10-Q 1 b43728wge10vq.txt THE WESTWOOD GROUP INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION 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, 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: 0-1590 -------------- 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 (l) 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 ------- ------- As of August 14, 2002, 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. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE WESTWOOD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements. THE WESTWOOD GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 1. BASIS OF PRESENTATION INTERIM RESULTS In the opinion of management, the accompanying unaudited consolidated condensed 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 generally accepted accounting principles 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, 2001. PRINCIPLES OF CONSOLIDATION The accompanying consolidated condensed financial statements as of June 30, 2002 and December 31, 2001 and for the three and six month periods ended June 30, 2002 and 2001 include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. INCOME PER COMMON SHARE The Company follows Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, issued by the Financial Accounting Standards Board. Under SFAS No. 128, the basic and diluted net income and loss per share of common stock is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period, including potentially dilutive stock options. 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. Stock options were not considered in 2001 since the company had a net loss and their effect would be antidilutive. The amount of potentially dilutive common shares issuable under the Company's stock options, if any, are determined based on the treasury stock method. 2. DEBT Long-term debt consisted of the following:

The note agreement contains certain restrictive covenants including the maintenance of certain financial ratios and debt coverage requirements. The note is collateralized by a mortgage and security interest in all real estate and personal property at Wonderland Greyhound Park. The Company is currently negotiating refinancing of this loan. In the event that a new credit facility is not entered into, the final payment on the loan is to be made July 1, 2003 in the amount of $3,568,204. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 new statute, the Company and the other area racetracks are permitted to continue to provide simulcast broadcasting of thoroughbred racing to their patrons until December 2005. The new legislation also provides that the Company is required to pay premiums for the right to simulcast out-of-state 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 accounts of the individual racetracks responsible for such unclaimed wagers. Finally, the new 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 potential for increases in cash flow from such legislation, management does not believe that this new legislation in its current state will materially benefit the Company's overall racing operations. The Company continues to be negatively impacted by a strong Massachusetts state lottery, two Indian Casinos in Connecticut and slot machines at the Lincoln, Rhode Island, greyhound track. The casinos and track are in close proximity to the Massachusetts border and therefore rely upon their ability to attract Massachusetts patrons. Furthermore, Wonderland is at a competitive disadvantage when compared with other New England greyhound racetracks in that the simulcast legislation only permits it to offer a very limited amount of simulcasting from thoroughbred racetracks due to its proximity to the Suffolk Downs thoroughbred racetrack. Management has worked diligently over the last several years in attempting to convince the Governor and the Legislature of The Commonwealth of Massachusetts of the need to allow the Commonwealth's commercial racetracks to offer their patrons expanded gaming opportunities. The Massachusetts state legislature took no action on gaming in the year 2002. Gaming legislation was defeated in the Massachusetts House of Representatives in May 2002. The Company cannot predict whether such legislation will ever be enacted or enacted on favorable terms. Management continues to examine the full range of strategic alternatives available 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. Wonderland currently conducts live racing seven nights per week. Wonderland also offers simulcast wagering afternoons and evenings throughout the year. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 The table below illustrates certain key statistics for Wonderland Park, the Company's greyhound racing operation, for the three months ended June 30, 2002 and 2001. QUARTER ENDED JUNE 30, 2002 2001 -------- ------- Performances 91 91 Simulcast days 91 91 Pari-mutuel handle (thousands) Live-on track $ 4,757 $ 5,833 Live-simulcast 8,500 8,597 Guest-simulcast 12,728 13,282 ------- ------- $25,985 $27,712 ======= ======== Total attendance 70,297 78,607 Average per capita on site wagering $249 $243 THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING REVENUE Total operating revenue declined by $336,000 or 7% to $4.21 million in the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001. Parimutuel commissions declined by $280,000 or 7% from $3.67 million to $3.39 million during the same period. Total handle in the second quarter of 2002 was approximately $25.9 million as compared to $27.7 million in 2001. Live-on track handle decreased 18% or about $1.07 million from $5.8 million to $4.8 million in 2001, with an average daily attendance of approximately 772 persons in 2002 compared to 864 persons in 2001. Live-simulcast handle decreased by $97,000 or 1% in the second quarter of 2002 compared to the second quarter of 2001. Guest-simulcast handle decreased by $554,000 or 4% from 2002 to 2001. 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. It stood at approximately $770,000 for the three months ended June 30, 2002 decreasing by approximately $50,000 from approximately $820,000 for the three months ended June 30, 2001. Parimutuel commission for the three months ended June 30, 2002 included approximately $34,000 deposited into the Greyhound Capital Improvements Trust Fund, $52,000 deposited into the Greyhound Promotional Trust Fund, and $24,000 deposited into the Greyhound Adoption Trust Fund. During same period of 2001 these figures amounted to $64,000, $64,000, and $0, respectively. OPERATING EXPENSES Operating expenses of approximately $4.1 million for the three months ended June 30, 2002 decreased by approximately $406,000 from approximately $4.5 million for the three months ended June 30, 2001. A credit of approximately $140,000 on utilities costs related to prior years and salary cost reductions were primarily responsible for the decrease. INTEREST EXPENSE Interest expense decreased by approximately $91,000 for the three months ended June 30, 2002 from $184,000 in the three months ended June 30, 2001 to approximately $92,000 in the three months ended June 30, 2002. The decrease is the result of interest accrued in 2001 on the litigations settlement with a totalisator vendor that is described in "Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased approximately $27,000 to $155,000 in the three months ended June 30, 2002, from $128,000 in the comparable period in 2001. The increase is the result of capital additions to the racing facility. INCOME TAX PROVISION 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 2001 primarily due to the utilization of available net operating loss carryforwards in 2002 and the net loss in 2001. The provision for taxes of $27,000 and $33,000 in the first six months of 2002 and 2001, respectively, represents estimated state taxes. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 The table below illustrates certain key statistics for Wonderland Park, the Company's greyhound racing operation, for the six months ended June 30, 2002 and 2001. 2002 2001 -------- -------- Performances 167 172 Simulcast days 181 180 Pari-mutuel handle (thousands) Live-on track $8,717 $10,818 Live-simulcast 16,349 17,636 Guest-simulcast 25,313 25,764 -------- -------- $ 50,379 $54,218 ======== ======== Total attendance 135,850 147,441 Average per capita on site wagering $250 $248 OPERATING REVENUE Total operating revenue declined by $421,000 to $8.24 million in the six months ended June 30, 2002 as compared to $8.66 million in the six months ended June 30, 2001. Parimutuel commissions declined by 5.0% from $7.07 million to $6.72 million during the same period. Total handle in the first six months of 2002 was approximately $50.4 million as compared to $54.2 million in 2001. Live-on track handle decreased 19% or about $2.1 million from $10.8 million in 2001 to $8.7 million in 2002, with an average attendance of approximately 813 persons in 2002 compared to 857 persons in 2001. Live-simulcast handle decreased by $1.3 million or 7% in the first six months of 2002. Guest-simulcast handle decreased by $451,000 or 2% from 2001. The decrease in admissions revenue, when associated discounts are added back, approximates the decline in attendance of 8%. Other operating revenue consists of food and beverage, program sales, lottery, parking and gift shop sales. It stood at approximately $1,432,000 for the six months ended June 30, 2002 decreasing by approximately $51,000 from approximately $1,484,000 for the six months ended June 30, 2001. Parimutuel commission for the six months ended June 30, 2002 included approximately $68,000 deposited into the Greyhound Capital Improvements Trust Fund, $100,000 deposited into the Greyhound Promotional Trust Fund, and $44,000 deposited into the Greyhound Adoption Trust Fund. During same period of 2001 these figures amounted to $124,000, $124,000, and $0, respectively. OPERATING EXPENSES Operating expenses of approximately $7.9 million for the six months ended June 30, 2002 decreased by approximately $655,000 from approximately $8.5 million for the six months ended June 30, 2001. A credit on utilities costs of approximately 140,000 related to prior years and salary cost reductions were primarily responsible for the increase. INTEREST EXPENSE Interest expense decreased by approximately $65,000 for the six months ended June 30, 2002 from $292,000 in the six months ended June 30, 2001 to approximately $227,000 in the six months ended June 30, 2002. The increase is the result of interest accrued in 2001 on the litigations settlement with a totalisator vendor that is described in "Legal Proceedings" in the Company's Annual Report on Form 10-K, for the year ended December 31, 2001. THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DEPRECIATION AND AMORTIZATION Depreciation and amortization increased approximately $32,000 to $289,000 in the six months ended June 30, 2002, from $257,000 in the comparable period in 2001. The increase is the result of capital additions to the racing facility. INCOME TAX PROVISION 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 2001 primarily due to the utilization of available net operating loss carryforwards in 2002 and the net loss in 2001. The provision for taxes of $27,000 and $33,000 in the first six months of 2002 and 2001, respectively, represents estimated state taxes. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company had a working capital deficit of approximately $1.7 million, and a stockholders' deficiency of approximately $325,000. 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 $73,000 at June 30, 2002, compared with $12,000 at December 31, 2001. The Company generated cash flows from operations of approximately $397,000 during the first six months of 2002 as compared to $69,000 during the corresponding period in 2001. Non-cash items included in the Company's net income in the first six months of 2002 consist of depreciation and amortization expense of $289,000. Changes in working capital accounts including restricted cash, accounts payable and other accrued liabilities generated approximately $27,000 of cash in the first six months of 2002. Net cash used in investing activities in 2002 of approximately $505,000 represents investments and additions to the property, plant and equipment. Financing activities in 2002 include $241,000 of funds used to reduce outstanding balances on long-term debt. The Company is currently undertaking a capital improvements program to improve its track and patron facilities. It is anticipated that these expenditures will be fully funded by the Capital Improvement Trust fund and a 1999 grant program contained in the racing bill that was passed by the legislature in November 2001. The Company has recently received a commitment letter for a $6,500,000 loan from a financial institution. A portion of the proceeds of this loan will be used to refinance the Company's current credit facility. The Company anticipates that this transaction will be consummated in the third quarter of 2002, subject to the satisfaction of the terms and conditions set out in the commitment letter. The Company received a short-term working capital advance from Charles F. Sarkis, an officer of the Company, of $300,000 in March 2002. This funding accrues interest at a rate of 12% and is payable on demand. It is anticipated that a portion of the proposed $6,500,000 loan will be used to repay this capital advance. The Company believes that it will generate enough cash from operations to satisfy its anticipated obligations during 2002. 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: THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 settlement of liabilities related to discontinued operations, contractual obligations and other accrued expenses. Actual results could differ from those estimates. ESCROWED CASH Escrowed cash is related to the operations of Wonderland and includes amounts held by The Commonwealth of Massachusetts in trust funds (for capital improvements and advertising/promotion). Wonderland funds these costs and requests reimbursements from the trust funds. Wonderland is reimbursed upon approval by the Commonwealth. 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 totalistar 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 foward-looking statements. Such factors 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. SPECIAL ATTENTION SHOULD BE PAID TO SUCH FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO, STATEMENTS RELATING TO (I) THE COMPANY'S ABILITY TO EXECUTE ITS BUSINESS STRATEGY, (II) THE COMPANY'S ABILITY TO OBTAIN SUFFICIENT RESOURCES TO FINANCE ITS WORKING CAPITAL AND CAPITAL EXPENDITURES NEEDS AND PROVIDE FOR ITS OBLIGATIONS, AND (III) THE STATEMENTS CONTAINED IN THIS ITEM. 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"). The preceding discussion of the financial condition and results of operations of the Company should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 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 THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Exhibit Number Description ------- ----------- (27) Financial Data Schedule. (99.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 THE WESTWOOD GROUP, INC. AND SUBSIDIARIES JUNE 30, 2002 -------------------------------------------------------------------------------- Pursuant to the requirement 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. /s/ Richard P. Dalton Date August 14, 2002 -------------------------------------- Richard P. Dalton President, Chief Executive Officer and Director (Principal Financial and Accounting Officer)

WESTWOOD GROUP INC 10-Q