FINANCIAL STATEMENTS
CONTENTS Financial Statements: Exhibit Independent Auditor s Report Statements of Financial Position - Income Tax Basis Statements of Activities and Changes in Net Assets - Income Tax Basis Statements of Cash Flows - Income Tax Basis A B C Notes to Financial Statements
Board of Directors The Delaware State Fair, Inc. Harrington, Delaware Report on the Financial Statements We have audited the accompanying financial statements of The Delaware State Fair, Inc., which comprise the statements of financial position - income tax basis, as of December 31, 2013 and 2012, and the related statements of activities and changes in net assets - income tax basis and cash flows - income tax basis for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the basis of accounting the Organization uses for income tax purposes; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Independent Auditor s Report Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
The Delaware State Fair, Inc. Page -2- We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and net assets of The Delaware State Fair, Inc. as of December 31, 2013 and 2012 and its activities and changes in net assets for the years then ended in accordance with the basis of accounting the Organization uses for income tax purposes described in Note 1. Basis of Accounting We draw attention to Note 1 of the financial statements, which describes the basis of accounting. The financial statements are prepared on the basis of accounting the Organization uses for income tax purposes, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Dover, Delaware April 7, 2014
STATEMENTS OF FINANCIAL POSITION - INCOME TAX BASIS ASSETS December 31, 2013 2012 Current Assets: Cash and cash equivalents $ 1,531,722 $ 1,809,708 Investments, at fair value 12,822,989 11,927,107 Accounts receivable 437,904 368,939 Dividend receivable 188,806 377,612 Interest receivable 3,159 3,088 Prepaid expenses 127,560 134,798 Total Current Assets 15,112,140 14,621,252 Property and Equipment: Buildings, improvements and equipment 31,860,833 31,129,913 Land 336,774 197,267 Construction in progress 291,192 204,776 32,488,799 31,531,956 Less: Accumulated depreciation 17,855,721 16,901,963 Net Property and Equipment 14,633,078 14,629,993 Other Assets: Deferred income taxes 342,843 342,843 Investment, at cost 155,628 155,628 Total Other Assets 498,471 498,471 Total Assets $ 30,243,689 $ 29,749,716 The accompanying notes are an integral part of these financial statements.
Exhibit A LIABILITIES December 31, 2013 2012 Current Liabilities: Current portion of note payable $ 62,500 $ 150,000 Accounts payable 468,455 428,059 Retirement contributions payable 35,634 37,720 Deposits 750 750 Deferred income 660,991 708,002 Total Current Liabilities 1,228,330 1,324,531 Long-Term Liability: Note payable, net of current portion shown above 62,500 Total Liabilities 1,228,330 1,387,031 NET ASSETS Net Assets: Unrestricted: Contributed capital 307,230 294,730 Cumulative excess of revenue and support over expenses 28,708,129 28,067,955 Total Net Assets (Exhibit B) 29,015,359 28,362,685 Total Liabilities and Net Assets $ 30,243,689 $ 29,749,716
Exhibit B THE DELAWARE STATE FAIR, INC. STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS - INCOME TAX BASIS Year Ended December 31, 2013 2012 Revenue and Support $ 6,018,196 $ 6,321,275 Operating Expenses 6,104,023 6,617,554 Loss Before Depreciation ( 85,827) ( 296,279) Depreciation Expense 970,968 945,427 Loss From Operations ( 1,056,795) ( 1,241,706) Other Income (Expense): Interest and dividend income 1,099,083 1,915,349 Interest expense ( 4,291) ( 13,283) Gain (loss) on sale of property and equipment 9,200 ( 1,403) Net realized and unrealized gains on investments 592,977 508,879 Other Income, Net 1,696,969 2,409,542 Excess of Revenue and Support Over Expenses 640,174 1,167,836 Issuance of Shares 12,500 15,000 Increase in Unrestricted Net Assets 652,674 1,182,836 Unrestricted Net Assets: Beginning of year 28,362,685 27,179,849 Ending of year (Exhibit A) $ 29,015,359 $ 28,362,685 The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS - INCOME TAX BASIS Year Ended December 31, 2013 2012 Cash Flows From Operating Activities: Cash received from sales, concessions, and rentals $ 5,942,940 $ 6,253,871 Cash paid to suppliers and employees ( 6,101,537) ( 6,621,151) Interest and dividends received 1,287,818 1,930,316 Interest paid ( 4,291) ( 13,283) Net Cash Provided By Operating Activities 1,124,930 1,549,753 Cash Flows From Investing Activities: Purchase of property and equipment ( 971,711) ( 1,168,315) Proceeds from sale of property and equipment 9,200 Purchase of investments ( 11,090,831) ( 2,472,144) Proceeds from sale of investments 10,787,926 1,665,064 Net Cash Used For Investing Activities ( 1,265,416) ( 1,975,395) Cash Flows From Financing Activities: Issuance of shares 12,500 15,000 Repayments of note payable ( 150,000) ( 450,000) Net Cash Used For Financing Activities ( 137,500) ( 435,000) Net Change In Cash and Cash Equivalents ( 277,986) ( 860,642) Cash and Cash Equivalents: Beginning of year 1,809,708 2,670,350 End of year $ 1,531,722 $ 1,809,708 The accompanying notes are an integral part of these financial statements.
Exhibit C RECONCILIATION OF EXCESS OF REVENUE AND SUPPORT OVER EXPENSES TO NET CASH PROVIDED BY OPERATING ACTIVITIES Year Ended December 31, 2013 2012 Excess of Revenue and Support Over Expenses $ 640,174 $ 1,167,836 Adjustments To Reconcile Excess of Revenue and Support Over Expenses To Net Cash Provided By Operating Activities: Depreciation 970,968 945,427 (Gain) loss on sale of property and equipment ( 9,200) 1,403 Net realized and unrealized gains on investments ( 592,977) ( 508,879) (Increase) decrease in: Accounts receivable ( 68,965) 11,793 Dividend receivable 188,806 Interest receivable ( 71) 14,967 Prepaid expenses 7,238 ( 44,133) Increase (decrease) in: Accounts payable 38,054 55,074 Retirement contributions payable ( 2,086) ( 5,010) Deferred income ( 47,011) ( 88,725) Net Cash Provided By Operating Activities $ 1,124,930 $ 1,549,753
Note 1 - Summary of Significant Accounting Policies Organization and Business Activity The Delaware State Fair, Inc. (the Fair), a not-for-profit Delaware corporation, was initially formed in 1919, for the purpose of promoting and encouraging agriculture, horticulture and domestic arts for the information and betterment of the inhabitants of rural communities within the State of Delaware. The Fair offers shares ($2.50 par value) for sale to the general public. The organization has authorized 12,000 shares of which 8,019 and 7,994 are issued and outstanding at December 31, 2013 and 2012, respectively. Shareholders have certain rights and obligations, including the annual election of the Fair's Board of Directors. Current Fair policy provides that on an annual basis, each shareholder shall receive one gate pass good for the ten days of fair together with an invitation to the annual shareholders' dinner. No part of the Fair's assets, earnings or revenues inures to the benefit of any shareholder. Basis of Accounting The Fair s policy is to prepare its financial statements on the accounting basis used for federal income tax purposes. The income tax basis of accounting differs from accounting principles generally accepted in the United States of America. The primary differences in the financial statements of the Fair using the income tax basis as opposed to using accounting principles generally accepted in the United States of America are the accounting of its unconsolidated subsidiary at historical cost and the accelerated method used for the depreciation of property and equipment. Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. -1-
Note 1 - Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents For purposes of the statements of cash flows - income tax basis, the Fair considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Fair maintains its cash in bank accounts at high quality financial institutions. The balances, at times exceed federally insured limits. Advertising Advertising costs are expensed as incurred and total $142,389 and $126,472 for the years ended December 31, 2013 and 2012, respectively. Property and Equipment Purchased property and equipment is stated at cost, and donated assets are recorded at fair market value as of the date of donation. Depreciation is calculated using straight-line and accelerated methods over the estimated useful lives of the assets. Income Taxes The Fair qualifies as a tax-exempt organization under the Internal Revenue Code and its activities are generally not subject to income tax. During the year ended December 31, 2012, the Fair applied to change its tax exempt classification from Section 501(c)(5) to Section 501(c)(3). The Internal Revenue Service approved the change in late 2012. The new classification is retroactive to the date of the formation of the Fair. Investments The Fair has investments in marketable securities consisting of common stocks, exchange traded funds, mutual funds and real estate. Marketable securities are stated at fair value, and unrealized holding gains and losses are included in income. -2-
Note 1 - Summary of Significant Accounting Policies (Continued) Investments (Continued) Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Recent Accounting Pronouncements In October 2012, the Financial Accounting Standards Board issued ASU 2012-04, Technical Corrections and Improvements. The amendments in the Update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to the fair value measurements. The amendments in this update will generally be effective for fiscal periods beginning after December 15, 2013, for non public entities, except for amendments in this update where there was no transition guidance whith were immediately effective upon issuance. The adoption of immediately effective amendments was not significant to these financials. The impact of adopting ASU 2012-04 on subsequent periods has not yet been determined. Note 2 - Investments The following is a summary of the Fair's investments: December 31, 2013 Gross Gross Unrealized Unrealized Fair Cost Losses Gains Value Common stocks $ 311,673 ($ 1,024) $ 147,097 $ 457,746 Exchange traded funds 6,607,000 ( 120,046) 763,740 7,250,694 Mutual funds 5,212,866 ( 187,037) 10,720 5,036,549 Real estate 75,000 3,000 78,000 Total $ 12,206,539 ($ 308,107) $ 924,557 $ 12,822,989-3-
Note 2 - Investments (Continued) December 31, 2012 Gross Gross Unrealized Unrealized Fair Cost Losses Gains Value Common stocks $ 577,521 ($ 5,944) $ 124,713 $ 696,290 Exchange traded funds 4,599,866 ( 8,487) 361,140 4,952,519 Mutual funds 6,016,748 ( 96,606) 280,156 6,200,298 Real estate 75,000 3,000 78,000 Total $ 11,269,135 ($ 111,037) $ 769,009 $ 11,927,107 Return on investments are comprised of the following: Year Ended December 31, 2013 2012 Interest and dividends $ 341,819 $ 398,861 Realized gains (losses) 634,492 95,328 Unrealized gains (losses) ( 41,515) 413,551 Investment fees ( 51,417) ( 47,306) Total $ 883,379 $ 860,434 The gross realized gains from the sales of securities for the years ended December 31, 2013 and 2012 are $802,583 and $178,414, respectively. The gross realized losses from sales of securities for the years ended December 31, 2013 and 2012 are $168,091 and $83,086, respectively. FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows: -4-
Note 2 - Investments (Continued) Level 1 Level 2 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012. Common Stocks : Valued at the closing market price reported on the active market in which the individual securities are traded. Exchange Traded Funds : Valued at quoted prices as reported on the active market in which the funds are traded. Mutual Funds : Valued at quoted prices as reported on the active market in which the mutual funds are traded. -5-
Note 2 - Investments (Continued) Real Estate : Non-traded real estate investment trust (REIT), is valued by an independent appraiser and is sold on a secondary market at a set price over a specific offering period. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Fair believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value meassurement at the reporting date. The following tables set forth by level, within the fair value hierarchy, the Fair's investments at fair value as of December 31, 2013 and 2012: Investments at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total Common Stocks: Energy $ 52,227 $ 52,227 Consumer staples 32,669 32,669 Health care 67,568 67,568 Consumer discretionary 50,474 50,474 Industrials 67,597 67,597 Information technology 33,382 33,382 Materials 18,050 18,050 Financials 111,619 111,619 Telecommunication services 7,901 7,901 Utilities 16,259 16,259 Total Common Stocks 457,746 457,746 Exchange Traded Funds: U.S. equity funds 3,465,401 3,465,401 International equity funds 1,672,021 1,672,021 Taxable bond funds 1,774,723 1,774,723 Commodities 128,026 128,026 Sector equity funds 210,523 210,523 Total Exchange Traded Funds 7,250,694 7,250,694-6-
Note 2 - Investments (Continued) Investments at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total Mutual Funds: U.S. equity funds $ 104,878 $ 104,878 Taxable bond funds 4,395,710 4,395,710 Alternative funds 495,036 495,036 Commodities 40,925 40,925 Total Mutual Funds 5,036,549 5,036,549 Real Estate $ 78,000 78,000 Total Investments at Fair Value $ 12,744,989 $ -0- $ 78,000 $ 12,822,989 Investments at Fair Value as of December 31, 2012 Level 1 Level 2 Level 3 Total Common Stocks: Energy $ 101,408 $ 101,408 Consumer staples 59,078 59,078 Health care 90,215 90,215 Consumer discretionary 48,852 48,852 Industrials 64,766 64,766 Information technology 74,033 74,033 Materials 25,741 25,741 Financials 182,105 182,105 Telecommunication services 9,597 9,597 Utilities 40,495 40,495 Total Common Stocks 696,290 696,290-7-
Note 2 - Investments (Continued) Investments at Fair Value as of December 31, 2012 Level 1 Level 2 Level 3 Total Exchange Traded Funds: Domestic stock funds $ 1,726,236 $ 1,726,236 International stock funds 488,641 488,641 Fixed income funds 1,989,185 1,989,185 Commodities 264,223 264,223 Sector stock funds 484,234 484,234 Total Exchange Traded Funds 4,952,519 4,952,519 Mutual Funds: International stock funds 665,852 665,852 Fixed income funds 5,523,741 5,523,741 Commodities 10,705 10,705 Total Mutual Funds 6,200,298 6,200,298 Real Estate $ 78,000 78,000 Total Investments at Fair Value $ 11,849,107 $ -0- $ 78,000 $ 11,927,107 The following table sets forth a summary of changes in the fair value of the Fair's Level 3 asset for the years ended December 31, 2013 and 2012: December 31, 2013 2012 Real Estate: Balance - Beginning of year $ 78,000 $ -0- Purchase 75,000 Unrealized gain relating to asset still held at the reporting date 3,000 Balance - End of year $ 78,000 $ 78,000-8-
Note 3 - Income Taxes Certain activities conducted by the Fair are subject to federal unrelated business income tax. Since 2006, changes to the Internal Revenue Code related to income from controlled organizations has enabled the Fair to exclude certain rental income received from Harrington Raceway, Inc. (HRI) resulting in net operating losses from unrelated business activities. This exclusion has been extended by the American Taxpayer Relief Act and is set to expire after December 31, 2013. The net operating loss (NOL) carryforward as of December 31, 2013 for federal income tax purposes is approximately $2,272,000. The Fair also has approximately $125,000 of charitable contribution deductions which expire over the next five years. The NOL's expire as follows: December 31, 2026 $ 149,000 December 31, 2027 330,000 December 31, 2028 364,000 December 31, 2029 451,000 December 31, 2030 403,000 December 31, 2031 204,000 December 31, 2032 185,000 December 31, 2033 186,000 Deferred taxes are the result of the NOL carryforward related to unrelated business income activities. The Fair has recorded a valuation allowance of $66,271 and $32,787, as of December 31, 2013 and 2012, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. Based on management's projections, the net deferred tax assets will be recovered with projected taxable income over the next twenty years. There was no other activity in the valuation allowance account during 2013 and 2012. -9-
Note 3 - Income Taxes (Continued) The Fair recognizes the tax benefit from an uncertain tax position only if it is morelikely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. Management evaluated the Fair's tax positions and concluded that the Fair had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. With few exceptions, the Fair is no longer subject to income tax examinations by the U.S. federal, state and local tax authorities for years before 2010, due to the expiration of the statute of limitations. Note 4 - Investment, At Cost The Fair owns approximately 77% of the outstanding shares of HRI. This investment is recorded at its historical cost. Note 5 - Debt Debt consists of the following: December 31, 2013 2012 Note Payable - PNC Bank, Delaware (PNC) monthly principal payments of $12,500, interest is payable at 2.91% at December 31, 2013, the note is unsecured and final payment is due May 2014. $ 62,500 $ 212,500 Less: Current portion 62,500 150,000 Long-Term Portion $ -0- $ 62,500 Maturity of debt is as follows: 2014 $ 62,500-10-
Note 5 - Debt (Continued) The Fair maintains an unsecured $2,850,000 revolving line of credit with PNC. The variable interest rate is 2.91% at December 31, 2013 and is based upon the daily LIBOR rate plus 275 basis points. The line of credit is renewed annually, and has been extended until September 30, 2014. The outstanding balance at December 31, 2013 and 2012 was $-0-. Among other things, the line of credit agreement contains covenants against pledging property owned by the Fair. Note 6 - Retirement Plan The Fair maintains a defined contribution pension plan covering substantially all employees who are at least 21 years of age and have completed 1 year of service and 1,000 hours. Employees may contribute up to 100% of their wages into the plan subject to limitations under the Internal Revenue Code. The Fair will contribute an additional 100% of the employees contribution, up to a maximum of 6% of the eligible employees compensation. Contributions totaled $50,758 and $53,742 for the years ended December 31, 2013 and 2012, respectively. In addition, the Fair may make annual discretionary profit sharing contributions at rates to be determined each year by the Board of Directors and allocated among participants in proportion to their compensation. Contribution rates were 4% and contributions totaled $32,198 and $33,471 for the years ended December 31, 2013 and 2012, respectively. Note 7 - Related Party Transactions Included in the Fair's revenue and support for the years ended December 31, 2013 and 2012 are $590,192 and $665,097, respectively, of fair admission revenue and rental income from certain real property from HRI. Included in the Fair's accounts receivable at December 31, 2013 and 2012 are $125,106 and $53,133, respectively, of receivables due from HRI. Included in the Fair's accounts payable at December 31, 2013 and 2012 are $48,425 and $85,723, respectively, of payables due to HRI. -11-
Note 7 - Related Party Transactions (Continued) Included in the Fair's interest and dividend income for the years ended December 31, 2013 and 2012 are $755,224 and $1,510,109, respectively, of dividends from HRI. Dividends declared to stockholders and payable to the Fair by HRI total $188,806 and $377,612 at December 31, 2013 and 2012, respectively. The Fair purchases goods and services from various businesses that are owned by or affiliated with certain members of the Board of Directors of the Fair or Harrington Raceway, Inc. These purchases include construction services, maintenance services and insurance brokerage and are conducted in the normal course of business. Note 8 - Subsequent Events Subsequent to year-end, the Delaware State Fair has certain commitments related to construction of a plaza and poultry barn which total $2,158,342. Management has evaluated all subsequent events through April 7, 2014, the date the financial statements were available to be issued. -12-