-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PG4H1PgiZrfRBEBWykAv/2z6cqJti7M0lctplGTqbIcc8QgtRaG8w+lrra/NJUXf 2zqT1K6n3V6kBWhS3C1Mdw== 0000950144-99-001424.txt : 19990212 0000950144-99-001424.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950144-99-001424 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIR GROUNDS CORP CENTRAL INDEX KEY: 0000034236 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 720361770 STATE OF INCORPORATION: LA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07607 FILM NUMBER: 99531910 BUSINESS ADDRESS: STREET 1: 1751 GENTILLY BLVD CITY: NEW ORLEANS STATE: LA ZIP: 70119 BUSINESS PHONE: 5049445515 MAIL ADDRESS: STREET 1: 1751 GENTILLY BLVD CITY: NEW ORLEANS STATE: LA ZIP: 70119 10-K405 1 FAIR GROUNDS CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1998 Commission file number 0-7607 ---------------- ------ FAIR GROUNDS CORPORATION ------------------------ (Exact name of registrant as specified in its charter) Louisiana 72-0361770 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1751 Gentilly Blvd., New Orleans LA 70119 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code 504/944-5515 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NOT APPLICABLE NONE Securities registered pursuant to Section 12 (g) of the Act: Common Stock, No Par Value - -------------------------------------------------------------------------------- (Title of Class) Indicate by a check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $3,341,412 computed by reference to the average bid and asked prices of such stock on January 28, 1999. The number of shares outstanding of the issuer's single class of common stock was 468,580 as of January 28, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Information Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III. PAGE 1 OF 69 PAGES EXHIBIT INDEX ON PAGE 60 2 TABLE OF CONTENTS
Item Page - ----- ---- ITEM 1. BUSINESS............................................................................. 3 ITEM 2. PROPERTIES........................................................................... 11 ITEM 3. LEGAL PROCEEDINGS.................................................................... 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................................................. 16 Executive Officers of the Registrant................................................. 16 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................................... 16 ITEM 6. SELECTED FINANCIAL DATA.............................................................. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................. 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................................................. 26 ITEM 8. FINANCIAL STATEMENTS................................................................. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................. 54 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................................... 54 ITEM 11. EXECUTIVE COMPENSATION............................................................... 54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................................................................... 54 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................................... 54 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................................................... 55 SIGNATURES............................................................................................. 58 EXHIBIT INDEX.......................................................................................... 60
2 3 PART I ITEM 1. BUSINESS GENERAL OVERVIEW OF BUSINESS Fair Grounds Corporation (the "Company"), which was incorporated in 1941, is the owner of the Fair Grounds Race Course in New Orleans, Louisiana, at which thoroughbred horse racing, off-track betting and video poker gaming are conducted. The Fair Grounds Race Course currently is in its 127th racing season, making it the third oldest thoroughbred racing track in the United States. In addition to its live racing operations, the Company operates five off-track betting facilities, referred to herein as tele-tracks, at locations in St. Bernard, Orleans, Jefferson, St. John and LaFourche Parishes, Louisiana, as well as a tele-track facility located at the Fair Grounds Race Course. Through Finish Line Management Corporation ("Finish Line"), an affiliate, the Company operates five tele-track facilities in Terrebonne, St. Tammany and Jefferson Parishes, Louisiana. At each location, the Company makes available pari-mutuel and video poker wagering and food and beverage services to the public and receives revenues from such services. The Company conducts its annual live racing meet and operates its tele-tracks for off-track betting pursuant to the rules and under the authority of the Louisiana State Racing Commission (the "Racing Commission"), a statutory body, the members of which are appointed by the Governor of Louisiana. The Company's live races are simulcasted to its tele-tracks and to other facilities located both inside and outside Louisiana. The Company's fiscal year ends on October 31; accordingly, unless otherwise indicated, references herein to a year mean the fiscal year which ended in the calendar year to which reference is made. For example, references to "fiscal 1998" means the fiscal year ended October 31, 1998. DESCRIPTION OF BUSINESS Live Racing Meet Live Racing at the Fair Grounds Race Course. Annually, upon application and after hearing, the Racing Commission grants to each of the horse racing tracks operating in Louisiana certain dates during which live racing meets may be conducted. Currently four licensees, including the Company, operate live racing meets in Louisiana at various times during the year. The Company's live racing meet is conducted annually at the Fair Grounds Race Course generally from Thanksgiving Day to late March. One other track in Louisiana, Delta Downs, conducts its live racing meet during the same time period as the Company conducts its live meet. Such track is smaller and is located approximately two hundred miles from New Orleans. Delta Downs also simulcasts to and allows wagering to be accepted on its live races at the tele-tracks to which the Company simulcasts its live races and at which wagering on the Company's live races is accepted. 3 4 The Company's live racing meet for the fiscal year ended October 31, 1998 was conducted over 88 racing days. The total on-track handle, which is the amount of money handled during the live racing meet through the Company's mutuel machines at the Fair Grounds Race Course, was $25,789,351 in fiscal 1998, $20,200,754 in fiscal 1997, and $20,180,889 in fiscal 1996. See "Sources of Revenue." During its annual live racing meet, the Company attracts thoroughbred horses from racing stables located in Louisiana and from nationally known racing stables in Kentucky and elsewhere. Approximately 35% of the thoroughbred starters at the Fair Grounds Race Course during its live racing meet are Louisiana-bred. The live racing meet features races with guaranteed purses in excess of $250,000 and purses averaging approximately $22,000 per race. For the fiscal year ending October 31, 1999, the Racing Commission granted the Company a license to conduct its live racing meet during the period from November 26, 1998 through March 29, 1999, a total of 88 racing days, with live racing being conducted generally five days a week (Thursday through Monday) and with ten to eleven races during each racing day. Simulcasting of Live Races. In addition to conducting live horse racing during the live racing meet, the Company simulcasts its live races to, and allows wagering to be accepted at, the tele-tracks which it operates in Orleans, St. Bernard, St. John, Jefferson and LaFourche Parishes, Louisiana, the tele-tracks which are licensed to the Company and operated by Finish Line, and tele-tracks operated by the other horse racing tracks in Louisiana. The Company also simulcasts live races to certain other wagering facilities located outside of Louisiana. The Company has continued to experience significant increases in the demand for the Company's races from out-of-state markets. Total handle from such out-of-state markets during the fiscal 1998 racing season was approximately $220 million, a 32.5% increase over the previous racing season. The Company earns a net commission (after payment of purses) of approximately 1.5% of the out-of-state handle. Off-Track Betting Ownership and Operation of Tele-Track Facilities. Louisiana authorizes off-track wagering and regulates the licensure by the Racing Commission of tele-tracks, the ownership of such facilities, the commissions which can be earned on wagers and other related matters. In 1988 each horse racing track then operating in Louisiana was granted a license to operate tele-tracks at its racetrack and also within a 55-mile radius of its racetrack, provided that the voters of the parish where the tele-track was to be located approved the establishment of such a facility. When two pari-mutuel racetracks are located within the same 55-mile radius, any tele-tracks opened in such areas are to be jointly owned unless one of the eligible racetracks does not wish to participate. The Company and Jefferson Downs Corporation ("Jefferson Downs"), which is an affiliate of the Company and which through 1992 conducted live racing at a facility located approximately 12 miles west of the Fair Grounds Race Course, are parties to an agreement, entered into in 1992 when Jefferson Downs ceased its live racing pursuant to which the Company, through Finish Line, operates the tele-tracks formerly operated by Jefferson Downs. Total paid attendance at the Company's tele-tracks (excluding the former 4 5 Jefferson Downs tele-tracks) during the fiscal year ended October 31, 1998 was 391,271 compared to 389,149 during fiscal 1997 and 318,831 during fiscal 1996, and the total off-track handle at such facilities during the 1998 fiscal year was $93,921,423, compared to $85,481,397 during fiscal 1997 and $76,293,113 during fiscal 1996. See "Sources of Revenue" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company is a party to a Management Agreement (the "Management Agreement") with Finish Line pursuant to which Finish Line operates the tele-track facilities owned by Jefferson Downs and transferred to the Company effective in May 1993. The Management Agreement is for a term of ten years, which commenced on November 1, 1992, with the option granted to Finish Line to extend the term for two additional five-year periods. Pursuant to the Management Agreement, Finish Line has the exclusive responsibility for the direction, supervision, management and operation of such facilities, collects all monies from such operation and pays all expenses in connection therewith. The Company receives 0.1% of the gross pari-mutuel handle at such facilities, and Finish Line is to receive monthly compensation equal to the difference between the gross receipts collected at such facilities less all expenses (including the guaranteed payment to the Company) paid by Finish Line. In addition, Finish Line is to indemnify the Company for, among other things, all obligations under the leases assigned by Jefferson Downs to the Company. A portion of the handle generated at these tele-tracks is set aside to supplement purses for live racing at the Fair Grounds Race Course. See "Purse Supplements," below. Simulcasting to Tele-Track Facilities. When a live racing meet is not in progress at the Fair Grounds Race Course, horse races are simulcasted from other tracks then conducting live racing in Louisiana, as well as from various race tracks throughout the United States hosting races of national prominence to the Company's tele-tracks, to the tele-track facility located at the Fair Grounds Race Course and to other off-track tele-tracks. The Company generally is required to make payments in the form of host track fees and purse supplements to those tracks conducting live races which are simulcasted to the Company's tele-tracks. The Company's tele-tracks generally are open daily, depending on patron demands and race offerings, for afternoon and evening racing programs which are simulcasted to the tele-tracks. Purse Supplements. A portion of the handle generated at tele-track facilities is required by Louisiana law to be set aside and used to supplement purses at live racing facilities. Purse supplements are computed on a sliding scale of 5.5%, 6% and 6.5% on the tele-tracks' daily handle plus an additional 1.5% of all "exotic" wagers at tele-track facilities. Purse supplements of 6.5% of handle are required on all wagers when off-track betting is conducted at the racing facility of the primary licensee. Breakage and Uncashed Mutuel Tickets. Race tracks and tele-tracks are allowed to retain breakage, which is the residual amount remaining in the betting pool after winnings are paid out to the nearest dime; however, one-half of such revenue must be paid out as purses. During fiscal 1998, the Company's revenue from breakage was $518,822 compared to $481,554 in fiscal 1997 and $439,204 in fiscal 1996. Race tracks are also allowed to retain the proceeds from uncashed winning pari-mutuel tickets, up to 5 6 $250,000 for each live or simulcasted meet, with the excess to be remitted to the State of Louisiana. During the fiscal year ended October 31, 1998, the Company retained approximately $476,740 in proceeds of such uncashed mutuel tickets as compared to approximately $404,000 in fiscal 1997 and $331,000 in fiscal 1996. Video Poker Operations Louisiana permits pari-mutuel facilities to install and operate an unlimited number of video poker machines. Other types of businesses in Louisiana, such as bars, truck stops and restaurants, are permitted to operate video poker machines but are restricted in the number of machines they may operate. See "Regulation." The owners of pari-mutuel wagering facilities such as the Company are required to set aside one-half of the net revenues from such devices in excess of certain amounts and use such amounts which are set aside to supplement purses for live racing or, if live racing is not then being conducted, to place such amounts in an interest-bearing account and utilize them to supplement purses during the next live racing meet. Any such funds which are earned from devices located at a tele-track are to be used for purse supplements by the owner of the tele-track or, if it is jointly owned, to be divided among the owners in proportion to their ownership interests. The Company, Jefferson Downs and Finish Line entered into an agreement in February 1992 with Video Services, Inc. ("VSI"), whereby VSI was granted the exclusive right and license by the Company to install, maintain and operate video draw poker devices at the Fair Grounds Race Course and Jefferson Downs Race Course and at the tele-tracks operated by the Company, Jefferson Downs and Finish Line. Such agreement was for an initial term of five years, with an option by VSI to extend the term for an additional five years, which option was exercised. Pursuant to such agreement, the Company receives a percentage of the revenues from the operation of the devices installed at the Company's facilities, such percentage being calculated on the basis of the average amount collected daily from each device during each month, after the payment of prizes, taxes and fees. See "Sources of Revenue." The devices installed by VSI pursuant to such agreement remain the property of VSI. As of October 31, 1998, there were a total of 315 devices in operation at the Company's facilities (not including tele-tracks operated by Finish Line). In addition, there were a total of 414 devices at the tele-tracks operated by Finish Line as of October 31, 1998. The Company receives purse supplements from the tele-tracks operated by Finish Line, which includes the tele-tracks formerly owned by Jefferson Downs. The agreement also provides for the Company and Finish Line to share in an annual promotional fee of $270,000 paid by VSI. During fiscal 1998, by agreement between the Company and Finish Line, the total amount of such promotional fee was retained by the Company. Of such amount, $135,000 was set aside for purse supplements to be paid during the Company's 1998-99 racing meet. In connection with general elections held on November 5, 1996, special elections were held in each parish in Louisiana to approve or disapprove, on a parish-by-parish basis, video poker and other forms of gaming. In such local elections, the voters in St. Tammany Parish, where the Company, through its management agreement with Finish Line, maintains two facilities disapproved video poker operations. As a result, the video 6 7 poker operations at those two facilities will be terminated in June 1999; however, the loss of video poker revenue from such locations will not have a material adverse effect on the Company's results of operations. SOURCES OF REVENUE Income from Wagering The principal component of the Company's revenue is generated from parimutuel wagering, both on-track and off-track. In pari-mutuel wagering on horses, those who wager on the first, second and third place horses share the total stakes, or pool, less a percentage retained by the Company. The term "pool" means the total amount wagered to win (first place), to place (second place), or to show (third place) on every horse in a given race, or exacta, quinella and trifecta wagers on certain combinations of horses. Under the pari-mutuel system, bettors wager against each other and not against the racing facility, which has no interest in which horse wins or loses. Racing facilities are authorized under Louisiana law to retain a stated percentage of the total money handled through the mutuel machines located at such racing facilities and their tele-tracks on each racing day. Mutuel commissions range from 17% to 25% of money handled depending upon the type of wager. For the fiscal year ended October 31, 1998, the Company received pari-mutuel commissions and related income of $24.7 million, compared to $21.7 million for fiscal 1997 and $19.7 million for fiscal 1996. Total commission income (less pari-mutuel taxes) was $21.6 million for fiscal 1998, $18.9 million for fiscal 1997, and $17.1 million for fiscal 1996. The Company also receives, during its live racing meet, a percentage of the handle from all tele-tracks and racing facilities to which its races are simulcasted, paid in the form of host track fees as compensation for the simulcasting of its races to such facilities. The Company also pays host track fees to other racing facilities for the simulcasting of races to the Company's tele-tracks. For the fiscal year ended October 31, 1998, the Company received host track fees of $7.1 million and paid host track fees of $2.8 million. During fiscal 1997 the Company received host track fees of $5.7 million and paid host track fees of $2.5 million, and during fiscal 1996 the Company received host track fees of $4.4 million and paid host track fees of $2.2 million. Income from Video Poker Operations For the fiscal year ended October 31, 1998, revenue from video poker operations was $2.9 million compared to $2.3 million in fiscal 1997 and $2.0 million in fiscal 1996. In the fiscal year ended October 31, 1998, the Company did not receive any video poker franchise fee relief revenues as a result of having repaid all indebtedness incurred to construct its new main grandstand and racing facility. Video poker franchise fee relief revenues were $1.9 million and $2.9 million in the fiscal years ended October 31, 1997 and October 31, 1996, respectively. As previously described, there were a total of 315 devices in operation at the Company's facilities (not including the tele-tracks operated by Finish Line) as of October 31, 1998. 7 8 Other Sources of Revenue Additional revenue to the Company is generated from program sales, admission charges collected by the racing facility and tele-tracks, parking, and food and beverage services, all of which are operated directly by the Company. Pursuant to its agreement with the publisher of the Daily Racing Form, the Company is the wholesaler for sales of the Daily Racing Form in the greater New Orleans area. For two weekends each year, after the Company's live racing meet has concluded, the infield of the Fair Grounds Race Course is used by a non-profit organization in New Orleans to host a Jazz and Heritage Festival. As compensation for the use of its facilities, the Company receives all revenues from certain beverage concessions during the Jazz and Heritage Festival. The Company and the sponsor of the Jazz and Heritage Festival are parties to an agreement for the use of the Company's facilities through the year 2001. Revenues from the 1998 Festival were $1.4 million, compared to $1.0 million from the 1997 Festival and $1.5 million from the 1996 Festival. Seasonality The Company's business is seasonal, and the Company has received and should continue to receive a majority of its revenues during the first and second quarters of its fiscal year when its live racing meet is held. Prior to the commencement of off-track wagering, the Company did not earn significant revenues in the third and fourth quarters of its fiscal year. Because the Company's tele-tracks are now operated year-round, the Company earns revenues throughout the fiscal year but on a smaller scale in the third and fourth quarters than in the first and second quarters of its fiscal year. In addition, video poker operations are conducted year-round; however, revenue from video poker operations generally is higher during the months when live racing is conducted at the Company's race track since attendance there is higher during such period. For information regarding the Company's operating revenues, income or loss from operations, other income, net income or loss and total assets, see "Selected Financial Data." COMPETITION The Company continues to face competition from other companies in the gaming industry, including those which offer pari-mutuel wagering. Activities which compete or which have the potential for competing with the Company's racing facility, tele-tracks and video poker operations include other horse racing tracks and tele-tracks, riverboat and dockside gambling, casinos operated on Indian reservations, a land-based casino under construction in New Orleans, state-sponsored lotteries and video poker in restaurants, bars, hotels and truck stops. All such activities are present in the State of Louisiana, the Mississippi Gulf Coast area or elsewhere in the State of Mississippi. In recent years, the growth of gaming in the United States has been reflected in various forms, including riverboats, dockside gaming facilities, Native American gaming ventures, land-based casinos, state- sponsored lotteries, and expanded off-track wagering opportunities. The impact of the lottery, video poker, and casinos or riverboats on live 8 9 racing in Louisiana has been felt by all of the existing tracks. Additional forms of gaming which may be introduced in the future, as well as future expansions, additions and enhancements to existing facilities by the Company's competitors, could result in additional funds being directed away from the Company's on-track and off-track facilities. Horse Racing The Company's racing facility and tele-tracks compete for patrons with a number of sporting events and leisure time and entertainment activities in the New Orleans area and throughout Louisiana, including race tracks and tele-tracks owned and operated by three other licensees. The Company also competes with other race tracks in Louisiana and throughout the United States in securing high caliber thoroughbred horses to run at the Company's race track. The Company believes that it provides high quality horse racing at the Fair Grounds Race Course. Other Forms of Legalized Gaming Louisiana Lottery. A state-wide lottery began operations in Louisiana in September 1991. The Company believes that at its inception the Louisiana lottery contributed significantly to a decline in the Company's average daily pari-mutuel handle (consisting of both on-track and off- track wagering); however, the Company believes that the lottery has had little impact during the last several fiscal years. Casino Gambling. A number of dockside casinos are currently operating in or near Biloxi, Mississippi, located on the Mississippi Gulf Coast approximately 60 miles east of New Orleans. In addition, a substantial number of dockside gaming facilities are in operation. The Louisiana Riverboat Economic Development and Gaming Control Act, which became effective in July 1991, approved the conduct of riverboat gaming activities on 12 separate waterways in Louisiana. The legislation authorizes the issuance of up to 15 licenses to operate riverboat casinos within the State, with no more than six in any one Parish. As of January 1, 1999, 14 licenses had been granted and there were 13 licensed riverboats in operation in Louisiana, three of which were operating in the New Orleans area. In 1992, the Louisiana legislature approved a single land-based casino to be developed in downtown New Orleans. Such legislation provided that the casino is to be the only such authorized casino in the State of Louisiana. The City of New Orleans awarded contracts for the development and operation of such casino project, and in May 1995 temporary gambling operations commenced and construction on the permanent casino facility was begun. The temporary gambling operations and construction were halted in the Fall of 1995 when the developer of the casino filed for bankruptcy. Construction of the land-based casino was started again in 1998 and construction is expected to be completed late in 1999 or early in 2000. Video Poker Operations. As described herein, pari-mutuel facilities to have an unlimited number of video poker devices at such facilities. Any person who has been granted a license to sell alcoholic beverages for 9 10 consumption on the premises may be granted a license for the placement of devices on such premises; however, with the exception of pari-mutuel facilities and truck stop facilities, a licensee may not have more than three such devices. Truck stop facilities may have no more than 50 devices. Devices which are placed in restaurants are to be operated only in designated areas which are separate from the dining areas of such restaurants. The Company believes that there are numerous establishments throughout the New Orleans area at which video poker devices are located; however, the Company does not believe that the placement of such devices at such other establishments has had a material adverse effect on the revenue which has been generated from the operation of such devices at the Company's racetrack and tele-tracks. REGULATION The Company's operation of pari-mutuel wagering at its racetrack and tele-tracks is subject to extensive regulation pursuant to Louisiana law and the rules and regulations of the Racing Commission which govern, among other things, (i) the awarding of licenses for the conduct of live racing meets; (ii) the conduct of thoroughbred horse racing; (iii) the types of wagering which may be offered by the Company and other pari- mutuel facilities; and (iv) the disposition of revenue generated from wagering. Off-track wagering is also regulated by the Racing Commission. Such legislation, and subsequent regulations adopted by the Racing Commission, govern the ownership and operation of off-track wagering facilities, the commissions which facilities may earn on wagers and the amounts which must be set aside as purse supplements, as described elsewhere herein. The Video Draw Poker Devices Control Law is subject to regulation by the gaming enforcement division of the Louisiana State Police. Such legislation describes the specifications which must be met before devices can be utilized in Louisiana, and also sets forth certain licensing, accounting and reporting requirements. EMPLOYEES During its live racing season, the Company employs approximately 805 persons. At all other times, the Company employs approximately 400 persons. 10 11 ITEM 2. PROPERTIES The Company owns its racetrack site which consists of approximately 145 acres of land situated within a fenced area adjacent to Gentilly Boulevard in the New Orleans city limits and within a ten-minute drive from downtown New Orleans. Located on such property is a one-mile oval, sandy loam race track and a seven-furlong turf track inside the main track. The Company owns the clubhouse and tele-track facility described herein as well as the new grandstand facility. Construction of the Company's new main grandstand and racing facility, which commenced in August 1994 but was halted in September 1995, recommenced during fiscal 1997. The facility was completed in November 1997 and opened for live racing on November 27, 1997. The new facility is a multi-tiered concrete and steel structure, with a total seating capacity for approximately 5,000 people. The size of the new facility, together with the adjacent tele-track building completed in December 1994, is approximately 217,000 square feet in the aggregate. There is general seating in a bleacher area in the front of the grandstand with reserved seating, including the new clubhouse area, located in tiered areas above the grandstand. In a significant change from the design of the old building, the paddock is located in the middle of and behind the grandstand and may be viewed through a glass area from all levels of the facility. The Company also owns 50 modern concrete barns with supporting buildings and facilities which are located on the property and are capable of quartering approximately 2,000 horses. There is an all-concrete parking lot which can accommodate approximately 4,000 vehicles within the fenced area. In December 1997, the Company repaid all remaining indebtedness under its then outstanding note to First National Bank of Commerce (now Bank One) which was secured by a $17.5 million collateral mortgage on substantially all of the real property and equipment of the Company and by a security interest in all of the Company's furniture, fixtures, equipment, and other items of personal property. The Company leases the facilities for its off-track tele-tracks under lease agreements which contain various terms. The tele-tracks formerly licensed to Jefferson Downs and now licensed to the Company are also leased; however, as described herein, Finish Line has agreed to indemnify the Company for, among other things, all obligations under the leases assigned by Jefferson Downs to the Company. The Company has an agreement with Autotote Limited ("Autotote"), pursuant to which Autotote provides the Company with wagering services, including totalisator, computer and related services. The Company is obligated to pay Autotote a percentage of the total pari-mutuel handle, and is also obligated to pay Autotote certain equipment and contingent rental fees in connection with leasing certain equipment from Autotote. See Note 8 of Notes to the Financial Statements included elsewhere herein for a description of the Company's lease obligations. 11 12 ITEM 3. LEGAL PROCEEDINGS FIRE RELATED LITIGATION During the past five years, the Company has been a party to a number of legal proceedings which have arisen as a result of the December 1993 fire that destroyed the Company's main clubhouse and grandstand building, or in connection with the Company's efforts to collect insurance proceeds after the fire. The following is a brief description of such fire-related proceedings: Travelers Litigation In May 1994, the Company filed an action in the 24th Judicial Court in the State of Louisiana against Travelers Indemnity Company of Illinois ("Travelers") and others. The Company contended that the insurance policy issued by Travelers provided the Company with blanket coverage in the amount of $24.2 million in excess of the $10 million of underlying coverage and, accordingly, that Travelers was liable for the difference between $24.2 million and the amount previously paid by Travelers (approximately $9.5 million), plus statutory penalties of 10% of the amount not paid, interest, attorney's fees and costs. The Company further contended that the insurance agent and the insurance broker who arranged for the insurance were liable to the Company for any damages sustained including any damages sustained because the amount of coverage was less than that claimed by the Company. Travelers' position was that its liability under such policy was limited to the amount which it had previously paid. In November 1996, the Company reached a joint settlement with the insurance agent and broker pursuant to which the insurance agent and broker agreed paid a total of $10,000,000 to the Company. The settlement agreement included a "Mary Carter" provision whereby the insurance agent and broker are entitled to share in any recovery that the Company may eventually obtain from Travelers in that litigation. The Company's action against Travelers was tried in September 1997, and in April 1998 the trial court entered judgment in favor of the Company and against Travelers, awarding the Company an additional $2,410,905 in business interruption insurance, legal interest on that sum from May 1994 until paid, statutory penalties in the amount of $222,128 and attorney's fees in an amount to be set by the Court. The court later fixed the amount of attorney's fees at $75,000. In August 1998, the trial court denied all post trial motions and certified the judgment as being immediately appealable. Appeals by both the Company and Travelers are now pending before the state court of appeals. Under the Mary Carter agreement referenced above, the liability insurers of the agent and broker are entitled to share in any recovery from Travelers. ADT Litigation In December 1994, the Company filed an action in the Civil District Court for the Parish of Orleans, State of Louisiana against ADT Security Systems Mid-South, Inc. ("ADT"), which provided and maintained the fire alarm system at the race track, and other defendants. The complaint 12 13 sought damages, not otherwise compensated for by insurance, that were allegedly caused by the negligence of one or more of the defendants. The Company's three fire insurers and a third party's insurance company, which insured the operator of the video poker machines destroyed in the fire, intervened in the suit asserting subrogation claims against the same defendants. In late 1996, the Company and three insurance companies entered into settlements with the manufacturer of a lighting ballast and an architect. After division of the settlement proceeds among the Company and the three insurance companies and the payment of various litigation expenses, the Company received approximately $268,000. In March 1997, a jury trial was held on the remaining claims and resulted in an award in favor of the Company and the subrogated insurance companies of approximately $49.8 million in the aggregate in damages against ADT, plus interest, of which approximately $31.8 million, plus interest, was awarded to the Company. The judgment was appealed to the Court of Appeals of Louisiana, Fourth Circuit, by ADT, the Company and three of the subrogated insurance companies. In June 1997, the insurance company that insured the initial layer of ADT's liability tendered approximately $9.3 million in partial settlement of the action. After a dispute with the subrogated insurers over the division of these funds was resolved in August 1997, the Company received approximately $4 million of those proceeds after litigation expenses. In December 1997, the Company entered into a settlement with ADT and ADT's excess coverage insurers pursuant to which the Company was paid $37 million and agreed to indemnify ADT and its insurers against the judgment creditor claims of the four subrogated insurers. In December 1997, the Company received $7.7 million of such funds net of litigation expenses, and the balance of the settlement funds was placed in escrow pending resolution of the subrogation claims. In July 1998, the Company settled the subrogation claims of three of the four insurers, as well as an action filed in April 1997 in United States District Court for the Eastern District of Louisiana by those three insurers against the Company seeking a declaratory judgement that a contract had been entered into by the parties respecting the distribution of funds recovered in the ADT litigation. Under the terms of this settlement, the three insurers received a total of $12.97 million from the funds in escrow. At that time, the Company received an additional $2.2 million from the funds in escrow, net of litigation expenses, leaving approximately $6.3 million in escrow which is not reflected as an asset on the Company's balance sheet as of October 31, 1998. In September 1998, the Court of Appeals, among other things, reversed the trial court's award of $4.25 million to the Company's primary property insurer on its subrogation claim, concluding that the trial court had erred in making that award to the insurer when the Company had not been fully compensated for its property loss. This decision rendered moot the remainder of the appeals. The insurer appealed this decision to the Louisiana Supreme Court which recently denied the appeal. The funds remaining in escrow will be paid out when this case is concluded. 13 14 United National Litigation The Company was a defendant, along with its general liability insurance carrier, United National Insurance Company ("United National"), in a civil action filed in December 1994 in the United States District Court for the Eastern District of Louisiana by St. Paul Mercury Insurance Company ("St. Paul"), the insurer of the computerized betting equipment at the race track. St. Paul alleged that it was subrogated to its insured's rights to collect damages and that it had paid approximately $1,175,000 to its insured for the loss of equipment in the fire. Subsequently, United National filed a declaratory judgment action against the Company, wherein it sought to deny coverage for St. Paul's subrogation claim. The Company filed a counterclaim against United National, seeking coverage for the St. Paul claim as well as payment for various other fire-related claims previously denied by United National. This action was consolidated for trial with the suit filed by St. Paul against the Company. Both United National and the Company moved for summary judgment on the question of whether the exclusion relied on by United National to deny coverage for the various claims applied. In 1996, the United States District Court ruled that the policy exclusion relied upon by United National did not apply to the claim asserted by St. Paul and to claims made by various jockeys and valets that were previously paid by the Company. United National subsequently appealed this decision to the United States Court of Appeals for the Fifth Circuit which held that the claims were covered. In May 1997, the St. Paul suit was settled pursuant to an agreement whereby ADT agreed to pay an undisclosed sum and United National, as the Company's insurer, agreed to pay $275,000. In February 1998, United National tendered $56,553 to the Company for claims which it acknowledged were covered under the policy. In November 1998, United National tendered an additional $11,818 to the Company for claims which it acknowledged were covered under the policy. In December 1998, the Company settled the balance of its claims against United National for an additional $140,000 which has been paid by United National. OTHER LITIGATION In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston Downs Racing Association ("Livingston") naming the Company and other defendants in an antitrust/civil RICO suit. This suit is currently in the discovery stage, and the Company has filed a motion for summary judgment. Livingston had previously filed a series of other legal actions against the Company which were resolved in the Company's favor. A suit was also filed in state court in Louisiana in 1996 by Livingston against the Company and the State of Louisiana seeking a declaration that the State off-track betting law is unconstitutional. The trial court ruled in the plaintiff's favor. The Louisiana Supreme Court reversed the trial court decision, holding that the off-track betting statute is constitutional. Livingston's request for rehearing was subsequently denied. 14 15 In 1996 a suit was filed in state court in Louisiana by the Louisiana Horsemen's Benevolent and Protective Association ("HBPA") against the Company, the State of Louisiana, and all other pari-mutuel wagering facilities operating in Louisiana. The HBPA is seeking a larger portion of video poker proceeds. The Company believes it is currently in compliance with the guidelines established by the Louisiana State Police Gaming Division, which regulates compliance with Louisiana's video poker law. In July 1997, Evelyn Allen and other present or former security or concessions employees of the Company filed an action in the United States District Court in New Orleans claiming that the plaintiffs were entitled, under the Fair Labor Standards Act, to overtime for hours worked over 40 in each work week from July 1994 to July 1997. Two of the plaintiffs also sought to recover damages for alleged retaliatory discharge. In December 1998, the Company and the plaintiffs reached a settlement pursuant to which the Company will pay the plaintiffs $100,000 in full settlement of all claims for overtime pay. The retaliatory discharge claims were tried in December 1998 and dismissed by the Court at the conclusion of evidence. The plaintiffs' claim for attorneys fees has not yet been resolved. Except as described above, there are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company is a party or of which any of its property is the subject. 15 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with Instruction 3 to Item 401(b) of Regulation S-K, the following information is submitted concerning the executive officers of the Company: BRYAN G. KRANTZ, age 38, is President, General Manager and a director of the Company and is President of Finish Line Management Corporation, which operates certain off-track betting facilities in Louisiana. MARIE G. KRANTZ, age 63, is Chairman of the Board of Directors and Treasurer of the Company and is Secretary/Treasurer of Finish Line Management Corporation. MERVIN MUNIZ, JR., age 56, is Director of Racing and Racing Secretary. GORDON M. ROBERTSON, age 58, is Chief Financial Officer of the Company. JOAN B. STEWART, age 66, is Secretary of the Company No family relationships exist between or among any nominee, director or executive officer of the Company, except that Bryan G. Krantz is the son of Marie G. Krantz. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common shares of the Company are not listed on The Nasdaq Stock Market or any other established trading market. Trading in the common shares of the Company generally has been sporadic and trading volume generally is very low. The range of high and low bid quotations set forth below represents the bid quotations at the end of each fiscal quarter.
FISCAL 1997 1997 1998 1998 QUARTER ENDED Low Bid High Bid Low Bid High Bid ------------- ------- -------- ------- -------- January 31 $12.50 $20.00 $15.50 $20.00 April 30 $11.00 $25.00 $16.00 $17.00 July 31 $14.00 $18.00 $20.00 $26.00 October 31 $15.00 $25.00 $23.00 $30.00
As of January 1, 1999, there were approximately 430 shareholders of record of the 468,580 issued and outstanding common shares of the Company. There were no cash dividends declared or paid during fiscal 1998, 1997 or 1996. 16 17 The Company is not subject to any restrictions (other than non-contractual business considerations) affecting its present or future ability to pay dividends with respect to its common shares. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 18 ITEM 6. SELECTED FINANCIAL DATA FAIR GROUNDS CORPORATION SELECTED FINANCIAL DATA For the Five Years Ended October 31
1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- OPERATING REVENUES $36,785,091 $30,980,259 $27,496,500 $23,031,031 $22,371,571 OPERATING EXPENSES 38,884,188 32,201,167 29,809,843 26,394,452 26,094,568 ----------- ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (2,126,464) (1,220,908) (2,313,343) (3,363,421) (3,722,997) INTEREST EXPENSE 19,752 266,435 791,566 12,318 284,926 OTHER INCOME 1,483,027 3,013,320 4,279,503 2,459,163 605,553 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM, AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (663,189) 1,525,977 1,174,594 (916,576) (3,402,370) PROVISION (BENEFIT) FOR INCOME TAXES (3,364,232) 775,288 294,896 (300,460) (1,878,635) EXTRAORDINARY ITEM - GAIN FROM FIRE (net of taxes) 6,272,628 9,022,525 - - 9,312,758 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES - - - 104,000 (75,094) ---------- ---------- ----------- ----------- ----------- NET INCOME (LOSS) $8,973,671 $9,773,214 $ 879,698 $ (512,116) $ 7,713,929 ========== ========== =========== =========== =========== COMMON SHARES OUTSTANDING 469,940 469,940 469,940 469,940 469,940 ========== ========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE $ 19.09 $ 20.80 $ 1.87 $ (1.09) (16.48) ========== ========== =========== =========== =========== CASH DIVIDENDS DECLARED PER SHARE $ None $ None $ None $ None $ None ========== ========== =========== =========== ============ TOTAL ASSETS $49,144,377 $48,089,820 $ 34,791,597 $ 30,954,654 $ 26,470,322 =========== =========== ============ ============ ============= NOTES PAYABLE (EXCLUDING CURRENT PORTION) $ - $ - $ - $ - $ 1,000,000 =========== =========== ============ =========== ============
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997 Revenues. During the fiscal years ended October 31, 1998 and 1997, the Company derived its pari-mutuel income by conducting live racing meets of 88 days during each fiscal year and in the operation of its tele-tracks for off-track wagering. In fiscal 1998, the Company utilized its new grandstand and clubhouse facilities, which were completed in November 1997, when live racing was being conducted at the Fair Grounds Race Course. Live racing in fiscal 1997 was conducted at Fair Grounds Race Course utilizing temporary tent facilities and the tele-track which was completed and put into service in late 1994. During each such fiscal year, the Company operated tele-tracks in New Orleans at the Fair Grounds Race Course and on Bourbon Street, and at locations in Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana. Through Finish Line Management Corporation, an affiliated company, the Company operated tele-track facilities in Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana. For the fiscal year ended October 31, 1998, the Company reported total in-state pari-mutuel wagering of $119,710,774 compared to $105,682,151 in fiscal 1997. Comparative pari-mutuel wagering and attendance figures for the fiscal years ended October 31, 1998 and 1997 are as follows:
1998 1997 ------------- --------------- Pari-mutuel wagering: On-track handle $ 25,789,351 $ 20,200,754 Off-track handle 93,921,423 85,481,397 ------------- --------------- Total in-state wagering $ 119,710,774 $ 105,682,151 ============= =============== Out-of-state simulcast handle $ 219,765,627 $ 165,823,806 ============= =============== Attendance: On-track 189,439 109,982 Off-track 391,271 389,149 ------------- --------------- Total Attendance 592,710 499,131 ============= ===============
The $5,588,597, or 27.7%, increase in the on-track handle is primarily due to the opening of the new racing facility in November 1997. The Company believes that the $8,440,026, or 9.9%, increase in off-track handle is primarily due to the Company transmitting better simulcasting signals and higher quality racing in the Company's live racing meet. The $53,941,821, or 32.5%, increase in out-of-state handle is the result of those same factors as well as telecasting the Company's races to new out-of-state markets. During the fiscal year ended October 31, 1998, New York took full cards from the Company through the end of January increasing the New York handle by $21 million over the same period last year plus significant handle increases from Kentucky, Pennsylvania, Texas and Las Vegas. 19 20 Net Income. The Company reported net income of $8,973,671 for the fiscal year ended October 31, 1998 compared to net income of $9,773,214 for the previous fiscal year. In both fiscal years, the Company received significant litigation settlements as described herein, and in fiscal 1998 the Company also reported a $3.36 million income tax benefit as described herein. In addition, as previously reported, in fiscal 1997, the Company received video poker franchise fee relief of approximately $1.92 million which was not available in fiscal 1998. The Company anticipates that net income for fiscal 1999 will be substantially below net income for fiscal 1998 because the Company does not expect to record an income tax benefit in fiscal 1999 similar to that recorded in fiscal 1998 and the Company may not receive any significant litigation recoveries in fiscal 1999. Operating Revenues. As a result of the increases in total attendance and wagering on the Company's races, the Company's fiscal 1998 operating revenues increased by $5,804,832, or 18.7%, from the prior fiscal year. This included increases of $2,919,060, or 14.5%, in pari-mutuel commissions, $37,268, or 7.74%, in breakage, $1,366,471, or 23.8%, in host track fees, $553,084, or 23.6%, in video poker revenue, and $456,199, or 154%, in admissions revenue. Admission revenues include admissions to box seats and suites that were unavailable prior to the opening of the new racing facility in November 1997. In addition, net concessions revenues increased by approximately $586,417, or 65.8%, as a result of the opening of the new clubhouse and grandstand facilities. The Company believes that operating revenues in fiscal 1999 will be slightly higher than in fiscal 1998 due to further increases in attendance and wagering. Racing Expenses. Total racing expenses increased by $5,743,309, or 20.4%, over fiscal year 1997, primarily as a result of increases in purses, racing salaries and related benefits, host track fees, repairs and maintenance, advertising, utilities, program paper, forms and other supplies, and miscellaneous racing expenses, arising from the increased pari-mutuel handle and attendance at the new racing facility. Depreciation expense increased by $258,826, or 16.3%, also due to the opening of the new facility. The Company expects that racing expenses in fiscal 1999 will be slightly higher than in fiscal 1998. General and Administrative Expenses. General and administrative expenses for the fiscal year ended October 31, 1998 increased $967,079, or 22.9%, from the prior fiscal year. The increase was a result of an increase in salaries and related taxes and benefits, property taxes, miscellaneous expenses, and office expenses primarily due to the opening of the new facility. The Company expects general and administrative expenses in fiscal 1999 to be at approximately the same level as in fiscal 1998. Other Income (Expenses). Total other income decreased $1,283,610, or 46.7%, from the prior fiscal year primarily as a result of a decrease of $1,921,362 in video poker franchise fee relief partially offset by an increase of $328,220 in Jazz and Heritage Festival beverage sales income due to the improved weather during this year's festival compared to the prior year's festival, and a decrease of $246,683 of interest expense due to the repayment of the construction loans in late 1997. The Company expects other income (expense) to be at approximately the same level as in fiscal 1998. 20 21 Interest income increased by $52,469 from the prior fiscal year primarily as a result of the Company investing its operating funds in overnight repurchase securities through a financial institution beginning in July 1998. Short term loan closing costs decreased by $127,105 due to the lack of financing needs of the Company compared to the prior fiscal year. The decrease in the gain on sale of property, plant and equipment of $115,602 related to the prior year sale of certain temporary racing facilities, which were used prior to the opening of the Company's new facility. Extraordinary Items. During the fiscal year ended October 31, 1998, the Company recorded an extraordinary item of $6,272,628, which was net of $3,683,924 of income taxes, as a result of a fire-related litigation settlement with ADT discussed further herein. During the fiscal year ended October 31, 1997, the Company recorded an extraordinary item of $9,022,525, which was net of $5,298,944 of deferred income taxes, as a result of a fire-related litigation settlement with an insurance agent and broker. Income Taxes. In addition to the components of net income previously discussed, net income for fiscal 1998 included an income tax benefit of $3,364,232 compared to income tax expense of $775,288 in fiscal 1997. The income tax benefit was attributable to a reduction of the excess of basis for financial reporting purposes over basis for tax purposes of property constructed with the recoveries in the fire-related litigation and insurance settlements due to the current recognition of the gain on the receipt of the recoveries for tax purposes. Fiscal 1997 Compared to Fiscal 1996 Revenues. During the fiscal years ended October 31, 1997 and 1996, the Company derived its pari-mutuel income by conducting live racing meets of 88 days during each fiscal year, and in the operation of its tele- tracks for off-track wagering. In each of those periods, the Company utilized temporary tent facilities and its new tele-track at the Fair Grounds Race Course when conducting live racing because the new grandstand and clubhouse had not been completed. During each such fiscal year, the Company operated tele-tracks in New Orleans at the Fair Grounds Race Course and on Bourbon Street, and at locations in Jefferson, Lafourche, St. Bernard and St. John Parishes, Louisiana. Through Finish Line, the Company operated tele-track facilities in Terrebonne, St. Tammany, and Jefferson Parishes, Louisiana that were formerly operated by Jefferson Downs. For the fiscal year ended October 31, 1996, the Company reported total in-state pari-mutuel wagering of $105,682,151 compared to $96,474,002 in fiscal 1996. Comparative pari-mutuel wagering and attendance figures for the fiscal years ended October 31, 1997 and 1996 are as follows:
1997 1996 ------------ ------------ Pari-mutuel wagering: On-track handle $ 20,200,754 $ 20,180,889 Off-track handle 85,481,397 76,293,113 ------------ ------------ Total in-state wagering $105,682,151 $ 96,474,002 ============ ============
21 22
1997 1996 ------------ ------------ Out-of-state simulcast handle $165,823,806 $116,590,172 ============ ============ Attendance: On-track 109,982 110,162 Off-track 389,149 316,687 ------------ ------------ Total Attendance 499,131 426,849 ============ ============
Although in previous fiscal years the Company had experienced declines in on-track handle due to the limited amenities afforded by the temporary facilities, the on-track handle for fiscal 1997 was slightly higher than that for fiscal 1996. The $9,188,284, or 12%, increase in off-track handle was primarily the result of the continued success and growth of the Jefferson Parish tele- track facility opened in October 1995. Handle at the Jefferson Parish facility during fiscal 1997 increased 31.4% over the prior fiscal year. The $49,233,634, or 42%, increase in out-of-state handle in fiscal 1997 was the result of continued efforts to telecast the Company's races to new out-of-state markets. During the fiscal 1997 race meet, there were 14 new markets telecasting the Company's races, including tracks in Ohio, Oklahoma, Florida, Michigan and New York, which accounted for approximately $27.7 million, or 56%, of the handle increase. Net Income. For the fiscal year ended October 31, 1997, the Company reported net income of $9,773,214, compared to net income of $879,698 in fiscal 1996. The increase was primarily the result of litigation settlements and increases in mutuel income compared to fiscal 1996, partially offset by an increase in racing expenses over the prior fiscal year. These are described in more detail below. Operating Revenues. As a result of the increase in total wagering, the Company's fiscal 1997 operating revenues increased by $3,483,759, or 13%, from fiscal 1996. This included increases of $1,887,524, or 10%, in pari-mutuel commissions, $73,651, or 22%, in uncashed mutuel tickets, $1,322,817, or 30%, in host track fees and $391,126, or 20%, in video poker revenue. The Jefferson Parish tele-track facility accounted for a significant portion of the increase in video poker revenues. The increase was partially offset by increased pari-mutual taxes of $222,074. Racing Expenses. Total racing expenses increased by $2,708,119, or 10.7%, over fiscal 1996, primarily as a result of increases in purses, racing salaries, contracts and services, host track fees, advertising, rent, repairs and maintenance and program paper, forms and other supplies arising out of increased pari-mutuel handle. This increase was partially offset by a decrease in depreciation expense and utilities and miscellaneous expense. The temporary racing facilities which the Company had utilized since January 1994 became fully depreciated in January 1997. General and Administrative Expenses. General and administrative expenses for the fiscal year ended October 31, 1997 decreased $316,155, or 7.2%, from fiscal 1996 primarily due to decreases in salaries resulting from a reduction in general and administrative staff. The decrease was partially offset by increases in contracts and services for the 22 23 construction of the new main facility and by increases in office expense. Other Income (Expenses). Total other income decreased $741,052, or 21.2%, from fiscal 1996 primarily as a result of a decrease in Jazz and Heritage Festival revenue and video poker franchise fee relief revenue, partially offset by a gain of $115,602 on the sale of the salvage from the removal of the fully depreciated temporary facilities, and a decrease in interest expense of $525,131 relating to the bank financing discussed elsewhere herein. The Jazz and Heritage Festival revenue decreased $486,218, or 31.7%, due to inclement weather during the first weekend of the seven-day festival in fiscal 1997. The Company receives revenues on the sale of certain beverages during the festival, which is held at the Fair Grounds Race Course. Video poker franchise fee relief revenue decreased $967,600, or 33.5%, compared to fiscal 1996. The revenue provided by the franchise fee relief legislation described elsewhere herein was available for only a few months during fiscal 1997, compared to the entire 12 months in fiscal 1996. No franchise fee relief was available to the Company after fiscal 1997 because the Company had repaid all indebtedness incurred to construct its new main grandstand and racing facility. Extraordinary Items. During fiscal year 1997, the Company received settlement payments in connection with the fire-related litigation described herein in the aggregate amount of $14,321,469. These proceeds were net of related income tax expense of $5,298,944. Income Taxes. In addition to the components of net income previously discussed, the net income for fiscal 1997 included income tax expense of $775,288 compared to an income tax expense of $294,896 in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES General Cash and cash equivalents increased $2,384,974 during the fiscal year ended October 31, 1998, compared to a decrease of $1,072,178 during the fiscal year ended October 31, 1997. The increase in cash and cash equivalents in fiscal 1998 was the result of cash provided by operations of $1,895,735, and cash provided by investing activities of $5,761,248, partially offset by cash used for financing activities of $5,272,009. Cash used in financing activities related primarily to the repayment of construction loans. The cash provided by investing activities was primarily the receipt of $9.9 million of proceeds from fire-related litigation settlement, partially offset by construction expenditures for the Company's new racing facility. In December 1997, the Company entered into a settlement with ADT and its excess coverage insurers, pursuant to which the Company was paid $37 million, which was deposited in escrow, and agreed to indemnify ADT and its insurers against the judgment creditor claims of the intervening insurers. In December 1997, the Company received $7.7 million of such funds net of litigation expenses. The balance of the settlement funds were placed in escrow pending resolution of subrogation claims. The Company received an additional $2.2 million, net of litigation expenses, 23 24 in July 1998 pursuant to the settlement described below. The claims of the Company and the Company's primary property insurer to the remaining escrow funds are the subject of a civil action now on appeal to the Louisiana Supreme Court. In connection with the receipt of the settlement proceeds described herein, the Company recognized an extraordinary gain for the fiscal year ended October 31, 1998 of approximately $6.27 million, which is net of income taxes of approximately $3.68 million. As a result of this and other settlements received, the Company has a total net deferred tax liability of approximately $7.08 million. Approximately $3.0 million of this tax liability was due for the tax year ended October 31, 1998 and has been paid. The remaining deferred tax liability is to be paid over approximately 39 years in accordance with Internal Revenue Service regulations. The Company intends to fund these future tax obligations through operations. In April 1, 1998, in connection with the ongoing fire-related litigation, the court entered judgment in favor of the Company and against Travelers, awarding the Company an additional $2,410,905 in business interruption insurance, legal interest on the sum from May 13, 1994 until paid, statutory penalties in the amount of $222,128 and attorney's fees in an amount to be set by the court. In August 1998, the Court denied all post trial motions and certified the judgment as being immediately appealable. Under the Mary Carter agreement referred to above, the liability insurers of the agent and broker are entitled to share in this award. The Company estimates that its portion of the award, when paid, will be approximately $1.5 million to $2 million, depending upon the amount of interest accrued and attorney's fees awarded. This award has been appealed. As of October 31, 1998, the Company had received cumulatively, since the December 1993 fire, approximately $44 million of insurance proceeds resulting from fire loss claims submitted to the Company's insurance carriers or in litigation settlements. The Company's new main grandstand and racing facility was substantially completed in November 1997 and was opened for the start of the Company's 1997-98 live racing meet. The total cost of constructing the facility, excluding the tele-track facility at the Fair Grounds Race Course that was completed in late 1994, through October 31, 1998 was approximately $31 million. Of such amount, approximately $2.5 million was spent during the fiscal year ended October 31, 1998. All of the Company's indebtedness to First National Bank of Commerce (now "Bank One") ("FNBC"), which was incurred in connection with the construction of the new facility, has been repaid and the Company has no significant indebtedness remaining relating to construction of those facilities. As a result, video poker franchise fee relief, which was made available to the Company by legislation enacted in 1994, has not been available to the Company since fiscal 1997. During the 1994-1997 fiscal years, the Company received approximately $5.5 million in the aggregate in franchise fee relief. On April 14, 1998, the Company entered into a working capital line of credit agreement with FNBC. The line of credit is for $2.5 million with interest at 8% on amounts outstanding. In addition to monthly interest payments on outstanding balances, any amounts outstanding plus unpaid accrued interest are due on April 14, 1999. 24 25 There were no amounts drawn down or outstanding on this line of credit during the fiscal year ended October 31, 1998. The line of credit is secured by a commercial guarantee by Finish Line Management Corporation and a collateral mortgage note dated November 30, 1995 with all related amendments. In January 1999, the Company received a $1 million advance from its video poker operator which it will repay in six equal installments beginning in February 1999. The Company believes that the combination of existing cash, cash from future operations, any additional amounts received in the fire-related litigation, funds available under its working capital line of credit, and the Company's increased capacity to incur short-term and long-term indebtedness, if necessary, will be sufficient to fund the Company's cash requirements for the foreseeable future. Year 2000 Compliance A significant part of the Company's operations are dependent on computer systems and applications. These systems are either owned by the Company or are provided under contract by third party technology or other service providers. If these systems are not year 2000 compliant, the Company could experience system failures or miscalculations leading to disruption of business operations. In fiscal 1998 the Company began, and is now continuing, its assessment of its data processing functions to determine if they are year 2000 compliant. The Company has recently formed a task force to assist in its assessment of year 2000 readiness. Based in part on that assessment, in fiscal 1998 the Company purchased and installed an updated version of its accounting software that its vendor states is year 2000 compliant and is now in the process of testing that compliance. The Company has also made, and is continuing to make, inquiries to third party providers as to their compliance and is in the process of obtaining written assurances from certain vendors, as well as other race tracks with which the Company interfaces, as to their year 2000 readiness. The Company's plant and equipment, as well as the providers of services to the plant and equipment, are also being reviewed to determine whether they are year 2000 ready. The services of certain of those providers, including electrical and telephone services, are essential to the Company's ability to operate. The Company's most significant third party technology services provider is Autotote, which performs the totalisator functions for the Company. The Company's contract with Autotote provides that the services are to be year 2000 compliant. Autotote has contracted with a third party consultant to attain such compliance. If Autotote does not become compliant, the Company's operations could be adversely affected until another provider of the totalisator function can be found. The video services provided by another third party provider are also important to the Company's operations. These services include the production of the telecast signal at the Fair Grounds Race Course and distribution to the Company's tele-tracks and to other wagering facilities within and outside Louisiana. The Company is working with such provider to ensure that the software applications that provide the graphical enhancements and other distinguishing features to the telecast signals are year 2000 compliant. The video poker devices at the 25 26 Company's facilities are provided by another third party provider. The Company is working with that provider to ensure that such equipment is year 2000 compliant. To date, the Company has incurred costs of approximately $30,000, including the cost and time of Company employees, to address year 2000 issues. Although the Company has not completed its assessment of its facility, data processing and other equipment and, accordingly, has not determined the total costs associated with its efforts to prepare for year 2000, the Company currently believes that the costs of addressing its year 2000 transition will not have a material adverse effect on the Company's financial condition or business operations. The Company has not yet completed a contingency plan addressing failure to be year 2000 ready. Impact of Inflation To date, inflation has not had a material effect in the Company's operations. Forward-Looking Statements The statements in this Management's Discussion and Analysis that are forward-looking are based upon current expectations, and actual results may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by the Company that the objectives or plans of the Company will be achieved. Such statements include, but are not limited to, the Company's expectations regarding the source of funds for payment of its deferred tax liability, the recovery of additional funds in the fire-related litigation, the adequacy of its cash, cash equivalents and borrowings available under its new working capital line of credit to fund future operations, and the Company's increased capacity to incur short-term and long-term indebtedness. Words such as "anticipates," "believes," "expects," "estimated" and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results to differ materially including, but not limited to, the following: changing economic, market and business conditions, the ability of the Company to compete effectively for top horses and trainers necessary to field high-quality horse racing; the ability of the Company to grow its share of the interstate simulcast market; a substantial change in allocation of live racing days; the impact of competition from alternative gaming (including riverboat casinos and lotteries) and other sports and entertainment options in those markets in which the Company operates; and the Company's success in attracting new patrons and generating additional revenue for purses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company utilizes an overnight sweep arrangement pursuant to which available funds are invested in daily repurchase agreements which are collateralized by U.S. government or agency securities. The Company also has deposits in U.S. Treasury money market funds which are short-term in nature and guaranteed by the U.S. government. Because of the short-term duration of the financial instruments held by the Company, management does not believe that its financial instruments are materially sensitive to changes in interest rates. 26 27 ITEM 8. FINANCIAL STATEMENTS The following financial statements of the Company, including the notes thereto, and the Report of Independent Certified Public Accountants are included herewith: Report of Independent Certified Public Accountants Balance Sheets, October 31, 1998 and 1997 Statements of Operations for the Three Years Ended October 31, 1998 Statements of Changes in Stockholders' Equity for the Three Years Ended October 31, 1998 Statements of Cash Flows for the Three Years Ended October 31, 1998 27 28 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of the Fair Grounds Corporation We have audited the accompanying balance sheets of the Fair Grounds Corporation as of October 31, 1998 and 1997, and the related statements of operations, of changes in stockholders' equity, and of cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. Rebowe & Company Metairie, Louisiana January 8, 1999 28 29 FAIR GROUNDS CORPORATION BALANCE SHEETS October 31
ASSETS 1998 1997 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 7,577,730 $ 5,192,756 Cash and cash equivalents - restricted 118,218 2,643,702 Accounts receivable 1,078,638 1,348,530 Mutuel settlements 139,964 38,892 Investment securities - available for sale -- 592,878 Inventory 118,357 95,303 Deferred income taxes 59,940 -- Prepaid expenses 437,322 353,167 ------------ ------------ Total Current Assets 9,530,169 10,265,228 ------------ ------------ OTHER ASSETS 283,411 125,516 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 43,870,295 40,587,514 Land improvements 4,348,135 4,340,935 Automotive equipment 931,424 849,201 Machinery and equipment 2,432,433 2,365,837 Furniture and fixtures 366,575 326,898 ------------ ------------ Total 51,948,862 48,470,385 Less: accumulated depreciation and amortization (15,904,346) (14,057,590) ------------ ------------ Depreciable property - net 36,044,516 34,412,795 Land 3,286,281 3,286,281 ------------ ------------ Property, plant and equipment - net 39,330,797 37,699,076 ------------ ------------ TOTAL ASSETS $ 49,144,377 $ 48,089,820 ============ ============
29 30 FAIR GROUNDS CORPORATION BALANCE SHEETS (CONTINUED) October 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ------------ ------------ CURRENT LIABILITIES Notes payable $ 46,894 $ 5,318,903 Accounts payable 1,493,409 1,097,655 Construction contract payable 58,732 1,156,726 Accrued liabilities: Deferred purses 7,930,825 7,425,179 Host track fees 374,251 416,516 Uncashed mutuel tickets 446,786 364,246 Other 369,135 524,850 Deferred revenues 275,701 140,840 Income taxes payable 450,185 121,000 ------------ ------------ Total Current Liabilities 11,445,918 16,565,915 ------------ ------------ DEFERRED INCOME TAXES 7,043,865 9,846,104 ------------ ------------ Total Liabilities 18,489,783 26,412,019 ------------ ------------ COMMITMENTS AND CONTINGENCIES -- -- ------------ ------------ STOCKHOLDERS' EQUITY Capital stock - no par value; authorized 600,000 shares, 469,940 shares issued and 468,580 shares outstanding 1,525,092 1,525,092 Additional paid-in capital 1,936,702 1,936,702 Retained earnings 27,228,325 18,254,654 Unrealized loss on investment securities-available for sale -- (3,122) ------------ ------------ Total 30,690,119 21,713,326 Less: treasury stock at cost, 1,360 shares at 1998 and 1997 (35,525) (35,525) ------------ ------------ Total Stockholders' Equity 30,654,594 21,677,801 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,144,377 $ 48,089,820 ============ ============
See accompanying notes to financial statements. 30 31 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS For the Years Ended October 31
1998 1997 1996 ------------ ------------ ------------ REVENUES Pari-mutuel commissions $ 23,751,342 $ 20,832,282 $ 18,944,758 Breakage 518,822 481,554 439,204 Uncashed mutuel tickets 476,740 404,405 330,754 ------------ ------------ ------------ Total 24,746,904 21,718,241 19,714,716 Less: pari-mutuel tax (3,164,575) (2,792,092) (2,570,018) ------------ ------------ ------------ Commission income 21,582,329 18,926,149 17,144,698 Host track fees 7,100,025 5,733,544 4,410,727 ------------ ------------ ------------ Total Mutuel Income 28,682,354 24,659,693 21,555,425 Concessions 2,194,788 1,485,227 1,467,187 Admissions (net of taxes) 753,069 296,870 351,569 Parking 45,090 20,581 14,967 Video poker 2,899,761 2,346,677 1,955,551 Programs and forms 1,598,562 1,491,628 1,474,947 Miscellaneous 611,467 679,583 676,854 ------------ ------------ ------------ Total Operating Revenues 36,785,091 30,980,259 27,496,500 ------------ ------------ ------------ RACING EXPENSES Purses 13,339,805 11,041,607 9,558,545 Salaries and related taxes and benefits 7,058,677 5,702,370 5,092,149 Contracts and services 2,197,555 2,333,814 2,069,396 Depreciation 1,847,867 1,589,041 1,810,257 Host track fees 2,785,281 2,482,926 2,178,478 Program paper, forms and other supplies 1,774,943 1,587,615 1,545,963 Utilities 1,204,332 674,071 711,022 Advertising and promotion 1,152,101 917,817 781,935 Cost of sales - concessions 716,918 593,774 541,691 Repairs and maintenance 733,474 383,343 300,332 Rent 326,973 304,138 303,006 Miscellaneous 704,012 488,113 497,736 ------------ ------------ ------------ Total Racing Expenses $ 33,841,938 $ 28,098,629 $ 25,390,510 ------------ ------------ ------------
(Continued) 31 32 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS (CONTINUED) For the Years Ended October 31
1998 1997 1996 ----------- ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSES Salaries and related taxes and benefits $ 1,483,233 $ 993,049 $ 1,225,683 Insurance 827,775 866,343 950,882 Property taxes 811,104 399,541 395,863 Legal, audit and director fees 1,051,024 1,129,814 1,203,501 Contracts and services 179,880 197,603 159,521 Office expenses 408,938 350,090 303,398 Miscellaneous 307,663 166,098 180,485 ----------- ----------- ----------- Total General and Administrative Expenses 5,069,617 4,102,538 4,419,333 ----------- ----------- ----------- LOSS FROM OPERATIONS (2,126,464) (1,220,908) (2,313,343) ----------- ----------- ----------- OTHER INCOME (EXPENSE) Jazz and Heritage Festi- val income - net 1,376,973 1,048,753 1,534,971 Video poker franchise fee revenue -- 1,921,362 2,888,962 Interest expense (19,752) (266,435) (791,566) Interest income 130,821 78,352 31,990 Short-term loan closing costs (24,042) (151,147) (159,702) Gain on sale of property, plant and equipment -- 115,602 20,362 Gain (Loss) on sale of securities available for sale (725) 398 (37,080) ----------- ----------- ----------- Total Other Income $ 1,463,275 $ 2,746,885 $ 3,487,937 ----------- ----------- -----------
(Continued) 32 33 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS (CONTINUED) For the Years Ended October 31
1998 1997 1996 ----------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES, AND EXTRAORDINARY ITEM $ (663,189) $1,525,977 $1,174,594 PROVISION (BENEFIT) FOR INCOME TAXES (3,364,232) 775,288 294,896 ----------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 2,701,043 750,689 879,698 EXTRAORDINARY ITEM - INSURANCE PROCEEDS AS A RESULT OF DECEMBER 1993 FIRE (net of $3,683,924 and $5,298,944 of related income taxes in 1998 and 1997, respectively) 6,272,628 9,022,525 -- ----------- ---------- ---------- NET INCOME $ 8,973,671 $9,773,214 $ 879,698 =========== ========== ==========
(Continued) 33 34 FAIR GROUNDS CORPORATION STATEMENTS OF OPERATIONS (CONTINUED) For the Years Ended October 31
1998 1997 1996 ---- ---- ---- PER SHARE OF COMMON STOCK: INCOME BEFORE EXTRAORDINARY ITEM $ 5.74 $ 1.60 $1.87 EXTRAORDINARY ITEM, NET OF INCOME TAXES 13.35 19.20 -- ------ ------ ----- NET INCOME $19.09 $20.80 $1.87 ====== ====== =====
See accompanying notes to financial statements. 34 35 FAIR GROUNDS CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended October 31
Unrealized Loss On Additional Securities Total Capital Paid-In Retained Available Treasury Stockholders' Stock Capital Earnings For Sale Stock Equity ----- ------- -------- -------- ----- ------ Balance, October 31, 1995 $1,525,092 $ 1,942,350 $ 7,601,742 $(54,884) $(45,973) $ 10,968,327 Net Income -- -- 879,698 -- -- 879,698 Change in unrealized loss on securities available for sale -- -- -- 37,759 -- 37,759 Loss on sale of treasury stock -- (5,648) -- -- -- (5,648) Treasury stock sold (400) shares -- -- -- -- 10,448 10,448 ---------- ----------- ----------- -------- -------- ------------ Balance, October 31, 1996 1,525,092 1,936,702 8,481,440 (17,125) (35,525) 11,890,584 Net Income -- -- 9,773,214 -- -- 9,773,214 Change in unrealized loss on securities available for sale -- -- -- 14,003 -- 14,003 ---------- ----------- ----------- -------- -------- ------------ Balance, October 31, 1997 1,525,092 1,936,702 18,254,654 (3,122) (35,525) 21,677,801 Net Income -- -- 8,973,671 -- -- 8,973,671 Change in unrealized loss on securities available for sale -- -- -- 3,122 -- 3,122 ---------- ----------- ----------- -------- -------- ------------ Balance, October 31, 1998 $1,525,092 $ 1,936,702 $27,228,325 $ -- $(35,525) $ 30,654,594 ========== =========== =========== ======== ======== ============
See accompanying notes to financial statements. 35 36 FAIR GROUNDS CORPORATION STATEMENTS OF CASH FLOWS For the Years Ended October 31
1998 1997 1996 ----------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,973,671 $ 9,773,214 $ 879,698 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,847,867 1,589,041 1,810,257 Gain on sale of property -- (115,602) (20,363) Provision (benefit) for deferred income taxes (3,318,085) 5,836,263 244,896 Loss (Gain) on sale of investment securities (725) (398) 37,080 Gain from fire (9,900,000) (14,321,469) -- Change in assets and liabilities: (Increase) decrease in: Accounts receivable and mutuel settlements 168,820 (438,071) 91,868 Inventory (23,054) (11,055) (3,683) Prepaid expenses (84,155) 72,816 131,050 Cash and cash equivalents - restricted 2,525,484 (2,509,773) 20,980 Increase (decrease) in: Accounts payable and accrued liabilities 736,220 524,312 (5,541) Deferred purses 505,646 732,124 1,026,843 Deferred revenues 134,861 134,840 (44,149) Income taxes payable 329,185 71,000 50,000 ----------- ------------ ----------- Total Adjustments (7,077,936) (7,279,246) 3,339,238 ----------- ------------ ----------- Net cash provided by operating activities 1,895,735 1,337,242 4,218,936 ----------- ------------ -----------
(Continued) 36 37 FAIR GROUNDS CORPORATION STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended October 31
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (3,478,477) (12,965,686) (5,650,671) Construction contract payable (1,097,994) 1,156,726 -- Purchase of securities available for sale (750,000) (500,000) -- Proceeds from sale of securities available for sale 1,346,725 108,852 270,454 Deposits and other assets (157,895) (23,832) (30,420) Proceeds from sale of property (1,111) 126,371 91,964 Proceeds from fire litigation settlements 9,900,000 14,321,469 -- ----------- ------------ ------------ Net cash provided by (used for) investing activities 5,761,248 2,223,900 (5,318,673) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 2,272,253 17,083,985 10,307,260 Principal repayments of short-term borrowings (7,544,262) (21,717,305) (4,061,179) ----------- ------------ ------------ Net cash provided by (used for) financing activities (5,272,009) (4,633,320) 6,246,081 ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,384,974 (1,072,178) 5,146,344 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,192,756 6,264,934 1,118,590 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,577,730 $ 5,192,756 $ 6,264,934 =========== ============ ============
See accompanying notes to financial statements. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business 37 38 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 The Company conducts a live fall/spring race meet for thoroughbred horses and participates in inter-track wagering as a host track and as a receiving track. In addition, the Company currently operates five off-track betting facilities located in Southeast Louisiana, as well as a tele-track facility located at the Fair Grounds Race Course. Most of the Company's revenues and receivables are dependent on patrons of horse racing and other horse racing facilities and tele-tracks. This results in a concentration of risk and could be affected by laws or economic conditions that affect the gaming industry. Uninsured Cash Deposits As of October 31, 1998 and 1997, the Company had deposits in various financial institutions in the aggregate of $8,124,477 and $8,740,475, respectively. In fiscal year 1998, $7,097,978 was invested in U.S. Government Securities which are guaranteed by the Federal Government, but are not FDIC insured. The remaining deposits exceeded insured limits as of October 31, 1998 and 1997 by $787,598 and $3,339,415, respectively. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and Cash Equivalents - Restricted As of October 31, 1998, restricted assets totalled $118,218 relating to the worker's compensation program. As of October 31, 1997, restricted assets totalled $2,643,702, which included a certificate of deposit of $114,581 pledged as a security deposit for the Company's worker's compensation program, an escrow account of $674,360, and a money market account of $1,847,858 held by Bank One and were restricted for construction payments. Inventory Inventory consists primarily of food and beverage items and is stated at the lower of cost or market. Cost is determined by the first-in, first-out method. 38 39 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is provided by the straight-line method. The estimated useful lives of the buildings range from 20 to 40 years. Lives of other depreciable assets range from approximately 3 to 20 years. For financial reporting purposes, leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful life of the asset. Accounts Receivable The Company has recorded accounts receivable from pari-mutuel wagering, video poker and other activities. The majority of these receivables are settled at least monthly and are considered fully collectable. No allowance for doubtful accounts is considered necessary. Deferred Revenues Promotional fees and reserved seating deposits received by the Company are deferred and recognized as income over the duration of the racing meet. Investment Securities - Available for Sale The Company classifies its investment securities as held to maturity or available for sale based upon its ability and intent to hold such securities. The Company has classified its securities as available for sale and reports them at fair value with the unrealized gain or loss shown as a separate component of stockholders' equity. The Company records realized gains and losses on investment securities as they are sold, using the specific identification method. Fair Value Disclosures Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosure about Fair Value of Financial Instruments," is a part of a continuing process by the FASB to improve information on financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for such financial instruments as defined by the Statement: Cash and Cash Equivalents -- The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Notes Payable -- The carrying amount of the Company's borrowings under its line of credit agreements and other long-term debt approximates fair value, based upon current interest rates. 39 40 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Uncashed Mutuel Tickets Holders of uncashed winning pari-mutuel tickets have until 90 days after the end of a given race meet to cash their winning tickets. Tickets that expire become revenues of the Company, up to a maximum of $250,000 per live or simulcasted race meet. Uncashed pari-mutuel tickets exceeding $250,000 per live or simulcasted race meet are remitted to the State of Louisiana. Income Taxes The Company records income taxes in accordance with SFAS No. 109. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. The most significant deferred tax items of the Company relates to the deferred tax gain as a result of the December 1993 fire as further discussed in Note 6. Deferred Purses Deferred purses include those amounts required by Louisiana law to be withheld from commissions, video poker revenues, or out-of-state host fees earned by a racing licensee and paid as purse supplements during the licensee's succeeding live racing meet. Net Income Per Share Net income per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Per share amounts were determined using 468,580 common shares outstanding for fiscal 1998, 1997 and 1996. 40 41 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. NOTE 2 - STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Cash was paid during the following fiscal years for:
1998 1997 1996 ---------- -------- -------- Interest $ 50,594 $454,457 $802,797 ========== ======== ======== Taxes $3,154,626 $166,969 $ -- ========== ======== ========
The 1997 cash paid for interest includes capitalized interest of $214,103. There were no noncash investing or financing activities for fiscal years ended October 31, 1998, 1997, and 1996. NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE At October 31, 1997, investment securities were classified as available for sale and consisted of the following:
1997 1997 Gross Amortized Market Unrealized Cost Value Loss --------- --------- ----------- Preferred and common stocks $ 96,000 $ 92,878 $ (3,122) ========= ========= =========== Corporate debt securities $ 500,000 $ 500,000 $ -- ========= ========= ===========
There was no investment securities classified as available for sale at October 31, 1998. During the fiscal years ended October 31, 1998 and 1997, proceeds from sales of investment securities available for sale were $1,346,725 and $108,852 respectively, and gross realized gains (losses) from such sales were $(725), and $398, respectively. 41 42 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 4 - NOTES PAYABLE - CURRENT
October 31 ------------------------- 1998 1997 ---------- --------- First National Bank of Commerce ("FNBC"); interest at 9% secured by a second mortgage note on certain property, and 342,584 common shares of the Company owned in the aggregate by Jefferson Downs Corporation, due October 31, 1998. $ -- $ 5,221,725 INAC Corp.; Installment note insurance premium financing; interest at 6.79%, final installment due February 1999. 46,894 -- INAC Corp; Installment note insurance premium financing; interest at 6.69%, final installment due February 1998. -- 97,178 ----------- ----------- $ 46,894 $ 5,318,903 =========== ===========
NOTE 5 - INCOME TAXES The components of the income tax provision (benefit) are as follows:
October 31 ----------------------------------------------- 1998 1997 1996 ----------- ---------- --------- Current: Federal $ 3,197,655 $ 121,000 $ 50,000 State 486,269 -- -- ----------- ---------- --------- Total 3,683,924 121,000 50,000 Deferred (3,364,232) 5,953,232 (244,896) ----------- ---------- --------- Total $ 319,692 $6,074,232 $(294,896) =========== ========== =========
Approximately $3.2 million and $5.3 million of the deferred income tax provision is shown net of the extraordinary item - gain on fire on the Statement of Operations for the year ended October 31, 1998 and 1997. 42 43 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 5 - INCOME TAXES (CONTINUED): For the fiscal years ended October 31, 1998 and 1997, the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below along with a summary of activity in the valuation allowance.
October 31 -------------------------------- 1998 1997 ----------- ------------ Current deferred tax assets: General liability insurance reserves $ 59,940 $ 59,940 Net operating loss carry forwards -- -- ----------- ------------ Total current deferred tax assets 59,940 59,940 Current deferred tax liabilities: Deferred tax on gain from fire -- (264,846) ----------- ------------ Net current deferred tax assets (liabilities) $ 59,940 $ (204,906) =========== ============ Non-current deferred tax assets: Book accumulated depreciation in excess of tax $ 518,169 $ 218,034 ----------- ------------ Total non-current deferred tax assets 518,169 218,034 Non-current deferred tax liabilities: Deferred tax on gain from fire (7,562,034) (10,064,138) ----------- ------------ Net non-current deferred tax liabilities $ 7,043,865 $ (9,846,104) =========== ============ Valuation allowance, beginning of year $ -- $ -- Change during the year -- -- ----------- ------------ Valuation allowance, end of year $ -- $ -- =========== ============
43 44 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 5 - INCOME TAXES (CONTINUED) A reconciliation of the provision (benefit) for taxes on income at the Company's federal statutory income tax rate to the tax provision (benefit) for financial reporting purposes for fiscal years ending October 31, 1998, 1997 and 1996 is as follows:
October 31 ------------------------------------------------- 1998 1997 1996 ----------- ----------- --------- Expected tax provision (benefit) $ 3,140,516 $ 5,388,132 $ 399,362 State income taxes 486,269 475,423 35,238 Change in valuation allowance -- -- (119,253) Additional realizable carryback credits -- -- -- Additional realizable carryforward net operating losses -- -- -- Utilization of net operating loss -- 251,000 -- Additional tax basis attributable to gain (3,364,232) -- -- Other 57,139 (40,323) (20,451) ----------- ----------- --------- Actual tax provision $ 319,692 $ 6,074,232 $ 294,896 =========== =========== =========
As of October 31, 1996, the Company had a net operating loss carryforward of approximately $678,000 which was utilized in fiscal 1997. As of October 31, 1998, the Company has recorded a non-current deferred tax liability totaling $7,043,865 as a result of the deferred gain on the fire for income tax purposes. The Company has reinvested all fire insurance and litigation proceeds into its new facilities within the allowable replacement period, therefore deferring the gain on the involuntary conversion. As a result, the Company has a difference between the book and tax bases of such facilities. This taxable difference will reverse with the scheduled depreciation of such assets over the next 39 years. 44 45 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 6 - COMMITMENTS AND CONTINGENCIES Fire Related Litigation The Company has been a party to a number of legal proceedings which arose as a result of the December 1993 fire or in connection with the Company's efforts to collect insurance proceeds after the fire. The following is a brief description of such fire-related proceedings: Travelers Litigation In May 1994, the Company filed an action in the 24th Judicial Court in the State of Louisiana against Travelers Indemnity Company of Illinois ("Travelers") and others. The Company contended that the insurance policy issued by Travelers provided the Company with blanket coverage in the amount of $24.2 million in excess of the $10 million of underlying coverage and, accordingly, that Travelers was liable for the difference between $24.2 million and the amount previously paid by Travelers (approximately $9.5 million), plus statutory penalties of 10% of the amount not paid, interest, attorney's fees and costs. The Company further contended that the insurance agent and the insurance broker who arranged for the insurance were liable to the Company for any damages sustained including any damages sustained because the amount of coverage was less than that claimed by the Company. Travelers' position was that its liability under such policy was limited to the amount which it had previously paid. In November 1996, the Company reached a joint settlement with the insurance agent and broker pursuant to which the insurance agent and broker agreed paid a total of $10,000,000 to the Company. The settlement has been reported as an extraordinary item on the Company's Statement of Operations, net of related income taxes. The settlement agreement included a "Mary Carter" provision whereby the insurance agent and broker are entitled to share in any recovery that the Company may eventually obtain from Travelers in that litigation. The Company's action against Travelers was tried in September 1997, and in April 1998 the trial court entered judgment in favor of the Company and against Travelers, awarding the Company an additional $2,410,905 in business interruption insurance, legal interest on that sum from May 1994 until paid, statutory penalties in the amount of $222,128 and attorney's fees in an amount to be set by the Court. The court later fixed the amount of attorney's fees at $75,000. In August 1998, the trial court denied all post trial motions and certified the judgment as being immediately appealable. Appeals by both the Company and Travelers are now pending before the state court of appeals. Under the Mary Carter agreement referenced above, the liability insurers of the agent and broker are entitled to share in any recovery from Travelers. ADT Litigation In December 1994, the Company filed an action in the Civil District Court for the Parish of Orleans, State of Louisiana against ADT Security 45 46 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 Systems Mid-South, Inc. ("ADT"), which provided and maintained the fire alarm system at the race track, and other defendants. The complaint sought damages, not otherwise compensated for by insurance, that were allegedly caused by the negligence of one or more of the defendants. The Company's three fire insurers and a third party's insurance company, which insured the operator of the video poker machines destroyed in the fire, intervened in the suit asserting subrogation claims against the same defendants. In late 1996, the Company and three insurance companies entered into settlements with the manufacturer of a lighting ballast and an architect. After division of the settlement proceeds among the Company and the three insurance companies and the payment of various litigation expenses, the Company received approximately $268,000. In March 1997, a jury trial was held on the remaining claims and resulted in an award in favor of the Company and the subrogated insurance companies of approximately $49.8 million in the aggregate in damages against ADT, plus interest, of which approximately $31.8 million, plus interest, was awarded to the Company and the balance to the subrogated insurance companies, including approximately $4.25 million to the Company's primary property insurer. The judgment was appealed to the Court of Appeals of Louisiana, Fourth Circuit, by ADT, the Company and three of the subrogated insurance companies. In June 1997, the insurance company that insured the initial layer of ADT's liability tendered approximately $9.3 million in partial settlement of the action. After a dispute with the subrogated insurers over the division of these funds was resolved in August 1997, the Company received approximately $4 million of those proceeds after litigation expenses. In December 1997, the Company entered into a settlement with ADT and ADT's excess coverage insurers pursuant to which the Company was paid $37 million and agreed to indemnify ADT and its insurers against the judgment creditor claims of the four subrogated insurers. In December 1997, the Company received $7.7 million of such funds net of litigation expenses, and the balance of the settlement funds was placed in escrow pending resolution of the subrogation claims. The receipt of such funds has been reported as an extraordinary item on the Company's Statement of Operations, net of related income taxes. In July 1998, the Company settled the subrogation claims of three of the four insurers, as well as an action filed in April 1997 in United States District Court for the Eastern District of Louisiana by those three insurers against the Company seeking a declaratory judgement that a contract had been entered into by the parties respecting the distribution of funds recovered in the ADT litigation. Under the terms of this settlement, the three insurers received a total of $12.97 million from the funds in escrow. At that time, the Company received an additional $2.2 million from the funds in escrow, net of litigation expenses, which has been reported as an extraordinary item on the Company's Statement of Operations, net of related income taxes. Approximately $6.3 million is held in escrow pending resolution of the claims between the Company and its primary property insurer, and such funds are not reflected as an asset on the Company's balance sheet as of October 31, 1998. 46 47 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 In September 1998, the Court of Appeals, among other things, reversed the trial court's award of $4.25 million to the Company's primary property insurer on its subrogation claim, concluding that the trial court had erred in making that award to the insurer when the Company had not been fully compensated for its property loss. This decision rendered moot the remainder of the appeals. The insurer appealed this decision to the Louisiana Supreme Court which recently denied the appeal. The funds remaining in escrow will be paid out when the case is concluded. United National Litigation The Company was a defendant, along with its general liability insurance carrier, United National Insurance Company ("United National"), in a civil action filed in December 1994 in the United States District Court for the Eastern District of Louisiana by St. Paul Mercury Insurance Company ("St. Paul"), the insurer of the computerized betting equipment at the race track. St. Paul alleged that it was subrogated to its insured's rights to collect damages and that it had paid approximately $1,175,000 to its insured for the loss of equipment in the fire. Subsequently, United National filed a declaratory judgment action against the Company, wherein it sought to deny coverage for St. Paul's subrogation claim. The Company filed a counterclaim against United National, seeking coverage for the St. Paul claim as well as payment for various other fire-related claims previously denied by United National. This action was consolidated for trial with the suit filed by St. Paul against the Company. Both United National and the Company moved for summary judgment on the question of whether the exclusion relied on by United National to deny coverage for the various claims applied. In 1996, the United States District Court ruled that the policy exclusion relied upon by United National did not apply to the claim asserted by St. Paul and to claims made by various jockeys and valets that were previously paid by the Company. United National subsequently appealed this decision to the United States Court of Appeals for the Fifth Circuit which held that the claims were covered. In May 1997, the St. Paul suit was settled pursuant to an agreement whereby ADT agreed to pay an undisclosed sum and United National, as the Company's insurer, agreed to pay $275,000. In February 1998, United National tendered $56,553 to the Company for claims which it acknowledged were covered under the policy. In November 1998, United National tendered an additional $11,818 to the Company for claims which it acknowledged were covered under the policy. In December 1998, the Company settled the balance of its claims against United National for an additional $140,000 which has been paid by United National. 47 48 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 Other Litigation In 1996, a suit was filed in U.S. District Court in Baton Rouge by Livingston Downs Racing Association ("Livingston") naming the Company and other defendants in an antitrust/civil RICO suit. This suit is currently in the discovery stage, and the Company has filed a motion for summary judgment. Management of the Company believes the action is without merit. Livingston had previously filed a series of other legal actions against the Company which were resolved in the Company's favor. The amount in question in this action has not yet been determined but could be substantial. A suit was also filed in state court in Louisiana in 1996 by Livingston against the Company and the State of Louisiana seeking a judgment that the State off-track betting law is unconstitutional. The trial court ruled in the plaintiff's favor. The Louisiana Supreme Court reversed the trial court decision, holding that the off-track betting statute is constitutional. Livingston's request for rehearing was subsequently denied. In 1996 a suit was filed in state court in Louisiana by the Louisiana Horsemen's Benevolent and Protective Association ("HBPA") against the Company, the State of Louisiana, and all other pari-mutuel wagering facilities operating in Louisiana. The HBPA is seeking a larger portion of video poker proceeds. The Company believes it is currently in compliance with the guidelines established by the Louisiana State Police Gaming Division, which regulates compliance with Louisiana's video poker law. In July 1997, Evelyn Allen and other present or former security or concessions employees of the Company filed an action in the United States District Court in New Orleans claiming that the plaintiffs were entitled, under the Fair Labor Standards Act, to overtime for hours worked over 40 in each work week from July 1994 to July 1997. Two of the plaintiffs also sought to recover damages for alleged retaliatory discharge. In December 1998, the Company and the plaintiffs reached a settlement agreement pursuant to which the Company will pay the plaintiffs $100,000 in full settlement of all claims for overtime pay. The retaliatory discharge claims were tried in December 1998. At the conclusion of evidence, the court dismissed those claims. The plaintiffs' claim for attorneys fees has not yet been resolved. Except as described above, there are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company is a party or of which any of its property is the subject. 48 49 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 NOTE 7 - RELATED PARTY TRANSACTIONS In April 1996, Bryan G. Krantz purchased 339,604 shares of the Company's stock from a Trust which had previously acquired the shares from Marie G. Krantz. A promissory note was executed by Bryan G. Krantz in favor of the Trust for $9,984,358 with interest at 5.76% per year. The note is due in April 2005 and cannot be prepaid. The note is secured by a Stock Pledge Agreement in favor of the Trust executed by Bryan G. Krantz and Marie G. Krantz, in her capacity as Voting Trustee of a Voting Trust which at the time of such purchase, and throughout the period referred to herein, held such shares. In April 1998, Bryan G. Krantz transferred said 339,604 shares of the Company's common stock to Finish Line Management Corporation ("Finish Line"), together with all of his interest in the Voting Trust and the voting trust certificate issued by Marie G. Krantz, as Voting Trustee, to Bryan G. Krantz representing a beneficial interest in 339,604 shares of the Company's common stock. Finish Line assumed Bryan G. Krantz's indebtedness to the Trust and agreed to be bound by the Stock Pledge Agreement. Bryan G. Krantz owns 100% of the capital stock of Finish Line, having acquired from Marie G. Krantz, as Voting Trustee, in March 1998 the 66.6% of the outstanding capital stock of Finish Line not theretofore owned by him. Accordingly, the transfer of the 339,604 shares of common stock from Bryan G. Krantz to Finish Line did not constitute a change in beneficial ownership of said 339,604 shares. Marie G. Krantz, Chairman of the Board of Directors and Treasurer of the Company, has voting control, as Voting Trustee, over the 339,604 shares of common stock of the Company (72.27% of the outstanding common stock of the Company) owned by Finish Line. In August 1992, the Company entered into a Management Agreement with Finish Line to operate five tele-track facilities previously operated by Jefferson Downs Corporation ("Jefferson Downs"), all of the capital stock of which is owned by Marie G. Krantz and Bryan G. Krantz, for a period of ten years, commencing November 1, 1992, with the option granted to Finish Line to extend the term of the Management Agreement for two additional five year periods. The Management Agreement provides that Finish Line is to have the exclusive responsibility for the direction, supervision, management and operation of such facilities, is to collect all monies from such operation and is to pay all expenses in connection therewith. The Company receives a monthly payment of 0.1% of the gross pari-mutuel handle at such facilities plus purse supplements, and Finish Line receives monthly compensation equal to the difference between the gross receipts collected at such facilities less all expenses (including the payment to the Company described herein) paid by Finish Line. In addition, Finish Line is to indemnify the Company for, among other things, all obligations under the leases assigned by Jefferson Downs to the Company. During the fiscal years ended October 31, 1998, 1997 and 1996, the Company received $90,668, $82,655, and $88,835, respectively, from Finish Line in accordance with the Management Agreement. Accounts receivable (payable) from (to) Finish 49 50 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 Line were $753,984 and $(124,324) at October 31, 1998 and 1997, respectively. The following table reflects the host track fees and purse supplement receipts from Finish Line for the fiscal years ended October 31, 1998, 1997, and 1996.
Received by the Company and Paid by Finish Line for the Years Ended October 31 ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Host track fees $ 297,035 $ 325,680 $ 363,275 ========== ========== ========== Purse supplement receipts $4,788,281 $4,822,405 $4,337,179 ========== ========== ==========
Marie G. Krantz and Bryan G. Krantz each own 50% of the capital stock of Continental Advertising, Inc. ("Continental"). During the fiscal years ended October 31, 1998, 1997 and 1996, the Company made payments to Continental of $502,000, $333,000, and $341,000, respectively, to reimburse Continental for advertising expenses paid by it. As of October 31, 1998 and 1997, the Company was due amounts included in accounts receivable of $6,614 and $41,869 from Continental, respectively. In February 1992, the Company, Jefferson Downs and Finish Line entered into an agreement with Video Services, Inc. ("VSI"), whereby VSI was granted the exclusive right and license by the Company to install, maintain and operate video draw poker devices at the Fair Grounds Race Course, Jefferson Downs Race Course and at the tele-tracks then operated by the Company, Jefferson Downs and Finish Line. Such agreement was for an initial term of five years, with an option by VSI to extend the term for an additional five years, which option was exercised. The agreement provides that the Company is to receive a percentage of the revenues from the operation of the devices installed at the Company's facilities (not including the facilities operated for the Company by Finish Line). Such percentage is calculated on the basis of the average amount collected daily from each device during each month, after the payment of prizes, taxes and fees. One-half of the net revenues from such devices, after deduction of certain amounts, are required by state statute to be paid as purse supplements during the live racing meet. In addition, this agreement entitles the Company and Finish Line to share in a $270,000 annual promotional fee paid by VSI. In each of fiscal years 1998, 1997 and 1995, upon agreement of the Company and Finish Line, the Company received the total promotional fee of $270,000. Of this amount, $135,000 was set aside each year as purse supplements to be paid during the upcoming racing season. The video poker draw devices which have been installed and are to be installed by VSI remain the property of VSI. As of October 31, 1998, 1997 and 1996, there were a total of 315, 297, and 234 devices, respectively, in operation at all of the Company's facilities. In addition, there were a total of 414, 428, and 419 devices in operation 50 51 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 at the Finish Line facilities as of October 31, 1998, 1997 and 1996, respectively. Gross video poker revenues and related purse supplements for the years ended October 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ---------- ---------- ---------- Gross video poker revenue $2,899,761 $2,346,677 $1,955,551 ========== ========== ========== Purse supplements $1,197,433 $ 981,097 $ 821,973 ========== ========== ==========
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:
============================================================================== Monthly Location Lease Term Payment - ------------------------------------------------------------------------------ St. Bernard Parish, January 1, 1995 to Louisiana January 31, 1999 $ 6,000 - ------------------------------------------------------------------------------ LaPlace, Louisiana February 1, 1998 to January 31, 1999 $ 4,420 February 1, 1999 to January 31, 2000 $ 4,553 - ------------------------------------------------------------------------------ Bourbon Street - March 15, 1991 to New Orleans, March 14, 1999 $10,000 Louisiana March 15, 1999 to March 14, 2004 $13,125 - ------------------------------------------------------------------------------ Thibodaux, Louisiana October 1, 1998 to September 30, 1999 $ 2,300 - ------------------------------------------------------------------------------ Metairie, Louisiana February 1, 1998 to January 31, 1999 $ 9,000 February 1, 1999 to January 31, 2000 $ 9,500 ==============================================================================
The tele-tracks formerly licensed to Jefferson Downs and now licensed to the Company are also leased; however, as described herein, Finish Line has agreed to indemnify the Company for, among other things, all obligations under the leases assigned by Jefferson Downs to the Company. 51 52 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 Future obligations over the primary lease terms, not including renewal periods, of the Company's long-term leases as of October 31, 1998 are as follows:
Year Ending October 31 ----------- 1999 353,475 2000 285,159 2001 186,000 Thereafter $ 374,063 ---------- Total $1,198,697 ==========
The Company was a party to an agreement with Autotote Limited whereby Autotote Limited was to provide wagering services for the Company until November 1997, including all computer and other related services to carry out the totalisator function for the Company. The Company agreed to pay Autotote Limited 0.0045% of the total on-track pari-mutuel handle of the Company, plus fixed equipment rental fees for its off-track betting facilities. The Company entered into an new agreement with Autotote Limited on November 21, 1997 until November 20, 2002 with the same terms as the old contract and pay Autotote Limited 0.0039% of the total on-track pari-mutuel handle, plus fixed equipment rental fees for certain equipment provided by Autotote. The minimum to be paid to Autotote Limited for each year of the agreement was $200,000. No estimates of future obligations under this agreement have been included in the above table. For the fiscal years ended October 31, 1998, 1997, and 1996, the Company incurred $200,000 in minimum rental fees and $647,187, $600,724 and $575,390, respectively, in equipment and contingent rental fees in connection with its agreement with Autotote Limited. Such rental fees were recorded as racing expenses - contracts and services. NOTE 9 - STOCK OPTIONS The Company has a stock option plan whereby all incentive stock options granted under the Plan are intended to qualify as incentive stock options under Section 422(b) of the Internal Revenue Code. Under the Plan, the option price per share must be at least equal to 100% of the fair market value per share of the common shares of the Company on the date of the grant. An aggregate of 20,000 common shares has been reserved for issue and may be granted up to February 28, 2001. No options were granted or exercised during fiscal years ended October 31, 1998, 1997 and 1996. No options were outstanding at October 31, 1998. NOTE 10 - DEFINED CONTRIBUTION PLAN The Company's 401(k) Plan is a defined contribution plan covering all full-time employees that have at least one year of service and are age twenty-one or older. 52 53 FAIR GROUNDS CORPORATION NOTES TO FINANCIAL STATEMENTS For the Years Ended October 31, 1998, 1997 and 1996 Plan participants may contribute to the Plan, and the Company may make matching contributions subject to the provisions of the Employees Retirement Income Security Act. The Company did not make any matching contributions to the Plan during the years ended October 31, 1998, 1997, and 1996. NOTE 11 - SUBSEQUENT EVENTS In January 1999, the Company received an advance from Video Services, Inc. in the amount of $1,000,000 to be repaid in six equal installments beginning in February, 1999. 53 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors of the Company contained in the section entitled "Election of Directors" of the definitive Information Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission on or about February 26, 1999 is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained in the sections entitled "Executive Compensation" and "Board Committees and Compensation" of the definitive Information Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission on or about February 26, 1999 is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section entitled "Security Ownership" of the definitive Information Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission on or about February 26, 1999 is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section entitled "Election of Directors" and "Executive Compensation" of the definitive Information Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission on or about February 26, 1999 is incorporated herein by reference in response to this item. 54 55 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following audited financial statements are included in Part II, Item 8:
Financial Statements Page - -------------------- ---- Report of Independent Certified Public Accountants 29 Balance Sheets, October 31, 1998 and 1997 30 Statements of Operations for the Three Years Ended October 31, 1998 32 Statements of Changes in Stockholder's Equity for the Three Years Ended October 31, 1998 36 Statements of Cash Flows for the Three Years Ended October 31, 1998 37 Notes to Financial Statements 40 (b) Report on Form 8-K: None (c) Exhibits: The following exhibits are filed as part of this report. Those exhibits which have been previously filed and incorporated herein by reference are identified by reference to the previous filing. 3.1 * Articles of Incorporation of Fair Grounds Corporation, as amended (incorporated herein by reference to Exhibit (3)(a) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992). 3.2 * Amended and Restated By-Laws of Fair Grounds Corporation (incorporated herein by reference to Exhibit (3)(b) to the Form 10- K of the Company for the fiscal year ended October 31, 1990). 9 * Voting Trust Agreement dated as of August 31, 1993, by and among Bryan G. Krantz and Richard Katcher, Trustee, as grantors, and Marie G. Krantz as Voting Trustee (incorporated herein by reference to
55 56 exhibit 2 to Amendment No. 3 to Schedule 13D filed by such persons on October 13, 1993). 10.1 * Net Commercial Lease Agreement dated November 10, 1988, between Pelican Homestead and Savings Association and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(e) to the Form 10-K of the Company for the fiscal year ended October 31, 1989). 10.2 * Lease of Commercial Property dated February 1, 1989, between Mereaux and Nunez, Inc. and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(f) to the Form 10-K of the Company for the fiscal year ended October 31, 1989). 10.3 * Lease Agreement dated March 8, 1989, between Richard F. Keyworth and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(g) to the Form 10-K of the Company for the fiscal year ended October 31, 1989). 10.4 * Fair Grounds Corporation Stock Option Plan (incorporated herein by reference to Appendix A to the definitive Information Statement of the Company dated February 26, 1991). 10.5 * Commercial Lease Agreement dated April 1, 1991 between Blake's Superette, Inc. and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(m) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992). 10.6 * Lease Agreement dated November 21, 1991 between Jefferson Downs Corporation and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(n) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992).
56 57 10.7 * Management Agreement by and between Finish Line Management Corp. and Fair Grounds Corporation, dated October 9, 1992. (Incorporated herein by reference to Exhibit (10)(q) to the Form 10-K of the Company for the fiscal year ended October 31, 1992, filed on February 15, 1993.) 10.8 * Agreement dated February 28, 1992, by and between Video Services, Inc., Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corp. (Incorporated herein by reference to Exhibit (10)(t) to the Form 10-K of the Company for the fiscal year ended October 31, 1992, filed on February 15, 1993.) 10.9 62 Lease Agreement dated August 1, 1995 between Fair Grounds Corporation and Robert J. and Iris Ann Saia. 27 69 Financial Data Schedule
* Incorporated herein by reference as indicated. 57 58 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized. FAIR GROUNDS CORPORATION By: /s/ Bryan G. Krantz ------------------------------ Date: February 10, 1999 Bryan G. Krantz, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Capacity Date PRINCIPAL EXECUTIVE OFFICER: /s/ Bryan G. Krantz - --------------------------------- Bryan G. Krantz President February 10, 1999 PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Gordon M. Robertson - --------------------------------- Gordon M. Robertson Chief Financial February 10, 1999 Officer 58 59 DIRECTORS: /s/ Katherine F. Duncan - -------------------------- Katherine F. Duncan Director February 10, 1999 /s/ Richard Katcher - -------------------------- Richard Katcher Director February 10, 1999 /s/ Marie G. Krantz - -------------------------- Marie G. Krantz Director February 10, 1999 and Chairman of the Board /s/ Bryan G. Krantz - -------------------------- Bryan G. Krantz Director February 10, 1999 and President /s/ Ronald J. Maestri - -------------------------- Ronald J. Maestri Director February 10, 1999 /s/ Charmaine R. Morel - -------------------------- Charmaine R. Morel Director February 10, 1999 /s/ Wayne E. Thomas - -------------------------- Wayne E. Thomas Director February 10, 1999 59 60 EXHIBIT INDEX
Exhibit Description Page - ------- ----------- ---- 3.1 * Articles of Incorporation of Fair Grounds Corporation, as amended (incorporated herein by reference to Exhibit (3)(a) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992). 3.2 * Amended and Restated By-Laws of Fair Grounds Corporation (incorporated herein by reference to Exhibit (3)(b) to the Form 10- K of the Company for the fiscal year ended October 31, 1990). 9 * Voting Trust Agreement dated as of August 31, 1993, by and among Bryan G. Krantz and Richard Katcher, Trustee, as grantors, and Marie G. Krantz as Voting Trustee (incorporated herein by reference to exhibit 2 to Amendment No. 3 to Schedule 13D filed by such persons on October 13, 1993). 10.1 * Net Commercial Lease Agreement dated November 10, 1988, between Pelican Homestead and Savings Association and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(e) to the Form 10-K of the Company for the fiscal year ended October 31, 1989). 10.2 * Lease of Commercial Property dated February 1, 1989, between Mereaux and Nunez, Inc. and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(f) to the Form 10-K of the Company for the fiscal year ended October 31, 1989). 10.3 * Lease Agreement dated March 8, 1989, between Richard F. Keyworth and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(g) to the Form 10-K of the Company for the fiscal year ended October 31, 1989).
60 61 10.4 * Fair Grounds Corporation Stock Option Plan (incorporated herein by reference to Appendix A to the definitive Information Statement of the Company dated February 26, 1991). 10.5 * Commercial Lease Agreement dated April 1, 1991 between Blake's Superette, Inc. and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(m) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992). 10.6 * Lease Agreement dated November 21, 1991 between Jefferson Downs Corporation and Fair Grounds Corporation (incorporated herein by reference to Exhibit (10)(n) to the Form 10-K of the Company for the fiscal year ended October 31, 1991, filed on January 29, 1992). 10.7 * Management Agreement by and between Finish Line Management Corp. and Fair Grounds Corporation, dated October 9, 1992. (Incorporated herein by reference to Exhibit (10)(q) to the Form 10-K of the Company for the fiscal year ended October 31, 1992, filed on February 15, 1993.) 10.8 * Agreement dated February 28, 1992, by and between Video Services, Inc., Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corp. (Incorporated herein by reference to Exhibit (10)(t) to the Form 10-K of the Company for the fiscal year ended October 31, 1992, filed on February 15, 1993.) 10.9 62 Lease Agreement dated August 1, 1995 between Fair Grounds Corporation and Robert J. and Iris Ann Saia. 27 69 Financial Data Schedule
* Incorporated herein by reference as indicated. 61 EX-10.9 2 LEASE AGREEMENT DATED AUGUST 1, 1995 1 EXHIBIT 10.9 LEASE OF COMMERCIAL PROPERTY * UNITED STATES OF AMERICA LEASE BY ROBERT J. AND IRIS * STATE OF LOUISIANA ANN SAIA TO FAIR GROUNDS CORPORATION * PARISH OF JEFFERSON ******************************************************************************** Robert J. and Iris Ann Saia (herein collectively called Lessor) hereby lease to Fair Grounds Corporation (herein called Lessee), the following described premises: Building and all improvements located upon and within the property described in Exhibits "B" and "C" annexed hereto. This lease is for a term of six (6) months, commencing August 1,1995 and ending January 31, 1996. This lease is made for and in consideration of the covenants herein contained and for a monthly rental of $8,200.00; the said rental to be payable monthly in advance on the first day of each and every month during the term of this lease. If Lessee shall fail to pay any rental within five (5) days after same is due, Lessee shall be obligated to pay a late charge equal to the greater of One Hundred and no/100 ($100.00) or five percent (5%) of any rental payment or portion thereof not paid when due. The net rental hereinabove fixed for the term hereof means that, in addition to the said amounts of actual rental, the Lessee will pay all taxes levied by the State and all political subdivisions on the leased property for the period covered by this lease, and will pay all insurance and premiums on such policies of fire and windstorm, as the Lessors reasonably direct be carried against the leased property during the period covered by this lease. The Lessor shall not require the carrying of fire insurance beyond the full insurable value of the leased property, nor the carrying of windstorm insurance beyond fifty percent (50%) of the amount of fire insurance carried. Within thirty (30) days after Lessor's receipt of tax bills, Lessor shall notify Lessee in writing and shall include an invoice showing the full amount of such taxes. A legible copy of the original tax bills shall be attached to said invoice for Lessee's review. The taxes and insurance premiums herein provided to be paid by Lessee are a part of the rent for the leased premises, and, should the Lessee fail to pay promptly and punctually any of said taxes, or insurance premiums, the Lessor may, but need not, pay same and recover repayment thereof at once from lessee with interest at the rate of eight percent (8%) per annum from date of payment of same by Lessor. The Lessee will make all necessary repairs, excluding repairs to the roof to keep the leased property in a good order as it now is, ordinary 62 2 wear and tear excepted, and is also to keep all toilets in repair to conform with good sanitary conditions. The Lessee is to have the right to sublet the leased premises in whole, or part, to any subtenant for the conduct of any mercantile business of unobjectionable character. Lessor will not be responsible for damage caused by leaks in the roof, by bursting of pipes by freezing or otherwise, or by any vices or defects of the leased property, or the consequences thereof, except in the case of positive neglect or failure to take action toward remedying of such defects within reasonable time after having written notice from Lessee of such defects and the damage caused thereby. Should Lessee fail to promptly so notify Lessor, in writing, of any such defects, Lessee will become responsible for any damage resulting to Lessor or other parties. The said premises and appurtenances, including locks, keys, lighting, air conditioning & heating, and plumbing systems, and fixtures and attachments, are delivered in good order and Lessee is obligated to keep all of same in like order during the term of this lease; to keep in repair all plumbing, even when injured by freezing; to keep the drains and plumbing clean and to so deliver them at the expiration of this lease; to pay all bills for water, electricity and similar charges as may be attributable to leased premises, to comply with all Laws and Ordinances of the State, City, Board of Health and other public bodies, now in force or which may hereafter be enacted of whatever character, at Lessee's own expense; and to notify Lessor or agent, in writing, any time the leased premises will be unoccupied, so that necessary vacancy permits may be obtained from Lessor's insurance companies, and upon Lessee's failure to do so, Lessor may take such steps as Lessor thinks necessary for Lessor's protection, including retaking possession of the premises without relieving or impairing Lessee's liability. No repair shall be due Lessee except such as may be rendered necessary by fire or other casualty, not occasioned by fault or negligence of Lessee. Lessor will not be responsible for damages of any sort to any persons or property, however occasioned, unless caused by the negligence of Lessor; and Lessee shall hold Lessor harmless from any claims by and or liability to third persons however arising, unless caused by negligence of Lessor. Lessor shall at all times have the right to enter the premises for the purpose of inspection and of making such, if any repairs as Lessor may be bound for or elect to make. The care, maintenance and repairs of machinery, glass or plate glass are assumed by Lessee, together with all liability or claims fire damages, and Lessee shall maintain liability insurance to the extent of $500,000.00. Should Lessee be unable to obtain possession on date of commencement of lease because of delays by tenants, or should there be any other delay in granting possession, not caused by fault of Lessor, this lease shall not be affected thereby, and Lessee shall not be entitled to any damages beyond the remission of rent for such term during which he is deprived possession. The destruction in whole or in part of the leased premises, by fire or other casualty, will not vitiate this lease, but the Lessor shall rebuild or repair said leased premises as speedily as practicable, and except as hereinafter stated, substantially as said leased premises were before 63 3 such destruction, and the Lessee shall resume occupancy immediately upon the rebuilding or the repairing being completed, and shall be entitled simply to a credit for the period during which the Lessee shall have been excluded from the occupancy of the premises; provided, however, that where the destruction of the leased premises in whole or in part occurs at so late a period that the Lessee could not be restored to the enjoyment of the leased premises for a period of at least six (6) months before the expiration of this lease or any extensions thereof, the Lessee shall be under no obligation to resume possession, and the Lessor shall be under no obligation to rebuild or repair. Lessee is bound not to do or suffer any act to be done or omitted, which would forfeit the insurance, or increase the rate thereof, on any property of Lessor or contents thereof, to whomsoever belonging; not to transfer this lease, in whole or in part, without the written consent of Lessor, which written consent shall not be unreasonably withheld; at the end of this lease to return, by actual delivery of the keys, without further notice, possession of the said premises and appurtenances, broom-cleaned and free of trash, in like good order as received, the usual decay, wear and tear only excepted; to replace all broken glass and to remove any and all signs painted or placed in or upon the leased premises before leaving. The Lessee shall not be considered in default as to any obligation or condition of this lease, and the lease shall not be considered as violated in any degree unless the status claimed to be a default or violation shall continue for five (5) days after written notice thereof is delivered by registered mail to the Lessee at the leased premises by or on behalf of the Lessor. Lessee is obligated not to make any additions or alterations whatsoever to the premises without written permission. All additions, alterations or improvements made by Lessee with or without consent of Lessor, no matter how attached (except movable trade fixtures), must remain the property of the Lessor, unless otherwise stipulated herein, Lessee however, expressly waiving all right to compensation thereof. Lessee shall comply in every respect at Lessee's own expense, with the rules and regulations of the Louisiana Fire prevention Bureau, or those of any similar bureau or association in existence at the time. Should Lessee at any time violate any of the conditions of this lease, or fail to comply with any of Lessee's obligations hereunder, or fail to pay the rent or water bill or similar charges punctually at maturity, as stipulated, or upon the filing of a bankruptcy, receivership or respite petition by or against Lessee, or upon Lessee's suspension, failure or insolvency, the rent for the whole unexpired term of this lease shall, without putting Lessee in default, at once become due and exigible, and in any such event, Lessor shall have the option either at once to demand the entire rent for the whole term or to immediately cancel this lease without putting the Lessee in default; Lessee to remain responsible for all damages or losses suffered by Lessor; Lessee hereby assenting thereto and expressly waiving the legal notice to vacate the premises. Failure to strictly and promptly enforce these conditions shall not operate as a waiver of Lessor's rights, Lessor expressly reserving the right to always enforce prompt payment of rent, or to cancel this lease, regardless of any indulgences or extensions previously granted. Failure 64 4 to comply with any condition or obligation of this lease of this lease will make Lessee liable for any loss or damage sustained. Should Lessee at any time use the leased premises or any option thereof for any illegal or unlawful purpose, or commit, or permit or tolerate the commission therein of any act made punishable by fine or imprisonment under the laws of the United States or the State of Louisiana, or any ordinance of this City or Parish, the remedies set forth in the preceding paragraph shall be available to Lessor immediately without necessity of giving any notice to Lessee. At the expiration of this lease, or its termination for other causes, Lessee is obligated to immediately surrender possession. Lessee also expressly waives any notice to vacate at the expiration of this lease and all legal delays, and hereby confesses judgment with costs placing Lessor in possession to be executed at once. Should Lessor allow or permit Lessee to remain in the leased premises after the expiration of this lease, this shall not be construed as a reconduction of this lease. No auction sales shall be conducted on the premises without written consent of the Lessor. Should any claim in favor of Lessor upon this lease be placed in the hands of an agent or attorney to give special attention to the enforcement of such claim, Lessee shall in order to protect Lessor fully against all expenses, pay as fees and compensation to such agent or attorney, an additional sum of ten percent (10%) of the amount due on such claim, provided that the amount is over $1,000.00, and twenty percent (20%) if that amount be $1,000.00 or under, together with all costs, charges and expenses. Lessor hereby reserves the right to post and to keep posted on the property, signs, "For Sale" or "For Rent", during the sixty days preceding the expiration of this lease, and Lessee hereby consents to allow the premises to be inspected on an order from Lessor or agent. in the event that Lessee is absent from the City, at any time during the last mentioned period, keys to the premises will be left with some representative of Lessee in order that the property may be shown, and Lessor or agent will be advised in writing where the keys may be obtained. ADDITIONAL TERMS 1. Lessor warrants that it has full right and authority to lease the Leased Premises upon the terms and conditions herein set forth; and the Lessee shall peacefully and quietly hold and enjoy the Leased Premises for the full term hereof so long as it does not default in the performance of any of its covenants hereunder. Lessor further warrants as of the Commencement Date that: a) Lessor is fully cognizant of the intended use of the demised premises by Lessee, and that such use is in full conformity with all municipal and/or parish zoning ordinances; and b) the building or structure to be occupied by Lessee meets or exceeds ail minimum municipal, parish or state building codes and regulations. 2. Lessee shall have the right and option to extend the terms of the lease for the number of terms and for the number of years for 65 5 each term set out herein. Lessee shall give notice of its intent to extend its terms hereunder by written notice to Lessor given not sooner than one (1) year nor later than sixty (60) days prior to the end of the then current terms. If extended hereunder, the extended term shall be under all of the same terms and conditions as set out in the lease, except as modified herein: (a) Number of Option Terms: See Exhibit "A". (b) Length of Option Terms: See Exhibit "A". (c) Annual Basic Rental for Extended Term: See Exhibit "A". 3. Lessor guarantees Lessee access to a minimum of 65 parking spaces upon the leased premises and within one hundred (100) feet thereof. All such parking spaces shall be hard-surfaced or shelled, and Lessee shall have exclusive use thereof. 4. Lessee may commence the installation of improvements prior to August 1, 1995 but in no event shall rental term begin prior to that date and Lessee shall not be responsible for rentals prior thereto. 5. Lessor hereby grants to Lessee a right of first refusal for the purchase of the leased premises, upon Lessor's receipt of a bona fide offer to purchase from a third party. Such right of first refusal shall be exercised in the following mariner: Upon Lessor's receipt of a bona fide offer to purchase from a third party, Lessor shall notify Lessee in writing, via certified or registered mail within five (5) calendar days of receipt of such offer, and shall include therewith a copy of such offer. Upon receipt by Lessee of such notice from Lessor, Lessee shall have ten (10) calendar days to exercise, in writing, Lessee's right of first refusal by tendering to Lessor, via certified or registered mail, either Lessee's offer to purchase or Lessee's refusal to exercise such right of first refusal. 6. Lessor shall install or reinstall the basic kitchen equipment, movables and plant previously used in the leased premises by the former tenant, and shall make the basic kitchen plant operational. Lessor does not make any representations as to the appropriateness of said equipment for Lessee's intended use, but does warrant that all such equipment shall be operational on or before Commencement date of the Lease. Lessee shall thereafter be responsible for the maintenance of said equipment for the term of the lease and any renewals or extensions thereof. All such kitchen equipment, movables and fixtures shall be listed and inventoried, and shall remain the property of Lessor, with Lessee having the exclusive use of same for the term of the Lease and any renewals or extensions thereof. 66 6 The provisions contained in this paragraph also include all tables, chairs, stools, etc. currently in place on the premises. 7. If for any reason beyond the control of the parties, it becomes impossible to receive proper television transmission signals, then this lease may be terminated by Lessee upon sixty (60) days written notice. 8. This lease shall be subject to and predicated upon review and approval by the Parish of Jefferson and the Louisiana State Racing Commission. 9. * Lessee agrees to place Lessor a ten thousand dollar ($10,000.00) rental deposit. This deposit will become due upon the execution of this lease. 10. If for any reason beyond the control of the parties, Lessee loses its license to place and operate video poker machines or OTB activities on the premises, then this lease may be terminated by Lessee upon sixty (60) days written notice. 11. Lessor shall be responsible for protection of the leased premises from termite and/or wood destroying insect infestation and damage. This lease is to take effect in Louisiana, and is to be governed and controlled by laws of that state. Executed at New Orleans, Louisiana, this 1st day of August, 1995. LESSOR: ------ /s/Diedra Fifee By: /s/Robert J. Saia - -------------------------------- ----------------------------- /s/Carlisa F. De Cosola By: /s/Iris Ann Saia - -------------------------------- ------------------------------ (witnesses) Title: Owners --------------------------- LESSEE: Fair Grounds Corporation ------ /s/Diedra Fifee By:/s/Bryan G. Krantz - -------------------------------- ------------------------------ /s/Carlisa F. De Cosola Title: President - -------------------------------- (witnesses) * Deposit will be tendered upon completion of provisions in # 8. 67 7 EXHIBIT "A" Rent for the subject property to be paid according to the following schedule: Primary term: Six(6) months at $8,200.00 per month. First Option: Eighteen(18) months at $8,500.00 per month. Second Option: Twenty-four(24) months at $9,000.00 per month. Third Option: Twenty-four(24) months at $9,500.00 per month. Fourth Option: Twenty-four (24) months at $10,000.00 per month. As additional consideration for the subject lease, Lessor will receive four (4) "free admission" clubhouse passes for the Fair Grounds Race Track for the entire term of this lease. Fair Grounds Corporation /s/Robert J. Saia - ----------------------------- /s/Iris Ann Saia By:/s/Bryan G. Krantz - ----------------------------- -------------------------- Lessor Lessee 8/1/95 8/1/95 - ----------------------------- ----------------------------- Date Date 68 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF FAIR GROUNDS CORP FOR THE TWELVE MONTH PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-31-1998 NOV-01-1997 OCT-31-1998 7,696 0 1,079 0 118 9,530 55,235 15,904 49,144 11,446 0 1,525 0 0 29,130 49,144 28,682 36,785 0 33,842 5,070 0 19 (663) (3,364) 2,701 0 6,273 0 8,974 19.09 19.09
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