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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 SEPTEMBER 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 (IRS Employer Identification
of 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
20,855,775
Outstanding at November 9, 1998
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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 September 30, 1998 and December 31, 1997...................... 3
Condensed and Consolidated Statements of Operations for the Three Months and Nine Months Ended September
30, 1998 and 1997........................................................................................ 4
Condensed and Consolidated Statements of Cash Flow for the Nine months Ended September 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......................................... 24
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-2
Item 6--Exhibits and Reports on Form 8-K................................................................... II-2
SIGNATURE PAGE
2
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 DEC. 31
1998 1997
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents........................................................ $ 11,013,000 $ 7,715,000
Restricted cash.................................................................. 173,000 188,000
Accounts receivable net of allowance
For doubtful accounts of $122,000.............................................. 527,000 431,000
Deferred financing costs......................................................... 1,271,000 1,617,000
Deferred income taxes............................................................ 2,550,000 2,550,000
Other current assets............................................................. 832,000 516,000
------------- -------------
Total current assets............................................................... 16,366,000 13,017,000
------------- -------------
Property:
Land............................................................................. 4,136,000 371,000
Building......................................................................... 25,651,000 19,014,000
Equipment and automobiles........................................................ 8,108,000 6,388,000
Furniture and fixtures........................................................... 5,849,000 3,131,000
Construction in progress......................................................... 1,850,000 258,000
------------- -------------
45,594,000 29,162,000
------------- -------------
Less accumulated depreciation.................................................... (8,463,000) (6,363,000)
------------- -------------
37,131,000 22,799,000
------------- -------------
Net assets of discontinued oil and gas activities.................................. 2,693,000 2,616,000
------------- -------------
Other assets:
Excess of cost of investments over net assets acquired, net of accumulated
amortization of $1,417,000 and $1,274,000...................................... 2,357,000 2,500,000
Note Receivable.................................................................... 461,000 0
Deposits and other................................................................. 629,000 102,000
------------- -------------
3,447,000 2,602,000
------------- -------------
$ 59,637,000 $ 41,034,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 516,000 $ 594,000
Other accrued liabilities........................................................ 1,542,000 2,465,000
Current portion of long-term debt................................................ 31,000 40,000
Current portion of deferred income taxes......................................... 133,000 133,000
------------- -------------
Total current liabilities.......................................................... 2,222,000 3,232,000
------------- -------------
Deferred income taxes, less current portion........................................ 1,097,000 1,130,000
------------- -------------
Long-term debt, less current portion............................................... 33,455,000 21,559,000
------------- -------------
Shareholders' equity:
Common stock..................................................................... 2,000 2,000
Paid in capital.................................................................. 36,122,000 35,326,000
Accumulated deficit.............................................................. (13,261,000) (20,215,000)
------------- -------------
Total shareholders' equity......................................................... 22,863,000 15,113,000
------------- -------------
$ 59,637,000 $ 41,034,000
------------- -------------
------------- -------------
3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues
Video lottery terminals............................................. $20,840,000 $14,400,000 $50,313,000 $37,185,000
Parimutuel commissions.............................................. 1,352,000 1,214,000 3,713,000 3,460,000
Food, beverage and lodging.......................................... 2,512,000 1,711,000 5,652,000 4,025,000
Other............................................................... 577,000 338,000 1,219,000 832,000
----------- ----------- ----------- -----------
Total revenues.................................................... 25,281,000 17,663,000 60,897,000 45,502,000
----------- ----------- ----------- -----------
Costs of revenue
Cost of video lottery terminals..................................... 12,249,000 8,894,000 30,101,000 23,199,000
Cost of parimutuel commissions...................................... 1,017,000 1,637,000 3,537,000 4,428,000
Cost of food, beverage and lodging.................................. 2,240,000 1,424,000 4,795,000 3,473,000
Cost of other revenues.............................................. 320,000 226,000 718,000 789,000
----------- ----------- ----------- -----------
Total cost of revenues............................................ 15,826,000 12,181,000 39,151,000 31,889,000
----------- ----------- ----------- -----------
Gross Profit.......................................................... 9,455,000 5,482,000 21,746,000 13,613,000
----------- ----------- ----------- -----------
Selling, general and administrative expenses:
Marketing and promotions............................................ 1,062,000 1,077,000 2,848,000 2,432,000
General and administrative.......................................... 2,696,000 1,131,000 6,948,000 3,716,000
Depreciation and amortization....................................... 683,000 591,000 2,243,000 1,588,000
----------- ----------- ----------- -----------
Total selling, general and administrative expenses................ 4,441,000 2,799,000 12,039,000 7,736,000
----------- ----------- ----------- -----------
Operating income...................................................... 5,014,000 2,683,000 9,707,000 5,877,000
----------- ----------- ----------- -----------
Interest income....................................................... 92,000 54,000 275,000 98,000
Interest expense...................................................... (1,233,000) (780,000) (3,055,000) (2,636,000)
----------- ----------- ----------- -----------
(1,141,000) (726,000) (2,780,000) (2,538,000)
----------- ----------- ----------- -----------
Income before benefit of income taxes................................. 3,873,000 1,957,000 6,927,000 3,339,000
Benefit for income taxes.............................................. (23,000) 224,000 27,000 290,000
----------- ----------- ----------- -----------
Net income............................................................ $ 3,850,000 2,181,000 6,954,000 3,629,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share.................................................. $ 0.18 $ 0.11 $ 0.34 $ 0.18
Net income per share assuming dilution................................ $ 0.16 $ 0.10 $ 0.29 $ 0.17
Weighted average number of shares outstanding:
Basic............................................................... 20,861,322 19,814,291 20,301,137 19,780,958
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted............................................................. 23,662,597 21,378,434 24,088,681 20,881,375
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
4
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1998 1997
-------------- -------------
Cash flows from operating activities:
Net income....................................................................... $ 6,954,000 $ 3,629,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred financing cost amortization........................................... 346,000 1,242,000
Depreciation and amortization.................................................. 2,243,000 1,568,000
Deferred income taxes.......................................................... (33,000) (354,000)
Changes in operating assets and liabilities
Accounts receivable net of allowance......................................... (96,000) --
Other current assets......................................................... (316,000) (292,000)
Accounts payable and accrued liabilities..................................... (1,001,000) (325,000)
-------------- -------------
Net cash provided by operating activities.......................................... 8,097,000 5,488,000
-------------- -------------
Cash flows from investing activities:
Restricted cash.................................................................. 15,000 (18,000)
Net assets from discontinued activities.......................................... (77,000) --
Settlement of prior acquisition costs............................................ -- (383,000)
Notes Receivable................................................................. (461,000)
Deposits and other............................................................... (527,000) (38,000)
Capital expenditures............................................................. (16,432,000) (5,125,000)
-------------- -------------
Net cash used in investing activities.............................................. (17,482,000) (5,564,000)
-------------- -------------
Cash flows used in financing activities
Principal payments............................................................... -- (1,106,000)
Proceed from excise of stock options............................................. 796,000
Loan proceeds.................................................................... 11,887,000 5,377,000
-------------- -------------
Cash provided by financing activities.............................................. 12,683,000 4,271,000
-------------- -------------
NET INCREASE (DECREASE) IN CASH.................................................... 3,298,000 4,195,000
Cash, Beginning of Period.......................................................... 7,715,000 4,226,000
-------------- -------------
Cash, End of Period................................................................ $ 11,013,000 $ 8,421,000
-------------- -------------
-------------- -------------
5
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included herein. Operating results for the nine months
ended September 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
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2--EQUITY TRANSACTIONS
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 at meetings of the Board of Directors, audit committee, and
shareholders.
During March 1998, the Company granted 950,000 options pursuant to its 1992
Employee Stock Option Plan to employees. The options were granted at an exercise
price of $2.41, the estimated fair market value of the Company's common stock at
the date of grant and vested immediately. Approximately 1,200,000 options
exercisable at a price of $2.00 per share granted under such plan had expired
unexercised in October 1997.
During August and September 1998, holders of previously-issued options to
purchase the Company's common stock exercised options to purchase a total of
1,006,380 shares at prices ranging from $.50 to $1.21875 per share by delivery
of cash, notes, and other common stock of the Company, resulting in a net
increase in the number of issued and outstanding shares of 840,273 for proceeds
(cash and notes) totaling $795,000 as well as the delivery of 166,107 shares of
the Company's common stock.
NOTE 3--INCOME TAXES
The benefit for income taxes recorded in the accompanying statements of
operations for the nine months ended September 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 September 30, 1998
the Company 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 September 30, 1998 the Company 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
6
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
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
Company 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, which has been renamed the Ramada Inn & Speedway
Casino, in North Las Vegas, Nevada (the "Las Vegas Property") for $5.5 million.
The transaction was an asset purchase for cash. The Company expects, during
November 1998, to apply for approval to operate casino gaming and, in the
interim, has leased the gaming area to Dynasty Games Distributing, a
non-affiliated, licensed casino operator. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company entered
into 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, Nevada which has been renamed the Ramada Inn & Speakeasy Casino, for $8
million (the "Reno Property", collectively with the Las Vegas Property, the
"Nevada Properties"). The transaction was an asset purchase for cash. The
Company expects, during November 1998, to apply for approval to operate casino
gaming and, in the interim, has leased the gaming area to Dynasty Games
Distributing, a non-affiliated, licensed casino operator. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company entered into a franchise agreement for the Reno Property with Ramada
Franchise Systems, Inc.
The Nevada Properties are qualified for nonrestricted casino gaming upon
licensing of a casino operator pursuant to "grandfather" provisions of
applicable state and municipal laws. Specifically, the Nevada Properties are
subject to legislation passed in 1991 by the Nevada Legislature which is
commonly referred to as the Resort Hotel Legislation. The key portions of this
legislation are found in Section 463.1605 of the Nevada Revised Statutes
("NRS"). NRS 463.1605 essentially provides that the Nevada Commission shall not
approve a nonrestricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel. A resort hotel is defined to include an establishment held out to the
public as a hotel with more than 200 rooms available for sleeping
accommodations, at least one bar with capacity for more than 30 patrons, and at
least one restaurant with capacity for more than 60 patrons. The Las Vegas
Property does not have 200 rooms and is therefore subject to the provisions of
NRS 463.1605. The Reno Property has more than 200 rooms so it is in compliance
with NRS 463.1605. A county, city or town may require resort hotels to meet
standards in addition to those required by NRS 463.1605 as a condition to
issuance of a gaming license by the particular county, city or town. The City of
Reno has by ordinance increased the room requirement for resort hotels to 300.
Therefore, the Reno Property does not conform to the 300 room City of Reno
requirement. The Las Vegas Property is exempt from NRS 463.1605 because this
location has held a non-restricted gaming license. The grandfathered exemption,
however, is only valid as to the Las Vegas Property until the earlier of the
commencement of gaming operations at that property or May, 1999. As to the Reno
Property, the Company is relying upon a January 22, 1998 determination by the
City of Reno that the property is grandfathered. The failure to keep the
grandfathered exemptions to NRS 463.1605 and the local regulations governing
resort hotels would have a materially adverse effect on the Company.
7
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
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 Company has also applied
for a liquor license for the Reno Property. The Reno Property has an 8,000
square foot casino area and a small convention facility. The Reno Property
recently underwent renovations of approximately $4 million prior to its
acquisition by the Company. 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 had 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 has commenced
construction of 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 acquired from a third party an
adjacent parcel of approximately 1/2 acre in order to increase the parking
capacity to 511 cars. The Company believes it can complete construction by
January of 1999.
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
8
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACQUISITIONS (CONTINUED)
(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 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, cyclical nature of business, limited public market and liquidity,
shares eligible for future sale, impact of anti-takeover measures, the Company's
common stock being subject to penny stock regulation and other risks detailed in
the Company's other Securities and Exchange Commission filings from time to
time.
RESULTS OF OPERATIONS
The Company earned revenues for the respective nine month and three month
periods in 1998 and 1997 as shown below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
OPERATING REVENUES
Video lottery operations............................... $20,840,000 $14,400,000 $50,313,000 $37,185,000
Parimutuel commissions................................. 1,352,000 1,214,000 3,713,000 3,460,000
Lodging, food and beverage............................. 2,512,000 1,711,000 5,652,000 4,025,000
Other revenues......................................... 577,000 338,000 1,219,000 832,000
----------- ----------- ----------- -----------
Total Revenues..................................... $25,281,000 $17,663,000 $60,897,000 $45,502,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 $3,850,000
profit from continuing operations for the third quarter of 1998 and $6,954,000
profit from continuing operations for the nine months
9
ending September 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 became 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. Terminals located in the
lodge's Speakeasy Gaming Saloon are more popular than those at the racetrack and
account for significantly more revenue. Beginning in July 1998, in accordance
with the new law and with the approval of the State Lottery Commission, the
Company increased the number of terminals from 1,000 to 1,200 (800 in the lodge
and Speakeasy Gaming Saloon; 400 at the racetrack) by relocating 100 terminals
from the racetrack and leasing 200 new "nickel" machines from Video Lottery
Concepts. See "Liquidity and Sources of Capital--Capital Improvements."
The Company anticipates that Mountaineer Park, particularly video lottery
operations, will continue to be the dominant factor in the Company's financial
condition. Ultimately, the profitability of the recently acquired 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, as evidenced by the fact that in the current
quarter, the Nevada Properties generated a net loss of only $489,000 despite
construction, interest charges, and lack of gaming operations.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Total revenues increased from $17.7 million in the third quarter of 1997 to
$25.3 million in 1998, an increase of 43%. Approximately $6.4 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 $1.2 million of additional revenues. The Nevada
Properties contributed $478,000 in lodging, food and beverage revenues in the
quarter ended September 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, 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 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, 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, as of September 30, 1998, Mountaineer Park operated 800 VLTs at the
Lodge and 400 at the racetrack. On November 1, 1998, the Company replaced its
last 200 Card Terminals with leased Slot Terminals. 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
September 30, 1998 and is still continuing, coupled with an extensive direct
mail campaign. In January of 1997, Mountaineer also began
10
broadcasting a 30-minute "infomercial" advertisement on television affiliates
within a two-hour driving radius.
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 September 30, 1998, average
daily net win for VLTs placed at the racetrack was $75 (including $0 for days
when there was no live racing), compared to $246 on the Lodge-based terminals
for a facility-wide average of $189 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 VLT revenues will
increase at the racetrack, the Company's primary focus is to expand its lodge
VLT 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 September 30, 1998 and 1997 is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
------------------------
1998 1997
----------- -----------
Total gross wagers........................................................................ $69,953,000 $49,265,000
Less patron payouts....................................................................... $49,113,000 $34,865,000
----------- -----------
Revenue--
video lottery operations.................................................................. $20,840,000 $14,400,000
----------- -----------
Average daily net win per terminal........................................................ $ 189 $ 157
----------- -----------
----------- -----------
Revenues from video lottery operations increased by 44% from $14.4 million
in the third quarter of 1997 to $20.8 million in 1998. Management believes the
increase resulted primarily from increased patronage resulting from the July
opening of the 12,000 square foot addition to the Speakeasy Gaming Saloon, the
increase in the number of gaming machines from 1,000 to 1,200 facility-wide and
from 500 to 800 in the Speakeasy, the introduction of "nickel" (versus quarter)
machines, cross marketing to patrons attending live concert and boxing events,
increased advertising and, to a lesser extent, the increase in parimutuel purse
size. Increased attendance for the purchase of tickets for the multi-state
"Power Ball" lottery game during periods of unusually high jackpots also
contributed to the increase in revenues, as Power Ball players participated in
Mountaineer Park's other offerings.
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
September 30, 1998 and 1997 are summarized below:
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1998 1997
-------------- -------------
Simulcast racing parimutuel handle............................. $ 6,011,000 $ 5,290,000
Live racing parimutuel handle.................................. 6,800,000 5,988,000
Less patrons' winning tickets.................................. (10,164,000) (8,940,000)
-------------- -------------
2,647,000 2,338,000
Less:
State and county parimutuel tax................................ (140,000) (131,000)
Purses and Horsemen's Association.............................. (1,155,000) (993,000)
-------------- -------------
Revenues--parimutuel commissions............................... $ 1,352,000 $ 1,214,000
With the same number of live racing days (61) conducted during the two
quarters being compared, parimutuel handle increased by $1,533,000, or
approximately 13.5%, and parimutuel revenue increased by $138,000, or 11.3%. At
the same time, daily purses for live racing during the third quarter of 1998
averaged $70,700, an increase of 44.5% over the $48,900 average daily purses
paid during the third quarter of 1997. During the third quarter of 1998,
Mountaineer Park also had larger stakes races. For the August 1998 running of
the West Virginia Derby, Mountaineer Park's race participants were paid $345,000
in a single day, with $200,000 funded by the State Racing Commission for the
feature race.
While management does not view the increases in handle and revenues as
significant (in comparison to the increases in purses), management continues to
believe that periodic increases in average daily purses and purses for stakes
races will attract higher quality racehorses. Management believes that over time
such increases and improvements should lead to increased live racing handle, or
alternatively smaller decreases. Management also believes that the enhanced
quality of racehorses should improve the Company's prospects in export
simulcasting. Commencement of export simulcasting activity would not only create
a new source of revenue but the anticipated related increase in gross dollars
wagered on the Company's live races should also generate increases in live
handle (as a greater and more diverse wagering pool lessens the impact a
particular wager will have on the pay-off odds). Management intends to continue
its policy of increasing average daily purses (though not necessarily in the
winter months) as well as sponsor substantially increased stakes races
attempting to develop an export simulcast business. Management does not expect
results from racing operations to improve materially, despite larger daily
purses, stakes races, better horses, and reduced costs, unless and until
Mountaineer Park also commences export simulcasting. 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 47% to $2.5 million for
the three months ended September 30, 1998. Restaurant, bar and concession
facilities produced $247,000 of the revenue increase, while lodge revenues
increased $554,000. Food and beverage operations accounted for approximately 67%
and 72% of the revenues earned by this profit center in the third 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
12
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 $478,000 in the quarter ended September 30, 1998, with 96%
of these revenues originating from lodge operations.
OTHER OPERATING REVENUE. Other sources of revenues consist primarily of
non-core businesses such as admission, programs, golf, special events, check
cashing and ATM services. 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. These other revenues increased by
$239,000 or 71% to $577,000 for the three-month period ended September 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 September 30, 1998 and 1997 are as
follows:
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1998 1997
------------- -------------
Operating Costs
Video lottery operations....................................... $ 12,249,000 $ 8,894,000
Parimutuel commissions......................................... 1,017,000 1,637,000
Lodging, food and beverage..................................... 2,240,000 1,424,000
Other revenues................................................. 320,000 226,000
------------- -------------
Total Operating Costs........................................ $ 15,826,000 $ 12,181,000
------------- -------------
------------- -------------
Gross profit (Loss)
Video lottery operations....................................... $ 8,591,000 $ 5,506,000
Parimutuel commissions......................................... 335,000 (423,000)
Lodging, food and beverage..................................... 272,000 287,000
Other revenues................................................. 257,000 112,000
------------- -------------
Total Gross Profit........................................... $ 9,455,000 $ 5,482,000
------------- -------------
------------- -------------
Mountaineer's 43% increase in revenues resulting from the expanded scope of
entertainment offerings resulted in higher total costs, as expenses increased by
30% to $15.8 million in the third quarter of 1998. Approximately $3.4 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 experienced a 1% decrease in marketing and promotions expense, a 138%
increase in general and administrative expenses, and a 16% increase in
depreciation and amortization. The increase in general and administrative
expenses, as in the second quarter of the current fiscal year, 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; (3) professional fees related to
financing and acquisition activity; and (4) the reallocation of general and
administrative costs (such as advertising, personnel, maintenance, housekeeping,
security and professional fees). These reallocations caused an increase of
$1,052,000 in the three months ending September 30, 1998 as compared to the
three months ending September 30, 1997. The Company is attempting to expand the
video lottery business, while attempting to reduce the losses of the parimutuel
business by increasing productivity, expanding marketing efforts in a more
cost-effective manner (in the current quarter, for example, by increasing
direct-mail versus print advertising), increasing purse sizes, attracting higher
quality jockeys and horses, and pursuing export simulcasting to increase
parimutuel wagering. See "Parimutuel Commissions." Gross profit from the
Company's four profit centers increased 72% from $5.5 million for the third
quarter of 1997 to $9.5 million for the same period in 1998.
13
VLTS OPERATING COSTS. Costs of video lottery revenue increased by $3.4
million or 38% from $8.9 million for the three months ended September 30, 1997,
to $12.3 million for the three months ended September 30, 1998, primarily
reflecting an increase in statutory expenses. Additional expenses were incurred
in connection with video lottery, housekeeping and security personnel.
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
SEPTEMBER 30
-----------------------
1998 1997
----------- ----------
Employee Pension Fund..................................................................... $ 102,000 $ 70,000
Horsemen's Purse Fund..................................................................... 3,163,000 2,183,000
----------- ----------
SUBTOTAL................................................................................ $ 3,265,000 $2,253,000
State of West Virginia.................................................................... $ 6,557,000 $4,545,000
Tourism Promotion Fund.................................................................... 612,000 423,000
Hancock County............................................................................ 408,000 282,000
Stakes Races.............................................................................. 204,000 141,000
Veteran's Memorial........................................................................ 204,000 141,000
----------- ----------
TOTAL................................................................................... $11,250,000 $7,785,000
----------- ----------
----------- ----------
The remaining significant expenses allocated to video lottery operations
consist of VLT lease expense ($326,000 in the third quarter of 1998 compared to
$266,000 in the third quarter of 1998 due to the leasing of 200 additional
machines in July of 1998), direct and indirect wages and employee benefits
($427,000 in the third quarter of 1998, compared to $352,000 in the third
quarter of 1997), and waste and sewage disposal ($29,000 in the third quarter of
1998 compared to $10,000 in the third 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 December 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 third quarter of 1997 to the third 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
$620,000, or 38%, from $1.6 million in the third quarter of 1997, to $1.0
million in the third quarter of 1998. Purse expense (consisting of statutorily
determined percentages of live racing handle) increased 15% to $675,000 in the
third quarter of 1998
14
(which does not include $200,000 funded by the State Racing Commission for the
West Virginia Derby), which is consistent with the 14% 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 $57,000 to
$417,000 in the third quarter of 1998 consistent with the 16% 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
$134,000 in the third quarters of 1998 compared to $120,000 in 1997. Direct and
indirect wages and employee benefits attributable to racing operations decreased
($69,000) to $716,000 in the three months ended September 30, 1998. The number
of live race performances remained the same at 61 days in 1998 as compared to
the same period in 1997.
Other costs of parimutuel commissions revenue decreased in the aggregate by
approximately $565,000 in the third quarter of 1998 from $732,000 in the third
quarter of 1997 primarily as a result of management's decision no longer to
attempt to allocate general and administrative costs (such as advertising,
personnel, maintenance, housekeeping, security and professional fees) among the
Company's individual profit centers.
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 $816,000 from $1.4
million in the third quarter of 1997 to $2.2 million in the third quarter of
1998. Direct expenses of the Company's food and beverage operations increased
from $1.3 million in the third quarter of 1997 to $1.4 million for the same
period in 1998. Additionally, the Nevada Properties' food, beverage and lodging
operating costs in the third quarter of 1998 were $450,000.
Lodging direct costs totaled $823,000 for the third quarter of 1998 as
opposed to $289,000 in 1997. Of this increase, $438,000 was generated by the
Nevada Properties purchased in May of 1998. The West Virginia facility accounted
for the remaining direct costs of $385,000. $96,000 of the increase in costs can
be attributed to increased costs of waste disposal ($34,000) and lodge wages and
employee benefits ($62,000) 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, gift shop, check
cashing and ATM services increased by $94,000 from $226,000 in the third quarter
of 1997 to $320,000 in the third quarter of 1998.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at Mountaineer Park
decreased approximately 1% to $1,062,000 in the third quarter of 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 third quarter of 1997 and 1998, Mountaineer
Park's marketing and promotion costs were defrayed by a state grant in the
amount of approximately $150,000 from a convention and visitors bureau of which
Mountaineer Park is a member.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST. The Company's general
and administrative expense increased by $1.6 million to $2.7 million, from $1.1
million for the three months ended September 30, 1998 as compared to the three
months ended September 30, 1997. Such increase resulted primarily from an
increase in acquisition costs (by $573,000 in 1998) and insurance expense (by
$53,000 in 1998). Also, the housekeeping (by $283,000 in 1998), maintenance (by
$458,000 in 1998), security (by $390,000 in 1998) and accounting (by $190,000 in
1998) are included in general and administrative. These departments
15
caused an increase in general and administrative expenses of $1,052,000 for the
third quarter of 1998 as compared to the same period in 1997.
In the third quarter of 1998, the Company incurred $1.2 million of interest
expense as compared with $780,000 of interest expense in the third quarter of
1997. This increase is attributable to the Company's increased borrowing in
connection with the acquisition of the Nevada Properties.
Depreciation and amortization costs increased 16% from $591,000 in the third
quarter of 1997 to $683,000 in the third quarter of 1998, reflecting increased
capitalization of improvements completed at Mountaineer Park's facilities.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Total revenues increased from $45.5 million in the first three quarters of
1997 to $60.9 million in 1998, an increase of $15.4 million or 34%. Of this
increase, 85%, or $13.1 million, can be attributed to the video lottery
operations. Parimutuel commissions increased by $253,000 for the nine months
ended September 30, 1998. Food, beverage, lodging and other operations
contributed $2.0 million of increased revenues for this period.
VIDEO LOTTERY OPERATIONS. A summary of the video lottery gross wagers less
patron payouts ("net win") for the nine months ended September 30, 1998 and 1997
is as follows:
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------- ------------
Total gross wagers........................................................................ $ 175,388,000 $128,435,000
Less patron payouts....................................................................... (125,075,000) (91,250,000)
------------- ------------
Revenues--video lottery operations........................................................ $ 50,313,000 $ 37,185,000
------------- ------------
------------- ------------
Average daily net win per terminal........................................................ $ 173 $ 144
------------- ------------
------------- ------------
Revenues from video lottery operations increased by 35% from $37.2 million
in the first nine months of 1997 to $50.3 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 an aggressive print and direct mail campaign, greater familiarity of
customers with the Company's gaming machines, the July 1998 opening of the
12,000 square foot addition to the Speakeasy Gaming Saloon, the increase from
1,000 to 1,200 machines, the implementation of the 2:1 lodge versus racetrack
machine ratio, and, to a lesser extent, the increase in parimutuel purse size.
16
PARIMUTUEL COMMISSIONS. Mountaineer's parimutuel commissions for the nine
months ended September 30, 1998 and 1997 are summarized below:
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1998 1997
-------------- --------------
Simulcast racing parimutuel handle............................ $ 17,506,000 $ 16,091,000
Live racing parimutuel handle................................. 17,253,000 15,967,000
Less patrons' winning tickets............................... (27,586,000) (25,402,000)
-------------- --------------
7,173,000 6,656,000
Less
State and county parimutuel tax............................. (384,000) (384,000)
Purses and Horsemen's Association........................... (3,076,000) (2,812,000)
-------------- --------------
Revenues--parimutuel commissions.............................. $ 3,713,000 $ 3,460,000
-------------- --------------
-------------- --------------
Simulcast handle in the first nine months of 1998 increased 8.8% to $17.5
million in comparison to the same period in 1997. Live racing handle increased
by 8.1% from $16.0 million in 1997 to $17.3 million in 1998. These increases
resulted from increased video lottery attendance and cross-marketing from such
activity. Mountaineer has completed 164 days of the annually required 210 days
in the first three quarters of 1998 compared to 176 days in 1997.
Mountaineer paid average daily live purses of $62,600 in the first nine
months of 1998, a 42% increase over the $44,000 average for the corresponding
period of 1997. Mountaineer also sponsored stakes races of up to $35,000 as
compared with $25,000 in 1997, and also hosted the West Virginia Derby which had
a $200,000 purse which was reimbursed to the Company by the West Virginia Racing
Commission.
FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging revenues
accounted for a combined increase of 40% to $5.7 million for the nine months
ended September 30, 1998. Restaurant, bar and concession facilities produced
$771,000 of the revenue increase, which is a 26% increase over the first nine
months of 1997. Lodging revenues increased $856,000 for an 86% increase over the
same period in 1997. Of the increase in lodging revenues, $736,000 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. The ratio of revenue from food and
beverage to revenue from lodging for the West Virginia 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 $387,000 to
$1.2 million for the nine month period ended September 30, 1998 compared to the
same period in 1997. Other operating revenues are primarily derived from the
sale of racing programs, check cashing and ATM services and admission fees
relating to Mountaineer's periodic boxing and concert events. Concert ticket
sales accounted for $159,000 of other operating revenues for the nine months
ended September 30, 1998 in comparison to $21,000 in 1997. Check cashing and ATM
services accounted for $255,000 of other operating revenues.
17
COSTS AND EXPENSES. Operating costs and gross profit earned from operations
for the nine month periods ended September 30, 1998 and 1997 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1998 1997
----------- -----------
Operating Costs:
Video lottery operations................................................................ $30,101,000 $23,199,000
Pari-mutuel commissions................................................................. 3,537,000 4,428,000
Lodging, food and beverage.............................................................. 4,795,000 3,473,000
Other revenues.......................................................................... 718,000 789,000
----------- -----------
Total Operating Costs................................................................. $39,151,000 $31,889,000
----------- -----------
----------- -----------
Gross Profit (Loss)
Video lottery operations................................................................ $20,212,000 $13,986,000
Pari-mutuel commissions................................................................. 176,000 (968,000)
Lodging, food and beverage.............................................................. 857,000 552,000
Other revenues.......................................................................... 501,000 43,000
----------- -----------
$21,746,000 $13,613,000
----------- -----------
----------- -----------
Mountaineer's 34% increase in revenues resulted in higher total costs, as
expenses increased by 23% to $39.2 million in the three quarters of 1998. Gross
profit from the Company's four profit centers increased by 60% from the $13.6
million for the first three quarters of 1997 to $21.7 million for the same
period in 1998.
VIDEO LOTTERY OPERATING COSTS. Costs of VLTs increased by $6.9 million, or
30%, to $30.1 million for the nine months ended September 30, 1998, reflecting
the increase in statutory expenses directly related to the 35% increase in video
lottery revenues.
Statutory costs and assessments, including the State Administrative Fee, for
the respective nine month periods are as follows:
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1998 1997
------------- -------------
Employees Pension Fund......................................... $ 247,000 $ 182,000
Horsemen's Purse Fund.......................................... 7,670,000 5,641,000
------------- -------------
Subtotal....................................................... $ 7,917,000 $ 5,823,000
State of West Virginia......................................... 15,677,000 11,712,000
Tourism Promotion Fund......................................... 1,484,000 1,092,000
Hancock County................................................. 990,000 728,000
Stakes Races................................................... 495,000 364,000
Veteran's Memorial............................................. 495,000 364,000
------------- -------------
$ 27,058,000 $ 20,083.000
------------- -------------
------------- -------------
The remaining significant expenses of the Company with respect to its video
lottery operations consist of VLT lease expense incurred ($947,000 in the first
three quarters of 1998 compared to $852,000 in 1997), and utilities and waste
removal expense allocated ($302,000 in the first three quarters of 1998 compared
to $342,000 in 1997). Direct and indirect wages and employee benefits increased
by 22% to $1,163,000 for the first nine months of 1998 compared to $959,000 for
the same period in 1997.
18
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 $891,000 or 20%, from $4.4 million in the first three quarters of
1997 to $3.5 million in the first three quarters of 1998. Purse expense
(consisting of statutorily determined percentages of live racing handle) rose 8%
to $1.7 million in the first three quarters of 1998, which is consistent with
the 8% 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 $105,000 to $1.2 million in the first three quarters of 1998,
which is consistent with the 9% 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
$536,000 in the first three quarters of 1998 and 1997. Wages and benefits
relating to the Company's racing operations decreased $202,000 or 9% to
$1,942,000 in the nine months ended September 30, 1998. The number of live race
performances decreased by 12 days in 1998 to 164 days as compared to 176 days in
1997.
FOOD, BEVERAGE AND LODGING OPERATING COSTS. Operating costs of the
Company's lodging, food and beverage operations increased by 38% to $4.8 million
in the first nine months of 1998. Direct expenses of the Company's food and
beverage operations increased by 19% from $2.6 million in 1997 to $3.1 million
for the same period in 1998. The food and beverage operation earned a gross
profit of $657,000, an increase of 59%, in the first nine months of 1998,
compared to $412,000 in 1997.
Lodging direct costs totaled $1.7 million for the first nine months of 1998
as opposed to $864,000 in 1997. Of this amount, $653,000 was generated by the
Nevada Properties purchased in May 1998. The remaining $1.1 million of direct
cost is attributed to the West Virginia facility. Lodge wages and employee
benefits increased by $106,000 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
$71,000 from $789,000 for the nine months ended September 30, 1997 to $718,000
for the nine months ended September 30, 1998.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at the Company's
Mountaineer operation increased 17% from $2.4 million for the first three
quarters of 1997 to $2.8 million for the same period in 1998. The increase is
attributable to the continued broadcasting of the Company's infomercial and
increased print and direct-mail advertising and prize give-aways. During the
first nine months of 1997, the Company's marketing and promotion costs were
defrayed by a state grant in the amount of $315,000 as compared with $398,000 in
the first nine months of 1998. The Company has received additional grant funds
of $159,000 in November 1998 and has been awarded an additional grant of
$334,000 for marketing expenses incurred and to be incurred from July through
December of 1998, which the Company anticipates will be funded in the fourth
quarter of 1998.
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES. General and
administrative expense increased by $3.2 million to $6.9 million, or 86%, from
$3.7 million for the nine month period ended September 30, 1998 and 1997,
respectively. Such increase resulted primarily from an increase in acquisition
costs, service personnel and professional fees and the inclusion of
housekeeping, security, accounting and maintenance costs rather than allocating
such costs among the Company's individual profit centers.
In the first three quarters of 1998, the Company incurred $3,055,000 of
interest expense as compared with $2,636,000 of interest expense in the first
three quarters of 1997 due to additional borrowing to finance the acquisition of
the Nevada Properties. See Note 4 to Condensed and Consolidated Financial
19
Statements. The increase in interest expense is not directly proportionate to
the increase in the outstanding loan amount as a result of deferred financing
costs recorded in the first nine months of 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased by 41%, or $655,000, to $2.2 million for the nine months
ended September 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 paving completed subsequent to the first quarter of 1997.
CASH FLOWS
The Company's net cash provided by operating activities in the nine months
ended September 30, 1998 was $8,097,000, compared to $5,488,000 provided in the
first nine months of 1997. The Company's net change in cash position, however,
was greater ($4,195,000) during the first nine months of 1997 than for the same
period in 1998 ($3,298,000), principally due to the Company's investment in the
Nevada Properties and the Speakeasy addition in West Virginia during 1998.
Current year noncash expenses include $2,243,000 of depreciation and
amortization and $346,000 for the amortization of deferred financing costs.
The Company invested $2.9 million in capital improvements for the West
Virginia property in the first three quarters of 1998 versus $5.1 million in
1997. The Company also invested $13.5 million with respect to the purchase of
the Nevada Properties.
In connection with the exercise of previously granted stock options to
purchase a total of 1,056,380 shares of the Company's common stock during the
first nine months of 1998, the Company received $335,000 in cash, a note for
$461,000, and 166,107 shares of previously issued common stock (which were
canceled and returned to authorized but unissued status) having a market value
at the time of delivery of approximately $280,300.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of September 30, 1998 was
$14,144,000 and its unrestricted cash balance was $11,013,000. Racing purses are
paid from funds contributed by the Company to bank accounts owned by the horse
owners who race at Mountaineer Park. At September 30, 1998, the balances in
these accounts exceeded purse obligations by $1,040,000. 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 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
20
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 and 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 September 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 nine
months of 1998 of $643,000.
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 commence in late 1999. The Company expects the cost of such expansion to be
approximately $7 to 8 million. 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,
expansion of administrative offices and a new telephone system. The Company also
intends to spend approximately $2 million to $2.5 million to develop export
simulcasting at Mountaineer Park during 1999.
The Company expects that expansion and renovation of the Las Vegas Property
will cost approximately $2 million, and that the renovation and redecoration of
the Reno Property will cost approximately $500,000. The Company has received the
necessary permits for construction at the Las Vegas Property and expects to
complete that construction early in the first quarter of 1999. See Note 4 to the
Condensed and Consolidated Financial Statements.
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 has extended this option until October 1,
1999 without additional cash consideration and intends to exercise it to
purchase substantially all such 349 acres.
In February 1998, Mountaineer Park purchased from Realm, Inc. 350 acres in
Chester, West Virginia, located adjacent to Mountaineer Park's operations, for a
purchase price of $240,000, exclusive of brokerage fees and closing costs of
approximately $30,000. The Company has no current plans to develop this
unimproved property.
On November 2, 1998, the Company's subsidiary, Speakeasy Gaming of Las
Vegas, Inc., purchased a one-half acre parcel adjacent to the Las Vegas Property
for the sum of $120,000. See "Subsequent Events."
OUTSTANDING OPTIONS AND WARRANTS. As of September 30, 1998, there were
outstanding options and warrants to purchase 7,590,867 shares of the Company's
common stock. Of this amount, warrants to purchase 1,757,813 shares are held by
the Company's lender whose exercise rights are subject to a contractual
ownership limitation not to exceed 5% of the Company's outstanding voting shares
without
21
prior approval of the West Virginia Lottery Commission. All but 70,000 of such
shares are either subject to registration rights or have been included in a
registration statement which the Company filed with the Securities and Exchange
Commission. See Note 2 to the Condensed and Consolidated Financial Statements.
If all such options and warrants were exercised, the Company would receive
proceeds of approximately $11.4 million. The Company expects that, subject to
shareholder approval, it will continue to grant options to its officers,
directors, and key employees.
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 employment agreements, consulting agreements,
operating leases, and the Company's pension plan and union contract. The Company
believes that it has the ability to meet all of its obligations under such
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 and will be sufficient to
fund its currently-planned projects during the next 12 months. The Company also
has commitments with respect to common stock registration rights.
On October 30, 1998, the Company's oil and gas subsidiary, ExCal Energy
Corporation ("ExCal") sold to SABAL Corp., a non-affiliate of the Company, its
remaining interests in Michigan. In connection with the transaction, ExCal (i)
received an Assignment of Production Payment in the amount of $2.5 million,
which bears interest at the rate of 3% per year, matures after a term of fifteen
years, and is convertible, at the election of ExCal, into up to 25% of the
equity of SABAL; and (ii) agreed to lend to SABAL up to $500,000 to be used
principally for the development of the project. The loan to SABAL bears interest
at the rate of 15% per year (interest only for the first six months) and is for
a term of two years. See "Subsequent Events."
YEAR 2000. The Company has analyzed year 2000 issues with its computer and
software advisors and has assessed the impact of Year 2000 issues on the
Company's operations. Manufacturer's documentation of Year 2000 compliance has
been reviewed during this assessment. All information technology items, both
software and hardware, are Year 2000 compliant except for one software package
being used by the Video Lottery Department. The one software package that is not
compliant is IGT's SAMS 3 System. This system is the central communication
package that allows communication between the IGT VLTs on site and the Lottery
Commission software in Charleston, West Virginia. The solution to this Year 2000
noncompliance must be agreed upon by all four West Virginia tracks. The Company
determined that it would be more economical to replace the current SAMS 3 System
than to modify it so that it is Year 2000 compliant because the system was no
longer sufficient to meet the Company's anticipated needs irrespective of the
Year 2000 issue and because a new system would generally enhance the Company's
competitive position in the industry. The final determination of the replacement
system has not been made at this time. The Company anticipates that the
selection of the new software will be made within the next six months. The cost
of the replacement system may range from $250,000 to $500,000 per track.
A non-information technology system that is not in Year 2000 compliance at
this time is the telephone system for the West Virginia property. This phone
system is no longer sufficient to meet the Company's needs in any event. A new
system has been contracted for and installation should be completed by December
31, 1998. The cost of this system is approximately $320,000. Other software and
hardware replacements completed in 1998 involved scheduled updating of systems
and were not accelerated due to the Year 2000 issue. The Company believes that
all of its other non-information systems are Year 2000 compliant. The Company
believes that there are currently no other material Year 2000 issues to be
disclosed.
22
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. The Company closed the sale of its remaining oil
and gas interests on October 30, 1998. See "Subsequent Events."
SUBSEQUENT EVENTS
DIVESTITURE OF OIL AND GAS INTERESTS. On October 30, 1998, the Company's
oil and gas subsidiary, ExCal Energy Corporation ("ExCal"), sold and transferred
to SABAL Corp., ("SABAL") all of its rights, title and interest in the joint
venture it had entered with Fleur-David corporation in December of 1992 with
respect to the Marathon-Otter Lake Field in Lapeer and Genesee Counties,
Michigan. Simultaneously, SABAL acquired Fleur-David's interest in the joint
venture as well as an adjacent gas processing plant, equipment and other
property from Tessenderlo-Kerley, Inc. ExCal and Fleur-David exchanged mutual
releases with respect to the prior joint venture. In return for its interest,
ExCal received from SABAL the assignment of a production payment in the
principal amount of $2,500,000 payable out of 1/4 of the net revenue
attributable to the interests acquired or after-acquired by SABAL in oil and gas
leases in Lapeer and Genesee counties, Michigan. The production payment is
convertible at the election of ExCal into up to 25% of the equity of SABAL and
bears interest at a rate of 3% per annum upon the unpaid balance, with all
principle and interest due, in any event, after a term of 15 years.
Also as a part of the above referenced transaction, ExCal agreed to lend
SABAL up to $500,000, of which $217,259.99 was advanced at closing, to be used
principally for the development of the project and the acquisition of additional
oil and gas leases in Michigan. The loan is for a term of two years and accrues
interest at a rate of 15% annually. The loan requires payments of interest only
for the first 6 months, and then becomes payable in equal monthly installments
of principle and interest. The Loan is also secured by substantially all the
assets of SABAL, including a first priority mortgage on the Otter Lake Gas Plant
and a perfected, first-priority security interest in the equipment SABAL
acquired from Tessenderlo-Kerley, Inc. The loan is also subject to an
Inter-Creditor Agreement between SABAL as Debtor and ExCal, Biscayne Petroleum
Corporation (an affiliate of the Company's president, Edson Arneault, which lent
money to Fleur-David (and which SABAL assumed) when ExCal lacked funds to pay
its proportionate costs of the joint venture) and Roger Landress, collectively,
as Creditors. Under the Inter-Creditor Agreement, payment to each of the
Creditors in the case of a sale of Sabal's assets is determined in proportion to
the amount owed each of the Creditors.
The sale to SABAL completes the Company's divestiture of its oil and gas
interests in accordance with the Plan of Orderly Liquidation adopted by the
Company's Board of Directors on March 31, 1993.
The Company has not determined whether the transaction will result in a
write down of the asset value on the Company's Condensed and Consolidated
Balance Sheet for the fiscal year ending December 31, 1998 or whether the
Company will reserve any amount with respect to the loan to SABAL.
ACQUISITION OF LAND ADJACENT TO THE RAMADA INN AND SPEEDWAY CASINO. On
November 2, 1998 Speakeasy Gaming of Las Vegas, Inc., a wholly owned subsidiary
of the Company, completed the acquisition from Union Oil Company of California,
of a 1/2 acre parcel of real property located adjacent to
23
the Ramada Inn and Speedway Casino in North Las Vegas, Nevada for the sum of
$120,000. This property was acquired to augment the grounds surrounding the
Ramada Inn and Speedway Casino and to be utilized, primarily, to provide the
additional parking required by local authorities and needed to accommodate the
expansion of parking and operations at that location. Speakeasy will provide its
lender a first priority security interest in the parcel in accordance with the
terms of such lender's consent to the purchase.
APPLICATION FOR APPROVAL TO OPERATE CASINO GAMING. On November 12, 1998 the
Company filed its applications in the State of Nevada for approval to operate
casino gaming at the Nevada Properties.
ITEM 3.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
24
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.
GEORGE JONES V. MOUNTAINEER PARK, INC. AND MTR GAMING GROUP, INC., Circuit
Court of Hancock County West Virginia, Civil Action No. 95-C-103G. In connection
with a Court-ordered settlement conference, the plaintiff voluntarily dismissed
all claims with the exception of the slander claim arising out of statements
made prior to the Company's acquisition of Mountaineer Park by the
then-president. Mountaineer Park and its insurer then settled the slander claim
for an amount that is not material to the Company's financial condition.
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
The annual meeting of shareholders of the Registrant was held on August 21,
1998 for the purpose of (i) electing directors of the Company, (ii) approving
the adoption of the Company's 1998 Stock Incentive Plan, (iii) approving the
grant of Stock Options to the Company's independent directors, and (iv)
ratifying the appointment of the Registrant's independent public accountants for
the year ending December 31, 1998. Proxies for the meeting were solicited
pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was
no solicitation in opposition.
(a) The following directors were elected by the following vote:
FOR WITHHELD
------------ ---------
Edson R. Arneault.............................................. 16,339,406 119,345
Robert L. Ruben................................................ 16,373,606 85,145
Robert A. Blatt................................................ 16,374,806 83,945
James V. Stanton............................................... 16,350,306 108,445
William D. Fugazy, Jr.......................................... 16,348,006 110,745
(b) The proposal to approve the adoption of the Company's 1998 Stock
Incentive Plan:
FOR AGAINST ABSTAIN
- ------------ --------- ---------
15,596,217 733,407 129,127
(c) The proposal to ratify grant of Stock Options to the Corporation's
independent directors was approved by the following votes.
FOR AGAINST ABSTAIN
- ------------ --------- ---------
15,595,887 742,532 120,332
II-1
(d) The proposal to ratify the appointment of the independent public
accountants for the year ending December 31, 1998 was approved by the following
vote:
FOR AGAINST ABSTAIN
- ------------ --------- ---------
16,356,696 56,135 45,920
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)
10.1 Exclusive Space Lease Agreement between the Company and Dynasty Games
Distributing (for Las Vegas Property) (4)
10.2 Exclusive Space Lease Agreement between the Company and Dynasty Games
Distributing (for Reno Property) (4)
10.3 Bill of Sale, Assignment and Quit Claim made by ExCal Energy Corporation
in favor of SABAL Corp. of ExCal's interest in oil and gas and interests
(4)
10.4 Assignment of Production Payment made by SABAL Corp. in favor of ExCal
Energy Corporation in the amount of $2.5 million (4)
10.5 Mutual Release by and between ExCal Energy Corporation, the Company and
Fleur-David Corporation (4)
10.6 Term Loan Agreement by and between ExCal Energy Corporation and SABAL
Corp. (4)
10.7 Term Note made by SABAL Corp. in favor of ExCal Energy Corporation in the
amount of $500,000 (4)
10.8 General Security Agreement made by SABAL Corp. in favor of ExCal Energy
Corporation (4)
10.9 Inter-Creditor Agreement among SABAL Corp., Roger Landress, Biscayne
Petroleum Corporation and ExCal Energy Corporation (4)
10.10 Mortgage made by SABAL Corp. in favor of ExCal Energy Corporation granting
ExCal a first priority security interest in the Otter Lake Gas Plant
recorded in Lapeer County, Michigan (4)
27.1 Financial Data Schedule (4)
99.1 Press Release Dated November 4, 1998 (4)
99.2 Press Release Dated November 2, 1998 (4)
II-2
99.3 Purchase Agreement by and between Speakeasy Gaming of Las Vegas, Inc. and
Union Oil Company of California for a 1/2 acre parcel of real property in
North Las Vegas, Nevada (4)
99.4 Deed transferring that 1/2 acre parcel of real property in North Las
Vegas, Nevada from Union Oil Company of California to Speakeasy Gaming of
Las Vegas, Inc. (4)
- ------------------------
(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.
(4) Filed herewith.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the third
quarter of 1998 and thereafter:
(1) An amendment to the Current Report on Form 8-K (filed by the Company on
May 20, 1998) 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
II-3
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: November 13, 1998 By: /s/ EDSON R. ARNEAULT
------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF FINANCIAL OFFICER