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SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement [ ] Confidential, for Use of the
Commission Only (as permitted
[ ] Definitive Information Statement by Rule 14c-5(d)(2))
Fair Grounds Corporation
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(Name of Registrant As Specified in Charter)
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and 0-11.
(1) Title of each class of securities to which transaction
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
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[ ] Check box if any part of the fee is offset as provided by Exchange
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FAIR GROUNDS CORPORATION
1751 Gentilly Boulevard
New Orleans, Louisiana 70119
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FAIR GROUNDS CORPORATION
1751 Gentilly Boulevard
New Orleans, Louisiana 70119
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Fair Grounds Corporation:
Please take notice that a special meeting of shareholders of Fair
Grounds Corporation (the "Company") will be held on , 2000, at 2:00 p.m.,
Central Time, at the Fair Grounds Race Course, 1751 Gentilly Boulevard, New
Orleans, Louisiana, for the purpose of considering and voting upon proposals to
amend the Company's Articles of Incorporation to (i) effect a reclassification
of the common shares of the Company in the form of a reduction of authorized
shares and a reverse stock split, authorize the payment of cash in lieu of
fractional shares, and provide a cash payment of $40.00 per share of outstanding
common shares in lieu of the issuance of any resulting fractional shares and
(ii) eliminate the requirement that directors of the Company have actual
ownership or all legal or constructive control of at least 400 common shares of
the Company.
The Board of Directors has fixed the close of business on , 2000
as the record date for the determination of shareholders entitled to notice of
and to vote at the annual meeting and at any adjournment thereof. A list of such
shareholders will be available for inspection at the time and place of meeting.
All shareholders are cordially invited to attend the meeting at which
sandwiches and refreshments will be served.
By Order of the Board of Directors
David R. Sherman
Secretary
, 2000
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FAIR GROUNDS CORPORATION
1751 GENTILLY BOULEVARD
NEW ORLEANS, LOUISIANA 70119
INFORMATION STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
, 2000
INTRODUCTION
This Information Statement is being furnished to shareholders of Fair
Grounds Corporation (the "Company"), in connection with a special meeting of
shareholders which is to be held on , 2000, at 2:00 p.m., Central Time, at
the Fair Grounds Race Course, 1751 Gentilly Boulevard, New Orleans, Louisiana.
The telephone number of the Company is (504) 944-5515. This Information
Statement is being first sent or given to shareholders on or about , 2000.
At the special meeting, the Company's shareholders will consider and
vote upon two proposed amendments to the Company's Articles of Incorporation.
One of the proposed amendments (the "Reclassification Amendment") effects a
reclassification of the common shares of the Company in the form of a reduction
of authorized shares and a reverse stock split, authorizes the payment of cash
in lieu of fractional shares, and provides a cash payment of $40.00 per share of
outstanding common shares in lieu of the issuance of any resulting fractional
shares. The other proposed amendment (the "Director Share Ownership Amendment")
eliminates the requirement that directors of the Company have actual ownership
or all legal or constructive control of at least 400 common shares of the
Company. The Reclassification Amendment and the Director Share Ownership
Amendment are sometimes referred to in this Information Statement as the
"Proposed Amendments."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY
THE TRANSACTION DESCRIBED IN THIS INFORMATION STATEMENT HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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SUMMARY
The following is a summary of certain information contained in this
Information Statement. It is not intended to be a complete explanation of all
the matters which it covers, and much of the information contained in this
Information Statement is not covered by this summary. The information contained
in this summary is qualified in all respects by reference to the detailed
discussion of these matters contained elsewhere in this Information Statement.
Shareholders are urged to read this Information Statement, including the
annexes, in its entirety.
This Information Statement contains certain forward-looking statements
that are based upon the beliefs and assumptions of, and information available
to, the management of the Company at the time such statements are made. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the Company. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", or
variations of such words and similar expressions are intended to identify such
forward-looking statements. The statements are not guaranties of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PURPOSE OF THE MEETING
At the special meeting of shareholders of the Company, shareholders
will consider and vote on two proposed amendments to the Company's Articles of
Incorporation.
One proposed amendment (the "Reclassification Amendment") effects a
reclassification of the common shares of the Company in which the number of
common shares the Company is authorized to issue is reduced from 600,000 to
3,000 and each 200 common shares of the Company issued and outstanding or held
as treasury shares on the effective date of the reclassification is combined
into 1 common share of the Company, unless that combination results in the
reclassification constituting a "business combination" within the meaning of
Section 12:132 of the Business Corporation Law of Louisiana, in which case the
largest whole number of shares less than 200 that does not result in the
reclassification constituting a business combination will be combined into 1
common share of the Company (the "Reverse Stock Split"). The Reclassification
Amendment provides that no fractional shares will be issued in connection with
the Reverse Stock Split and authorizes the payment of cash in lieu of fractional
shares. Pursuant to the Reclassification Amendment, each person who would
otherwise be entitled to receive a fractional share will receive a cash payment
in the amount of $40.00 per share for each common share held by that person
immediately prior to the effectiveness of the Reverse Stock Split that is not
combined with other common shares to constitute a whole share as a part of the
Reverse Stock Split. For example, if the Reverse Stock Split is effected at a
ratio of 1 new common share for each 200 common shares outstanding, a person who
holds of record 250 common shares immediately prior to the effectiveness of the
Reverse Stock Split will be entitled to receive, following the Reverse Stock
Split, 1 new common share of the Company and a cash payment of $2,000.00,
representing $40.00 per share for each of the 50 common shares which was not
combined into a whole share. Assuming the same ratio of 1 new common share for
each 200 common shares
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outstanding, a person who holds of record fewer than 200 common shares at the
effective time will receive a cash payment of $40.00 per share for each of that
person's shares and will no longer be a shareholder of the Company. See "The
Reverse Stock Split."
The other proposed amendment (the "Director Share Ownership Amendment")
eliminates the requirement in the Company's Articles of Incorporation that
directors of the Company have actual ownership or all legal or constructive
control of at least 400 common shares of the Company. The Reclassification
Amendment and the Director Share Ownership Amendment are sometimes referred to
in this Information Statement as the "Proposed Amendments."
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting will be held on , 2000 at 2:00 p.m., Central
Time, at the Fair Grounds Race Course, 1751 Gentilly Boulevard, New Orleans,
Louisiana for the purpose of considering and voting upon the Proposed
Amendments. The Board of Directors is not soliciting proxies in connection with
the special meeting and proxies are not requested from shareholders.
VOTING SECURITIES AND RECORD DATE
Common shares, with no par value, are the only voting securities of the
Company. Holders of record of common shares outstanding at the close of business
on , 2000 will be entitled to one vote for each common share held of
record on the record date upon each matter presented to the shareholders to be
voted upon at the special meeting. At the close of business on , 2000,
the Company had outstanding 468,580 common shares. The presence, in person or
by proxy, of a majority of the common shares of the Company outstanding on the
record date will constitute a quorum for the transaction of business at the
special meeting.
REQUIRED VOTE
Pursuant to the Company's Articles of Incorporation and the Business
Corporation Law of Louisiana, the affirmative vote of the holders of a majority
of the common shares which are present in person or by proxy at the special
meeting is required to approve each of the Proposed Amendments. Any proxies sent
to the Company which are marked "abstain" with respect to the approval of the
Proposed Amendments will be counted for the purpose of determining the number of
common shares represented at the meeting but will have the same effect as a
negative vote for the purpose of determining whether the requisite vote has been
obtained.
EXCHANGE OF CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
If the Reverse Stock Split is effected, each 200 common shares of the
Company issued and outstanding or held as treasury shares on the effective date
of the Reverse Stock Split will be combined into 1 common share of the Company,
unless that combination would result in the reclassification constituting a
"business combination" within the meaning of Section 12:132 of the Business
Corporation Law of Louisiana, in which case the largest whole number of shares
less than 200 that will not result in the reclassification constituting a
business combination will be combined into 1 common share of the Company. No
fractional shares will be issued in connection with the Reverse Stock Split.
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Instead, each person who would otherwise be entitled to receive a fractional
share will receive a cash payment in the amount of $40.00 per share for each
common share held by that person immediately prior to the effectiveness of the
Reverse Stock Split that is not combined with other common shares to constitute
a whole share as a part of the Reverse Stock Split.
Shareholders should not send in their stock certificates now. If the
Reverse Stock Split is approved and effected, the Company or its transfer agent
will send shareholders instructions for submitting their stock certificate(s) in
exchange for certificates representing new common shares, if any, and cash in
lieu of fractional shares. See "Special Factors - Exchange of Certificates and
Payment for Fractional Shares."
FAIRNESS OF THE REVERSE STOCK SPLIT
The Board of Directors believes that the Reverse Stock Split is fair to
the Company and to its shareholders. However, the Board of Directors is not
making any recommendation with respect to the manner in which shareholders vote
their shares inasmuch as the members of the Board of Directors and the executive
officers, including Marie G. Krantz and Bryan G. Krantz, beneficially own enough
shares to approve the Reclassification Amendment. See "Special Factors -
Fairness of the Reverse Stock Split."
VALUATION AND OPINION OF DUFF & PHELPS
Duff & Phelps, LLC ("Duff & Phelps") was engaged by the Board of
Directors of the Company to assist the Board in determining the fair market
value of the Company's common shares and to provide an opinion to the Board as
to the fairness of the cash consideration to be paid in lieu of the issuance of
fractional shares as part of the Reverse Stock Split. Duff & Phelps has advised
the Board that, in its opinion, $40.00 per share to be paid in lieu of the
issuance of fractional shares is fair from a financial point of view. See
"Special Factors Valuation Report and Opinion of Duff & Phelps."
FINANCING OF THE REVERSE STOCK SPLIT
The Board estimates that the total cost to be incurred by the Company
in the Reverse Stock Split for payment of fractional share interests, including
transactional expenses of approximately $150,000, will be approximately
$1,225,000. The Company intends to finance the transaction from working capital
and, if necessary, the Company's outstanding line of credit. See "Financing of
the Reverse Stock Split."
CONDUCT OF THE COMPANY'S BUSINESS AFTER THE REVERSE STOCK SPLIT
If the Reverse Stock Split is effected, the Company intends to
terminate the registration of its common shares under the Securities Exchange
Act of 1934, as amended (the "1934 Act"). Thereafter, the Company will cease the
filing of periodic reports, proxy and information statements and other reports
and documents otherwise required to be filed with the Securities and Exchange
Commission (the "SEC"). See "Special Factors - Reasons for the Reverse Stock
Split," and "Special Factors - Conduct of the Company's Business After the
Reverse Stock Split."
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REASONS FOR THE REVERSE STOCK SPLIT
The Board believes that neither the Company nor its shareholders
derives any material benefit from the continued registration of the Company's
common shares under the 1934 Act and that the monetary expense and burden to
management of continued registration significantly outweigh any benefits that
may be received by the Company or its shareholders as a result of such
registration. See "Special Factors - Reasons for the Reverse Stock Split."
CURRENT BUSINESS OF THE COMPANY
The Company 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. In addition to its live racing operations, the
Company operates five "tele-tracks" for off-track betting 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 wagering
and food and beverage services to the public and receives revenues from such
services. Video poker wagering is conducted at all locations other than the two
facilities located in St. Tammany Parish.
FEDERAL INCOME TAX CONSEQUENCES
The receipt of new common shares in exchange for presently outstanding
common shares will not result in recognition of gain or loss to the shareholder.
The receipt of cash by a shareholder pursuant to the Reverse Stock Split will be
a taxable transaction for federal income tax purposes. See "Special Factors -
Federal Income Tax Consequences."
APPRAISAL RIGHTS; ESCHEAT LAWS
Pursuant to the Business Corporation Law of Louisiana, there will be no
appraisal rights for dissenting shareholders if the Reverse Stock Split is
approved. Under state escheat laws, any cash for fractional interests not
claimed by the shareholder entitled to it may escheat to, and be claimed by,
various states. See "Special Factors - Appraisal Rights; Escheat Laws."
GENERAL INFORMATION
VOTING SECURITIES AND RECORD DATE
Common shares, with no par value, are the only voting securities of the
Company. Holders of record of common shares outstanding at the close of business
on , 2000 will be entitled to one vote for each common share held of record on
the record date upon each matter presented to the shareholders to be voted upon
at the special meeting. At the close of business on , 2000, the Company had
outstanding [468,580] common shares. The presence, in person or by proxy, of a
majority of the common shares of the Company outstanding on the record date will
constitute a quorum for the transaction of business at the special meeting.
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REQUIRED VOTE
Pursuant to the Company's Articles of Incorporation and the Business
Corporation Law of Louisiana, the affirmative vote of the holders of a majority
of the common shares who are present in person or by proxy at the special
meeting is required to approve each of the Proposed Amendments. Any proxies sent
to the Company which are marked "abstain" with respect to the approval of the
Proposed Amendments will be counted for the purpose of determining the number of
common shares represented at the meeting but will have the same effect as a
negative vote for the purpose of determining whether the requisite vote has been
obtained.
The directors and executive officers of the Company have advised the
Company that they intend to vote their common shares in favor of the Proposed
Amendments. The directors and executive officers of the Company beneficially
own, in the aggregate, 344,535 common shares of the Company which constitute
approximately 73.5% of the outstanding common shares. See "Beneficial Ownership
of Common Shares."
THE REVERSE STOCK SPLIT
The Board of Directors of the Company has adopted a resolution, subject
to shareholder approval, that the Company's Articles of Incorporation be amended
to effect a reclassification of the common shares of the Company in which (i)
the number of common shares that the Company is authorized to issue is reduced
from 600,000 shares, with no par value, to 3,000 shares, with no par value, (ii)
each 200 common shares issued and outstanding or held as treasury shares on the
effective date of the amendment is combined into 1 new common share, unless that
combination results in the reclassification constituting a "business
combination" within the meaning of Section 12:132 of the Business Corporation
Law of Louisiana, in which case the whole largest number of shares less than 200
which does not result in the reclassification constituting a business
combination will be combined into 1 new common share of the Company and (iii) in
lieu of issuing any fractional shares resulting from the reclassification, the
Company is authorized to pay and pays to any person who would otherwise be
entitled to receive a fractional share a cash payment in the amount of $40.00
per share for each common share held by that person immediately prior to the
effectiveness of the Reverse Stock Split that is not combined with other common
shares to constitute a whole share as a part of the Reverse Stock Split.
If the Reverse Stock Split is effected at a ratio of one new common
share for each 200 outstanding common shares, approximately 350 of the current
413 record holders will cease to be shareholders of the Company, permitting the
Company to deregister its common shares under the 1934 Act since it will have
fewer than 300 record holders.
The text of the Reclassification Amendment effecting the Reverse Stock
Split is as follows:
That Article VI of the Articles of Incorporation be deleted and the
following be inserted in lieu thereof:
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ARTICLE VI
The total number of shares of this Corporation shall be Three Thousand
(3,000) common shares of no par value. All common shares shall, upon
issuance, be deemed fully paid stock and not liable to any further call
or assessment. Such common shares may be issued by the Corporation from
time to time by the Board of Directors thereof, without the necessity
of any authority by the shareholders, except as otherwise required by
law. The Corporation may, in lieu of issuing fractional shares or
scrip, pay to any person who would otherwise be entitled to receive a
fractional share an amount in cash equal to the fair value of such
fractional share, as determined by the Board of Directors. All of the
voting rights of this Corporation shall be vested in the holders of
common shares.
Upon the effectiveness of this amendment, each common share of the
Corporation issued and outstanding or held by the Corporation as a
treasury share at such time shall be reclassified and converted into a
fractional share equal to the product of (a) one (1) and (b) one
two-hundredth (1/200) or such other fraction determined as set forth
below (the "Conversion Fraction"). If the reclassification of the
common shares of the Corporation using a Conversion Fraction of one
two-hundredth (1/200) constitutes a "Business Combination" within the
meaning of Section 132 of the Business Corporation Law of Louisiana
(LSA-R.S. 12:132), then the Conversion Fraction shall be a fraction the
numerator of which is one (1) and the denominator of which is the
largest whole number less than two hundred (200) that does not result
in such reclassification and conversion being a Business Combination,
in each case, as determined by the Board of Directors of the
Corporation. In lieu of issuing any fractional shares resulting from
such reclassification and conversion, the Corporation shall pay to each
person who would otherwise be entitled to receive a fractional share an
amount in cash equal to the product of (aa) Forty and no/100 Dollars
($40.00) and (bb) the fraction of a share to which such person would
otherwise be entitled and (cc) the reciprocal of the Conversion
Fraction.
The Board of Directors intends to file the Reclassification Amendment
as soon as is reasonably practicable following approval by the shareholders.
However, the Board of Directors has reserved the right to abandon the Reverse
Stock Split at any time prior to its effectiveness, even after the approval
thereof by shareholders, if circumstances arise which, in the opinion of the
Board of Directors, make such abandonment advisable, such as, but not limited
to, (i) any legal action or proceeding concerning the Reverse Stock Split or, in
the opinion of the Board of Directors, materially adversely affecting the
Company, being instituted or threatened in any court or by or before any
governmental agency, or (ii) there shall have been, in the opinion of the Board
of Directors, any material change in the business, financial condition or
operations of the Company which in the opinion of the Board of Directors makes
such abandonment advisable.
SPECIAL FACTORS
BACKGROUND OF THE PROPOSED REVERSE STOCK SPLIT
In late 1999, the Company's management began considering the benefits
and detriments of the Company's "going private." Management determined that the
Company spends approximately
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$80,000 each year in satisfying its obligations under the 1934 Act and noted
that the Company also incurs intangible costs to the extent that compliance with
the 1934 Act diverts management's attention from the business of the Company.
Management determined that the Company derived little, if any, of the benefits
usually associated with being a public company in that there is no significant
trading market for the common shares of the Company and the Company has not
raised, and does not presently intend to raise, capital or effect acquisitions
with its common shares.
Management examined possible alternatives for going private and
presented the concept of going private to the Board of Directors at a meeting of
the Board of Directors on June 27, 2000, at which all directors other than
Richard Katcher were present. At that meeting, management expressed its views,
as outlined above, as to the benefits and detriments of going private and the
possible alternatives for going private, including a tender offer, a merger or a
reverse stock split. In addition, counsel for the Company reviewed the
provisions of Louisiana law related to certain "business combinations" as set
forth in Sections 12:132-12:134 of the Business Corporation Law of Louisiana
(the "Fair Price Law") and the special voting requirements that apply to such
transactions under the Fair Price Law. At that meeting, the Board authorized
management and counsel for the Company to explore the advantages and
disadvantages of a reverse stock split as a means of going private as well as
the engagement of a financial advisor to assist in determining the fair market
value of the Company's common shares in the event the Board decided to proceed
with a going private transaction. Subsequent to that meeting, management and
counsel for the Company reviewed various information about several financial
advisors and communicated directly with two financial advisors, one of which was
Duff & Phelps, L.L.C. ("Duff & Phelps"). A representative of Duff & Phelps was
invited to make a presentation to the Company's Board of Directors.
The Board of Directors again discussed the concept of going private at
a meeting held on July 19, 2000, at which all of the directors were present. At
that meeting a representative of Duff & Phelps made a presentation about the
financial advisory services provided by Duff & Phelps and its qualifications to
provide a valuation report and fairness opinion, including its experience in the
gaming industry. The Board authorized management to continue its analysis of the
advisability of the Company going private through a reverse stock split and
approved the engagement of Duff & Phelps to prepare a valuation of the Company's
common shares and, if requested by the Board, to render an opinion with respect
to the fairness, from a financial point of view, of any consideration to be
received by the Company's shareholders in connection with a reverse stock split.
At a special meeting of the Company's Board of Directors held on August 15,
2000, Duff & Phelps made an oral presentation on its preliminary findings with
respect to the value of the Company's common shares and was available to answer
questions regarding those findings. All of the members of the Board other than
William K. Caldwell, Jr. were present at the August 15, 2000 meeting.
Thereafter, at a special meeting held on August 29, 2000, at which all of the
directors were present, Duff & Phelps made a presentation to the Board and
advised the Board that in its opinion the fair market value of the Company's
common shares lies within the range of $38.00 to $42.00 per share. At that
meeting, and at the request of the Board of Directors, Duff & Phelps gave its
oral opinion, that was confirmed in writing, that the payment of $40.00 per
share for fractional shares is fair, from a financial point of view, to the
shareholders of the Company who, as a part of a reverse stock split, would
receive cash in lieu of fractional shares. The Board, after considering the
factors discussed below, including the Duff & Phelps valuation report and
fairness opinion, adopted the Reclassification
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Amendment and concluded that a payment of $40.00 per share in lieu of fractional
shares would be fair to the shareholders who would be cashed out as well as to
the shareholders who would retain an equity interest in the Company.
REASONS FOR THE REVERSE STOCK SPLIT
The Board has determined that deregistering the common shares of the
Company under the 1934 Act is in the best interests of the Company and its
shareholders and that a reverse stock split is the best means of reducing the
number of record holders. The Board believes that it is an opportune time to
enable the vast majority of shareholders to liquidate their shares easily, at a
fair price and with no brokerage costs, recognizing that no active trading
market currently exists with respect to the common shares. In connection
therewith, the Board determined that the Company has available the financial
resources needed to pay for any fractional shares which may be created in the
Reverse Stock Split. The Board also believes that neither the Company nor its
shareholders derives any material benefit from the registration of the common
shares under the 1934 Act. Over the past 25 years, the Company has not raised
capital through offerings of its common shares or utilized its common shares in
connection with acquisitions of other businesses or assets, and the Company does
not have any present intention to raise capital or effect acquisitions with its
common shares. The Company does not have, and will likely not develop in the
foreseeable future, any significant trading market for its common shares.
The Company has incurred and would continue to incur substantial costs
as a result of its status as a reporting company under the 1934 Act. It incurs
direct costs, including legal, accounting, and printing fees, to prepare annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy solicitation or information statement materials and annual reports
for distribution to shareholders prior to annual meetings. These direct costs
are estimated to be approximately $80,000 per year. The Company also incurs
substantial indirect costs because the Company's management is required to
devote substantial time and attention to the preparation and review of these
filings, the furnishing of information to shareholders and other shareholder
matters. Since the Company has relatively few executive personnel, these
indirect costs can be substantial. In light of the lack of benefits the Company
has achieved from its status as a reporting company, the Board does not believe
such costs are justified.
FAIRNESS OF THE REVERSE STOCK SPLIT
The Board believes that the Reverse Stock Split, taken as a whole, is
fair to, and in the best interests of, the shareholders of the Company,
including those current shareholders who will not retain their interests in the
Company. The Board also believes that the process by which it approved the
Reverse Stock Split is fair. However, the Board of Directors is not making any
recommendation with respect to the manner in which shareholders vote with
respect to the Reverse Stock Split inasmuch as the members of the Board and the
executive officers of the Company, including Marie G. Krantz and Bryan G.
Krantz, beneficially own enough shares to approve the Reverse Stock Split. See
"Beneficial Ownership of Common Shares." The directors and executive officers of
the Company, including Marie G. Krantz and Bryan G. Krantz, have advised the
Company that they intend to vote their common shares in favor of the Reverse
Stock Split.
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In reaching its determination that the Reverse Stock Split, taken as a
whole, is fair to, and in the best interests of, the shareholders, the Board
considered, among other things, (i) the benefits and detriments to the Company
and its shareholders in deregistering its common shares under the 1934 Act, (ii)
alternative means of effecting a "going private" transaction, (iii) the effects
of the Reverse Stock Split on the Company and its shareholders, (iv) information
with respect to the financial condition, results of operations, assets,
liabilities, business and prospects of the Company, and current industry,
economic and market conditions, and (v) the valuation of the common shares of
the Company by Duff & Phelps and the opinion of Duff & Phelps as to the
fairness, from a financial point of view, of the cash consideration to be paid
in lieu of the issuance of fractional shares as part of the Reverse Stock Split.
The Board determined that each of the foregoing factors generally supported the
conclusion that the Reverse Stock Split is fair to the unaffiliated
shareholders. In view of the circumstances and the wide variety of factors
considered in connection with its evaluation of the fairness of the Reverse
Stock Split, taken as a whole, the Board did not find it practicable to assign
relative weights to the factors considered in reaching its determination that
the Reverse Stock Split, taken as a whole, is fair to, and in the best interests
of, the shareholders of the Company. If any factor assisted the Board in its
determination, the Board did not assign a relative weight to such factor and did
not make a determination as to why a particular factor, as a result of the
deliberations by the Board, should be assigned any weight.
The Board considered a number of factors in determining whether it was
in the best interests of the Company and its shareholders to undertake a
transaction to reduce the number of record holders of the Company to less than
300 persons in order to terminate the registration of its common shares under
the 1934 Act. The Board of Directors determined that a cost savings of
approximately $80,000 per year could be achieved if the Company terminated the
registration. The Board also considered the time and effort currently required
of management to comply with the reporting and other requirements associated
with the continued registration of its common shares under the 1934 Act. The
Board recognized that shareholders of the Company following the deregistration
of the common shares of the Company would not be entitled to quarterly and
annual reports. However, the Board determined that neither the Company nor its
shareholders derives any material benefit from the registration of the Company's
common shares and noted that trading in the Company's common shares has been
infrequent and sporadic for many years and that the Company does not have and
will likely not develop in the future any significant trading market for its
common shares. The Board also considered that a majority of the Company's
shareholders would, as a result of a "going private" transaction, receive a fair
value for all or a portion of their shares without any brokerage costs. After
considering the relevant factors, the Board unanimously determined that neither
the Company nor its shareholders derives any material benefit from the continued
registration of the Company's common shares and that the monetary expense to the
Company and the burden to management of continued registration significantly
outweigh any benefit that may be received by the Company or its shareholders as
a result of such registration.
The Board unanimously determined that the Reverse Stock Split is fair
to the Company's shareholders from a procedural point of view. The Board
considered a number of factors in reaching that determination, including
alternative means of effecting the deregistration and the likelihood of each
resulting in the deregistration of the common shares of the Company. See
"Special Factors - Alternatives Considered." The Board considered that the
Reverse Stock Split is not structured to require the approval of a majority of
the unaffiliated shareholders of the Company. The Board also
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<PAGE> 13
took into account the limited voting activity of the Company's shareholders on
matters submitted for their approval in the past as well as the failure of a
number of shareholders of the Company to provide up-to-date mailing addresses
for shareholder communications. The Board considered that it did not retain an
unaffiliated representative to act solely on behalf of the unaffiliated
shareholders for purposes of negotiating the terms of the Reverse Stock Split or
preparing a report with respect to the fairness of the Reverse Stock Split and
that shareholders have no appraisal rights in connection with the Reverse Stock
Split but determined that such a procedure was unnecessary in that the Company
had engaged Duff & Phelps to assist in determining the fair market value of the
Company's common shares and to render an opinion as to the fairness, from a
financial point of view, of the cash consideration to be paid in lieu of
fractional shares as part of the Reverse Stock Split. The Board considered that,
in light of the limited trading market for the common shares of the Company, the
Reverse Stock Split provides many of the Company's shareholders with the
opportunity to receive a fair value for all or a portion of their interests in
the Company without incurring brokerage costs. The Board also noted that the
Reverse Stock Split is structured so that shareholders of the Company may have
an opportunity, after receiving notice of the proposed Reverse Stock Split, to
purchase a sufficient number of shares in the open market prior to the effective
date of the Reverse Stock Split to avoid having their entire interest in the
Company cashed out.
The Board of Directors also unanimously concluded that the Reverse
Stock Split is fair to the Company's shareholders from a financial point of
view. In reaching its determination, the Board considered the following factors:
(i) current and historical market prices of the common shares, (ii) the net book
value of the common shares, (iii) the going concern value of the Company, (iv)
the liquidation value of the Company, (v) the absence of any firm offers made by
any unaffiliated person during the past two years and (vi) the valuation report
and fairness opinion of Duff & Phelps.
The Board reviewed the current and historical bid prices for the
Company's common shares from the beginning of the first quarter of fiscal 1998
through the end of the fiscal 1999 and noted that the bid price ranged from a
low of $15.50 to a high of $35.00. It also noted that in the period from the end
of fiscal 1999 through the end of the third quarter of fiscal 2000 the bid price
ranged from a low of $30.25 to a high of $37.00. The Board also noted that 600
shares traded at $45.00 per share on June 26, 2000 on the OTC Bulletin Board,
the only reported trade at a price higher than $37.50 per share during the years
1999 and 2000. The Board also noted that 100 common shares traded at $33.25 on
August 18, 2000 on the OTC Bulletin Board, the last trading day during which
there was any reported trading activity prior to the August 29, 2000 meeting of
the Board. The Board also took into account that trading in the Company's stock
for many years has been and continues to be sporadic and relatively inactive and
was of the view that a determination of the fair market value of the Company's
common shares should not be based on limited trading activity on a single day.
The net book value per share as of April 30, 2000 was approximately
$66.21. While the Board recognized that the net book value per share of the
Company's common shares is substantially in excess of the cash consideration to
be paid for fractional shares, the Board determined that net book value per
share is not an appropriate measure of the fair market value of the Company's
common shares because net book value per share is an accounting concept based on
the historical costs of the Company's assets. The Board also determined that a
liquidation value was not an appropriate measure of the fair market value of the
Company's common shares because there is not a ready market for the Company's
assets, especially in light of the single use nature of the material assets of
the Company.
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<PAGE> 14
The Board considered the value of the Company's common shares on a
going concern basis, giving consideration to the earnings of the Company over
the past few years, the outlook for the Company, the Company's financial
condition, including current and future earnings and cash flow, the Board's
knowledge of the business and prospects of the Company, and the valuation report
of Duff & Phelps.
In reaching its conclusion as to the fairness of the consideration to
be paid for fractional shares, the Board did not give consideration to firm
offers for the Company or shares representing control of the Company because, to
its knowledge, no such firm offers were made. The Board is aware, however, that
in the second half of 1999 management of the Company had discussions with
Churchill Downs, Inc., which initiated those discussions, concerning the
possible acquisition of the Company and Finish Line Management Corporation, a
corporation privately held by members of management. In the course of those
discussions, representatives from Churchill Downs visited the Company's and
Finish Line's facilities and met with officers of the Company on two occasions.
Those discussions were terminated in October 1999 without any firm offer for the
Company being made.
The Board also considered the valuation report and fairness opinion
provided by Duff & Phelps. See "Special Factors - Valuation Report and Opinion
by Duff & Phelps".
The Board did not assign any specific weight to any of the above
factors. However, in their considerations, individual members of the Board of
Directors may have given differing weights to different factors. Notwithstanding
the foregoing, the Board gave significant weight to Duff & Phelps' valuation
report and opinion that the consideration to be paid in lieu of issuing
fractional shares in the Reverse Stock Split is fair, from a financial point of
view, to the unaffiliated shareholders of the Company.
VALUATION REPORT AND OPINION OF DUFF & PHELPS
Introduction
Duff & Phelps has acted as financial advisor to the Company in
connection with the proposed Reverse Stock Split and has assisted the Board of
Directors in its examination of the fairness, from a financial point of view, of
the consideration to be paid to the Company's shareholders for fractional shares
in connection with the proposed Reverse Stock Split. Duff & Phelps is one of the
nation's largest independent specialty investment banking and financial advisory
firms and for over 60 years has been providing valuation and financial advisory
services to clients ranging from small, privately held companies to large,
publicly traded corporations. The Company selected Duff & Phelps as its
financial advisor based upon Duff & Phelps' experience, ability and reputation
for providing fairness opinions and other advisory services on a wide variety of
corporate transactions.
On July 19, 2000, the Board approved the engagement of Duff & Phelps to
provide a valuation of the common shares of the Company and, if requested by the
Board, to render an opinion with respect to the fairness, from a financial point
of view, of the consideration to be received by the Company's shareholders in
lieu of fractional shares. On August 15, 2000, Duff & Phelps made an oral
presentation on its preliminary findings with respect to the value of the
Company's common shares, and on August 29,
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<PAGE> 15
2000, Duff & Phelps made a presentation to the Board and advised the Board that
in its opinion the fair market value of the Company's common shares is within
the range of $38.00 to $42.00 per share. At that meeting, Duff & Phelps gave its
opinion that the payment of $40.00 per share for fractional shares is fair, from
a financial point of view, to the shareholders of the Company who would receive
cash in lieu of fractional shares as part of the proposed Reverse Stock Split.
The full text of Duff & Phelps' written opinion is attached as Appendix A to
this Information Statement.
In preparing its valuation report and arriving at its fairness opinion,
Duff & Phelps reviewed, among other items, the Company's annual reports and
reports filed on Form 10-K including audited financial information for the
fiscal years ended October 31, 1994 through 1999; certain interim announcements
and quarterly reports on Form 10-Q and other public information for the Company;
unaudited financial information in internal financial reports of the Company for
the period ended July 31, 2000; and certain internal financial analyses and
forecasts for the Company prepared by its management and provided to Duff
&Phelps for purposes of its analyses in regards to the proposed Reverse Stock
Split and preparation of its report and opinion. Duff & Phelps also reviewed
historical stock market prices and trading volume for the Company's common
shares.
Duff & Phelps reviewed industry and financial information, which
included, among other items, financial and stock market data relating to
publicly held companies which Duff & Phelps deemed relevant for comparative
purposes to the Company. All industry information and data on public companies
deemed comparable to the Company, in whole or in part, and used in Duff & Phelps
analysis were obtained from regularly published industry and investment sources.
In addition, Duff & Phelps held discussions with senior management of the
Company regarding past, current, and projected operations and regarding
discussions of the proposed Reverse Stock Split. Duff & Phelps also took into
account its assessment of general economic, market and financial conditions, as
well as its experience in securities and business valuation, in general, and
with respect to similar transactions, in particular. Duff & Phelps did not make
any independent appraisals of the assets or liabilities of the Company.
In performing its analysis and rendering its report and opinion with
respect to the proposed Reverse Stock Split, Duff & Phelps relied upon the
accuracy and completeness of all information provided to it, whether obtained
from public or private sources, including the Company's management, and did not
attempt to independently verify any such information. Duff & Phelps notes that
nothing has come to its attention in the course of its analysis to make Duff &
Phelps believe that it is not reasonable to rely on the information described
above, including the projections and reports of the management of the Company.
Duff & Phelps' report and opinion further assume that information supplied and
representations made by the Company's management regarding the Company and the
background and terms of the proposed Reverse Stock Split are substantially
accurate. Duff & Phelps' opinion is dated August, 29 2000. The opinion is
necessarily based upon market, economic, financial and other conditions as they
exist and can be evaluated as of such date. The Company did not place any
limitation upon Duff & Phelps with respect to the procedures followed or factors
considered by Duff & Phelps in rendering its valuation report or its opinion.
Summary of Analyses
13
<PAGE> 16
In preparing its valuation report and opinion to the Board of
Directors, Duff & Phelps performed a variety of financial and comparative
analyses regarding the valuation of the Company including (i) a discounted cash
flow analysis of the projected free cash flow of the Company; and (ii) a
comparison of financial performance and market valuation ratios of the Company
with those of publicly traded companies Duff & Phelps deemed relevant for
purposes of its opinion.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted
cash flow analysis of the projected free cash flows of the Company. Free cash
flow is defined as cash that is available to either reinvest in new businesses
or to distribute to investors in the form of dividends, stock buybacks, or debt
service. The projected free cash flows are discounted to the present at a rate
which reflects the relative risk associated with these flows as well as the
rates of return which both equity and debt investors could expect to realize on
alternative investment opportunities.
The Company's future free cash flows were based on projected revenues,
net income, depreciation and amortization, working capital and capital
expenditure requirements for the fiscal years ending October 31, 2000 through
October 31, 2009. The Company's management provided Duff & Phelps with internal
estimates of performance for the remainder of the fiscal year ending October 31,
2000. Duff & Phelps discounted the resulting free cash flows at rates of 12.5%
to 13.5%. The discount rate range reflects, among other things, industry risks,
the relatively small market capitalization of the Company, and current rates of
return required by investors in equity instruments in general. The discounted
cash flow analysis resulted in a marketable minority basis value, or a
reasonable estimate of the price that a fully informed buyer would pay for a
common share of the Company. The discounted cash flow analysis yielded a
marketable minority price range of $38.20 to $42.00 per share.
Comparable Company Analysis. In the comparable company analysis, Duff &
Phelps selected a set of publicly traded companies based on comparability to the
Company. Although no single company chosen is exactly similar to the Company,
these companies share many of the same operating characteristics and are
affected by many of the same economic forces. The value of the Company is
derived from the rate at which these companies are capitalized in the market,
after adjusting for differences in operations and performance.
Using publicly available information, Duff & Phelps analyzed the
historical financial performance, stock prices and resulting valuation multiples
for the following seven gaming industry companies: Anchor Gaming, Autotote
Corp., Canterbury Park Holding Corp., Churchill Downs, Inc., Colonial Downs
Holdings, Dover Downs Entertainment, and Penn National Gaming (the "Fair Grounds
Comparable Companies").
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<PAGE> 17
Duff & Phelps compared the financial performance of the Company with
the financial performance of the Fair Grounds Comparable Companies. Duff &
Phelps adjusted all financial performance measures for extraordinary items.
Comparative statistics reveal the following:
HISTORICAL FINANCIAL PERFORMANCE SUMMARY
(IN PERCENTAGES)
<TABLE>
<CAPTION>
Fair Grounds Median
------------ ------
<S> <C> <C>
Five-Year Compounded Annual Growth in Revenues(1) 13.3 30.7
Five-Year Compounded Annual Growth in EBITDA(2) NM(3) 35.0
Five-Year Average EBITDA margins(4) -1.1 16.9
LTM EBITDA margins(5) 2.4 19.3
Five-Year Average Returns on Invested Capital 0.5 12.4
LTM Returns on Invested Capital 0.7 12.7
</TABLE>
(1) Five-year growth rates based on fiscal years 1994 through 1999
(2) EBITDA = earnings before interest, taxes, depreciation and amortization
(3) NM = not meaningful
(4) Five-year averages are based on fiscal years 1995 through 1999
(5) LTM = latest twelve months (April 30, 2000 for Fair Grounds)
Duff & Phelps analyzed the stock prices for the Fair Grounds Comparable
Companies as multiples of latest twelve months and projected cash flow and
latest twelve months revenues. A summary of these multiples is as follows:
FAIR GROUNDS CORPORATION
ANALYSIS OF PUBLICLY TRADED COMPARABLE COMPANIES
MARKET DATA SUMMARY
<TABLE>
<CAPTION>
Capitalized Value as a Multiple of
Operating Cash Flow
--------------------------------------------
Latest
Latest Projected 12 Months'
12 Months Fiscal Year Revenues
=====================================================================
<S> <C> <C> <C>
Range - High 7.5x 6.5x 1.8x
Low 5.3 5.0 0.7
Mean 6.9 5.9 1.4
Median 7.1 6.1 1.4
</TABLE>
Sources: Standard & Poor's Compustat Services, Inc. and First Call Corporation.
The comparable company analysis yielded a marketable minority interest
value of $40.00 to $43.00 per share.
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<PAGE> 18
After consideration of the results from the discounted cash flow
analysis and the comparable company analysis presented above, Duff & Phelps
concluded that the fair market value of the common shares of the Company, on a
marketable minority interest basis, is from $38.41 to $41.62 per share as of
August 29, 2000.
The foregoing is a summary of the process by which Duff & Phelps valued
the common shares of the Company and rendered its opinion that the consideration
to be paid in lieu of issuing fractional shares in connection with the Reverse
Stock Split is fair, from a financial point of view, to those persons receiving
cash in lieu of fractional shares in connection with the Reverse Stock Split.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the process
underlying Duff & Phelps' fairness opinion. In arriving at its fairness opinion,
Duff & Phelps considered the results of all such analyses taken as a whole.
Furthermore, in arriving at its fairness opinion, Duff & Phelps did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. No company or transaction used in the above analyses as a
comparison is identical to the Company. The analyses were prepared solely for
purposes of Duff & Phelps valuing the common shares of the Company and providing
its opinion to the Company's Board of Directors as to the fairness of the
consideration to be received by the holders of the Company's common shares in
the proposed Reverse Stock Split from a financial point of view and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses are based upon numerous factors or events beyond the control of the
Company, its advisors or any other person, and are inherently uncertain. Actual
future results may be materially different from those forecasts.
The summary of the valuation report and opinion set forth in this
Information Statement is qualified in its entirety by reference to the full text
of the valuation report and the opinion which are incorporated herein by
reference. The full text of the Duff & Phelps written opinion is attached as
Appendix A to this Information Statement. A copy of the valuation report has
been filed as an exhibit to the Schedule 13E-3 filed by the Company with the
SEC. The valuation report and opinion of Duff & Phelps set forth certain
assumptions made, procedures followed, matters considered, limitations on and
scope of review by Duff & Phelps in rendering its valuation report and opinion.
Copies of the valuation report will be made available for inspection and copying
at the principal executive offices of the Company during regular business hours
by any interested shareholder of the Company or his representative who has been
so designated in writing. The Schedule 13E-3 and the valuation report of Duff &
Phelps are also available at the SEC's Web site at http://www.sec.gov. The Duff
& Phelps valuation report and fairness opinion were rendered without regard to
the necessity for, or level of, any restrictions, obligations or undertakings
which may be imposed or required in the course of obtaining regulatory approvals
for the proposed Reverse Stock Split.
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<PAGE> 19
Fee and other Information
The engagement of Duff & Phelps was approved by the Board of Directors
of the Company on July 19, 2000 and the terms of such engagement are set forth
in an engagement letter dated August 4, 2000. As compensation for its services
as financial advisor to the Company in connection with the proposed Reverse
Stock Split, the Company agreed to pay Duff & Phelps a fee of $35,000 for
services relating to the valuation report and to pay an additional fee of
$25,000 if the Board of Directors requested Duff & Phelps to provide its opinion
as to the fairness of the consideration to be paid in lieu of issuing fractional
shares. No portion of the fee paid to Duff & Phelps is contingent upon the
conclusion reached in its report or its opinion. In addition, the Company has
agreed to reimburse Duff & Phelps for its reasonable out-of-pocket expenses,
including the fees and expenses of its legal counsel, and to indemnify Duff &
Phelps against certain liabilities, including liabilities under the federal
securities laws, relating to, arising out of or in connection with its
engagement. Except as reflected in this Information Statement, neither Duff &
Phelps nor, to the best of its knowledge, any of its affiliates has had a
material relationship during the past two years with the Company or any of its
affiliates, nor is any material relationship contemplated.
ALTERNATIVES CONSIDERED
The Board considered alternatives to the proposed Reverse Stock Split,
including an issuer tender offer and a cash-out merger. The Board rejected these
alternatives because there was no assurance that either alternative would result
in the Company having fewer than 300 record holders and being able to deregister
its common shares. The Board noted that trading in the common shares of the
Company has been sporadic and relatively inactive for many years, that the
Company has been unable to ascertain the location of many of its shareholders
and that over 100 of the record holders own less than 20 shares each. Because of
these facts, the Board was concerned that an issuer tender offer may not receive
a sufficient response to result in the Company being in a position to
deregister. The Board was also concerned, due to the unknown location of many of
the Company's shareholders and the limited voting activity of the Company's
shareholders in the past, that a cash-out merger would not receive the approval
required by the Business Corporation Law of Louisiana and would, therefore, not
result in the Company being in a position to deregister.
INTERESTS OF CERTAIN PERSONS AND POTENTIAL CONFLICTS OF INTEREST
Shareholders should be aware that the Company's directors and executive
officers have interests which may present them with conflicts of interest in
connection with the Reverse Stock Split. Specifically, all of the directors and
executive officers of the Company own common shares and will continue to be
shareholders of the Company following the Reverse Stock Split. See "Beneficial
Ownership of Common Shares."
CONDUCT OF THE COMPANY'S BUSINESS AFTER THE REVERSE STOCK SPLIT
The Company intends, following the Reverse Stock Split, to terminate
the registration of its common shares under the 1934 Act. The Company will then
be relieved of the obligation to comply with the proxy and information statement
rules of Regulations 14A and 14C under Section 14 of the 1934 Act, and its
officers and directors and shareholders owning more than 10% of the common
shares
17
<PAGE> 20
will be relieved of the reporting requirements and "short swing" trading
restrictions under Section 16 of the 1934 Act. Further, the Company will no
longer be subject to the periodic reporting requirements of the 1934 Act and
will cease filing information with the SEC. Among other things, the effects of
this change will be a savings to the Company in not having to comply with the
requirements of the 1934 Act. Although shareholders may sell their shares in
privately negotiated transactions, there will be no public market for the common
shares and shareholders may be dependent to a great extent upon the Company's
willingness to purchase shares.
As a result of the Reverse Stock Split, the number of authorized common
shares of the Company will be reduced to 3,000 shares, of which approximately
2,200 shares will be outstanding, assuming the Reverse Stock Split is effected
at a ratio of 1 to 200. If the Reverse Stock Split is effected, the officers and
directors of the Company will hold approximately 78.1% of the outstanding common
shares. Such individuals now own approximately 73.5%. See "Beneficial Ownership
of Common Shares". With the exception of the number of authorized shares, the
terms of the common shares before and after the Reverse Stock Split will remain
the same. Following the Reverse Stock Split, the Company may have less than 100
beneficial owners of its common shares, in which case the Company would not be
subject to the Fair Price Law. In such event, the minority shareholders could be
cashed out through a merger or other transaction without compliance with the
Fair Price Law. Although the Company is not issuing fractional shares resulting
from the Reverse Stock Split, the Company may elect to issue fractional shares
from time to time in the future.
Other than as described herein, the Company expects its business and
operations to continue after the Reverse Stock Split as they are currently being
conducted. However, Louisiana has recently enacted legislation that will permit
the Company to accept telephone and Internet wagers. The Company anticipates
installing systems to accept such wagering in the future and is optimistic about
the long term benefits of such wagering. Other than as described herein, neither
the Company nor its management has any current plans or proposals to effect any
extraordinary corporate transaction, such as a merger, reorganization or
liquidation; to sell or transfer any material amount of its assets; to change
its Board of Directors or management; to materially change its dividend policy
or indebtedness or capitalization; or otherwise to effect any material change in
its corporate structure or business. However, the Board will continue to
evaluate such business and operations after the Reverse Stock Split and make
such changes as are deemed appropriate.
FEDERAL INCOME TAX CONSEQUENCES
THE COMPANY HAS NOT SOUGHT, AND DOES NOT INTEND TO SEEK, A RULING FROM
THE INTERNAL REVENUE SERVICE OR AN OPINION OF COUNSEL AS TO THE TAX CONSEQUENCES
OF THE REVERSE STOCK SPLIT. THE TAX DISCUSSION SET FORTH BELOW IS INCLUDED IN
THIS INFORMATION STATEMENT FOR GENERAL INFORMATION ONLY. THIS DISCUSSION IS
BASED ON CURRENT LAW AS OF THE DATE OF THIS INFORMATION STATEMENT AND DOES NOT
TAKE INTO ACCOUNT ANY SPECIAL RULES WHICH MAY PERTAIN TO THE TAX CONSEQUENCES OF
THE TRANSACTION ON PARTICULAR SHAREHOLDERS SUCH AS, FOR EXAMPLE, DEALERS IN
SECURITIES, TAX EXEMPT ENTITIES AND NON-RESIDENT ALIENS. THIS DISCUSSION IS
INCLUDED WITHOUT REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
PARTICULAR SHAREHOLDER, AND NO SHAREHOLDER IS ENTITLED TO RELY UPON THE
FOLLOWING TAX DISCUSSION TO DETERMINE THE FEDERAL, STATE AND LOCAL INCOME TAX
CONSEQUENCES OF THE REVERSE STOCK SPLIT WITH RESPECT TO SUCH SHAREHOLDER.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR MORE SPECIFIC AND
DEFINITIVE ADVICE
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<PAGE> 21
AS TO THE FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTION, AS WELL AS
ADVICE AS TO THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
Tax Consequences to the Company.
The proposed Reverse Stock Split is intended to qualify for federal
income tax purposes as a tax-free reorganization of the Company pursuant to
Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the
"Code"). Amounts paid by the Company for fractional shares will not be
deductible by the Company, but will be treated either as dividend distributions
or as amounts paid in exchange for shares. Accordingly, the Company does not
anticipate any tax consequences at the Company level as a result of the Reverse
Stock Split.
Tax Consequences to Shareholders.
The following discussion assumes each shareholder holds his or her
common shares as a capital asset as of the time of the effectiveness of the
Reverse Stock Split.
Exchange of Common Shares Solely for New Common Shares.
A shareholder who receives solely new common shares pursuant to the
Reverse Stock Split will recognize no gain or loss under Section 354 of the
Code. The aggregate tax basis of the new common shares received by such
shareholder pursuant to the Reverse Stock Split will be the same as the
aggregate tax basis of the common shares surrendered in exchange. The holding
period of the new common shares received by such shareholder will include the
holding period of the common shares surrendered in the exchange.
Exchange of Common Shares Solely for Cash.
In the case of a shareholder who receives only cash in exchange for all
of his or her common shares, the cash will be treated as received by the
shareholder as a distribution in redemption of the shareholder's common shares,
subject to the provisions and limitations of Section 302 of the Code. Where,
after such distribution, a former shareholder does not own any new common shares
directly or indirectly through the constructive ownership or attribution rules
of Section 318 of the Code (under which shareholders are treated as holding not
only their own shares, but also shares held by certain related persons and
entities), the redemption will be treated as a complete termination of the
shareholder's interest within the meaning of Section 302(b)(3) of the Code. As
provided in Section 1001 of the Code, capital gain or capital loss will be
recognized by such shareholder in an amount equal to the difference between the
amount of cash received in the redemption and the aggregate tax basis of the
common shares surrendered. The gain or loss will be long term gain or loss if
the shareholder has held, or is deemed to have held, his or her common shares
for more than one year as of the time of the effectiveness of the Reverse Stock
Split.
Exchange of Common Shares for a Combination of Cash and New Common Shares.
A shareholder who receives new common shares and cash pursuant to the
Reverse Sock Split will recognize gain (if any), but in an amount limited to the
amount of cash received. Such gain will
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<PAGE> 22
be recognized in the year in which the new common shares and cash are received,
or in the year that the new common shares or cash is entitled to be received
(i.e., at the time of the effectiveness of the Reverse Stock Split). Any
recognized gain will be eligible for capital gain treatment in accordance with
the provisions of Section 1001 of the Code cited above, unless such receipt of
cash has the effect of a distribution of a dividend, as provided in Section 356
of the Code, in which case such gain will be taxable as ordinary income to the
extent of the recipient shareholder's ratable share of the Company's earnings
and profits as of the time of the effectiveness of the Reverse Stock Split. The
principles set forth in Section 302 of the Code and discussed in the United
States Supreme Court decision in Clark v. Commissioner, 109 S. Ct. 1455, 89-1
U.S.T.C. 9320 (1989) will serve as guidelines in determining whether the receipt
of cash has the effect of the distribution of a dividend under Section 356 of
the Code. Under these principles, the distribution to a shareholder will not be
considered to have the effect of a distribution of a dividend if it is
"substantially disproportionate" with respect to the shareholder or if it is
"not essentially equivalent to a dividend" with respect to the shareholder. The
application of the tests set out in Section 302 of the Code and Clark assume
that the shareholder received solely new common shares pursuant to the Reverse
Stock Split and then received cash through a redemption by the Company of a
number of such shares of new common shares having a value equal to the amount of
cash received.
Under Section 302 of the Code, a distribution will be "substantially
disproportionate" with respect to a shareholder if the shareholder's
proportionate interest in new common shares actually held by the shareholder
after the Reverse Stock Split is less than 80% of what the shareholder's
proportionate interest would have been if solely new common shares had been
distributed to such shareholder in the Reverse Stock Split. In applying this
test for purposes of Section 356 of the Code, the constructive ownership or
attribution rules of Section 318 of the Code are applicable.
Even though a distribution does not satisfy the substantially
disproportionate test discussed above, it still may be "not essentially
equivalent to a dividend" to a shareholder depending upon the shareholder's
particular facts and circumstances. The United States Supreme Court in Davis v.
United States, 397 U.S. 301 (1970), concluded that in order for a distribution
to be considered not essentially equivalent to a dividend, there must be a
"meaningful reduction in the shareholder's proportionate interest" (emphasis
added). Shareholders who increase their proportionate interest in the Company as
a result of the Reverse Stock Split will not experience a meaningful reduction
in their proportionate interest in the Company, and therefore, to the extent
they receive a distribution of cash in connection with the Reverse Stock Split,
such distribution will be deemed cash essentially equivalent to a dividend and
taxable as ordinary income to the extent of their ratable share of the Company's
earnings and profits as of the time of the Reverse Stock Split. See Rev. Rul.
78-351, 1978-2 C.B. 148 (holding that the fractional share rule of Rev. Rul.
69-34, 1969-1 C.B. 105 does not apply in the case of a reverse stock split under
circumstances substantially identical to these).
A shareholder who receives new common shares and cash will have an
aggregate basis in such new common shares which will be the same as the
aggregate tax basis of the common shares surrendered in the exchange, decreased
by the amount of any cash received, and increased by the amount of any gain
recognized on the change. The holding period of new common shares received by
such a shareholder will include the holding period of common shares surrendered
in the exchange.
20
<PAGE> 23
APPRAISAL RIGHTS; ESCHEAT LAWS
No appraisal rights are available under the Business Corporation Law of
Louisiana to shareholders who dissent from the Reverse Stock Split proposal.
There may exist other rights or actions under state law for shareholders who are
aggrieved by reverse stock splits generally. Although the nature and extent of
such rights or actions are uncertain and may vary depending upon facts or
circumstances, shareholder challenges to corporate action in general are related
to the fiduciary responsibilities of corporate officers and directors and to the
fairness of corporate transactions. For example, shareholders could, if they
deemed such to be applicable, take appropriate legal action against the Company
and its Board of Directors, and claim that the transaction was unfair to the
unaffiliated shareholders, or that there was no justifiable or reasonable
business purpose for the Reverse Stock Split.
Persons whose shares are eliminated and whose addresses are unknown to
the Company, or who do not return their stock certificates and request payment
therefor, generally will have a period of years from the date of the Reverse
Stock Split in which to claim the cash payment payable to them. For example,
with respect to shareholders whose last known addresses are in New York, as
shown by the records of the Company, the period is three years. Following the
expiration of that three-year period, the Abandoned Property Law of New York
would likely cause the cash payments to escheat to the State of New York. For
shareholders who reside in other states or whose last known addresses, as shown
by the records of the Company, are in states other than New York, such states
may have abandoned property laws which call for such state to obtain either (i)
custodial possession of property that has been unclaimed until the owner
reclaims it; or (ii) escheat of such property to the state. Under the laws of
such other jurisdictions, the "holding period" or the time period which must
elapse before the property is deemed to be abandoned may be shorter or longer
than three years.
EXCHANGE OF CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
If the proposed Reverse Stock Split is effected, the Company or its
transfer agent will provide shareholders with transmittal forms and instructions
for submitting their stock certificates in exchange for a new certificate or
certificates representing the appropriate number of new common shares of the
Company and cash in lieu of fractional shares. On the effective date of the
Reverse Stock Split, each certificate representing an outstanding common share
of the Company will be deemed for all corporate purposes, and without further
action by any person, to evidence ownership of the reduced whole number of new
common shares, if applicable, and the right to receive cash for any fractional
share interest. If the Reverse Stock Split is effected at a ratio of 1 to 200,
each shareholder of record who holds fewer than 200 common shares immediately
prior to the effectiveness of the Reverse Stock Split will cease to have any
rights with respect to the new common shares and will only have the right to
receive cash in lieu of the fractional share to which such shareholder of record
would otherwise be entitled. To the extent that a person would be entitled to a
fractional share as a result of the Reverse Stock Split, then the Company or its
transfer agent will forward to such person, in lieu of such fractional share, a
cash payment equal to $40.00 per share for each common share held of record by
that person immediately prior to the effectiveness of the Reverse Stock Split
that is not combined with other common shares to constitute a whole share as
part of the Reverse Stock Split.
21
<PAGE> 24
If certificates for common shares have been lost or destroyed, the
Company may, in its discretion, accept in connection with the Reverse Stock
Split a duly executed affidavit and indemnity agreement of loss or destruction,
in a form satisfactory to the Company, in lieu of the lost or destroyed
certificate. Additional instructions regarding lost or destroyed stock
certificates will be included with the transmittal form and instructions sent to
shareholders of record after the effectiveness of the Reverse Stock Split.
The transmittal form and instructions will be sent by the Company to
shareholders of record promptly after the effective date of the Reverse Stock
Split. Do not send in your stock certificates until you receive the transmittal
form and instructions.
No brokerage commissions or service charges will be payable by
shareholders in connection with the exchange of certificates or the payment of
cash in lieu of issuing fractional shares.
FINANCING OF THE REVERSE STOCK SPLIT
The Board estimates that the total cost to the Company of the Reverse
Stock Split for the payment of the fractional share interests in the Reverse
Stock Split and the estimated transactional fees and expenses of $150,000 will
be approximately $1,225,000. The Company intends to finance this transaction
primarily from working capital and, if necessary, from the Company's outstanding
line of credit with First Bank and Trust. The line of credit is for $2.5 million
with a variable interest rate on amounts outstanding. No amounts were drawn or
outstanding on the line of credit during the nine months ended July 31, 2000.
The Company anticipates repaying any amount borrowed under the line of credit
through cash generated from future operations.
DIRECTOR SHARE OWNERSHIP AMENDMENT
Article VIII of the Company's Articles of Incorporation provides, in
part, that the directors of the Company "shall have actual ownership or all
legal or constructive control of at least four hundred (400) shares of the stock
of the Corporation." If the Reclassification Amendment is effected, the
Company's capital structure will be changed in such a manner that none of its
directors, except Marie G. Krantz and Bryan G. Krantz, will satisfy that
requirement. Further, the Board of Directors believes that requiring directors
to own a fixed number of shares may impede the Company's efforts to attract
qualified persons to serve as members of its Board of Directors. The proposed
Director Share Ownership Amendment, if effected, would remove this requirement
from the Company's Articles of Incorporation.
The Board of Directors is not making any recommendation with respect to
the manner in which shareholders vote with respect to the proposed Director
Share Ownership Amendment inasmuch as the members of the Board and the executive
officers of the Company, including Marie G. Krantz and Bryan G. Krantz,
beneficially own enough shares to approve the Director Share Ownership
Amendment. See "Beneficial Ownership of Common Shares." The directors and
executive officers of the Company, including Marie G. Krantz and Bryan G.
Krantz, have advised the Company that they intend to vote their common shares in
favor of the Director Share Ownership Amendment.
22
<PAGE> 25
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table sets forth certain information regarding the
beneficial ownership of common shares of the Company, as of August 31, 2000 of
(i) each person who, to the knowledge of the Company, owns beneficially more
than 5% of the outstanding common shares of the Company, (ii) each director and
nominee for election as a director, (iii) each of the current executive officers
of the Company and (iv) all directors and executive officers of the Company as a
group. The information set forth in the following table is based upon statements
filed by such persons with the Commission and information otherwise available to
the Company. Unless otherwise indicated, each person has sole voting and
investment power of the common shares of the Company beneficially owned by him
or her.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(A)
---------------- -------------------- -------------
<S> <C> <C>
William K. Caldwell, Jr. 400 *
Richard Katcher 400 *
Bryan G. Krantz(b)(d) 341,413 72.9%
Marie G. Krantz(c)(d) 340,584 72.7%
Ronald J. Maestri 480 *
Charmaine R. Morel 480 *
Langdon H. Stone 400 *
Wayne E. Thomas 400 *
All Directors and Executive
Officers as a Group(f) 344,353 73.5%
</TABLE>
* Less than 1% of Class.
(a) The percentage of class beneficially owned has been computed on the
basis of 468,580 common shares outstanding on August 31, 2000.
(b) Bryan G. Krantz is the beneficial owner of the following common shares
of the Company: 340,104 common shares held by Marie G. Krantz as Voting
Trustee under the Voting Trust Agreement described below, constituting
72.6% of the common shares outstanding; 1,200 common shares held
jointly by him and his wife, constituting less than 1% of the common
shares outstanding; 9 shares held by him and 100 shares held by
Jefferson Downs Corporation ("Jefferson Downs"), each constituting less
than 1% of the common shares outstanding. Finish Line Management
Corporation ("Finish Line"), all the outstanding capital stock of which
is beneficially owned by Mr. Krantz, holds the Voting Trust Certificate
respecting 339,604 common shares in the Voting Trust, and Mr. Krantz
holds the Voting Trust Certificate respecting 500 common shares in the
Voting Trust. Mr. Krantz, as a director, executive officer and the
beneficial owner of all of the outstanding capital stock of Finish
Line, may be deemed to share with Ms. Krantz the power to dispose or
direct the disposition of 339,604 common shares held by Ms. Krantz as
Voting Trustee, the Voting Trust Certificate with respect to which is
held by Finish Line. In addition, Mr. Krantz has the sole power to
dispose or direct the disposition of 500 common shares held by Ms.
Krantz as Voting Trustee, the Voting Trust Certificate
23
<PAGE> 26
with respect to which is held by him, shares with his wife the power to
vote or direct the vote and to dispose or direct the disposition of the
1,200 common shares held jointly with her and has the sole power to
vote or direct the vote and to dispose or direct the disposition of the
9 shares held by him. He may be deemed to share with Ms. Krantz the
power to vote or direct the vote and the power to dispose or direct the
disposition of the 100 common shares held by Jefferson Downs. Mr.
Krantz's address is 1751 Gentilly Boulevard, New Orleans, Louisiana
70119.
(c) Marie G. Krantz is the beneficial owner of 380 common shares of the
Company held directly by her, constituting less than 1% of the common
shares outstanding, and 100 common shares held by Jefferson Downs,
constituting less than 1% of the common shares outstanding, and she may
be deemed to be the beneficial owner of the 340,104 common shares held
by her as Voting Trustee under the Voting Trust Agreement described
below, constituting 72.6% of the common shares outstanding. In her
capacity as Voting Trustee, Ms. Krantz has the sole power to vote or
direct the vote of the 340,104 common shares held by her as Voting
Trustee, and, as a director and executive officer of Finish Line, she
may be deemed to share with Bryan G. Krantz the power to dispose or
direct the disposition of 339,604 common shares held by her as Voting
Trustee, the Voting Trust Certificate with respect to which is held by
Finish Line. She also has the sole power to vote or direct the vote and
the sole power to dispose or direct the disposition of the 380 common
shares held by her directly. She may be deemed to share with Mr. Krantz
the power to vote or direct the vote and the power to dispose or direct
the disposition of the 100 common shares held by Jefferson Downs. The
Voting Trust Agreement, pursuant to which Mr. Krantz and Richard
Katcher, as Trustee of the Masoni Trust, are grantors and Ms. Krantz is
Voting Trustee, provides that title to the 340,104 common shares is
vested in Ms. Krantz as Voting Trustee during the term of the Voting
Trust and that in such capacity she may exercise all rights of a holder
of common shares of the Company, including the right to vote such
common shares; however, the common shares which are subject to the
Voting Trust Agreement may not be transferred, sold, assigned or
otherwise disposed of by Ms. Krantz during the term of the Voting
Trust, other than in connection with any corporate event or action
which affects common shares other than the common shares subject to the
Voting Trust Agreement. The Voting Trust Agreement, which was entered
into in 1993, is for an initial term of 15 years, is irrevocable during
its term, and is to survive the death of the grantors thereunder. It
may be extended for an additional ten years at the written request of
such grantors. The 339,604 common shares as to which Mr. Krantz and Ms.
Krantz may be deemed to share the power to dispose or direct the
disposition and which are held by the Voting Trust are pledged, along
with the Voting Trust Certificate issued by the Voting Trust with
respect to said 339,604 common shares, to Richard Katcher, as Trustee
of the Masoni Trust, as security for the payment of a promissory note
made and delivered by Mr. Krantz in April 1996, when the Masoni Trust
sold such shares to Mr. Krantz, and later assumed by Finish Line. A
default in the payment of said note could result in the Masoni Trust
acquiring control of the Company. Ms. Krantz's address is 1751 Gentilly
Boulevard, New Orleans, Louisiana 70119.
(d) Bryan G. Krantz and Marie G. Krantz, who together are the beneficial
owners of an aggregate of 341,793 common shares, constituting
approximately 72.9% of the common
24
<PAGE> 27
shares outstanding, have reported to the Commission that they
constitute a "group" within the meaning of section 13(d)(3) of the
Exchange Act. By virtue of their beneficial ownership of common shares
of the Company and the matters set forth in filings made by them under
Section 13(d) of the Exchange Act, Ms. Krantz and Mr. Krantz may be
deemed to be controlling persons of the Company.
(e) See notes (b) - (d) above. The number of common shares shown as
beneficially owned includes any directors qualifying shares held by
each director and nominee for election as a director.
If the Reverse Stock Split is effected at a 1 for 200 ratio, Bryan G.
Krantz and Marie G. Krantz will own beneficially 1,706 and 1,701 common shares,
respectively, representing 77.5% and 77.3%, respectively, of the outstanding
common shares.
MANAGEMENT OF THE COMPANY
The following table shows each director and executive officer of the
Company, his or her age, present positions and offices with the Company,
principal occupation and the name and principal business of the corporation or
other organization in which such occupation has been carried on, the year he or
she first became a director of the Company, and directorships in certain other
corporations, based upon information furnished to the Company by each director
and executive officer or otherwise available to the Company. Unless otherwise
indicated, each director and executive officer of the Company has engaged in the
occupations stated below for at least the last five years. No family
relationships exist between or among any director or executive officer of the
Company, except that Bryan G. Krantz is the son of Marie G. Krantz. Each
director and executive officer is a citizen of the United States. During the
past 5 years, no director or executive officer of the Company was convicted in a
criminal proceeding (excluding traffic violations and similar misdemeanors) or
was subject to a judgment, decree or final order enjoining further violations
of, or prohibiting activities subject to, federal or state securities laws or
finding any violation of such law.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL DIRECTOR
OCCUPATION AGE SINCE
------------------ --- --------
<S> <C> <C>
William K. Caldwell, Jr. 48 2000
Director of Golf, Chateau Golf &
Country Club, New Orleans,
Louisiana.
Richard Katcher 81 1994
Retired; attorney with Baker and
Hostetler, Cleveland, Ohio until 1995.
Bryan G. Krantz 39 1990
President and General Manager of the
Company; President of Finish Line
Management Corporation, which
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
NAME AND PRINCIPAL DIRECTOR
OCCUPATION AGE SINCE
------------------ --- --------
<S> <C> <C>
operates certain off-track betting
facilities in Louisiana.
Marie G. Krantz 64 1900
Chairman of the Board of Directors
and Treasurer of the Company;
Secretary-Treasurer of Finish Line
Management Corporation.
Ronald J. Maestri 59 1991
Director of Special Events, Greater
New Orleans Sports Foundation since
April 2000.
Director of Athletics, University of
New Orleans prior to April 2000.
Charmaine R. Morel 65 1987
Administrative Assistant, MOTA,
L.L.C., Metairie, Louisiana, which
operates Artiesia Restaurant, since
1998; prior to 2000, Administrative
Assistant, Fennelly & Bayley, Inc.,
d/b/a Mike's on the Avenue, a
restaurant in New Orleans;
Secretary/Treasurer of Victory
Management Group, a company
providing management services, from
January 1993 to December 1995.
Langdon H. Stone 54 2000
President, Stone Insurance, Inc., New
Orleans, Louisiana.
Wayne E. Thomas 52 1996
Self employed insurance agent.
David R. Sherman 47 --
Secretary of the Company since July
2000; Attorney, Chehardy, Sherman,
Ellis, Breslin & Murray, L.L.P.,
Metairie, Louisiana
</TABLE>
26
<PAGE> 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1992, the Company entered into a Management Agreement (the
"Management Agreement") with Finish Line Management Corporation ("Finish Line").
The Management Agreement provides that Finish Line is to operate the Company's
tele-track facilities in Terrebonne, St. Tammany and Jefferson Parishes,
Louisiana, which were formerly owned by Jefferson Downs, for a period of ten
years, commencing November 1, 1992, with the option granted to Finish Line to
extend the term of the Management Agreement for two additional five-year
periods. The Management Agreement provides that Finish Line is to have the
exclusive responsibility for the direction, supervision, management and
operation of such facilities, is to collect all monies from such operation and
is to pay all expenses in connection therewith. Pursuant to the Management
Agreement, the Company receives 0.1% of the gross pari-mutuel handle at such
facilities, 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 above) paid by Finish
Line. In addition, Finish Line is to indemnify the Company for, among other
things, all obligations under the leases assigned by Jefferson Downs to the
Company. During the fiscal year ended October 31, 1999, Finish Line paid the
Company $87,530 under the Management Agreement, host track fees of $305,591 and
purse supplements of $4,986,874. As of October 31, 1999, the Company had
accounts receivable from Finish Line in the aggregate amount of $774,245.
The Company, Jefferson Downs and Finish Line are parties to an
agreement with Video Services, Inc. ("VSI"), whereby VSI has the exclusive right
and license to install, maintain and operate video draw poker devices at the
Fair Grounds Race Course and at the tele-tracks operated by the Company and
Finish Line. The initial term of the Agreement, which was entered into in 1992,
was five years, with an option by VSI to extend the term for an additional five
years, which option has been 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 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. The devices installed by VSI
pursuant to such agreement remain the property of VSI. As of October 31, 1999,
there were a total of 337 devices in operation at all of the Company's
facilities (excluding the tele-tracks operated for the Company by Finish Line)
and 345 devices in operation at facilities managed by Finish Line, including the
facilities formerly owned by Jefferson Downs. In fiscal 1999, the Company
received gross video poker revenue of $2,980,435, including amounts to be paid
as purse supplements totaling $1,265,192. In addition, such agreement provides
that the Company, Jefferson Downs and Finish Line are entitled to receive an
annual promotional allowance from VSI in the aggregate amount of $270,000, which
for the fiscal year ended October 31, 1999 was paid in full to the Company, with
one-half of said amount set aside for purse supplements. The agreement also
provides for advances annually from VSI against future revenues of up to $1
million in the aggregate to the Company, Jefferson Downs and Finish Line. The
Company received all of such advance during the year ended October 31, 1999 and
has also received such an advance during the current fiscal year. The Company
anticipates that it will continue to receive revenues pursuant to the agreement
with VSI for the remaining term of that agreement.
Marie G. Krantz is a director, the President and the owner of 66 2/3%
of the outstanding common stock, and Bryan Krantz is a director, Vice President
and the owner of 33 1/3% of the outstanding common stock, of Jefferson Downs.
Ms. Krantz is a director and executive officer, and Mr. Krantz is a director,
executive officer and the beneficial owner of all of the outstanding common
stock, of Finish
27
<PAGE> 30
Line. By virtue of such positions and ownership and their positions with and
relationship with such entities, the Company, Finish Line and Jefferson Downs
may be deemed to be affiliates.
Ms. Krantz and Mr. Krantz each own 50% of the outstanding common stock
of Continental Advertising, Inc. ("Continental"), an advertising agency which
provided advertising services to the Company during the last fiscal year and is
continuing to provide advertising services to the Company during the current
fiscal year. During the 1999 fiscal year, the Company made payments to
Continental of $628,365 to reimburse it for Company advertising expenses paid by
it. As of October 31, 1999, the Company was due $13,894 from Continental. No
commission or any other form of compensation is paid to the Krantzes for
advertising services rendered to the Company by Continental. The Board of
Directors believes that the terms of such arrangement are no less favorable to
the Company than terms that would be available from unrelated third parties for
comparable transactions.
During the years 1995-1997, Ms. Krantz guaranteed the Company's
indebtedness incurred in the reconstruction of its facilities destroyed by the
1993 fire and as security therefor granted the lender a security interest in
assets owned by her. In March 1999, after repayment of the indebtedness and
release of the security interest, the Company, as authorized by the Board of
Directors, paid to Ms. Krantz a guaranty fee of $988,799, computed as a
percentage of the outstanding balance of the indebtedness during the loan
period. The Board of Directors of the Company believes that the terms of such
arrangement were no less favorable to the Company than terms that would have
been available to the Company from unrelated third parties for comparable
transactions.
From time to time, persons who are officers, directors or principal
shareholders of the Company own or have interests in horses racing at the
Company's race track. Such races are conducted under the rules and regulations
of the Louisiana Racing Commission, and no officer, director or principal
shareholder receives any extra or special benefits not shared by all others so
racing.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the six month
periods ended April 30, 2000 and 1999 is 252.22 and 148.56, respectively. The
Company's ratio of earnings to fixed charges for the fiscal years ended October
31, 1999 and 1998 is (87.10) and (121.74) respectively.
28
<PAGE> 31
SELECTED FINANCIAL DATA
FAIR GROUNDS CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Five Years Ended October 31
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 41,794,601 $ 36,785,091 $ 30,980,259 $ 27,496,500 $ 23,031,031
OPERATING EXPENSES 43,537,452 39,209,437 32,201,167 29,809,843 26,394,452
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,742,851) (2,424,346) (1,220,908) (2,313,343) (3,363,421)
INTEREST EXPENSE 19,783 19,752 266,435 791,566 12,318
OTHER INCOME 399,015 1,483,027 3,013,320 4,279,503 2,459,163
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM, AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES (1,343,836) (961,071) 1,525,977 1,174,594 (916,576)
PROVISION (BENEFIT) FOR
INCOME TAXES (236,256) (645,355) 775,288 294,896 (300,460)
EXTRAORDINARY ITEM - GAIN
FROM FIRE (net of taxes) 2,517,713 6,272,628 9,022,525 -- --
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES -- -- -- -- 104,000
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,410,133 $ 5,956,912 $ 9,773,214 $ 879,698 $ (512,116)
============ ============ ============ ============ ============
COMMON SHARES OUTSTANDING 469,940 469,940 469,940 469,940 469,940
============ ============ ============ ============ ============
NET INCOME (LOSS) PER COMMON
SHARE $ 3.01 $ 12.71 $ 20.80 $ 1.87 $ (1.09)
============ ============ ============ ============ ============
SPECIAL CASH DIVIDENDS PAID PER SHARE $ 1.00 $ None $ None $ None $ None
============ ============ ============ ============ ============
TOTAL ASSETS $ 48,951,539 $ 49,144,377 $ 48,089,820 $ 34,791,597 $ 30,954,654
============ ============ ============ ============ ============
</TABLE>
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the historical financial condition and
results of operations of the Company for each of the three years in the period
ended October 31, 1999 and for the six months ended April 30, 2000 and April 30,
1999. The financial information, discussion and analysis that follow are based
upon and should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto. See "Financial Statements." The
Company's fiscal year begins on November 1 of each year and ends on October 31
of the following year. Unless otherwise indicated, reference to a year in this
discussion means the fiscal year ended October 31 of the calendar year to which
reference is made. For example, references to 1999 mean the fiscal year which
commenced on November 1, 1998 and ended October 31, 1999.
RESULTS OF OPERATIONS
Comparison of the Six Months Ended April 30, 2000 and 1999
Revenues. During the six months ended April 30, 2000 and 1999, the Company
derived its pari-mutuel income by conducting 88 live racing days during each
fiscal period and in the operation of its tele-tracks for off-track wagering.
During each such period, 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 six months ended April 30, 2000, the Company reported total in-state
pari-mutuel wagering of $78,851,604 compared to $78,537,304 in the comparable
period in fiscal 1999.
Comparative pari-mutuel wagering and attendance figures for the six months ended
April 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 26,136,189 $ 27,412,562
Off-track handle 51,715,415 51,124,742
------------ ------------
Total in-state wagering $ 77,851,604 $ 78,537,304
============ ============
Out-of-state simulcast handle $366,467,601 $321,342,925
============ ============
Total On-Track Attendance 310,912 336,466
============ ============
</TABLE>
The Company believes that the $1,276,373, or 4.7%, decrease in on-track
handle is primarily due to the increased competition locally from the land based
casino which opened in October 1999, and from other simulcast signals competing
with the Company's signal. There was no material change in the off-track handle
between the two periods. The $45,124,676, or 14%,
30
<PAGE> 33
increase in out-of-state handle is primarily due to the continued high quality
of racing at the Fair Grounds Race Course. Due to occasional bad weather in
other parts of the country, the Company's races became alternates when certain
tracks were unable to race, thus increasing the Company's simulcasting. In
addition, during the six months ended April 30, 2000, the Company experienced
significant handle increases from California, as the Company's races became one
of the two featured simulcasts signals in that state starting in January 2000.
Primarily as a result of the out-of-state handle increase, the
Company's total operating revenues increased $775,528, or 2.6%, from the
comparable period in the prior fiscal year, including an increase of $1,380,348,
or 13.9%, in host track fees. In addition, net video poker revenues increased by
$30,323, or 3.5%. These increases were partially offset by decreases of
$395,541, or 2.5%, in pari-mutuel commissions; $20,334, or 4.7%, in breakage;
$70,881, or 4%, in concessions revenue; $43,527, or 7.6%, in admissions
revenues; and $2,724, or 4.8%, in parking revenue. The decreased revenues are
mainly attributable to the decrease in on-track attendance and handle during the
current fiscal year period.
Racing Expenses. Total racing expenses for the six months ended April
30, 2000 increased $1,363,228, or 5.7%, over the comparable period in the prior
fiscal year, primarily as a result of the increased out-of-state pari-mutuel
activities. The increase in racing expenses was attributable to an increase of
$465,489, or 4.3%, in purses, as well as increases in salaries and related taxes
and benefits, contracts and services, host track fees, utilities, advertising
and promotions, and rent, partially offset by decreases in depreciation, repairs
and maintenance, programs, forms and other supplies, and miscellaneous expenses.
The increase in rent was due to the increased monthly rent at the
Bourbon Street Tele-Track location, as well as rent payments, beginning in
February 2000, for a new tele-track location to be opened in Hanrahan,
Louisiana. Depreciation decreased in the current fiscal year period due to many
of the Tele-Track's leasehold improvements becoming fully depreciated in the
prior fiscal year.
General and Administrative Expenses. General and administrative
expenses decreased by $1,723,399, or 41.7%, in the current fiscal year period
primarily as a result of decreases in salaries and related taxes and benefits,
legal, audit and director fees, office expenses and miscellaneous expenses.
During the six months ended April 30, 1999, certain members of management were
paid bonuses as authorized by the Board of Directors. No bonuses were authorized
or paid in the current fiscal year period. Legal, audit and director fees
decreased in the current fiscal year period as a result of the conclusion prior
to the period of most of the fire-related litigation. Office expenses decreased
in the current fiscal year period as a result of a change in the expense
classification of the Company's pari-mutuel fiber optic telephone charges. In
the prior fiscal year period, these charges were included in office expenses,
while in the current fiscal year period, the charges are classified as contracts
and services and are included in racing expenses. In the fiscal 1999 period,
miscellaneous expenses included a guarantee fee of approximately $988,000 paid
in connection with a pledge of assets and guarantee of corporate indebtedness.
No guarantee fee was paid in the current fiscal year period.
31
<PAGE> 34
Other Income (Expense). Other income decreased in the six months ended
April 30, 2000 by $214,412, or 19.2%, compared to the first six months of fiscal
1999 primarily as a result of a $184,142 decrease in Jazz Heritage Festival
income. The decrease in Jazz and Heritage Festival income was attributable to a
timing difference, with three days of the 2000 Jazz and Heritage Festival
falling in the first six months of the current fiscal year compared to five days
of the 1999 Jazz and Heritage Festival falling in the comparable period in
fiscal 1999.
Extraordinary Items. During the six months ended April 30, 1999, the
Company received settlement payments in connection with the fire-related
litigation in the aggregate amount of $3,983,280. These proceeds were reported
net of related taxes. In the comparable period in the current fiscal year, the
Company received $327,147 in connection with the fire-related litigation, which
is shown net of $121,044 of related taxes.
Income Taxes. For the six months ended April 30, 2000, the income tax
provision was $1,315,841, compared to $1,174,670 in the comparable period in
fiscal 1999. The difference between periods reflects changes in pre-tax income
between the respective periods.
Net Income. The Company reported net income of $2,446,588 for the six
months ended April 30, 2000 compared to net income of $3,850,337 for the six
months ended April 30, 1999.
Fiscal 1999 Compared to Fiscal 1998
Revenues. During the fiscal years ended October 31, 1999 and 1998, 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. During each such fiscal year, in addition to live racing
conducted at the Fair Grounds race course in New Orleans, the Company operated
tele-tracks in New Orleans at the Fair Grounds Race Course and on Bourbon
Street, and at locations in Jefferson, Lafourche, St. Bernard and St. John
Parishes, Louisiana. Through Finish Line Management Corporation, an affiliated
company, the Company operated tele-track facilities in Terrebonne, St. Tammany,
and Jefferson Parishes, Louisiana.
For the fiscal year ended October 31, 1999, the Company reported total
in-state pari-mutuel wagering of $126,264,900 compared to $119,710,774 in fiscal
1998.
Comparative pari-mutuel wagering and attendance figures for the fiscal
years ended October 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Pari-mutuel wagering:
On-track handle $ 27,412,562 $ 25,789,351
Off-track handle 98,852,338 93,921,423
------------ ------------
Total in-state wagering $126,264,900 $119,710,774
============ ============
Out-of-state simulcast handle $321,342,925 $219,765,629
============ ============
Attendance:
On-track 170,684 189,439
Off-track 379,910 391,271
------------ ------------
Total Attendance 550,594 580,710
============ ============
</TABLE>
32
<PAGE> 35
The Company attributes the $1,623,211, or 6.3%, increase in the
on-track handle in the 1999 fiscal year primarily to the improved quality of
racing resulting from increased purses paid during the fiscal 1999 race meet.
The Company believes that the $4,930,915, or 5.3%, increase in
off-track handle is primarily due to the Company transmitting better
simulcasting signals and to higher quality horses racing in the Company's fiscal
1999 live racing meet. The $101,577,296, or 46.2%, increase in out-of-state
handle is believed to be the result of those same factors. In addition, during
the fiscal 1999 race meet the Company's races were sometimes simulcasted to
locations that have not generally received simulcasts of the Company's races,
thus increasing the Company's simulcasting handle. Those locations received
simulcasts of the Company's races during fiscal 1999 because certain other
tracks were unable to conduct live racing and simulcast their races to those
locations due to severe winter weather. During the fiscal year ended October 31,
1999, the Company experienced significant simulcast handle increases from
California and New York. These two markets accounted for approximately $46.4
million, or 46%, of the handle increase.
With the increase in total handle, the Company's operating revenues in
the fiscal year ended October 31, 1999 increased by $5,009,510, or 13.6%, from
the prior fiscal year. This included increases of $1,539,409, or 6.5%, in
pari-mutuel commissions, $179,196, or 34.5%, in breakage, $63,384, or 13.3% in
uncashed mutuel tickets, $77,285, or 3.5%, in concessions, $3,210,979, or 45.2%,
in host track fees, $80,674, or 2.8%, in video poker revenues, $11,516, or
25.5%, in parking revenues, and $211,722, or 34.6%, in miscellaneous revenues.
Miscellaneous revenue included approximately $150,000 of promotional fee
revenues paid by third parties which advertise in the Company's racing program
plus $135,000 of promotional fees paid to the Company by its video poker
operator. Also included in miscellaneous revenues is group sales and special
events revenues held at the Company's facilities which have continued to
increase since the building of its new grandstand and clubhouse facilities.
These increases were partially offset by a $55,442, or 7.4%, decrease in
admissions revenues, a $143,557, or 9%, decrease in programs and forms revenue
and a $165,656 or 5.2% increase in pari-mutuel tax expense. Admissions are no
longer collected at the Company's teletrack in Lafourche Parish. Programs and
forms revenues have decreased as a result of a continued decline in racing form
sales. Management believes racing form sales are being replaced by the sales of
less expensive racing programs. In addition, some information found in these
racing publications can now be obtained by the public over the internet, thus
reducing the demand for program and form sales.
Racing Expenses. Total racing expenses increased $3,348,937, or 10%, in
the 1999 fiscal year over the prior period, primarily as a result of the
increased pari-mutuel activities. This increase included an increase of
$2,326,443, or 17.4%, in purses. Other increases included salaries and related
taxes and benefits, contracts and services, rent, repairs and maintenance,
concessions costs, advertising and promotion, and host track fees paid by the
Company. These increases were partially offset by decreases in utilities,
depreciation, and program paper, forms and other supplies.
33
<PAGE> 36
General and Administrative Expenses. General and administrative
expenses increased by $979,078, or 18.2%, in the 1999 fiscal year primarily as a
result of performance bonuses paid in the second fiscal quarter to key
personnel, increased property taxes, increased office expenses and increased
legal fees relating to ongoing litigation discussed elsewhere herein. Also
contributing to the higher general and administrative expenses in fiscal 1999
was a $118,000 increase in the accrual for contingent liabilities over the prior
year based upon management's evaluation of outstanding contingencies at October
31, 1999. These increases were partially offset by decreases in insurance costs
due to lower property and general liability premiums, and decreased contracts
and services.
Other Income (Expense). Other income decreased in the fiscal year ended
October 31, 1999 by $1,064,260, or 72.7%, due, in part, to a $127,931 decrease
in Jazz and Heritage Festival income. The decrease in Jazz and Heritage Festival
income was primarily attributable to a $25,000 increase of the festival
sponsorship fee paid by the Company, a decrease in infield food sales compared
to the 1998 festival, and increased cost of goods sold at the 1999 festival. The
decrease in other income was also attributable to the Company's payment, during
the 1999 fiscal year, of a guaranty fee in the amount of $988,789 to Marie G.
Krantz for her guaranty of, and pledge of personal assets to secure, the
Company's reconstruction debt from 1995 through completion of construction in
late 1997. No additional guaranty payments are due to Ms. Krantz, and the
Company will not be making a similar guaranty payment in the 2000 fiscal year.
Extraordinary Items. During the fiscal year ended October 31, 1999, the
Company received settlement payments in connection with the fire related
litigation previously reported in the aggregate amount of $4 million. These
proceeds were reported net of related taxes of approximately $1.48 million. In
the comparable prior fiscal year period, settlements totaled $9.96 million and
were reported net of $3.68 million of related taxes.
Income Taxes. For the fiscal year ended October 31, 1999, income tax
benefit was $236,256, compared to $645,355 for fiscal 1998. The difference
between periods reflects changes in pretax income and deferred tax assets and
liabilities between the respective periods.
Net Income. The Company reported net income of $1,410,133 for the
fiscal year ended October 31, 1999 compared to $5,956,912 for the fiscal year
ended October 31, 1998. The Company's net income in fiscal 1999 was
significantly reduced from that in fiscal 1998 primarily due to a substantial
reduction in the fire-related litigation recoveries in the 1999 fiscal year. The
Company anticipates that there may be a further reduction in net income in
fiscal 2000 inasmuch as the Company may not receive any significant litigation
recoveries in fiscal 2000. Excluding the extraordinary items and income taxes
discussed above, net income (loss) in the current fiscal year was $(1,343,836)
compared to $(961,071) in the fiscal year ended October 31, 1998.
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
34
<PAGE> 37
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 580,710 499,131
============ ============
</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 fiscal 1997 plus significant handle increases
from Kentucky, Pennsylvania, Texas and Las Vegas.
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%, in pari-mutuel commissions, $37,268,
or 7.74%, in breakage, $1,366,481, or 23.8%, in host track fees, $553,084, or
23.6%, in video poker revenue, and $456,199, or 154%, in admissions revenue.
Admissions 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
35
<PAGE> 38
approximately $586,417, or 65.8%, as a result of the opening of the new
clubhouse and grandstand facilities.
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 and promotion, 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.
General and Administrative Expenses. General and administrative
expenses for the fiscal year ended October 31, 1998 increased $1,264,961, or
30.8%, 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.
Other Income (Expenses). Total other income in fiscal 1998 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 fiscal 1998'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.
Interest income in fiscal 1998 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 in fiscal 1998 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 fiscal 1997 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. 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 $645,355
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.
Net Income. The Company had net income of $5,956,912 for the fiscal
year ended October 31, 1998 compared to net income of $9,773,214 for the
previous fiscal year. Although the Company received significant litigation
settlements as described herein in both fiscal years, the
36
<PAGE> 39
recoveries in fiscal 1998 were substantially below the fiscal 1997 recoveries.
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.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $911,078 during the fiscal year
ended October 31, 1999, as a result of cash provided by investing activities of
$3,179,859, partially offset by cash used for operating activities of $874,131,
and cash used for financing activities of $1,394,650. Cash provided from
investing was primarily from fire litigation settlements described elsewhere
herein. Cash used for operations was primarily due to the payment of purses
during the Company's live racing meet. Cash used by financing was primarily the
result of dividends paid on the Company's stock partially offset by short term
financing proceeds.
Cash and cash equivalents decreased $2,924,859 during the six months
ended April 30, 2000, as a result of cash used in operating activities of
$3,503,393, partially offset by cash provided by investing activities of
$188,147 and cash provided by financing activities of $390,387. Cash used in
operations was primarily due to the payment of horseman's purses and other
related racing payments. Cash provided by investing was the result of proceeds
from a fire-related litigation settlement previously discussed. Cash provided by
financing is the net of the $1 million advance from the Company's video poker
operator received in January 2000 less debt repayments made through April 30,
2000.
As of April 30, 2000, the Company had received cumulatively, since the
December 1993 fire, approximately $48.3 million, before taxes, of insurance
proceeds resulting from fire loss claims submitted to the Company's insurance
carriers or in litigation settlements. The Company's new main grandstand and
racing facility was substantially completed in November 1997 and was opened for
the start of the Company's 1997-98 live racing meet. The total cost of
constructing and furnishing the facility, including the tele-track facility at
the Fair Grounds Race Course that was completed in late 1994, was in excess of
$35 million.
In November 1999, the Company entered into a working capital line of
credit agreement with First Bank and Trust. The line of credit is for $2.5
million with a variable interest rate on amounts outstanding. No amounts have
been drawn down on the line of credit since it was entered into in November
1999.
On April 30, 1999, the Company paid a special cash dividend of $1.00
per share to shareholders of record at the close of business on April 15, 1999.
The Company presently has no plans to declare any additional cash dividends.
The Company believes that the combination of existing cash, cash from
future operations, funds available under its working capital line of credit, and
the Company's capacity to incur short-term and long-term indebtedness, if
necessary, will be sufficient to fund the Company's cash requirements for the
foreseeable future, including payment of cash in lieu of fractional shares if
the
37
<PAGE> 40
proposed Reverse Stock Split is effected. The Company has a deferred tax
liability of approximately $9.65 million at April 30, 2000 arising from fire
insurance and other litigation settlements that is to be paid over approximately
38 years. The Company currently anticipates payment of that liability with funds
obtained through the sources outlined above.
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. The Company has not experienced any significant problems associated
with the year 2000 issue, although it is possible that year 2000 problems could
develop at a later date.
Impact of Inflation
To date, inflation has not had a material effect in the Company's
operations.
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.
MARKET FOR THE COMMON SHARES; DIVIDENDS
The Company's common shares are traded in the over-the-counter market
and are quoted in the "pink sheets" promulgated by the National Quotation
Bureau, Inc. and are qualified for listing on the OTC Bulletin Board under the
symbol "FGNO". Trading in the Company's common shares has been sporadic and
relatively inactive for many years.
The following chart sets forth the range of the high and low bid
quotations for the common shares of the Company for each period indicated. The
quotations represent prices between dealers and do not include retail markups,
markdowns, commissions or other adjustments and may not represent actual
transactions. The information presented was obtained from Dorsey & Company, a
broker-dealer located in New Orleans, Louisiana.
<TABLE>
<CAPTION>
BID PRICES
PERIOD HIGH LOW
<S> <C> <C>
Fiscal year ended October 31, 1998:
Nov. 1, 1997 to Jan. 31, 1998 20.00 15.50
Feb. 1, 1998 to Apr. 30, 1998 17.00 16.00
May 1, 1998 to July 31, 1998 26.00 20.00
Aug. 1, 1998 to Oct. 31, 1998 30.00 23.00
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
BID PRICES
PERIOD HIGH LOW
<S> <C> <C>
Fiscal year ended October 31, 1999:
Nov. 1,1998 to Jan. 31, 1999 25.00 22.50
Feb. 1, 1999 to Apr. 30, 1999 27.00 24.25
May 1, 1999 to July 31, 1999 31.13 27.50
Aug. 1, 1999 to Oct. 31, 1999 35.00 30.50
Fiscal year ending October 31, 2000:
Nov. 1,1999 to Jan. 31, 2000 34.50 32.00
Feb. 1, 2000 to Apr. 30, 2000 32.00 30.25
May 1, 2000 to July 31, 2000 37.00 30.50
</TABLE>
On August 18, 2000, the last trading day on which there was any trading
in common shares of the Company preceding the announcement of the proposed
Reverse Stock Split, the closing sales price of the common shares of the Company
on the OTC Bulletin Board was $33.25.
On April 30, 1999 the Company paid a special dividend of $1.00 per
share to shareholders of record at the close of business on April 15, 1999. No
other cash dividends were declared or paid during fiscal 1999 or 1998 or during
fiscal 2000 to date.
EXPENSES
The following is an estimate of the costs and expenses incurred or
expected to be incurred by the Company in connection with the Reverse Stock
Split. The amount shown below excludes the cost of paying for fractional shares
after the Reverse Stock Split is effected.
<TABLE>
<S> <C>
Legal fees and expenses $ 75,000
Transfer and exchange agent fees 5,000
Accounting fees and expenses 5,000
Printing and mailing costs 3,000
Fee to Duff & Phelps 60,000
Miscellaneous 2,000
---------
Total $ 150,000
</TABLE>
INCORPORATION BY REFERENCE
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Information Statement shall be deemed to be
modified or superseded for purposes of this Information Statement to the extent
that a statement contained in this Information Statement or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference in this Information Statement modifies or supersedes such statement.
39
<PAGE> 42
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Information Statement.
This Information Statement incorporates documents by reference that are
not presented in or delivered with this Information Statement. Copies of these
documents are available without charge upon request from the Company.
ADDITIONAL INFORMATION
A representative of Rebowe & Company will be present at the special
meeting, will have an opportunity to make a statement if he so desires and will
be available to answer appropriate questions from shareholders.
The Company is presently subject to the informational requirements of
the 1934 Act and in accordance therewith files reports and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company; the address of such site
is http://www.sec.gov.
OTHER MATTERS
The Board of Directors does not intend to bring any business before the
annual meeting other than that stated herein and is not aware of any other
matters that may be presented for action at the meeting.
By Order of The Board of Directors
David R. Sherman
Secretary
Dated: , 2000
40
<PAGE> 43
FINANCIAL STATEMENTS
INDEX
The following financial statements of the Company, including the notes
thereto, and the Report of Independent Certified Public Accountants are included
herewith:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance Sheets at October 31, 1999 and 1998 F-2
Statements of Operations
for the Three Years Ended October 31, 1999 F-4
Statements of Changes in Stockholders' Equity
for the Three Years Ended October 31, 1999 F-7
Statements of Cash Flows
for the Three Years Ended October 31, 1999 F-8
Notes to Financial Statements
for the Three Years Ended October 31, 1999 F-10
Balance Sheets (unaudited) at April 30, 2000 and April 30, 1999 F-24
Statements of Operations and Retained Earnings (unaudited)
for the Six Months Ended April 30, 2000 and 1999 F-26
Statements of Cash Flows (unaudited)
for the Six Months Ended April 30, 2000 and 1999 F-29
Notes to Financial Statements (unaudited)
for the Six Months Ended April 30, 2000 and 1999 F-31
</TABLE>
<PAGE> 44
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
(the "Company") as of October 31, 1999 and 1998, 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, 1999. 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,
1999, and 1998 and the results of its operations and its cash flows for each of
the three years in the period ended October 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Rebowe & Company
Metairie, Louisiana
January 3, 2000
F-1
<PAGE> 45
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31
-------------------------------
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,488,808 $ 7,577,730
Cash and cash equivalents - restricted 125,665 118,218
Accounts receivable 1,079,222 1,078,638
Mutuel settlements 181,630 139,964
Inventory 125,156 118,357
Deferred income taxes 103,600 59,940
Prepaid expenses 468,165 437,322
------------ ------------
Total Current Assets 10,572,246 9,530,169
------------ ------------
OTHER ASSETS 53,768 283,411
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 44,177,698 43,870,295
Land improvements 4,463,899 4,348,135
Automotive equipment 963,243 931,424
Machinery and equipment 2,696,449 2,432,433
Furniture and fixtures 405,352 366,575
------------ ------------
Total 52,706,641 51,948,862
Less: accumulated depreciation
and amortization (17,667,397) (15,904,346)
------------ ------------
Depreciable property - net 35,039,244 36,044,516
Land 3,286,281 3,286,281
------------ ------------
Property, plant and equipment - net 38,325,525 39,330,797
------------ ------------
TOTAL ASSETS $ 48,951,539 $ 49,144,377
============ ============
</TABLE>
F-2
<PAGE> 46
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
October 31
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 109,613 $ 46,894
Accounts payable 849,288 1,552,141
Accrued liabilities:
Deferred purses 8,104,835 7,930,825
Host track fees 432,721 374,251
Uncashed mutuel tickets 391,790 446,786
Other 543,183 369,135
Deferred revenues 282,970 275,701
Income taxes payable 4,932 515,391
------------ ------------
Total Current Liabilities 10,719,332 11,511,124
------------ ------------
DEFERRED INCOME TAXES 9,652,819 9,995,418
------------ ------------
Total Liabilities 20,372,151 21,506,542
------------ ------------
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 25,153,119 24,211,566
------------ ------------
Total 28,614,913 27,673,360
Less: treasury stock at cost,
1,360 shares at 1999 and 1998 (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 28,579,388 27,637,835
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,951,539 $ 49,144,377
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 47
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended October 31
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Pari-mutuel commissions $ 25,290,751 $ 23,751,342 $ 20,832,282
Breakage 698,018 518,822 481,554
Uncashed mutuel tickets 540,124 476,740 404,405
------------ ------------ ------------
Total 26,528,893 24,746,904 21,718,241
Less: pari-mutuel tax (3,330,231) (3,164,575) (2,792,092)
------------ ------------ ------------
Commission income 23,198,662 21,582,329 18,926,149
Host track fees 10,311,004 7,100,025 5,733,544
------------ ------------ ------------
Total Mutuel Income 33,509,666 28,682,354 24,659,693
Concessions 2,272,073 2,194,788 1,485,227
Admissions (net of taxes) 697,627 753,069 296,870
Parking 56,606 45,090 20,581
Video poker 2,980,435 2,899,761 2,346,677
Programs and forms 1,455,005 1,598,562 1,491,628
Miscellaneous 823,189 611,467 679,583
------------ ------------ ------------
Total Operating Revenues 41,794,601 36,785,091 30,980,259
------------ ------------ ------------
RACING EXPENSES
Purses 15,666,248 13,339,805 11,041,607
Salaries and related
taxes and benefits 7,710,882 7,058,677 5,702,370
Contracts and services 2,353,119 2,197,555 2,333,814
Depreciation 1,763,051 1,847,867 1,589,041
Host track fees 3,168,059 2,785,281 2,482,926
Program paper, forms and
other supplies 1,649,714 1,774,943 1,587,615
Utilities 998,231 1,204,332 674,071
Advertising and promotion 1,195,451 1,152,101 917,817
Cost of sales - concessions 866,532 716,918 593,774
Repairs and maintenance 774,331 733,474 383,343
Rent 359,872 326,973 304,138
Miscellaneous 685,385 704,012 488,113
------------ ------------ ------------
Total Racing Expenses $ 37,190,875 $ 33,841,938 $ 28,098,629
------------ ------------ ------------
</TABLE>
(Continued)
F-4
<PAGE> 48
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended October 31
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and related
taxes and benefits $ 2,145,314 $ 1,483,233 $ 993,049
Legal, audit and director fees 1,254,283 1,051,024 1,129,814
Property taxes 965,661 811,104 399,541
Insurance 818,374 827,775 866,343
Office expenses 569,711 408,938 350,090
Contracts and services 127,794 179,880 197,603
Miscellaneous 465,440 605,545 166,098
----------- ----------- -----------
Total General and
Administrative Expenses 6,346,577 5,367,499 4,102,538
----------- ----------- -----------
LOSS FROM OPERATIONS (1,742,851) (2,424,346) (1,220,908)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival
income - net 1,249,042 1,376,973 1,048,753
Video poker franchise fee -- -- 1,921,362
Financing charge (988,789) -- --
Interest expense (19,783) (19,752) (266,435)
Interest income 158,545 130,821 78,352
Other -- (24,767) (35,147)
----------- ----------- -----------
Total Other Income $ 399,015 $ 1,463,275 $ 2,746,885
----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEM $(1,343,836) $ (961,071) $ 1,525,977
PROVISION (BENEFIT) FOR
INCOME TAXES (236,256) (645,355) 775,288
----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (1,107,580) (315,716) 750,689
EXTRAORDINARY ITEM -
INSURANCE PROCEEDS AS A
RESULT OF DECEMBER 1993
FIRE (net of $1,478,657, $3,683,924
and $5,298,944 of related income taxes
in 1999, 1998 and 1997, respectively) 2,517,713 6,272,628 9,022,525
----------- ----------- -----------
NET INCOME $ 1,410,133 $ 5,956,912 $ 9,773,214
=========== =========== ===========
</TABLE>
(Continued)
F-5
<PAGE> 49
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended October 31
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OF COMMON STOCK:
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM $ (2.37) $ (0.68) $ 1.60
EXTRAORDINARY ITEM,
NET OF INCOME TAXES 5.38 13.39 19.20
-------- -------- --------
NET INCOME $ 3.01 $ 12.71 $ 20.80
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 50
FAIR GROUNDS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended October 31, 1999, 1998 and 1997
<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, 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 -- -- 5,956,912 -- -- 5,956,912
Change in unrealized loss
on securities available
for sale -- -- -- 3,122 -- 3,122
---------- ---------- ------------ -------- -------- ------------
Balance, October 31, 1998 1,525,092 1,936,702 24,211,566 -- (35,525) 27,637,835
Net Income -- -- 1,410,133 -- -- 1,410,133
Special cash dividends ($1 per share) -- -- (468,580) -- -- (468,580)
---------- ---------- ------------ -------- -------- ------------
Balance, October 31, 1999 $1,525,092 $1,936,702 $ 25,153,119 $ -- $(35,525) $ 28,579,388
========== ========== ============ ======== ======== ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 51
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended October 31
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 1,410,133 $ 5,956,912 $ 9,773,214
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,763,051 1,847,867 1,589,041
Financing charge 988,789 -- --
Gain on sale of property -- -- (115,602)
Provision (benefit) for
deferred income taxes (407,805) (301,326) 5,836,263
Loss (Gain) on sale of
investment securities -- (725) (398)
Gain from fire (3,996,370) (9,900,000) (14,321,469)
Change in assets and
liabilities:
(Increase) decrease in:
Accounts receivable and
mutuel settlements (42,250) 168,820 (438,071)
Inventory (6,799) (23,054) (11,055)
Prepaid expenses (30,843) (84,155) 72,816
Cash and cash equivalents -
restricted (7,447) 2,525,484 (2,509,773)
Deposits and other assets 229,643 (157,895) (23,832)
Increase (decrease) in:
Accounts payable and
accrued liabilities (510,259) 736,220 524,312
Deferred purses 174,010 505,646 732,124
Deferred revenues 7,269 134,861 134,840
Income taxes payable (445,253) 329,185 71,000
------------ ------------ ------------
Total Adjustments (2,284,264) (4,219,072) (8,459,804)
------------ ------------ ------------
Net cash provided by (used for)
operating activities (874,131) 1,737,840 1,313,410
------------ ------------ ------------
</TABLE>
(Continued)
F-8
<PAGE> 52
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended October 31
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures (757,779) (3,478,477) (12,965,686)
Construction contract
payable (58,732) (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
Proceeds from sale of property -- (1,111) 126,371
Proceeds from fire
litigation settlements 3,996,370 9,900,000 14,321,469
------------ ------------ ------------
Net cash provided by
investing activities 3,179,859 5,919,143 2,247,732
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends paid (468,580) -- --
Payment of financing charge (988,789) -- --
Proceeds from short-term
borrowings 1,320,052 2,272,253 17,083,985
Principal repayments
of short-term borrowings (1,257,333) (7,544,262) (21,717,305)
------------ ------------ ------------
Net cash used for
financing activities (1,394,650) (5,272,009) (4,633,320)
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 911,078 2,384,974 (1,072,178)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 7,577,730 5,192,756 6,264,934
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 8,488,808 $ 7,577,730 $ 5,192,756
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 53
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company conducts a live winter/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
regulations or economic conditions that affect the gaming industry.
Basis of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiary, F. G. Staffing Services, Inc. All inter-company
balances and transactions have been eliminated in consolidation.
Uninsured Cash Deposits
As of October 31, 1999 and 1998, the Company had deposits in various financial
institutions in the aggregate of $8,622,684 and $8,124,477, respectively. In
fiscal year 1999, $308,915 was FDIC insured and $7,884,502 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, 1999 and 1998 by $429,267 and $787,598, 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, 1999 and 1998, restricted cash totalled $125,665 and
$118,218, respectively. This restricted cash is a security deposit for the
Company's worker's compensation program.
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.
F-10
<PAGE> 54
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
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.
Advertising
Advertising costs are charged to operations when incurred.
Accounts Receivable
The Company has recorded accounts receivable from pari-mutuel wagering, video
poker and other activities. The majority of these receivables is settled at
least monthly and considered fully collectable. Therefore, management does not
consider an allowance for doubtful accounts to be 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.
F-11
<PAGE> 55
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Statement of Financial
Accounting Standards (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 5.
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.
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.
F-12
<PAGE> 56
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification
Certain prior year accounts have been reclassified to conform to the current
year presentation. This reclassification has no effect on the net income for
the year ended October 31, 1998 and 1997.
Restatement of 1998 Financial Statements
The financial statements for the year ended October 31, 1998 have been restated
to correct for an error in the calculation of deferred income taxes. The
Company's statement of operations for the fiscal year ended October 31, 1998
erroneously reflected a benefit for income taxes of $3,364,232 and net income
for fiscal 1998 of $8,973,671. The benefit for income taxes was primarily
related to the insurance and litigation recoveries arising out of a fire at the
Company's race track in 1993 and the reinvestment of those recoveries in the
Company's new facilities. Had this error not occurred, net income would have
been reduced by $3,016,759 or $6.38 per share, to $5,956,912 or $12.71 per
share. Stockholders' equity at October 31, 1998 would have been $27,637,835 as
compared to the previously reported amount of $30,654,594. The Company's
financial statements as of October 31, 1998 have been restated to reflect this
adjustment.
NOTE 2 - STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
Cash was paid during the following fiscal years for:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest $ 19,783 $ 50,594 $ 454,457
============ ============ ============
Income taxes $ 1,298,000 $ 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, 1999, 1998, and 1997.
F-13
<PAGE> 57
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE
There were no investment securities classified as available for sale at October
31, 1999 and 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. There were no proceeds from sales of investment
securities or gains (losses) realized for the fiscal year ended October 31,
1999.
NOTE 4 - NOTES PAYABLE
<TABLE>
<CAPTION>
October 31
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Imperial Premium Finance, Inc.
Installment note - insurance
premium financing; interest at 6.75%,
final installment due April 2000. 69,130 --
INAC Corp; Installment note -
insurance premium financing;
interest at 6.78%, final installment
due February 2000. 40,483 --
INAC Corp.; Installment note -
insurance premium financing;
interest at 6.79%, final installment
due February 1999. -- 46,894
--------- ---------
$ 109,613 $ 46,894
========= =========
</TABLE>
NOTE 5 - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
October 31
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 1,278,244 $ 3,188,238 $ 121,000
State 200,413 495,686 --
------------ ------------ ------------
Total 1,478,657 3,683,924 121,000
Deferred (236,256) (645,355) 5,953,232
------------ ------------ ------------
Total $ 1,242,401 $ 3,038,569 $ 6,074,232
============ ============ ============
</TABLE>
F-14
<PAGE> 58
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 5 - INCOME TAXES (CONTINUED)
Approximately $1.5 million, $3.7 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 years ended October 31, 1999, 1998 and
1997, respectively.
For the fiscal years ended October 31, 1999 and 1998, the tax effects of
temporary differences that gave rise to significant portions of the deferred
tax assets and liabilities are presented below. There was no activity in the
valuation allowance in fiscal years 1999 and 1998.
<TABLE>
<CAPTION>
October 31
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current deferred tax assets:
General liability insurance contingency accrual $ 103,600 $ 59,940
------------ ------------
Total current deferred tax assets $ 103,600 $ 59,940
============ ============
Non-current deferred tax assets:
Tax accumulated depreciation in excess of book $ (1,850,589) $ (2,193,188)
------------ ------------
Total non-current deferred tax assets (1,850,589) (2,193,188)
Non-current deferred tax liabilities:
Deferred tax on gain from fire (7,802,230) (7,802,230)
------------ ------------
Net non-current deferred tax liabilities $ (9,652,819) $ (9,995,418)
============ ============
</TABLE>
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, 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
October 31
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expected tax provision $ 901,862 $ 3,058,464 $ 5,388,132
State income taxes 200,413 495,686 475,423
Utilization of net operating loss -- -- 251,000
Additional tax basis attributable to gain -- (347,473) --
Other 140,126 (168,108) (40,323)
------------ ------------ ------------
Actual tax provision $ 1,242,401 $ 3,038,569 $ 6,074,232
============ ============ ============
</TABLE>
F-15
<PAGE> 59
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 5 - INCOME TAXES (CONTINUED)
As of October 31, 1999, the Company has recorded a non-current deferred tax
liability totaling $9,652,819 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 its remaining tax life.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company has been a party to a number of legal proceedings which arose 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
pending fire-related proceedings or proceedings terminated during the fiscal
year ended October 31, 1999:
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. The settlement agreement included a "Mary Carter" provision
whereby the insurance agent and broker are entitled to share in any recovery
that the Company might have obtained 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.
Both the Company and Travelers filed appeals with the Louisiana Fifth Circuit
Court of Appeals. On September 28, 1999 the Court of Appeals amended the trial
court judgment to delete the
F-16
<PAGE> 60
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
$2,410,905 award for business interruption coverage and otherwise affirmed the
trial court's decision. After the Company's petition for rehearing was refused
by the Court of Appeals on October 18, 1999, the Company filed an application
for writ of certiorari with the Louisiana Supreme Court which has not yet acted
on such application. Since the decision by the Court of Appeals, Travelers has
paid $327,147 to the Company in satisfaction of that portion of the judgment
attributable to penalties, attorney's fees and interest thereon. Under the Mary
Carter provision, the Company is entitled to the following: (i) 100% of the
first $1.0 million recovered and 100% of any recovery from $3.0 million to $4.0
million; (ii) 57.214437% of any recovery from $10.0 million to $14,674,474; and
(iii) 85% of any recovery in excess of $14,674,474.
Livingston Downs Litigation
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust/civil RICO suit alleging the Company participated in a
conspiracy to prevent the plaintiff from entering the live racing, off track
betting and video poker markets. The Company filed a motion for summary
judgment in late 1998 but that motion has not been decided by the U.S. District
Court. Livingston had previously filed a series of other legal actions against
the Company which were resolved in the Company's favor. Management believes
that Livingston's claims in this case are without merit. However, there is no
assurance that the Company will successfully defend all of Livingston's claims.
Because the amount is question has not yet been determined but could be
substantial and because there is no assurance that there will be insurance
coverage or that it will be adequate, as discussed below, the failure of the
Company to prevail in this lawsuit could have a material adverse effect on the
Company's operations, financial condition and cash flows.
In a declaratory judgment action related to the Livingston suit brought by
insurers for the Company and several of its affiliates, which case has been
consolidated with the suit filed by Livingston, on January 14, 1999 the U.S.
District Court granted the Company's motion for summary judgment, finding that
coverage exists under certain of the Company's insurance policies for claims
asserted by Livingston and that the insurers have a duty to defend. The
insurers have filed a motion for new trial that is pending in the U.S. District
Court. There is no assurance that the motion for new trial will be denied or,
if denied, that the decision of the U.S. District Court will be affirmed on
appeal or that the insurance policies will provide sufficient coverage to
indemnify the Company fully.
Other Litigation
A suit was filed in 1996 in the 19th Judicial District Court in Louisiana by
the Louisiana Horsemen's Benevolent and Protective Association ("LHBPA"), an
association of horsemen organized to promote the dissemination of information
on issues critical to horsemen and the exchange of ideas and information,
against the Company, the State of Louisiana, and all other pari-mutuel wagering
facilities operating in Louisiana. The LHBPA is seeking a larger portion of
video poker proceeds on the grounds that the State of Louisiana and the horse
racing tracks in Louisiana have misinterpreted a Louisiana statute specifying
the amount of revenues from video poker machines at
F-17
<PAGE> 61
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
pari-mutuel waging facilities that are to be used as purse supplements. A
motion for summary judgment seeking dismissal of this action was filed in April
1999 and is pending before the court. Management believes that the Company is
in compliance with the Louisiana statute and the guidelines established by the
Louisiana State Police Gaming Division, which regulates compliance with the
State of Louisiana video poker law, and that the Company has sufficient
defenses to all claims. However, there is no assurance that the Company will
successfully defend the LHBPA's claims. Because the amount in question could be
substantial, the failure by the Company to prevail in this lawsuit could have a
material effect on the Company's operations, financial condition and cash
flows.
In July 1997, 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 1999, the Company and the plaintiffs reached a
settlement agreement pursuant to which the Company paid the plaintiffs $100,000
in full settlement of all claims for overtime pay plus attorneys' fees. The
retaliatory discharge claims were tried in 1999. At the conclusion of evidence,
the court dismissed those claims.
During fiscal 1999, the Company received a final payment of $3,996,370 in
connection with the fire-related litigation against ADT Security Systems
Mid-South, Inc., as previously reported. This amount has been reported as an
extraordinary item, net of taxes, in the Company's October 31, 1999 Statement
of Operations.
The Company also has an accrued liability of $280,000 for contingent
liabilities as of October 31, 1999. This amount has been reported as an "Other
Current Liability" in the October 31, 1999 Balance Sheet. This accrual
increased by $118,000 over fiscal 1998's accrual based upon management's
evaluation of outstanding contingencies at October 31, 1999. Such increase of
the accrual for contingent liabilities has been reported as a "Miscellaneous
General and Administrative Expense" in the Company's October 31, 1999 Statement
of Operations.
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
NOTE 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
F-18
<PAGE> 62
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
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, 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, 1999, 1998 and 1997, the Company received
$87,530, $90,668, and $82,655, respectively, from Finish Line in accordance
with the Management Agreement. Accounts receivable from Finish Line were
$774,245 and $753,984 at October 31, 1999 and 1998, respectively.
The following table reflects the host track fees and purse supplement receipts
from Finish Line for the fiscal years ended October 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Received by the Company and Paid
by Finish Line for the Years Ended October 31
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Host track fees $ 305,591 $ 297,035 $ 325,680
============ ============ ============
Purse supplement receipts $ 4,986,874 $ 4,788,281 $ 4,822,405
============ ============ ============
</TABLE>
F-19
<PAGE> 63
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
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, 1999, 1998 and 1997, the Company made payments to Continental of
$628,365, $502,000, and $333,000, respectively, to reimburse Continental for
advertising expenses paid by it. Continental does not generate any net income
and the Krantz's do not receive any form of compensation from it. As of October
31, 1999 and 1998, the Company was due amounts included in accounts receivable
of $13,894 and $6,614 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 1999, 1998 and 1997, 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, 1999, 1998 and 1997, there
were a total of 337, 315, and 297 devices, respectively, in operation at all of
the Company's facilities. In addition, there were a total of 345, 414, and 428
devices in operation at the Finish Line facilities as of October 31, 1999, 1998
and 1997, respectively.
In March 1999, the Company, as approved by its Board of Directors, paid to
Marie G. Krantz a guaranty fee in the amount of $988,789, which was computed on
the basis of the Company's outstanding reconstruction indebtedness during the
period set forth below, for her guaranty of, and pledge of personal assets to
secure, the Company's reconstruction debt from 1995 through completion of
construction in late 1997.
F-20
<PAGE> 64
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
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, Louisiana January 1, 1995 to January 31, 1999 $ 6,000
February 1, 1999 to January 31, 2004 $ 9,325
-------------------------------------------------------------------------------------------------
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 March 14, 1999 $10,000
New Orleans, Louisiana March 15, 1999 to March 14, 2004 $13,125
-------------------------------------------------------------------------------------------------
Thibodaux, Louisiana October 1, 1998 to September 30, 1999 $ 2,300
October 1, 1999 to September 30, 2000 $ 2,300
-------------------------------------------------------------------------------------------------
Metairie, Louisiana February 1, 1998 to January 31, 1999 $ 9,000
February 1, 1999 to January 31, 2000 $ 9,500
February 1, 2000 to January 31, 2001 $ 9,500
=================================================================================================
</TABLE>
F-21
<PAGE> 65
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 8 - LEASES (CONTINUED)
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.
Future obligations over the primary lease terms, not including renewal periods,
of the Company's long-term leases as of October 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending
October 31
-----------
<S> <C>
2000 $ 422,359
2001 297,900
2002 269,400
2003 269,400
2004 87,038
------------
Total $ 1,346,097
============
</TABLE>
The Company is party to an agreement with Autotote Limited to provide wagering
services, including computer and all related services to carry out the
totalisator function for the Company, until November 20, 2002. The Company pays
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 is $200,000. No
estimates of future obligations under this agreement have been included in the
above table. For the fiscal years ended October 31, 1999, 1998, and 1997, the
Company incurred $200,000 in minimum rental fees and $695,670, $647,187 and
$600,724, 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,
1999, 1998 and 1997. No options were outstanding at October 31, 1999.
F-22
<PAGE> 66
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
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.
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, 1999, 1998, and 1997.
NOTE 11 - SUBSEQUENT EVENT
On November 9, 1999, the Company received $326,396.87 from Travelers Indemnity
Company of Illinois. (See Note 6 above).
F-23
<PAGE> 67
FINANCIAL INFORMATION
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,563,949 $ 8,488,808
Cash and cash equivalents
- restricted 131,068 125,665
Accounts receivable 1,566,900 1,079,222
Mutuel settlements 274,598 181,630
Inventory 140,980 125,156
Prepaid expenses 911,700 468,165
Deferred Taxes 103,600 103,600
------------ ------------
Total Current Assets 8,692,795 10,572,246
------------ ------------
OTHER ASSETS 93,099 53,768
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 44,207,383 44,177,698
Land improvements 4,463,899 4,463,899
Automotive equipment 976,953 963,243
Machinery and equipment 2,732,873 2,696,449
Furniture and fixtures 425,202 405,352
------------ ------------
Total 52,806,310 52,706,641
Less: accumulated depreciation
and amortization (18,495,794) (17,667,397)
------------ ------------
Depreciable property - net 34,310,516 35,039,244
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 37,596,797 38,325,525
------------ ------------
TOTAL ASSETS $ 46,382,691 $ 48,951,539
============ ============
</TABLE>
(Continued)
F-24
<PAGE> 68
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 500,000 $ 109,613
Accounts payable 351,818 849,288
Accrued liabilities:
Deferred purses 1,514,186 8,104,835
Host track fees 613,203 432,721
Uncashed mutuel tickets 652,094 391,790
Other 635,710 543,183
Deferred revenues -- 282,970
Income taxes payable 1,436,885 4,932
------------ ------------
Total Current Liabilities 5,703,896 10,719,332
------------ ------------
DEFERRED INCOME TAXES 9,652,819 9,652,819
------------ ------------
Total Liabilities 15,356,715 20,372,151
------------ ------------
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 27,599,707 25,153,119
------------ ------------
Total 31,061,501 28,614,913
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 31,025,976 28,579,388
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 46,382,691 $ 48,951,539
============ ============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 69
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 15,658,553 $ 16,054,094
Breakage 416,065 436,399
Uncashed mutuel tickets 154,122 174,024
------------ ------------
Total 16,228,740 16,664,517
Less: pari-mutuel tax 1,949,207 1,947,761
------------ ------------
Commission income 14,279,533 14,716,756
Host track fees 11,315,854 9,935,506
------------ ------------
Total Mutuel Income 25,595,387 24,652,262
Concessions 1,679,434 1,750,315
Video poker (net) 909,447 879,124
Admissions (net of taxes) 530,440 573,967
Parking 53,904 56,628
Programs and forms 867,361 870,268
Miscellaneous 574,576 652,457
------------ ------------
Total Operating Revenues 30,210,549 29,435,021
------------ ------------
RACING EXPENSES
Purses 11,277,103 10,811,614
Salaries and related taxes
and benefits 5,213,460 4,672,647
Contracts and services 1,953,360 1,713,985
Host track fees 1,969,027 1,646,332
Depreciation 828,397 980,516
Cost of sales - concessions 591,302 570,145
Utilities 577,888 498,756
Repairs and maintenance 333,567 375,254
Programs, forms and other
supplies 1,049,498 1,162,323
Advertising and promotion 942,977 731,697
Rent 309,531 164,713
Miscellaneous 376,879 458,809
------------ ------------
Total Racing Expenses $ 25,150,019 $ 23,786,791
------------ ------------
</TABLE>
(Continued)
F-26
<PAGE> 70
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 516,422 $ 1,203,270
Insurance 391,336 416,081
Property taxes 482,205 479,870
Legal, audit and director fees 334,432 436,647
Contracts and services 61,957 64,294
Office expenses 272,725 336,268
Miscellaneous 344,572 1,190,618
------------ ------------
Total General and
Administrative Expenses 2,403,649 4,127,048
------------ ------------
NET INCOME FROM OPERATIONS 2,656,881 1,521,182
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 870,504 1,054,646
Interest expense (10,576) (10,309)
Interest income 39,517 69,520
------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 3,556,326 2,635,039
Provision for income taxes 1,315,841 1,174,670
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 2000 - $4.78,
1999 - $3.12) 2,240,485 1,460,369
Extraordinary item - gain from fire
(net of $121,044 and $1,593,312 206,103 2,389,968
of taxes in 2000 and 1999, ------------ ------------
respectively)
NET INCOME (per share
2000 - $5.22, 1999 - $8.22) $ 2,446,588 $ 3,850,337
RETAINED EARNINGS, BEGINNING OF
PERIOD $ 25,153,119 $ 24,211,566
</TABLE>
F-27
<PAGE> 71
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
DIVIDENDS PAID $ -- $ (468,580)
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 27,599,707 $ 27,593,323
============ ============
CASH DIVIDENDS PER SHARE $ -- $ 1.00
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ============
</TABLE>
See accompanying notes to financial statements
F-28
<PAGE> 72
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,446,588 $ 3,850,337
------------ ------------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (327,147) (3,983,280)
Depreciation 828,397 980,516
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (580,646) (761,680)
Inventory (15,824) (9,172)
Prepaid expenses (443,535) (1,377,816)
Restricted cash (5,403) (7,447)
Increase (decrease) in
Accounts payable and
accrued liabilities (224,461) (1,236,287)
Deferred revenue (282,970) (275,701)
Deferred purses (6,590,649) (6,548,857)
Income taxes payable 1,431,953 2,197,143
Uncashed mutuel tickets 260,304 177,262
Contracts Payable -- (58,732)
------------ ------------
Total adjustments (5,949,981) (10,904,051)
------------ ------------
Net cash used for operating
activities (3,503,393) (7,053,714)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from litigation
settlement 327,147 3,983,280
Capital expenditures (99,669) (262,830)
Decrease (Increase) in deposits (39,331) 5,651
------------ ------------
Net cash provided by investing
activities 188,147 3,726,101
------------ ------------
</TABLE>
(Continued)
F-29
<PAGE> 73
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ -- $ 200,627
Principal repayments on loans (109,613) (111,536)
Advances from third party 1,000,000 1,000,000
Repayments to third party (500,000) (500,000)
Dividends Paid -- (468,580)
------------ ------------
Net cash provided by
financing activities 390,387 120,511
------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,924,859) (3,207,102)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,488,808 7,577,730
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,563,949 $ 4,370,628
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 10,576 $ 10,309
============ ============
Income taxes paid $ 100,000 $ 1,112,000
============ ============
</TABLE>
F-30
<PAGE> 74
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying Financial Statements have been prepared in accordance with the
instructions to Form 10-Q and reflect all adjustments which management believes
necessary (which adjustments are of a normal recurring nature) to present fairly
the results for the periods stated.
The Company's business is seasonal, and interim results are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole.
For further information refer to the Financial Statements and footnotes included
in the Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1999.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Fire Related Litigation
The following is a brief description of the Traveler's Litigation that arose as
a result of the December 1993 fire and in connection with the Company's efforts
to collect insurance proceeds after the fire and that was concluded during the
first six months of fiscal 2000: On May 14, 1994, the Company filed an action in
the 24th Judicial Court in the State of Louisiana against Travelers Indemnity
Company of Illinois ("Travelers") and others. The Company contended that the
insurance policy provided by Travelers provided the Company with blanket
coverage in the amount of $24.2 million in excess of the $10 million of
underlying coverage, 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
F-31
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
insurance broker who arranged for the insurance were liable to the Company for
any damages sustained because the amount of coverage is less than that claimed
by the Company. Travelers' position is that its liability under such policy is
limited to the amount which it had previously paid. In November 1996, the
Company entered into a joint settlement with the insurance agent and broker,
whereby the Company received a total of $10 million from those parties. The
settlement also included a "Mary Carter" provision whereby the insurance agent
and broker became entitled to share in certain recoveries that the Company might
eventually obtain on its remaining claims against Travelers. The litigation
against Travelers was concluded in January 2000 and the Company was awarded an
additional $327,147 in attorneys fees, penalties and interest which was paid by
Travelers. Under the Mary Carter provision, the Company was entitled to retain
the full amount of such payment. This recovery of $206,103 (net of $121,044 of
income taxes) is shown as an extraordinary item on the Company's statement of
operations for the six months ended April 30, 2000.
Other Litigation
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust/civil RICO suit alleging the Company participated in a
conspiracy to prevent the plaintiff from entering the live racing, off-track
betting and video poker markets. The Company filed a motion for summary judgment
in late 1998, but that motion has not been decided by the U.S. District Court.
Livingston had previously filed a series of other legal actions against the
Company which were resolved in the Company's favor. Management believes that
Livingston's claims in this case are without merit. However, there is no
assurance that the Company will successfully defend all of Livingston's claims.
Because the amount in question has not yet been determined but could be
substantial and because there is no assurance that there will be insurance
coverage or that it will be adequate, as discussed below, the failure of the
Company to prevail in this lawsuit could have a material adverse effect on the
Company's operations, financial condition and cash flows.
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<PAGE> 76
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In a declaratory judgment action related to the Livingston suit brought by
insurers for the Company and several of its affiliates, which case has been
consolidated with the suit filed by Livingston, on January 14, 1999 the U. S.
District Court granted the Company's motion for summary judgment, finding that
coverage exists under certain of the Company's insurance policies for claims
asserted by Livingston and that the insurers have a duty to defend. The insurers
have filed a motion for new trial that is pending in the U. S. District Court.
There is no assurance that the motion for new trial will be denied or, if
denied, that the decision of the U. S. District Court will be affirmed on appeal
or that the insurance policies will provide sufficient coverage to indemnify the
Company fully.
A suit was filed in 1996 by the Louisiana Horsemen's Benevolent and Protective
Association ("LHBPA"), an association of horsemen organized to promote the
dissemination of information on issues critical to horsemen and the exchange of
ideas and information, against the Company, the State of Louisiana, and all
other pari-mutuel wagering facilities operating in Louisiana. The LHBPA is
seeking a larger portion of video poker proceeds on the ground that the State of
Louisiana and the horse racing tracks in Louisiana have misinterpreted a
Louisiana statute specifying the amount of revenues from video poker machines at
pari-mutuel wagering facilities that are to be used as purse supplements. A
motion for summary judgment seeking dismissal of this action was filed in April
1999 and is pending before the court. Management believes that the Company is in
compliance with the Louisiana statute and the guidelines established by the
Louisiana State Police Gaming Division, which regulates compliance with the
State of Louisiana video poker law, and that the Company has sufficient defenses
to all claims. However, there is no assurance that the Company will successfully
defend the LHBPA's claims. Because the amount in question could be substantial,
the failure by the Company to prevail in this lawsuit could have a material
adverse effect on the Company's operations, financial condition and cash flows.
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<PAGE> 77
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.
NOTE 3 - ADVANCE
In January 2000, the Company received a non-interest bearing advance of
$1,000,000 from Video Services, Inc., to be repaid in full in six equal monthly
installments beginning in February 2000. The outstanding balance of the advance
is included in notes payable in the April 30, 2000 financial statements.
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<PAGE> 78
APPENDIX A
August 29, 2000
Board of Directors
Fair Grounds Corporation
1751 Gentilly Blvd.
New Orleans, LA 70119
Members of the Board:
Duff & Phelps, LLC ("Duff & Phelps") has been retained to provide our opinion to
the Board of Directors of Fair Grounds Corporation ("Fair Grounds" or the
"Company") as to the fairness, from a financial point of view, of a proposed
reverse stock split (the "Reverse Stock Split") of the Company's common stock.
Subject to shareholder approval, the Company's articles of incorporation will be
amended to (1) reduce the number of shares that the Company is authorized to
issue from 600,000 shares to 3,000 shares, (2) combine each approximately 200
shares into 1 new common share, and (3) pay cash in lieu of issuing fractional
shares resulting from the Reverse Stock Split. Shareholders will receive $40.00
per pre-split share in lieu of fractional shares. In connection with this
engagement, Duff & Phelps also assisted the Board of Directors regarding a
determination of the fair market value of the Company's common stock.
Scope of Analysis
In the course of performing this engagement we:
- Held discussions with Company management regarding Fair Grounds'
history and future prospects;
- Toured Fair Grounds Race Course with onsite OTB and one offsite OTB
facility;
- Reviewed and analyzed Fair Grounds' historical financial statements:
Audited financial statements on SEC Form 10-K for the fiscal years
ended October 31, 1994 through 1999; unaudited financial statements on
SEC Form 10-Q for the periods ended January 31, 2000 and April 30,
2000; internal unaudited statements provided by the Company for the
period ended July 31, 2000.
- Performed a discounted cash flow analysis based on projections prepared
in conjunction with the management of the Company;
- Analyzed a group of seven publicly-traded gaming companies to analyze
the industry's financial performance, growth, and valuation multiples;
and
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- Reviewed recent stock price and volume trading activity of Fair
Grounds' common stock.
In arriving at our opinion, we have relied upon and assumed the accuracy and
completeness of the financial and other information considered in our review,
whether from public sources or Fair Grounds, and have not assumed any
responsibility for independent verification of such information. Industry
information and financial data used in our analysis were obtained from regularly
published industry and investment sources. Our opinion assumes that information
and representations made by management and their representatives are
substantially accurate regarding the Company and the Reverse Stock Split. We
have not made any independent valuation or appraisal of the assets and
liabilities of the Company. Our opinion is necessarily based upon current
economic and market conditions and must be considered in that context.
Conclusion
Based upon, and subject to the foregoing, it is our opinion that as of the date
hereof the consideration to be paid by the Company to shareholders in lieu of
fractional shares is fair from a financial point of view to those shareholders.
Respectfully submitted,
LSB:ac
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