a year mean the fiscal year which ended in the
calendar year to which reference is made. For example, references to "fiscal
1998" means the fiscal year ended October 31, 1998.
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 licensees, including the Company, operate live racing
meets in Louisiana at various times during the year.
The Company's live racing meet is conducted annually at the Fair Grounds Race
Course generally 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 is
located 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.
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The Company's live racing meet for the fiscal year ended October 31, 1998 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 $25,789,351 in fiscal 1998, $20,200,754 in
fiscal 1997, and $20,180,889 in fiscal 1996. 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 35% of the thoroughbred
starters at the Fair Grounds Race Course during its live racing meet are
Louisiana-bred. The live racing meet features races with guaranteed purses in
excess of $250,000 and purses averaging approximately $22,000 per race.
For the fiscal year ending October 31, 1999, the Racing Commission granted the
Company a license to conduct its live racing meet during the period from
November 26, 1998 through March 29, 1999, a total of 88 racing days, with live
racing being conducted generally five days a week (Thursday through Monday) 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, Jefferson 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 1998 racing season was approximately $220
million, a 32.5% increase over the previous racing season. The Company earns a
net commission (after payment of purses) of approximately 1.5% of the
out-of-state handle.
Off-Track Betting
Ownership and Operation of Tele-Track Facilities. Louisiana authorizes off-track
wagering and 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. In 1988 each horse racing track 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. 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. The Company and
Jefferson Downs Corporation ("Jefferson Downs"), which is 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, are parties to an
agreement, entered into in 1992 when Jefferson Downs ceased its live racing
pursuant to which 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
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Jefferson Downs tele-tracks) during the fiscal year ended October 31, 1998 was
391,271 compared to 389,149 during fiscal 1997 and 318,831 during fiscal 1996,
and the total off-track handle at such facilities during the 1998 fiscal year
was $93,921,423, compared to $85,481,397 during fiscal 1997 and $76,293,113
during fiscal 1996. See "Sources of Revenue" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company is a party to a Management Agreement (the "Management Agreement")
with Finish Line pursuant to which Finish Line operates the tele-track
facilities owned by Jefferson Downs and transferred to the Company effective in
May 1993. 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. Pursuant to the Management Agreement,
Finish Line has the exclusive responsibility for the direction, supervision,
management and operation of such facilities, collects all monies from such
operation and pays all expenses in connection therewith. The Company receives
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. A portion of the handle generated at these
tele-tracks is 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 plus an additional 1.5% of all
"exotic" wagers at tele-track facilities. 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.
Breakage and Uncashed Mutuel Tickets. Race tracks and tele-tracks are allowed to
retain breakage, which is the residual amount remaining in the betting pool
after winnings are paid out to the nearest dime; however, one-half of such
revenue must be paid out as purses. During fiscal 1998, the Company's revenue
from breakage was $518,822 compared to $481,554 in fiscal 1997 and $439,204 in
fiscal 1996. Race tracks are also allowed to retain the proceeds from uncashed
winning pari-mutuel tickets, up to
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$250,000 for each live or simulcasted meet, with the excess to be remitted to
the State of Louisiana. During the fiscal year ended October 31, 1998, the
Company retained approximately $476,740 in proceeds of such uncashed mutuel
tickets as compared to approximately $404,000 in fiscal 1997 and $331,000 in
fiscal 1996.
Video Poker Operations
Louisiana permits pari-mutuel facilities to install and operate an unlimited
number of video poker machines. Other types of businesses in Louisiana, such as
bars, truck stops and restaurants, are permitted to operate video poker machines
but are restricted in the number of machines they may operate. See "Regulation."
The owners of pari-mutuel wagering facilities such as the Company are required
to set aside one-half of the net revenues from such devices in excess of certain
amounts and 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.
The Company, Jefferson Downs and Finish Line entered into an agreement in
February 1992 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 and Jefferson Downs
Race Course and at the tele-tracks operated by the Company, Jefferson Downs and
Finish Line. Such agreement was for an initial term of five years, with an
option by VSI to extend the term for an additional five years, which option was
exercised. Pursuant to such agreement, the Company receives a percentage of the
revenues from the operation of the devices installed at the Company's
facilities, such percentage being 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, 1998, there were
a total of 315 devices in operation at the Company's facilities (not including
tele-tracks operated by Finish Line). In addition, there were a total of 414
devices at the tele-tracks operated by Finish Line as of October 31, 1998. The
Company receives purse supplements from the tele-tracks operated by Finish Line,
which includes the tele-tracks formerly owned by Jefferson Downs.
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 1998, 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 1998-99 racing meet.
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 St. Tammany Parish, where the Company, through its
management agreement with Finish Line, maintains two facilities disapproved
video poker operations. As a result, the video
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poker operations at those two facilities will be terminated in June 1999;
however, the loss of video poker revenue from such locations will not have a
material adverse effect on the Company's results of operations.
SOURCES OF REVENUE
Income from Wagering
The principal component of the Company's revenue is generated from parimutuel
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, quinella 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, 1998, the Company
received pari-mutuel commissions and related income of $24.7 million, compared
to $21.7 million for fiscal 1997 and $19.7 million for fiscal 1996. Total
commission income (less pari-mutuel taxes) was $21.6 million for fiscal 1998,
$18.9 million for fiscal 1997, and $17.1 million for fiscal 1996.
The Company also receives, during its live racing meet, a percentage of the
handle from all tele-tracks and racing facilities to which its races are
simulcasted, paid in the form of host track fees as compensation for the
simulcasting of its races to such facilities. 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, 1998, the Company received
host track fees of $7.1 million and paid host track fees of $2.8 million. During
fiscal 1997 the Company received host track fees of $5.7 million and paid host
track fees of $2.5 million, and during fiscal 1996 the Company received host
track fees of $4.4 million and paid host track fees of $2.2 million.
Income from Video Poker Operations
For the fiscal year ended October 31, 1998, revenue from video poker operations
was $2.9 million compared to $2.3 million in fiscal 1997 and $2.0 million in
fiscal 1996. In the fiscal year ended October 31, 1998, the Company did not
receive any video poker franchise fee relief revenues as a result of having
repaid all indebtedness incurred to construct its new main grandstand and racing
facility. Video poker franchise fee relief revenues were $1.9 million and $2.9
million in the fiscal years ended October 31, 1997 and October 31, 1996,
respectively. As previously described, there were a total of 315 devices in
operation at the Company's facilities (not including the tele-tracks operated by
Finish Line) as of October 31, 1998.
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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 Company's 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 certain beverage
concessions during the Jazz and Heritage Festival. The Company and the sponsor
of the Jazz and Heritage Festival are parties to an agreement for the use of the
Company's facilities through the year 2001. Revenues from the 1998 Festival were
$1.4 million, compared to $1.0 million from the 1997 Festival and $1.5 million
from the 1996 Festival.
Seasonality
The Company's business is seasonal, and 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."
COMPETITION
The Company continues to face 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 other horse racing
tracks and tele-tracks, riverboat and dockside gambling, casinos operated on
Indian reservations, a land-based casino under construction in New Orleans,
state-sponsored lotteries and video poker in restaurants, bars, hotels and truck
stops. All such activities are present in the State of Louisiana, the
Mississippi Gulf Coast area or elsewhere in the State of Mississippi.
In recent years, the growth of gaming in the United States 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
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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 race tracks in Louisiana and throughout the
United States in securing high caliber thoroughbred horses to run at the
Company's race track. The Company believes that it provides high quality horse
racing at the Fair Grounds Race Course.
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 Company believes that 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. In addition, a substantial number of dockside gaming
facilities are in operation.
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, 1999, 14 licenses had
been granted and there were 13 licensed riverboats in operation in Louisiana,
three 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. The temporary gambling
operations and construction were halted in the Fall of 1995 when the developer
of the casino filed for bankruptcy. Construction of the land-based casino was
started again in 1998 and construction is expected to be completed late in 1999
or early in 2000.
Video Poker Operations. As described herein, 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
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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 areas 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) 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 employs approximately 805 persons. At
all other times, the Company employs approximately 400 persons.
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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 a ten-minute 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 owns the clubhouse and tele-track facility described herein as well
as the new grandstand facility. Construction of the Company's new main
grandstand and racing facility, which commenced in August 1994 but was halted in
September 1995, recommenced during fiscal 1997. The facility was completed in
November 1997 and opened for live racing on November 27, 1997. The new facility
is a multi-tiered concrete and steel structure, with a total seating capacity
for approximately 5,000 people. The size of the new facility, together with the
adjacent tele-track building completed in December 1994, is approximately
217,000 square feet in the aggregate. There is general seating in a bleacher
area in the front of the grandstand with reserved seating, including the new
clubhouse area, located in tiered areas above the grandstand. In a significant
change from the design of the old building, the paddock is located in the middle
of and behind the grandstand and may be viewed through a glass area from all
levels of the facility.
The Company also owns 50 modern concrete barns with supporting buildings and
facilities which are located on the property and are 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.
In December 1997, the Company repaid all remaining indebtedness under its then
outstanding note to First National Bank of Commerce (now Bank One) which was
secured by a $17.5 million collateral mortgage on substantially all of the real
property and equipment of the Company and by a security interest in all of the
Company's furniture, fixtures, equipment, and other items of personal property.
The Company leases the facilities for its off-track tele-tracks under lease
agreements which contain 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.
The Company has an agreement with Autotote Limited ("Autotote"), pursuant to
which Autotote provides the Company with wagering services, including
totalisator, computer and related services. The Company is obligated to pay
Autotote a percentage of the total pari-mutuel handle, and is also obligated to
pay Autotote certain equipment and contingent rental fees in connection with
leasing certain equipment from Autotote.
See Note 8 of Notes to the Financial Statements included elsewhere herein for a
description of the Company's lease obligations.
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ITEM 3. LEGAL PROCEEDINGS
FIRE RELATED LITIGATION
During the past five years, the Company has been a party to a number of legal
proceedings which have arisen as a result of the December 1993 fire that
destroyed the Company's main clubhouse and grandstand building, 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:
Travelers Litigation
In May 1994, the Company filed an action in the 24th Judicial Court in the State
of Louisiana against Travelers Indemnity Company of Illinois ("Travelers") and
others. The Company contended that the insurance policy issued by Travelers
provided the Company with blanket coverage in the amount of $24.2 million in
excess of the $10 million of underlying coverage and, accordingly, that
Travelers was liable for the difference between $24.2 million and the amount
previously paid by Travelers (approximately $9.5 million), plus statutory
penalties of 10% of the amount not paid, interest, attorney's fees and costs.
The Company further contended that the insurance agent and the insurance broker
who arranged for the insurance were liable to the Company for any damages
sustained including any damages sustained because the amount of coverage was
less than that claimed by the Company. Travelers' position was that its
liability under such policy was limited to the amount which it had previously
paid.
In November 1996, the Company reached a joint settlement with the insurance
agent and broker pursuant to which the insurance agent and broker agreed paid a
total of $10,000,000 to the Company. The settlement agreement included 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 in that
litigation. The Company's action against Travelers was tried in September 1997,
and in April 1998 the trial court entered judgment in favor of the Company and
against Travelers, awarding the Company an additional $2,410,905 in business
interruption insurance, legal interest on that sum from May 1994 until paid,
statutory penalties in the amount of $222,128 and attorney's fees in an amount
to be set by the Court. The court later fixed the amount of attorney's fees at
$75,000. In August 1998, the trial court denied all post trial motions and
certified the judgment as being immediately appealable. Appeals by both the
Company and Travelers are now pending before the state court of appeals. Under
the Mary Carter agreement referenced above, the liability insurers of the agent
and broker are entitled to share in any recovery from Travelers.
ADT Litigation
In December 1994, the Company filed an action in the Civil District Court for
the Parish of Orleans, State of Louisiana against ADT Security Systems
Mid-South, Inc. ("ADT"), which provided and maintained the fire alarm system at
the race track, and other defendants. The complaint
12
<PAGE> 13
sought 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 third party's insurance company, which insured the operator
of the video poker machines destroyed in the fire, intervened in the suit
asserting subrogation claims against the same defendants.
In late 1996, the Company and three insurance companies entered into settlements
with the manufacturer of a lighting ballast and an architect. After division of
the settlement proceeds among the Company and the three insurance companies and
the payment of various litigation expenses, the Company received approximately
$268,000. In March 1997, a jury trial was held on the remaining claims and
resulted in an award in favor of the Company and the subrogated insurance
companies of approximately $49.8 million in the aggregate in damages against
ADT, plus interest, of which approximately $31.8 million, plus interest, was
awarded to the Company. The judgment was appealed to the Court of Appeals of
Louisiana, Fourth Circuit, by ADT, the Company and three of the subrogated
insurance companies. In June 1997, the insurance company that insured the
initial layer of ADT's liability tendered approximately $9.3 million in partial
settlement of the action. After a dispute with the subrogated insurers over the
division of these funds was resolved in August 1997, the Company received
approximately $4 million of those proceeds after litigation expenses.
In December 1997, the Company entered into a settlement with ADT and ADT's
excess coverage insurers pursuant to which the Company was paid $37 million and
agreed to indemnify ADT and its insurers against the judgment creditor claims of
the four subrogated insurers. In December 1997, the Company received $7.7
million of such funds net of litigation expenses, and the balance of the
settlement funds was placed in escrow pending resolution of the subrogation
claims. In July 1998, the Company settled the subrogation claims of three of the
four insurers, as well as an action filed in April 1997 in United States
District Court for the Eastern District of Louisiana by those three insurers
against the Company seeking a declaratory judgement that a contract had been
entered into by the parties respecting the distribution of funds recovered in
the ADT litigation. Under the terms of this settlement, the three insurers
received a total of $12.97 million from the funds in escrow. At that time, the
Company received an additional $2.2 million from the funds in escrow, net of
litigation expenses, leaving approximately $6.3 million in escrow which is not
reflected as an asset on the Company's balance sheet as of October 31, 1998.
In September 1998, the Court of Appeals, among other things, reversed the trial
court's award of $4.25 million to the Company's primary property insurer on its
subrogation claim, concluding that the trial court had erred in making that
award to the insurer when the Company had not been fully compensated for its
property loss. This decision rendered moot the remainder of the appeals. The
insurer appealed this decision to the Louisiana Supreme Court which recently
denied the appeal. The funds remaining in escrow will be paid out when this case
is concluded.
13
<PAGE> 14
United National Litigation
The Company was a defendant, along with its general liability insurance carrier,
United National Insurance Company ("United National"), in a civil action filed
in December 1994 in the United States District Court for the Eastern District of
Louisiana by St. Paul Mercury Insurance Company ("St. Paul"), the insurer of the
computerized betting equipment at the race track. St. Paul alleged that it was
subrogated to its insured's rights to collect damages and that it had paid
approximately $1,175,000 to its insured for the loss of equipment in the fire.
Subsequently, United National filed a declaratory judgment action against the
Company, wherein it sought to deny coverage for St. Paul's subrogation claim.
The Company filed a counterclaim against United National, seeking coverage for
the St. Paul claim as well as payment for various other fire-related claims
previously denied by United National. This action was consolidated for trial
with the suit filed by St. Paul against the Company.
Both United National and the Company moved for summary judgment on the question
of whether the exclusion relied on by United National to deny coverage for the
various claims applied. In 1996, the United States District Court ruled that the
policy exclusion 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 Court of Appeals for the Fifth Circuit which held
that the claims were covered.
In May 1997, the St. Paul suit was settled pursuant to an agreement whereby ADT
agreed to pay an undisclosed sum and United National, as the Company's insurer,
agreed to pay $275,000. In February 1998, United National tendered $56,553 to
the Company for claims which it acknowledged were covered under the policy. In
November 1998, United National tendered an additional $11,818 to the Company for
claims which it acknowledged were covered under the policy. In December 1998,
the Company settled the balance of its claims against United National for an
additional $140,000 which has been paid by United National.
OTHER LITIGATION
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust/civil RICO suit. This suit is currently in the discovery stage,
and the Company has filed a motion for summary judgment. Livingston had
previously filed a series of other legal actions against the Company which were
resolved in the Company's favor.
A suit was also filed in state court in Louisiana in 1996 by Livingston against
the Company and the State of Louisiana seeking a declaration that the State
off-track betting law is unconstitutional. The trial court ruled in the
plaintiff's favor. The Louisiana Supreme Court reversed the trial court
decision, holding that the off-track betting statute is constitutional.
Livingston's request for rehearing was subsequently denied.
14
<PAGE> 15
In 1996 a suit was filed in state court in Louisiana by the Louisiana Horsemen's
Benevolent and Protective Association ("HBPA") against the Company, the State of
Louisiana, and all other pari-mutuel wagering facilities operating in Louisiana.
The HBPA is seeking a larger portion of video poker proceeds. The Company
believes it is currently in compliance with the guidelines established by the
Louisiana State Police Gaming Division, which regulates compliance with
Louisiana's video poker law.
In July 1997, Evelyn Allen and other present or former security or concessions
employees of the Company filed an action in the United States District Court in
New Orleans claiming that the plaintiffs were entitled, under the Fair Labor
Standards Act, to overtime for hours worked over 40 in each work week from July
1994 to July 1997. Two of the plaintiffs also sought to recover damages for
alleged retaliatory discharge. In December 1998, the Company and the plaintiffs
reached a settlement pursuant to which the Company will pay the plaintiffs
$100,000 in full settlement of all claims for overtime pay. The retaliatory
discharge claims were tried in December 1998 and dismissed by the Court at the
conclusion of evidence. The plaintiffs' claim for attorneys fees has not yet
been resolved.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
15
<PAGE> 16
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with Instruction 3 to Item 401(b) of Regulation S-K, the following
information is submitted concerning the executive officers of the Company:
BRYAN G. KRANTZ, age 38, is President, General Manager and a director of the
Company and is President of Finish Line Management Corporation, which operates
certain off-track betting facilities in Louisiana.
MARIE G. KRANTZ, age 63, is Chairman of the Board of Directors and Treasurer of
the Company and is Secretary/Treasurer of Finish Line Management Corporation.
MERVIN MUNIZ, JR., age 56, is Director of Racing and Racing Secretary.
GORDON M. ROBERTSON, age 58, is Chief Financial Officer of the Company.
JOAN B. STEWART, age 66, is Secretary of the Company
No family relationships exist between or among any nominee, director or
executive officer of the Company, except that Bryan G. Krantz is the son
of Marie G. Krantz.
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 set forth below represents the bid
quotations at the end of each fiscal quarter.
<TABLE>
<CAPTION>
FISCAL 1997 1997 1998 1998
QUARTER ENDED Low Bid High Bid Low Bid High Bid
------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
January 31 $12.50 $20.00 $15.50 $20.00
April 30 $11.00 $25.00 $16.00 $17.00
July 31 $14.00 $18.00 $20.00 $26.00
October 31 $15.00 $25.00 $23.00 $30.00
</TABLE>
As of January 1, 1999, there were approximately 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 1998, 1997 or 1996.
16
<PAGE> 17
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.
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
FAIR GROUNDS CORPORATION
SELECTED FINANCIAL DATA
For the Five Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $36,785,091 $30,980,259 $27,496,500 $23,031,031 $22,371,571
OPERATING EXPENSES 38,884,188 32,201,167 29,809,843 26,394,452 26,094,568
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,126,464) (1,220,908) (2,313,343) (3,363,421) (3,722,997)
INTEREST EXPENSE 19,752 266,435 791,566 12,318 284,926
OTHER INCOME 1,483,027 3,013,320 4,279,503 2,459,163 605,553
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM, AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES (663,189) 1,525,977 1,174,594 (916,576) (3,402,370)
PROVISION (BENEFIT) FOR
INCOME TAXES (3,364,232) 775,288 294,896 (300,460) (1,878,635)
EXTRAORDINARY ITEM - GAIN
FROM FIRE (net of taxes) 6,272,628 9,022,525 - - 9,312,758
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES - - - 104,000 (75,094)
---------- ---------- ----------- ----------- -----------
NET INCOME (LOSS) $8,973,671 $9,773,214 $ 879,698 $ (512,116) $ 7,713,929
========== ========== =========== =========== ===========
COMMON SHARES OUTSTANDING 469,940 469,940 469,940 469,940 469,940
========== ========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE $ 19.09 $ 20.80 $ 1.87 $ (1.09) (16.48)
========== ========== =========== =========== ===========
CASH DIVIDENDS DECLARED
PER SHARE $ None $ None $ None $ None $ None
========== ========== =========== =========== ============
TOTAL ASSETS $49,144,377 $48,089,820 $ 34,791,597 $ 30,954,654 $ 26,470,322
=========== =========== ============ ============ =============
NOTES PAYABLE (EXCLUDING
CURRENT PORTION) $ - $ - $ - $ - $ 1,000,000
=========== =========== ============ =========== ============
</TABLE>
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Revenues. During the fiscal years ended October 31, 1998 and 1997, the Company
derived its pari-mutuel income by conducting live racing meets of 88 days during
each fiscal year and in the operation of its tele-tracks for off-track
wagering. In fiscal 1998, the Company utilized its new grandstand and clubhouse
facilities, which were completed in November 1997, when live racing was being
conducted at the Fair Grounds Race Course. Live racing in fiscal 1997 was
conducted at Fair Grounds Race Course utilizing temporary tent facilities and
the tele-track which was completed and put into service in late 1994. 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 Jefferson,
Lafourche, St. Bernard and St. John Parishes, Louisiana. Through Finish Line
Management Corporation, an affiliated company, the Company operated tele-track
facilities in Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana.
For the fiscal year ended October 31, 1998, the Company reported total in-state
pari-mutuel wagering of $119,710,774 compared to $105,682,151 in fiscal 1997.
Comparative pari-mutuel wagering and attendance figures for the fiscal years
ended October 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 25,789,351 $ 20,200,754
Off-track handle 93,921,423 85,481,397
------------- ---------------
Total in-state wagering $ 119,710,774 $ 105,682,151
============= ===============
Out-of-state simulcast handle $ 219,765,627 $ 165,823,806
============= ===============
Attendance:
On-track 189,439 109,982
Off-track 391,271 389,149
------------- ---------------
Total Attendance 592,710 499,131
============= ===============
</TABLE>
The $5,588,597, or 27.7%, increase in the on-track handle is primarily due to
the opening of the new racing facility in November 1997.
The Company believes that the $8,440,026, or 9.9%, increase in off-track handle
is primarily due to the Company transmitting better simulcasting signals and
higher quality racing in the Company's live racing meet. The $53,941,821, or
32.5%, increase in out-of-state handle is the result of those same factors as
well as telecasting the Company's races to new out-of-state markets. During the
fiscal year ended October 31, 1998, New York took full cards from the Company
through the end of January increasing the New York handle by $21 million over
the same period last year plus significant handle increases from Kentucky,
Pennsylvania, Texas and Las Vegas.
19
<PAGE> 20
Net Income. The Company reported net income of $8,973,671 for the fiscal year
ended October 31, 1998 compared to net income of $9,773,214 for the previous
fiscal year. In both fiscal years, the Company received significant litigation
settlements as described herein, and in fiscal 1998 the Company also reported a
$3.36 million income tax benefit as described herein. In addition, as previously
reported, in fiscal 1997, the Company received video poker franchise fee relief
of approximately $1.92 million which was not available in fiscal 1998. The
Company anticipates that net income for fiscal 1999 will be substantially below
net income for fiscal 1998 because the Company does not expect to record an
income tax benefit in fiscal 1999 similar to that recorded in fiscal 1998 and
the Company may not receive any significant litigation recoveries in fiscal
1999.
Operating Revenues. As a result of the increases in total attendance and
wagering on the Company's races, the Company's fiscal 1998 operating revenues
increased by $5,804,832, or 18.7%, from the prior fiscal year. This included
increases of $2,919,060, or 14.5%, in pari-mutuel commissions, $37,268, or
7.74%, in breakage, $1,366,471, or 23.8%, in host track fees, $553,084, or
23.6%, in video poker revenue, and $456,199, or 154%, in admissions revenue.
Admission revenues include admissions to box seats and suites that were
unavailable prior to the opening of the new racing facility in November 1997. In
addition, net concessions revenues increased by approximately $586,417, or
65.8%, as a result of the opening of the new clubhouse and grandstand
facilities. The Company believes that operating revenues in fiscal 1999 will be
slightly higher than in fiscal 1998 due to further increases in attendance and
wagering.
Racing Expenses. Total racing expenses increased by $5,743,309, or 20.4%, over
fiscal year 1997, primarily as a result of increases in purses, racing salaries
and related benefits, host track fees, repairs and maintenance, advertising,
utilities, program paper, forms and other supplies, and miscellaneous racing
expenses, arising from the increased pari-mutuel handle and attendance at the
new racing facility. Depreciation expense increased by $258,826, or 16.3%, also
due to the opening of the new facility. The Company expects that racing expenses
in fiscal 1999 will be slightly higher than in fiscal 1998.
General and Administrative Expenses. General and administrative expenses for the
fiscal year ended October 31, 1998 increased $967,079, or 22.9%, from the prior
fiscal year. The increase was a result of an increase in salaries and related
taxes and benefits, property taxes, miscellaneous expenses, and office expenses
primarily due to the opening of the new facility. The Company expects general
and administrative expenses in fiscal 1999 to be at approximately the same level
as in fiscal 1998.
Other Income (Expenses). Total other income decreased $1,283,610, or 46.7%, from
the prior fiscal year primarily as a result of a decrease of $1,921,362 in video
poker franchise fee relief partially offset by an increase of $328,220 in Jazz
and Heritage Festival beverage sales income due to the improved weather during
this year's festival compared to the prior year's festival, and a decrease of
$246,683 of interest expense due to the repayment of the construction loans in
late 1997. The Company expects other income (expense) to be at approximately the
same level as in fiscal 1998.
20
<PAGE> 21
Interest income increased by $52,469 from the prior fiscal year primarily as a
result of the Company investing its operating funds in overnight repurchase
securities through a financial institution beginning in July 1998. Short term
loan closing costs decreased by $127,105 due to the lack of financing needs of
the Company compared to the prior fiscal year. The decrease in the gain on sale
of property, plant and equipment of $115,602 related to the prior year sale of
certain temporary racing facilities, which were used prior to the opening of the
Company's new facility.
Extraordinary Items. During the fiscal year ended October 31, 1998, the Company
recorded an extraordinary item of $6,272,628, which was net of $3,683,924 of
income taxes, as a result of a fire-related litigation settlement with ADT
discussed further herein. During the fiscal year ended October 31, 1997, the
Company recorded an extraordinary item of $9,022,525, which was net of
$5,298,944 of deferred income taxes, as a result of a fire-related litigation
settlement with an insurance agent and broker.
Income Taxes. In addition to the components of net income previously discussed,
net income for fiscal 1998 included an income tax benefit of $3,364,232 compared
to income tax expense of $775,288 in fiscal 1997. The income tax benefit was
attributable to a reduction of the excess of basis for financial reporting
purposes over basis for tax purposes of property constructed with the recoveries
in the fire-related litigation and insurance settlements due to the current
recognition of the gain on the receipt of the recoveries for tax purposes.
Fiscal 1997 Compared to Fiscal 1996
Revenues. During the fiscal years ended October 31, 1997 and 1996, the Company
derived its pari-mutuel income by conducting live racing meets of 88 days during
each fiscal year, and in the operation of its tele- tracks for off-track
wagering. In each of those periods, the Company utilized temporary tent
facilities and its new tele-track at the Fair Grounds Race Course when
conducting live racing because the new grandstand and clubhouse had not been
completed. 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 Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana. 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 $105,682,151 compared to $96,474,002 in fiscal 1996.
Comparative pari-mutuel wagering and attendance figures for the fiscal years
ended October 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 20,200,754 $ 20,180,889
Off-track handle 85,481,397 76,293,113
------------ ------------
Total in-state wagering $105,682,151 $ 96,474,002
============ ============
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Out-of-state simulcast
handle $165,823,806 $116,590,172
============ ============
Attendance:
On-track 109,982 110,162
Off-track 389,149 316,687
------------ ------------
Total Attendance 499,131 426,849
============ ============
</TABLE>
Although in previous fiscal years the Company had experienced declines in
on-track handle due to the limited amenities afforded by the temporary
facilities, the on-track handle for fiscal 1997 was slightly higher than that
for fiscal 1996.
The $9,188,284, or 12%, increase in off-track handle was primarily the result of
the continued success and growth of the Jefferson Parish tele- track facility
opened in October 1995. Handle at the Jefferson Parish facility during fiscal
1997 increased 31.4% over the prior fiscal year.
The $49,233,634, or 42%, increase in out-of-state handle in fiscal 1997 was the
result of continued efforts to telecast the Company's races to new out-of-state
markets. During the fiscal 1997 race meet, there were 14 new markets telecasting
the Company's races, including tracks in Ohio, Oklahoma, Florida, Michigan and
New York, which accounted for approximately $27.7 million, or 56%, of the handle
increase.
Net Income. For the fiscal year ended October 31, 1997, the Company reported net
income of $9,773,214, compared to net income of $879,698 in fiscal 1996. The
increase was primarily the result of litigation settlements and increases in
mutuel income compared to fiscal 1996, partially offset by an increase in racing
expenses over the prior fiscal year. These are described in more detail below.
Operating Revenues. As a result of the increase in total wagering, the Company's
fiscal 1997 operating revenues increased by $3,483,759, or 13%, from fiscal
1996. This included increases of $1,887,524, or 10%, in pari-mutuel commissions,
$73,651, or 22%, in uncashed mutuel tickets, $1,322,817, or 30%, in host track
fees and $391,126, or 20%, in video poker revenue. The Jefferson Parish
tele-track facility accounted for a significant portion of the increase in video
poker revenues. The increase was partially offset by increased pari-mutual taxes
of $222,074.
Racing Expenses. Total racing expenses increased by $2,708,119, or 10.7%, over
fiscal 1996, primarily as a result of increases in purses, racing salaries,
contracts and services, host track fees, advertising, rent, repairs and
maintenance and program paper, forms and other supplies arising out of increased
pari-mutuel handle. This increase was partially offset by a decrease in
depreciation expense and utilities and miscellaneous expense. The temporary
racing facilities which the Company had utilized since January 1994 became fully
depreciated in January 1997.
General and Administrative Expenses. General and administrative expenses for the
fiscal year ended October 31, 1997 decreased $316,155, or 7.2%, from fiscal 1996
primarily due to decreases in salaries resulting from a reduction in general and
administrative staff. The decrease was partially offset by increases in
contracts and services for the
22
<PAGE> 23
construction of the new main facility and by increases in office expense.
Other Income (Expenses). Total other income decreased $741,052, or 21.2%, from
fiscal 1996 primarily as a result of a decrease in Jazz and Heritage Festival
revenue and video poker franchise fee relief revenue, partially offset by a gain
of $115,602 on the sale of the salvage from the removal of the fully depreciated
temporary facilities, and a decrease in interest expense of $525,131 relating to
the bank financing discussed elsewhere herein.
The Jazz and Heritage Festival revenue decreased $486,218, or 31.7%, due to
inclement weather during the first weekend of the seven-day festival in fiscal
1997. The Company receives revenues on the sale of certain beverages during the
festival, which is held at the Fair Grounds Race Course.
Video poker franchise fee relief revenue decreased $967,600, or 33.5%, compared
to fiscal 1996. The revenue provided by the franchise fee relief legislation
described elsewhere herein was available for only a few months during fiscal
1997, compared to the entire 12 months in fiscal 1996. No franchise fee relief
was available to the Company after fiscal 1997 because the Company had repaid
all indebtedness incurred to construct its new main grandstand and racing
facility.
Extraordinary Items. During fiscal year 1997, the Company received settlement
payments in connection with the fire-related litigation described herein in the
aggregate amount of $14,321,469. These proceeds were net of related income tax
expense of $5,298,944.
Income Taxes. In addition to the components of net income previously discussed,
the net income for fiscal 1997 included income tax expense of $775,288 compared
to an income tax expense of $294,896 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $2,384,974 during the fiscal year ended
October 31, 1998, compared to a decrease of $1,072,178 during the fiscal year
ended October 31, 1997. The increase in cash and cash equivalents in fiscal 1998
was the result of cash provided by operations of $1,895,735, and cash provided
by investing activities of $5,761,248, partially offset by cash used for
financing activities of $5,272,009. Cash used in financing activities related
primarily to the repayment of construction loans. The cash provided by investing
activities was primarily the receipt of $9.9 million of proceeds from
fire-related litigation settlement, partially offset by construction
expenditures for the Company's new racing facility.
In December 1997, the Company entered into a settlement with ADT and its excess
coverage insurers, pursuant to which the Company was paid $37 million, which was
deposited in escrow, and agreed to indemnify ADT and its insurers against the
judgment creditor claims of the intervening insurers. In December 1997, the
Company received $7.7 million of such funds net of litigation expenses. The
balance of the settlement funds were placed in escrow pending resolution of
subrogation claims. The Company received an additional $2.2 million, net of
litigation expenses,
23
<PAGE> 24
in July 1998 pursuant to the settlement described below. The claims of the
Company and the Company's primary property insurer to the remaining escrow funds
are the subject of a civil action now on appeal to the Louisiana Supreme Court.
In connection with the receipt of the settlement proceeds described herein, the
Company recognized an extraordinary gain for the fiscal year ended October 31,
1998 of approximately $6.27 million, which is net of income taxes of
approximately $3.68 million. As a result of this and other settlements received,
the Company has a total net deferred tax liability of approximately $7.08
million. Approximately $3.0 million of this tax liability was due for the tax
year ended October 31, 1998 and has been paid. The remaining deferred tax
liability is to be paid over approximately 39 years in accordance with Internal
Revenue Service regulations. The Company intends to fund these future tax
obligations through operations.
In April 1, 1998, in connection with the ongoing fire-related litigation, the
court entered judgment in favor of the Company and against Travelers, awarding
the Company an additional $2,410,905 in business interruption insurance, legal
interest on the sum from May 13, 1994 until paid, statutory penalties in the
amount of $222,128 and attorney's fees in an amount to be set by the court. In
August 1998, the Court denied all post trial motions and certified the judgment
as being immediately appealable. Under the Mary Carter agreement referred to
above, the liability insurers of the agent and broker are entitled to share in
this award. The Company estimates that its portion of the award, when paid, will
be approximately $1.5 million to $2 million, depending upon the amount of
interest accrued and attorney's fees awarded. This award has been appealed. As
of October 31, 1998, the Company had received cumulatively, since the December
1993 fire, approximately $44 million of insurance proceeds resulting from fire
loss claims submitted to the Company's insurance carriers or in litigation
settlements.
The Company's new main grandstand and racing facility was substantially
completed in November 1997 and was opened for the start of the Company's 1997-98
live racing meet. The total cost of constructing the facility, excluding the
tele-track facility at the Fair Grounds Race Course that was completed in late
1994, through October 31, 1998 was approximately $31 million. Of such amount,
approximately $2.5 million was spent during the fiscal year ended October 31,
1998.
All of the Company's indebtedness to First National Bank of Commerce (now "Bank
One") ("FNBC"), which was incurred in connection with the construction of the
new facility, has been repaid and the Company has no significant indebtedness
remaining relating to construction of those facilities. As a result, video poker
franchise fee relief, which was made available to the Company by legislation
enacted in 1994, has not been available to the Company since fiscal 1997. During
the 1994-1997 fiscal years, the Company received approximately $5.5 million in
the aggregate in franchise fee relief.
On April 14, 1998, the Company entered into a working capital line of credit
agreement with FNBC. The line of credit is for $2.5 million with interest at 8%
on amounts outstanding. In addition to monthly interest payments on outstanding
balances, any amounts outstanding plus unpaid accrued interest are due on April
14, 1999.
24
<PAGE> 25
There were no amounts drawn down or outstanding on this line of credit during
the fiscal year ended October 31, 1998. The line of credit is secured by a
commercial guarantee by Finish Line Management Corporation and a collateral
mortgage note dated November 30, 1995 with all related amendments.
In January 1999, the Company received a $1 million advance from its video poker
operator which it will repay in six equal installments beginning in February
1999.
The Company believes that the combination of existing cash, cash from future
operations, any additional amounts received in the fire-related litigation,
funds available under its working capital line of credit, and the Company's
increased capacity to incur short-term and long-term indebtedness, if necessary,
will be sufficient to fund the Company's cash requirements for the foreseeable
future.
Year 2000 Compliance
A significant part of the Company's operations are dependent on computer systems
and applications. These systems are either owned by the Company or are provided
under contract by third party technology or other service providers. If these
systems are not year 2000 compliant, the Company could experience system
failures or miscalculations leading to disruption of business operations.
In fiscal 1998 the Company began, and is now continuing, its assessment of its
data processing functions to determine if they are year 2000 compliant. The
Company has recently formed a task force to assist in its assessment of year
2000 readiness. Based in part on that assessment, in fiscal 1998 the Company
purchased and installed an updated version of its accounting software that its
vendor states is year 2000 compliant and is now in the process of testing that
compliance.
The Company has also made, and is continuing to make, inquiries to third party
providers as to their compliance and is in the process of obtaining written
assurances from certain vendors, as well as other race tracks with which the
Company interfaces, as to their year 2000 readiness. The Company's plant and
equipment, as well as the providers of services to the plant and equipment, are
also being reviewed to determine whether they are year 2000 ready. The services
of certain of those providers, including electrical and telephone services, are
essential to the Company's ability to operate. The Company's most significant
third party technology services provider is Autotote, which performs the
totalisator functions for the Company. The Company's contract with Autotote
provides that the services are to be year 2000 compliant. Autotote has
contracted with a third party consultant to attain such compliance. If Autotote
does not become compliant, the Company's operations could be adversely affected
until another provider of the totalisator function can be found. The video
services provided by another third party provider are also important to the
Company's operations. These services include the production of the telecast
signal at the Fair Grounds Race Course and distribution to the Company's
tele-tracks and to other wagering facilities within and outside Louisiana. The
Company is working with such provider to ensure that the software applications
that provide the graphical enhancements and other distinguishing features to the
telecast signals are year 2000 compliant. The video poker devices at the
25
<PAGE> 26
Company's facilities are provided by another third party provider. The Company
is working with that provider to ensure that such equipment is year 2000
compliant.
To date, the Company has incurred costs of approximately $30,000, including the
cost and time of Company employees, to address year 2000 issues. Although the
Company has not completed its assessment of its facility, data processing and
other equipment and, accordingly, has not determined the total costs associated
with its efforts to prepare for year 2000, the Company currently believes that
the costs of addressing its year 2000 transition will not have a material
adverse effect on the Company's financial condition or business operations. The
Company has not yet completed a contingency plan addressing failure to be year
2000 ready.
Impact of Inflation
To date, inflation has not had a material effect in the Company's operations.
Forward-Looking Statements
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results may
differ materially. Therefore, the inclusion of such forward-looking information
should not be regarded as a representation by the Company that the objectives or
plans of the Company will be achieved. Such statements include, but are not
limited to, the Company's expectations regarding the source of funds for payment
of its deferred tax liability, the recovery of additional funds in the
fire-related litigation, the adequacy of its cash, cash equivalents and
borrowings available under its new working capital line of credit to fund future
operations, and the Company's increased capacity to incur short-term and
long-term indebtedness. Words such as "anticipates," "believes," "expects,"
"estimated" and variations of such words and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements contained
herein involve numerous risks and uncertainties, and there are a number of
factors that could cause actual results to differ materially including, but not
limited to, the following: changing economic, market and business conditions,
the ability of the Company to compete effectively for top horses and trainers
necessary to field high-quality horse racing; the ability of the Company to grow
its share of the interstate simulcast market; a substantial change in allocation
of live racing days; the impact of competition from alternative gaming
(including riverboat casinos and lotteries) and other sports and entertainment
options in those markets in which the Company operates; and the Company's
success in attracting new patrons and generating additional revenue for purses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes an overnight sweep arrangement pursuant to which available
funds are invested in daily repurchase agreements which are collateralized by
U.S. government or agency securities. The Company also has deposits in U.S.
Treasury money market funds which are short-term in nature and guaranteed by the
U.S. government. Because of the short-term duration of the financial instruments
held by the Company, management does not believe that its financial instruments
are materially sensitive to changes in interest rates.
26
<PAGE> 27
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, 1998 and 1997
Statements of Operations for the Three Years Ended October 31, 1998
Statements of Changes in Stockholders' Equity for the Three Years Ended
October 31, 1998
Statements of Cash Flows for the Three Years Ended October 31, 1998
27
<PAGE> 28
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, 1998 and 1997, 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, 1998. These financial statements 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,
1998 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended October 31, 1998 in conformity with
generally accepted accounting principles.
Rebowe & Company
Metairie, Louisiana
January 8, 1999
28
<PAGE> 29
FAIR GROUNDS CORPORATION
BALANCE SHEETS
October 31
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,577,730 $ 5,192,756
Cash and cash equivalents -
restricted 118,218 2,643,702
Accounts receivable 1,078,638 1,348,530
Mutuel settlements 139,964 38,892
Investment securities -
available for sale -- 592,878
Inventory 118,357 95,303
Deferred income taxes 59,940 --
Prepaid expenses 437,322 353,167
------------ ------------
Total Current Assets 9,530,169 10,265,228
------------ ------------
OTHER ASSETS 283,411 125,516
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 43,870,295 40,587,514
Land improvements 4,348,135 4,340,935
Automotive equipment 931,424 849,201
Machinery and equipment 2,432,433 2,365,837
Furniture and fixtures 366,575 326,898
------------ ------------
Total 51,948,862 48,470,385
Less: accumulated depreciation
and amortization (15,904,346) (14,057,590)
------------ ------------
Depreciable property - net 36,044,516 34,412,795
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 39,330,797 37,699,076
------------ ------------
TOTAL ASSETS $ 49,144,377 $ 48,089,820
============ ============
</TABLE>
29
<PAGE> 30
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
October 31
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 46,894 $ 5,318,903
Accounts payable 1,493,409 1,097,655
Construction contract payable 58,732 1,156,726
Accrued liabilities:
Deferred purses 7,930,825 7,425,179
Host track fees 374,251 416,516
Uncashed mutuel tickets 446,786 364,246
Other 369,135 524,850
Deferred revenues 275,701 140,840
Income taxes payable 450,185 121,000
------------ ------------
Total Current Liabilities 11,445,918 16,565,915
------------ ------------
DEFERRED INCOME TAXES 7,043,865 9,846,104
------------ ------------
Total Liabilities 18,489,783 26,412,019
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY
Capital stock - no par value;
authorized 600,000 shares,
469,940 shares issued and
468,580 shares outstanding 1,525,092 1,525,092
Additional paid-in capital 1,936,702 1,936,702
Retained earnings 27,228,325 18,254,654
Unrealized loss on investment
securities-available for sale -- (3,122)
------------ ------------
Total 30,690,119 21,713,326
Less: treasury stock at cost,
1,360 shares at 1998
and 1997 (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 30,654,594 21,677,801
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 49,144,377 $ 48,089,820
============ ============
</TABLE>
See accompanying notes to financial statements.
30
<PAGE> 31
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Pari-mutuel commissions $ 23,751,342 $ 20,832,282 $ 18,944,758
Breakage 518,822 481,554 439,204
Uncashed mutuel tickets 476,740 404,405 330,754
------------ ------------ ------------
Total 24,746,904 21,718,241 19,714,716
Less: pari-mutuel tax (3,164,575) (2,792,092) (2,570,018)
------------ ------------ ------------
Commission income 21,582,329 18,926,149 17,144,698
Host track fees 7,100,025 5,733,544 4,410,727
------------ ------------ ------------
Total Mutuel Income 28,682,354 24,659,693 21,555,425
Concessions 2,194,788 1,485,227 1,467,187
Admissions (net of taxes) 753,069 296,870 351,569
Parking 45,090 20,581 14,967
Video poker 2,899,761 2,346,677 1,955,551
Programs and forms 1,598,562 1,491,628 1,474,947
Miscellaneous 611,467 679,583 676,854
------------ ------------ ------------
Total Operating
Revenues 36,785,091 30,980,259 27,496,500
------------ ------------ ------------
RACING EXPENSES
Purses 13,339,805 11,041,607 9,558,545
Salaries and related
taxes and benefits 7,058,677 5,702,370 5,092,149
Contracts and services 2,197,555 2,333,814 2,069,396
Depreciation 1,847,867 1,589,041 1,810,257
Host track fees 2,785,281 2,482,926 2,178,478
Program paper, forms and
other supplies 1,774,943 1,587,615 1,545,963
Utilities 1,204,332 674,071 711,022
Advertising and promotion 1,152,101 917,817 781,935
Cost of sales -
concessions 716,918 593,774 541,691
Repairs and maintenance 733,474 383,343 300,332
Rent 326,973 304,138 303,006
Miscellaneous 704,012 488,113 497,736
------------ ------------ ------------
Total Racing
Expenses $ 33,841,938 $ 28,098,629 $ 25,390,510
------------ ------------ ------------
</TABLE>
(Continued)
31
<PAGE> 32
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and related
taxes and benefits $ 1,483,233 $ 993,049 $ 1,225,683
Insurance 827,775 866,343 950,882
Property taxes 811,104 399,541 395,863
Legal, audit and director
fees 1,051,024 1,129,814 1,203,501
Contracts and services 179,880 197,603 159,521
Office expenses 408,938 350,090 303,398
Miscellaneous 307,663 166,098 180,485
----------- ----------- -----------
Total General and
Administrative
Expenses 5,069,617 4,102,538 4,419,333
----------- ----------- -----------
LOSS FROM OPERATIONS (2,126,464) (1,220,908) (2,313,343)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Jazz and Heritage Festi-
val income - net 1,376,973 1,048,753 1,534,971
Video poker franchise fee
revenue -- 1,921,362 2,888,962
Interest expense (19,752) (266,435) (791,566)
Interest income 130,821 78,352 31,990
Short-term loan closing
costs (24,042) (151,147) (159,702)
Gain on sale of
property, plant and
equipment -- 115,602 20,362
Gain (Loss) on sale of
securities available
for sale (725) 398 (37,080)
----------- ----------- -----------
Total Other Income $ 1,463,275 $ 2,746,885 $ 3,487,937
----------- ----------- -----------
</TABLE>
(Continued)
32
<PAGE> 33
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE
INCOME TAXES, AND
EXTRAORDINARY ITEM $ (663,189) $1,525,977 $1,174,594
PROVISION (BENEFIT) FOR
INCOME TAXES (3,364,232) 775,288 294,896
----------- ---------- ----------
INCOME BEFORE
EXTRAORDINARY ITEM 2,701,043 750,689 879,698
EXTRAORDINARY ITEM -
INSURANCE PROCEEDS AS A
RESULT OF DECEMBER 1993
FIRE (net of $3,683,924
and $5,298,944 of related
income taxes in
1998 and 1997,
respectively) 6,272,628 9,022,525 --
----------- ---------- ----------
NET INCOME $ 8,973,671 $9,773,214 $ 879,698
=========== ========== ==========
</TABLE>
(Continued)
33
<PAGE> 34
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PER SHARE OF COMMON STOCK:
INCOME BEFORE
EXTRAORDINARY ITEM $ 5.74 $ 1.60 $1.87
EXTRAORDINARY ITEM,
NET OF INCOME TAXES 13.35 19.20 --
------ ------ -----
NET INCOME $19.09 $20.80 $1.87
====== ====== =====
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 35
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, 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) -- -- -- (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
Net Income -- -- 9,773,214 -- -- 9,773,214
Change in unrealized loss
on securities available
for sale -- -- -- 14,003 -- 14,003
---------- ----------- ----------- -------- -------- ------------
Balance, October 31, 1997 1,525,092 1,936,702 18,254,654 (3,122) (35,525) 21,677,801
Net Income -- -- 8,973,671 -- -- 8,973,671
Change in unrealized loss
on securities available
for sale -- -- -- 3,122 -- 3,122
---------- ----------- ----------- -------- -------- ------------
Balance, October 31, 1998 $1,525,092 $ 1,936,702 $27,228,325 $ -- $(35,525) $ 30,654,594
========== =========== =========== ======== ======== ============
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 36
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 8,973,671 $ 9,773,214 $ 879,698
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 1,847,867 1,589,041 1,810,257
Gain on sale
of property -- (115,602) (20,363)
Provision (benefit) for
deferred income taxes (3,318,085) 5,836,263 244,896
Loss (Gain) on sale of
investment securities (725) (398) 37,080
Gain from fire (9,900,000) (14,321,469) --
Change in assets and
liabilities:
(Increase) decrease in:
Accounts receivable and
mutuel settlements 168,820 (438,071) 91,868
Inventory (23,054) (11,055) (3,683)
Prepaid expenses (84,155) 72,816 131,050
Cash and cash
equivalents -
restricted 2,525,484 (2,509,773) 20,980
Increase (decrease) in:
Accounts payable and
accrued liabilities 736,220 524,312 (5,541)
Deferred purses 505,646 732,124 1,026,843
Deferred revenues 134,861 134,840 (44,149)
Income taxes payable 329,185 71,000 50,000
----------- ------------ -----------
Total Adjustments (7,077,936) (7,279,246) 3,339,238
----------- ------------ -----------
Net cash provided by
operating activities 1,895,735 1,337,242 4,218,936
----------- ------------ -----------
</TABLE>
(Continued)
36
<PAGE> 37
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended October 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures (3,478,477) (12,965,686) (5,650,671)
Construction contract
payable (1,097,994) 1,156,726 --
Purchase of securities
available for sale (750,000) (500,000) --
Proceeds from sale of
securities available
for sale 1,346,725 108,852 270,454
Deposits and other assets (157,895) (23,832) (30,420)
Proceeds from sale of
property (1,111) 126,371 91,964
Proceeds from fire
litigation settlements 9,900,000 14,321,469 --
----------- ------------ ------------
Net cash provided by
(used for) investing
activities 5,761,248 2,223,900 (5,318,673)
----------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from short-term
borrowings 2,272,253 17,083,985 10,307,260
Principal repayments
of short-term borrowings (7,544,262) (21,717,305) (4,061,179)
----------- ------------ ------------
Net cash provided by
(used for) financing
activities (5,272,009) (4,633,320) 6,246,081
----------- ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,384,974 (1,072,178) 5,146,344
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,192,756 6,264,934 1,118,590
----------- ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,577,730 $ 5,192,756 $ 6,264,934
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
37
<PAGE> 38
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
The Company conducts a live fall/spring race meet 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. Most of the Company's revenues and receivables are
dependent on patrons of horse racing and other horse racing facilities and
tele-tracks. This results in a concentration of risk and could be affected by
laws or economic conditions that affect the gaming industry.
Uninsured Cash Deposits
As of October 31, 1998 and 1997, the Company had deposits in various financial
institutions in the aggregate of $8,124,477 and $8,740,475, respectively. In
fiscal year 1998, $7,097,978 was invested in U.S. Government Securities which
are guaranteed by the Federal Government, but are not FDIC insured. The
remaining deposits exceeded insured limits as of October 31, 1998 and 1997 by
$787,598 and $3,339,415, 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, 1998, restricted assets totalled $118,218 relating to the
worker's compensation program. As of October 31, 1997, restricted assets
totalled $2,643,702, which included a certificate of deposit of $114,581 pledged
as a security deposit for the Company's worker's compensation program, an escrow
account of $674,360, and a money market account of $1,847,858 held by Bank One
and were restricted for construction payments.
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.
38
<PAGE> 39
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. For financial reporting purposes, leasehold improvements are amortized
over the lesser of the term of the related lease or the estimated useful life of
the asset.
Accounts Receivable
The Company has recorded accounts receivable from pari-mutuel wagering, video
poker and other activities. The majority of these receivables are settled at
least monthly and are considered fully collectable. No allowance for doubtful
accounts is considered necessary.
Deferred Revenues
Promotional fees and reserved seating deposits received by the Company are
deferred and recognized as income over the duration of the racing meet.
Investment Securities - Available for Sale
The Company classifies its investment securities as held to maturity or
available for sale based upon its ability and intent to hold such securities.
The Company has classified its securities as available for sale and reports them
at fair value with the unrealized gain or loss shown as a separate component of
stockholders' equity. The Company records realized gains and losses on
investment securities as they are sold, using the specific identification
method.
Fair Value Disclosures
Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosure
about Fair Value of Financial Instruments," is a part of a continuing process by
the FASB to improve information on financial instruments. The following methods
and assumptions were used by the Company in estimating its fair value
disclosures for such financial instruments as defined by the Statement:
Cash and Cash Equivalents -- The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Notes Payable -- The carrying amount of the Company's borrowings under its
line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
39
<PAGE> 40
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 live or simulcasted
race meet. Uncashed pari-mutuel tickets exceeding $250,000 per live or
simulcasted race meet are remitted to the State of Louisiana.
Income Taxes
The Company records income taxes in accordance with SFAS No. 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 No. 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. The most significant deferred tax items of the
Company relates to the deferred tax gain as a result of the December 1993 fire
as further discussed in Note 6.
Deferred Purses
Deferred purses include those amounts required by Louisiana law to be withheld
from commissions, video poker revenues, or out-of-state host fees earned by a
racing licensee and paid as purse supplements during the licensee's succeeding
live racing meet.
Net Income Per Share
Net income per share is determined by dividing net income 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 1998, 1997
and 1996.
40
<PAGE> 41
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 - STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Cash was paid during the following fiscal years for:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Interest $ 50,594 $454,457 $802,797
========== ======== ========
Taxes $3,154,626 $166,969 $ --
========== ======== ========
</TABLE>
The 1997 cash paid for interest includes capitalized interest of $214,103.
There were no noncash investing or financing activities for fiscal years ended
October 31, 1998, 1997, and 1996.
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE
At October 31, 1997, investment securities were classified as available for sale
and consisted of the following:
<TABLE>
<CAPTION>
1997 1997 Gross
Amortized Market Unrealized
Cost Value Loss
--------- --------- -----------
<S> <C> <C> <C>
Preferred and
common stocks $ 96,000 $ 92,878 $ (3,122)
========= ========= ===========
Corporate debt
securities $ 500,000 $ 500,000 $ --
========= ========= ===========
</TABLE>
There was no investment securities classified as available for sale at October
31, 1998.
During the fiscal years ended October 31, 1998 and 1997, proceeds from sales of
investment securities available for sale were $1,346,725 and $108,852
respectively, and gross realized gains (losses) from such sales were $(725), and
$398, respectively.
41
<PAGE> 42
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 4 - NOTES PAYABLE - CURRENT
<TABLE>
<CAPTION>
October 31
-------------------------
1998 1997
---------- ---------
<S> <C> <C>
First National Bank of Commerce
("FNBC"); 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
Jefferson Downs Corporation,
due October 31, 1998. $ -- $ 5,221,725
INAC Corp.; Installment note
insurance premium financing;
interest at 6.79%, final installment
due February 1999. 46,894 --
INAC Corp; Installment note
insurance premium financing;
interest at 6.69%, final installment
due February 1998. -- 97,178
----------- -----------
$ 46,894 $ 5,318,903
=========== ===========
</TABLE>
NOTE 5 - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
October 31
-----------------------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $ 3,197,655 $ 121,000 $ 50,000
State 486,269 -- --
----------- ---------- ---------
Total 3,683,924 121,000 50,000
Deferred (3,364,232) 5,953,232 (244,896)
----------- ---------- ---------
Total $ 319,692 $6,074,232 $(294,896)
=========== ========== =========
</TABLE>
Approximately $3.2 million and $5.3 million of the deferred income tax provision
is shown net of the extraordinary item - gain on fire on the Statement of
Operations for the year ended October 31, 1998 and 1997.
42
<PAGE> 43
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 5 - INCOME TAXES (CONTINUED):
For the fiscal years ended October 31, 1998 and 1997, the tax effects of
temporary differences that gave rise to significant 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
--------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Current deferred tax assets:
General liability insurance
reserves $ 59,940 $ 59,940
Net operating loss carry forwards -- --
----------- ------------
Total current deferred tax
assets 59,940 59,940
Current deferred tax
liabilities:
Deferred tax on gain from fire -- (264,846)
----------- ------------
Net current deferred tax
assets (liabilities) $ 59,940 $ (204,906)
=========== ============
Non-current deferred tax assets:
Book accumulated depreciation
in excess of tax $ 518,169 $ 218,034
----------- ------------
Total non-current deferred
tax assets 518,169 218,034
Non-current deferred tax
liabilities:
Deferred tax on gain from fire (7,562,034) (10,064,138)
----------- ------------
Net non-current deferred
tax liabilities $ 7,043,865 $ (9,846,104)
=========== ============
Valuation allowance,
beginning of year $ -- $ --
Change during the year -- --
----------- ------------
Valuation allowance,
end of year $ -- $ --
=========== ============
</TABLE>
43
<PAGE> 44
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 5 - 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, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
October 31
-------------------------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Expected tax provision
(benefit) $ 3,140,516 $ 5,388,132 $ 399,362
State income taxes 486,269 475,423 35,238
Change in valuation
allowance -- -- (119,253)
Additional realizable
carryback credits -- -- --
Additional realizable
carryforward net
operating losses -- -- --
Utilization of net
operating loss -- 251,000 --
Additional tax basis
attributable to
gain (3,364,232) -- --
Other 57,139 (40,323) (20,451)
----------- ----------- ---------
Actual tax provision $ 319,692 $ 6,074,232 $ 294,896
=========== =========== =========
</TABLE>
As of October 31, 1996, the Company had a net operating loss carryforward of
approximately $678,000 which was utilized in fiscal 1997.
As of October 31, 1998, the Company has recorded a non-current deferred tax
liability totaling $7,043,865 as a result of the deferred gain on the fire for
income tax purposes. The Company has reinvested all fire insurance and
litigation proceeds into its new facilities within the allowable replacement
period, therefore deferring the gain on the involuntary conversion. As a result,
the Company has a difference between the book and tax bases of such facilities.
This taxable difference will reverse with the scheduled depreciation of such
assets over the next 39 years.
44
<PAGE> 45
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Fire Related Litigation
The Company has been a party to a number of legal proceedings which arose 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:
Travelers Litigation
In May 1994, the Company filed an action in the 24th Judicial Court in the State
of Louisiana against Travelers Indemnity Company of Illinois ("Travelers") and
others. The Company contended that the insurance policy issued by Travelers
provided the Company with blanket coverage in the amount of $24.2 million in
excess of the $10 million of underlying coverage and, accordingly, that
Travelers was liable for the difference between $24.2 million and the amount
previously paid by Travelers (approximately $9.5 million), plus statutory
penalties of 10% of the amount not paid, interest, attorney's fees and costs.
The Company further contended that the insurance agent and the insurance broker
who arranged for the insurance were liable to the Company for any damages
sustained including any damages sustained because the amount of coverage was
less than that claimed by the Company. Travelers' position was that its
liability under such policy was limited to the amount which it had previously
paid.
In November 1996, the Company reached a joint settlement with the insurance
agent and broker pursuant to which the insurance agent and broker agreed paid a
total of $10,000,000 to the Company. The settlement has been reported as an
extraordinary item on the Company's Statement of Operations, net of related
income taxes. The settlement agreement included 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 in that litigation. The
Company's action against Travelers was tried in September 1997, and in April
1998 the trial court entered judgment in favor of the Company and against
Travelers, awarding the Company an additional $2,410,905 in business
interruption insurance, legal interest on that sum from May 1994 until paid,
statutory penalties in the amount of $222,128 and attorney's fees in an amount
to be set by the Court. The court later fixed the amount of attorney's fees at
$75,000. In August 1998, the trial court denied all post trial motions and
certified the judgment as being immediately appealable. Appeals by both the
Company and Travelers are now pending before the state court of appeals. Under
the Mary Carter agreement referenced above, the liability insurers of the agent
and broker are entitled to share in any recovery from Travelers.
ADT Litigation
In December 1994, the Company filed an action in the Civil District Court for
the Parish of Orleans, State of Louisiana against ADT Security
45
<PAGE> 46
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
Systems Mid-South, Inc. ("ADT"), which provided and maintained the fire alarm
system at the race track, and other defendants. The complaint sought 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 third party's insurance company, which insured the operator of the video
poker machines destroyed in the fire, intervened in the suit asserting
subrogation claims against the same defendants.
In late 1996, the Company and three insurance companies entered into settlements
with the manufacturer of a lighting ballast and an architect. After division of
the settlement proceeds among the Company and the three insurance companies and
the payment of various litigation expenses, the Company received approximately
$268,000. In March 1997, a jury trial was held on the remaining claims and
resulted in an award in favor of the Company and the subrogated insurance
companies of approximately $49.8 million in the aggregate in damages against
ADT, plus interest, of which approximately $31.8 million, plus interest, was
awarded to the Company and the balance to the subrogated insurance companies,
including approximately $4.25 million to the Company's primary property insurer.
The judgment was appealed to the Court of Appeals of Louisiana, Fourth Circuit,
by ADT, the Company and three of the subrogated insurance companies. In June
1997, the insurance company that insured the initial layer of ADT's liability
tendered approximately $9.3 million in partial settlement of the action. After a
dispute with the subrogated insurers over the division of these funds was
resolved in August 1997, the Company received approximately $4 million of those
proceeds after litigation expenses.
In December 1997, the Company entered into a settlement with ADT and ADT's
excess coverage insurers pursuant to which the Company was paid $37 million and
agreed to indemnify ADT and its insurers against the judgment creditor claims of
the four subrogated insurers. In December 1997, the Company received $7.7
million of such funds net of litigation expenses, and the balance of the
settlement funds was placed in escrow pending resolution of the subrogation
claims. The receipt of such funds has been reported as an extraordinary item on
the Company's Statement of Operations, net of related income taxes. In July
1998, the Company settled the subrogation claims of three of the four insurers,
as well as an action filed in April 1997 in United States District Court for the
Eastern District of Louisiana by those three insurers against the Company
seeking a declaratory judgement that a contract had been entered into by the
parties respecting the distribution of funds recovered in the ADT litigation.
Under the terms of this settlement, the three insurers received a total of
$12.97 million from the funds in escrow. At that time, the Company received an
additional $2.2 million from the funds in escrow, net of litigation expenses,
which has been reported as an extraordinary item on the Company's Statement of
Operations, net of related income taxes. Approximately $6.3 million is held in
escrow pending resolution of the claims between the Company and its primary
property insurer, and such funds are not reflected as an asset on the Company's
balance sheet as of October 31, 1998.
46
<PAGE> 47
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
In September 1998, the Court of Appeals, among other things, reversed the trial
court's award of $4.25 million to the Company's primary property insurer on its
subrogation claim, concluding that the trial court had erred in making that
award to the insurer when the Company had not been fully compensated for its
property loss. This decision rendered moot the remainder of the appeals. The
insurer appealed this decision to the Louisiana Supreme Court which recently
denied the appeal. The funds remaining in escrow will be paid out when the case
is concluded.
United National Litigation
The Company was a defendant, along with its general liability insurance carrier,
United National Insurance Company ("United National"), in a civil action filed
in December 1994 in the United States District Court for the Eastern District of
Louisiana by St. Paul Mercury Insurance Company ("St. Paul"), the insurer of the
computerized betting equipment at the race track. St. Paul alleged that it was
subrogated to its insured's rights to collect damages and that it had paid
approximately $1,175,000 to its insured for the loss of equipment in the fire.
Subsequently, United National filed a declaratory judgment action against the
Company, wherein it sought to deny coverage for St. Paul's subrogation claim.
The Company filed a counterclaim against United National, seeking coverage for
the St. Paul claim as well as payment for various other fire-related claims
previously denied by United National. This action was consolidated for trial
with the suit filed by St. Paul against the Company.
Both United National and the Company moved for summary judgment on the question
of whether the exclusion relied on by United National to deny coverage for the
various claims applied. In 1996, the United States District Court ruled that the
policy exclusion 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 Court of Appeals for the Fifth Circuit which held
that the claims were covered.
In May 1997, the St. Paul suit was settled pursuant to an agreement whereby ADT
agreed to pay an undisclosed sum and United National, as the Company's insurer,
agreed to pay $275,000. In February 1998, United National tendered $56,553 to
the Company for claims which it acknowledged were covered under the policy. In
November 1998, United National tendered an additional $11,818 to the Company for
claims which it acknowledged were covered under the policy. In December 1998,
the Company settled the balance of its claims against United National for an
additional $140,000 which has been paid by United National.
47
<PAGE> 48
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
Other Litigation
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust/civil RICO suit. This suit is currently in the discovery stage,
and the Company has filed a motion for summary judgment. Management of the
Company believes the action is without merit. Livingston had previously filed a
series of other legal actions against the Company which were resolved in the
Company's favor. The amount in question in this action has not yet been
determined but could be substantial.
A suit was also filed in state court in Louisiana in 1996 by Livingston against
the Company and the State of Louisiana seeking a judgment that the State
off-track betting law is unconstitutional. The trial court ruled in the
plaintiff's favor. The Louisiana Supreme Court reversed the trial court
decision, holding that the off-track betting statute is constitutional.
Livingston's request for rehearing was subsequently denied.
In 1996 a suit was filed in state court in Louisiana by the Louisiana Horsemen's
Benevolent and Protective Association ("HBPA") against the Company, the State of
Louisiana, and all other pari-mutuel wagering facilities operating in Louisiana.
The HBPA is seeking a larger portion of video poker proceeds. The Company
believes it is currently in compliance with the guidelines established by the
Louisiana State Police Gaming Division, which regulates compliance with
Louisiana's video poker law.
In July 1997, Evelyn Allen and other present or former security or concessions
employees of the Company filed an action in the United States District Court in
New Orleans claiming that the plaintiffs were entitled, under the Fair Labor
Standards Act, to overtime for hours worked over 40 in each work week from July
1994 to July 1997. Two of the plaintiffs also sought to recover damages for
alleged retaliatory discharge. In December 1998, the Company and the plaintiffs
reached a settlement agreement pursuant to which the Company will pay the
plaintiffs $100,000 in full settlement of all claims for overtime pay. The
retaliatory discharge claims were tried in December 1998. At the conclusion of
evidence, the court dismissed those claims. The plaintiffs' claim for attorneys
fees has not yet been resolved.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
48
<PAGE> 49
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
NOTE 7 - RELATED PARTY TRANSACTIONS
In April 1996, Bryan G. Krantz purchased 339,604 shares of the Company's stock
from a Trust which had previously acquired the shares from Marie G. Krantz. 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 due in April 2005 and
cannot be prepaid. The note is secured by a Stock Pledge Agreement in favor of
the Trust executed by Bryan G. Krantz and Marie G. Krantz, in her capacity as
Voting Trustee of a Voting Trust which at the time of such purchase, and
throughout the period referred to herein, held such shares. In April 1998, Bryan
G. Krantz transferred said 339,604 shares of the Company's common stock to
Finish Line Management Corporation ("Finish Line"), together with all of his
interest in the Voting Trust and the voting trust certificate issued by Marie G.
Krantz, as Voting Trustee, to Bryan G. Krantz representing a beneficial interest
in 339,604 shares of the Company's common stock. Finish Line assumed Bryan G.
Krantz's indebtedness to the Trust and agreed to be bound by the Stock Pledge
Agreement. Bryan G. Krantz owns 100% of the capital stock of Finish Line, having
acquired from Marie G. Krantz, as Voting Trustee, in March 1998 the 66.6% of the
outstanding capital stock of Finish Line not theretofore owned by him.
Accordingly, the transfer of the 339,604 shares of common stock from Bryan G.
Krantz to Finish Line did not constitute a change in beneficial ownership of
said 339,604 shares.
Marie G. Krantz, Chairman of the Board of Directors and Treasurer of the
Company, has voting control, as Voting Trustee, over the 339,604 shares of
common stock of the Company (72.27% of the outstanding common stock of the
Company) owned by Finish Line.
In August 1992, the Company entered into a Management Agreement with Finish Line
to operate five tele-track facilities previously operated by Jefferson Downs
Corporation ("Jefferson Downs"), all of the capital stock of which is owned by
Marie G. Krantz and Bryan G. Krantz, 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 receives a monthly payment of 0.1% of the gross
pari-mutuel handle at such facilities plus purse supplements, and Finish Line
receives 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, 1998, 1997 and 1996, the Company received $90,668, $82,655, and
$88,835, respectively, from Finish Line in accordance with the Management
Agreement. Accounts receivable (payable) from (to) Finish
49
<PAGE> 50
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
Line were $753,984 and $(124,324) at October 31, 1998 and 1997, respectively.
The following table reflects the host track fees and purse supplement receipts
from Finish Line for the fiscal years ended October 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Received by the Company
and Paid by Finish Line
for the Years Ended October 31
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Host track fees $ 297,035 $ 325,680 $ 363,275
========== ========== ==========
Purse supplement
receipts $4,788,281 $4,822,405 $4,337,179
========== ========== ==========
</TABLE>
Marie G. Krantz and Bryan G. Krantz each own 50% of the capital stock of
Continental Advertising, Inc. ("Continental"). During the fiscal years ended
October 31, 1998, 1997 and 1996, the Company made payments to Continental of
$502,000, $333,000, and $341,000, respectively, to reimburse Continental for
advertising expenses paid by it. As of October 31, 1998 and 1997, the Company
was due amounts included in accounts receivable of $6,614 and $41,869 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 was for an initial term of five years, with an
option by VSI to extend the term for an additional five years, which option was
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 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 each of fiscal years 1998, 1997 and 1995, 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.
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, 1998, 1997 and 1996, there
were a total of 315, 297, and 234 devices, respectively, in operation at all of
the Company's facilities. In addition, there were a total of 414, 428, and 419
devices in operation
50
<PAGE> 51
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
at the Finish Line facilities as of October 31, 1998, 1997 and 1996,
respectively.
Gross video poker revenues and related purse supplements for the years ended
October 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross video poker revenue $2,899,761 $2,346,677 $1,955,551
========== ========== ==========
Purse supplements $1,197,433 $ 981,097 $ 821,973
========== ========== ==========
</TABLE>
NOTE 8 - 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>
==============================================================================
Monthly
Location Lease Term Payment
- ------------------------------------------------------------------------------
<S> <C> <C>
St. Bernard Parish, January 1, 1995 to
Louisiana January 31, 1999 $ 6,000
- ------------------------------------------------------------------------------
LaPlace, Louisiana February 1, 1998 to
January 31, 1999 $ 4,420
February 1, 1999 to
January 31, 2000 $ 4,553
- ------------------------------------------------------------------------------
Bourbon Street - March 15, 1991 to
New Orleans, March 14, 1999 $10,000
Louisiana March 15, 1999 to
March 14, 2004 $13,125
- ------------------------------------------------------------------------------
Thibodaux, Louisiana October 1, 1998 to
September 30, 1999 $ 2,300
- ------------------------------------------------------------------------------
Metairie, Louisiana February 1, 1998 to
January 31, 1999 $ 9,000
February 1, 1999 to
January 31, 2000 $ 9,500
==============================================================================
</TABLE>
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.
51
<PAGE> 52
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
Future obligations over the primary lease terms, not including renewal periods,
of the Company's long-term leases as of October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending
October 31
-----------
<S> <C>
1999 353,475
2000 285,159
2001 186,000
Thereafter $ 374,063
----------
Total $1,198,697
==========
</TABLE>
The Company was a party to an agreement with Autotote Limited whereby Autotote
Limited was 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 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 Company entered into an
new agreement with Autotote Limited on November 21, 1997 until November 20, 2002
with the same terms as the old contract and pay Autotote Limited 0.0039% of the
total on-track pari-mutuel handle, plus fixed equipment rental fees for certain
equipment provided by Autotote. The minimum to be paid to Autotote Limited for
each year of the agreement was $200,000. No estimates of future obligations
under this agreement have been included in the above table. For the fiscal years
ended October 31, 1998, 1997, and 1996, the Company incurred $200,000 in minimum
rental fees and $647,187, $600,724 and $575,390, 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 9 - STOCK OPTIONS
The Company has a stock option plan whereby 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 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 has been reserved for issue and may be granted up to February 28, 2001.
No options were granted or exercised during fiscal years ended October 31, 1998,
1997 and 1996. No options were outstanding at October 31, 1998.
NOTE 10 - DEFINED CONTRIBUTION PLAN
The Company's 401(k) 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.
52
<PAGE> 53
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1998, 1997 and 1996
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, 1998, 1997, and 1996.
NOTE 11 - SUBSEQUENT EVENTS
In January 1999, the Company received an advance from Video Services, Inc. in
the amount of $1,000,000 to be repaid in six equal installments beginning in
February, 1999.
53
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors of the Company contained in the section
entitled "Election of Directors" of the definitive Information Statement for the
1999 Annual Meeting of Shareholders to be filed with the Commission on or about
February 26, 1999 is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections entitled "Executive Compensation" and
"Board Committees and Compensation" of the definitive Information Statement for
the 1999 Annual Meeting of Shareholders to be filed with the Commission on or
about February 26, 1999 is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section entitled "Security Ownership" of the
definitive Information Statement for the 1999 Annual Meeting of Shareholders to
be filed with the Commission on or about February 26, 1999 is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section entitled "Election of Directors" and
"Executive Compensation" of the definitive Information Statement for the 1999
Annual Meeting of Shareholders to be filed with the Commission on or about
February 26, 1999 is incorporated herein by reference in response to this item.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The following audited financial statements are included in Part
II, Item 8:
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- ----
<S> <C> <C>
Report of Independent Certified Public
Accountants 29
Balance Sheets, October 31, 1998 and 1997 30
Statements of Operations for the Three Years
Ended October 31, 1998 32
Statements of Changes in Stockholder's
Equity for the Three Years Ended
October 31, 1998 36
Statements of Cash Flows for the Three
Years Ended October 31, 1998 37
Notes to Financial Statements 40
(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.
3.1 *
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).
3.2 *
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
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C>
exhibit 2 to Amendment No. 3 to Schedule 13D filed by
such persons on October 13, 1993).
10.1 *
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).
10.2 *
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).
10.3 *
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).
10.4 *
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).
10.5 *
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).
10.6 *
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).
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C> <C>
10.7 *
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.)
10.8 *
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.)
10.9 62
Lease Agreement dated August 1, 1995 between Fair
Grounds Corporation and Robert J. and Iris Ann Saia.
27 69
Financial Data Schedule
</TABLE>
* Incorporated herein by reference as indicated.
57
<PAGE> 58
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: February 10, 1999 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.
Name Capacity Date
PRINCIPAL EXECUTIVE OFFICER:
/s/ Bryan G. Krantz
- ---------------------------------
Bryan G. Krantz President February 10, 1999
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Gordon M. Robertson
- ---------------------------------
Gordon M. Robertson Chief Financial February 10, 1999
Officer
58
<PAGE> 59
DIRECTORS:
/s/ Katherine F. Duncan
- --------------------------
Katherine F. Duncan Director February 10, 1999
/s/ Richard Katcher
- --------------------------
Richard Katcher Director February 10, 1999
/s/ Marie G. Krantz
- --------------------------
Marie G. Krantz Director February 10, 1999
and Chairman
of the Board
/s/ Bryan G. Krantz
- --------------------------
Bryan G. Krantz Director February 10, 1999
and President
/s/ Ronald J. Maestri
- --------------------------
Ronald J. Maestri Director February 10, 1999
/s/ Charmaine R. Morel
- --------------------------
Charmaine R. Morel Director February 10, 1999
/s/ Wayne E. Thomas
- --------------------------
Wayne E. Thomas Director February 10, 1999
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
3.1 *
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).
3.2 *
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).
10.1 *
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).
10.2 *
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).
10.3 *
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).
</TABLE>
60
<PAGE> 61
<TABLE>
<S> <C> <C>
10.4 *
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).
10.5 *
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).
10.6 *
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).
10.7 *
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.)
10.8 *
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.)
10.9 62
Lease Agreement dated August 1, 1995 between
Fair Grounds Corporation and Robert J. and
Iris Ann Saia.
27 69
Financial Data Schedule
</TABLE>
* Incorporated herein by reference as indicated.
61
<PAGE> 1
EXHIBIT 10.9
LEASE OF COMMERCIAL PROPERTY * UNITED STATES OF AMERICA
LEASE BY ROBERT J. AND IRIS * STATE OF LOUISIANA
ANN SAIA
TO FAIR GROUNDS CORPORATION * PARISH OF JEFFERSON
********************************************************************************
Robert J. and Iris Ann Saia (herein collectively called Lessor) hereby lease to
Fair Grounds Corporation (herein called Lessee), the following described
premises:
Building and all improvements located upon and within the property
described in Exhibits "B" and "C" annexed hereto.
This lease is for a term of six (6) months, commencing August 1,1995 and ending
January 31, 1996.
This lease is made for and in consideration of the covenants herein contained
and for a monthly rental of $8,200.00; the said rental to be payable monthly in
advance on the first day of each and every month during the term of this lease.
If Lessee shall fail to pay any rental within five (5) days after same is due,
Lessee shall be obligated to pay a late charge equal to the greater of One
Hundred and no/100 ($100.00) or five percent (5%) of any rental payment or
portion thereof not paid when due.
The net rental hereinabove fixed for the term hereof means that, in addition
to the said amounts of actual rental, the Lessee will pay all taxes levied by
the State and all political subdivisions on the leased property for the period
covered by this lease, and will pay all insurance and premiums on such policies
of fire and windstorm, as the Lessors reasonably direct be carried against the
leased property during the period covered by this lease. The Lessor shall not
require the carrying of fire insurance beyond the full insurable value of the
leased property, nor the carrying of windstorm insurance beyond fifty percent
(50%) of the amount of fire insurance carried.
Within thirty (30) days after Lessor's receipt of tax bills, Lessor shall
notify Lessee in writing and shall include an invoice showing the full amount of
such taxes. A legible copy of the original tax bills shall be attached to said
invoice for Lessee's review.
The taxes and insurance premiums herein provided to be paid by Lessee are a
part of the rent for the leased premises, and, should the Lessee fail to pay
promptly and punctually any of said taxes, or insurance premiums, the Lessor
may, but need not, pay same and recover repayment thereof at once from lessee
with interest at the rate of eight percent (8%) per annum from date of payment
of same by Lessor.
The Lessee will make all necessary repairs, excluding repairs to the roof to
keep the leased property in a good order as it now is, ordinary
62
<PAGE> 2
wear and tear excepted, and is also to keep all toilets in repair to conform
with good sanitary conditions. The Lessee is to have the right to sublet the
leased premises in whole, or part, to any subtenant for the conduct of any
mercantile business of unobjectionable character.
Lessor will not be responsible for damage caused by leaks in the roof, by
bursting of pipes by freezing or otherwise, or by any vices or defects of the
leased property, or the consequences thereof, except in the case of positive
neglect or failure to take action toward remedying of such defects within
reasonable time after having written notice from Lessee of such defects and the
damage caused thereby. Should Lessee fail to promptly so notify Lessor, in
writing, of any such defects, Lessee will become responsible for any damage
resulting to Lessor or other parties.
The said premises and appurtenances, including locks, keys, lighting, air
conditioning & heating, and plumbing systems, and fixtures and attachments, are
delivered in good order and Lessee is obligated to keep all of same in like
order during the term of this lease; to keep in repair all plumbing, even when
injured by freezing; to keep the drains and plumbing clean and to so deliver
them at the expiration of this lease; to pay all bills for water, electricity
and similar charges as may be attributable to leased premises, to comply with
all Laws and Ordinances of the State, City, Board of Health and other public
bodies, now in force or which may hereafter be enacted of whatever character, at
Lessee's own expense; and to notify Lessor or agent, in writing, any time the
leased premises will be unoccupied, so that necessary vacancy permits may be
obtained from Lessor's insurance companies, and upon Lessee's failure to do so,
Lessor may take such steps as Lessor thinks necessary for Lessor's protection,
including retaking possession of the premises without relieving or impairing
Lessee's liability.
No repair shall be due Lessee except such as may be rendered necessary by
fire or other casualty, not occasioned by fault or negligence of Lessee. Lessor
will not be responsible for damages of any sort to any persons or property,
however occasioned, unless caused by the negligence of Lessor; and Lessee shall
hold Lessor harmless from any claims by and or liability to third persons
however arising, unless caused by negligence of Lessor. Lessor shall at all
times have the right to enter the premises for the purpose of inspection and of
making such, if any repairs as Lessor may be bound for or elect to make.
The care, maintenance and repairs of machinery, glass or plate glass are
assumed by Lessee, together with all liability or claims fire damages, and
Lessee shall maintain liability insurance to the extent of $500,000.00.
Should Lessee be unable to obtain possession on date of commencement of
lease because of delays by tenants, or should there be any other delay in
granting possession, not caused by fault of Lessor, this lease shall not be
affected thereby, and Lessee shall not be entitled to any damages beyond the
remission of rent for such term during which he is deprived possession.
The destruction in whole or in part of the leased premises, by fire or other
casualty, will not vitiate this lease, but the Lessor shall rebuild or repair
said leased premises as speedily as practicable, and except as hereinafter
stated, substantially as said leased premises were before
63
<PAGE> 3
such destruction, and the Lessee shall resume occupancy immediately upon the
rebuilding or the repairing being completed, and shall be entitled simply to a
credit for the period during which the Lessee shall have been excluded from the
occupancy of the premises; provided, however, that where the destruction of the
leased premises in whole or in part occurs at so late a period that the Lessee
could not be restored to the enjoyment of the leased premises for a period of at
least six (6) months before the expiration of this lease or any extensions
thereof, the Lessee shall be under no obligation to resume possession, and the
Lessor shall be under no obligation to rebuild or repair.
Lessee is bound not to do or suffer any act to be done or omitted, which
would forfeit the insurance, or increase the rate thereof, on any property of
Lessor or contents thereof, to whomsoever belonging; not to transfer this lease,
in whole or in part, without the written consent of Lessor, which written
consent shall not be unreasonably withheld; at the end of this lease to return,
by actual delivery of the keys, without further notice, possession of the said
premises and appurtenances, broom-cleaned and free of trash, in like good order
as received, the usual decay, wear and tear only excepted; to replace all broken
glass and to remove any and all signs painted or placed in or upon the leased
premises before leaving.
The Lessee shall not be considered in default as to any obligation or
condition of this lease, and the lease shall not be considered as violated in
any degree unless the status claimed to be a default or violation shall continue
for five (5) days after written notice thereof is delivered by registered mail
to the Lessee at the leased premises by or on behalf of the Lessor.
Lessee is obligated not to make any additions or alterations whatsoever to
the premises without written permission. All additions, alterations or
improvements made by Lessee with or without consent of Lessor, no matter how
attached (except movable trade fixtures), must remain the property of the
Lessor, unless otherwise stipulated herein, Lessee however, expressly waiving
all right to compensation thereof.
Lessee shall comply in every respect at Lessee's own expense, with the rules
and regulations of the Louisiana Fire prevention Bureau, or those of any similar
bureau or association in existence at the time.
Should Lessee at any time violate any of the conditions of this lease, or
fail to comply with any of Lessee's obligations hereunder, or fail to pay the
rent or water bill or similar charges punctually at maturity, as stipulated, or
upon the filing of a bankruptcy, receivership or respite petition by or against
Lessee, or upon Lessee's suspension, failure or insolvency, the rent for the
whole unexpired term of this lease shall, without putting Lessee in default, at
once become due and exigible, and in any such event, Lessor shall have the
option either at once to demand the entire rent for the whole term or to
immediately cancel this lease without putting the Lessee in default; Lessee to
remain responsible for all damages or losses suffered by Lessor; Lessee hereby
assenting thereto and expressly waiving the legal notice to vacate the premises.
Failure to strictly and promptly enforce these conditions shall not operate as a
waiver of Lessor's rights, Lessor expressly reserving the right to always
enforce prompt payment of rent, or to cancel this lease, regardless of any
indulgences or extensions previously granted. Failure
64
<PAGE> 4
to comply with any condition or obligation of this lease of this lease will make
Lessee liable for any loss or damage sustained. Should Lessee at any time use
the leased premises or any option thereof for any illegal or unlawful purpose,
or commit, or permit or tolerate the commission therein of any act made
punishable by fine or imprisonment under the laws of the United States or the
State of Louisiana, or any ordinance of this City or Parish, the remedies set
forth in the preceding paragraph shall be available to Lessor immediately
without necessity of giving any notice to Lessee.
At the expiration of this lease, or its termination for other causes, Lessee
is obligated to immediately surrender possession. Lessee also expressly waives
any notice to vacate at the expiration of this lease and all legal delays, and
hereby confesses judgment with costs placing Lessor in possession to be executed
at once. Should Lessor allow or permit Lessee to remain in the leased premises
after the expiration of this lease, this shall not be construed as a
reconduction of this lease.
No auction sales shall be conducted on the premises without written consent
of the Lessor.
Should any claim in favor of Lessor upon this lease be placed in the hands
of an agent or attorney to give special attention to the enforcement of such
claim, Lessee shall in order to protect Lessor fully against all expenses, pay
as fees and compensation to such agent or attorney, an additional sum of ten
percent (10%) of the amount due on such claim, provided that the amount is over
$1,000.00, and twenty percent (20%) if that amount be $1,000.00 or under,
together with all costs, charges and expenses.
Lessor hereby reserves the right to post and to keep posted on the property,
signs, "For Sale" or "For Rent", during the sixty days preceding the expiration
of this lease, and Lessee hereby consents to allow the premises to be inspected
on an order from Lessor or agent. in the event that Lessee is absent from the
City, at any time during the last mentioned period, keys to the premises will be
left with some representative of Lessee in order that the property may be shown,
and Lessor or agent will be advised in writing where the keys may be obtained.
ADDITIONAL TERMS
1. Lessor warrants that it has full right and authority to lease the
Leased Premises upon the terms and conditions herein set forth;
and the Lessee shall peacefully and quietly hold and enjoy the
Leased Premises for the full term hereof so long as it does not
default in the performance of any of its covenants hereunder.
Lessor further warrants as of the Commencement Date that: a)
Lessor is fully cognizant of the intended use of the demised
premises by Lessee, and that such use is in full conformity with
all municipal and/or parish zoning ordinances; and b) the
building or structure to be occupied by Lessee meets or exceeds
ail minimum municipal, parish or state building codes and
regulations.
2. Lessee shall have the right and option to extend the terms of the lease
for the number of terms and for the number of years for
65
<PAGE> 5
each term set out herein. Lessee shall give notice of its intent to extend
its terms hereunder by written notice to Lessor given not sooner than one
(1) year nor later than sixty (60) days prior to the end of the then
current terms. If extended hereunder, the extended term shall be under all
of the same terms and conditions as set out in the lease, except as
modified herein:
(a) Number of Option Terms: See Exhibit "A".
(b) Length of Option Terms: See Exhibit "A".
(c) Annual Basic Rental for
Extended Term: See Exhibit "A".
3. Lessor guarantees Lessee access to a minimum of 65 parking spaces upon the
leased premises and within one hundred (100) feet thereof. All such
parking spaces shall be hard-surfaced or shelled, and Lessee shall have
exclusive use thereof.
4. Lessee may commence the installation of improvements prior to August 1,
1995 but in no event shall rental term begin prior to that date and Lessee
shall not be responsible for rentals prior thereto.
5. Lessor hereby grants to Lessee a right of first refusal for the purchase
of the leased premises, upon Lessor's receipt of a bona fide offer to
purchase from a third party. Such right of first refusal shall be
exercised in the following mariner:
Upon Lessor's receipt of a bona fide offer to purchase from a third party,
Lessor shall notify Lessee in writing, via certified or registered mail
within five (5) calendar days of receipt of such offer, and shall include
therewith a copy of such offer.
Upon receipt by Lessee of such notice from Lessor, Lessee shall have ten
(10) calendar days to exercise, in writing, Lessee's right of first refusal
by tendering to Lessor, via certified or registered mail, either Lessee's
offer to purchase or Lessee's refusal to exercise such right of first
refusal.
6. Lessor shall install or reinstall the basic kitchen equipment, movables
and plant previously used in the leased premises by the former tenant, and
shall make the basic kitchen plant operational.
Lessor does not make any representations as to the appropriateness of said
equipment for Lessee's intended use, but does warrant that all such
equipment shall be operational on or before Commencement date of the Lease.
Lessee shall thereafter be responsible for the maintenance of said equipment
for the term of the lease and any renewals or extensions thereof.
All such kitchen equipment, movables and fixtures shall be listed and
inventoried, and shall remain the property of Lessor, with Lessee having the
exclusive use of same for the term of the Lease and any renewals or
extensions thereof.
66
<PAGE> 6
The provisions contained in this paragraph also include all tables, chairs,
stools, etc. currently in place on the premises.
7. If for any reason beyond the control of the parties, it becomes impossible
to receive proper television transmission signals, then this lease may be
terminated by Lessee upon sixty (60) days written notice.
8. This lease shall be subject to and predicated upon review and approval by
the Parish of Jefferson and the Louisiana State Racing Commission.
9. * Lessee agrees to place Lessor a ten thousand dollar ($10,000.00) rental
deposit. This deposit will become due upon the execution of this lease.
10. If for any reason beyond the control of the parties, Lessee loses
its license to place and operate video poker machines or OTB
activities on the premises, then this lease may be terminated by
Lessee upon sixty (60) days written notice.
11. Lessor shall be responsible for protection of the leased premises
from termite and/or wood destroying insect infestation and damage.
This lease is to take effect in Louisiana, and is to be governed and controlled
by laws of that state.
Executed at New Orleans, Louisiana, this 1st day of August, 1995.
LESSOR:
------
/s/Diedra Fifee By: /s/Robert J. Saia
- -------------------------------- -----------------------------
/s/Carlisa F. De Cosola By: /s/Iris Ann Saia
- -------------------------------- ------------------------------
(witnesses) Title: Owners
---------------------------
LESSEE: Fair Grounds
Corporation ------
/s/Diedra Fifee By:/s/Bryan G. Krantz
- -------------------------------- ------------------------------
/s/Carlisa F. De Cosola Title: President
- --------------------------------
(witnesses)
* Deposit will be tendered upon completion of provisions in # 8.
67
<PAGE> 7
EXHIBIT "A"
Rent for the subject property to be paid according to the following schedule:
Primary term: Six(6) months at $8,200.00 per month.
First Option: Eighteen(18) months at $8,500.00 per month.
Second Option: Twenty-four(24) months at $9,000.00 per month.
Third Option: Twenty-four(24) months at $9,500.00 per month.
Fourth Option: Twenty-four (24) months at $10,000.00 per month.
As additional consideration for the subject lease, Lessor will receive four (4)
"free admission" clubhouse passes for the Fair Grounds Race Track for the entire
term of this lease.
Fair Grounds Corporation
/s/Robert J. Saia
- -----------------------------
/s/Iris Ann Saia By:/s/Bryan G. Krantz
- ----------------------------- --------------------------
Lessor Lessee
8/1/95 8/1/95
- ----------------------------- -----------------------------
Date Date
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FAIR GROUNDS CORP FOR THE TWELVE MONTH PERIOD ENDED
OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 7,696
<SECURITIES> 0
<RECEIVABLES> 1,079
<ALLOWANCES> 0
<INVENTORY> 118
<CURRENT-ASSETS> 9,530
<PP&E> 55,235
<DEPRECIATION> 15,904
<TOTAL-ASSETS> 49,144
<CURRENT-LIABILITIES> 11,446
<BONDS> 0
1,525
0
<COMMON> 0
<OTHER-SE> 29,130
<TOTAL-LIABILITY-AND-EQUITY> 49,144
<SALES> 28,682
<TOTAL-REVENUES> 36,785
<CGS> 0
<TOTAL-COSTS> 33,842
<OTHER-EXPENSES> 5,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (663)
<INCOME-TAX> (3,364)
<INCOME-CONTINUING> 2,701
<DISCONTINUED> 0
<EXTRAORDINARY> 6,273
<CHANGES> 0
<NET-INCOME> 8,974
<EPS-PRIMARY> 19.09
<EPS-DILUTED> 19.09
</TABLE>
