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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:
[ ] Preliminary Information Statement [ ] Confidential, for Use of the
Commission Only (as permitted
[X] Definitive Information Statement by Rule 14c-5(d)(2))
Fair Grounds Corporation
-------------------------------------------------------------------------------
(Name of Registrant As Specified in Charter)
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[X] No Fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(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
was determined)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange
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statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
FAIR GROUNDS CORPORATION
1751 Gentilly Boulevard
New Orleans, Louisiana 70119
<PAGE> 2
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 Tuesday, November 28, 2000,
at 10:00 a.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 October 3,
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
pastries and refreshments will be served.
By Order of the Board of Directors
David R. Sherman
Secretary
November 3, 2000
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FAIR GROUNDS CORPORATION
1751 GENTILLY BOULEVARD
NEW ORLEANS, LOUISIANA 70119
INFORMATION STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 28, 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 Tuesday, November 28, 2000, at 10:00 a.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
November 3, 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.
SUMMARY
The following is a summary of material 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.
<PAGE> 4
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"). If the Reverse Stock
Split is effected at a ratio of 1 new common share for each 200 common shares
outstanding immediately prior to its effectiveness, the number of common shares
outstanding will be reduced from 468,580 to approximately 2,209 and the number
of record holders of common shares will be reduced to fewer than 100. 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. The following chart illustrates the
effects of the Reverse Stock Split on the record holders of various numbers of
common shares of the Company, assuming the Reverse Stock Split is effected
at a 1 for 200 ratio:
<TABLE>
<CAPTION>
Number of Shares Number of Shares Cash in Lieu
Pre Split Post Split of Fractional Shares
---------------- ---------------- --------------------
<S> <C> <C>
1 0 $ 40
100 0 4,000
199 0 7,960
200 1 0
201 1 40
275 1 3,000
399 1 7,960
400 2 0
401 2 40
450 2 2,000
599 2 7,960
</TABLE>
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 Tuesday, November 28, 2000 at
10:00 a.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 October 3, 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 October 3, 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
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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. Although the
Company is not soliciting proxies in connection with the special meeting, 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 as reflected on the Company's stock transfer records
will be combined into 1 common share of the Company, unless the Board of
Directors determines that such 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. Such determination will be made promptly after the Reclassification
Amendment is filed with the Secretary of State of Louisiana and receipt of stock
transfer records from the Company's transfer agent reflecting the record
ownership of the Company's common shares as of the date of filing of the
Reclassification Amendment. No fractional shares will be issued in connection
with the Reverse Stock Split. Instead, each record holder 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 of record instructions for submitting their stock
certificates in exchange for certificates representing new common shares, if
any, and cash in lieu of fractional shares. See "The Reverse Stock Split -
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 the shareholders of the Company, including the
unaffiliated shareholders. Marie G. Krantz and Bryan G. Krantz, individually,
believe that the Reverse Stock Split is fair to the unaffiliated shareholders
of the Company and considered the same factors as the Board considered in
reaching that conclusion. All references to conclusions by the Board as to
fairness and to factors considered by the Board apply as well to Marie G. Krantz
and Bryan G. Krantz (collectively, the "Krantzes"). 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 the Krantzes, beneficially own enough shares to
approve the Reclassification Amendment. See "The Reverse Stock Split - 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
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issuance of fractional shares is fair from a financial point of view. See "The
Reverse Stock Split - 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 $190,000, will be approximately
$1,265,000. The Company intends to finance the transaction from working capital
and, if necessary, the Company's outstanding line of credit. See "The Reverse
Stock Split - 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 "The Reverse Stock Split - Factors - Reasons for the
Reverse Stock Split," and "The Reverse Stock Split - Factors - Conduct of the
Company's Business After the Reverse Stock Split."
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 "The Reverse Stock Split - 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 four "tele-tracks" for off-track betting at locations in St.
Bernard, Jefferson, St. John and LaFourche Parishes, Louisiana, as well as a
tele-track facility located at the Fair Grounds Race Course. The Company is
planning to open a new tele-track in Jefferson Parish during the second quarter
of fiscal 2001. 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 "The Reverse Stock
Split - 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 "The Reverse Stock Split - Factors - Appraisal Rights;
Escheat Laws."
4
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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 October 3, 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 October 3, 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 who are present in person or by proxy at the special
meeting is required to approve each of the Proposed Amendments. Although the
Company is not soliciting proxies in connection with the special meeting, 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 as reflected on the Company's stock transfer
records 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 record holder 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.
5
<PAGE> 8
The following chart illustrates the effects of the Reverse Stock Split
on the record holders of various numbers of common shares of the Company,
assuming the Reverse Stock Split is effected at a 1 for 200 ratio:
<TABLE>
<CAPTION>
Number of Shares Number of Shares Cash in Lieu
Pre Split Post Split of Fractional Shares
---------------- ---------------- --------------------
<S> <C> <C>
1 0 $ 40
100 0 4,000
199 0 7,960
200 1 0
201 1 40
275 1 3,000
399 1 7,960
400 2 0
401 2 40
450 2 2,000
599 2 7,960
</TABLE>
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 414
record holders as of October 3, 2000 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:
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.
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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 December 1993, the Company's grandstand, clubhouse, paddock and
administrative facilities were destroyed by fire, as a result of which the
Company operated out of temporary facilities from January 1994 until November
1997 while its new facilities were being constructed. During that period
management devoted substantial time to arranging for financing for, and to the
construction of, the new facilities and to legal proceedings related to the
fire, in addition to the time devoted to the Company's thoroughbred horse
racing, pari-mutuel wagering and other gaming operations. Throughout that period
and until December 1997, there was substantial uncertainty as to the outcome of
litigation instituted by the Company to collect insurance proceeds and damages
related to the fire. With the completion of the new facilities in November 1997
and settlement or disposition of most of the litigation related to the fire by
December 1997, in fiscal 1998 and fiscal 1999 management focused on promotion of
the Company's new facilities, enhancing the Company's simulcasting of its live
races and normalizing operations after the disruptions occasioned by the fire.
In late 1999, with the Company having completed two fiscal years of
operations in its new facilities and the fire-related litigation substantially
completed, the Company's management began considering the benefits and
detriments of the Company's "going private." Management determined that the
Company spends approximately $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. In addition, Berkowitz, Lefkovits, Isom
& Kushner, P.C., 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 business combinations
under the Fair Price Law. The Fair Price Law provides that a business
combination, as defined in the Fair Price Law, must be approved by the
affirmative vote of at least 80% of the outstanding shares of the voting stock
of the corporation and 66 2/3% of the votes entitled to be cast by holders of
voting stock not held by interested shareholders, in addition to any vote
otherwise required by law or the corporation's articles of incorporation. These
special voting requirements do not apply to the Reverse Stock Split because it
is not a business combination under the Fair Price Law. At the June 27 meeting,
the Board considered an issuer tender offer and a cash-out merger as a means of
going private but rejected both of those alternatives because there was no
assurance that either would result in the Company being in a position to
deregister its common shares. See "The Reverse Stock Split-Special Factors-
Alternatives Considered." The Board also discussed a reverse stock split and
authorized management and counsel for
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<PAGE> 10
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 Duff & Phelps, L.L.C. ("Duff & Phelps") and Mercer Capital
Management, Inc. Based on a review of Duff & Phelp's qualifications and
experience, 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.
On August 1, 2000, representatives of Duff & Phelps visited Company facilities
in New Orleans and met with management of the Company to obtain information for
use in preparing its valuation report.
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. Duff & Phelps reported that it was
utilizing a discounted cash flow analysis and a comparable company analysis to
determine the fair market value of the Company's common shares. A representative
of Duff & Phelps described the two methods of analysis and stated that it
appeared, on a preliminary basis, that the value of the Company's common shares
was in a range from $32.00 per share to $42.00 per share but that he expected
the range to be narrowed once Duff & Phelps obtained additional information and
completed its analyses. All of the members of the Board other than William K.
Caldwell, Jr. were present at the August 15, 2000 meeting. Following the Board
meeting, representatives of Duff & Phelps met with management and counsel for
the Company to review in greater detail the preliminary findings and to obtain
additional information about the Company. 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
approximately $38.00 to $42.00 per share. Following such presentation and a
discussion period, one of the Company's directors, Langdon H. Stone, recommended
that $40.00 per pre-split share be paid in lieu of fractional shares if the
Company effected a reverse stock split 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 Amendment
and concluded that a payment of $40.00 per share in lieu of fractional shares
would be fair to the shareholders, including unaffiliated shareholders, who
would be cashed out as well as to the shareholders, including unaffiliated
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, including unaffiliated 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
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<PAGE> 11
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 is fair to, and in the
best interests of, the shareholders of the Company, including the unaffiliated
shareholders. Marie G. Krantz and Bryan G. Krantz, individually, believe that
the Reverse Stock Split is fair to the unaffiliated shareholders of the Company
and considered the same factors as the Board considered in reaching that
conclusion. All references to conclusions by the Board as to fairness and to
factors considered by the Board apply as well to Marie G. Krantz and Bryan G.
Krantz. The Krantzes did not quantify or otherwise attach relative weights to
the specific factors that they considered. 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 the
Krantzes, 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 the Krantzes, have advised the Company that they intend
to vote their common shares in favor of the Reverse Stock Split.
In reaching its determination that the Reverse Stock Split is fair to,
and in the best interests of, the shareholders, including the unaffiliated
shareholders, the Board considered, among other things, (i) the benefits and
detriments to the Company and its shareholders in deregistering the Company's
common shares under the 1934 Act, (ii) the 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
shareholders of the Company, including the unaffiliated shareholders.
With respect to the factors addressed in clauses (i) and (iii) above,
the Board considered a number of factors in determining whether it was in the
best interests of the Company and its shareholders, including the unaffiliated
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
9
<PAGE> 12
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 the Company's common
shares under the 1934 Act. The Board recognized that deregistration of the
common shares of the Company would substantially reduce the information required
to be furnished by the Company to shareholders and terminate the Company's
obligations to make filings with the Securities and Exchange Commission. The
Board also recognized that deregistration would likely negatively affect
liquidity of the common shares and therefore could be detrimental to continuing
shareholders and that unaffiliated shareholders who are not cashed out will
continue to be minority holders in a privately-held company. 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 recognized that certain shareholders would, as a result of the Reverse
Stock Split, receive all cash and have no continuing equity interest in the
Company, and therefore will not participate in the Company's future potential
growth and earnings, while other shareholders would receive common shares and,
in some instances, cash in the Reverse Stock Split and will have a continuing
interest in the future potential earnings and growth of the Company. The Board
believes that the Reverse Stock Split is fair to unaffiliated shareholders
despite such difference in treatment because it believes that the value of the
consideration to be received in each case is the same on a per share basis and
because of the opportunity for shareholders to adjust their ownership of common
shares prior to the Reverse Stock Split, as discussed below.
With respect to the factor described in clause (ii) above, the Board
considered several alternative means of effecting the deregistration and the
likelihood of each resulting in the deregistration of the common shares of the
Company. See "The Reverse Stock Split - Special Factors - Alternatives
Considered." The Board also considered the procedure for effecting the Reverse
Stock Split. 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. While the Board recognizes that structuring the Reverse Stock Split in
this manner may be viewed as weighing against the fairness of the Reverse Stock
Split, the Board also recognizes that the Reverse Stock Split is being effected
in accordance with the voting requirements under Louisiana law. The Board also
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 those steps were 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, and
viewed as supporting the Reverse Stock Split, 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 adjust the number of
common shares owned of record so that holders who would otherwise be cashed out
can become continuing holders and holders who would otherwise continue to own
shares may be able to divide or otherwise adjust
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<PAGE> 13
their existing holdings of record so as to be cashed out as to some or all of
their shares. The Board believes that the choice provided by this structure
supports the Reverse Stock Split.
With respect to the factors described in clause (iv) above, the Board
of Directors unanimously concluded that the Reverse Stock Split is fair to the
Company's shareholders, including unaffiliated 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. In considering these
factors, the Board took into account the presentation made by Duff & Phelps that
included a review of the valuation methods described in clauses (ii), (iii) and
(iv) in the immediately preceding sentence.
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 and that payment to unaffiliated shareholders of
cash in lieu of fractional shares that is less than net book value may be viewed
as weighing against the fairness of the Reverse Stock Split, 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 believes that the valuation methods used by Duff & Phelps are
appropriate methods of determining the fair market value of the Company's common
shares, and, accordingly believes that the Reverse Stock Split is fair to the
shareholders of the Company, including the unaffiliated shareholders, even
though net book value exceeds $40.00 per share. The Board also determined that
liquidation value is 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 and the regulatory requirements that must be met by any purchaser
intending to use the Company's facilities for pari-mutuel wagering and other
gaming operations.
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. The Board was advised by Duff & Phelps that in its view the
two valuation methods used by it - discounted cash flow analysis and comparable
company analysis - were the most appropriate methods for determining the fair
market value of the Company's common shares and based on that information, as
well as Duff & Phelps' review for the Board of other valuation methods as
described above, the Board concluded that paying cash for fractional shares
within the range of values determined by Duff & Phelps would be fair to the
shareholders of the Company, including the unaffiliated shareholders. Duff &
Phelps also advised the Board that it determined the fair market value of the
Company's common shares on the basis of both of those valuation methods, taken
together. It also noted in its valuation report that, while the comparable
company valuation analysis range was $40.00 to $43.00 per share, the fair market
value of the common shares of the Company would be at the lower end of that
range due to relative differences in the Company's size,
11
<PAGE> 14
growth prospects, limited diversity of the Company's business lines and
profitability. Based on such information, the Board believes that the $40.00 per
share to be paid in lieu of fractional shares is fair to the shareholders of the
Company, including the unaffiliated shareholders. While the Board recognizes
that the Company's aggregate cash and cash equivalents at July 31, 2000 exceed
the estimated cost of the Reverse Stock Split, the Board believes that the value
of the Company's common shares should not be based solely on the value of a
particular asset as of a particular date and, accordingly, does not view this to
be an indication that the Reverse Stock Split is unfair to the shareholders,
including the unaffiliated shareholders.
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 ("Finish Line"). 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 and
Finish Line on two occasions. The discussions focused on an acquisition by
Churchill Downs, Inc. of both the Company and Finish Line and did not address a
purchase of the Company on a stand-alone basis. Management of Finish Line and
the Company were not interested in continuing discussions with Churchill Downs,
Inc. based on the preliminary acquisition terms suggested by Churchill Downs,
Inc. and terminated those discussions in October 1999 without any firm offer for
the Company being made and without discussing with Churchill Downs, Inc. any
alternatives to such a purchase.
The Board also considered the valuation report and fairness opinion
provided by Duff & Phelps. See "The Reverse Stock Split - Special Factors -
Valuation Report and Opinion by Duff & Phelps."
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,
the Board did not find it practicable to assign relative weights to the factors
considered in reaching its determination that the Reverse Stock Split, is fair
to, and in the best interests of, the shareholders of the Company, including the
unaffiliated shareholders. 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. 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, and relied on, Duff & Phelps' valuation report and
opinion in reaching its conclusion that the Reverse Stock Split is fair to the
shareholders of the Company, including the unaffiliated shareholders, who would
be cashed out as well as to those shareholders, including unaffiliated
shareholders, who would retain an equity interest in the Company. In doing so,
the Board took into account that the Duff & Phelps opinion was that the payment
of $40.00 per share for fractional shares is fair, from a financial point of
view, to the shareholders who would receive cash in lieu of fractional shares as
a part of the Reverse stock Split. The Board also took into account that the
Duff & Phelps opinion does not address the fairness of the consideration to the
unaffiliated shareholders as a separate group of shareholders. Additionally, the
Board took into account that the Duff & Phelps opinion does not address the
fairness of the Reverse Stock Split to the shareholders, including unaffiliated
shareholders, to the extent that their shares are not cashed out in the Reverse
Stock Split. See "The Reverse Stock Split - Special Factors - Valuation Report
and Opinion of Duff & Phelps."
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.
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<PAGE> 15
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, 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 approximately
$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
In preparing its valuation report and opinion to the Board of Directors,
Duff & Phelps performed the following financial and comparative analyses
regarding the valuation of the Company: (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
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<PAGE> 16
purposes of its opinion. Duff & Phelps believed these analyses to be the most
appropriate methods for determining the fair market value of the Company's
common shares, and, based on such advice, as well as Duff & Phelps' review of
other valuation methods, the Board concluded that it would not have other
financial analyses performed.
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").
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
14
<PAGE> 17
(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. Duff & Phelps noted in its valuation report
that the fair market value of the common shares of the Company would be at the
lower end of that range due to relative differences in the Company's size,
growth prospects, limited diversity of the Company's business lines and
profitability. 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.
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<PAGE> 18
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.
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." Based on the financial statements of the Company as
of and for the nine months ended July 31, 2000 and as adjusted to give effect to
the
16
<PAGE> 19
Reverse Stock Split assuming the Reverse Stock Split was effected on July 31,
2000 for the purpose of the net book value computation and on November 1, 1999
for the purpose of the net earnings computation, as a result of the Reverse
Stock Split at a 1 for 200 ratio, (1) the interest of the Krantzes collectively
in the net book value and in the net earnings of the Company increases from
72.94% to 77.36%; (2) the net book value of the common shares beneficially owned
by the Krantzes increases from $22,161,283 (actual) to $22,537,207 (pro forma);
and (3) the interest of the Krantzes in the net earnings of the Company for the
nine months ended July 31, 2000 decreases from $1,315,477 (actual) to $1,219,102
(pro forma).
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 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 and management will
continue to evaluate such business and operations after the Reverse Stock Split
and make such changes or enter into such arrangements or transactions in the
future, including a transaction that would result in the remaining shareholders
of the Company being cashed out, as they may deem 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
17
<PAGE> 20
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 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 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
18
<PAGE> 21
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.
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
19
<PAGE> 22
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 Louisiana, as
shown by the records of the Company, the period is five years. Following the
expiration of that five-year period, the Louisiana Uniform Unclaimed Property
Act of 1997 would likely cause the cash payments to escheat to the State of
Louisiana. 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
Louisiana, 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 five 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 holders of record on the effective date of the
Reverse Stock Split 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.
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 $190,000 will
be approximately $1,265,000. The Company intends to finance this transaction
primarily from working capital and, if necessary, from the Company's
outstanding
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<PAGE> 23
line of credit with First Bank and Trust. As of July 31, 2000, the Company's
working capital was $2,593,950 and the Company's cash and each equivalents
totaled $8,791,105. The line of credit is for $2.5 million with interest on
amounts outstanding at Citibank N.A.'s prime rate less 0.5% per annum or LIBOR
plus 2% from time to time in effect, as selected by the Company. The line of
credit is secured by a collateral mortgage on the Company's facilities. The
initial one-year term of the line of credit terminates on November 22, 2000 but
has been renewed for an additional one-year term which expires on November 22,
2001. The loan agreement contains certain negative covenants, including
restrictions on changing the nature of the Company's business, merging,
consolidating, liquidating or dissolving the Company, changing the identity of
the Company's controlling shareholders, and entering into any agreement with an
affiliate of the Company unless it is commercially reasonable and on terms that
would normally be obtained in an arm's length transaction with an unrelated
party. No amounts were drawn or outstanding on the line of credit during fiscal
2000 to date. The Company anticipates repaying any amount borrowed under the
line of credit through cash generated from future operations and has no
specific plan or arrangement for such repayment.
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.
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
(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(e) 344,353 73.5%
</TABLE>
21
<PAGE> 24
* 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
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
22
<PAGE> 25
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 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, address, telephone number 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.
23
<PAGE> 26
<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, 3600 Chateau Blvd,
New Orleans, Louisiana 70065
(504) 467-1351
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
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, 1400 Poydras,
Suite 918, New Orleans, Louisiana 70112
(504) 525-5678 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., 21516 Highway 36,
Abita Springs, Louisiana, 70420
(504) 892-1662 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.,
111 Veterans Blvd, Suite 1600, Metairie,
Louisiana 70005
(800) 299-4161
Wayne E. Thomas, 3333 West Napolean 52 1996
Avenue, Suite 200, Metairie, Louisiana 70001
(504) 831-7747 Self employed insurance agent.
David R. Sherman 47 --
Secretary of the Company since July
2000; Attorney, Chehardy, Sherman,
Ellis, Breslin & Murray, L.L.P.,
1100 One Galleria Blvd,
Metairie, Louisiana 70001
(504) 833-5600
</TABLE>
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
24
<PAGE> 27
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 Line. By virtue of such positions and ownership and their
positions with and relationship with such entities, the Company, Finish Line
and Jefferson Downs may be deemed to be affiliates.
Marie G. Krantz and Bryan G. 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.
25
<PAGE> 28
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 nine month
periods ended July 31, 2000 and 1999 was 185.5 and 60.3, respectively. For the
fiscal years ended October 31, 1999 and 1998, there were deficiencies in
earnings available for fixed charges of $19,783 and $19,752 respectively.
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
October 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the audited
financial statements of the Company for those years. The selected financial
data set forth below for the nine month periods ended July 31, 2000 and 1999
have been derived from the unaudited financial statements of the Company for
those periods and include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for those periods. The selected financial data should be read in
conjunction with the financial statements and related notes and other financial
data included elsewhere herein.
<TABLE>
<CAPTION>
For the Nine Months
Ended July 31 For the Five Years Ended October 31
--------------------------- ------------------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $36,156,380 $35,755,616 $ 41,794,601 $ 36,785,091 $ 30,980,259
OPERATING EXPENSES 35,656,420 36,093,318 43,537,452 39,209,437 32,201,167
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS) FROM OPERATIONS 499,960 (337,702) (1,742,851) (2,424,346) (1,220,908)
INTEREST EXPENSE 13,746 17,021 19,783 19,752 266,435
OTHER INCOME 2,049,346 1,363,243 399,015 1,483,027 3,013,320
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES,
EXTRAORDINARY ITEM, AND
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES 2,535,560 1,008,520 (1,343,836) (961,071) 1,525,977
PROVISION (BENEFIT) FOR
INCOME TAXES 938,157 511,676 (236,256) (645,355) 775,288
EXTRAORDINARY ITEM - GAIN
FROM FIRE (net of taxes) 206,103 2,389,968 2,517,713 6,272,628 9,022,525
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES -- -- -- -- --
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS) $ 1,803,506 $ 2,886,812 $ 1,410,133 $ 5,956,912 $ 9,773,214
=========== =========== ============ ============ ============
COMMON SHARES OUTSTANDING 468,580 468,580 468,580 468,580 468,580
=========== =========== ============ ============ ============
NET INCOME (LOSS) PER
COMMON SHARE $ 3.84 $ 6.16 $ 3.01 $ 12.71 $ 20.80
=========== =========== ============ ============ ============
SPECIAL CASH DIVIDENDS
PAID PER SHARE $ NONE $ 1.00 $ 1.00 $ None $ None
=========== =========== ============ ============ ============
BALANCE SHEET DATA (at period end):
CASH AND CASH EQUIVALENTS 8,791,105 7,662,561 8,488,808 7,577,730 5,192,756
TOTAL ASSETS 48,610,736 49,068,092 $ 48,951,539 $ 49,144,377 $ 48,089,820
=========== =========== ============ ============ ============
<CAPTION>
For the Five Years Ended October 31
-----------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING REVENUES $ 27,496,500 $ 23,031,031
OPERATING EXPENSES 29,809,843 26,394,452
------------ ------------
NET INCOME (LOSS) FROM OPERATIONS (2,313,343) (3,363,421)
INTEREST EXPENSE 791,566 12,318
OTHER INCOME 4,279,503 2,459,163
------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES,
EXTRAORDINARY ITEM, AND
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES 1,174,594 (916,576)
PROVISION (BENEFIT) FOR
INCOME TAXES 294,896 (300,460)
EXTRAORDINARY ITEM - GAIN
FROM FIRE (net of taxes) -- --
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES -- 104,000
------------ ------------
NET INCOME (LOSS) $ 879,698 $ (512,116)
============ ============
COMMON SHARES OUTSTANDING 468,580 468,580
============ ============
NET INCOME (LOSS) PER
COMMON SHARE $ 1.87 $ (1.09)
============ ============
SPECIAL CASH DIVIDENDS
PAID PER SHARE $ None $ None
============ ============
BALANCE SHEET DATA (at period end):
CASH AND CASH EQUIVALENTS 6,264,934 1,118,590
TOTAL ASSETS $ 34,791,597 $ 30,954,654
============ ============
</TABLE>
26
<PAGE> 29
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 nine months ended July 31, 2000 and
July 31, 1999. The financial information, discussion and analysis that follow
are based upon and should be read in conjunction with the 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 NINE MONTHS ENDED JULY 31, 2000 AND 1999
Revenues. During the nine months ended July 31, 2000 and 1999, the Company
derived its pari-mutuel income by conducting 88 live racing days during each
nine month 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, the Company operated tele-track facilities in Terrebonne, St.
Tammany, and Jefferson Parishes, Louisiana. In late July 2000, the Company
closed its Bourbon Street tele-track. However, the Company believes that this
closure will not have a material adverse effect on the Company's operations
based upon the lack of profitability of that tele-track in the past.
For the nine months ended July 31, 2000, the Company reported total in-state
pari-mutuel wagering of $101,807,095, compared to $104,372,668, in the
comparable period in fiscal 1999.
Comparative pari-mutuel wagering and attendance figures for the nine months
ended July 31, 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 75,670,906 76,960,106
------------- -------------
Total in-state wagering $ 101,807,095 $ 104,372,668
============= =============
Out-of-state simulcast handle $ 366,467,601 $ 321,342,925
============= =============
Total On-Track Attendance 412,081 453,925
============= =============
</TABLE>
The Company believes that the $1,276,373, or 4.6%, 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.
The Company believes that the $1,289,200, or 1.7%, decrease in off-track handle
is primarily due to the opening in May 2000 of a new tele-track facility by
Finish Line in Kenner, Louisiana. The Kenner tele-track is located approximately
eight miles from the Company's tele-track in Metairie, Louisiana. The Company is
planning to open a new tele-track during the second quarter of 2001 in Harahan,
Louisiana and believes that the handle and
27
<PAGE> 30
attendance at that facility will partially or completely offset the decreases
in handle and attendance attributable to the new Kenner tele-track. The Company
believes that the $45,124,676, or 14%, increase in out-of-state handle is
primarily due to the continued high quality of racing at the Fair Grounds Race
Course. In addition, during the nine months ended July 31, 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 in the nine months ended July 31, 2000 increased $400,764,
or 1.1%, from the comparable period in the prior fiscal year, including an
increase of $1,045,145, or 10.1%, in host track fees. In addition, net video
poker revenues in the current fiscal year period increased by $25,916, or 2.0%
from the comparable period in fiscal 1999. The increases in host track fees and
net video poker revenue in the current fiscal year period were partially offset
by decreases of $389,881, or 1.9%, in pari-mutuel commissions; $37,807, or
6.5%, in breakage; $31,238, or 1.5%, in concessions revenue; $73,761, or 11.4%,
in admissions revenues; and $2,702, or 4.8%, in parking revenue. These
decreases are mainly attributable to declines in on-track attendance and handle
during the current fiscal year period as well as the termination of the
practice of charging for admission at the Company's St. Bernard Parish
tele-track.
Racing Expenses. Total racing expenses for the nine months ended July 31, 2000
increased $644,279, or 2.0%, 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
$360,569, or 2.8%, in purses, as well as increases in salaries and related
taxes and benefits, contracts and services, utilities, and rent, partially
offset by decreases in depreciation, advertising and promotions, 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 until its closure in July 2000, as well as rent
payments, beginning in February 2000, for a new tele-track location to be
opened in Harahan, 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 $1,081,177, or 20%, in the current fiscal year period primarily as
a result of decreases in legal, audit and director fees, insurance, and
miscellaneous expenses. 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. In the fiscal 1999 period, miscellaneous expenses
included a guarantee fee of approximately $988,000 paid in connection with a
guaranty of corporate indebtedness. No guaranty fee was paid in the current
fiscal year period.
Other Income (Expense). Other income increased in the nine months ended July
31, 2000 by $689,378, or 51.2%, compared to the first nine months of fiscal
1999 primarily as a result of a $704,986 increase in Jazz and Heritage Festival
income. The increase is attributable to an increase in the sales prices of
beverages sold at the 2000 Festival.
Extraordinary Items. During the nine months ended July 31, 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
$1,593,312 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 nine months ended July 31, 2000, the income tax provision
was $938,157, compared to $511,676 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 $1,803,506 for the nine months
ended July 31, 2000 compared to net income of $2,886,812 for the nine months
ended July 31, 1999.
28
<PAGE> 31
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>
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.
29
<PAGE> 32
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.
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
30
<PAGE> 33
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
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
31
<PAGE> 34
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 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 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.
32
<PAGE> 35
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 increased $302,297 during the nine months
ended July 31, 2000, as a result of cash provided by operating activities of
$24,512, cash provided by investing activities of $18,183 and cash provided by
financing activities of $259,602.
As of July 31, 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 term of the loan agreement has
been extended to November 22, 2001. The line of credit is for $2.5 million with
interest on amounts outstanding at Citibank N.A.'s prime rate less 0.5% per
annum or LIBOR plus 2% from time to time in effect, as selected by the Company.
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 proposed Reverse Stock Split is effected. The Company has a deferred tax
liability of approximately $9.65 million at July 31, 2000 arising from
reinvestment of fire insurance and other litigation settlements into its new
facilities within the allowable replacement period. That deferred tax liability
is to be paid over approximately 37 years which is the remaining useful life of
the new facilities for tax purposes. The Company currently anticipates payment
of that liability with funds obtained through the sources outlined above. See
Note 5, "Commitments and Contingencies" in the Notes to Financial Statements
for the Years Ended October 31, 1999, 1998 and 1997 included elsewhere herein.
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
33
<PAGE> 36
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
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 ended 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
Aug. 1, 2000 to Oct. 31, 2000 44.00 32.38
</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 1998, 1999 or 2000 or
during fiscal 2001 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
34
<PAGE> 37
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 $ 110,000
Transfer and exchange agent fees 5,000
Accounting fees and expenses 5,000
Printing and mailing costs 8,000
Fee to Duff & Phelps 60,000
Miscellaneous 2,000
---------
Total $ 190,000
</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.
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: November 3, 2000
35
<PAGE> 38
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 at July 31, 2000 (unaudited) and October 31, 1999 F-21
Statements of Operations and Retained Earnings (unaudited)
for the Nine Months Ended July 31, 2000 and 1999 F-23
Statements of Cash Flows (unaudited)
for the Nine Months Ended July 31, 2000 and 1999 F-26
Notes to Financial Statements (unaudited)
for the Nine Months Ended July 31, 2000 and 1999 F-28
</TABLE>
<PAGE> 39
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> 40
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 291,083 318,040
Accounts receivable - related parties 788,139 760,598
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> 41
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> 42
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 10,005,413 6,802,990 5,407,864
Host track fees - related parties 305,591 297,035 325,680
------------ ------------ ------------
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 735,659 520,799 596,928
Miscellaneous - related parties 87,530 90,668 82,655
------------ ------------ ------------
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 298,452 650,101 862,451
Advertising and
promotion - related parties 628,365 502,000 333,000
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> 43
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 - related party (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> 44
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> 45
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> 46
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 - related party 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 (14,709) 763,225 (225,520)
Accounts receivable - related parties (27,541) (594,405) (212,551)
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> 47
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) -- --
related party
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> 48
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.
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. The Company records impairment losses on long-lived
assets used in operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Advertising
Advertising costs are charged to operations when incurred.
F-10
<PAGE> 49
FAIRGROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-11
<PAGE> 50
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)
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.
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-12
<PAGE> 51
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-13
<PAGE> 52
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-14
<PAGE> 53
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 the next 37 years which is the remaining tax life of such
facilities.
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 $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;
F-15
<PAGE> 54
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended
October 31, 1999, 1998 and 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
(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 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
F-16
<PAGE> 55
FAIRGROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 6 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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
F-17
<PAGE> 56
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
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>
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.
F-18
<PAGE> 57
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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>
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>
F-19
<PAGE> 58
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Years Ended October 31, 1999, 1998 and 1997
NOTE 8 - LEASES (CONTINUED)
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.
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-20
<PAGE> 59
FAIR GROUNDS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,791,105 $ 8,488,808
Cash and cash equivalents
- restricted 131,068 125,665
Accounts receivable 476,006 327,109
Accounts receivable - related parties 297,014 304,860
Mutuel settlements -- 181,630
Inventory 130,778 125,156
Prepaid expenses 1,239,402 468,165
Deferred Taxes 103,600 103,600
------------ ------------
Total Current Assets 11,168,973 10,572,246
------------ ------------
OTHER ASSETS 88,097 53,768
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 44,297,167 44,177,698
Land improvements 4,463,899 4,463,899
Automotive equipment 995,765 963,243
Machinery and equipment 2,799,243 2,696,449
Furniture and fixtures 425,202 405,352
------------ ------------
Total 52,981,276 52,706,641
Less: accumulated depreciation
and amortization (18,913,891) (17,667,397)
------------ ------------
Depreciable property - net 34,067,385 35,039,244
Land 3,286,281 3,286,281
------------ ------------
Property, plant and
equipment - net 37,353,666 38,325,525
------------ ------------
TOTAL ASSETS $ 48,610,736 $ 48,951,539
============ ============
</TABLE>
(Continued)
F-21
<PAGE> 60
FAIR GROUNDS CORPORATION
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
July 31, October 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 369,215 $ 109,613
Accounts payable 267,107 849,288
Accrued liabilities:
Deferred purses 5,053,282 8,104,835
Host track fees 548,191 432,721
Uncashed mutuel tickets 533,856 391,790
Other 581,081 543,183
Deferred revenues 163,090 282,970
Income taxes payable 1,059,201 4,932
------------ ------------
Total Current Liabilities 8,575,023 10,719,332
------------ ------------
DEFERRED INCOME TAXES 9,652,819 9,652,819
------------ ------------
Total Liabilities 18,227,842 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 26,956,625 25,153,119
------------ ------------
Total 30,418,419 28,614,913
Less: treasury stock at cost,
1,360 shares (35,525) (35,525)
------------ ------------
Total Stockholders' Equity 30,382,894 28,579,388
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,610,736 $ 48,951,539
============ ============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 61
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Pari-mutuel commissions $ 20,491,668 $ 20,881,549
Breakage 540,562 578,369
Uncashed mutuel tickets 420,481 441,634
------------ ------------
Total 21,452,711 21,901,552
Less: pari-mutuel tax 2,580,986 2,626,526
------------ ------------
Commission income 18,871,725 19,275,026
Host track fees 11,074,547 10,005,413
Host track fees - related parties 281,601 305,591
------------ ------------
Total Mutuel Income 30,227,874 29,586,030
Concessions 2,014,660 2,045,898
Video poker (net) 1,321,624 1,295,708
Admissions(net of taxes) 573,258 647,019
Parking 53,904 56,606
Programs and forms 1,121,312 1,188,800
Miscellaneous 776,477 871,395
Miscellaneous - related parties 67,271 64,160
------------ ------------
Total Operating Revenues 36,156,380 35,755,616
------------ ------------
RACING EXPENSES
Purses 13,108,809 12,748,240
Salaries and related taxes
and benefits 6,779,616 6,403,511
Contracts and services 2,409,633 2,331,287
Host track fees 2,470,319 2,477,603
Depreciation 1,246,494 1,464,857
Cost of sales - concessions 716,403 659,576
Utilities 788,088 722,611
Repairs and maintenance 533,561 520,760
Programs, forms and other
supplies 1,409,643 1,486,922
Advertising and promotion 906,579 497,070
Advertising and promotion-related parties 97,644 608,512
Rent 451,015 266,292
Miscellaneous 440,267 526,551
------------ ------------
Total Racing Expenses $ 31,358,071 $ 30,713,792
------------ ------------
</TABLE>
(Continued)
F-23
<PAGE> 62
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and related taxes
and benefits $ 1,622,613 $ 1,577,235
Insurance 608,885 657,713
Property taxes 721,727 724,550
Legal, audit and director fees 480,955 795,897
Contracts and services 95,149 97,321
Office expenses 370,236 252,726
Miscellaneous 398,784 1,274,084
------------ ------------
Total General and
Administrative Expenses 4,298,349 5,379,526
------------ ------------
NET INCOME (LOSS) FROM OPERATIONS 499,960 (337,702)
OTHER INCOME (EXPENSE)
Jazz and Heritage Festival Income 1,953,306 1,248,320
Interest expense (13,746) (17,021)
Interest income 96,040 114,923
------------ ------------
Total Other Income (Expense) 2,035,600 1,346,222
------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 2,535,560 1,008,520
Provision for income taxes 938,157 511,676
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM
(per share - 2000 - $3.41,
1999 - $1.06) 1,597,403 496,844
Extraordinary item - gain from fire
(net of $121,044 and $1,593,312
of taxes in 2000 and 1999,
respectively) 206,103 2,389,968
------------ ------------
NET INCOME (per share
2000 - $3.84, 1999 - $6.16) $ 1,803,506 $ 2,886,812
RETAINED EARNINGS, BEGINNING OF
PERIOD $ 25,153,119 $ 27,228,325
</TABLE>
(Continued)
F-24
<PAGE> 63
FAIR GROUNDS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(CONTINUED)
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
DIVIDENDS PAID $ -- $ (468,580)
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 26,956,625 $ 29,646,557
============ ============
CASH DIVIDENDS PER SHARE $ $ 1.00
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 468,580 468,580
============ ============
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE> 64
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,803,506 $ 2,886,812
------------ ------------
Adjustments to reconcile net income
to net cash used for
operating activities:
Extraordinary item -
gain from fire (327,147) (3,983,280)
Depreciation 1,246,494 1,464,857
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 487,832 586,633
Inventory (5,622) (3,656)
Prepaid expenses (771,237) (1,429,997)
Restricted cash (5,403) (7,447)
Increase (decrease) in
Accounts payable and
accrued liabilities (428,813) (1,180,220)
Deferred revenue (119,880) (38,091)
Deferred purses (3,051,553) (2,939,691)
Income taxes payable 1,054,269 1,546,535
Uncashed mutuel tickets 142,066 28,826
Contracts Payable -- (58,732)
Total adjustments (1,778,994) (6,014,263)
------------ ------------
Net cash provided by operating
activities 24,512 (3,127,451)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from litigation
settlement 327,147 3,983,280
Capital expenditures (274,635) (460,883)
Decrease (Increase) in deposits (34,329) 11,609
------------ ------------
Net cash provided by investing
activities 18,183 3,534,006
------------ ------------
</TABLE>
(Continued)
F-26
<PAGE> 65
FAIR GROUNDS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds $ 426,253 $ 346,131
Principal repayments on loans (166,651) (199,275)
Advances from third party 1,000,000 1,000,000
Repayments to third party (1,000,000) (1,000,000)
Dividends Paid -- (468,580)
------------ ------------
Net cash provided by (used for)
financing activities 259,602 (321,724)
------------ ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 302,297 84,831
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,488,808 7,577,730
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,791,105 $ 7,662,561
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 13,746 $ 17,021
============ ============
Income taxes paid $ 345,000 $ 1,283,000
============ ============
</TABLE>
F-27
<PAGE> 66
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended July 31, 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 nine 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 insurance broker who arranged for the insurance were
liable to the Company for 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 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 nine months
ended July 31, 2000.
F-28
<PAGE> 67
FAIRGROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Litigation
In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston
Downs Racing Association ("Livingston") naming the Company and other defendants
in an antitrust/civil RICO suit alleging the Company participated in a
conspiracy to prevent the plaintiff from entering the live racing, off-track
betting and video poker markets. 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. In a declaratory
judgment action related to the Livingston suit brought by insurers for the
Company and several of its affiliates, which case has been consolidated with the
suit filed by Livingston, on January 14, 1999 the U. S. District Court granted
the Company's motion for summary judgment, finding that coverage exists under
certain of the Company's insurance policies for claims asserted by Livingston
and that the insurers have a duty to defend. The insurers have filed a motion
for new trial that is pending in the U. S. District Court. There is no assurance
that the motion for new trial will be denied or, if denied, that the decision of
the U. S. District Court will be affirmed on appeal or that the insurance
policies will provide sufficient coverage to indemnify the Company fully.
A suit was filed in 1996 by the Louisiana Horsemen's Benevolent and Protective
Association ("LHBPA"), an association of horsemen organized to promote the
dissemination of information on issues critical to horsemen and the exchange of
ideas and information, against the Company, the State of Louisiana, and all
other pari-mutuel wagering facilities operating in Louisiana. The LHBPA is
seeking a larger portion of video poker proceeds on the grounds that the State
of Louisiana and the horse racing tracks in 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. On August 8, 2000, the court denied a
motion for summary judgment filed by another pari-mutuel wagering facility. In
the process of denying that motion, the court indicated that it appeared that
the pari-mutuel wagering facilities were improperly deducting tax payments in
calculating the amount of revenues to be used in determining purse supplements.
Notwithstanding such indication by 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. 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.
F-29
<PAGE> 68
FAIR GROUNDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended July 31, 2000 and 1999
(Unaudited)
NOTE 3 - ADVANCE
In January 2000, the Company received a non-interest bearing advance of
$1,000,000 from Video Services, Inc., which was repaid in full in six equal
monthly installments beginning in February 2000.
NOTE 4 - SUBSEQUENT EVENT
On August 29, 2000, the Company's Board of Directors adopted a resolution to
amend the Company's Articles of Incorporation to provide for a reverse stock
split that would have the effect of reducing the number of shareholders of
record of the Company below 300 and enabling the Company to deregister its
common shares under the Securities Exchange Act of 1934. The proposed amendment,
which is subject to shareholder approval, calls for a reverse stock split in
which each 200 common shares outstanding at the effective time of the amendment
will be combined into one share but also provides for a reduction in the one for
200 ratio if that ratio results in the transaction being classified as a
"business combination" under certain provisions of the Business Corporation Law
of Louisiana. The proposed amendment also provides that no fractional shares
will be issued in the reverse stock split and that $40.00 cash will be paid for
each common share outstanding immediately prior to the effective time of the
reverse stock split that is not combined into a whole share as a result of the
reverse stock split. The Company anticipates that a special meeting of
shareholders will be held in October or November 2000 to take action on the
proposed amendment.
F-30
<PAGE> 69
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
- 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
A-1
<PAGE> 70
fractional shares is fair from a financial point of view to those shareholders.
Respectfully submitted,
DUFF & PHELPS, LLC
LSB:ac
A-2
