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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-20508
------------------------
MTR GAMING GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1103135
----------- ---------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
STATE ROUTE 2 SOUTH, P.O. BOX 358, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Company: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.00001 PAR VALUE
Class
21,982,460
Outstanding at August 10, 2000
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MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
SECTION PAGE
- ------- --------
PART I FINANCIAL INFORMATION
Item 1--Financial Statements................................ 3
Condensed and Consolidated Balance Sheets at June 30, 2000
and December 31, 1999..................................... 3
Condensed and Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2000 and
1999...................................................... 4
Condensed and Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999................... 5
Notes to Condensed and Consolidated Financial Statements.... 6
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Item 3--Quantitative and Qualitative Disclosures about
Market Risk............................................... 21
PART II OTHER INFORMATION
Item 1--Legal Proceedings................................... 22
Item 2--Changes in Securities............................... 22
Item 3--Defaults upon Senior Securities..................... 22
Item 4--Submission of Matters to a Vote of Securities
Holders................................................... 22
Item 5--Other Information................................... 22
Item 6--Exhibits and Reports on Form 8-K.................... 22
SIGNATURE PAGE.............................................. 23
Exhibit Index...............................................
2
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
JUNE 30 DEC. 31
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,927,000 $ 7,380,000
Restricted cash........................................... 750,000 891,000
Accounts receivable net of allowance for doubtful accounts
of $48,000 and $138,000................................. 2,655,000 1,026,000
Deferred financing costs.................................. 244,000 244,000
Deferred income taxes..................................... 1,228,000 1,526,000
Income tax receivable..................................... 535,000 519,000
Other current assets...................................... 2,477,000 1,575,000
----------- -----------
Total current assets........................................ 16,816,000 13,161,000
----------- -----------
Property and equipment, net................................. 62,598,000 52,756,000
Other assets:
Excess of cost of investments over net assets acquired,
net of Accumulated amortization of $1,904,000 and
$1,778,000.............................................. 1,870,000 1,996,000
Deferred income taxes..................................... 579,000 0
Deferred financing costs, net of current portion.......... 855,000 977,000
Deposits and other........................................ 649,000 669,000
----------- -----------
$83,367,000 $69,559,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 992,000 $ 1,453,000
Other accrued liabilities................................. 4,362,000 1,746,000
Current deferred income taxes............................. 97,000 0
Current portion of capital leases......................... 1,916,000 561,000
Current portion of long-term debt......................... 11,820,000 7,982,000
----------- -----------
Total current liabilities................................... 19,187,000 11,742,000
----------- -----------
Long-term debt, less current portion........................ 23,296,000 26,409,000
Capital lease obligations, net of current portion........... 2,808,000 982,000
----------- -----------
Deferred income tax......................................... 851,000 717,000
----------- -----------
Total liabilities........................................... 46,142,000 39,850,000
Shareholders' equity:
Common Stock................................................ -- --
Paid in capital............................................. $36,830,000 $36,454,000
Shareholder receivable...................................... (976,000) (457,000)
Accumulated deficit......................................... 1,371,000 (6,288,000)
Total shareholders' equity.................................. 37,225,000 29,709,000
----------- -----------
$83,367,000 $69,559,000
=========== ===========
3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues
Gaming.................................. $36,666,000 $23,433,000 $68,413,000 $42,349,000
Parimutuel commissions.................. 1,282,000 1,280,000 2,382,000 2,194,000
Food, beverage and lodging.............. 4,017,000 2,682,000 6,983,000 4,491,000
Other................................... 723,000 905,000 1,166,000 1,247,000
----------- ----------- ----------- -----------
Total revenues........................ 42,688,000 28,300,000 78,944,000 50,281,000
----------- ----------- ----------- -----------
Costs of revenue
Cost of gaming terminals.................. 21,064,000 13,345,000 39,529,000 24,866,000
Cost of parimutuel commissions............ 1,372,000 1,479,000 2,687,000 2,696,000
Cost of food, beverage and lodging........ 3,246,000 2,391,000 5,869,000 4,184,000
Cost of other revenues.................... 615,000 584,000 986,000 868,000
----------- ----------- ----------- -----------
Total cost of revenues.................... 26,297,000 17,799,000 49,071,000 32,614,000
----------- ----------- ----------- -----------
Gross Profit.............................. 16,391,000 10,501,000 29,873,000 17,667,000
----------- ----------- ----------- -----------
Selling, general and administrative
expenses:
Marketing and promotions.................. 3,121,000 1,234,000 4,682,000 2,074,000
General and administrative................ 4,600,000 3,349,000 8,955,000 6,131,000
Depreciation and amortization............. 1,219,000 1,274,000 2,759,000 2,298,000
----------- ----------- ----------- -----------
Total selling, general and administrative
expenses................................ 8,940,000 5,857,000 16,396,000 10,503,000
----------- ----------- ----------- -----------
Operating income.......................... 7,451,000 4,644,000 13,477,000 7,164,000
----------- ----------- ----------- -----------
Interest income........................... 67,000 73,000 136,000 156,000
Interest expense.......................... (767,000) (1,245,000) (1,587,000) (2,346,000)
----------- ----------- ----------- -----------
(700,000) (1,172,000) (1,451,000) (2,190,000)
----------- ----------- ----------- -----------
Income before income taxes................ 6,751,000 3,472,000 12,026,000 4,974,000
Provision for income taxes................ 2,434,000 1,215,000 4,341,000 1,740,000
----------- ----------- ----------- -----------
Net income................................ $ 4,317,000 $ 2,257,000 $ 7,685,000 $ 3,234,000
=========== =========== =========== ===========
Net income per share (basic)
Net income after income taxes........... $ 0.20 $ 0.11 $ 0.36 $ 0.15
Net income per share (assuming dilution)
Net income after income taxes........... $ 0. 17 $ 0.09 $ 0.30 $ 0.13
Weighted average number of shares
outstanding:
Basic..................................... 21,794,596 20,896,322 21,566,833 20,896,322
=========== =========== =========== ===========
Diluted................................... 26,137,861 24,926,390 25,597,694 24,503,226
=========== =========== =========== ===========
4
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
-------------------------
2000 1999
------------ ----------
Cash flows from operating activities:
Net income................................................ $ 7,685,000 $3,234,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred financing cost amortization.................... 122,000 255,000
Depreciation and amortization........................... 2,759,000 2,298,000
Deferred income taxes................................... (50,000) 1,655,000
Income tax receivable................................... (16,000) 0
Changes in operating assets and liabilities
Accounts receivable net of allowance.................. (1,629,000) (721,000)
Other current assets.................................. (902,000) (300,000)
Accounts payable and accrued liabilities.............. 2,155,000 968,000
------------ ----------
Net cash provided by operating activities................... 10,124,000 7,389,000
------------ ----------
Cash flows from investing activities:
Restricted cash........................................... 141,000 (225,000)
Deposits and other........................................ 20,000 (188,000)
Capital expenditures...................................... (12,475,000) (7,970,000)
------------ ----------
Net cash used in investing activities....................... (12,314,000) (8,383,000)
------------ ----------
Cash flows used in financing activities
Shareholder receivable increase........................... (519,000) 0
Stock repurchase program.................................. (26,000) 0
Additional paid in capital................................ 376,000 0
Net increase in long term debt and capitalized lease
obligations............................................. 3,906,000 1,014,000
------------ ----------
Cash provided by financing activities....................... 3,737,000 1,014,000
NET INCREASE IN CASH........................................ 1,547,000 20,000
Cash, Beginning of Period................................... 7,380,000 9,074,000
------------ ----------
Cash, End of Period......................................... $ 8,927,000 $9,094,000
============ ==========
5
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included herein. Operating results for the six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the consolidated financial statements and notes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999.
NOTE 2--EQUITY TRANSACTIONS
In March of 2000, pursuant to various employment agreements, the Company
granted to various employees and its outside directors options to purchase, in
the aggregate, 270,000 shares of the Company's common stock. Also in March of
2000, the Board of Directors of the Company created, subject to shareholder
approval, the Company's 2000 Employee Stock Purchase Plan, for which the Company
intends to reserve 825,000 shares, of which 795,000 shares have been granted to
various employees of the Company.
All of the options granted on March 13, 2000 are for a term of ten years
from the date of grant, and except for the grants to the Company's independent
directors provide for immediate vesting. All of such options are exercisable at
the price of $2.50 per share, the estimated fair market value of the Company's
common stock at the date of grant.
In June of 2000, the Company repurchased 12,000 shares of its common stock
in the open market for $39,000 pursuant to its approved $3 million stock
repurchase program. In July 2000, the Company repurchased an additional 48,000
shares of its common stock for $253,437.
During the six months ended June 30, 2000, holders of previously issued
options to purchase the Company's common stock exercised options to purchase a
total of 698,800 shares at prices ranging from $.5625 to $2.15625 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 652,059 for
proceeds (cash and notes) totaling $566,000 as well as the delivery of 46,741
mature shares of the Company's common stock valued at $202,000 (which shares
were canceled and returned to authorized but unissued status) in lieu of cash.
NOTE 3--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 upon temporary
differences between bases used for financial reporting and income taxes
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. As of June 30, 2000, there is no valuation allowance being used by
the Company. The Company and its subsidiaries file a consolidated federal income
tax return.
6
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LINE OF CREDIT
In January of 2000 Mountaineer Park entered an $8 million discretionary line
of credit with PNC Leasing, LLC, pursuant to which Mountaineer Park has borrowed
$2,792,000.
In June of 2000, in contemplation of entering a $60 million syndicated
non-reducing revolving line of credit led by Wells Fargo Bank (the "Restated
Facility"), the Company and Wells Fargo amended the Credit Agreement ("the First
Amendment"). On an interim basis (until August 1, 2000), the First Amendment
increased the credit facility from $28.5 million to $38.5 million and deferred
scheduled principal reduction payments in order to accommodate the Company's
plans for Phase I of the expansion at Mountaineer Park (comprising construction
of the arena, a 32,000 square foot expansion of the Speakeasy Gaming Saloon to
house approximately 550 additional slots, improvements related to launching
Mountaineer's export simulcast business, and various projects (such as paving)
to support the improvements. In July of 2000, the Company and Wells Fargo again
amended the Credit Agreement (the "Second Amendment"). The Second Amendment
extended the interim increase and deferral of principal reductions until
September 1, 2000. The Company anticipates that the Restated Facility will be
completed prior to September 1, or that Wells Fargo will again extend the
interim increases until closing. In the event the Restated Facility does not
close by September 1, and if Wells Fargo does not agree to further extensions,
then the Company would be required to reduce the facility to $28.5 million and
abide by the terms of the original Credit Agreement.
NOTE 5--RELATED PARTY TRANSACTIONS
On April 14, 2000 in connection with the exercise of nonqualified stock
options granted on January 23, 1996, Robert L. Ruben, Robert A. Blatt and Edson
R. Arneault, all of whom are officers and directors of the Company, delivered to
the Company promissory notes in the amounts of $42,186.75, $28,124.50 and
$168,747.00, respectively. The promissory notes are full recourse obligations,
bear interest at 9% per year (the Prime Rate on that date), and are due and
payable at the end of a two-year term. The notes are secured by the shares of
common stock (425,000 in the aggregate) underlying the options.
On July 5, 2000, pursuant to Section 6.08(e) of the Wells Fargo Credit
Agreement, Edson R. Arneault borrowed $132,721.88 from the Company for the
purpose of funding taxes payable from the purchase of shares of the Company
acquired through the exercise of the nonqualified stock options referred to
above. The loan is evidenced by a promissory note, bears interest at the Prime
Rate plus one percent (1.0%) per annum and is fully due and payable on July 5,
2001.
7
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to,
leverage and debt service, gaming regulation, licensing and taxation of gaming
operations, dependence on key personnel, competition, including competition from
legalization of gaming in states near the Company's gaming operations, no
dividends, continued losses from horse racing, costs associated with maintenance
and expansion of Mountaineer Park's infrastructure to meet the demands attending
increased patronage, costs and risks attending construction, expansion of
operations, market acceptance of the Company's Nevada Properties and maintenance
of "grandfathered" status of those properties, cyclical nature of business,
limited public market and liquidity, shares eligible for future sale, impact of
anti-takeover measures, the Company's common stock being subject to penny stock
regulation and other risks detailed in the Company's Securities and Exchange
Commission filings.
RESULTS OF OPERATIONS
The Company, through wholly owned subsidiaries, owns and operates the
Mountaineer Racetrack and Gaming Resort ("Mountaineer Park") in Chester, West
Virginia, the Ramada Inn and Speedway Casino in North Las Vegas, Nevada (the
"Speedway Property"), and the Ramada Inn and Speakeasy Casino in Reno, Nevada
(the "Reno Property" or, collectively with the Speedway Property, the "Nevada
Properties").
The Company anticipates that Mountaineer Park, particularly gaming
operations, will continue to be the dominant factor in the Company's financial
condition. Having obtained its Nevada gaming licenses and taken over gaming
operations at the Nevada properties in the fourth quarter of 1999, the Company
expects the financial performance of those properties to improve as well.
The Company earned revenues for the respective six-month and three-month
periods in 2000 and 1999 as shown below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
OPERATING REVENUES
Gaming operations......................... $36,666,000 $23,433,000 $68,413,000 $42,349,000
Parimutuel commissions.................... 1,282,000 1,280,000 2,382,000 2,194,000
Lodging, food and beverage................ 4,017,000 2,682,000 6,983,000 4,491,000
Other revenues............................ 723,000 905,000 1,166,000 1,247,000
----------- ----------- ----------- -----------
Total Revenues............................ $42,688,000 $28,300,000 $78,944,000 $50,281,000
=========== =========== =========== ===========
For the first six months, the Company's total revenues increased by
$28.7 million from 1999 to 2000, an increase of 57.0%. Approximately
$23.5 million of the increase was produced by gaming operations at Mountaineer
Park. Mountaineer Park's revenue from parimutuel commissions increased by
$188,000, or 8.6%; its lodging revenues increased by $85,000 or 11.7%; food and
beverage revenues increased by
8
$1.6 million or 57.2% from $2.7 million to $4.3 million; and other revenues at
Mountaineer Park decreased by $96,000 or 7.9%.
The Nevada Properties contributed $4.5 million in gross revenues in the
first half of 2000, a $3.4 million or 319% increase from revenues of $1,070,000
during the first half of 1999. During the first quarter of 1999, the Speedway
Property was generally dark during renovation of hotel rooms and food and
beverage facilities and construction of the 15,600 square foot casino building
and parking lots. This property's hotel and food and beverage facilities were
re-opened in March 1999. The Company had no revenues from gaming operations at
either property through September 1999. On October 1, 1999, the Company took
over gaming operations at the two Nevada Properties. The gaming revenue for the
six months of operation in 2000 was $2.5 million. The sources of the remaining
revenues for the first half of 2000 were $1,020,000 from lodging, $870,000 from
food and beverage and $44,000 in other income. Total revenues generated by the
North Las Vegas property were $2.8 million, while the Reno property's total
revenues were $1.7 million. The Grand Opening of the Las Vegas Speedway occurred
March 1-5, 2000, and the Reno Speakeasy's Grand Opening occurred April 26-30,
2000.
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
For the second quarter, the Company's total revenues increased by
$14.4 million from 1999 to 2000, an increase of 50.8%. Approximately
$11.5 million of the increase was produced by gaming operations at Mountaineer
Park. Mountaineer Park's revenue from parimutuel commissions remained relatively
consistent; its lodging revenues increased by $30,000 or 7.4%; food and beverage
revenues increased by $817,000 or 50.5% from $1.6 million to $2.4 million; and
other revenues at Mountaineer Park decreased by $193,000 or 21.7%. The Nevada
Properties contributed $2.9 million in gross revenue, with $1.7 million from
gaming, $607,000 from lodging, $538,000 from food and beverage, and $25,000 from
other revenues in the second quarter of 2000.
GAMING OPERATIONS
Revenues from gaming operations increased by 56.5% from $23.4 million in
1999 to $36.7 million in 2000. Management attributes this extraordinary increase
to the following factors: (1) the introduction of 400 coin drop slot machines at
Mountaineer Park in November of 1999; (2) the commencement of gaming operations
at the Nevada Properties in October of 1999 (resulting in $1.7 million in gaming
revenues); (3) enactment of legislation effective in June of 2000 eliminating
the restriction on the ratio of slots permitted at Mountaineer Park's Lodge
compared to the racetrack buildings; (4) the continued aggressive marketing of
all of the Company's properties, including the Grand Opening of the Las Vegas
Speedway and Reno Speakeasy; and (5) the expanded hours of operations for the
track based gaming machines commencing in June of 1999 (resulting in a 98.8%
increase in the net win per machines per day for such machines from $81 to
$161).
In April of 1999, the Lottery Law was amended effective June 11, 1999, to
permit Mountaineer Park to operate coin drop, mechanical reel Las Vegas-style
slot machines. In April of 2000, the Lottery Law was amended effective
June 2000 to remove a requirement that Mountaineer Park have no more than two
slots at its Lodge for each slot at its racetrack buildings.
On June 14, 1999, in anticipation of adding coin drop machines, the Company
began increasing the number of days during which the machines located at the
racetrack remain in operation. Previously, those machines operated only on live
racing days and during special events. Also the Speedway Gaming Room was built
to house 72 new coin drop machines in the track's lower grandstand. In November
of 1999, Mountaineer Park introduced its first coin drop machines.
In the second quarter of 2000, the average daily win per coin drop machine
was $384 compared to $227 for ticket terminals. For the same period, average
daily net win for the track-based machines was $161 compared to $363 earned on
the Lodge-based terminals for a facility-wide average of $282 per machine
9
per day. At the end of the second quarter of 2000, Mountaineer Park operated a
total of 1355 slots with 806 in the Lodge (305 coin drop and 501 ticket) and 549
in the racetrack buildings (225 coin drop and 324 ticket). A summary of gaming
operations revenue for the three months ended June 30, 2000 and 1999 is as
follows:
THREE MONTHS ENDED
JUNE 30
---------------------------
2000 1999
------------ ------------
Total gross wagers............................... $264,069,000 $ 83,671,000
Less patron payouts.............................. (227,628,000) ($60,238,000)
------------ ------------
Table games revenue.............................. 225,000 --
------------ ------------
Revenue--
Gaming operations................................ $ 36,666,000 $ 23,433,000
------------ ------------
Average daily net win per terminal............... $ 282 $ 199
============ ============
Since October 1, 1999, the Company has operated gaming at its Nevada
Properties. The Speedway Property had gaming revenues of $1.2 million for the
three months ended June 30, 2000. The Speakeasy Property's gaming revenues were
$518,000 for the same period. Both properties' gaming revenues have shown
significant increases (101% increase at the Speedway and 103% increase at the
Speakeasy) in comparison to the first quarter of 2000.
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. Mountaineer
Park's parimutuel commissions for the three months ended June 30, 2000 and 1999
are summarized below:
THREE MONTHS ENDED
JUNE 30
-----------------------
2000 1999
---------- ----------
Simulcast racing parimutuel handle................... $6,292,000 $5,896,000
Live racing parimutuel handle........................ 5,317,000 5,788,000
Less patrons' winning tickets........................ (9,184,000) (9,249,000)
---------- ----------
2,425,000 2,435,000
Less:
State and county parimutuel tax...................... (126,000) (130,000)
Purses and Horsemen's Association.................... (1,017,000) (1,025,000)
---------- ----------
Revenues--parimutuel commissions..................... $1,282,000 $1,280,000
Simulcast handle in the second three months of 2000 increased $396,000 to
$6.3 million in comparison to the same period in 1999. Live racing handle
decreased by 8.1% or $471,000 from $5.7 million in 1999 to $5.3 million in 2000.
Total revenues for parimutuel commissions for the second quarter of 2000 stayed
relatively stable in comparison to the same period in 1999. The decrease in live
handle reflects the fact that
10
Mountaineer Park completed 51 of the annually required 210 race meets in the
second quarter of 2000 compared to 57 in the second quarter of 1999.
Mountaineer Park paid average daily live purses of $105,800 in the second
quarter of 2000, a 22.8% increase over the $86,200 average for the corresponding
period of 1999.
Management does not expect results from racing operations to improve
materially, despite larger daily purses, stakes races, better horses and larger
patron volume for the resort, unless and until Mountaineer Park also commences
export simulcasting. Export simulcasting would not only create a new source of
revenue but the anticipated related increase in gross dollars wagered on
Mountaineer Park's live races should also generate increases in live handle (as
a greater and more diverse wagering pool lessens the impact a particular wager
will have on the pay-off odds). The commencement of export simulcasting would
involve substantial capital improvements (approximately $4-5 million).
In May of 2000, the West Virginia Racing Commission approved the April 2000
revision of Mountaineer Park and its Horsemen's cost sharing agreement, which
permits Mountaineer Park to recoup from the horsemen's share of export simulcast
revenue up to $1.25 million together with interest incurred for certain capital
improvements. Since that time, the Company has commenced renovations and
improvements to the racing facilities in anticipation of an August 2000 start of
export simulcasting. No assurances can be given that the Company will
successfully commence export simulcasting, or commence such activity by a
certain date, or that the anticipated results will be realized. See "Operating
Costs" and "Parimutuel Commission Operating Costs."
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined revenue
increase of 49.8% to $4.0 million for the three months ended June 30, 2000
compared to $2.7 million for the same period in 1999. Company wide, restaurant,
bar and concession facilities produced $1.2 million of the revenue increase,
while lodge revenues increased $130,000, a 14.2% increase over the same period
in 1999. Food and beverage revenues increased $817,000 to $2.4 million at
Mountaineer Park in the second quarter of 2000. Management believes the
conversion of the trackside buffet to the more popular deli setup and increases
in the number of patrons visiting the resort resulted in the growth in this
area.
The increase in revenue for food, beverage and lodging in Nevada was
$487,000 with $387,000 of the increase coming from food and beverage. The
Speedway revenues for food and beverage increased by $231,000 to $318,000 for
the three months ended June 30, 2000. The Reno Property had an increase of
$156,000 for the same period. The increased patronage after the Grand Openings
and the commencement of bus programs at both locations are the primary reasons
for these increases.
Lodging revenues increased $130,000 for a 14.2% increase over the same
period in 1999. Of the increase in lodging revenues, $100,000 can be attributed
to the two Nevada Properties.
OTHER OPERATING REVENUES
Other sources of revenues decreased by $182,000 to $723,000 for the three
months ended June 30, 2000 compared to the same period in 1999. Other operating
revenues are primarily derived from the sale of programs, lottery tickets,
admission fees, check cashing, golf and ATM services. ATM fees in the second
quarter of 2000 more than doubled to $166,000 as a result of Management's
decision to operate the ATM's rather than outsource this service. Other
operating revenue for the second quarter of 1999 included a one-time $170,000
refund for overpayment of prior years' sales tax. Lottery ticket sales decreased
by $60,000 to $34,000 in 2000. In the second quarter of 1999, the Power Ball
game in which the West Virginia Lottery participates had unusually high
jackpots, which accounted for a $60,000 increase in ticket sales at Mountaineer
Park. The present sales level is consistent with 1998 lottery tickets sales.
While these activities are non-core business activities, Management believes
that they are necessary to attract gaming patrons.
11
OPERATING COSTS
The Company's $14.4 million increase in revenues resulted in higher total
costs, as directly related expenses increased by $8.5 million to $26.3 million
in the second quarter of 2000 compared to the same period in 1999. Approximately
$7.7 million of the increase in operating costs is attributable to gaming
operations, including applicable state taxes and fees and gaming direct costs of
$1.2 million for the two Nevada properties.Parimutuel direct cost decreased by
$107,000, while cost of lodging and food and beverage increased by $855,000. Of
the 35.8% increase in the cost of food and beverage and lodging, $536,000 can be
attributed to the Nevada Properties. The cost of other income increased by
$31,000 in 2000 to $615,000. The increase is due primarily to higher check
cashing costs due to the increase in the number of checks being cashed at
Mountaineer Park.
Operating costs and gross profits earned from operations for the three-month
periods ended June 30, 2000 and 1999 are as follows:
THREE MONTHS ENDED
JUNE 30
-------------------------
2000 1999
----------- -----------
Operating Costs
Gaming operations.................................. $21,064,000 $13,345,000
Parimutuel commissions............................. 1,372,000 1,479,000
Lodging, food and beverage......................... 3,246,000 2,391,000
Other revenues..................................... 615,000 584,000
----------- -----------
Total Operating Costs.......................... $26,297,000 $17,799,000
=========== ===========
Gross profit (Loss)
Gaming operations.................................. $15,602,000 $10,088,000
Parimutuel commissions............................. (90,000) (199,000)
Lodging, food and beverage......................... 771,000 291,000
Other revenues..................................... 108,000 321,000
----------- -----------
Total Gross Profit............................. $16,391,000 $10,501,000
=========== ===========
GAMING OPERATING COSTS
Company wide, costs of gaming revenues increased by $7.7 million, a 57.8%
increase corresponding to the 56.5% increase in gaming revenues. Costs of gaming
revenue in West Virginia increased by $6.5 million or 48.9% to $19.9 million for
the three months ended June 30, 2000, reflecting an increase in statutory
expenses directly related to the 51.1% increase in gaming revenues. Such
expenses accounted for $5.3 million of the total cost increase. Gaming machine
lease expense decreased $422,000 due to capitalizing of lease expense for the
new coin drop equipment. Wages and benefits increased for the three months
ending June 30, 2000 by $267,000 due to increases in personnel to accommodate
the increase in patron volume and the additional personnel required for coin
drop slot operations compared to ticketed machines. For the quarter ending
June 30, 2000, the Nevada Properties incurred $1.2 million in gaming costs,
compared to none in the second quarter of 1999, when the Company did not operate
gaming in Nevada.
After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer Park is obligated to make payments from the remaining gaming
revenues to certain funds administered by the West Virginia Lottery Commission
as follows: State Tax 30%, Horsemen's Purse Fund 15.5%, Tourism Promotion 3%,
Hancock County Tax 2%, Stakes Races 1%, Miscellaneous State Projects 1% and
Employee Pension Fund 0.5%. Assessments paid to the Employee Pension Fund are
returned by the Lottery Commission to a defined contribution pension plan
administered by Mountaineer Park for the sole benefit of Mountaineer Park
employees. Assessments paid to the Horsemen's Purse Fund are returned by the
Lottery Commission
12
to bank accounts administered by Mountaineer Park for the sole benefit of horse
owners who race at Mountaineer Park. These funds are used exclusively to pay
purses for thoroughbred races run at Mountaineer Park, in amounts determined by
Mountaineer Park in accordance with its agreement with the Horsemen's Benevolent
and Protective Association. Taxes and assessments paid to all of these funds are
included in "Costs of Gaming Terminals" in the Consolidated Statement of
Operations. The State of West Virginia annually reconciles the State
Administrative Fee and the amount not utilized by the state is refunded every
year to Mountaineer Park on June 30th, the end of the state's fiscal year. The
refund in June of 1999 was $1.1 million after payment of other statutory costs
and assessments. This refund for the year ending June 30, 2000 has not been
determined. This amount was reflected in the June 30, 1999 financial statements
as a reduction of gaming costs for the second quarter of 1999. No such reduction
is reflected for the same period in 2000.
Statutory costs and assessments for the respective three-month periods are
as follows:
THREE MONTHS ENDED
JUNE 30
-------------------------
2000 1999
----------- -----------
Employee Pension Fund.............................. $ 172,000 $ 121,000
Horsemen's Purse Fund.............................. 5,327,000 3,773,000
----------- -----------
SUBTOTAL....................................... $ 5,499,000 $ 3,894,000
State of West Virginia............................. $10,311,000 $ 7,304,000
Tourism Promotion Fund............................. 1,031,000 730,000
Hancock County..................................... 687,000 487,000
Stakes Races....................................... 344,000 244,000
Misc. State Projects............................... 344,000 244,000
----------- -----------
$18,216,000 $12,903,000
=========== ===========
PARIMUTUEL COMMISSIONS
Costs (the individual components of which are detailed below) of parimutuel
commissions decreased by $107,000, or 7.2%, from $1.5 million in the second
quarter of 1999 to $1.4 million in the second quarter of 2000. One of the
primary reasons for this decrease was the decrease in the number of live racing
days from 57 to 51. Purse expense (consisting of statutorily determined
percentages of live racing handle) decreased by $46,000 to $522,000 in the
second quarter of 2000, which is consistent with the decrease in live handle and
the number of race days conducted. 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 by $47,000 to $763,000 in the second quarter of 2000,
which is consistent with the increase in simulcast wagering. Parimutuel
commissions revenue is reported net of these expenses in the Consolidated
Statement of Operations.
Cost of parimutuel commission also includes decreases in wages and benefits
related to the decrease in live racing meets and similar decreases for equipment
rental, insurance, outside services, supplies and complimentary racing forms
totaling $85,000.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$2.4 million for the second three months of 1999 to $3.2 million for the same
period in 2000. Of the $855,000 increase, $536,000 is attributable to the Nevada
properties. The food and beverage operations earned a gross profit of $505,000
for the second quarter of 2000 compared to a $37,000 for the same period in
1999, an increase of $468,000. Lodging operations earned a gross profit of
$266,000 for the second quarter of 2000 compared to $254,000 for the same period
in 1999, an increase of $12,000.
13
The Nevada Properties' gross profit from food, beverage and lodging
operations was $38,000 for the three months ended June 30, 2000, in comparison
to a $88,000 gross profit for the same period in 1999. This decrease in
profitability can be attributed to food and beverage specials and the increase
in staffing for the Grand Openings.
Mountaineer Park's gross profit for these areas was $733,000 for the second
quarter of 2000, compared to $204,000 in 1999, resulting from greater efficiency
in the use of labor and supplies.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues consisting primarily of non-core businesses such as
racing programs, check cashing and golf increased by $31,000 from $584,000 in
the second quarter of 1999 to $615,000 in the second quarter of 2000, which
Management does not believe is material.
MARKETING AND PROMOTIONS EXPENSE
Company wide, marketing expenses increased in the second quarter of 2000 to
$3.1 million from $1.2 million. Of the $1.9 million increase in marketing and
promotions, $916,000 is attributable to the Nevada Properties and their Grand
Openings. Marketing expenses at the Company's Mountaineer Park operation
increased 84% from $1.2 million for the second quarter of 1999 to $2.2 million
for the same period in 2000. The increase is attributable primarily to:
(1) reduction of second quarter 1999 marketing expense by virtue of receipt of a
State grant ($88,000); (2) increased prize giveaways via Mountaineer Park's
Frequent Player Club promotion; (3) Management's decision to provide free
non-alcoholic beverages to gaming patrons; and (4) an increase in salaries and
related employee benefits.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
General and administrative expense for the second quarter of 2000 increased
by $1,251,000 or 37.4% from $3.3 million to $4.6 million. The reason for the
increase in general and administrative expense was twofold. First with respect
to operations, the increases are due primarily to: (1) a $404,000 increase in
costs of security, surveillance, housekeeping and maintenance staff to
accommodate Mountaineer Park's larger crowds; (2) a $356,000 increase in
compensation and benefits primarily for the Company's executive officers;
(3) additional general and administrative costs of $351,000 generated by the
Nevada Properties; and (4) increased insurance costs.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately
$5 million to $50 million) gaming and/or parimutuel businesses, professional
fees related to evaluating acquisition and financing opportunities increased by
approximately $79,000 during the quarter ended June 30, 2000.
In the second quarter of 2000, the Company incurred $767,000 of interest
expense compared to $1.2 million in the second quarter of 1999. The decrease in
interest expense is attributable to the Company's refinancing which reduced the
interest rate from 13% to approximately 9% and principal from $34 million to
approximately $30 million.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses decreased 4.3%, or $55,000, to
$1.2 million for the three months ended June 30, 2000. This decrease reflects
the changing nature of the Company's fixed assets to longer-term investments
(E.G., buildings and improvements) and the leasing (versus purchase) of new
gaming devices. Depreciation for the Nevada Properties was $470,000 for the
second quarter of 2000.
14
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total revenues increased from $50.3 million in the first half of 1999 to
$78.9 million in 2000, an increase of $28.7 million or 57.0%. Of this increase,
90.9%, or $26.1 million, can be attributed to the gaming operations. Parimutuel
commissions increased by $188,000 for the six months ended June 30, 2000. Food,
beverage, lodging and other operations contributed $2.4 million of increased
revenues for this period.
GAMING OPERATIONS
A summary of the gaming operations revenues for the six months ended
June 30, 2000 and 1999 is as follows:
SIX MONTHS ENDED
JUNE 30
---------------------------
2000 1999
------------ ------------
Total gross wagers............................... $468,745,000 $150,191,000
Less patron payouts.............................. (400,677,000) (107,842,000)
------------ ------------
Table games revenue.............................. 345,000 --
------------ ------------
Revenues--
Gaming operations.............................. $ 68,413,000 $ 42,349,000
============ ============
Average daily net win per terminal............... $ 268 $ 182
============ ============
Revenues from gaming operations increased by 61.6% from $42.3 million in the
first six months of 1999 to $68.4 million in 2000. Management attributes the
increase to the following factors: extensive advertising, the introduction of
coin drop slots at Mountaineer Park, the expanded gaming hours and facilities
trackside at Mountaineer Park, and the contribution of gaming revenues from the
Nevada Properties ($2.5 million).
PARIMUTUEL COMMISSIONS
Mountaineer's parimutuel commissions for the six months ended June 30, 2000
and 1999 are summarized below:
SIX MONTHS ENDED
JUNE 30
-------------------------
2000 1999
----------- -----------
Simulcast racing parimutuel handle................. $11,782,000 $10,694,000
Live racing parimutuel handle...................... 9,797,000 9,334,000
Less patrons' winning tickets.................... (17,057,000) (15,853,000)
----------- -----------
4,522,000 4,175,000
Less
State and county parimutuel tax.................. (245,000) (237,000)
Purses and Horsemen's Association................ (1,895,000) (1,744,000)
----------- -----------
Revenues--parimutuel commissions................... $ 2,382,000 $ 2,194,000
=========== ===========
Simulcast handle in the first six months of 2000 increased 10.2% to
$11.8 million compared to the same period in 1999. Live racing handle increased
by 5.0% from $9.3 million in 1999 to $9.8 million in 2000 due to increased
patronage at the resort in general and cross-marketing. Mountaineer Park paid
average daily live purses of $95,900 in the first six months of 2000, a 19.7%
increase over the $80,100 average for the corresponding period of 1999.
15
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined revenue
increase of 55.5% to $7.0 million for the six months ended June 30, 2000
compared to $4.5 million for the same period in 1999. Company wide, restaurant,
bar and concession facilities produced $2.2 million of the revenue increase,
while lodge revenues increased $261,000, a 16.6% increase over the same period
in 1999. Food and beverage revenues increased $1.6 million to $4.3 million at
Mountaineer Park in the second quarter of 2000. Management believes the
conversion of the trackside buffet to the more popular deli setup and increases
in the number of patrons visiting the resort resulted in the growth in this
area.
The increase in revenue for food, beverage and lodging in Nevada was
$850,000 with $674,000 of the increase in food and beverage for these
properties. The increase is attributable to the Company taking over gaming
operations in October of 1999 and promoting the properties.
Lodging revenues increased $261,000 for a 16.6% increase over the same
period in 1999. Of the increase in lodging revenues, $176,000 can be attributed
to the two Nevada Properties.
OTHER OPERATING REVENUES
Other sources of revenues decreased by $81,000 to $1,166,000 for the six
months ended June 30, 2000 compared to the same period in 1999. Other operating
revenues are primarily derived from the sale of racing programs, check cashing
fees, golf, special event admissions and ATM service fees. A $146,000 increase
in ATM service fees in 2000 (occasioned by Management's decision to own and
operate ATMs rather than outsourcing this service) was offset by miscellaneous
income recorded in the second quarter of 1999 due to a $170,000 refund for
overpayment of prior years' sales tax. Other sources of other revenue remained
essentially constant for the two periods being compared.
OPERATING COSTS
Operating costs and gross profit earned from operations for the six-month
periods ended June 30, 2000 and 1999 are as follows:
SIX MONTHS ENDED
JUNE 30
-------------------------
2000 1999
----------- -----------
Operating Costs:
Gaming operations................................ $39,529,000 $24,866,000
Pari-mutuel commissions.......................... 2,687,000 2,696,000
Lodging, food and beverage....................... 5,869,000 4,184,000
Other revenues................................... 986,000 868,000
----------- -----------
Total Operating Costs.......................... $49,071,000 $32,614,000
=========== ===========
Gross Profit (Loss)
Gaming operations................................ $28,884,000 $17,483,000
Pari-mutuel commissions.......................... (305,000) (502,000)
Lodging, food and beverage....................... 1,114,000 307,000
Other revenues................................... 180,000 379,000
----------- -----------
Total Gross Profit............................. $29,873,000 $17,667,000
=========== ===========
The Company's 57.0% increase in revenues resulted in higher total costs, as
expenses increased by 50.5% to $49.1 million in the first half of 2000. Gross
profit increased by 69.1% from $17.7 million for the first half of 1999 to
$29.9 million for the same period in 2000.
16
GAMING OPERATIONS
Company wide, costs of gaming revenues increased by $14.7 million, a 59.0%
increase corresponding to the 61.6% increase in gaming revenues. Costs of gaming
revenues in West Virginia increased by $12.8 million, or 51.5%, to
$37.7 million for the six months ended June 30, 2000, reflecting the increase in
statutory expenses directly related to the 55.5% increase in gaming revenues.
Lease expense for gaming devices decreased by $746,000 due to entering into
capitalized lease arrangements for the new coin drop equipment. Salary and
related benefits increased by $541,0000 for the six months ended June 30, 2000.
For the same period, the Nevada Properties incurred $1.9 million in costs
associated with gaming, compared to $0 for the first half of 1999, when the
Company had no gaming operations in Nevada.
Statutory costs and assessments for the respective six-month periods are as
follows:
SIX MONTHS ENDED
JUNE 30
-------------------------
2000 1999
----------- -----------
Employees Pension Fund............................. $ 324,000 $ 215,000
Horsemen's Purse Fund.............................. 10,070,000 6,661,000
----------- -----------
SUBTOTAL....................................... 10,394,000 $ 6,876,000
State of West Virginia............................. 19,490,000 12,893,000
Tourism Promotion Fund............................. 1,949,000 1,289,000
Hancock County..................................... 1,299,000 860,000
Stakes Races....................................... 650,000 430,000
Miscellaneous State Projects....................... 650,000 430,000
----------- -----------
$34,432,000 $22,778,000
=========== ===========
PARIMUTUEL COMMISSIONS
Costs of parimutuel commissions remained relatively stable at $2.7 million
for the first half of both 2000 and 1999. Purse expense (consisting of
statutorily determined percentages of live racing handle) increased 5.4% to
$963,000 in the first half of 2000, which is consistent with the 5.3% increase
in live handle. Parimutuel commissions revenue is reported net of these expenses
in the Consolidated Statement of Operations.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$4.2 million for the six months ending June 30, 1999 to $5.9 million for the
same period in 2000. Of the $1.7 million increase, $981,000 is attributable to
the Nevada properties. The food and beverage operations earned a gross profit of
$743,000 for the first six months of 2000 compared to a $25,000 loss for the
same period in 1999, an increase of $768,000. Lodging operations earned a gross
profit of $371,000 for the first half of 2000 compared to $332,000 for the same
period in 1999, an increase of $39,000.
The Nevada Properties' gross profit (loss) from food, beverage and lodging
operations was ($4,000) for the six months ended June 30, 2000, compared to
$128,000 for the same period in 1999. This decrease in profitability can be
attributed to food and beverage specials and the increase in staffing for the
Grand Openings.
Mountaineer Park's gross profit for these areas was $1.1 million for the
first half of 2000, compared to $179,000 in 1999. $943,000 of the gross profit
is attributable to food and beverage. The increase is attributable to greater
efficiency in uses of labor and supplies. Also, food costs for the first half of
1999 (50% of sales) were affected by excessive spoilage related to inclement
weather. During the first six months of 2000, food costs were reduced to 36% of
sales.
17
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues increased by $118,000 from $868,000 for the six
months ended June 30, 1999 to $986,000 for the six months ended June 30, 2000.
These increases can be attributed primarily to golf operations ($50,000) and
special events ($124,000).
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses increased $2.6 million for the first half of 2000 to
$4.7 million. The increase is attributable primarily to the following factors:
(1) doubling of the number of members of Mountaineer Park's Player's Club and
increases in prize giveaways through this promotion, which caused a $455,000
increase in costs; (2) Management's decision to provide free soft drinks and
coffee to gaming patrons ($600,000); (3) receipt of a State grant for
advertising matching funds in the first half of 1999 (but not expected until the
third quarter of 2000); and (4) increases in direct mail advertising and new
promotions such as "Millionaire Madness."
Marketing for the two Nevada Properties increased by $1.2 million for the
six months ended June 30, 2000 in comparison to the same period in 1999. The
majority of these costs were associated with the Grand Openings of the two
properties.
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES
General and administrative expenses for the periods being compared increased
by $2.8 million or 46.1% from $6.1 million to $9.0 million. The reason for the
increase in general and administrative costs was twofold. First, with respect to
operations, the increases are due primarily to (1) a $790,000 increase in costs
of security, surveillance, maintenance and housekeeping to accommodate
Mountaineer Park's larger crowds; (2) increases in compensation and benefits for
the Company's executive officers; and (3) additional general and administrative
costs of $1.4 million generated by the Nevada Properties.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately
$5 million to $50 million) gaming and/or parimutuel businesses, professional
fees and travel expenses related to evaluating acquisition and financing
opportunities incurred by the Company increased by approximately $436,000 during
the first six months of 2000.
In the first half of 2000, the Company incurred $1.6 million of interest
expense compared to $2.3 million in the first half of 1999. The decrease in
interest expense is attributable to the Company's refinancing which reduced both
the interest rate and principal.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by 20.1%, or $461,000, to
$2.8 million for the six months ended June 30, 2000. This increase reflects the
increased capitalization of improvements completed at Mountaineer Park's
facilities. Depreciation for the Nevada Properties was $925,000 for the first
half of 2000.
CASH FLOWS
The Company's operations produced $10,124,000 in cash flow in the six months
ended June 30, 2000, compared to $7,389,000 produced in the first six months of
1999. Current year non-cash expenses included $2.8 million of depreciation and
amortization and $122,000 for the amortization of deferred financing costs.
The Company invested $10.9 million in capital improvements for the West
Virginia property in the first half of 2000 versus $4.4 million in 1999. The
Company also invested $1.6 million in capital assets related to the Nevada
Properties.
18
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance (deficit) as of June 30, 2000 was
($2,371,000) and its unrestricted cash balance was $8,927,000. The negative
working capital balance resulted from the classification of draws against the
$10 million increase of the Wells Fargo line of credit as short-term debt. The
Company expects to reclassify these amounts as long-term debt prior to
September 1, 2000 upon the contemplated closing of the Restated Facility (as
defined below).
Racing purses are paid from funds contributed by the Company to bank
accounts owned by the horse owners who race at Mountaineer Park. At June 30,
2000, the balances in these accounts exceeded purse obligations by
$3.1 million; this amount is available for payment of future purse obligations
at the discretion of the Company and in accordance with the terms of its
agreement with the HBPA.
On December 27, 1999, the Company entered a $30,000,000 five-year senior
secured reducing, revolving credit facility with Wells Fargo Bank, N.A. On that
date, the Company drew the full $30 million available under the Wells Fargo loan
and used the proceeds, combined with approximately $5.3 million of the Company's
cash, to prepay amounts previously borrowed from Madeleine LLC from 1996 through
1998 and to pay the costs and fees related to the transaction.
In June of 2000, in contemplation of entering a $60 million syndicated
non-reducing revolving line of credit led by Wells Fargo Bank (the "Restated
Facility"), the Company and Wells Fargo amended the Credit Agreement ("the First
Amendment"). On an interim basis (until August 1, 2000), the First Amendment
increased the credit facility from $28.5 million to $38.5 million and deferred
scheduled principal reduction payments in order to accommodate the Company's
plans for Phase I of the expansion at Mountaineer Park (comprising construction
of the arena, a 32,00 square foot expansion of the Speakeasy Gaming Saloon to
house approximately 550 additional slots, improvements related to launching
Mountaineer's export simulcast business, and various projects (such as paving)
to support the improvements). In July of 2000, the Company and Wells Fargo again
amended the Credit Agreement (the "Second Amendment"). The Second Amendment
extended the interim increase and deferral of principal reductions until
September 1, 2000. The Company anticipates that the Restated Facility will be
completed prior to September 1, or that Wells Fargo will again extend the
interim increases until closing. In the event the Restated Facility does not
close by September 1, and if Wells Fargo does not agree to further extensions,
then the Company would be required to reduce the facility to $28.5 million and
abide by the terms of the original Credit Agreement.
At June 30, 2000, the outstanding principal balance of the Wells Fargo loan
was $34 million.
The Credit Agreement permits the Company to finance separately up to
$8 million of additional senior indebtedness for the purchase or lease of gaming
equipment as well as up to $15 million of subordinated debt for capital
improvements. In January of 2000, pursuant to the carve out for equipment
financing, Mountaineer Park entered an $8 million discretionary line of credit
with PNC Leasing, LLC, pursuant to which Mountaineer Park has borrowed
$2,792,000. The Company anticipates that the Restated Facility will eliminate
the carve out for subordinated debt and increase the amount of permitted
equipment financing to $13 million.
CAPITAL IMPROVEMENTS. The Company has begun significant further expansion
of its Mountaineer Park facility. The four-phase plan includes approximately
tripling its hotel room capacity, adding 50,000 square feet of additional gaming
rooms which will hold an additional 1,100 coin drop machines, an arena, a spa,
additional parking and a convention center. The expansion project will be
completed in phases as cash flow and available lines of credit permit, will take
approximately 18 months to complete, and is estimated to cost approximately $50
to $60 million. The first phase of the expansion, which includes a 32,000 square
foot expansion of the Speakeasy Gaming Saloon, the construction of an arena and
additional parking lots, is expected to be completed in August of 2000.
19
The Company has also recently completed the purchase and installation of a
backup power supply ($1.3 million) and additional surveillance equipment
($450,000). The Company also intends to spend approximately $2 million to
$2.5 million for capital improvements related to development of export
simulcasting at Mountaineer Park during 2000.
Pursuant to the agreement with Wells Fargo Bank, the Company must spend
between 2% and 6% of its gross operating revenue for maintenance of its
facilities.
On June 22, 1999, Mountaineer Park entered into agreements to purchase for
$583,000 approximately 287.65 acres of real property (including two buildings)
previously subject to an October 7, 1997 option and located adjacent to its
Hancock County, West Virginia operation. Mountaineer Park had paid $100,000 for
an irrevocable option. Subject to resolution of certain title issues,
Mountaineer Park intends to close the purchases, which call for payment to be
made in the form of a $200,000 cash payment at closing and a $383,000 term note
bearing interest at 9% payable over five years.
On July 31, 2000 Mountaineer Park purchased for a total of $56,000 (plus
closing costs) two parcels of real property (one including a residence)
aggregating approximately 7.5 acres. Management intends to use the parcels,
which are adjacent to the Woodview Golf Course, for expansion of the course.
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 June 30, 2000, there were outstanding options and warrants to purchase
8,616,807 shares of the Company's common stock. Of this amount, warrants to
purchase 1,757,813 shares are held by the Company's prior lender whose exercise
rights are subject to a statutory ownership limitation not to exceed 5% of the
Company's outstanding voting shares without prior approval of the West Virginia
Lottery Commission. All but 70,000 of such shares are either subject to
registration rights or have been included in registration statements that the
Company has filed with the Securities and Exchange Commission and which have
been declared effective. If all such options and warrants were exercised, the
Company would receive proceeds of approximately $15.4 million.
DEFERRED INCOME TAX BENEFIT. Based upon the pretax income of $12 million
earned for the six months ended June 30, 2000, Management believes that the
Company will be able to utilize its $3.5 million (as of December 31, 2000) of
federal net operating loss tax carry forwards. The utilization of federal net
operating losses may be subject to certain limitations.
COMMITMENTS AND CONTINGENCIES
The Company has various commitments including those under various consulting
agreements, operating leases, and the Company's pension plan and union contract.
The Company has also entered into employment agreements with certain employees
for periods ranging from one to five years. Compensation under the employment
agreements consists of cash payments and stock option commitments, and in some
instances commitments to fund deferred compensation plans. The Company
anticipates cash payments in the amount of $5.2 million over the next three
years under the employment agreements. In addition, the Company is faced with
certain contingencies involving litigation and environmental remediation and
monitoring. The Company is also committed, upon completion of a gaming software
installation, to make a final payment of $458,000 on a $1.7 million contract.
The Company believes that cash generated from operations and available lines of
credit will be sufficient to meet all of the Company's currently anticipated
commitments and contingencies.
20
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at June 30, 2000. 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. The Company's exposure
to market risk for changes in interest rates relates primarily to the Company's
long-term debt obligation pursuant to its credit agreement. The table below
presents the Company's credit agreements for which fair value is subject to
changing market interest rates:
AS OF JUNE 30, 2000
ESTIMATED CASH INFLOW (OUTFLOW) BY YEAR OF PRINCIPAL MATURITY
ESTIMATED CARRYING
IN THOUSANDS 2000 2001 2002 2003 2004 FAIR VALUE VALUE
- ------------ -------- -------- -------- -------- -------- ---------- --------
Credit Agreement based on Libor plus margin..... 7,000 6,000 6,000 6,000 9,000 34,000 34,000
21
PART II
OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
ITEM 2--CHANGES IN SECURITIES
Not Applicable
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable
ITEM 5--OTHER INFORMATION
Not Applicable
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation for Winners
Entertainment, Inc. dated August 17, 1993 (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Winner's Entertainment, Inc. dated October
10, 1996 (incorporated by reference to the Company's report
on Form 8-K filed November 1, 1996).
3.3 Amended Bylaws of the Company (incorporated by reference to
the Company's report on Form 8-K filed February 20, 1998).
10.8 First Amendment to Credit Agreement, entered as of June 1,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as Lender
(filed herewith).
10.9 Second Amendment to Credit Agreement, entered as of July 31,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as Lender
(filed herewith).
10.10 Agreement concerning sharing of costs related to export
simulcasting entered April 10, 2000 by Mountaineer Park,
Inc. and the Mountaineer Park Horsemen's Benevolent and
Protective Association (as approved on May 19, 2000 by the
West Virginia State Racing Commission) (filed herewith).
10.11 Promissory Note dated July 5, 2000 made by Edson R. Arneault
in favor of MTR Gaming Group, Inc. in the amount of
$132,721.88 (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2000.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1933, the Company has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
MTR GAMING GROUP, INC.
DATE: AUGUST 14, 2000 By: /s/ EDSON R. ARNEAULT
-----------------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER
By: /s/ MARY JO NEEDHAM
-----------------------------------------
Mary Jo Needham
CHIEF FINANCIAL OFFICER
23
EXHIBIT INDEX
EXHIBIT NO. PAGE NO.
- ----------- --------
3.1......... Restated Certificate of Incorporation for Winners
Entertainment, Inc. dated August 17, 1993................... *
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Winner's Entertainment, Inc. dated October
10, 1996.................................................... *
3.3 Amended Bylaws of the Company............................... *
10.8 First Amendment to Credit Agreement, entered as of June 1,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as
Lender......................................................
10.9 Second Amendment to Credit Agreement, entered as of July 31,
2000 by MTR Gaming Group, Inc., Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., and Speakeasy Gaming of
Reno, Inc. as Borrowers and Wells Fargo Bank, N.A. as
Lender......................................................
10.10 Agreement concerning sharing of costs related to export
simulcasting entered April 10, 2000 by Mountaineer Park,
Inc. and the Mountaineer Park Horsemen's Benevolent and
Protective Association (as approved on May 19, 2000 by the
West Virginia State Racing Commission)......................
10.11 Promissory Note dated July 5, 2000 made by Edson R. Arneault
in favor of MTR Gaming Group, Inc. in the amount of
$132,721.88.................................................
27.1 Financial Data Schedule.....................................
- ------------------------
* Incorporated by Reference