10-Q 1 l90327ae10-q.txt SCIOTO DOWNS, INC. FORM 10-Q 1 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 JULY 31, 2001 ------------------------ 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 September 10, 2001: 595,767, par value $1.05 2 SCIOTO DOWNS, INC. INDEX --------------------------------------------------------------------------------

3 SCIOTO DOWNS, INC. BALANCE SHEETS AT JULY 31, 2001, OCTOBER 31, 2000 AND JULY 31, 2000 -------------------------------------------------------------------------------

CONTINUED - 1 - 4 SCIOTO DOWNS, INC. BALANCE SHEETS AT JULY 31, 2001, OCTOBER 31, 2000 AND JULY 31, 2000 -------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. - 2 - 5 SCIOTO DOWNS, INC. STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JULY 31, 2001 AND 2000 (UNAUDITED) -------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. - 3 - 6 SCIOTO DOWNS, INC. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 (UNAUDITED) -------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. - 4 - 7 SCIOTO DOWNS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 (UNAUDITED) ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited 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, Inc.'s (the Company) annual report on Form 10-K. Reference should be made to the Company's 2000 Form 10-K for additional disclosures, including a summary of the Company's accounting policies. 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 year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain reclassifications of prior period amounts have been made in the financial statements to conform to the July 31, 2001 presentation. 2. INCOME TAXES The Company's estimated annual effective tax rate differs from the statutory rate due to the application of surtax exemptions and the valuation allowance. Due to uncertainty regarding future taxable income, the Company has recorded a valuation allowance of $140,459 against net deferred tax assets at July 31, 2001. 3. 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 the settlement of $58,670 at April 30, 2001. At July 31, 2001, the Company had an outstanding receivable from Mid-America Racing Association, Inc. (Mid-America), a related party, of $517,169. The Company has reserved approximately $292,000 of this amount as of July 31, 2001 due to the uncertainty of its collectibility. - 5 - 8 SCIOTO DOWNS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 (UNAUDITED) ------------------------------------------------------------------------------- 4. SUBSEQUENT EVENT On August 1, 2001, the Company acquired all of the outstanding common shares of Mid-America for $150,000. The consideration of $150,000 is 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 horse racing, typically immediately following the racing season of the Company. The lease of racing facilities between Mid-America and the Company was terminated as of the acquisition date. The acquisition will be accounted for under the purchase method. Accordingly, the assets, liabilities, and the results of operations of Mid-America will be reflected in the financial statements of the Company from the acquisition date. - 6 - 9 SCIOTO DOWNS, INC. OTHER INFORMATION ------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION, CONTINUED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. The Company's actual results in 2001 and future periods may differ significantly from the prospects discussed in the forward-looking statements. 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 2001, the Company continued to service the debt on the clubhouse and the simulcasting equipment with funds generated during the 2000 racing season and the 2001 simulcasting season. The live racing season at Scioto Downs annually falls within the third quarter, ending in July. Beginning January 1, 2001, the Company commenced year-round simulcasting, which will create additional revenue. In order to do this, the Company terminated its simulcasting agreement with Beulah Park in September 2000. Thus, no revenue will be earned related to this agreement. THREE MONTHS ENDED JULY 31, 2001 COMPARED TO THE THREE MONTHS ENDED JULY 31, 2000 Income from racing operations was $106,881, which was a decrease of $795,417 or 88%. The decrease resulted from a decrease in operating revenue of $1,607,294, offset by a decline in operating expenses of $811,877. Operating revenues decreased primarily due to an overall decline in commissions, breakage, admissions, and concessions, program, parking and other of $1,750,566, an increase of $14,293 from sires stakes entry fees and a decrease of $38,134 from the simulcasting export signal revenue, which is a decrease in the commissions paid by racetracks receiving Scioto Downs' signal. The primary reason from the decrease in operating revenues is due to Buelah Park remaining open for simulcasting during the three months ended July 31, 2001. Previously, Buelah Park was closed during the period subject to a prior agreement. - 7 - 10 SCIOTO DOWNS, INC. OTHER INFORMATION ------------------------------------------------------------------------------- Operating expenses decreased primarily due to a decrease of purse expense of $543,936, a decrease in simulcasting fees of $196,063 and a decrease in salaries and wages of $47,232, resulting from a decrease in overtime and a reduction of seasonal employees. Operating and general expenses for the three months ended July 31, 2001 includes a reserve of $64,207 for estimated uncollectible amounts due from Mid-America Racing Association, Inc. pursuant to its lease with the Company. The Company recorded income tax expense of $140,459 and $132,426 for the three months ended July 31, 2001 and 2000, respectively. The expense has been recorded at the anticipated effective tax rates for fiscal years 2001 and 2000, respectively. The expense for the three months ended July 31, 2001 includes a valuation allowance against net deferred tax assets due to uncertainty regarding future taxable income. NINE MONTHS ENDED JULY 31, 2001 COMPARED TO THE NINE MONTHS ENDED JULY 31, 2000 Year-round simulcasting resulted in an increase in pari-mutuel commissions and breakage, pari-mutuel taxes, purses and simulcasting. Purse expense represents payments into the simulcast purse fund and purse payments. Loss from racing operations was $1,016,255, which was an increase of $813,030 or 400%. The increase resulted from an increase in operating expenses of $1,768,927 offset by an increase in operating revenues of $955,897. Operating revenues increased due to an increase in net pari-mutuel commissions and breakage of $1,234,892. This was offset by a decrease in admissions, simulcasting shared revenue, rental income, and concessions, program, parking and other of $224,162. Operating expenses increased primarily due to an increase in purse expense of $546,609 and an increase in salaries and wages of $211,465 due to an increase in additional staffing needed for year-round simulcasting. Other operating and general expenses increased $718,896 due mainly to increases in advertising and tote rental due to year-round simulcasting, utilities, real estate and personal property taxes, professional fees, repairs and maintenance and other miscellaneous expenses. Operating and general expenses for the nine months ended July 31, 2001 also includes a reserve of approximately $292,000 for estimated uncollectible amounts due from Mid-America Racing Association, Inc. Included in the prior year general expense is a recovery of approximately $54,000 in simulcasting purse pool funds from the Ohio Racing Commission. Simulcasting fees paid by the Company increased by $270,844 due to the year-round simulcasting during 2001. The Company recorded an income tax benefit of $33,541 and $47,058 for the nine months ended July 31, 2001 and 2000, respectively. The benefit has been recorded at the anticipated effective tax rates for fiscal years 2001 and 2000, respectively. A valuation allowance has been recorded against the deferred tax benefit at July 31, 2001 due to uncertainty regarding future taxable income. - 8 - 11 SCIOTO DOWNS, INC. OTHER INFORMATION ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $727,916 for the nine months ended July 31, 2001 as compared to cash provided by operations of $384,370 for the nine months ended July 31, 2000. The decrease of $1,112,286 in cash provided by operating activities was primarily a result of an increase in net loss from racing operations of $809,479 and an increase in net accounts receivable of $323,939. SUBSEQUENT EVENT On August 1, 2001, the Company acquired all of the outstanding common shares of Mid-America for $150,000. The consideration of $150,000 is 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 horse racing, typically immediately following the racing season of the Company. The lease of racing facilities between Mid-America and the Company was terminated as of the acquisition date. The acquisition will be accounted for under the purchase method. Accordingly, the assets, liabilities, and the results of operations of Mid-America will be reflected in the financial statements of the Company from the acquisition date. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (FAS No. 141), Business Combinations, which provides that all business combinations should be accounted for under the purchase method of accounting and establishes criteria for the initial recognition and measurement of goodwill and other intangible assets recorded in connection with a business combination. The provisions of FAS 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later. The Company will apply the provisions of FAS 141 to the August 2001 acquisition of Mid-America Racing Association, Inc., and to any future business combinations. In addition, the FASB issued Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets, which establishes the accounting for goodwill and other intangible assets following their recognition. FAS 142 provides that goodwill should not be amortized but should be tested for impairment at least annually using a fair-value based approach. In addition, FAS 142 provides that intangible assets other than goodwill should be amortized over their finite useful lives and the remaining useful life of the asset be evaluated each reporting period. Intangible assets determined to have indefinite useful lives should not be amortized but should be tested for impairment at least annually. FAS 142 is effective for the Company beginning November 1, 2002. Goodwill acquired in a business combination for which the acquisition date is after June 30, 2001 should not be amortized. The Company will be required to perform a transitional impairment test under FAS 142 for - 9 - 12 SCIOTO DOWNS, INC. OTHER INFORMATION ------------------------------------------------------------------------------- all goodwill recorded as of November 1, 2002. Any impairment loss recorded as a result of completing the transitional test will be treated as a change in accounting principle. Any goodwill resulting from the August 2001 purchase of Mid-America Racing Association, Inc. will not be amortized in accordance with FAS 142. Management of the Company is currently analyzing the impact of FAS 142 and is unable to estimate the impact of the adoption of FAS 142 at this time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. - 10 - 13 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 July 31, 2001. - 11 - 14 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: September 14, 2001 BY: /s/ Edward T. Ryan ------------------ ------------------ Edward T. Ryan President DATE: September 14, 2001 BY: /s/ Richard J. Fiore ------------------ -------------------- Richard J. Fiore Chief Financial Officer - 12-

SCIOTO DOWNS INC 10-Q