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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 0-1590
THE WESTWOOD GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1983910
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
190 V.F.W. Parkway, Revere, Massachusetts 02151
(Address of principal executive offices) (Zip Code)
781-284-2600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of August 11, 2003, 351,210 shares of the Registrant's common stock, par
value $.01 per share, and 912,015 shares of the Registrant's Class B common
stock, par value $.01 per share, were outstanding.
PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1: Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 ....... 3
Consolidated Statements of Operations for the three months ended
June 30, 2003 and June 30, 2002 ............................................. 5
Consolidated Statements of Operations for the six months ended
June 30, 2003 and June 30, 2002 ............................................. 6
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and June 30, 2002 ............................................. 7
Notes to Consolidated Financial Statements .................................. 8
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 11
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk .................. 18
ITEM 4: Controls and Procedures ..................................................... 18
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings ........................................................... 19
ITEM 2: Changes in Securities and Use of Proceeds ................................... 20
ITEM 3: Defaults Upon Senior Securities ............................................. 20
ITEM 4: Submission of Matters to a Vote of Security Holders ......................... 20
ITEM 5: Other Information ........................................................... 20
ITEM 6: Exhibits and Reports on Form 8-K ............................................ 20
SIGNATURE ........................................................................... 21
EXHIBIT INDEX ....................................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WESTWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
------------ ------------
ASSETS (Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 479,292 $ 114,327
Restricted cash 277,439 376,279
Escrowed cash 174,897 294,996
Accounts receivable 16,054 20,781
Prepaid expenses and other current assets 276,883 134,583
Notes receivable from officers short term portion 598,646 1,137,572
------------ ------------
Total current assets 1,823,211 2,078,538
------------ ------------
PROPERTY, PLANT, & EQUIPMENT
Building and building improvements 19,121,765 19,094,811
Machinery and equipment 4,875,680 4,848,183
Land 348,066 348,066
------------ ------------
24,345,511 24,291,060
Less accumulated depreciation and amortization (19,822,573) (19,534,414)
------------ ------------
Net property, plant and equipment 4,522,938 4,756,646
------------ ------------
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of
$83,037 and $33,214 at June 30, 2003 and December 31, 2002
respectively 215,900 265,723
Other assets, net 26,379 26,379
------------ ------------
Total other assets 242,279 292,102
------------ ------------
Total assets $ 6,588,428 $ 7,127,286
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE WESTWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 2,294,697 $ 1,749,997
Outstanding pari-mutuel tickets 451,039 608,226
Current maturities of long-term debt (Note 2) 104,710 96,072
------------ ------------
Total current liabilities 2,850,446 2,454,295
LONG-TERM DEBT, less current maturities (Note 2) 5,821,427 5,531,302
OTHER LONG-TERM LIABILITIES 918,906 985,827
------------ ------------
Total liabilities 9,590,779 8,971,424
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' DEFICIENCY:
Common stock, $.01 par value; authorized
3,000,000 shares, 1,944,409 shares issued 19,444 19,444
Class B Common stock, $.01 par value; authorized
1,000,000 shares; 912,615 shares issued 9,126 9,126
Additional paid-in capital 13,379,275 13,379,275
Accumulated deficit (7,949,129) (6,790,916)
Accumulated other comprehensive loss (496,285) (496,285)
Cost of 1,593,199 common and 600 Class B
common shares in treasury (7,964,782) (7,964,782)
------------ ------------
Total stockholders' deficiency (3,002,351) (1,844,138)
------------ ------------
Total liabilities and stockholders' deficiency $ 6,588,428 $ 7,127,286
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE WESTWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
June 30, June 30,
For the Three Months Ended 2003 2002
- -------------------------------------------------------------------------------
OPERATING REVENUES:
Pari-mutuel commissions $ 3,020,871 $ 3,392,600
Admissions 38,595 46,245
Concessions and parking 628,536 770,124
----------- -----------
Total operating revenue 3,688,002 4,208,969
----------- -----------
Operating expenses:
Wages, taxes and benefits 1,724,145 1,502,137
Purses 803,023 893,996
Cost of food and beverage 108,156 171,992
Administrative and operating 1,518,165 1,372,575
Depreciation and amortization 162,050 155,386
----------- -----------
Total operating expenses 4,315,539 4,096,086
----------- -----------
Income (loss) from operations (627,537) 112,883
----------- -----------
Other expense:
Interest expense, net (107,391) (92,911)
Other expense, net (10,000) (1,890)
----------- -----------
Total other expense (117,391) (94,801)
----------- -----------
Income (loss) from operations before (744,928) 18,082
provision for income taxes
Provision for income taxes 7,500 10,303
----------- -----------
Net income (loss) $ (752,428) $ 7,779
----------- -----------
Basic and diluted per share data:
Net income (loss) ($0.59) $ 0.01
=========== ===========
Weighted average
common shares outstanding 1,263,225 1,263,225
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THE WESTWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
June 30, June 30,
For the Six Months Ended 2003 2002
- -------------------------------------------------------------------------------
OPERATING REVENUES:
Pari-mutuel commissions $ 5,900,383 $ 6,718,299
Admissions 66,525 88,654
Concessions and parking 1,175,640 1,432,798
----------- -----------
Total operating revenue 7,142,548 8,239,751
----------- -----------
Operating expenses:
Wages, taxes and benefits 3,252,277 3,057,149
Purses 1,582,767 1,756,092
Cost of food and beverage 185,543 282,115
Administrative and operating 2,696,924 2,488,401
Depreciation and amortization 337,982 289,293
----------- -----------
Total operating expenses 8,055,493 7,873,050
----------- -----------
Income (loss) from operations (912,945) 366,701
----------- -----------
Other (expense):
Interest expense, net (201,768) (227,208)
Other expense, net (10,000) (31,344)
----------- -----------
Total other (expense) (211,768) (258,552)
----------- -----------
Income (loss) from operations before (1,124,713) 108,149
provision for income taxes
Provision for income taxes 33,500 27,445
----------- -----------
Net income (loss) $(1,158,213) $ 80,704
=========== ===========
Basic and diluted per share data:
Net income (loss) ($0.92) $ 0.06
=========== ===========
Weighted average
common shares outstanding 1,263,225 1,263,225
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
THE WESTWOOD GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($1,158,213) $ 80,704
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 337,982 289,293
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash 98,840 (165,131)
Decrease in escrowed cash 120,099 14,618
Decrease in accounts receivable 4,727 25,395
Decrease (increase) in prepaid expenses and other current assets (142,300) 52,210
Decrease in other assets, net -- 38,073
Increase in accounts payable and other accrued liabilities 518,390 229,560
Decrease in outstanding pari-mutuel tickets (157,187) (91,888)
Decrease in accrued executive bonus long -term portion -- (46,769)
Decrease in other long term liabilities (66,921) (28,926)
----------- ---------
Total adjustments 713,630 316,435
----------- ---------
Net cash provided by (used in) operating activities (444,583) 397,139
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (28,141) (504,963)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of debt (51,237) (241,320)
Proceeds from debt financing 350,000 --
Decrease in notes receivable, officers 538,926 109,469
Short term advances -- 300,000
----------- ---------
Net cash provided by financing activities 837,689 168,149
----------- ---------
Net increase in cash and cash equivalents 364,965 60,325
Cash and cash equivalents, beginning of year 114,327 12,355
----------- ---------
Cash and cash equivalents, end of year $ 479,292 $ 72,680
----------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 201,768 $ 202,661
----------- ---------
Income taxes $ 26,000 $ 25,000
----------- ---------
The company recorded capital lease obligations of $26,310 in 2003.
The accompanying notes are an integral part of these consolidated financial
statements.
7
1. BASIS OF PRESENTATION
INTERIM RESULTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of results of
operations for the interim periods presented. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities on the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Operating results for interim
periods are not necessarily indicative of results that may be expected for an
entire fiscal year. Accordingly, these interim consolidated financial statements
should be read in conjunction with the consolidated financial statements
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements as of June 30, 2003 and
December 31, 2002 and for the three and six month periods ended June 30, 2003
and 2002 include the accounts of the Company and its wholly-owned subsidiaries.
All material inter-company accounts and transactions have been eliminated in
consolidation.
INCOME ( LOSS ) PER COMMON SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common shares and
potentially dilutive common shares, consisting of stock options with an exercise
price below the average market price of common shares. Stock options were not
considered in 2003 since the Company had a net loss and their effect would be
antidilutive. The Company's stock options did not have a dilutive effect in 2002
since the option prices per share were deemed to be equal to or higher than the
estimated average per share market price of the Company's common stock.
The amount of potentially dilutive common shares issuable under the
Company's stock options, if any, are determined based on the treasury stock
method.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION
At June 30, 2003, the Company continued to account for stock-based
compensation plans using the intrinsic value method. The Company accounts for
stock based compensation plans in accordance with the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
All stock options were fully vested as of December 31, 2000. As a result,
there is no pro-forma expense for the six months ended June 30, 2003 and 2002.
8
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables". EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue generating activities. EITF 00-21 will be
effective for periods beginning after June 15, 2003. The adoption of EITF 00-21
is not expected to have a material impact on the Company's financial position
and results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest entities.
Under current practice, two enterprises generally have been included in
consolidated financial statements because one enterprise controls the other
through voting interests. This interpretation defines the concept of "variable
interests" and requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse the risks among the parties involved. The provisions of FIN 46, which
the Company adopted in 2003, did not have a material impact on the consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, and hedging relations designated after June 30, 2003, except for
those provisions of SFAS No. 149 which relate to SFAS No. 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003. For those issues, the provisions that are currently in effect should
continue to be applied in accordance with their respective effective dates. In
addition, certain provisions of SFAS No. 149, which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a
material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective beginning September 1, 2003. The adoption of SFAS No. 150 is not
expected to have a material effect on the Company's financial statements.
2. DEBT
Long-term debt consisted of the following:
June 30, 2003 December 31, 2002
------------- -----------------
6.5% Boston Federal Savings Bank term loan $5,926,137 $5,627,374
Requiring 34 monthly payments of
principal and interest beginning
November 1, 2002 collateralized by a
mortgage and security interest in all
real estate and personal property
located at Wonderland Greyhound Park.
The final payment on the loan is to be
made September 1, 2005 in the amount of
$5,690,369.
Less current maturities 104,710 96,072
---------- ----------
Long - term portion $5,821,427 $5,531,302
========== ==========
9
At June 30, 2003, the Company had drawn down a total of $6,000,000 under
the Boston Federal Savings Bank line, with an additional $500,000 available for
use. Of this available amount, $250,000 is currently available for working
capital purposes and $250,000 may be used to assist the Company for transaction
costs relating to the proposed purchase of stock from the minority stockholders
of the Company.
The Loan, Reimbursement, and Security Agreement, dated as of September 3,
2002, by and between Wonderland Greyhound Park Realty, LLC and Boston Federal
Savings Bank, contains certain restrictive covenants including the maintenance
of certain financial ratios and debt coverage requirements. As of June 30, 2003,
the Company was in compliance with these covenants. The note is collateralized
by a mortgage and security interest in all real estate and personal property at
Wonderland Greyhound Park.
3. LITIGATION
The Company is involved in various legal proceedings that arise in the
ordinary course of its business.
On March 18, 2003, which was one day prior to the date of the special
meeting of the Company's stockholders to approved a proposed reverse stock split
going private transaction, the Company received an Administrative Complaint and
Ex Parte Motion for a Temporary Order to Cease and Desist from the Securities
Division of the Office of the Secretary of The Commonwealth of Massachusetts'
Securities Division. The Administrative Complaint claimed that the Company
failed to disclose certain information to the stockholders in the proxy
statement related to the proposed reverse stock split, which the Division
alleged to be "material." Specifically, the Division alleged that the Company
failed to disclose (i) the existence of loans from E. Mark Noonan, the principal
of Alouette Capital, to the Company and Mr. Sarkis; (ii) that Alouette Capital
was not a registered broker dealer, and (iii) the extent of the Company's
lobbying activities with respect to the passage of gaming legislation. The
stockholders' meeting scheduled for March 19, 2003 to approve the proposed going
private transaction was adjourned in order to permit the Company to address this
matter, and the stockholders' vote was never taken. On April 8, 2003, the
Company filed an answer in response to the Administrative Complaint denying each
of the allegations set forth in the Administrative Complaint.
On June 16, 2003, the Company executed an Offer of Settlement and a
Consent Order was issued. The principal elements of the settlement were as
follows:
(i) The Company would not commit any future violations of chapter
110A of Massachusetts General Laws and the corresponding regulations
promulgated thereunder;
(ii) The Company paid the sum of $10,000 to offset the cost of the
Division's investigation;
(iii) If the Company retains a fairness opinion provider as part of
any proposed going private transaction, the Company would engage a
fairness opinion provider that is independent, unaffiliated, and free
from all material conflicts of interest;
(iv) The Company would not, within the next twelve months, enter
into, effect or consummate with its then existing shareholders a going
private transaction where the common stock of Company is valued as a per
share price of less than $4.00, however, it could seek review of this
provision through petition to the Director of the Division and he/she may
grant such relief at his/her sole discretion, provided that such relief
shall not be unreasonably withheld;
(v) The Company would include all material facts, consistent with
the SEC's rules, considered by the Board of Directors in reaching its
fairness determination regarding any proposed going private transaction
and would present a fair and balanced
10
representation of the potential expansion of gaming legislation in
Massachusetts consistent with all applicable SEC rules;
(vi) The Company would make available to any fairness opinion
provider retained by the Board of Directors to determine the fairness of
any proposed going private transaction, any and all current gaming-related
reports and materials prepared for the Company by any consultant,
including any financial projections;
(vii) The Company would present to the Division any draft of an
amendment to the existing February 13, 2003 Proxy Statement or any other
filing under the SEC's Regulation M-A contemporaneously with submission of
the same to the SEC for review;
(viii) The Company would require approval of any proposed going
private transaction by majority of (a) the unaffiliated stockholders of
the outstanding shares of Common Stock, and (b) the unaffiliated
stockholders of the Class B Common Stock;
(ix) The Company would value the stock based upon a range deemed to
be fair by the new fairness opinion provider; and
(x) The Company would include provisions that would pay former
stockholders whose shares have been purchased through the transaction an
additional premium, earn out, or the like, should legislation be enacted
into law, within one (1) year of the stockholders vote approving the
transaction, authorizing the Company to install slot machines at its
racetrack, with the amount of any payment to former stockholders to be
determined based upon the particular provisions of the statute, and
whether, in fact, the Company realizes increased revenues in connection
therewith.
On April 1, 2003, a class action complaint was filed by a stockholder of
the Company against the Company and the Company's Board of Directors in the
Court of Chancery in the State of Delaware seeking to enjoin the proposed
reverse stock split on the basis that is not fair to the stockholders and that
the proxy statement omits information alleged to be "material." On June 17,
2003, the Company filed a Motion to Dismiss for mootness on the grounds that the
proposed going private transaction has not or will not be completed. To date,
the plaintiffs have not filed a response to the motion, and no further action
has been taken at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
related notes appearing elsewhere in this quarterly report. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of many factors, including, but
not limited to, those set forth under "Results of Operations" and elsewhere in
this quarterly report.
RESULTS OF OPERATIONS
During 2001, the Company and the owners of other area racetracks worked to
enact legislation which would permit the Company and the other greyhound track
to continue to provide simulcast broadcasting of thoroughbred racing on a more
frequent basis, as well as providing for a decrease in the pari-mutuel taxes
paid to the Commonwealth and that the funds available from the pari-mutuel tax
decrease be made available for increases in purses and the Greyhound Capital
Improvement and Promotional Trust Funds as well as the establishment of a
Greyhound Adoption Fund and the implementation of an off-track betting system.
On November 17, 2001, the "Act Providing for Improvements to the Horse and
Greyhound Racing Industry in the Commonwealth and the Regulation Thereof" was
signed into law by the acting governor of Massachusetts. Under this statute, the
Company and the other area racetracks are permitted to continue to provide
simulcast
11
broadcasting of thoroughbred racing to their patrons until December 2005. This
legislation also provides that the Company is to pay premiums for the right to
simulcast interstate thoroughbred and harness racing ranging from 3% to 7% for
the benefit of the purse accounts at the Commonwealth's two commercial horse
racetracks. In addition, to the extension and expansion of simulcast
broadcasting, this statute provides for a "purse pool," which will be funded by
taxes, fees and assessments with a minimum of $400,000 being credited to the
purse accounts of each racetrack with any remaining portion being apportioned
among the racetracks pursuant to a formula to be devised by the State Racing
Commission. All unclaimed simulcast wagers collected at each racetrack are to be
deposited with the Massachusetts State Racing Commission for payment to the
purse account of the individual racetracks responsible for such unclaimed
wagers. The Westwood Group also received a one-time grant of $300,035 during
2001 from the Commonwealth for the purpose of funding capital improvements and
repairs to its facility and equipment. Finally, the statute authorizes account
wagering at each of the individual racetracks and establishes a nine member
special commission to study the feasibility of an off-track betting program in
Massachusetts.
Despite the enactment of this legislation and the initial potential for an
increase in cash flow from such legislation, management does not believe that
this legislation has materially benefited the Company's overall racing
operations since November 2001.
While various legislation has been introduced, the Massachusetts state
legislature took no action to expand legalized gaming in the years 2000, 2001
and 2002. On October 3, 2002, the then Governor of Massachusetts issued an
executive order establishing a special commission to study and report on the
potential impact, both positive and negative, of the potential expansion of
legalized gaming in Massachusetts. This commission held public hearings in four
locations throughout the Commonwealth and reported its findings to the Governor
on December 31, 2002. This commission's report did not recommend that the
Governor and/or the state legislature enact legislation that would expand
gaming, but instead focused on the various ways that the expansion of legalized
gaming could possibly impact, both negatively and positively, the Commonwealth
and its citizens. Management is unable to predict what, if any, impact this
report will have on the overall prospects for the enactment of legislation in
Massachusetts to expand legalized gaming. There is no assurance that the release
of this report will prompt or thwart the introduction or enactment of such
legislation. This is not the first time a commission of this type has been
formed. Over the past decade, when similar commissions have proposed the
introduction of gaming legislation, numerous bills have been introduced, but
legislation has never been enacted despite being supported of by the then
Governor of The Commonwealth of Massachusetts and certain state legislators.
In the Spring of 2003, according to newspaper accounts, Governor Mitt
Romney was considering introducing legislation to allow the installation of
video slot machines at two to four unspecified sites in the Commonwealth, which
would be determined by means of an auction with five-year licenses going to the
highest bidders. In a hearing of the Government Regulations Committee of the
Massachusetts House of Representatives, Robert Pozen, Governor Romney's Chief of
Commerce and Labor, on behalf of the Romney administration, stated that 7,200
slot machines at three unspecified sites could raise as much as $300 million
annually in additional state tax revenues. At this same hearing, a number of
other gaming-related proposals were discussed. On April 15, 2003, the House of
Representatives debated two gaming bills related to permitting slot machines at
the Commonwealth's four racetracks and authorizing slot machines and full-scale
casinos. Both of these gaming bills were defeated in the House of
Representatives on that date.
A provision calling for the expansion of legalized gaming was not included
in the Massachusetts budget for fiscal year 2004. According to published
newspaper accounts, legislation to expand legalized gaming will not be
introduced in the Massachusetts state legislature until the Fall of 2003. If
Governor Romney and/or the state legislature determines to introduce or enact
legislation in 2003 to expand gaming, the process to enact gaming legislation
could take a number of months, and it is impossible to predict the nature of any
such legislation and whether the Company would in fact benefit from such
legislation if ultimately enacted.
The Company is still experiencing a decline in total attendance and
live-on track handle caused by a variety of factors, including a general decline
in the pari-mutuel racing industry, the negative effect of the ballot initiative
on greyhound racing's image, and strong competition for the wagered dollar from
the Massachusetts State Lottery and from the introduction of casino gambling and
slot machines in neighboring states.
12
Wonderland Greyhound Park currently conducts live racing five (5) nights
per week. Wonderland Greyhound Park also offers simulcast wagering afternoons
and evenings throughout the year.
13
The table below illustrates certain key statistics for Wonderland Greyhound
Park, the Company's greyhound racing operation, for the three months ended June
30, 2003 and 2002.
2003 2002
------- -------
Performances 75 91
Simulcast days 91 91
Pari-mutuel handle (in thousands)
Live-on track $ 3,577 $ 4,757
Live-simulcast 6,686 8,500
Guest-simulcast 12,297 12,728
------- -------
Total pari-mutuel handle $22,560 $25,985
======= =======
Total attendance 62,922 70,297
Average per capita on site wagering $ 252 $ 249
Average Daily Attendance 839 772
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
OPERATING REVENUE
Total operating revenue declined by approximately $521,000, or 12%, to
$3.69 million in the quarter ended June 30, 2003 as compared to the quarter
ended June 30, 2002. Pari-mutuel commissions declined by 11% from approximately
$3.39 million to $3.02 million during the same period. Total handle in the
second quarter of 2003 was approximately $22.56 million as compared to
approximately $25.99 million in 2002. Live-on track handle decreased 25%, or
about $1.18 million, from approximately $4.76 million to approximately $3.58
million in 2002, with an average daily attendance of approximately 839 persons
in 2003 compared to 772 persons in 2002. Live-simulcast handle decreased by
approximately $1.81 million from approximately $8.50 million to approximately
$6.69 million, or 21%, in the second quarter of 2003 compared to the second
quarter of 2002. Guest-simulcast handle decreased by $431,000 from approximately
$12.73 million to approximately $12.30 million, or 3%, from 2003 to 2002.
The decrease in admissions revenue, when associated discounts are added
back, approximates the decline in attendance of 11%. Other operating revenue
consists of food and beverage, program sales, lottery, parking and gift shop
sales. Other operating revenue stood at approximately $629,000 for the three
months ended June 30, 2003 decreasing by approximately $141,000 from
approximately $770,000 for the three months ended June 30, 2002. Pari-mutuel
commission for the three months ended June 30, 2003 included approximately
$30,000 deposited into the Greyhound Capital Improvements Trust Fund, $46,000
deposited into the Greyhound Promotional Trust Fund, and $31,000 deposited into
the Greyhound Adoption Trust Fund. During same period of 2002, these figures
amounted to $34,000, $52,000, and $35,000, respectively.
OPERATING EXPENSES
Operating expenses of approximately $4.32 million for the three months
ended June 30, 2003 increased by approximately $219,000 from approximately $4.10
million for the three months ended June 30, 2002. This increase was attributable
to an increase in salary expense related to adjustments negotiated with
bargaining units as well as an increase in utilities expense or approximately
$125,000 which was mainly the result of a credit that was received in the first
quarter of 2002.
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INTEREST EXPENSE
Interest expense increased by approximately $14,000 for the three months
ended June 30, 2003 from approximately $93,000 in the three months ended June
30, 2002 to approximately $107,000 in the three months ended June 30, 2003 due
to increased debt borrowings.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $7,500 to $162,000
in the three months ended June 30, 2003, from $155,000 in the comparable period
in 2002. The increase is the result of capital additions to the racing facility.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was less than the statutory
federal tax rate of 34% during the first six months of 2003 and 2002 primarily
due to the utilization of available net operating loss carryforwards in 2002 and
the net loss in 2003. The provision for taxes of approximately $7,500 and
$10,000 in the second three months of 2003 and 2002, respectively, represents
estimated state taxes.
The table below illustrates certain key statistics for Wonderland
Greyhound Park, the Company's greyhound racing operation, for the six months
ended June 30, 2003 and 2002.
2003 2002
-------- --------
Performances 141 167
Simulcast days 180 181
Pari-mutuel handle (in thousands)
Live-on track $ 6,261 $ 8,717
Live-simulcast 12,477 16,349
Guest-simulcast 24,069 25,313
-------- --------
Total pari-mutuel handle $ 42,807 $ 50,379
======== ========
Total attendance 117,722 135,850
Average per capita on site wagering $ 258 $ 250
Average Daily Attendance 835 813
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
OPERATING REVENUE
Total operating revenue declined by $1.10 million, or 13%, to
approximately $7.14 million in the six months ended June 30, 2003 as compared to
approximately $8.24 million in the six months ended June 30, 2002. Pari-mutuel
commissions declined by 12% to approximately $5.90 million from approximately
$6.72 million during the same period. Total handle in the first six months of
2003 was approximately $42.81 million as compared to $50.38 million in 2002.
This represents a decrease of 15%. Live-on track handle decreased 28% or about
$2.46 million from approximately $8.72 million in 2002 to $6.26 million in 2002,
with an average attendance of approximately 835 persons in 2003 compared to 813
persons in 2002. Live-simulcast handle decreased by $3.87 million to $12.47
million, or 24%, in the first six months of 2003 as compared to $16.35 million
during the comparable period of 2002. Guest-simulcast handle decreased by $1.24
million, or 5%, to approximately $24.07 million from approximately $25.31
million in the first six months of 2002.
15
The decrease in admissions revenue, when associated discounts are added
back, approximates the decline in attendance of 15%. Other operating revenue
consists of food and beverage, program sales, lottery, parking and gift shop
sales. Other operating revenue stood at approximately $1.18 million for the six
months ended June 30, 2003 decreasing by approximately $250,000 from
approximately $1.43 million for the six months ended June 30, 2002. Pari-mutuel
commission for the six months ended June 30, 2003 included approximately $60,000
deposited into the Greyhound Capital Improvements Trust Fund, $46,000 deposited
into the Greyhound Promotional Trust Fund, and $31,000 deposited into the
Greyhound Adoption Trust Fund. During same period of 2002, these figures
amounted to $68,000, $44,000, and $44,000 respectively.
OPERATING EXPENSES
Operating expenses of approximately $8.06 million for the six months ended
June 30, 2003 increased by approximately $182,000 from approximately $7.87
million for the six months ended June 30, 2002. This increase was attributable
to an increase in salary expense related to adjustments negotiated with
bargaining units as well as an increase in utilities expense of approximately
$125,000 which was mainly the result of a credit that was received in the first
quarter of 2002.
INTEREST EXPENSE
Interest expense decreased by approximately $25,000 for the six months
ended June 30, 2003 from $227,000 in the six months ended June 30, 2002 to
approximately $202,000 in the six months ended June 30, 2003 due to increased
debt borrowings.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $49,000 to $338,000
in the six months ended June 30, 2003, from $289,000 in the comparable period in
2002. The increase is the result of capital additions to the racing facility.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was less than the statutory
federal tax rate of 34% during the first six months of 2002 and 2002 primarily
due to the utilization of available net operating loss carryforwards in 2002 and
the net loss in 2003. The provision for taxes of $34,000 and $27,000 in the
first six months of 2003 and 2002, respectively, represents estimated state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had a working capital deficit of
approximately $1.0 million, and a stockholders' deficit of approximately $3.0
million. Historically, the Company's primary sources of capital to finance its
businesses have been its cash flow from operations and credit facilities. The
Company's capital needs are primarily for maintenance and enhancement of the
racing facility at Wonderland, and for debt service requirements. The Company's
cash and cash equivalents totaled approximately $479,000 at June 30, 2003,
compared with $114,000 at December 31, 2002. This increase in cash was primarily
due to the payment received on the note receivable from an officer. The Company
generated a cash deficiency from operations of approximately $445,000 during the
first six months of 2003 as compared to a cash surplus of $397,000 during the
corresponding period in 2002. Non-cash items included in the Company's net loss
in the first six months of 2003 consist of depreciation and amortization expense
of $338,000. Changes in working capital accounts including restricted cash,
accounts payable and other accrued liabilities generated approximately $376,000
of cash in the first six months of 2003.
Net cash used in investing activities in 2003 of approximately $28,000
represents investments and additions to the property, plant and equipment.
Financing activities in 2003 include $51,000 of funds used to reduce outstanding
balances on long-term debt, as well as proceeds from debt financing of $350,000
and the decrease of $539,000 in notes receivable from officers.
16
The Company believes that it will generate enough cash from operating and
financing activities to satisfy its anticipated obligations during 2003.
Management continues to examine the full range of strategic alternatives
in an effort to maximize shareholder value, including the benefits and
disadvantages of remaining a public company, particularly in light of the lack
of a meaningful trading market for its common stock.
CRITICAL ACCOUNTING POLICIES
In accordance with the U.S. Securities and Exchange Commission Release
Nos. 33-8040, 34-45149 and FR-60, the Company's Critical Accounting Policies are
as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates that could impact on the Company's
results of operations include those relating to contractual obligations and
other accrued expenses. Actual results could differ from those estimates.
RESTRICTED CASH
Restricted cash includes approximately $150,000 and $125,000 at June 30,
2003 and December 31, 2002, respectively, related to funds dedicated to payment
of the Company's liability for outstanding pari-mutuel tickets. Unclaimed
winnings from pari-mutuel wagering are held by Wonderland Greyhound Park until
they become payable to the Commonwealth by operation of unclaimed property
statutes. Restricted cash includes approximately $1,000 and $126,000 at June 30,
2003 and December 31, 2002, respectively, which is required to be used for the
purposes of the proposed going private transaction. Restricted cash also
includes approximately $126,000 and $125,000 at June 30, 2003 and December 31,
2002, respectively, held as collateral for the Company's letter of credit which
secures the Company's racing bond.
ESCROWED CASH
Escrowed cash is related to the operations of Wonderland Greyhound Park
and includes amounts held by The Commonwealth of Massachusetts in trust funds
(for capital improvements and advertising/promotion). Wonderland Greyhound Park
funds these costs and requests reimbursements from the trust funds. Wonderland
Greyhound Park is reimbursed upon approval by the Commonwealth of Massachusetts.
REVENUE RECOGNITION
The Company's annual revenues are mainly derived from the net commission
that it receives from wagers made by patrons during its live-on track racing
performances, live and guest-simulcast racing performances and from admission
and concession charges at such performances. Inter-track receivables and
payables are dependent on the accuracy of an independent totalisator vendor.
This vendor's system has been independently reviewed and deemed reliable.
FORWARD-LOOKING STATEMENTS
Certain statements contained throughout this quarterly report constitute
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from those contemplated or projected,
forecasted, estimated or budgeted in or expressed or implied by such
forward-looking statements. Such factors
17
include, among others, the following: general economic and business conditions;
industry trends, changes in business strategy or development plans; availability
and quality of management; and availability, terms and employment of capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material exposure to market risk that could affect its
future results of operations and financial condition. Risks and uncertainties,
including those not presently known to us or that we currently deem immaterial,
may impair our business. The Company does not use derivative products and does
not have any material monetary assets (See Item 2, "Liquidity and Capital
Resources").
ITEM 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange
Act"). The rules refer to the controls and other procedures designed to ensure
that information required to be disclosed in reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified. The Company's management, including the
Company's Chief Executive Officer, performed an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
as of June 30, 2003 and, based on that evaluation, concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003.
During the three month period ended June 30, 2003, there were no
significant changes in the Company's internal control over financial reporting
that materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that arise in the
ordinary course of its business.
March 18, 2003, which was one day prior to the date of the special meeting
of the Company's stockholders to approve a proposed reverse stock split going
private transaction, the Company received an Administrative Complaint and Ex
Parte Motion for a Temporary Order to Cease and Desist from the Securities
Division of the Office of the Secretary of The Commonwealth of Massachusetts'
Securities Division. The Administrative Complaint claimed that the Company
failed to disclose certain information to the stockholders in the prior proxy
statement, which the Division alleged to be "material." Specifically, the
Division alleged that the Company failed to disclose (i) the existence of loans
from E. Mark Noonan, the principal of Alouette Capital, to the Company and Mr.
Sarkis; (ii) that Alouette Capital was not a registered broker dealer, and (iii)
the extent of the Company's lobbying activities with respect to the passage of
gaming legislation. The stockholders' meeting scheduled for March 19, 2003 to
approve the proposed going private transaction was adjourned in order to permit
the Company to address this matter, and the stockholders' vote was never taken.
On April 8, 2003, the Company filed an answer in response to the Administrative
Complaint denying each of the allegations set forth in the Administrative
Complaint.
On June 16, 2003, the Company executed an Offer of Settlement and a
Consent Order was issued. The principal elements of the settlement were as
follows:
(i) The Company would not commit any future violations of
chapter 110A of Massachusetts General Laws and the corresponding
regulations promulgated thereunder;
(ii) The Company paid the sum of $10,000 to offset the cost of
the Division's investigation;
(iii) If the Company retains a fairness opinion provider as
part of any proposed going private transaction, the Company would
engage a fairness opinion provider that is independent,
unaffiliated, and free from all material conflicts of interest;
(iv) The Company would not, within the next twelve months,
enter into, effect or consummate with its then existing shareholders
a going private transaction where the common stock of Company is
valued as a per share price of less than $4.00, however, it could
seek review of this provision through petition to the Director of
the Division and he/she may grant such relief at his/her sole
discretion, provided that such relief shall not be unreasonably
withheld;
(v) The Company would include all material facts, consistent
with the SEC's rules, considered by the Board of Directors in
reaching its fairness determination regarding any proposed going
private transaction and would present a fair and balanced
representation of the potential expansion of gaming legislation in
Massachusetts consistent with all applicable SEC rules;
(vi) The Company would make available to any fairness opinion
provider retained by the Board of Directors to determine the
fairness of any proposed going private transaction, any and all
current gaming-related reports and materials prepared for the
Company by any consultant, including any financial projections;
(vii) The Company would present to the Division any draft of
an amendment to the existing February 13, 2003, Proxy Statement or
any other filing under the SEC's Regulation M-A contemporaneously
with submission of the same to the SEC for review;
19
(viii) The Company would require approval of any proposed
going private transaction by majority of (a) the unaffiliated
stockholders of the outstanding shares of Common Stock, and (b) the
unaffiliated stockholders of the Class B Common Stock;
(ix) The Company would value the stock based upon a range
deemed to be fair by the new fairness opinion provider; and
(x) The Company would include provisions that would pay former
stockholders whose shares have been purchased through the
transaction an additional premium, earn out, or the like, should
legislation be enacted into law, within one (1) year of the
stockholders vote approving the transaction, authorizing the Company
to install slot machines at its racetrack, with the amount of any
payment to former stockholders to be determined based upon the
particular provisions of the statute, and whether, in fact, the
Company realizes increased revenues in connection therewith.
On April 1, 2003, a class action complaint was filed by a stockholder of
the Company against the Company and the Company's Board of Directors in the
Court of Chancery in the State of Delaware seeking to enjoin the proposed
reverse stock split on the basis that is not fair to the stockholders and that
the proxy statement omits information alleged to be "material". On June 17,
2003, the Company filed a Motion to Dismiss for mootness on the grounds that the
proposed going private transaction has not or will not be completed. To date,
the plaintiffs have not filed a response to the motion, and no further action
has been taken at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification by Principal Executive Officer and Principal
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by Principal Executive Officer and Principal
Financial and Accounting Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Current Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements 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.
THE WESTWOOD GROUP, INC.
Date: August 14, 2003 /s/ Richard P. Dalton
-------------------------------------------
Richard P. Dalton President,
Chief Executive Officer and
Director (Principal Executive Officer and
Principal Financial and Accounting Officer)
21
EXHIBIT INDEX
31.1 Certification by Principal Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Principal Executive Officer and Principal Financial and
Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
22