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 March 31, 1998.
[ ] 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
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(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
STATE ROUTE 2 SOUTH, P.O. Box 358, CHESTER, WEST VIRGINIA 26034
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(Address of principal executive offices)
(304) 387-5712
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(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
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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
20,021,049
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Outstanding at May 11, 1998
MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
SECTION PAGE
PART 1 -- FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed and Consolidated Balance Sheets
at March 31, 1998 and December 31, 1997 1
Condensed and Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997 3
Condensed and Consolidated Statements of Cash Flow
for the Three Months Ended March 31, 1998 and 1997 4
Notes to Condensed and Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II -- Other Information
Item 6 - Exhibits and Reports on Form 8-K 23
Signature Page
PART 1
FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,747,000 $ 7,715,000
Restricted cash 185,000 188,000
Accounts receivable, net of
allowance for doubtful accounts
of $125,000 451,000 431,000
Deferred financing costs 1,502,000 1,617,000
Deferred income taxes 2,550,000 2,550,000
Other current assets 379,000 516,000
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Total current assets 13,814,000 13,017,000
------------ -----------
Property:
Land 641,000 371,000
Buildings 19,014,000 19,014,000
Equipment and automobiles 6,518,000 6,388,000
Furniture and fixtures 3,145,000 3,131,000
Construction in progress 474,000 258,000
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29,792,000 29,162,000
Less accumulated depreciation (7,031,000) (6,363,000)
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22,761,000 22,799,000
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Net assets of discontinued oil and
gas activities 2,616,000 2,616,000
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Other assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,337,000 and
$1,274,000 2,437,000 2,500,000
Deposits and other 202,000 102,000
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2,639,000 2,602,000
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$ 41,830,000 $41,034,000
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1
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Continued)
March 31, December 31,
1998 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 936,000 $ 594,000
Other accrued liabilities 1,677,000 2,465,000
Current portion of long-term debt 29,000 40,000
Current portion of deferred income taxes 133,000 133,000
------------ -----------
Total current liabilities 2,775,000 3,232,000
------------ -----------
Deferred income taxes, less current portion 1,097,000 1,130,000
------------ -----------
Long-term debt, less current portion 21,570,000 21,559,000
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Shareholders' equity:
Common stock 2,000 2,000
Paid-in capital 35,326,000 35,326,000
Accumulated deficit (18,940,000) (20,215,000)
------------ -----------
Total shareholders' equity 16,388,000 15,113,000
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$ 41,830,000 $ 41,034,000
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2
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
---------------------------
March 31, March 31,
1998 1997
----------- -----------
Revenues:
Video lottery terminals $13,968,000 $10,053,000
Parimutuel commissions 1,162,000 1,049,000
Food, beverage and lodging 1,338,000 943,000
Other 222,000 197,000
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Total revenues 16,690,000 12,242,000
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Costs of revenues:
Cost of video lottery terminals 8,812,000 6,398,000
Cost of parimutuel commissions 1,437,000 1,282,000
Cost of food, beverage and lodging 1,251,000 837,000
Cost of other revenues 180,000 283,000
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Total cost of revenues 11,680,000 8,800,000
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Gross profit 5,010,000 3,442,000
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Selling, general and administrative expenses:
Marketing and promotions 683,000 578,000
General and administrative 1,635,000 1,079,000
Depreciation and amortization 731,000 451,000
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Total selling, general and
administrative expenses 3,049,000 2,108,000
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Operating income 1,961,000 1,334,000
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Interest income 85,000 28,000
Interest expense (813,000) (1,094,000)
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(728,000) (1,066,000)
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Income before benefit for income taxes 1,233,000 268,000
Benefit for income taxes 42,000 33,000
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Net income $ 1,275,000 $ 301,000
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----------- -----------
Net income per share $ 0.06 $ 0.02
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Net income per share assuming dilution $ 0.05 $ 0.01
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Weighted average number of shares outstanding:
Basic 19,941,000 19,291,000
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Diluted 23,690,000 21,068,000
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3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
---------------------------
March 31, March 31,
1998 1997
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Cash flows from operating activities:
Net income $ 1,275,000 $ 301,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred financing costs amortization 115,000 533,000
Depreciation and amortization 731,000 451,000
Deferred income taxes (33,000) (33,000)
Changes in operating assets and liabilities:
Other current assets 117,000 (150,000)
Accounts payable and accrued liabilities (446,000) (677,000)
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Net cash provided by operating activities 1,759,000 425,000
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Cash flows from investing activities:
Restricted cash 3,000 -
Settlement of prior acquisition costs - (105,000)
Deposits and other (100,000) 22,000
Capital expenditures (630,000) (1,631,000)
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Net cash used in investing activities (727,000) (1,714,000)
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Cash flows used in financing activities:
Principal payments - (69,000)
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Net change in cash 1,032,000 (1,358,000)
Cash, beginning of period 7,715,000 4,226,000
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Cash, end of period $ 8,747,000 $ 2,868,000
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4
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 three months ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. 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, 1997.
NOTE 2 - EQUITY TRANSACTIONS
SETTLEMENT OF MOUNTAINEER PARK ACQUISITION PRICE GUARANTEE. In connection with
the December 1992 acquisition of Mountaineer Park, Inc., the Company issued
certain shares of the Company's common stock which bore registration rights and
were guaranteed at $6.00 per share. 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 a 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.
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.
During January 1998, the Company granted 50,000 and 10,000 options outside of
the Company's stock option plans to employees and to a non-employee,
respectively. 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.
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.
5
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - INCOME TAXES
The benefit for income taxes recorded in the accompanying statements of
operations for the three months ended March 31, 1998 and 1997 results from
non-tax deductible depreciation expense attributable to the purchase method of
accounting for the investment in Mountaineer Park, Inc. At March 31, 1997, the
Registrant recorded a valuation allowance of approximately $4.2 million against
its primary deferred tax assets (net operating loss carryforwards for federal
and state income tax purposes). At March 31, 1997, the Registrant has
approximately $18.3 million in federal net operating loss carryforwards and
approximately $4.6 million in state net operating loss carryforwards; the use of
such net operating loss carryforwards earned from 1992 through 1995 are subject
to certain limitations as a result of common stock issuances. Due to
limitations under the Alternative Minimum Tax rules of the Tax Reform Act of
1986, the Registrant expects to make quarterly federal income tax payments.
NOTE 4 - ACQUISITIONS
ACQUISITIONS - The Company, through its newly formed, wholly owned subsidiaries,
Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming of Reno, Inc.,
consummated the purchase on May 5, 1998, of two hotel/gaming properties in
Nevada: the Cheyenne Hotel & Casino in North Las Vegas for $5.5 million and the
Reno Ramada in Reno for $8 million, respectively. Both transactions were asset
purchases for cash, and both properties are qualified for unrestricted casino
gaming upon licensing of a casino operator pursuant to "grandfather" provisions
of applicable state and municipal laws. The Company expects to apply for gaming
approval and intends to lease the gaming area to a licensed casino operator.
The Company also plans to pursue franchise agreements for both properties with
Ramada Franchise Systems, Inc.
THE CHEYENNE HOTEL & CASINO, NORTH LAS VEGAS, NEVADA - The Company purchased the
Cheyenne Hotel & Casino from Banter, Inc. for $5.5 million. The Cheyenne is a
131-room hotel consisting of one two-story building and one three-story building
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. The hotel has a bar, restaurant, and a swimming pool as
well as parking for approximately 172 cars. The prior owners had operated 25
slot machines at the hotel's bar and had commenced construction of an 18,000
square foot addition including a 10,000 square foot casino, which the Company
intends to complete. The Company's plan for the casino calls for 350 slot
machines, three blackjack tables, one roulette wheel, and one craps table.
6
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - ACQUISITIONS, CONTINUED
The Company plans to implement a motor racing theme for the casino in an effort
to accommodate patrons of the nearby Las Vegas Motor Speedway. The Company
estimates that the cost of the construction of the casino and renovation of some
of the hotel rooms will be approximately $2 million. The Company expects to
complete construction within the next 120 days and will rename the project the
"Speedway Hotel & Casino".
THE RENO RAMADA HOTEL, RENO, NEVADA - The Company purchased the Reno Ramada
Hotel from Reno Hotel, LLC, an affiliate of the Company's lender, for $8
million. The Reno property has a total of 262 hotel rooms, 236 of which are
located in an eleven story tower and 26 of which are in a separate three-story
structure. The 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 8,000 square foot casino area and a small
convention facility. The property recently underwent renovations of
approximately $4 million. The Company's development plans for the casino at the
Reno property likewise will call for 350 slot machines, three blackjack tables,
a roulette wheel, and a craps table. The Reno casino's theme will be similar to
the Speakeasy concept in place at the Company's Mountaineer Racetrack & Gaming
Resort in West Virginia. The Company also plans to spend approximately $500,000
on renovations of the hotel and expansion of the capacity of the convention
facility and will rename the project the "Speakeasy Hotel & Casino".
FINANCING OF THE ACQUISITIONS - The Company financed the acquisitions through
its cash on hand and additional borrowings from its existing lender, Madeleine
LLC. Pursuant to a Third Amended and Restated Term Loan Agreement entered as of
April 30, 1998 by Mountaineer Park, Inc., Speakeasy Gaming of Las Vegas, Inc.
and Speakeasy Gaming of Reno, Inc. jointly and severally as borrowers, the
Company as guarantor, and Madeleine LLC as lender, the Company increased its
borrowings (previously the principal sum of $21,476,500) by (i) $8 million,
representing the full purchase price of the Reno Ramada Hotel; (ii) $3,765,000
toward the purchase of the Cheyenne Hotel & Casino; and (iii) $150,000 in
lender's fees. The Company expended approximately $2 million of its cash
reserves for the balance of the purchase price of the Cheyenne property and
closing costs and expenses of the transactions. The loan amendment also
provides a construction line of credit of up to $1.7 million for the Cheyenne
property and increase Mountaineer's line of credit by $5 million (up to $1.5
million of which may be used for improvements at the Nevada properties). The
loans, as well as 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 and
now Speakeasy Vegas and
7
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - ACQUISITIONS, CONTINUED
Speakeasy Reno and are unconditionally guaranteed by the Company. The call
premium applicable to prepayment of the loans (5% until July 2, 1998, 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
Cheyenne construction line of credit.
8
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", "Liquidity and Sources of
Capital" and "Recent Developments" 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,
dependence on key personnel, competition, no dividends, continued losses from
horse racing, road improvements, costs associated with maintenance and expansion
of Mountaineer Park's infrastructure to meet the demands attending increased
patronage, failure to liquidate discontinued operations, cyclical nature of
business, 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, construction of improvements as
well as its estimates of the time and expense involved in such construction at
its recently acquired hotel properties; the entering of franchise agreements;
licensing, operation, and configuration of gaming facilities at the Nevada
properties; and the long-term prospects for the successful operation of acquired
properties and other risks detailed in the Company's Securities and Exchange
Commission filings.
RESULTS OF OPERATIONS - Three Months Ended March 31, 1998 Compared to Three
Months Ended March 31, 1997.
The Company earned revenues for the respective three month periods in 1998
and 1997 as shown below:
Three Months Ended March 31
---------------------------
1998 1997
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Operating Revenues
Video lottery operations $ 13,968,000 $ 10,053,000
Parimutuel commissions 1,162,000 1,049,000
Lodging, food and beverage 1,338,000 943,000
Other revenues 222,000 197,000
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Total Revenues $16,690,000 $ 12,242,000
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Mountaineer Park has exhibited steady, pronounced revenue growth under its
expansion plan begun in September 1994. The emergence of video lottery as
Mountaineer Park's dominant profit center and the 1996 amendment of the West
Virginia video lottery law (the "Lottery Law") to
9
permit the addition of video game themes depicting symbols on reels commonly
referred to as "line games" or "slot games" ("Slot Terminals") have allowed
the Company to generate increased revenues. Primarily as a result of this
significant increase in gaming revenues, the Company earned a $1,275,000
million profit from continuing operations in the first quarter of 1998. In
March 1998, the Lottery law was further amended with respect to the permitted
number and location of video lottery terminals pursuant to which Mountaineer
Park is entitled, effective June 13, 1998, to change the ratio of Video
Lottery Terminals ("VLTs") located in its lodge facility versus the racetrack
building from 1:1 to 2:1. See "Liquidity and Sources of Capital - Capital
Improvements".
Total revenues increased from $12.2 million in the first quarter of 1997 to
$16,690,000 million in 1998, an increase of 36.8%. Approximately $3.9 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 $500,000 of additional revenues. Management believes
the increase resulted primarily from increased patronage resulting from the
Company's expanded advertising activities, the increase in revenue generated by
having 800 Slot Terminals for the entire quarter (compared to only 400 Slot
Terminals in the first quarter of 1997 until March 1997 when Mountaineer Park
purchased additional Slot Terminals), greater familiarity of customers with the
Company's gaming machines and other enhanced facilities.
VIDEO LOTTERY OPERATIONS. Mountaineer has operated VLTs in West Virginia
since December 1992; operations were conducted under a provisional license until
September 1994. The West Virginia Racetrack Video Lottery Act, signed in March
1994, allowed the uninterrupted continuation of video lottery games at
Mountaineer and permitted the Company to increase its number of VLTs from 165 to
400 on September 4, 1994. In July 1995, the Company placed into operation an
additional 400 VLTs, bringing the total number of VLTs in operation to 800. The
800 VLTs then in operation offered only card games and keno ("Card Terminals").
Upon the enactment of an amendment of the video lottery law permitting Slot
Terminals, in July of 1996 Mountaineer converted 350 Card Terminals into Slot
Terminals. In October of 1996, Mountaineer converted an additional 50 Card
Terminals to Slot Terminals. In March of 1997, Mountaineer purchased and
installed 400 new Slot Terminals and removed 200 previously leased Card
Terminals, bringing the total number of VLTs to 1,000 as of March 13, 1997,
consisting of 800 Slot Terminals and 200 Card Terminals. In March 1998, the
Lottery law was further amended with respect to the permitted number and
location of video lottery terminals pursuant to which Mountaineer Park is
entitled to change the ratio of VLTs located in its lodge facility versus the
racetrack building from 1:1 to 2:1. See "Liquidity and Sources of Capital -
Capital Improvements".
The results of video lottery operations reflect a four-year trend of
significantly increasing aggregate net win, coupled with an increase in average
daily net win per terminal since the inception of Slot Terminals. The Company
plans to pursue additional growth in its video lottery operations. The
aggressive newspaper marketing campaign begun in July 1996 continued through
March 31, 1998 and is still continuing coupled with an extensive direct mail
campaign. In January of 1997, Mountaineer also began broadcasting a 30 minute
"infomercial" advertisement on television affiliates within a two hour driving
radius.
The Company has completed a large scale redecoration of its video lottery
facilities, including expansion of ancillary dining and bar areas at the lodge
and racetrack. The Company has spent $18 million on this expansion and
redecoration. For the three months ended March 31, 1998,
10
average daily net win on the VLTs placed at the racetrack was $66 (including
$0 for days when there was no live racing), compared to $244 on the
Lodge-based terminals for a facility-wide average of $155 per VLT per day.
Although management believes that revenues will increase at the racetrack,
the Company's primary focus is to expand its lodge operations. See
"Parimutuel Commissions" and "Liquidity and Sources of Capital - Capital
Improvements."
A summary of the video lottery gross winnings less patron payouts ("net
win") for the three months ended March 31, 1998 and 1997 is as follows:
Three Months Ended March 31
---------------------------
1998 1997
---- ----
Total gross wagers $ 49,588,000 $ 34,762,000
Less patron payouts (35,620,000) (24,709,000)
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Revenue -video lottery operations 13,968,000 10,053,000
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Average daily net win per terminal $ 155 $ 132
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Revenues from video lottery operations increased by 39% from $10.1
million in the first quarter of 1997 to $14 million in 1998. Management
believes the increase resulted primarily from increased patronage resulting
from the Company's expanded advertising activities, the increase to 800 Slot
Terminals in March 1997, greater familiarity of customers with the Company's
gaming machines and other enhanced facilities. In March of 1997, Mountaineer
purchased and installed 400 new Slot Terminals and removed 200 previously
leased Card Terminals, bringing the total number of VLTs to 1,000 as of March
13, 1997, consisting of 800 Slot Terminals and 200 Card Terminals.
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 from 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's parimutuel commissions for the three months ended March
31, 1998 and 1997 are summarized below:
11
Three Months Ended March 31
------------------------------
1998 1997
----------- -----------
Simulcast racing parimutuel handle $ 5,686,000 $ 5,435,000
Live racing parimutuel handle 4,906,000 4,161,000
Less patrons' winning tickets (8,375,000) (7,594,000)
----------- -----------
2,217,000 2,002,000
Less:
State and county parimutuel tax (125,000) (119,000)
Purses and Horsemen's Association (930,000) (834,000)
----------- -----------
Revenues - parimutuel commissions $ 1,162,000 $ 1,049,000
----------- -----------
----------- -----------
For the three months ended March 31, 1998, simulcast handle rose by
$250,000, an increase of approximately 5% compared to the same period in
1997. Live racing handle for the three months ended March 31, 1998 was $4.9
million, an increase of 18% from the corresponding period in 1997. Management
believes these increases resulted primarily from increased video lottery
attendance, cross-marketing from such activity and completing 52 days of the
annually required 210 day racing requirement in the first quarter of 1998
compared to 50 days in the same period in 1997. Mountaineer Park paid
average daily live purses of $52,900 in the three months ended March 31,
1998, a 32% increase over the $40,000 average daily live purses in the
corresponding period of 1997, and sponsored stakes races of up to $25,000 in
the three months ended March 31, 1998 as compared with $20,000 in the
corresponding period in 1997. Management believes that periodic increases in
average daily purses and purses for stakes races will attract higher quality
race horses. 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 race
horses 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 in the remainder of
fiscal year 1998 as well as sponsor substantially increased stakes races
attempting to develop an export simulcast business. 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".
In 1997 the West Virginia legislature passed a bill which Management
believes will help the Company's live racing operations. Pursuant to the
bill, as of the beginning of 1998, the two thoroughbred tracks in West
Virginia are required to schedule 210 days of live racing annually, down from
the previous 220 day minimum. 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.
FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging
revenues accounted for a combined increase of 42% to $1.3 million for the
three months ended March 31, 1998.
12
Restaurant, bar and concession facilities produced $315,000 of the revenue
increase, while lodge revenues increased $80,000 Food and beverage operations
accounted for approximately 75% and 73% of the revenues earned by this profit
center in the first quarters of 1998 and 1997, respectively. Management
believes that increased revenues from lodging, food and beverage resulted
primarily from enhanced video lottery facilities and related advertising,
which in turn led to increased consumption of food and beverages by the
Company's customers. The ratio of revenue from food and beverage to revenue
from lodging has generally remained constant, reflecting that Mountaineer
Park has historically drawn more day traffic than overnight stays.
OTHER OPERATING REVENUES. Other sources of revenues consist primarily of
non-core businesses such as admission, programs, golf, tennis and swimming.
While these lines of business are not the Company's most profitable, the
Company believes they are necessary for it to continue to attract gaming
patrons. Other revenues increased by $25,000, or 13% to $222,000 for the
three month period ended March 31, 1998 compared to the same period in 1997.
COSTS AND EXPENSES. Operating costs and gross profit earned from
operations for the three month periods ended March 31, 1998 and 1997 are as
follows:
Three Months Ended March 31
------------------------------
1998 1997
----------- -----------
Operating Costs:
Video lottery operations $ 8,812,000 $ 6,398,000
Parimutuel commissions 1,437,000 1,282,000
Lodging, food and beverage 1,251,000 837,000
Other revenues 180,000 283,000
----------- -----------
Total Operating $11,680,000 $ 8,800,000
----------- -----------
----------- -----------
Costs
Gross Profit (Loss):
Video lottery operations $ 5,156,000 $ 3,655,000
Parimutuel commissions (275,000) (233,000)
Lodging, food and beverage 87,000 106,000
Other revenues 42,000 (86,000)
----------- -----------
Total Gross Profit $ 5,010,000 $ 3,442,000
----------- -----------
----------- -----------
Mountaineer's 36.3% increase in revenues resulting from the expanded
scope of entertainment offerings resulted in higher total costs, as expenses
increased by 33% to $11.7 million in the first quarter of 1998. Approximately
$2.4 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 increase in revenues in the three months ended
March 31, 1998 resulted in a 33% increase in cost of revenues, an 18%
increase in marketing and promotions expense, a 52% increase in general and
administrative expenses, and a 62.1% increase in depreciation and
amortization. The increased marketing and promotion expenses were due
primarily to 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
13
increase in general and administrative expenses was due primarily to (1)
additional personnel engaged in video lottery, 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 activity. 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, increasing purse
sizes and attracting higher quality jockeys and horses to increase parimutuel
wagering. See "Parimutuel Commissions". Gross profit from the Company's four
profit centers increased from $3.4 million for the first quarter of 1997 to
$5.5 million for the same period in 1998.
Video Lottery Terminals Operating Costs. Costs of video lottery
revenue increased by $2.4 million or 38% from $6.4 million for the three
months ended March 31, 1997, to $8.8 million for the three months ended March
31, 1998, primarily reflecting an increase in statutory expenses. Such
expenses accounted for $2.2 million of the total cost increase. Additional
expenses were incurred in connection with video lottery, housekeeping and
security personnel.
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) 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.
Statutory costs and assessments, including the State Administrative Fee,
for the respective three month periods are as follows:
14
Three Months Ended March 31
------------------------------
1998 1997
----------- -----------
Employee Pension Fund $ 68,000 $ 48,000
Horsemen's Purse Fund 2,078,000 1,496,000
----------- -----------
Subtotal $ 2,146,000 $ 1,554,000
State of West Virginia $ 4,582,000 $ 3,296,000
Tourism Promotion Fund 402,000 290,000
Hancock County 268,000 193,000
Stakes Races 134,000 97,000
Veteran's Memorial 134,000 97,000
----------- -----------
Total $ 7,666,000 $ 5,517,000
----------- -----------
----------- -----------
The remaining significant expenses incurred by video lottery operations
consist of VLT lease expense ($355,000 in the first quarter of 1998 compared
to $320,000 in the first quarter of 1997), direct and indirect wages and
employee benefits ($480,000 in the first quarter of 1998, compared to
$391,000 in the first quarter of 1997), and utilities, property tax, waste
and sewage disposal and insurance ($217,700 in the first quarter of 1998
versus $158,200 in the first quarter of 1997). This $59,500 increase resulted
primarily from an increase in the cost of utilities and waste and sewage
disposal related to VLT operations in the first quarter of 1998 as compared
with the first quarter of 1997. The Company's total waste disposal costs are
currently estimated by management to be approximately $200,000 per quarter,
substantially as a result of the increase in patron attendance at
Mountaineer. The State of West Virginia has authorized Hancock County to
build an expanded sewage system that would serve the Chester area, which is
scheduled to be completed in approximately October 1999.
Wages and benefits expense increased from the first quarter of 1997 to
the first quarter of 1998 in response to higher levels of patron play.
Management believes these costs experienced a moderate increase in the first
quarter of 1998 from the levels experienced in the first quarter of 1997 due
to the increase from 800 VLTs to 1,000 VLTs in March, 1997 and growth in
patron volume.
PARIMUTUEL COMMISSIONS OPERATING COSTS. Costs (the individual components
of which are detailed below) of parimutuel commission revenue attributable to
live racing increased by $155,000, or 12%, from $1.3 million in the first
quarter of 1997, to $1.4 million in the first quarter of 1998. Purse expense
(consisting of statutorily determined percentages of live racing handle) rose
19% to $482,000 in the first quarter of 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 $21,000 to $448,000 in the first quarter of 1998 consistent
with the 4.6% increase in simulcasting wagers. Parimutuel commissions revenue
is reported net of these expenses in the Consolidated Statement of
Operations.
15
Totalisator and other lease expenses remained stable at approximately
$120,000 in the first quarters of 1998 and 1997. Direct and indirect wages
and employee benefits attributable to racing operations decreased slightly
($12,000 or 2%) to $637,000 in the three months ended March 1998. The number
of live race performances increased by 2 days in 1998 to 52 days as compared
to the same period in 1997.
Other costs of parimutuel commission revenue increased in the aggregate
by approximately $167,000 in the first quarter of 1998 from $513,000 in the
first quarter of 1997 primarily as a result of allocation of overhead items
including advertising, personnel and professional fees as determined by
management.
Mountaineer's labor agreement with approximately 50 mutuel and 9 video
lottery employees has been extended to November 30, 2002. The Company's
agreement with HBPA has been extended until January 1, 2001.
FOOD, BEVERAGE AND LODGING OPERATING COSTS. Operating costs of the
Company's lodging, food and beverage operations increased by $414,000 from
$837,000 in the first quarter of 1997 to $1,251,000 in the first three months
of 1998. Direct expenses of the Company's food and beverage operations
increased by 40% from $580,000 in 1997 to $811,000 for the same period in
1998. The food and beverage operation earned a gross profit of $193,000, an
increase of 87%, in the first three months of 1998 compared to $103,000 in
1997.
Lodging direct costs totaled $440,000 for the first three months of 1998
as opposed to $257,000 in 1997. This increase resulted primarily from an
increase in the cost of the lodge's waste and sewage disposal of $90,000 in
1998. Also lodge wages and employee benefits increased by $24,000 in 1998.
This increase was caused by an increase in service personnel in these areas.
Amenities and linens in the rooms were upgraded in the first quarter causing
a $35,000 increase in the cost of supplies. See "Video Lottery Terminals
Operating Costs".
COST OF OTHER OPERATING REVENUES. Costs of other revenues consisting
primarily of non-core businesses such as racing programs, golf, tennis and
swimming decreased by $103,000 from $283,000 in the first quarter of 1997 to
$180,000 in the first quarter of 1998.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at the Company's
Mountaineer operation increased by 18% from $578,000 for the first quarter of
1997 to $683,000 for the same period in 1998. Management has started an
aggressive regional marketing campaign centered on its 30-minute infomercial
broadcasts throughout portions of a two hour driving radius of Mountaineer.
In 1997, Mountaineer's marketing and promotion costs were defrayed by a state
grant in the amount of $330,000 from a convention and visitors bureau of
which Mountaineer is a member. The Company has been granted an additional
$320,000 to be received in 1998 and expects to apply for a grant, also in
1998, of an additional $320,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST EXPENSE. The
Company's general and administrative expense increased by $556,000 to $1.6
million, from $1.1 million for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997. Such increase resulted
primarily from an increase in acquisition costs, service personnel and
professional fees.
16
In the first quarter of 1998, the Company incurred $800,000 of interest
expense as compared with $1.1 million of interest expense in the first quarter
of 1997. Interest expense in 1997 included a $1.8 million one-time cash fee paid
over the first year of the extended loan term pursuant to the July 2, 1997
Seconded Amended and Restated Term Loan Agreement the Company and Mountaineer
Park entered with Madeleine LLC. Approximately $287,434 of such fees remain to
be expensed prior to July 1998. See "Recent Developments."
Depreciation and amortization costs increased 62% from $451,000 in the
first quarter of 1997 to $731,000 in the first quarter of 1998, reflecting
increased capitalization of improvements completed at Mountaineer Park's
facilities and the allocation of $3.1 million for the purchase of 400 VLTs in
March of 1997 and $1.2 million for the paving of the Company's parking lots
subsequent to the first quarter in 1997.
CASH FLOWS
The Company's operations produced $1,759,000 of cash flow in the three
months ended March 31, 1998, compared to $425,000 produced in the first three
months of 1997. Current year noncash expenses include $731,000 for depreciation
and amortization and $115,000 for the amortization of deferred financing costs.
The Company invested $630,000 for continued expansion and development of
its properties at Mountaineer in the first three months of 1998, compared to a
$1.6 million investment in the first three months of 1997.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $11,039,000 at March 31,
1998, and its unrestricted cash balance amounted to $8,747,000. Racing purses
are paid from funds contributed by the Company to bank accounts owned by the
horse owners who race at Mountaineer Park. At March 31, 1998, the balances in
these accounts exceeded the purse payment obligations by $874,000; 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) called for payments of interest only with the principal due at the end of
the four year term;
17
(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 were
unaffected by the Second Amended Agreement. The Company continues to
guarantee the loan. In addition, as a result of the Second Amended Term Loan
Agreement the Company had excess funds available for investment (subject to
negative covenants contained in the Second Amended Term Loan Agreement) and
further expansion at Mountaineer Park.
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 may be
paid over the first year of the term (as of March 31, 1998, the Company paid
approximately 1,513,350 and is obligated to pay the remaining $287,434 in equal
payments over the following three months); (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., Speakeasy Gaming of Reno,
Inc. and Madeleine LLC in order to finance certain acquisitions by
subsidiaries of the Company which were consummated on May 5, 1998. See
"Recent Developments".
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 occur in 1998 and 1999. The Company began to invest in significant
infrastructure improvements beginning with extensive paving in the fourth
quarter of 1997. 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, including a new entrance to the racetrack
clubhouse.
On March 14, 1998, the West Virginia State Legislature passed House Bill
4632, which, among other things, amended Section 29-22A-12(b)(5) of the
Racetrack Video Lottery Act of 1994 (regarding number and location of video
lottery terminals). The amendment, which became effective in April 1998,
permits Mountaineer Park to change the ratio of VLTs located in the Lodge versus
the racetrack building from 1:1 to 2:1. As a result of the amendment,
Mountaineer Park has applied to the Lottery Commission for permission to
increase the number of VLTs from 1,000 to 1,200 and to install 200 new Slot
Terminals (which the Company will purchase or lease) and move 100 VLTs from the
track to the lodge. Mountaineer Park has commenced construction of a second
addition of approximately 8,000 square feet to the Speakeasy Gaming Saloon to
house the 300 additional VLTs. Pending Lottery Commission Approval of the
increase and relocation of VLTs, management anticipates that the Speakeasy
addition will be completed during the third quarter of
18
1998, at which time Mountaineer Park will operate 800 VLTs at the Lodge and
400 at the racetrack to maximize the success of the Company's lodge-based
video lottery operations. See "Video Lottery Operations".
On October 7, 1997, Mountaineer 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 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.
In February 1998, Mountaineer Park purchased from Realm, Inc. 350
acres in Chester, West Virginia 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.
ROAD IMPROVEMENTS. During the third quarter of 1997, construction
projects were completed affecting West Virginia State Route 2 (the road
Mountaineer Park fronts) both in Weirton (approximately 18 miles to the
south) and in Chester (approximately 8 miles to the north), and Ohio State
Routes 7 and 11. The Route 2 construction in Weirton was completed in April
1998 and the Route 2 construction in Chester and Route 7 in Ohio are
scheduled to be completed in the next 45 days. The Company has experienced
no discernible impact on patronage since such construction commenced.
OUTSTANDING OPTIONS AND WARRANTS. As of March 31, 1998, there were
outstanding options and warrants to purchase 8,597,247 shares of the Company's
common stock below market price. Of this amount, options to purchase 4,738,914
shares are held by consultants, employees, former employees or directors of the
Company, and warrants to purchase 2,471,874 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 the Company's intention to effect
registration and will be included in a registration statement which the Company
intends to file with the Securities and Exchange Commission.
See Note 2 to the Condensed and Consolidated Financial Statements for the three
months ended March 31, 1998 and 1997. If all such options and warrants were
exercised, the Company would receive proceeds of approximately $12.3 million.
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 allow the Company to utilize its
18.3 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.
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
three years. Compensation under the employment agreements consists of both cash
payments and stock option commitments. The Company
19
anticipates cash payments in the amount of approximately $809,000 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. Although there can be no assurance, the Company believes that
cash generated from operations will be sufficient to meet all of the
Company's currently anticipated commitments and contingencies. (See "Recent
Developments").
The Company also has commitments with respect to common stock
registration rights, some of which include substantial cash penalties if the
Company does not timely meet its obligations.
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. The Company has come to the determination that there are no Year
2000 issues to be disclosed which would have a material adverse effect on the
financial condition of the Company.
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 owns in
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. That
plan of orderly liquidation provided for certain rework, remediation and
development costs to address environmental matters, increased production and
enhancement of the value of such properties for sale.
Although the Company has prepared a plan of liquidation with respect to
these properties, it has thus far been unable to effect a liquidation of its
Michigan properties. The Company has valued such properties at $2,616,000 as of
March 31, 1998, net of $252,000 of accrued rework costs, which it believes
represents net realizable value for the properties. Nonetheless, given the
Company's difficulty in finding a buyer for the properties, it may be required
to sell the properties at a loss and on terms substantially less favorable to
the Company than initially foreseen or, alternatively, to write down the value
of such assets on its consolidated balance sheet. For the quarters ending March
31, 1997 and 1998, the Company had no revenues or expenses for discontinued
operations. Currently, the Company is negotiating a sale of its remaining oil
and gas interests to Fleur-David Corporation. There can be no assurance,
however, that such sale will be concluded.
20
RECENT DEVELOPMENTS
PURCHASE OF TWO NEVADA GAMING PROPERTIES
The Company, through its newly formed, wholly owned subsidiaries,
Speakeasy Gaming of Las Vegas, Inc. and Speakeasy Gaming of Reno, Inc.,
consummated the purchase on May 5, 1998, of two hotel/gaming properties in
Nevada: the Cheyenne Hotel & Casino in North Las Vegas for $5.5 million and
the Reno Ramada in Reno for $8 million, respectively. Both transactions were
asset purchases for cash, and both properties are qualified for unrestricted
casino gaming upon licensing of a casino operator pursuant to "grandfather"
provisions of applicable state and municipal laws. The Company expects to
apply for gaming approval and intends to lease the gaming area to a licensed
casino operator. The Company also plans to pursue franchise agreements for
both properties with Ramada Franchise Systems, Inc.
THE CHEYENNE HOTEL & CASINO, NORTH LAS VEGAS, NEVADA. The Company
purchased the Cheyenne Hotel & Casino from Banter, Inc. for $5.5 million.
The Cheyenne is a 131-room hotel consisting of one two-story building and one
three-story building 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. The hotel has a
bar, restaurant, and swimming pool as well as parking for approximately 172
cars. The prior owners had operated 25 slot machines at the hotel's bar and
had commenced construction of an 18,000 square foot addition including a
10,000 square foot casino, which the Company intends to complete. The
Company's plan for the casino calls for 350 slot machines, three blackjack
tables, one roulette wheel, and one craps table. The Company plans to
implement a motor racing theme for the casino in an effort to accommodate
patrons of the nearby Las Vegas Motor Speedway. The Company estimates that
the cost of construction of the casino and renovation of some of the hotel
rooms will be approximately $2 million. The Company expects to complete
construction within the next 120 days and will rename the project the
"Speedway Hotel & Casino".
THE RENO RAMADA HOTEL, RENO, NEVADA. The Company purchased the Reno
Ramada Hotel from Reno Hotel LLC, an affiliate of the Company's lender, for $8
million. The Reno property has a total of 262 hotel rooms, 236 of which are
located in an eleven story tower and 26 of which are in a separate three-story
structure. The 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. The property recently underwent renovations of
approximately $4 million. The Company's development plans for the casino at the
Reno property likewise call for 350 slot machines, three blackjack tables, a
roulette wheel, and a craps table. The Reno casino's theme will be similar to
the Speakeasy concept in place at the Company's Mountaineer Racetrack & Gaming
Resort in West Virginia. The Company also plans to spend approximately $500,000
on renovations of the hotel and expansion of the capacity of the convention
facility and will rename the project the "Speakeasy Hotel & Casino".
OPERATION OF THE PROPERTIES/GAMING LICENSING. The Company and its newly
formed subsidiaries intend to apply as soon as practicable to the authorities in
the State of Nevada for all
21
necessary permits and licenses required for the Company to operate casinos at
the two 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. In the
interim, the Company will operate the hotels and restaurants and lease the
casino area to an independent, licensed casino operator as permitted by
Nevada law.
The Company anticipates that Speakeasy Vegas will immediately hire
approximately twenty-five new employees at the Cheyenne property and that
Speakeasy Reno will hire approximately forty new employees at the Reno property.
The Company has engaged Bruce E. Dewing to oversee the operation of the two
Nevada properties as well as to assist the Company in the licensing process.
Mr. Dewing has more than twenty years experience in upper level management of
hotels and casinos and holds a non-restricted gaming license in the State of
Nevada. Most recently, Mr. Dewing was President and CEO of the Ormsby House
Hotel/Casino, a 200-room hotel with three restaurants and full service casino
with entertainment in Carson City, Nevada. From 1981-1994, Mr. Dewing served
variously as Vice President/Operations, General Manager/Chief Marketing
Officer/Director of the Sands Regency Hotel & Casino in Reno, Nevada. He was
responsible for management of the Sands Regency's 1,000 hotel rooms and
supervised 950 employees and twenty-five departments.
FINANCING OF THE ACQUISITIONS. The Company financed the acquisitions
through its cash on hand and additional borrowings from its existing lender,
Madeleine LLC. Pursuant to a Third Amended and Restated Term Loan Agreement
entered as of April 30, 1998 by Mountaineer Park, Inc., Speakeasy Gaming of Las
Vegas, Inc., and Speakeasy Gaming of Reno, Inc. jointly and severally as
borrowers, the Company as guarantor, and Madeleine LLC as lender, the Company
increased its borrowings (previously the principal sum of $21,476,500) by (i) $8
million, representing the full purchase price of the Reno Ramada Hotel; (ii)
$3,765,000 toward the purchase of the Cheyenne Hotel & Casino; and (iii)
$150,000 in lender's fees. The Company expended approximately $2 million of its
cash reserves for the balance of the purchase price of the Cheyenne property and
closing costs and expenses of the transactions. The loan amendment also
provides a construction line of credit of up to $1.7 million for the Cheyenne
property and increases Mountaineer's line of credit by $5 million (up to $1.5
million of which may be used for improvements at the Nevada properties). 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 and
now Speakeasy Vegas and Speakeasy Reno and are unconditionally guaranteed by the
Company. The call premium applicable to prepayment of the loans (5% until July
2, 1998, 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 Cheyenne construction line of credit.
22
PART II
OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended (1)
3.2 Certificate of Amended of restated Certificate of
Incorporation, filed as of October 18, 1996 (2)
3.3 Amended Bylaws of the Company (3)
10.1 Letter Agreement by and between the Company and James
V. Stanton dated February 18, 1998 (3).
10.2 Letter Agreement by and between the Company and William
D. Fugazy, Jr. dated February 18, 1998 (3).
10.3 Amendment of Employment Agreement by and between the
Company and Thomas K. Russell dated February 16,
1998 (3).
10.4 Purchase Agreement by and between Mountaineer Park , Inc.
and Realm, Inc., an Ohio corporation, dated February 12,
1998 (3).
10.5 Deed dated February 13, 1998, executed by Realm, Inc.(3)
10.6 Purchase Agreement by and between Speakeasy Gaming of
Nevada, Inc., and Banter, Inc. dated as of May 5, 1998.
10.7 Purchase Agreement by and between Speakeasy Gaming of
Reno, Inc. and Reno Hotel, LLC dated April 30, 1998.
23
10.8 First Amendment to Purchase Agreement by and between
Speakeasy Gaming of Las Vegas, Inc. and Banter, Inc. dated
May 5, 1998.
10.9 Second Amendment First Amendment to Purchase Agreement by
and among Speakeasy Gaming of Las Vegas, Inc., Banter,
Inc. and Southwest Exchange Corporation dated May 5, 1998.
10.10 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.
10.11 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.
10.12 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.
10.13 Pledge and Security Agreement by and between MTR Gaming
Group, Inc. and Madeleine LLC dated as of April 30, 1998.
10.14 General Security Agreement by and between Speakeasy Gaming
of Reno, Inc. and Madeleine LLC dated as of April 30,
1998.
10.15 General Security Agreement by and between Speakeasy Gaming
of Las Vegas, Inc. and Madeleine LLC dated as of May 5,
1998.
10.16 1998 Stock Incentive Plan
27.1 Financial Data Schedule.
99.1 Press Release dated May 7, 1998.
FOOTNOTES
(1) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 18, 1996, filed November 1, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated and filed on February 20, 1998.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the
first quarter of 1998 and thereafter:
Reports on Form 8-K
The Company filed the following current reports on Form 8-K during the
first quarter of 1998 and thereafter:
24
(1) A current report on Form 8-K was filed by the Company on February 20, 1998,
(with the earliest event reported dated January 27, 1998) reporting the
following items:
(i) compliance with new corporate governance standards of NASDAQ's
continued listing requirements;
(ii) resignation of Thomas K. Russell;
(iii) appointment of Officers;
(iv) purchase of 350 acre property in Hancock County, West Virginia.
25
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.
May 15, 1998
By: /s/ Edson R. Arneault
-----------------------------------
Edson R. Arneault, CHAIRMAN,
CHIEF EXECUTIVE OFFICER, PRESIDENT,
CHIEF FINANCIAL OFFICER
26