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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
COMMISSION FILE NO. 0-20508
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MTR GAMING GROUP, INC.
(exact name of Company as specified in its charter)
DELAWARE IRS NO. 84-1103135
(State of Incorporation) (IRS Employer
Identification)
STATE ROUTE 2, SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Company's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: COMMON STOCK $.00001 PAR VALUE
Name of each exchange on which registered: NASDAQ STOCK MARKET
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Indicate by check mark whether the Company (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K of Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Company's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K / /
The aggregate market value of the Company's common stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on March 22, 2000 (based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $52,635,296.
The Company's common stock outstanding at March 22, 2000 was
21,337,401 shares.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................ 1
Company History........................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION:............................................ 1
Mountaineer Race Track & Gaming Resort--Chester, West
Virginia................................................ 1
Lodge Facilities and Speakeasy Gaming Saloon.............. 2
Video Lottery Facilities.................................. 2
Recreational Facilities................................... 3
Trailer Park.............................................. 3
Undeveloped Land.......................................... 3
Current Operations at Mountaineer Park.................... 3
Racing Operations......................................... 3
Video Slot Operations..................................... 4
Lodging, Food and Beverage Operations..................... 5
Ramada Inn and Speedway Casino--North Las Vegas, Nevada... 5
Ramada Inn and Speakeasy Casino--Reno, Nevada............. 6
Operation of the Nevada Properties/Gaming Licensing....... 6
Business Strategy......................................... 6
Improve Financial Results of Racing Operations at
Mountaineer Park........................................ 7
Create and Cultivate Niche Market for Nevada Properties... 8
Competition............................................... 8
Employees................................................. 9
Regulation and Licensing.................................. 9
Nevada Gaming Regulation.................................. 12
Impact of Resort Hotel Legislation........................ 15
Compliance with Other Laws................................ 15
Restrictions on Share Ownership and Transfer.............. 15
Application of Environmental Regulations.................. 16
Discontinued Operations................................... 16
ITEM 2. PROPERTIES.......................................... 16
Hotel, Gaming, Racing and Other Property.................. 16
Equipment Leases.......................................... 17
ITEM 3. LEGAL PROCEEDINGS................................... 17
Pending Litigation........................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 17
ITEM 5.MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 17
ITEM 6. SELECTED FINANCIAL DATA............................. 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 19
Results of Operations..................................... 19
Twelve Months Ended December 31, 1999 Compared to Twelve
Month Ended December 31. 1998........................... 19
Gaming Operations......................................... 19
Parimutuel Commissions.................................... 20
Lodging, Food and Beverage................................ 21
Other Operating Revenues.................................. 22
Operating Costs........................................... 22
Gaming Operating Costs.................................... 23
Parimutuel Commissions Operating Costs.................... 24
Lodging, Food and Beverage Operating Costs................ 24
Costs of Other Operating Revenues......................... 25
Marketing and Promotions Expense.......................... 25
General and Administrative Expenses and Interest.......... 25
Twelve Months Ended December 31, 1998 Compared to Twelve
Months Ended December 31, 1997.......................... 25
Video Lottery Operations.................................. 26
Parimutuel Commissions.................................... 27
Lodging, Food and Beverage................................ 27
Other Operating Revenues.................................. 27
Operating Costs........................................... 27
Video Lottery Terminals Operating Costs................... 28
Parimutuel Commissions Operating Costs.................... 29
Lodging, Food and Beverage Operating Costs................ 29
Cost of Other Operating Revenues.......................... 29
Marketing and Promotions Expense.......................... 29
General and Administrative Expense and Interest........... 30
Liquidity and Sources of Capital.......................... 30
Capital Improvements...................................... 31
Outstanding Options and Warrants.......................... 31
Deferred Income Tax Benefit............................... 32
Commitments and Contingencies............................. 32
Results of Discontinued Operations........................ 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET
RISKS..................................................... 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 33
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY.............. 33
Business Experience....................................... 34
ITEM 11. EXECUTIVE COMPENSATION............................. 35
OPTION GRANTS IN 1999..................................... 36
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END OPTION VALUES.................................. 36
Section 16(a) Beneficial Ownership Reporting Compliance... 36
Employment Agreements..................................... 36
Compensation of Directors................................. 37
Compensation Committee Interlocks and Insider
Participation........................................... 37
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM
8-K....................................................... 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly owned subsidiaries, owns and operates
Mountaineer Racetrack & Gaming Resort in Chester, West Virginia, the Ramada Inn
and Speedway Casino in North Las Vegas, Nevada, and the Ramada Inn and Speakeasy
Casino in Reno, Nevada.
The Company was incorporated in March 1988 in Delaware under the name
"Secamur Corporation," a wholly owned subsidiary of Buffalo Equities, Inc.
("Buffalo"), and later "spun-off" through the sale of its stock to the
stockholders of Buffalo in January 1989. In June 1989, the Company merged with
Pacific International Industries, Inc., which had been engaged in the contract
security guard services business in Southern California since its inception in
February 1987. Upon completion of the merger, the Company was renamed Excalibur
Security Services, Inc. to reflect its new line of business. After operating
unprofitably, the Company filed a voluntary petition for reorganization with the
U.S. Bankruptcy Court for the Central District of California in December 1990,
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court approved the
Company's sale of its security guard services business in May 1991, and
confirmed the Company's plan of reorganization in December 1991. The plan of
reorganization authorized the Company to acquire, primarily, specified gaming
and oil and gas businesses. Upon confirmation of the plan of reorganization, the
Company changed its name to Excalibur Holding Corporation. In connection with
management's decision to operate as a gaming company, the Company was renamed
Winners Entertainment, Inc. in August 1993. At the annual meeting of
stockholders on October 15, 1996, the stockholders of the Company approved a
change of the Company's name from Winners Entertainment, Inc. to MTR Gaming
Group, Inc.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to,
leverage and debt service, gaming regulation, licensing and taxation of gaming
operations, expiration or non-renewal of Nevada gaming licenses, dependence on
key personnel, competition, including competition from legalization of gaming in
states near the Company's gaming operations, no dividends, continued losses from
horse racing, costs associated with maintenance and expansion of Mountaineer
Park's infrastructure to meet the demands attending increased patronage, costs
and risks attending construction, expansion of operations, market acceptance of
the Company's Nevada properties and maintenance of "grandfathered" status of
those properties, cyclical nature of business, limited public market and
liquidity, shares eligible for future sale, impact of anti-takeover measures,
the Company's common stock being subject to penny stock regulation and other
risks detailed in the Company's Securities and Exchange Commission filings.
MOUNTAINEER RACETRACK & GAMING RESORT--CHESTER, WEST VIRGINIA
Pursuant to a stock purchase agreement dated May 5, 1992, the Company
acquired all of the common stock of Mountaineer Park, Inc. ("Mountaineer Park"),
a West Virginia corporation, in December 1992. Mountaineer Park offers
parimutuel wagering on live thoroughbred horse racing and simulcast horse and
greyhound racing as well as approximately 1,355 video slot machines as part of
an entertainment complex and destination resort with hotel, dining and lounge
facilities, and outdoor activities including golf,
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swimming and tennis. Mountaineer Park is situated on the Ohio River at the
northern tip of West Virginia's northwestern panhandle in Hancock County,
approximately 40 miles south of Youngstown, Ohio and 35 miles west of
Pittsburgh, Pennsylvania. Mountaineer Park owns approximately 1,234 acres of
real property in Hancock County, of which approximately 231 are west of State
Route 2 and are the site of the racetrack and Lodge; 835 are east of Route 2 and
are largely unimproved; and 168 acres comprise Mountaineer's Woodview Golf
Course located approximately seven miles south of the Mountaineer complex in the
town of New Cumberland.
Mountaineer Park offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. The track also conducts simulcast (closed circuit television)
thoroughbred horse and greyhound dog racing from other prominent racetracks
around the country. Mountaineer Park's main racetrack consists of an oval dirt
track approximately one mile in length. Inside the main track is a natural turf
(grass) track measuring seven furlongs or 7/8 of a mile. The racetrack buildings
consist of the clubhouse and grandstand that provide glass-enclosed stadium and
box seating for approximately 770 and 2,850 patrons, respectively. The buildings
are each three stories and are connected by an enclosed walkway. Live and
simulcast racing can be viewed by approximately 1,200 dining patrons in a
restaurant and sandwich bar located in the clubhouse and grandstand
respectively. The grandstand building also houses a deli that seats 120. The
Clubhouse also provides a 2,400 square feet glass-enclosed meeting room, which
will accommodate approximately 200 people. In addition to seating areas, the
grandstand covers approximately 57,000 square feet of interior space on the main
and mezzanine levels containing parimutuel windows and food and beverage
concession stands. The clubhouse covers approximately 25,000 square feet of
interior space and likewise offers parimutuel windows. The grandstand has an
indoor stage with a seating capacity of approximately 2,240, which is used for
concerts and boxing matches, some of which have been nationally televised. The
racetrack apron, which is accessible from both buildings, provides racing fans
with up-close viewing of horses entering the racetrack and crossing the finish
line. The stable area accommodates approximately 1,250 horses and is located
adjacent to the main track. Mountaineer's racetrack parking lots have a combined
capacity for over 2,900 vehicles.
In addition to parimutuel wagering on live horse racing and simulcast horse
and greyhound racing, Mountaineer Park offers three video lottery gaming areas
in its racetrack buildings: the Riverside Gaming Terrace, the Hollywood Knights,
and the Speedway.
LODGE FACILITIES AND SPEAKEASY GAMING SALOON
The Mountaineer Lodge (the "Lodge") is a two-story facility near Mountaineer
Park's main entrance on West Virginia State Route 2. The Lodge offers 101 rooms,
including 50 standard rooms (one double bed), 46 superior rooms (two double
beds), and five king rooms and suites. The Lodge's Gatsby Steak Emporium seats
125 patrons for casual dining. An enclosed deck seats an additional 68 patrons.
The Lodge is also the site of the Speakeasy Gaming Saloon. Encompassing 27,000
square feet (including a 14,000 square foot addition that opened in July of
1998), the Speakeasy, together with adjacent smaller rooms, houses 2/3 of
Mountaineer Park's 1,355 video slot machines, extensive off-track wagering
facilities and Big Al's Deli, where patrons may purchase pizza and sandwiches
until closing. The Lodge parking lots have a combined capacity for approximately
1,000 vehicles.
VIDEO LOTTERY FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers video lottery gaming through approximately 1,355 video lottery terminals
("VLTs" or "Video Slots") located in the racetrack clubhouse, grandstand and
Lodge. The Company owns 400 machines and leases the remaining 955. The racetrack
houses 1/3 of the VLTs in its Riverside Gaming Terrace on the second floors of
the clubhouse, the Hollywood Knights on the second floor of the grandstand, and
the Speedway Game Room on the lower level of the grandstand. The Lodge offers
the remaining 2/3, primarily in the Speakeasy Gaming Saloon. VLTs allow a player
to select from several game themes, including up to four versions of draw poker,
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blackjack, two versions of keno, and various games that simulate classic casino
slot machines. During 1999, West Virginia law was amended to permit coin out,
mechanical reel slot machines. Mountaineer began operating 400 of these classic
casino slot machines during the fourth quarter of 1999.
RECREATIONAL FACILITIES
Mountaineer Park has three tennis courts, a volleyball court, a basketball
court, two swimming pools and two children's swimming pools. These facilities
are made available for use by Lodge guests and the general public at specified
daily or seasonal rates.
On January 22, 1999, the Company purchased the Woodview Golf Course, an
eighteen-hole par 71 course measuring approximately 6,300 yards on a 168-acre
tract, which is located approximately seven miles from Mountaineer Park in New
Cumberland, West Virginia. Mountaineer Park operates a free shuttle bus service
between the Lodge and the Woodview Golf Course. A par three, nine-hole
"executive" golf course previously operated on the acreage between the Lodge and
the racetrack has been closed and will be the site for Mountaineer Park's
planned expansion. See "Business Strategy"; "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital
Improvements."
TRAILER PARK
The Company maintains a trailer park consisting of 61 individual lots on
approximately 11.5 acres located across West Virginia State Route 2 from the
Lodge and the entrance to Mountaineer Park. The lots are rented for fixed
monthly fees, mostly to individuals who are employed by Mountaineer Park or its
horsemen in racing operations. The Company is responsible for maintenance of the
road and grounds, refuse removal and providing water and sewage hook-ups. The
tenants pay all utility expenses.
UNDEVELOPED LAND
Mountaineer Park owns, as part of its 1,234 acres, contiguous tracts of 375
acres, 350 acres and 110 acres that are largely undeveloped. The undeveloped
acreage is located directly across West Virginia State Route 2 from the Lodge
and racetrack main entrance. On June 22, 1999 Mountaineer Park entered into
contracts to acquire an additional 287.65 contiguous acres for a total of
$583,000. Pending resolution of certain title issues, Mountaineer Park intends
to close on those purchases. Management has no definitive plans to develop such
property.
CURRENT OPERATIONS AT MOUNTAINEER PARK
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and Video Slot operations and, to a lesser extent, its lodging,
food and beverage operations. Additional revenues are generated from ticket
sales for concerts and boxing events and from greens fees and other recreational
facilities fees.
RACING OPERATIONS
The Company is subject to annual licensing requirements established by the
West Virginia State Racing Commission (the "Racing Commission"). The Company's
license was renewed in December 1999, and will remain effective through
December 2000.
The Company's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer Park
and on races conducted at other "host" racetracks and broadcast live (i.e.,
import simulcast) at Mountaineer Park. In parimutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
pre-set odds. The dollars wagered form a pool of funds from which winnings are
paid based on odds determined solely by the wagering activity. The racetrack
acts as a stakeholder for the wagering patrons and deducts from the
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amounts wagered a "take-out" or gross commission, from which the racetrack pays
state and county taxes and racing purses. The Company's parimutuel commission
rates are fixed as a percentage of the total handle or amounts wagered. With
respect to Mountaineer Park's live racing operations, such percentage is fixed
by West Virginia law at three levels, 17.25%, 19% and 25%, depending on the
complexity of the wager. The lower rate applies to wagering pools involving only
win, place and show wagers while the higher rates apply to pools involving
wagers on specified multiple events, such as trifecta, quinella and perfecta
wagers. With respect to simulcast racing operations, the Company generally has
opted to apply the commission rates imposed by the jurisdictions of the host
racetracks, as it may do with the consent of the Racing Commission. Such rates
vary with each jurisdiction and may be more or less favorable than the live
racing commission rates. Out of its gross commissions, the Company is required
to distribute fixed percentages to its fund for the payment of regular purses
(the "regular purse fund"), the state of West Virginia and Hancock County and,
with respect to commissions derived from simulcast operations, Mountaineer
Park's employee pension plan. After deducting state and county taxes and, with
respect to simulcast commission, simulcast fees and expenses and employee
pension plan contributions, approximately one-half of the remainder of the
commissions are payable to the regular purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
VIDEO SLOT OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 1999 for a period of one
year.
The Company derives revenue from the operation of Video Slots in the form of
net win on the gross terminal income, or the total cash deposited into a VLT
less the value of credits cleared for winning redemption tickets. Pursuant to
the West Virginia Racetrack Video Lottery Act of 1994, as amended (the "Lottery
Act"), the Company's commission is fixed at 47% of the net win after deducting
an administration fee of up to 4% of gross terminal revenues first paid to the
State of West Virginia.
The Company owns 400 Video Slots and leases a total of 955 Video Slots from
four manufacturers. The leases covering 855 of the leased Video Slots provide
for a fixed monthly rental, while the lease for the remaining 100 VLTs calls for
a percentage of net win.
In June of 1998, the Lottery Act was amended to permit Mountaineer Park to
change the ratio of Video Slots located at the Lodge versus the racetrack
building from 1:1 to 2:1. Accordingly, in July of 1998, Mountaineer Park
increased the total number of VLTs, at such time, from 1,000 to 1,200 with 800
VLTs in the Lodge and 400 in the racetrack building.
In June of 1999, the Lottery Act was again amended to permit the use of
video slot machines that pay out winnings in coins or tokens, instead of paper
tickets, and to utilize symbols on mechanical rolling drums instead of video
images. In November of 1999, Mountaineer Park became the first of the State's
racetracks to operate these "coin drop" classic casino slot machines.
Although the Lottery Commission approved the linking of video slots in
progressive jackpot networks in 1995, the technology for video lottery
progressives has only recently become available. In January of 1999, Mountaineer
Park introduced progressives on a test basis with respect to a total of 100 VLTs
in several networks or "banks" located in the Speakeasy and the Riverside Gaming
Terrace. In anticipation of the addition of progressive Video Slots, Mountaineer
Park obtained regulatory approval to increase the number of Video Slots from
1,200 to 1,355.
Mountaineer currently operates approximately 1,355 Video Slots, of which 400
are Coin Drop Slots and 100 offer progressive jackpots.
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In March of 2000, the West Virginia State Legislature passed, and the
Governor signed into law, Senate Bill 462, which removes the existing 2:1 ratio
limitation for Video Slots at the Lodge versus the racetrack building, thus
allowing additional Video Slots at the Lodge without regard to the number of
Video Slots at the racetrack building.
LODGING, FOOD AND BEVERAGE OPERATIONS
The Clubhouse restaurant is open a minimum of 210 days annually on live race
days and offers seating for 650 customers with full lunch and dinner menus and a
private buffet. Clubhouse customers include racing fans, local residents and
private social groups. Beverages and cocktails are also available in the
grandstand building at the Hollywood Knights Saloon, which services video
lottery players as well as racing fans. A deli adjacent to the Hollywood Knights
Saloon provides customers with a variety of sandwiches and salads. The
grandstand also offers Big Al's Deli II, which serves sandwiches, hotdogs and
pizza. Closed circuit television monitors displaying Mountaineer Park's live and
simulcast races are provided at every table in both the Clubhouse and grandstand
restaurant for the convenience of racing fans. The racetrack food and beverage
facilities are intended to complement the entertainment experience for racing
fans and video lottery players and, therefore, are designed to offer familiar
menus with moderate pricing in a comfortable atmosphere.
Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on weekdays, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Gatsby Steak Emporium, which seats 125 patrons
for casual dining, and an additional 68 persons on an enclosed deck. Food and
beverages are also available at the Lodge in Big Al's Deli located in the
Speakeasy Gaming Saloon and in the Iron Horse Lounge. Table and barstool seating
is available in the Speakeasy Gaming Saloon and the Iron Horse Lounge for the
video lottery gaming and off-track wagering patrons accommodated there. The
Lodge and its food and beverage operations are operated in combination with its
entertainment facilities and are utilized principally to increase racing
attendance and video lottery play. Accordingly, the Company maintains
inexpensive room and food and beverage rates.
RAMADA INN AND SPEEDWAY CASINO--NORTH LAS VEGAS, NEVADA
In May of 1998, the Company, through its wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc. ("Speakeasy Las Vegas"), purchased a 131-room hotel
and casino property (previously known as the Cheyenne Hotel & Casino) and has
renamed it the Ramada Inn and Speedway Casino (together with an adjacent 1/2
acre parcel purchased thereafter to augment parking, the "Speedway Property").
Since acquiring the Speedway Property, the Company has renovated 118 of the
hotel rooms, refurbished the restaurant, and constructed a 15,600 square foot
addition that houses the casino, a new swimming pool, and parking lots that now
accommodate 474 cars. The Speedway Property sits on approximately 6.1 acres and
consists of one two-story building and one three-story building. The casino and
restaurant have an auto-racing theme, as the Speedway Property is the closest
hotel and casino to the Las Vegas Motor Speedway.
The Speedway Property is located at 3227 Civic Center Drive in North Las
Vegas at the intersection of Cheyenne Avenue and Interstate 15. I-15 is a major
interstate freeway, which extends north into Utah and south into the Los Angeles
Basin. The Property is approximately five miles from the Las Vegas Motor
Speedway and three miles from Nellis Air Force Base.
RAMADA INN AND SPEAKEASY CASINO--RENO, NEVADA
In May of 1998, the Company purchased a 262-room hotel and casino
(previously known as the Reno Ramada Plaza Hotel) and has renamed it the Ramada
Inn and Speakeasy Casino (the "Reno Property"). An eleven-story tower houses 236
of the Reno Property's hotel rooms, with 26 rooms contained in a
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separate three-story structure. The Reno Property is located at 6th and Lake
Streets in Reno and has parking for approximately 238 cars. The tower also has a
restaurant, a deli and two bars. The Reno Property has an 8000 square foot
casino area. The property also has a 7,900 square foot convention facility.
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING
On November 12, 1998, the Company, Speakeasy Las Vegas, Speakeasy Reno, and
certain of the Company's officers and directors filed applications in the State
of Nevada for the permits and licenses required for the Company to operate
casinos at the two Nevada Properties. In September of 1999, the Nevada Gaming
Commission issued Speakeasy Vegas and Speakeasy Reno two-year licenses to
conduct non-restricted gaming at the Nevada Properties. The Gaming Commission
also recognized the Company as a publicly traded corporation (thus eliminating
the need for each of the Company's shareholders to seek regulatory approval) and
found the individual applicants suitable as well. Prior to receiving the
licenses, and in order to preserve the properties' exemptions from resort hotel
legislation, the Company had leased the casinos to an independent, licensed
casino operator pursuant to leases that did not provide any revenues to the
Company. Accordingly, the Company did not realize any gaming revenue from the
Nevada Properties until October of 1999, when it took over operation of the
casinos. Currently, the Company operates approximately 300 slot machines, five
blackjack tables and two roulette wheels at the Speedway Property and
approximately 200 slot machines, five blackjack tables and a roulette wheel at
the Speakeasy Casino.
BUSINESS STRATEGY
The Company's business strategy involves further developing and expanding
its existing operations at Mountaineer Park, operating casinos at the Nevada
Properties, and seeking to acquire other middle-market, lower priced (ranging
from approximately $5 million to $50 million) gaming and/or parimutuel
businesses.
DEVELOP AND MARKET MOUNTAINEER PARK AS A DESTINATION RESORT AND DIVERSIFIED
ENTERTAINMENT FACILITY. Established in 1951 as a horse racing venue, Mountaineer
Park historically focused its operations on parimutuel wagering and related
amenities. Following the appointment of Edson R. Arneault as Chairman and Chief
Executive Officer in April 1995, the Company has sought to capitalize on the
passage of the Lottery Act by repositioning the facility as a gaming destination
resort and diversified entertainment facility. The Company has invested in
excess of $28 million in expansion, renovation, and refurbishment of Mountaineer
Park and has incrementally increased the number of Video Slots from 165 at the
time of acquisition to approximately 1355 in January of 1999 as legislative
developments either permitted additional Video Slots or made their operation
more profitable. The Company has also undertaken an aggressive marketing
campaign involving print, radio and television advertisements, including
30-minute "infomercials" aired in Mountaineer Park's target markets, and direct
mail.
INCREASE CAPACITY THROUGH EXPANSION OF FACILITIES AND INCREASING VIDEO SLOT
COUNT. Mountaineer Park's successful marketing, enhanced facilities and improved
racing and Video Slot products have resulted in a paradigm shift: while weekends
and summer months, respectively, continue to produce higher volumes of patrons
and revenues than weekdays and winter months, respectively, commencing with the
fourth quarter of 1999, weekday Video Slot revenues have regularly produced
results previously seen only on weekends; and winter months are producing
results previously seen only in summer months. Indeed, Video Slot revenue for
the month of February 2000 was $10.2 million, which is the highest monthly Video
Slot revenue in the Company's history. In order to capitalize on this momentum,
the Company's strategy is to increase Mountaineer Park's capacity and
attractiveness through expansion and refurbishment as follows:
- Expand the Speakeasy Gaming Saloon by approximately 50,000 square feet;
implement more sophisticated version of speakeasy theme.
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- Add approximately 1,050 Coin Drop and other Video Slots, subject to
regulatory approval, bringing machine count to approximately 2,400.
- Add approximately 220 hotel rooms to satisfy demand at peak times and to
permit marketing of convention facilities and golf packages during
off-peak times.
- Add an enclosed swimming pool and spa facilities.
- Construct convention facilities (approximately 25,000 square feet) to
allow promotion of group sales and to host special events.
- Construct arena (approximately 95,000 square feet with 4,000 seats) to
accommodate boxing events, concerts and other events designed to drive
patron volume.
- Construct (or have third party construct and own) new championship golf
course and golf training facility on undeveloped acreage.
Management's strategy is to implement some or all of these expansion plans
in phases as cash flow and available financing permit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Sources of Capital." Management's goal is to complete
a 15,000 square foot addition to the Speakeasy Gaming Saloon and add, subject to
regulatory approval, approximately 550 Coin Drop Video Slots by August of 2000.
Management believes that the County sewer project, which is necessary for the
implementation of the Company's expansion plans, will be completed by
approximately July of 2000.
IMPROVE FINANCIAL RESULTS OF RACING OPERATIONS AT MOUNTAINEER PARK. The
Company has a two-pronged strategy for improving the financial results of its
horse racing business: (i) continue to improve the quality of the live racing
product by increasing average purses and sponsoring "stakes" races or
"championship" races; and (ii) make its live racing product more attractive to
wagerers by broadening the betting pool through the commencement of export
simulcasting.
Management believes that the enhanced quality of racehorses should improve
the Company's prospects in export simulcasting. Commencement of export
simulcasting activity would not only create a new source of revenue but the
anticipated related increase in gross dollars wagered on Mountaineer Park's live
races should also generate increases in live handle, as a greater and more
diverse wagering pool lessens the impact a particular wager will have on the
pay- off odds. Management intends to continue its policy of increasing average
daily purses (though not necessarily in the winter months) as well as sponsor
substantially increased stakes races in an attempt to develop an export
simulcast business. Management does not expect results from racing operations to
improve materially, despite larger daily purses, stakes races, better horses,
and reduced costs, unless and until Mountaineer Park also commences export
simulcasting.
Commencement of export simulcasting will require significant capital
expenditures for equipment and facilities upgrades. In December of 1998,
Mountaineer Park and its horsemen executed an agreement, subject to the approval
of the West Virginia Racing Commission, with respect to the sharing of the cost
of such capital improvements. The Racing Commission sought the advice of the
State Attorney General's Office, which believed that the arrangement would
violate the State's racing statute. On March 11, 2000, the West Virginia State
Legislature passed House Bill 4487 amending the statute to permit such
agreements. On March 28, 2000, the Governor signed the bill into law. The
Company will again ask the Racing Commission to approve the cost sharing
agreement, but cannot assure such approval. Accordingly, the Company does not
anticipate commencement of export simulcasting until approximately 120 days
after the Racing Commission approves the cost sharing agreement. Thus, no
assurances can be given that the Company will successfully commence export
simulcasting or that the anticipated results will be realized. See "Operating
Costs" and "Parimutuel Commission Operating Costs."
CREATE AND CULTIVATE NICHE MARKET FOR NEVADA PROPERTIES. Management believes
that each of the Nevada properties possesses unique characteristics vis-a-vis
direct competitors. The Speedway Property is the
7
closest full service hotel and casino to the Las Vegas Motor Speedway and the
only motor racing themed casino in the United States. The property is further
distinguished by expansive interior and exterior murals that depict racing
scenes; four distinct auto-themed dining areas; and a "Stockcar Frenzy" race
simulator, which allows patrons to sit in the drivers seat for a five minute
race around the famous Bristol Speedway Track. With its renovated hotel and new
casino and bandstand, the Speedway Property is, in management's judgment, the
most attractive hotel/casino in the North Las Vegas market. The Company's
strategy is to maintain an aggressive print, television, radio and direct mail
campaign to focus on these unique characteristics to drive customer traffic. The
marketing strategy likewise includes promotions through the Las Vegas Motor
Speedway.
The Company's Speakeasy Casino in Reno provides an intimate atmosphere in
newly renovated space. And, while the casino is small, the hotel rooms are
spacious. Management believes that the property distinguishes itself from its
downtown Reno competitors by virtue of its luxuriousness and unique theme.
Management's strategy is to market this property as an upscale spot for locals
and convenient hotel for travelers doing business in downtown Reno. The
Company's strategy also includes marketing the property's 7,900 square foot
convention facility to drive casino traffic.
COMPETITION
The Company faces substantial competition in each of the markets in which
its gaming facilities are located. Some of the competitors have significantly
greater name recognition and financial and marketing resources than the Company.
All of the Company's gaming operations primarily compete with other gaming
operations in their geographic areas. New expansion and development activity
(with the exception of video lottery in Mountaineer Park's target markets) is
occurring in each of the relevant markets, which may be expected to intensify
competitive pressures. All of the Company's gaming operations also compete to a
lesser extent with operations in other locations, including Native American
lands, riverboats and cruise ships, and with other forms of legalized gaming in
the United States, including state-sponsored lotteries, on- and off- track
wagering, high-stakes bingo, card parlors, and the emergence of Internet gaming.
Several states have considered legalized casino gaming and others may in the
future.
Specific competitive factors relating to the Company's primary gaming
markets include the following:
MOUNTAINEER PARK. In recent years, the number of gaming options available to
consumers in the Company's West Virginia area market has increased considerably.
Mountaineer Park's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia, Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio and The
Meadows, located approximately 80 miles away from Mountaineer Park in
Washington, Pennsylvania. Wheeling Downs conducts parimutuel greyhound dog
racing and video lottery gaming. Thistledown conducts parimutuel thoroughbred
horse racing but not video lottery gaming. The Meadows conducts live harness
racing and provides import simulcasting, but does not have video lottery gaming.
In general, Mountaineer Park competes with other tracks for participation by
quality racehorses. The Company also competes with statewide lotteries in West
Virginia, Pennsylvania and Ohio, off-track and on-site wagering in Pennsylvania,
and, to a lesser extent, destination gaming facilities in Las Vegas and Atlantic
City, as well as other entertainment options available to consumers, including
live and televised professional and collegiate major sports events. The Company
will also compete with off-track wagering in Ohio, which has recently been
approved in that state. To the extent that Pennsylvania, Ohio or West Virginia
legalizes any forms of casino gaming, slot machines or video lottery gaming, the
Company's Video Slot operations could compete with any such new gaming
facilities located within driving distance of Mountaineer Park. If permitted
under such new legislation, such facilities may offer more gaming machines than
Mountaineer Park, as well as forms of gaming not available in West Virginia.
Such competition could have a material adverse effect on the Company.
8
THE SPEEDWAY PROPERTY. The Company does not intend for the Speedway Property
to compete with the high-end luxury hotel/casinos along Las Vegas' famous Strip
(along Las Vegas Boulevard between Sahara Avenue and Tropicana Avenue). Although
the Strip is the main attraction for gaming patrons who travel to Las Vegas, the
Company believes that North Las Vegas constitutes a distinct segment of the Las
Vegas gaming market. Nevertheless, management recognizes that the Strip may
limit customer traffic to the North Las Vegas area. Even within the North Las
Vegas segment of the market, however, Speakeasy Las Vegas faces substantial
competition from other small casinos. New properties, or major additions,
expansions or enhancements to competitors' existing properties, could have a
material adverse effect on the Company.
THE RENO PROPERTY. The Reno Property competes with other properties in Reno,
Nevada and other Nevada gaming markets. The Reno Property's principal direct
competitors are those gaming facilities located in downtown Reno. There are
currently nine gaming facilities in downtown Reno with over 11,700 slot
machines, 470 table games and 6,600 hotel rooms. These gaming facilities are, in
general, larger and have more amenities than the Reno Property. New properties,
or major additions, expansions or enhancements to competitors' existing
properties could have a material adverse effect on the Company.
In March of 2000, California voters passed a proposition to permit Indian
tribes to conduct and operate slot machines, lottery games and banked and
percentage card games on Indian lands. If the Federal government approves the
compacts, the Nevada properties could be adversely impacted as a result of this
increased competition.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,025 employees (800
in connection with operations at Mountaineer Park and the remainder in Nevada)
of whom approximately 70 were represented by a labor union under a collective
bargaining agreement. The union representing mutuel clerks at the racetrack has
been expanded in recent years to cover certain employees providing off-track
betting services at the Lodge. The collective bargaining agreement was extended
until November 30, 2002. The Company believes that its employee relations are
good.
The Company anticipates that the number of employees for operations at
Mountaineer Park will increase materially in connection with the contemplated
expansion.
REGULATION AND LICENSING
GENERAL. All of the Company's gaming operations are subject to extensive
regulations and could be subjected at any time to additional or more restrictive
regulations. The Company is also subject to the provisions of West Virginia law
that govern the conduct of thoroughbred horse racing in West Virginia (the "West
Virginia Racing Act") and the operation of Video Slots in West Virginia (the
"Lottery Act"). The Company's live racing, pari-mutuel wagering and Video Slot
operations are contingent upon the continued governmental approval of such
operations as forms of legalized gaming. The Company also may be materially
adversely affected by legislation of additional forms of gaming activity, or
expanded licensure, within or near the Company's present or future markets.
The regulations and oversight applicable to the Company's operations are
intended primarily to safeguard the legitimacy of gaming activity and its
freedom from inappropriate or criminal influences. The Company's material
licenses are subject to annual or other periodic renewal and governmental
authorities may refuse to grant permission to continue to operate existing
facilities. The failure to obtain or maintain in effect required regulatory
approvals would have a material adverse effect upon the Company's business,
financial condition and results of operations.
9
WEST VIRGINIA RACING AND GAMING REGULATION. The Company's operations at
Mountaineer Park are subject to regulation by the West Virginia State Racing
Commission (the "Racing Commission") under the West Virginia Racing Act, and by
the West Virginia State Lottery Commission under the Lottery Act. The powers and
responsibilities of the Racing Commission include, among other things,
(i) granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving simulcasting activities, (iii) licensing all officers,
directors, racing officials and certain other employees of the Company and
(iv) approving all contracts entered into by the Company affecting racing and
parimutuel wagering operations. Such powers and responsibilities extend to the
approval and/or oversight of all aspects of racing and parimutuel wagering
operations. In order to conduct simulcast racing, Mountaineer Park is required
under West Virginia law to hold a minimum of 210 live race days each year. West
Virginia law requires that at least 80% of Mountaineer Park's employees must be
citizens and residents of West Virginia and must have been such for at least one
year. In addition, certain activities, such as simulcasting races, require the
consent of the representatives of a majority of the horse owners and trainers at
Mountaineer Park.
If the Company commences export simulcast activities that occur outside of
West Virginia, such operations could be subject to regulation by other state
racing commissions, as well as the provisions of the Federal Interstate Horse
Racing Act of 1978, which prohibits Mountaineer Park from accepting off-track
wagering on simulcast racing without the approval of the Racing Commission and,
subject to certain exceptions, of any other currently operating track within 60
miles, or if none, of the closest track in any adjoining state. The Company has
received all necessary approvals to conduct its current operations at
Mountaineer Park; however, such approvals are subject to renewal and approval
annually. The failure to receive or retain approvals or renewals of approvals,
or a delay in receiving such approvals and renewals, could cause the reduction
or suspension of racing and parimutuel wagering, as well as of Video Slot
operations, at Mountaineer Park and have a material adverse effect upon the
Company's business, financial condition and results of operations.
Pursuant to the Lottery Act, each of the two West Virginia horse racetracks
and two West Virginia dog racetracks licensed prior to January 1, 1994 and which
conduct a minimum number of days of live racing, may apply for an annual license
to operate Video Slots at its racetrack. The Lottery Act likewise requires that
the operator of Mountaineer Park be subject to a written agreement with the
horse owners, breeders and trainers who race horses at that facility (the
"Mountaineer Park Horsemen") in order to conduct Video Slots operations. The
Company is party to the requisite agreement with the Mountaineer Park Horsemen,
which expires on January 1, 2001. The Lottery Act also requires that the
operator of Mountaineer Park be subject to a written agreement with the
parimutuel clerks in order to operate Video Slots. The Company is party to the
requisite agreement with its pari-mutuel clerks which expires on November 30,
2002. The absence of an agreement with the Mountaineer Park Horsemen or the
parimutuel clerks at Mountaineer Park, or the termination or non-renewal of such
agreement, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Lottery Commission has broad
powers to approve and monitor all operations of the video lottery terminals, the
specification of the terminals and the interface between the terminals and the
West Virginia Central Lottery System. The Lottery Commission also acts upon the
Company's requests for increases in the number of Video Slots. The Lottery
Commission's denial of a request to increase the number of Video Slots at
Mountaineer Park could limit the Company's growth and thus adversely affect the
Company's business, financial condition and results of operations. In addition,
the Lottery Commission licenses all persons who control the licensed entity or
are key personnel of the video lottery operation to ensure their integrity and
absence of any criminal involvement.
The conduct of video lottery gaming by a racing facility is subject to the
approval of the voters of the county in which the facility is located. If such
approval is obtained, the facilities may continue to conduct video lottery
activities unless the matter is resubmitted to the voters pursuant to a petition
signed by at least 5% of the registered voters, who must wait at least five
years to bring such a petition. If approval is denied, another vote on the issue
may not be held for a period of two years. Video lottery gaming was
10
approved in Hancock County, the location of Mountaineer Park, on May 10, 1994.
If such approval were ever revoked pursuant to the Lottery Act, it would have a
material adverse effect on the Company.
In order to qualify as a "video lottery game," as the term is defined under
the Lottery Act, a game must, among other things, be a game of chance which
utilizes an interactive electronic terminal device allowing input by an
individual player. Such a game may not be based on any of the following game
themes: roulette, dice, or baccarat card games. Moreover, video lottery machines
must meet strict hardware and software specifications, including minimum and
maximum pay-out requirements, and must be connected to the Lottery Commission's
central control computer by an on-line or dial-up communication system. Only
machines registered with and approved by the Lottery Commission may offer video
lottery games.
Under the Lottery Act, racetracks that conduct video lottery gaming, as well
as persons who service and repair video lottery machines and validation managers
(persons who perform video lottery ticket redemption services) are required to
be licensed by the Lottery Commission. The licensing application procedures are
extensive and include inquiries into, and an evaluation of, the character,
background (including criminal record, reputation and associations), business
ability and experience of an applicant and the adequacy and source of the
applicant's financing arrangements. In addition, a racetrack applicant must hold
a valid racing license, have an agreement regarding video lottery revenues with
the representatives of a majority of the horsemen, the parimutuel clerks and the
breeders for the racetrack and post a bond or irrevocable letter of credit in
such amount as the Lottery Commission shall determine. Finally, no license will
be granted until the Lottery Commission determines that each person who has
"control" of an applicant meets all of the applicable licensing qualifications.
Persons deemed to have control of a corporate applicant include: (i) any holding
or parent company or subsidiary of the applicant who has the ability to elect a
majority of the applicant's board of directors or to otherwise control the
activities of the applicant; and (ii) key personnel of an applicant, including
any executive officer, employee or agent, who has the power to exercise
significant influence over decisions concerning any part of the applicant's
business operations.
Video Lottery machines may only be operated in the grandstand building of a
racetrack where parimutuel wagering is permitted; provided, however, that if a
racetrack was authorized by the Lottery Commission prior to November 1, 1993 to
operate video lottery machines in another area of the racetrack's facilities,
such racetrack may continue to do so as long as there is one video lottery
machine in the grandstand building for each two machines located in another area
of the racetrack. Accordingly, Mountaineer Park may continue to operate video
lottery machines at the Lodge, provided that there are at least half as many
machines located in the grandstand building of the racetrack.
In March of 2000, the West Virginia State Legislature passed a bill, which
the Governor signed into law, that amended the Lottery Act to remove the
existing 2:1 ratio limitation for Video Slots at the Lodge versus the racetrack
building, thus allowing additional Video Slots at the Lodge without regard to
the number of Video Slots at the racetrack building.
The Lottery Act imposes extensive operational controls relating to, among
other matters, security and supervision, access to the machines, hours of
operation, general liability insurance coverage and machine location. In
addition, the Lottery Act prohibits the extension of credit for video lottery
play and requires Lottery Commission approval before any video lottery
advertising and promotional activities are conducted. The Lottery Act provides
for criminal and civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be
deposited with the Lottery Commission to be shared in accordance with the
provisions of the Lottery Act. Under such provisions, each racetrack must
electronically remit to the Lottery Commission its "gross terminal income"
(total cash deposited into video lottery machines less the value of credits
cleared for winning redemption tickets). To ensure the availability of such
funds to the Lottery Commission, each racetrack must maintain in its account an
amount equal to or greater than the gross terminal income to be remitted. If a
racetrack fails to
11
maintain this balance, the Lottery Commission may disable all of the racetrack's
video lottery machines until full payment of all amounts due is made. From the
gross terminal income remitted by a licensee, the Lottery Commission will deduct
up to 4% to cover its costs of administering video lottery at the licensee's
racetrack and divide the remaining amounts as follows: 47% is returned to the
racetrack, 30% is paid to the State's general revenue fund, 15.5% is deposited
in the racetrack's fund for the payment of purses, and the remaining 7.5% is
divided among tourism promotion, Hancock County, the Veterans Memorial Program,
the Racetrack Employees Pension Fund, and other programs.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply its business would be materially adversely effected.
NEVADA GAMING REGULATION. The laws, regulations, and supervisory procedures
of the Nevada Gaming Authorities are based upon declarations of public policy
which are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) to provide a
source of state and local revenues through taxation and licensing fees.
In order to operate non-restricted gaming at the Nevada Properties, the
Company, Speakeasy Las Vegas, Speakeasy Reno and certain officers and directors
are required to be licensed as operators of a casino by the Nevada Gaming
Authorities. A gaming license requires the periodic payment of fees and taxes
and is not transferable. The Company has also been registered by the Nevada
Commission as a publicly traded corporation ("Registered Corporation") and as
such, it will be required periodically to submit detailed financial and
operating reports to the Nevada Commission and furnish any other information
which the Nevada Commission may require. No person may become a stockholder of,
or receive any percentage of profits from, Speakeasy Las Vegas or Speakeasy Reno
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. In September of 1999, the Company and all relevant affiliates
obtained from the Nevada Gaming Authorities the necessary licenses to engage in
gaming activities at the Nevada Properties. With respect to the licenses of
Speakeasy Vegas and Speakeasy Reno, the Nevada Gaming Authorities issued
licenses for a term of two years, after which the Company will have to apply for
and obtain permanent licenses in order to continue conducting gaming operations
at those locations.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Nevada Subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors, and certain key employees of the Nevada Subsidiaries must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers,
directors, and key employees of the Company who are actively and directly
involved in gaming activities of the Nevada Subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and in addition to their authority
to
12
deny an application for a finding of suitability or licensing, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Nevada Subsidiaries, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or the Nevada subsidiaries to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and the Nevada subsidiaries must submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities, and similar financial transactions by the Company
and the Nevada subsidiaries will have to be reported to, or approved by, the
Nevada Commission.
If it were determined that the Company or its Nevada Subsidiaries had
violated the Nevada Gaming Control Act or the regulations promulgated thereunder
(collectively, the "Nevada Act"), the gaming licenses could be limited,
conditioned, suspended, or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, the Nevada Subsidiaries, the Company,
and the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than
10 percent of the Company's voting securities apply to the Nevada Commission for
a finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more then
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies, or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership,
or trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found
13
unsuitable. The same restrictions apply to a record owner of securities if the
record owner, after request, fails to identify the beneficial owner. Any
stockholder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the common stock of a Registered Corporation beyond such
period of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its Nevada subsidiaries, the Company
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays remuneration
in any form to that person for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company must maintain a current stock ledger in Nevada which may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company will also be required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act. Likewise, the Company may not
make a public offering of its securities without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire, or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors, and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates;
(ii) preserve the beneficial aspects of conducting business in the corporate
form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the
14
Registered Corporation's stockholders for the purposes of acquiring control of
the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who is or proposes to become involved in a gaming venture
outside of Nevada is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $15,000 to pay the expenses of
investigation of the Nevada Board of their participation in such foreign gaming.
The revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
IMPACT OF RESORT HOTEL LEGISLATION. The Speedway Property and the Reno
Property are subject to legislation passed in 1991 by the Nevada Legislature,
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation are found in Section 463.1605 of the Nevada Revised Statutes
("NRS"). NRS 463.1605 essentially provides that the Nevada Commission shall not
approve a non-restricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel. A resort hotel is defined to include an establishment held out to the
public as a hotel with more than 200 rooms available for sleeping
accommodations, at least one bar with capacity for more than 30 patrons, and at
least one restaurant with capacity for more than 60 patrons. A county, city or
town may require resort hotels to meet standards in addition to those required
by NRS 463.1605 as a condition to issuance of a gaming license by the particular
county, city or town. The City of Reno has by ordinance increased the room
requirement for resort hotels to 300. The Nevada Properties are exempt from NRS
463.1605 because these locations have held non-restricted gaming licenses. The
grandfathered exemptions, however, are lost in the event gaming is abandoned
within the meaning of the statute and local regulations. The March 1999
commencement of gaming operations at the Speedway Property and the April 1999
commencement at the Reno Property preserved the grandfathered status of the
Nevada Properties. The failure to keep the grandfathered exemptions to NRS
463.1605 and the local regulations governing resort hotels (by abandonment of
gaming operations) would have a materially adverse effect on the Company.
COMPLIANCE WITH OTHER LAWS. The Company and facilities are also subject to a
variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Nevada and West Virginia governing the serving
of alcoholic beverages. Mountaineer Park, Speakeasy Vegas and Speakeasy Reno
derive a significant portion of their other revenues from the sale of alcoholic
beverages. Any interruption or termination of the ability to serve alcoholic
beverages would have a material adverse effect on the Company's business,
financial condition and results of operations.
RESTRICTIONS ON SHARE OWNERSHIP AND TRANSFER. Unless prior approval of the
West Virginia Lottery Commission is obtained, the sale of five percent or more
of the voting stock of the license holder or any corporation that controls the
license holder or the sale of a license holder's assets (other than in the
ordinary course of business), or any interest therein, to any person not
previously determined by the Lottery Commission to have satisfied the licensing
qualifications, voids the license. With respect to the State of Nevada, any
beneficial holder of a Registered Corporation's voting securities (or rights to
acquire
15
such securities), regardless of the number of shares owned, may be required to
file an application, be investigated and have his suitability as a beneficial
holder of the registered Corporation's voting securities determined if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation. Applicable Nevada law requires any person who
acquires more than 5% of a Registered Corporation's voting securities to report
the acquisition to the Nevada Commission. The Nevada Act requires that
beneficial owners of more than 10% of the voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing.
APPLICATION OF ENVIRONMENTAL REGULATIONS. Generally, the Company and its
subsidiaries are subject to a variety of federal, state and local governmental
laws and regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. While the Company believes that it and its
subsidiaries are presently in material compliance with all environmental laws,
failure to comply with such laws could result in the imposition of severe
penalties or restrictions on operations by government agencies or courts that
could materially adversely affect the Company's operations. The Company does not
have insurance to cover environmental liabilities, if any, other than certain
limited coverage with respect to the Reno Property.
DISCONTINUED OPERATIONS
In January 1992, as part of its plan of reorganization, the Company, through
its wholly owned subsidiary, ExCal Energy Corporation, acquired from various
affiliates of the Company's president and chairman, Edson Arneault (prior to his
becoming an affiliate of the Company), oil and gas leases and wells in Ohio (the
"Ohio Interests") and an interest in oil wells in Michigan (the "Michigan
Interests"). Pursuant to an October 1993 Plan of Orderly Liquidation, in
December of 1994, the Company sold the Ohio Interests for notes valued at
approximately $426,000. In October of 1998, the Company exchanged the Michigan
Interests with an affiliate of its former joint venture partner for an
assignment of production payment in the amount of $2.5 million, which is
convertible at the Company's election into up to 25% of the equity of the
purchaser. In connection with the exchange of the Michigan Interests, the
Company likewise agreed to lend to the purchaser up to $500,000 for development
of the project and acquisition of related assets. The loan is secured by
substantially all of the assets of the purchaser. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Discontinued
Operations"; Note 10 of the Notes to Consolidated Financial Statements; and
"Certain Relationships and Related Transactions".
ITEM 2. PROPERTIES
HOTEL, GAMING, RACING AND OTHER PROPERTY
Mountaineer Park is comprised of a thoroughbred racetrack and the Lodge
providing video lottery gaming, off-track wagering, dining and lounge facilities
as well as facilities for, swimming, tennis and other outdoor activities
covering approximately 1,066 acres (including approximately 835 undeveloped
acres) in Chester, West Virginia. The Mountaineer Park facility encompasses
approximately 4,100 feet of frontage on the Ohio River. Mountaineer Park also
owns a 168-acre tract including the Woodview Golf Course in New Cumberland, West
Virginia.
The Speedway Property sits on approximately 6.1 acres and consists of one
two-story building and one three-story building with a total of 131 hotel rooms.
The Property also has a restaurant and lounge facilities, as well as the newly
constructed 15,600 square foot casino building with parking for 474 cars.
The Reno Property sits on approximately 1.74 acres in downtown Reno and
consists of an eleven-story tower that contains 236 of the Reno Property's hotel
rooms, with 26 rooms contained in a separate three-
16
story structure. The Reno Property is located at 6th and Lake Streets in Reno
and has parking for approximately 238 cars. The tower also has a restaurant, a
deli and two bars. The Reno Property has an 8000 square foot casino area and a
convention facility of approximately 7,900 square feet.
Substantially all of the Company's assets are pledged to secure the debt
evidenced by the Credit Agreement dated as of December 20, 1999 among
Mountaineer Park, Inc., Speakeasy Las Vegas, Speakeasy Reno, the Company and
Wells Fargo Bank.
EQUIPMENT LEASES
At December 31, 1999, in connection with video lottery and racing
operations, Mountaineer Park leased 955 video lottery machines, a totalisator
system, video tape and closed circuit television systems and other equipment
required for its operations. At December 31, 1999, Speakeasy Las Vegas leased
219 slot machines, outdoor signs, and coin operate telephones required for its
operations. At December 31, 1999, Speakeasy Reno leased 178 slot machines,
outdoor signs, a dishwashing machine and coin operated telephones required for
its business operations.
ITEM 3. LEGAL PROCEEDINGS
PENDING LITIGATION
REINHOLD V. MOUNTAINEER PARK, INC., Circuit Court of Hancock County, West
Virginia, Civ. No. 98-30-W. On February 19, 1998 Juanita Reinhold filed a
complaint against Mountaineer Park, alleging wrongful termination of employment
and improper use of polygraph testing. Ms. Reinhold seeks $250,000 in
compensatory damages, $250,000 in punitive damages, plus costs and attorney's
fees. Mountaineer Park has answered the complaint, denying any liability on the
grounds that Ms. Reinhold's employment was properly terminated and the polygraph
examination was administered by the local law enforcement authorities, in the
presence of Ms. Reinhold's counsel, in connection with a police investigation.
Plaintiff has only recently obtained substitute counsel after the October 1998
withdrawal of her original counsel in the face of Mountaineer Park's motion to
disqualify him. Discovery has only recently commenced.
The Company (including its subsidiaries) is also a defendant in various
lawsuits relating to routine matters incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "MNTG". On March 22, 2000, the closing trade price for the Company's
Common Stock was $2.8125. As of March 22, 2000, there were approximately 654
stockholders of record of the Company's Common Stock.
The Company historically has not paid cash dividends and does not intend to
pay such dividends in the foreseeable future.
The following table sets forth the range of high and low bid price
quotations obtained from the National Quotation Bureau, LLC for the Common Stock
for the two fiscal years ended December 31, 1998 and 1999 and for the period of
January 1, 2000 through March 22, 2000. These quotes are believed to be
17
representative of inter-dealer quotations, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
HIGH LOW
--------- ---------
Year Ended December 31, 1998:
First Quarter....................................... $ 2.9375 $ 2.00
Second Quarter...................................... 3.46875 2.4375
Third Quarter....................................... 2.5 1.625
Fourth Quarter...................................... 2.84375 1.75
Year Ending December 31, 1999:
First Quarter....................................... 2.6875 1.96875
Second Quarter...................................... 3.65625 2.5625
Third Quarter....................................... 3.59375 2.50
Fourth Quarter...................................... 3.46875 2.375
Year Ending December 31, 2000:
First Quarter (January 1, 2000 through March 22,
2000)............................................. 3.3125 2.4375
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 1999, have been derived from the audited consolidated
financial statements of the Company, certain of which are included elsewhere in
this Report, and should be read in conjunction with those consolidated financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues..................... $113,421,000 $83,110,000 $60,138,000 $40,204,000 $24,927,000
Income/(loss) from continuing
operations................. 6,995,000 10,423,000 4,694,000 1,155,000 (5,313,000)
Income/(loss) per share from
continuing operations
Basic:....................... .33 .51 .24 .06 (.33)
Assuming dilution:........... .28 .44 .22 .06 (.33)
Discontinued operations data:
Revenues..................... -- -- -- -- --
Loss from extraordinary
item....................... (756,000)
Loss from discontinued
operations................. -- (2,735,000) -- -- --
Loss per share from
discontinued operations in
1998; extraordinary item in
1999.......................
Basic........................ (.03) (.13) -- -- --
Assuming dilution............ (.03) (.11) -- -- --
Balance Sheet Data:
Working Capital
(Deficiency)............... 1,419,000 12,457,000 9,785,000 3,897,000 (7,453,000)
Current Assets............... 13,161,000 15,016,000 12,884,000 7,016,000 1,972,000
Current Liabilities.......... 11,742,000 2,559,000 3,099,000 3,119,000 9,425,000
Total assets-continuing
operations................. 69,559,000 59,737,000 38,285,000 28,262,000 23,131,000
Net assets-discontinued
operations................. -- -- 2,616,000 2,616,000 2,616,000
Total Liabilities............ 39,850,000 36,547,000 25,788,000 20,612,000 19,763,000
Total Stockholders' Equity... 29,709,000 23,190,000 15,113,000 10,266,000 5,984,000
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company anticipates that Mountaineer Park, particularly gaming
operations, will continue to be the dominant factor in the Company's financial
condition for at least the next fiscal year. Having obtained its Nevada gaming
licenses and taken over gaming operations at the Nevada properties in the fourth
quarter of 1999, the Company expects the financial performance of those
properties to improve as well.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
Total revenues increased by $30,311,000 from 1998 to 1999, an increase of
36.5%. Approximately $26.3 million of the increase was produced by gaming
operations at Mountaineer Park. Mountaineer Park's revenue from parimutuel
commissions decreased by $292,000, or 6.1%; its lodging revenues increased by
$83,000, or 5.6%; food and beverage revenues increased by $1.3 million or 26.8%
to $6.3 million; and other revenues increased by $670,000 or 37.2%.
The Nevada Properties contributed $3,225,000 in revenues in the year ended
December 31, 1999, a $2.2 million or 208.4% increase from revenues of $1,046,000
for the year ended December 31, 1998. In 1998, the Speedway Property was
generally dark during renovation of hotel rooms and food and beverage facilities
and construction of the 15,600 square foot casino building and parking lots.
This property's hotel and food and beverage facilities were re-opened in
March 1999. The Company had no revenues from gaming operations at either
property during 1998 and through September 1999. On October 1, 1999, the Company
took over gaming operations at the two Nevada Properties. The gaming revenue for
the three months of operation in 1999 was $621,000. The sources of the remaining
revenues for 1999 were $1.9 million from lodging, $619,000 from food and
beverage and $60,000 in other income.
GAMING OPERATIONS
Revenues from gaming operations increased 39.1% from $69.0 million in 1998
to $96.0 million in 1999. Management attributes the dramatic increase to the
following factors: (1) the increase in machine count from 1,200 to 1,300 by
introducing 100 progressive Video Slots; (2) the introduction of 400 coin drop
slot machines in November 1999; (3) the July 1998 increase in ratio (from 1:1 to
2:1) of gaming machines located at the Lodge as compared to the racetrack
building; (4) continued aggressive marketing; and (5) the expanded hours of
operation for the track based gaming machines commencing in June of 1999
(resulting in a 37% increase in the net win per machine per day for such
machines).
An amendment of the Lottery Law that became effective in June of 1998
permitted Mountaineer Park to change the ratio of Video Slots located in the
Lodge versus the racetrack building from 1:1 to 2:1. Terminals located in the
Lodge's Speakeasy Gaming Saloon are more popular than those at the racetrack and
account for significantly more revenue. To capitalize on the change in law, the
Company constructed a 12,000 square foot addition to the Lodge's Speakeasy
Gaming Saloon, obtained regulatory approval to increase the total number of
Video Slots from 1,000 to 1,200 (by leasing 200 new "nickel" machines), and
placed 800 Video Slots in the Lodge and 400 in the racetrack building (as of
July 2, 1998). In January of 1999, an additional 100 progressive gaming machines
were placed in the gaming areas.
In December 1998, Mountaineer Park leased 100 more Video Slots (62 in the
Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive Video Slot banks. These machines
were placed in service on December 17, 1998 and therefore did not have a
material impact on operations for the year ended December 31, 1998. Since
May 9, 1999, Mountaineer has paid approximately $1,250,000 in large progressive
jackpots.
In April of 1999, the Lottery Law was amended, effective June 11, 1999, to
permit Mountaineer Park to operate coin drop, mechanical reel Las Vegas-style
slot machines. On June 14, 1999, in anticipation of
19
adding coin drop machines, the Company began increasing the number of days
during which the machines located at the racetrack remain in operation.
Previously, those machines operated only on live racing days and during special
events. Also the Speedway Gaming Room was built to house 72 new coin drop
machines in the track's lower grandstand. In November of 1999, Mountaineer Park
introduced its first coin drop machines. During November and December of 1999,
the average daily win per coin drop machine was $251 compared to $147 for other
Video Slots.
For the twelve months ended December 31, 1999, average daily net win for the
track-based Video Slots was $96 (including $0 for days before June 1999 when
there was no live racing), compared to $261 earned on the Lodge-based terminals
for a facility-wide average of $200 per machine per day. A summary of the video
lottery gross wagers less patron payouts ("net win") for the twelve months ended
December 31, 1999 and 1998 is as follows:
1999 1998
-------------- --------------
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------------
Total gross wagers............................ $ 373,767,000 $ 240,164,000
Less patron payouts........................... $ (278,435,000) $ (171,172,000)
-------------- --------------
Revenue--
video lottery operations...................... $ 95,332,000 $ 68,992,000
============== ==============
Average daily net win per terminal............ $ 200 $ 171
============== ==============
Since October 1, 1999, the Company has operated gaming at its two Nevada
Properties. The North Las Vegas property had gaming revenues of $379,000 for the
three months ending December 31, 1999. The Reno property's gaming revenues were
$242,000 for the same period. The Company believes after the scheduled Grand
Openings in March and April of 2000, with a more aggressive advertising campaign
and the completion of the renovations at the two locations, these amounts will
significantly increase.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which means
the total amount wagered without regard to predetermined deductions, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place, or show bet. In parimutuel wagering,
patrons bet against each other rather than against the operator of the facility
or with pre-set odds. The total wagering handle is composed of the amounts
wagered by each individual according to the wagering activity. The total amounts
wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total wagering handle or total amounts wagered. The Company
earned an average commission rate of 20% in each of the past three years.
20
Parimutuel commissions for the twelve months ended December 31, 1999 and
1998 are summarized below.
1999 1998
----------- -----------
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
Live racing parimutuel handle...................... $19,824,000 $21,594,000
Simulcast racing parimutuel handle................. 21,249,000 22,217,000
Less patrons' winning tickets...................... (32,486,000) (34,661,000)
----------- -----------
8,587,000 9,150,000
State and county parimutuel tax.................... (485,000) (494,000)
Purses and Horsemen's Association.................. (3,598,000) (3,860,000)
----------- -----------
Revenues parimutuel commissions.................... $ 4,504,000 $ 4,796,000
=========== ===========
Despite a 26.9% increase in the average daily purses (from $66,000 in 1998
to $83,750 in 1999) and higher patron volume, total revenues for parimutuel
commissions for the year ending December 31, 1999 decreased 6.1% in comparison
to 1998. Live racing handle decreased 8% to $19.8 million in 1999 from
$21.6 million in 1998. Simulcast handle in 1999 decreased by $968,000 (4%) to
$21.2 million in comparison to the same period in 1998. Management attributes
the decrease in parimutuel revenue largely to the scheduling of special events
such as concerts and boxing matches on live race days. Management had hoped that
new patrons drawn by special events would likewise become parimutuel wagering
and slot patrons. The anticipated increase in slot revenue was realized while
the increase in parimutuel handle was not. These events in 2000 have been
scheduled for evenings that will not conflict with regularly scheduled race
days.
Management does not expect results from racing operations to improve
materially, despite larger daily purses, stakes races, better horses and larger
patron volume for the resort, unless and until Mountaineer Park also commences
export simulcasting. Export simulcasting would not only create a new source of
revenue but the anticipated related increase in gross dollars wagered on
Mountaineer Park's live races should also generate increases in live handle (as
a greater and more diverse wagering pool lessens the impact a particular wager
will have on the pay-off odds). The commencement of export simulcasting would
involve substantial capital improvements (approximately $4-5 million). In
December of 1998, Mountaineer Park and its horsemen executed an agreement,
subject to the approval of the West Virginia Racing Commission, with respect to
the sharing of the cost of such capital improvements. The Racing Commission
sought the advice of the State Attorney General's Office, which originally
believed that the arrangement would violate the State's racing statue. The
Company asked the Attorney General's Office to reconsider that conclusion. At
the same time, the Company pursued legislation to make plain that the statute
permitted the agreement. On March 11, 2000, the West Virginia State Legislature
passed House Bill 4487 amending the statute to permit such agreements. On March
28, 2000, the Governor signed the bill into law. The Company will again ask the
Racing Commission to approve the cost sharing agreement. Accordingly, the
Company does not anticipate commencement of export simulcasting until
approximately 120 days after the Racing Commission approves the cost sharing
agreement. Thus, no assurances can be given that the Company will successfully
commence export simulcasting, or commence such activity within the anticipated
time, or that the anticipated results will be realized. See "Operating Costs"
and "Parimutuel Commission Operating Costs."
LODGING, FOOD AND BEVERAGE
Revenues from lodging, food and beverage accounted for a combined increase
of 39.1% or $2.9 million to $10.4 million for the year ended December 31, 1999,
from $7.5 million for the same period in 1998. Company wide, restaurant, bar and
concession facilities produced $1.9 million of the revenue increase, while lodge
revenues increased $1.0 million. Of the increase in revenues, food and beverage
operations
21
accounted for approximately 65% of the revenues from this profit center in 1999
and 67% in 1998. At Mountaineer Park, food and beverage revenues increased
$1.3 million to $6.3 million in 1999. Management believes that increased
revenues from lodging, food and beverage at Mountaineer Park resulted primarily
from enhanced gaming facilities and related advertising, which in turn led to
increased larger patron volume. Of the $2.9 million increase in food, beverage
and lodging revenue, 52% or $1.5 million can be attributed to the Nevada
Properties.
OTHER OPERATING REVENUES
Other revenues increased by $710,000, or 39% from 1999 to 1998. Other
sources of revenues consist primarily of non-core businesses such as admission,
program sales, golf, special events, such as concerts and professional boxing
matches, check cashing and ATM services. Other operating revenues also included
two refunds for overpayment of prior years' sales tax in the amount of $271,000.
Due to the purchase of Woodview Golf Course in 1999, golf revenues increased by
$212,000 to $380,000. Revenues from ATM service fees, a new service instituted
in July of 1998, were $364,000 in 1999 compared to $143,000 in 1998. Revenues
from admissions and program sales increased by $105,000 to $451,000 in 1999.
While these activities are non-core business activities, Management believes
that they are necessary to attract gaming patrons.
OPERATING COSTS
The Company's $30.3 million increase in revenues was accompanied by higher
total costs, as directly related expenses increased by $19.5 million to
$73.6 million in 1999 compared to 1998. Approximately $15 million of the
increase in operating costs is attributable to the gaming operations, which
includes applicable state taxes and fees. Parimutuel direct cost increased by
$337,000, while cost of lodging and food and beverage increased by
$2.9 million. Of the 44.8% increase in the cost of food and beverage and
lodging, $1.35 million can be attributed to the Nevada Properties. The cost of
other income increased by $1.2 million in 1999 to $2.4 million. The increase is
due primarily to higher operating costs for golf attending the operation of a
full-length golf course as opposed to a nine-hole executive course and increased
spending on entertainment offerings for patrons at Mountaineer Park.
The 36.5% increase in revenues was also accompanied by a 62.9% increase in
marketing and promotions expense. There was a 37.3% increase in general and
administrative expenses, and a 44.9% increase in depreciation and amortization.
The increased marketing and promotion expenses were due primarily to the
production costs and broadcast costs of the Company's second infomercial,
"Hancock County, We're on Top of West Virginia", increases in direct mail,
print, radio and television advertising and increased prize giveaways. The
increase in general and administrative expenses was due primarily to
(1) additional personnel engaged in maintenance, housekeeping and security to
accommodate Mountaineer Park's larger crowds; (2) an increase in employee
benefits in the form of insurance and employee meals; (3) travel and insurance
costs along with professional fees related to financing and acquisition
activity, including consideration of acquisitions that were not consummated. The
Nevada Properties' general and administrative costs were $1.9 million in 1999,
compared to $413,000 in 1998 due primarily to increased patronage and the
re-opening of the Speedway Property.
22
Operating Costs and gross profits earned from operations for the
twelve-month periods ended December 31, 1999 and 1998 are as follows:
1999 1998
----------- -----------
YEARS ENDED
DECEMBER 31
-------------------------
Operating Costs
Video Lottery Terminals............................ $56,431,000 $41,404,000
Parimutuel Commissions............................. 5,300,000 4,963,000
Lodging, Food and Beverage......................... 9,441,000 6,522,000
Other.............................................. 2,425,000 1,212,000
----------- -----------
Total Operating Costs.............................. $73,597,000 $54,101,000
=========== ===========
1999 1998
----------- -----------
YEARS ENDED
DECEMBER 31
-------------------------
Gross Profit (Loss)
Video Lottery Terminals............................ 39,521,000 $27,588,000
Parimutuel Commissions............................. (796,000) (167,000)
Lodging, Food and Beverage......................... 991,000 977,000
Other.............................................. 108,000 611,000
----------- -----------
Total Gross Profit (Loss).......................... $39,824,000 $29,009,000
=========== ===========
GAMING OPERATING COSTS
Costs of gaming revenue for 1999 increased by $15 million or 36.3% from
$41.4 million to $56.4 million for the year ended December 31, 1999, compared to
1998, in proportion to the increase in revenue. (See Note 12 of the Consolidated
Financial Statements). Such expenses accounted for $14.3 million of the total
cost increase of the additional expenses incurred in connection with gaming.
Gaming machine lease expense increased by $566,000 in comparison to 1998 due to
the new 200 machines installed in July 1998 and the additional 100 machines
installed in December 1998. Wages and benefits as well as supplies expense
increased from 1998 to 1999 by $489,000 in response to higher levels of patron
play, patron volume and the additional personnel required for coin drop slot
operations compared to other machines. There was $625,000 of gaming expense in
Nevada in 1999, the first year of gaming operations.
Under the Lottery Act, the following statutory rates paid to certain
entities are in effect.
State of West Virginia...................................... 30.0%
Hancock County.............................................. 2.0%
Horseman's Association (racing purses)...................... 15.5%
Other....................................................... 5.5%
----
Total Statutory Payments.................................... 53.0%(1)
====
- ------------------------
(1) Excludes up to a 4% administrative fee charged by the State of West Virginia
based on revenues. In addition, rates are applied to revenues net of this 4%
administrative fee. (See Note 12 to the Consolidated Financial Statements of
the Company.)
23
Statutory costs and assessments excluding the State Administrative fee for
the respective twelve-month periods are as follows:
1999 1998
----------- -----------
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
Employee Pension Fund.............................. $ 474,000 $ 339,000
Horseman's Purse Fund.............................. 14,703,000 10,511,000
----------- -----------
Subtotal......................................... 15,177,000 10,850,000
State of West Virginia............................. 28,457,000 20,343,000
Tourism Promotion Fund............................. 2,846,000 2,034,000
Hancock County..................................... 1,897,000 1,356,000
Stakes Races....................................... 949,000 678,000
Miscellaneous State Projects....................... 949,000 678,000
----------- -----------
Total............................................ $50,275,000 $35,939,000
=========== ===========
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel commission revenue attributable to racing increased by $337,000 to
approximately $5.3 million in 1999. Purse expense (consisting of statutorily
determined percentages of live racing handle) decreased by $177,000, 8.3%, to
$1.9 million in 1999, which is consistent with the 8.2% decrease in live handle.
In connection with simulcasting race operations, contractual fees paid to host
tracks and additional statutorily determined percentages of simulcast
commissions contributed to the purse fund for live racing decreased $70,000 to
$2.170 million in 1999 consistent with the 4.0% decrease in simulcasting wagers.
Parimutuel commissions revenue is reported net of these expenses in the
Consolidated Statement of Operations.
Direct and indirect wages and employee benefits attributable to racing
operations increased by $240,000 to approximately $2.6 million in 1999 due to
expanded hours of OTB operations trackside to accommodate cross-selling to slot
payers during the expanded hours of slot operations. Also due to a change in
state mandated testing, veterinarian service costs increased by $131,000 in 1999
to $196,000.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$6.5 million in 1998 to $9.4 million in 1999. Of the $2.9 million increase in
expenses, $1.35 million is attributable to the Nevada Properties. The lodging,
food and beverage operation earned a gross profit of $991,000 compared to
$977,000 in 1998, an increase of $14,000. Lodging direct costs totaled
$2,651,000 for 1999 compared to $2.2 million in 1998.
The Nevada Properties' gross profit for these areas was $192,000 in 1999
compared to $23,000 in 1998. The Speedway Property in North Las Vegas was not in
operation due to extensive remodeling from September 13, 1998 to March 1, 1999.
Direct costs of lodging for the Nevada Properties were $1.3 million, a $351,000
increase over 1998. This increase resulted from the Speedway Property being open
for nine months as opposed to three months in 1998. In 1999, gross profit from
food and beverage operations was $408,000. The profit margin for food and
beverage at the Nevada Properties increased from 44% in 1998 to 60% in 1999 due
primarily to greater patronage leading to more efficient absorption of fixed
costs. In compliance with applicable requirements of the State of Nevada, the
restaurants at these properties were open 24 hours a day, 7 days a week even
though gaming facilities at these locations were not fully operational.
Mountaineer Park's gross profit for these profit centers was $800,000 in
1999 compared to $955,000 in 1998. The decline in gross profit is attributable
to several factors, including increased cost for wages and
24
employee benefits owing to an increase in service personnel in these areas,
increased use of special food and beverage pricing to attract more gaming
patrons, and higher cost of waste disposal and utilities.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
racing programs, golf, special event ticket sales and check cashing doubled from
$1.2 million in 1998 to $2.4 million in 1999. This increase can be attributed to
golf course operations ($399,000), special events costs ($577,000) and
admissions and program sales ($129,000). The Company believes the acquisition of
a full-length golf course and the increase in frequency and quality of special
events at Mountaineer Park were important factors in enhancing Mountaineer
Park's image as a resort and attracting and maintaining more gaming patrons.
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense at Mountaineer Park increased by
$1.7 million to $4.7 million for the year ended December 31, 1999. This increase
resulted primarily from increased advertising expenses in connection with the
Company's aggressive marketing campaign, its second infomercial, which was
produced and broadcast in 1999, the advertising campaign to introduce coin drop
machines and the new point award system at the Frequent Players Club. In 1998,
Mountaineer Park's advertising costs were defrayed by a state grant in the
amount of $560,000 compared to $196,000 in 1999. Advertising costs for the
Nevada Properties increased by $207,000 in 1999 to $229,000 due to advertising
campaigns initiated in anticipation of the grand openings of these properties in
2000.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
The Company's general and administrative expense for 1999 increased by
$3.9 million, or 37.3%, to $14.4 million compared to $10.5 million for the year
ended December 31, 1999 (which is consistent with the increase in revenue). The
reasons for the increase in this area are twofold. First, with respect to
operations, the increases were due to (i) a $790,000 increase in salaries for
security, housekeeping, maintenance and accounting staff to accommodate the
larger crowds at Mountaineer Park; together with (ii) the $424,000 increase in
employee benefit expense. Secondly, with respect to implementation of the
Company's business strategy (to acquire other middle-market, lower priced gaming
or parimutuel businesses, and the refinancing activity of debt), professional
fees and travel expenses related to these activities increased by $922,000 in
1999. Due largely to the commencement of operations at the Speedway Property
(which was dark in 1998) and increased activity at the Reno Property, general
and administrative costs increased by $1.5 million from $414,000 in 1998.
Interest expense (which does not include loss on debt extinguishment
reported as an extraordinary item) did not vary materially for the periods being
compared. The Company refinanced its long-term debt in late December of 1999.
The effect of the lower interest rate, from 13% to LIBOR plus 3% (for an
interest rate of 9.16% for the first six months of the term) will not be seen
until 2000. See "Liquidity and Sources of Capital."
Depreciation and amortization costs increased by 44.9% from $3.8 million in
1998 to $5.5 million in 1999, reflecting increased capitalization of
improvements completed at Mountaineer Park's facilities (such as the 12,000
square foot addition to the Speakeasy, the purchase of Woodview Golf Course, and
the purchase of 400 coin drop slot machines) and the acquisition of the Nevada
Properties. Depreciation for the Nevada Properties was $1.2 million.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997
Total revenues increased by $22,972,000 from 1997 to 1998, an increase of
38.2%. Approximately $19.8 million of the increase was produced by video lottery
operations, while the parimutuel commissions
25
and lodging, food, beverage and other operations at Mountaineer Park contributed
approximately $3.2 million of additional revenues. Management believes the
increase resulted primarily from increased patronage resulting from the
Company's expanded advertising activities, the increase to 1,200 Video Slots in
July 1998 (as compared to 800 from January 1 through March 12, 1997 and 1,000
thereafter) together with a change in law that permitted Mountaineer Park to
change the ratio of Video Slots in the Lodge as compared to the racetrack
building, the introduction of a variety of Video Slots, the expansion of the
Speakeasy Gaming Saloon and other enhanced facilities.
The Nevada Properties contributed $1,046,000 in lodging, food and beverage
revenues in the year ended December 31, 1998. Since the May 1998 acquisition,
the Speedway Property was generally dark during renovation of hotel rooms and
food and beverage facilities and construction of the 15,600 square foot casino
building and parking lots. There were no gaming operations at either property
during 1998.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 40% from $49.2 million in
1997 to $69.0 million in 1998.
An amendment of the Lottery Law that became effective in June of 1998
permitted Mountaineer Park to change the ratio of Video Slots located in the
Lodge versus the racetrack building from 1:1 to 2:1. Terminals located in the
Lodge's Speakeasy Gaming Saloon are more popular than those at the racetrack and
account for significantly more revenue. To capitalize on the change in law, the
Company constructed a 12,000 square foot addition to the Lodge's Speakeasy
Gaming Saloon, obtained regulatory approval to increase the total number of
Video Slots from 1,000 to 1,200 (by leasing 200 new "nickel" machines), and
placed 800 Video Slots in the Lodge and 400 in the racetrack building (as of
July 2, 1998).
With the expansion of the Speakeasy, Mountaineer Park also doubled the size
of Big Al's Deli and added additional bar and entertainment facilities
In December 1998, Mountaineer Park leased 100 more Video Slots (62 in the
Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive Video Slot banks. These machines
were placed in service on December 17, 1998 and therefore did not have a
material impact on operations for the year ended December 31, 1998.
A summary of the video lottery gross wagers less patron payouts ("net win")
for the twelve months ended December 31, 1998 and 1997 is as follows:
1998 1997
-------------- --------------
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------------
Total gross wagers............................ $ 240,164,000 $ 171,138,000
Less patron payouts........................... $ (171,172,000) $ (121,951,000)
-------------- --------------
Revenue--
video lottery operations...................... $ 68,992,000 $ 49,187,000
============== ==============
Average daily net win per terminal............ $ 171 $ 140
============== ==============
26
PARIMUTUEL COMMISSIONS
Parimutuel commissions for the twelve months ended December 31, 1998 and
1997 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
1998 1997
----------- -----------
Live racing parimutuel handle...................... $21,594,000 $20,100,000
Simulcast racing parimutuel handle................. 22,217,000 20,875,000
Less patrons' winning tickets...................... (34,661,000) (32,464,000)
----------- -----------
9,150,000 8,511,000
State and county parimutuel tax.................... (494,000) (493,000)
Purses and Horsemen's Association.................. (3,860,000) (3,581,000)
----------- -----------
Revenues--parimutuel commissions................... $ 4,796,000 $ 4,437,000
=========== ===========
For the twelve months ended December 31, 1998, live handle rose by
$1.5 million to $21.6 million, an increase of 7.5% compared to $20.1 million for
the same period in 1997. Simulcast racing handle for the year ended 1998 was
$22.2 million, an increase of $1.3 million from the year ended 1997. Management
believes these increases resulted primarily from increased video lottery
attendance and cross-marketing from such activity. During 1998 management raised
average daily purses from $58,000 to $66,000 and sponsored stakes races of up to
$35,000 as compared with $25,000 in 1997. In 1998, Mountaineer Park also had
larger championship races. For the August 1998 running of the West Virginia
Derby, Mountaineer Park's race participants were paid $345,000 in a single day,
with $200,000 funded by the State Racing Commission for the feature race.
LODGING, FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage accounted for a combined
increase of 38.4% to $7.5 million for the year ended December 31, 1998, from
$5.4 million for the same period in 1997. Restaurant, bar and concession
facilities produced $880,000 of the revenue increase, while lodge revenues
increased $1.2 million. Food and beverage operations accounted for approximately
67% of the revenues from this profit center in 1998 and 75% in 1997. This
variance is attributable to the Nevada Properties. In 1998, 93%, or $976,000, in
revenues generated by the Nevada Properties was from lodging. Management
believes that increased revenues from lodging, food and beverage at Mountaineer
Park resulted primarily from enhanced video lottery facilities and related
advertising, which in turn led to increased consumption of food and beverages by
the Company's customers. Increases in food and beverage revenue at Mountaineer
Park also resulted from the expansion of food and beverage facilities in the
Speakeasy in July of 1998.
OTHER OPERATING REVENUES
Other revenues increased by $726,000, or 66.2% from 1998 to 1997. The
increase in 1998 was caused by a $268,000 increase in miscellaneous income, a
$177,000 increase in check cashing fees, a $147,000 increase in special event
ticket sales, and a $143,000 increase in ATM service fees.
OPERATING COSTS
Total operating costs increased by 31.6% from $41.1 million in 1997 to
$54.1 million in 1998. Approximately $11.3 million of the increase was
attributable to the cost of operating video lottery terminals, which includes
applicable state taxes and fees, and related advertising. The Company's 38.2%
increase in revenues in 1998 were accompanied by a 31.6% increase in cost of
revenues, a 13.4% increase in marketing and promotions expense, a 33.1% increase
in general and administrative expenses, and a 58.3% increase in depreciation and
amortization. The Nevada Properties' general and administrative costs were
$413,000 in 1998.
Gross profit increased 52.5% in 1998 to $29.0 million compared from
$19.0 million in 1997.
27
Operating Costs and gross profits earned from operations for the
twelve-month period ended December 31, 1998 and 1997 are as follows:
YEARS ENDED
DECEMBER 31
-------------------------
1998 1997
----------- -----------
Operating Costs
Video Lottery Terminals............................ $41,404,000 $30,081,000
Parimutuel Commissions............................. 4,963,000 5,591,000
Lodging, Food and Beverage......................... 6,522,000 4,268,000
Other.............................................. 1,212,000 1,171,000
----------- -----------
Total Operating Costs.............................. $54,101,000 $41,111,000
=========== ===========
YEARS ENDED
DECEMBER 31
-------------------------
1998 1997
----------- -----------
Gross Profit (Loss)
Video Lottery Terminals............................ $27,588,000 $19,106,000
Parimutuel Commissions............................. (167,000) (1,154,000)
Lodging, Food and Beverage......................... 977,000 1,149,000
Other.............................................. 611,000 (74,000)
----------- -----------
Total Gross Profit (Loss).......................... $29,009,000 $19,027,000
=========== ===========
VIDEO LOTTERY TERMINALS OPERATING COSTS
Costs of video lottery revenue for 1998 increased by $11.3 million or 37.6%
from $30.1 million for 1997 to $41.4 million for the year ended December 31,
1998, reflecting an increase in statutory expenses (See Note 12 of the
Consolidated Financial Statements). Such expenses accounted for $10.5 million of
the total cost increase with the additional expenses incurred in connection with
video lottery. VLT lease expense increased by $297,000 in comparison to 1997 due
to the new 200 machines installed in July 1998 and the additional 100 machines
installed in December 1998. Wages and benefits and supplies expense increased
from 1997 to 1998 by $280,000 in response to higher levels of patron play and
patron volume.
Under the Lottery Act, the following statutory rates paid to certain
entities are in effect.
State of West Virginia...................................... 30.0%
Hancock County.............................................. 2.0%
Horseman's Association (racing purses)...................... 15.5%
Other....................................................... 5.5%
------
Total Statutory Payments.................................... 53.0%(1)
======
- ------------------------
(1) Excludes up to a 4% administrative fee charged by the State of West Virginia
based on revenues. In addition, rates are applied to revenues net of this 4%
administrative fee. (See Note 12 to the Consolidated Financial Statements of
the Company.)
28
Statutory costs and assessments excluding the State Administrative fee for
the respective twelve-month periods are as follows:
TWELVE MONTHS
ENDED DECEMBER 31
-------------------------
1998 1997
----------- -----------
Employee Pension Fund.............................. $ 339,000 $ 241,000
Horseman's Purse Fund.............................. 10,511,000 7,480,000
----------- -----------
Subtotal......................................... 10,850,000 7,721,000
State of West Virginia........................... 20,343,000 14,476,000
Tourism Promotion Fund............................. 2,034,000 1,448,000
Hancock County..................................... 1,356,000 965,000
Stakes Races....................................... 678,000 483,000
Veterans Memorial (now Miscellaneous State
Projects)........................................ 678,000 482,000
----------- -----------
Total............................................ $35,939,000 $25,575,000
=========== ===========
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel commission revenue decreased by $628,000 to approximately $5 million
in 1998. One of the primary causes of this decrease is the reduction of the
required number of live racing from 220 days a year in 1997 to 210 days in 1998.
Purse expense (consisting of statutorily determined percentages of live racing
handle) increased by $160,000, 8.1%, to $2.1 million in 1998, which is
consistent with the increase in live handle. In connection with simulcasting
race operations, contractual fees paid to host tracks and additional statutorily
determined percentages of simulcast commissions contributed to the purse fund
for live racing increased $116,000 to $2.3 million in 1998 consistent with the
7.4% increase in simulcasting wagers.
Direct and indirect wages and employee benefits attributable to racing
operations decreased by $322,000 to approximately $2.2 million in 1998, while
employee insurance benefits were also reduced by $226,000 in 1998 primarily as a
result of the reduction in the required number of live race days and
reallocation of the costs of certain personnel to other departments.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$4.3 million in 1997 to $6.5 million in 1998. Of the $2.3 million increase in
expenses, $1.0 million is attributable to the Nevada Properties. The lodging,
food and beverage operation earned a gross profit of $977,000 compared to
$1.1 million in 1997, a decrease of $172,000. The Nevada Properties' gross
profit for these areas was $23,000. Lodging direct costs totaled $2.2 million
for 1998 compared to $821,000 in 1997. Direct costs for lodging for the Nevada
Properties were $976,000. Lodge wages and employee benefits for the West
Virginia property increased by $90,000 to $458,000 in 1998 from $368,000 in
1997, while food and beverage operation wages and employee benefits increased by
$296,000 in 1998. Such increases were caused as a result of an increase in
service personnel in these areas.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
racing programs, golf, tennis and swimming and check cashing increased by
$41,000 from $1,171,000 in 1997 to $1,212,000 in 1998.
29
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense increased by $359,000 to $3,050,000 for the
year ended December 31, 1998 primarily due to increased advertising expenses in
connection with the Company's aggressive marketing campaign (commenced in 1996),
its infomercial advertising continuing in 1998 and an increase in concert
production costs. In 1998, Mountaineer Park's advertising costs were defrayed by
a state grant in the amount of $560,000, compared to a grant of $330,000 in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
The Company's general and administrative expense increased by $2.6 million
to $10.5 million, or 33.1%, from $7.9 million for the year ended December 31,
1998 as compared to 1997. Such increase resulted primarily from an increase of
$1.5 million in service personnel. The increases in accounting and
administrative salaries were caused in part by the additions of an Internal
Audit department and a Management Information Systems department. Professional
fees due to financing and acquisition activity (including acquisitions that were
considered but not consummated) increased by $375,000. The Nevada Properties had
general and administrative expenses totaling $413,000 in 1998.
In 1998, the Company incurred $4,259,000 of interest expense. Interest
expense in 1998 included $860,000 of a $1.8 million one-time cash fee paid over
the first year of the extended loan term pursuant to the July 2, 1997 Second
Amended and Restated Term Loan Agreement among the Company, Mountaineer Park and
Madeleine LLC. The increase in interest expense can be attributed to the
Company's increased borrowing in connection with the acquisition of the Nevada
Properties ($11.4 million).
Depreciation and amortization costs increased 58.3% from $2.4 million in
1997 to $3.8 million in 1998, reflecting increased capitalization of
improvements completed at Mountaineer Park's facilities such as the new
Clubhouse entry ($206,000) and the Speakeasy addition ($1.3 million).
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $1,419,000 at December 31,
1999, and its unrestricted cash balance amounted to $7,380,000. Racing purses
are paid from funds contributed by the Company to bank accounts owned by the
horse owners who race at Mountaineer Park. At December 31, 1999, the balances in
these accounts exceeded the purse payment obligations by $1,212,000; this amount
is available for payment of future purse obligations at the discretion of the
Company and in accordance with the terms of its agreement with the HBPA.
On December 27, 1999, the Company entered a $30,000,000 five-year senior
secured reducing, revolving credit facility with Wells Fargo Bank, N.A.. The
Company has drawn the full $30 million available under the Wells Fargo loan and
used the proceeds, combined with approximately $5.3 million of the Company's
cash, to prepay amounts previously borrowed from Madeleine LLC from 1996 through
1998 and to pay the costs and fees related to the transactions.
The Wells Fargo loans bears interest as follows: for the first six months,
the interest rate, which is variable, will be the London Interbank Offered Rate,
(the "LIBOR"), plus a margin of 3%. This resulted in an interest rate of 9.16%
as of December 31, 1999. Thereafter, the interest rate will be adjusted
quarterly to LIBOR plus a margin of 2.0 to 2.5%, depending upon the Company's
leverage ratio, as defined. Interest is payable not less frequently than
quarterly. The Company may elect from time to time either to continue to borrow
on a LIBOR basis (with 1, 2, 3 or 6 month contracts) or to convert to an
interest rate based upon the Prime Rate or Federal Funds Rate plus a margin of 1
to 1 1/2% depending upon the leverage ratio. Beginning 90 days after closing,
the maximum available credit line will be reduced by $1.5 million per quarter,
equating to a five-year amortization. Amounts prepaid over and above such
reductions may be re-borrowed, subject to a commitment fee ranging from 37.5 to
50 basis points depending upon the leverage ratio.
30
Although the Credit Agreement requires the Company to reduce the outstanding
principal by $6 million per year (whereas the Company's previous financing
required payments of interest only), the Company believes that the combination
of positive cash flow trend and interest savings will prevent the Company from
suffering a material decrease in liquidity.
The Credit Agreement permits the Company to finance separately up to
$8 million of additional senior indebtedness for the purchase or lease of gaming
equipment as well as up to $15 million of subordinated debt for capital
improvements.
In January of 2000, pursuant to the carve out for equipment financing,
Mountaineer Park entered an $8 million discretionary line of credit with PNC
Leasing, LLC, pursuant to which Mountaineer Park has borrowed $2,792,000.
Pursuant to the carve out for subordinated debt, the Company is currently
negotiating a $15 million subordinated, unsecured revolving line of credit to
finance capital improvements. Although there can be no assurances, the Company
believes that it will be able to obtain this line of credit during the second
quarter of 2000.
As set forth below, the Company is contemplating significant capital
improvements to prepare for the launch of an export simulcasting business at
Mountaineer Park. The Company has entered an agreement with the Horsemen's
Benevolent and Protective Association, which, subject to regulatory approval,
could provide Mountaineer Park half of the $4 to 5 million estimated for the
completion of the project. Because the Company has not determined to proceed
with the project absent regulatory approval of the external cash, the amount
estimated below for such capital improvements is expressed net of this external
cash.
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer Park facility including approximately tripling its
hotel room capacity, adding 50,000 square feet of additional gaming rooms which
will hold an additional 1,100 video slots, an arena, a spa, a parking garage and
a convention center. The construction of these projects will most likely
commence in the spring of 2000. The expansion project will be completed in
phases as cash flow and available lines of credit permit, will take
approximately 18 to 24 months to complete, and is estimated to cost
approximately $50 million. Capital improvements of a near-term nature include
numerous smaller renovations, such as additional restroom facilities in the
Grandstand, renovations to the barn area, improvements at the Woodview Golf
Course, and additional office space trackside. The Company also expects modest
capital expenditures for further improvement and signage at the Nevada
Properties. The Company also intends to spend approximately $2 million to
$2.5 million to develop export simulcasting at Mountaineer Park during 2000.
On June 22, 1999, Mountaineer Park entered into agreements to purchase for
$583,000 approximately 287.65 acres of real property (including two buildings)
previously subject to an October 7, 1997 option and located adjacent to its
Hancock County, West Virginia operation. Mountaineer Park had paid $100,000 for
an irrevocable option. Subject to resolution of certain title issues,
Mountaineer Park intends to close the purchases, which call for payment to be
made in the form of a $200,000 cash payment at closing and a $383,000 term note
bearing interest at 9% payable over five years.
Management believes that except as set forth above, its cash balances, cash
flow from operations, and available lines of credit will be sufficient to cover
contemplated capital expenditures.
OUTSTANDING OPTIONS AND WARRANTS. As of December 31, 1999, there were
outstanding options and warrants to purchase 8,250,607 shares of the Company's
common stock. Of this amount, warrants to purchase 1,757,813 shares are held by
the Company's prior lender whose exercise rights are subject to a statutory
ownership limitation not to exceed 5% of the Company's outstanding voting shares
without prior approval of the West Virginia Lottery Commission. All but 70,000
of such shares are either subject to registration rights or have been included
in a registration statement which the Company filed with the Securities and
Exchange Commission and which has been declared effective. If all such options
and warrants were exercised, the Company would receive proceeds of approximately
$13.3 million.
31
In March of 2000, pursuant to various employment agreements, the Company
granted to various employees and its outside directors options to purchase, in
the aggregate, 270,000 shares of the Company's common stock. Also in March of
2000, the Board of Directors of the Company created, subject to shareholder
approval, the Company's 2000 Employee Stock Purchase Plan, for which the Company
intends to reserve 825,000 shares, of which 795,000 shares have been granted to
various employees of the Company.
DEFERRED INCOME TAX BENEFIT. Management believes that the substantial and
steady revenue increases earned in the past three years will continue, and
ultimately occur in amounts which will more likely than not allow the Company to
utilize its $3.5 million federal net operating loss tax carry forwards, although
there are no assurances that sufficient income will be earned in future years to
do so. The utilization of federal net operating losses may be subject to certain
limitations. For the year ended December 31, 1998, a reconciliation of the
statutory Federal income tax provision from continuing operations to the benefit
for income taxes includes utilization of net operating loss carry forwards of
approximately $2.6 million. In 1999 the Company recognized income taxes fully at
a rate of 36%. This caused a $3.5 million income tax expense. See Note 11 of the
Notes to the Company's Audited Financial Statements for the years ended
December 31, 1999, 1998 and 1997.
COMMITMENTS AND CONTINGENCIES
The Company has various commitments including those under various consulting
agreements, operating leases, and the Company's pension plan and union contract.
The Company has also entered into new employment agreements with certain
employees for periods ranging from one to five years. Compensation under the
employment agreements consists of both cash payments and stock option
commitments. The Company anticipates cash payments in the amount of
approximately $2.8 million over the next three years under the employment
agreements. The Company believes that it has the ability to meet all of its
obligations under the employment agreements. Also, the Company has contracted to
purchase a new communications software package for the gaming equipment in West
Virginia. The total cost to Mountaineer was $1.7 million. This project has not
been completed and $916,000 is still outstanding on the contract. In addition,
the Company is faced with certain contingencies involving litigation and
environmental remediation. These commitments and contingencies are discussed in
greater detail in Note 7 to the Company's Audited Financial Statements for the
years ended December 31, 1999, 1998 and 1997. Although there can be no
assurance, the Company believes that its cash balances, cash generated from
operations and available lines of credit will be sufficient to meet all of the
Company's currently anticipated commitments and contingencies.
On October 30, 1998, the Company's oil and gas subsidiary, ExCal Energy
Corporation ("Excal") exchanged to SABAL Corp., an unaffiliated entity, its
remaining oil and gas interests. In connection with the transaction, ExCal
(i) received an Assignment of Production Payment in the amount of $2.5 million,
which bears interest at the rate of 3% per year, matures after a term of fifteen
years, and is convertible, at the election of ExCal, into up to 25% of the
equity of SABAL on a fully diluted basis; and (ii) agreed to lend to SABAL up to
$500,000 to be used principally for the development of the project. The loan to
SABAL bears interest at the rate of 15% per year (interest only for the first
six months) and is for a term of two years. The balance of this loan as of
December 31, 1999 was $398,000. Because of the uncertainty of collection of the
production payment, and the depressed oil market, the Company recorded a
one-time loss in connection with this exchange (involving the sale of its
discontinued operations) of approximately $2.7 million. See "--Results of
Discontinued Operations" and Note 10 of the Notes to the Company's Audited
Financial Statements for the years ended December 31, 1999, 1998 and 1997.
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Company's Board approved a formal plan to divest the
Company of certain oil and gas operations the Company owned in Ohio and Michigan
through a plan of orderly liquidation.
32
This decision was based upon several factors including (i) the anticipated
potential of the Company's gaming operations and the anticipated time to be
devoted to it by management, (ii) the expiration of "Section 29" credits, a
credit against federal income taxes derived from gas produced from Devonian
Shale and "tight sands" formations from wells commenced before January 1993,
(iii) the impact of delays in connection with the West Virginia Supreme Court
litigation and subsequent passage of enabling legislation for video lottery
during 1994 which caused management to focus the Company's efforts and financial
resources on Mountaineer Park, and (iv) the Company's desire to continue to
place its primary emphasis on its gaming and recreational businesses. The
Company closed the exchange of its remaining oil and gas interest on
October 30, 1998. See "Commitments and Contingencies."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company holds no material market risk sensitive financial instruments or
interest therein, except for its credit agreement, at December 31, 1999. The
Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligation pursuant to its credit
agreement. The table below presents the Company's credit agreement for which
fair value is subject to changing market interest rates:
AS OF DECEMBER 31, 1999
----------------------------------------------------------------------------------------
ESTIMATED CASH INFLOW (OUTFLOW) BY YEAR OF PRINCIPAL MATURITY
-------------------------------------------------------------- ESTIMATED CARRYING
IN THOUSANDS 2000 2001 2002 2003 2004 FAIR VALUE VALUE
- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Credit Agreement
based on LIBOR plus
margin............. 4,500,000 6,000,000 6,000,000 6,000,000 7,500,000 30,000,000 30,000,000
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and accompanying footnotes are set forth on pages F-1
through F-39 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See the Registrant's Report on Form 8-K filed February 4, 1999 and Amendment
No. 1 on Form 8-K/A filed February 12, 1999, both of which are incorporated
herein by reference.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
The following table sets forth information regarding the directors and
executive officers of the Company.
NAME AGE POSITION AND OFFICE HELD
- ---- -------- ------------------------------------------
Edson R. Arneault(1)...................... 52 President, Chief Executive Officer, Chief
Financial Officer, Chairman of the Board
Robert L. Ruben(3)........................ 38 Vice President, Assistant Secretary,
Director
Robert A. Blatt(2)(3)..................... 59 Vice President, Assistant Secretary,
Director
James V. Stanton(1)....................... 67 Director
William D. Fugazy, Jr.(1)................. 49 Director
Rose Mary Williams........................ 43 Secretary
- ------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Finance Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
33
BUSINESS EXPERIENCE
EDSON R. ARNEAULT, 52, has been a director of the Company since
January 1992 and has served as the Company's President and Chief Executive
Officer since April 26, 1995. He also serves as Chairman of the Company's Audit
Committee. He is also an officer and director of the Company's subsidiaries,
Mountaineer Park, ExCal, Speakeasy Reno and Speakeasy Las Vegas. Mr. Arneault is
also a principal in numerous ventures directly or indirectly engaged in the
development, production and transportation of oil and gas. Since becoming the
President of the Company and Mountaineer Park, however, Mr. Arneault has devoted
all his time and attention to the business of the Company. Mr. Arneault is a
certified public accountant, and has served as a tax partner with Seidman and
Seidman (now "BDO Seidman, LLP"), a public accounting firm, in Grand Rapids,
Michigan, from 1977 to 1980. Mr. Arneault was employed as a certified public
accountant by Arthur Andersen in the tax department of its Cleveland office from
1972 to 1976. Mr. Arneault is a member of the Independent Producers Association
of America, the Ohio Oil and Gas Association, the Michigan Oil and Gas
Association and the Michigan Association of Certified Public Accountants.
Mr. Arneault received his Bachelor of Science in Business Administration from
Bowling Green University in 1969, his Master of Arts from Wayne State University
in 1971; and his Masters in Business Administration from Cleveland State
University in 1978. Mr. Arneault also serves as a member of the Hospitality and
Tourism Management Board of Visitors of Robert Morris College in Pittsburgh,
Pennsylvania. See "--Certain Relationships and Related Transactions."
ROBERT L. RUBEN, 38, has been a director of the Company since
September 1995 and a Vice President since February 1999. He also serves as
Assistant Secretary of the Company, is Chairman of the Company's Compensation
Committee, and serves as a director and assistant secretary of Mountaineer Park.
He is a partner in Ruben & Aronson, LLP, a Washington, D.C. law firm.
Previously, Mr. Ruben was a principal in Freer, McGarry, Bodansky & Rubin, P.C.,
a Washington, D.C. law firm, where he practiced from 1991 until 1997. From 1986
to 1988, Mr. Ruben was associated with the firm of Bishop, Cook, Purcell &
Reynolds, which later merged with Winston & Strawn, and from 1989 to 1991,
Mr. Ruben was associated with the firm of Wickens, Koches & Brooks. Mr. Ruben
practices principally in the areas of commercial litigation and
corporate/securities law. Mr. Ruben received his Bachelor of Arts from the
University of Virginia in 1983 and his Juris Doctor from the Dickinson School of
Law of Penn State University in 1986. He is a member of the bars of the District
of Columbia and the Commonwealth of Pennsylvania (inactive). Freer, McGarry,
Bodansky & Rubin, P.C. served as counsel to the Company from November of 1991 to
December of 1997. Ruben & Aronson, LLP currently serves as counsel to the
Company, and Mr. Ruben has represented Mr. Arneault and various of his
affiliates since 1987. See "Certain Relationships and Related Transactions."
ROBERT A. BLATT, 59, has been a director of the Company since
September 1995 and a Vice President since February 1999. Mr. Blatt is the Chief
Executive Officer and managing member of CGE Shattuck, L.L.C., and of New
England National, L.L.C. and a member of the board of directors of AFP Imaging
Corporation. Mr. Blatt is also a director and assistant secretary of Mountaineer
Park, Chairman of the Company's Finance Committee and a member of the Company's
Compensation Committee. Since 1979 he has been chairman and majority owner of
CRC Group, Inc., and related entities, a developer, owner, and operator of
shopping centers and other commercial properties, and since 1985, a member (seat
owner) of the New York Stock Exchange, Inc. From 1959 through 1991, Mr. Blatt
served as director, officer or principal of numerous public and private
enterprises. Mr. Blatt received his Bachelor of Science in Finance from the
University of Southern California in 1962 and his Juris Doctor from the
University of California at Los Angeles in 1965. He is a member of the State Bar
of California. See "Certain Relationships and Related Transactions."
JAMES V. STANTON, 67, has been a director of the Company since
February 1998 and serves on the Company's Audit Committee. Mr. Stanton has his
own law and lobbying firm, Stanton & Associates, in Washington, D.C. From 1971
to 1978, Mr. Stanton represented the 20th Congressional District of Ohio in
34
the United States House of Representatives. While in Congress Mr. Stanton served
on the Select Committee on Intelligence, the Government Operations Committee,
and the Public Works and Transportation Committee. Mr. Stanton has held a wide
variety of public service positions, including service as the youngest City
Council President in the history of Cleveland, Ohio and membership on the Board
of Regents of the Catholic University of America in Washington, D.C.
Mr. Stanton is also former Executive Vice President of Delaware North, a
privately held international company which, during Mr. Stanton's tenure, had
annual sales of over $1 billion and became the leading parimutuel wagering
company in the United States, with worldwide operations including horse racing,
harness racing, dog racing, and Jai-Lai. Delaware North also owned the Boston
Garden and the Boston Bruins hockey team. From 1985-1994 Mr. Stanton was a
principal and co-founder of Western Entertainment Corporation, which pioneered
one of the first Native American Gaming operations in the United States, a
90,000 square foot bingo and casino gaming operation located on the San Manuel
Indian Reservation in California, which generated annual revenues in excess of
$50 million. Mr. Stanton also serves on the boards of CCA Companies
Incorporated, and Saf T Lok Incorporated.
WILLIAM D. FUGAZY, JR., 49, has been a director of the Company since
February 1998 and serves on the Company's Audit Committee. He is presently
Chairman of Camelot Ventures, Inc., which is a financial advisory firm based in
New York City and is Chief Executive Officer of Summit Aviation Corporation,
which is an executive aviation services firm based at Republic Airport in East
Farmingdale, New York. Mr. Fugazy is a former Regional President of Koll Real
Estate Services, a company which provided real estate services throughout the
United States and internationally. Koll was one of the largest real estate
services companies in the world and in August 1997 merged with CB Commercial
Real Estate Group, Inc. Mr. Fugazy served in this capacity since January 1993.
Prior to joining Koll, Mr. Fugazy was President of Tishman Management and
Leasing Services Corporation, also a national real estate service company which
was sold to Koll in 1992. Mr. Fugazy served in that capacity since
September 1989. Prior to joining Tishman, Mr. Fugazy was Senior Vice President
of Muller and Company, a national investment banking and securities brokerage
operation. Mr. Fugazy is also a partner and officer of the Beacon Hotel and
Resort Corporation, a hotel management company with offices in New York, Los
Angeles, California and Miami Beach, Florida. Mr. Fugazy holds a B.S. Degree
from Fordham University in New York.
ROSE MARY WILLIAMS, 43, was appointed to the position of Secretary of the
Company in January 1998 and Director of Racing of the Company in January 1997.
She has been employed at Mountaineer Park since 1977, when she began working in
the Mutuel Department. In 1980, she accepted the position of Statistician in the
computer room. When Mountaineer Park began receiving simulcast signals from
other racetracks in 1991, she was appointed to Simulcast Coordinator. She then
began serving as Mutuel Manager in 1995. Ms. Williams is a member of Turf
Publicists of America.
35
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded, paid to or earned
by the most highly compensated executive officers of the Company whose
compensation exceeded $100,000 in the fiscal year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-----------------------------------------------------
AWARDS PAYOUTS
ANNUAL ------------------------ --------------------------
COMPENSATION OTHER
------------------- ANNUAL RESTRICTED OPTIONS
SALARY BONUS COMP. STOCK AWARDS SARS LTIP ALL OTHER
NAME YEAR ($) ($)(1) ($)(2) ($) (#)(3) PAYOUTS ($) COMP. ($)(5)
- ---- -------- -------- -------- -------- ------------ --------- ----------- ------------
Edson R. Arneault(4)....... 1999 447,461 100,000 304,300 -- 500,000 -- 23,324
Chairman, President and 1998 384,525 92,750 38,028 -- 1,000,000 -- --
Chief Executive Officer of 1997 300,643 67,500 5,523 -- 150,000 -- --
MTR Gaming Group, Inc.
Bruce E. Dewing(4)......... 1999 178,461 -- 6,120 -- 50,000 -- --
Vice President and Chief 1998 128,846 -- 3,060 -- -- -- --
Operating Officer of
Speakeasy Las Vegas and
Speakeasy Reno
- --------------------------
(1) Mr. Arneault's bonus paid in 1998 includes $52,000 earned by Mr. Arneault in
1997.
(2) As to Mr. Arneault for 1999 includes $303,000 performance bonus and an
estimated pension plan contribution of $1,300; for 1998 includes $36,922
vacation pay and $1,106 pension plan contribution. As to Mr. Dewing,
consists of car allowance.
(3) All grants in 1999 consisted if non-qualified stock options for a term of
five years. The options are fully vested and have an exercise price of $2.00
per share.
(4) Consists of $2,182 of income realized in connection with insurance premium
paid pursuant to deferred compensation agreement (See "Employment
Agreement") and $21,142 for life insurance.
OPTION GRANTS IN 1999
The following table contains information concerning the grant of stock
options during fiscal year 1999 to the Company's executive officers named in the
Summary Compensation Table.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS OPTION TERM(1)
UNDERLYING OPTIONS GRANTED IN EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR EXERCISE PRICE DATE 5% 10%
- ---- -------------------- ----------- -------------- ---------- -------- --------
Edson R. Arneault...... 500,000 42.0% $2.00 Feb. 2004 276,282 610,510
Bruce Dewing........... 50,000 4.2% 2.00 Feb. 2004 27,628 61,051
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
"Potential Realizable Value" has been calculated assuming an aggregate five
year appreciation of the fair market value of the Company's common stock on
the date of the grant at annual compounded rates of 5% and 10%,
respectively. These amounts represent hypothetical gains that could be
achieved. Actual gains, if any, on the exercise of stock options will depend
on the future performance of the Company's stock and
36
the date on which the options are exercised. Moreover, the gains shown are
net of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the option or the sale of the
underlying shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and value of
options held by each of the Company's executive officers named in the Summary
Compensation Table as of December 31, 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT YEAR
OPTIONS AT FISCAL YEAR END END($)(1)
SHARES ACQUIRED VALUE --------------------------- -----------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ------------- -------------
Edson R. Arneault.... 141,334 269,771 1,950,000 -- $2,268,250 --
- ------------------------
(1) Based on the market price of the Company's Common Stock of $3.0625 on
December 31, 1999, as reported by Nasdaq.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the provisions of Section 16(a) of the Exchange Act, the Company's
officers, directors and 10% beneficial stockholders are required to file reports
of their transactions in the Company's securities with the Commission. Based
solely on a review of the Forms 3 and 4 and amendments thereto furnished to the
Company during its most recent fiscal year and Forms 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal year, the
Company believes that as of March 22, 2000, all of its executive officers,
directors and greater than 10% beneficial stockholders, complied with all filing
requirements applicable to them during 1999.
EMPLOYMENT AGREEMENTS
In February of 1999, the Company entered into an employment agreement with
its President and CEO, Edson R. Arneault. The agreement is for a term of five
(5) years, calls for an annual base salary of $450,000 (subject to automatic
annual cost of living increases of 5%), semi-annual cash bonuses of $50,000, and
a performance bonus for each year equal to 1% of the gross operating revenue
increase over 1998 operating revenue (provided, however, that EBITDA, as
defined, exceeds 1998 EBITDA). The employment agreement also entitles Mr.
Arneault to participate in the Company's various benefit plans for health
insurance, life insurance and the like. The employment agreement likewise
permits Mr. Arneault to lease at the Company's expense, or have the Company
lease, reasonable living quarters for use by Mr. Arneault and other executives
of the Company in the State of Nevada and in any other state or jurisdiction in
which the Company is pursuing substantial business opportunities such that Mr.
Arneault is required, as a practical matter, to spend a substantial portion of
his time in such jurisdiction.
In the event Mr. Arneault's employment is terminated by him for good reason,
as defined, or by the Company other than for cause or a permanent and total
disability, he will be entitled to the compensation otherwise payable to him
under the employment agreement. In the event Mr. Arneault's employment is
terminated in connection with a change in control of the Company, Mr. Arneault
would be entitled to a cash severance payment equal to three times his annual
base salary and payment by the Company of the next five annual premium payments
for the insurance policy called for by the deferred compensation plan described
below.
In January of 1999, the Company entered into a deferred compensation
agreement with Mr. Arneault. Pursuant to the agreement, the Company has
purchased a life insurance policy on Mr. Arneault's life (face amount of
$2,250,000 and annual premium of $100,000). The owner of the policy is the
Company. The
37
agreement entitles Mr. Arneault or his beneficiary to an annual benefit, as
defined, upon retirement, death or termination out of the cash value of the
insurance policy, after the Company has recouped the aggregate amount of
premiums paid. The benefits provided by the agreement were granted as additional
benefits and not as part of any salary reduction plan or arrangement deferring a
bonus or a salary increase.
The Company entered an employment agreement with Bruce E. Dewing, the Chief
Operating Officer of Speakeasy Las Vegas and Speakeasy Reno. The agreement is
for a term ending May 31, 2001 and calls for an annual base salary of $180,000
and entitles Mr. Dewing to the use of a Company car as well as to participate in
the Company's various employee benefit plans. In the event Mr. Dewing's
employment is terminated by the Company other than for cause or a permanent and
total disability, he will be entitled to the compensation otherwise payable to
him under the employment agreement. Mr. Dewing's employment agreement does not
provide for any additional compensation in the event of termination in
connection with a change in control.
COMPENSATION OF DIRECTORS
On February 18, 1998, the Company entered into separate agreements with
Mr. Stanton and Mr. Fugazy to provide certain compensation for their services on
the Company's Board of Directors. Specifically, each agreement provided for:
(i) the grant of options to purchase 25,000 shares of common stock of the
Company for each year of service (see Item 12--Stock Ownership of Certain
Beneficial Owners and Management; (ii) the registration by the Company, at its
sole cost, of the shares underlying such options by including such shares in any
registration statement the Company determines to file with the Securities and
Exchange Commission with respect to employee compensation; (iii) the adjustment
of the terms of such options in certain events as set forth in the agreement;
and (iv) a fee of $2,500 for each regular meeting of the Board, audit committee
or shareholders attended and reimbursement of expenses for travel, food and
lodging incurred in attending such meetings.
Directors who are employees of the Company do not receive compensation for
attendance at Board meetings, but are entitled to reimbursement for expenses
they incur in attending such meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On November 8, 1995, the Board voted to form an executive compensation
committee consisting of Mr. Ruben and Mr. Blatt, (the "Committee"). The
Committee is authorized to review all compensation matters involving directors
and executive officers and Committee approval is required for any compensation
to be paid to executive officers or directors who are employees of the Company.
As a matter of policy and to assure compliance with Rule 16b-3(d)(1) of the
Securities Exchange Act of 1934, the decisions of the Compensation Committee are
subject to ratification by a majority of the Board. Both Messrs. Blatt and Ruben
serve as officers and directors of the Company and of Mountaineer Park.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 22, 2000, the ownership of the
Company's Common Stock by persons owning more than 5% of such stock, and the
ownership of such stock by the executive officers
38
and directors of the Company. As of March 22, 2000 there were 21,337,401 shares
of Common Stock outstanding. All such shares were owned both beneficially and of
record, except as otherwise noted.
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ---------------- -------------------- -------------------
Edson R. Arneault(1)..................................... 4,064,317 17.79
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034
Robert L. Ruben(2)....................................... 691,228 3.21%
Ruben & Aronson, LLP
3299 K Street, N.W.
Suite 403
Washington, DC 20007
Robert A. Blatt(3)....................................... 1,057,684 4.91%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue,
Suite 303
Larchmont, NY 10538
James V. Stanton(4)...................................... 61,900 Less than 1%
Stanton & Associates
1310 19th Street, N.W.
Washington, D.C. 20036
William D. Fugazy, Jr.(4)................................ 72,500 Less than 1%
140 East 45th Street, Suite 4000
New York, New York 10017
Rose Mary Williams(5).................................... 60,000 Less than 1%
State Route 2
Chester, West Virginia 26034
Bruce E. Deming(6)....................................... 100,000 Less than 1%
200 E. 6th Street
Reno, Nevada 89501
Madeleine LLC(7)......................................... 2,170,241 9.61%
450 Park Avenue
New York, NY 10022
Total Officers and Directors as a Group (7 persons)(8)... 6,007,629 24.60%
- ------------------------
(1) Includes 2,114,317 shares and options to acquire beneficial ownership of
1,950,000 shares within 60 days held by Mr. Arneault or his affiliates. Also
includes 10,000 shares held in the name of Mr. Arneault's minor son, but
does not include 10,000 shares held in the name of Mr. Arneault's adult
daughter. Does not include options to purchase 300,000 shares granted to Mr.
Arneault in March of 2000 under the Company's 2000 Stock Incentive Plan (the
"2000 Plan") which was approved by the Company's Board of Directors in March
of 2000. The 2000 Plan and all options granted under that plan are subject
to shareholder approval of the 2000 Plan.
(2) Includes 41,228 shares and options to acquire beneficial ownership of
650,000 shares within 60 days held by Mr. Ruben. Does not include options to
purchase 150,000 shares granted to Mr. Ruben in March of 2000 under the 2000
Plan.
39
(3) Includes 432,684 shares and options to acquire beneficial ownership of
625,000 shares exercisable within 60 days held by Mr. Blatt. Does not
include options to purchase 150,000 shares granted to Mr. Blatt in March of
2000 under the 2000 Plan.
(4) Includes 11,900 shares and options to acquire beneficial ownership of 50,000
shares exercisable within 60 days held by Mr. Stanton. Includes 14,000
shares and options to acquire beneficial ownership of 50,000 shares
exercisable within 60 days held by Mr. Fugazy. For each year of service on
the Company's Board of Directors, Mr. Stanton and Mr. Fugazy will each
receive options to purchase 25,000 shares of common stock of the Company.
Such options will be exercisable for a term of five years from the date of
grant. Any options that have not vested at the end of each calendar year
will be deemed cancelled.
(5) Includes no shares and options to acquire beneficial ownership of 60,000
shares within 60 days held by Ms. Williams. Does not include options to
purchase 30,000 shares granted to Ms. Williams in March of 2000 under the
2000 Plan.
(6) Includes no shares and options to acquire beneficial ownership of 100,000
shares within 60 days held by Mr. Dewing.
(7) Includes 486,821 shares and options to acquire beneficial ownership of
1,683,420 shares within 60 days held by Madeleine LLC; provided, however,
that pursuant to an agreement with the Company, Madeleine LLC may not
exercise its warrant to the extent such exercise would result in its
ownership of 5% or more of the then issued and outstanding shares of common
stock of the Company without the prior approval of the West Virginia State
Lottery Commission.
(8) Includes Messrs. Arneault, Blatt, Ruben, Stanton and Fugazy and Ms.
Williams.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August of 1998, in connection with the exercise of options to purchase
378,415 shares of the Company's common stock, the Company's President and CEO,
Edson Arneault, delivered to the Company a promissory note for approximately
$461,000. The note is a full recourse obligation and was originally due on or
before August 1999 and bears interest at an annual rate of 8.5%. In 1999,
Mr. Arneault paid the interest then due on the note, and the Company agreed to
extend the note to August 2000. Also in August of 1999, in connection with the
exercise of options to purchase 141,334 shares of common stock, Mr. Arneault
delivered a promissory note for approximately $150,000. This note is a full
recourse obligation due on or before August 2000 and bears interest at an annual
rate of 8.0%. Mr. Arneault has pledged the 519,749 shares purchased in
connection with such exercises to secure repayment of the notes.
Mr. Robert Ruben, an officer and member of the Company's board, is a member
of the law firm Ruben & Aronson, LLP, which has performed legal services for the
Company. The Company and Ruben & Aronson anticipate that the law firm will
perform legal services for the Company in the future. During the fiscal year
ended December 31, 1999, the Company paid Ruben & Aronson the sum of $592,000
for legal services.
The Company anticipates that during the fiscal year ending December 31, 2000
it will pay Century Well Services, Inc. ("Century") more than $60,000 for
drilling and other earth moving services in connection with improvements and
maintenance at the Woodview Golf Course. Century is an affiliate of Edson
Arneault, the Company's president and chief executive officer. To date, Century
has been the low bidder in a competitive bidding process with respect to
services it has provided. Accordingly, the Company believes that its dealings
with Century have been on terms no less favorable than the Company could
reasonably have obtained from a non-affilite.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements (Included in Part II of this Report):
Report of Independent Certified Public Accountants (F-2)
Independent Auditors' Report (F-3)
Consolidated Balance Sheets as of December 31, 1999 and 1998 (F-4)
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1999 (F-5)
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended December 31, 1999 (F-6)
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999 (F-7)
Notes to Consolidated Financial Statements (F-8)
(b) Financial Statements Schedules (Included in Part IV of this Report):
Schedule II--Valuation Allowances of the years ended December 31, 1999,
1998 and 1997.
(c) Exhibits:
EXHIBIT NO. ITEM TITLE
----------- ----------
3.1 Restated Certificate of Incorporation for Winner's
Entertainment, Inc. dated August 17, 1993 (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993).
3.2 Amended By Laws (incorporated by reference to the Company's
report on Form 8-K filed February 20, 1998).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of Winner's Entertainment, Inc. dated
October 10, 1996 (incorporated by reference to the Company's
report on Form 8-K filed November 1, 1996.
4.1 Specimen of Common Stock Certificates (incorporated by
reference to the Company's report on Form 10-K for the
fiscal year ending December 31, 1989).
10.1 Deferred Compensation Agreement dated January 1, 1999
between MTR Gaming Group, Inc. and Edson R. Arneault.
10.2 Employment Agreement dated February 1, 1999 between MTR
Gaming Group, Inc. and Edson R. Arneault (incorporated by
reference to the Company's report on Form 10-K for the
fiscal year ending December 31, 1998).
10.3 Employment Agreement dated February 1, 1999 between MTR
Gaming Group, Inc. and Robert A. Blatt.
10.4 Employment Agreement dated February 1, 1999 between MTR
Gaming Group, Inc. and Robert L. Ruben.
10.5 Deferred Compensation Agreement dated June 1, 1999 between
the Company and Robert A. Blatt (incorporated by reference
to the Company's Report on Form 10-Q for the Quarter ended
June 30, 1999).
41
EXHIBIT NO. ITEM TITLE
----------- ----------
10.6 Deferred Compensation Agreement dated June 1, 1999 between
the Company and Robert L. Ruben dated June 1, 1999
(incorporated by reference to the Company's Report on
Form 10-Q for the Quarter ended June 30, 1999).
10.7 Credit Agreement dated as of December 20, 1999 between Wells
Fargo Bank, N.A. and the Company, Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. (incorporated by reference to the Company's
Report on Form 8-K filed December 28, 1999).
10.8 Master Lease dated January 27, 2000 between Mountaineer
Park, Inc. and PNC Leasing, LLC (incorporated by reference
to the Company's Report on Form 8-K filed February 4,
2000).
10.9 Schedule to Master Lease (incorporated by reference to the
Company's Report on Form 8-K filed February 4, 2000).
10.10 Supplement to Schedule to Master Lease (incorporated by
reference to the Company's Report on Form 8-K filed
February 4, 2000).
10.11 Bill of Sale dated January 27, 2000 from Mountaineer Park,
Inc. to PNC Leasing, LLC incorporated by reference to the
Company's Report on Form 8-K filed February 4, 2000).
10.12 Guaranty made January 27, 2000 by the Company in favor of
PNC Leasing, LLC with respect to obligations of Mountaineer
Park, Inc. under Master Lease (incorporated by reference to
the Company's Report on Form 8-K filed February 4, 2000).
10.13 Summary of Terms and Conditions dated December 8, 1999 with
regard to Master Lease (incorporated by reference to the
Company's Report on Form 8-K filed February 4, 2000).
10.14 1999 Stock Incentive Plan (incorporated by reference to the
Company's Proxy Statement filed July 22, 1999).
23.1 Consent of Corbin and Wertz (filed herewith).
23.2 Consent of BDO Seidman, LLP (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(d) Reports on Form 8-K
The Company filed the following current reports on Form 8-K during the
fourth quarter of 1999 and thereafter:
A current report on Form 8-K was filed by the Company on December 28,
1999 (with the earliest event reported dated December 27, 1999) reporting
that the Company had obtained a credit facility from Wells Fargo Bank.
A current report on Form 8-K was filed by the Company on February 4, 2000
(with the earliest event reported dated January 27, 2000) reporting that
the Company had obtained a credit facility from PNC Leasing, LLC.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MTR GAMING GROUP, INC.
By: /s/ EDSON R. ARNEAULT
-----------------------------------------
Edson R. Arneault,
CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
Date: March 30, 2000
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 Company
and in the capacities and on the date indicated.
SIGNATURE CAPACITY
--------- --------
/s/ EDSON R. ARNEAULT Chairman, President, Chief
------------------------------------------- Executive Officer and Chief March 30, 2000
Edson R. Arneault Financial Officer
/s/ ROBERT A. BLATT
------------------------------------------- Director March 30, 2000
Robert A. Blatt
/s/ ROBERT L. RUBEN
------------------------------------------- Director March 30, 2000
Robert L. Ruben
/s/ JAMES V. STANTON
------------------------------------------- Director March 30, 2000
James V. Stanton
/s/ WILLIAM D. FUGAZY, JR.
------------------------------------------- Director March 30, 2000
William D. Fugazy, Jr.
/s/ MARY JO NEEDHAM
------------------------------------------- Controller March 30, 2000
Mary Jo Needham
43
MTR GAMING GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COLUMN B
BALANCE AT COLUMN E
BEGINNING OF COLUMN C COLUMN D BALANCE AT END
COLUMN A PERIOD ADDITIONS DEDUCTIONS OF PERIOD
- -------- ------------ ---------- ----------- --------------
Year ended December 31, 1999:
Allowance for doubtful accounts receivable.... $ 138,000 -- $ 97,000 $ 41,000
Allowance for doubtful production note
receivable.................................. 2,500,000 -- 2,500,000 --
$2,638,000 -- $ 2,597,000 $ 41,000
Year ended December 31, 1998:
Allowance for doubtful accounts receivable.... $ 125,000 $ 13,000 -- $ 138,000
Allowance for doubtful production note
receivable.................................. -- 2,500,000 -- 2,500,000
Allowance for deferred tax assets............. 4,703,000 -- (4,703,000) --
$4,828,000 $2,513,000 $(4,703,000) $2,638,000
Year ended December 31, 1997:
Allowance for doubtful accounts receivable.... $ 140,000 -- $ (15,000) $ 125,000
Allowance for doubtful notes receivable....... 290,000 -- (290,000) --
Allowance for deferred tax assets............. 8,563,000 -- (3,860,000) 4,703,000
$8,993,000 -- $(4,165,000) $4,828,000
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MTR Gaming Group, Inc.
We have audited the consolidated financial statements of MTR Gaming Group, Inc.
and subsidiaries as of and for the years ended December 31, 1999 and 1998 and
have issued our report thereon dated February 19, 2000, except as to Note 14,
which is as of March 13, 2000. Our audits also included the consolidated
financial statement schedules for 1999 and 1998 of MTR Gaming Group, Inc. and
subsidiaries. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibilty is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Costa Mesa, California
February 19, 2000
45
INDEPENDENT AUDITORS' REPORT
Board of Directors
MTR Gaming Group, Inc.
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of MTR Gaming Group, Inc. and subsidiaries for the year ended
December 31, 1997, and have issued our report thereon dated February 27, 1998.
Our audit also included the consolidated financial statement schedule for 1997
of MTR Gaming Group, Inc. and subsidiaries. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statement
schedule based on our audit. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Corbin & Wertz
Irvine, California
February 27, 1998
46
MTR GAMING GROUP, INC.
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (BDO
SEIDMAN, LLP)............................................. F-2
INDEPENDENT AUDITORS' REPORT (CORBIN & WERTZ)............... F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-4
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999.......... F-5
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended December 31,
1999...................................................... F-6
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999.......... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheets of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTR Gaming
Group, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
February 19, 2000, except
as to Note 14, which is as of
March 13, 2000
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of MTR Gaming Group, Inc. and its
subsidiaries (the "Company") for the year ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of MTR Gaming Group, Inc. and its subsidiaries for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
February 27, 1998
F-3
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,380,000 $ 9,074,000
Restricted cash........................................... 891,000 239,000
Accounts receivable, net of allowance for doubtful
accounts of $41,000 and $138,000 in 1999 and 1998,
respectively............................................ 1,026,000 1,041,000
Deferred financing costs.................................. 244,000 1,259,000
Income tax receivable..................................... 519,000 --
Deferred income taxes..................................... 1,526,000 2,417,000
Other current assets...................................... 1,575,000 986,000
----------- -----------
Total current assets........................................ 13,161,000 15,016,000
Property and equipment, net................................. 52,756,000 40,279,000
Excess of cost of investments over net assets acquired, net
of accumulated amortization of $1,778,000 and $1,526,000
in 1999 and 1998, respectively............................ 1,996,000 2,248,000
Deferred income taxes....................................... -- 1,643,000
Deferred financing costs, net of current portion............ 977,000 --
Deposits and other.......................................... 669,000 551,000
----------- -----------
$69,559,000 $59,737,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,453,000 $ 624,000
Accrued liabilities....................................... 1,746,000 1,302,000
Current portion of capital leases......................... 561,000 --
Current portion of long-term and other debt............... 7,982,000 633,000
----------- -----------
Total current liabilities................................... 11,742,000 2,559,000
Long-term and other debt, less current portion.............. 26,409,000 33,988,000
Capital lease obligations, net of current portion........... 982,000 --
Deferred income taxes....................................... 717,000 --
----------- -----------
Total liabilities........................................... 39,850,000 36,547,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.00001 par value; 50,000,000 shares
authorized; 21,297,242 and 20,866,163 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ -- --
Common stock subscribed; 30,312 shares at December 31,
1999 and 1998........................................... -- --
Paid-in-capital........................................... 36,454,000 36,178,000
Shareholder receivable.................................... (457,000) (461,000)
Accumulated deficit....................................... (6,288,000) (12,527,000)
----------- -----------
Total shareholders' equity.................................. 29,709,000 23,190,000
----------- -----------
Total liabilities and shareholders' equity.................. $69,559,000 $59,737,000
=========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ----------- ----------- -----------
REVENUES
Video lottery terminals................................... $95,952,000 $68,992,000 $49,187,000
Pari-mutuel commissions................................... 4,504,000 4,796,000 4,437,000
Lodging, food and beverage................................ 10,432,000 7,499,000 5,417,000
Other..................................................... 2,533,000 1,823,000 1,097,000
----------- ----------- -----------
Total revenues.............................................. 113,421,000 83,110,000 60,138,000
----------- ----------- -----------
COSTS OF REVENUES
Cost of video lottery terminals........................... 56,431,000 41,404,000 30,081,000
Cost of pari-mutuel commissions........................... 5,300,000 4,963,000 5,591,000
Cost of lodging, food and beverage........................ 9,441,000 6,522,000 4,268,000
Cost of other............................................. 2,425,000 1,212,000 1,171,000
----------- ----------- -----------
Total costs of revenues..................................... 73,597,000 54,101,000 41,111,000
----------- ----------- -----------
Gross profit................................................ 39,824,000 29,009,000 19,027,000
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing and promotions.................................. 4,968,000 3,050,000 2,691,000
General and administrative................................ 14,440,000 10,515,000 7,900,000
Depreciation and amortization............................. 5,539,000 3,822,000 2,415,000
----------- ----------- -----------
Total selling, general and administrative expenses.......... 24,947,000 17,387,000 13,006,000
----------- ----------- -----------
Operating income............................................ 14,877,000 11,622,000 6,021,000
Interest income............................................. 335,000 401,000 191,000
Interest expense............................................ (4,270,000) (4,259,000) (3,341,000)
----------- ----------- -----------
Income from continuing operations before income taxes....... 10,942,000 7,764,000 2,871,000
(Provision) benefit for income taxes........................ (3,947,000) 2,659,000 1,823,000
----------- ----------- -----------
Income from continuing operations........................... 6,995,000 10,423,000 4,694,000
Discontinued operations:
Loss on disposal of oil and gas assets.................... -- (2,735,000) --
----------- ----------- -----------
Income before extraordinary item............................ 6,995,000 7,688,000 4,694,000
Extraordinary item:
Loss on debt extinguishment, net of tax benefit of
$427,000................................................ (756,000) -- --
----------- ----------- -----------
NET INCOME.................................................. $ 6,239,000 $ 7,688,000 $ 4,694,000
=========== =========== ===========
NET INCOME PER SHARE-BASIC:
Continuing operations..................................... $ 0.33 $ 0.51 $ 0.24
Discontinued operations................................... -- (0.13) --
Extraordinary item........................................ (0.03) -- --
----------- ----------- -----------
NET INCOME PER SHARE...................................... $ 0.30 $ 0.38 $ 0.24
=========== =========== ===========
NET INCOME PER SHARE-ASSUMING DILUTION
Continuing operations..................................... $ 0.28 $ 0.44 $ 0.22
Discontinued operations................................... -- (0.11) --
Extraordinary item........................................ (0.03) -- --
----------- ----------- -----------
NET INCOME PER SHARE...................................... $ 0.25 $ 0.33 $ 0.22
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic..................................................... 21,029,073 20,292,751 19,513,560
=========== =========== ===========
Diluted................................................... 24,741,548 23,446,235 21,252,751
=========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES
OF RECEIVABLE
COMMON STOCK COMMON ADDITIONAL FROM
---------------------- STOCK PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT SUBSCRIBED CAPITAL STOCK OPTIONS DEFICIT
---------- --------- ------------- ------------- ----------------- ----------------
Balances, January 1, 1997.......... 19,126,043 $ -- 525,848 $35,175,000 $ -- $(24,909,000)
Value recorded in connection with
warrants and options issued to
employees........................ -- -- -- 130,000 -- --
Shares issued from exercise of
stock options.................... 160,000 -- -- 159,000 -- --
Expense recorded in connection with
amendments to options previously
issued to employees.............. -- -- -- 156,000 -- --
Shares reclassed from common stock
subscribed and issued in
connection with settlements...... 12,070 -- (30,159) (27,000) -- --
Shares issued in connection with
price guarantee settlements...... 150,000 -- -- (318,000) -- --
Shares reclassed from common stock
subscribed and issued in
connection with financing
agreements....................... 465,377 -- (465,377) -- -- --
Shares issued in connection with
financing agreements............. 25,000 -- -- 50,000 -- --
Shares issued for services
rendered......................... 2,400 -- -- 3,000 -- --
Net income......................... -- -- -- -- -- 4,694,000
---------- --------- -------- ----------- --------- ------------
Balances, December 31, 1997........ 19,940,890 -- 30,312 35,328,000 -- (20,215,000)
Shares issued from exercise of
stock options.................... 925,273 -- -- 819,000 (461,000) --
Value recorded in connection with
options issued to non-
employees........................ -- -- -- 31,000 -- --
Net income......................... 7,688,000
---------- --------- -------- ----------- --------- ------------
Balances, December 31, 1998........ 20,866,163 -- 30,312 36,178,000 (461,000) (12,527,000)
Shares issued from exercise of
stock options.................... 431,079 -- -- 344,000 4,000 --
Value recorded in connection with
options issued to non-
employees........................ -- -- -- 40,000 -- --
Cancellation of price guarantees
through cash payment............. -- -- -- (108,000) -- --
Net income......................... 6,239,000
---------- --------- -------- ----------- --------- ------------
Balances, December 31, 1999........ 21,297,242 $ -- 30,312 $36,454,000 $(457,000) $ (6,288,000)
========== ========= ======== =========== ========= ============
TOTAL
-----------
Balances, January 1, 1997.......... $10,266,000
Value recorded in connection with
warrants and options issued to
employees........................ 130,000
Shares issued from exercise of
stock options.................... 159,000
Expense recorded in connection with
amendments to options previously
issued to employees.............. 156,000
Shares reclassed from common stock
subscribed and issued in
connection with settlements...... (27,000)
Shares issued in connection with
price guarantee settlements...... (318,000)
Shares reclassed from common stock
subscribed and issued in
connection with financing
agreements....................... --
Shares issued in connection with
financing agreements............. 50,000
Shares issued for services
rendered......................... 3,000
Net income......................... 4,694,000
-----------
Balances, December 31, 1997........ 15,113,000
Shares issued from exercise of
stock options.................... 358,000
Value recorded in connection with
options issued to non-
employees........................ 31,000
Net income......................... 7,688,000
-----------
Balances, December 31, 1998........ 23,190,000
Shares issued from exercise of
stock options.................... 348,000
Value recorded in connection with
options issued to non-
employees........................ 40,000
Cancellation of price guarantees
through cash payment............. (108,000)
Net income......................... 6,239,000
-----------
Balances, December 31, 1999........ 29,709,000
===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 6,239,000 $ 7,688,000 $ 4,694,000
Adjustments to reconcile net income to net cash provided by
net operating activities:
Depreciation and amortization............................. 5,048,000 3,822,000 2,416,000
Loss on disposal of discontinued operations............... -- 2,735,000 --
Other non-cash provisions, net............................ -- --
Extraordinary loss on debt extinguishment................. 756,000 -- --
Net change in allowance for doubtful accounts
receivable.............................................. (97,000) 13,000 (15,000)
Common stock and options issued for services rendered and
amortization of interest................................ 502,000 539,000 1,590,000
Deferred income taxes..................................... 3,678,000 (2,773,000) (1,923,000)
Change in operating liabilities--discontinued
operations.............................................. -- (119,000) --
Change in operating assets and liabilities--operating
activities:
Income tax receivable................................... (519,000) -- --
Other current assets.................................... (439,000) (1,093,000) (153,000)
Accounts payable........................................ 829,000 30,000 (315,000)
Accrued liabilities..................................... 685,000 (300,000) (285,000)
------------ ------------ -----------
Net cash provided by operating activities................... 16,682,000 10,542,000 6,009,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash........................................... (652,000) (51,000) (3,000)
Deposits and other assets................................. (118,000) (116,000) (61,000)
Capital expenditures, including acquisitions.............. (15,456,000) (21,050,000) (6,510,000)
Note receivable........................................... -- (333,000) --
------------ ------------ -----------
Net cash used in investing activities....................... (16,226,000) (21,550,000) (6,574,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (33,757,000) -- --
Proceeds from the issuance of long-term debt.............. 30,000,000 11,765,000 5,377,000
Proceeds for issuance of other debt....................... 3,832,000 1,243,000 --
Payments on short-term notes and other debt............... (647,000) (136,000) (194,000)
Principal payments on capital leases...................... (597,000) -- --
Finance cost paid......................................... (1,221,000) (863,000) (959,000)
Payments in connection with redeemable common stock....... (108,000) -- (329,000)
Proceeds from issuance of common stock through exercise of
stock options........................................... 348,000 358,000 159,000
------------ ------------ -----------
Net cash (used in) provided by financing activities......... (2,150,000) 12,367,000 4,054,000
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (1,694,000) 1,359,000 3,489,000
Cash and cash equivalents, beginning of year................ 9,074,000 7,715,000 4,226,000
------------ ------------ -----------
Cash and cash equivalents, end of year...................... $ 7,380,000 $ 9,074,000 $ 7,715,000
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest................................................ $ 3,808,000 $ 3,505,000 $ 2,562,000
============ ============ ===========
Income taxes............................................ $ 788,000 $ 261,000 $ 16,000
============ ============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES ARE DISCLOSED THROUGHOUT THE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
MTR Gaming Group, Inc. (the "Company"), a Delaware corporation, owns and
operates hotel and gaming properties in West Virginia and Nevada.
The Company acquired Mountaineer Park, Inc. in December of 1992 and has
since operated the Mountaineer Racetrack & Gaming Resort ("Mountaineer Park" or
the "Resort") in West Virginia's northern "panhandle," approximately twenty-five
miles from the Pittsburgh International Airport. The Resort complex also
includes a thoroughbred horse racetrack, pari-mutuel wagering, off-track
wagering on horse and greyhound races simulcast from other tracks, a 101-room
lodge, swimming, dining and lounge facilities. Mountaineer Park also owns the
Woodview Golf Course, which is located approximately seven miles from the
Resort.
On May 5, 1998, through two newly formed, wholly owned subsidiaries, the
Company closed the purchase of two hotel/gaming properties in Nevada: the
Cheyenne Hotel & Casino, which has been renamed the "Ramada Inn and Speedway
Casino", in North Las Vegas and the Reno Ramada, which has been renamed the
"Ramada Inn and Speakeasy Casino," in Reno.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MTR Gaming Group, Inc. ("MTR"), Mountaineer Park, Inc. ("Mountaineer Park"),
Speakeasy Gaming of Las Vegas, Inc. ("Speakeasy-Las Vegas"), Speakeasy Gaming of
Reno, Inc. ("Speakeasy-Reno") and ExCal Energy Corporation ("ExCal")
(collectively, the "Company"). All significant intercompany transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reported periods. Significant estimates made by management include, but are
not limited to, the impairment, if any, of long-lived assets. Actual results
could materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
These consolidated historical financial statements contain financial
instruments whereby the fair market value of the financial instruments could be
different than that recorded on a historical basis in the accompanying
consolidated financial statements. The financial instruments consist of cash and
cash equivalents, restricted cash, accounts receivable, accounts payable and
long-term and other debt. The carrying amounts of the Company's financial
instruments generally approximate their fair values as of December 31, 1999 and
1998.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers highly liquid investments with a remaining maturity of
90 days or less from the purchase date to be cash equivalents. Cash equivalents
consist primarily of overnight repurchase agreements at December 31, 1999.
F-8
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted cash includes short-term certificates of deposit (see Note 7) and
unredeemed winning tickets from its racing operations.
DEFERRED FINANCING COSTS
Amortization expense amounted to $462,000, $508,000 and $1,283,000 for the
year ended December 31, 1999, 1998 and 1997, respectively, related to prior debt
issuance costs and has been reflected as interest expense in the accompanying
consolidated statement of operations. During the year ended December 31, 1999,
the Company wrote-off the remaining deferred loan costs in connection with the
1999 financing (see Note 6), which is included in the extraordinary loss on
extinguishment of debt in the accompanying consolidated statement of operations.
New debt issuance costs totaling $1,221,000 were capitalized in relation to
the refinancing of debt during December 1999 (see Note 6).
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Major betterments are capitalized while routine repairs and maintenance are
charged to expense when incurred. The Company capitalizes direct materials and
labor, and allocates interest during construction periods. Depreciation is
computed using the straight-line method over the following estimated useful
lives:
Buildings................................................... 20 to 40
Furniture and Fixtures...................................... 5 to 7
Equipment and Automobiles................................... 3 to 15
Interest is capitalized to construction in progress based on the product
resulting from applying the Company's cost of borrowing rate to qualifying
assets under active redevelopment. Interest capitalized in 1999, 1998, and 1997
was $444,000, $132,000, and $512,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted SFAS 121 in 1996, as required. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company evaluates impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management of the Company assesses the recoverability of long-lived
assets by determining whether the depreciation and amortization of such assets
over their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. To date, management has not
identified any impairment of long-lived assets.
F-9
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF COST OF INVESTMENTS OVER NET ASSETS ACQUIRED
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefited.
Goodwill is being amortized on the straight line method over an expected fifteen
year life. Amortization expense included in the accompanying consolidated
statements of operations for each of the years ended December 31, 1999, 1998 and
1997 is $252,000.
REVENUE RECOGNITION
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing and off-track betting at the time wagers are made. Such
commissions are a designated portion of the wagering handle as determined by the
West Virginia State Racing Commission (the Racing Commission). Such revenues are
shown net of the taxes assessed by state and local agencies, as well as purses
and contract amounts paid to the Horsemen's Benevolent Protection Association
(the "HPBA") (see Note 13).
Revenues from video lottery represent the net win earned on video slot,
poker, keno or blackjack wagers. Net win is the difference between wagers placed
and winning payouts to patrons, and is recorded at the time wagers are made (see
Note 12).
Revenues from food and beverage are recognized at the time of sale and
revenues from lodging are recognized on the date of stay.
Other revenues consist primarily of fees earned from activities ancillary to
the Company's racing and gaming activities. Such revenues are recorded at the
time services are rendered or sales are made.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. In 1996, the Company
adopted the provisions of SFAS 123 which relate to non-employee stock-based
compensation, and has elected to account for its stock-based compensation to
employees under APB 25.
ADVERTISING
The Company generally expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 1999, 1998 and 1997 was $4,968,000,
$3,050,000 and $2,691,000, respectively, net of advertising grants received from
the State of West Virginia of $196,000, $560,000 and 330,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Statement 109), Accounting for Income
Taxes. Under Statement 109, an asset and
F-10
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liability method is used whereby deferred tax assets and liabilities are
determined based on temporary differences between bases used for financial
reporting and income tax reporting purposes. Income taxes are provided based on
the enacted tax rates in effect at the time such temporary differences are
expected to reverse. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not realize tax
assets through future operations. The Company and its subsidiaries file a
consolidated federal income tax return.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share
("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
The following tables illustrate the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted net
income per share from continuing operations computations.
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS--
Net income from continuing operations available to
common shareholders.................................. $ 6,995,000 21,029,751 $0.33
-----
Effect of dilutive securities--
Warrants and options................................... 3,711,797
----------- -----------
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions......... $ 6,995,000 24,741,548 $0.28
=========== =========== =====
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS--
Net income from continuing operations available to
common shareholders.................................. $10,423,000 20,292,751 $0.51
-----
Effect of dilutive securities--
Warrants and options................................... -- 3,153,484
----------- -----------
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions......... $10,423,000 23,446,235 $0.44
=========== =========== =====
F-11
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS--
Net income from continuing operations available to
common shareholders.................................. $ 4,694,000 19,513,560 $0.24
-----
Effect of dilutive securities--
Warrants and options................................... -- 1,739,191
----------- -----------
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions......... $ 4,694,000 21,252,751 $0.22
=========== =========== =====
The above dilutive EPS calculations do not include 360,000, 350,000 and
700,000 of potential dilutive securities for the years ending December 31, 1999,
1998 and 1997, respectively.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The Company adopted the provisions
of this statement in 1998. These disclosure requirements had no impact on the
Company's financial position or results of operations. The Company has no
elements of other comprehensive income, as defined by SFAS No. 130.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures of an Enterprise and Related Information. The provisions of this
statement require disclosures of financial and descriptive information about an
enterprise's operating segments in annual and interim financial reports issued
to stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Company adopted the provisions
of this statement for 1998 annual reporting. These disclosure requirements had
no impact on the Company's financial position or results of operations, or the
Company's existing segment disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statement presentation to conform to the 1999 presentation.
F-12
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at certain financial institutions in
excess of amounts insured by Federal agencies. In addition, the Company
maintains significant cash balances on hand at its gaming operations.
CYCLICAL NATURE OF BUSINESS
The Company's primary business involves leisure and entertainment. During
periods of recession or economic downturn, consumers may reduce or eliminate
spending on leisure and entertainment activities. In the event that any of the
Company's demographic markets suffer adverse economic conditions, the Company's
revenues may be materially adversely affected. In addition, the operations of
Mountaineer Park are typically seasonal in nature. Winter conditions may
adversely affect transportation routes to Mountaineer Park, as well as cause
cancellations of live horse racing. As a result, adverse seasonal conditions
could have a material adverse effect on the operations of the Company. In the
Las Vegas and Reno market, business levels are generally weaker from
Thanksgiving through the middle of January (except during the week between
Christmas and New Years) and throughout the summer, and generally stronger from
mid-January through Easter and from mid-September through Thanksgiving.
The Company's results at Speakeasy-Las Vegas and Speakeasy-Reno may also be
affected by inclement weather. For example, Speakeasy-Reno, located in the
foothills of the Sierra Nevada mountains in Nevada, is subject to snow and icy
road conditions during the winter months. Any such severe weather conditions may
discourage potential customers from visiting Speakeasy-Reno. It is unlikely that
the Company will be able to obtain business interruption coverage for casualties
resulting from severe weather, and there can be no assurance that the Company
will be able to obtain casualty insurance coverage at affordable rates for
casualties resulting from severe weather.
LICENSING
The Company's business is highly regulated. The ability of the Company to
remain in business, and to operate profitably depends upon the Company's ability
to satisfy all applicable racing and gaming laws and regulations.
WEST VIRGINIA RACING AND GAMING REGULATION
The Company's operations at Mountaineer Park are subject to regulation by
the Racing Commission under the West Virginia Racing Act, and by the West
Virginia State Lottery Commission (the "Lottery Commission") under the West
Virginia Racetrack Video Lottery Act ("the Lottery Act").
The powers and responsibilities of the Racing Commission include, among
other things, (i) granting permission annually to maintain racing licenses and
schedule race meets, (ii) approving simulcasting activities, (iii) licensing all
officers, directors, racing officials and certain other employees of the Company
and (iv) approving all contracts entered into by the Company affecting racing
and pari-mutuel wagering operations. Such powers and responsibilities extend to
the approval and/or oversight of all aspects of racing and pari-mutuel wagering
operations. The Company has received all necessary approvals to conduct its
current operations at Mountaineer Park, however, such approvals are subject to
renewal and approval annually. The failure to receive or retain approvals or
renewals of approvals, or a delay in receiving such approvals and renewals,
could cause the reduction or suspension of racing and pari-mutuel wagering, as
F-13
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
well as of video slot operations, at Mountaineer Park and could have a material
adverse effect upon the Company's business, financial condition and results or
operations.
Pursuant to the Lottery Act, West Virginia horse racetracks licensed prior
to January 1, 1994 and which conduct a minimum number of days of live racing,
may apply for an annual license to operate video slots at its racetrack. The
Lottery Act likewise requires that the operator of Mountaineer Park be subject
to a written agreement with the horse owners, breeders and trainers who race
horses at that facility in order to conduct video slot operations. The Company
is party to the requisite agreement with the HPBA, which expires on January 1,
2001. The Lottery Act also requires that the operator of Mountaineer Park be
subject to a written agreement with the pari-mutuel clerks in order to operate
video slots. The Company is party to the requisite agreement with its
pari-mutuel clerks which expires on November 30, 2002. The absence of an
agreement with the HPBA or the pari-mutuel clerks at Mountaineer Park, or the
termination or non-renewal of such agreements, would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Lottery Commission has broad powers to approve and monitor all operations of
the video lottery terminals, the specification of the terminals and the
interface between the terminals and the West Virginia Central Lottery System. In
addition, the Lottery Commission licenses all persons who control the licensed
entity or are key personnel of the video lottery operation to ensure their
integrity and absence of any criminal involvement.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply, its business would be materially adversely effected.
NEVADA GAMING REGULATION
On September 23, 1999, the Company obtained the necessary licenses from the
state of Nevada to operate both of the Nevada properties' casinos. The laws,
regulations, and supervisory procedures of the Nevada Gaming Authorities are
based upon declarations of public policy which are concerned with, among other
things: (i) the prevention of unsavory or unsuitable persons from having a
direct or indirect involvement with gaming at any time or in any capacity; (ii)
the establishment and maintenance of responsible accounting practices and
procedures; (iii) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent
practices; and (v) to provide a source of state and local revenues through
taxation and licensing fees. Change in such laws, regulations, and procedures
could have an adverse effect on the operations of the Company.
In order to operate non-restricted gaming in Nevada, Speakeasy-Las Vegas and
Speakeasy-Reno are required to be licensed as operators of a casino by the
Nevada Gaming Authorities. A gaming license requires the periodic payment of
fees and taxes and is not transferable. The Company is registered by the Nevada
Commission as a publicly traded corporation (Registered Corporation) and as
such, it will be required periodically to submit detailed financial and
operating reports to the Nevada Commission and
F-14
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
furnish any other information which the Nevada Commission may require. No person
may become a stockholder of, or receive any percentage of profits from,
Speakeasy-Las Vegas and Speakeasy-Reno without first obtaining licenses and
approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or
Speakeasy-Las Vegas and Speakeasy-Reno in order to determine whether such
individual is suitable or should be licensed as a business associate of a gaming
licensee.
If the Nevada Gaming Authorities were to determine that Speakeasy-Las Vegas
and/or Speakeasy-Reno had violated the Nevada Gaming Control Act or the
regulations promulgated thereunder (collectively, the Nevada Act), the gaming
licenses could be limited, conditioned, suspended, or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition,
Speakeasy-Las Vegas, Speakeasy-Reno, the Company, and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission.
IMPACT OF RESORT HOTEL LEGISLATION
The locations upon which Speakeasy-Las Vegas and the Speakeasy-Reno are
located are subject to legislation passed in 1991 by the Nevada Legislature
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation essentially provide that the Nevada Commission shall not
approve a non-restricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel, as defined. A county, city or town may require resort hotels to meet
standards in addition to those required by the Nevada Legislature as a condition
to issuance of a gaming license by the particular county, city or town. Unless
gaming were to be abandoned, the locations owned by Speakeasy-Las Vegas and
Speakeasy-Reno are exempt from the Resort Hotel Legislation because these
locations have held non-restricted gaming licenses prior to the enactment of the
legislation. The failure to keep the grandfathered exemptions to the Resort
Hotel Legislation and the local regulations governing resort hotels would have a
material adverse effect on the Company.
POLITICAL CLIMATE
The Company's ability to remain in the gaming business depends on the
continued political acceptability of gaming activities to both the public and
state governmental officials. In addition, the gaming laws impose high tax
rates, and fixed pari-mutuel commission rates which, if altered, may diminish
the Company's profitability. Management is aware of nothing to indicate that
West Virginia and Nevada state officials will change their policies toward
gaming activities, particularly video lottery gaming; however, there are no
assurances that such policies will not be changed. Any substantial unfavorable
change in the enabling laws or tax rates on gaming revenues could make the
Company's business substantially more onerous, less profitable or illegal, which
would have a material adverse effect on the Company's business.
In August 1996, the United States Congress passed legislation, which
President Clinton signed, creating the National Gambling Impact and Policy
Commission (the "Policy Commission") to conduct a comprehensive study of all
matters relating to the economic and social impact of gaming in the United
States. The legislation provided that, not later than two years after the
enactment of such legislation, the Policy Commission must issue a report to the
President and to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. That report with
F-15
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
accompanying recommendations was issued on June 18, 1999. Those recommendations
include, among others, the statement that states should refuse to allow the
introduction of casino-style gambling in parimutuel facilities for (i) the
primary purpose of saving a parimutuel facility that the market has determined
no longer serves the community; or (ii) for the purpose of competing with other
forms of gambling. If such recommendations were enacted into law, it could
adversely impact the gaming industry and have a material adverse effect on the
Company's business and operations. The Company is unable to predict whether this
study will result in law that would impose additional regulations on gaming
industry operators, including the Company.
COMPETITION
The Company faces substantial competition in each of the markets in which
its gaming facilities are located. Some of the competitors have significantly
greater name recognition and financial and marketing resources than the Company.
Such competition results, in part, from the geographic concentration of
competitors. All of the Company's gaming operations primarily compete with other
gaming operations in their geographic areas. New expansion and development
activity is occurring in each of the relevant markets, which may be expected to
intensify competitive pressures. All of the Company's gaming operations also
compete to a lesser extent with operations in other locations, including Native
American lands, riverboats and cruise ships, and with other forms of legalized
gaming in the United States, including state-sponsored lotteries, on and off
track wagering, high-stakes bingo and card parlors. Several states have
considered legalized casino gaming and others may in the future. Legalization of
large-scale, unlimited casino gaming in or near any major metropolitan area or
increased gaming in other areas could have a material adverse effect on the
business of any or all of the Company's gaming facilities. In March, 2000,
California voters passed a proposition to permit Indian tribes to conduct and
operate slot machine, lottery games and banked and percentage card games on
Indian lands. If the Federal government approves the compacts, the Nevada
properties could be adversely impacted as a result of this increased
competition.
ENVIRONMENTAL REGULATIONS
Generally, the Company and its subsidiaries are subject to a variety of
federal, state and local governmental laws and regulations relating to the use,
storage, discharge, emission and disposal of hazardous materials. While the
Company believes that it and its subsidiaries are presently in material
compliance with all environmental laws, failure to comply with such laws could
result in the imposition of severe penalties or restrictions on operations by
government agencies or courts that could adversely affect operations. In
addition, although the Company is not aware of any environmental contamination
at its properties (with the exception of a discharge from an underground storage
tank at Mountaineer Park which is (i) subject to a state-approved plan of
redemption and (ii) not considered material), it has not conducted exhaustive
environmental investigations of all such properties. The Company does not have
insurance to cover environmental liabilities, if any, other than certain
coverage limited to its Reno property.
4. ACQUISITIONS
SPEAKEASY-LAS VEGAS AND SPEAKEASY-RENO
Speakeasy-Las Vegas consummated the purchase on May 5, 1998 of the Cheyenne
Hotel & Casino, in North Las Vegas, Nevada for approximately $5.5 million.
Speakeasy-Reno consummated the purchase
F-16
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
from an entity under common control with its then primary lender and stockholder
of the Company on May 5, 1998 of the Reno Ramada in Reno, Nevada for
approximately $8 million. The Company financed these acquisitions via new debt
of $11,915,000, including a $150,000 loan fee, (see Note 6), and cash of
approximately $2,082,000, including direct acquisition costs of approximately
$347,000.
These asset acquisitions were accounted for as purchases, and accordingly,
the assets and liabilities of the acquired entities have been recorded at their
estimated fair values at the dates of acquisition. The purchase price, including
direct acquisition costs, approximated the estimated fair values of the net
assets acquired.
The consolidated statement of operations for the year ended December 31,
1998 does not include any revenues or expenses related to these acquisitions
prior to their closing dates. The unaudited proforma results of operations for
the year ended December 31, 1998 assuming these acquisitions had occurred on
January 1, 1998, and for the year ended December 31, 1997, assuming these
acquisitions had occurred on January 1, 1997, are as follows:
DECEMBER 31, 1998 1997
- ------------ ----------- -----------
Total revenues..................................... $83,353,000 $61,284,000
----------- -----------
Net income......................................... $ 6,794,000 $ 2,668,000
=========== ===========
Net income per share--basic........................ $ 0.33 $ 0.14
=========== ===========
Net income per share--assuming dilution............ $ 0.29 $ 0.13
=========== ===========
These pro forma consolidated results of operations have been presented for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
January 1, 1998 or 1997, or which may result in the future.
PURCHASE OF 350 ACRE PROPERTY
On February 12, 1998, Mountaineer Park acquired a 350-acre parcel of
unimproved real property located in Chester, Hancock County, West Virginia for a
purchase price of $240,000, exclusive of brokerage fees and closing costs of
approximately $30,000. The property is contiguous with the property on which the
Company's Mountaineer Racetrack & Gaming Resort is situated. The Company
currently has no plans for the development of the property.
ACQUISITION OF LAND ADJACENT TO THE SPEAKEASY-LAS VEGAS
On November 2, 1998, Speakeasy-Las Vegas completed the acquisition of a 1/2
acre parcel of real property located adjacent to the Speedway Hotel and Casino
for the sum of $120,000. This property was acquired to augment the grounds
surrounding the Speedway Hotel and Casino and is to be utilized, primarily, to
provide the additional parking required by local authorities and needed to
accommodate the expansion of parking and operations at that location.
ACQUISITION OF GOLF COURSE
The Company acquired, during January 1999, an 18-hole golf course, including
real property, improvements, personal property and equipment, located
approximately seven miles from the Company's
F-17
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
Mountaineer Race Track & Gaming Resort. The purchase price was approximately
$841,000 which was satisfied by the issuance of a promissory note of $600,000
(interest only at 8% per annum, all due and payable after five years), the
assumptions of bank debt of $158,000, the assumption of the payable of $52,000
and cash of $29,000 (see Note 6).
5. PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
1999 1998
------------ -----------
Land.............................................. $ 5,159,000 $ 4,443,000
Building and improvements......................... 34,916,000 29,634,000
Equipment (Note 7)................................ 14,230,000 9,536,000
Furniture and fixtures............................ 10,181,000 5,912,000
Construction in progress.......................... 2,999,000 687,000
------------ -----------
67,485,000 50,212,000
Less accumulated depreciation..................... (14,729,000) (9,933,000)
------------ -----------
$ 52,756,000 $40,279,000
============ ===========
Depreciation expense charged to operations related to property and equipment
during the years ended December 31, 1999, 1998 and 1997 was $4,796,000,
$3,570,000 and $2,164,000, respectively.
6. LONG-TERM DEBT
$5 MILLION TERM NOTE
On July 2, 1996, Mountaineer Park entered into a financing arrangement with
a private lending firm for a $5 million working capital loan and a $11.1 million
loan commitment to refinance Mountaineer Park's construction loan with a former
lender. The note evidencing the loan called for 36 monthly payments of interest
only at the rate of 12% per annum. The Company also agreed to issue the lender
183,206 shares of its common stock, warrants to purchase an additional 1,142,860
shares at $1.06 per share and pay a $400,000 loan fee. All warrants were
immediately vested and are exercisable for a term of five years. The stock and
warrants were registered during 1996.
As part of the transaction, the lender also provided a one year commitment
to lend Mountaineer Park up to $11.1 million of additional funds to be used to
refinance the first mortgage held by the former lender. In connection with the
financial commitment, the Company paid a $110,000 commitment fee and issued the
lender additional warrants to purchase 350,000 shares of common stock at $1.06
per share (which were fully vested at the issuance date and expire in 2001).
The aforementioned warrants are entitled to protection from dilution in
certain circumstances.
The Company assigned values of approximately $250,000 and $191,000 related
to the aforementioned common shares and warrants, respectively, issued in
connection with the financing. Such amounts were capitalized as deferred
financing costs along with the aforementioned fees. All deferred financing costs
relating to the financing were amortized by December 31, 1996 because of the
amendment as noted below.
F-18
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
In order to assure compliance with provisions of the Lottery Act concerning
control over a licensee, the lender has agreed that it may not own, through the
exercise of warrants or otherwise, more than 5% of the Company's outstanding
common stock unless and until the Lottery Commission either (i) approves the
lender or (ii) provides an advisory opinion approving an arrangement whereby the
lender may own but may not have voting rights to any shares in excess of the 5%
threshold. If the lender becomes disqualified after such Lottery Commission
approval, any share held in excess of the 5% threshold, if registered, shall be
sold by the lender in the market; otherwise such shares may be put to the
Company at the then market price, said price payable in cash or in the form of a
note with interest only payable monthly at 24% per annum for a period of one
year at which time all principal and unpaid interest become due.
$16.1 MILLION AMENDED AND RESTATED TERM NOTE
On December 26, 1996, Mountaineer Park amended and restated its July 2, 1996
term loan agreement (the "Amended and Restated Term Loan Agreement"), increasing
the amount of principal borrowed from $5.0 million to $16.1 million. Mountaineer
Park also entered into a line of credit agreement with the same lender on
December 26, 1996, for borrowings up to $5,376,000.
The restated loan agreement bore interest at the rate of 12% per annum, and
called for payments of interest only until the maturity date of December 26,
1999, at which time all principal and unpaid interest was due. In connection
with this transaction, the Company agreed to issue 550,000 shares of its common
stock and warrants to purchase an additional 1,632,140 shares of the Company's
common stock at an exercise price of $1.06 per share (which were fully vested at
the date of issuance and expire in 2001). Both the shares and the warrants were
issued in thirteen equal monthly installments. The shares and warrants were
assigned an aggregate value of approximately $777,000, which was recorded as
deferred financing costs. The warrants are entitled to protection from dilution
in certain circumstances. The Company amortized the deferred financing costs
through June 30, 1997 because of the July 2, 1997 refinancing as discussed
below.
SECOND AMENDED TERM LOAN AGREEMENT
On July 2, 1997, Mountaineer Park and its lender again amended and restated
the $16.1 million loan agreement. The July 2, 1997 Second Amended Term Loan
Agreement revised the prior loan agreement as follows:
i) The maturity date of the loan was extended to July 2, 2001.
ii) The principal amount borrowed was increased to $21,476,500 (by drawing down
the line of credit).
iii) Annual cash fees in the amount of 8% of the outstanding principal balance
due on each anniversary of the term loan were eliminated.
iv) Annual warrants to purchase 250,000 shares of the Company's common stock at
an exercise price of $1.06, due to be issued on November 15, 1997, 1998 and
1999 were eliminated.
v) Annual warrants to purchase additional shares in a number to be calculated
under a formula defined in the Amended Term Loan Agreement, due to be issued
on November 15, 1997, 1998 and 1999, were eliminated.
As consideration for the Second Amended Term Loan Agreement, Mountaineer
Park agreed to pay the lender (i) a one time commitment fee of $1.8 million,
which was paid over the first year of the term; (ii)
F-19
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
interest at the rate of 13% (compared to 12% on the $16.1 million term loan and
15% on the $5.4 million line of credit under the Amended Term Loan Agreement);
and (iii) a call premium equal to 5% in the event of prepayment during the first
year of the term, declining to 3% during the second year, 2% in the third year,
and 1% in the final year.
THIRD AMENDED AND RESTATED TERM LOAN AGREEMENT
The Company, as guarantor, and its lender again amended and restated the
loan agreement on April 30, 1998, (the "Third Amended and Restated Term Loan
Agreement") in order to help finance the acquisitions of Speakeasy-Las Vegas and
Speakeasy-Reno. This increased the term loan amount to approximately $27,865,000
and the line amount to approximately $10,377,000 (approximately $5,527,000 of
which was drawn upon as of December 31, 1998). The Third Amended and Restated
Term Loan Agreement also established a separate $1.7 million line of credit for
construction of Speakeasy--Las Vegas. The loans, as well as any draws against
the line of credit, continued to be for a term ending July 2, 2001 with monthly
payments of interest only at the rate of 13% per year with all principal
becoming due at the end of the term. The call premium applicable to prepayment
of the loans (2% from July 3, 1999 until July 2, 2000 and 1% from July 3, 2000
until the end of the term), however, does not apply to the amounts borrowed for
the acquisitions or draws on the $1.7 million construction line of credit.
CREDIT AGREEMENT
On December 20, 1999, the Company and its operating subsidiaries,
Mountaineer Park, Inc., Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming
of Reno, Inc., entered into a $30 million five-year senior secured reducing
revolving credit facility (the "Credit Agreement") with Wells Fargo Bank,
National Association. The Company has drawn the full $30 million available under
the Wells Fargo loan and used the proceeds, combined with approximately $5.3
million of the Company's cash, to prepay the loans previously made to the
Company under the Third Amended and Restated Term Loan Agreement.
The Credit Agreement bears interest as follows: for the first six months,
the interest rate, which is variable, will be the London Interbank Offered Rate,
(the "LIBOR"), plus a margin of 3% (which equates to 9.16% at December 31,
1999). Thereafter, the interest rate will be adjusted quarterly depending upon
the Company's leverage ratio, as defined. The interest rate could be based upon
the LIBOR plus a margin of 2.0 to 2.5% depending on the leverage ratio. Interest
is payable not less frequently than quarterly. The Company may elect from time
to time either to continue to borrow on a LIBOR basis (with 1, 2, 3 or 6 month
contracts) or to convert to an interest rate based upon the Prime Rate or
Federal Funds Rate plus a margin of 1 to 1 1/2% depending upon the leverage
ratio. Beginning 90 days after closing, the maximum available credit line will
be reduced by $1.5 million per quarter, equating to a five-year amortization.
Amounts prepaid over and above such reductions may be re-borrowed, subject to a
commitment fee ranging from 37.5 to 50 basis points depending upon the leverage
ratio.
The Credit Agreement evidencing the loan contains customary affirmative and
negative covenants and events of default, as defined. Under the Credit
Agreement, the Company will also spend between a minimum 2% and a maximum 6% of
gross revenues on maintenance of the Company's properties. Substantially all of
the Company's assets and those of its operating subsidiaries, including the
stock of the operating subsidiaries, are pledged as security for repayment of
the loans made under the Credit Agreement.
F-20
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The Credit Agreement permits the Company to finance separately up to $8
million of additional senior indebtedness for the purchase or lease of gaming
equipment as well as up to $15 million of subordinated debt for capital
improvements.
The financing also involved the payment of various fees and charges,
including an up-front fee of 2% of the amount financed, a financial advisory fee
of 1.5% of the amount financed, and other customary fees and charges.
The credit agreement bears certain restrictive financial covenants affecting
future transactions to be entered into by the Company. These covenants include,
but are not limited to, restrictions on the ability of the Company to incur
additional debt, lend money, acquire other businesses or make capital
expenditures. Additionally, beginning March 31, 2000, the Company is required to
comply with certain minimum levels of leverage ratios, adjusted fixed charge
coverage and minimum tangible net worth. Anti-dilution provisions are included
in the agreement limiting the number of securities which can be issued without
the lender's prior approval.
OTHER NOTES PAYABLE
In May 1996, the Company reached a settlement agreement with the holder of
52,250 shares of redeemable common stock, valued at $313,000. Pursuant to the
settlement agreement, the Company agreed to pay $25,000 upon execution of the
settlement agreement and delivered an unsecured, non-interest bearing promissory
note calling for a total of three payments of $5,000 due on August 1, 1996,
November 1, 1996 and February 1, 1997; a payment of $50,087 on May 1, 1997; and
a total of four annual payments of $40,087 due on May 1, 1998 through 2001. The
obligation to pay the amounts described above was discounted at 8%. As of
December 31, 1999, the remaining principal balance on this note was $50,000, net
of a discount of approximately $20,000.
In November 1998, Mountaineer Park entered into an agreement to purchase 200
video lottery terminals, at which time the 200 previously leased terminals were
returned to the lessor without penalty. Under the terms of the agreement,
Mountaineer Park is required to make 24 monthly payments of $56,208 through
October 2000. The agreement, which is secured by the video lottery terminals, is
non-interest bearing and therefore, was discounted at a rate of 8%. As of
December 31, 1999, the remaining balance on this agreement was $542,000, net of
a discount of approximately $20,000.
In December 1999, Mountaineer Park obtained an unsecured loan in the amount
of $2,792,000. The loan was due January 31, 2000 and bore interest at 9.5%.
Subsequent to December 31, 1999, this unsecured loan became part of a newly
established line of credit (see Note 14).
In January 1999, in connection with the acquisition of an 18-hole golf
course, the Company issued a promissory note for $603,000, bearing interest at
8% per annum due monthly, principal due January 20, 2004, which is secured by
the property. Additionally, the Company assumed approximately $158,000 of term
debt. The term debt, with interest at 10.00%, is being repaid with monthly
principal and interest payments of $2,476 through August 2006. As of December
31, 1999 there was $141,000 outstanding under the promissory note and term debt.
In April 1999, the Company entered into an agreement to purchase equipment
for the golf course. Under the terms of the agreement, the Company is required
to make principal and interest payments of
F-21
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
$8,752 through April 2002. The agreement bears interest at 8% and is secured by
the equipment. As of December 31, 1999, there was $237,000 outstanding under
this agreement.
ANNUAL COMMITMENTS
Future annual principal payments under all debt agreements as of December
31, 1999 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
2000........................................................ $ 7,982,000
2001........................................................ 6,151,000
2002........................................................ 6,066,000
2003........................................................ 6,022,000
2004........................................................ 8,127,000
Thereafter.................................................. 43,000
-----------
Total....................................................... $34,391,000
===========
7. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
During 1999, the Company entered into capital lease arrangements to finance
the acquisition of equipment including 397 video lottery terminals at its
Company's Nevada properties. Commitments for minimum lease payments under
capital leases at the end of 1999 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
2000........................................................ $ 727,000
2001........................................................ 691,000
2002........................................................ 211,000
2003........................................................ 71,000
2004........................................................ 12,000
----------
1,712,000
Less amount representing interest at rates from 7.82% to
17.89%.................................................... (169,000)
----------
Present value of net minimum lease payments, including
current maturities of $561,000............................ $1,543,000
==========
F-22
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Property, plant and equipment at December 31, 1999 include the following
amounts for capitalized leases:
Building improvements (Note 5).............................. $ 298,000
Equipment (Note 5).......................................... 1,519,000
----------
1,817,000
Less allowance for depreciation............................. (96,000)
----------
$1,391,000
==========
MOUNTAINEER BOND REQUIREMENTS
Mountaineer Park is required to maintain bonds in the aggregate amount of
$340,000, as of December 31, 1999, for the benefit of the Lottery Commission
through June 30, 2000. The bonding requirements have been satisfied via the
issuance of surety bonds and certificates of deposit securing letters of credit,
each of which is collateralized by certain bank deposits.
VIDEO LOTTERY SOFTWARE
The Company and the other West Virginia race tracks have contracted with a
vendor to replace the central communication package that allows communication
between the video lottery terminals on site and the lottery commission's system
in Charleston, West Virginia with an upgraded system that includes other
enhancements of the video lottery program. The Lottery Commission approved the
contract on June 25, 1999. Installation of the system should be completed in
2000. The upgrade will cost Mountaineer Park approximately $1.7 million of which
approximately $784,000 has been incurred as of December 31, 1999 (Note 5). A
letter of credit for $916,000, secured by cash of $458,000, has been issued to
the manufacturer for this expenditure as of December 31, 1999.
TOTALISATOR SYSTEM OPERATING LEASE
The Company leases its Totalisator system under an amended operating lease
dated November 28, 1995. Under the amended lease terms, the Company must pay the
greater of $1,000 per live race performance or 0.55% of the live racing handle.
In addition, the Company must pay the greater of $300 per live race day ($550 if
no live race performance) per simulcast race day or 0.55% of the simulcast
racing handle. The lease agreement expires in October 2000. For the years ended
December 31, 1999, 1998 and 1997, the rent expense under the lease was
approximately $476,000, $454,000 and $437,000, respectively, which is included
in cost of pari-mutuel commissions in the accompanying consolidated statements
of operations.
VIDEO LOTTERY TERMINALS OPERATING LEASES
The Company leases 855 video lottery terminals under operating leases that
expire through April 2001. The Company also leases 100 progressive video lottery
terminals. The weekly lease payments on these 100 progressive video lottery
terminals shall be equal to 9% of the "Gross Terminal Income", as defined. The
agreement has an expiration date of June 30, 2000. The Company made lease
payments totaling approximately $408,000 in 1999 pursuant to this agreement.
F-23
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
For the years ended December 31, 1999, 1998 and 1997, total video lottery
rental expense was approximately $1,982,000, $1,416,000 and $1,119,000,
respectively, which is included in costs of video lottery in the accompanying
consolidated statements of operations.
PHOTOFINISH SYSTEM OPERATING LEASE
Mountaineer Park leases its timing and photofinish equipment under an
operating lease at a cost of $235 per live race day. The lease agreement expires
in May 2002. The Company made lease payments totaling $43,000 in 1999, $47,000
in 1998 and $52,000 in 1997.
RACING VIDEOTAPE SYSTEM OPERATING LEASE
The Company leases its videotape and closed circuit television equipment at
a minimum cost of $400 per live race day and $125 per simulcast race day under
an operating lease expiring in October 2002. In addition, the lease calls for
incremental daily payments if more than one simulcast program is offered on any
particular day, under the following tiered schedule: $65 for a second simulcast
program, a total of $35 for a third and/or fourth program, and $65 for a fifth
program. Rental payments made pursuant to this lease for the years ended
December 31, 1999, 1998 and 1997 were approximately $225,000, $297,000 and
$269,000, respectively.
FUTURE MINIMUM LEASE PAYMENTS
Future annual minimum payments under all material operating leases as of
December 31, 1999 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
2000........................................................ $1,133,000
2001........................................................ 445,000
2002........................................................ 132,000
----------
Total....................................................... $1,710,000
==========
LITIGATION
On February 26, 1998, Mountaineer Park was served with a complaint filed by
a former employee claiming wrongful termination of employment and improper
administration of a polygraph test. The complaint alleges that pursuant to
statute concerning such tests, Mountaineer Park is criminally liable to the
State of West Virginia and civilly liable to the plaintiff. The complaint seeks
$250,000 in compensatory damages and a like amount in punitive damages. The
Company denies all allegations and plans to defend its position vigorously.
The Company is party to various other lawsuits which have arisen in the
normal course of its business. Certain matters are covered by insurance, after
the Company meets certain deductible requirements, generally $2,500 per
occurrence. The liability, if any, arising from unfavorable outcomes of lawsuits
is presently unknown.
F-24
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PENSION PLAN
Mountaineer has a qualified defined contribution plan covering substantially
all of its employees (the "Plan"). The Plan was ratified retroactively on March
18, 1994 by the legislature of the State of West Virginia. The Plan
contributions are based on .25% of the race track and simulcast wagering
handles, and approximately 0.5% of the net revenues of video lottery activities
beginning March 18, 1994. Contributions to the Plan for the years 1999, 1998,
and 1997 were $474,000, $451,000 and $344,000, respectively.
CONSULTING AGREEMENTS
On October 1, 1997, the Company entered into a two-year financial advisory
agreement with an investment banking firm to perform various consulting
services. Under the terms of the agreement, the Company issued warrants to
purchase 150,000 shares of its common stock at an exercise price of $1.50 per
share. The warrants are exercisable for a period of four years and have
piggy-back registration rights. The agreement was terminated on February 15,
1999.
Also on October 1, 1997, Mountaineer Park entered into a three year contract
with an employee benefits and governmental relations consultant. Under the terms
of the agreement the consultant will receive annual options to purchase 10,000
shares of the Company's common stock on October 1, 1997, 1998 and 1999. The
options are exercisable for a period of five years from the dates vested at an
exercise price for each tranche equal to the market price of the Company's
common stock on the dates of vesting. The exercise price will be the market
price of the Company's common stock on the dates of grant.
The Company recorded, during 1997, $130,000 in expense in connection with
the aforementioned grants of warrants and options to nonemployees.
On November 10, 1999, the Company entered into a one year financial advisory
agreement with an investment banking firm to perform various consulting services
for a cash payment of $125,000 and a contingent transaction fee, as defined, for
any successful transactions.
UNDEVELOPED LAND
On June 22, 1999, Mountaineer Park entered into agreements to purchase for
$583,000 approximately 287.65 acres of real property (including two buildings)
previously subject to an October 7, 1997 option and located adjacent to its
Hancock County, West Virginia operation. Mountaineer Park had paid $100,000 for
an irrevocable option. Subject to resolution of certain title issues,
Mountaineer Park intends to close the purchases, which call for payment to be
made in the form of a $200,000 cash payment at closing and a $383,000 term note
bearing interest at 9% payable over five years.
F-25
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OFFICER EMPLOYMENT AGREEMENT AND DEFERRED COMPENSATION AGREEMENT
The Company entered into a new employment agreement dated February 1999 with
its President and CEO (the "Officer"). The agreement is for a term of five (5)
years, calls for an annual base salary of $450,000 (subject to automatic annual
cost of living increases of 5%), semi-annual cash bonuses of $50,000, and a
performance bonus for each year equal to 1% of the gross operating revenue
increase over 1998 operating revenue (provided, however, that EBITDA, as
defined, exceeds 1998 EBITDA). The Company also entered into a deferred
compensation agreement dated January 1999 whereby the Company has purchased a
life insurance policy on the Officer's life (face amount of $2,250,000 and
annual premium of $100,000). The owner of the policy will be the Company. The
Officer will also be entitled, after the Company recoups the aggregate premiums
paid, to an annual benefit, as defined, upon retirement, death or termination
out of the cash value of the insurance policy.
The agreement provides that the Officer shall be entitled, at the Company's
expense, to lease living and/or office quarters for himself and the Company in
the State of Nevada and, if necessary, in any other state or jurisdiction in
which the Company commences business operations after February 1, 1999 or in any
other state or jurisdiction in which the Company is pursuing substantial
business opportunities such that the Officer is required, as a practical matter,
to spend a substantial portion of his time in such jurisdiction. The expense
incurred for living and/or office quarters shall be reasonable and shall be paid
directly by the Company, or at Officer's election, reimbursed by the Company.
The agreement provides that if the Officer's period of employment is
terminated by reason of death or physical or mental incapacity, the Company will
continue to pay the Officer or his estate the compensation otherwise payable to
the Officer for a period of two years. If the Officer's period of employment is
terminated for a reason other than death or physical or mental incapacity or for
cause, the Company will continue to pay the Officer the compensation that
otherwise would have been due him for the remaining period of employment. If the
Officer's period of employment is terminated for cause, the Company will have no
further obligation to pay the Officer, other than compensation unpaid at the
date of termination.
In the event that the termination of the Officer's period of employment
occurs after there has been a change of control of the Company, as defined, and
(i) the termination is not for cause or by reason of the death or physical or
mental disability of the Officer or (ii) the Officer terminates his employment
for good reason, as defined in the agreement, then the Officer will have the
right to receive within thirty days of the termination, a sum that is three
times his annual base salary, but not to exceed the amount deductible by the
Company under the Internal Revenue Code of 1986.
OTHER EMPLOYMENT AGREEMENTS AND DEFERRED COMPENSATION AGREEMENTS
The Company entered into various other employment agreements during 1999
with other employees. The Company also entered into two additional deferred
compensation agreements dated June 1999 whereby the Company has purchased life
insurance policies on these two employees lives. (aggregate face amount of
$1,618,000 and aggregate annual premiums of $50,000). The owner of the policies
will be the Company. The employees will also be entitled, after the Company
recoups the aggregate premiums paid, to an annual benefit, as defined, upon
retirement, death or termination out of the cash value of the insurance
policies.
F-26
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future annual minimum payments under the employment agreements as of
December 31, 1999 is as follows:
DECEMBER 31, AMOUNT
- ------------ ----------
2000........................................................ $ 749,000
2001........................................................ 673,000
2002........................................................ 627,000
2003........................................................ 659,000
2004........................................................ 58,000
----------
Total....................................................... $2,766,000
==========
DIRECTOR AGREEMENTS
On February 18, 1998, the Company entered into separate agreements with two
new directors to provide certain compensation for their services on the
Company's Board of Directors. Specifically, each agreement provided for: (i) the
grant of options to purchase 25,000 shares of common stock of the Company for
each year of service; (ii) the registration by the Company, at its sole cost, of
the shares underlying such options by including such shares in any registration
statement the Company determines to file with the Securities and Exchange
Commission with respect to employee compensation; (iii) the adjustment of the
terms of such options in certain events as set forth in the agreement; and (iv)
a fee of $2,500 for each regular meeting of the Board, audit committee or
shareholders meetings attended and reimbursement of expenses for travel, food
and lodging incurred in attending such meetings.
8. RELATED PARTY TRANSACTIONS
The Company had a note receivable for $240,000 from a shareholder of the
Company at December 31, 1995, as well as additional non-interest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bore interest at
8% per annum and was due on demand. During 1995, the Company recorded a
provision for loss in the amount of $240,000. The Company recorded a settlement
during July 1997 regarding this receivable (see Note 9).
One of the Company's directors, who is also a shareholder, is a member of
the Company's outside legal firm. The Company paid legal fees to that law firm
during 1999, 1998 and 1997 totaling approximately $592,000, $834,000 and
$360,000, respectively.
9. SHAREHOLDERS' EQUITY
LIMITATIONS ON DIVIDENDS
Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its shareholders
as a result of its accumulated deficit as of December 31, 1999. Furthermore,
under the company's and lender's credit agreement, the Company is prohibited
from paying any dividends without the lender's consent. The Company currently
intends to retain all earnings, if any, to finance and expand its operations.
F-27
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
REDEEMABLE COMMON STOCK SETTLEMENTS
The Company granted in 1992 put rights requiring the Company, upon demand,
to redeem up to 209,000 shares at $6.00 per share (the "Redeemable Shares") if
the shares were not registered by February 1, 1993.
During 1995, holders of 104,500 of the Redeemable Shares received an
aggregate of 276,750 make-up shares, and in 1996 the holder of 52,250 Redeemable
Shares received 133,416 make-up shares for a total of 410,166 "Settlement
Shares." The holders of the Settlement Shares were granted registration rights
and the right to that number of additional shares necessary to make up the
difference, if any, between $1.50 per share and the average market value of the
Company's common stock for the ninety (90) trading days immediately following
the effective date of the registration of the Settlement Shares (the "Average
Market Price"). In the event the Settlement Shares were not registered by June
30, 1996, the Company was to issue promissory notes in the principal amount of
$1.50 multiplied by the number of Settlement Shares and bearing interest at the
rate of 12% per annum and payable in 24 monthly installments. For each $1.50 of
principal paid on the notes, however, the holder was required to return a
Settlement Share to the Company. Also, the notes were to be reduced by an amount
equal to the Average Market Price multiplied by the number of Settlement Shares.
With respect to 120,000 of the Settlement Shares, the holder elected to
terminate the Company's $1.50 per share repurchase right. Accordingly, the
Company was not required to issue a promissory note with respect to these
Settlement Shares. However, based on the Average Market Price, the Company was
required to issue 30,312 additional shares, which are included in common stock
subscribed.
With respect to 156,750 shares of the Settlement Shares, the Company issued
a note in the amount of $235,000 (156,750 shares multiplied by $1.50). However,
by an amended settlement agreement dated November 1, 1996, in exchange for a
cash payment of $31,000 and the cancellation of the Company's right to
repurchase the Settlement Shares for $1.50 per share, the holder canceled the
promissory note and relinquished the right to receive additional shares.
With respect to the holder of 133,416 Settlement Shares, the Company issued
a note in the amount of $200,000. The Company redeemed 16,677 shares (which were
canceled and returned to authorized but unissued status) upon the October 31,
1996 effectiveness of a registration statement that included the Settlement
Shares. Such effectiveness stayed the Company's payment obligation for a period
of 90 business days. Based on the Average Market Price, the Company was entitled
to a credit against the note in an amount of $150,000. However, based on the
Average Market Price, the Company was required to issue 30,159 additional
shares. Pursuant to a December 2, 1997 Second Amended Settlement Agreement, the
Company paid $27,000 and issued 12,070 shares of restricted common stock in
exchange for cancellation of the promissory note, acknowledgment that the
Company had satisfied all of its obligations to date, and release of any further
obligations to the holder, including the additional shares.
Pursuant to a May 10, 1996 settlement agreement with the final holder of
52,250 of the Redeemable Shares, the Company agreed to pay the holder $25,000
upon the execution of the agreement and issue a $225,000 non-interest bearing
promissory note in exchange for the cancellation of put rights in connection
with the Redeemable Shares. The Company discounted the note at 8%. The
outstanding balance under the note as of December 31, 1999 amounted to $50,000
and is included on the accompanying 1998 consolidated balance sheet in long-term
debt. Under the terms of the note, the Company is currently obligated to
F-28
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
pay two annual payments of $40,000. The holder also agreed to the cancellation
of options to purchase 50,000 shares of the Company's common stock for $.01 per
share.
In connection with the aforementioned settlements, the Redeemable Shares
were reclassified to common stock during 1996. The Company reduced redeemable
common stock obligations by $1,406,000, recorded long-term debt of $241,000, and
increased additional paid-in capital by $1,165,000 during 1996.
GUARANTEED SHARES
In connection with the 1992 acquisition of Mountaineer Park, the Company
issued 529,676 shares which had registration rights, guaranteed at a per share
value of $6.00. The Company was obligated to issue additional shares should a
market value per share deficiency exist at the time of registration. The Company
granted in 1992 put rights to the holder (a bank) of 60,604 of the
aforementioned shares at $6.00 per share, all of which became exercisable on or
before December 31, 1995. Such rights were not exercised as of December 31,
1995. Accordingly, the Company has reduced redeemable common stock and has
increased shareholders' equity in the accompanying 1996 consolidated statement
of shareholders' equity.
In December 1996, the Company reached a settlement agreement with the holder
of 2,514 shares which bore a $6.00 per share price guarantee. The Company paid a
$3,500 cash settlement in December 1996 in exchange for the cancellation of the
price guarantee.
In December 1996, the Company reached a settlement agreement with the holder
of 135,529 shares which bore a $6.00 per share price guarantee. The Company paid
a $250,000 cash settlement in December 1996 in exchange for a cancellation of
the price guarantee.
In January 1997, the Company reached a settlement with the holders of
118,948 shares which bore the $6.00 per share price guarantee. In exchange for
the cancellation of the price guarantee, the Company paid a cash settlement of
$102,000 and issued 100,000 additional shares of the Company's common stock in
January 1997. The Company recorded a $102,000 charge to paid-in capital in
connection with this transaction.
In July 1997, the Company reached a settlement with the former majority
shareholder of Mountaineer Park (the "Holder"), and holder of 181,739 additional
guaranteed shares. The settlement was part of a larger transaction by which
Mountaineer Park and the Company resolved all matters outstanding with the
Holder. Pursuant to the agreement, the price guarantee was extinguished, the
Company paid a cash settlement of $278,000 out of which the Holder repaid in
full the $78,000 balance due on a promissory note, and the Company canceled a
note receivable in the amount of $240,000 and issued 50,000 shares of restricted
common stock. The Company had recorded a $302,000 provision for doubtful
accounts in 1995 in reference to the note receivable. The Company recorded a
$216,000 reduction to paid-in capital and a $78,000 reduction in notes
receivable in connection with this transaction.
In September 1999, the Company reached a settlement with the holder of
30,342 shares which bore the $6.00 share price guarantee. In exchange for the
cancellation of the price guarantee, the Company paid a cash settlement of
$108,000. The Company recorded a $108,000 charge to paid-in capital.
STOCK OPTION PLANS
In May 1992, the Board of Directors approved the grant of non-qualified
options to purchase 600,000 shares to certain officers and directors of the
Company. Each option entitles the holder to purchase one
F-29
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
share of common stock at an exercise price of $1.06 per share and is fully
vested as of the date of grant. The exercise price approximated the fair value
of the shares at the date of grant; such options were due to expire in May 1997
(see below).
In October 1992, the Board of Directors adopted an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code. The
plan reserves 1,200,000 shares for issuance.
In May 1995, the Board of Directors approved the grant of non-qualified
options to purchase 823,047 shares to certain officers and directors of the
Company. Each option entitled the holder to purchase one share of common stock
at an exercise price of approximately $1.22 per share and was fully vested as of
the date of grant. These options where exercised during September 1998 (see
below).
In November 1995, the Board of Directors adopted an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code. The
plan reserves 500,000 shares for issuance which were granted effective January
23, 1996 (15,000 of which were cancelled). The options are exercisable at the
then fair market value of $.5625 per share, and are exercisable immediately,
expire in 2001, and are subject to certain restrictions.
On January 23, 1996, the Board of Directors granted to two outside
directors, non-qualified stock options to purchase a total of 125,000 shares of
the Company's common stock, at the fair market value of the shares on the date
of grant of $.5625 per share. The options are immediately exercisable for a term
of five years. The value of these options was calculated at $19,000 and was
charged to the 1996 consolidated statement of operations and was reflected as an
increase to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
In October 1996, the Board of Directors adopted an incentive stock option
plan meeting the requirements of section 422 of the Internal Revenue Code (see
above for certain requirements under Section 422). The plan reserved 500,000
shares for issuance.
On October 2, 1996, the Board of Directors granted two outside directors,
the non-qualified stock options to purchase a total of 150,000 shares of the
Company's common stock, at the fair market value of the shares on the date of
grant of $1.06 per share. The options are immediately exercisable for a term of
five years. The value of these options was calculated at $50,000 and was charged
to the 1996 consolidated statement of operations and was reflected as an
increase to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
On May 27, 1997 and again on August 26, 1997, the Company's board of
directors voted to amend the terms of options granted to certain officers and
key employees of the Company on May 28, 1992 such that, with respect to grantees
of such options who were then employees of the Company or its subsidiaries (in
the aggregate, options to purchase 410,867 shares of the Company's common stock
at a price of $1.06 per share), the period during which such options may be
exercised was extended, most recently for a period of 2 years. The Company
recorded $156,000 of compensation expense during the year ended December 31,
1997 as a result of the option amendments.
On August 14, 1997, the board adopted the Amended 1996 Stock Option Plan.
The Plan reserved for grant options to acquire up to 750,000 shares of common
stock of the Company. On September 19, 1997, the board elected to grant in the
aggregate all 750,000 options as non-qualified options to fourteen key
F-30
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
employees and directors at an exercise price of $1.34 per share, the fair market
value of the stock on the date of grant. The options are fully vested at the
date of grant and are exercisable for a term of five years.
The Board of Directors established the 1998 Stock Incentive Plan (the "1998
Plan"). The 1998 Plan reserved for issuance upon exercise up to 800,000 shares
of the Company's common stock.
During January 1998, the Company granted 800,000 options pursuant to its
1998 Stock Incentive Plan to employees. The options were granted at an exercise
price of $2.15625, the estimated fair market value of the Company's common stock
at the date of grant and vested immediately. These options expire in January
2003.
During January 1998, the Company granted 60,000 options outside of the
Company's stock option plan to employees. The options were granted at an
exercise price of $2.15625, the estimated fair market value of the Company's
common stock at the date of grant, and vested immediately. These options expire
in January 2003.
During February 1998, the Company granted 50,000 options outside of the
Company's stock option plan to directors. The options were granted at an
exercise price of $2.50, the estimated fair market value of the Company's common
stock at the date of grant. The options vest in increments of 6,250 options
after attendance at meetings of the Board of Directors, audit committee, and
shareholders. These options expire in February 2003. The Company recorded
$31,000 in compensation expense during 1998 related to these options.
During March 1998, the Company granted 950,000 options pursuant to its 1992
Employee Stock Option Plan to employees. The options were granted at an exercise
price of $2.41, the estimated fair market value of the Company's common stock at
the date of grant and vested immediately. Approximately 1,200,000 options
exercisable at a price of $2.00 per share granted under such plan had expired
unexercised in October 1997.
During August and September 1998, holders of previously-issued options to
purchase the Company's common stock exercised options to purchase a total of
1,091,380 shares at prices ranging from $.01 to $1.21875 per share by delivery
of cash, notes, and other common stock of the Company, resulting in a net
increase in the number of issued and outstanding shares of 925,273 for proceeds
(cash and notes) totaling approximately $819,000 as well as the delivery of
166,107 mature shares of the Company's common stock (which were cancelled and
returned to authorized but unissued shares) in lieu of cash.
The Board of Directors established the 1999 Stock Incentive Plan (the "1999
Plan") during February 1999. The 1999 Plan reserves for issuance up to 800,000
shares of the Company's common stock. The Company granted options to purchase
750,000 shares on February 24, 1999 at an exercise price of $2.00 per share
pursuant to this plan. The options vest immediately and have a term of five
years.
The Company also granted 135,000 options on February 24, 1999 to employees
and non-employees outside of the Company's stock option plans at an exercise
price of $2.00 per share. The Company also granted, on February 24, 1999,
250,000 options to employees at an exercise price of $2.00 per share pursuant to
the 1992 Plan. In addition, the two outside directors were granted 25,000
options each at an exercise price $2.00 per share pursuant to their agreements
(see Note 7). All of the aforementioned options have a five year term and are
immediately vested, except as to the outside director options which vest
according to their agreements (see Note 7).
F-31
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
In December 1999, in consideration for cancellation of certain anti-dilution
rights, the Company agreed to extend for ten months 300,000 options previously
granted to an investment banking firm at an exercise price of $4.00. The Company
recorded $40,000 in compensation expense during 1999 related to these options
which will now expire on December 31, 2000
During August and September 1999, holders of previously-issued options to
purchase the Company's common stock exercised options to purchase a total of
490,260 shares at prices ranging from $.56 to $1.06 per share by delivery of
cash, notes, and other common stock of the Company, resulting in a net increase
in the number of issued and outstanding shares of 431,079 for proceeds (cash and
notes) totaling approximately $171,000 as well as the delivery of 59,181 mature
shares valued at $177,000 of the Company's common stock (which shares were
cancelled and returned to authorized but unissued status) in lieu of cash.
During 1998, in connection with the exercise of 378,415 options by the
Company's President and CEO, the Company received a promissory note for
approximately $461,000. During 1999, in connection with the exercise of 141,334
(included in the aforementioned 490,260) options the promissory was increased by
approximately $243,000. In December 1999, the Company reduced the note
receivable by approximately $247,000, net of taxes, from a performance bonus
earned by the President and CEO. The note is due on or before August 2000 and
bears interest at an annual rate of 8.5%. The note receivable balance of
$457,000 and $461,000 at December 31, 1999 and 1998, respectively, has been
reflected as an offset to stockholders' equity in the accompanying consolidated
financial statements.
During each of the years in the three year period ended December 31, 1999,
stock option and warrant activity is as follows:
PRICE RANGE PER WEIGHTED AVERAGE
SHARES AVAILABLE SHARE EXERCISE PRICE
---------------- --------------- ----------------
Balance, January 1, 1997......................... 8,069,630 $0.01 - 8.00 $ 1.44
Granted.......................................... 930,000 1.34 - 1.54 1.37
Canceled......................................... (1,907,383) 0.56 - 2.40 1.95
Exercised........................................ (160,000) 0.01 - 1.06 0.99
---------- ------------ ------
Balance, December 31, 1997....................... 6,932,247 0.01 - 8.00 1.00
Granted.......................................... 1,860,000 2.16 - 2.50 2.29
Canceled......................................... (145,000) 3.00 3.00
Exercised........................................ (1,091,380) 0.01 - 1.22 1.03
---------- ------------ ------
Balance, December 31, 1998....................... 7,555,867 0.01 - 4.88 1.60
---------- ------------ ------
Granted.......................................... 1,485,000 2.00 - 4.00 2.40
Canceled......................................... (300,000) 4.00 4.00
Exercised........................................ (490,260) 0.56 - 1.06 1.05
---------- ------------ ------
Balance, December 31, 1999....................... 8,250,607 $0.01 - 4.88(1) $ 1.69
========== ============ ======
Exercisable at December 31, 1999................. 8,250,607 $0.01 - 4.88 $ 1.69
========== ============ ======
- ------------------------
(1) Includes options to purchase 20,000 shares of common stock at $0.01 per
share. Weighted average fair value of options granted during 1999 and 1998
was $1.00 and $1.14, respectively.
F-32
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
The following summarizes information about the Company's stock options and
warrants outstanding at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED NUMBER
REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF EXERCISE NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE DECEMBER 31, AVERAGE
PRICES DECEMBER 31, 1999 IN YEARS PRICE 1999 PRICE
- ----------------- ------------------ ---------------- -------- -------------- --------
0.01$to 0.80..... 675,000 1.00(1) $0.58 675,000 $0.58
1.06 to 1.50..... 4,195,607 1.90 1.13 4,195,607 1.13
2.00 to 2.50..... 3,020,000 3.12 2.29 3,020,000 2.29
4.00 to 4.88..... 360,000 .83(2) 4.15 360,000 4.15
--------- ---------
8,250,607 8,250,607
========= =========
- ------------------------
(1) Excludes 20,000 options with no set expiration date.
(2) Excludes 60,000 options with no set expiration date.
PRO FORMA STOCK OPTION INFORMATION
Pro forma information regarding net income is required by SFAS 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method pursuant to SFAS 123, rather than the method
pursuant to APB 25 as discussed in Note 1. The fair value of these options was
estimated at the date of grant using the Black Scholes option pricing model with
the following assumptions for the years ended December 31, 1999, 1998 and 1997:
risk free rates of between 6.5% and 7.2%; dividend yield of 0%; expected life of
the options of between 10 and 60 months; and volatility factors of the expected
market price of the Company's common stock of between 52% and 68%.
The Black Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
PRO FORMAS FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------- ---------- ---------- ----------
Net income:
As reported............................................ $6,239,000 $7,688,000 $4,694,000
Pro forma.............................................. $4,765,000 $5,611,000 $4,060,000
Net income per share, assuming dilution:
As reported............................................ $ 0.25 $ 0.33 $ 0.22
Pro forma.............................................. $ 0.19 $ 0.24 $ 0.19
F-33
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management.
During 1994 and 1995, various corporate affiliates of the Company's chief
executive officer advanced an aggregate sum of approximately $100,000 to ExCal
primarily to cover overhead expenses in connection with the maintenance of
leases and other costs associated with the Company's existing oil and gas
interests in Michigan and former interests in Ohio. In February 1996, such
advances, along with accrued interest thereon at the rate of 10% per annum, was
converted into a demand promissory note in the principal amount of $100,218
payable to the chief executive officer at the rate of 10% per annum. This note
was repaid in 1998 in its entirety.
During October 1998, the Company transferred all of its right, title and
interest in its oil and gas interests to an affiliate of its former joint
venture partner, SABAL Corp. ("SABAL"), in exchange for an assignment of
production payment in the amount of $2,500,000 (the "Production Payment"). The
Production Payment is payable out of a percentage of SABAL's net revenue
interest from oil and gas produced in its Michigan interests, as defined. The
Production Payment bears interest at 3% annually and is due and payable in its
entirety at the end of fifteen years. For as long as the Production Payment is
outstanding, the Company can convert the Production Payment into and up to 25%
of the common stock of SABAL on a fully diluted basis. The Production Payment is
collateralized by all the assets and interests of SABAL. Because of the
uncertainty of collection of the production payment, and the depressed oil
market, the Company recorded a loss in connection with this exchange of
approximately $2,735,000 (the net assets at the date of exchange), which has
been presented as a loss on disposal of discontinued operations. To the extent
that the Company realizes this asset in the future, such realization will be
flowed through discontinued operations as a change in estimate.
In connection with the aforementioned transfer, the Company has entered into
a term loan agreement with SABAL whereby the Company will loan SABAL up to
$500,000. The term loan is for a period of two years (interest only for the
first six months, and 15% per annum thereafter) and is secured by SABAL's real
and personal property and equipment related to its oil and gas interest in
Michigan and Texas. As of December 31, 1999 the Company had loaned to SABAL
approximately $398,000.
In connection with the aforementioned transfer, SABAL has promised to pay to
Biscayne Petroleum Corporation, an affiliate of the Company's President and CEO,
approximately $98,000. SABAL assumed this liability from Fleur-David
Corporation, the Company's former oil and gas operating partner. The Company has
entered into an Inter-Creditor Agreement with SABAL and others that effectively
prorates the net proceeds of any sale of assets by SABAL, other than in the
ordinary course of business, among all creditors based on the total aggregate
debt of SABAL at the time.
F-34
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The following summarizes the benefit for income taxes from continuing
operations for the years ended December 31:
1999 1998 1997
---------- ----------- -----------
Current
Federal............................................... $ 159,000 $ 114,000 $ 100,000
State................................................. 110,000 --
---------- ----------- -----------
269,000 114,000 100,000
---------- ----------- -----------
Deferred
Federal............................................... 3,678,000 (2,773,000) (1,923,000)
State................................................. -- -- --
---------- ----------- -----------
3,678,000 (2,773,000) (1,923,000)
---------- ----------- -----------
Provision (benefit) for income taxes.................... $3,947,000 $(2,659,000) $(1,823,000)
========== =========== ===========
A reconciliation of the expected statutory Federal income tax provision from
continuing operations to the benefit for income taxes for the years ended
December 31:
1999 1998 1997
---------- ----------- -----------
Provision for income taxes at a federal statutory rate
of 34%................................................ $3,720,000 $ 2,636,000 $ 976,000
Increase (reduction) in income taxes resulting from:
Changes in the valuation allowance for deferred tax
assets allocated to income tax benefit................ -- (2,825,000) (2,064,000)
Depreciation and amortization, not deductible for income
tax purposes.......................................... 148,000 148,000 148,000
Utilization of net operating loss carryforwards......... -- (2,618,000) (1,027,000)
Other................................................... 79,000 -- 144,000
---------- ----------- -----------
Provision (benefit) for income taxes.................... $3,947,000 $(2,659,000) $(1,823,000)
========== =========== ===========
At December 31, 1999 and 1998, significant components of the Company's net
deferred taxes are as follows:
1999 1998
---------- -----------
Deferred tax assets:
Net operating loss carryforwards.................. $1,178,000 $ 3,870,000
Depreciation...................................... 4,000 34,000
Deferred rent..................................... -- 4,000
AMT credit........................................ 445,000 245,000
Reserves and allowances........................... 125,000 1,037,000
---------- -----------
1,752,000 5,190,000
Less valuation allowance............................ -- --
---------- -----------
$1,752,000 $ 5,190,000
---------- -----------
Deferred tax liability--Non-deductible tax basis.... $ (943,000) $(1,130,000)
========== ===========
F-35
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The Company's valuation allowance decreased during 1998 by approximately
$4,703,000.
At December 31, 1999, the Company has federal net operating loss carry
forwards of approximately $3,464,000 for federal income tax reporting purposes
and approximately $4,365,000 for California reporting purposes, expiring through
2011 and 2002, respectively. The Tax Reform Act of 1986 includes provisions
which limit the Federal net operating loss carry forwards available for use in
any given year if certain events, including a significant change in stock
ownership, occur.
12. VIDEO LOTTERY OPERATIONS
WEST VIRGINIA
The Company derives revenue from the operation of video lottery games in the
form of net win on the gross terminal income, or the total cash deposited into a
VLT less the value of credits cleared for winning redemption tickets. Pursuant
to the Lottery Act, the Company's share of net win is fixed at 47% of the net
win after deducting an administration fee of up to 4% of gross terminal revenues
first paid to the State of West Virginia. The Company is subject to annual
licensing requirements established by the Lottery Commission; its license has
been renewed through June 2000.
Mountaineer Park offers video lottery gaming through 1,355 video lottery
terminals ("VLTs") located in the racetrack clubhouse, grandstand and Lodge of
which 955 are leased (Note 7).
A summary of video lottery gross wagers, less winning patron payouts, for
the years ended December 31 is as follows:
1999 1998 1997
------------ ------------- -------------
Total Gross Wagers................................ $373,767,000 $ 240,164,000 $ 171,138,000
Less Winning Patron Payouts....................... 278,435,000 (171,172,000) (121,951,000)
------------ ------------- -------------
Video Lottery Revenues............................ $ 95,332,000 $ 68,992,000 $ 49,187,000
============ ============= =============
The Company pays an administrative fee to the Lottery Commission not to
exceed 4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds including two funds which directly or
indirectly benefit the Company. These amounts are included in cost of video
lottery terminals in the consolidated statements of operations.
F-36
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. VIDEO LOTTERY OPERATIONS (CONTINUED)
Amounts contributed to these funds for the years ended December 31 were as
follows:
1999 1998 1997
----------- ----------- -----------
HBPA purses........................................... $14,703,000 $10,511,000 $ 7,480,000
Company pension plan.................................. 474,000 339,000 241,000
West Virginia general fund............................ 28,457,000 20,343,000 14,476,000
West Virginia Breeders' Classic fund.................. 949,000 678,000 483,000
Hancock County general fund........................... 1,897,000 1,356,000 965,000
West Virginia tourism promotion fund.................. 2,846,000 2,034,000 1,448,000
Miscellaneous state projects.......................... 949,000 678,000 482,000
----------- ----------- -----------
$50,275,000 $35,939,000 $25,575,000
=========== =========== ===========
NEVADA
During the year ending December 31, 1999, the Company recorded approximately
$621,000 in gaming revenue from its Nevada properties.
13. RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Race Track and
Gaming Resort. Under West Virginia Horse Racing Law, the Company's commission
revenue is a designated portion of the parimutuel wagering handle (amounts
wagered).
The Company is subject to annual licensing requirements established by the
Racing Commission. The Company's license was renewed in December 1999, and will
remain effective through December 2000.
On August 15, 1997, Mountaineer Park executed a new agreement with the HBPA,
the exclusive authorized bargaining representative for all thoroughbred horse
owners who participate in live races at Mountaineer Park. Mountaineer Park
contributes all purse funds earned by such horse owners, as well as compensation
to the HBPA in an amount equal to 15.5% of the amount paid for purses, from
proceeds of its live and simulcast racing and video lottery operations.
Mountaineer Park is required to conduct a minimum of 210 live racing events
annually during the term of the agreement, down from a minimum threshold of 220
days under the prior contract. Also, the minimum daily purse payment will
increase from $22,500 under the prior agreement to $30,000. The new contract,
which expires on January 1, 2001, contains no other material changes from the
prior agreement.
Mountaineer Park's labor agreement with approximately 50 mutuel and 9 video
lottery employees has been extended until November 30, 2002.
The Company's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer Park
and on races conducted at other "host" racetracks and broadcast live (i.e.
import simulcast) at Mountaineer Park. In parimutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
pre-set odds. The dollars wagered form a pool of funds from which winnings are
paid based on odds determined solely by the wagering activity. The racetrack
acts as a stakeholder for the wagering patrons and deducts from the amounts
wagered a "take-out" or gross commission, from which the racetrack pays state
and county taxes and racing purses. The Company's parimutuel commission rates
are fixed as a percentage of the total
F-37
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RACING OPERATIONS (CONTINUED)
handle or amounts wagered. With respect to Mountaineer Park's live racing
operations, such percentage is fixed by West Virginia law at three levels,
17.25%, 19% and 25%, depending on the complexity of the wager. The lower rate
applies to wagering pools involving only win, place and show wagers, while the
higher rates apply to pools involving wagers on specified multiple events, such
as trifecta, quinella and perfecta wagers. With respect to simulcast racing
operations, the Company generally has opted to apply the commission rates
imposed by the jurisdictions of the host racetracks, as it may do with the
consent of the Racing Commission. Such rates vary with each jurisdiction and may
be more or less favorable than the live racing commission rates. Out of its
gross commissions, the Company is required to distribute fixed percentages to
its fund for the payment of regular purses (the "regular purse fund"), the state
of West Virginia and Hancock County and, with respect to commissions derived
from simulcast operations, Mountaineer Park's employee pension plan. After
deducting state and county taxes and, with respect to simulcast commission,
simulcast fees and expenses and employee pension plan contributions,
approximately one-half of the remainder of the commissions are payable to the
regular purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
The Company pays purses into a fund established for the benefit of
participating horsemen for each day on which live racing is conducted. The
Company has a contractual obligation to pay the horsemen a percentage (the
Earned Commission) of the live and simulcast (satellite off-track wagering) race
handle less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues).
A summary of the parimutuel handle and deductions, including satellite
off-track wagering, for the years ended December 31 are as follows:
1999 1998 1997
------------ ------------ ------------
Total parimutuel handle............................. $ 41,073,000 $ 43,811,000 $ 40,975,000
Less patron's winning tickets and breakage.......... (32,486,000) (34,661,000) (32,464,000)
------------ ------------ ------------
8,587,000 9,150,000 8,511,000
Less:
Parimutuel tax paid to:
West Virginia and Hancock County.................. (485,000) (494,000) (493,000)
Purses and Horsemen's Association................. (3,598,000) (3,860,000) (3,581,000)
------------ ------------ ------------
$ 4,504,000 $ 4,796,000 $ 4,437,000
============ ============ ============
14. SUBSEQUENT EVENTS
LINE OF CREDIT
On January 27, 2000, Mountaineer Park, Inc. ("Mountaineer"), a wholly-owned
subsidiary of MTR Gaming Group, Inc. (the "Company"), entered into a new three
year senior line of credit for the principal amount of up to $8 million with PNC
Leasing, LLC ("PNC"), a subsidiary of PNC Bank, National Association (the "PNC
Financing"), effective January 31, 2000. The proceeds of this line of credit are
to be
F-38
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
used to lease equipment for video lottery operations at the Mountaineer
Racetrack and Gaming Resort in West Virginia. The initial draw at closing was
$2,792,000 and has been applied to the sale/leaseback of 400 video lottery
machines previously purchased by Mountaineer (see Note 6). The interest rate for
the PNC Financing will be fixed at the time of each draw, and is tied to the
prime rate at the Federal Reserve Bank of Cleveland on that day, plus a margin
of 1%. The interest rate for the $2,792,000 drawn at closing was 9.969%.
The indebtedness under the PNC Financing is secured by the equipment leased
with the proceeds of the financing and is guaranteed by the Company. The PNC
Financing has been approved by the West Virginia Lottery Commission and is
permitted by a carve-out for equipment financing in the Company's existing
financing arrangements with its senior secured lender, Wells Fargo Bank,
National Association. Mountaineer may request additional draws until December
31, 2000, subject to PNC's discretion. The master lease and related leasing
documents evidencing the PNC Financing contain customary affirmative and
negative covenants, events of default and other ordinary leasing provisions.
STOCK OPTIONS
The Board of Directors, subject to the approval of the Company's
shareholders, established the 2000 Stock Incentive Plan (the "2000 Plan"). The
2000 Plan reserves for issuance 825,000 shares of the Company's common stock.
Subject to shareholder approval of the 2000 Plan, on March 13, 2000 the Company
granted to seventeen employees and consultants a total of 795,000 options at an
exercise price of $2.50 per share pursuant to the 2000 Plan.
The Company also granted to employees and non-employees outside of the
Company's stock option plans 220,000 options on March 13, 2000 at an exercise
price of $2.50 per share. In addition, the two outside directors were granted
25,000 options each at an exercise price of $2.50 per share pursuant to their
agreements (see Note 7). All of the aforementioned options are non-qualified
stock options, were issued with exercise prices which were at market, have a
ten-year term, and are immediately vested, except as to the outside director
options, which vest according to their agreements (see Note 7).
F-39