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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
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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 0-1365
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SCIOTO DOWNS, INC.
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(Exact name of registrant as specified in its charter)
OHIO 31-4440550
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6000 SOUTH HIGH STREET, COLUMBUS, OHIO 43207
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(Address of principal executive offices) (Zip Code)
(614) 491-2515
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(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X__ No _____
The number of common shares outstanding at March 17, 2003:
595,767, par value $1.05
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PAGES
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 2003, October 31, 2002
and January 31, 2002 1-2
Consolidated Statements of Operations for the three months ended
January 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the three months ended
January 31, 2003 and 2002 4
Notes to the Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
SCIOTO DOWNS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2003, OCTOBER 31, 2002 AND JANUARY 31, 2002
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, OCTOBER 31, JANUARY 31,
2003 2002 2002
----------- ------------- -----------
(UNAUDITED) (AS RESTATED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 362,613 $ 319,484 $ 295,938
Restricted cash 438,573 31,864 59,640
Accounts receivable 47,951 240,452 72,773
Prepaid expenses and other 105,728 37,423 18,368
---------- ---------- ----------
Total current assets 954,865 629,223 446,719
---------- ---------- ----------
Property and equipment, at cost 20,734,041 20,731,769 20,683,942
Less accumulated depreciation 15,714,960 15,575,042 15,147,084
---------- ---------- ----------
Total property and equipment 5,019,081 5,156,727 5,536,858
---------- ---------- ----------
Other noncurrent assets 60,421 60,421 76,803
Racing permit 755,760 755,760 755,760
---------- ---------- ----------
Total assets $ 6,790,127 $ 6,602,131 $ 6,816,140
========== ========== ==========
CONTINUED
-1-
SCIOTO DOWNS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2003, OCTOBER 31, 2002 AND JANUARY 31, 2002
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JANUARY 31, OCTOBER 31, JANUARY 31,
2003 2002 2002
----------- ------------- -----------
(UNAUDITED) (AS RESTATED) (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, trade $ 703,628 $ 1,160,086 $ 515,372
Current maturities, term debt 210,341 206,640 196,421
Line of credit - 110,000 195,000
Accrued expenses 301,410 389,690 284,821
Purses payable and simulcast purse fund 974,229 512,895 308,324
--------- --------- ---------
Total current liabilities 2,189,608 2,379,311 1,499,938
--------- --------- ---------
Minimum pension liability 378,348 378,348 335,458
Accrued pension 195,020 195,020 274,374
Term debt, net of current maturities 2,429,907 2,471,050 2,637,153
Note payable 1,000,000 - -
Stockholders' equity
Common stock, $1.05 par value per share, issued
and outstanding, 595,767 shares 625,555 625,555 625,555
Capital in excess of par value of common stock 2,037,300 2,037,300 2,037,300
Accumulated deficit (1,687,263) (1,106,105) (258,180)
Accumulated other comprehensive loss (378,348) (378,348) (335,458)
--------- --------- ---------
Total stockholders' equity 597,244 1,178,402 2,069,217
--------- --------- ---------
Total liabilities and stockholders' equity $ 6,790,127 $ 6,602,131 $ 6,816,140
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-2-
SCIOTO DOWNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
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2003 2002
Pari-mutuel commissions and breakage $ 2,038,747 $ 2,050,807
Less pari-mutuel taxes 313,688 313,118
----------- -----------
1,725,059 1,737,689
Operating revenues, other 168,624 133,170
----------- -----------
1,893,683 1,870,859
Operating expenses:
Purses 771,800 777,236
Salaries and wages 428,604 444,856
Simulcasting fees 281,621 306,273
Depreciation 139,918 142,384
Insurance 154,131 107,560
Other operating and general expense 643,868 592,334
----------- -----------
2,419,942 2,370,643
----------- -----------
Loss from operations (526,259) (499,784)
Loss on disposal of assets - (691)
Net interest expense (54,899) (58,416)
----------- -----------
Loss before income taxes (581,158) (558,891)
Income taxes - -
----------- -----------
Net loss $ (581,158) $ (558,891)
=========== ===========
Net loss per common share--basic and diluted $ (.98) $ (.94)
=========== ===========
Weighted average common shares outstanding--basic and diluted 595,767 595,767
=========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
SCIOTO DOWNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (581,158) $ (558,891)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 139,918 142,384
Loss on disposal of assets - 691
Changes in assets and liabilities:
Accounts receivable 192,501 475,598
Prepaid expenses and other (68,305) 1,510
Accounts payable and purses payable and simulcast purse fund 4,876 (5,238)
Accrued expenses (64,280) (93,189)
----------- -----------
Net cash used in operating activities (376,448) (37,135)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted cash (406,709) (16,947)
Purchase of equipment (2,272) -
Contribution to joint venture (24,000) -
----------- -----------
Net cash used in investing activities (432,981) (16,947)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 1,000,000 -
Dividends paid - (29,788)
Payments on term debt and line of credit (147,442) (38,880)
----------- -----------
Net cash provided by (used in) financing activities 852,558 (68,668)
----------- -----------
Net increase (decrease) in cash and cash equivalents 43,129 (122,750)
Cash and cash equivalents, beginning of period 319,484 418,688
----------- -----------
Cash and cash equivalents, end of period $ 362,613 $ 295,938
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
SCIOTO DOWNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Scioto Downs, Inc. and its wholly owned subsidiary,
Mid-America Racing Association, Inc. (Mid-America) from its acquisition
date of August 1, 2001, collectively referred to as Scioto Downs or the
Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The financial information furnished reflects all adjustments which are,
in the opinion of management, necessary to present a fair statement of
the results for the interim periods on a basis consistent with that of
prior periods. All such adjustments are of a normal recurring nature.
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and,
consequently, do not include all the disclosures normally required by
accounting principles generally accepted in the United States of
America or those normally made in Scioto Downs' Annual Report on Form
10-K, as amended. The year-end consolidated balance sheet was derived
from audited consolidated financial statements, but does not include
all disclosures required by accounting principles generally accepted in
the United States of America. Reference should be made to the Company's
2002 Form 10-K, as amended for additional disclosures, including a
summary of the Company's accounting policies.
The accompanying consolidated financial statements have been prepared
assuming that Scioto Downs will continue as a going concern. The
Company has incurred recurring losses from operations and has a working
capital deficit at January 31, 2003.
Management previously implemented plans to reduce expenses and generate
revenues from additional sources in order to improve operating results.
However, these plans depended on a successful 2002 live racing season,
which did not occur due primarily to a decline in the racing industry
in Ohio. As a result, management's plans have not produced the desired
results, and the Company's consolidated financial position has not
improved.
On December 23, 2002, the Company entered into an agreement and plan of
merger with MTR Gaming Group, Inc. (MTR). If the transaction takes
place, this will provide liquidity to the operation subject to MTR's
willingness and ability to fund operations. However, failure to
consummate the transaction will make the ability to continue future
operations uncertain.
At this time, it is uncertain whether the Company will be able to
continue as a going concern. The financial statements, however, have
not been adjusted to account for the entity on other than a going
concern basis.
2. INCOME TAXES
The Company provides for income taxes in interim periods based on its
estimated annual effective tax rate. The estimated annual effective tax
rate differs from the statutory rate due to the application of surtax
exemptions. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. The
Company has determined at January 31, 2003 and 2002 that it is more
likely than not that the deferred tax assets will not be realized and,
therefore, has recorded a full valuation allowance.
-5-
SCIOTO DOWNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
3. PLAN OF MERGER
On December 23, 2002, the Company entered into an agreement and plan of
merger (the Agreement) with MTR, pursuant to which the Company will
become a wholly owned subsidiary of MTR. The Agreement provides that
each stockholder of the Company may elect to receive $32 in cash for
each share of the Company's common stock owned by the stockholder.
Alternatively, each stockholder may elect to receive an amount equal to
$17 per share plus 10 annual earnout payments per share subject to the
conditions set forth in the Agreement. Consummation of the transaction
is subject to various conditions, including the successful completion
of the due diligence review by MTR, the approval by the stockholders of
the Company and the attainment of necessary regulatory approvals.
Pursuant to the terms of the merger agreement, MTR has completed its
due diligence review of the Company and on March 12, 2003 indicated its
intent to proceed with the merger, subject to the terms and conditions
in the Agreement.
On December 24, 2002, the Company received a $1 million payment from
MTR in accordance with the terms of the Agreement. In the event the
Agreement is terminated for cause as defined in the Agreement, the $1
million will become a loan to be repaid by the Company to MTR on
December 23, 2005, and shall bear interest at a rate equal to MTR's
cost of borrowing. The loan will be collateralized by the Company's
real and personal property. The $1 million is included in notes payable
in the consolidated balance sheet of the Company at January 31, 2003.
4. ADOPTION OF ACCOUNTING PRINCIPLES AND RECENT ACCOUNTING PRONOUNCEMENT
Effective November 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets." SFAS 142 requires that the Company evaluate the remaining
useful lives of intangible assets not subject to amortization to
determine whether events and circumstances continue to support an
indefinite useful life. The intangible asset is required to be tested
for impairment at least annually, or more frequently if events and
changes in circumstances indicate that the asset might be impaired. The
Company evaluated the useful life of the racing permit at November 1,
2002, and determined that the license continues to be an indefinite
lived intangible asset. The Company performed a transitional impairment
test during the three months ended January 31, 2003 and determined that
no impairment charge was necessary. No events or changes in
circumstances during the three month period ended January 31, 2003
indicate that the racing license might be impaired.
Effective November 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses accounting and
reporting standards for the impairment or disposal of long-lived
assets. In accordance with SFAS 144, the Company evaluates the
recoverability of long-lived assets in accordance with its existing
accounting policies, whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable.
The adoption of SFAS 144 had no impact on the financial position or the
results of operations of the Company for the three months ended January
31, 2003.
On January 15, 2003, the FASB completed its redeliberations of the
project related to the consolidation of variable interest entities
which will culminate with the issuance of FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
FIN 46 will require disclosures regarding ownership interests in
variable interest entities. This Interpretation applies immediately to
variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company does not anticipate having to make
additional disclosures as a result of FIN 46.
-6-
SCIOTO DOWNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
5. JOINT VENTURE
The Company had a 20% equity interest in an off-track betting parlor
and accounts for the investment under the equity method of accounting.
In January 2003, the Company amended the operating agreement with the
off-track betting parlor and agreed to contribute $24,000 in exchange
for its membership units and release from all other obligations
pursuant to the terms of the operating agreement.
6. DEBT FINANCING ARRANGEMENTS
During January 2003, the Company paid the outstanding balance under the
line of credit of $110,000. Further availability under the line was
terminated by the lender.
The Company's term loan agreement contains an acceleration clause
whereby the lender has the right to declare the loan immediately due
and payable if, in the lender's judgment, an event has occurred which
is likely to have a material adverse effect on the Company.
7. ENVIRONMENTAL REMEDIATION AND COMPLIANCE
During January 2003, as part of due diligence procedures associated
with the proposed merger with MTR, the Company commenced Phase II
trials of environmental studies related to potential contamination of
the land. No determination has been made as to whether the Company will
be required to take remedial action to clean-up the land, or as to the
cost of such action, if any. Environmental remediation and compliance
expenditures, if any, will be expensed or capitalized by the Company in
accordance with accounting principles generally accepted in the United
States of America. Liabilities are recorded when it is probable the
obligations have been incurred and the amounts can be reasonably
estimated.
8. SUBSEQUENT EVENT
On February 1, 2003, the Company terminated its food concessionaire
agreement and assumed operation of all concessions.
-7-
SCIOTO DOWNS, INC.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis is concerned with
material changes in financial condition and results of
operations for the Company's consolidated balance sheets
at January 31, 2003 and October 31, 2002, and for the
consolidated statements of operations for the three months
ended January 31, 2003 and 2002.
This discussion and analysis should be read together with
management's discussion and analysis included in the
Company's Annual Report on Form 10-K, as amended for the
fiscal year ended October 31, 2002.
This report may contain various "forward-looking
statements" within the meaning of applicable securities
law. The use of forward-looking words such as "believe",
"expect", "anticipate", "project", "estimate", "intend",
"hope" and similar words identify "forward-looking
statements" which speak only as of the date the statement
was made. Such forward-looking statements are subject to
risk, uncertainties and other factors, which could cause
actual results to materially differ from those made,
projected or implied. Such risks and uncertainties would
include such matters as the national and local general
economic business and other conditions, the availability of
financing, the impact of federal and state legislation and
of governmental regulation, the impact of competition and
other risks and uncertainties that are described in our
Securities and Exchange Commission filings. The Company
disclaims any obligation to update any forward-looking
statement.
The racing industry in general in Ohio in 2002 experienced
an overall decline in business and this decline continued
into our first quarter of 2003. Attendance was down, and
the amount wagered on racing in Ohio was down approximately
7% from the previous year. Purses paid to winning horses
were also down approximately 24%. Several developments in
the racing industry have contributed to this result.
One factor is the rapid growth of what is known as account
wagering. This system allows an individual to place a wager
on a horserace while at home, by telephone or over the
Internet, using an account established with the telephone
or Internet entity. Commissions received by the racetrack
from account wagering are significantly less than if the
person places a wager at the racetrack, thus, causing a
decline in the racetrack's revenue.
Another factor adversely affecting horseracing in Ohio is
increased gambling competition from surrounding states.
West Virginia, for example, has authorized electronic
gaming machines at its racetracks. Indiana has riverboat
gambling. Casino gambling is now in operation in Michigan.
These out-of-state gambling facilities patronized by Ohio
residents take business away from the Ohio racetracks and
also provide the racetracks in those states which have
these other forms of gambling with additional funds to pay
higher purses and, thus, attract the more popular horses.
Generally, the customers at Ohio tracks do not wager as
much on a less popular class of horses, so this situation
also causes the handle to decline. At the present time, it
is extremely difficult for the Ohio racetracks to compete
with racetracks in other states that have alternate forms
of gambling. As a result, the racing industry in Ohio is in
decline which has adversely affected the Company's
operations.
-8-
SCIOTO DOWNS, INC.
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Management has reviewed all operating costs and has taken
steps to reduce expenses through cost containment,
reductions in expenses and renegotiation of agreements with
vendors. Also, management has been looking into ways to
utilize its facilities to earn additional revenue from
sources other than racing. Several agreements have been
reached regarding facility use fees with participating
customers.
Management's plans to improve operating results also
depended on a successful live 2002 racing season, which did
not occur. As a result, management's plans have not
produced the desired results and the Company's consolidated
financial position has not improved.
On December 23, 2002, the Company entered into an agreement
and plan of merger (the Agreement) with MTR Gaming Group,
Inc. (MTR), pursuant to which the Company will become a
wholly owned subsidiary of MTR. The Agreement provides that
each stockholder of the Company may elect to receive $32 in
cash for each share of the Company's common stock owned by
the stockholder. Alternatively, each stockholder may elect
to receive an amount equal to $17 per share plus 10 annual
earnout payments subject to the conditions set forth in the
Agreement. Consummation of the transaction is subject to
various conditions, including the successful completion of
the due diligence review by MTR, the approval by the
stockholders of the Company and the attainment of necessary
regulatory approvals. Pursuant to terms of the merger
agreement, MTR has completed its due diligence review of
the Company and on March 12, 2003 indicated its intent to
proceed with the merger, subject to the terms and
conditions in the Agreement.
On December 24, 2002, the Company received a $1 million
payment from MTR in accordance with the terms of the
Agreement. In the event the Agreement is terminated for
cause as defined in the Agreement, the $1 million will
become a loan to be repaid by the Company to MTR on
December 23, 2005, and shall bear interest at a rate equal
to MTR's cost of borrowing. The loan will be collateralized
by the Company's real and personal property. The $1 million
is included in notes payable in the consolidated balance
sheet of the Company at January 31, 2003.
If the transaction takes place this will provide liquidity
to the operations subject to MTR's willingness and ability
to fund operations. However, failure to consummate the
transaction will make the ability to continue future
operations uncertain.
At this time, it is uncertain that the Company will be able
to continue as a going concern. The financial statements,
however, have not been adjusted to account for the entity
on other than a going concern basis.
GENERAL
Due to the seasonal nature of the business, the Company
experiences net operating losses during the first two
quarters of the fiscal year. In addition, the Company uses
this period to perform routine repairs and maintenance and
facility improvements. During the first quarter of 2003,
the Company continued to service the debt on the clubhouse
and the simulcasting equipment with funds generated during
the 2002 racing season, the 2003 simulcasting season, and
the loan from MTR.
-9-
SCIOTO DOWNS, INC.
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The live racing season at Scioto Downs annually falls
within the third and fourth quarters, ending in September.
The Company also conducts year-round simulcasing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Scioto Downs' discussion and analysis of its financial
condition and results of operations are based upon Scioto
Downs' consolidated financial statements, which have been
prepared in accordance with accounting principles
generally accepted in the United States of America. The
preparation of these financial statements requires Scioto
Downs to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, Scioto Downs evaluates
its estimates, including those related to unclaimed
purses, unclaimed winning tickets, bad debts, intangible
assets, income taxes, pensions and other postretirement
benefits, and contingencies and litigation. Scioto Downs
bases its estimates on historical experience and on
various other assumptions that are believed to be
reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying
values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ
from these estimates under different assumptions or
conditions.
Scioto Downs believes the following critical accounting
policies affect its more significant judgments and
estimates used in the preparation of its consolidated
financial statements. Scioto Downs records a valuation
allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. While Scioto
Downs has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing
the need for the valuation allowance, in the event that
the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such
determination was made.
The Company sponsors a defined benefit plan. Accounting
for this plan requires the Company to make certain
assumptions regarding the discount rate, expected rate of
return on plan assets, and mortality. Actual rates could
differ from those estimated by management and have a
material effect on financial statements.
The Company evaluates the recoverability of long-lived
assets whenever events or changes in circumstances
indicate that the carrying value of the assets may not be
recoverable. The assets are reduced to net realizable
value based on several factors including management's
plans for future operations, recent operating results and
projected cash flows. These projected cash flows include
assumptions related to future results of operations and
market conditions, and could be materially affected by
changes in assumptions and conditions.
THREE MONTHS ENDED JANUARY 31, 2003 COMPARED TO THREE
MONTHS ENDED JANUARY 31, 2002
Year-round simulcasting for the quarter ended January 31,
2003 resulted in a decrease of $12,060 in pari-mutuel
commissions and breakage as compared to 2002 due to the
decrease in wagering dollars of $178,380 or 2.0%. We
believe this decrease was
-10-
attributable to the weather in December and January and
the current depressed condition of the economy.
Other operating revenues increased by $35,454 or 26.6% due
to the track being open for winter training, which
provided rental income of $41,312 for the quarter ended
January 31, 2003. Concession income was received in the
amount of $14,989 and fee income generated from the ATM
machines increased by $8,682. These increases help to
offset a loss of other rental income of $20,000.
Salaries and wages decreased by $16,252 to $428,604 for
the three months ended January 31, 2003 from $444,856 for
the three months ended January 31, 2002. The decrease was
due primarily to a reduction in mutual clerk hours and
reduction in headcount. Insurance expense increased
$46,571 for the three months ended January 31, 2003 due to
the increase in general insurance rates. Operating and
general expenses increased by $51,534 due mainly to
increases in utility costs, legal fees and winter training
expenses. There were reductions in advertising and tote
rental fees as the Company continued to look for expense
reductions. Interest expense for the period declined as a
result of lower average borrowings during the first
quarter of 2003.
Simulcasting fees decreased $24,652 to $281,621 for the
three months ended January 31, 2003 from $306,273 for the
three months ended January 31, 2002. This reduction was
due primarily to lower handle. Purse expense during the
three months ended January 31, 2003 and 2002 represents
payments to the simulcast purse fund as required by the
Ohio Racing Commission. Payments are based upon simulcast
handle on dark days.
LIQUIDITY AND CAPITAL RESOURCES
Scioto Downs' cash and cash equivalents increased to
$362,613 as of January 31, 2003 as compared to $319,484 as
of October 31, 2002.
Net cash of $376,448 used for operating activities
consisted of a net loss of $581,158, offset by noncash
items of $139,918 and $64,792 provided by working capital
and other activities. Net cash provided by working capital
and other activities resulted primarily from a decrease in
accounts receivable, primarily from the dark day fund,
partially offset by a decrease in accrued expenses and
prepaid expenses.
Net cash used in investing activities was $432,981 for the
quarter ended January 31, 2003, resulting primarily from
the net receipt of restricted cash of $406,709 from the
dark day fund, and a $24,000 payment to Mifflin Meadows
Off-Track Betting Parlor that released the Company from
its investment.
Net cash provided by financing activities of $852,558
consisted primarily of proceeds from MTR borrowing of $1
million in accordance with the terms of the proposed
merger agreement.
During January 2003, the Company paid the outstanding
balance under the line of credit of $110,000. Further
availability under the line was terminated by the lender.
-11-
SCIOTO DOWNS, INC.
- --------------------------------------------------------------------------------
Management reviewed all operating costs and took steps to
reduce expenses through cost containment, reductions in
expenditures and renegotiation of agreements with vendors.
Management also explored ways in which to utilize its
facilities to earn additional revenue from sources other
than harness horseracing. Even after management's
initiatives, business has continued to decline, resulting
in operating losses during the fiscal year 2002 live
racing season which continued into our first quarter of
2003. As a result, management has been considering
alternative options for liquidity and is pursuing a
potential disposition of the business.
At this time, it is uncertain that the Company will be
able to continue as a going concern. The financial
statements, however, have not been adjusted to account for
the entity on other than a going concern basis. On
December 23, 2002, the Company entered into an agreement
and plan of merger (the Agreement) with MTR Gaming Group,
Inc. (MTR), pursuant to which the Company will become a
wholly owned subsidiary of MTR. The Agreement provides
that each stockholder of the Company may elect to receive
$32 in cash for each share of the Company's common stock
owned by the stockholder. Alternatively, each stockholder
may elect to receive an amount equal to $17 per share plus
10 annual earnout payments subject to the conditions set
forth in the Agreement. Consummation of the transaction is
subject to various conditions, including the successful
completion of the due diligence review by MTR, the
approval by the stockholders of the Company and the
attainment of necessary regulatory approvals. Pursuant to
the terms of the merger agreement, MTR has completed its
due diligence review of the Company and on March 12, 2003
indicated its intent to proceed with the merger, subject
to the terms and conditions in the Agreement.
On December 24, 2002, the Company received a $1 million
payment from MTR in accordance with the terms of the
Agreement. In the event the Agreement is terminated for
cause as defined in the Agreement, the $1 million will
become a loan to be repaid by the Company to MTR on
December 23, 2005, and shall bear interest at a rate equal
to MTR's cost of borrowing. The loan will be
collateralized by the Company's real and personal
property. The $1 million is included in notes payable in
the consolidated balance sheet of the Company at January
31, 2003.
If the transaction takes place this will provide liquidity
to the operations subject to MTR's willingness and ability
to continue to fund operations. However, failure to
consummate the transaction will make the ability to repay
the $1 million loan and to continue future operations
uncertain.
Management's plan in 2003 is to continue with year-round
simulcasting. On January 1, 2002, an agreement with Beulah
Park went into effect that reduces the number of hours
both tracks compete against each other for simulcasting
revenues. This agreement has been renewed for 2003. The
desired result is a reduction in overhead and an increase
in revenue.
The Company and MARA Enterprises, Inc. (MARA) participate
in a multiple-employer pension plan. In the event that
MARA is unable to fund their portion of the benefit
obligation, the Company would be liable for the amount. At
October 31, 2002, MARA's portion of the funded status
deficit was approximately $123,000.
-12-
SCIOTO DOWNS, INC.
- --------------------------------------------------------------------------------
The Company has off balance sheet financing in the form of
lease obligations expiring through December 2005. The
following represents the minimum future operating lease
payments for these commitments, as well as the aggregate
maturities for all of the Company's debt as of January 31,
2003.
PARI-MUTUEL
TERM NOTE OPERATING EQUIPMENT
DEBT PAYABLE LEASES LEASE TOTAL
---------- ---------- ---------- ---------- ----------
2003 $ 210,341 $ - $ 40,336 $ 57,000 $ 307,677
2004 170,662 - 14,424 57,000 242,086
2005 184,284 1,000,000 14,424 57,000 1,255,708
2006 200,853 - 2,404 57,000 260,257
2007 217,190 - - - 217,190
Thereafter 1,656,918 - - - 1,656,918
---------- ---------- ---------- ---------- ----------
$2,640,248 $1,000,000 $ 71,588 $ 228,000 $3,939,836
========== ========== ========== ========== ==========
The Company's payments for the lease of pari-mutuel
equipment is based on a fixed rental fee for various
equipment, a variable fee per live racing and simulcast
program events, and a variable fee based on program
wagers. The table above reflects the Company's minimum
obligation for the lease of pari-mutuel equipment, based
on the number of live racing days approved by the Ohio
Racing Commission.
RECENT ACCOUNTING PRONOUNCEMENT
On January 15, 2003, the FASB completed its
redeliberations of the project related to the
consolidation of variable interest entities which will
culminate with the issuance of FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities -
an interpretation of ARB No. 51. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of
a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial
support from other parties. FIN 46 will require
disclosures regarding ownership interests in variable
interest entities. This Interpretation applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company
does not anticipate having to make additional disclosures
as a result of FIN 46.
-13-
SCIOTO DOWNS, INC.
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information that must be
disclosed in filings with the Securities and Exchange
Commission is recorded, processed, summarized and reported
in a timely manner, the Company does have disclosure
controls and procedures in place. The Chief Executive
Officer and Chief Financial Officer have reviewed and
evaluated disclosure controls and procedures within 90 days
of the filing of this Form 10-Q, and have concluded that
such controls and procedures are appropriate, and that no
changes are needed. There have been no significant changes
in internal controls, the business, or other factors that
could adversely affect internal controls since the date of
the evaluation.
-14-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings--None
ITEM 2. Changes in Securities--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--None
(b) Reports on Form 8-K
Form 8-K dated December 23, 2002 - On December 23,
2002, the Company, MTR, and Racing Acquisition, Inc.,
a wholly owned subsidiary of MTR, entered into an
Agreement and Plan of Merger. The Agreement and Plan
of Merger and a copy of the press release dated
December 23, 2002, jointly issued by the Company and
MTR relating to the merger, were attached as exhibits
to the Form 8-K.
-15-
SIGNATURES
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.
SCIOTO DOWNS, INC.
------------------
Registrant
DATE: March 17, 2003 BY: /s/ Edward T. Ryan
-------------- --------------
Edward T. Ryan
President
DATE: March 17, 2003 BY: /s/ Richard J. Fiore
-------------- --------------------
Richard J. Fiore
Chief Financial Officer
-16-
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward T. Ryan, President of Scioto Downs, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Scioto Downs, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls (as defined in Exchange Act
Rules 13a - 14 and 15d -14) and procedures for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that material
information relating to the issuer, including its consolidated subsidiaries, is
made known to them by others within those entities, particularly during the
period in which the periodic reports are being prepared;
(ii) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the report
(the "Evaluation Date"); and
(iii) Presented in the report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Edward T. Ryan
--------------
President
-17-
I, Richard J. Fiore, Chief Financial Officer of Scioto Downs, Inc., certify
that:
1. I have reviewed this report on Form 10-Q of Scioto Downs, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls (as defined in Exchange Act
Rules 13a - 14 and 15d -14) and procedures for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that material
information relating to the issuer, including its consolidated subsidiaries, is
made known to them by others within those entities, particularly during the
period in which the periodic reports are being prepared;
(ii) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the report
(the "Evaluation Date"); and
(iii) Presented in the report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Richard J. Fiore
-----------------------
Chief Financial Officer
-18-