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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
COMMISSION FILE NO. 0-20508
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MTR GAMING GROUP, INC.
(exact name of Company as specified in its charter)
DELAWARE IRS NO. 84-1103135
(State of Incorporation) (IRS Employer Identification)
STATE ROUTE 2, SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Company's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: COMMON STOCK $.00001 PAR VALUE
Name of each exchange on which registered: NASDAQ STOCK MARKET
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Indicate by check mark whether the Company (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K of Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Company's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K / /
The aggregate market value of the Company's common stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on March 22, 1999 (based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $43,770,033.
The Company's common stock outstanding at March 22, 1999 was 20,896,322
shares.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.......................................................... 4
Company History......................................................... 4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:............. 4
Mountaineer Race Track & Gaming Resort--Chester, West Virginia.......... 5
Lodge Facilities and Speakeasy Gaming Saloon............................ 5
Video Lottery Facilities................................................ 5
Recreational Facilities................................................. 6
Trailer Park............................................................ 6
Undeveloped Land........................................................ 6
Current Operations...................................................... 6
Racing Operations....................................................... 6
Video Slot Operations................................................... 7
Lodging, Food and Beverage Operations................................... 8
Ramada Inn and Speedway Casino--North Las Vegas, Nevada................. 8
Ramada Inn and Speakeasy Casino--Reno, Nevada........................... 8
Operation of the Nevada Properties/Gaming Licensing..................... 9
Business Strategy....................................................... 9
Development and Marketing of Mountaineer Park as a Destination Resort
and Diversified Entertainment Facility............................... 9
Increasing Mid-Week Business.......................................... 9
Increase Patronage of Video Slots at Racetrack........................ 10
Improve Financial Results of Racing Operations at Mountaineer Park.... 10
Competition............................................................. 10
Mountaineer Park...................................................... 10
The Speedway Property................................................. 11
The Reno Property..................................................... 11
Employees............................................................... 11
Regulation And Licensing................................................ 11
General............................................................... 11
West Virginia Racing and Gaming Regulation............................ 12
Nevada Gaming Regulation.............................................. 14
Impact of Resort Hotel Legislation.................................... 17
Compliance with Other Laws............................................ 17
Restrictions on Share Ownership and Transfer.......................... 17
Application of Environmental Regulations.............................. 18
Discontinued Operations................................................. 18
ITEM 2. PROPERTIES........................................................ 18
Hotel, Gaming, Racing and Other Property................................ 18
Equipment Leases........................................................ 19
ITEM 3. LEGAL PROCEEDINGS................................................. 19
Pending Litigation...................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 20
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 20
ITEM 6. SELECTED FINANCIAL DATA........................................... 20
2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS..................................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 35
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY............................ 36
Business Experience..................................................... 36
ITEM 11. EXECUTIVE COMPENSATION........................................... 38
Summary Compensation Table.............................................. 38
OPTION GRANTS IN 1998................................................... 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES......................................................... 39
Section 16(a) Beneficial Ownership Reporting Compliance................. 39
Employment Agreements................................................... 39
Compensation of Directors............................................... 40
Compensation Committee Interlocks and Insider Participation............. 41
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K............ 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................
3
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly owned subsidiaries, owns and operates
Mountaineer Racetrack and 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. Pending licensing, the casinos at the
Company's Nevada properties have been leased to a non-affiliated licensed casino
operator pursuant to leases that are terminable by the Company on thirty days
notice. The Company also holds notes and an assignment of production payment
acquired in the disposition of its discontinued oil and gas business.
The Company was incorporated in March 1988 in Delaware under the name
"Secamur Corporation," a wholly owned subsidiary of Buffalo Equities, Inc.
("Buffalo"), and later "spun-off" through the sale of its stock to the
stockholders of Buffalo in January 1989. In June 1989, the Company merged with
Pacific International Industries, Inc., which had been engaged in the contract
security guard services business in Southern California since its inception in
February 1987. Upon completion of the merger, the Company was renamed Excalibur
Security Services, Inc. to reflect its new line of business. After operating
unprofitably, the Company filed a voluntary petition for reorganization with the
U.S. Bankruptcy Court for the Central District of California in December 1990,
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court approved the
Company's sale of its security guard services business in May 1991, and
confirmed the Company's plan of reorganization in December 1991. The plan of
reorganization authorized the Company to acquire, primarily, specified gaming
and oil and gas businesses. Upon confirmation of the plan of reorganization, the
Company changed its name to Excalibur Holding Corporation. In connection with
management's decision to operate as a gaming company, the Company was renamed
Winners Entertainment, Inc. in August 1993. At the annual meeting of
stockholders on October 15, 1996, the stockholders of the Company approved a
change of the Company's name from Winners Entertainment, Inc. to MTR Gaming
Group, Inc.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, gaming regulation, licensing and taxation
of gaming operations, lack 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, failure to liquidate discontinued operations, cyclical nature
of business, Year 2000 issues, limited public market and liquidity, lack of
public market, shares eligible for future sale, impact of anti-takeover
measures, the Company's common stock being subject to penny stock regulation and
other risks detailed in the Company's Securities and Exchange Commission
filings.
4
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 1,300 video slot machines as part of an
entertainment complex and destination resort with hotel, dining and lounge
facilities, and outdoor activities including golf, swimming and tennis.
Mountaineer Park is situated on a 956-acre site 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 offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. The track also conducts simulcast (closed circuit television)
thoroughbred horse and greyhound dog racing from other prominent racetracks
around the country. Mountaineer Park's main racetrack consists of an oval dirt
track approximately one mile in length. Inside the main track is a natural turf
(grass) track measuring seven furlongs or 7/8 of a mile. The racetrack is
equipped with two chutes for races of lengths from 4 1/2 furlongs to over one
mile. The racetrack buildings consist of the clubhouse and grandstand which
provide glass-enclosed stadium and box seating for approximately 770 and 2,850
patrons, respectively. The buildings are each three stories and are connected by
an enclosed walkway. Live and simulcast racing can be viewed by approximately
1,200 dining patrons in a restaurant and sandwich bar located in the clubhouse
and grandstand respectively. The grandstand building also houses a buffet which
provides customers with low-cost meals featuring a variety of foods from
breakfast foods to prime rib and seats 120. The Clubhouse also provides a 2,400
square feet glass-enclosed meeting room which will accommodate approximately 200
people. In addition to seating areas, the grandstand covers approximately 57,000
square feet of interior space on the main and mezzanine levels containing
parimutuel windows and food and beverage concession stands. The clubhouse covers
approximately 25,000 square feet of interior space and likewise offers
parimutuel windows. The grandstand has an indoor stage with a seating capacity
of approximately 2,240, which is used for concerts and boxing matches, some of
which have been nationally televised. The racetrack apron, which is accessible
from both buildings, provides racing fans with up-close viewing of horses
entering the racetrack and crossing the finish line. The stable area
accommodates approximately 1,250 horses and is located adjacent to the main
track. Mountaineer's racetrack parking lots have a combined capacity for over
2,900 vehicles.
LODGE FACILITIES AND SPEAKEASY GAMING SALOON
The Mountaineer Lodge (the "Lodge") is a two-story facility which overlooks
the par three, nine hole "executive" golf course near Mountaineer Park's main
entrance on West Virginia State Route 2. The Lodge offers 101 rooms, including
50 standard rooms (one double bed), 46 superior rooms (two double beds), and
five king rooms and suites. The Lodge's Gatsby Dining Room seats 125 patrons for
casual dining overlooking the golf course and an additional 68 patrons may be
seated on an enclosed deck. The Lodge is also the site of the Speakeasy Gaming
Saloon. Encompassing 25,000 square feet (including a 12,000 square foot addition
that opened in July of 1998), the Speakeasy, together with adjacent smaller
rooms, houses 2/3 of Mountaineer Park's 1,300 video slot machines, extensive
off-track wagering facilities and Big Al's Deli, where patrons may purchase
pizza and sandwiches until closing. The Lodge parking lots have a combined
capacity for approximately 700 vehicles.
VIDEO LOTTERY FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers video lottery gaming through 1,300 video lottery terminals ("VLTs" or
"Video Slots") located in the racetrack clubhouse, grandstand and Lodge. The
Company owns 400 VLTs and leases the remaining 900 VLTs. The racetrack houses
1/3 of the VLTs in its Riverside Gaming Terrace on the second floors of the
clubhouse and grandstand, and the Lodge offers the remaining 2/3, which is the
maximum allowed by law, primarily in the
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Speakeasy Gaming Saloon. VLTs allow a player to select from several game themes,
including up to four versions of draw poker, blackjack, two versions of keno,
and various games that simulate classic casino slot machines.
RECREATIONAL FACILITIES
Mountaineer Park has a par three, nine-hole "executive" golf course, three
tennis courts, a volleyball court, a basketball court, two swimming pools and
two children's swimming pools. These facilities are made available for use by
Lodge guests and the general public at specified daily or seasonal rates.
On January 22, 1999, the Company purchased the Woodview Golf Course, an
eighteen-hole par 71 course measuring approximately 6,300 yards on a 168-acre
tract, which is located approximately seven miles from Mountaineer Park in New
Cumberland, West Virginia. SEE "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Subsequent Events".
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 in
racing operations. The Company is responsible for maintenance of the road and
grounds, refuse removal and providing water and sewage hook-ups. The tenants pay
all utility expenses.
UNDEVELOPED LAND
Mountaineer Park owns, as part of its 956-acre site, a 375-acre tract and a
contiguous 350 acre-tract (purchased in February 1998) that are currently
undeveloped. The undeveloped acreage is located directly across West Virginia
State Route 2 from the Lodge and racetrack main entrance. On October 7, 1997,
Mountaineer Park acquired an option to purchase approximately 349 additional
contiguous acres. The option, for which Mountaineer Park paid $100,000, has a
duration of two years and entitles Mountaineer Park to purchase the property and
buildings for $600,000. Management has no definitive plans to develop such
property, but is considering construction of a championship golf course.
CURRENT OPERATIONS AT MOUNTAINEER PARK
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and Video Slot operations and, to a lesser extent, its lodging,
food and beverage operations. Additional revenues are generated from ticket
sales for concerts and boxing events and from greens fees and other recreational
facilities fees.
RACING OPERATIONS
The Company is subject to annual licensing requirements established by the
West Virginia State Racing Commission (the "Racing Commission"). The Company's
license was renewed in December 1998, and will remain effective through December
1999.
The Company's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer Park
and on races conducted at other "host" racetracks and broadcast live (i.e.,
import simulcast) at Mountaineer Park. In parimutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
pre-set odds. The dollars wagered form a pool of funds from which winnings are
paid based on odds determined solely by the wagering activity. The racetrack
acts as a stakeholder for the wagering patrons and deducts from the amounts
wagered a "take-out" or gross commission, from which the racetrack pays state
and county taxes and racing purses. The Company's parimutuel commission rates
are fixed as a percentage of the total handle or amounts wagered. With respect
to Mountaineer Park's live racing operations, such percentage is
6
fixed by West Virginia law at three levels, 17.25%, 19% and 25%, depending on
the complexity of the wager. The lower rate applies to wagering pools involving
only win, place and show wagers while the higher rates apply to pools involving
wagers on specified multiple events, such as trifecta, quinella and perfecta
wagers. With respect to simulcast racing operations, the Company generally has
opted to apply the commission rates imposed by the jurisdictions of the host
racetracks, as it may do with the consent of the Racing Commission. Such rates
vary with each jurisdiction and may be more or less favorable than the live
racing commission rates. Out of its gross commissions, the Company is required
to distribute fixed percentages to its fund for the payment of regular purses
(the "regular purse fund"), the state of West Virginia and Hancock County and,
with respect to commissions derived from simulcast operations, Mountaineer Park
's employee pension plan. After deducting state and county taxes and, with
respect to simulcast commission, simulcast fees and expenses and employee
pension plan contributions, approximately one-half of the remainder of the
commissions are payable to the regular purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
VIDEO SLOT OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 1998 for a period of one
year.
The Company derives revenue from the operation of Video Slots in the form of
net win on the gross terminal income, or the total cash deposited into a VLT
less the value of credits cleared for winning redemption tickets. Pursuant to
the Lottery Act, the Company's commission is fixed at 47% of the net win after
deducting an administration fee of up to 4% of gross terminal revenues first
paid to the State of West Virginia.
The Company owns 400 VLTs and leases a total of 900 VLTs from three
manufacturers. The leases covering 800 of the leased VLTs provide for a fixed
monthly rental, while the lease for the remaining 100 VLTs calls for a
percentage of net win.
In March 1996, the West Virginia legislature approved the usage of video
game themes depicting symbols on reels, commonly referred to as "line games" or
"slot games" ("Slot Terminals") in addition to the poker, blackjack and keno
games previously permitted ("Card Terminals"). In July of 1996, Mountaineer Park
converted 350 Card Terminals into Slot Terminals. In October of 1996, another 50
VLTs were converted. On March 15, 1997, Mountaineer purchased and installed 400
new Slot Terminals and removed 200 older Card Terminals, resulting in an
increase in the number of VLTs then in operation from 800 to 1,000, consisting
of 800 Slot Terminals and 200 Card Terminals.
In June of 1998, West Virginia's video lottery law was amended to permit
Mountaineer Park to change the ratio of VLTs located at the Lodge versus the
racetrack building from 1:1 to 2:1. Accordingly, in July of 1998, Mountaineer
Park installed in the Speakeasy 200 new VLTs and 100 VLTs previously operated in
the racetrack building, resulting in an increase in the total number of VLTs, at
such time, from 1,000 to 1,200 with 800 VLTs in the Lodge and 400 in the
racetrack building.
Although the Lottery Commission approved the linking of video slots in
progressive jackpot networks in 1995, the technology for video lottery
progressives has only recently become available. In January of 1999, Mountaineer
Park introduced progressives on a test basis with respect to a total of 100 VLTs
in several networks or "banks" located in the Speakeasy and the Riverside Gaming
Terrace. While the games have been popular with patrons--with one jackpot
reaching $140,000 by March--technical difficulties have required periodic shut
downs of those games. In anticipation of the addition of progressive Video
Slots, Mountaineer Park obtained regulatory approval to increase the number of
Video Slots from 1,200 to 1,355 and currently operates 1,300 Video Slots.
7
LODGING, FOOD AND BEVERAGE OPERATIONS
The Clubhouse restaurant is open a minimum of 210 days annually on live race
days and offers seating for 650 customers with full lunch and dinner menus and a
private buffet. Clubhouse customers include racing fans, local residents and
private social groups. Beverages and cocktails are also available in the
grandstand building at the Hollywood Knights Saloon, which services video
lottery players, as well as racing fans. A buffet adjacent to the Hollywood
Knights Saloon provides customers with low-cost, all-you-can-eat meals featuring
a variety of foods from breakfast foods to prime rib. The grandstand also offers
Big Al's Deli II, which serves sandwiches, hotdogs and pizza. Closed circuit
television monitors displaying Mountaineer Park's live and simulcast races are
provided at every table in both the Clubhouse and grandstand restaurant for the
convenience of racing fans. The racetrack food and beverage facilities are
intended to complement the entertainment experience for racing fans and video
lottery players and, therefore, are designed to offer familiar menus with
moderate pricing in a comfortable atmosphere.
Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on weekdays, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Gatsby Dining Room, which seats 125 patrons
for casual dining, and an additional 68 persons on an enclosed deck overlooking
the golf course. Food and beverages are also available at the Lodge in Big Al's
Deli located in the Speakeasy Gaming Saloon and in the Iron Horse Lounge. Table
and barstool seating is available in the Speakeasy Gaming Saloon and the Iron
Horse Lounge for the video lottery gaming and off-track wagering patrons
accommodated there. The Lodge and its food and beverage operations are operated
in combination with its entertainment facilities and are utilized principally to
increase racing attendance and video lottery play. Accordingly, the Company
maintains inexpensive room and food and beverage rates.
RAMADA INN AND SPEEDWAY CASINO--NORTH LAS VEGAS, NEVADA
In May of 1998, the Company, through its wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc. ("Speakeasy Las Vegas"), purchased a 131-room hotel
and casino property (previously known as the Cheyenne Hotel & Casino) and has
renamed it the Ramada Inn and Speedway Casino (together with an adjacent 1/2
acre parcel purchased thereafter to augment parking, the "Speedway Property").
Since acquiring the Speedway Property, the Company has renovated ninety-five of
the hotel rooms, refurbished the restaurant, and constructed a 15,600 square
foot addition that houses the casino, and parking lots that now accommodate 474
cars. The Company is in the process of renovating the remaining hotel rooms and
plans to construct a new swimming pool. The Speedway Property sits on
approximately 6.1 acres and consists of one two-story building and one
three-story building. The casino and restaurant have an auto racing theme, as
the Speedway Property is the closest hotel and casino to the Las Vegas Motor
Speedway.
The Speedway Property is located at 3227 Civic Center Drive in North Las
Vegas at the intersection of Cheyenne Avenue and Interstate 15. I-15 is a major
interstate freeway, which extends north into Utah and south into the Los Angeles
Basin. The Property is approximately five miles from the Las Vegas Motor
Speedway and three miles from Nellis Air Force Base.
RAMADA INN AND SPEAKEASY CASINO--RENO, NEVADA
In May of 1998, the Company purchased a 262-room hotel and casino
(previously known as the Reno Ramada Plaza Hotel) and has renamed it the Ramada
Inn and Speakeasy Casino (the "Reno Property"). An eleven-story tower houses 236
of the Reno Property's hotel rooms, with 26 rooms contained in a 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 for which the Company intends to implement a theme similar to the
Speakeasy concept in place at Mountaineer Park. The property also has a small
convention facility.
8
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING
On November 12, 1998, the Company, Speakeasy Las Vegas, Speakeasy Reno, and
certain of the Company's officers and directors filed applications in the State
of Nevada for the permits and licenses required for the Company to operate
casinos at the two Nevada Properties. The Company is advised, however, that the
licensing process may take approximately one year to complete and that there can
be no assurances that the Company will obtain the necessary approvals. Until the
Company obtains these approvals, it will not be permitted to conduct gaming or
participate in any gaming revenues generated at the properties. Accordingly, the
Company's operating revenues from its Nevada properties are currently derived
from hotel, food and beverage operations. At the conclusion of the six month
period of free rent provided by the casino leases (September of 1999 for the
Speedway Casino and approximately October of 1999 for the Speakeasy Casino), the
Company will also generate revenue from the rental of those casinos (unless the
Company shall have received its Nevada gaming licenses and terminated the casino
leases). Upon receipt of its Nevada gaming licenses, the Company expects to earn
revenues from casino operations as well.
BUSINESS STRATEGY
The Company's business strategy involves further developing and expanding
its existing operations at Mountaineer Park, developing and, upon licensing,
operating casinos at the Nevada Properties, and seeking to acquire other
middle-market, lower priced (ranging from approximately $5 million to $50
million) gaming and/or parimutuel businesses.
DEVELOPMENT AND MARKETING OF MOUNTAINEER PARK AS A DESTINATION RESORT AND
DIVERSIFIED ENTERTAINMENT FACILITY. Established in 1951 as a horse racing venue,
Mountaineer Park has 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 $20 million in expansion, renovation, and
refurbishment of Mountaineer Park and has incrementally increased the number of
Video Slots from 165 at the time of acquisition to 1300 in December of 1998 as
legislative developments either permitted additional Video Slots or made their
operation more profitable. The Company has also undertaken an aggressive
marketing campaign involving print, radio and television advertisements,
including a 30-minute "infomercial" that has been airing since 1997 in
Mountaineer Park's target markets.
INCREASING MID-WEEK BUSINESS. As Mountaineer Park now operates near
capacity on weekends, the Company's strategy is to increase mid-week patronage
of Mountaineer Park's gaming facilities by offering more entertainment and
amenities. To that end, Mountaineer Park has increased the number of concerts to
be held in fiscal 1999 and has purchased a full-length golf course within a
ten-minute drive of the resort. The Company's strategy is to market mid-week
golf packages that include overnight stays at the Lodge. The Company is also
considering construction of a championship golf course, perhaps to be designed
by a well known golf course designer, on Mountaineer Park's undeveloped land to
enhance the Company's ability to market the property as a golf and gaming
resort. Commencing in 1998, the Company has been acquiring and seeking to
acquire additional acreage near Mountaineer Park for future development of a
diversified entertainment complex.
Also to increase patronage during the week, the Company is in the planning
stage of constructing a small regional convention center and approximately 120
additional hotel rooms at Mountaineer Park. Additional projects under
consideration include a spa adjacent to Mountaineer Park's swimming pool.
Management believes the diversification of activities could significantly expand
the Company's customer base and allow more families, vacationers, tourists,
business travelers, community groups and local residents to enjoy Mountaineer
Park, thereby increasing mid-week room occupancy, Video Slot revenue, off-track
betting revenue and food and beverage sales. Management will likely not commence
such
9
construction, however, until completion of a new sewer project (for which
Mountaineer Park has contracted with the Hancock County Public Service District)
to accommodate increased patronage. The Company expects the sewer to be
available in approximately December of 1999.
INCREASE PATRONAGE OF VIDEO SLOTS AT RACETRACK. The success of
Mountaineer's Lodge-based Video Slot operations in the Speakeasy Gaming Saloon
has left the Video Slots in the racetrack building underutilized. Currently, the
track-based Video Slots as well as food and beverage facilities are open only
during Mountaineer Park's 210 live race days or during special events such as
concerts and boxing matches. Both to maximize the Company's investment in its
racetrack-based Video Slots and associated amenities, and to relieve
overcrowding in the Speakeasy, the Company's strategy is to encourage patrons to
use the racetrack's Video Slots. Management may offer free or reduced price food
and beverage as well as providing more entertainment at the racetrack in order
to attract patrons. If this strategy proves successful, Mountaineer Park will
likely increase the number of days it opens its track-based Video Slot and food
and beverage facilities.
IMPROVE FINANCIAL RESULTS OF RACING OPERATIONS AT MOUNTAINEER PARK. The
Company has a two-pronged strategy for improving the financial results of its
horse racing business: (i) continue to improve the quality of the live racing
product by increasing average purses and sponsoring "stakes" races or
"championship" races; and (ii) make its live racing product more attractive to
wagerers by broadening the betting pool through the commencement of export
simulcasting.
Management believes that the enhanced quality of racehorses should improve
the Company's prospects in export simulcasting. Commencement of export
simulcasting activity would not only create a new source of revenue but the
anticipated related increase in gross dollars wagered on Mountaineer Park's live
races should also generate increases in live handle, as a greater and more
diverse wagering pool lessens the impact a particular wager will have on the
pay-off odds. Management intends to continue its policy of increasing average
daily purses (though not necessarily in the winter months) as well as sponsor
substantially increased stakes races attempting to develop an export simulcast
business. Management does not expect results from racing operations to improve
materially, despite larger daily purses, stakes races, better horses, and
reduced costs, unless and until Mountaineer Park also commences export
simulcasting. Commencement of export simulcasting will require significant
capital expenditures for equipment and facilities upgrades, and no assurance can
be given, however, that the Company will successfully commence export
simulcasting or that the anticipated results will be realized.
COMPETITION
The Company faces substantial competition in each of the markets in which
its gaming facilities are located. Some of the competitors have significantly
greater name recognition and financial and marketing resources than the Company.
All of the Company's gaming operations primarily compete with other gaming
operations in their geographic areas. New expansion and development activity
(with the exception of video lottery in Mountaineer Park's target markets) is
occurring in each of the relevant markets, which may be expected to intensify
competitive pressures. All of the Company's gaming operations also compete to a
lesser extent with operations in other locations, including Native American
lands, riverboats and cruise ships, and with other forms of legalized gaming in
the United States, including state-sponsored lotteries, on- and off- track
wagering, high-stakes bingo, card parlors, and the emergence of Internet gaming.
Several states have considered legalized casino gaming and others may in the
future.
Specific competitive factors relating to the Company's primary gaming
markets include the following:
MOUNTAINEER PARK. In recent years, the number of gaming options available
to consumers in the Company's West Virginia area market has increased
considerably. Mountaineer Park's principal direct competitors are Wheeling
Downs, located approximately 40 miles to the south in Wheeling, West Virginia,
Thistledown, located approximately 85 miles to the northwest in Cleveland, Ohio
and Ladbroke, located
10
approximately 80 miles away from Mountaineer Park in Washington, Pennsylvania.
Wheeling Downs conducts parimutuel greyhound dog racing and video lottery
gaming. Thistledown conducts parimutuel thoroughbred horse racing but not video
lottery gaming. Ladbroke conducts live harness racing and provides import
simulcasting, but does not have video lottery gaming. In general, Mountaineer
Park competes with other tracks for participation by quality racehorses. The
Company also competes with statewide lotteries in West Virginia, Pennsylvania
and Ohio, off-track and on-site wagering in Pennsylvania, and, to a lesser
extent, destination gaming facilities in Las Vegas and Atlantic City, as well as
other entertainment options available to consumers, including live and televised
professional and collegiate major sports events. The Company will also compete
with off-track wagering in Ohio, which has recently been approved in that state.
To the extent that Pennsylvania, Ohio or West Virginia legalizes any forms of
casino gaming, slot machines or video lottery gaming, the Company's Video Slot
operations could compete with any such new gaming facilities located within
driving distance of Mountaineer Park. If permitted under such new legislation,
such facilities may offer more gaming machines than Mountaineer Park, or gaming
machines which are superior to those offered by 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. Although the Strip is the main attraction for gaming patrons who
travel to Las Vegas, the Company believes that North Las Vegas constitutes a
distinct segment of the Las Vegas gaming market. Nevertheless, management
recognizes that the strip may limit customer traffic to the North Las Vegas
area. Even within the North Las Vegas segment of the market, however, Speakeasy
Las Vegas faces substantial competition from other small casinos. New
properties, or major additions, expansions or enhancements to competitors'
existing properties, could have a material adverse effect on the Company.
THE RENO PROPERTY. The Reno Property competes with other properties in
Reno, Nevada and other Nevada gaming markets. The Reno Property's principal
direct competitors are those gaming facilities located in downtown Reno. There
are currently nine gaming facilities in downtown Reno with over 11,700 slot
machines, 470 table games and 6,600 hotel rooms. These gaming facilities are, in
general, larger and have more amenities than the Reno Property. New properties,
or major additions, expansions or enhancements to competitors' existing
properties could have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1998, Mountaineer Park had approximately 683 employees of
whom approximately 70 were represented by a labor union under a collective
bargaining agreement. During its peak season in 1998, the Company had as many as
approximately 750 employees, including full-time temporary employees. 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. As of
December 31, 1998, the Company also had one full-time and two part-time
employees in Orange County, California. The Company believes that its employee
relations are good.
REGULATION AND LICENSING
GENERAL. All of the Company's current and proposed gaming operations are
subject to extensive regulations and could be subjected at any time to
additional or more restrictive regulations. The Company is also subject to the
provisions of West Virginia law that govern the conduct of thoroughbred horse
racing in West Virginia (the "West Virginia Racing Act") and the operation of
Video Slots in West Virginia (the "Lottery Act"). The Company's live racing,
pari-mutuel wagering and Video Slot operations are contingent upon the continued
governmental approval of such operations as forms of legalized gaming. The
Company also may be materially adversely affected by legislation of additional
forms of gaming activity, or expanded licensure, within or near the Company's
present or future markets.
11
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 Company's operations at
Mountaineer Park are subject to regulation by the West Virginia State Racing
Commission (the "Racing Commission") under the West Virginia Racing Act, and by
the West Virginia State Lottery Commission under the Lottery Act. The powers and
responsibilities of the Racing Commission include, among other things, (i)
granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving simulcasting activities, (iii) licensing all officers,
directors, racing officials and certain other employees of the Company and (iv)
approving all contracts entered into by the Company affecting racing and
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. In order to conduct simulcast racing, Mountaineer Park is required
under West Virginia law to hold a minimum of 210 live race days each year. West
Virginia law requires that at least 80% of Mountaineer Park's employees must be
citizens and residents of West Virginia and must have been such for at least one
year. In addition, certain activities, such as simulcasting races, require the
consent of the representatives of a majority of the horse owners and trainers at
Mountaineer Park.
If the Company commences export simulcast activities that occur outside of
West Virginia, such operations could be subject to regulation by other state
racing commissions, as well as the provisions of the Federal Interstate Horse
Racing Act of 1978, which prohibits Mountaineer Park from accepting off-track
wagering on simulcast racing without the approval of the Racing Commission and,
subject to certain exceptions, of any other currently operating track within 60
miles, or if none, of the closest track in any adjoining state. The Company has
received all necessary approvals to conduct its current operations at
Mountaineer Park; however, such approvals are subject to renewal and approval
annually. The failure to receive or retain approvals or renewals of approvals,
or a delay in receiving such approvals and renewals, could cause the reduction
or suspension of racing and pari-mutuel wagering, as well as of Video Slot
operations, at Mountaineer Park and have a material adverse effect upon the
Company's business, financial condition and results of operations.
Pursuant to the Lottery Act, each of the two West Virginia horse racetracks
and two West Virginia dog racetracks licensed prior to January 1, 1994 and which
conduct a minimum number of days of live racing, may apply for an annual license
to operate Video Slots at its racetrack. The Lottery Act likewise requires that
the operator of Mountaineer Park be subject to a written agreement with the
horse owners, breeders and trainers who race horses at that facility (the
"Mountaineer Park Horsemen") in order to conduct Video Slots operations. The
Company is party to the requisite agreement with the Mountaineer Park Horsemen,
which expires on January 1, 2001. The Lottery Act also requires that the
operator of Mountaineer Park be subject to a written agreement with the
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 Mountaineer Park Horsemen or the
pari-mutuel clerks at Mountaineer Park, or the termination or non-renewal of
such agreement, would have a material adverse affect 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.
The conduct of video lottery gaming by a racing facility is subject to the
approval of the voters of the county in which the facility is located. If such
approval is obtained, the facilities may continue to conduct
12
video lottery activities unless the matter is resubmitted to the voters pursuant
to a petition signed by at least 5% of the registered voters, who must wait at
least five years to bring such a petition. If approval is denied, another vote
on the issue may not be held for a period of two years. Video lottery gaming was
approved in Hancock County, the location of Mountaineer Park, on May 10, 1994.
If such approval were ever revoked pursuant to the Lottery Act, it would have a
material adverse effect on the Company.
In order to qualify as a "video lottery game," as the term is defined under
the Lottery Act, a game must, among other things, be a game of chance which
utilizes an interactive electronic terminal device allowing input by an
individual player. Such a game may not be based on any of the following game
themes: roulette, dice, or baccarat card games. Moreover, video lottery machines
must meet strict hardware and software specifications, including minimum and
maximum pay-out requirements, and must be connected to the Lottery Commission's
central control computer by an on-line or dial-up communication system. Only
machines registered with and approved by the Lottery Commission may offer video
lottery games.
Under the Lottery Act, racetracks that conduct video lottery gaming, as well
as persons who service and repair video lottery machines and validation managers
(persons who perform video lottery ticket redemption services) are required to
be licensed by the Lottery Commission. The licensing application procedures are
extensive and include inquiries into, and an evaluation of, the character,
background (including criminal record, reputation and associations), business
ability and experience of an applicant and the adequacy and source of the
applicant's financing arrangements. In addition, a racetrack applicant must hold
a valid racing license, have an agreement regarding video lottery revenues with
the representatives of a majority of the horsemen, the parimutuel clerks and the
breeders for the racetrack and post a bond or irrevocable letter of credit in
such amount as the Lottery Commission shall determine. Finally, no license will
be granted until the Lottery Commission determines that each person who has
"control" of an applicant meets all of the applicable licensing qualifications.
Persons deemed to have control of a corporate applicant include: (i) any holding
or parent company or subsidiary of the applicant who has the ability to elect a
majority of the applicant's board of directors or to otherwise control the
activities of the applicant; and (ii) key personnel of an applicant, including
any executive officer, employee or agent, who has the power to exercise
significant influence over decisions concerning any part of the applicant's
business operations.
Video Lottery machines may only be operated in the grandstand building of a
racetrack where parimutuel wagering is permitted; provided, however, that if a
racetrack was authorized by the Lottery Commission prior to November 1, 1993 to
operate video lottery machines in another area of the racetrack's facilities,
such racetrack may continue to do so as long as there is one video lottery
machine in the grandstand building for each machine located in another area of
the racetrack. Accordingly, Mountaineer Park may continue to operate video
lottery machines at the Lodge, provided that there are at least as many machines
located in the grandstand building of the racetrack.
In June of 1998, the Lottery Act was amended, permitting Mountaineer Park to
change the ratio of VLTs located in the Lodge versus the racetrack building from
1:1 to 2:1.
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
13
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 9% is divided among tourism promotion, Hancock County,
the Breeders' Classics, the Veterans Memorial Program and the Racetrack
Employees Pension Fund.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply its business would be materially adversely effected.
NEVADA GAMING REGULATION. The laws, regulations, and supervisory procedures
of the Nevada Gaming Authorities are based upon declarations of public policy
which are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) to provide a
source of state and local revenues through taxation and licensing fees.
In order to operate non-restricted gaming at the Nevada Properties, the
Company, Speakeasy Las Vegas, Speakeasy Reno and certain officers and directors
are required to be licensed as operators of a casino by the Nevada Gaming
Authorities. A gaming license requires the periodic payment of fees and taxes
and is not transferable. The Company has also applied to be registered by the
Nevada Commission as a publicly traded corporation ("Registered Corporation")
and as such, it will be required periodically to submit detailed financial and
operating reports to the Nevada Commission and furnish any other information
which the Nevada Commission may require. No person may become a stockholder of,
or receive any percentage of profits from, Speakeasy Las Vegas or Speakeasy Reno
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and all relevant affiliates filed applications for the
necessary licenses on November 12, 1998, but neither the Company nor its Nevada
subsidiaries has yet obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, and licenses required in order to engage in
gaming activities in Nevada.
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
14
deny an application for a finding of suitability or licensing, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
After registration and licensing, 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.
After registration and licensing, the Company and the Nevada subsidiaries
will be required to 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.
After licensing, if it were determined that the Nevada Gaming Control Act or
the regulations promulgated thereunder (collectively, the "Nevada Act") was
violated by the Company or its Nevada subsidiaries, the gaming licenses could be
limited, conditioned, suspended, or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Nevada subsidiaries, the
Company, and the persons involved could be subject to substantial fines for each
separate violation of the Nevada Act at the discretion of the Nevada Commission.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10
percent of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more then
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies, or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership,
or trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
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,
15
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Nevada subsidiaries, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
After registration and licensing, the Company will be required to 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. After registration and licensing, the Nevada Commission
will have 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.
After registration and licensing, 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
16
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 $10,000 to pay the expenses of
investigation of the Nevada Board of their participation in such foreign gaming.
The revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
IMPACT OF RESORT HOTEL LEGISLATION. The Speedway Property and the Reno
Property are subject to legislation passed in 1991 by the Nevada Legislature,
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation are found in Section 463.1605 of the Nevada Revised Statutes
("NRS"). NRS 463.1605 essentially provides that the Nevada Commission shall not
approve a nonrestricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel. A resort hotel is defined to include an establishment held out to the
public as a hotel with more than 200 rooms available for sleeping
accommodations, at least one bar with capacity for more than 30 patrons, and at
least one restaurant with capacity for more than 60 patrons. A county, city or
town may require resort hotels to meet standards in addition to those required
by NRS 463.1605 as a condition to issuance of a gaming license by the particular
county, city or town. The City of Reno has by ordinance increased the room
requirement for resort hotels to 300. The Nevada Properties are exempt from NRS
463.1605 because these locations have held non-restricted gaming licenses. The
grandfathered exemptions, however, are lost in the event gaming is abandoned
within the meaning of the statute and local regulations. The March 1999
commencement of gaming operations at the Speedway Property and the contemplated
April 1 commencement at the Reno Property will preserve the grandfathered status
of the Nevada properties. The failure to keep the grandfathered exemptions to
NRS 463.1605 and the local regulations governing resort hotels (by abandonment
of gaming operations) would have a materially adverse effect on the Company.
COMPLIANCE WITH OTHER LAWS. The Company and facilities are also subject to
a variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Nevada and West Virginia governing the serving
of alcoholic beverages. Mountaineer Park derives a significant portion of its
other revenues from the sale of alcoholic beverages to patrons of its
facilities, and the Company anticipates that the same will be true of Speakeasy
Las Vegas and Speakeasy Reno. Any interruption or termination of Mountaineer
Park's existing ability to serve alcoholic beverages or the inability of
Speakeasy Las Vegas or Speakeasy Reno to hold permits 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
17
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. Applicable Nevada law requires any person who
acquires more than 5% of a Registered Corporation's voting securities to report
the acquisition to the Nevada Commission. The Nevada Act requires that
beneficial owners of more than 10% of the voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing.
APPLICATION OF ENVIRONMENTAL REGULATIONS. Generally, the Company and its
subsidiaries are subject to a variety of federal, state and local governmental
laws and regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. While the Company believes that it and its
subsidiaries are presently in material compliance with all environmental laws,
failure to comply with such laws could result in the imposition of severe
penalties or restrictions on operations by government agencies or courts that
could materially adversely affect the Company's operations. The Company does not
have insurance to cover environmental liabilities, if any, other than certain
limited coverage with respect to the Reno Property.
DISCONTINUED OPERATIONS
In January 1992, as part of its plan of reorganization, the Company, through
its wholly owned subsidiary, ExCal Energy Corporation, acquired from various
affiliates of the Company's president and chairman, Edson Arneault (prior to his
becoming an affiliate of the Company), oil and gas leases and wells in Ohio (the
"Ohio Interests") and an interest in oil wells in Michigan (the "Michigan
Interests"). Pursuant to an October 1993 Plan of Orderly Liquidation, in
December of 1994, the Company sold the Ohio Interests for notes valued at
approximately $426,000. In October of 1998, the Company exchanged the Michigan
Interests to an affiliate of its former joint venture partner for an assignment
of production payment in the amount of $2.5 million, which is convertible at the
Company's election into up to 25% of the equity of the purchaser. In connection
with the exchange of the Michigan Interests, the Company likewise agreed to lend
to the purchaser up to $500,000 for development of the project and acquisition
of related assets. The loan is secured by substantially all of the assets of the
purchaser. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Discontinued Operations"; Note 13 of the Notes to
Consolidated Financial Statements; and "Certain Relationships and Related
Transactions".
ITEM 2. PROPERTIES
HOTEL, GAMING, RACING AND OTHER PROPERTY
Mountaineer Park is comprised of a thoroughbred racetrack and the Lodge
providing video lottery gaming, off-track wagering, dining and lounge facilities
as well as facilities for golf, swimming, tennis and other outdoor activities
covering approximately 956 acres (including approximately 725 undeveloped acres)
in Chester, West Virginia. The Mountaineer Park facility encompasses
approximately 4,100 feet of frontage on the Ohio River. Mountaineer Park also
owns a 168-acre tract including the Woodview Golf Course in New Cumberland, West
Virginia.
The Speedway Property sits on approximately 6.1 acres and consists of one
two-story building and one three-story building with a total of 131 hotel rooms.
The Property also has a restaurant and lounge facilities, as well as the newly
constructed 15,600 square foot casino building with parking for 474 cars.
18
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 small convention
facility.
Substantially all of the Company's assets are pledged to secure the debt
evidenced by the Third Amended and Restated Term Loan Agreement, dated as of
July 2, 1996, as amended and restated as of December 10, 1996, as further
amended and restated as of July 2, 1997, and as of April 30, 1998, among
Mountaineer Park, Inc., Speakeasy Las Vegas, Speakeasy Reno, the Company and
Madeleine LLC.
EQUIPMENT LEASES
At December 31, 1998, in connection with video lottery and racing
operations, Mountaineer Park leased 900 video lottery machines, a totalisator
system, video tape and closed circuit television systems and other equipment
required for its operations.
ITEM 3. LEGAL PROCEEDINGS
PENDING LITIGATION
OVELLE HOLDINGS, INC. V. MTR GAMING GROUP, INC., Circuit Court of Hancock
County, West Virginia, Civil Action 97-C-133G. On July 24, 1997, the Company and
Mountaineer Park were served with a complaint filed by Ovelle Holdings, Inc.
claiming breach of contract and breach of the implied covenant of good faith and
fair dealing in connection with a financing commitment allegedly obtained by the
plaintiff for Mountaineer Park. The complaint seeks recovery of $350,000 in
fees, as well as lost profits on shares of the Company's stock the plaintiff
alleges it could have purchased upon the exercise of options to which plaintiff
claims entitlement, and loan servicing fees, pre- and post-judgment interest,
and costs.
The Company and Mountaineer Park have filed a motion for summary judgment on
the grounds that letters authored by plaintiff constitute an admission that
plaintiff was unable to arrange closing of the subject financing by the express
deadline contained in the parties' agreement and that no agreement to extend the
closing date was reached. Thus, plaintiff did not satisfy the conditions
precedent to its right to compensation of any kind. In January of 1999, the
plaintiff filed its opposition to the motion for summary judgment, asserting
that the Company interfered with plaintiff's performance and that time was not
of the essence in the agreement. The parties have agreed to submit to
non-binding mediation in an effort to resolve the matter amicably.
REINHOLD V. MOUNTAINEER PARK, INC., Circuit Court of Hancock County, West
Virginia, Civ. No. 98-30-W. On February 19, 1998 Juanita Reinhold filed a
complaint against Mountaineer Park, alleging wrongful termination of employment
and improper use of polygraph testing. Ms. Reinhold seeks $250,000 in
compensatory damages, $250,000 in punitive damages, plus costs and attorney's
fees. Mountaineer Park has answered the complaint, denying any liability on the
grounds that Ms. Reinhold's employment was properly terminated and the polygraph
examination was administered by the local law enforcement authorities, in the
presence of Ms. Reinhold's counsel, in connection with a police investigation.
The Company also filed a motion to disqualify the plaintiff's counsel on the
grounds that (i) he has a conflict of interest as a consequence of his former
service as counsel to and a member of the board of directors of Mountaineer
Park; and (ii) Mountaineer Park's pending unrelated action against him for legal
malpractice prevents him from rendering objective advice to his current client.
In the face of the motion, counsel moved to withdraw. At a hearing on October 5,
1998, the Court granted the motion to withdraw and permitted Mountaineer Park to
seek sanctions to recover its costs of prosecuting the motion to disqualify.
That motion for sanctions is still pending, no substitute counsel has yet filed
an appearance on behalf of the plaintiff, and there has been no further activity
in the case.
19
The Company (including its subsidiaries) is also a defendant in various law
suits relating to routine matters incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "MNTG". On March 22, 1999, the closing trade price for the Company's
Common Stock was $2.375. As of March 22, 1999, there were approximately 610
stockholders of record of the Company's Common Stock.
The following table sets forth the range of high and low bid price
quotations obtained from the National Quotation Bureau, LLC for the Common Stock
for the two fiscal years ended December 31, 1997 and 1998 and for the period of
January 1, 1999 through March 22, 1999. 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, 1997:
First Quarter......................................................... 1.46875 .78125
Second Quarter........................................................ 1.3125 1.00
Third Quarter......................................................... 1.4375 1.21875
Fourth Quarter........................................................ 2.46875 1.4375
Year Ending December 31, 1998:
First Quarter......................................................... 2.9375 2.00
Second Quarter........................................................ 3.46875 2.4375
Third Quarter......................................................... 2.50 1.625
Fourth Quarter........................................................ 2.84375 1.75
Year Ending December 31, 1999:
First Quarter (January 1, 1999 through March 22, 1999)................ 2.65625 1.96875
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 1998, 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
20
financial statements (including the notes thereto) and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere herein.
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Revenues............................. $ 83,110,000 $ 60,138,000 $ 40,204,000 $ 24,927,000 $ 14,656,000
Income/(loss) from continuing
operations......................... 10,423,000 4,694,000 1,155,000 (5,313,000) (6,902,000)
Income/(loss) per share from
continuing operations
Basic:............................... .51 .24 .06 (.33) (.48)
Assuming dilution:................... .44 .22 .06 (.33) (.48)
Discontinued operations data:
Revenues............................. -- -- -- -- 184,000
Loss from discontinued operations.... (2,735,000) -- -- -- (640,000)
Loss per share from discontinued
operations.........................
Basic................................ (.13) -- -- -- (.04)
Assuming dilution.................... (.11) -- -- -- (.04)
Balance Sheet Data:
Working Capital (Deficiency)......... 12,457,000 9,785,000 3,897,000 (7,453,000) (1,763,000)
Current Assets....................... 15,016,000 12,884,000 7,016,000 1,972,000 3,600,000
Current Liabilities.................. 2,559,000 3,099,000 3,119,000 9,425,000 5,363,000
Total assets-continuing operations... 59,737,000 38,285,000 28,262,000 23,131,000 21,387,000
Net assets-discontinued operations... -- 2,616,000 2,616,000 2,616,000 2,571,000
Total Liabilities.................... 36,547,000 25,788,000 20,612,000 19,763,000 14,200,000
Total Stockholders' Equity........... 23,190,000 15,113,000 10,266,000 5,984,000 9,758,000
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
In December 1992, the Company acquired Mountaineer Park with the intent of
enhancing its facilities for promotion as a high quality gaming, racing and
recreation resort. Shortly thereafter, the Company determined to focus primarily
on the gaming industry. The Company anticipates that Mountaineer Park,
particularly video lottery operations, will continue to be the dominant factor
in the Company's financial condition for at least the next fiscal year.
Ultimately, the profitability of the Speedway and Reno Properties, which the
Company acquired in the second quarter of 1998, will be directly related to
whether and when the Company obtains all necessary Nevada gaming approvals. The
Company has been advised that the licensing process may take approximately a
year to complete, and that there can be no assurance that the Company will
obtain such licenses.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997
Total revenues increased by $22,972,000 from 1997 to 1998, an increase of
38.2%. Approximately $19.8 million of the increase was produced by video lottery
operations, while the parimutuel commissions and lodging, food, beverage and
other operations at Mountaineer Park contributed approximately $3.2 million of
additional revenues. Management believes the increase resulted primarily from
increased patronage resulting from the Company's expanded advertising
activities, the increase to 1,200 Video Slots in July 1998 (as compared to 800
from January 1 through March 12, 1997 and 1,000 thereafter) together with a
change in law that permitted Mountaineer Park to change the ratio of Video Slots
in the Lodge as compared to the racetrack building, the introduction of a
variety of Video Slots, the expansion of the Speakeasy Gaming Saloon and other
enhanced facilities.
The Nevada Properties contributed $1,046,000 in lodging, food and beverage
revenues in the year ended December 31, 1998. Since the May 1998 acquisition,
the Speedway Property has generally been dark during renovation of hotel rooms
and food and beverage facilities and construction of the 15,600 square foot
casino building and parking lots. There were no gaming operations at either
property during 1998.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 40% from $49.2 million in
1997 to $69.0 million in 1998.
An amendment of the Lottery Law that became effective in June of 1998
permitted Mountaineer Park to change the ratio of Video Slots located in the
Lodge versus the racetrack building from 1:1 to 2:1. Terminals located in the
Lodge's Speakeasy Gaming Saloon are more popular than those at the racetrack and
account for significantly more revenue. To capitalize on the change in law, the
Company constructed a 12,000 square foot addition to the Lodge's Speakeasy
Gaming Saloon, obtained regulatory approval to increase the total number of
Video Slots from 1,000 to 1,200 (by leasing 200 new "nickel" machines), and
placed 800 Video Slots in the Lodge and 400 in the racetrack building (as of
July 2, 1998).
With the expansion of the Speakeasy, Mountaineer Park also doubled the size
of Big Al's Deli and added additional bar and entertainment facilities. These
changes, together with the Company's advertising campaign, are primarily
responsible for the dramatic increase in revenue. Management also believes that
the introduction of variety in Mountaineer Park's Video Slots--in terms of both
manufacturers and types of games (nickel-based as well as quarter-based)
contributed to the increased patronage. Previously, only one manufacturer had
been authorized to provide Video Slots in West Virginia.
In December 1998, Mountaineer Park leased 100 more Video Slots (62 in the
Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive Video Slot
22
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.
For the twelve months ended December 31, 1998, average daily net win on the
VLTs placed at the racetrack was $68 (including $0 for days when there was no
live racing), compared to $243 earned on the Lodge-based terminals for a
facility-wide average of $171 per VLT per day. Management believes that the
increase from 500 Video Slots to 862 at the Lodge will result in a higher
overall net win for the facility. Both to maximize the Company's investment in
its racetrack-based Video Slots and associated amenities, and to relieve
overcrowding in the Speakeasy, the Company intends to encourage patrons to use
the racetrack's Video Slots. Management may offer free or reduced price food and
beverage as well as providing more entertainment at the racetrack in order to
attract patrons. If this strategy proves successful, Mountaineer Park will
likely increase the number of days it opens its track-based Video Slot and food
and beverage facilities. See "--Parimutuel Commissions" and "--Liquidity and
Sources of Capital--Capital Improvements."
A summary of the video lottery gross wagers less patron payouts ("net win")
for the twelve months ended December 31, 1998 and 1997 is as follows:
TWELVE MONTHS ENDED DECEMBER
31
------------------------------
1998 1997
-------------- --------------
Total gross wagers............................................................... $ 240,164,000 $ 171,138,000
Less patron payouts.............................................................. $ 171,172,000 $ 121,951,000
-------------- --------------
Revenue--
video lottery operations......................................................... $ 68,992,000 $ 49,187,000
-------------- --------------
Average daily net win per terminal............................................... $ 171 $ 140
-------------- --------------
-------------- --------------
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.
23
Parimutuel commissions for the twelve months ended December 31, 1998 and
1997 are summarized below.
TWELVE MONTHS ENDED DECEMBER
31
------------------------------
1998 1997
-------------- --------------
Live racing parimutuel handle..................................................... $ 21,594,000 $ 20,100,000
Simulcast racing parimutuel handle................................................ 22,217,000 20,875,000
Less patrons' winning tickets..................................................... (34,661,000) (32,464,000)
-------------- --------------
9,150,000 8,511,000
State and county parimutuel tax................................................... (494,000) (493,000)
Purses and Horsemen's Association................................................. (3,860,000) (3,581,000)
-------------- --------------
Revenues--parimutuel commissions.................................................. $ 4,796,000 $ 4,437,000
For the twelve months ended December 31, 1998, live handle rose by $1.5
million to $21.6 million, an increase of 7.5% compared to $20.1 million for the
same period in 1997. Simulcast racing handle for the year ended 1998 was $22.2
million, an increase of $1.3 million from the year ended 1997. Management
believes these increases resulted primarily from increased video lottery
attendance and cross-marketing from such activity. During 1998 management raised
average daily purses from $58,000 to $66,000 and sponsored stakes races of up to
$35,000 as compared with $25,000 in 1997. In 1998, Mountaineer Park also had
larger championship races. For the August 1998 running of the West Virginia
Derby, Mountaineer Park's race participants were paid $345,000 in a single day,
with $200,000 funded by the State Racing Commission for the feature race.
While management is encouraged by the $2.8 million increase in parimutuel
handle and $359,000 increase in revenue, it does not view the increases in
handle and revenues as significant (in comparison to the increases in purses).
Management continues to believe that periodic increases in average daily purses
and purses for stakes races will attract higher quality racehorses. Management
believes that over time such increases and improvements should lead to increased
live racing handle, or alternatively smaller decreases. Management also believes
that the enhanced quality of racehorses should improve the Company's prospects
in export simulcasting. Commencement of export simulcasting activity would not
only create a new source of revenue but the anticipated related increase in
gross dollars wagered on the Company's live races should also generate increases
in live handle (as a greater and more diverse wagering pool lessens the impact a
particular wager will have on the pay-off odds). Management intends to continue
its policy of increasing average daily purses (though not necessarily in the
winter months) as well as sponsoring substantially increased stakes races and
attempting to develop an export simulcast business. Management does not expect
results from racing operations to improve materially, despite larger daily
purses, stakes races, better horses, and reduced costs, unless and until
Mountaineer Park also commences export simulcasting. No assurance can be given,
however, that the Company will successfully commence export simulcasting or that
the anticipated results will be realized. See "--Costs and Expenses" and
"--Parimutuel Commission Operating Costs."
LODGING, FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage accounted for a combined
increase of 38.4% to $7.5 million for the year ended December 31, 1998, from
$5.4 million for the same period in 1997. Restaurant, bar and concession
facilities produced $880,000 of the revenue increase, while lodge revenues
increased $1.2 million. Food and beverage operations accounted for approximately
67% of the revenues from this profit center in 1998 and 75% in 1997. This
variance is attributable to the Nevada Properties. In 1998, 93%, or $976,000, in
revenues generated by the Nevada Properties was from lodging. Management
believes that increased revenues from lodging, food and beverage at Mountaineer
Park resulted primarily
24
from enhanced video lottery facilities and related advertising, which in turn
led to increased consumption of food and beverages by the Company's customers.
Increases in food and beverage revenue at Mountaineer Park also resulted from
the expansion of food and beverage facilities in the Speakeasy in July of 1998.
OTHER OPERATING REVENUES
Other sources of revenues consist primarily of non-core businesses such as
admission, programs, golf, special events, such as concerts and professional
boxing matches, check cashing and ATM services. While these lines of business
are not the Company's most profitable, the Company believes they are necessary
for the Company to continue to attract gaming patrons. Other revenues increased
by $726,000, or 66.2% from 1998 to 1997. The increase in 1998 was caused by a
$268,000 increase in miscellaneous income, a $177,000 increase in check cashing
fees, a $147,000 increase in special event ticket sales, and a $143,000 increase
in ATM service fees.
OPERATING COSTS
Total operating costs increased by 31.6% from $41.1 million in 1997 to $54.1
million in 1998. Approximately $11.3 million of the increase was attributable to
the cost of operating video lottery terminals, which includes applicable state
taxes and fees, and related advertising. The Company's 38.2% increase in
revenues in 1998 were accompanied by a 31.6% increase in cost of revenues, a
13.4% increase in marketing and promotions expense, a 33.1% increase in general
and administrative expenses, and a 58.3% increase in depreciation and
amortization. The increased marketing and promotion expenses were due primarily
to the continued broadcast of the Company's "Hancock County: The Action's Closer
Than You Think" infomercial, 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) additional marketing and promotional personnel, both
to implement the Company's marketing plan and to analyze the effectiveness of
the Company's marketing efforts to obtain the maximum long-term benefits of such
efforts; and (3) professional fees related to financing and acquisition
activity, including consideration of acquisitions that were not consummated. The
Nevada Properties' general and administrative costs were $413,000 in 1998.
The gains resulting from the profitability of the video lottery operations
have been offset by the losses sustained by parimutuel commissions business;
however, the Company has been able to substantially reduce its losses due to the
improvement in VLT operations. Based on this trend, the Company is attempting to
expand the video lottery business, while attempting to reduce the losses of the
parimutuel business by increasing productivity, expanding marketing efforts in a
more cost effective manner, increasing purse sizes, attracting higher quality
jockeys and horses, and pursuing export simulcasting to increase parimutuel
wagering. See "Parimutuel Commissions." Gross profit increased 52.5% in 1998
from $29.0 million compared to $19.0 million in 1997.
25
Operating Costs and gross profits earned from operations for the twelve
month period ended December 31, 1998 and 1997 are as follows:
YEARS ENDED DECEMBER 31
----------------------------
1998 1997
------------- -------------
Operating Costs
Video Lottery Terminals............................................................ $ 41,404,000 $ 30,081,000
Parimutuel Commissions............................................................. 4,963,000 5,591,000
Lodging, Food and Beverage......................................................... 6,522,000 4,268,000
Other.............................................................................. 1,212,000 1,171,000
------------- -------------
Total Operating Costs.............................................................. $ 54,101,000 $ 41,111,000
------------- -------------
------------- -------------
YEARS ENDED DECEMBER 31
----------------------------
1998 1997
------------- -------------
Gross Profit (Loss)
Video Lottery Terminals............................................................ $ 27,588,000 $ 19,106,000
Parimutuel Commissions............................................................. (167,000) (1,154,000)
Lodging, Food and Beverage......................................................... 977,000 1,149,000
Other.............................................................................. 611,000 (74,000)
------------- -------------
Total Gross Profit (Loss).......................................................... $ 29,009,000 $ 19,027,000
------------- -------------
------------- -------------
VIDEO LOTTERY TERMINALS OPERATING COSTS
Costs of video lottery revenue for 1998 increased by $11.3 million or 37.6%
from $30.1 million to $41.4 million for the year ended December 31, 1997,
compared to 1998, reflecting an increase in statutory expenses (See Note 15 of
the Consolidated Financial Statements). Such expenses accounted for $10.4
million of the total cost increase with the additional expenses incurred in
connection with video lottery. VLT lease expense increased by $297,000 in
comparison to 1997 due to the new 200 machines installed in July 1998 and the
additional 100 machines installed in December 1998. Wages and benefits and
supplies expense increased from 1997 to 1998 by $280,000 in response to higher
levels of patron play and patron volume.
Under the March 17, 1994, Racetrack Video 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 15 to the Consolidated Financial Statements of
the Company.)
26
Statutory costs and assessments including the State Administrative fee for
the respective twelve month periods are as follows:
TWELVE MONTHS ENDED
DECEMBER 31
----------------------------
1998 1997
------------- -------------
Employee Pension Fund.............................................................. $ 339,000 $ 241,000
Horseman's Purse Fund.............................................................. 10,511,000 7,480,000
Subtotal......................................................................... 10,850,000 7,721,000
State of West Virginia............................................................. 20,343,000 14,476,000
Tourism Promotion Fund............................................................. 2,034,000 1,448,000
Hancock County..................................................................... 1,356,000 965,000
Stakes Races....................................................................... 678,000 483,000
Veterans Memorial.................................................................. 678,000 482,000
------------- -------------
Total............................................................................ $ 35,939,000 $ 25,575,000
------------- -------------
------------- -------------
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel commission revenue attributable to racing decreased by $628,000 to
approximately $5 million in 1998. One of the primary causes of this decrease is
the reduction of the required number of live racing from 220 days a year in 1997
to 210 days in 1998. Purse expense (consisting of statutorily determined
percentages of live racing handle) increased by $160,000, 8.1%, to $2.1 million
in 1998, which is consistent with the increase in live handle. In connection
with simulcasting race operations, contractual fees paid to host tracks and
additional statutorily determined percentages of simulcast commissions
contributed to the purse fund for live racing increased $116,000 to $2.3 million
in 1998 consistent with the 7.4% increase in simulcasting wagers. 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 decreased by $322,000 to approximately $2.2 million in 1998, while
employee insurance benefits were also reduced by $226,000 in 1998 primarily as a
result of the reduction in the required number of live race days and
reallocation of the costs of certain personnel to other departments.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from $4.3
million in 1997 to $6.5 million in 1998. Of the $2.3 million increase in
expenses, $1.0 million is attributable to the Nevada Properties. The lodging,
food and beverage operation earned a gross profit of $977,000 compared to $1.1
million in 1997, a decrease of $172,000. The Nevada Properties' gross profit for
these areas was $22,000. The Speedway Property in North Las Vegas was not in
operation due to extensive remodeling since September 13, 1998. Lodging direct
costs totaled $2.2 million for 1998 compared to $821,000 in 1997. Direct costs
for lodging for the Nevada Properties were $976,000. Lodge wages and employee
benefits for the West Virginia property increased by $163,000 to $531,000 in
1998 from $368,000 in 1997, while food and beverage operation wages and employee
benefits increased by $296,000 in 1998. Such increases were caused as a result
of an increase in service personnel in these areas.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
racing programs, golf, tennis and swimming and check cashing increased by
$41,000 from $1,171,000 in 1997 to $1,212,000 in 1998.
27
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense increased by $359,000 to $3,050,000 for the
year ended December 31, 1998 primarily due to increased advertising expenses in
connection with the Company's aggressive marketing campaign (commenced in 1996),
its infomercial advertising continuing in 1998 and an increase in concert
production costs. In 1998, Mountaineer Park's advertising costs were defrayed by
a state grant in the amount of $560,000, compared to a grant of $330,000 in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
The Company's general and administrative expense increased by $2.6 million
to $10.5 million, or 33.1%, from $7.9 million for the year ended December 31,
1998 as compared to 1997 (which increase is consistent with the increase in
revenue). Such increase resulted primarily from an increase of $1.5 million in
service personnel as follows: housekeeping ($172,000); security ($435,000);
human resources ($100,000); accounting ($247,000); administrative ($218,000) and
maintenance departments ($303,000). The increases in accounting and
administrative salaries were caused in part by the additions of an Internal
Audit department and a Management Information Systems department. Professional
fees due to financing and acquisition activity (including acquisitions that were
considered but not consummated) increased by $375,000. The Nevada Properties had
general and administrative expenses totaling $413,000 in 1998.
In 1998, the Company incurred $4,259,000 of interest expense. Interest
expense in 1998 included $860,000 of a $1.8 million one-time cash fee paid over
the first year of the extended loan term pursuant to the July 2, 1997 Second
Amended and Restated Term Loan Agreement among the Company, Mountaineer Park and
Madeleine LLC. The increase in interest expense can be attributed to the
Company's increased borrowing in connection with the acquisition of the Nevada
Properties ($11.4 million).
Depreciation and amortization costs increased 58.3% from $2.4 million in
1997 to $3.8 million in 1998, reflecting increased capitalization of
improvements completed at Mountaineer Park's facilities such as the new
Clubhouse entry ($206,000) and the Speakeasy addition ($1.3 million).
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
Total revenues increased by $19.9 million from 1996 to 1997, an increase of
50%. Video lottery operations accounted for $18.5 million of the increase, and
lodging, food and beverage operations contributed $1.5 million of the increase.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 60%, from $30.7 million in
1996 to $49.2 million in 1997. Management believes the increase resulted
primarily from increased patronage resulting from the Company's expanded
advertising activities, the conversion of 800 Video Slots from card and keno
games to "line" or "reel" games by March 1997 (as compared to 1996 when the
Company had no line games until July of that year), greater familiarity of
customers with the Company's gaming machines, and other enhanced facilities.
In July of 1996, after passage of legislation permitting the use of line
games as opposed to only card and keno games, Mountaineer Park converted 350
Video Slots to line games. Also in July of 1996 the Company began a large-scale
marketing campaign aimed beyond the 40 mile radius from which the Company has
traditionally drawn the bulk of its patrons. In October of 1996, Mountaineer
Park converted an additional 50 Video Slots to line games. In March of 1997,
Mountaineer Park purchased and installed 400 new Video Slots and removed 200
previously leased card-only games, bringing the total number of VLTs to 1,000 as
of March 13, 1997, consisting of 800 with line games and only 200 without. In
January of 1997, Mountaineer Park also began broadcasting the first 30-minute
"infomercial" advertisement on television affiliates within a two hour driving
radius.
28
A summary of the video lottery gross wagers less patron payouts ("net win")
for the twelve months ended December 31, 1996 and 1997 is as follows:
TWELVE MONTHS ENDED
DECEMBER 31
------------------------------
1997 1996
-------------- --------------
Total gross wagers............................................................... $ 171,138,000 $ 104,819,000
Less patron payouts.............................................................. $ 121,951,000 $ 74,119,000
-------------- --------------
Revenue--
video lottery operations......................................................... $ 49,187,000 $ 30,700,000
-------------- --------------
Average daily net win per terminal............................................... $ 140 $ 105
-------------- --------------
-------------- --------------
PARIMUTUEL COMMISSIONS
Parimutuel commissions for the twelve months ended December 31, 1997 and
1996 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
----------------------------
1997 1996
------------- -------------
Live racing parimutuel handle...................................................... $ 20,100,000 $ 20,426,000
Simlucast racing parimutuel handle................................................. 20,875,000 19,673,000
Less patrons' winning tickets...................................................... (32,464,000) (31,766,000)
------------- -------------
8,511,000 8,333,000
State and county parimutuel tax.................................................... (493,000) (487,000)
Purses and Horsemen's Association.................................................. (3,581,000) (3,547,000)
------------- -------------
Revenues--parimutuel commissions................................................... $ 4,437,000 $ 4,299,000
For the twelve months ended December 31, 1997, live handle rose by $1.2
million to $20.9 million, an increase of 6.1% compared to $19.7 million for the
same period in 1996. Management believes the increase resulted primarily from
increased video lottery attendance and cross-marketing from such activity.
Simulcast racing handle declined by $326,000, for the year ended December 31,
1997, to $20.1 million, from $20.4 million for the year ended December 31, 1996.
Average daily purses for 1997 increased to $58,000 from $54,000 in 1996, and
prizes for stakes races increased to $25,000 as compared with $20,000 in 1996.
In 1997, the West Virginia legislature passed a bill that reduced the
minimum number of annually required racing days from 220 to 210 commencing in
1998. Additionally, the bill specified procedures which allow further reductions
in the required number of live race days if certain conditions exist, subject to
approval by the State Racing Commission.
LODGING FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage accounted for a combined
increase of 37% to $5.4 million for the year ended December 31, 1997, from $3.9
million for the same period in 1996. Restaurant, bar and concession facilities
produced $1.3 million of the revenue increase, while Lodge revenues increased
$200,000. Food and beverage operations accounted for approximately
three-quarters of the revenues earned by this profit center in 1997 and 1996.
Management believes that increased revenues from lodging, food and beverage
resulted from enhanced video lottery facilities and related advertising, which
in turn led to increased consumption of food and beverages by the Company's
customers, substantially as a result of the opening of Big Al's Deli in the
Speakeasy Gaming Saloon. The ratio of revenue
29
from food and beverage to revenue from lodging has remained constant, reflecting
that Mountaineer has historically drawn more day traffic than overnight stays.
OTHER REVENUES
Other revenue decreased by $163,000 or 12.9%, from $1,260,000 to $1,097,000
in 1997 as compared to 1996. $112,000 of the decrease resulted from the
Company's decision to permit free parking for its customers at the racetrack
facility.
OPERATING COSTS
The expanded scope of operations which produced Mountaineer Park's 1996 50%
revenue increase was accompanied by a 48.8% increase in cost of revenues, a
56.6% increase in marketing and promotions expense, a 27.1% increase in general
and administrative expenses, and a 44.9% increase in depreciation and
amortization.
Operating costs and gross profits earned from operations for the twelve
month period ended December 31, 1997 and 1996 are as follows:
YEARS ENDED DECEMBER 31
----------------------------
1997 1996
------------- -------------
Operating Costs
Video Lottery Terminals............................................................ $ 30,081,000 $ 19,244,000
Parimutuel Commissions............................................................. 5,591,000 4,923,000
Lodging, Food and Beverage......................................................... 4,268,000 2,805,000
Other.............................................................................. 1,171,000 660,000
------------- -------------
Total Operating Costs.............................................................. $ 41,111,000 $ 27,632,000
------------- -------------
------------- -------------
YEAR ENDED DECEMBER 31
----------------------------
1997 1996
------------- -------------
Gross Profit (Loss)
Video Lottery Terminals............................................................ $ 19,106,000 $ 11,456,000
Parimutuel Commissions............................................................. (1,154,000) (624,000)
Lodging, Food and Beverage......................................................... 1,149,000 1,140,000
Other.............................................................................. (74,000) 600,000
------------- -------------
Total Gross Profit (Loss).......................................................... $ 19,027,000 $ 12,572,000
------------- -------------
------------- -------------
VIDEO LOTTERY TERMINALS OPERATING COSTS
Costs of video lottery revenues increased by $10.8 million, or 56.3%, from
$19.2 million to $30.1 million for the year ended December 31, 1997, compared to
1996, reflecting the increase in statutory expenses directly related to the 60%
increase in video lottery revenues. Such expenses accounted for $9.7 million of
the total cost increase.
30
Statutory costs and assessments including the State Administrative fee for
the respective twelve-month periods are as follows:
TWELVE MONTHS ENDED
DECEMBER 31
---------------------------
1997 1996
------------- ------------
Employee Pension Fund................................................................ $ 241,000 $ 150,000
Horseman's Purse Fund................................................................ 7,480,000 4,645,000
Subtotal........................................................................... 7,721,000 4,795,000
State of West Virginia............................................................... 14,476,000 8,989,000
Tourism Promotion Fund............................................................... 1,448,000 899,000
Hancock County....................................................................... 965,000 599,000
Stakes Races......................................................................... 483,000 300,000
Veterans Memorial.................................................................... 482,000 300,000
------------- ------------
Total.............................................................................. $ 25,575,000 15,882,000
------------- ------------
------------- ------------
PARIMUTUEL COMMISSIONS OPERATING COSTS
Costs of parimutuel commission revenue increased by $668,000 to
approximately $5.6 million in 1997 primarily as a result of increased cost of
jockey insurance and expansion of video patrol and veterinarian services. Purse
expense dropped 2.5%, to $1.9 million in 1997, reflecting the decrease in live
racing wagers. Contractual fees paid to host tracks and the Horsemen's
Association in connection with simulcasting race operations increased $100,000
to $2.3 million in 1997, consistent with the 6.1% increase in simulcasting
wagers.
Direct and indirect wages and employee benefits attributable to racing
operations increased by $100,000 to approximately $2.5 million in 1997 from $2.4
million in 1996, while lease expense was increased by $91,000 to $788,000 due
primarily to the increase in simulcast handle.
LODGING FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from $2.8
million in 1996 to $4.3 million in 1997 consistent with the increase in revenue
and due to allocation of waste disposal costs. The lodging, food and beverage
operation's gross profit remained stable at $1.1 million in 1996 and 1997.
Lodging direct costs totaled $1.5 million for 1996, compared to $821,000 in
1997. Lodge wages and employee benefits decreased by $152,000 from $520,000 in
1996, while food and beverage operation wages and employee benefits increased by
$452,000 from $783,000 in 1996 to $1.2 million in 1997.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues increased by $511,000 from $660,000 in 1996 to
$1,171,000 in 1997 primarily as a result of increases in the cost of check
cashing services, lottery ticket sales, golf course maintenance and special
events.
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense increased by $973,000 to $2.7 million for
the year ended December 31, 1997, compared to $1.7 million for the year ended
December 31, 1996. The bulk of this increase occurred in January 1997, when
Mountaineer Park commenced extensive infomercial advertising on television
affiliates within a two hour driving radius. In 1997, Mountaineer Park's
advertising costs were defrayed by a state grant in the amount of $330,000 from
a convention and visitors bureau of which Mountaineer Park is a member.
31
GENERAL AND ADMINISTRATIVE EXPENSES AND INTEREST
The Company's general and administrative expenses increased by $1.7 million
to $7.9 million, or 27%, from $6.2 million for the years ended December 31, 1997
and 1996, respectively primarily as a result of increases in professional and
consulting fees and higher salaries and cost of supplies for housekeeping,
maintenance and security. In 1997, the Company incurred $3.3 million of
interest. Interest expense in 1997 included the payment of approximately $1.1
million of the $1.8 million of one-time cash fees provided by the Second Amended
and Restated Term Loan Agreement among the Company, Mountaineer Park, and
Madeleine LLC. Depreciation and amortization costs increased 44.9% from
$1,667,000 in 1996 to $2,415,000 in 1997, reflecting the increased property,
plant and equipment balances carried at Mountaineer Park, including the purchase
of 400 VLTs for $3.2 million.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $12,457,000 at December 31,
1998, and its unrestricted cash balance amounted to $9,074,000. Racing purses
are paid from funds contributed by the Company to bank accounts owned by the
horse owners who race at Mountaineer Park. At December 31, 1998, the balances in
these accounts exceeded the purse payment obligations by $946,000; this amount
is available for payment of future purse obligations at the discretion of the
Company and in accordance with the terms of its agreement with the HBPA.
LONG-TERM DEBT AND LINE OF CREDIT REFINANCING. Effective July 2, 1997,
Mountaineer and the Company amended and restated the July 2, 1996 Term Loan
Agreement, which had been previously amended and restated as of December 10,
1996. The December 10, 1996 Amended Term Loan Agreement reflected an increase in
the amount borrowed from $5 million to $16.1 million, established a $5,376,500
revolving line of credit, and converted the lender's position from second to
first trust holder.
The July 2, 1997 Second Amended Term Loan Agreement (i) extended the term of
the loan to July 2, 2001 (compared to July 2, 1999); (ii) increased the total
amount borrowed to $21,476,500 (by virtue of Mountaineer Park drawing down the
line of credit); (iii) eliminated from the Amended Term Loan Agreement annual
fees of cash in the amount of 8% of the outstanding principal balance of the
loan that would have been due each November 15 while the loan is outstanding;
(iv) calls for payments of interest only with the principal due at the end of
the four year term; (v) eliminated annual warrants to purchase 250,000 shares of
the Company's common stock at $1.06 per share which would have been issued on
November 15, 1997, 1998 and 1999; and (vi) eliminated annual warrants to
purchase additional shares in a number to be calculated under a formula defined
in the Amended Term Loan Agreement, which would have been issued on November 15,
1997, 1998 and 1999. The lender's rights pursuant to the Amended Term Loan
Agreement with respect to the 550,000 shares of the Company's stock and warrants
to purchase 1,632,140 additional shares issued thereunder are unaffected by the
Second Amended Agreement. The Company continues to guarantee the loan. As a
result of this transaction and as a result of the combination of financing and
the Company's increased revenues and cash flows, the Company was able to reduce
current liabilities from $3,099,000 at December 31, 1997 to $2,599,000 as of
December 31, 1998.
As consideration for the lender's entering into the Second Amended Term Loan
Agreement, Mountaineer Park agreed (i) to pay a one time fee of approximately
$1.8 million or 8.5% of the total amount borrowed, which was payable over the
first year of the term (as of December 31, 1998, the Company paid the full
amount of this fee); (ii) to pay interest at the rate of 13% (compared to 12% on
the $16.1 million term loan and 15% on the $5.4 million line of credit under the
Amended Term Loan Agreement); and (iii) to pay a call premium equal to 5% in the
event of prepayment during the first year of the term, declining to 3% during
the second year, 2% in the third year and 1% in the final year.
The Company, as guarantor, entered into the Third Amended and Restated Term
Loan Agreement, dated as of April 30, 1998, by and among Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc.,
32
Speakeasy Gaming of Reno, Inc. and Madeleine LLC in order to finance the
acquisitions of the Nevada Properties. This increased the loan amount to
$33,391,500.
The loan amendment also provides a construction line of credit of up to $1.7
million for the Speedway Property and increases Mountaineer Park's line of
credit by $5 million (up to $1.5 million of which may be used for improvements
at the Nevada Properties). At December 31, 1998, the Company had not drawn
against the lines of credit, except for $150,000 in payment of fees associated
with the increase of Mountaineer Park's credit line. The loans, as well as any
draws against the lines of credit, continue to be for a term ending July 2, 2001
with monthly payments of interest only at the rate of 13% per year with all
principal becoming due at the end of the term. The loans likewise remain secured
by substantially all of the assets of Mountaineer Park and now Speakeasy Las
Vegas and Speakeasy Reno and are unconditionally guaranteed by the Company. The
call premium applicable to prepayment of the loans (3% between July 3, 1998 and
July 2, 1999, 2% from July 3, 1999 until July 2, 2000, and 1% from July 3, 2000
until the end of the term), however, does not apply to the $11.8 million
borrowed for the acquisitions or draws on the $1.7 million Speedway construction
line of credit.
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer Park facility including approximately doubling its
hotel room capacity and constructing a regional convention center, most likely
to commence in late 1999 or early 2000. The Company may separately finance any
construction activities that it executes of this magnitude. Capital improvements
of a near-term nature include numerous smaller renovations, such as renovations
to the concession stands. The Company also intends to spend approximately $2
million to $2.5 million to develop export simulcasting at Mountaineer Park
during 1999.
On October 7, 1997, Mountaineer Park entered into an agreement by which it
obtained an exclusive option to purchase 349 acres of real property located
adjacent to its Hancock County, West Virginia operation. Mountaineer Park paid
$100,000 in exchange for an irrevocable option to purchase the property for
$600,000 before October 1, 1998, with payment to be made in the form of a
$200,000 cash payment at closing and a $400,000 term note bearing interest at 9%
payable over five years. The Company has extended this option for an additional
year and intends to exercise it to purchase substantially all such 349 acres.
In February 1998, Mountaineer Park purchased from Realm, Inc. 350 acres in
Chester, West Virginia, located adjacent to Mountaineer Park's operations, for a
purchase price of $240,000, exclusive of brokerage fees and closing costs of
approximately $30,000. The Company has no current plans to develop this
unimproved property.
On November 2, 1998, the Company's subsidiary, Speakeasy Gaming of Las
Vegas, Inc., purchased a one-half acre parcel adjacent to the Las Vegas Property
for the sum of $120,000.
On January 21,1999, the Company purchased the 168-acre Woodview Golf Course
in New Cumberland, West Virginia. The purchase price of the course was $843,000,
primarily for a note and assumption of debt. The Company plans to improve the
cart paths, greens and Clubhouse.
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 improvements.
OUTSTANDING OPTIONS AND WARRANTS. As of December 31, 1998, there were
outstanding options and warrants to purchase 7,555,867 shares of the Company's
common stock. Of this amount, warrants to purchase 1,757,813 shares are held by
the Company's lender whose exercise rights are subject to a statutory ownership
limitation not to exceed 5% of the Company's outstanding voting shares without
prior approval of the West Virginia Lottery Commission. All but 70,000 of such
shares are either subject to registration rights or have been included in a
registration statement which the Company filed with the Securities and Exchange
Commission and which has been declared effective. If all such options and
warrants were exercised, the Company would receive proceeds of approximately
$11.5 million.
33
In February of 1999, pursuant to various employment agreements and the
Company's 1992 Employee Stock Option Plan, the Company granted to various
employees options to purchase, in the aggregate, 435,000 shares of the Company's
common stock. Also in February of 1999, the Board of Directors of the Company
created, subject to shareholder approval, the Company's 1999 Employee Stock
Purchase Plan, for which the Company intends to reserve 800,000 shares, of which
750,000 shares have been granted to various employees of the Company.
DEFERRED INCOME TAX BENEFIT. Management believes that the substantial and
steady revenue increases earned in the past three years will continue, and
ultimately occur in amounts which will more likely than not allow the Company to
utilize its $11.4 million federal net operating loss tax carry forwards,
although there are no assurances that sufficient income will be earned in future
years to do so. The utilization of federal net operating losses may be subject
to certain limitations. For the year ended December 31, 1998, a reconciliation
of the statutory Federal income tax provision from continuing operations to the
benefit for income taxes includes utilization of net operating loss carry
forwards of approximately $2.6 million. See Note 14 of the Notes to the
Company's Audited Financial Statements for the years ended December 31, 1998,
1997 and 1996.
COMMITMENTS AND CONTINGENCIES
The Company has various commitments including those under various consulting
agreements, operating leases, and the Company's pension plan and union contract.
The Company has also entered into new employment agreements with certain
employees for periods ranging from one to five years. Compensation under the
employment agreements consists of both cash payments and stock option
commitments. The Company anticipates cash payments in the amount of
approximately $2.4 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. In addition, the Company is faced
with certain contingencies involving litigation and environmental remediation.
These commitments and contingencies are discussed in greater detail in Notes 9
and 10 to the Company's Audited Financial Statements for the years ended
December 31, 1998, 1997 and 1996. Although there can be no assurance, the
Company believes that its cash balances, cash generated from operations and
available lines of credit will be sufficient to meet all of the Company's
currently anticipated commitments and contingencies.
On October 30, 1998, the Company's oil and gas subsidiary, ExCal Energy
Corporation ("Excal") exchanged to SABAL Corp., an unaffiliated entity, its
remaining oil and gas interests. In connection with the transaction, ExCal (i)
received an Assignment of Production Payment in the amount of $2.5 million,
which bears interest at the rate of 3% per year, matures after a term of fifteen
years, and is convertible, at the election of ExCal, into up to 25% of the
equity of SABAL on a fully diluted basis; and (ii) agreed to lend to SABAL up to
$500,000 to be used principally for the development of the project. The loan to
SABAL bears interest at the rate of 15% per year (interest only for the first
six months) and is for a term of two years. The balance of this loan as of
December 31, 1998 was $333,000. Because of the uncertainty of collection of the
production payment, and the depressed oil market, the Company recorded a
one-time loss in connection with this exchange (involving the sale of its
discontinued operations) of approximately $2.7 million. See "--Results of
Discontinued Operations" and Note 13 of the Notes to the Company's Audited
Financial Statements for the years ended December 31, 1998, 1997 and 1996.
YEAR 2000
The Company has analyzed Year 2000 issues with its computer and software
advisors and has assessed the impact of Year 2000 issues on the Company's
operations. Manufacturer's documentation of Year 2000 compliance has been
reviewed during this assessment. All information technology items, both software
and hardware, are Year 2000 compliant except for one software package being used
by the Video Lottery Department. The one software package that is not compliant
is IGT's SAMS 3 System. This system is the central communication package that
allows communication between the IGT VLT's on site and the Lottery
34
Commission software in Charleston, WV. The solution to this Year 2000
noncompliance must be agreed upon by all four West Virginia tracks. The Company
determined that it would be more economical to replace the current SAMS 3 System
than to modify it so that it is Year 2000 compliant, because the system was no
longer sufficient to meet the Company's anticipated needs irrespective of the
Year 2000 issue and because a new system would generally enhance the Company's
competitive position in the industry. The final determination of the replacement
system has not been made at this time. It is anticipated that the selection of
the new software will be made within the next three months. The cost of the
replacement system may range from $250,000 to $500,000 per track. In the event
the system has not been replaced in a timely manner, the Company's contingency
plan is to modify the existing SAMS 3 system to be Y2K compliant. The company
believes that the cost of such modification will not be material.
The Company believes that all of its non-information systems are Year 2000
compliant. The Company believes that there are currently no other material Year
2000 issues to be disclosed.
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Company's Board approved a formal plan to divest the
Company of certain oil and gas operations the Company owned in Ohio and Michigan
through a plan of orderly liquidation. This decision was based upon several
factors including (i) the anticipated potential of the Company's gaming
operations and the anticipated time to be devoted to it by management, (ii) the
expiration of "Section 29" credits, a credit against federal income taxes
derived from gas produced from Devonian Shale and "tight sands" formations from
wells commenced before January 1993, (iii) the impact of delays in connection
with the West Virginia Supreme Court litigation and subsequent passage of
enabling legislation for video lottery during 1994 which caused management to
focus the Company's efforts and financial resources on Mountaineer Park, and
(iv) the Company's desire to continue to place its primary emphasis on its
gaming and recreational businesses. The Company closed the exchange of its
remaining oil and gas interest on October 30, 1998. See "Commitments and
Contingencies."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at December 31, 1998. The Company's loans,
payables, or receivables to or from others (including loans, payables or
receivables to or from its subsidiaries or joint ventures) and the interest
thereon, are all expressed as dollar obligations and payable in dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and accompanying footnotes are set forth on pages F-1
through F-42 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See "Exhibits, Financial Schedules and Reports on Form 8-K--Reports on Form
8-K."
35
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).......... 51 President, Chief Executive Officer,
Chief Financial Officer, Chairman of the
Board
Robert L. Ruben(3)............ 37 Vice President, Assistant Secretary,
Director
Robert A. Blatt(2)(3)......... 58 Vice President, Assistant Secretary,
Director
James V. Stanton(1)........... 66 Director
William D. Fugazy, Jr.(1)..... 48 Director
Rose Mary Williams............ 42 Secretary
- ------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Finance Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
BUSINESS EXPERIENCE
EDSON R. ARNEAULT, 51, 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,
Golden Palace, 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
virtually all his time and attention to the business of the Company. Mr.
Arneault is a certified public accountant, and has served as a tax partner with
Seidman and Seidman (now "BDO Seidman, LLP"), a public accounting firm, in Grand
Rapids, Michigan, from 1977 to 1980. Mr. Arneault was employed as a certified
public accountant by Arthur Andersen in the tax department of its Cleveland
office from 1972 to 1976. Mr. Arneault is a member of the Independent Producers
Association of America, the Ohio Oil and Gas Association, the Michigan Oil and
Gas Association and the Michigan Association of Certified Public Accountants.
Mr. Arneault received his Bachelor of Science in Business Administration from
Bowling Green University in 1969, his Master of Arts from Wayne State University
in 1971; and his Masters in Business Administration from Cleveland State
University in 1978. Mr. Arneault also serves as a member of the Hospitality and
Tourism Management Board of Visitors of Robert Morris College in Pittsburgh,
Pennsylvania. See "--Certain Relationships and Related Transactions."
ROBERT L. RUBEN, 37, 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. Mr. Ruben is also a director of
Mountaineer Park and serves as assistant secretary of the Company and
Mountaineer Park and as Chairman of the Compensation Committee. 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
36
the Dickinson School of Law in 1986. He is a member of the bars of the District
of Columbia and the Commonwealth of Pennsylvania. 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, 58, 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 66, has been a director of the Company since February 1998
and serves on the Company's Audit Committee. Mr. Stanton has his own law and
lobbying firm, Stanton & Associates, in Washington, D.C. From 1971 to 1978, Mr.
Stanton represented the 20th Congressional District of Ohio in the United States
House of Representatives. While in Congress Mr. Stanton served on the Select
Committee on Intelligence, the Government Operations Committee, and the Public
Works and Transportation Committee. Mr. Stanton has held a wide variety of
public service positions, including service as the youngest City Council
President in the history of Cleveland, Ohio and membership on the Board of
Regents of the Catholic University of America in Washington, D.C. Mr. Stanton is
also former Executive Vice President of Delaware North, a privately held
international company which, during Mr. Stanton's tenure, had annual sales of
over $1 billion and became the leading parimutuel wagering company in the United
States, with worldwide operations including horse racing, harness racing, dog
racing, and Jai-Lai. Delaware North also owned the Boston Garden and the Boston
Bruins hockey team. From 1985-1994 Mr. Stanton was a principal and co-founder of
Western Entertainment Corporation, which pioneered one of the first Native
American Gaming operations in the United States, a 90,000 square foot bingo and
casino gaming operation located on the San Manuel Indian Reservation in
California, which generated annual revenues in excess of $50 million. Mr.
Stanton also serves on the boards of CCA Companies Incorporated, and Saf T Lok,
Inc.
WILLIAM D. FUGAZY, JR., 48, has been a director of the Company since
February 1998 and serves on the Company's Audit Committee. He is presently
Chairman of Camelot Ventures, Inc., which is a financial advisory firm based in
New York City and is Chief Executive Officer of Summit Aviation Corporation,
which is an executive aviation services firm based at Republic Airport in East
Farmingdale, New York. Mr. Fugazy is a former Regional President of Koll Real
Estate Services, a company which provided real estate services throughout the
United States and internationally. Koll was one of the largest real estate
services companies in the world and in August 1997 merged with CB Commercial
Real Estate Group, Inc. Mr. Fugazy served in this capacity since January 1993.
Prior to joining Koll, Mr. Fugazy was President of Tishman Management and
Leasing Services Corporation, also a national real estate service company which
was sold to Koll in 1992. Mr. Fugazy served in that capacity since September
1989. Prior to joining Tishman, Mr. Fugazy was Senior Vice President of Muller
and Company, a national investment banking and securities brokerage operation.
Mr. Fugazy is also a partner and officer of the Beacon Hotel and Resort
Corporation, a hotel management company with offices in New York, Los Angeles,
California and Miami Beach, Florida. Mr. Fugazy holds a B.S. Degree from Fordham
University in New York.
37
ROSE MARY WILLIAMS, 42, 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.
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 $100,000 in the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------ ----------------------- PAYOUTS
OTHER RESTRICTED ----------------------
ANNUAL STOCK OPTIONS ALL OTHER
SALARY BONUS COMP. AWARDS SARS LTIP COMP.
NAME YEAR ($)(1) ($) ($)(2) ($) (#)(3) PAYOUTS ($) ($)(5)
- ------------------------------------- --------- --------- --------- --------- ----------- ---------- ----------- ---------
Edson R. Arneault(4) ................ 1998 384,525 92,750 36,922 -- 1,000,000 -- --
Chairman, President and Chief 1997 300,643 67,500 4,517 -- 150,000 -- --
Executive Officer of MTR Gaming 1996 230,521 67,500 24,590 2,748 300,000 -- --
Group, Inc.
Thomas K. Russell ................... 1998 12,000 -- -- -- -- -- 99,676
Secretary, Treasurer, Chief 1997 170,697 -- -- -- -- -- --
Financial Officer, General Counsel 1996 162,729 -- 7,496 619 100,000 -- --
and Director of MTR Gaming Group,
Inc.
Bruce E. Dewing(4) .................. 1998 128,846 -- -- -- -- -- --
Vice President and Chief Operating
Officer of Speakeasy Las Vegas and
Speakeasy Reno
- ------------------------
(1) Mr. Arneault's bonus paid in 1998 includes $52,000 earned by Mr. Arneault in
1997. In February of 1998, Mr. Russell resigned his positions and became a
part-time employee.
(2) Includes accrued 1997 vacation compensation of $14,769 and accrued 1998
vacation compensation of $22,153 paid to Mr. Arneault in 1998.
(3) All options granted by the board of directors in 1998 were approved by vote
of the stockholders at the Company's annual meeting of stockholders held
August 21, 1998.
(4) See "Employment Agreements" below with respect to Mr. Arneault. Mr. Dewing
commenced employment with the Company in 1998.
(5) Represents severance paid in connection with termination of Mr. Russell's
employment agreement.
38
OPTION GRANTS IN 1998
The following table contains information concerning the grant of stock
options during fiscal year 1998 to the Company's executive officers named in the
Summary Compensation Table.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL OPTION TERM(1)
OPTIONS OPTIONS GRANTED EXERCISE EXPIRATION -----------------------
NAME GRANTED(#)(1) IN FISCAL YEAR PRICE DATE 5% 10%
- ------------------------------ -------------- --------------- ------------- ------------- ----------- ----------
Edson R. Arneault............. 300,000 16% $ 2.15625 Jan. 2003 178,720 394,923
700,000 38% 2.41 March 2003 466,087 1,029,930
- ------------------------
(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.
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, 1998.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
ACQUIRED END AT YEAR END($)(1)
ON EXERCISE VALUE ------------------------- ---------------------------
NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- -------------- ----------- ---------- ------------- ------------ -------------
Edson R. Arneault.......... 378,415 149,474 1,591,334 -- $ 1,013,502 --
Thomas K. Russell.......... 222,316 101,709 179,500 -- $ 295,665 --
- ------------------------
(1) Based on the market price of the Company's Common Stock of $2.43 on December
31, 1998, as reported by Nasdaq.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the provisions of Section 16(a) of the Exchange Act, the Company's
officers, directors and 10% beneficial stockholders are required to file reports
of their transactions in the Company's securities with the Commission. Based
solely on a review of the Forms 3 and 4 and amendments thereto furnished to the
Company during its most recent fiscal year and Forms 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal year, the
Company believes that as of March 22, 1999, all of its executive officers,
directors and greater than 10% beneficial stockholders, except for Mr. Stanton
(with respect to one report), complied with all filing requirements applicable
to them during 1998.
EMPLOYMENT AGREEMENTS
On February 16, 1998, the Company entered into an Amendment of Employment
Agreement with Thomas K. Russell (the "Amendment Agreement") which governs, as
of such date, the terms of Mr. Russell's employment with the Company. The
Amendment Agreement replaced a May 10, 1994 agreement pursuant to which Mr.
Russell served as an officer and director of the Company. Pursuant to the terms
of the Amendment Agreement (i) Mr. Russell resigned from all directorships and
offices that he held with the Company and its affiliates (the "Companies") prior
to February 16, 1998 and from membership on any committees of the Companies;
(ii) the Company agreed to pay Mr. Russell the sum of
39
$99,676.94 offset by any advances or payroll received by him from the Company
after December 31, 1997 (such offsets totaling $48,000); (iii) the Company
agreed to employ Mr. Russell as an Assistant to the President for a term of 20
months commencing on January 1, 1998 and terminating on September 15, 1999
(during which time Mr. Russell will not be expected to devote more than 15 hours
per month to the business of the Company in consideration of a salary of $1,000
per month); and (iv) the Company and Mr. Russell agreed on certain other
provisions including a release and indemnification, medical insurance,
non-disclosure and confidentiality.
The Company entered into a new employment agreement dated February 1, 1999
with its President and CEO, Edson R. Arneault. The agreement is for a term of
five (5) years, calls for an annual base salary of $450,000 (subject to
automatic annual cost of living increases of 5%), semi-annual cash bonuses of
$50,000, and a performance bonus for each year equal to 1% of the gross
operating revenue increase over 1998 operating revenue (provided, however, that
EBITDA, as defined, exceeds 1998 EBITDA). The Company also entered into a
deferred compensation agreement dated January 1999 whereby the Company will
purchase a life insurance policy on the President and CFO's life (face amount of
$2,250,000 and annual premium of $100,000). The owner of the policy will be the
Company. The President and CEO will also be entitled to an annual benefit, as
defined, upon retirement, death or termination out of the cash value of the
insurance policy. The benefits provided by the agreement were granted to the
President as additional benefits and not as part of any salary reduction plan or
arrangement deferring a bonus or a salary increase.
On February 1, 1999, the Company entered into an employment agreement with
Robert A. Blatt. Pursuant to the agreement, Mr. Blatt agreed to serve the
Company in the capacity of Vice President, Chairman of the Company's Finance
Committee, a member of its Compensation Committee as well as Assistant Secretary
and Vice President of Mountaineer Park, Inc., and in such other offices and
directorships of the Company and its affiliates to which he may be elected or
appointed, for a five year period ending January 31, 2004. The agreement
provides for an annual base salary of $46,000 per year (subject to automatic
annual cost of living increases of 5%), additional compensation for additional
services in the amount of $2,500 per day and cash bonuses and other benefits as
the Compensation Committee of the Company's Board of Directors may periodically
award in its discretion based on Mr. Blatt's performance. The Company also
agreed to provide a deferred compensation plan upon terms and conditions
described in the agreement.
On February 1, 1999, the Company also entered into an employment agreement
with Robert L. Ruben. Pursuant to the agreement, Mr. Ruben agreed to serve the
Company as Assistant Secretary, Vice President, Chairman of the Compensation
Committee and Chairman of the Compliance Committee, as well as Assistant
Secretary and Vice President of Mountaineer Park, Inc. and in such other offices
and directorships of the Company and of its affiliates to which he may be
elected or appointed, for a five year period ending on January 31, 2004. The
agreement provides for an annual base salary of $46,000 per year (subject to
automatic annual cost of living increases of 5%) and such cash bonuses and other
benefits as the Compensation Committee of the Board of Directors may
periodically award in its discretion based on Mr. Ruben's performance. The
Company also agreed to provide a deferred compensation plan upon terms and
conditions described in the agreement.
COMPENSATION OF DIRECTORS
During 1998 Mr. Ruben and Mr. Blatt received $2,500 for each meeting of the
Board of Directors, a committee of the Board or of the shareholders that they
attend and reimbursement for out-of-pocket expenses incurred in attending such
meetings. Mr. Blatt also received $3,000 per month for serving as Chairman of
the Finance Committee and $114,250 in consulting fees. For their service in 1996
through 1998, Messrs. Ruben and Blatt also received options to purchase, in the
aggregate, 500,000 and 475,000 shares of the Company's common stock,
respectively, for prices ranging from $.56 to $2.15 per share. As of February
1999, Messrs. Ruben and Blatt became employees of the Company. Directors who are
40
employees of the Company do not receive compensation for attendance at Board
meetings, but are entitled to reimbursement for expenses that they incur in
attending such meetings.
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.
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.
41
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 22, 1999, 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 22, 1999 there were 20,896,322 shares of Common Stock outstanding.
All such shares were owned both beneficially and of record, except as otherwise
noted.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS
- --------------------------------------------------- ----------------------- ---------------
Edson R. Arneault(1) .............................. 3,765,567 16.59%
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034
Robert L. Ruben(2) ................................ 541,228 2.53%
Ruben & Aronson, LLP
3299 K Street, N.W.
Suite 403
Washington, DC 20007
Robert A. Blatt(3) ................................ 896,684 4.19%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue,
Suite 303
Larchmont, NY 10538
James V. Stanton(4) ............................... 36,900 Less than 1%
Stanton & Associates
1310 19th Street, N.W.
Washington, D.C. 20036
William D. Fugazy, Jr.(4) ......................... 39,000 Less than 1%
140 East 45th Street, Suite 4000
New York, New York 10017
Rose Mary Williams(5) ............................. 35,000 Less than 1%
State Route 2
Chester, West Virginia 26034
Madeleine LLC(6) .................................. 2,171,241 9.58%
450 Park Avenue
New York, NY 10022
Donald G. Saunders(7) ............................. 1,418,170 6.69%
32251 Peppertree Bend,
San Juan Capistrano, California 92675
Total Officers and Directors as a Group 5,314,379 22.38%
(6 persons)(8)...................................
- ------------------------
(1) Includes 1,974,233 shares and options to acquire beneficial ownership of
1,791,334 shares within 60 days held by Mr. Arneault or his affiliates. Does
not include options to purchase 300,000 shares granted to Mr. Arneault in
February of 1999 under the Company's 1999 Stock Incentive Plan (the "1999
Plan") which was approved by the Company's Board of Directors in February
1999. The 1999 Plan and all options granted under that plan are subject to
shareholder approval.
42
(2) Includes 41,228 shares and options to acquire beneficial ownership of
500,000 shares within 60 days held by Mr. Ruben. Does not include options to
purchase 150,000 shares granted to Mr. Ruben in February of 1999 under the
1999 Plan.
(3) Includes 421,684 shares and options to acquire beneficial ownership of
475,000 shares exercisable within 60 days held by Mr. Blatt. Does not
include options to purchase 150,000 shares granted to Mr. Blatt in February
of 1999 under the 1999 Plan.
(4) Includes 11,900 shares and options to acquire beneficial ownership of 25,000
shares exercisable within 60 days held by Mr. Stanton. Includes 14,000
shares and options to acquire beneficial ownership of 25,000 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 35,000
shares within 60 days held by Ms. Williams.
(6) Includes 412,428 shares and options to acquire beneficial ownership of
1,757,813 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.
(7) Includes 1,124,637 shares and options to acquire beneficial ownership of
293,533 shares within 60 days.
(8) Includes Messrs. Arneault, Blatt, Ruben, Stanton and Fugazy and Ms.
Williams.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May of 1998, Speakeasy Reno purchased the Reno Property from Reno Hotel,
LLC. Reno Hotel, LLC and Madeleine LLC, the Company's lender, are under common
control. Speakeasy Reno purchased the Reno Property for $8 million, all of which
was financed by Madeleine LLC pursuant to the Third Amended and Restated Term
Loan Agreement. See Note 7 "Long-Term Debt" of the Notes to Consolidated
Financial Statements. Madeleine LLC also owns 421,228 shares of the Company's
common stock and warrants to purchase 1,757,813 additional shares exercisable,
subject to certain restrictions, for $1.06 per share. See Item 12 "Stock
Ownership of Certain Beneficial Owners and Management". The Company issued the
common stock and warrants in 1996 in connection with the loan transactions.
In August of 1998, in connection with the exercise of options to purchase
378,415 shares of the Company's common stock, the Company's President and CEO,
Edson Arneault, delivered to the Company a promissory note for approximately
$461,000. The note is a full recourse obligation due on or before August 1999
and bears interest at an annual rate of 8.5%.
During 1994 and 1995, various corporate affiliates of Mr. Arneault advanced
an aggregate sum of approximately $100,000 to the Company's oil and gas
subsidiary primarily to cover overhead expenses in connection with the
maintenance of leases and other costs associated with those operations. In
February 1996, such advances, along with accrued interest thereon at the rate of
10% per annum, were converted into a demand promissory note in the principal
amount of $100,218 together with interest at the rate of 10% per annum. This
note was repaid in 1998 in its entirety.
In addition to the aforementioned loans to the Company, Mr. Arneault's
affiliate, Biscayne Petroleum Corporation, also lent approximately $100,000 to
Fleur-David Corporation, the Company's former oil and gas operating partner. In
October of 1998, the Company exchanged its remaining oil and gas assets to
43
SABAL Corporation ("SABAL"), which had succeeded to the rights of Fleur-David
Corporation. SABAL assumed various obligations of Fleur-David, including the
note payable to Biscayne. As part of the exchange to SABAL, the Company has
entered into a term loan agreement with SABAL whereby the Company will loan
SABAL up to $500,000. The term loan is for a period of two years (interest only
for the first six months, and 15% per annum thereafter) and is secured by
SABAL's real and personal property and equipment related to its oil and gas
interest in Michigan and Texas. As of December 31, 1998, the Company had loaned
to SABAL approximately $330,000. The Company, Biscayne and others have entered
into an Inter-Creditor Agreement with SABAL that effectively prorates the net
proceeds of any sale of assets by SABAL, other than in the ordinary course of
business, among all creditors based on the total aggregate debt of SABAL to such
creditors at the time.
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, 1998, the Company paid Ruben & Aronson the sum of $833,794
for legal services.
Mr. Robert Blatt, and officer and member of the Company's board, and an
affiliate of Mr. Blatt have performed consulting services for the Company.
During the fiscal year ended December 31, 1998, the Company paid Mr. Blatt and
his affiliates, in the aggregate, $114,250.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements (Included in Part II of this Report):
Independent Auditors' Report (F-2)
Consolidated balance Sheets as of December 31, 1998 and 1997 (F-3)
Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 1998 (F-4)
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 1998 (F-5)
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998 (F-6)
Notes to Consolidated Financial Statements (F-7)
(b) Financial Statements Schedules (Included in Part IV of this Report):
Schedule II--Valuation Allowances of the years ended December 31, 1998, 1997
and 1996.
(c) Exhibits:
EXHIBIT NO. OR
INCORPORATION
EXHIBIT NO. ITEM TITLE BY REFERENCE
- ----------- --------------------------------------------------------------------------------------- ---------------
3.1 Restated Certificate of Incorporation for Winners Entertainment, dated August 17,
1993................................................................................. **
3.2 Amended By Laws........................................................................ X
3.3 Certificate of Amendment of Restated Certificate of Incorporation of Winner's
Entertainment, Inc. dated October 10, 1996........................................... ++
44
EXHIBIT NO. OR
INCORPORATION
EXHIBIT NO. ITEM TITLE BY REFERENCE
- ----------- --------------------------------------------------------------------------------------- ---------------
4.1 Specimen of Common Stock Certificates.................................................. *
4.2 Warrant Certificate No. 1 issued to Madeleine LLC, dated July 2, 1996, to purchase
891,250 shares of Common Stock of Winners Entertainment, Inc. at $1.06 per share for
five years commencing July 2, 1996................................................... ####
4.3 Warrant Certificate No. 6 issued to Madeleine LLC, dated December 10, 1996, to purchase
125,552 Shares of Common Stock of MTR Gaming Group, Inc. at $1.06 per share for five
years commencing December 10, 1996................................................... +++
10.1 Term Loan Agreement among Mountaineer Park, Inc., Winners Entertainment, Inc. and
Madeleine LLC, dated July 2, 1996.................................................... ####
10.2 First Amendment to Term Loan Agreement among Mountaineer, the Company and Madeleine
LLC, dated July 2, 1996.............................................................. ####
10.3 Promissory Note by Mountaineer, Inc. to Madeleine LLC, dated July 2, 1996.............. ####
10.4 Security Agreement made by Mountaineer Park, Inc. in favor of Madeleine LLC, dated July
2, 1996.............................................................................. ####
10.5 Deed of Trust, Leasehold Deed of Trust, Security Agreement, Assignment, Fixture Filing
and Financing Statement by and among Mountaineer Park, Inc., Deborah A. Sink and Carl
D. Andrews as Trustees, and Madeleine LLC as the Secured Party, dated July 2, 1996... ####
10.6 Stock Transfer Agreement between the Company and Madeleine LLC, dated July 2, 1996..... ####
10.7 Registration Rights Agreement between Madeleine LLC and Winners Entertainment, Inc.,
dated July 2, 1996................................................................... ####
10.8 Financing Commitment from Madeleine, LLC to Mountaineer, dated July 2, 1996............ ####
10.9 November 29, 1995 Agreement by and between Autotote Systems, Inc. and Mountaineer Park,
Inc. for totalisator services provided pursuant to an agreement dated September 21,
1984, as amended. Letter agreement dated April 12, 1995 attached as Exhibit "A"...... ****
10.10 Totalisator Services Agreement between Autotote Systems, Inc. dated November 29, 1995
and Mountaineer...................................................................... ****
10.11 Master Lease Agreement #154920 and Schedule 2 thereto between IGT-North America and
Mountaineer for video lottery machine equipment lease dated June 19, 1995............ ****
10.12 Amendment to Master Lease Agreement by and among IGT-North America, Mountaineer and the
Company dated March 26, 1996......................................................... ****
10.13 Amendment, dated May 11, 1995, to Totalisator Services Agreement, dated March 15, 1988,
between Autotote Limited and Mountaineer............................................. #
10.14 Master Lease Agreement, dated August 10, 1994, between IGT-North America and
Mountaineer.......................................................................... #
10.15 Totalisator Services Agreement, dated March 15, 1988, between Autotote Limited and
Mountaineer Park, Inc................................................................ #
10.16 Employment Agreement, dated March 1, 1997, between MTR Gaming Group, Inc. and Edson R.
Arneault............................................................................. #####
45
EXHIBIT NO. OR
INCORPORATION
EXHIBIT NO. ITEM TITLE BY REFERENCE
- ----------- --------------------------------------------------------------------------------------- ---------------
10.17 Settlement Agreement and Release, dated July 1, 1997, between MTR Gaming Group Inc. and
Bill Blair, Incorporated............................................................. ######
10.18 Amended Term Loan Agreement, dated as of July 2, 1996, as amended and restated as of
December 10, 1996, among Mountaineer Park, Inc., MTR Gaming Group, Inc., and
Madeleine LLC........................................................................ +++
10.19 Amended and Restated General Security Agreement dated July 2, 1996, as amended and
restated as of December 10, 1996, made by Mountaineer Park, Inc. in favor of
Madeleine LLC........................................................................ +++
10.20 Credit Line Deed of Trust, Leasehold Deed of Trust, Security Agreement, Assignment,
Fixture Filing and Financing Statement by and among Mountaineer Park, Inc. as
grantor, Deborah A. Sink and Carl D. Andrews as trustees, and Madeleine LLC as the
secured party, dated December 10, 1996............................................... +++
10.21 Promissory Note dated December 10, 1996 made by Mountaineer Park, Inc. in the principal
amount of $16,100,000 in favor of Madeleine LLC...................................... +++
10.22 Registration Rights Agreement dated July 2, 1996 between Winners Entertainment, Inc.
and Madeleine LLC.................................................................... ####
10.23 Amendment No. 1 to Registration Rights Agreement dated December 10, 1996 between MTR
Gaming Group, Inc. and Madeleine LLC................................................. +++
10.24 Promissory Note dated December 10, 1996 made by Mountaineer Park, Inc. in the principal
amount not to exceed $5,376,500 in favor of Madeleine LLC............................ +++
10.25 Second Amended Term Loan Agreement, dated as of July 2, 1996, as amended and restated
as of December 10, 1996, and as further amended and restated as of July 2, 1997,
among Mountaineer Park, Inc., MTR Gaming Group, Inc., and Madeleine LLC.............. ++++
10.26 Letter Agreement by and between the Company and James V. Stanton dated February 18,
1998................................................................................. X
10.27 Letter Agreement by and between the Company and William J. Fugazy, Jr. dated February
18, 1998............................................................................. X
10.28 Purchase Agreement by and between Speakeasy Gaming of Nevada, Inc., and Banter, Inc.
dated as of May 5, 1998.............................................................. XXX
10.29 Purchase Agreement by and between Speakeasy Gaming of Reno, Inc. and Reno Hotel, LLC
dated April 30, 1998................................................................. XXX
10.30 First Amendment to Purchase Agreement by and between Speakeasy Gaming of Las Vegas,
Inc. and Banter, Inc. dated May 5, 1998.............................................. XXX
10.31 Second Amendment to Purchase Agreement by and among Speakeasy Gaming of Las Vegas,
Inc., Banter, Inc. and Southwest Exchange Corporation dated May 5, 1998.............. XXX
10.32 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by
Speakeasy of Las Vegas, Inc. as Trustor, Nevada Title Company, as Trustee for the
benefit of Madeleine LLC, as Beneficiary dated April 30, 1998........................ XXX
46
EXHIBIT NO. OR
INCORPORATION
EXHIBIT NO. ITEM TITLE BY REFERENCE
- ----------- --------------------------------------------------------------------------------------- ---------------
10.33 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by
Speakeasy Gaming of Reno, Inc. as Trustor, United Title of Nevada, as Trustee for the
benefit of Madeleine LLC, as Beneficiary dated April 30, 1998........................ XXX
10.34 Third Amended and Restated Term Loan Agreement amended and restated as of April 30,
1998 by and among Mountaineer Park, Inc., Speakeasy Gaming of Las Vegas, Inc.,
Speakeasy Gaming of Reno, Inc., MTR Gaming Group, Inc. and Madeleine LLC............. XXX
10.35 Pledge and Security Agreement by and between MTR Gaming Group, Inc. and Madeleine LLC
dated as of April 30, 1998........................................................... XXX
10.36 General Security Agreement by and between Speakeasy Gaming of Reno, Inc. and Madeleine
LLC dated as of April 30, 1998....................................................... XXX
10.37 General Security Agreement by and between Speakeasy Gaming of Las Vegas, Inc. and
Madeleine LLC dated as of May 5, 1998................................................ XXX
10.38 1998 Stock Incentive Plan.............................................................. XXX
10.39 Exclusive Space Lease Agreement between the Company and Dynasty Games Distributing (for
Las Vegas Property).................................................................. XXXX
10.40 Exclusive Space Lease Agreement between the Company and Dynasty Games Distributing (for
Reno Property)....................................................................... XXXX
10.41 Bill of Sale, Assignment and Quit Claim made by ExCal Energy Corporation in favor of
SABAL Corp. of ExCal's interest in oil and gas and interests......................... XXXX
10.42 Assignment of Production Payment made by SABAL Corp. in favor of ExCal Energy
Corporation in the amount of $2.5 million............................................ XXXX
10.43 Mutual Release by and between ExCal Energy Corporation, the Company and Fleur-David
Corporation.......................................................................... XXXX
10.44 Term Loan Agreement by and between ExCal Energy Corporation and SABAL Corp............. XXXX
10.45 Term Note made by SABAL Corp. in favor of ExCal Energy Corporation in the amount of
$500,000............................................................................. XXXX
10.46 General Security Agreement made by SABAL Corp. in favor of ExCal Energy Corporation.... XXXX
10.47 Inter-Creditor Agreement among SABAL Corp., Roger Landress, Biscayne Petroleum
Corporation and ExCal Energy Corporation............................................. XXXX
10.48 Mortgage made by SABAL Corp. in favor of ExCal Energy Corporation granting ExCal a
first priority security interest in the Otter Lake Gas Plant recorded in Lapeer
County, Michigan..................................................................... XXXX
10.49 Deferred Compensation Agreement dated January 1, 1999 between MTR Gaming Group, Inc.
and Edson R. Arneault................................................................ XX
10.50 Employment Agreement Dated February 1, 1999, between MTR Gaming Group, Inc. and Edson
R. Arneault.......................................................................... XX
10.51 Employment Agreement Dated February 1, 1999 between MTR Gaming Group, Inc. and Robert
A. Blatt............................................................................. XX
47
EXHIBIT NO. OR
INCORPORATION
EXHIBIT NO. ITEM TITLE BY REFERENCE
- ----------- --------------------------------------------------------------------------------------- ---------------
10.52 Employment Agreement Dated February 1, 1999 between MTR Gaming Group, Inc. and Robert
L. Ruben............................................................................. XX
10.53 Sewer Facilities User Agreement between Hancock County Public Service District and
Mountaineer Park, Inc................................................................ XX
23.1 Consent of Corbin and Wertz............................................................ XX
23.2 Consent of BDO Seidman, LLP............................................................ XX
27.1 Financial Data Schedule................................................................ XX
- ------------------------
* Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1989 and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1993 and incorporated herein by
reference thereto.
*** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended June 30, 1994 and incorporated herein by reference
thereto.
***** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 3, 1996 and incorporated herein by
reference thereto.
# Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended March 31, 1995 and incorporated herein by reference thereto.
## Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1995 and incorporated herein by reference thereto.
### Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended September 30, 1995 and incorporated herein by reference thereto.
#### Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1996 and incorporated herein by reference thereto.
##### Previously filed as an exhibit to the Company's 10-Q for the Quarter
March 31, 1997 and incorporated herein by reference thereto.
###### Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1997 and incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Form 8-K dated
September 30, 1996 and incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Form 8-K dated
November 1, 1996 and incorporated herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Form 8-K dated
January 7, 1997, and incorporated herein by reference thereto.
++++ Previously filed as an exhibit to the Company's Form 8-K dated July
8, 1997, and incorporated herein by reference thereto.
X Previously filed as an exhibit to the Company's Form 8-K dated
February 20, 1998, and incorporated herein by reference thereto.
48
XX Filed herewith.
XXX Previously filed as an exhibit to the Company's 10-Q for the quarter
ended March 31, 1999, and incorporated herein by reference thereto.
XXXX Previously filed as an exhibit to the Company's 10-Q for the quarter
ended September 30, 1998 and incorporated herein by reference thereto.
(d) Reports on Form 8-K
The Company filed the following current reports on Form 8-K during the
fourth quarter of 1998 and thereafter:
A current report on Form 8-K was filed by the Company on February 4, 1999,
(with the earliest event reported dated February 1, 1999) reporting that the
Company had dismissed Corbin & Wertz as its auditors and engaged the firm of
BDO Seidman, LLP. An amendment of such form was filed on February 9, 1999 on
Form 8-K/A attaching as an exhibit a letter from Corbin & Wertz pertaining
to the report on Form 8-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MTR GAMING GROUP, INC.
By: /s/ EDSON R. ARNEAULT
-----------------------------------------
Edson R. Arneault,
CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
Date: March 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
SIGNATURE CAPACITY
- ------------------------------ --------------------------
/s/ EDSON R. ARNEAULT Chairman, President, Chief
- ------------------------------ Executive Officer and March 31, 1999
Edson R. Arneault Chief Financial Officer
/s/ ROBERT A. BLATT
- ------------------------------ Director March 31, 1999
Robert A. Blatt
/s/ ROBERT L. RUBEN
- ------------------------------ Director March 31, 1999
Robert L. Ruben
/s/ JAMES V. STANTON
- ------------------------------ Director March 31, 1999
James V. Stanton
/s/ WILLIAM D. FUGAZY, JR.
- ------------------------------ Director March 31, 1999
William D. Fugazy, Jr.
50
MTR GAMING GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CQLUMN B CLOUMN E
BALANCE AT BALANCE AT
BEGINNING OF COLUMN C COLUMN D END OF
COLUMN A PERIOD ADDITIONS DEDUCTIONS PERIOD
- --------------------------------------------------------- ------------ ------------ ------------- ------------
Year ended December 31, 1998:
Allowance for doubtful accounts receivable............. $ 125,000 $ 13,000 $ -- $ 138,000
Allowance for doubtful production note receivable...... -- 2,500,000 -- 2,500,000
Allowance for deferred tax assets...................... 4,703,000 -- (4,703,000) --
------------ ------------ ------------- ------------
$ 4,828,000 $ 2,513,000 $ (4,703,000) $ 2,638,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Year ended December 31, 1997:
Allowance for doubtful accounts receivable............. $ 140,000 -- $ (15,000) $ 125,000
Allowance for doubtful notes receivable................ 290,000 -- (290,000) --
Allowance for deferred tax assets...................... 8,563,000 -- (3,860,000) 4,703,000
------------ ------------ ------------- ------------
$ 8,993,000 -- $ (4,165,000) $ 4,828,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Year ended December 31, 1996:
Allowance for doubtful accounts receivable............. $ 70,000 $ 70,000 -- $ 140,000
Allowance for doubtful notes receivable................ 290,000 -- -- 290,000
Allowance for deferred tax assets...................... 9,600,000 -- (1,037,000) 8,563,000
------------ ------------ ------------- ------------
$ 9,960,000 $ 70,000 $ (1,037,000) $ 8,993,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
51
INDEPENDENT AUDITORS' REPORT
Board of Directors
MTR Gaming Group, Inc.
We have audited the consolidated financial statements of MTR Gaming Group,
Inc. and subsidiaries as of December 31, 1997 and for each of the years in the
two-year period ended December 31, 1997, and have issued our report thereon
dated February 27, 1998. Our audits also included the consolidated financial
statement schedule of MTR Gaming Group, Inc. and subsidiaries. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Corbin & Wertz
Irvine, California
February 27, 1998
52
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MTR Gaming Group, Inc.
We have audited the consolidated financial statements of MTR Gaming Group,
Inc. and subsidiaries as of December 31, 1998 and for the year ended December
31, 1998 and have issued our report thereon dated February 19, 1999. Our audit
also included the consolidated financial statement schedule of MTR Gaming Group,
Inc. and subsidiaries. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated financial statement schedule based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
BDO Seidman, LLP
Costa Mesa, California
February 19, 1999
53
MTR GAMING GROUP, INC.
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and 1997......................... F-4
Consolidated Statements of Operations for each of the years in the three-year period
ended December 31, 1998............................................................ F-5
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 1998.......................................... F-6
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1998............................................................ F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................................... F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheet of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTR Gaming
Group, Inc. and its subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
February 19, 1999
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheets of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1997, 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, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTR Gaming
Group, Inc. and its subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
CORBIN & WERTZ
Irvine, California
February 27, 1998
F-3
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 9,074,000 $ 7,715,000
Restricted cash.................................................................. 239,000 188,000
Accounts receivable, net of allowance for doubtful accounts of $138,000 and
$125,000 in 1998 and 1997, respectively........................................ 1,041,000 431,000
Deferred financing costs......................................................... 1,259,000 1,617,000
Deferred income taxes............................................................ 2,417,000 2,417,000
Other current assets............................................................. 986,000 516,000
------------- -------------
Total current assets............................................................... 15,016,000 12,884,000
Property and equipment, net........................................................ 40,279,000 22,799,000
Note receivable.................................................................... 333,000 --
Net assets of discontinued oil and gas activities.................................. -- 2,616,000
Excess of cost of investments over net assets acquired, net of accumulated
amortization of $1,526,000 and $1,274,000 in 1998 and 1997, respectively......... 2,248,000 2,500,000
Deferred income taxes.............................................................. 1,643,000 --
Deposits and other................................................................. 218,000 102,000
------------- -------------
$ 59,737,000 $ 40,901,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 624,000 $ 594,000
Accrued liabilities.............................................................. 1,302,000 2,465,000
Current portion of long-term and other debt...................................... 633,000 40,000
------------- -------------
Total current liabilities.......................................................... 2,559,000 3,099,000
Long-term and other debt, less current portion..................................... 33,988,000 21,559,000
Deferred income taxes.............................................................. -- 1,130,000
------------- -------------
Total liabilities.................................................................. 36,547,000 25,788,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.00001 par value; 50,000,000 shares authorized; 20,866,163 and
19,940,890 shares issued and outstanding at December 31, 1998 and 1997,
respectively................................................................... -- --
Common stock subscribed; 30,312 shares at December 31, 1998 and 1997............. -- --
Paid-in-capital.................................................................. 36,178,000 35,328,000
Shareholder receivable........................................................... (461,000) --
Accumulated deficit.............................................................. (12,527,000) (20,215,000)
------------- -------------
Total stockholders' equity......................................................... 23,190,000 15,113,000
------------- -------------
Total liabilities and shareholders' equity......................................... $ 59,737,000 $ 40,901,000
------------- -------------
------------- -------------
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, 1998 1997 1996
- -------------------------------------------------------------------- ------------- ------------- -------------
REVENUES
Video lottery terminals........................................... $ 68,992,000 $ 49,187,000 $ 30,700,000
Pari-mutuel commissions........................................... 4,796,000 4,437,000 4,299,000
Lodging, food and beverage........................................ 7,499,000 5,417,000 3,945,000
Other............................................................. 1,823,000 1,097,000 1,260,000
------------- ------------- -------------
Total revenues...................................................... 83,110,000 60,138,000 40,204,000
------------- ------------- -------------
COSTS OF REVENUES
Cost of video lottery terminals................................... 41,404,000 30,081,000 19,244,000
Cost of pari-mutuel commissions................................... 4,963,000 5,591,000 4,923,000
Cost of lodging, food and beverage................................ 6,522,000 4,268,000 2,805,000
Cost of other..................................................... 1,212,000 1,171,000 660,000
------------- ------------- -------------
Total costs of revenues............................................. 54,101,000 41,111,000 27,632,000
------------- ------------- -------------
Gross profit........................................................ 29,009,000 19,027,000 12,572,000
------------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing and promotions.......................................... 3,050,000 2,691,000 1,718,000
General and administrative........................................ 10,515,000 7,900,000 6,217,000
Depreciation and amortization..................................... 3,822,000 2,415,000 1,667,000
------------- ------------- -------------
Total selling, general and administrative expenses.................. 17,387,000 13,006,000 9,602,000
------------- ------------- -------------
Operating income.................................................... 11,622,000 6,021,000 2,970,000
Interest income..................................................... 401,000 191,000 54,000
Interest expense.................................................... (4,259,000) (3,341,000) (3,460,000)
Non-recurring income................................................ -- -- 705,000
------------- ------------- -------------
Income from continuing operations before benefit for income taxes... 7,764,000 2,871,000 269,000
Benefit for income taxes............................................ 2,659,000 1,823,000 886,000
------------- ------------- -------------
Income from continuing operations................................... 10,423,000 4,694,000 1,155,000
Discontinued operations:
Loss on disposal of oil and gas assets............................ (2,735,000) -- --
------------- ------------- -------------
NET INCOME.......................................................... $ 7,688,000 $ 4,694,000 $ 1,155,000
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER SHARE DATA:
Continuing operations............................................... $ .51 $ .24 $ .06
Discontinued operations............................................. (.13) -- --
------------- ------------- -------------
NET INCOME PER SHARE--BASIC......................................... $ .38 $ .24 $ .06
------------- ------------- -------------
Continuing operations............................................... $ .44 $ .22 $ .06
Discontinued operations............................................. (.11) -- --
------------- ------------- -------------
NET INCOME PER SHARE--ASSUMING DILUTION............................. $ .33 $ .22 $ .06
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic............................................................. 20,292,751 19,513,560 18,590,056
Diluted........................................................... 23,446,235 21,252,751 19,075,897
------------- ------------- -------------
------------- ------------- -------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RECEIVABLE
SHARES FROM
COMMON STOCK OF COMMON ADDITIONAL EXERCISE
---------------------- STOCK PAID-IN OF STOCK ACCUMULATED
SHARES AMOUNT SUBSCRIBED CAPITAL OPTIONS DEFICIT TOTAL
--------- ----------- ----------- ---------- ----------- ------------ ----------
Balances, January 1, 1996............. 17,022,645 $ -- -- $32,117,000 $ (69,000) ($26,064,000) $5,984,000
Shares issued in connection with legal
settlements......................... 175,000 -- -- 236,000 -- -- 236,000
Shares issued for services rendered by
related parties..................... 719,476 -- -- 309,000 -- -- 309,000
Shares issued in connection with
financing agreements................ 442,829 -- 465,377 953,000 -- -- 953,000
Shares issued for capital raising
activities.......................... 207,500 -- -- 175,000 -- -- 175,000
Expense recorded in connection with
options issued to outside
directors........................... -- -- -- 69,000 -- -- 69,000
Cash collected on receivable from
exercise of stock options........... -- -- -- -- 69,000 -- 69,000
Shares reclassed from redeemable
common stock and issued in
connection with settlements......... 558,593 -- 60,471 1,165,000 -- -- 1,165,000
Value recorded in connection with
warrants issued in connection with
financing agreements................ -- -- -- 401,000 -- -- 401,000
Cancellation of price guarantees
through cash payment................ -- -- -- (250,000) -- -- (250,000)
Net income............................ -- -- -- -- -- 1,155,000 1,155,000
--------- ----- ----------- ---------- ----------- ------------ ----------
Balances, December 31, 1996........... 19,126,043 -- 525,848 35,175,000 -- (24,909,000) 10,266,000
Value recorded in connection with
warrants and options issued to
employees........................... -- -- -- 130,000 -- -- 130,000
Shares issued from exercise of stock
options............................. 160,000 -- -- 159,000 -- -- 159,000
Expense recorded in connection with
amendments to options previously
issued to employees................. -- -- -- 156,000 -- -- 156,000
Shares reclassed from common stock
subscribed and issued in connection
with settlements.................... 12,070 -- (30,159) (27,000) -- -- (27,000)
Shares issued in connection with price
guarantee settlements............... 150,000 -- -- (318,000) -- -- (318,000)
Shares reclassed from common stock
subscribed and isssued in connection
with financing agreements........... 465,377 -- (465,377) -- -- -- --
Shares issued in connection with
financing agreements................ 25,000 -- -- 50,000 -- -- 50,000
Shares issued for services rendered... 2,400 -- -- 3,000 -- -- 3,000
Net income............................ -- -- -- -- -- 4,694,000 4,694,000
--------- ----- ----------- ---------- ----------- ------------ ----------
Balances, December 31, 1997........... 19,940,890 -- 30,312 35,328,000 -- (20,215,000) 15,113,000
Shares issued from exercise of stock
options............................. 925,273 -- -- 819,000 (461,000) -- 358,000
Value recorded in connection with
options issued to non-employees..... -- -- -- 31,000 -- -- 31,000
Net income............................ 7,688,000 7,688,000
--------- ----- ----------- ---------- ----------- ------------ ----------
Balances, December 31, 1998........... 20,866,163 $ -- 30,312 $36,178,000 $(461,000) ($12,527,000) $23,190,000
--------- ----- ----------- ---------- ----------- ------------ ----------
--------- ----- ----------- ---------- ----------- ------------ ----------
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, 1998 1997 1996
- ---------------------------------------------------------------------- ------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 7,688,000 $ 4,694,000 $ 1,155,000
Adjustments to reconcile net income to net cash provided by net
operating activities:
Depreciation and amortization..................................... 3,822,000 2,416,000 1,667,000
Loss on disposal of discontinued operations....................... 2,735,000 -- --
Non-recurring income (non-cash)................................... -- -- (705,000)
Other non-cash provisions, net.................................... -- -- (83,000)
Net change in allowance for doubtful accounts receivable.......... 13,000 (15,000) 70,000
Common stock and options issued for services rendered and
amortization of interest........................................ 539,000 1,590,000 1,321,000
Deferred income taxes............................................. (2,773,000) (1,923,000) (893,000)
Change in operating liability--discontinued operations............ (119,000) -- --
Change in operating assets and liability--
operating activities:
Other current assets............................................ (1,093,000) (153,000) 231,000
Accounts payable................................................ 30,000 (315,000) (2,254,000)
Accrued liabilities............................................. (300,000) (285,000) (183,000)
------------- ------------ -------------
Net cash provided by operating activities............................. 10,542,000 6,009,000 326,000
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash..................................................... (51,000) (3,000) 241,000
Deposits and other assets........................................... (116,000) (61,000) 14,000
Capital expenditures, including acquisitions........................ (21,050,000) (6,510,000) (1,767,000)
Note receivable..................................................... (333,000) -- --
------------- ------------ -------------
Net cash used in investing activities................................. (21,550,000) (6,574,000) (1,512,000)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt.......................................... -- -- (10,469,000)
Proceeds from the issuance of long-term debt........................ 11,765,000 5,377,000 16,100,000
Proceeds for issuance of other debt................................. 1,243,000 -- --
Payments on short-term notes........................................ (136,000) (194,000) (1,052,000)
Proceeds from the issuance of short-term notes...................... -- -- 1,052,000
Finance cost paid................................................... (863,000) (959,000) (845,000)
Payments in connection with redeemable common stock................. -- (329,000) (250,000)
Proceeds from issuance of common stock through exercise of stock
options........................................................... 358,000 159,000 69,000
------------- ------------ -------------
Net cash provided by financing activities............................. 12,367,000 4,054,000 4,605,000
------------- ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 1,359,000 3,489,000 3,419,000
CASH AND CASH EQUIVALENTS, beginning of year.......................... 7,715,000 4,226,000 807,000
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of year................................ $ 9,074,000 $ 7,715,000 $ 4,226,000
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest.............................................................. $ 3,505,000 $ 2,562,000 $ 2,493,000
------------- ------------ -------------
------------- ------------ -------------
Income taxes.......................................................... $ 261,000 $ 16,000 $ 25,000
------------- ------------ -------------
------------- ------------ -------------
NON-CASH INVESTING AND FINANCING ACTIVITIES ARE DISCLOSED THROUGHOUT THE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
MTR Gaming Group, Inc. (the "Company"), a Delaware corporation, owns and
operates hotel and gaming properties in West Virginia and Nevada.
The Company acquired Mountaineer Park, Inc. in December of 1992 and has
since operated the Mountaineer Racetrack & Gaming Resort ("Mountaineer Park") in
West Virginia's northern "panhandle," approximately twenty-five miles from the
Pittsburgh International Airport. The resort complex also includes a
thoroughbred horse racetrack, pari-mutuel wagering, off-track wagering on horse
and greyhound races simulcast from other tracks, a 101-room lodge, a nine-hole
golf course, swimming, dining and lounge facilities.
On May 5, 1998, through two newly formed, wholly owned subsidiaries, the
Company closed the purchase of two hotel/gaming properties in Nevada: the
Cheyenne Hotel & Casino, which has been renamed the "Ramada Inn and Speedway
Casino", in North Las Vegas and the Reno Ramada, which has been renamed the
"Ramada Inn and Speakeasy Casino," in Reno.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MTR Gaming Group, Inc. ("MTR"), Mountaineer Park, Inc. ("Mountaineer Park"),
Speakeasy Gaming of Las Vegas, Inc. ("Speakeasy-Las Vegas"), Speakeasy Gaming of
Reno, Inc. ("Speakeasy-Reno"), ExCal Energy Corporation ("ExCal"), and SDR
Corporation (collectively, the "Company"). All significant intercompany
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reported periods. Actual results could materially differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
These consolidated historical financial statements contain financial
instruments whereby the fair market value of the financial instruments could be
different than that recorded on a historical basis in the accompanying
consolidated financial statements. The financial instruments consist of cash and
cash equivalents, restricted cash, accounts receivable, note receivable,
accounts payable and long-term debt. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of December 31,
1998.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers highly liquid investments with a remaining maturity of
90 days or less from the purchase date to be cash equivalents. Cash equivalents
consist primarily of overnight repurchase agreements at December 31, 1998.
F-8
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted cash includes short-term certificates of deposit (see Note 10)
and unredeemed winning tickets from its racing operations (see Note 16).
DEFERRED FINANCING COSTS
The Company capitalizes certain loan costs in connection with its financing
activities and these costs are amortized over the expected term of the related
loans using a method that approximates the effective interest method.
Amortization of these costs totaling $508,000, $1,283,000 and $1,845,000 for the
years ended December 31, 1998, 1997 and 1996, respectively, and has been
reflected as interest expense in the accompanying consolidated statements 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:
20 to 40
Buildings.................................................... years
Furniture and fixtures....................................... 5 to 7 years
Equipment and automobiles.................................... 3 to 15 years
Interest is capitalized to construction in progress based on the product
resulting from applying the Company's cost of borrowing rate to qualifying
assets under active redevelopment. Interest capitalized in 1998, 1997, and 1996
was $132,000, $512,000, and $197,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted SFAS 121 in 1996, as required. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company evaluates impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management of the Company assesses the recoverability of long-lived
assets by determining whether the depreciation and amortization of such assets
over their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. To date, management has not
identified any impairment of long-lived assets.
EXCESS OF COST OF INVESTMENTS OVER NET ASSETS ACQUIRED
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefited.
Goodwill is being amortized on the straight line method over an expected fifteen
year life. Amortization expense included in the accompanying consolidated
statements of operations for each of the years ended December 31, 1998, 1997 and
1996 is $252,000.
F-9
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing and off-track betting at the time wagers are made. Such
commissions are a designated portion of the wagering handle as determined by the
West Virginia State Racing Commission (the Racing Commission). Such revenues are
shown net of the taxes assessed by state and local agencies, as well as purses
and contract amounts paid to the Horsemen's Benevolent Protection Association
(the "HPBA") (see Note 16).
Revenues from video lottery represent the net win earned on video slot,
poker, keno or blackjack wagers. Net win is the difference between wagers placed
and winning payouts to patrons, and is recorded at the time wagers are made (see
Note 15).
Revenues from food and beverage are recognized at the time of sale and
revenues from lodging are recognized on the date of stay.
Other revenues consist primarily of fees earned from activities ancillary to
the Company's racing and gaming activities. Such revenues are recorded at the
time services are rendered or sales are made.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. In 1996, the Company
adopted the provisions of SFAS 123 which relate to non-employee stock-based
compensation, and has elected to account for its stock-based compensation to
employees under APB 25.
ADVERTISING
The Company generally expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 1998, 1997 and 1996 was $3,050,000,
$2,691,000 and $1,718,000, respectively, net of advertising grants received from
the State of West Virginia of $560,000 and 330,000 for the years ended December
31, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Statement 109), Accounting for Income
Taxes. Under Statement 109, an asset and liability method is used whereby
deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations. The
Company and its subsidiaries file a consolidated federal income tax return.
F-10
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share
("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
The following tables illustrate the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted net
income per share from continuing operations computations.
FOR THE YEAR ENDED DECEMBER 31, 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 $ .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 $ .44
---------- ----------- ---
---------- ----------- ---
FOR THE YEAR ENDED DECEMBER 31,
1997
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------- ----------- -----------
Basic EPS--
Net income from continuing operations available to
common shareholders................................... $4,694,000 19,513,560 $ 0.24
-----
-----
Effect of dilutive securities--
Warrants and options.................................... -- 1,739,191
--------- -----------
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions.......... $4,694,000 21,252,751 $ 0.22
--------- ----------- -----
--------- ----------- -----
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,
1996
-----------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------- ----------- -----------
Basic EPS--
Net income from continuing operations available to
common shareholders................................... $1,155,000 18,590,056 $ 0.06
-----
-----
Effect of dilutive securities--
Warrants and options.................................... -- 485,841
--------- -----------
Dilutive EPS--
Net income from continuing operations available to
common shareholders plus assumed conversions.......... $1,155,000 19,075,897 $ 0.06
--------- ----------- -----
--------- ----------- -----
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The Company adopted the provisions
of this statement in 1998. These disclosure requirements had no impact on the
Company's financial position or results of operations. The Company has no
elements of other comprehensive income, as defined by SFAS No. 130.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures of an Enterprise and Related Information. The provisions of this
statement require disclosures of financial and descriptive information about an
enterprise's operating segments in annual and interim financial reports issued
to stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Company adopted the provisions
of this statement for 1998 annual reporting. These disclosure requirements had
no impact on the Company's financial position or results of operations, or the
Company's existing segment disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statement presentation to conform to the 1998 presentation.
F-12
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES
CONCENTRATION OF CREDIT RISK
The Company maintains, at times, cash balances at certain financial
institutions in excess of amounts insured by Federal agencies.
CYCLICAL NATURE OF BUSINESS
The Company's primary business involves leisure and entertainment. During
periods of recession or economic downturn, consumers may reduce or eliminate
spending on leisure and entertainment activities. In the event that any of the
Company's demographic markets suffer adverse economic conditions, the Company's
revenues may be materially adversely affected. In addition, the operations of
Mountaineer Park are typically seasonal in nature. Winter conditions may
adversely affect transportation routes to Mountaineer Park, as well as cause
cancellations of live horse racing. As a result, adverse seasonal conditions
could have a material adverse effect on the operations of the Company. In the
Las Vegas and Reno market, business levels are generally weaker from
Thanksgiving through the middle of January (except during the week between
Christmas and New Years) and throughout the summer, and generally stronger from
mid-January through Easter and from mid-September through Thanksgiving.
The Company's results at Speakeasy-Las Vegas and Speakeasy-Reno may also be
affected by inclement weather. For example, Speakeasy-Reno, located in the
foothills of the Sierra Nevada mountains in Nevada, is subject to snow and icy
road conditions during the winter months. Any such severe weather conditions may
discourage potential customers from visiting Speakeasy-Reno. It is unlikely that
the Company will be able to obtain business interruption coverage for casualties
resulting from severe weather, and there can be no assurance that the Company
will be able to obtain casualty insurance coverage at affordable rates for
casualties resulting from severe weather.
LICENSING
The Company's business is highly regulated. The ability of the Company to
remain in business, and to operate profitably depends upon the Company's ability
to satisfy all applicable racing and gaming laws and regulations.
WEST VIRGINIA RACING AND GAMING REGULATION
The Company's operations at Mountaineer Park are subject to regulation by
the Racing Commission under the West Virginia Racing Act, and by the West
Virginia State Lottery Commission (the "Lottery Commission") under the West
Virginia Racetrack Video Lottery Act ("the Lottery Act").
The powers and responsibilities of the Racing Commission include, among
other things, (i) granting permission annually to maintain racing licenses and
schedule race meets, (ii) approving simulcasting activities, (iii) licensing all
officers, directors, racing officials and certain other employees of the Company
and (iv) approving all contracts entered into by the Company affecting racing
and pari-mutuel wagering operations. Such powers and responsibilities extend to
the approval and/or oversight of all aspects of racing and pari-mutuel wagering
operations. The Company has received all necessary approvals to conduct its
current operations at Mountaineer Park, however, such approvals are subject to
renewal and approval annually. The failure to receive or retain approvals or
renewals of approvals, or a delay in receiving such approvals and renewals,
could cause the reduction or suspension of racing and pari-mutuel wagering, as
F-13
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
well as of video slot operations, at Mountaineer Park and could have a material
adverse effect upon the Company's business, financial condition and results or
operations.
Pursuant to the Lottery Act, West Virginia horse racetracks licensed prior
to January 1, 1994 and which conduct a minimum number of days of live racing,
may apply for an annual license to operate video slots at its racetrack. The
Lottery Act likewise requires that the operator of Mountaineer Park be subject
to a written agreement with the horse owners, breeders and trainers who race
horses at that facility in order to conduct video slot operations. The Company
is party to the requisite agreement with the HPBA, which expires on January 1,
2001. The Lottery Act also requires that the operator of Mountaineer Park be
subject to a written agreement with the pari-mutuel clerks in order to operate
video slots. The Company is party to the requisite agreement with its
pari-mutuel clerks which expires on November 30, 2002. The absence of an
agreement with the HPBA or the pari-mutuel clerks at Mountaineer Park, or the
termination or non-renewal of such agreements, would have a material adverse
affect on the Company's business, financial condition and results of operations.
The Lottery Commission has broad powers to approve and monitor all operations of
the video lottery terminals, the specification of the terminals and the
interface between the terminals and the West Virginia Central Lottery System. In
addition, the Lottery Commission licenses all persons who control the licensed
entity or are key personnel of the video lottery operation to ensure their
integrity and absence of any criminal involvement.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply, its business would be materially adversely effected.
NEVADA GAMING REGULATION
The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations, and
procedures could have an adverse effect on the operations of the Company.
In order to operate non-restricted gaming in Nevada, Speakeasy-Las Vegas and
Speakeasy-Reno are required to be licensed as operators of a casino by the
Nevada Gaming Authorities. A gaming license requires the periodic payment of
fees and taxes and is not transferable. The Company has applied to be registered
by the Nevada Commission as a publicly traded corporation (Registered
Corporation) and as such, it will be required periodically to submit detailed
financial and operating reports to the Nevada Commission and furnish any other
information which the Nevada Commission may require. No person may become a
stockholder of, or receive any percentage of profits from, Speakeasy-Las Vegas
and
F-14
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
Speakeasy-Reno without first obtaining licenses and approvals from the Nevada
Gaming Authorities. Neither the Company nor Speakeasy-Las Vegas and
Speakeasy-Reno have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, and licenses required in order to engage in
gaming activities in Nevada. There can be no assurances that the Company or
Speakeasy-Las Vegas and Speakeasy-Reno will obtain all necessary licenses or
approvals.
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. Officers, directors, and certain key employees of Speakeasy-Las Vegas
and Speakeasy-Reno must file applications with the Nevada Gaming Authorities and
may be required to be licensed or found suitable by the Nevada Gaming
Authorities.
After licensing, if it were determined that the Nevada Gaming Control Act or
the regulations promulgated thereunder (collectively, the Nevada Act) was
violated by the Speakeasy-Las Vegas and/or Speakeasy-Reno, the gaming licenses
they are applying for could be limited, conditioned, suspended, or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Speakeasy-Las Vegas, Speakeasy-Reno, the Company, and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission.
IMPACT OF RESORT HOTEL LEGISLATION
The locations upon which Speakeasy-Las Vegas and the Speakeasy-Reno are
located are subject to legislation passed in 1991 by the Nevada Legislature
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation essentially 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, 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.
Speakeasy-Las Vegas is exempt from the Resort Hotel Legislation because this
location has held a non-restricted gaming license. The grandfathered exemption,
however, is only valid as to the Speakeasy-Las Vegas until the earlier of the
commencement of gaming operations at that property or May, 1999. As to
Speakeasy-Reno, the Company is relying upon a January 22, 1998 determination by
the City of Reno that the property is grandfathered. The failure to keep the
grandfathered exemptions to the Resort Hotel Legislation and the local
regulations governing resort hotels would have a materially adverse effect on
the Company.
POLITICAL CLIMATE
The Company's ability to remain in the gaming business depends on the
continued political acceptability of gaming activities to both the public and
state governmental officials. In addition, the gaming laws impose high tax
rates, and fixed pari-mutuel commission rates which, if altered, may diminish
the Company's profitability. Management is aware of nothing to indicate that
West Virginia and Nevada state officials will change their policies toward
gaming activities, particularly video lottery gaming; however, there are no
assurances that such policies will not be changed. Any substantial unfavorable
change in the enabling laws or tax rates on gaming revenues could make the
Company's business substantially more onerous, less profitable or illegal, which
would have a material adverse effect on the Company's business.
F-15
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RISKS AND UNCERTAINTIES (CONTINUED)
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 provides 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. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business and results of
operations. The Company is unable to predict whether this study will result in
legislation 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.
ENVIRONMENTAL REGULATIONS
Generally, the Company and its subsidiaries are subject to a variety of
federal, state and local governmental laws and regulations relating to the use,
storage, discharge, emission and disposal of hazardous materials. While the
Company believes that it and its subsidiaries are presently in material
compliance with all environmental laws, failure to comply with such laws could
result in the imposition of severe penalties or restrictions on operations by
government agencies or courts that could adversely affect operations. In
addition, although the Company is not aware of any environmental contamination
at its properties (with the exception of a discharge from an underground storage
tank at Mountaineer Park which is (i) subject to a state-approved plan of
redemption and (ii) not considered material), it has not conducted exhaustive
environmental investigations of all such properties. The Company does not have
insurance to cover environmental liabilities, if any, other than certain
coverage limited to its Reno property.
4. ACQUISITIONS
SPEAKEASY-LAS VEGAS AND SPEAKEASY-RENO
Speakeasy-Las Vegas consummated the purchase on May 5, 1998 of the Cheyenne
Hotel & Casino,in North Las Vegas, Nevada for approximately $5.5 million.
Speakeasy-Reno consummated the purchase from an entity under common control with
its primary lender and stockholder on May 5, 1998 of the Reno
F-16
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
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 7), and cash of approximately $2,082,000, including direct acquisition
costs of approximately $347,000.
These asset acquisitions were accounted for as purchases, and accordingly,
the assets and liabilities of the acquired entities have been recorded at their
estimated fair values at the dates of acquisition. The purchase price, including
direct acquisition costs, approximated the estimated fair values of the net
assets acquired.
The consolidated statement of operations for the year ended December 31,
1998 does not include any revenues or expenses related to these acquisitions
prior to their closing dates. The unaudited proforma results of operations for
the year ended December 31, 1998 assuming these acquisitions had occurred on
January 1, 1998, and for the year ended December 31, 1997, assuming these
acquisitions had occurred on January 1, 1997, are as follows:
DECEMBER 31, 1998 1997
- --------------------------------------------------------------- ------------- -------------
Total revenues................................................. $ 83,353,000 $ 61,284,000
------------- -------------
------------- -------------
Net income..................................................... $ 6,794,000 $ 2,668,000
------------- -------------
------------- -------------
Net income per share--basic.................................... $ .33 $ .14
------------- -------------
------------- -------------
Net income per share--assuming dilution........................ $ .29 $ .13
------------- -------------
------------- -------------
These pro forma consolidated results of operations have been presented for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
January 1, 1998 or 1997, or which may result in the future.
PURCHASE OF 350 ACRE PROPERTY
On February 12, 1998, Mountaineer Park acquired a 350 acre 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 "New
Property"). The New Property is unimproved and is contiguous with the property
on which the Company's Mountaineer Racetrack & Gaming Resort is situated (the
"Existing Property"). The New Property is separate from the 349 acre property
(with respect to which the Company currently holds a purchase option--see note
10) which is also contiguous to the Existing Property. The Company currently has
no plans for the development of the New Property.
ACQUISITION OF LAND ADJACENT TO THE SPEAKEASY-LAS VEGAS
On November 2, 1998, Speakeasy-Las Vegas completed the acquisition of a 1/2
acre parcel of real property located adjacent to the Speedway Hotel and Casino
for the sum of $120,000. This property was acquired to augment the grounds
surrounding the Speedway Hotel and Casino and is to be utilized, primarily, to
provide the additional parking required by local authorities and needed to
accommodate the expansion of parking and operations at that location.
Speakeasy-Las Vegas has provided its lender a first priority security interest
in the parcel in accordance with the terms of such lender's consent to the
purchase. A portion of the property is the subject of a condemnation action by
the state of Nevada and conveyance is subject to be reduced or modified by the
finalization of the condemnation action.
F-17
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
See Note 18--Subsequent Events
5. PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
DECEMBER 31, 1998 1997
- --------------------------------------------------------------- ------------- -------------
Land........................................................... $ 4,443,000 $ 371,000
Building....................................................... 29,634,000 19,014,000
Equipment...................................................... 9,536,000 6,388,000
Furniture and fixtures......................................... 5,912,000 3,131,000
Construction in progress....................................... 687,000 258,000
------------- -------------
50,212,000 29,162,000
Less accumulated depreciation.................................. (9,933,000) (6,363,000)
------------- -------------
$ 40,279,000 $ 22,799,000
------------- -------------
------------- -------------
Depreciation expense charged to operations related to property and equipment
during the years ended December 31, 1998, 1997 and 1996 was $3,570,000,
$2,164,000 and $1,415,000, respectively.
6. SHORT-TERM DEBT
In 1996, Mountaineer Park entered into a series of short-term financing
arrangements with certain lenders. Under the terms of the agreements,
Mountaineer Park received net proceeds of $1,052,000 and was obligated to repay
a total of $1,250,000. In addition, the Company issued 175,000 shares of its
common stock valued at $137,000. These short-term obligations were paid in full
in 1996. The Company has reflected $335,000 (including the aforementioned
$137,000) as interest expense in the accompanying consolidated statement of
operations for the year ended December 31, 1996 in connection with these
obligations.
7. LONG-TERM DEBT
$5 MILLION TERM NOTE
On July 2, 1996, Mountaineer Park entered into a financing arrangement with
a private lending firm for a $5 million working capital loan and a $11.1 million
loan commitment to refinance Mountaineer Park's construction loan with a former
lender. The note evidencing the loan called for 36 monthly payments of interest
only at the rate of 12% per annum. The Company also agreed to issue the lender
183,206 shares of its common stock, warrants to purchase an additional 1,142,860
shares at $1.06 per share and pay a $400,000 loan fee. All warrants were
immediately vested and are exercisable for a term of five years. The stock and
warrants were registered during 1996.
As part of the transaction, the lender also provided a one year commitment
to lend Mountaineer Park up to $11.1 million of additional funds to be used to
refinance the first mortgage held by the former lender. In connection with the
financial commitment, the Company paid a $110,000 commitment fee and issued the
lender additional warrants to purchase 350,000 shares of common stock at $1.06
per share (which were fully vested at the issuance date and expire in 2001).
F-18
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
The aforementioned warrants are entitled to protection from dilution in
certain circumstances.
The Company assigned values of approximately $250,000 and $191,000 related
to the aforementioned common shares and warrants, respectively, issued in
connection with the financing. Such amounts were capitalized as deferred
financing costs along with the aforementioned fees. All deferred financing costs
relating to the financing were amortized by December 31, 1996 because of the
amendment as noted below.
In order to assure compliance with provisions of the Lottery Act concerning
control over a licensee, the lender has agreed that it may not own, through the
exercise of warrants or otherwise, more than 5% of the Company's outstanding
common stock unless and until the Lottery Commission either (i) approves the
lender or (ii) provides an advisory opinion approving an arrangement whereby the
lender may own but may not have voting rights to any shares in excess of the 5%
threshold. If the lender becomes disqualified after such Lottery Commission
approval, any share held in excess of the 5% threshold, if registered, shall be
sold by the lender in the market; otherwise such shares may be put to the
Company at the then market price, said price payable in cash or in the form of a
note with interest only payable monthly at 24% per annum for a period of one
year at which time all principal and unpaid interest become due.
$16.1 MILLION AMENDED AND RESTATED TERM NOTE
On December 26, 1996, Mountaineer Park amended and restated its July 2, 1996
term loan agreement (the "Amended and Restated Term Loan Agreement"), increasing
the amount of principal borrowed from $5.0 million to $16.1 million. The Company
is guarantor pursuant to the Amended and Restated Term Loan Agreement.
Mountaineer Park also entered into a line of credit agreement with the same
lender on December 26, 1996, for borrowings up to $5,376,000.
The restated loan agreement bore interest at the rate of 12% per annum, and
called for payments of interest only until the maturity date of December 26,
1999, at which time all principal and unpaid interest was due. In connection
with this transaction, the Company agreed to issue 550,000 shares of its common
stock and warrants to purchase an additional 1,632,140 shares of the Company's
common stock at an exercise price of $1.06 per share (which were fully vested at
the date of issuance and expire in 2001). Both the shares and the warrants were
issued in thirteen equal monthly installments. The shares and warrants were
assigned an aggregate value of approximately $777,000, which was recorded as
deferred financing costs. The warrants are entitled to protection from dilution
in certain circumstances. The stock and warrants are subject to demand
registration rights. The Company amortized the deferred financing costs through
June 30, 1997 because of the July 2, 1997 refinancing as discussed below.
SECOND AMENDED TERM LOAN AGREEMENT
On July 2, 1997, Mountaineer Park and its lender again amended and restated
the $16.1 million loan agreement. The July 2, 1997 Second Amended Term Loan
Agreement bore the following revisions from the prior loan agreements:
i) The maturity date of the loan was extended to July 2, 2001.
ii) The principal amount borrowed was increased to $21,476,500 (by drawing
down the line of credit).
iii) Annual cash fees in the amount of 8% of the outstanding principal
balance due on each anniversary of the term loan were eliminated.
F-19
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
iv) Annual warrants to purchase 250,000 shares of the Company's common stock
at an exercise price of $1.06, due to be issued on November 15, 1997,
1998 and 1999 were eliminated.
v) Annual warrants to purchase additional shares in a number to be
calculated under a formula defined in the Amended Term Loan Agreement,
due to be issued on November 15, 1997, 1998 and 1999, were eliminated.
vi) Annual shares of the Company's common stock equal to 5% of the
outstanding principal balance on November 15, 1997, 1998 and 1999 were
eliminated.
As consideration for the Second Amended Term Loan Agreement, Mountaineer
Park agreed to pay the lender (i) a one time commitment fee of $1.8 million,
which was paid over the first year of the term; (ii) interest at the rate of 13%
(compared to 12% on the $16.1 million term loan and 15% on the $5.4 million line
of credit under the Amended Term Loan Agreement); and (iii) a call premium equal
to 5% in the event of prepayment during the first year of the term, declining to
3% during the second year, 2% in the third year, and 1% in the final year. The
Company continues to guarantee the loan, and the lender's security position has
been improved from second to first trust holder.
In July 1997, Mountaineer Park paid Bridge Capital, LLC, $100,000 for
services rendered in connection with arranging this transaction.
THIRD AMENDED AND RESTATED TERM LOAN AGREEMENT
The Company, as guarantor, and its lender again amended and restated the
loan agreement on April 30, 1998, (the "Third Amended and Restated Term Loan
Agreement") in order to help finance the acquisitions of Speakeasy-Las Vegas and
Speakeasy-Reno. This increased the term loan amount to approximately $27,865,000
and the line amount to approximately $10,377,000 (approximately $5,527,000 of
which was drawn upon as of December 31, 1998). The Third Amended and Restated
Term Loan Agreement also established a separate $1.7 million line of credit for
construction of Speakeasy--Las Vegas. The loans, as well as any draws against
the line of credit, continue to be for a term ending July 2, 2001 with monthly
payments of interest only at the rate of 13% per year with all principal
becoming due at the end of the term. The loans are secured by substantially all
of the assets of Mountaineer Park, Speakeasy-Las Vegas and Speakeasy-Reno and
are unconditionally guaranteed by the Company. The call premium applicable to
prepayment of the loans (3% between July 3, 1998 and July 2, 1999, 2% from July
3, 1999 until July 2, 2000, and 1% from July 3, 2000 until the end of the term),
however, does not apply to the amounts borrowed for the acquisitions or draws on
the $1.7 million construction line of credit.
The Third Amended and Restated Term Loan Agreement bears certain restrictive
financial covenants affecting future transactions to be entered into by the
Company. These covenants include, but are not limited to, restrictions on the
ability of the Company to incur additional debt, lend money, acquire other
businesses, make capital expenditures, or increase management's compensation.
Anti-dilution provisions are included in the agreement limiting the number of
securities which can be issued without the lender's prior approval. The Company
was in compliance with, or had obtained a waiver for non-compliance with, all
such restrictive financial covenants at December 31, 1998.
F-20
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OTHER DEBT
TRADE NOTE PAYABLE
In September 1995, Mountaineer Park entered into an agreement with its
Totalisator system supplier to convert $461,167 of outstanding trade payables
into a term note. Under the terms of the agreement, Mountaineer Park was
required to make 21 monthly interest and principal payments of $17,800 and eight
(8) additional payments of approximately $17,800 on various dates through May
31, 1997. The loan, which was unsecured, bore interest at the rate of 12% per
annum. The loan was paid off during 1997.
OTHER NOTES PAYABLE
In May 1996, the Company reached a settlement agreement with the holder of
52,250 shares of redeemable common stock, valued at $313,000. Pursuant to the
settlement agreement, the Company agreed to pay $25,000 upon execution of the
settlement agreement and delivered an unsecured, non-interest bearing promissory
note calling for a total of three payments of $5,000 due on August 1, 1996,
November 1, 1996 and February 1, 1997; a payment of $50,087 on May 1, 1997; and
a total of four annual payments of $40,087 due on May 1, 1998 through 2001. The
obligation to pay the amounts described above was discounted at 8%. As of
December 31, 1998, the remaining principal balance on this note was $82,000, net
of a discount of approximately $38,000.
In November 1998, Mountaineer Park entered into an agreement to purchase 200
video lottery terminals, at which time the 200 previously leased terminals were
returned to the lessor without penalty. Under the terms of the agreement,
Mountaineer Park is required to make 24 monthly payments of $56,208 through
October 2000. The agreement, which is secured by the video lottery terminals, is
non-interest bearing and therefore, was discounted at a rate of 8%. As of
December 31, 1998, the remaining balance on this agreement was $1,147,000, net
of a discount of approximately $90,000.
ANNUAL COMMITMENTS
Future annual principal payments under other debt agreements as of December
31, 1998 are as follows:
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1999.......................................................................... $ 722,000
2000.......................................................................... 608,000
2001.......................................................................... 27,000
------------
Total....................................................................... $ 1,357,000
------------
------------
F-21
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NON-RECURRING INCOME
In 1996, the Company negotiated significant reductions in four previously
accrued obligations, and as a result recorded $705,000 in non-recurring income
The non-recurring income resulted from the following: (i) In 1995, the Company
recorded a provision for loss in the amount of $308,000 in connection with a
legal judgment which had been assessed against Mountaineer. In June 1996, the
related lawsuit was settled by payment of $100,000; (ii) In September 1996, the
Company reached agreement in a dispute over trade accounts payable. A $411,000
claim for professional fees, which was accrued as of December 31, 1995, was
satisfied in full upon payment of a $150,000 cash settlement in September 1996;
(iii) In July 1994, the Company entered into an agreement in settlement of
claims arising from a 1993 financial advisory agreement. In connection
therewith, the Company accrued a $150,000 liability and issued warrants to
purchase 145,000 shares of common stock with registration rights, exercisable at
a price of $6.25 per share through January 15, 1997. In September 1996, the
settlement agreement was amended as follows: (a) The obligation to remit the
$150,000 payment was reduced to $90,000 in return for an immediate payment of
$90,000, and (b) The exercise price of the previously issued warrants was
reduced to $3.00 per share and the exercise period was extended to January 15,
1998; (iv) In April 1995, the Company entered into a severance agreement with
its former chief executive officer. In connection therewith, the Company was
obligated to pay approximately $440,000 over a period of two years. In addition,
the Company repriced certain incentive options and was obligated to provide
certain benefits during the term of the agreement. In 1995, management
discontinued payments under the agreement due to their discovery of certain
matters which they believe nullified the agreement. As of December 31, 1995, the
Company had accrued an estimated remaining liability of $400,000 in connection
with the severance. In October 1996, the severance agreement was amended as
follows: (a) A cash payment of $100,000 was remitted to the former officer in
October 1996; (b) the Company issued 100,000 shares of common stock with
registration rights to the officer in October 1996. These shares were valued at
$124,000; (c) The former chief executive officer waived his rights to receive
salary and expense payments totaling approximately $400,000 as described in the
original agreement.
10. COMMITMENTS AND CONTINGENCIES
MOUNTAINEER BOND REQUIREMENTS
Mountaineer Park is required to maintain bonds in the aggregate amount of
$120,000, as of December 31, 1998, for the benefit of the Lottery Commission
through June 30, 1999. The bonding requirement has been satisfied via the
issuance of a $20,000 surety bond and four certificates of deposit securing
letters of credit aggregating $100,000, each of which is collateralized by
certain bank deposits.
TOTALISATOR SYSTEM OPERATING LEASE
The Company leases its Totalisator system under an amended operating lease
dated November 28, 1995. Under the amended lease terms, the Company must pay the
greater of $1,000 per live race performance or 0.55% of the live racing handle.
In addition, the Company must pay the greater of $300 per live race day ($550 if
no live race performance) per simulcast race day or 0.55% of the simulcast
racing handle. The lease agreement expires in October 2000. For the years ended
December 31, 1998, 1997 and 1996, the rent expense under the lease was
approximately $454,000, $437,000 and $396,000, respectively, which is included
in cost of pari-mutuel commissions in the accompanying consolidated statements
of operations.
F-22
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
VIDEO LOTTERY TERMINALS OPERATING LEASE
In September 1994, Mountaineer Park entered into a master operating lease
agreement for 400 new video lottery terminals which was scheduled to expire
September 1997. The monthly lease payments on these 400 video lottery terminals
were $72,000, plus taxes, insurance and maintenance costs (see discussions of
amendment to the master lease below).
On April 7, 1995, Mountaineer Park amended its payment schedule to the
master lease to provide for 400 additional video lottery terminals which were
installed in June 1995. In connection with this lease addition, Mountaineer Park
was obligated to pay 36 monthly installments of $82,000 beginning in January
1996 through December 1998 for these 400 additional video lottery terminals.
Mountaineer Park has normalized the rent expense over the 42 month lease term
(see discussion of amendment to the master lease below).
On March 26, 1996, periodic rental payments under the master lease agreement
were amended to reflect a new consolidated payment schedule. Under the new
agreement, the Company made monthly payments of approximately $119,000 in March
and April 1996, $183,000 from May through October 1996 and $119,000 from
November 1996 through January 1999. In addition to the amounts reflected above,
the Company made interest payments from March through October 1996 at a rate of
15% on certain past due rental payments under the previous agreement for a total
interest obligation of approximately $26,000.
On February 27, 1997 the Company agreed to purchase 400 video lottery
terminals in connection with its ongoing expansion of video lottery operations
for a total of $3,137,000. The new terminals were placed into operation on March
11, 1997, at which time 200 original terminals placed into service in September
1994 were returned to the lessor without penalty.
Effective at the date of return, the payment schedule of the September 1994
operating lease agreement, as amended March 26, 1996, was further amended. Under
the amended schedule, monthly payments decreased from $119,471 to $100,185,
through January 15, 1999. On January 21, 1999, the agreement was further amended
to extend the termination date to June 30, 1999. Under the amended schedule, the
monthly payments are $82,700 for the period from January 16, 1999 through June
15, 1999 and $41,000 for the period from June 16, 1999 through June 30, 1999.
All other lease terms remained unchanged. There are no early termination
penalties in connection with this amendment.
On June 30, 1998, Mountaineer Park entered into an operating lease agreement
for 200 new video lottery terminals. The monthly lease payments on these 200
video lottery terminals is $45,700 per month through June 2001.
On October 1, 1998, Mountaineer Park entered into an operating lease
agreement for 100 new progressive video lottery terminals. The weekly lease
payments on these 100 progressive video lottery terminals shall be equal to 9%
of the "Gross Terminal Income", as defined. The agreement has an expiration date
of December 31, 1999.
For the years ended December 31, 1998, 1997 and 1996, video lottery rental
expense was approximately $1,416,000, $1,119,000 and $1,394,000, respectively,
which is included in costs of video lottery in the accompanying consolidated
statements of operations.
F-23
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PHOTOFINISH SYSTEM OPERATING LEASE
Mountaineer 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 1998, $52,000 in 1997
and $50,000 in 1996.
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 ($500 prior to April 15, 1996) 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, 1998, 1997 and 1996 were
approximately $297,000, $269,000 and $230,000, respectively.
FUTURE MINIMUM LEASE PAYMENTS
Future annual minimum payments under all material operating leases as of
December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
1999.......................................................................... $ 1,258,000
2000.......................................................................... 1,073,000
2001.......................................................................... 385,000
2002.......................................................................... 127,000
Thereafter.................................................................... 3,000
------------
Total....................................................................... $ 2,846,000
------------
------------
LITIGATION
The Company was served with a complaint claiming breach of contract and
breach of the implied covenant of good faith and fair dealing in connection with
a financing commitment allegedly obtained by the plaintiff for Mountaineer Park.
The complaint seeks recovery of $350,000 in fees, as well as lost profits on
shares of the Company's stock the plaintiff alleges it could have purchased upon
the exercise of warrants it was to have earned, and loan servicing fees, which
lost profits and servicing fees are alleged to exceed $75,000, pre- and
post-judgment interest, and costs.
The Company has filed a motion for summary judgment on the grounds that
letters authored by plaintiff constitute an admission that plaintiff was unable
to arrange closing of the subject financing by the express deadline contained in
the parties' agreement and that no agreement to extend the closing date was
reached. Thus, plaintiff did not satisfy the conditions precedent to its right
to compensation of any kind. The Company and the plaintiff have agreed to
non-binding mediation in an attempt to resolve this matter amicably.
On February 26, 1998, Mountaineer Park was served with a complaint filed by
a former employee claiming wrongful termination of employment and improper
administration of a polygraph test. The
F-24
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
complaint alleges that pursuant to statute concerning such tests, Mountaineer
Park is criminally liable to the State of West Virginia and civilly liable to
the plaintiff. The complaint seeks $250,000 in compensatory damages and a like
amount in punitive damages. The Company denies all allegations and plans to
defend its position vigorously.
The Company is party to various other lawsuits which have arisen in the
normal course of its business. Certain matters are covered by insurance, after
the Company meets certain deductible requirements, generally $2,500 per
occurrence.
The liability, if any, arising from unfavorable outcomes of the
aforementioned lawsuits is presently unknown.
PENSION PLAN
Mountaineer has a qualified defined contribution plan covering substantially
all of its employees (the "Plan"). The Plan was ratified retroactively on March
18, 1994 by the legislature of the State of West Virginia. The Plan
contributions are based on .25% of the race track and simulcast wagering
handles, and approximately 0.5% of the net revenues of video lottery activities
beginning March 18, 1994. Contributions to the Plan for the years 1998, 1997,
and 1996 were $451,000, $344,000 and $250,000, respectively.
CONSULTING AGREEMENTS
On October 1, 1997, the Company entered into a two-year financial advisory
agreement with an investment banking firm to perform various consulting
services. Under the terms of the agreement, the Company issued warrants to
purchase 150,000 shares of its common stock at an exercise price of $1.50 per
share. The warrants will be exercisable for a period of four years and have
piggy-back registration rights. The agreement was terminated on February 15,
1999.
Also on October 1, 1997, Mountaineer Park entered into a three year contract
with an employee benefits and governmental relations consultant. Under the terms
of the agreement the consultant will receive annual options to purchase 10,000
shares of the Company's common stock on October 1, 1997, 1998 and 1999. The
options will be exercisable for a period of five years from the dates vested at
an exercise price for each tranche equal to the market price of the Company's
common stock on the dates of vesting. The exercise price will be the market
price of the Company's common stock on the dates of grant.
The Company recorded, during 1997, $130,000 in expense in connection with
the aforementioned grants of warrants and options to nonemployees.
UNDEVELOPED LAND
On October 7, 1997, Mountaineer Park entered into an agreement in which it
obtained an exclusive option to purchase 349 acres of real property (including
two buildings) located adjacent to its Hancock County, West Virginia operation.
Mountaineer Park paid $100,000 for an irrevocable option to purchase the
property for $600,000 before October 1, 1998, with payment to be made in the
form of a $200,000 cash payment at closing and a $400,000 term note bearing
interest at 9% payable over five years. The Company has extended this option
until October 1, 1999 without additional cash consideration and intends to
exercise its options to purchase substantially all such 349 acres.
F-25
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OFFICER EMPLOYMENT AGREEMENT
On March 1, 1997, the Company entered into a three year employment agreement
with its president and chairman of the Company ("Officer"). The employment
agreement provides that the Officer will receive a base salary with annual cost
of living adjustments and bonuses at the recommendation of the compensation
committee and upon approval of the board of directors.
The agreement provides that if the Officer's period of employment is
terminated by reason of death or physical or mental incapacity, the Company will
continue to pay the Officer or his estate the compensation otherwise payable to
the Officer for a period of two years. If the Officer's period of employment is
terminated for a reason other than death or physical or mental incapacity or for
cause, the Company will continue to pay the Officer the compensation that
otherwise would have been due him for the remaining period of employment. If the
Officer's period of employment is terminated for cause, the Company will have no
further obligation to pay the Officer, other than compensation unpaid at the
date of termination.
In the event that the termination of the Officer's period of employment
occurs after there has been a change of control of the Company, as defined, and
(i) the termination is not for cause or by reason of the death or physical or
mental disability of the Officer or (ii) the Officer terminates his employment
for good reason, as defined in the agreement, then the Officer will have the
right to receive within thirty days of the termination, a sum that is three
times his annual base salary, but not to exceed the amount deductible by the
Company under the Internal Revenue Code of 1986.
See Note 18, Subsequent Events.
Future annual minimum payments under the officer employment agreement as of
December 31, 1998 is as follows:
YEARS ENDING DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- ----------
1999............................................................................ $ 315,000
2000............................................................................ 53,000
----------
Total......................................................................... $ 368,000
----------
----------
DIRECTOR AGREEMENTS
On February 18, 1998, the Company entered into separate agreements with two
new directors to provide certain compensation for their services on the
Company's Board of Directors. Specifically, each agreement provided for: (i) the
grant of options to purchase 25,000 shares of common stock of the Company for
each year of service; (ii) the registration by the Company, at its sole cost, of
the shares underlying such options by including such shares in any registration
statement the Company determines to file with the Securities and Exchange
Commission with respect to employee compensation; (iii) the adjustment of the
terms of such options in certain events as set forth in the agreement; and (iv)
a fee of $2,500 for each regular meeting of the Board, audit committee or
shareholders meetings attended and reimbursement of expenses for travel, food
and lodging incurred in attending such meetings.
F-26
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS
The Company had a note receivable for $240,000 from a shareholder of the
Company at December 31, 1995, as well as additional non-interest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bore interest at
8% per annum and was due on demand. During 1995, the Company recorded a
provision for loss in the amount of $240,000. The Company recorded a settlement
during July 1997 regarding this receivable (see Note 12).
COMMON STOCK ISSUED FOR SERVICES RENDERED
The Company incurred salaries to officers totaling $177,000 which remained
unpaid as of December 31, 1995. On February 9, 1996, the Company agreed to issue
a total of 466,676 shares of the Company's common stock in satisfaction of these
unpaid salaries. The fair value of these shares approximated the value of the
services rendered.
On January 19, 1996, the Company issued 200,000 shares of the Company's
common stock at a value of $101,000 to an employee and shareholder for services
rendered. The fair value of such shares has been reflected as "general and
administrative expenses" in the accompanying 1996 consolidated statement of
operations.
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 1998, 1997 and 1996 totaling approximately $834,000, $360,000
and$334,000, respectively.
See Note 12 for additional related party transactions.
12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES
During 1996, the Company changed its authorized shares from 25,000,000 to
50,000,000.
LIMITATIONS ON DIVIDENDS
Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its shareholders
as a result of its accumulated deficit as of December 31, 1998. Furthermore,
under the Company's and lender's Third Amended and Restated Term Loan 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.
REDEEMABLE COMMON STOCK SETTLEMENTS
The Company granted in 1992 put rights requiring the Company, upon demand,
to redeem up to 209,000 shares at $6.00 per share (the "Redeemable Shares") if
the shares were not registered by February 1, 1993.
During 1995, holders of 104,500 of the Redeemable Shares received an
aggregate of 276,750 make-up shares, and in 1996 the holder of 52,250 Redeemable
Shares received 133,416 make-up shares for a total of 410,166 "Settlement
Shares." The holders of the Settlement Shares were granted registration rights
and the right to that number of additional shares necessary to make up the
difference, if any, between $1.50 per share and the average market value of the
Company's common stock for the ninety (90) trading days immediately following
the effective date of the registration of the Settlement Shares (the "Average
Market Price"). In the event the Settlement Shares were not registered by June
30, 1996, the Company was to issue
F-27
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES (CONTINUED)
promissory notes in the principal amount of $1.50 multiplied by the number of
Settlement Shares and bearing interest at the rate of 12% per annum and payable
in 24 monthly installments. For each $1.50 of principal paid on the notes,
however, the holder was required to return a Settlement Share to the Company.
Also, the notes were to be reduced by an amount equal to the Average Market
Price multiplied by the number of Settlement Shares.
With respect to 120,000 of the Settlement Shares, the holder elected to
terminate the Company's $1.50 per share repurchase right. Accordingly, the
Company was not required to issue a promissory note with respect to these
Settlement Shares. However, based on the Average Market Price, the Company is
required to issue 30,312 additional shares, which are included in common stock
subscribed.
With respect to 156,750 shares of the Settlement Shares, the Company issued
a note in the amount of $235,000 (156,750 shares multiplied by $1.50). However,
by an amended settlement agreement dated November 1, 1996, in exchange for a
cash payment of $31,000 and the cancellation of the Company's right to
repurchase the Settlement Shares for $1.50 per share, the holder canceled the
promissory note and relinquished the right to receive additional shares.
With respect to the holder of 133,416 Settlement Shares, the Company issued
a note in the amount of $200,000. The Company redeemed 16,677 shares (which were
canceled and returned to authorized but unissued status) upon the October 31,
1996 effectiveness of a registration statement that included the Settlement
Shares. Such effectiveness stayed the Company's payment obligation for a period
of 90 business days. Based on the Average Market Price, the Company was entitled
to a credit against the note in an amount of $150,000. However, based on the
Average Market Price, the Company is required to issue 30,159 additional shares,
which are included in common stock subscribed in the accompanying 1996
consolidated statement of shareholders' equity. Pursuant to a December 2, 1997
Second Amended Settlement Agreement, the Company paid $27,000 and issued 12,070
shares of restricted common stock in exchange for cancellation of the promissory
note, acknowledgment that the Company had satisfied all of its obligations to
date, and release of any further obligations to the holder, including the
additional shares.
Pursuant to a May 10, 1996 settlement agreement with the final holder of
52,250 of the Redeemable Shares, the Company agreed to pay the holder $25,000
upon the execution of the agreement and issue a $225,000 non-interest bearing
promissory note in exchange for the cancellation of put rights in connection
with the Redeemable Shares. The Company discounted the note at 8%. The
outstanding balance under the note as of December 31, 1998 amounted to $82,000
and is included on the accompanying 1998 consolidated balance sheet in long-term
debt. Under the terms of the note, the Company is currently obligated to pay
four annual May payments of $40,000 from 1998 through 2001. The holder also
agreed to the cancellation of options to purchase 50,000 shares of the Company's
common stock for $.01 per share.
In connection with the aforementioned settlements, the Redeemable Shares
were reclassified to common stock during 1996. The Company reduced redeemable
common stock obligations by $1,406,000, recorded long-term debt of $241,000, and
increased additional paid-in capital by $1,165,000 during 1996 which is included
in the accompanying 1996 consolidated statement of shareholders' equity.
GUARANTEED SHARES
In connection with the 1992 acquisition of Mountaineer Park, the Company
issued 529,676 shares which had registration rights, guaranteed at a per share
value of $6.00. The Company was obligated to issue additional shares should a
market value per share deficiency exist at the time of registration. The
F-28
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES (CONTINUED)
Company granted in 1992 put rights to the holder (a bank) of 60,604 of the
aforementioned shares at $6.00 per share, all of which became exercisable on or
before December 31, 1995. Such rights were not exercised as of December 31,
1995. Accordingly, the Company has reduced redeemable common stock and has
increased shareholders' equity in the accompanying 1996 consolidated statement
of shareholders' equity.
In December 1996, the Company reached a settlement agreement with the holder
of 2,514 shares which bore a $6.00 per share price guarantee. The Company paid a
$3,500 cash settlement in December 1996 in exchange for the cancellation of the
price guarantee.
In December 1996, the Company reached a settlement agreement with the holder
of 135,529 shares which bore a $6.00 per share price guarantee. The Company paid
a $250,000 cash settlement in December 1996 in exchange for a cancellation of
the price guarantee.
In January 1997, the Company reached a settlement with the holders of
118,948 shares which bore the $6.00 per share price guarantee. In exchange for
the cancellation of the price guarantee, the Company paid a cash settlement of
$102,000 and issued 100,000 additional shares of the Company's common stock in
January 1997. The Company recorded a $102,000 charge to paid-in capital in
connection with this transaction.
In July 1997, the Company reached a settlement with the former majority
shareholder of Mountaineer Park (the "Holder"), and holder of 181,739 additional
guaranteed shares. The settlement was part of a larger transaction by which
Mountaineer Park and the Company resolved all matters outstanding with the
Holder. Pursuant to the agreement, the price guarantee was extinguished, the
Company paid a cash settlement of $278,000 out of which the Holder repaid in
full the $78,000 balance due on a promissory note, and the Company canceled a
note receivable in the amount of $240,000 and issued 50,000 shares of restricted
common stock. The Company had recorded a $302,000 provision for doubtful
accounts in 1995 in reference to the note receivable. The Company recorded a
$216,000 reduction to paid-in capital and a $78,000 reduction in notes
receivable in connection with this transaction.
As of December 31, 1998, 30,342 shares remain outstanding with a maximum
$6.00 price guarantee (subject to a credit of approximately $1.50 per share).
COMMON STOCK ISSUED FOR SERVICES
During the year ended December 31, 1996, the Company issued 52,800 shares
valued at approximately $31,000 for services rendered, and the value of such
shares was charged to the 1996 consolidated statement of operations.
In 1996, the Company issued 75,000 shares of its common stock pursuant to a
settlement agreement, and accordingly recorded a $111,000 reduction in accrued
liabilities.
During the year ended December 31, 1996, the Company issued 207,500 shares
valued at approximately $175,000 for services rendered by a financial consultant
in connection with capital raising activities in 1994. The value of the shares
was charged to general and administrative expenses in the 1994 consolidated
statement of operations and was reflected as an accrued liability on the 1995
accompanying consolidated balance sheet. In 1996, the Company recorded a
reduction to accrued liabilities and an increase to additional paid-in capital
of $175,000.
F-29
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES (CONTINUED)
STOCK OPTION PLANS
In May 1992, the Board of Directors approved the grant of non-qualified
options to purchase 600,000 shares to certain officers and directors of the
Company. Each option entitles the holder to purchase one share of common stock
at an exercise price of $1.06 per share and is fully vested as of the date of
grant. The exercise price approximated the fair value of the shares at the date
of grant; such options were due to expire in May 1997 (see below).
In October 1992, the Board of Directors adopted an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code. The
plan reserves 1,200,000 shares for issuance which were granted effective October
1992. The options are exercisable at the then fair market value of $4.875 per
share (unless such options are granted to a 10% shareholder, in which case the
exercise price would be no less than 110% of the then fair market value), and
are exercisable over a period of five (5) years, subject to certain
restrictions. The Board of Directors may grant new options under the Plan
through October 2002.
In May 1995, the Board of Directors approved the grant of non-qualified
options to purchase 823,047 shares to certain officers and directors of the
Company. Each option entitles the holder to purchase one share of common stock
at an exercise price of approximately $1.22 per share and is fully vested as of
the date of grant. These options where exercised during September 1998 (see
below).
In November 1995, the Board of Directors adopted an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code (see
above for certain requirements under Section 422). The plan reserves 500,000
shares for issuance which were granted effective January 23, 1996. The options
are exercisable at the then fair market value of $.5625 per share, and are
exercisable immediately, expire in 2001, and are subject to certain
restrictions.
On January 23, 1996, the Board of Directors granted to two outside
directors, non-qualified stock options to purchase a total of 125,000 shares of
the Company's common stock, at the fair market value of the shares on the date
of grant of $.5625 per share. The options are immediately exercisable for a term
of five years. The value of these options was calculated at $19,000 and was
charged to the 1996 consolidated statement of operations and was reflected as an
increase to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
In October 1996, the Board of Directors adopted, subject to shareholder
approval, an incentive stock option plan meeting the requirements of section 422
of the Internal Revenue Code (see above for certain requirements under Section
422). The plan reserved 500,000 shares for issuance.
On October 2, 1996, the Board of Directors granted two outside directors,
non-qualified stock options to purchase a total of 150,000 shares of the
Company's common stock, at the fair market value of the shares on the date of
grant of $1.06 per share. The options are immediately exercisable for a term of
five years. The value of these options was calculated at $50,000 and was charged
to the 1996 consolidated statement of operations and was reflected as an
increase to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
On May 27, 1997 and again on August 26, 1997, the Company's board of
directors voted to amend the terms of options granted to certain officers and
key employees of the Company on May 28, 1992 such that, with respect to grantees
of such options who are currently employees of the Company or its subsidiaries
(in the aggregate, options to purchase 410,867 shares of the Company's common
stock at a price of $1.06 per
F-30
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES (CONTINUED)
share), the period during which such options may be exercised was extended, most
recently for a period of 2 years. The options originally would have expired on
May 28, 1997. This action was taken in continuation of the goal the Company has
previously set forth in its employee stock option plans: to provide the
participants with maximum benefits and to provide an incentive to the management
of the Company. The Company recorded $156,000 of compensation expense during the
year ended December 31, 1997 as a result of the option amendments.
On August 14, 1997, the board adopted the Amended 1996 Stock Option Plan.
The Plan reserved for grant options to acquire up to 750,000 shares of common
stock of the Company. On September 19, 1997, the board elected to grant in the
aggregate all 750,000 options as non-qualified options to fourteen key employees
and directors (for their services as directors) at an exercise price of $1.34
per share, the fair market value of the stock on the date of grant. The options
are fully vested at the date of grant and are exercisable for a term of five
years. On October 8, 1997, the Company's shareholders ratified the amended plan.
The Board of Directors established the 1998 Stock Incentive Plan (the "1998
Plan"). The 1998 Plan will reserve for issuance upon exercise up to 800,000
shares of the Company's common stock.
During January 1998, the Company granted 800,000 options pursuant to its
1998 Stock Incentive Plan to employees. The options were granted at an exercise
price of $2.15625, the estimated fair market value of the Company's common stock
at the date of grant and vested immediately. These options expire in January
2003.
During January 1998, the Company granted 60,000 options outside of the
Company's stock option plan to employees. The options were granted at an
exercise price of $2.15625, the estimated fair market value of the Company's
common stock at the date of grant, and vested immediately. These options expire
in January 2003.
During February 1998, the Company granted 50,000 options outside of the
Company's stock option plan to directors. The options were granted at an
exercise price of $2.50, the estimated fair market value of the Company's common
stock at the date of grant. The options vest in increments of 6,250 options
after attendance at meetings of the Board of Directors, audit committee, and
shareholders. These options expire in February 2003. The Company recorded
$31,000 in compensation expense during 1998 related to these options.
During March 1998, the Company granted 950,000 options pursuant to its 1992
Employee Stock Option Plan to employees. The options were granted at an exercise
price of $2.41, the estimated fair market value of the Company's common stock at
the date of grant and vested immediately. Approximately 1,200,000 options
exercisable at a price of $2.00 per share granted under such plan had expired
unexercised in October 1997.
During August and September 1998, holders of previously-issued options to
purchase the Company's common stock exercised options to purchase a total of
1,091,380 shares at prices ranging from $.01 to $1.21875 per share by delivery
of cash, notes, and other common stock of the Company, resulting in a net
increase in the number of issued and outstanding shares of 925,273 for proceeds
(cash and notes) totaling approximately $819,000 as well as the delivery of
166,107 mature shares of the Company's common stock in lieu of cash.
F-31
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
In connection with the exercise of 378,415 options by the Company's
President and CEO, the Company received a promissory note for approximately
$461,000. The note is due on or before August 1999 and bears interest at an
annual rate of 8.5%. The note receivable has been reflected as an offset to
stockholders' equity in the accompanying 1998 consolidated financial statements.
During each of the years in the three year period ended December 31, 1998,
stock option and warrant activity is as follows:
SHARES PRICE RANGE WEIGHTED AVERAGE
AVAILABLE PER SHARE EXERCISE PRICE
--------------- ----------- -----------------
Balance, January 1, 1996................. 4,259,630 $ 0.01-8.00 $ 1.89
Granted.................................. 3,980,000 0.56-1.06 0.97
Canceled................................. (170,000) 0.01-3.00 2.12
Exercised................................ -- -- --
---------------
Balance, December 31, 1996............... 8,069,630 0.01-8.00 1.44
Granted.................................. 930,000 1.34-1.50 1.37
Canceled................................. (1,907,383) 0.56-2.40 1.95
Exercised................................ (160,000) 0.01-1.06 0.99
---------------
Balance, December 31, 1997............... 6,932,247 0.01-8.00 1.00
Granted.................................. 1,860,000 2.16-2.50 2.29
Canceled................................. (145,000) 3.00 3.00
Exercised................................ (1,091,380) 0.01-1.22 1.03
---------------
Balance, December 31, 1998............... 7,555,867(1) $ 0.01-4.88(1) $ 1.60
---------------
---------------
Exercisable at December 31, 1998......... 7,530,867 $ 0.01-4.88 $ 1.60
---------------
---------------
- ------------------------
(1) Includes options to purchase 20,000 shares of common stock at $0.01 per
share.
Weighted average fair value of options granted during 1998 was $1.14.
The following summarizes information about the Company's stock options and
warrants outstanding at December 31, 1998:
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AT AVERAGE
PRICES DECEMBER 31, 1998 LIFE PRICE DECEMBER 31, 1998 PRICE
- ---------------------- ----------------- --------------- ----------- ----------------- -----------
0.0$1 to 0.80....... 680,000 2.0(1) $ 0.56 680,000 $ 0.56
1.06 to 1.50....... 4,655,860 2.7 1.12 4,655,860 1.12
2.16 to 2.50....... 1,860,000 4.12 2.29 1,835,000 2.29
4.00 to 4.88....... 360,000 1.16(2) 4.15 360,000 4.15
----------------- -----------------
7,555,867 7,530,867
----------------- -----------------
----------------- -----------------
- ------------------------
(1) Excludes 20,000 options with no set expiration date.
(2) Excludes 60,000 options with no set expiration date.
F-32
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
PRO FORMA STOCK OPTION INFORMATION
Pro forma information regarding net income is required by SFAS 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method pursuant to SFAS 123, rather than the method
pursuant to APB 25 as discussed in Note 1. The fair value of these options was
estimated at the date of grant using the Black Scholes option pricing model with
the following assumptions for the years ended December 31, 1998, 1997 and 1996:
risk fee rates of between 5.45% and 7.2%; dividend yield of 0%; expected life of
the options of between 3 and 5 years; and volatility factors of the expected
market price of the Company's common stock of between 44% 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, 1998 1997 1996
- ---------------------------------------------------- ------------ ------------ ------------
Net income:
As reported....................................... $ 7,688,000 $ 4,694,000 $ 1,155,000
Pro forma......................................... $ 5,611,000 $ 4,060,000 $ 1,104,000
Net income per share, assuming dilution:
As reported....................................... $ 0.33 $ 0.22 $ 0.06
Pro forma......................................... $ 0.24 $ 0.19 $ 0.06
13. DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management.
During 1994 and 1995, various corporate affiliates of the Company's chief
executive officer advanced an aggregate sum of approximately $100,000 to ExCal
primarily to cover overhead expenses in connection with the maintenance of
leases and other costs associated with the Company's existing oil and gas
interests in Michigan and former interests in Ohio. In February 1996, such
advances, along with accrued interest thereon at the rate of 10% per annum, was
converted into a demand promissory note in the principal amount of $100,218
payable to the chief executive officer at the rate of 10% per annum. This note
was repaid in 1998 in its entirety.
During October 1998, the Company transferred all of its right, title and
interest in its oil and gas interests to an affiliate of its former joint
venture partner, SABAL Corp. ("SABAL"), in exchange for an
F-33
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. DISCONTINUED OPERATIONS (CONTINUED)
assignment of production payment in the amount of $2,500,000 (the "Production
Payment"). The Production Payment is payable out of a percentage of SABAL's net
revenue interest from oil and gas produced in its Michigan interests, as
defined. The Production Payment bears interest at 3% annually and is due and
payable in its entirety at the end of fifteen years. For as long as the
Production Payment is outstanding, the Company can convert the Production
Payment into and up to 25% of the common stock of SABAL on a fully diluted
basis. The Production Payment is collateralized by all the assets and interests
of SABAL. Because of the uncertainty of collection of the production payment,
and the depressed oil market, the Company recorded a loss in connection with
this exchange of approximately $2,735,000 (the net assets at the date of
exchange), which has been presented as a loss on disposal of discontinued
operations. To the extent that the Company realizes this asset in the future,
such realization will be flowed through discontinued operations as a change in
estimate.
In connection with the aforementioned transfer, the Company has entered into
a term loan agreement with SABAL whereby the Company will loan SABAL up to
$500,000. The term loan is for a period of two years (interest only for the
first six months, and 15% per annum thereafter) and is secured by SABAL's real
and personal property and equipment related to its oil and gas interest in
Michigan and Texas. As of December 31, 1998, the Company had loaned to SABAL
approximately $333,000.
In connection with the aforementioned transfer, SABAL has promised to pay to
Biscayne Petroleum Corporation, an affiliate of the Company's President and CEO,
approximately $98,000. SABAL assumed this liability from Fleur-David
Corporation, the Company's former oil and gas operating partner. The Company has
entered into an Inter-Creditor Agreement with SABAL and others that effectively
prorates the net proceeds of any sale of assets by SABAL, other than in the
ordinary course of business, among all creditors based on the total aggregate
debt of SABAL at the time.
14. INCOME TAXES
The following summarizes the benefit for income taxes for the years ended
December 31:
1998 1997 1996
------------- ------------- -----------
Current
Federal.......................................... $ 114,000 $ 100,000 $ 5,000
State............................................ -- -- 2,000
------------- ------------- -----------
114,000 100,000 7,000
------------- ------------- -----------
Deferred
Federal.......................................... (2,773,000) (1,923,000) (757,000)
State............................................ -- -- (136,000)
------------- ------------- -----------
(2,773,000) (1,923,000) (893,000)
------------- ------------- -----------
Benefit for income taxes........................... $ (2,659,000) $ (1,823,000) $ (886,000)
------------- ------------- -----------
------------- ------------- -----------
F-34
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
A reconciliation of the expected statutory Federal income tax provision from
continuing operations to the benefit for income taxes for the year ended
December 31, 1998 and 1997 are as follows:
1998 1997 1996
------------- ------------- -------------
Provision for income taxes at a federal statutory
rate of 34%.................................... $ 2,636,000 $ 976,000 $ 91,000
Increase (reduction) in income taxes resulting
from:
Changes in the valuation allowance for deferred
tax assets allocated to income tax benefit... (2,825,000) (2,064,000) (1,099,000)
Depreciation and amortization, not deductible
for income tax purposes...................... 148,000 148,000 145,000
Utilization of net operating loss
carryforwards................................ (2,618,000) (1,027,000) --
Other............................................ -- 144,000 (23,000)
------------- ------------- -------------
Benefit for income taxes....................... $ (2,659,000) $ (1,823,000) $ (886,000)
------------- ------------- -------------
------------- ------------- -------------
At December 31, 1998 and 1997, significant components of the Company's net
deferred taxes are as follows:
1998 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards.............................. $ 3,870,000 $ 6,985,000
Depreciation.................................................. 34,000 40,000
Deferred rent................................................. 4,000 60,000
AMT credit.................................................... 245,000 --
Reserves and allowances....................................... 1,037,000 168,000
------------- -------------
5,190,000 7,253,000
Less valuation allowance........................................ -- (4,703,000)
------------- -------------
$ 5,190,000 $ 2,550,000
------------- -------------
------------- -------------
Deferred tax liability--Non-deductible tax basis................ (1,130,000) (1,263,000)
------------- -------------
$ (1,130,000) $ (1,263,000)
------------- -------------
------------- -------------
The Company's valuation allowance decreased during 1998 and 1997 by
approximately $4,703,000 and $3,860,000, respectively.
At December 31, 1998, the Company has federal net operating loss carry
forwards of approximately $11,400,000 for federal income tax reporting purposes
and approximately $4,400,000 for California reporting purposes, expiring through
2011 and 2002, respectively. The Tax Reform Act of 1986 includes provisions
which limit the Federal net operating loss carry forwards available for use in
any given year if certain events, including a significant change in stock
ownership, occur.
F-35
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. VIDEO LOTTERY OPERATIONS
The Company derives revenue from the operation of video lottery games in the
form of net win on the gross terminal income, or the total cash deposited into a
VLT less the value of credits cleared for winning redemption tickets. Pursuant
to the Lottery Act, the Company's share of net win is fixed at 47% of the net
win after deducting an administration fee of up to 4% of gross terminal revenues
first paid to the State of West Virginia. The Company is subject to annual
licensing requirements established by the Lottery Commission; its license has
been renewed through June 1999.
Mountaineer Park offers video lottery gaming through 1,300 video lottery
terminals ("VLTs") located in the racetrack clubhouse, grandstand and Lodge.
A summary of video lottery gross wagers, less winning patron payouts, for
the years ended December 31 is as follows:
1998 1997 1996
--------------- --------------- --------------
Total Gross Wagers........................ $ 240,164,000 $ 171,138,000 $ 104,819,000
Less Winning Patron Payouts............... (171,172,000) (121,951,000) (74,119,000)
--------------- --------------- --------------
Video Lottery Revenues.................... $ 68,992,000 $ 49,187,000 $ 30,700,000
--------------- --------------- --------------
--------------- --------------- --------------
The Company pays an administrative fee to the Lottery Commission not to
exceed 4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds including two funds which directly or
indirectly benefit the Company. These amounts are included in cost of video
lottery terminals in the consolidated statements of operations.
Amounts contributed to these funds for the years ended December 31 were as
follows:
1998 1997 1996
------------- ------------- -------------
HBPA purses..................................... $ 10,511,000 $ 7,480,000 $ 4,645,000
Company pension plan............................ 339,000 241,000 150,000
West Virginia general fund...................... 20,343,000 14,476,000 8,989,000
West Virginia Breeders' Classic fund............ 678,000 483,000 300,000
Hancock County general fund..................... 1,356,000 965,000 599,000
West Virginia tourism promotion fund............ 2,034,000 1,448,000 899,000
Veterans Memorial fund.......................... 678,000 482,000 300,000
------------- ------------- -------------
$ 35,939,000 $ 25,575,000 $ 15,882,000
------------- ------------- -------------
------------- ------------- -------------
16. RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Race Track and
Gaming Resort. Under West Virginia Horse Racing Law, the Company's commission
revenue is a designated portion of the parimutuel wagering handle (amounts
wagered).
On August 15, 1997, Mountaineer Park executed a new agreement with the HBPA,
the exclusive authorized bargaining representative for all thoroughbred horse
owners who participate in live races at Mountaineer Park. Mountaineer Park
contributes all purse funds earned by such horse owners, as well as compensation
to the HBPA in an amount equal to 15.5% of the amount paid for purses, from
proceeds of
F-36
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RACING OPERATIONS (CONTINUED)
its live and simulcast racing and video lottery operations. Mountaineer Park is
required to conduct a minimum of 210 live racing events annually during the term
of the agreement, down from a minimum threshold of 220 days under the prior
contract. Also, the minimum daily purse payment will increase from $22,500 under
the prior agreement to $30,000. The new contract, which expires on January 1,
2001, contains no other material changes from the prior agreement.
Mountaineer Park's labor agreement with approximately 50 mutuel and 9 video
lottery employees has been extended until November 30, 2002.
The Company's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer Park
and on races conducted at other "host" racetracks and broadcast live (i.e.
import simulcast) at Mountaineer Park. In parimutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
pre-set odds. The dollars wagered form a pool of funds from which winnings are
paid based on odds determined solely by the wagering activity. The racetrack
acts as a stakeholder for the wagering patrons and deducts from the amounts
wagered a "take-out" or gross commission, from which the racetrack pays state
and county taxes and racing purses. The Company's parimutuel commission rates
are fixed as a percentage of the total handle or amounts wagered. With respect
to Mountaineer Park's live racing operations, such percentage is fixed by West
Virginia law at three levels, 17.25%, 19% and 25%, depending on the complexity
of the wager. The lower rate applies to wagering pools involving only win, place
and show wagers, while the higher rates apply to pools involving wagers on
specified multiple events, such as trifecta, quinella and perfecta wagers. With
respect to simulcast racing operations, the Company generally has opted to apply
the commission rates imposed by the jurisdictions of the host racetracks, as it
may do with the consent of the Racing Commission. Such rates vary with each
jurisdiction and may be more or less favorable than the live racing commission
rates. Out of its gross commissions, the Company is required to distribute fixed
percentages to its fund for the payment of regular purses (the "regular purse
fund"), the state of West Virginia and Hancock County and, with respect to
commissions derived from simulcast operations, Mountaineer Park's employee
pension plan. After deducting state and county taxes and, with respect to
simulcast commission, simulcast fees and expenses and employee pension plan
contributions, approximately one-half of the remainder of the commissions are
payable to the regular purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
The Company pays purses into a fund established for the benefit of
participating horsemen for each day on which live racing is conducted. The
Company has a contractual obligation to pay the horsemen a percentage (the
Earned Commission) of the live and simulcast (satellite off-track wagering) race
handle less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues).
F-37
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RACING OPERATIONS (CONTINUED)
A summary of the parimutuel handle and deductions, including satellite
off-track wagering, for the years ended December 31 are as follows:
1998 1997 1996
-------------- -------------- --------------
Total parimutuel handle.......................................... $ 43,811,000 $ 40,975,000 $ 40,099,000
Less patron's winning tickets and breakage....................... (34,661,000) (32,464,000) (31,766,000)
-------------- -------------- --------------
9,150,000 8,511,000 8,333,000
Less:
Parimutuel tax paid to:
West Virginia and Hancock County............................... (494,000) (493,000) (487,000)
Purses and Horsemen's Association.............................. (3,860,000) (3,581,000) (3,547,000)
-------------- -------------- --------------
$ 4,796,000 $ 4,437,000 $ 4,299,000
-------------- -------------- --------------
-------------- -------------- --------------
F-38
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following represents the condensed unconsolidated balance sheets for MTR
Gaming Group, Inc. as of December 31, 1998 and 1997, and the condensed
unconsolidated statements of operations and cash flows for the three-year period
ended December 31, 1998.
CONDENSED UNCONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1998 1997
-------------- --------------
ASSETS:
Current assets:
Cash............................................................................ $ 4,000 $ 4,000
Prepaid expenses................................................................ 17,000 --
Deferred income taxes........................................................... 2,550,000 857,000
-------------- --------------
2,571,000 861,000
-------------- --------------
Property and equipment, net....................................................... 63,000 5,000
-------------- --------------
Other assets:
Advances to and investments in subsidiaries, including taxes receivable......... 15,929,000 13,922,000
Deferred income taxes and tax receivable from subsidiaries...................... 4,147,000 --
Excess of cost of investments over net assets acquired, net of accumulated
amortization of $401,000 and $334,000 in 1998 and 1997, respectively.......... 599,000 666,000
-------------- --------------
20,675,000 14,588,000
-------------- --------------
$ 23,309,000 $ 15,454,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 2,000 $ 68,000
Accrued liabilities............................................................. 35,000 150,000
Current portion of long-term debt............................................... 28,000 40,000
-------------- --------------
65,000 258,000
Long-term debt, less current portion.............................................. 54,000 83,000
-------------- --------------
119,000 341,000
Stockholders' equity:
Common stock.................................................................... -- --
Paid-in capital................................................................. 36,178,000 35,328,000
Stockholder receivable.......................................................... (461,000) --
Accumulated deficit............................................................. (12,527,000) (20,215,000)
-------------- --------------
23,190,000 15,113,000
-------------- --------------
$ 23,309,000 $ 15,454,000
-------------- --------------
-------------- --------------
F-39
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
Revenues:
Management fee................................... $ 144,000 $ 144,000 $ 144,000
Other.......................................... 1,000 6,000 2,000
------------- ------------- -------------
145,000 150,000 146,000
------------- ------------- -------------
General and administrative....................... 2,101,000 1,956,000 1,961,000
------------- ------------- -------------
Operating loss................................... (1,956,000) (1,806,000) (1,815,000)
------------- ------------- -------------
Other (income) and expense:
Interest income................................ (186,000) (508,000) (444,000)
Interest expense............................... -- -- 52,000
Non-recurring income........................... -- -- (321,000)
Depreciation................................... 4,000 12,000 25,000
Amortization................................... 67,000 67,000 67,000
Other.......................................... 4,000 -- --
Interest in income of consolidated
subsidiaries................................. (3,693,000) (5,214,000) (2,349,000)
------------- ------------- -------------
(3,804,000) (5,643,000) (2,970,000)
------------- ------------- -------------
Income before income taxes....................... 1,848,000 3,837,000 1,155,000
Benefit for income taxes......................... 5,840,000 857,000 --
------------- ------------- -------------
Net income....................................... $ 7,688,000 $ 4,694,000 $ 1,155,000
------------- ------------- -------------
------------- ------------- -------------
F-40
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
Cash flows from operating activities:
Income from continuing operations.................................. $ 7,688,000 $ 4,694,000 $ 1,155,000
Adjustments to reconcile net income to net cash provided by (used
in) continuing operating activities:
Depreciation and amortization.................................... 71,000 79,000 92,000
Non-recurring income (non-cash).................................. -- -- (705,000)
Common stock and options issued for services rendered and
amortization of interest....................................... 31,000 147,000 194,000
Management fees.................................................. (144,000) (144,000) (144,000)
Imputed interest................................................. (186,000) (508,000) (444,000)
Interest in (income) of consolidated subsidiaries................ (3,693,000) (5,214,000) (2,349,000)
Deferred income taxes............................................ (5,840,000) (857,000) --
Change in operating assets and liabilities, net of effects of
acquired companies:
Other current assets........................................... (17,000) -- 10,000
Accounts payable............................................... (66,000) 5,000 (350,000)
Accrued liabilities............................................ (115,000) 100,000 (163,000)
------------- ------------- -------------
Net cash provided by (used in) operating activities.................. (2,271,000) (1,698,000) (2,704,000)
------------- ------------- -------------
Cash flows from investing activities:
Restricted cash.................................................... -- 100,000 --
Deposits and other assets.......................................... -- -- --
Capital expenditures............................................... (62,000) (7,000) --
Decrease (increase) in investment in and advances to affiliates and
consolidated subsidiaries........................................ 2,016,000 1,635,000 2,847,000
------------- ------------- -------------
Net cash provided by (used in) investing activities.................. 1,954,000 1,728,000 2,847,000
------------- ------------- -------------
Cash flows from financing activities:
Payments on long-term debt......................................... (41,000) (55,000) --
Payments in connection with redeemable common stock................ -- -- (250,000)
Proceeds from issuance of common stock through exercise of stock
options.......................................................... 358,000 -- 69,000
------------- ------------- -------------
Net cash provided by (used in) financing activities.................. 317,000 (55,000) (181,000)
------------- ------------- -------------
Net decrease in cash and cash equivalents............................ -- (25,000) (38,000)
Cash and cash equivalents, beginning of year......................... 4,000 29,000 67,000
------------- ------------- -------------
Cash and cash equivalents, end of year............................... $ 4,000 $ 4,000 $ 29,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest......................................................... $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
Income taxes..................................................... $ 268,000 $ 16,000 $ 25,000
------------- ------------- -------------
------------- ------------- -------------
F-41
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS
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 $600,000 (interest only at 8% per annum, all
due and payable after five years), the assumptions of bank debt of $158,000, the
assumption of the payable of $52,000 and cash of $29,000.
OFFICER EMPLOYMENT AGREEMENT AND DEFERRED COMPENSATION AGREEMENT
The Company entered into a new employment agreement dated February 1999 with
its President and CEO. The agreement is for a term of five (5) years, calls for
an annual base salary of $450,000 (subject to automatic annual cost of living
increases of 5%), semi-annual cash bonuses of $50,000, and a performance bonus
for each year equal to 1% of the gross operating revenue increase over 1998
operating revenue (provided, however, that EBITDA, as defined, exceeds 1998
EBITDA). The Company also entered into a deferred compensation agreement dated
January 1999 whereby the Company will purchase a life insurance policy on the
President and CFO's life (face amount of $2,250,000 and annual premium of
$100,000). The owner of the policy will be the Company. The President and CEO
will also be entitled to an annual benefit, as defined, upon retirement, death
or termination out of the cash value of the insurance policy.
STOCK OPTIONS (UNAUDITED)
The Board of Directors, subject to the approval of the Company's
shareholders, established the 1999 Stock Incentive Plan (the "1999 Plan"). The
1999 Plan reserves for issuance up to 800,000 shares of the Company's common
stock. The Company granted 750,000 shares on February 24, 1999 at an exercise
price of $2.00 per share pursuant to this plan.
The Company also granted 135,000 options on February 24, 1999 to employees
and non-employees outside of the Company's stock option plans at an exercise
price of $2.00 per share. The Company also granted on February 24, 1999 250,000
options to employees at an exercise price of $2.00 per share pursuant to the
1992 Plan. In addition, the two outside directors were granted 25,000 options
each at an exercise price $2.00 per share pursuant to their agreements (see Note
12). All of the aforementioned options have a five year term and are immediately
vested, except as to the outside director options which vest according to their
agreements (see Note 12).
F-42