<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
SCIOTO DOWNS, INC.
COLUMBUS, OHIO
EMPLOYER I.D. NO. 31-4440550
<PAGE> 2
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1996
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
to
For the transition period from
-----------------------------------------------
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
incorporation or organization) Identification Number)
6000 South High Street, Columbus, Ohio 43207
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (614) 491-2515
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
- ---------------------------- -----------------------------------------
<PAGE> 3
FORM 10-K, CONTINUED
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Common Stock
- -------------------------------------------------------------------------------
(Title of Class)
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 ninety (90) days.
YES X NO
-------- --------
The aggregate market value of the Registrant's voting stock held by
nonaffiliated stockholders as of December 20, 1996 was $3,399,200 or $14.00 per
share.
Registrant has only one class of shares outstanding, namely, common
shares. The number of common shares outstanding as of December 20, 1996 was
595,767.
Portions of the following documents are incorporated by reference:
1. Portions of the Annual Report to Stockholders for the year ended
October 31, 1996 are incorporated by reference in Part II.
2. Portions of Scioto Downs, Inc.'s definitive Proxy Statement furnished
to stockholders in connection with the Annual Meeting of Stockholders
to be held February 12, 1997 are incorporated by reference in Part
III.
The Exhibit index is on page 9.
<PAGE> 4
PART I
ITEM 1. BUSINESS
The Registrant's sole business is the ownership and operation of a
harness horse racing facility located at 6000 South High Street, Columbus, Ohio.
Racing operations at the South High Street facility were started in 1959, and
there has been no material change in the method of conducting its business. In
addition to the race track itself, there are parking, grandstand, clubhouse, and
eating facilities for Registrant's customers and barn and stable facilities for
the horses. Revenue is derived principally from commissions on pari-mutuel
wagering (net of pari-mutuel taxes), admission fees to enter the facilities, and
concessions, programs, parking, and other. These items represent 61.1%, 3.0% and
35.9% of total revenues, respectively, during 1996. The nearest race track
competition is Beulah Park, a thoroughbred horse race track, approximately six
miles away. Beulah Park typically races from November until the first weekend of
May. During fiscal year 1996, there was only one day on which both tracks were
open. Registrant conducts its business pursuant to a permit issued annually by
The Ohio State Racing Commission. The Commission prescribes what forms of
wagering are permissible, the number of races allowed, the procedures on
wagering, and the wagering information to be provided to the public. For the
period covered by this report, Registrant was issued a permit by The Ohio State
Racing Commission to conduct harness horse racing at its facilities for a period
of 61 days. Racing is primarily conducted at night six days a week. The 61-day
period in 1996 commenced May 6 and continued through July 15. Registrant then
leased its facilities to Mid-America Racing Association, Inc., for 54 days of
racing, which period ended September 14, 1996. This lease generated 5.1% of
total revenue. This lease is on file with the Commission. During September 1996,
the Registrant entered into an agreement with Beulah Park to share revenues
derived from full card simulcasting. Revenues derived by the
2
<PAGE> 5
Registrant from full card simulcasting conducted in the afternoons on days it is
conducting live racing in the evening and on days it is not conducting live
racing, will be shared with Beulah Park. Revenues derived by the Registrant from
simulcasting during the evening hours when the Registrant is conducting live
racing will be retained by the Registrant. On days that it is conducting live
racing in the afternoon, Beulah Park will conduct full card simulcasting in the
evening. Revenues derived by Beulah Park from full card simulcasting conducted
in the evenings on days it is conducting live racing in the afternoon and on
days when it is not conducting live racing, will be shared with the Registrant.
No live racing has been conducted at Registrant's facilities since September 14,
1996. The 1997 racing season will commence May 3, 1997. During the racing
season, Registrant employs approximately 350 people, most of whom are
pari-mutuel clerks employed only during the racing meet.
ITEM 2. PROPERTIES
Registrant's place of business is located at 6000 South High Street,
Columbus, Ohio. Registrant owns in fee approximately 173 acres of land at this
location. Situated thereon are the physical facilities necessary for the
operation of a harness horse racing business, including the race track,
grandstand with a capacity of 10,000, and enclosed clubhouse buildings with a
capacity of 1,500 for customers, in which are located eating and pari-mutuel
wagering facilities, barns, a paddock, and related facilities for the horses,
drivers, and trainers. In addition, a substantial (approximately 6,000-space)
parking area is provided for customers. These facilities are used fully during
the racing season, which covered 115 days commencing in May and ending in
mid-September.
3
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS
Registrant is not a party to any material pending legal proceedings
other than routine litigation incidental to its business, most of which is
covered by insurance.
Registrant has no knowledge of any material pending legal proceedings
to which any director, officer or affiliate of the Registrant, any owner of
record or beneficiary of more than five percent of the voting securities of the
Registrant, or any associate of any such director, officer or security holder is
a party adverse to the Registrant or has a material interest adverse to the
Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
4
<PAGE> 7
PART II
The following items are incorporated herein by reference from the indicated
pages of the Annual Report to Stockholders for the fiscal year ended October 31,
1996:
ANNUAL REPORT TO
STOCKHOLDERS PAGES
Item 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
Item 6. SELECTED FINANCIAL DATA 14
Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12-14
Item 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA 4-11
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Not applicable
5
<PAGE> 8
PART III
ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Items 10, 11, 12 and 13 is incorporated
herein by reference to the definitive Proxy Statement of the Registrant dated
January 20, 1997, relating to the Annual Meeting of Stockholders to be held on
February 12, 1997.
6
<PAGE> 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SCIOTO DOWNS, INC.
Index to Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
REFERENCE PAGE
-------------------
FORM 10-K ANNUAL REPORT
ANNUAL REPORT TO STOCKHOLDERS
------------------- ---------------------
<S> <C> <C>
(a) 1. Financial Statements
--------------------------------------------------------------
Data incorporated by reference from the attached
1996 Annual Report to Stockholders of Scioto Downs, Inc.:
Report of Independent Accountants on Financial
Statements 12
Balance Sheets as of October 31, 1996 and 1995 4
Statements of Operations for the years ended October
31, 1996, 1995 and 1994 5
Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995 and 1994 6
Statements of Cash Flows for the years ended October
31, 1996, 1995 and 1994 7
Notes to the Financial Statements 8-11
(a) 2. Financial Statement Schedules
--------------------------------------------------------------
Financial statement schedules are omitted because they are not
required or are not applicable.
(a) 3. Exhibits
--------------------------------------------------------------
See Index to Exhibits at Page 9.
(b) Reports on Form 8-K
--------------------------------------------------------------
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(c) See Index to Exhibits at Page 9.
(d) Not applicable or not required
(e) Not applicable.
</TABLE>
7
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
--------------------------------
By /s/ Robert S. Steele
--------------------------------
President & Chief Operating
Officer and a Director
--------------------------------
Title
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the dates indicated.
--------------------------------
Date: January 15, 1997 By /s/ Robert S.Steele
--------------------------------
President & Chief Operating
Officer and a Director
--------------------------------
Title
--------------------------------
Date: January 15, 1997 By /s/ LaVerne A. Hill
--------------------------------
Vice President and a Director
--------------------------------
Title
--------------------------------
Date: January 15, 1997 By /s/ William C.Heer
--------------------------------
Treasurer and a Director
--------------------------------
Title
--------------------------------
Date: January 15, 1997 By /s/ John J.Chester
--------------------------------
Director
--------------------------------
Title
--------------------------------
Date: January 15, 1997 By /s/ John F.Fissell
--------------------------------
Director
--------------------------------
Title
--------------------------------
Date: January 15, 1997 By /s/ Cyril J. Elbert
--------------------------------
Controller
--------------------------------
Title
8
<PAGE> 11
INDEX TO EXHIBITS ANNUAL REPORT ON FORM 10-K
for the year ended October 31, 1996
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO.
<S> <C> <C>
3A Articles of Incorporation of the Registrant, as amended to date
3B Code of Regulations of the Registrant, as amended to date
10A Lease with Hilliard Raceway, Inc., now Mid-America Racing
Association, Inc., and amendment thereto
10B Simulcasting agreement with Beulah Park Pages 10-13
13 Annual Report to Stockholders Pages 14-28
27 Financial Data Schedule Page 29
</TABLE>
9
<PAGE> 1
Exhibit 10.B
AGREEMENT
This agreement made and entered into this 17 day of September, 1996,
by and among Scioto Downs, Inc., an Ohio corporation, Mid-America Racing
Association, Inc., an Ohio corporation, and Heartland Jockey Club, Ltd., an Ohio
limited liability company.
Recitals
Scioto Downs, Inc., hereinafter "Scioto", and Mid-America Racing
Association, Inc., hereinafter "MARA", each own a permit to conduct harness
horse racing at the Scioto Downs racetrack, 6000 South High Street, Columbus,
Ohio. Reference herein to "Scioto Downs" includes Scioto and MARA. Heartland
Jockey Club, Ltd., hereinafter "Heartland", owns permits to conduct
thoroughbred race meetings at the Beulah Park racetrack in Grove City, Ohio.
Reference herein to "Beulah Park" includes Heartland.
In accordance with full card simulcasting legislation approved in Ohio
which permits racetracks operating within the same county to enter into an
agreement regarding the conduct of simulcast racing programs at their
respective tracks and the sharing of the retained commissions therefrom, Scioto
Downs and Beulah Park desire to enter into this agreement regarding the conduct
of simulcast racing programs at their respective tracks and the sharing of the
retained commissions therefrom.
Now, therefore, the parties agree as follows:
1. Scioto Downs and Beulah Park will continue to operate during
those days that have previously been allocated to them by the Ohio State Racing
Commission. This schedule will continue the pattern of avoiding overlapping on
any racing days except for the first day of the Scioto meet and the last day of
the MARA meet.
2. On days that it is conducting live racing in the evening,
Scioto Downs will conduct full card simulcasting in the afternoon. Scioto
Downs also may conduct full card simulcasting on days it is not conducting live
racing. Revenues derived by Scioto Downs from full card simulcasting conducted
in the afternoons on days it is conducting live racing in the evening and on
days when it is not conducting live racing will be shared with Beulah Park as
provided in paragraph 6 hereof. Revenues derived by Scioto Downs from
simulcasting during the evening hours when Scioto Downs is conducting live
racing will be retained by Scioto Downs. On days that it is conducting live
racing in the afternoon, Beulah Park will conduct full card simulcasting in the
evening. Beulah Park may also conduct full card simulcasting on days it is not
conducting live racing. Revenues derived by Beulah Park from full card
simulcasting conducted in the evenings on days it is conducting live racing in
the afternoon and on days when it is not conducting live racing will be shared
with Scioto Downs as provided in paragraph 6
10
<PAGE> 2
hereof. Revenues derived by Beulah Park from simulcasting during the afternoon
hours when Beulah Park is conducting live racing will be retained by Beulah
Park.
3. If either Scioto Downs or Beulah Park commences a live racing
program and for whatever reason that program is terminated after one race and
full card simulcasting is thereafter commenced to replace the live racing
program, the revenues from that simulcasting will be treated as having been
generated during a live racing program and will not be shared with the other
track. If, however, either track for whatever reason does not conduct live
racing on any particular day otherwise scheduled for live racing and instead
conducts full card simulcasting on that day, the revenues generated from that
simulcasting will be shared with the other track as provided in paragraph 6
hereof.
4. On a day when Beulah Park is conducting live racing, simulcast
revenues received by Beulah Park for races commencing after 6:30 p.m. shall be
shared with Scioto Downs. On a day when Scioto Downs is conducting live
racing, simulcast revenues received by Scioto Downs on races commencing prior
to 6:30 p.m. shall be shared with Beulah Park. If Scioto Downs is simulcasting
a racing program from another track and that racing program continues after the
live racing program at Scioto Downs ends, the revenues derived by Scioto Downs
from the simulcasting of the racing program from the other track up to and
including all races commencing prior to 1:00 a.m. of the following day will be
retained by Scioto Downs and not shared with Beulah Park. All revenues derived
from such simulcasting of races commencing after 1:00 a.m. of the following
day shall be shared with Beulah Park as provided in paragraph 6 hereof.
5. Scioto Downs and Beulah Park shall each be entitled to retain
out of full card simulcasting revenues an amount to cover specified expenses
determined in accordance with paragraph 6 hereof for each full card
simulcasting session the revenues of which are to be shared between the tracks.
In the event either of the tracks conduct full card simulcasting in both the
afternoon and the evening of the same day without live racing during either
session, this would constitute two (2) full card simulcasting sessions and the
track would be entitled to retain the amount to cover expenses for each
session.
6. The amount of the revenues derived from simulcasting that,
pursuant to this agreement, is to be shared between Scioto Downs and Beulah
Park shall be determined and shared on the following basis:
(a) From the gross commissions on such simulcast wagering
retained each day by the track conducting the simulcasting
("simulcasting track"), deduct the following:
(i) parimutuel wagering tax attributable to
such simulcast wagering;
11
<PAGE> 3
(ii) simulcast fees paid to another track to
obtain the simulcast;
(iii) as provided in paragraph 5 hereof, an
amount to cover specified expenses, which initially shall be
four thousand one hundred seventy-five dollars ($4,175) and
thereafter the amount determined in accordance with
subparagraph (c) below; and
(iv) the amount to be allocated by the
simulcasting track to purses determined as provided in Section
3769.089(E)(i) O.R.C.
(b) To the amount determined in accordance with
subparagraph (a) above, add 2-3/8% of the amount wagered on the
simulcasts or the applicable percentage determined in accordance with
Section 3769.089(E)(1) or (E)(2) O.R.C. The resulting amount shall be
divided equally between Scioto Downs and Beulah Park, subject to the
provisions of subparagraph (c) hereof.
(c) The amount of four thousand three hundred dollars
($4,300) set forth in subparagraph (a)(iii) above has been determined
based on the following specified estimated costs for a simulcast
session:
<TABLE>
<S> <C>
Mutuel clerks $1,000.00
Money room $ 100.00
Mutuel manager $ 100.00
Security $ 300.00
Video control $ 200.00
Simulcast coordinator $ 200.00
Program director $ 125.00
Interface charge for common pool $ 100.00
Decoder $ 50.00
Utilities $ 300.00
Tote expense $ 500.00
Clean-up supplies $ 200.00
Marketing - advertising $1,000.00
Telephone lines $ 125.00
---------
$4,300.00
</TABLE>
At the end of each thirty (30) day period, the costs for the areas
delineated above will be audited by Scioto Downs and Beulah Park to
determine if the actual costs in these areas for a simulcast session
during the thirty-day period were less than or greater than the
estimate of four thousand three hundred dollars ($4,300). If the
costs so determined are greater than theestimate of four thousand
three hundred dollars ($4,300), out of the monies to be divided
equally between Scioto Downs and Beulah Park for the simulcast
sessions following the audit, the simulcasting track shall be entitled
to retain the difference between the actual and estimated expenses
before any division with the other track. If the costs so determined
are less than the estimate of four thousand three hundred dollars
($4,300), out of the monies to be divided equally between Scioto Downs
and Beulah Park for the simulcast sessions following the audit, the
12
<PAGE> 4
track not conducting the simulcasting shall receive the difference
between the actual and the estimated expenses before any division with
the other track. In the event the actual expenses for a simulcast
session vary from the estimated expenses (initially $4,300), the
amount of expenses to be deducted pursuant to subparagraph (a)(iii)
above shall be adjusted to reflect the actual expenses.
7. Any amounts due to the non-simulcasting track shall be paid to
it on a weekly basis. The simulcasting track shall deliver to the
non-simulcasting track along with the payment an accounting of all activity and
calculations leading to the determination of the amount of the payment,
including totalisator records.
8. This agreement shall be effective on September 19, 1996 and
shall continue thereafter for a period of one (1) year ending September 18,
1996. If the parties are unable to agree upon the terms of a new agreement or
to an extension of this agreement prior to thirty (30) days before the end of
the one (1) year period, this agreement shall terminate effective midnight,
September 18, 1996. Upon termination, any monies owed by one track to the
other shall be paid within one week of the termination date.
9. This agreement shall be binding upon and inure to the benefit
of the parties hereto, their successors and assigns.
10. This agreement shall be construed in accordance with and
governed by the laws of the State of Ohio.
SCIOTO DOWNS, INC.
By /s/ Robert S. Steele, President
------------------------------------
MID-AMERICA RACING ASSOCIATION, INC.
By /s/ Robert S. Steele, Vice President
------------------------------------
HEARTLAND JOCKEY CLUB, LTD.
By /s/ Charles J. Ruma
-------------------------------------
13
<PAGE> 1
THE 1996
ANNUAL REPORT
SCIOTO DOWNS, INC.
[PHOTO]
14
<PAGE> 2
DIRECTORS PRINCIPAL OCCUPATION
ROBERT S. STEELE President and Chief Operating Officer of Scioto Downs, Inc.,
Vice-President, General Manager and Director of
Mid-America Racing Association, Inc.
WILLIAM C. HEER Treasurer of Scioto Downs, Inc.; Vice-President, National
Graphics Corporation; Director and Treasurer, Mid-America
Racing Association, Inc.
JOHN J. CHESTER Partner in the law firm of Chester, Willcox and Saxbe.
PAUL A. SOLDNER Doctor of Veterinary Medicine.
LaVERNE A. HILL Vice President and Director, Scioto Downs, Inc.,
President and Director, Mid-America Racing Association, Inc.
JOHN B. GERLACH Chairman and Chief Executive Officer, Lancaster Colony Corp.
JOHN F. FISSELL Retired Consultant, Sturm & Dillard Company
RUSSEL G. MEANS Chairman of the Board, Employee Benefit Management Corp.
DELMER L. BONE Elected official - County Commissioner, Greene County, Ohio;
Floral and beauty shop executive.
OFFICERS
ROBERT S. STEELE President and Chief Operating Officer
LaVERNE A. HILL Vice President
RODERICK H. WILLCOX Secretary
WILLIAM C. HEER Treasurer
STOCKHOLDERS' INQUIRIES
A copy of the Corporation's Annual Report for the year ended October 31, 1996
on Form 10-K as required to be filed with the Securities and Exchange
Commission will be available after February 1, 1997. Stockholders may obtain a
copy free of charge by writing to:
CYRIL J. ELBERT
SCIOTO DOWNS, INC.
P.O. BOX 07823
COLUMBUS, OHIO 43207-0823
Front Cover photo courtesy of Ed Keys
15
<PAGE> 3
President's Letter to the Stockholders
The year produced many changes in Ohio's racing industry, and I am optimistic as
we embark on our 39th season of racing at Scioto Downs. After hard work by all
engaged in the racing industry, the Ohio General Assembly passed House Bill 561
in 1996, permitting full card simulcasting in the state of Ohio. This
legislation went into effect on September 19, after Scioto Downs closed for the
season. Racing fans at other tracks in Ohio have received the new product with
enthusiasm. The early returns look promising for the visibility of Ohio harness
racing, for the purse structure at Ohio tracks, and for the bottom line for all
of Ohio racing.
Also, Issue 1 on the ballot in November [which would have permitted several
river boat casinos in Ohio] was soundly defeated by the voters. The passage of
this constitutional amendment would have been detrimental to racing in this
state, as it not only did not provide any benefits for racing, but also
specifically excluded racing simulcasts from the river boats.
We did face several challenges this past season. Competition for horses from
Indiana and other surrounding states continues to be strong, and a record
rainfall during the first five weeks of our 1996 meet impacted our handle and
attendance negatively.
For the meet, our total handle was $20,579,567 and 200,993 guests attended the
races. That translates into an average of 3,295 patrons and a handle of $337,370
per night for the 61-date meet. While both figures were down from 1995, our
decline was much less than that of other harness tracks. The exceptions are
tracks that have slot machines approved at their sites, such as Dover Downs in
Delaware.
On the positive side, we posted our second $1 million handle during the meet,
and in fact topped our previous best handle by more than $220,000! We made a
concerted effort to promote our Jug Preview divisions, and were able to put our
races on the cards at such tracks as Mohawk Raceway, Garden State Park, The
Meadows, and Foxboro. The result was a total handle of $1,231,444, of which
$477,744 was wagered on our four Preview divisions at other locations.
The enthusiastic response to our product is heartening as we look ahead to
offering our full cards at tracks across North America.
We continued the Telephone Account Betting that started in 1994, with an average
daily handle of $5,374 in 1996.
An agreement was reached with nearby thoroughbred track, Beulah Park, so that we
would not be open for simulcasting at the same time. They are holding
simulcasting during their live racing season while we are dark, and we receive a
share of their simulcasting proceeds. Likewise, when we open our live meet and
simulcasting program, Beulah will be dark and will receive a share of our
simulcasting proceeds.
Because of the different needs and expectations of simulcasting patrons, there
are numerous changes underway at Scioto Downs. First, our Penthouse Level is
being transformed into our primary simulcasting facility, with the south end of
the Clubhouse upgraded to take the overflow for simulcasting crowds.
We are adding 78 television sets to the Penthouse Level, which will be installed
in banks of six. In the Clubhouse, we are adding 78 sets. Our guests in the
Grandstand will also be able to take advantage of full card simulcasting, with
additional television sets on both the Mezzanine Level and the main line.
Highlights on our 1997 stakes schedule include the popular Scarlett O'Hara, Pink
Bonnet, and of course the competitive Ohio Sire Stakes and Fair Stakes. We also
have plans to make Scioto Downs even more user-friendly than it has been in the
past. Look for our family days, tours of the backstretch, and community outreach
programs in 1997.
Sincerely,
Robert S. Steele,
President,
SCIOTO DOWNS, INC.
16
<PAGE> 4
SCIOTO DOWNS, INC.
BALANCE SHEETS
October 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................$ 621,591 $ 787,786
Accounts receivable ........................................ 47,106 71,060
Prepaid expenses and other.................................. 36,453 77,950
Investment in joint venture ................................ 82,446 59,101
----------- -----------
Total current assets................................ 787,596 995,897
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Buildings .................................................. 14,448,305 14,441,531
Land improvements........................................... 1,314,740 1,314,740
Furniture and fixtures...................................... 1,650,495 1,649,689
Machinery and equipment..................................... 1,556,376 1,373,104
----------- -----------
18,969,916 18,779,064
Less accumulated depreciation............................. 11,962,780 11,279,018
----------- -----------
7,007,136 7,500,046
Land........................................................ 299,847 299,847
----------- -----------
7,306,983 7,799,893
----------- -----------
Total assets..........................................$ 8,094,579 $ 8,795,790
=========== ===========
LIABILITIES
CURRENT LIABILITIES:
Accounts payable, trade.....................................$ 167,937 $ 167,392
Dividends payable........................................... 29,789 29,789
Current maturities, term debt .............................. 100,000 3,247,411
Deferred income taxes ...................................... 11,880
Accrued expenses:
Property taxes............................................ 160,255 160,177
Other..................................................... 45,053 48,538
----------- -----------
Total current liabilities............................. 503,034 3,665,187
----------- -----------
MINIMUM PENSION LIABILITY .................................... 89,877 78,566
----------- -----------
DEFERRED INCOME TAXES ....................................... 4,910 180,864
----------- -----------
TERM DEBT, NET OF CURRENT MATURITIES ......................... 3,025,855
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY
COMMON STOCK, $1.05 PAR VALUE PER SHARE:
Authorized: 3,600,000 shares
Issued and outstanding: 595,767 shares...................... 625,555 625,555
CAPITAL IN EXCESS OF PAR VALUE OF STOCK ...................... 2,037,300 2,037,300
RETAINED EARNINGS ............................................ 1,856,343 2,247,793
PENSION LIABILITY ADJUSTMENT, NET OF TAXES .................. (48,295) (39,475)
----------- -----------
Total stockholders' equity........................ 4,470,903 4,871,173
----------- -----------
Total liabilities and stockholders' equity........$ 8,094,579 $ 8,795,790
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 5
SCIOTO DOWNS, INC.
STATEMENTS OF OPERATIONS
for the years ended October 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
NIGHTS OF RACING 61 61 61
-- -- --
<S> <C> <C> <C>
OPERATING REVENUES:
Pari-mutuel commissions and breakage ..................... $ 4,375,312 $ 4,690,408 $ 4,660,088
Less pari-mutuel taxes ................................. 771,643 842,511 1,076,533
----------- ----------- -----------
3,603,669 3,847,897 3,583,555
Admissions ............................................... 179,990 197,700 204,384
Concessions, program, parking, and other ................. 751,606 782,743 814,755
Entry fees and purse monies added by others .............. 782,704 888,712 812,299
Rental income from leased facilities ..................... 301,419 305,226 316,009
Pari-mutuel tax abatement earned ......................... 280,968 294,683 301,316
----------- ----------- -----------
5,900,356 6,316,961 6,032,318
----------- ----------- -----------
OPERATING EXPENSES:
Purse awards ............................................. 2,510,802 2,597,178 2,493,017
Salaries and wages ....................................... 1,048,031 1,030,606 1,043,284
Depreciation ............................................. 697,196 693,583 709,403
Advertising .............................................. 283,514 338,779 338,111
Real and personal property taxes ......................... 192,293 192,077 206,783
Insurance ................................................ 188,540 177,440 201,545
Repairs and maintenance .................................. 174,879 165,483 142,020
Other operating and general .............................. 1,095,954 1,114,519 970,215
----------- ----------- -----------
6,191,209 6,309,665 6,104,378
----------- ----------- -----------
(Loss) income from racing operations ................... (290,853) 7,296 (72,060)
Equity in earnings of joint venture ........................ 23,345 15,705 21,018
Interest expense, net ...................................... (249,383) (258,855) (292,078)
----------- ----------- -----------
Loss before income tax benefit and change
in accounting principle ............................ (516,891) (235,854) (343,120)
Income tax benefit of operating loss ....................... 185,000 106,000 104,000
----------- ----------- -----------
Loss before cumulative effect of change in accounting
principle .............................................. (331,891) (129,854) (239,120)
Cumulative effect of change in accounting for income taxes . 41,000
----------- ----------- -----------
Net loss ........................................... $ (331,891) $ (129,854) $ (198,120)
=========== =========== ===========
LOSS PER COMMON SHARE:
Loss before cumulative effect of change in accounting
principle .............................................. $ (.56) $ (.22) $ (.40)
Cumulative effect of change in accounting for income taxes .07
----------- ----------- -----------
NET LOSS PER COMMON SHARE .................................. $ (.56) $ (.22) $ (.33)
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING .......................... 595,767 595,767 595,767
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 6
SCIOTO DOWNS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended October 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
CAPITAL IN PENSION
COMMON STOCK EXCESS OF LIABILITY TOTAL
-------------------- PAR VALUE RETAINED ADJUSTMENT, STOCKHOLDERS'
SHARES AMOUNT OF STOCK EARNINGS NET OF TAXES EQUITY
------ ------ -------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1993........ 595,767 $625,555 $2,037,300 $2,694,884 $5,357,739
Net loss..................... (198,120) (198,120)
Cash dividends .............. (59,578)(A) (59,578)
Pension liability
adjustment, net of
taxes ..................... $ (41,033) (41,033)
--------- ---------- ----------- ----------- ----------- --------------
Balance, October 31, 1994........ 595,767 625,555 2,037,300 2,437,186 (41,033) 5,059,008
Net loss..................... (129,854) (129,854)
Cash dividends .............. (59,539)(A) (59,539)
Pension liability
adjustment, net of
taxes ..................... 1,558 1,558
--------- ---------- ----------- ----------- ----------- --------------
Balance, October 31, 1995........ 595,767 625,555 2,037,300 2,247,793 (39,475) 4,871,173
Net loss..................... (331,891) (331,891)
Cash dividends............... (59,559)(A) (59,559)
Pension liability
adjustment, net of
taxes ..................... (8,820) (8,820)
--------- ---------- ----------- ----------- ----------- --------------
Balance, October 31, 1996........ 595,767 $625,555 $2,037,300 $1,856,343 $ (48,295) $4,470,903
========= ========== =========== =========== =========== ==============
<CAPTION>
(A) Dividends per share:
<S> <C>
1994 $.10
====
1995 $.10
====
1996 $.10
====
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 7
SCIOTO DOWNS, INC.
STATEMENTS OF CASH FLOWS
for the years ended October 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss) ............................................ $(331,891) $(129,854) $(198,120)
--------- --------- ---------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in earnings of joint venture ................ (23,345) (15,705) (21,018)
Cumulative effect of change in accounting
for income taxes ................................. (41,000)
Depreciation and amortization ...................... 732,139 728,526 753,346
Deferred income taxes .............................. (185,000) (106,000) (104,000)
Change in refundable income taxes .................. 59,430
Change in accounts receivable ...................... 23,954 (41,096) (19,336)
Change in prepaid expenses and other ............... 6,211 7,304 12,781
Change in accounts payable, trade .................. 545 31,746 52,058
Change in accrued expenses ......................... (3,407) 3,435 (9,469)
--------- --------- ---------
Total adjustments ................................ 551,097 608,210 682,792
--------- --------- ---------
Net cash provided by operating activities ........ 219,206 478,356 484,672
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net .............. (204,286) (200,312) (198,224)
--------- --------- ---------
Net cash used in investing activities ............ (204,286) (200,312) (198,224)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term debt ................................ (121,556) (115,804) (106,105)
Dividends paid ....................................... (59,559) (59,539) (59,578)
Payment of refinancing fee ........................... (104,829)
--------- --------- ---------
Net cash used in financing activities .............. (181,115) (175,343) (270,512)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (166,195) 102,701 15,936
Cash and cash equivalents, beginning of year ........... 787,786 685,085 669,149
--------- --------- ---------
Cash and cash equivalents, end of year ........... $ 621,591 $ 787,786 $ 685,085
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest paid ...................................... $ 250,224 $ 228,896 $ 258,514
========= ========= =========
Income taxes refunded .............................. $ 0 $ 1,372 $ 57,728
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
The Company increased (reduced) its net
minimum pension liability, which is net of taxes ... $ 8,820 $ (1,558) $ 41,033
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE> 8
NOTES TO THE FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS:
Scioto Downs, Inc.'s (the Company) business is the ownership and operation
of a harness horseracing facility located in Ohio. Revenues are earned from
commissions on pari-mutuel wagering and various other related revenues
including admissions, concessions and parking.
2. ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in
the preparation of the financial statements.
A. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents represent amounts on deposit with financial
institutions, including money market investments. At October 31, 1996
and 1995, cash and cash equivalents included investments of
approximately $612,000 and $648,000, respectively, held at one
financial institution.
B. PROPERTY AND EQUIPMENT:
The Company records asset acquisitions at cost. Depreciation is
recognized on the straight-line method over the estimated useful lives
of the applicable assets as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
CLASS OF ASSETS LIVES (YEARS)
<S> <C>
Buildings................................... 10 to 40
Land improvements............................ 6 to 20
Furniture and fixtures....................... 4 to 20
Machinery and equipment...................... 5 to 15
</TABLE>
Maintenance, repairs and minor renewals are charged to expense as
incurred, while major renewals and betterments are capitalized. The
cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the related accounts, and resulting gains
or losses are reflected in income.
C. INCOME TAXES:
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires a change from the deferred method to the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Under the deferred method, deferred
taxes were recognized using the tax rate applicable to the year of the
calculation and were not adjusted for subsequent changes in tax rates.
The Company adopted SFAS No. 109 in 1994 and has reported the
cumulative effect of the change in the method of accounting for income
taxes as of the beginning of 1994 in the statement of operations.
D. NET LOSS PER COMMON SHARE:
Net loss per share of common stock is based on the weighted average
number of shares outstanding during each of the respective years.
E. 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
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
3. AFFILIATED ENTITY:
The Company leases its racing facilities to Mid-America Racing Association,
inc. (Mid America), which has common management and certain common
stockholders with the company. The facilities are leased for the period of
time necessary to conduct an annual racing meet under the terms of a
25-year lease agreement which expires on December 31, 2013. The lease
agreement provides for rental payments to the Company based upon
percentages of daily pari-mutuel wagering during the meet with a minimum
annual rental payment of $7,200. During 1996, 1995 and 1994, Mid-America
paid to the Company additional rents of $57,763 each year. These additional
payments are based upon two months of the Company's required debt service
during the period in which Mid-America rents the Company's facilities.
These additional payments are subject to annual approval by Mid-America.
The gross lease income was $301,419 in 1996, $305,226 in
21
<PAGE> 9
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
1995 and $316,009 in 1994. As discussed in Note 7, the lessee remits its
portion of the pari-mutuel tax abatement to the Company. Such tax abatement
remitted amounted to $126,621 in 1996, $128,964 in 1995 and $135,860 in
1994. In addition, the lessee is required to pay certain operating
expenses. Revenues from this lease are accounted for on the operating
method.
Accounts receivable includes amounts due from Mid-America for the portion
of certain shared corporate overhead expenses paid by Scioto Downs, Inc.
and subsequently reimbursed by Mid-America. Such receivables were $6,836
and $45,506 at October 31, 1996 and 1995, respectively, and such reimbursed
expenses were $277,000 in 1996, $257,920 in 1995 and $192,009 in 1994.
4. INCOME TAXES:
As discussed in Note 2, the Company adopted SFAS No. 109 as of the
beginning of 1994. The cumulative effect on prior years of adopting this
change in accounting principle increased net income by $41,000 and is
reported separately in the statement of operations for the year ended
October 31, 1994.
Income tax benefit includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income taxes (benefit):
Deferred....................................................... $(185,000) $(106,000) $(104,000)
--------- --------- ---------
Total.......................................................... $(185,000) $(106,000) $(104,000)
========= ========= =========
</TABLE>
A summary of the effective income tax rates is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PRETAX LOSS
-------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate.......................................... (34)% (34)% (34)%
Surtax exemption................................................ 5 1
Permanent differences........................................... 7 3 3
Deferred tax rate adjustment.................................... (9) (19)
---- ---- ----
Effective tax rate.............................................. (36)% (45)% (30)%
=== === ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at October 31
are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
DEFERRED TAX ASSETS ARISING FROM:
<S> <C> <C>
AMT credit/net operating loss carryovers...................... $ 511,153 $ 393,046
Valuation allowance........................................... ( 97,071) (78,775)
Pension liability adjustment.................................. 24,880 20,323
--------- ---------
Total deferred tax assets................................... $ 438,962 $ 334,594
========= =========
DEFERRED TAX LIABILITIES ARISING FROM:
Depreciation.................................................. $ 443,872 $ 517,547
Other, net.................................................... 9,791
--------- ---------
Total deferred tax liabilities.............................. $ 443,872 $ 527,338
========= =========
</TABLE>
The Company has recorded a valuation allowance of $97,071 and $78,775 at
October 31, 1996 and 1995, respectively, related to net operating loss
carryforwards for state income taxes and contribution carryforwards not
expected to be utilized. Deferred tax assets, liabilities, and federal
income tax expense in future years can be significantly affected by changes
in enacted tax rates and the rates at which net operating loss carryforwards
are utilized.
22
<PAGE> 10
NOTES TO THE FINANCIAL STATEMENTS, Continued
At October 31, 1996, the Company has, for federal income tax purposes,
approximately $59,000 in alternative minimum tax credit carryforwards and
$1,315,000 in net operating loss carryforwards. The tax operating loss
carryforwards expire over the years 2008 through 2011. The alternative
minimum tax credit can be carried forward indefinitely.
5. COMMITMENTS:
The Company leases pari-mutuel equipment under a five-year noncancelable
operating lease which expires April 30, 1998. Rental expense was $115,871
in 1996, $116,854 in 1995 and $106,339 in 1994. The aggregate of the
minimum rental payment for pari-mutuel equipment is based upon an annual
minimum lease payment of $97,600 plus additional rental payments if
pari-mutuel wagering exceeds certain predetermined levels. During January
1997, the Company entered into an agreement to purchase and install
approximately $455,000 of simulcasting equipment.
6. RETIREMENT PLANS:
The Company and Mid-America sponsor a noncontributory defined
benefit pension plan covering all full-time employees meeting certain age
and service requirements. The Company and Mid-America share proportionately
the costs and related assets of the plan. The Company's total pension
expense, which includes both current service costs and amortization of
prior years' service costs, amounted to $26,537 in 1996, $26,169 in 1995
and $20,880 in 1994.
The Company's funding policy is to contribute annually an amount sufficient
to fund the plan's current service cost on a current basis, and to fund
estimated past service costs over a thirty-year period using a different
actuarial cost method and different assumptions from those used for
financial reporting.
Net pension expense includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 14,627 $ 13,648 $ 13,487
Interest cost on projected benefit obligations................... 32,381 31,155 30,454
Actual (gain) loss on plan assets................................ (17,709) (35,674) 5,318
Net amortization relating to the deferral of initial
transitional obligation and subsequent gains and losses......... (2,762) 17,040 (28,379)
-------- -------- --------
Net pension expense.............................................. $ 26,537 $ 26,169 $ 20,880
======== ======== ========
</TABLE>
The Company's portion of the funded status of the plan and accrued pension
expense at October 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits............................................... $421,432 $405,023 $385,603
Nonvested benefits............................................ 9,477 8,486 12,901
-------- -------- --------
Accumulated benefit obligation.................................... 430,909 413,509 398,504
Impact of future salary increases................................. 29,136 27,963 27,360
-------- -------- --------
Projected benefit obligation...................................... 460,045 441,472 425,864
Plan assets at fair value, primarily a diversified
income fund and cash equivalents................................ 334,520 330,935 312,640
-------- -------- --------
Plan assets in deficiency of projected
benefit obligation.............................................. (125,525) (110,537) (113,224)
Items not recognized in income:
Unrecognized prior service cost .............................. 2,547 2,803 3,075
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions...................................... 102,311 87,767 89,544
Initial transitional obligation which is being
amortized over 17.5 years....................................... 14,155 15,959 17,864
Accrued pension expense........................................... $(6,512) $(4,008) $(2,741)
======== ======= =======
</TABLE>
23
<PAGE> 11
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
Assumptions used for the plan are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate..................................................... 7.50% 7.50% 7.50%
Rate of increase in compensation levels........................... 5.50% 5.50% 5.50%
Long-term rate of return on assets................................ 8.00% 8.00% 8.00%
</TABLE>
Plan assets have been valued at market value.
The Company and Mid-America have a 401(k) savings plan covering substantially
all full-time employees. The Company expensed matching contributions of
$7,656 in 1996, $7,202 in 1995 and $7,529 in 1994.
7. PARI-MUTUEL TAX ABATEMENT:
To encourage the improvement of racing facilities in Ohio, permit holders are
allowed to recover 70% of the cost of qualified improvements as determined by
the Ohio State Racing Commission. Such recovery is accomplished by reducing
each day's pari-mutuel tax paid to the state by 3/4 of 1% of pari-mutuel
wagering and continues for 15 years (10 years if construction of the
improvements commenced after March 29, 1988), or until the total tax
reduction reaches 70% of the cost of the improvement, whichever occurs first.
Such abatement is available to all permit holders who race at the improved
facility. By agreement, Mid-America remits its portion of the abatement to
the Company (see Note 3). At October 31, 1996, the Company had $1,751,574 of
abatement available for recovery in future periods.
The Company earned pari-mutuel tax abatement (including amounts remitted by
Mid-America) of $280,968 in 1996, $294,683 in 1995 and $301,316 in 1994.
8. DEBT FINANCING ARRANGEMENTS:
The Company has available for its use a line of credit with a financial
institution for $1,000,000. The line, which is renewed annually, calls for
interest at the prime rate (8.25% at October 31, 1996). The Company borrowed
and subsequently repaid $415,000 during fiscal 1996. At October 31, 1996 and
1995, the line had no outstanding balance.
In October 1996, the Company refinanced its five-year term loan with the same
financial institution. The revised term loan agreement calls for a
fifteen-year amortization of the principal at a fixed rate of 8.15% and
interest, with a minimum annual principal reduction of $100,000. A balloon
payment for the remaining principal is due in November 2001. The aggregate
amount of the required annual principal payments at October 31, 1996 is as
follows:
<TABLE>
<S> <C>
1997 $ 100,000
1998 100,000
1999 100,000
2000 100,000
2001 100,000
Thereafter 2,625,855
----------
Total $3,125,855
==========
</TABLE>
The term loan is collateralized by a first mortgage on the Company's real
property facilities, as well as all other personal property, and an
assignment of the rents from the Company's lease arrangements.
9. JOINT VENTURE:
On January 14, 1992, the Company entered into a joint venture agreement for
the purpose of installing and operating outdoor advertising at the Company's
facilities. Revenues and expenses, as well as cash shortfalls, are shared
equally by both participants in the joint venture. The Company accounts for
its investment under the equity method of accounting. The Company recorded
$23,345 in 1996, $15,075 in 1995 and $21,018 in 1994, as its proportionate
share of the joint venture's earnings in its statements of operations.
24
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Scioto Downs, Inc.
We have audited the accompanying balance sheets of Scioto Downs, Inc. as of
October 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended October 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scioto Downs, Inc. as of
October 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Company changed its
method of accounting for income taxes in 1994.
/s/ Coopers & Lybrand LLP
Columbus, Ohio
January 6, 1997
1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
The following should be read in conjunction with the Selected Financial Data
and the Financial Statements of the company, including the respective notes
thereto, all of which are included herein.
GENERAL
The Company's operations are limited by the race dates assigned to it by the
Ohio State Racing Commission. In Ohio, each permit holder may be granted 61 race
days within a specified time period. The entire racing season at Scioto Downs
commencing in May and ending in September was divided between Scioto Downs, 61
days, and Mid-America Racing Association, 54 days. As a result, the entire
racing season for the Company falls within the third quarter ending July 31st.
The majority of rental income form leasing the facility to Mid-America is earned
during the fourth quarter ending October 31st.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenue from pari-mutuel commissions and breakage decreased by 6.7% or
$315,096 due to poor weather experienced during the first part of the racing
season. Admissions income decreased by 9.0% or $17,710 due to a decrease in
attendance. Pari-mutuel taxes decreased 8.4% or $70,868 due to the decrease in
the pari-mutuel handle. Consequently, purse expense decreased $86,376 since, by
agreement with the horsemen, purses are calculated based on commissions net of
pari-mutuel taxes. Entry fees and purse monies added by others decreased by
11.9% or $106,008, due to a lower number of horses entered in stake events
during the current race meet. Concession, programs and other decreased primarily
due to the decrease in attendance. Rental income and tax abatement pass through
from Mid-America decreased by $3,807 and $13,715, respectively, due to a
decrease in handle for Mid-America in 1996.
Interest expense is a result of debt required to finance the construction
of the clubhouse enclosure and draws on the line of credit for operations
during the off season. The decrease of $9,472 is a result
25
<PAGE> 13
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 -- CONTINUED
of the increase in the prime lending rate on the line of credit, offset by
recurring payments for principal reductions of debt. Other operating and general
expenses decreased by 1.7% or $18,565 due to a reduction in the simulcasting
expense in the current year.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Revenues from pari-mutuel commissions and breakage increased slightly at .1%
or $30,320 despite a 5.8% decrease in attendance as a result of increased
wagering from simulcasting two to four races per night in the 1995 season. Thus,
per capita (average wagering per person) increased 6.3% form $94.46 in 1994 to
$100.44 in 1995. Admissions income decreased by $6,684 due to a decrease in
attendance. Pari-mutuel taxes decreased $234,022 or 21.7% due mainly to a new
state tax law. Consequently, purse expense increased $104,161 since, by
agreement with the horseman, purses are calculated based on commissions net of
pari-mutuel taxes. Entry fees and purse monies added by others increased by
$76,413 due to a higher number of horses entered in stake events during the
current race meet. Concessions, program, and other decreased primarily due to
the decrease in attendance. Rental income and tax abatement pass through from
Mid-America decreased by $10,783 and $6,633, respectively, due to a decrease in
handle for Mid-America in 1995.
Interest expense is a result or debt required to finance the construction of
the clubhouse enclosure. The decrease of $33,223 is a result of the reduced
principal balance of the debt.
Other operating and general expenses increased by $144,304 or 14.9% for
1995, primarily as a result of increased simulcasting expenses of $82,593 and
minor increases in utilities, and other miscellaneous expenses.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
Total revenues remained constant with only a .1% decrease while operating
expenses also held steady with a 2.2% increase. A slight decrease in overall
attendance of 639 or .3% from 1993 and a large increase in passes with free
admission, resulted in a decrease of $23,719 in admissions revenue. Rental
income and tax abatement pass through from Mid-America decreased by $42,273 and
$16,317, respectively, due to a decrease in handle for Mid-America in 1994 with
6 less racing days. Purse awards paid increased by $22,736 as a direct result of
higher entry fees and purse monies added by others. Other operating and general
expenses increased by $63,489 primarily as a result of simulcast expense,
heating fuel cost and group sales advertising increasing $23,260, $10,202 and
$14,140, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Clubhouse enclosure project was completed prior to the 1991 racing
season at a total cost of approximately $5,316,000. The Company financed the
project with a combination of internal funds of $1,641,000 and a $3,675,000 loan
with its principle financial institution (see note 8 to the financial statements
for further details). During 1996, 1995 and 1994, the Company invested $204,286,
$200,312, and $198,224, respectfully, in the purchases of property and
equipment. During 1996, 1995 and 1994 the Company utilized its $1,000,000 line
of credit to provide working capital during the off season and anticipates
having to draw upon the line during the off season in 1997. In addition, the
Company continued to generate positive cash flow from operations during 1996,
1995 and 1994 $219,206, $478,356, and $484,672, respectfully. Cash provided by
operating activities decreased during 1996 due to an increase in the net loss as
a result of poor weather conditions. Positive cash flow is anticipated to
continue from operations in future years along with liquidity. The Company's
ability to generate sufficient cash to meet its needs, on both a long-term and
short-term basis, is anticipated to continue based on the Company's stable
current ratios of 1.57, 1.92 (excluding the balloon portion of long-term debt)
and 1.88 as of October 31, 1996, 1995 and 1994, respectfully, and other
long-term plans. During 1996, 1995 and 1994, the Company has paid cash dividends
despite a net loss that is due principally to depreciation and other noncash
items. In October 1996, the Company refinanced the five-term loan with the same
financial institution. The revised term loan agreement calls for a fifteen-year
amortization of the principal at a fixed rate of 8.15% and interest, with a
minimum annual principal reduction of $100,000. A balloon payment for the
remaining principal is due in November 2001.
26
<PAGE> 14
RECENT DEVELOPMENTS AND OUTLOOK
The Ohio General Assembly passed legislation authorizing "full card
simulcasting". This will allow an unlimited number of race tracks to be
simulcast at a track or parlor during the track's race meet dates. This will
enable crossbreed simulcasting; thus Scioto will show thoroughbreds as well as
harness from other race tracks. This legislation will provide for increased
utilization of current facilities and an opportunity to increase handle by
offering additional diversified product. The Company has estimated a cost of
$750,000 for the installation of the necessary equipment for providing the
simulcast product to its customers. The Company intends to finance the
installation and equipment through a loan with its principle financial
institution.
During September 1996, the Company entered into an agreement with Beulah
Park to share revenues derived from full card simulcasting. Revenues are derived
by the Company from full card simulcasting conducted in the afternoons on days
it is conducting live racing in the evening, and, on days it is not conducting
live racing, will be shared with Beulah Park. Revenues derived by the Company
from simulcasting during the evening hours when the Company is conducting live
racing will be retained by the Company. On days that it is conducting live
racing in the afternoon, Beulah Park will conduct full card simulcasting in the
evening. Revenues derived by Beulah Park from full card simulcasting conducted
in the evenings on days it is conducting live racing in the afternoon, and, on
days when it is not conducting live racing, will be shared with the Company.
SELECTED FINANCIAL DATA
For the five years ended October 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net loss per common share (a)..................... $ (.56) $ (.22) $ (.33) $ (.31) $ (.20)
========== ========== ========== ========== ==========
Total assets...................................... $8,094,579 $8,795,790 $9,172,613 $9,621,762 $9,961,563
========== ========== ========== ========== ==========
Cash dividends per common share................... $ .10 $ .10 $ .10 $ .10 $ .10
========== ========== ========== ========== ==========
Average common shares outstanding................. 595,767 595,767 595,767 595,767 595,767
========== ========== ========== ========== ==========
Term obligations.................................. $3,125,855 $3,247,411 $3,263,615 $3,369,320 $3,475,155
========== ========== ========== ========== ==========
<FN>
(a) See Note 2 to the Financial Statements.
</TABLE>
TWENTY YEAR PER SHARE SUMMARY OF (LOSS) EARNINGS, DIVIDENDS, AND BOOK VALUE
<TABLE>
<CAPTION>
(LOSS)
YEAR EARNINGS DIVIDENDS BOOK VALUE
<S> <C> <C> <C>
1996 $ (.56) $ .10 $ 7.50
1995 (.22) .10 8.18
1994 (.33) .10 8.49
1993 (.31) .10 8.99
1992 (.20) .10 9.41
1991 .00 .44 9.71
1990 .21 .44 10.15
1989 .71 .44 10.38
1988 .68 .42 10.11
1987 .44 .40 9.85
1986 .76 .40 9.81
</TABLE>
<TABLE>
<CAPTION>
(LOSS)
YEAR EARNINGS DIVIDENDS BOOK VALUE
<S> <C> <C> <C>
1985 $ .51 $ .40 $ 9.45
1984 .83 .40 9.22
1983 .62 .40 8.79
1982 .47 .40 8.49
1981 .53 .40 8.37
1980 .54 .40 8.21
1979 .74 .38 8.06
1978 .82 .36 7.70
1977 .72 .35 7.23
1976 .56 .32 6.85
</TABLE>
27
<PAGE> 15
FIVE YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 31 1996 1995 1994 1993 1992
---------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Pari-mutuel commissions and breakage.................. $4,375,312 $4,690,408 $4,660,088 $4,647,173 $4,714,886
Less pari-mutuel taxes.............................. 771,643 842,511 1,076,533 1,066,663 1,079,526
---------- ---------- ---------- ---------- ----------
3,603,669 3,847,897 3,583,555 3,580,510 3,635,360
Admissions............................................ 179,990 197,700 204,384 228,103 261,374
Concessions, program, parking, and other.............. 751,606 782,743 814,755 799,233 835,227
Entry fees and purse monies added by others........... 782,704 888,712 812,299 753,601 733,394
Rental income from leased facilities.................. 301,419 305,226 316,009 358,282 355,475
Pari-mutuel tax abatement earned...................... 280,968 294,683 301,316 317,633 316,754
---------- ---------- ---------- ---------- ----------
5,900,356 6,316,961 6,032,318 6,037,362 6,137,584
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Purse awards.......................................... 2,510,802 2,597,178 2,493,017 2,470,281 2,450,020
Salaries and wages.................................... 1,048,031 1,030,606 1,043,284 1,019,485 1,023,592
Depreciation.......................................... 697,196 693,583 709,403 701,300 700,957
Advertising........................................... 283,514 338,779 338,111 310,754 327,362
Real and personal property taxes...................... 192,293 192,077 206,783 198,174 186,155
Insurance............................................. 188,540 177,440 201,545 212,660 187,418
Insurancend maintenance............................... 174,879 165,483 142,020 155,926 177,562
Other operating and general........................... 1,095,954 1,114,519 970,215 906,726 889,468
---------- ---------- ---------- ---------- ----------
6,191,209 6,309,665 6,104,378 5,975,306 5,942,534
---------- ---------- ---------- ---------- ----------
(Loss) income from racing operations................ ( 290,853) 7,296 ( 72,060) 62,056 195,050
Equity in earnings of joint venture..................... 23,345 15,705 21,018 9,858 9,535
Interest expense, net................................... ( 249,383) ( 258,855) ( 292,078) ( 352,596) ( 381,947)
Gain on sale of equipment............................... 3,500
---------- ---------- ---------- ---------- ----------
Loss before income tax benefit
and change in accounting principle.................. ( 516,891) ( 235,854) ( 343,120) ( 277,182) ( 177,362)
Income tax benefit of operating loss.................... 185,000 106,000 104,000 90,000 56,000
---------- ---------- ---------- ---------- ----------
Loss before cumulative effect of
change in accounting principle...................... ( 331,891) ( 129,854) ( 239,120) ( 187,182) ( 121,362)
Cumulative effect of change in accounting
for income taxes.................................... 41,000
---------- ---------- ---------- ---------- ----------
Net loss.......................................... $( 331,891) $( 129,854) $( 198,120) $( 187,182) $( 121,362)
========== ========== ========== ========== ==========
</TABLE>
QUARTERLY SHARE DATA:
Set forth below are the high and low closing bid prices of Scioto Downs,
Inc. as reported by Tradeline and the cash dividends paid and declared on a
fiscal quarter basis for the two years ended October 31, 1996. These bid prices
do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
LOW HIGH DIVIDENDS
<S> <C> <C> <C>
1996 First Quarter 1/31 $12.00 $15.25
Second Quarter 4/30 12.00 16.25
Third Quarter 7/31 12.25 14.75 $.05
Fourth Quarter 10/31 12.25 14.25 .05
1995 First Quarter 1/31 $10.50 $11.00
Second Quarter 4/30 10.50 10.88
Third Quarter 7/31 10.88 12.25 $.05
Fourth Quarter 10/31 12.25 15.25 .05
</TABLE>
The market for the Company's common stock is generally inactive.
The number of common stockholders of the Company as of October 31, 1996 totaled
1,697.
The Company anticipates that the pattern of cash dividends paid in 1996 will be
maintained in the near future.
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-1-1995
<PERIOD-END> OCT-31-1996
<CASH> 621,591
<SECURITIES> 0
<RECEIVABLES> 47,106
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 787,596
<PP&E> 7,306,983
<DEPRECIATION> 11,962,780
<TOTAL-ASSETS> 8,094,579
<CURRENT-LIABILITIES> 503,034
<BONDS> 0
<COMMON> 625,555
0
0
<OTHER-SE> 3,845,348
<TOTAL-LIABILITY-AND-EQUITY> 8,094,579
<SALES> 226,783
<TOTAL-REVENUES> 5,923,701
<CGS> 93,013
<TOTAL-COSTS> 6,191,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249,383
<INCOME-PRETAX> (516,891)
<INCOME-TAX> (185,000)
<INCOME-CONTINUING> (331,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (331,891)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
