<PAGE> 1
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, 1998
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period to
from ---------------------------------------------
Commission file number 0-1365
---------------------------------------------
SCIOTO DOWNS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in ith charter)
Ohio 31-4440550
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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> 2
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 January 8, 1999 was $4,404,010 or $12.25 per
share.
Registrant has only one class of shares outstanding, namely, common
shares. The number of common shares outstanding as of January 8, 1999 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, 1998 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 23, 1999 are incorporated by reference in Part
III.
The Exhibit index is on page 10.
<PAGE> 3
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 started in 1959 and there
has been no material change in the method of conducting this business. In
addition to the racetrack itself, there are parking, grandstand, clubhouse and
eating facilities for Registrant's customers and barn and stable facilities for
the horses. Revenue is derived primarily from commissions on parimutuel wagering
(net of parimutuel taxes), admission fees to enter the facilities and
concessions, programs and parking. In 1998, commissions on parimutuel wagering
net of parimutuel taxes represented 64% of revenues, in 1997 65%, and in 1996
61%. In 1998, admissions represented 2% of revenues, in 1997 2%, and in 1996 3%.
In 1998, revenues from concessions, parking and programs amounted to 10% of
revenues, in 1997 11%, and in 1996 12%. During each off-season period in 1998,
1997 and 1996, the Registrant employed 17 persons. During the last three years,
average daily attendance has declined from 3,295 in 1996 to 2,219 in 1997 and to
2,187 in 1998. However, during 1997 and 1998, because of the full-card
simulcasting program, Registrant did not track attendance for people entering
the facility prior to 6:00 p.m.
The number of races conducted during a live racing program varies from
9 races during the week to 11 or 12 races on weekends. The nearest racetrack
competition is Beulah Park, a thoroughbred horse racetrack approximately 6 miles
away. Beulah Park typically conducts live racing from the middle of September
until the first weekend of May, during which time Registrant is not open.
Registrant conducts its business pursuant to a permit issued annually
by the Ohio Racing Commission. All of the racing conducted by Registrant is
conducted in accordance with applicable Ohio statutes and the rules and
regulations of the Ohio Racing Commission. The Ohio Racing Commission regulates
and controls the forms of wagering that are permitted at the racetrack, the
procedures to be followed as to wagering, the wagering information to be
provided to the public, the number of races permitted during a racing program
and the days and time of day racing will be permitted. The Commission also
approves full- card simulcasting schedules. All persons who work at the
racetrack must be licensed by the Ohio Racing Commission. All owners, trainers,
drivers and other persons involved in the racing program must be licensed by the
Ohio Racing Commission. For the period covered by this report, Registrant was
issued a permit by the Ohio Racing Commission to conduct harness live racing at
its facilities for a period of 61 days together with full-card simulcasting on
those days and an additional 11 days (Sundays).
2
<PAGE> 4
Except on special occasions such as Memorial Day, July 4 and Labor Day,
Registrant conducts its racing at night 6 days a week. The 71 day period in 1998
commenced May 2nd and continued through July 11th. Registrant then leased its
facilities to Mid-America Racing Association, Inc. for 60 days of live racing,
which period ended September 19, 1998. Mid-America Racing conducted full-card
simulcasting on live racing days and on an additional 10 days (Sundays). This
lease generated 7% of total revenue in 1998. This lease is on file with the
Commission.
During 1998, major racing programs conducted at Registrant's facilities
included the Little Brown Jug Preview, the Scarlet O'Hara, the Pink Bonnet, the
Ohio Sires Stakes events and Ohio Fair stakes events. Forms of competition faced
by Registrant during its summer racing schedule include, in addition to the
normal summer events, professional baseball (minor league in Columbus and major
league in Cincinnati and Cleveland), outdoor music concerts and other similar
entertainment events. Riverboat gambling has been approved in Indiana and
land-based casinos have been approved in Michigan. At the present time there is
not sufficient information to determine if these gambling opportunities had a
noticeable effect upon the wagering conducted at Registrant's facility.
Legalized gambling in the form of the Ohio lottery has been in existence for
many years and has had an adverse effect upon wagering at Registrant's facility.
In 1997, the Ohio legislature approved legislation which permits full
card simulcasting at racetracks in Ohio. This legislation enables Ohio
racetracks to bring in to their facilities via television day and night full
race programs conducted at racetracks located outside the State of Ohio. As a
result of this legislation, during its regular racing meet from May to July,
Registrant, in addition to its regular live racing program in the evening shows
at its facility via television during the day and night races being conducted at
other tracks in Ohio and tracks outside of Ohio. Customers at Registrant's
facility are able to wager on all of these races.
As a result of this legislation, Registrant and its nearest racetrack
competitor Beulah Park could be open year round conducting both live racing and
bringing racing in from out of state in competition with each other. This
situation would not be advantageous to either track and, as a result, Registrant
and Beulah Park entered into an agreement to not be open at the same. Pursuant
to this agreement, during 1998 Beulah Park operated from the middle of September
to the first of May while Registrant was closed. During that period of time
revenues derived from simulcasting at Beulah Park at night when it is not
conducting live racing was, after deducting of certain expenses, shared with
Scioto Downs ($70,915 during 1998 and $49,874 during 1997). Overall, during
1998, as a result of full card simulcasting, wagering on live racing declined
and the additional wagering on simulcast races offset the decline in wagering on
live racing. No live racing or full card simulcasting has been conducted at
Registrant's facilities since September 19, 1998. The 1999 racing season will
commence May 1, 1999.
3
<PAGE> 5
During the racing season, the Registrant has employed approximately 350
people, most all of whom are parimutuel clerks employed during the hours the
track is open for simulcasting and live racing which is approximately twelve
noon to midnight. As a part of the full card simulcast racing program,
Registrant sends its live races via television to all other tracks in Ohio and
as many facilities outside the State of Ohio that it can contract with to
receive the signal, which could be as many as 25 facilities. Registrant will
receive a percentage (in most instances 3%) of the amount wagered on its races
at these other facilities outside the State of Ohio. Total export signal revenue
was $243,216 in 1998.
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 (including simulcasting), 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 141 days
commencing in May and ending in mid-September.
4
<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.
5
<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,
1998:
<TABLE>
<CAPTION>
ANNUAL REPORT TO
STOCKHOLDERS SEQUENTIAL PAGES
<S> <C> <C>
Item 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 25
Item 6. SELECTED FINANCIAL DATA 24
Item 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS 18-23
Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK Not applicable
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 4-17
Item 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE Not applicable
</TABLE>
6
<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
February 4, 1999, relating to the Annual Meeting of Stockholders to be held on
February 23, 1999.
7
<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> <C>
(a.) 1. Financial Statements
Data incorporated by reference from the attached
1998 Annual Report to Stockholders of
Scioto Downs, Inc.:
Report of Independent Accountants on
Financial Statements 17
Balance Sheets as of October 31, 1998 and 1997 4
Statements of Operations for the years ended
October 31, 1998, 1997 and 1996 6
Statements of Stockholders' Equity for the years
ended October 31, 1998, 1997 and 1996 7
Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996 8
Notes to the Financial Statements 9
(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 10.
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 10.
(d) Not applicable or not required
(e) Not applicable.
</TABLE>
8
<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,
Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ Robert S. Steele
-----------------------------------
President, Chief Operating Officer,
Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ LaVerne A. Hill
-----------------------------------
Vice President, Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ William C. Heer
-----------------------------------
Treasurer, Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ John J. Chester
-----------------------------------
Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ John F. Fissell
-----------------------------------
Director
-----------------------------------
Title
-----------------------------------
Date: January 29, 1999 By /s/ Robert E. Suchy
-----------------------------------
Controller
-----------------------------------
Title
9
<PAGE> 11
INDEX TO EXHIBITS ANNUAL REPORT ON FORM 10-K
for the year ended October 31, 1998
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<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 *
13 Annual Report to Stockholders
27 Financial Data Schedule
</TABLE>
* Previously filed with Securities and Exchange Commission
10
<PAGE> 1
SCIOTO DOWNS, INC.
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
OCTOBER 31, 1998, 1997 AND 1996
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
January 8, 1999
To the Board of Directors and Stockholders
Scioto Downs, Inc.
Columbus, Ohio
In our opinion, the accompanying balance sheets and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Scioto Downs, Inc. at October 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
1
<PAGE> 3
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,503,240 $ 924,176
Accounts receivable 269,352 283,866
Prepaid expenses and other 77,729 59,815
Investment in joint venture 97,126 95,089
----------------- -----------------
Total current assets 1,947,447 1,362,946
----------------- -----------------
Property and equipment, at cost:
Buildings 14,548,305 14,448,305
Land improvements 1,328,990 1,328,990
Furniture and fixtures 1,657,699 1,657,699
Machinery and equipment 2,181,802 2,181,802
----------------- -----------------
19,716,796 19,616,796
Less accumulated depreciation 13,386,843 12,691,406
----------------- -----------------
6,329,953 6,925,390
Land 299,847 299,847
----------------- -----------------
6,629,800 7,225,237
----------------- -----------------
Total assets $ 8,577,247 $ 8,588,183
----------------- -----------------
</TABLE>
CONTINUED
2
<PAGE> 4
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------
1998 1997
LIABILITIES
<S> <C> <C>
Current liabilities:
Accounts payable, trade $ 41,123 $ 133,977
Purses payable and simulcast purse fund 495,055 129,785
Dividends payable 29,789 29,789
Current maturities, term debt 281,237 253,548
Accrued expenses:
Property taxes 166,090 150,369
Other 51,821 31,034
----------------- -----------------
Total current liabilities 1,065,115 728,502
----------------- -----------------
Minimum pension liability 115,771 105,121
----------------- -----------------
Deferred income taxes 43,342 28,994
----------------- -----------------
Term debt, net of current maturities 2,925,113 3,242,001
----------------- -----------------
Commitments and contingencies
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 1,833,861 1,880,490
Pension liability adjustment, net of taxes (68,810) (59,780)
----------------- -----------------
Total stockholders' equity 4,427,906 4,483,565
----------------- -----------------
Total liabilities and stockholders' equity $ 8,577,247 $ 8,588,183
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
STATEMENTS OF OPERATIONS
OCTOBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Nights of live racing 61 61 61
----------------- --------------- -----------------
Dark days of simulcasting 11 11
----------------- ---------------
Operating revenues:
Pari-mutuel commissions and breakage $ 6,108,475 $ 6,031,728 $ 4,375,312
Less pari-mutuel taxes 930,613 900,345 771,643
----------------- --------------- -----------------
5,177,862 5,131,383 3,603,669
----------------- --------------- -----------------
Export signal revenue 243,216 212,594 -
Admissions 132,172 149,425 179,990
Simulcasting shared revenue, net 70,915 49,874 -
Concessions, program, parking, and other 796,784 843,921 751,606
Entry fees and purse monies added by others 728,915 750,053 782,704
Rental income from leased facilities 551,582 429,709 301,419
Pari-mutuel tax abatement earned 394,062 368,247 280,968
----------------- --------------- -----------------
8,095,508 7,935,206 5,900,356
----------------- --------------- -----------------
Operating expenses:
Purses 3,073,960 2,875,409 2,510,802
Salaries and wages 1,182,815 1,199,212 1,048,031
Simulcasting fees 673,151 562,787 -
Depreciation and amortization 695,437 728,626 697,196
Advertising 312,649 311,929 283,514
Real and personal property taxes 193,551 187,237 192,293
Insurance 209,943 238,262 188,540
Repairs and maintenance 199,948 231,220 174,879
Other operating and general 1,271,423 1,252,600 1,095,954
----------------- --------------- -----------------
7,812,877 7,587,282 6,191,209
----------------- --------------- -----------------
Income (loss) from racing operations 282,631 347,924 (290,853)
Equity in earnings of joint venture 2,036 12,643 23,345
Interest expense, net (252,737) (246,861) (249,383)
----------------- --------------- -----------------
Income (loss) before income tax (expense) benefit 31,930 113,706 (516,891)
Income tax (expense) benefit (19,000) (30,000) 185,000
----------------- --------------- -----------------
Net income (loss) $ 12,930 $ 83,706 $ (331,891)
----------------- --------------- -----------------
Net income (loss) per common share $ .02 $ .14 $ (.56)
----------------- --------------- -----------------
Dividends per common share $ .10 $ .10 $ .10
----------------- --------------- -----------------
Weighted average shares outstanding, basic and diluted 595,767 595,767 595,767
----------------- --------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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>
Balances, 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)
---------- ----------- ----------- ---------- ----------- -----------
Balances, October 31, 1996 595,767 625,555 2,037,300 1,856,343 (48,295) 4,470,903
Net income -- -- -- 83,706 -- 83,706
Cash dividends -- -- -- (59,559)(A) -- (59,559)
Pension liability adjustment, net of taxes -- -- -- -- (11,485) (11,485)
---------- ----------- ----------- ---------- ----------- -----------
Balances, October 31, 1997 595,767 625,555 2,037,300 1,880,490 (59,780) 4,483,565
Net income -- -- -- 12,930 -- 12,930
Cash dividends -- -- -- (59,559)(A) -- (59,559)
Pension liability adjustment, net of taxes -- -- -- -- (9,030) (9,030)
---------- ----------- ----------- ---------- ----------- -----------
Balances, October 31, 1998 595,767 $ 625,555 $ 2,037,300 $ 1,833,861 $ (68,810) $ 4,427,906
---------- ----------- ----------- ---------- ----------- -----------
</TABLE>
(A) Dividends per share:
1996 $.10
1997 $.10
1998 $.10
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,930 $ 83,706 $ (331,891)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Equity in earnings of joint venture (2,037) (12,643) (23,345)
Depreciation and amortization 695,437 728,626 732,139
Deferred income taxes 19,000 30,000 (185,000)
Change in accounts receivable 14,514 (236,760) 23,954
Change in prepaid expenses and other (20,946) (25,519) 6,211
Change in accounts payable, trade and
purses payable and simulcast purse fund 272,416 81,575 545
Change in accrued expenses 36,508 (23,905) (3,407)
----------- ----------- -----------
Net cash provided by operating activities 1,027,822 625,080 219,206
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (100,000) (632,630) (204,286)
----------- ----------- -----------
Net cash used in investing activities (100,000) (632,630) (204,286)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 538,500 --
Payments on term debt (289,199) (168,806) (121,556)
Dividends paid (59,559) (59,559) (59,559)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (348,758) 310,135 (181,115)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 579,064 302,585 (166,195)
Cash and cash equivalents, beginning of year 924,176 621,591 787,786
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,503,240 $ 924,176 $ 621,591
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest paid $ 299,723 $ 284,694 $ 250,224
----------- ----------- -----------
Income taxes paid $ -- $ -- $ --
----------- ----------- -----------
Supplemental schedule of noncash financing activity:
The Company increased its net
minimum pension liability, which is net of taxes $ 9,030 $ 11,485 $ 8,820
----------- ----------- -----------
The Company incurred accounts payable for
leasehold improvements $ 14,250
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE BUSINESS
Scioto Downs, Inc.'s (the Company) business is the ownership and
operation of a harness horseracing facility located in central Ohio.
Revenues are earned from commissions on pari-mutuel wagering and
various 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.
Cash and cash equivalents. Cash and cash equivalents represent amounts
on deposit with financial institutions, including money market
investments with original maturities of three months or less. At
October 31, 1998, cash and cash equivalents included deposits of
approximately $1,601,000, held at one financial institution.
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 LIVES
CLASS OF ASSETS (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 operations.
Long-lived assets. During 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that full recoverability is
questionable. Management evaluates the recoverability of long-lived
assets using several factors in the valuation including, but not
limited to, management's plans for future operations, recent operating
results and projected cash flows. The adoption of SFAS No. 121 had no
effect on the Company's results of operations or financial condition.
7
<PAGE> 9
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Income taxes. The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to "temporary differences" between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Net income (loss) per common share. Net income (loss) per share of
common stock is based on the weighted average number of shares
outstanding during each of the respective years. During 1998, the
Company adopted SFAS No. 128, "Earnings per Share." The adoption of
SFAS 128 had no impact on the Company's earnings per share
computations.
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.
Revenue recognition. The Company recognizes commission revenue based
upon various percentages of pari-mutuel wagering. Other revenues are
recognized when services are performed.
New accounting pronouncements. In June 1997, the FASB issued SFAS No.
130, Reporting Comprehensive Income. SFAS 130 is effective for
financial statements issued for periods beginning after December 15,
1997, with earlier application encouraged. The Company intends to adopt
SFAS 130 in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS 131 is effective for
financial statements issued for periods beginning after December 15,
1997. The Company intends to adopt SFAS 131 in fiscal year 1999.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106. SFAS 132 is effective for financial
statements issued for periods beginning after December 15, 1997. The
Company intends to adopt SFAS 132 in fiscal year 1999.
Advertising costs. Advertising costs are expensed as incurred.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
8
<PAGE> 10
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 on percentages of daily pari-mutuel wagering during the meet with
a minimum annual rental payment of $7,200. During 1998, 1997 and 1996,
Mid-America paid to the Company additional rents of $156,243, $94,929,
and $57,763, respectively. These additional payments are based on two
months of the Company's required debt service on the clubhouse
enclosure during the period in which Mid-America rents the Company's
facilities, and beginning in fiscal year 1997, 47% of the annual
payments of principal and interest on the simulcasting equipment loan
(see Note 8). These additional payments are subject to annual approval
by Mid-America. The gross lease income was $551,582 in 1998, $429,709
in 1997, $301,419 in 1996. 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 $192,354 in 1998, $169,517 in 1997, and
$126,621 in 1996. In addition, the lessee is required to pay certain
operating expenses. Revenues from this lease are accounted for on the
operating method.
The Company collects simulcasting purse pool funding and other monies
on behalf of Mid-America and remits such funding to Mid-America on a
periodic basis. In addition, amounts are due from Mid-America for the
portion of certain shared corporate overhead expenses paid by the
Company, and subsequently reimbursed by Mid-America. Accounts
receivable from Mid-America were $248,375 and $283,866 at October 31,
1998 and 1997, respectively, and such reimbursed expenses were $241,519
in 1998, $143,369 in 1997, and $277,000 in 1996.
4. INCOME TAXES
Income tax expense (benefit) includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Federal income tax expense (benefit):
Deferred $ 19,000 $ 30,000 $(185,000)
--------- --------- ---------
Total $ 19,000 $ 30,000 $(185,000)
--------- --------- ---------
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------------------
A summary of the effective income tax rates is as follows:
PERCENTAGE OF PRETAX LOSS
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 34% 34% (34)%
Surtax exemption (19) (10) --
Permanent differences 24 7 7
Deferred tax rate and other adjustments 21 (5) (9)
----- ----- -----
Effective tax rate 60% 26% (36)%
----- ----- -----
</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>
1998 1997
----------- ---------
<S> <C> <C>
Deferred tax assets arising from:
AMT credit/net operating loss carryovers $ 475,507 $ 478,753
Valuation allowance (96,671) (95,682)
Pension liability adjustment 35,448 30,796
--------- ---------
Total deferred tax assets $ 414,284 $ 413,867
--------- ---------
Deferred tax liabilities arising from:
Depreciation $ 457,626 $ 442,861
--------- ---------
Total deferred tax liabilities $ 457,626 $ 442,861
--------- ---------
</TABLE>
The Company has recorded a valuation allowance of $96,671 and $95,682
at October 31, 1998 and 1997, 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.
At October 31, 1998, the Company has, for federal income tax purposes,
approximately $59,000 in alternative minimum tax credit carryforwards
and approximately $1,185,000 in net operating loss carryforwards. The
tax operating loss carryforwards expire over the years 2008 through
2013. 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 with an automatic extension as long as
the Company conducts pari-mutuel wagering. Rental expense was $121,432
in 1998, $118,628 in 1997, and $115,871 in 1996. Under the agreement,
the Company is obligated to pay the third party processor a minimum
charge per program of $1,600 (approximately $97,600 for one year).
10
<PAGE> 12
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 $28,127 in 1998, $22,204 in
1997, and $26,537 in 1996.
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>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during
the year $ 13,057 $ 8,731 $ 14,627
Interest cost on projected benefit
obligations 32,453 33,150 32,381
Actual (gain) loss on plan assets (29,238) (32,026) (17,709)
Net amortization relating to the
deferral of initial transitional obligation
and subsequent gains and losses 11,855 12,349 (2,762)
-------- -------- --------
Net pension expense $ 28,127 $ 22,204 $ 26,537
-------- -------- --------
</TABLE>
11
<PAGE> 13
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The Company's portion of the funded status of the plan and accrued
pension expense at October 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
Actuarial present value of benefit obligations:
<S> <C> <C> <C>
Vested benefits $ 446,825 $ 455,267 $ 421,432
Nonvested benefits 16,743 3,988 9,477
--------- --------- ---------
Accumulated benefit obligation 463,568 459,255 430,909
Impact of future salary increases 28,929 19,859 29,136
--------- --------- ---------
Projected benefit obligation 492,497 479,114 460,045
Plan assets at fair value, primarily a
diversified income fund and cash equivalents 334,175 352,693 334,520
--------- --------- ---------
Plan assets in deficiency of
projected benefit obligation (158,322) (126,421) (125,525)
Items not recognized in income:
Unrecognized prior service cost 1,859 2,275 2,547
Unrecognized net gain from past
experience different from that assumed and
effects of changes in assumptions 133,187 110,435 102,311
Initial transitional obligation, which is
being amortized over 17.5 years 9,654 12,270 14,155
--------- --------- ---------
Accrued pension expense $ (13,622) $ (1,441) $ (6,512)
--------- --------- ---------
Assumptions used for the plan are as follows:
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Rate of increase in compensation
levels 4.75% 5.00% 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 $8,122 in 1998, $5,750 in 1997, and $7,656 in 1996.
12
<PAGE> 14
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 a fraction 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, 1998, the Company had $989,265 of
abatement available for recovery in future periods. The Company earned
pari-mutuel tax abatement (including amounts remitted by Mid-America)
of $394,062 in 1998, $368,247 in 1997, and $280,968 in 1996.
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. The Company borrowed and subsequently
repaid approximately $254,000 during 1997. At October 31, 1998 and
1997, 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%, with a minimum annual principal reduction of $100,000. A balloon
payment for the remaining principal is due in November 2001. Interest
is payable monthly. 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. The remaining balance on this loan is $2,871,888 at
October 31, 1998.
In July 1997, the Company entered into a three-year term loan with the
same financial institution to finance the installation of simulcasting
equipment. The term loan agreement calls for a three-year amortization
of the principal at a fixed rate of 8.17%. The Company is required to
make monthly payments of principal and interest. The remaining balance
on this loan is $334,462 at October 31, 1998.
The aggregate amount of the required annual principal payments on
related term debt obligations at October 31, 1998 is as follows:
1999 $ 281,237
2000 267,673
2001 100,000
2002 2,557,440
------------
Total $ 3,206,350
------------
13
<PAGE> 15
SCIOTO DOWNS, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
9. JOINT VENTURE
The Company maintains 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 50% investment under the equity method of accounting.
The Company recorded $2,036 in 1998, $12,643 in 1997, and $23,345 in
1996, as its proportionate share of the joint venture's earnings in its
statements of operations.
14
<PAGE> 16
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
FIVE-YEAR SUMMARY OF OPERATIONS
OCTOBER 31, 1998, 1997, 1996,1995 AND 1994
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Operating revenues:
<S> <C> <C> <C> <C> <C>
Pari-mutuel commissions and breakage $ 6,108,475 $ 6,031,728 $ 4,375,312 $ 4,690,408 $ 4,660,088
Less pari-mutuel taxes 930,613 900,345 771,643 842,511 1,076,533
----------- ----------- ----------- ----------- -----------
5,177,862 5,131,383 3,603,669 3,847,897 3,583,555
Export signal revenue 243,216 212,594 -- -- --
Admissions 132,172 149,425 179,990 197,700 204,384
Simulcasting shared revenue, net 70,915 49,874 -- -- --
Concessions, program, parking, and other 796,784 843,921 751,606 782,743 814,755
Entry fees and purse monies added by others 728,915 750,053 782,704 888,712 812,299
Rental income from leased facilities 551,582 429,709 301,419 305,226 316,009
Pari-mutuel tax abatement earned 394,062 368,247 280,968 294,683 301,316
----------- ----------- ----------- ----------- -----------
8,095,508 7,935,206 5,900,356 6,316,961 6,032,318
----------- ----------- ----------- ----------- -----------
Operating expense:
Purses 3,073,960 2,875,409 2,510,802 2,597,178 2,493,017
Salaries and wages 1,182,815 1,199,212 1,048,031 1,030,606 1,043,284
Simulcasting fees 673,151 562,787 -- -- --
Depreciation 695,437 728,626 697,196 693,583 709,403
Advertising 312,649 311,929 283,514 338,779 338,111
Real and personal property taxes 193,551 187,237 192,293 192,077 206,783
Insurance 209,943 238,262 188,540 177,440 201,545
Repairs and maintenance 199,948 231,220 174,879 165,483 142,020
Other operating and general 1,271,423 1,252,600 1,095,954 1,114,519 970,215
----------- ----------- ----------- ----------- -----------
7,812,877 7,587,282 6,191,209 6,309,665 6,104,378
----------- ----------- ----------- ----------- -----------
Income (loss) from racing operations 282,631 347,924 (290,853) 7,296 (72,060)
Equity in earnings of joint venture 2,036 12,643 23,345 15,705 21,018
Interest expense, net (252,737) (246,861) (249,383) (258,855) (292,078)
----------- ----------- ----------- ----------- -----------
Income (loss) before income tax (expense)
benefit and change in accounting principle 31,930 113,706 (516,891) (235,854) (343,120)
Income tax (expense) benefit (19,000) (30,000) 185,000 106,000 104,000
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change in
accounting principle 12,930 83,706 (331,891) (129,854) (239,120)
Cumulative effect of change in accounting for income
taxes -- -- -- -- 41,000
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 12,930 $ 83,706 $ (331,891) $ (129,854) $ (198,120)
----------- ----------- ----------- ----------- -----------
</TABLE>
15
<PAGE> 17
SCIOTO DOWNS, INC.
SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
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, 1998. These bid prices do not
include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Low High Dividends
------------ ----------- ---------
<S> <C> <C> <C> <C>
1998 First Quarter 1/31 $ 12.25 $ 12.94
Second Quarter 4/30 12.25 12.75
Third Quarter 7/31 12.25 12.94 $ .05
Fourth Quarter 10/31 12.25 12.94 .05
1997 First Quarter 1/31 $ 12.25 $ 14.25
Second Quarter 4/30 12.25 13.00
Third Quarter 7/31 12.25 12.75 $ .05
Fourth Quarter 10/31 12.25 14.25 .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, 1998 totaled
1,592.
16
<PAGE> 18
<TABLE>
<CAPTION>
SCIOTO DOWNS, INC.
SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating revenues $ 8,095,508 $ 8,113,835 $ 5,900,356 $ 6,316,961 $ 6,032,318
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 12,930 $ 83,706 $ (331,891) $ (129,854) $ (198,120)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share (a) 0.02 0.14 (0.56) (0.22) (0.33)
----------- ----------- ----------- ----------- -----------
Cash dividends per common share $ .10 $ .10 $ .10 $ .10 $ .10
----------- ----------- ----------- ----------- -----------
Average common shares outstanding 595,767 595,767 595,767 595,767 595,767
----------- ----------- ----------- ----------- -----------
Total assets $ 8,577,247 $ 8,588,183 $ 8,094,579 $ 8,795,790 $ 9,172,613
----------- ----------- ----------- ----------- -----------
Term obligations $ 3,206,350 $ 3,495,549 $ 3,125,855 $ 3,247,411 $ 3,263,615
----------- ----------- ----------- ----------- -----------
<FN>
(a) Based upon weighted average shares outstanding, basic and diluted
</TABLE>
TWENTY-YEAR PER SHARE SUMMARY OF EARNINGS (LOSS), DIVIDENDS, AND BOOK VALUE
<TABLE>
<CAPTION>
Earnings Book
Year (Loss) Dividends Value
---------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1998 $ 0.02 $ 0.10 $ 7.43
1997 0.14 0.10 7.53
1996 (0.56) 0.10 7.50
1995 (0.22) 0.10 8.18
1994 (0.33) 0.10 8.49
1993 (0.31) 0.10 8.99
1992 (0.20) 0.10 9.41
1991 0.00 0.44 9.71
1990 0.21 0.44 10.15
1989 0.71 0.44 10.38
1988 0.68 0.42 10.11
1987 0.44 0.40 9.85
1986 0.76 0.40 9.81
1985 0.51 0.40 9.45
1984 0.83 0.40 9.22
1983 0.62 0.40 8.79
1982 0.47 0.40 8.49
1981 0.53 0.40 8.37
1980 0.54 0.40 8.21
1979 0.74 0.38 8.06
</TABLE>
17
<PAGE> 19
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
Any forward looking statements contained in the following discussion or
elsewhere in this document involve risks and uncertainties which may cause
actual results to differ materially from those discussed. A wide range factors
could contribute to those differences, including those discussed in this
document. The following discussion should be read in conjunction with the
Selected Financial Data and the Financial Statements of Scioto Downs, Inc.
("Scioto Downs" or "the Company") including the respective notes thereto, all of
which are included herein.
GENERAL
The results of operations of the Company are dependent upon the operations of
Scioto Downs as a live harness horse racing facility and as a simulcast wagering
facility. 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
racing 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, 72 days (which included 11 simulcasting days in which no live racing
occurred or, more commonly referred to as, "dark days"), and Mid-America Racing
Association (Mid-America), 62 days (which included 8 simulcasting dark days). As
a result, the entire racing season for the Company falls within the third
quarter ending July 31st. The majority of rental income from leasing the
facility and simulcasting equipment to Mid-America is earned during the fourth
quarter ending October 31st.
PARI-MUTUEL COMMISSIONS AND BREAKAGE REVENUES
The Company's annual revenue is mainly derived from the pari-mutuel commissions
and breakage revenue that it receives from wagers made by the public during its
racing meet. Wages at Scioto Downs are placed under the pari-mutuel wagering
system whereby individual bettors wager against each other in a pool. The
Company merely acts as the stakeholder for the wagers made by the public and
deducts a commission which is fixed by Ohio law, and which is shared principally
by the State of Ohio, horsemen (in the form of purses to horse owners and in
various incentive awards) and the Company when conducting the race meet. The
Company, as the race track operator, has no interest in the order of finish in
any given race.
Pari-mutuel revenues are derived from three sources: commissions and breakage
(generally 20%) from wagers made at Scioto Downs on live racing; commissions and
breakage (generally 20%) from wagers made at Scioto Downs on the audio-visual
signal received of races conducted in Ohio and at out-of-state locations
(imported simulcast races); and commissions (generally 3%) of wages made at
other track locations when Scioto Downs exports its live racing signal to other
track locations (commonly referred to as "export signal revenue").
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenue from pari-mutuel commissions and breakage increased by 1.3% or $76,747
due to a $325,112 increase in pari-mutuel commissions and breakage from
simulcasting, offset by a decrease in live racing pari-mutuel commissions and
breakage of $248,365 caused by a trend towards increases in other forms of
gambling. Pari-mutuel taxes increased 3.4% or $30,268 due to the increase in the
pari-mutuel handle. Entry fees and purse monies added by others decreased by
2.8% or $21,638, due to a lower number of horses entered in stake events during
the current race meet. Revenue from concessions, program sales,
18
<PAGE> 20
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
parking and other decreased $47,137 primarily due to the decrease in
concessionaire sales. The decline in average on-track attendance contributed
directly to the decrease in admissions income of $17,253 or 11.5%. Rental income
and tax abatement earned increased by $121,873 and $25,815, respectively, due to
increases in handle for Mid-America in 1998 and changes in the rental agreement.
As a result of enacted legislation, Beulah Park, the Company's nearest
competitor, could be open year round conducting both live racing and
simulcasting racing in from out of state tracks in direct competition with the
Company. This situation would not be advantageous to either track and, as a
result, during 1997 the Company and Beulah Park entered into an agreement to not
be open at the same time. Pursuant to the agreement, Beulah Park operated from
the middle of September to the first of May while the Company was closed. During
that period of time, revenues derived from simulcasting at Beulah Park at night
when it was not conducting live racing was, after deducting certain expenses,
shared with the Company. Beulah Park paid shared revenues to the Company during
the Beulah Park's racing season and the Company was not required to remit
amounts to Beulah Park during its racing season. Revenue ("simulcasting shared
revenue") under the agreement was $70,915 during 1998 and $49,874 during 1997.
Operating expenses such as purses and simulcasting fees increased as a result of
additional simulcasting business activities. Purses include $211,949 of expense
directly attributed to the Company paying into the horseman's purse pool on
simulcasting dark days which is comparable to $206,310 in 1997. Purses increased
$198,551 or 6.9% due mainly to increases in total handle which caused a
reduction in the usage of dark day funds. Simulcasting fees increased $110,364
or 19.6% due to an increase in the number of races simulcasted into the
racetrack during the Company's meet. Insurance expense decreased $28,319 or
11.9% due to a reduction in current year rates. Repairs and maintenance expense
decreased $31,272 or 13.5% due mainly to a mild winter in 1998, precautionary
measures taken by the Company in the barn areas, and less upkeep required on the
facilities as a result of decreased attendance.
Interest expense is a result of debt required to finance the construction of the
clubhouse enclosure and simulcasting equipment. Overall interest expense
increased $5,876 which includes increases in interest income of $12,550.
Income from racing operations decreased $65,293 or 18.8% due mainly to the
reasons listed above.
Income tax expense decreased from $30,000 in 1997 to $19,000 in 1998. The
effective tax rate changed from 26% in 1997 to 60% in 1998. The effective income
tax expense rate of 60% differs from the statutory federal rate of 34% due to a
surtax exemption of 19%, permanent differences related mainly to lobbying
expense which increased the statutory rate by 24%, and an increase in the
statutory rate of 21% related to a difference in the rate at which the deferred
tax assets and liabilities are recorded.
Net income decreased from $83,706, or $.14 per share in 1997 to $12,930, or $.02
per share in 1998 due mainly to a decrease in income from racing operations.
19
<PAGE> 21
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenue from pari-mutuel commissions and breakage increased by 40% or $1,656,416
due to a $3,625,522 increase in pari-mutuel commissions and breakage from
simulcasting, offset by a decrease in live racing pari-mutuel commissions and
breakage of $1,969,106 caused by a trend towards increases in other forms of
gambling. Overall, the Company had an additional 11 racing days which directly
attributed to the increases in revenue from pari-mutuel commissions and
breakage. Pari-mutuel taxes increased 16.7% or $128,702 due to the increase in
the pari-mutuel handle. Consequently, purse expense increased $364,607 since, by
agreement with the horsemen, purses are calculated based on commissions net of
part-mutuel taxes. Purses include $206,310 of expense directly attributed to the
Company paying into the horseman's purse pool on simulcasting dark days. Entry
fees and purse monies added by others decreased by 4.2% or $32,651, due to a
lower number of horses entered in stake events during the current race meet.
Concession, program, parking and other increased $92,315 primarily due to the
increase in unclaimed tickets income increases in program sales due to
simulcasting. Unclaimed tickets income relates to "winning" tickets which were
not cashed by the bettors. The decline in average on-track attendance has
attributed directly to the decrease in admissions income of $30,565 of 16.9%.
Rental income and tax abatement earned increased by $128,290 and $87,279,
respectively, due to increases in handle for Mid-America in 1997.
As a result of enacted legislation, Beulah Park, the Company's nearest
competitor, could be open year round conducting both live racing and
simulcasting racing from out of state tracks in direct competition with the
Company. This situation would not be advantageous to either track and, as a
result, during 1997 the Company and Beulah Park entered into an agreement to not
be open at the same time and to share simulcasting revenues. Pursuant to the
agreement, Beulah Park operated from the middle of September to the first of May
while the Company was closed. During that period of time, revenues derived from
simulcasting at Beulah Park at night when it was not conducting live racing was,
after deducting certain expenses, shared with the Company. Revenue
("simulcasting shared revenues") under this agreement was $49,874 during 1997.
Operating expenses such as salaries and wages, advertising, insurance and
repairs and maintenance increased as a result of the new simulcasting business
activities (e.g. racetrack is open additional hours as a result of
simulcasting). Depreciation expense increased 4.5% or $31,430 as a result of the
new simulcasting equipment additions. Other operating and general expenses
increased by 14.3% or $156,646 due to general increases in business activities,
primarily rated to simulcasting. Simulcasting fees were $562,787 which includes
$443,596 in expense for importing races into the facility (generally 3% of
handle wagered) and $119,191 of expenses to operate the television equipment,
decoding, transmission, etc.
Interest expense is a result of debt required to finance the construction of the
clubhouse enclosure, draws on the line of credit for operations during the off
season and simulcasting equipment. Overall interest expense increased $12,410
which includes increases in interest income of $14,932. The additions to
interest expense were a result of increases in the interest rate on the line of
credit and $11,180 of new financing interest relating to simulcasting equipment,
offset by recurring payments for principal reductions of debt. Interest income
and dividends increased as a result of higher average investment and cash
deposit balances throughout the year.
20
<PAGE> 22
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Income (loss) from racing operations increased $638,777 from a loss of $290,853
in 1996 to income of $347,924 in 1997 due to the reasons listed above.
Income tax expense increased from a benefit of $185,000 in 1996 to an expense of
$30,000 in 1997. The effective tax rate changed from a benefit of 36% in 1996 to
an expense of 26% in 1997. The effective income tax expense rate of 26% differs
from the statutory federal rate of 34% due to a surtax exemption of 10%,
permanent differences related mainly to lobbying expense which increased the
statutory rate by 7%, and a reduction in the statutory rate of 5% related to a
change in the rate at which the deferred tax assets and liabilities are
recorded.
Net income increased from a loss of $331,891, or ($.56) per share in 1996 to
income of $83,706, or $.14 per share in 1997 due to an increase in income from
racing operations.
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
principal financial institution. The original five year term loan was entered
into in October 1991 at an interest rate of 9.875%. In October 1996, the Company
refinanced the five-term loan with the same financial institution in order to
take advantage of lower interest rates. 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 of $2,557,440 for the remaining principal is due in November 2001. The
Company anticipates that it will need to refinance the balloon payment based
upon current anticipated cash flow estimates.
The simulcasting equipment installation project was completed during 1997 at a
total cost of $615,195. The Company financed the project with a combination of
internal funds of $76,695 and $538,500 from a term note agreement with its
principal financial institution. The terms of the loan were agreed upon in July,
1997 with a principal amount of $538,500 at an interest rate of 8.17% for three
years.
Excluding the simulcasting equipment, during 1998, 1997 and 1996, the Company
invested $100,000, $17,435, and $204,286, respectively, for purchases of
property and equipment. During 1997 and 1996, the Company utilized its
$1,000,000 line of credit to provide working capital during the off season. The
Company borrowed and subsequently repaid approximately $254,000 during 1997. The
Company did not utilize the line of credit during 1998.
The Company continued to generate positive cash flow from operations during
1998, 1997 and 1996. Cash provided by operating activities was $1,028,022 for
1998 compared to $625,080 for 1997. This increase was mainly a result of net
cash provided by changes in accounts receivable and accounts payable, trade and
purses payable and simulcast purse fund of $287,130 in 1998 compared to net cash
used of $155,185 in 1997. Cash provided by operating activities for 1997 was
$625,080 compared to $219,206 for 1996. The increase was due mainly to an
increase in net income to $83,706 in 1997 from a loss of $331,891 in 1996.
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 1.83, 1.87 and 1.57 as of
October 31, 1998, 1997 and 1996, respectively, and other long-term plans. During
1998, 1997 and 1996, the Company has paid cash dividends, despite a net loss
that is due principally to
21
<PAGE> 23
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
depreciation and amortization of $695,437, $728,626, and $732,139, respectively,
and deferred income taxes of $19,000, $30,000, and $(185,000). Although the
Company cannot anticipate future performance, the Company anticipates that the
pattern of cash dividends paid in 1998 will be maintained in the near future.
RECENT DEVELOPMENTS AND OUTLOOK
During 1999, the Company will continue to pursue the development of off-track
betting parlors as state law requires. This effort is being undertaken with the
other racetracks in Ohio. The construction of these parlors is considered to
have a favorable impact on the Company's operations.
In addition, the Company revised its agreement with Beulah Park, whereby the
Company receives a share of proceeds from simulcasting generated during a dark
period at Beulah during the winter. However, at no time in which the Company is
racing and conducting simulcasting will the Company share proceeds with Beulah
Park.
YEAR 2000
The Year 2000 problem exists because many computer programs use only the last
two digits to refer to a year. Accordingly, such computer programs do not
distinguish a year that begins with "20" from a year that begins with "19". If
not corrected, these computer programs could fail or create erroneous results.
The Company is in the process of developing and implementing a plan for the
identification and remediation of Year 2000 issues that could affect its
business. The identification and remediation plan has five categories: (1)
mission critical software, (2) other software, (3) information technology
hardware, (4) non-information technology systems, and (5) third party related
issues.
Mission Critical Software: The Company has identified five mission critical
software systems: horseman purse systems, stock transfer systems, general
ledger, bank services, and accounts payable systems. In the first quarter of
fiscal year 1999, the Company purchased the Accpac for Windows Corporate Series
Accounting System. The Accpac Corporate series has represented it is Year 2000
compliant. The installation and training of the Accpac software began in January
1999 and be completed by the end of April 1999.
Other Software: The Company maintains and periodically updates all other
software utilized by it, such as word processing and spreadsheet management.
Along with the purchase of the Accpac software, Year 2000 compliant word
processing and spreadsheet software was purchased in the first quarter of fiscal
year 1999. Installation of this software began in January 1999 and finish by the
end of April 1999.
Information Technology Hardware: The Company purchased from ADC Information
Technology Services, a Gateway ALR 7200 NT network fileserver in December 1998.
Five Pentium II - 266 Windows personal computers were also purchased in December
1998. Installation and training on this network began in January 1999 and be
completed by April 1999. The NT 4.0 Network System is represented as being Year
2000 complaint.
22
<PAGE> 24
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Non-Information Technology Systems: The Company will begin an inventory of all
non-information technology systems that may have a material impact on the
Company's ability to conduct business in a usual manner. The General Manager of
the Company was informed of the need of this requirement, as was the Board of
Directors. The Company intends to perform internal testing and gather third
party representations as to the system's Year 2000 compliance. This process and
required corrections are to be completed by October 31, 1999.
Third Party Related Issues: The Company has identified those vendors whose
services have a material impact on the Company's ability to conduct normal
business operations. The Company's largest and most necessary vendor, American
Totalisator, has been contacted and has responded that its systems are Year 2000
compliant. Other vendors' compliance certifications have been received as well.
The Company will continue to request for confirmation from other major vendors.
Costs to Address the Year 2000 Issue: The Company has committed to spend
approximately $65,000 on its Year 2000 compliance through fiscal year 1999. The
Company does not anticipate spending additional amounts after 1999 but will make
necessary expenditures as required.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the caption "Recent Developments
and Outlook" and other provisions of this report which are not historical facts
are "forward looking statements" that involve various important risks,
uncertainties and other factors which could cause the Company's actual results
for 1999 and beyond to differ materially from those expressed in such forward
looking statements. These important factors include, without limitation, the
following risks and uncertainties: real or perceived adverse economic
conditions, the impact of other forms of gambling, the outcome of litigation,
the impact of changes in government regulations, the problems associated with
the Year 2000 issue and the other risks described in the Company's Securities
and Exchange Commission filings.
INFLATION
Inflation is not expected to materially impact the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
130 is effective for financial statements issued for periods beginning after
December 15, 1997. The Company intends to adopt SFAS 130 in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS 131 is effective for financial
statements issued for periods beginning after December 15, 1997. The Company
intends to adopt SFAS 131 in fiscal year 1999.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits - an Amendment of FASB Statements No.
87, 88, and 106. SFAS 132 is effective for financial statements issued for
periods beginning after December 15, 1997. The Company intends to adopt SFAS 132
in fiscal year 1999.
23
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 1,503,240
<SECURITIES> 0
<RECEIVABLES> 269,352
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<COMMON> 635,555
<OTHER-SE> 3,802,351
<TOTAL-LIABILITY-AND-EQUITY> 8,577,247
<SALES> 244,509
<TOTAL-REVENUES> 8,095,508
<CGS> 129,333
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<INCOME-PRETAX> 31,930
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