Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
COMMISSION FILE NO. 0-20508
------------------------
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)
------------------------
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
------------------------
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 23, 2001(based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $116,594,630.
The Company's common stock outstanding at March 23, 2001 was 22,208,501
shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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................................................ 2
Lodge Facilities and Speakeasy Gaming Saloon.............. 2
Gaming Facilities......................................... 3
Recreational Facilities................................... 3
Trailer Park.............................................. 3
Undeveloped Land.......................................... 3
Current Operations at Mountaineer Park.................... 4
Racing Operations......................................... 4
Gaming Operations......................................... 5
Lodging, Food and Beverage Operations..................... 5
Ramada Inn and Speedway Casino -- North Las Vegas,
Nevada.................................................. 6
Ramada Inn and Speakeasy Casino -- Reno, Nevada........... 6
Operation of the Nevada Properties/Gaming Licensing....... 6
Business Strategy......................................... 7
Develop and Market Mountaineer Park as a Destination
Resort and Diversified Entertainment Facility........... 7
Increase Capacity through Expansion of Facilities and
Increasing Gaming Count................................. 7
Improve Financial Results of Racing Operations at
Mountaineer Park........................................ 8
Create and Cultivate Niche Market for Nevada Properties... 8
Competition............................................... 9
Employees................................................. 10
Regulation and Licensing.................................. 10
West Virginia Racing and Gaming Regulation................ 10
Nevada Gaming Regulation.................................. 12
Impact of Resort Hotel Legislation........................ 16
Compliance with Other Laws................................ 16
Restrictions on Share Ownership and Transfer.............. 16
Application of Environmental Regulations.................. 16
Discontinued Operations................................... 17
ITEM 2. PROPERTIES.......................................... 17
Hotel, Gaming, Racing and Other Property.................. 17
Equipment Leases.......................................... 18
ITEM 3. LEGAL PROCEEDINGS................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 18
ITEM 5.MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 18
ITEM 6. SELECTED FINANCIAL DATA............................. 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 19
Results of Operations..................................... 19
Twelve Months Ended December 31, 2000 Compared to Twelve
Month Ended December 31. 1999........................... 20
Gaming Operations......................................... 20
Parimutuel Commissions.................................... 21
Lodging, Food and Beverage................................ 22
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, 1999 Compared to Twelve
Months Ended December 31, 1998.......................... 25
Gaming Operations......................................... 26
Parimutuel Commissions.................................... 27
Lodging, Food and Beverage................................ 27
Other Operating Revenues.................................. 27
Operating Costs........................................... 28
Gaming Operating Costs.................................... 28
Parimutuel Commissions Operating Costs.................... 29
Lodging, Food and Beverage Operating Costs................ 29
Costs of Other Operating Revenues......................... 30
Marketing and Promotions Expense.......................... 30
General and Administrative Expense and Interest........... 30
Liquidity and Sources of Capital.......................... 31
Capital Improvements...................................... 31
Outstanding Options and Warrants.......................... 32
Commitments and Contingencies............................. 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.............. 34
Business Experience....................................... 34
ITEM 11. EXECUTIVE COMPENSATION............................. 36
OPTION GRANTS IN 2000..................................... 37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END OPTION VALUES.................................. 37
Section 16(a) Beneficial Ownership Reporting Compliance... 37
Employment Agreements..................................... 37
Compensation of Directors................................. 39
Compensation Committee Interlocks and Insider
Participation........................................... 39
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM
8-K....................................................... 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly owned subsidiaries, owns and operates the
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. During 1998, the Company divested its oil and gas operations and
since that time has operated only in the gaming and entertainment business.
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, weather or road conditions
limiting access to the Company's properties, 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 from time to time in the Company's Securities and Exchange
Commission filings. Further, the Company has no obligation and assumes no
obligation to update any forward-looking statements.
1
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 1,905 gaming machines as part of an
entertainment complex and destination resort with hotel, dining and lounge
facilities, entertainment and event center, health spa and outdoor activities
including golf, 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 1,311 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; approximately 175 acres
comprise Mountaineer's Woodview Golf Course located approximately seven miles
south of the Mountaineer complex in the town of New Cumberland; and the
remainder of the acreage is available for future development.
Mountaineer Park offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. In August of 2000, Mountaineer Park also began exporting its signal to
other outlets in the United States and the Caribbean. Those outlets
(approximately 196 off-track wagering parlors thus far) simulcast Mountaineer
Park's races and conduct parimutuel wagering. Mountaineer Park receives a
negotiated fee in the form of either a percentage of the amount wagered or a
flat fee per day. Mountaineer Park also conducts parimutuel wagering on horse
and greyhound dog racing simulcast via closed circuit television 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. 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 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. The 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.
The Lodge's Gatsby Dining Room seats 125 patrons for casual dining. The Lodge is
also the site of the Speakeasy Gaming Saloon and the Downtown Chicago Gaming
Room. Encompassing 59,000 square feet (including a 32,000 square foot addition
that opened in August of 2000), the Speakeasy, together with adjacent smaller
rooms, houses over 70% of Mountaineer Park's 1,905 gaming machines, extensive
off-track wagering facilities and Big Al's Deli. The Lodge parking lots have a
combined capacity for approximately 2,300 vehicles.
2
GAMING FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers gaming through approximately 1,905 slot machines located in the racetrack
clubhouse, grandstand and Lodge. Of these machines, 873 machines are ticket
machines while 1,032 are the traditional coin drop, casino style slot machines.
Mountaineer Park owns 1,304 machines and leases the remaining 601. The racetrack
houses 30% of the machines 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 70% primarily in the Speakeasy Gaming Saloon and Downtown
Chicago Gaming Room. The gaming machines allow a player to select from several
game themes, including up to four versions of draw poker, blackjack, two
versions of keno, and various classic casino slot machine games.
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.
In January of 1999, Mountaineer Park purchased the Woodview Golf Course, an
eighteen-hole par 71 course measuring approximately 6,300 yards (subsequently
expanded to 6,550 yards) on a 175-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. See "Business Strategy"; "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Improvements."
In August of 2000, Mountaineer Park opened the Harvey E. Arneault Memorial
Arena and Events Centre. Known as the "Harv," this 65,000 square foot facility
is a tent-like fabric structure that seats approximately 5,000 patrons for
concerts, boxing matches and other entertainment offerings. The Harv has a
state-of-the-art stage, permanent bleachers and food and beverage concessions.
See "Business Strategy"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Improvements."
In February of 2001, Mountaineer Park opened its Spa and Fitness Centre.
Also a fabric structure, this 12,000 square foot facility has a full complement
of weight training and cardiovascular equipment as well as aerobics classes, a
health bar, locker rooms with steam and sauna rooms, a hair and nail salon and
treatment rooms for massage, facials and tanning. The spa offers both annual and
day memberships. 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. Mountaineer Park maintains the road and grounds,
removes refuse and provides water and sewage hook-ups. The tenants pay all
utility expenses.
UNDEVELOPED LAND
Mountaineer Park owns, as part of its 1,311 acres, contiguous tracts of 375
acres, 350 acres, 110 acres and 69 acres that are largely undeveloped.
Mountaineer Park has entered into contracts to acquire approximately 400
additional contiguous acres. Management has no definitive plans to develop such
property. Mountaineer Park also owns a 69-acre parcel in New Cumberland, West
Virginia on
3
which it intends to develop an RV park. See "Business Strategy"; and "Liquidity
and Sources of Capital."
CURRENT OPERATIONS AT MOUNTAINEER PARK
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and gaming operations and, to a lesser extent, its lodging, food
and beverage operations. Additional revenues are generated from ticket sales for
concerts and boxing events, ATM access fees and from greens fees, spa
memberships 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 2000, and will remain effective through
December 2001.
The Company's revenue from racing operations is derived mainly from three
sources: commissions earned on parimutuel wagering on live races held at
Mountaineer Park; commissions earmed on races conducted at other "host"
racetracks and broadcast live (i.e., import simulcast) at Mountaineer Park; and,
since August 11, 2000, commissions earned or fees paid to Mountaineer Park by
other racetracks and off track wagering facilities that broadcast Mountaineer
Park's races live (i.e., export simulcast). 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 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 import simulcast racing operations, Mountaineer Park 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. With respect to export
simulcast racing operations, "guest" tracks and off track wagering outlets pay
"host" fees to Mountaineer Park that average 3% of the handle wagered on
Mountaineer Park's live races. Casinos and off track wagering facilities in
Nevada currently receive Mountaineer Park's live race signal from a disseminator
to whom Mountaineer Park pays a fee. The guest outlets then pay a flat daily fee
to Mountaineer Park. Out of its gross host fees, Mountaineer Park distributes a
fixed percentage to its fund for payment of regular purses and to Mountaineer
Park's employee pension plan. After deducting the amount due from the Horsemen
for capital improvements, approximately one-half of the remainder of the
commissions is payable to the 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.
4
GAMING OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 2000 for a period of one
year.
The Company derives revenue from the operation of gaming in the form of net
win on the gross terminal income, or the total cash deposited into a machine
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 1,304 machines and leases a total of 601 machines from four
manufacturers. The leases covering the leased machines provide for a fixed
monthly rental.
In June of 1998, the Lottery Act was amended to permit Mountaineer Park to
change the ratio of gaming machines 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 machines, at such time, from 1,000 to 1,200 with
800 terminals in the Lodge and 400 in the racetrack building.
In June of 1999, the Lottery Act was again amended to permit the use of
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
machines in several networks or "banks" located in the Speakeasy and the
Riverside Gaming Terrace. In anticipation of the addition of progressive games,
Mountaineer Park obtained regulatory approval to increase the number of slots
from 1,200 to 1,355. In the fourth quarter of 2000, Mountaineer Park eliminated
its progressive games because the available games proved unpopular. Mountaineer
Park intends to implement progressive games again when new games are approved
for use in West Virginia.
Mountaineer Park currently operates approximately 1,905 gaming machines, of
which 1,032 are coin drop machines.
In March of 2000, the Lottery Act was again amended to remove the 2:1 ratio
limitation for slots at the Lodge versus the racetrack building, thus allowing
additional slots at the Lodge without regard to the number 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 gaming
patrons 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 gaming players and, therefore, are designed to offer familiar menus
with moderate pricing in a comfortable atmosphere.
5
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 Restaurant, which seats 125 patrons for
casual dining. Food and beverages are also available at the Lodge in Big Al's
Delis located in the Speakeasy Gaming Saloon, the Downtown Chicago Gaming Room
and in the Iron Horse Lounge. Table and barstool seating is available in the
Speakeasy Gaming Saloon and the Iron Horse Lounge for the 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 gaming 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, and constructed 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 past Downtown Las
Vegas, the Las Vegas "strip" and into the Los Angeles Basin. The Speedway
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 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
housed in a separate building.
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING
In September of 1999, the Nevada Gaming Commission issued the Company's
Nevada subsidiaries 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 336 slot machines, eight blackjack tables, a craps table and one
roulette wheel at the Speedway Property and approximately 266 slot machines and
five blackjack tables at the Reno Property.
6
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 gaming and/or parimutuel businesses
(with a particular emphasis on such opportunities in states bordering West
Virginia.
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 $77 million in expansion, renovation, and refurbishment of
Mountaineer Park and has incrementally increased the number of gaming machines
from 165 at the time of acquisition to approximately 1,905 in December of 2000
as legislative developments either permitted additional gaming machines 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 GAMING
COUNT. Mountaineer Park's successful marketing, enhanced facilities and improved
racing and gaming 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 gaming revenues have regularly produced results
previously seen only on weekends; and winter months (notwithstanding the
unusually harsh weather from November of 2000 through February of 2001) are
producing results previously seen only in summer months. Indeed, gaming revenue
for the month of February 2001 was $10.5 million compared to $11.5 million in
June of 2000. In order to capitalize on this momentum, in 2000 the Company began
a four-phased expansion. Phase One of the expansion included:
- Construction of the 60,000 square foot arena for concerts, boxing, and
other events (such as billiard tournaments, car shows and charitable
bingo) to drive gaming traffic (opened August of 2000).
- Expansion of the Speakeasy Gaming Saloon by approximately 32,000 square
feet to house 550 additional slots (opened August of 2000).
- Commencement of export simulcasting after making necessary capital
improvements, which will create new revenue source (opened August of
2000).
- Construction of 12,000 square foot full service spa and fitness center as
an amenity for hotel guests as well as for the local community (opened
February of 2001).
Phase Two of the expansion will include:
- Addition of approximately 220 hotel rooms and enclosed swimming pool to
satisfy demand at peak times and to permit marketing of convention
facilities and golf packages during off-peak times (scheduled for
completion by end of fiscal 2001).
- Further expansion of the Speakeasy Gaming Saloon by approximately 20,000
square feet to house, subject to regulatory approval, approximately 595
additional slots, bringing machine count to approximately 2,500 (scheduled
for completion by July of 2001).
- Construct convention facilities (approximately 25,000 square feet) to
allow promotion of group sales and to host special events (scheduled for
completion in August of 2001).
7
- Implement state-of-the-art automated player tracking to allow more
efficient use of marketing and promotions dollars (installation expected
by May of 2001).
Additional phases of the development, which are not scheduled for fiscal
2001 but remain contemplated as cash flow and available financing permit,
include constructing (or having third party construct and own) a new
championship golf course and golf training facility on undeveloped acreage and
developing housing, equestrian trails, and a river front shopping village.
Management's strategy is to implement the expansion plans as part of a plan
to create a destination resort that will both expand the Company's target market
and further distinguish Mountaineer Park from competitors whose facilities may
have some but not all of the entertainment venues available at Mountaineer Park.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Sources of Capital."
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 continued growth of
Mountaineer Park's new export simulcasting business.
Management believes that the enhanced quality of racehorses should improve
the Company's prospects in export simulcasting. The commencement of export
simulcasting activity has not only created a new source of revenue but the
related increase in gross dollars wagered on Mountaineer Park's live races has
also improved the quality of racing as a wagering product, as a greater and more
diverse wagering pool lessens the impact a particular wager will have on the
pay- off odds. Management continues to believe that the improvement of the
racing product through increasing average daily purses (though not necessarily
in the winter months) and sponsoring increased stakes races as part of the
development of the export simulcast business, together with cross marketing of
parimutuel wagering to slot patrons, will result in increased on-track handle as
well. 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 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 and a distinct
auto-themed dining area. With its renovated hotel and new casino and bandstand,
the Speedway Property is well positioned to gain market share 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 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 has been to market this property as an upscale spot for
locals and convenient hotel for tourists and travelers doing business in
downtown Reno. Management has also been marketing the property's 7,900 square
foot convention facility to drive casino traffic. Legislation passed in March of
2000 in California to permit Indian tribes to conduct casino gaming, however,
represents a threat to the tourist market. To mitigate the effect of this new
competition, management has begun courting the locals market through the local
radio and print media. As a second means of improving the return on the
Company's investment, management is studying the feasibility of reducing the
Company's capital exposure through the conversion and sale of some or all of the
hotel's guest rooms as time share units.
8
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 gaming 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.
Casinos in Canada have likewise recently begun advertising in Mountaineer Park's
target markets.
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 and
Northfield Park, 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 and Northfield conduct 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. Since commencing export simulcasting, Mountaineer Park also
completes with racetracks across the country to have its signal carried by
off-track wagering parlors. 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, Atlantic City, and Canada 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. To the extent that Pennsylvania, Ohio or West
Virginia legalizes any forms of casino gaming, slot machines or video lottery
gaming, Mountaineer Park's gaming 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.
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, the Speedway Property 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
9
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. The Nevada properties, particularly the
Reno Property, could be adversely affected as a result of this increased
competition.
EMPLOYEES
As of December 31, 2000, the Company had approximately 1,400 employees
(1,100 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 slots in West Virginia (the "Lottery
Act"). The Company's live racing, pari-mutuel wagering and 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.
WEST VIRGINIA RACING AND GAMING REGULATION. 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.
The Company's export simulcast activities that occur outside of West
Virginia are subject to regulation by other state racing commissions, as well as
the provisions of the Federal Interstate Horse
10
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 gaming 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 gaming 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 gaming operations. The Company is party to
the requisite agreement with the Mountaineer Park Horsemen, which expires on
January 1, 2004. 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 gaming. 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 gaming machines, the specification of the
machines 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 gaming machines. The Lottery Commission's denial of a
request to increase the number of machines 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
gaming operation to ensure their integrity and absence of any criminal
involvement.
The conduct of 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. Gaming was 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 gaming, as well as persons
who service and repair gaming 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
11
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. Accordingly, Mountaineer Park may operate
video lottery machines at the Lodge as well as the racetrack.
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 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
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 affected.
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
12
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, its Nevada subsidiaries and certain officers and directors are required
to be licensed or found suitable as operators and owners 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 that the Nevada Commission may require. No person may become a
stockholder of, or receive any percentage of profits from, the Company's Nevada
subsidiaries 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 or
approvals to engage in gaming activities at the Nevada Properties. With respect
to the licenses of the Nevada subsidiaries, 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 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.
13
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 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
14
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 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
15
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 adopted a 201-room
requirement for resort hotels. 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. Moreover, the Reno Property has more than 201 rooms and
therefore, under current ordinance, would qualify as a resort hotel. 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
material 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 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. 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. Failure to comply with such laws could result
16
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. At December 31, 2000, the
outstanding balance on such loan was $329,000, and the Company is no longer
obligated to advance additional sums. 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 slot machine gaming, off-track wagering, dining and lounge, spa and
event facilities as well as facilities for swimming, tennis and other outdoor
activities covering approximately 1,143 acres (including approximately 912
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 175-acre tract including the Woodview Golf Course in New
Cumberland, West Virginia, a 69-acre tract in New Cumberland slated for an RV
park and has contracts to purchase approximately 400 additional acres near the
resort.
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 Speedway 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-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 Amended and Restated Credit Agreement dated as of August 15,
2000 among Mountaineer Park, Inc., Speakeasy Las Vegas, Speakeasy Reno, the
Company and Wells Fargo Bank, PNC Bank, N.A., National City Bank, and the Bank
of Scotland.
17
EQUIPMENT LEASES
At December 31, 2000, in connection with gaming and racing operations,
Mountaineer Park leased 601 gaming machines, a totalisator system, video tape
and closed circuit television systems and other equipment required for its
operations. At December 31, 2000, Speakeasy Las Vegas leased 219 slot machines,
outdoor signs, and coin-operated telephones required for its operations. At
December 31, 2000, Speakeasy Reno leased 178 slot machines, outdoor signs, a
dishwashing machine and coin operated telephones required for its business
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits, which have
arisen in the ordinary course of operating their businesses. The liability, if
any, arising from settlements or unfavorable outcomes of such lawsuits is
presently unknown.
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 NASDAQ National Market under the
symbol "MNTG". On March 23, 2001, the closing trade price for the Company's
Common Stock was $5.25. As of March 23, 2001, there were approximately 779
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. Under the Company's and its
lenders' credit agreement, the Company is prohibited from paying any dividends
without the lenders' consent.
The following table sets forth the range of high and low bid price
quotations for the Common Stock for the two fiscal years ended December 31, 1999
and 2000 and for the period of January 1, 2001 through March 23, 2001. These
quotes are believed to be 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, 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.......................................... 3.375 2.125
Second Quarter......................................... 5.125 2.25
Third Quarter.......................................... 9.0312 4.9375
Fourth Quarter......................................... 8.1875 4.00
Year Ending December 31, 2001
First Quarter (January 1, 2001 through March 23,
2001)................................................ 7.50 4.34375
18
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 2000, 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 YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $170,574,000 $113,421,000 $83,110,000 $60,138,000 $40,204,000
Income from continuing
operations................ 15,061,000 6,995,000 10,423,000 4,694,000 1,155,000
Income per share from
continuing operations
Basic....................... .69 .33 .51 .24 .06
Assuming dilution........... .59 .28 .44 .22 .06
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............. 12,311,000 1,419,000 12,457,000 9,785,000 3,897,000
Current Assets.............. 20,912,000 13,161,000 15,016,000 12,884,000 7,016,000
Current Liabilities......... 8,601,000 11,742,000 2,559,000 3,099,000 3,119,000
Total assets--continuing
operations................ 115,685,000 69,559,000 59,737,000 38,285,000 28,262,000
Net assets--discontinued
operations................ -- -- -- 2,616,000 2,616,000
Long-term obligations
(including capital
leases)................... 59,870,000 26,409,000 33,988,000 21,559,000 16,230,000
Total Liabilities........... 70,237,000 39,850,000 36,547,000 25,788,000 20,612,000
Total Stockholders'
Equity.................... 45,448,000 29,709,000 23,190,000 15,113,000 10,266,000
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
19
fourth quarter of 1999, the Company expects the financial performance of those
properties to improve as well.
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1999
Total revenues increased by $57.2 million from 1999 to 2000, an increase of
50.4%. Approximately $46.3 million of the increase was produced by gaming
operations at Mountaineer Park. Mountaineer Park's revenue from parimutuel
commissions increased by $1.3 million, or 29.6%; its lodging revenues increased
by $120,000, or 7.6%; food and beverage revenues increased by $1.1 million or
16.5% to $7.4 million; and other revenues increased by $627,000 or 25.4%.
The Nevada Properties contributed $10,811,000 in revenues in the year ended
December 31, 2000, a $7.6 million or 235.2% increase from revenues of $3,225,000
for the year ended December 31, 1999. 2000 was the first full year of gaming
operations for the Nevada Properties. 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 2000 was $6.2 million. The sources of the
remaining revenues for 2000 were $2.3 million from lodging (a $400,000 increase
over 1999), $2.1 million from food and beverage ($1.5 million increase from
1999) and $217,000 in other income.
GAMING OPERATIONS
Revenues from gaming operations increased 54.1% from $96.0 million in 1999
to $147.9 million in 2000. Management attributes the dramatic increase to the
following factors: (1) the increase in machine count from 1,355 to 1,905 by the
opening of the new Downtown Chicago Speakeasy Gaming Room in August of 2000;
(2) increases in foot traffic driven by new amenities as Mountaineer Park
becomes a destination resort; (3) the increasing contributions of gaming
revenues from the Nevada properties; (4) continued aggressive marketing and
(5) the growing popularity of our coin drop mechanical reel slot machines.
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 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. In 2000, the average daily win per coin drop machine was $312 compared
to $204 for other machines.
For the twelve months ended December 31, 2000, average daily net win for the
track-based gaming machines was $137 (including $0 for non-racing days when
those gaming rooms were closed), compared to $305 earned on the Lodge-based
terminals for a facility-wide average of $247 per machine per day. A summary of
the video lottery gross wagers less patron payouts ("net win") for the twelve
months ended December 31, 2000 and 1999 is as follows:
TWELVE MONTHS ENDED
DECEMBER 31
------------------------------
2000 1999
-------------- -------------
Total gross wagers............................. $1,028,786,000 $ 373,767,000
Less patron payouts............................ $ (887,141,000) $(278,435,000)
-------------- -------------
Revenue--video lottery operations.............. $ 141,645,000 $ 95,332,000
============== =============
Average daily net win per terminal (WV)........ $247 $200
============== =============
20
Since October 1, 1999, the Company has operated gaming at its two Nevada
Properties. The Speedway Property had gaming revenues of $4,244,000 for the year
ending December 31, 2000. The Reno Property's gaming revenues were $2.0 million
for the same period. The Company believes that with a more aggressive
advertising campaign and the building of a customer base, these amounts will
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.
Parimutuel commissions for the twelve months ended December 31, 2000 and
1999 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Live racing parimutuel handle...................... $19,115,000 $19,824,000
Simulcast racing parimutuel handle................. 22,969,000 21,249,000
Less patrons' winning tickets...................... (33,231,000) (32,486,000)
----------- -----------
8,853,000 8,587,000
State and county parimutuel tax.................... (500,000) (485,000)
Purses and Horsemen's Association.................. (3,688,000) (3,598,000)
----------- -----------
Revenues--parimutuel commissions................... 4,665,000 4,504,000
Revenues--export simulcast......................... 1,172,000 --
----------- -----------
Revenues--parimutuel............................... $ 5,837,000 $ 4,504,000
=========== ===========
Because of the 32.2% increase in the average daily purses (from $83,750 in
1999 to $110,700 in 2000), increasing the number of live race days from the
mandated 210 days to 220 days, and the commencement of export simulcasting,
total revenues for parimutuel commissions for the year ending December 31, 2000
increased 29.6% in comparison to 1999. Live racing handle decreased 3.6% to
$19.1 million in 2000 from $19.8 million in 1999. Simulcast handle in 2000
increased by $1.7 million (8.1%) to $23.0 million in comparison to the same
period in 1999. Commissions for export simulcast, implemented on August 11,
2001, were $1.2 million. Management attributes the increase in parimutuel
revenue largely to advent of exporting of the simulcast signal and the
additional 10 live racing days.
To date, the results of export simulcasting have outpaced management's
expectations. Management expected average daily handle including export
simulcast of $250,000 to $300,000 during a ramp up period. During the fourth
quarter of 2000, the average daily handle was in fact $481,000. For the week
ending December 27, 2000, the daily average handle for export simulcast was
$776,000. Accordingly, management is cautiously optimistic that its export
simulcast business will continue to grow and that results from racing operations
will improve materially. The commencement of export simulcasting did involve
substantial capital improvements (approximately $4-5 million). In December of
1998,
21
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 Racing Commission then approved the cost sharing
agreement. Accordingly, the Company commenced the exporting simulcasting signals
on August 11, 2000. See "Operating Costs," "Parimutuel Commission Operating
Costs," and "Liquidity and Sources of Capital."
LODGING, FOOD AND BEVERAGE
For the year ended December 31, 2000, revenues from lodging, food and
beverage were $13.5 million, which represents an increase of $3 million or 29.0%
compared to revenues of $10.4 million for the same period in 1999. Company wide,
restaurant, bar and concession facilities produced $2.5 million of the revenue
increase, while lodge revenues increased $460,000. At Mountaineer Park, food and
beverage revenues increased $1.1 million to $7.4 million in 2000. 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 larger patron volume. Of the $3.0 million increase in food,
beverage and lodging revenue, 60% or $1.8 million can be attributed to the
Nevada Properties.
OTHER OPERATING REVENUES
Other revenues increased by $854,000, or 33.7% from 1999 to 2000. 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. Due to the opening of the "Harv", the
entertainment schedules was expanded which caused a $232,000 increase in ticket
sales in 2000 to $502,000. Revenues from ATM service fees were $668,000 in 2000
compared to $363,000 in 1999. Upon opening the new Downtown Chicago Gaming Room,
four additional ATM machines were installed to handle the resulting increase in
patronage. Also, commissions from the sale of West Virginia Lottery tickets
increased by $53,000 to $151,000 in 2000.
OPERATING COSTS
The Company's $57.2 million or 50.4% increase in revenues was accompanied by
higher total costs, as directly related expenses increased by $36.3 million or
49.3% to $109.9 million in 2000 compared to 1999. Approximately $29.8 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
$1.1 million, while cost of lodging and food and beverage increased by
$4.2 million. Of the 44.2% increase in the cost of food and beverage and
lodging, $2.3 million can be attributed to the Nevada Properties. The cost of
other income increased by $1.1 million in 2000 to $3.6 million. The increase is
due primarily to higher operating costs of the Harv, which is a larger facility
that enables Mountaineer Park to attract more popular (and therefore more
expensive) entertainers.
22
Operating Costs and gross profits earned from operations for the
twelve-month periods ended December 31, 2000 and 1999 are as follows:
YEARS ENDED
DECEMBER 31
--------------------------
2000 1999
------------ -----------
Operating Costs
Gaming............................................ $ 86,275,000 $56,431,000
Parimutuel Commissions............................ 6,410,000 5,300,000
Lodging, Food and Beverage........................ 13,612,000 9,441,000
Other............................................. 3,562,000 2,425,000
------------ -----------
Total Operating Costs........................... $109,859,000 $73,597,000
============ ===========
YEARS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Gross Profit (Loss)
Gaming............................................. $61,615,000 $39,521,000
Parimutuel Commissions............................. (573,000) (796,000)
Lodging, Food and Beverage......................... (152,000) 991,000
Other.............................................. (175,000) 108,000
----------- -----------
Total Gross Profit (Loss)........................ $60,715,000 $39,824,000
=========== ===========
GAMING OPERATING COSTS
Costs of gaming revenue for 2000 increased by $29.8 million or 52.9% from
$56.4 million to $86.3 million compared to the year ended December 31, 1999. The
increase is in proportion to the 54.1% increase in revenue. Costs of gaming
revenue in West Virginia increased by $26.1 million or 47.1% to $81.6 million in
2000, reflecting an of $24.8 million in statutory expenses directly related to
the 48.6% increase in gaming revenues. See Note 12 of the Consolidated Financial
Statements. Gaming machine lease expense decreased by $694,000 in comparison to
1999 primarily because of a change from operating leases to capital leases.
Wages and benefits as well as supplies expense increased from 1999 to 2000 by
$1.7 million 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 $4.7 million of gaming expense in Nevada in 2000, the first
full 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:
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Employee Pension Fund.............................. $ 700,000 $ 474,000
Horseman's Purse Fund.............................. 21,695,000 14,703,000
----------- -----------
Subtotal......................................... 22,395,000 15,177,000
State of West Virginia............................. 41,990,000 28,457,000
Tourism Promotion Fund............................. 4,199,000 2,846,000
Hancock County..................................... 2,799,000 1,897,000
Stakes Races....................................... 1,400,000 949,000
Miscellaneous State Projects....................... 1,400,000 949,000
----------- -----------
Total............................................ $74,183,000 $50,275,000
=========== ===========
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel operations increased by $1.1 million to approximately $6.4 million in
2000. Costs that can be directly linked to export simulcasting accounted for
$678,000 of this increase. Also due to the demand for our signal, the racing
schedule was extended to 220 days. This caused a related increase in cost of
payroll and benefits of approximately $150,000. Purse expense (consisting of
statutorily determined percentages of live racing handle) decreased by $42,000,
or 3.7%, to $1.9 million in 2000, which is consistent with the 3.6% decrease in
live handle. (Additional contributions to racing purses equal to 15.5% of net
win from video lottery operations as required by statute are charged to gaming
operations.) 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
$200,000 to $2.4 million in 2000 consistent with the 8.1% increase in
simulcasting wagers. Parimutuel commissions revenue is reported net of these
expenses in the Consolidated Statement of Operations.
Exclusive of the costs of the expanded racing schedule, direct and indirect
wages and employee benefits attributable to racing operations increased by
$134,000 to approximately $3.5 million in 2000 due to expanded hours of OTB
operations trackside and a contractual increase in salaries.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$9.4 million in 1999 to $13.6 million in 2000. Of the $4.2 million increase in
expenses, $2.3 million is attributable to the Nevada Properties. Company wide,
food and beverage direct costs increased by $3.7 million to $10.5 million for a
loss of $1.1 million in 2000. Lodging direct costs totaled $3.1 million for 2000
compared to $2.7 million in 1999 resulting in a gross profit of $905,000.
The Nevada Properties reported an operating loss from food, beverage and
lodging of $304,000 compared to a gross profit of $207,000 for the year ending
December 31, 1999. These increases in costs are tied to increased food costs of
$900,000 due to specials aimed at driving casino traffic. Also due to the
increase patronage, (sales increased by $1.8 million) salaries, wages and
related benefits increased by $1.1 million.
Mountaineer Park's gross profit for these profit centers was $150,000 in
2000 compared to $800,000 in 1999. The decline in gross profit is attributable
to several factors, including increased cost for wages and employee benefits
($782,000), a 1.7% increase in the ratio of cost of food and beverage
24
to sales, translating into $500,000 increase in costs, and an increase in the
cost of food and beverage supplies ($346,000) due to increased sales volume.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
special event ticket sales, racing programs, golf and check cashing, increased
by 46.9% from $2.4 million in 1999 to $3.6 million in 2000. These increases can
be tied to the opening of The Harv and the accompanying increase in the number
of special events held in 2000.
MARKETING AND PROMOTIONS EXPENSE
Company wide, marketing and promotions expense increased to $9.7 million for
the year ended December 31, 2000 from $5.0 million for 1999. Of this $4.7
increase in marketing and promotions, $2.2 million is attributable to the Nevada
Properties. In 1999, the Nevada Properties had $200,000 in marketing and
promotional cost. Marketing and promotions expenses at Mountaineer Park
increased from $4.7 million in 1999 to $7.2 million in 2000. The increase can be
attributable to (1) the grand opening of The Harv and the nine special events
held in The Harv ($700,000); (2) the increase in prizes to member of the
Frequent Player's Club ($1.1 million); (3) the increase in other promotional
events in 2000 ($450,000); and (5) an increase in salaries and related employee
benefits ($265,00).
GENERAL AND ADMINISTRATIVE EXPENSES AND INTEREST
General and administrative expenses for the year ending December 31, 2000
increased by $4.5 million, or 31.0% from $14.4 million in 1999. General and
administrative costs for 2000 constituted 11.1% of gross sales in comparison to
12.7% for 1999. The dollar increase in general and administrative expense is
attributable to: (1) $1.4 million increase in general and administrative costs
generated by the Nevada Properties; and (2) increases in costs of security,
surveillance, housekeeping and maintenance staffs to accommodate Mountaineer
Park's larger crowds and expanded facilities ($2.3 million).
Interest expense (which does not include loss on debt extinguishment
reported as an extraordinary item) decreased by $1,213,000 compared to 1999.
This decrease to $3.1 million is the result of the December 1999 refinancing and
the August 2000 amended and restatement of the Company's credit facility, which
reduced the company's interest rate from 13% to 7.1875% as of March 8, 2001. See
"Liquidity and Sources of Capital."
Depreciation and amortization costs increased by 13.6% from $5.5 million in
1999 to $6.3 million in 2000. This increase reflects the $37.2 million increase
in fixed assets other than for construction in progress and the capital leasing
of new gaming devices. Depreciation for the Nevada Properties was $1.9 million.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
Total revenues increased by $30.3 million 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 $3.2 million 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. The
25
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 machines; (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).
In December 1998, Mountaineer Park leased 100 more gaming machines (62 in
the Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive 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.
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 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 types of machines.
For the twelve months ended December 31, 1999, average daily net win for the
track-based slots was $96 (including $0 for days when the track-based gaming
rooms were closed), 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:
TWELVE MONTHS ENDED
DECEMBER 31
-----------------------------
1999 1998
------------- -------------
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 Speedway 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.
26
PARIMUTUEL COMMISSIONS
Parimutuel commissions for the twelve months ended December 31, 1999 and
1998 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
1999 1998
----------- -----------
Live racing parimutuel handle...................... $19,824,000 $21,594,000
Simulcast racing parimutuel handle................. 21,249,000 22,217,000
----------- -----------
(32,486,000) (34,661,000)
Less patrons' winning tickets...................... 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.
LODGING, FOOD AND BEVERAGE
For the year ended December 31, 1999, revenues from lodging, food and
beverage were $10.4 million, an increase of $2.9 million or 39.1% compared to
$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 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 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%, compared to1998. 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. 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.
27
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.
Operating Costs and gross profits earned from operations for the
twelve-month periods ended December 31, 1999 and 1998 are as follows:
YEARS ENDED DECEMBER 31
-------------------------
1999 1998
----------- -----------
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
=========== ===========
YEARS ENDED DECEMBER 31
-------------------------
1999 1998
----------- -----------
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
28
$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.
Statutory costs and assessments excluding the State Administrative fee for
the respective twelve-month periods for Mountaineer Park are as follows:
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
1999 1998
----------- -----------
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, or 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
$2.2 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. 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
29
$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 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. Second, with respect to implementation of the
Company's business strategy (to acquire other middle- market, lower priced
gaming or parimutuel businesses, and the refinancing 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. 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
30
(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.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $12,311,000 at December 31,
2000, and its unrestricted cash balance amounted to $10,564,000. At
December 31, 2000, the balances in bank accounts owned by Mountaineer Park's
horsemen, but to which the Company contributes funds for racing purses, exceeded
the Company's purse payment obligations by $2.1 million. 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. The
Company also earns the interest on balances in these accounts.
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. On
August 15, 2000, the Company entered into the Amended and Restated Credit
Agreement with Wells Fargo, which increased the credit facility to $60,000,000.
The Restated Facility has a term of five years, calls for payments of interest
only until the end of the term, continues to be secured by substantially all of
the assets of the Company and its operating subsidiaries, and contains customary
affirmative and negative covenants and events of default. The Company may elect
to borrow at the London Interbank Offered Rate (LIBOR), plus a margin ranging
from 1.5% to 2.5%. Alternatively, the Company may elect to borrow at either the
Prime Rate or Federal Funds Rate, plus a margin ranging from 0.25% to 1.25%. The
applicable margin added to the benchmark rates listed above will depend upon the
ratio of the Company's debt to EBITDA. The applicable margin as of the closing
was 2% over LIBOR; at December 31, 2000 was 2.25% over LIBOR.
At December 31, 2000, the outstanding principal balance of the Wells Fargo
loan was $55,024,000.
The original Credit Agreement permitted 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
$4.8 million. The Restated Facility has eliminated the carve out for
subordinated debt and increased the amount of permitted equipment financing to
$13 million.
On October 5, 2000, as required by the Restated Facility, the Company
entered into an Interest Rate Cap Agreement with Wells Fargo Bank at a cost of
$214,750. The agreement caps the Company's interest rate under the Restated
Facility at 7.5% (plus the applicable margin) with respect to $30 million of
principal. The cost of this interest rate hedge product will be amortized over
the term of the Cap Agreement, which expires on December 31, 2003, and is
reported as interest expense. In the first quarter of 2001, in compliance with
Financial Accounting Standards No. 133, the fair value of the derivative will be
recognized as either an asset or liability in the statement of financial
position.
Pursuant to an agreement with the HBPA to share the cost of certain capital
improvements related to launching of Mountaineer Park's export simulcast
business, Mountaineer Park expects to receive approximately $900,000 over the
next two years.
CAPITAL IMPROVEMENTS. The Company is in the process of implementing
Mountaineer Park's previously announced four-phase expansion plan. The
four-phase plan includes approximately tripling the hotel room capacity, adding
60,000 square feet of additional gaming rooms which will hold an additional
1,100 slot machines, an arena, a spa, additional parking, a convention center, a
championship golf course, and an equestrian center, housing and a shopping
village. The expansion project will be completed in phases as cash flow and
available lines of credit permit and is estimated to cost approximately
$65 million through phase two.
31
Phase I of the expansion, which included a 32,000 square foot expansion of
the Speakeasy Gaming Saloon, the construction of the events center, additional
parking lots, and the spa, has been completed. The Company has likewise begun
construction of Phase II, which includes a further expansion of the Speakeasy
Gaming Saloon and construction of the convention center, hotel, enclosed
swimming pool and restaurants. The Company has also recently completed the
purchase and installation of a backup power supply ($1.5 million) and additional
surveillance equipment ($450,000). The Company also spent $2.2 million for
capital improvements related to development of export simulcasting at
Mountaineer Park during 2000. During fiscal year 2000, the Company spent a total
of $37 million on capital improvements related to expansion of Mountaineer Park.
Pursuant to the Restated Credit Facility with Wells Fargo Bank, the Company
must spend between 2% and 6% of its gross operating revenue from the prior year
for maintenance of its facilities. The Company spent 5.9% of 1999 gross
operating revenue totaling $6.7 million in 2000.
During 2001, the Company expects to spend approximately $30 million on
capital expansion at Mountaineer Park; $600,000 for capital improvements for the
Nevada Properties; $1.0 million for acquisition of additional acreage near
Mountaineer Park; $2.0 million for implementation of automated player tracking
at Mountaineer Park; $200,000 for the development of an RV park in West
Virginia; $500,000 toward the West Virginia Lottery Commission's new central
system; and up to $1.6 million for the repurchase of the Company's common stock.
Any significant acquisitions during 2001 would likely be financed
separately.
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, 2000, there were
outstanding options and warrants to purchase 8,310,607 shares of the Company's
common stock. If all such options and warrants were exercised, the Company would
receive proceeds of approximately $15.1 million.
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 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 $6.4 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 $458,000
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, 2000,
1999 and 1998. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements. Under its current policies, the Company uses
interest rate derivative instruments to manage exposure to interest rate changes
for a portion of its debt arrangements. Taking into account the effects of
interest rate derivatives designated as hedges, a hypothetical 100 basis point
adverse move
32
in interest rates along the entire interest rate yield curve would have limited
effect on the net fair value of all interest sensitive financial instruments at
December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and accompanying footnotes are set forth on pages F-1
through F-33 of this report.
Due to the correct application of the income tax benefit associated with
employee stock options under the treasury stock method, diluted net income per
share for the first three quarters of 2000 have been restated from amounts
previously reported. In the first quarter of 2000, earnings per share fully
diluted were reported as $.13 and are now reported as $.14. There was no change
in the second quarter and a $.01 increase in earnings per share fully diluted
for the third quarter. See footnote 14 of the accompanying financial statements.
In the fourth quarter of 1999, there was a $.03 reduction in earnings per
share fully diluted caused by the extinguishment of debt. This item has been
classified as an extraordinary item in the financial statements. See footnote 14
of the accompanying financial statements.
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; Report on
Form 8-K/A filed February 12, 1999; Report on Form 8-K filed September 8, 2000,
all 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)...................... 53 President, Chief Executive Officer,
Chairman of the Board
Robert L. Ruben(3)........................ 39 Vice President, Assistant Secretary,
Director
Robert A. Blatt(2)(3)..................... 60 Vice President, Assistant Secretary,
Director
James V. Stanton(1)....................... 68 Director
William D. Fugazy, Jr.(1)................. 50 Director
Rose Mary Williams........................ 44 Secretary
Mary Jo Needham........................... 45 Chief Financial Officer
Roger M. Szepelak (4)..................... 36 Vice President, Chief Operating Officer,
Nevada Properties
- ------------------------
(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.
(4) Appointed effective November 1, 2000.
33
BUSINESS EXPERIENCE
EDSON R. ARNEAULT, 53, 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 (inactive), 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, 39, 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, 60, 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, 68, 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
34
in 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 board of CCA Companies Incorporated.
WILLIAM D. FUGAZY, JR., 50, has been a director of the Company since
February 1998 and serves on the Company's Audit Committee. He is presently
president of Fiber Net Real Estate in Westport, Connecticut and chairman of
Camelot Ventures, Inc., which is a financial advisory firm based in New York
City. Mr. Fugazy is a former chief executive officer of Summit Aviation
Corporation, an executive aviation services firm, and 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. 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. 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, 44, 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.
MARY JO NEEDHAM, 45, was recently named Chief Financial Officer of the
Company. Ms. Needham joined the Company in December 1997 as Controller. She also
serves as Compliance Officer for the corporation. From 1995 until joining the
Company, Ms. Needham was Director of Finance of National Real Estate Information
Services in Pittsburgh, Pennsylvania. From 1990 to 1995 she was Controller of
Sheridan Broadcasting Corporation in Pittsburgh. From 1988 until 1990,
Ms. Needham was Head Accountant for Allegheny Financial Group. From 1987 to
1988, she was an Accounting Supervisor for Harrah's Reno and from 1986-1987 an
Internal Auditor for Peppermill Casinos in Reno. Ms. Needham earned her CPA in
Nevada in 1986 while working for Kafoury, Armstrong & Company where she
specialized in audits for the casino industry. She is also licensed as a CPA in
West Virginia. In 1977 she received her Bachelor of Science degree in Psychology
and Sociology from the University of Pittsburgh and in 1984 she received her
Bachelor of Science degree in Accounting from the University of Nevada, Reno.
Ms. Needham is a member of the American Institute of Certified Public
Accountants and the Pennsylvania Institute of Certified Public Accountants.
ROGER M. SZEPELAK, 36, was appointed Vice President and Chief Operating
Officer of Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming of
Reno, Inc. effective November 1, 2000. From
35
1996 to 2000, Mr. Szepelak served as vice president/assistant general manager of
the Texas Station Gambling Hall & Hotel in North Las Vegas, Nevada, where his
direct areas of responsibility included finance, casino cage, purchasing, hotel
and related areas, table games, keno, poker, bingo and the race and sports book.
Generally, Mr. Szepelak assisted the property president in all aspects of the
operation of this 200-room hotel and 90,000 square foot casino. From 1988 to
1996, Mr. Szepelak was with the Rio Hotel & Casino, Inc. in Las Vegas, where he
ultimately served as chief financial officer and treasurer. Mr. Szepelak
received his Bachelor of Business Administration from the University of Michigan
in 1986.
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 $100,000 in the fiscal year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------------------------
AWARDS PAYOUTS
ANNUAL ---------------------- --------------------------
COMPENSATION OTHER
------------------- ANNUAL RESTRICTED OPTIONS
SALARY BONUS COMP. STOCK SARS LTIP ALL OTHER
NAME YEAR ($) ($)(1) ($)(2) AWARDS ($) (#)(3) PAYOUTS ($) COMP. ($)(5)
- ---- -------- -------- -------- -------- ---------- --------- ----------- ------------
Edson R. Arneault(4)....... 2000 469,904 100,000 254,664 -- 300,000 -- 84,568
Chairman, President and 1999 447,461 100,000 304,300 -- 500,000 -- 23,324
Chief Executive Officer of 1998 384,525 92,750 38,028 -- 1,000,000 -- --
MTR Gaming Group, Inc.
Robert A. Blatt............ 2000 182,649 1,288 150,000 19,594
Vice President(4) 1999 132,328 150,000 3,115
- --------------------------
(1) Mr. Arneault's bonus paid in 1998 includes $52,000 earned by Mr. Arneault in
1997.
(2) As to Mr. Arneault for 2000 includes $250,000 performance bonus earned in
2000 and paid in 2001and an estimated pension plan contribution of $4,664;
for 1999 includes $303,000 performance bonus earned in 1999 and paid in 2000
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. Blatt
consist of an estimated pension plan contribution of $1,288.
(3) Grants in 2000 consisted of non-qualified stock options for a term of ten
years. The options are fully vested and have an exercise price of $2.50 per
share. All grants in 1999 consisted of 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) See "Employment Agreements" below. Mr. Blatt commenced employment with the
Company in 1999, having previously acted as a consultant.
(5) Consists of premiums for life insurance pursuant to a qualified plan in
accordance with Section 419 of Internal Revenue Code.
36
OPTION GRANTS IN 2000
The following table contains information concerning the grant of stock
options during fiscal year 2000 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.... 300,000 24% $2.50 March 2010 207,211 457,883
Robert A. Blatt...... 150,000 12% 2.50 March 2010 103,605 228,941
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
"Potential Realizable Value" has been calculated assuming an aggregate
five-year appreciation of the fair market value of the Company's common
stock on the date of the grant at annual compounded rates of 5% and 10%,
respectively. These amounts represent hypothetical gains that could be
achieved. Actual gains, if any, on the exercise of stock options will depend
on the future performance of the Company's stock and the date on which the
options are exercised. Moreover, the gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise of the option or the sale of the underlying
shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and value of
options held by each of the Company's executive officers named in the Summary
Compensation Table as of December 31, 2000.
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT YEAR END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
Edson R. Arneault.... 300,000 618,750 1,950,000 -- $4,977,048 --
Robert A. Blatt...... 50,000 103,758 725,000 -- 2,056,428 --
- ------------------------
(1) Based on the market price of the Company's Common Stock of $4.75 on
December 31, 2000, 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 23, 2001, all of its executive officers,
directors and greater than 10% beneficial stockholders, complied with all filing
requirements applicable to them during 2000.
EMPLOYMENT AGREEMENTS
In February of 1999, the Company entered into an employment agreement with
its President and CEO, Edson R. Arneault. The agreement was to be for a term of
five (5) years, called for an annual base salary of $450,000 (subject to
automatic annual cost of living increases of 5%), semi-annual cash
37
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 March of 2001, Mr. Arneault irrevocably waived the performance bonus of
$875,000 that would have been due under the employment agreement in exchange for
$250,000 and the Company's promise to negotiate in good faith to conclude a new
employment agreement during the first quarter of 2001. Although a definitive
agreement has not yet been concluded, it is contemplated that the Company and
Mr. Arneault will enter a new five-year agreement that will provide for, among
other things, a performance bonus due at the end of the five-year term based on
a number of factors including increases in EBITDA, earnings per share, market
price of the Company's common stock and revenue.
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
$3,300,000 and annual premium of $150,000). The owner of the policy is the
Company. The 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.
In February of 1999, the Company entered into an employment agreement with
Robert A. Blatt. The agreement is for a term of five (5) years, calls for an
annual base salary of $46,000 (subject to automatic annual cost of living
increases of 5%) and additional compensation of $2,500 per day in the event
Mr. Blatt performs additional services. The employment agreement also entitles
Mr. Blatt to participate in the Company's various benefit plans for health
insurance, life insurance and the like.
In the event Mr. Blatt'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. Blatt's employment is
terminated in connection with a change in control of the Company, Mr. Blatt
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 June of 1999, the Company entered into a deferred compensation agreement
with Mr. Blatt. Pursuant to the agreement, the Company has purchased a life
insurance policy on Mr. Blatt's life (face amount of $575,000 and annual premium
of $37,500). The owner of the policy is the Company. The agreement entitles
Mr. Blatt 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
38
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.
In October of 2000, the Company entered into a three-year employment
agreement with Roger Szepelak as Vice President and Chief Operating Officer for
Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming of Reno, Inc. The
agreement calls for an annual base salary of $150,000 with annual automatic cost
of living increases of 5% and entitles Mr. Szepelak to a car allowance as well
as to participate in the Company's various employee benefit plans. In the event
Mr. Szepelak'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. Szepelak'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.
39
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 2001, 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 and directors of the Company.
As of March 23, 2001 there were 22,208,501shares 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)..................................... 4,353,817 18.02%
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034
Robert L. Ruben(2)....................................... 841,228 3.67%
Ruben & Aronson, LLP
3299 K Street, N.W.
Suite 403
Washington, DC 20007
Robert A. Blatt(3)....................................... 1,214,084 5.29%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue, Suite 303
Larchmont, NY 10538
James V. Stanton(4)...................................... 86,900 Less than 1%
Stanton & Associates
1310 19th Street, N.W.
Washington, D.C. 20036
William D. Fugazy, Jr.(4)................................ 78,200 Less than 1%
140 East 45th Street, Suite 4000
New York, New York 10017
Rose Mary Williams(5).................................... 85,000 Less than 1%
State Route 2
Chester, West Virginia 26034
Mary Jo Needham (6)...................................... 60,340 Less than 1%
State Route 2
Chester, West Virginia 26034
Roger Szepelak (7)....................................... 30,000 Less than 1%
3227 Civic Center Drive
North Las Vegas, Nevada 89030
Madeleine LLC(8)......................................... 1,861,735 7.77%
450 Park Avenue
New York, NY 10022
Total Officers and Directors as a Group (8 persons)(9)... 6,749,569 26.03%
- ------------------------
(1) Includes 2,403,817 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.
40
(2) Includes 116,228 shares and options to acquire beneficial ownership of
725,000 shares within 60 days held by Mr. Ruben.
(3) Includes 489,084 shares and options to acquire beneficial ownership of
725,000 shares exercisable within 60 days held by Mr. Blatt.
(4) Includes 11,900 shares and options to acquire beneficial ownership of 75,000
shares exercisable within 60 days held by Mr. Stanton. Includes 3,200 shares
and options to acquire beneficial ownership of 75,000 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 85,000
shares within 60 days held by Ms. Williams.
(6) Includes 340 shares and options to acquire beneficial ownership of 60,000
shares within 60 days held by Ms. Needham.
(7) Includes 5,000 shares and options to acquire beneficial ownership of 25,000
shares within 60 days held by Mr. Szepelak. For each year of service with
the company during the three-year employment agreement, Mr. Szepelak will
receive options to purchase 25,000 shares of common stock. Also based upon
performance levels, Mr. Szepelak could receive an additional 25,000 shares
of common stock per year. Such options will be exercisable for a term of
five years from date of grant.
(8) Includes 123,922 shares and options to acquire beneficial ownership of
1,737,813 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.
(9) Includes Messrs. Arneault, Blatt, Ruben, Stanton and Fugazy, Szepelak,
Ms. Williams and Ms. Needham.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From August of 1998 through July of 2000, in connection with the exercise of
stock options and the payment of taxes incident to such exercises, the Company's
president and CEO, Edson Arneault, has delivered to the Company full recourse
promissory notes totaling approximately $913,000 in principal and that remain
outstanding. The notes mature variously in 2001 and 2002 and bear interest at
annual rates ranging from 8% to 1% above the Prime Rate. Mr. Arneault has
pledged the 819,749 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, 2000, the Company paid Ruben & Aronson the sum of $771,000
for legal services. In connection with the exercise of stock options to purchase
75,000 shares of Company's stock, Mr. Ruben delivered to the company a
promissory note for approximately $42,000. The note is a full recourse
obligation due on or before April 2002 and bears interest at nine percent. On
July 5, 2000 in connection with taxation on the same exercise of stock options,
Mr. Ruben delivered to the company a promissory note for approximately $47,000.
The note is a full recourse obligation due on or before July 2001 and bears
interest at an annual rate of prime plus one percent. Mr. Ruben has pledged the
75,000 shares purchased in connection with such exercise to secure repayment of
the notes.
Also in connection with the exercise of stock options to purchase 50,000
shares of Company's stock, Mr. Robert Blatt delivered to the company a
promissory note for approximately $28,000. The note is a full recourse
obligation due on or before April 2002 and bears interest at an annual rate of
nine percent. On July 5, 2000 in connection with taxation on the same exercise
of stock options, Mr. Blatt delivered to the company a promissory note for
approximately $30,000. The note is a full recourse obligation due on or before
July 2001 and bears interest at an annual rate of prime plus one percent.
Mr. Blatt has pledged the 50,000 shares purchased in connection with such
exercises to secure repayment of the notes.
During the fiscal year ending December 31, 2000, the Company paid Century
Well Services, Inc. ("Century") approximately $80,000 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-affiliate.
42
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 AUDITORS
Ernst & Young LLP (F-2)
BDO Seidman, LLP (F-3)
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and 1999 (F-4)
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000 (F-5)
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended December 31, 2000 (F-6)
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 2000 (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, 2000,
1999, and 1998.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(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 Excerpt from Common Stock Certificates (filed herewith)
10.1 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)
10.2 Schedule to Master Lease (incorporated by reference to the
Company's report on Form 8-K filed February 4, 2000)
10.3 Supplement to Schedule to Master Lease (incorporated by
reference to the Company's report on Form 8-K filed February
4, 2000)
43
EXHIBIT NO. ITEM TITLE
- ----------- ----------
10.4 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)
10.5 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)
10.6 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)
10.7 Promissory Note and Pledge Agreement dated April 14, 2000
made by Robert L. Ruben in favor of the Company
(incorporated by reference to the Company's report on Form
10-Q filed May 15, 2000) Pursuant to Instruction 2 to Item
601 of Regulation S-K, the Company has not attached
substantially identical documents between the Company and
Robert A. Blatt (principal amount $28,142.50 with respect to
50,000 shares) and Edson R. Arneault (principal amount
$168,747.00 with respect to 300,000 shares)
10.8 Amendment of Employment Agreement dated April 26, 2000
between the Company and Edson R. Arneault (incorporated by
reference to the Company's report on Form 10-Q filed May 15,
2000)
10.9 First Amendment to Credit Agreement, entered as of June 1,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as Lender
(incorporated by reference to the Company's report on Form
10-Q filed August 14, 2000)
10.10 Second Amendment to Credit Agreement, entered as of July 31,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as Lender
(incorporated by reference to the Company's report on Form
10-Q filed August 14, 2000)
10.11 Agreement concerning sharing of costs related to export
simulcasting entered April 10, 2000 by Mountaineer Park,
Inc. and the Mountaineer Park Horsemen's Benevolent and
Protective Association (as approved on May 19, 2000 by the
West Virginia State Racing Commission) (incorporated by
reference to the Company's report on Form 10-Q filed August
14, 2000)
10.12 Promissory Note dated July 5, 2000 made by Edson R. Arneault
in favor of MTR Gaming Group, Inc. in the amount of
$132,721.88 (incorporated by reference to the Company's
report on Form 10-Q filed August 14, 2000)
10.13 Amended and Restated Credit Agreement, entered as of August
15, 2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A., PNC
Bank, N.A., National City Bank of Pennsylvania, N.A. and the
Bank of Scotland as Lenders (incorporated by reference to
the Company's report on Form 10-Q filed November 14, 2000)
10.14 2000 Stock Incentive Plan (incorporated by reference to the
Company's Proxy Statement filed July 24, 2000)
10.15 First Amendment to 2000 Stock Incentive Plan (incorporated
by reference to the Company's Report on Form 10-Q filed
November 14, 2000)
44
EXHIBIT NO. ITEM TITLE
- ----------- ----------
16.1 Letter re change in certifying accountant (incorporated by
reference to the Company's Report on Form 8-K filed February
4, 1999; Report on Form 8-K/A filed February 12, 1999; and
Report on Form 8-K filed September 8, 2000)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of BDO Seidman, LLP (filed herewith)
(d) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 2000 or thereafter.
45
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, AND CHIEF EXECUTIVE
OFFICER
Date: March 30, 2001
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 And Chief March 30, 2001
Edson R. Arneault Executive Officer
/s/ ROBERT A. BLATT
------------------------------------------- Director March 30, 2001
Robert A. Blatt
/s/ ROBERT L. RUBEN
------------------------------------------- Director March 30, 2001
Robert L. Ruben
/s/ JAMES V. STANTON
------------------------------------------- Director March 30, 2001
James V. Stanton
/s/ WILLIAM D. FUGAZY, JR.
------------------------------------------- Director March 30, 2001
William D. Fugazy, Jr.
/s/ MARY JO NEEDHAM
------------------------------------------- Chief Financial Officer March 30, 2001
Mary Jo Needham
46
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, 2000:
Allowance for doubtful accounts receivable.... $ 41,000 -- $ 4,000 $ 37,000
$ 41,000 -- -- $ 37,000
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
See accompanying summary of accounting policies and notes to consolidated
financial statements.
47
MTR GAMING GROUP, INC.
CONTENTS
REPORT OF INDEPENDENT AUDITORS (ERNST & YOUNG LLP).......... F-2
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS (BDO SEIDMAN, LLP)..................... F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000.......... F-5
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended December 31,
2000...................................................... F-6
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.......... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheet of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the index at Item 14(b) for the year ended December 31, 2000.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MTR Gaming
Group, Inc. and its subsidiaries at December 31, 2000, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 9, 2001, except
for Note 7, as to
which the date is March 7, 2001
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheet of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1999 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. Our
audits also included the consolidated financial statement schedule listed in the
index at Item 14(b) for the years ended December 31, 1999 and 1998. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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 accounting principles
generally accepted in the United States. Also, in our opinion, the related
consolidated financial statement schedule, as referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
BDO SEIDMAN, LLP
Costa Mesa, California
February 19, 2000
F-3
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 1999
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,564,000 $ 7,380,000
Restricted cash........................................... 505,000 891,000
Accounts receivable, net of allowance for doubtful
accounts of $37,000 and $41,000 in 2000 and 1999,
respectively............................................ 3,044,000 334,000
Accounts receivable--Lottery Commission................... 1,073,000 692,000
Inventories............................................... 1,083,000 352,000
Deferred financing costs.................................. 555,000 244,000
Prepaid taxes............................................. 2,410,000 519,000
Deferred income taxes..................................... -- 1,526,000
Other current assets...................................... 1,678,000 1,223,000
------------ -----------
Total current assets........................................ 20,912,000 13,161,000
Property and equipment, net................................. 90,501,000 52,756,000
Excess of cost of investments over net assets acquired, net
of accumulated amortization of $2,030,000 and $1,778,000
in 2000 and 1999, respectively............................ 1,744,000 1,996,000
Deferred income taxes....................................... 13,000 --
Deferred financing costs, net of current portion............ 1,860,000 977,000
Deposits and other.......................................... 655,000 669,000
------------ -----------
Total assets................................................ $115,685,000 $69,559,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,370,000 $ 1,453,000
West Virginia State Lottery Commission payable............ 646,000 184,000
Accrued payroll and payroll taxes......................... 1,227,000 537,000
Other accrued liabilities................................. 1,755,000 1,025,000
Current portion of capital leases......................... 3,269,000 561,000
Current portion of long-term and other debt............... 334,000 7,982,000
------------ -----------
Total current liabilities................................... 8,601,000 11,742,000
Long-term and other debt, less current portion.............. 56,021,000 26,409,000
Capital lease obligations, net of current portion........... 3,849,000 982,000
Deferred income taxes....................................... 1,766,000 717,000
------------ -----------
Total liabilities........................................... 70,237,000 39,850,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.00001 par value; 50,000,000 shares
authorized; 22,176,001 and 21,297,242 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ -- --
Common stock subscribed; 30,312 shares at December 31,
2000 and 1999........................................... -- --
Paid-in capital........................................... 39,014,000 36,454,000
Shareholder receivable.................................... (1,243,000) (457,000)
Retained earnings/(deficit)............................... 7,677,000 (6,288,000)
------------ -----------
Total shareholders' equity.................................. 45,448,000 29,709,000
------------ -----------
Total liabilities and shareholders' equity.................. $115,685,000 $69,559,000
============ ===========
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, 2000 1999 1998
- ------------------------ ------------ ----------- -----------
REVENUES:
Gaming.................................................... $147,890,000 $95,952,000 $68,992,000
Pari-mutuel commissions................................... 5,837,000 4,504,000 4,796,000
Lodging, food and beverage................................ 13,460,000 10,432,000 7,499,000
Other..................................................... 3,387,000 2,533,000 1,823,000
------------ ----------- -----------
Total revenues.............................................. 170,574,000 113,421,000 83,110,000
------------ ----------- -----------
COSTS OF REVENUES:
Cost of gaming............................................ 86,275,000 56,431,000 41,404,000
Cost of pari-mutuel commissions........................... 6,410,000 5,300,000 4,963,000
Cost of lodging, food and beverage........................ 13,612,000 9,441,000 6,522,000
Cost of other............................................. 3,562,000 2,425,000 1,212,000
------------ ----------- -----------
Total costs of revenues..................................... 109,859,000 73,597,000 54,101,000
------------ ----------- -----------
Gross profit................................................ 60,715,000 39,824,000 29,009,000
------------ ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing and promotions.................................. 9,686,000 4,968,000 3,050,000
General and administrative................................ 18,921,000 14,440,000 10,515,000
Depreciation and amortization............................. 6,290,000 5,539,000 3,822,000
------------ ----------- -----------
Total selling, general and administrative expenses.......... 34,897,000 24,947,000 17,387,000
------------ ----------- -----------
Operating income............................................ 25,818,000 14,877,000 11,622,000
Interest income............................................. 262,000 335,000 401,000
Interest expense............................................ (3,057,000) (4,270,000) (4,259,000)
------------ ----------- -----------
Income from continuing operations before income taxes....... 23,023,000 10,942,000 7,764,000
(Provision) benefit for income taxes........................ (7,962,000) (3,947,000) 2,659,000
------------ ----------- -----------
Income from continuing operations........................... 15,061,000 6,995,000 10,423,000
Discontinued operations:
Loss on disposal of oil and gas assets.................... -- -- (2,735,000)
------------ ----------- -----------
Income before extraordinary item............................ 15,061,000 6,995,000 7,688,000
Extraordinary item:
Loss on debt extinguishment, net of tax benefit of
$427,000................................................ -- (756,000) --
------------ ----------- -----------
NET INCOME.................................................. $ 15,061,000 $ 6,239,000 $ 7,688,000
============ =========== ===========
NET INCOME (LOSS) PER SHARE-BASIC:
Continuing operations..................................... $ 0.69 $ 0.33 $ 0.51
Discontinued operations................................... -- -- (0.13)
Extraordinary item........................................ -- (0.03) --
------------ ----------- -----------
NET INCOME PER SHARE...................................... $ 0.69 $ 0.30 $ 0.38
============ =========== ===========
NET INCOME (LOSS) PER SHARE-ASSUMING DILUTION:
Continuing operations..................................... $ 0.59 $ 0.28 $ 0.44
Discontinued operations................................... -- -- (0.11)
Extraordinary item........................................ -- (0.03) --
------------ ----------- -----------
NET INCOME PER SHARE...................................... $ 0.59 $ 0.25 $ 0.33
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic..................................................... 21,839,426 21,029,073 20,292,751
============ =========== ===========
Diluted................................................... 25,350,869 24,741,548 23,446,235
============ =========== ===========
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 RETAINED
---------------------- STOCK PAID-IN EXERCISE OF EARNINGS
SHARES AMOUNT SUBSCRIBED CAPITAL STOCK OPTIONS /(DEFICIT)
---------- --------- ------------- ------------- ----------------- ------------
Balances, January 1, 1998.......... 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 nonemployees... -- -- -- 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 nonemployees... -- -- -- 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)
Shares issued from exercise of
stock options, including related
tax benefits..................... 803,259 -- -- 1,616,000 (786,000) --
Shares issued from exercise of
warrants......................... 300,000 -- -- 1,200,000 -- --
Purchase of common stock........... (224,500) -- -- (256,000) -- (1,096,000)
Net income......................... -- -- -- -- -- 15,061,000
---------- --------- ------ ----------- ----------- ------------
Balances, December 31, 2000........ 22,176,001 $ -- 30,312 $39,014,000 $(1,243,000) $ 7,677,000
========== ========= ====== =========== =========== ============
TOTAL
-----------
Balances, January 1, 1998.......... $15,113,000
Shares issued from exercise of
stock options.................... 358,000
Value recorded in connection with
options issued to nonemployees... 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 nonemployees... 40,000
Cancellation of price guarantees
through cash payment............. (108,000)
Net income......................... 6,239,000
-----------
Balances, December 31, 1999........ 29,709,000
Shares issued from exercise of
stock options, including related
tax benefits..................... 830,000
Shares issued from exercise of
warrants......................... 1,200,000
Purchase of common stock........... (1,352,000)
Net income......................... 15,061,000
-----------
Balances, December 31, 2000........ $45,448,000
===========
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, 2000 1999 1998
- ------------------------ ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $15,061,000 $ 6,239,000 $ 7,688,000
Adjustments to reconcile net income to net cash provided by
net operating activities:
Depreciation and amortization............................. 6,290,000 5,048,000 3,822,000
Loss on disposal of discontinued operations............... -- -- 2,735,000
Extraordinary loss on debt extinguishment................. -- 756,000 --
Net change in allowance for doubtful accounts
receivable.............................................. (4,000) (97,000) 13,000
Common stock and options issued for services rendered and
amortization of interest................................ -- 502,000 539,000
Deferred income taxes..................................... 2,562,000 3,678,000 (2,773,000)
Change in operating liabilities -- discontinued
operations.............................................. -- -- (119,000)
Change in operating assets and liabilities -- operating
activities:
Prepaid taxes........................................... (756,000) (519,000) --
Other current assets.................................... (4,273,000) (439,000) (1,093,000)
Accounts payable........................................ (83,000) 829,000 30,000
Accrued liabilities..................................... 1,882,000 685,000 (300,000)
----------- ----------- -----------
Net cash provided by operating activities................... 20,679,000 16,682,000 10,542,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash........................................... 386,000 (652,000) (51,000)
Deposits and other assets................................. (158,000) (118,000) (116,000)
Capital expenditures, including acquisitions.............. (38,469,000) (15,456,000) (21,050,000)
Note receivable........................................... -- -- (333,000)
----------- ----------- -----------
Net cash used in investing activities....................... (38,241,000) (16,226,000) (21,550,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (1,595,000) (33,757,000) --
Proceeds from the issuance of long-term debt.............. 26,351,000 30,000,000 11,765,000
Proceeds for issuance of other debt....................... 3,056,000 3,832,000 1,243,000
Payments on short-term notes and other debt............... (2,792,000) (647,000) (136,000)
Principal payments on capital leases...................... (2,408,000) (597,000) --
Finance cost paid......................................... (1,409,000) (1,221,000) (863,000)
Purchase and retirement of treasury stock................. (1,352,000) -- --
Payments in connection with redeemable common stock....... -- (108,000) --
Proceeds from issuance of common stock through exercise of
stock options and warrants.............................. 895,000 348,000 358,000
----------- ----------- -----------
Net cash (used in) provided by financing activities......... 20,746,000 (2,150,000) 12,367,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,184,000 (1,694,000) 1,359,000
Cash and cash equivalents, beginning of year................ 7,380,000 9,074,000 7,715,000
----------- ----------- -----------
Cash and cash equivalents, end of year...................... $10,564,000 $ 7,380,000 $ 9,074,000
=========== =========== ===========
CASH PAID DURING THE YEAR FOR:
Interest................................................ $ 2,756,000 $ 3,808,000 $ 3,505,000
=========== =========== ===========
Income taxes............................................ $ 6,200,000 $ 788,000 $ 261,000
=========== =========== ===========
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. (Company), a Delaware corporation, owns and operates
gaming and hotel 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 offers video
lottery gaming areas, a thoroughbred horse racetrack, pari-mutuel wagering
(which includes exporting of simulcasting signals to other race tracks and
off-track wagering on horse and greyhound races simulcast from other tracks), a
101-room lodge, swimming, dining and lounge facilities. In 2000, Mountaineer
Park also opened the Harvey E. Arneault entertainment center. Mountaineer Park
also owns the Woodview Golf Course, which is located approximately seven miles
from the Resort. In February 2001, Mountaineer Park opened a spa facility, The
Spa and Fitness Center at Mountaineer, as part of the Resort complex.
On May 5, 1998, through two newly formed, wholly owned subsidiaries, the
Company closed the purchase of two gaming/hotel 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), an inactive
company (collectively, the Company). All significant intercompany transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Management
believes that the estimates are reasonable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments approximated their carrying values
at December 31, 2000. The financial instruments consist of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, long-term
and other debt.
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.
Restricted cash includes short-term certificates of deposit (see Note 7) and
unredeemed winning tickets from its racing operations.
F-8
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories consist primarily of linens and
uniforms.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the terms of the related debt
and are reflected as interest expense in the accompanying consolidated statement
of operations. Amortization expense amounted to $215,000, $462,000 and $508,000
for the years ended December 31, 2000, 1999, and 1998, respectively. During the
year ended December 31, 1999, the Company wrote off the remaining deferred
financing costs in connection with debt that had been refinanced in 1999 (see
Note 6), which is included as an extraordinary loss on extinguishment of debt in
the accompanying consolidated statement of operations.
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. Interest capitalized in 2000, 1999, and 1998 was $1,308,000, $444,000,
and $132,000, respectively.
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,
which is over an expected fifteen-year life. Amortization expense included in
the accompanying consolidated statements of operations was $252,000 for each of
the years ended December 31, 2000, 1999, and 1998. The Company evaluates
impairment whenever events or changes in circumstances indicate that the
carrying amount of the goodwill may not be recoverable. Management of the
Company assesses the recoverability of the goodwill by determining whether the
amortization over the remaining expected life 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.
REVENUE RECOGNITION
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.
F-9
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company recognizes revenues from pari mutuel commissions earned from
thoroughbred racing, and importing of simulcast signals from other race tracks
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 HBPA), the exclusive
authorized bargaining representative for all thoroughbred horse owners who
participate in live races at Mountaineer Park. The Company recognizes revenues
from fees earned through the exporting of simulcast signals to other race tracks
at the time wagers are made. Such fees are based upon a predetermined percentage
of handle as contracted with the other race tracks.
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.
PROMOTIONAL ALLOWANCES
Revenue does not include the retail amount of rooms, food, and beverage
provided gratuitously to customers, which was $1,925,000 in 2000. There were no
significant promotional allowances in 1999 or 1998.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
No. 123). SFAS No. 123 permits the Company to continue accounting for
stock-based compensation as set forth in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB Opinion No. 25), provided
the Company discloses the pro forma effect on net income of adopting the full
provisions of SFAS No. 123. Accordingly, the Company continues to account for
stock-based compensation under APB Opinion No. 25 and has provided the required
pro forma disclosures.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 2000, 1999 and 1998 was $9,686,000, $4,968,000 and
$3,050,000, respectively, net of advertising grants received from the State of
West Virginia of $637,000, $196,000 and $560,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS
No. 109). Under SFAS No. 109, 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
F-10
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax assets through future operations. The Company and its subsidiaries file a
consolidated federal income tax return.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
during the year. Diluted earnings per share reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
other convertible securities and is calculated by using the weighted average
number of common shares outstanding adjusted to include the potentially dilutive
effect of these occurrences.
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, 2000
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS--
Net income from continuing operations available to
common shareholders.................................. $15,061,000 21,839,426 $0.69
Effect of dilutive securities--
Warrants and options................................... -- 3,511,443 --
----------- ---------- -----
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions......... $15,061,000 25,350,869 $0.59
=========== ========== =====
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 21,029,073 $0.33
Effect of dilutive securities--
Warrants and options................................... -- 3,712,475 --
----------- ---------- -----
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions......... $ 6,995,000 24,741,548 $0.28
=========== ========== =====
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, 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
=========== ========== =====
The above dilutive EPS calculations do not include 235,000, 360,000 and
350,000 of potential dilutive securities for the years ended December 31, 2000,
1999 and 1998, respectively, because they were antidulitive.
NEW ACCOUNTING PRONOUNCEMENTS
Derivatives
Financial Accounting Standards Board (FASB) Statement No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998, and
amended in June 2000, pursuant to FASB Statement No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES: AN AMENDMENT OF FASB
NO. 133. These statements establish accounting and reporting standards requiring
the fair value of all derivative instruments to be recognized as either assets
or liabilities in the statement of financial position. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Company has adopted the new accounting pronouncements effective
January 1, 2001. The Company has entered into an interest rate cap agreement to
manage interest rate risk and to lower its cost of borrowing. The effect of
adoption of the new accounting pronouncement was not material to the Company's
results of operations or financial position.
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS (SAB 101), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Although SAB 101 does not change existing accounting rules on revenue
recognition, changes in accounting to apply the guidance in SAB 101 may be
accounted for as a change in accounting principle. The effect of adopting the
provisions of SAB 101 did not have a material impact on the Company's results of
operations or financial condition.
F-12
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statement presentation to conform to the 2000 presentation.
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 (Lottery Commission) under the West Virginia
Racetrack Video Lottery Act (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
F-13
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
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 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 of 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 HBPA, which expires on
December 31, 2003. 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 HBPA or the pari-mutuel clerks at Mountaineer Park, or the
termination or nonrenewal 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 noncompliance, 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 Company has 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
F-14
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
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 nonrestricted 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 is 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 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 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
nonrestricted 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
nonrestricted 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
F-15
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
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
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 pari-mutuel facilities for (i) the
primary purpose of saving a pari-mutuel 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. 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
F-16
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
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 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, are as follows:
Total revenues.............................................. $83,353,000
Net income.................................................. $ 6,794,000
Net income per share--basic................................. $ 0.33
Net income per share--assuming dilution..................... $ 0.29
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 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
half-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.
F-17
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
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 Mountaineer Race Track & Gaming
Resort. The purchase price was approximately $841,000 which was satisfied by the
issuance of a promissory note of $603,000 (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).
ACQUISITION OF LAND ADJACENT TO WOODVIEW GOLF COURSE
During 2000, the Company acquired three parcels of real property located
adjacent to and for purposes of augmenting the grounds of the Woodview Golf
Course for the sum of $233,000.
5. PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
2000 1999
----------- -----------
Land............................................... $ 5,392,000 $ 5,159,000
Building and improvements.......................... 59,151,000 34,916,000
Equipment (Note 7)................................. 25,646,000 14,230,000
Furniture and fixtures............................. 11,342,000 10,181,000
Construction in progress........................... 9,350,000 2,999,000
----------- -----------
110,881,000 67,485,000
Less accumulated depreciation...................... (20,380,000) (14,729,000)
----------- -----------
$90,501,000 $52,756,000
=========== ===========
Depreciation expense charged to operations related to property and equipment
during the years ended December 31, 2000, 1999 and 1998 was $5,651,000,
$4,796,000 and $3,570,000, respectively.
6. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt at December 31 is summarized as follows:
2000 1999
----------- -----------
Credit agreement................................... $55,024,000 $30,000,000
Video lottery terminals agreement.................. -- 542,000
Unsecured loan..................................... -- 2,792,000
Promissory note.................................... 603,000 603,000
Term debt.......................................... 127,000 141,000
Other notes payable................................ 601,000 313,000
----------- -----------
56,355,000 34,391,000
Less current portion............................... (334,000) (7,982,000)
----------- -----------
Long-term portion.................................. $56,021,000 $26,409,000
=========== ===========
F-18
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
CREDIT AGREEMENT
On August 15, 2000, MTR Gaming Group, Inc. and its operating subsidiaries,
Mountaineer Park, Inc., Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming
of Reno, Inc., entered into an Amended and Restated Credit Agreement (Credit
Agreement) with a syndication of lenders led by Wells Fargo Bank, National
Association (Wells Fargo) to fully amend and restate an existing credit
agreement with Wells Fargo dated December 30, 1999 that had been amended in
July 2000.
The Credit Agreement increased the original credit line to $60 million and
provides for a $60 million balloon payment at the end of a five-year term. The
Company may elect on each draw either an interest rate based upon the higher of
the Prime Rate or Federal Funds Rate plus a margin of 0.25 to 1.25% depending
upon the Company's leverage ratio (Base Rate Loan) or the London Interbank
Offered Rate (LIBOR) plus a margin of 1.50% to 2.50%, depending on the Company's
leverage ratio (LIBOR loan). Each LIBOR loan must be at least five million
dollars (with minimum increments of one million dollars) and no more than five
LIBOR loans can be outstanding at any one time. Interest on each Base Rate Loan
is due monthly. For each LIBOR loan, the Company elects an interest period of
either 1, 2, 3, or 6 months. At December 31, 2000, the Company had $24,000 of
Base Rate Loans and $55,000,000 of LIBOR loans outstanding with interest rates
ranging from 8.875% to 9.0625%. Amounts prepaid over and above such reductions
can be reborrowed, subject to a commitment fee ranging from 0.375% to 0.50%
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 derived from the previous fiscal year 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.
In October 2000, as required by the Credit Agreement, the Company entered
into an Interest Rate Cap Agreement with Wells Fargo at a cost of $214,750. The
agreement caps the Company's interest rate under the Credit Agreement at 7.5%
(plus the applicable margin) with respect to $30 million of principal. Prior to
the adoption of FASB No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, the cost of this interest rate hedge product was being amortized
over the term of the Cap Agreement, which expires on December 31, 2003, and is
included with interest expense.
OTHER NOTES PAYABLE
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
noninterest bearing and therefore, was discounted at a rate of 8%. As of
December 31, 2000 and 1999, the remaining balance on this agreement was $-0- and
$542,000, net of a discount in 1999 of approximately $20,000, respectively.
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%. On
January 27, 2000, this unsecured
F-19
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
loan became part of a newly established leasing line of credit, which is
discussed in the Capital Leases section below.
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%, is being repaid with monthly
principal and interest payments of $2,466 through August 2006. As of
December 31, 2000 and 1999, there was $127,000 and $141,000, respectively,
outstanding under the promissory note and term debt.
CAPITAL LEASES
On January 27, 2000, Mountaineer Park entered into a 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 used
to lease equipment for video lottery operations at the Mountaineer Racetrack
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 Park with an unsecured loan in December 1999. 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%. In September 2000, Mountaineer Park drew an additional $3,248,000 at an
interest rate of 9.348% to lease 332 video lottery machines. At December 31,
2000, the balance outstanding on the line of credit was $4,849,000.
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. 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.
During 2000, the Company entered into capital lease arrangements with PDS
Financial Corporation--Nevada (PDS) to finance the acquisition of 248 video
lottery terminals at its Nevada properties for $1,414,000. The capital lease
arrangements are pursuant to master lease arrangements the Company has entered
into with PDS with interest rates ranging from 9% to 9.99% on current year
leases.
Property, plant and equipment at December 31, 2000 and 1999 include the
following amounts for capitalized leases:
2000 1999
----------- ----------
Building improvements............................... $ -- $ 298,000
Equipment........................................... 10,438,000 1,519,000
----------- ----------
10,438,000 1,817,000
Less allowance for depreciation..................... (1,225,000) (96,000)
----------- ----------
$ 9,213,000 $1,721,000
=========== ==========
F-20
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
The consolidated statement of cash flows for the year ended December 31,
2000 excludes capital lease non-cash transactions of $4,927,000.
ANNUAL COMMITMENTS
Future annual principal payments under all debt and capital lease agreements
as of December 31, 2000 are as follows:
LONG-TERM CAPITAL
DEBT LEASES
----------- -----------
2001............................................... $ 334,000 $ 3,798,000
2002............................................... 303,000 3,184,000
2003............................................... 21,000 922,000
2004............................................... 627,000 21,000
Thereafter......................................... 55,070,000 --
----------- -----------
Total long-term debt/minimum lease payments........ $56,355,000 7,925,000
===========
Less amount representing interest.................. (807,000)
-----------
Present value of future minimum lease payments..... 7,118,000
Less current maturities of capital lease
obligations...................................... (3,269,000)
-----------
Capital lease obligations.......................... $ 3,849,000
===========
7. COMMITMENTS AND CONTINGENCIES
MOUNTAINEER BOND REQUIREMENTS
Mountaineer Park is required to maintain bonds in the aggregate amount of
$340,000, as of December 31, 2000, for the benefit of the Lottery Commission
through June 30, 2001. 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 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
2001. The upgrade will cost Mountaineer Park approximately $1.7 million of which
approximately $1,242,000 has been incurred as of December 31, 2000. Upon
completion in 2001, the remaining $458,000 will be paid.
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
F-21
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
simulcast racing handle. The lease agreement was amended in 2000 to extend the
expiration date to October 2005. For the years ended December 31, 2000, 1999 and
1998, the rent expense under the lease was approximately $435,000, $476,000 and
$454,000, respectively, which is included in cost of pari-mutuel revenue in the
accompanying consolidated statements of operations.
VIDEO LOTTERY TERMINALS OPERATING LEASES
The Company leases 469 video lottery terminals under operating leases that
expire through April 2001. For the years ended December 31, 2000, 1999 and 1998,
total video lottery rental expense was approximately $1,288,000, $1,982,000 and
$1,416,000, respectively, which is included in costs of gaming in the
accompanying consolidated statements of operations.
The Company also leased 100 progressive video lottery terminals through
June 30, 2000. The weekly lease payments on these 100 progressive video lottery
terminals was equal to 9% of the "Gross Terminal Income," as defined. The
Company made lease payments totaling approximately $166,000 and $408,000 in 2000
and 1999, respectively, pursuant to this agreement.
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 $47,000 in 2000, $43,000
in 1999 and $47,000 in 1998.
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, 2000, 1999 and 1998 were approximately $264,000, $225,000 and
$297,000, respectively.
FUTURE MINIMUM LEASE PAYMENTS
Future annual minimum payments under all material operating leases as of
December 31, 2000 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
2001........................................................ $1,356,000
2002........................................................ 1,039,000
2003........................................................ 686,000
2004........................................................ 553,000
2005........................................................ 492,000
F-22
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is party to various lawsuits which have arisen in the normal
course of its business. The liability, if any, arising from unfavorable outcomes
of lawsuits is presently unknown.
PENSION PLAN
Mountaineer Park 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 2000, 1999, and 1998 were $700,000, $474,000 and $451,000, respectively.
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 previously paid
$100,000 for an irrevocable option to acquire the land. 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.
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 was to be for a term of
five (5) years ending January 31, 2004, 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 is
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.
In April 2000, in order to make the agreement at least coextensive with the
Company's long-term debt facility (which requires a key-man life insurance
policy on the Officer's life), this employment agreement was amended to extend
the term of the agreement through December 31, 2004. The amendment also provides
that the performance bonus to be earned for calendar year 2004 will be equal to
1% of 2004 gross operating revenue to the extent it exceeds 1999 operating
revenue.
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
F-23
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
In March of 2001, the Company's president irrevocably waived the year 2000
performance bonus of $875,000 that would have been due under the employment
agreement in exchange for $250,000 and the Company's promise to negotiate in
good faith to conclude a new employment agreement during the first quarter of
2001. Although a definitive agreement has not yet been concluded, it is
contemplated that the Company and its president will enter a new five-year
agreement that will provide for, among other things, a performance bonus due at
the end of the five-year term based on a number of factors including increases
in EBITDA, earnings per share, market price of the Company's common stock, and
revenue.
OTHER EMPLOYMENT AGREEMENTS AND DEFERRED COMPENSATION AGREEMENTS
The Company entered into various other employment agreements during 2000 and
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
is 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.
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
F-24
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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 2000, 1999 and 1998 totaling approximately $771,000, $592,000 and
$834,000, respectively.
9. SHAREHOLDERS' EQUITY
LIMITATIONS ON DIVIDENDS
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. In
addition, in 1999, pursuant to state laws, the Company was restricted from
making dividends to its shareholders as a result of its accumulated deficit as
of December 31, 1999.
COMMON STOCK
During 2000, the Company repurchased and retired 224,500 shares of its
common stock in the open market for $1,352,000 pursuant to its approved
$3 million stock repurchase program.
Stock options granted under the Company's 2000 Stock Incentive Plans and
predecessor plans (Incentive Plans) have been and may be granted at not less
than market prices on the dates of grant. Options granted under the Incentive
Plans have a maximum term of ten years. Stock options granted under the
Incentive Plans vest immediately. As of December 31, 2000, approximately
4,853,000 shares of common stock were reserved for future awards under the
Incentive Plans.
The consolidated statement of cash flows for the year ended December 31,
2000 excludes stockholder receivables for the issuance of common stock non-cash
transactions of $786,000.
F-25
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
During each of the years in the three-year period ended December 31, 2000,
stock option and warrant activity is as follows:
EXERCISE PRICE RANGE WEIGHTED AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE
---------------- -------------------- ----------------
Balance, January 1, 1998.................... 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 $ 1.69
Granted..................................... 1,540,000 2.50 - 6.25 2.91
Canceled.................................... (315,000) 2.50 2.50
Exercised................................... (1,150,000) 0.56 - 4.00 1.63
Expired..................................... (15,000) 4.00 4.00
---------- -------------------- ------
Balance, December 31, 2000.................. 8,310,607 $ 0.01 - 6.25(1) $ 1.82
========== ==================== ======
- ------------------------
(1) Includes options to purchase 20,000 shares of common stock at $0.01 per
share. Weighted average fair value of options granted during 2000, 1999, and
1998 was $1.33, $1.00, and $1.14, respectively.
The following summarizes information about the Company's stock options and
warrants outstanding at December 31, 2000:
WEIGHTED AVERAGE WEIGHTED NUMBER
REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF EXERCISE NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE DECEMBER 31, AVERAGE
PRICES DECEMBER 31, 2000 IN YEARS PRICE 2000 PRICE
- ----------------- ------------------ ---------------- -------- -------------- --------
$0.01 to 0.80 45,000 0.5(1) $0.45 45,000 $0.45
1.06 to 1.50 3,925,607 0.90 1.12 3,925,607 1.12
2.00 to 2.50 4,095,000 4.21 2.26 4,095,000 2.26
3.00 to 3.38 10,000 3.75 3.38 10,000 3.38
4.00 to 4.88 60,000 --(2) 4.88 60,000 4.88
6.00 to 6.75 175,000 4.83 6.25 25,000 6.25
--------- ---------
8,310,607 8,160,607
========= =========
- ------------------------
(1) Excludes 20,000 options with no set expiration date.
(2) Excludes 60,000 options with no set expiration date.
F-26
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
PRO FORMA STOCK OPTION INFORMATION
Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method pursuant to SFAS No. 123, rather than the
method pursuant to APB Opinion No. 25. 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, 2000, 1999 and 1998:
risk-free rates of between 5.8% and 7.2%; dividend yield of 0%; expected life of
the options of between 9 and 60 months; and volatility factors of the expected
market price of the Company's common stock of between 50% 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, 2000 1999 1998
- ------------------------------------------- ----------- ---------- ----------
Net income:
As reported........................................... $15,061,000 $6,239,000 $7,688,000
Pro forma............................................. $14,181,000 $4,765,000 $5,611,000
Net income per share, assuming dilution:
As reported........................................... $0.59 $0.25 $0.33
Pro forma............................................. $0.56 $0.19 $0.24
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 October 1998, the Company transferred all of its right, title and
interest in its oil and gas interests to 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, in 1998, the
F-27
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DISCONTINUED OPERATIONS (CONTINUED)
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. At December 31, 2000, the
Company believes it is premature to recognizing any change in value given
improving oil market conditions.
In connection with the aforementioned transfer, the Company entered into a
term loan agreement with SABAL whereby the Company would loan SABAL up to
$500,000. The term loan was for a period of two years (interest only for the
first six months, and 15% per annum thereafter) and was 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, 2000 and 1999, the Company had loaned to
SABAL approximately $329,000.
11. INCOME TAXES
The following summarizes the benefit for income taxes from continuing
operations for the years ended December 31:
2000 1999 1998
---------- ---------- -----------
Current
Federal................................................ $5,400,000 $ 159,000 $ 114,000
State.................................................. -- 110,000 --
---------- ---------- -----------
5,400,000 269,000 114,000
Deferred
Federal................................................ 2,562,000 3,678,000 (2,773,000)
State.................................................. -- -- --
---------- ---------- -----------
2,562,000 3,678,000 (2,773,000)
---------- ---------- -----------
Provision (benefit) for income taxes..................... $7,962,000 $3,947,000 $(2,659,000)
========== ========== ===========
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:
2000 1999 1998
---------- ---------- -----------
Provision for income taxes at a federal statutory rate of
34%.................................................... $7,829,000 $3,720,000 $ 2,636,000
Increase (reduction) in income taxes resulting from:
Changes in the valuation allowance for deferred tax
assets allocated to income tax benefit................. -- -- (2,825,000)
Depreciation and amortization, not deductible for income
tax purposes........................................... 63,000 148,000 148,000
Utilization of net operating loss carryforwards.......... -- -- (2,618,000)
Other.................................................... 70,000 79,000 --
---------- ---------- -----------
Provision (benefit) for income taxes..................... $7,962,000 $3,947,000 $(2,659,000)
========== ========== ===========
F-28
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
At December 31, 2000 and 1999, significant components of the Company's net
deferred taxes are as follows:
2000 1999
----------- ----------
Deferred tax assets:
Net operating loss carryforwards.................. $ -- $1,178,000
Depreciation...................................... -- 4,000
Deferred rent..................................... -- --
AMT credit........................................ -- 445,000
Reserves and allowances........................... 13,000 125,000
----------- ----------
13,000 1,752,000
Less valuation allowance............................ -- --
Deferred tax liabilities:
Tax basis of goodwill in excess of book........... (847,000) (943,000)
Tax depreciation in excess of book................ (919,000) --
----------- ----------
Deferred tax liability.............................. $(1,766,000) $ (943,000)
=========== ==========
The consolidated statement of cash flows for the year ended December 31,
2000 excludes $1,135,000 of tax benefit related to the exercise of non-qualified
stock options.
12. GAMING 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
video lottery terminal (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 30, 2001.
Mountaineer Park offers video lottery gaming through 1,905 video lottery
terminals located in the racetrack clubhouse, grandstand and Lodge of which
1,305 are leased.
A summary of video lottery gross wagers, less winning patron payouts at
Mountaineer Park, for the years ended December 31 is as follows:
2000 1999 1998
-------------- ------------ ------------
Total gross wagers................................ $1,028,786,000 $373,767,000 $240,164,000
Less winning patron payouts....................... (887,141,000) (278,435,000) (171,172,000)
-------------- ------------ ------------
Video lottery revenues............................ $ 141,645,000 $ 95,332,000 $ 68,992,000
============== ============ ============
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
F-29
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. GAMING OPERATIONS (CONTINUED)
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.
Amounts contributed to these funds for the years ended December 31 were as
follows:
2000 1999 1998
----------- ----------- -----------
HBPA purses........................................... $21,695,000 $14,703,000 $10,511,000
Company pension plan.................................. 700,000 474,000 339,000
West Virginia general fund............................ 41,990,000 28,457,000 20,343,000
West Virginia Breeders' Classic fund.................. 1,400,000 949,000 678,000
Hancock County general fund........................... 2,799,000 1,897,000 1,356,000
West Virginia tourism promotion fund.................. 4,199,000 2,846,000 2,034,000
Miscellaneous state projects.......................... 1,400,000 949,000 678,000
----------- ----------- -----------
$74,183,000 $50,275,000 $35,939,000
=========== =========== ===========
NEVADA
During the years ended December 31, 2000 and 1999, the Company recorded
approximately $6,245,000 and $620,000, respectively, in revenue from its Nevada
properties.
13. RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Race Track &
Gaming Resort. Under West Virginia Horse Racing Law, the Company's commission
revenue is a designated portion of the pari-mutuel wagering handle (amounts
wagered).
The Company is subject to annual licensing requirements established by the
Racing Commission. The Company's license was renewed in November 2000, and will
remain effective through December 30, 2001.
Mountaineer Park executed an agreement with the HBPA, the exclusive
authorized bargaining representative for all thoroughbred horse owners who
participate in live races at Mountaineer Park, whereby 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. The
terms of the contract indicate that Mountaineer Park is required to conduct a
minimum of 210 live racing events annually and provide for a minimum daily purse
payment of $30,000. The contract expires on January 1, 2004.
The Company's revenue from racing operations is derived mainly from
commissions earned on pari-mutuel 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 pari-mutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
preset 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 pari-mutuel commission rates
are fixed as a percentage of the
F-30
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RACING OPERATIONS (CONTINUED)
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 pari-mutuel 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 pari-mutuel handle and deductions, including satellite
off-track wagering, for the years ended December 31 are as follows:
2000 1999 1998
----------- ----------- -----------
Total pari-mutuel handle.............................. $81,486,000 $41,073,000 $43,811,000
Less patron's winning tickets and breakage............ (71,461,000) (32,486,000) (34,661,000)
----------- ----------- -----------
10,025,000 8,587,000 9,150,000
Less:
Pari-mutuel tax paid to:
West Virginia and Hancock County.................. (500,000) (485,000) (494,000)
Purses and Horsemen's Association................. (3,688,000) (3,598,000) (3,860,000)
----------- ----------- -----------
$ 5,837,000 $ 4,504,000 $ 4,796,000
=========== =========== ===========
F-31
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY DATA (UNAUDITED)
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
2000:
Revenues................................ $36,256,000 $42,688,000 $50,237,000 $41,393,000
Gross profit............................ 13,482,000 16,391,000 18,116,000 12,726,000
Net income.............................. 3,368,000 4,317,000 5,024,000 2,352,000
Basic net income per common shares........ 0.16 $ 0.20 $ 0.23 $ 0.11
Diluted net income per share.............. 0.14 0.17 0.19 0.09
Weighted average shares
outstanding--basic...................... 21,337,885 21,794,596 22,081,656 22,110,914
=========== =========== =========== ===========
Weighted average shares outstanding--
diluted............................... 24,040,161 24,733,577 26,178,627 25,927,696
=========== =========== =========== ===========
Diluted net income per share for the first three quarters of 2000 have been
restated from amounts previously reported due to the correct application of the
income tax benefit associated with employee stock options under the treasury
stock method.
1999:
Revenues................................ $21,981,000 $28,300,000 $32,007,000 $31,133,000
Gross profit............................ 7,166,000 10,501,000 11,419,000 10,738,000
Income from continuing operations before
extraordinary loss.................... 977,000 2,257,000 2,614,000 1,147,000
Extraordinary loss on debt
extinguishments....................... -- -- -- (756,000)
----------- ----------- ----------- -----------
Net income.............................. 977,000 2,257,000 2,614,000 391,000
----------- ----------- ----------- -----------
Basic net income per common share:
Income from continuing operations before
extraordinary loss.................... $ 0.05 $ 0.11 $ 0.12 $ 0.05
Extraordinary loss on debt
extinguishments....................... -- -- -- (0.03)
----------- ----------- ----------- -----------
Basic net income per common share......... $ 0.05 $ 0.11 $ 0.12 $ 0.02
=========== =========== =========== ===========
Diluted net income per common share:
Income from continuing operations before
extraordinary loss.................... $ 0.04 $ 0.09 $ 0.10 $ 0.05
Extraordinary loss on debt
extinguishments....................... -- -- -- (0.03)
----------- ----------- ----------- -----------
Diluted net income per common share....... $ 0.04 $ 0.09 $ 0.10 $ 0.02
----------- ----------- ----------- -----------
Weighted average shares outstanding --
basic................................... 20,896,322 20,896,322 21,141,690 21,191,288
=========== =========== =========== ===========
Weighted average shares outstanding --
diluted................................. 23,941,022 24,926,390 25,184,615 25,101,295
=========== =========== =========== ===========
F-32
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY DATA (UNAUDITED) (CONTINUED)
COMMON STOCK PRICES
PER QUARTER
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2000:
High.......................................... $3.38 $5.13 $9.03 $8.19
Low........................................... 2.13 2.25 4.94 4.00
1999:
High.......................................... 2.69 3.66 3.59 3.47
Low........................................... 1.97 2.56 2.50 2.38
F-33