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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, 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
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
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
20,021,049
Outstanding at August 12, 199
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MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
SECTION PAGE
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PART I FINANCIAL INFORMATION
Item 1--Financial Statements.................................................................................................. 3
Condensed and Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.............................................. 3
Condensed and Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1998 and 1997.......... 4
Condensed and Consolidated Statements of Cash Flow for the Six Months Ended June 30, 1998 and 1997............................ 5
Notes to Condensed and Consolidated Financial Statements...................................................................... 6
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 9
Item 3--Quantitative and Qualitative Disclosures about Market Risk............................................................ 23
PART II--OTHER INFORMATION
Item 1--Legal Proceedings..................................................................................................... II-1
Item 2--Changes in Securities................................................................................................. II-1
Item 3--Defaults upon Senior Securities....................................................................................... II-1
Item 4--Submission of Matters to a Vote of Securities Holders................................................................. II-1
Item 5--Other Information..................................................................................................... II-1
Item 6--Exhibits and Reports on Form 8-K...................................................................................... II-1
SIGNATURE PAGE................................................................................................................ II-3
2
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
JUNE 30 DEC. 31
1998 1997
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 7,997,000 $ 7,715,000
Restricted cash................................................................... 196,000 188,000
Accounts receivable net of allowance
for doubtful accounts of $124,000............................................... 916,000 431,000
Deferred financing costs.......................................................... 1,386,000 1,617,000
Deferred income taxes............................................................. 2,550,000 2,550,000
Other current assets.............................................................. 471,000 516,000
------------- -------------
Total current assets............................................................ 13,516,000 13,017,000
------------- -------------
Property:
Land.............................................................................. 4,136,000 371,000
Building.......................................................................... 25,240,000 19,014,000
Equipment and automobiles......................................................... 7,871,000 6,388,000
Furniture and fixtures............................................................ 5,756,000 3,131,000
Construction in progress.......................................................... 1,435,000 258,000
------------- -------------
44,438,000 29,162,000
------------- -------------
Less accumulated depreciation..................................................... (7,789,000) (6,363,000)
------------- -------------
36,649,000 22,799,000
------------- -------------
Net assets of discontinued oil and gas activities................................... 2,604,000 2,616,000
------------- -------------
Other assets:
Excess of cost of investments over net assets acquired, net of
Accumulated amortization of $1,400,000 and $1,274,000........................... 2,373,000 2,500,000
Deposits and other................................................................ 487,000 102,000
------------- -------------
2,860,000 2,602,000
------------- -------------
$ 55,629,000 $ 41,034,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 934,000 $ 594,000
Other accrued liabilities......................................................... 1,774,000 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....................................................... 2,870,000 3,232,000
------------- -------------
Deferred income taxes, less current portion......................................... 1,097,000 1,130,000
------------- -------------
Long-term debt, less current portion................................................ 33,445,000 21,559,000
------------- -------------
Shareholders' equity:
Common stock........................................................................ 2,000 2,000
Paid in capital..................................................................... 35,326,000 35,326,000
Accumulated deficit................................................................. (17,111,000) (20,215,000)
------------- -------------
Total shareholders' equity.......................................................... 18,217,000 15,113,000
------------- -------------
$ 55,629,000 $ 41,034,000
------------- -------------
------------- -------------
3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues
Video lottery teminals............................... $ 15,505,000 $ 12,732,000 $ 29,473,000 $ 22,785,000
Parimutuel commissions............................... 1,199,000 1,197,000 2,361,000 2,246,000
Food, beverage and lodging........................... 1,802,000 1,371,000 3,140,000 2,314,000
Other................................................ 420,000 297,000 642,000 494,000
------------ ------------ ------------ ------------
Total revenues..................................... 18,926,000 15,597,000 35,616,000 27,839,000
------------ ------------ ------------ ------------
Costs of revenue
Cost of video lottery terminals........................ 9,040,000 7,907,000 17,852,000 14,305,000
Cost of parimutuel commissions......................... 1,252,000 1,509,000 2,689,000 2,791,000
Cost of food, beverage and lodging..................... 1,304,000 1,212,000 2,555,000 2,049,000
Cost of other revenues................................. 49,000 280,000 229,000 563,000
------------ ------------ ------------ ------------
Total cost of revenues................................. 11,645,000 10,908,000 23,325,000 19,708,000
------------ ------------ ------------ ------------
Gross Profit........................................... 7,281,000 4,689,000 12,291,000 8,131,000
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Marketing and promotions............................... 1,103,000 777,000 1,786,000 1,355,000
General and administrative............................. 2,617,000 1,506,000 4,252,000 2,585,000
Depreciation and amortization.......................... 829,000 546,000 1,560,000 997,000
------------ ------------ ------------ ------------
Total selling, general and administrative expenses..... 4,549,000 2,829,000 7,598,000 4,937,000
------------ ------------ ------------ ------------
Operating income....................................... 2,732,000 1,860,000 4,693,000 3,194,000
------------ ------------ ------------ ------------
Interest income........................................ 98,000 16,000 183,000 44,000
Interest expense....................................... (1,009,000) (762,000) (1,822,000) (1,856,000)
------------ ------------ ------------ ------------
(911,000) (746,000) (1,639,000) (1,812,000)
------------ ------------ ------------ ------------
Income before benefit of income taxes.................. 1,821,000 1,114,000 3,054,000 1,382,000
Benefit for income taxes............................... 8,000 33,000 50,000 66,000
------------ ------------ ------------ ------------
Net income............................................. $ 1,829,000 $ 1,147,000 $ 3,104,000 $ 1,448,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share................................... $ 0.09 $ 0.06 $ 0.16 $ 0.07
Net income per share assuming dilution................. $ 0.07 $ 0.06 $ 0.13 $ 0.07
Weighted average number of shares outstanding:
Basic.................................................. 19,990,890 19,764,291 19,975,420 19,742,267
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted................................................ 24,442,404 20,379,057 24,126,306 20,657,383
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
4
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
----------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Net income........................................................................ $ 3,104,000 1,448,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred financing cost amortization............................................ 231,000 1,066,000
Depreciation and amortization................................................... 1,553,000 997,000
Deferred income taxes........................................................... (33,000) (66,000)
Changes in operating assets and liabilities
Accounts receivable net of allowance.......................................... (485,000) --
Other current assets.......................................................... 45,000 (426,000)
Accounts payable and accrued liabilities...................................... (351,000) 34,000
------------- -------------
Net cash provided by operating activities........................................... 4,064,000 3,053,000
------------- -------------
Cash flows from investing activities:
Restricted cash................................................................... (8,000) (12,000)
Net assets from discontinued activities........................................... 12,000 --
Settlement of prior acquisition costs............................................. -- (105,000)
Deposits and other................................................................ (385,000) (12,000)
Capital expenditures.............................................................. (15,276,000) (4,961,000)
------------- -------------
Net cash used in investing activities............................................... (15,657,000) (5,090,000)
------------- -------------
Cash flows used in financing activities
Principal payments................................................................ -- (186,000)
Loan proceeds..................................................................... 11,875,000 1,000,000
------------- -------------
Cash provided by financing activities............................................... 11,875,000 814,000
NET INCREASE (DECREASE) IN CASH..................................................... 282,000 (1,223,000)
Cash, Beginning of Period........................................................... 7,715,000 4,226,000
------------- -------------
Cash, End of Period................................................................. 7,997,000 3,003,000
------------- -------------
------------- -------------
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 no 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, 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 118,048 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 plan 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 February 1998, the Company granted 50,000 options outside of the
Company's stock option plan to directors. The options were granted at an
exercise price of $2.50, the estimated fair market value of the Company's common
stock at the date of grant. The options vest in increments of 6,250 options
after attendance of meetings.
During March 1998, the Company granted 950,000 options pursuant to its 1992
Employee Stock Option Plan to employees. The options were granted at an exercise
price of $2.41, the estimated fair market value of the Company's common stock at
the date of grant and vested immediately. Approximately 1,200,000 options
granted under such plan expired unexercised in October 1997.
NOTE 3--INCOME TAXES
The benefit for income taxes recorded in the accompanying statements of
operations for the six months ended June 30, 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 June 30, 1998 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 June 30, 1998 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
6
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
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
The Company through its newly formed, wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc., consummated the purchase on May 5, 1998 of the
Cheyenne Hotel & Casino in North Las Vegas (the "Las Vegas Property") for $5.5
million. The transaction was an asset purchase for cash, and the Las Vegas
Property is qualified for unrestricted casino gaming upon licensing of a casino
operator pursuant to "grandfather" provisions of applicable state and municipal
law. 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 a
franchise agreement for the Las Vegas Property with Ramada Franchise Systems,
Inc.
The Company through its newly formed, wholly owned subsidiary, Speakeasy
Gaming of Reno, Inc., consummated the purchase on May 5, 1998 of the Reno Ramada
in Reno for $8 million (the "Reno Property", collectively with the Las Vegas
Property, the "Nevada Properties"). The transaction was an asset purchase for
cash, and the Reno Property is 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 a franchise agreement for the Reno Property with
Ramada Franchise Systems, Inc.
DESCRIPTION OF THE RENO PROPERTY. The Company purchased the Reno Ramada
Hotel from Reno Hotel LLC, an affiliate of the Company's lender, for $8 million
in a negotiated transaction. The Reno Property was used as a hotel by the
previous owner prior to its purchase by the Company. 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 call for 350 slot machines, three
blackjack tables, a roulette wheel, and a craps table. The Reno Property
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.
DESCRIPTION OF THE LAS VEGAS PROPERTY. The Company purchased the Las Vegas
Property from Banter, Inc. for $5.5 million. The Las Vegas Property 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 Las Vegas
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. The Company plans to construct an
addition of approximately 15,000 square feet to house a casino. 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
7
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
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 has been advised by the City of North Las Vegas that
approval of its current construction plans will require the Company to acquire
from a third party an adjacent parcel of approximately 1/2 acre. The Company is
negotiating the purchase of the parcel for approximately $120,000 and believes
it can complete construction within 120 days after receipt of all necessary
governmental approvals.
FINANCING OF THE ACQUISITIONS. The Company financed the acquisition of the
Reno Property and the Las Vegas Property 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 Property; (ii) $3,765,000 toward the purchase of the Las Vegas
Property; 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 Las Vegas 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 Las Vegas 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 (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 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" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, gaming regulation and licensing,
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, obtaining building permits in the State of Nevada, consummation of
the purchase of a 1/2 acre parcel adjacent to the Las Vegas Property, 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 and other risks detailed in the Company's Securities and
Exchange Commission filings.
RESULTS OF OPERATIONS
The Company earned revenues for the respective six month and three month
periods in 1998 and 1997 as shown below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
OPERATING REVENUES
Video lottery operations........ $ 15,505,000 $ 12,732,000 $ 29,473,000 $ 22,785,000
Parimutuel commissions.......... 1,119,000 1,197,000 2,361,000 2,246,000
Lodging, food and beverage...... 1,802,000 1,371,000 3,140,000 2,314,000
Other revenues.................. 420,000 297,000 642,000 494,000
------------- ------------- ------------- -------------
Total Revenues $ 18,926,000 $ 15,597,000 $ 35,616,000 $ 27,839,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The Company's subsidiary, Mountaineer Park, has exhibited steady, pronounced
revenue growth under the expansion plan, which began in 1994, centered around
video lottery operations. The emergence of video lottery operations as
Mountaineer Park's dominant profit center and the 1996 amendment of the West
Virginia video lottery law (the "Lottery Law") to 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 $1,829,000 profit from continuing operations for the second
quarter of 1998 and $3,104,000 profit from continuing operations for the six
months ending June 30, 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. Since the end of the
second quarter of 1998, one hundred VLTs were moved from the racetrack building
to the lodge. Along with these one hundred machines, the company leased two
hundred additional
9
machines. These three hundred machines are currently located in the new 12,000
square foot lodge addition, which opened July 1, 1998. As of July 2, 1998, the
lodge has 800 VLTs and the racetrack has 400 VLTs for a total of 1,200 VLTs at
Mountaineer Park. See "Liquidity and Sources of Capital--Capital Improvements."
The Company, through its newly formed, wholly owned subsidiary, Speakeasy
Gaming of Reno, Inc., consummated the purchase on May 5, 1998 of the Reno
Property for $8 million. The transaction was an asset purchase for cash, and the
Reno Property is 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 a franchise agreement for the reno Property with Ramada Franchise
Systems, Inc.
The Company through its newly formed, wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc., consummated the purchase on May 5, 1998 of the Las
Vegas Property for $5.5 million. The transaction was an asset purchase for cash,
and the Las Vegas Property is qualified for unrestricted casino gaming upon
licensing of a casino operator pursuant to "grandfather" provisions of
applicable state and municipal law. 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 a franchise agreement for the Las Vegas Property
with Ramada Franchise Systems, Inc.
The profitability of the Nevada Properties will be directly related to
whether and when the Company obtains all necessary Nevada gaming approvals. The
Company has been advised that the licensing process may take approximately a
year to complete, and that there can be no assurance that the Company will
obtain such licenses. The Company does not believe that delays in the licensing
process would have a material adverse effect on its current cash flow.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total revenues increased from $15.6 million in the second quarter of 1997 to
$18.9 million in 1998, an increase of 21%. Approximately $2.8 million of the
increase was produced by video lottery operations, while the parimutuel
commissions and lodging, food, beverage and other operations at Mountaineer Park
contributed approximately $500,000 of additional revenues. Management believes
the increase resulted primarily from increased patronage resulting from the
Company's expanded advertising activities, greater familiarity of customers with
Mountaineer Park's gaming machines and other enhanced facilities, and the
increase in parimutuel purse size. The Nevada Properties contributed $283,000 in
lodging, food and beverage revenues in the quarter ended June 30, 1998.
VIDEO LOTTERY OPERATIONS. The Company, through Mountaineer Park, has
operated VLTs in West Virginia since December 1992; operations were conducted
under a provisional license until September 1994. The Lottery Law (the "Lottery
Law"), signed in March 1994, allowed the uninterrupted continuation of video
lottery games at Mountaineer Park, 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 Park replaced 350 Card Terminals with
Slot Terminals. In October of 1996, Mountaineer Park converted an additional 50
Card Terminals to Slot Terminals. In March of 1997, Mountaineer Park 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. In July of 1998,
10
having obtained the Lottery Commission's approval to increase the facility's
number of VLTs from 1,000 to 1,200, Mountaineer Park increased the number of
VLTs in the Lodge from 500 to 800 by installing 200 new VLTs and moving 100 VLTs
from the racetrack. Accordingly, at August 11, 1998, Mountaineer Park operates
800 VLTs at the Lodge and 400 at the racetrack. 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
June 30, 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 Mountaineer Park's
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. In July 1998, Mountaineer Park completed a 12,000 square foot
addition to the Speakeasy Gaming Saloon to house additional VLTs and enlarge
dining and entertaining facilities. For the three months ended June 30, 1998,
average daily net win for VLTs placed at the racetrack was $72 (including $0 for
days when there was no live racing), compared to $268 on the Lodge-based
terminals for a facility-wide average of $170 per VLT per day. Management
believes that the increase from 500 to 800 VLTs at the lodge will result in a
higher overall net win for the facility. 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 wagers less patron payouts ("net win")
for the three months ended June 30, 1998 and 1997 is as follows:
THREE MONTHS ENDED
JUNE 30
----------------------------
1998 1997
------------- -------------
Total gross wagers............................................. $ 55,848,000 $ 44,408,000
Less patron payouts............................................ $ 40,343,000 $ 31,676,000
------------- -------------
Revenue--video lottery operations.............................. $ 15,505,000 $ 12,732,000
------------- -------------
Average daily net win per terminal............................. $ 170 $ 140
------------- -------------
------------- -------------
Revenues from video lottery operations increased by 22% from $12.7 million
in the second quarter of 1997 to $15.5 million in 1998. Management believes the
increase resulted primarily from increased patronage resulting from the
Company's expanded advertising activities, greater familiarity of customers with
the Company's gaming machines, other enhanced facilities and the increase in
parimutuel purse size.
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
11
wagered. Mountaineer Park's parimutuel commissions for the three months ended
June 30, 1998 and 1997 are summarized below:
THREE MONTHS ENDED
JUNE 30
----------------------------
1998 1997
------------- -------------
Simulcast racing parimutuel handle.............................. $ 5,809,000 $ 5,366,000
Live racing parimutuel handle................................... 5,547,000 5,818,000
Less patrons' winning tickets................................... (9,048,000) (8,868,000)
------------- -------------
2,308,000 2,316,000
Less:
State and county parimutuel tax................................. (118,000) (134,000)
Purses and Horsemen's Association............................... (991,000) (985,000)
------------- -------------
Revenues--parimutuel commissions................................ $ 1,199,000 1,197,000
Management believes these changes resulted primarily from increased video
lottery attendance, cross-marketing from such activity, and completing 51 of the
210 annually required racing days in the second quarter of 1998 compared to 65
days in the same period in 1997. For live racing, Mountaineer Park paid average
daily purses of $61,800 in the three months ended June 30, 1998, a 43% increase
over the $43,300 average daily live purses in the corresponding period of 1997,
and sponsored stakes races of up to $25,000 in the three months ended June 30,
1998 and in the corresponding period in 1997. Management believes that periodic
increases in average daily purses and purses for stakes races will attract
higher quality racehorses. Management believes that over time such increases and
improvements should lead to increased live racing handle, or alternatively
smaller decreases. Management also believes that the enhanced quality of
racehorses should improve the Company's prospects in export simulcasting.
Commencement of export simulcasting activity would not only create a new source
of revenue but the anticipated related increase in gross dollars wagered on the
Company's live races should also generate increases in live handle (as a greater
and more diverse wagering pool lessens the impact a particular wager will have
on the pay-off odds). Management intends to continue its policy of increasing
average daily purses 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 reduced the
minimum number of annually required racing days from 220 to 210 commencing in
1998. Additionally, the bill specified procedures which allow further reductions
in the required number of live race days if certain conditions exist, subject to
approval by the State Racing Commission. The Company believes that the reduction
in the number of racing days required will reduce the direct costs of its racing
operations.
FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging revenues
at Mountaineer Park accounted for a combined increase of 31% to $1.8 million for
the three months ended June 30, 1998. Restaurant, bar and concession facilities
produced $136,000 of the revenue increase, while lodge revenues increased
$295,000. Food and beverage operations accounted for approximately 67% and 78%
of the revenues earned by this profit center in the second 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 with respect to Mountaineer Park has generally
remained constant, reflecting that Mountaineer Park has historically drawn more
day traffic than overnight stays. The Company's Nevada Properties contributed
additional lodging, food and beverage revenues of $283,000 in the quarter ended
June 30, 1998.
12
OTHER OPERATING REVENUE. 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 enhance the entertainment experience for Mountaineer Park's gaming
patrons. Such other revenues increased by $123,000 or 41% to $420,000 for the
three-month period ended June 30, 1998 compared to the same period in 1997.
COSTS AND EXPENSES. Operating costs and gross profits earned from
operations for the three-month periods ended June 30, 1998 and 1997 are as
follows:
THREE MONTHS ENDED
JUNE 30
----------------------------
1998 1997
------------- -------------
Operating Costs
Video lottery operations....................................... $ 9,040,000 $ 7,907,000
Parimutuel commissions......................................... 1,252,000 1,509,000
Lodging, food and beverage..................................... 1,304,000 1,212,000
Other revenues................................................. 49,000 280,000
------------- -------------
Total Operating Costs...................................... $ 11,645,000 $ 10,908,000
------------- -------------
------------- -------------
Gross profit (Loss)
Video lottery operations....................................... $ 6,465,000 $ 4,825,000
Parimutuel commissions......................................... (53,000) (312,000)
Lodging, food and beverage..................................... 498,000 159,000
Other revenues................................................. 371,000 17,000
------------- -------------
Total Gross Profit......................................... $ 7,281,000 $ 4,689,000
------------- -------------
------------- -------------
Mountaineer's 21% increase in revenues resulting from the expanded scope of
entertainment offerings resulted in higher total costs, as expenses increased by
7% to $11.6 million in the first quarter of 1998. Approximately $1.1 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 experienced a 42% increase in marketing and promotions expense, a 74%
increase in general and administrative expenses, and a 52% 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 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 $4.7 million for
the second quarter of 1997 to $7.3 million for the same period in 1998.
VLTS OPERATING COSTS. Costs of video lottery revenue increased by $1.1
million or 14% from $7.9 million for the three months ended June 30, 1997, to
$9.0 million for the three months ended June 30, 1998, primarily reflecting an
increase in statutory expenses. Additional expenses were incurred in connection
with video lottery, housekeeping and security personnel.
13
After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer is obligated to make payments from the remaining video lottery
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%, Veteran Memorial 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 to bank
accounts administered by Mountaineer for the sole benefit of horse owners who
race at Mountaineer. These funds are used exclusively to pay purses for
thoroughbred races run at Mountaineer, in amounts determined by Mountaineer 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 Video Lottery Terminals in the Consolidated Statement of Operations.
Statutory costs and assessments, including the State Administrative Fee, for
the respective three month periods are as follows:
THREE MONTHS ENDED
JUNE 30
--------------------------
1998 1997
------------ ------------
Employee Pension Fund............................................. $ 77,000 $ 64,000
Horsemen's Purse Fund............................................. 2,429,000 1,962,000
------------ ------------
SUBTOTAL.......................................................... $ 2,506,000 $ 2,026,000
State of West Virginia............................................ $ 4,538,000 $ 3,871,000
Tourism Promotion Fund............................................ 470,000 379,000
Hancock County.................................................... 314,000 253,000
Stakes Races...................................................... 157,000 126,000
Veteran's Memorial................................................ 157,000 126,000
------------ ------------
TOTAL............................................................. $ 8,142,000 $ 6,781,000
------------ ------------
------------ ------------
The remaining significant expenses allocated to video lottery operations
consist of VLT lease expense ($266,000 in the second quarter of 1998 and the
second quarter of 1997), direct and indirect wages and employee benefits
($261,000 in the second quarter of 1998, compared to $221,000 in the second
quarter of 1997), and utilities, property tax, waste and sewage disposal and
insurance ($52,000 in the second quarter of 1998 versus $69,000 in the second
quarter of 1997). Mountaineer Park'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 Park. 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. The Company believes that such a system would reduce
significantly Mountaineer Park's waste and sewage disposal costs.
Wages and benefits expense increased from the second quarter of 1997 to the
second quarter of 1998 in response to higher levels of patron play.
PARIMUTUEL COMMISSIONS OPERATING COSTS. Costs (the individual components of
which are detailed below) of parimutuel commission revenue decreased by
$257,000, or 17%, from $1.5 million in the first quarter of 1997, to $1.3
million in the second quarter of 1998. Purse expense (consisting of statutorily
determined percentages of live racing handle) decreased 5% to $540,000 in the
second quarter of 1998, which is consistent with the decrease in live handle and
the reduction of 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
14
live racing increased $26,000 to $339,000 in the second quarter of 1998
consistent with the 8% increase in simulcasting wagers. Parimutuel commissions
revenue is reported net of these expenses in the Consolidated Statement of
Operations.
Totalisator and other lease expenses remained stable at approximately
$113,000 in the second quarters of 1998 and 1997. Direct and indirect wages and
employee benefits attributable to racing operations decreased ($96,000) to
$655,000 in the three months ended June 30, 1998. The number of live race
performances decreased by 14 days in 1998 to 51 days as compared to the same
period in 1997.
Other costs of parimutuel commissions revenue increased in the aggregate by
approximately $76,000 in the second quarter of 1998 from $535,000 in the second
quarter of 1997 (primarily as a result of allocation of overhead items including
advertising, personnel and professional fees as determined by management).
Mountaineer Park's labor agreement with approximately 50 mutual 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 $92,000 from $1.2
million in the second quarter of 1997 to $1.3 million in the second quarter of
1998. Direct expenses of the Company's food and beverage operations increased by
27% from $720,000 in 1997 to $913,000 for the same period in 1998. Additionally
the Nevada Properties' food, beverage and lodging operating cost in the second
quarter of 1998 were $218,000.
Lodging direct costs totaled $391,000 for the second quarter of 1998 as
opposed to $318,000 in 1997. This increase resulted primarily from an increase
in the cost of the lodge's waste and sewage disposal of $29,000 in 1998. Also
lodge wages and employee benefits increased by $25,000 in 1998. This increase
was caused by an increase in service personnel in these areas. See "VLTs
Operating Costs".
COSTS OF OTHER OPERATING REVENUES. Costs of other revenues consisting
primarily of non-core businesses such as racing programs, golf, tennis and
swimming decreased by $231,000 from $280,000 in the second quarter of 1997 to
$49,000 in the second quarter of 1998.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at Mountaineer Park
increased by 42% from $777,000 for the second quarter of 1997 to $1.1 million
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 Park. In the first six
months of 1997 and 1998, Mountaineer Park's marketing and promotion costs were
defrayed by a state grant in the amount of approximately $330,000 from a
convention and visitors bureau of which Mountaineer Park is a member. The
Company has been granted an additional $320,000 to be received in the last six
months of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST. The Company's general
and administrative expense increased by $1.1 million to $2.6 million, from $1.5
million for the three months ended June 30, 1998 as compared to the three months
ended June 30, 1997. Such increase resulted primarily from an increase in
acquisition costs by $456,000, service personnel (by $351,000) and professional
fees by 51,000.
15
In the second quarter of 1998, the Company incurred $1 million of interest
expense as compared with $762,000 of interest expense in the second quarter of
1997. $112,000 of the increase is attributable to the Company's increased
borrowing in connection with the acquisition of the Nevada Properties.
Depreciation and amortization costs increased 52% from $546,000 in the
second quarter of 1997 to $829,000 in the second quarter of 1998, reflecting
increased capitalization of improvements completed at Mountaineer Park's
facilities.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total revenues increased from $27.8 million in the first two quarters of
1997 to $35.6 million in 1998, an increase of $7.8 million or 28%. Of this
increase, 86%, or $6.7 million can be attributed to the video lottery
operations. Parimutuel commissions increased by $115,000 for the six months
ended June 30, 1998. Food, beverage, lodging and other operations contributed
$974,000 of increased revenues for this period. Management believes the increase
resulted primarily from increased patronage resulting from the Company's
expanded advertising activities, greater familiarity of customers with
Mountaineer Park's gaming machines, other enhanced facilities, and the increase
in parimutuel purse size.
VIDEO LOTTERY OPERATIONS. A summary of the video lottery gross wagers less
patron payouts ("net win") for the six months ended June 30, 1998 and 1997 is as
follows:
SIX MONTHS ENDED JUNE 30
------------------------------
1998 1997
-------------- --------------
Total gross wagers........................................... $ 105,436,000 $ 79,170,000
Less patron payouts.......................................... (75,963,000) (56,385,000)
-------------- --------------
Revenues--video lottery operations........................... $ 29,473,000 $ 22,785,000
-------------- --------------
-------------- --------------
Average daily net win per terminal........................... $ 163 $ 136
-------------- --------------
-------------- --------------
Revenues from video lottery operations increased by 29% from $22.8 million
in the first six months of 1997 to $29.5 million in 1998. Management attributes
the increase to the following factors: extensive advertising, featuring a 30
minute infomercial broadcast on television affiliates within a two hour driving
radius and greater familiarity of customers with the Company's gaming machines,
other enhanced facilities and the increase in parimutuel purse size.
PARIMUTUEL COMMISSIONS. Mountaineer's parimutuel commissions for the six
months ended June 30, 1998 and 1997 are summarized below:
SIX MONTHS ENDED JUNE 30
------------------------------
1998 1997
-------------- --------------
Simulcast racing parimutuel handle............................ $ 11,495,000 $ 10,801,000
Live racing parimutuel handle................................. 10,453,000 9,979,000
Less patrons' winning tickets............................... (17,423,000) (16,462,000)
-------------- --------------
4,525,000 4,318,000
Less
State and county parimutuel tax............................. (243,000) (253,000)
Purses and Horsemen's Association........................... (1,921,000) (1,819,000)
-------------- --------------
Revenues--parimutuel commissions.............................. $ 2,361,000 $ 2,246,000
-------------- --------------
-------------- --------------
16
Simulcast handle in the first six months of 1998 increased 6.4% to $11.5
million in comparison to the same period in 1997. Live racing handle increased
by 5% from $10.0 million in 1997 to $10.5 million in 1998. These increases
resulted from increased video lottery attendance and cross-marketing from such
activity. Mountaineer has completed 103 days of the annually required 210 days
in the first half of 1998 compared to 115 days in 1997.
Mountaineer paid average daily live purses of $57,900 in the first six
months of 1998, a 38% increase over the $42,000 average for the corresponding
period of 1997. Mountaineer also sponsored stakes races of up to $25,000 as
compared with $20,000 in 1997.
FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging revenues
accounted for a combined increase of 36% to $3,140,000 for the six months ended
June 30, 1998. Restaurant, bar and concession facilities produced $450,000 of
the revenue increase, which is a 26% increase over the first six months of 1997.
Lodging revenues increased $375,000 for a 16% increase over the same period in
1997. Of the increase in lodging revenues, $279,000 can be attributed to the
Nevada Properties acquired in May, 1998. As additional services are offered to
the Nevada Properties' customers, the revenues from these two properties should
increase significantly. 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 for the West Virignia property has
generally remained constant, reflecting that Mountaineer Park has historically
drawn more day traffic than overnight stays.
OTHER OPERATING REVENUE. Other sources of revenues increased by $148,000 to
$642,000 for the six month period ended June 30, 1998 compared to the same
period in 1997. Other operating revenues are primarily derived from the sale of
racing programs and admission fees relating to Mountaineer's periodic boxing and
concert events. Concert ticket sales accounted for $91,000 of other operating
revenues for the six months ended June 30, 1998 in comparison to $21,000 in
1997.
COSTS AND EXPENSES. Operating costs and gross profit earned from operations
for the six month periods ended June 30, 1998 and 1997 are as follows:
SIX MONTHS ENDED JUNE 30
----------------------------
1998 1997
------------- -------------
Operating Costs:
Video lottery operations..................................... $ 17,852,000 $ 14,305,000
Pari-mutuel commissions...................................... 2,689,000 2,791,000
Lodging, food and beverage................................... 2,555,000 2,049,000
Other revenues............................................... 229,000 563,000
------------- -------------
Total Operating Costs...................................... $ 23,325,000 $ 19,708,000
------------- -------------
------------- -------------
Gross Profit (Loss)
Video lottery operations..................................... $ 11,621,000 $ 8,480,000
Pari-mutuel commissions...................................... (328,000) (545,000)
Lodging, food and beverage................................... 585,000 265,000
Other revenues............................................... 413,000 (69,000)
------------- -------------
$ 12,291,000 $ 8,131,000
------------- -------------
------------- -------------
Mountaineer's 28% increase in revenues resulted in higher total costs, as
expenses increased by 18% to $23.3 million in the first half of 1998. Gross
profit from the Company's four profit centers increased by 51% from the $8.1
million for the first two quarters of 1997 to $12.3 million for the same period
in 1998.
17
VIDEO LOTTERY OPERATING COSTS. Costs of VLTs increased by $3.5 million, or
25%, to $17.9 million for the six months ended June 30, 1998, reflecting the
increase in statutory expenses directly related to the 29% increase in video
lottery revenues.
Statutory costs and assessments, including the State Administrative Fee, for
the respective six month periods are as follows:
SIX MONTHS ENDED JUNE 30
----------------------------
1998 1997
------------- -------------
Employees Pension Fund......................................... $ 145,000 $ 112,000
Horsemen's Purse Fund.......................................... 4,507,000 3,458,000
------------- -------------
Subtotal....................................................... $ 4,652,000 $ 3,570,000
State of West Virginia......................................... 9,120,000 7,167,000
Tourism Promotion Fund......................................... 872,000 669,000
Hancock County................................................. 582,000 446,000
Stakes Races................................................... 291,000 223,000
Veteran's Memorial............................................. 291,000 223,000
------------- -------------
$ 15,808,000 $ 12,298.000
------------- -------------
------------- -------------
The remaining significant expenses of the Company with respect to its video
lottery operations consist of VLT lease expense incurred ($621,000 in the first
half of 1998 compared to $586,000 in 1997), and utilities and waste removal
expense allocated ($292,000 in the first half of 1998 compared to $286,000 in
1997). Direct and indirect wages and employee benefits increased by 22% to
$726,000 for the first six months of 1998.
Wages and benefits expense increased from 1997 to 1998 in response to higher
levels of patron play and patron volume. Management believes these costs will
increase in future quarters due to the addition to the lodge and the growth of
customer volume.
PARIMUTUEL COMMISSIONS OPERATING COSTS. Costs of parimutuel commissions
decreased by $102,000 or 4%, from $2.8 million in the first two quarters of 1997
to $2.7 million in the first two quarters of 1998. Purse expense (consisting of
statutorily determined percentages of live racing handle) rose 5% to $1 million
in the first half of 1998, which is consistent with the 5% 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 $47,000 to
$787,000 in the first half of 1998, which is consistent with the 6.4% increase
in simulcasting wagering. Parimutuel commissions revenue is reported net of
these expenses in the Consolidated Statement of Operations.
Totalisator and other lease expenses remained stable at approximately
$226,000 in the first two quarters of 1998 and 1997. Wages and benefits relating
to the Company's racing operations decreased $108,000 or 8% to $1,292,000 in the
six months ended June 30, 1998. the number of live race performances decreased
by 12 days in 1998 to 103 days as compared to 115 days in 1997.
FOOD, BEVERAGE AND LODGING OPERATING COSTS. Operating costs of the
Company's lodging, food and beverage operations increased by 25% to $2,255,000
in the first six months of 1998. Direct expenses of the Company's food and
beverage operations increased by 31% from $1.3 million in 1997 to $1.7 million
for the same period in 1998. The food and beverage operation earned a gross
profit of $438,000, a decrease of 7%, in the first six months of 1998, compared
to $473,000 in 1997.
Lodging direct costs totaled $831,000 for the first six months of 1998 as
opposed to $575,000 in 1997. Of this amount, $215,000 was generated by the
Nevada Properties purchased in May 1998. The remaining
18
$616,000 of direct cost is attributed to the West Virginia facility. Lodge wages
and employee benefits increased by $40,000 in 1998. This increase was caused by
an increase in service personnel in these areas.
COSTS OF OTHER OPERATING REVENUES. Costs of other revenues decreased by
$334,000 from $563,000 for the six months ended June 30, 1997 to $229,000 for
the six months ended June 30, 1998, due in part to the closure of the tennis
courts and one of the swimming pools.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at the Company's
Mountaineer operation increased 32% from $1.4 million for the first half of 1997
to $1.8 million for the same period in 1998. In 1996, management started an
aggressive regional marketing campaign centered on its 30-minute infomercial
broadcasts throughout portions of a two hour driving radius of Mountaineer. In
the first six months of 1997 and 1998, Mountaineer's marketing and promotions
costs were defrayed by a state grant in the amount of approximately $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 the last six
months of 1998.
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES. General and
administrative expense increased by $1.7 million to $4.3 million, or 65%, from
$2.6 million for the six month periods ended June 30, 1998 and 1997,
respectively. Such increase resulted primarily from an increase in acquisition
costs, service personnel and professional fees.
In the first two quarters of 1998, the Company incurred $1,822,000 of
interest expense as compared with $1,856,000 of interest expense in the first
two quarters of 1997. On May 6, 1998, the Third Amended and Restated Term Loan
Agreement was entered into to finance the acquisition and improvement of the
Nevada Properties. This increased the loan amount to $33,391,500, which caused
an increase in interest expense for the first six months of 1998 of $112,000.
See "Nevada Properties." Interest expense for the six months ended June 30, 1998
decreased as compared with the six months ended June 30, 1997, notwithstanding
the increase in the outstanding loan amount, as a result of deferred financing
costs recorded in the first six months of 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased by 56%, or $556,000 to $1.6 million for the six months ended
June 30, 1998. This increase reflects the 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 1997 and $1.2 million with
respect to the parking lots completed subsequent to the first quarter of 1997.
CASH FLOWS
The Company's operations produced $4,064,000 in cash flow in the six months
ended June 30, 1998, compared to $3,053,000 produced in the first three months
of 1997. Current year noncash expenses include $1,553,000 of depreciation and
amortization and $231,000 for the amortization of deferred financing costs.
The Company invested $1.8 million in capital improvements for the West
Virginia property in the first half of 1998 versus $5.0 million in 1997. The
Company also invested $13.5 million with respect to the purchase of the Nevada
Properties.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of June 30, 1998 was $10,646,000
and its unrestricted cash balance was $7,997,000. Racing purses are paid from
funds contributed by the Company to bank accounts owned by the horse owners who
race at Mountaineer Park. At June 30, 1998, the balances in these accounts
exceeded purse obligations by $970,000. 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.
19
LONG-TERM DEBT AND LINE OF CREDIT REFINANCING. Effective July 2, 1997,
Mountaineer Park 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; (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 was payable over the
first year of the term (as of June 30, 1998, the Company paid the full amount of
this fee; (ii) to pay interest at the rate of 13% (compared to 12% on the $16.1
million term loan and 15% on the $5.4 million line of credit under the Amended
Term Loan Agreement); and (iii) to pay a call premium equal to 5% in the event
of prepayment during the first year of the term, declining to 3% during the
second year, 2% in the third year and 1% in the final year.
The Company, as guarantor, entered into the Third Amended and Restated Term
Loan Agreement, dated as of April 30, 1998, by and among Mountaineer Park, Inc.,
Speakeasy Gaming of Las Vegas, Inc., 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. This increased the loan amount to
$33,391,500, which caused an increase in interest expense for the first six
months of 1998 of $112,000.
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. 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 Lottery
Law (regarding number and location of video lottery terminals). The amendment,
which became effective in June 1998, permitted Mountaineer Park to change the
ratio of VLTs located in the Lodge versus the racetrack building from 1:1 to
2:1. The Lottery Commission unanimously approved Mountaineer Park's request to
increase the facility's total number of VLTs from 1000 to 1200 and to implement
the new 2:1 lodge/racetrack ratio by installing 200 new VLTs and moving 100 VLTs
form the racetrack to the lodge. Accordingly, Mountaineer Park now operates 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".
20
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. The Company intends to exercise this option to purchase
substantially all such 349 acres.
In February 1998, Mountaineer Park purchased from Realm, Inc. 350 acres in
Chester, West Virginia, located adjacent to Mountaineer Park's operations, for a
purchase price of $240,000, exclusive of brokerage fees and closing costs of
approximately $30,000. The Company has no current plans to develop this
unimproved property.
OUTSTANDING OPTIONS AND WARRANTS. As of June 30, 1998, there were
outstanding options and warrants to purchase 8,347,247 shares of the Company's
common stock below market price. Of this amount, 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 six months ended June 30, 1998 and 1997. If all such options
and warrants were exercised, the Company would receive proceeds of approximately
$12.8 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 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. The Company believes that
cash generated from operations, cash on hand, and lines of credit will be
sufficient to meet all of the Company's currently anticipated commitments and
contingencies.
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.
YEAR 2000. The Company has analyzed Year 2000 issues with its computer and
software advisors and has assessed the impact of Year 2000 issues on the
Company's operations. 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
21
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
June 30, 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 six months ended June
30, 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 or its assignee. There can be no
assurance, however, that such sale will be concluded.
NEVADA PROPERTIES
PURCHASE OF RENO PROPERTY. The Company, through its newly formed, wholly
owned subsidiary, Speakeasy Gaming of Reno, Inc., consummated the purchase on
May 5, 1998 of the Reno Property for $8 million. The transaction was an asset
purchase for cash, and the Reno Property is 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 a franchise agreement for the Reno Property with
Ramada Franchise Systems, Inc.
DESCRIPTION OF THE RENO PROPERTY. The Company purchased the Reno Property
from Reno Hotel LLC, an affiliate of the Company's lender, for $8 million in a
negotiated transaction. 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 call for 350 slot machines, three blackjack tables, a roulette
wheel, and a craps table. The Reno Property's casino 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.
PURCHASE OF THE LAS VEGAS PROPERTY. The Company through its newly formed,
wholly owned subsidiary, Speakeasy Gaming of Las Vegas, Inc., consummated the
purchase on May 5, 1998 of the Las Vegas Property for $5.5 million. The
transaction was an asset purchase for cash, and the Las Vegas Property is
qualified for unrestricted casino gaming upon licensing of a casino operator
pursuant to "grandfather" provisions of applicable state and municipal law. 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 a franchise
agreement for the Las Vegas Property with Ramada Franchise Systems, Inc.
DESCRIPTION OF THE LAS VEGAS PROPERTY. The Company purchased the Las Vegas
Property from Banter, Inc. for $5.5 million. The Las Vegas Property is a
131-room hotel consisting of one two-story building and one three-story building
located and 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 Las Vegas
Property is approximately five miles from the Las Vegas Motor Speedway and three
miles from Nellis Air Force Base. The hotel has a bar,
22
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. The Company plans
to construct an addition of approximately 15,000 square feet to house a casino.
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 has been advised by the City of North Las
Vegas that approval of its current construction plans will require the Company
to acquire from a third party an adjacent parcel of approximately 1/2 acre. The
Company is negotiating the purchase of the parcel for approximately $120,000 and
believes it can complete construction within 120 days after receipt of all
necessary governmental approvals.
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING. The Company, Speakeasy
Reno Las Vegas and Speakeasy Reno intend to apply as soon as practicable to the
authorities in the State of Nevada for all necessary permits and licenses
required for the Company to operate casinos at the Nevada Properties. The
Company is advised, however, that the licensing process may take approximately
one year to complete and that there can be no assurances that the Company will
obtain the necessary approvals. Until the Company obtains these approvals, it
will not be permitted to conduct gaming or participate in any gaming revenues
generated at the Nevada Properties. In the interim, the Company will operate the
hotels and restaurants and lease the casino areas to independent, licensed
casino operators as permitted by Nevada law.
FINANCING OF THE ACQUISITIONS. The Company financed the acquisition of the
Nevada Properties 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
Property; (ii) $3,765,000 toward the purchase of the Las Vegas Property; 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 Las Vegas
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 Las
Vegas Property and increases Mountaineer Park's line of credit by $5 million (up
to $1.5 million of which may be used for improvements at the Nevada Properties).
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 ( 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
construction line of credit.
ITEM 3.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
23
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 Form 10-K for the year ended
December 31, 1997.
SUBSEQUENT EVENTS
GEORGE JONES V. MOUNTAINEER PARK, INC. AND MTR GAMING GROUP, INC., Circuit
Court of Hancock County West Virginia, Civil Action No. 95-C-103G. On August 11,
1998, the parties executed a stipulation in this action dismissing all claims
against the Company with prejudice. Mountaineer Park, Inc. will continue as the
Defendant in this action.
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 Articles of Incorporation, as amended (1)
3.2 Amended and Restated Articles of Incorporation, filed as of October 18,
1996 (2)
3.3 Amended Bylaws of the Company (3)
27.1 Financial Data Schedule
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(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.
(a) Reports on Form 8-K.
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The Company filed the following Current Reports on Form 8-K during the
second quarter of 1998 and thereafter:
(1) A Current Report on Form 8-K was filed by the Company on May 20, 1998, (with
the earliest event reported dated May 5, 1998) reporting the following
items:
(i) purchase of the Reno Ramada Hotel in Reno, Nevada from Reno Hotel, LLC.;
(ii) purchase of the Cheyenne Hotel & Casino in North Las Vegas
(2) An amendment to the Current Report on Form 8-K ( referred to in Section (1
above) was filed by the Company on July 15, 1998 deleting the description of
the purchase of the Reno Ramada Hotel under Item 2 of such Form and
including such description under Item 5 of such Form.
II-2
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, 1998
By:/s/ Edson R. Arneault
------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND CHIEF
FINANCIAL OFFICER
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