SCIOTO DOWNS

9 Months Ended

Sep. 30, 2012

SCIOTO DOWNS

SCIOTO DOWNS

NOTE 3—SCIOTO DOWNS

        During June 2011, Ohio introduced the framework for the expansion of gaming in Ohio including the installation of video lottery terminals ("VLTs") at Ohio's existing horse racetracks. Subsequently, in October 2011, the Ohio Lottery Commission approved certain rules and regulations for licensing VLT operations at Ohio's racetracks. We received our conditional Video Lottery Sales Agent License (the "License") in January 2012. The conditional License permitted Scioto Downs to install and operate VLTs subject to compliance with Scioto Downs' Video Lottery License Application (the "Application") and verification of the Application by the Ohio Lottery Commission. Upon final approval from the Ohio Lottery Commission, Scioto Downs received its permanent License in May 2012. As a condition of operating VLTs, the Company was required to enter into an agreement with the Ohio Harness Horsemen's Association ("OHHA") that would provide for an agreed upon percentage of Scioto Downs' gross VLT income to benefit the horse racing industry in Ohio. In May 2012, as a final agreement with the OHHA had not been reached, we entered into an escrow agreement with the Ohio State Racing Commission to deposit 9% of our gross VLT income into an escrow account to benefit the OHHA. The agreement will remain in effect until an agreement is reached with the OHHA. In May 2012, a lawsuit seeking to prevent the operation of VLTs at Ohio's horse racetracks was dismissed; however, in June 2012, the decision was appealed. See Note 11 for additional details on the Ohio lawsuit. We commenced gaming operations at Scioto Downs in June 2012.

        In anticipation of the issuance of the License, we commenced construction of our VLT gaming facility in December 2011. Development, construction and equipment costs are expected to approximate $125.0 million over a required three-year period, not including a $50.0 million license fee required to be paid upon achievement of certain milestones as defined in the framework. In May 2012, we completed the first of two phases of the build-out with the second phase completed in August 2012. During the nine months ended September 30, 2012, we expended approximately $105.7 million related to construction costs and equipment purchases, including $1.2 million of capitalized interest. Of the total $125.0 million project cost, we have expended a total of approximately $110.7 million, including $1.3 million of capitalized interest through September 30, 2012.

        As required by the framework, we have paid a total of $25.0 million of the $50.0 million in license fees; $10.0 million upon filing the Application and $15.0 million upon commencement of our VLT operations. At the commencement of our gaming operations, we became contractually obligated for the remaining $25.0 million installment for the License and have reflected this amount within license fee payable in the consolidated balance sheet at September 30, 2012. The license fee, including the final installment, is recorded as an indefinite-lived intangible asset on our consolidated balance sheet as of September 30, 2012. The final installment will be payable at the one year anniversary of our VLT operations in June 2013.

        During the three and nine months ended September 30, 2012, we incurred approximately $0.2 million and $2.7 million of project opening costs related to the opening of our VLT facility. Project opening costs are expensed as incurred and consist primarily of direct salaries and wages, legal and consulting fees, utilities and advertising.