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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 MARCH 31, 1999
/ / 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
20,896,322
Outstanding at May 10, 1999
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MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
SECTION PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements............................................................................... 3
Condensed and Consolidated Balance Sheets at March 31, 1999 and December 31, 1998.......................... 3
Condensed and Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998..... 4
Condensed and Consolidated Statements of Cash Flow for the Three Months Ended March 31, 1999 and 1998...... 5
Notes to Condensed and Consolidated Financial Statements................................................... 6
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7
Item 3--Quantitative and Qualitative Disclosures about Market Risk......................................... 18
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.................................................................................. II-1
Item 2--Changes in Securities.............................................................................. II-1
Item 3--Defaults upon Senior Securities.................................................................... II-1
Item 4--Submission of Matters to a Vote of Securities Holders.............................................. II-1
Item 5--Other Information.................................................................................. II-1
Item 6--Exhibits and Reports on Form 8-K................................................................... II-1
SIGNATURE PAGE
2
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
MARCH 31 DECEMBER 31
1999 1998
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents........................................................ $ 7,244,000 $ 9,074,000
Restricted cash.................................................................. 193,000 239,000
Accounts receivable, net of allowance
for doubtful accounts of $138,000.............................................. 1,200,000 1,041,000
Deferred financing costs......................................................... 1,132,000 1,259,000
Deferred income taxes............................................................ 2,025,000 2,417,000
Other current assets............................................................. 1,255,000 986,000
------------- -------------
Total current assets............................................................... 13,049,000 15,016,000
------------- -------------
Property:
Land............................................................................. 5,162,000 4,317,000
Building......................................................................... 27,318,000 27,204,000
Equipment and automobiles........................................................ 10,154,000 9,536,000
Furniture and fixtures........................................................... 6,031,000 5,923,000
Construction in progress......................................................... 6,536,000 3,244,000
------------- -------------
55,201,000 50,224,000
------------- -------------
Less accumulated depreciation.................................................... (10,906,000) (9,945,000)
------------- -------------
44,295,000 40,279,000
------------- -------------
Net assets of discontinued oil and gas activities.................................. -- --
------------- -------------
Note receivable.................................................................... 414,000 333,000
------------- -------------
Other assets:
Excess of cost of investments over net assets acquired, net of accumulated
amortization of $1,589,000 and $1,526,000...................................... 2,185,000 2,248,000
Deferred income taxes.............................................................. 1,643,000 1,643,000
Deposits and other................................................................. 273,000 218,000
------------- -------------
4,101,000 4,109,000
------------- -------------
$ 61,859,000 $ 59,737,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 344,000 $ 624,000
Other accrued liabilities........................................................ 2,008,000 1,302,000
Current portion of long-term debt................................................ 245,000 633,000
------------- -------------
Total current liabilities.......................................................... 2,597,000 2,559,000
------------- -------------
Long-term debt, less current portion............................................... 35,096,000 33,988,000
------------- -------------
Shareholders' equity:
Common stock..................................................................... -- --
Paid in capital.................................................................. 36,178,000 36,178,000
Shareholder receivable........................................................... (461,000) (461,000)
Accumulated deficit.............................................................. (11,551,000) (12,527,000)
------------- -------------
Total shareholders' equity......................................................... 24,166,000 23,190,000
------------- -------------
$ 61,859,000 $ 59,737,000
------------- -------------
------------- -------------
3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
----------- -----------
Revenues
Video lottery terminals............................................. $18,916,000 $13,968,000
Parimutuel commissions.............................................. 914,000 1,162,000
Food, beverage and lodging.......................................... 1,809,000 1,338,000
Other............................................................... 342,000 222,000
----------- -----------
Total revenues.................................................... 21,981,000 16,690,000
----------- -----------
Costs of revenue
Cost of video lottery terminals..................................... 11,521,000 8,812,000
Cost of parimutuel commissions...................................... 1,217,000 1,437,000
Cost of food, beverage and lodging.................................. 1,793,000 1,251,000
Cost of other revenues.............................................. 284,000 180,000
----------- -----------
Total cost of revenues............................................ 14,815,000 11,680,000
----------- -----------
Gross Profit.......................................................... 7,166,000 5,010,000
----------- -----------
Selling, general and administrative expenses:
Marketing and promotions............................................ 840,000 683,000
General and administrative.......................................... 2,782,000 1,635,000
Depreciation and amortization....................................... 1,024,000 731,000
----------- -----------
Total selling, general and administrative expenses................ 4,646,000 3,049,000
----------- -----------
Operating income...................................................... 2,520,000 1,961,000
----------- -----------
Interest income....................................................... 83,000 85,000
Interest expense...................................................... (1,101,000) (813,000)
Gain (Loss) on sales of operations.................................... -- --
----------- -----------
(1,018,000) (728,000)
----------- -----------
Income before income taxes............................................ 1,502,000 1,233,000
Provision for income taxes............................................ 525,000 (42,000)
----------- -----------
Net income............................................................ $ 977,000 $ 1,275,000
----------- -----------
----------- -----------
Net income per share (basic)
Pre tax net income.................................................. $ 0.07 $ 0.06
Net income after income taxes....................................... $ 0.05 $ 0.06
Net income per share (assuming dilution)
Pre tax net income.................................................. $ 0.06 $ 0.05
Net income after income taxes....................................... $ 0.04 $ 0.05
Weighted average number of shares outstanding:
Basic............................................................... 20,896,322 19,941,000
----------- -----------
----------- -----------
Diluted............................................................. 23,941,022 23,690,000
----------- -----------
----------- -----------
4
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31
---------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net income......................................................................... $ 977,000 $ 1,275,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred financing cost amortization............................................. 127,000 115,000
Depreciation and amortization.................................................... 1,024,000 731,000
Deferred income taxes 392,000 (33,000)
Changes in operating assets and liabilities
Accounts receivable net of allowance........................................... (160,000) --
Notes receivable............................................................... (81,000) --
Other current assets........................................................... (269,000) 117,000
Accounts payable and accrued liabilities....................................... 426,000 (446,000)
------------- ------------
Net cash provided by operating activities............................................ 2,436,000 1,759,000
------------- ------------
Cash flows from investing activities:
Restricted cash.................................................................... 46,000 3,000
Settlement of prior acquisition costs.............................................. -- --
Deposits and other................................................................. (55,000) (100,000)
Capital expenditures............................................................... (4,977,000) (630,000)
------------- ------------
Net cash used in investing activities................................................ $ (4,986,000) $ (727,000)
------------- ------------
Cash flows used in financing activities
Additional paid in capital......................................................... -- --
Loan proceeds...................................................................... $ 720,000
------------- ------------
Cash provided by financing activities................................................ 720,000 --
------------- ------------
NET INCREASE (DECREASE) IN CASH...................................................... (1,830,000) 1,032,000
Cash, Beginning of Period............................................................ 9,074,000 7,715,000
------------- ------------
Cash, End of Period.................................................................. $ 7,244,000 $ 8,747,000
------------- ------------
------------- ------------
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 three months
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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, 1998.
NOTE 2--EQUITY TRANSACTIONS
On February 24, 1999, the Board of Directors, subject to the approval of the
Company's shareholders, established the 1999 Stock Incentive Plan (the "1999
Plan"). The terms of the 1999 Plan are substantially identical to those of the
Company's 1998 Stock Incentive Plan. The 1999 Plan reserves for issuance up to
800,000 shares of the Company's common stock, of which the Board granted to
employees in the aggregate 750,000 non-qualified options to purchase shares of
the Company's common stock.
On February 24, 1999, the Company also granted to employees and consultants
outside of the Company's stock option plans options to purchase in the aggregate
135,000 shares of the Company's common stock.
On February 24, 1999, the Company also granted to employees, pursuant to the
Company's 1992 Employee Stock Option Plan, non-qualified options to purchase in
the aggregate 250,000 shares of the Company's common stock.
Also, on February 24, 1999, the Company granted to its independent directors
non-qualified options to purchase, in the aggregate, 50,000 shares of the
Company's common stock. The options vest in increments of 6,250 options after
attendance at meetings of the Board of Directors, audit committee or
shareholders.
All of the options granted on February 24, 1999 are for a term of five years
from the date of grant, and except for the grants to the Company's independent
directors provide for immediate vesting. All of such options are exercisable at
the price of $2.00 per share, the estimated fair market value of the Company's
common stock at the date of grant.
NOTE 3--INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Statement 109), Accounting for Income
taxes. Under Statement 109, an asset and liability method is used whereby
deferred tax assets and liabilities are determined based upon temporary
differences between bases used for financial reporting and income taxes
reporting purposes. Income taxes are provided based on the enacted tax rates in
effect at the time such temporary differences are expected to reverse. A
valuation allowance is provided for certain deferred tax assets if it is more
likely than not that the Company will not realize tax assets through future
operations. In 1999, there is no value allowance being used by the Company. As
of March 31, the Company has federal net operating loss carry forwards of
approximately $9,898,000 for federal tax reporting purposes and approximately
$4,400,000 for California
6
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
reporting purposes, expiring through 2011 and 2002, respectively. The Tax Reform
Act of 1986 includes provisions which limit the Federal net operating loss carry
forwards available for use in any given year if certain events, including a
significant change in stock ownership, occur. The Company and its subsidiaries
file a consolidated federal income tax return.
NOTE 4--ACQUISITIONS
On January 21, 1999, the Company acquired an 18 hole golf course now known
as Mountaineer's Woodview Golf Course, including real property, improvements,
personal property and equipment, located approximately seven miles form the
Company's Mountaineer Race Track and Gaming Resort. The purchase price was
$843,000, which was paid by the issuance of a promissory note of $600,000
(interest only at 8% per annum, with all principal due and payable after five
years), the assumption of bank debt of $158,000, the assumption of accounts
payable of $52,000 and $29,000 cash.
7
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, gaming regulation, licensing and taxation
of gaming operations, lack of Nevada gaming licenses, dependence on key
personnel, competition, including competition from legalization of gaming in
states near the Company's gaming operations, no dividends, continued losses from
horse racing, costs associated with maintenance and expansion of Mountaineer
Park's infrastructure to meet the demands attending increased patronage, costs
and risks attending construction, expansion of operations, market acceptance of
the Company's Nevada Properties and maintenance of "grandfathered" status of
those properties, cyclical nature of business, Year 2000 issues, limited public
market and liquidity, shares eligible for future sale, impact of anti-takeover
measures, the Company's common stock being subject to penny stock regulation and
other risks detailed in the Company's Securities and Exchange Commission
filings.
RESULTS OF OPERATIONS
The Company, through wholly owned subsidiaries, owns and operates
Mountaineer Racetrack and Gaming Resort ("Mountaineer Park") in Chester, West
Virginia, the Ramada Inn and Speedway Casino in North Las Vegas, Nevada (the
"Speedway Property"), and the Ramada Inn and Speakeasy Casino in Reno, Nevada
(the "Reno Property" or, collectively with the Speedway Property, the "Nevada
Properties"). Until the Company obtains the necessary licenses, the casinos at
the Nevada Properties have been leased to a non-affiliated licensed casino
operator pursuant to leases that are terminable by the Company immediately upon
the Company's receipt of the necessary gaming licenses.
The Company anticipates that Mountaineer Park, particularly video lottery
operations conducted pursuant to the West Virginia Racetrack Video Lottery Act
(the "Lottery Law"), will continue to be the dominant factor in the Company's
financial condition for at least the remainder of the current fiscal year.
Ultimately, the profitability of the Speedway and Reno Properties, which the
Company acquired in the second quarter of 1998, will be directly related to
whether and when the Company obtains all necessary Nevada gaming approvals. The
Company filed the necessary license applications on November 12, 1998 and 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.
8
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
The Company earned revenues for the respective three-month periods in 1999
and 1998 as shown below:
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
----------- -----------
OPERATING REVENUES
Video Lottery............................................................................. $18,916,000 $13,968,000
Parimutuel commissions.................................................................... 914,000 1,162,000
Lodging, food & beverage.................................................................. 1,809,000 1,338,000
Other Revenue............................................................................. 342,000 222,000
----------- -----------
Total Revenues........................................................................ $21,981,000 $16,690,000
----------- -----------
----------- -----------
For the first quarter, the Company's total revenues increased by $5.3
million from 1998 to 1999, an increase of 31.7%. Approximately $4.9 million of
the increase was produced by video lottery operations at Mountaineer Park.
Mountaineer Park's revenue from parimutuel commissions decreased by $248,000, or
21%; its lodging revenues decreased by $19,000; food and beverage revenues
increased by $108,000 or 11% from $998,000 to $1,106,000; and other revenues at
Mountaineer Park increased by $104,000 or 47%. Management believes that revenues
from all sources at Mountaineer Park were adversely affected by unusually harsh
weather conditions during the month of January of 1999 as compared to the
relatively mild weather in January of 1998.
Notwithstanding the effect of the weather on operations during January,
management believes that gross revenue increased primarily because of continued
advertising activities, the increase to 1,300 Video Slots in January 1999
(compared to 1,000 during the first quarter of 1998) together with a change in
law that permitted Mountaineer Park to change the ratio of Video Slots in the
Lodge as compared to the racetrack building from 1:1 to 2:1, the introduction of
progressive video slot networks, the expansion of the Speakeasy Gaming Saloon
during the third quarter of 1998, other enhanced facilities and the contribution
of the Nevada Properties.
The Nevada Properties contributed $398,000 in gross revenue, with $337,000
from lodging, $45,000 from food and beverage, and $16,000 from other revenues in
the first quarter of 1999. The Speedway Property was dark during most of the
period because of construction, and reopened on March 3, 1999 after the
completion of renovations and construction of the 15,600 square foot casino
building and parking lots. The Company did not generate any gaming revenue at
the Nevada Properties. Upon receiving the necessary licenses, the Company
intends to terminate the current leases immediately pursuant to their terms and
thereafter to operate gaming at the Nevada Properties.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased by 35.4% from $14 million
in 1998 to $18.9 million in 1999.
An amendment of the Lottery Law that became effective in June of 1998
permitted Mountaineer Park to change the ratio of Video Slots located in the
Lodge versus the racetrack building from 1:1 to 2:1. Terminals located in the
Lodge's Speakeasy Gaming Saloon account for significantly more revenues (e.g.,
for the three months ended March 31, 1999, average daily net win per Video Slot
at the racetrack was $57 (including $0 for days when there was no live racing),
compared to $223 earned on the Lodge-based Video Slots). To capitalize on the
change in law, the Company constructed a 12,000 square foot addition to the
Lodge's Speakeasy Gaming Saloon, obtained regulatory approval to increase the
total number of Video Slots from 1,000 to 1,200 (by leasing 200 new "nickel"
machines), and placed 800 Video Slots in the Lodge
9
and 400 in the racetrack building (as of July 2, 1998). With the expansion of
the Speakeasy, Mountaineer Park also doubled the size of Big Al's Deli and added
additional bar and entertainment facilities. In December of 1998, the Company
leased 100 more Video Slots (62 in the Speakeasy and 38 in the racetrack
building) from a third manufacturer to initiate four progressive Video Slot
banks. These machines were put into play during the month of January 1999 but
due to technical difficulties were not functioning continuously. These changes,
together with the Company's advertising campaign are primarily responsible for
the dramatic increase in revenue. Management also believes that the introduction
of variety in Mountaineer Park's Video Slots--in terms of both manufacturers and
types of games (nickel--based as well as quarter-based) contributed to the
increased patronage. Previously, only one manufacturer had been authorized to
provide Video Slots in West Virginia.
During the 1999 period, net win per Video Slot per day was $163 with
approximately 1,300 Video Slots in operation compared to $155 during the first
quarter of 1988 with 1,000 Video Slots in operation.
A summary of the video lottery gross winnings less patron payouts ("net
win") for the three months ended March 31, 1999 and 1998 is as follows:
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
----------- -----------
Total gross wagers........................................................................ $66,520,000 $49,588,000
Less patron payouts....................................................................... (47,604,000) (35,620,000)
----------- -----------
Revenues--video lottery operations........................................................ $18,916,000 $13,968,000
----------- -----------
----------- -----------
Average daily net win per terminal........................................................ $ 163 $ 155
----------- -----------
----------- -----------
In April of 1999, the Lottery Law was amended with respect to the type of
machines that are allowed. Effective June 11, 1999, Mountaineer Park will be
permitted to operate slot machines that pay out winnings in coins or tokens,
instead of paper tickets, and that utilize symbols on mechanical rolling drums
instead of video images. The amendment thus authorizes Las Vegas-style slot
machines.
The Company plans to install approximately 450 new coin drop, mechanical
reel slots at its Mountaineer Park in August (or as soon thereafter as testing
of coin drop machines can be concluded). The Company will convert additional
machines to coin drop as player preference dictates. Conversion of a video slot
to coin drop costs approximately $1,100 per machine. As part of the conversion
to coin drop machines, the Company also intends to increase the total number of
gaming machines to 1,355 for which the Company has already obtained regulatory
approval.
The Company expects video lottery revenue from Mountaineer Park to increase
upon the implementation of coin drop, mechanical reel slot machines.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which means
the total amount wagered without regard to predetermined deductions, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place or show bet. In parimutuel wagering,
patrons bet against each other rather than against the operator of the facility
or with pre-set odds. The total wagering handle is composed of the amounts
wagered by each individual according to the wagering activity. The total amounts
wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total wagering handle or total amounts wagered.
10
Mountaineer's parimutuel commissions for the three months ended March 31,
1999 and 1998 are summarized below:
THREE MONTHS ENDED
MARCH 31
-----------------------------
1999 1998
-------------- -------------
Simulcast racing parimutuel handle............................. $ 4,798,000 $ 5,686,000
Live racing parimutuel handle.................................. 3,546,000 4,906,000
Less patrons' winning tickets.................................. (6,604000) (8,375,000)
-------------- -------------
1,740,000 2,217,000
Less
State and county parimutuel tax................................ (107,000) (125,000)
Purses and Horsemen's Association.............................. (719,000) (930,000)
-------------- -------------
Revenues--parimutuel commissions............................... $ 914,000 $ 1,162,000
-------------- -------------
-------------- -------------
Simulcast handle in the first three months of 1999 decreased 15.6% to $4.8
million in comparison to the same period in 1998. Live racing handle decreased
by 27.7% from $4.9 million in 1998 to $3.5 million in 1999. Total revenues for
parimutuel commissions for the first quarter of 1999 decreased 21.3% in
comparison to the same period in 1998. These decreases resulted from a 19%
decrease in the number of live racing days in 1998. In the first two weeks of
January 1999, the northern panhandle of West Virginia and the surrounding areas
encountered numerous ice storms that caused the cancellation of live racing. As
a result, Mountaineer Park completed 42 of the annually required 210 days in the
first quarter of 1999 compared to 52 days in 1998. The 10 days of cancelled
racing will be made up during the second and third quarters of 1999.
Mountaineer paid average daily live purses of $71,800 in the first three
months of 1999, a 36% increase over the $52,900 average for the corresponding
period of 1998. 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. Export simulcasting would not only create a new source of revenue
but the anticipated related increase in gross dollars wagered on the Mountaineer
Park's live races should also generate increases in live handle (as a greater
and more diverse pool lessens the impact a particular wager will have on the
pay-off odds). The commencement of export simulcasting would involve substantial
capital improvements, and Management continues to study the most cost effective
manner to implement export simulcasting. No assurances can be given, however,
that the Company will successfully commence export simulcasting or that the
anticipated results will be realized. See "Parimutuel Commissions Operating
Costs".
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined revenue
increase of 35.2% to $1,809,000 for the three months ended March 31, 1999
compared to $1,338,000 during the first quarter of 1998. Restaurant, bar and
concession facilities produced $153,000 of the revenue increase, which is a 15%
increase over the first three months of 1998. Lodging revenues increased
$318,000 for a 94% increase over the same period in 1998. Of the increase in
lodging revenues, $337,000 can be attributed to the two Nevada Properties
acquired in May of 1998. Food and beverage operations accounted for 64% of these
revenues for the first quarter of 1999 compared to 75% for the same period in
1998. This variance is attributable to the Nevada Properties. For the first
quarter of 1999, $45,000 or 12% of the $382,000 of revenues for this profit
center in Nevada were generated from food and beverage. Now that both properties
are open and limited gaming is available to our patrons, the revenues from these
two properties should increase. Management believes that increased revenues from
food and beverage resulted primarily from enhanced video lottery facilities and
related advertising, which in turn led to increase consumption of food and
beverages by the Company's patrons. The $19,000 decrease in lodging revenues for
Mountaineer Park can be attributed to the inclement weather experienced in
January of 1999.
11
OTHER OPERATING REVENUES
Other sources of revenues increased by $120,000 to $342,000 for the three
months ended March 31, 1999 compared to the same period in 1998. Other operating
revenues are primarily derived from the sale of programs, parking, admission
fees, check cashing and ATM services. The increase in ATM service fees, a new
service instituted in July of 1998, was $58,000 for the first quarter of 1999.
Check cashing fees increased from 1998 by $35,000 to $84,000 in 1999. While
these activities are non-core business activities, Management believes that they
are necessary to attract gaming patrons.
OPERATING COSTS
Mountaineer Park's 31.7% increase in revenues resulted in higher total
costs, as directly related expenses increased by 26.8% to $14.8 million in the
first quarter of 1999 compared to the same period in 1998. Approximately $2.7
million of the $3.1 million increase in operating costs is attributable to the
video lottery operations, which includes applicable state taxes and fees. The
31.7% increase in revenue was also accompanied by a 23% increase in marketing
and promotions costs. General and administrative expenses increased by 70%, and
costs of parimutuel operations declined by $220,000 or 15%. Operating costs of
the Company's lodging, food and beverage operations increased by $542,000 or 43%
to $1.8 million in the first three months of 1999, of which $342,000 is
attributable to the Nevada Properties. Interest expense increased by $288,000 or
35%.
Operating costs and gross profit earned from operations for the three months
ended March 31, 1999 and 1998 are as follows:
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
----------- -----------
Operating Costs:
Video lottery operations.................................................................. $11,521,000 $ 8,812,000
Pari-mutuel commissions................................................................... 1,217,000 1,437,000
Lodging, food and beverage................................................................ 1,793,000 1,251,000
Other revenues............................................................................ 284,000 180,000
----------- -----------
Total Operating Costs................................................................. $14,815,000 $11,680,000
----------- -----------
----------- -----------
Gross Profit (Loss)
Video lottery operations.................................................................. $ 7,395,000 $ 5,156,000
Pari-mutuel commissions................................................................... (303,000) (275,000)
Lodging, food and beverage................................................................ 16,000 87,000
Other revenues............................................................................ 58,000 42,000
----------- -----------
Total Gross Profit.................................................................... $ 7,166,000 $ 5,010,000
----------- -----------
----------- -----------
VIDEO LOTTERY OPERATIONS
Costs of video lottery operations increased by $2.7 million, or 31%, to
$11.5 million for the three months ended March 31, 1999, reflecting the increase
in statutory expenses directly related to the 35.4% increase in video lottery
revenues. Such expenses accounted for $2,672,000 of the total cost increase.
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, Inc. for the sole benefit of
12
Mountaineer Park, Inc. employees. Assessments paid to the Horsemen's Purse Fund
are returned by the Lottery Commission to bank accounts administered by
Mountaineer Park for the sole benefit of horse owners who race at Mountaineer
Park. These funds are used exclusively to pay purses for thoroughbred races run
at Mountaineer Park, in amounts determined by Mountaineer Park in accordance
with its agreement with the Horsemen's Benevolent and Protective Association.
Taxes and assessments paid to all of these funds are included in "Costs of Video
Lottery Terminals" in the Consolidated Statements of Operations. Statutory costs
and assessments, including the State Administrative Fee, for the respective
three-month periods are as follows:
THREE MONTHS ENDED
MARCH 31
---------------------------
1999 1998
------------- ------------
Employees Pension Fund........................................... $ 93,000 $ 68,000
Horsemen's Purse Fund............................................ 2,888,000 2,078,000
------------- ------------
SUBTOTAL..................................................... $ 2,981,000 $ 2,146,000
State of West Virginia........................................... 6,053,000 4,582,000
Tourism Promotion Fund........................................... 559,000 402,000
Hancock County................................................... 373,000 268,000
Stakes Races..................................................... 186,000 134,000
Veteran's Memorial............................................... 186,000 134,000
------------- ------------
$ 10,338,000 $ 7,666,000
------------- ------------
------------- ------------
The remaining significant expense incurred by video lottery operations
consists of VLT lease expense ($601,000 in the first quarter of 1999 compared to
$355,000 in 1998). This increase in lease expense is due to the additional 200
machines installed in July and 100 in December of 1998. Direct and indirect
wages and employee benefits increased by $63,000 to $387,000 for the first three
months of 1999, due to the cost of added personnel in order to service higher
levels of patron play and numbers of patrons. Utilities and other administrative
expenses for the VLT department decreased by $195,000 to $79,000 in the first
quarter of 1999, due to change in allocation methodology.
PARIMUTUEL COMMISSIONS
Costs (the individual components of which are detailed below) of parimutuel
commissions decreased by $220,000 or 15%, from $1.4 million in the first quarter
of 1998 to $1.2 million in the first quarter of 1999. One of the primary reasons
for this decrease was the reduction in the number of live racing days from 52 to
42. Purse expense (consisting of statutorily determined percentages of live
racing handle) decreased by 34% or $181,000 to $345,000 in the first quarter of
1999, which is consistent with the decrease 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 decreased by $59,000 to $587,000
in the first quarter of 1999 (compared to $646,000 during the first quarter of
1998), which is consistent with the decrease in simulcasting wagering.
Parimutuel commissions revenue is reported net of these expenses in the
Consolidated Statement of Operations.
Totalistator and other lease expenses increased by $15,000 to approximately
$143,000 in the first quarter of 1999 despite the reduction in live race days,
due to increases in the cost of leasing such equipment. Wages and benefits
relating to the Company's racing operations were reduced by $188,000 to $476,000
for the first three months of 1999. Utilities and outside services increased by
$43,000 or 25% to $217,000 in the first quarter of 1999.
13
FOOD, BEVERAGE AND LODGING OPERATIONS
Operating costs of the Company's lodging, food and beverage operations
increased by $542,000 or 43% to $1.8 million in the first three months of 1999.
Of this amount, $342,000 is attributable to the Nevada Properties ($243,000 for
lodging costs and $99,000 for food and beverage costs). Of the remaining total
costs of $1.4 million, which are attributable to Mountaineer Park, $1.1 million
relates to food and beverage costs and $337,000 relates to costs of lodging.
The $1.1 million in food and beverage operating costs at Mountaineer Park
represents a 38% increase compared to the first quarter of 1998. This $307,000
increase resulted from increased purchasing in anticipation of increased patron
volume, increased cost of utilities and waste disposal ($96,000), and direct
labor and employee benefits costs ($140,000). Apart from costs associated with
food spoilage and overstaffing during January (resulting from the inclement
weather), the increased costs are generally in line with increased revenues from
greater patronage during February and March. Mountaineer Park's $337,000 in
operating costs from lodging for the first quarter of 1999 represents a $103,000
decrease from the 1998 period. Salaries and employee benefits related to lodging
as well as costs of supplies declined because of decreased hotel stays during
January--again due to the weather.
COSTS OF OTHER OPERATING REVENUES
Cost of other revenues increased by $104,000 or 58% from $180,000 for the
three months ended March 31, 1998 to $284,000 for the three months ended March
31, 1999. This increase is consistent with the increase in other revenues.
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses at the Company's Mountaineer Park operation increased 23%
from $683,000 for the first quarter of 1998 to $840,000 for the same period in
1999. Management continues an aggressive regional marketing campaign centered on
its 30-minute infomercial broadcasts throughout portions of a two-hour driving
radius of Mountaineer Park. In the first quarter of 1999, Mountaineer Park was
awarded a state grant in the amount of $133,000 in advertising matching funds.
An additional grant for the same amount is anticipated in the third quarter of
1999. The increase in marketing costs was also due to the production and
broadcast of Mountaineer Park's new infomercial and increases in direct mail
advertising.
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES
General and administrative expense for the periods being compared increased
by $1,147,000 or 70% from $1,635,000 to $2,782,000. The reason for the increase
in general and administrative costs was twofold. First, with respect to
operations, the increases are due primarily to (1) a 100% increase in costs of
security as well as increases in maintenance and housekeeping staff to
accommodate Mountaineer Park's larger crowds; (2) the third quarter 1998
addition of both internal audit/control and management information systems
departments at Mountaineer Park; (3) additional general and administrative costs
of $315,000 generated by the Nevada Properties; and (4) costs and fees
associated with pursuit of Nevada gaming licenses (approximately $57,000).
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately $5 million
to $50 million) gaming and/or parimutuel businesses, the Company incurred
increased professional fees and travel expenses related to evaluating
acquisition and financing opportunities (totaling approximately $330,000).
In the first quarter of 1999, the Company incurred $1,101,000 of interest
expense compared to $813,000 in the first quarter of 1998. The increased
interest expense is attributable to the Company's increased borrowings pursuant
to the April 30, 1998 Third Amended and Restated Term Loan Agreement to finance
the acquisition of the Nevada Properties. In the first quarter of 1998, interest
expense included
14
$115,000 of amortization of loan fees incurred in connection with the July 2,
1997 Second Amended and Restated Term Loan Agreement. The loan fees were fully
amortized in June of 1998 and are no longer reflected in interest expense.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by 40%, or $293,000, to
$1,024,000 for the three months ended March 31, 1999. This increase reflects the
increased capitalization of improvements completed at Mountaineer Park, such as
the 12,000 square foot addition to the Speakeasy Gaming Saloon, and the
acquisition of the Nevada Properties. Depreciation for the Nevada Properties was
$223,000 for the first quarter of 1999.
CASH FLOWS
The Company's operations produced $2,436,000 in cash flow in the three
months ended March 31, 1999, compared to $1,759,000 produced in the first three
months of 1998. Current year non-cash expenses included $1,024,000 of
depreciation and amortization and $127,000 for the amortization of deferred
financing costs.
The Company invested $2.1 million in capital improvements for the West
Virginia property in the first quarter of 1999 versus $630,000 in 1998. The
Company also invested $2.6 million in capital assets related to the Nevada
Properties.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of March 31, 1999 was $10,452,000
and its unrestricted cash balance was $7,244,000. Racing purses are paid from
funds contributed by the Company to bank accounts owned by the horse owners who
race at Mountaineer Park. At March 31, 1999, the balances in these accounts
exceeded purse obligations by $1.4 million; this amount is available for payment
of future purse obligations at the discretion of the Company and in accordance
with the terms of its agreement with the HBPA.
LONG-TERM DEBT AND LINE OF CREDIT REFINANCING. Effective July 2, 1997,
Mountaineer and the Company amended and restated the July 2, 1996 Term Loan
Agreement, which had been previously amended and restated as of December 10,
1996. The December 10, 1996 Amended Term Loan Agreement reflected an increase in
the amount borrowed from $5 million to $16.1 million, established a $5,376,500
line of credit, and converted the lender's position from second to first trust
holder.
The July 2, 1997 Second Amended Term Loan Agreement (i) extended the term of
the loan to July 2, 2001 (compared to July 2, 1999); (ii) increased the total
amount borrowed to $21,476,500 (by virtue of Mountaineer Park drawing down the
line of credit); (iii) eliminated from the Amended Term Loan Agreement annual
fees of cash in the amount of 8% of the outstanding principal balance of the
loan that would have been due each November 15 while the loan is outstanding;
(iv) calls for payments of interest only with the principal due at the end of
the four year term; (v) eliminated annual warrants to purchase 250,000 shares of
the Company's common stock at $1.06 per share which would have been issued on
November 15, 1997, 1998 and 1999; and (vi) eliminated annual warrants to
purchase additional shares in a number to be calculated under a formula defined
in the Amended Term Loan Agreement, which would have been issued on November 15,
1997, 1998 and 1999. The lender's rights pursuant to the Amended Term Loan
Agreement with respect to the 550,000 shares of the Company's stock and warrants
to purchase 1,632,140 additional shares issued thereunder are unaffected by the
Second Amended Agreement. The Company continues to guarantee the loan.
As consideration for the lender's entering into the Second Amended Term Loan
Agreement, Mountaineer Park (i) paid a one time fee of approximately $1.8
million or 8.5% of the total amount
15
borrowed; (ii) agreed 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) agreed 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. On July
4, 1999, the call premium will reduce to 2%.
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 the acquisition of the Nevada Properties,
which was consummated on May 5, 1998. This increased the loan amount to
$33,391,500.
The loan amendment also provides a construction line of credit of up to $1.7
million for the Speedway Property and increases Mountaineer Park's line of
credit by $5 million (up to $1.5 million of which may be used for improvements
at the Nevada Properties). At March 31, 1999, the Company had not drawn against
the lines of credit, except for $150,000 in payment of fees associated with the
increase of Mountaineer Park's credit line. The loans, as well as any draws
against the lines of credit, continue to be for a term ending July 2, 2001 with
monthly payments of interest only at the rate of 13% per year with all of the
assets of Mountaineer Park and now Speakeasy Las Vegas and Speakeasy Reno, and
are unconditionally guaranteed by the Company. The call premium applicable to
prepayment of the loans, however, does not apply to the $11.8 million borrowed
for the acquisitions or draws on the $1.7 million Speedway construction line of
credit.
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer Park facility including approximately doubling its
hotel room capacity and constructing a regional convention center, most likely
to commence in late 1999 or early 2000. The Company is also considering the
development of a championship golf course. The Company may separately finance
any construction activities that it executes of this magnitude. Capital
improvements of a near-term nature include numerous smaller renovations, such as
renovations to the concession stands and the development of a gaming area in the
lower grandstand. This new gaming area will house coin drop machines and include
a bar and food court.
The Company does not intend, however, to implement its expansion plans until
Hancock County commences construction of a new sewer facility to service
Mountaineer Park's growing needs. To that end, on December 30, 1998, Mountaineer
Park and the Hancock County Public Service District (the "District") executed a
Sewer Facilities User Agreement which pursuant to which the District agreed to
construct the sewer facility. Notwithstanding the fact that the agreement's
recitals stated that the District was authorized and empowered to acquire,
construct, maintain and improve the sewage treatment and disposal system, the
Company has recently learned that the District had not obtained a necessary
State approval. Whereas the District had believed it could complete the project
by December of 1999, it now believes that the approval process will delay
completion until approximately June of 2000. Costs of waste disposal will
likewise remain higher until the project is completed.
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 and intends to exercise it to purchase substantially all such 349 acres.
On January 21, 1999, the Company purchased the 168-acre Mountaineer's
Woodview Golf Course in New Cumberland, West Virginia. The purchase price of the
course was $843,000, primarily for a note and assumption of debt. The Company
plans to spend approximately $600,000 in 1999 renovating and improving the
course and clubhouse and acquiring golf course maintenance equipment.
16
Management believes that except as set forth above, its cash balances, cash
flow from operations, and available lines of credit will be sufficient to cover
contemplated capital improvements.
OUTSTANDING OPTIONS AND WARRANTS
In February of 1999, pursuant to various employment agreements and the
Company's 1992 Employee Stock Option Plan, the Company granted to various
employees options to purchase, in the aggregate, 435,000 shares of the Company's
common stock. Also in February of 1999, the Board of Directors of the Company
created, subject to shareholder approval, the Company's 1999 Employee Stock
Purchase Plan, for which the Company intends to reserve 800,000 shares, of which
750,000 shares have been granted to various employees of the Company.
As of March 31, 1999, there were outstanding options and warrants to
purchase 8,380,867 shares of the Company's common stock. Of this amount,
warrants to purchase 1,757,813 shares are held by the Company's lender whose
exercise rights are subject to a statutory ownership limitation not to exceed 5%
of the Company's outstanding voting shares without prior approval of the West
Virginia Lottery Commission. All but 70,000 of such shares are either subject to
registration rights or have been included in registration statements that the
Company has filed with the Securities and Exchange Commission and which have
been declared effective. If all such options and warrants were exercised, the
Company would receive proceeds of approximately $13.8 million.
DEFERRED INCOME TAX BENEFIT. Management believes that the substantial and
steady revenue increases earned in the past three years will continue, and
ultimately occur in amounts which will allow the Company to utilize its $9.9
million federal net operating loss tax carry forwards, although there are no
assurances that sufficient income will be earned in future years to do so. The
utilization of federal net operating losses may be subject to certain
limitations.
COMMITMENTS AND CONTINGENCIES
The Company has various commitments including those under various consulting
agreements, operating leases, and the Company's pension plan and union contract.
The Company has also entered into new employment agreements with certain
employees for periods ranging from one to five years. Compensation under the
employment agreements consists of cash payments and stock option commitments,
and in some cases commitments to fund deferred compensation plans. The Company
anticipates cash payments in the amount of $2.2 million over the next three
years under the employment agreements. The Company believes that it has the
ability to meet all of its obligations under the employment agreements. In
addition, the Company is faced with certain contingencies involving litigation
and environmental remediation. Although there can be no assurance, the Company
believes that cash generated from operations and available lines of credit will
be sufficient to meet all of the Company's currently anticipated commitments and
contingencies.
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 video lottery terminals on site and the Lottery
Commission's software in Charleston, WV.
There are two alternatives to correct this problem. One modification that is
available is to upgrade the SAMS 3 System by utilizing what is known as a SAS
bridge, which is a casino standard protocol that is Y2K compliant. The testing
for approval of this SAS bridge is anticipated to commence in May of 1999. If it
is
17
approved, the new software could be in place by July 1999. The second
alternative, which would have to be agreed upon by all four of the State's
racetracks, would be to replace the current SAMS system with another system that
is Y2K compliant. Such systems are available and requests for bids have gone out
to vendors to select a suitable replacement. The cost of the replacement system
may range from $750,000 to $1 million per track. However, such a replacement
system would accommodate other enhancements, such as automated player tracking
and state-of-the-art local and wide area progressive networks. The final
determination of which solution to use has not yet been made.
A non-information technology system that was not in Year 2000 compliance was
Mountaineer Park's telephone system. This phone system was also no longer
sufficient to meet the Company's needs in any event. A new, Y2K compliant system
was installed in January of 1999 at a cost of approximately $320,000. Other
software and hardware replacements completed in 1999 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.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at March 31, 1999. The Company's loans,
payables, or receivables to or from others (including loans, payables or
receivables to or from its subsidiaries or joint ventures) and the interest
thereon, are all expressed as dollar obligations and payable in dollars.
18
PART II
OTHER INFORMATION
ITEM 1.--LEGAL PROCEEDINGS
There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
ITEM 2.--CHANGES IN SECURITIES
Not applicable
ITEM 3.--DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable
ITEM 5.--OTHER INFORMATION
Not Applicable
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended (1)
3.2 Amended and Restated Articles of Incorporation, filed as of October 18,
1996 (2)
3.3 Amended Bylaws of the Company (3)
10.1 Amendment No. 1 to Exclusive Space Lease Agreement between the Company and
Dynasty Games Distributing (4)
10.2 Amendment No. 1 to Exclusive Space Lease Agreement between the Company and
Dynasty Games Distributing (for Reno Property) (4)
27.1 Financial Data Schedule (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 10-K
The Company did not file any reports on Form 10-K during the three months
ended March 31, 1999.
II-1
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: May 17, 1999 By: /s/ EDSON R. ARNEAULT
------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF FINANCIAL OFFICER