10-Q 1 l94830ae10vq.txt SCIOTO DOWNS, INC. 10-Q/QUARTER END 4-30-2002 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 April 30, 2002 ------------------------------- 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 ------------------------- SCIOTO DOWNS, INC. ------------------------------------------------------------------- (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 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) (614) 491-2515 -------------------------------------------------------------- (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 June 7, 2002: ------------ 595,767, par value $1.05 ------------------------ SCIOTO DOWNS, INC. INDEX --------------------------------------------------------------------------------

SCIOTO DOWNS, INC. CONSOLIDATED BALANCE SHEETS AT APRIL 30, 2002, OCTOBER 31, 2001 AND APRIL 30, 2001 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

CONTINUED -1- SCIOTO DOWNS, INC. CONSOLIDATED BALANCE SHEETS AT APRIL 30, 2002, OCTOBER 31, 2001 AND APRIL 30, 2001 --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements. -2- SCIOTO DOWNS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED) --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements. -3- SCIOTO DOWNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED) --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements. -4- SCIOTO DOWNS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION 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 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 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 the Company's annual report on Form 10-K. 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 Untied States of America. Reference should be made to the Company's 2001 Form 10-K for additional disclosures, including a summary of the Company's accounting policies. The accompanying financial statements have been prepared assuming that Scioto Downs will continue as a going concern. The Company has incurred recurring losses from operations, negative cash flows from operations and has a working capital deficit at April 30, 2002. Management has developed plans to improve operating results in 2002 that include changes that have been made and will continue to be made. These plans are dependent, in part, on a successful live racing season. However, to date results have not improved to the degree expected. If management's plans do not produce the desired results, the Company's financial position will not improve and it will need to consider other sources of liquidity to support its operations. 2. INCOME TAXES The Company's 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 April 30, 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. 3. DEFERRED REVENUE Deferred revenue represents cash received for entry fees and monies added by others, sustaining and nominating fees, unearned rental income, and advance ticket sales. Monies added by others represent sponsor contributions to the purse awards. Due to the seasonal nature of the business, these revenues are generally deferred during the first two quarters of the fiscal year, until the commencement of the live racing season. 4. COMMITMENTS AND CONTINGENCIES At October 31, 2000, the Company had an outstanding receivable from its former concessionaire of $127,864. The Company was in dispute with the former concessionaire and had fully reserved the receivable as of October 31, 2000. During the second quarter ended April 30, 2001, the Company reached a settlement agreement with the concessionaire. The settlement resulted in the receipt of equipment from the concessionaire and forgiveness by the Company of the outstanding receivable. The Company recognized a gain on settlement of $58,670 at April 30, 2001. -5- SCIOTO DOWNS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED) -------------------------------------------------------------------------------- 5. RELATED-PARTY ACCOUNTS RECEIVABLE At April 30, 2001, the Company had an outstanding receivable from Mid-America Racing Association, Inc., a related party prior to its acquisition August 1, 2001, of $227,962. This amount was fully reserved as of April 30, 2001 due to uncertainty of its collectibility. 6. ACQUISITION On August 1, 2001, Scioto Downs, Inc. acquired all of the outstanding common shares of Mid-America. The assets, liabilities, and results of Mid-America's operations have been reflected in the consolidated financial statements of Scioto Downs from the acquisition date. The consideration was $150,000, for which the Company issued non-interest-bearing promissory notes, which were due $50,000 at closing and $50,000 each in August 2002 and 2003. Mid-America owns a racing permit entitling it to conduct harness horseracing, typically immediately following the live racing season of Scioto Downs, Inc. The lease of racing facilities between Mid-America and Scioto Downs, Inc. was terminated as of the acquisition date. The acquisition was accounted for under the purchase method. The total purchase price has been allocated to the tangible and intangible assets and liabilities of Mid-America based upon their estimated fair values. The following unaudited pro forma information is presented as if the August 1, 2001 acquisition of Mid-America had occurred on November 1, 2000: THREE MONTHS SIX MONTHS ENDED ENDED APRIL 30, APRIL 30, 2001 2001 ----------- ----------- Net revenue $ 2,170,778 $ 2,700,034 Net loss (750,619) (1,452,125) Earnings per common share: Basic and diluted (1.26) (2.44) This unaudited pro forma financial information is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of November 1, 2000, nor is it necessarily indicative of future operating results. 7. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 145 (SFAS No. 145), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends -6- SCIOTO DOWNS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED) -------------------------------------------------------------------------------- FASB Statement No. 13, "Accounting for Leases," regarding the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also makes various technical corrections to other authoritative pronouncements. The provisions of SFAS No. 145 related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 shall be effective for financial statements issued on or after May 15, 2002. The Company is in the process of evaluating the impact on the consolidated financial statements of the adoption of SFAS No. 145. -7- SCIOTO DOWNS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION, CONT. 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 April 30, 2002 and October 31, 2001, and for the consolidated statements of operations for the three and six month periods ended April 30, 2002 and 2001. 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 for the fiscal year ended October 31, 2001. Portions of management's discussion and analysis presented below include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify "forward-looking statements", which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those made, projected or implied. The Company disclaims any obligation to update any forward-looking statement. 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 and second quarters of 2002, the Company continued to service the debt on the Clubhouse and the simulcasting equipment with funds generated during the 2001 racing season and the 2002 simulcasting season. The racing season at Scioto Downs annually falls within the third and fourth quarters, ending in September. Beginning January 1, 2001, the Company commenced year-round simulcasting. On August 1, 2001, the Company purchased all of the outstanding shares of Mid-America. The lease of the racing facilities between Mid-America and the Company was terminated as of the acquisition date. The results of operations of Mid-America from November 1, 2001 through April 30, 2002 are included in the results of operations discussed below. 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 -8- SCIOTO DOWNS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 -------------------------------------------------------------------------------- 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 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 will perform impairment tests on the racing permit on an annual basis and between annual tests in certain circumstances. Such circumstances may include changes in industry and market conditions, including the potential for changes in Ohio gaming regulations. Our tests may determine that the value of this asset has been impaired and this would require a write-down of the recorded asset value. 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. THREE MONTHS ENDED APRIL 30, 2002 COMPARED TO THREE MONTHS ENDED APRIL 30, 2001 Year-round simulcasting resulted in an increase in pari-mutuel commissions and breakage, pari-mutuel taxes and purses. Purse expense represents payments into the simulcast purse fund. Salaries and wages increased by $116,267 to $441,957 for the three months ended April 30, 2002. The increase was due primarily to the inclusion of salaries for Mid-America employees. Operating and general expense decreased by $204,609 due mainly to a related party receivable reserve of $227,962 recognized during the three months ended April 30, 2001, partially offset by higher utility costs, real estate and personal property taxes in the three months ended April 30, 2002. Management did achieve reductions in repairs and maintenance and advertising expenses. The income tax benefit decreased to $0 from $85,000 for the three months ended April 30, 2002 and 2001, respectively, as a result of the recording of a full valuation allowance on deferred tax assets at April 30, 2002. The Company normally provides for income taxes in interim periods based on the effective tax rate expected for the full year. -9- SCIOTO DOWNS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 -------------------------------------------------------------------------------- SIX MONTHS ENDED APRIL 30, 2002 COMPARED TO SIX MONTHS ENDED APRIL 30, 2001 Year-round simulcasting resulted in an increase in pari-mutuel commissions and breakage, pari-mutuel taxes, purses and simulcasting fees. Purse expense represents payments into the simulcast purse fund. Salaries and wages increased by $373,681 to $886,813 for the six months ended April 30, 2002 as compared to the six months ended April 30, 2001. The increase was due primarily to the inclusion of salaries for Mid-America employees and to additional staffing needed for year-round simulcasting. Operating and general expense increased by $32,407 due mainly to increases in utilities, real estate and personal property taxes. Included in general expense for the six months ended April 30, 2001 is a reserve of approximately $227,962 for a related-party receivable balance. The income tax benefit decreased to $0 from $174,000 for the six months ended April 30, 2002 and 2001, respectively, as a result of the recording of a full valuation allowance on deferred tax assets at April 30, 2002. The Company normally provides for income taxes based on the effective tax rate expected for the full year. LIQUIDITY AND CAPITAL RESOURCES Scioto Downs' cash and cash equivalents increased to $486,190 as of April 30, 2002 as compared to $418,688 as of October 31, 2001. Net cash of $943,859 provided by operating activities for the six months ended April 30, 2002 consisted primarily of a decrease in accounts receivable and increases in accounts payable, deferred revenue, purses payable, and simulcast purse fund. Net cash used in investing activities was $751,905 for the six months ended April 30, 2002 resulting from net receipts of restricted cash. Net cash used in financing activities of $124,452 consisted primarily of dividends paid of $29,788 and payments on term debt and the line of credit of $94,664. At January 1, 2002, the Company entered into an agreement with Beulah Park that reduced the number of hours both tracks compete against each other for simulcasting revenue. The desired result is a reduction in overhead and an increase in revenue. Scioto Downs' line of credit is in place and can be used to provide $325,000 of additional operating funds while the Company continues to implement cost reduction programs and new income streams. Management has developed plans to improve operating results in 2002 that include changes that have been made and will continue to be made. These plans are dependent, in part, on a successful live racing season. However, to date results have not improved to the degree expected. If management's plans do not produce the desired results, the Company's financial position will not improve and it will need to consider other sources of liquidity to support its operations. -10- SCIOTO DOWNS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED APRIL 30, 2002 AND 2001 -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. -11- SCIOTO DOWNS, INC. OTHER INFORMATION -------------------------------------------------------------------------------- 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--No reports on Form 8-K were filed during the quarter ended April 30, 2002. -12- 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: 6/14/02 BY: /s/ Edward T. Ryan ------------------------------- ----------------------------- Edward T. Ryan, President DATE: 6/14/02 BY: /s/ Richard J. Fiore -------------------------------- ---------------------------- Richard J. Fiore Chief Financial Officer -13-

SCIOTO DOWNS INC 10-Q