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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
20,919,022
Outstanding at August 11, 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 June 30, 1999 and December 31, 1998........................... 3
Condensed and Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1999
and 1998................................................................................................. 4
Condensed and Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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.............. 8
Item 3--Quantitative and Qualitative Disclosures about Market Risk......................................... 23
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.................................................................................. II-1
Item 2--Changes in Securities.............................................................................. II-1
Item 3--Defaults upon Senior Securities.................................................................... II-1
Item 4--Submission of Matters to a Vote of Securities Holders.............................................. II-1
Item 5--Other Information.................................................................................. II-1
Item 6--Exhibits and Reports on Form 8-K................................................................... II-1
SIGNATURE PAGE
2
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
JUNE 30 DEC. 31
1999 1998
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents........................................................ $ 9,094,000 $ 9,074,000
Restricted cash.................................................................. 464,000 239,000
Accounts receivable net of allowance for doubtful accounts of $141,000 and
$138,000....................................................................... 1,762,000 1,041,000
Interest Receivable................................................................ 26,000 0
Deferred financing costs........................................................... 1,004,000 1,259,000
Deferred income taxes............................................................ 2,405,000 2,417,000
Other current assets............................................................. 1,259,000 986,000
------------- -------------
Total current assets............................................................... 16,014,000 15,016,000
------------- -------------
Property:
Land............................................................................. 5,326,000 4,317,000
Building......................................................................... 32,231,000 27,204,000
Equipment and automobiles........................................................ 11,843,000 9,536,000
Furniture and fixtures........................................................... 6,116,000 5,923,000
Construction in progress......................................................... 2,678,000 3,244,000
------------- -------------
58,194,000 50,224,000
------------- -------------
Less accumulated depreciation.................................................... (12,116,000) (9,945,000)
------------- -------------
46,078,000 40,279,000
------------- -------------
Note receivable.................................................................... 414,000 333,000
------------- -------------
Other assets:
Excess of cost of investments over net assets acquired, net of accumulated
amortization of $1,652,000 and $1,526,000...................................... 2,122,000 2,248,000
Deferred income taxes............................................................ 1,643,000
------------- -------------
Deposits and other............................................................... 325,000 218,000
------------- -------------
2,447,000 4,109,000
------------- -------------
$ 64,953,000 $ 59,737,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 514,000 $ 624,000
Other accrued liabilities........................................................ 2,380,000 1,302,000
Current portion of long-term debt................................................ 495,000 633,000
------------- -------------
Total current liabilities.......................................................... 3,389,000 2,559,000
------------- -------------
Long-term debt, less current portion............................................... 35,140,000 33,988,000
------------- -------------
Shareholders' equity:
Common Stock..................................................................... -- --
Paid in capital.................................................................. $ 36,178,000 $ 36,178,000
Shareholder receivable........................................................... (461,000) (461,000)
------------- -------------
Accumulated deficit.............................................................. (9,293,000) (12,527,000)
------------- -------------
Total shareholders' equity......................................................... 26,424,000 23,190,000
------------- -------------
$ 64,953,000 $ 59,737,000
------------- -------------
------------- -------------
3
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues
Video lottery terminals................. $23,433,000 $15,505,000 $42,349,000 $29,473,000
Parimutuel commissions.................. 1,280,000 1,199,000 2,194,000 2,361,000
Food, beverage and lodging.............. 2,682,000 1,802,000 4,491,000 3,140,000
Other................................... 905,000 420,000 1,247,000 642,000
---------- ---------- ---------- ----------
Total revenues........................ 28,300,000 18,926,000 50,281,000 35,616,000
---------- ---------- ---------- ----------
Costs of revenue
Cost of video lottery terminals......... 13,345,000 9,040,000 24,866,000 17,852,000
Cost of parimutuel commissions.......... 1,479,000 1,252,000 2,696,000 2,689,000
Cost of food, beverage and lodging...... 2,391,000 1,304,000 4,184,000 2,555,000
Cost of other revenues.................. 584,000 49,000 868,000 229,000
---------- ---------- ---------- ----------
Total cost of revenues................ 17,799,000 11,645,000 32,614,000 23,325,000
---------- ---------- ---------- ----------
Gross Profit.............................. 10,501,000 7,281,000 17,667,000 12,291,000
---------- ---------- ---------- ----------
Selling, general and administrative
expenses:
Marketing and promotions................ 1,234,000 1,103,000 2,074,000 1,786,000
General and administrative.............. 3,349,000 2,617,000 6,131,000 4,252,000
Depreciation and amortization........... 1,274,000 829,000 2,298,000 1,560,000
---------- ---------- ---------- ----------
Total selling, general and
administrative expenses............. 5,857,000 4,549,000 10,503,000 7,598,000
---------- ---------- ---------- ----------
Operating income.......................... 4,644,000 2,732,000 7,164,000 4,693,000
---------- ---------- ---------- ----------
Interest income........................... 73,000 98,000 156,000 183,000
Interest expense.......................... (1,245,000) (1,009,000) (2,346,000) (1,822,000)
---------- ---------- ---------- ----------
(1,172,000) (911,000) (2,190,000) (1,639,000)
---------- ---------- ---------- ----------
Income before income taxes................ 3,472,000 1,821,000 4,974,000 3,054,000
Provision for income taxes................ 1,215,000 (8,000) 1,740,000 (50,000)
---------- ---------- ---------- ----------
Net income................................ $2,257,000 $1,829,000 $3,234,000 $3,104,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share (basic)
Pre tax net income...................... $ 0.17 $ 0.09 $ 0.24 $ 0.15
Net income after income tax............. $ 0.11 $ 0.09 $ 0.15 $ 0.16
Net income per share (assuming dilution)
Pre tax net income...................... $ 0.14 $ 0.07 $ 0.20 $ 0.13
Net income after income taxes........... $ 0.09 $ 0.07 $ 0.13 $ 0.13
Weighted average number of shares
outstanding:
Basic................................... 20,896,322 19,990,890 20,896,322 19,975,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted................................. 24,926,390 24,442,404 24,503,226 24,126,306
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
4
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
----------------------
1999 1998
--------- -----------
Cash flows from operating activities:
Net income....................................................... $3,234,000 3,104,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred financing cost amortization........................... 255,000 231,000
Depreciation and amortization.................................. 2,298,000 1,553,000
Deferred income taxes.......................................... 1,655,000 (33,000)
Changes in operating assets and liabilities
Accounts receivable net of allowance......................... (721,000) (485,000)
Other current assets......................................... (300,000) 45,000
Accounts payable and accrued liabilities..................... 968,000 (351,000)
--------- -----------
Net cash provided by operating activities.......................... 7,389,000 4,064,000
--------- -----------
Cash flows from investing activities:
Restricted cash................................................ (225,000) (8,000)
Net assets from discontinued activities........................ 0 12,000
Deposits and other............................................. (188,000) (385,000)
Capital expenditures........................................... (7,970,000) (15,276,000)
--------- -----------
Net cash used in investing activities.............................. (8,383,000) (15,657,000)
--------- -----------
Cash flows used in financing activities
Loan proceeds.................................................. 1,014,000 11,875,000
--------- -----------
Cash provided by financing activities.............................. 1,014,000 11,875,000
NET INCREASE (DECREASE) IN CASH.................................... 20,000 282,000
Cash, Beginning of Period.......................................... 9,074,000 7,715,000
--------- -----------
Cash, End of Period................................................ 9,094,000 7,997,000
--------- -----------
--------- -----------
5
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included herein. Operating results for the six months
ended June 30, 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
Registrant'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. The
Company's deferred taxes have been reduced by $1,655,000 to reflect the tax
consequences of the first half's income. 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 June 30, the Company has federal net
operating loss
6
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
carry forwards of approximately $6,426,000 for federal tax reporting purposes
and approximately $4,400,000 for California 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 known as
the Woodview Golf Course, including real property, improvements, personal
property and equipment, located approximately seven miles from the Company's
Mountaineer Race Track and Gaming Resort. The purchase price was $843,000,
payment of which included 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 $56,000 and $29,000 cash. On May 3, 1999, the Company acquired, for a
purchase price of $145,000, approximately 110 acres of real property as well as
a house and a mobile home (located on the property) and all the personal
property attendant to such real property at the time of purchase. A portion of
this real property adjoins the 350plus or minus acre undeveloped parcel acquired
in 1998 near the Company's Mountaineer Race Track & Gaming Resort.
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 one year to
complete and that there can be no assurance that the Company will obtain such
licenses.
8
The Company earned revenues for the respective six month and three month
periods in 1999 and 1998 as shown below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
OPERATING REVENUES
Video lottery operations.................. $23,433,000 $15,505,000 $42,349,000 $29,473,000
Parimutuel commissions.................... 1,280,000 1,199,000 2,194,000 2,361,000
Lodging, food and beverage................ 2,682,000 1,802,000 4,491,000 3,140,000
Other revenues............................ 905,000 420,000 1,247,000 642,000
---------- ---------- ---------- ----------
Total Revenues........................ $28,300,000 $18,926,000 $50,281,000 $35,616,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
For the first six months, the Company's total revenues increased by $14.7
million from 1998 to 1999, an increase of 41.2%. Approximately $12.9 million of
the increase was produced by video lottery operations at Mountaineer Park.
Mountaineer Park's revenue from parimutuel commissions decreased by $167,000, or
7.1%; its lodging revenues increased by $47,000 or 6.9%; food and beverage
revenues increased by $547,000 or 25.1% from $2,175,000 to $2,722,000; and other
revenues at Mountaineer Park increased by $582,000 or 91.6%. As a result of a
strong second quarter, the Company was able to overcome the adverse effects of
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 $1,070,000 in gross revenues, with
$844,000 from lodging, $196,000 from food and beverage, and $30,000 from other
revenues in the first half of 1999. This is in comparison to $279,000 from
lodging, $4,000 from food and beverage and $6,000 from other revenues in the
first half of 1998. The two properties were bought in May of 1998. The Speedway
Property was dark during most of the first quarter 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. The Company intends to
terminate the current casino leases immediately upon the Company's receipt of
the necessary gaming licenses required to operate gaming at the Nevada
Properties.
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
For the second quarter, the Company's total revenues increased by $9.4
million from 1998 to 1999, an increase of 49.5%. Approximately $7.9 million of
the increase was produced by video lottery operations at Mountaineer Park.
Mountaineer Park's revenue from parimutuel commissions increased by $81,000, or
6.8%; its lodging revenues increased by $66,000 or 19.3%; food and beverage
revenues increased by $438,000 or 37.3% from $1,177,000 to $1,616,000; and other
revenues at Mountaineer Park increased by $478,000 or 115.7%. The Nevada
Properties contributed $672,000 in gross revenue, with $507,000 from lodging,
$151,000 from food and beverage, and $14,000 from other revenues in the second
quarter of 1999.
9
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased by 51.1% from $15.5 million
in 1998 to $23.4 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 are more popular than those at the racetrack and
account for significantly more revenues (E.G., for the three months ended June
30, 1999, average daily net win per Video Slot at the racetrack was $81
(including $0 for days when there was no live racing), compared to $265 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 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 until the
second quarter of 1999.
On May 9, 1999, Mountaineer Park paid its first large progressive jackpot of
approximately $240,000. Management believes that word of mouth and advertising
focusing on the prospect and fact of large jackpots contributed to increases in
video slot play and revenue. 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. On June 14, 1999, the Company began increasing the number of days in
which machines located at the racetrack remain in operation. Previously, the
machines located at the track operated only on live racing days and during
special events.
During the 1999 period, net win per Video Slot per day was $199 with
approximately 1,300 Video Slots in operation compared to $170 during the second
quarter of 1998 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 June 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED
JUNE 30
------------------------
1999 1998
----------- -----------
Total gross wagers................................ $83,671,000 $55,848,000
Less patron payouts............................... $60,238,000 $40,343,000
----------- -----------
Revenue--video lottery operations................. $23,433,000 $15,505,000
----------- -----------
----------- -----------
Average daily net win per terminal................ $ 199 $ 170
----------- -----------
----------- -----------
In April of 1999, the Lottery Law was amended with respect to the types of
machines that are allowed. Effective June 11, 1999, the Lottery Law permits
Mountaineer Park to operate coin drop 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 450-500 new coin drop, mechanical
reel slots at Mountaineer Park in September (or as soon thereafter as testing of
coin drop machines can be concluded).
10
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.
The Company expects video lottery revenue from Mountaineer Park to increase
substantially 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. Mountaineer
Park's parimutuel commissions for the three months ended June 30, 1999 and 1998
are summarized below:
THREE MONTHS ENDED
JUNE 30
----------------------
1999 1998
---------- ----------
Simulcast racing parimutuel handle.............. $5,896,000 $5,809,000
Live racing parimutuel handle................... 5,788,000 5,547,000
Less patrons' winning tickets................... (9,249,000) (9,048,000)
---------- ----------
2,435,000 2,308,000
Less:
State and county parimutuel tax................. (130,000) (118,000)
Purses and Horsemen's Association............... (1,025,000) (991,000)
---------- ----------
Revenues--parimutuel commissions................ $1,280,000 $1,199,000
---------- ----------
---------- ----------
Simulcast handle in the second three months of 1999 increased $87,000 to
$5.9 million in comparison to the same period in 1998. Live racing handle
increased by 4.3% from $5.5 million in 1998 to $5.8 million in 1999. Total
revenues for parimutuel commissions for the second quarter of 1999 increased
6.8% in comparison to the same period in 1998. These increases resulted from a
12% increase in the number of live racing days in 1999. Mountaineer Park
completed 57 of the annually required 210 days in the second quarter of 1999
compared to 51 days in 1998.
Mountaineer Park paid average daily live purses of $86,200 in the second
quarter of 1999, a 39.5% increase over the $61,800 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 "Operating Costs" and "Parimutuel
Commission Operating Costs."
11
FOOD, BEVERAGE AND LODGING OPERATIONS
Total food, beverage and lodging revenues for the Company accounted for a
combined increase of 48.8% to $2.7 million for the three months ended June 30,
1999 compared to $1.8 million for the same period in 1998. Restaurant, bar and
concession facilities produced $586,000 of the revenue increase, while lodge
revenues increased $294,000, a 47% increase over the same period in 1998. Of the
increase in lodging revenues, $228,000 can be attributed to the two Nevada
Properties acquired in May of 1998. 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. Food and beverage operations,
company wide, accounted for approximately 66% and 67% of the revenues earned by
this profit center in the second quarters of 1999 and 1998, respectively. The
ratio of revenue from food and beverage to revenue from lodging has generally
remained constant, reflecting that the facilities have historically drawn more
day traffic than overnight stays. The Company's Nevada Properties contributed
lodging, food and beverage revenues of $658,000 in the quarter ended June 30,
1999 as opposed to $283,000 for the same period in 1998.
OTHER OPERATING REVENUES
Other sources of revenues increased by $485,000 to $905,000 for the three
months ended June 30, 1999 compared to the same period in 1998. Other operating
revenues are primarily derived from the sale of programs, parking, admission
fees, check cashing, golf and ATM services. In April of 1999, a refund for
overpayment of prior years' sales tax was received for $170,000. The ATM service
fees, a new service instituted in July of 1998, accounted for $80,000 in revenue
for the second quarter of 1999. Due to the purchase of the Woodview Golf Course,
golf fees increased by $113,000 to $181,000. Check cashing fees increased from
1998 by $30,000 to $85,000 in 1999, while commissions from lottery ticket sales
increased by $61,000 to $93,000 in 1999. While these activities are non-core
business activities, Management believes that they are necessary to attract
gaming patrons.
OPERATING COSTS
The Company's $9.4 million increase in revenues resulted in higher total
costs, as directly related expenses increased by $6.2 million to $17.8 million
in the second quarter of 1999 compared to the same period in 1998. Approximately
$4.3 million of the increase in operating costs is attributable to the video
lottery operations, which includes applicable state taxes and fees. The 49.5%
increase in revenue was also accompanied by an 11.9% increase in marketing and
promotions costs. General and administrative expenses increased by 28%, and
costs of parimutuel operations increased by $227,000 or 18.1%. Operating costs
of the Company's lodging, food and beverage operations increased by $1,087,000
or 83.4% to $2.4 million in the second three months of 1999, of which $353,000
is attributable to the Nevada Properties. Interest expense increased by $236,000
or 23.4% in the second quarter of 1999 due to increased borrowing of the
Company.
12
Operating costs and gross profits earned from operations for the three-month
periods ended June 30, 1999 and 1998 are as follows:
THREE MONTHS ENDED
JUNE 30
------------------------
1999 1998
----------- -----------
Operating Costs
Video lottery operations.......................... $13,345,000 $ 9,040,000
Parimutuel commissions............................ 1,479,000 1,252,000
Lodging, food and beverage........................ 2,391,000 1,304,000
Other revenues.................................... 584,000 49,000
----------- -----------
Total Operating Costs......................... $17,799,000 $11,645,000
----------- -----------
----------- -----------
Gross profit (Loss)
Video lottery operations.......................... $10,088,000 $ 6,465,000
Parimutuel commissions............................ (199,000) (53,000)
Lodging, food and beverage........................ 291,000 498,000
Other revenues.................................... 321,000 371,000
----------- -----------
Total Gross Profit............................ $10,501,000 $ 7,281,000
----------- -----------
----------- -----------
VLTS OPERATING COSTS
Costs of video lottery revenue increased by $4.3 million or 47.6% to $13.3
million for the three months ended June 30, 1999, reflecting an increase in
statutory expenses directly related to the 51.1% increase in video lottery
revenues. Such expenses accounted for $4,297,000 of the total cost increase.
After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer Park 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%, Miscellaneous State Projects 1% and
Employee Pension Fund 0.5%. Assessments paid to the Employee Pension Fund are
returned by the Lottery Commission to a defined contribution pension plan
administered by Mountaineer Park for the sole benefit of Mountaineer Park
employees. Assessments paid to the Horsemen's Purse Fund are returned by the
Lottery Commission 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 Statement of Operations. The State of West Virginia annually
reconciles the State Administrative Fee and the amount not utilized by the state
is refunded every year to Mountaineer Park on June 30th, the end of the state's
fiscal year. The refund in June of 1999 was $1.1 million after payment of other
statutory costs and assessments. The benefit of this refund is reflected in the
VLT costs for the second quarter of 1999.
13
Statutory costs and assessments, including the State Administrative Fee, for
the respective three month periods are as follows:
THREE MONTHS ENDED
JUNE 30
------------------------
1999 1998
----------- -----------
Employee Pension Fund............................. $ 121,000 $ 77,000
Horsemen's Purse Fund............................. 3,773,000 2,429,000
----------- -----------
SUBTOTAL...................................... $ 3,894,000 $ 2,506,000
State of West Virginia............................ $ 6,840,000 $ 4,538,000
Tourism Promotion Fund............................ 730,000 470,000
Hancock County.................................... 487,000 314,000
Stakes Races...................................... 244,000 157,000
Misc. State Projects.............................. 244,000 157,000
----------- -----------
$12,439,000 $ 8,142,000
----------- -----------
----------- -----------
The Company incurred an additional significant expense in its video lottery
operations consisting of VLT lease expense ($607,000 in the second quarter of
1999 compared to $266,000 in 1998). This increase was due to the additional 200
machines installed in July and 100 in December of 1998. Direct and indirect
wages and employee benefits increased by $240,000 to $501,000 in the second
quarter of 1999 due to the cost of added personnel in order to service higher
levels of patron play and numbers of patrons. Utilities and waste disposal
increased by $23,000 in the second quarter of 1999 compared to the same period
in 1998.
PARIMUTUEL COMMISSIONS
Costs (the individual components of which are detailed below) of parimutuel
commissions increased by $227,000, or 18.2%, from $1.3 million in the second
quarter of 1998 to $1.5 million in the second quarter of 1999. One of the
primary reasons for this increase was the increase in the number of live racing
days from 51 to 57 to compensate for the reduction of racing days that occurred
in the first quarter of 1999 due to inclement weather. Purse expense (consisting
of statutorily determined percentages of live racing handle) increased by
$68,000 to $568,000 in the second quarter of 1999, which is consistent with the
increase in live handle and the number of race days conducted. In connection
with simulcasting race operations, contractual fees paid to host tracks and
additional statutorily determined percentages of simulcast commissions
contributed to the purse fund for live racing increased by $45,000 to $716,000
in the second quarter of 1999, which is consistent with the increase in
simulcast wagering. Parimutuel commissions revenue is reported net of these
expenses in the Consolidated Statement of Operations.
Totalisator and other lease expenses increased by $32,000 to approximately
$140,000 in the second quarter of 1999, due to the increase in both race days
and in the cost of leasing such equipment. Wages and benefits attributable to
racing operations increased $23,000 to $727,000 in the three months ended June
30, 1999. Due to a change in state mandated testing, veterinarian services
increased $43,000 in the second quarter of 1999. Utilities and waste disposal
increased by $29,000 in the three months ending June 30, 1999.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Operating costs of the Company's lodging, food and beverage operations
increased by $1.1 million from $1.3 million in the second quarter of 1998 to
$2.4 million in the second quarter of 1999. Of this increase in expenses,
$353,000 is attributable to the Nevada Properties ($109,000 for lodging costs
and
14
$244,000 for food and beverage costs). In compliance with applicable
requirements of the State of Nevada, the Nevada Properties' restaurants were
open 24 hours a day, seven days a week even though the gaming facilities at
these locations were not fully operational. Of the remaining total costs, $1.8
million is attributable to Mountaineer Park ($1.5 million relates to food and
beverage costs; $337,000 relates to lodging).
The $1.5 million in food and beverage operating cost at Mountaineer Park
represents a $573,000 or 63% increase compared to the second quarter of 1998.
This increase resulted from increased purchasing ($241,000), increased cost of
utilities and waste disposal ($22,000), supplies ($24,000) and direct labor and
employee benefits costs ($192,000), due to increased patron volume. Mountaineer
Park's $337,000 in operating costs from lodging for the second quarter of 1999
represents a $131,000 increase from the 1998 period and resulted primarily from
increased salaries and employee benefits related to greater patronage.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues consisting primarily of non-core businesses such as
racing programs, check cashing, golf, tennis and swimming increased by $535,000
from $49,000 in the second quarter of 1998 to $584,000 in the second quarter of
1999. These increases can be attributed to the newly acquired Woodview Golf
Course ($225,000), special events costs ($172,000), gift shop costs ($43,000)
and check cashing costs ($39,000).
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses at Mountaineer Park increased by 11.9% from $1.1 million
for the second quarter of 1998 to $1.2 million for the same period in 1999. This
increase resulted primarily from the introduction of a new bus program and a new
point award system at the Frequent Players Club.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
General and administrative expense for the second quarter of 1999 increased
by $732,000 or 28% from $2.6 million to $3.3 million. The reason for the
increase in general and administrative costs was twofold. First with respect to
operations, the increases are due primarily to: (1) a $364,000 increase in costs
of security, housekeeping and maintenance 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; and (3) additional general and administrative costs of $392,000 generated
by the Nevada Properties.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately $5 million
to $50 million) gaming and/or parimutuel businesses, professional fees and
travel expenses related to evaluating acquisition and financing opportunities
incurred by the Company increased by approximately $159,000 during the quarter
ended June 30, 1999.
In the second quarter of 1999, the Company incurred $1.2 million of interest
expense as compared with $1.0 million of interest expense in the second 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
second quarter of 1998, interest expense included $115,000 of amortization of
loan fees, compared to $126,000 in the second quarter of 1999.
15
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased 53.7%, or $445,000, to $1.3
million for the three months ended June 30, 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
$300,000 for the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Total revenues increased from $35.6 million in the first two quarters of
1998 to $50.3 million in 1999, an increase of $14.7 million or 41.2%. Of this
increase, 87.8%, or $12.9 million, can be attributed to the video lottery
operations. Parimutuel commissions decreased by $167,000 for the six months
ended June 30, 1999. Food, beverage, lodging and other operations contributed
$1.4 million of increased revenues for this period.
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. In addition, 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 contributed to the significant
increase in gross revenue for this period.
VIDEO LOTTERY OPERATIONS
A summary of the video lottery gross wagers less patron payouts ("net win")
for the six months ended June 30, 1999 and 1998 is as follows:
SIX MONTHS ENDED
JUNE 30
---------------------------
1999 1998
------------- ------------
Total gross wagers................................ $ 150,191,000 $105,436,000
Less patron payouts............................... (107,842,000) (75,963,000)
------------- ------------
Revenues--video lottery operations................ $ 42,349,000 $ 29,473,000
------------- ------------
------------- ------------
Average daily net win per terminal................ $ 182 $ 163
------------- ------------
------------- ------------
Revenues from video lottery operations increased by 43.7% from $29.5 million
in the first six months of 1998 to $42.3 million in 1999. 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 of Mountaineer Park, greater familiarity of customers with the Company's
gaming machines, other enhanced facilities and, to a lesser degree, the increase
in parimutuel purse size.
16
PARIMUTUEL COMMISSIONS
Mountaineer's parimutuel commissions for the six months ended June 30, 1999
and 1998 are summarized below:
SIX MONTHS ENDED
JUNE 30
----------------------------
1999 1998
------------- -------------
Simulcast racing parimutuel handle................ $ 10,694,000 $ 11,495,000
Live racing parimutuel handle..................... 9,334,000 10,453,000
Less patrons' winning tickets................... (15,853,000) (17,423,000)
------------- -------------
4,175,000 4,525,000
Less
State and county parimutuel tax................. (237,000) (243,000)
Purses and Horsemen's Association............... (1,744,000) (1,921,000)
------------- -------------
Revenues--parimutuel commissions.................. $ 2,194,000 $ 2,361,000
------------- -------------
------------- -------------
Simulcast handle in the first six months of 1999 decreased 7.0% to $10.7
million in comparison to the same period in 1998. Live racing handle decreased
by 10.7% from $10.5 million in 1998 to $9.3 million in 1999. These decreases
resulted from decreased number of live racing days due to the inclement weather
that occurred in January of 1999. Mountaineer has completed 99 days of the
annually required 210 days in the first half of 1999 compared to 103 days in
1998. In the first two weeks of January, the northern panhandle of West Virginia
and the surrounding areas encountered numerous ice storms that caused the
cancellation of 10 live racing days. The remaining cancelled race days will be
made up in the third quarter of 1999. Mountaineer paid average daily live purses
of $80,100 in the first six months of 1999, a 38.3% increase over the $57,900
average for the corresponding period of 1998.
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined increase of 43%
or $1.35 million to $4,491,000 for the six months ended June 30, 1999.
Restaurant, bar and concession facilities produced $738,000 of the revenue
increase, which is a 33.9% increase over the first six months of 1998. Lodging
revenues increased $612,000 for a 63.6% increase over the same period in 1998.
Of the increase in lodging revenues, $565,000 can be attributed to the Nevada
Properties acquired in May 1998. Of the increase in food and beverage revenues,
$192,000 can be attributed to the Nevada properties. As additional services are
offered to the Nevada Properties' customers, the revenues from these two
properties should increase significantly. Management believes that increased
revenues from lodging, food and beverage resulted primarily from greater
patronage at Mountaineer Park due to enhanced video lottery facilities and
related advertising, which in turn led to increased consumption of food and
beverages by the Company's customers. The ratio of revenue from food and
beverage to revenue from lodging for the West Virginia property has generally
remained constant, reflecting that Mountaineer Park has historically drawn more
day traffic than overnight stays.
OTHER OPERATING REVENUES
Other sources of revenues increased by $605,000 to $1,247,000 for the six
month period ended June 30, 1999 compared to the same period in 1998. Other
operating revenues are primarily derived from the sale of racing programs, check
cashing fees, golf, special event admissions and ATM service fees. In April of
1999, the Company received a $170,000 refund for overpayment of prior years'
sales tax. The increase in ATM service fees, a new service instituted in July of
1998, was $143,000 for the first half of 1999. Due to the purchase of the
Woodview Golf Course, golf fees increased by $111,000 to $181,000. Check cashing
fees increased by $65,000 to $179,000 in 1999, while commissions for lottery
ticket sales
17
increased by $49,000 to $99,000 in 1999. While these activities are non-core
business activities, Management believes that they are necessary to attract
gaming patrons.
OPERATING COSTS
Operating costs and gross profit earned from operations for the six month
periods ended June 30, 1999 and 1998 are as follows:
SIX MONTHS ENDED
JUNE 30
------------------------
1999 1998
----------- -----------
Operating Costs:
Video lottery operations........................ $24,866,000 $17,852,000
Pari-mutuel commissions......................... 2,696,000 2,689,000
Lodging, food and beverage...................... 4,184,000 2,555,000
Other revenues.................................. 868,000 229,000
----------- -----------
Total Operating Costs......................... $32,614,000 $23,325,000
----------- -----------
----------- -----------
Gross Profit (Loss)
Video lottery operations........................ $17,483,000 $11,621,000
Pari-mutuel commissions......................... (502,000) (328,000)
Lodging, food and beverage...................... 307,000 585,000
Other revenues.................................. 379,000 413,000
----------- -----------
Total Gross Profit............................ $17,667,000 $12,291,000
----------- -----------
----------- -----------
The Company's 41.2% increase in revenues resulted in higher total costs, as
expenses increased by 39.8% to $32.6 million in the first half of 1999. Gross
profit increased by 43.7% from the $12.3 million for the first two quarters of
1998 to $17.7 million for the same period in 1999.
VIDEO LOTTERY OPERATIONS
Costs of VLTs increased by $7 million, or 39.3%, to $24.9 million for the
six months ended June 30, 1999, reflecting the increase in statutory expenses
directly related to the 43.7% increase in video lottery revenues.
Statutory costs and assessments, including the State Administrative Fee, for
the respective six month periods are as follows:
SIX MONTHS ENDED
JUNE 30
----------------------------
1999 1998
------------- -------------
Employees Pension Fund..................................... $ 215,000 $ 145,000
Horsemen's Purse Fund...................................... 6,661,000 4,507,000
------------- -------------
Subtotal................................................... 6,876,000 $ 4,652,000
State of West Virginia..................................... 12,893,000 9,120,000
Tourism Promotion Fund..................................... 1,289,000 872,000
Hancock County............................................. 860,000 582,000
Stakes Races............................................... 430,000 291,000
Miscellaneous State Projects............................... 430,000 291,000
------------- -------------
$ 22,778,000 $ 15,808,000
------------- -------------
------------- -------------
18
With respect to video lottery operations, VLT lease expenses increased ($1.2
million in the first half of 1999 compared to $621,000 in 1998) due to the
addition of 300 machines. Direct and indirect wages and employee benefits
increased by 18.8% to $875,000 for the first six months of 1999.
PARIMUTUEL COMMISSIONS
Costs (the individual components of which are detailed below) of parimutuel
commissions increased by $7,000 to $2.7 million in the first two quarters of
1999. Purse expense (consisting of statutorily determined percentages of live
racing handle) decreased 10% to $913,000 in the first half of 1999, which is
consistent with the 10% decrease in live handle. The cause of this decrease is
the reduction of live racing days by 4 in 1999. Parimutuel commissions revenue
is reported net of these expenses in the Consolidated Statement of Operations.
Totalisator and other lease expenses increased by $47,000 to $283,000 during
the first half of 1999 despite the reduction in live race days due to an
increase in the cost of leasing equipment. Wages and benefits relating to the
Company's racing operations decreased $23,000 to $1.2 million in the six months
ended June 30, 1999.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Operating costs of the Company's lodging, food and beverage operations
increased by $1.6 million or 63.8% to $4.2 million in the first six months of
1999 from $2.6 million for the same period in 1998. Of this amount, $695,000 is
attributable to the Nevada Properties ($352,000 for lodging costs and $343,000
for food and beverage costs). Of the remaining total costs of $3.3 million,
which are attributable to Mountaineer Park, $2.6 million is attributable to food
and beverage costs and $674,000 is attributable to lodging.
The $2.6 million in food and beverage operating cost at Mountaineer Park
represents an $860,000 or 49.5% increase compared to the first six months of
1998. This increase resulted primarily from increased purchasing ($342,000),
increased cost of utilities and waste disposal ($118,000), supplies ($63,000)
and direct labor and employee benefits costs ($332,000). Apart from the costs
associated with food spoilage and overstaffing during January (resulting from
inclement weather), the increased costs are generally in line with increased
revenues from greater patronage during the first half of 1999.
Mountaineer Park's $674,000 in operating costs from lodging for the first
half of 1999 represents a $30,000 increase from the 1998 period. Salaries and
employee benefits relating to lodging as well as costs of supplies increased
during the second quarter as a result of increased patronage and offset the
decrease of these costs that occurred in the first quarter of 1999.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues increased by $639,000 from $229,000 for the six
months ended June 30, 1998 to $868,000 for the six months ended June 30, 1999.
These increases can be attributed primarily to Woodview Golf Course, acquired in
January of 1999 ($260,000), special events costs ($203,000), gift shop costs
($63,000) and check cashing fees ($87,000) and are consistent with increases in
the Company's other revenues.
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses increased 16.1% from $1.8 million for the first half of
1998 to $2.1 million for the same period in 1999. The increase in marketing
costs was due primarily to the production and broadcast of Mountaineer Park's
new infomercial. Mountaineer Park also introduced a bus program and a new point
award system at the Frequent Players Club during this period. The increase in
marketing costs was also due to an increase in direct mail advertising. 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.
19
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES
General and administrative expenses for the periods being compared increased
by $1.9 million or 44.2% from $4.2 million to $6.1 million. The reason for the
increase in general and administrative costs was twofold. First, with respect to
operations, the increases are due primarily to (1) a $733,000 increase in costs
of security, maintenance and housekeeping 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
and (3) additional general and administrative costs of $707,000 generated by the
Nevada Properties.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately $5 million
to $50 million) gaming and/or parimutuel businesses, professional fees and
travel expenses related to evaluating acquisition and financing opportunities
incurred by the Company increased by approximately $489,000 during the first six
months of 1999.
In the first six months of 1999, the Company incurred $2.3 million of
interest expense compared to $1.8 million of interest expense for the same
period in 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 half of 1998, interest expense included $230,000 of amortization of loan
fees, compared to $252,000 in the first half of 1999.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by 47.3%, or $738,000, to
$2.3 million for the six months ended June 30, 1999. This increase reflects the
increased capitalization of improvements completed at Mountaineer Park's
facilities, such as the 12,000 square foot addition to the Speakeasy Gaming
Saloon and the acquisition of both Woodview Golf Course and the Nevada
Properties. Depreciation for the Nevada Properties was $505,000 for the first
half of 1999.
CASH FLOWS
The Company's operations produced $7,389,000 in cash flow in the six months
ended June 30, 1999, compared to $4,064,000 produced in the first six months of
1998. Current year non-cash expenses included $2.3 million of depreciation and
amortization and $252,000 for the amortization of deferred financing costs.
The Company invested $4.4 million in capital improvements for the West
Virginia property in the first half of 1999 versus $1.8 million in 1998. The
Company also invested $3.6 million in capital assets related to the Nevada
Properties.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of June 30, 1999 was $12,625,000
and its unrestricted cash balance was $9,094,000. Racing purses are paid from
funds contributed by the Company to bank accounts owned by the horse owners who
race at Mountaineer Park. At June 30, 1999, the balances in these accounts
exceeded purse obligations by $967,000; this amount is available for payment of
future purse obligations at the discretion of the Company and in accordance with
the terms of its agreement with the HBPA.
LONG-TERM DEBT AND LINE OF CREDIT REFINANCING. Effective July 2, 1997,
Mountaineer and the Company amended and restated the July 2, 1996 Term Loan
Agreement, which had been previously amended and restated as of December 10,
1996. The December 10, 1996 Amended Term Loan Agreement reflected an increase in
the amount borrowed from $5 million to $16.1 million, established a $5,376,500
line of credit, and converted the lender's position from second to first trust
holder.
20
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 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 was reduced 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 June 30, 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
pledged, 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. 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 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
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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 Park 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 Park 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 option period was subsequently extended until
October 1, 1999. The Company exercised this option with respect to approximately
328 acres and executed two separate purchase agreements for the acquisition of
two tracts (one consisting of 1.84 acres and the other approximately 326 acres)
comprising the acreage. A dispute has arisen, however, between Mountaineer Park
and the seller's lessee of the 1.84 acre parcel regarding the seller's ability
to convey insurable title to a portion of the property. As a result, the Company
initiated an action on July 16, 1999, in the Circuit Court of Hancock County,
West Virginia, seeking a declaratory judgment in its favor. Upon a favorable
resolution of the action, the Company intends to complete the purchase of this
property.
On January 21, 1999, the Company purchased the 168-acre 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 has spent approximately
$1.3 million renovating and improving the property and acquiring golf course
maintenance equipment.
On May 3, 1999, the Company acquired, for a purchase price of $145,000,
approximately 110 acres of real property including a house, a mobile home and
all the personal property attendant to such real property at the time of
purchase. A portion of this real property adjoins the 350+ acre undeveloped
parcel acquired in 1998 near the Company's Mountaineer Race Track & Gaming
Resort.
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 Stock Incentive
Plan, for which the Company has reserved 800,000 shares. To date, the Company
has granted, subject to Shareholder approval of the plan, 750,000 shares to
various employees of the Company of the plan.
As of June 30, 1999, there were outstanding options and warrants to purchase
8,740,867 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. See "Part II,
Item 2--Changes in Securities."
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 $11.4
million federal net operating loss tax carry forwards (as of December 31, 1998),
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.
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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, West Virginia. To correct this problem, the
Company is upgrading the SAMS 3 System by utilizing what is known as a SAS
bridge, which is a casino standard protocol that is Y2K compliant. The
installation of the SAS bridge is scheduled for September of 1999. In addition,
the Company and the other West Virginia race tracks have contracted with IGT to
replace the SAMS 3 System with a SAMS 4 System that is Y2K compliant and
includes other enhancements of the video lottery program. The Lottery Commission
approved the contract on June 25, 1999. Installation of the SAMS 4 system should
be completed by November 1999. The SAS Bridge and SAMS 4 System will cost
Mountaineer Park approximately $1.7 million. Secured letters of credit have been
issued to the manufacturer for this expenditure.
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
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at June 30, 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.
23
PART II
OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
ITEM 2--CHANGES IN SECURITIES
In July of 1999, holders of options to purchase the Company's common stock
exercised, in the aggregate, options to purchase 5,000 shares (for $.56 per
share) and 17,700 shares (for $1.06 per share).
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)
10.3 Deferred Compensation Agreement dated June 1, 1999, between the Company and
Robert A. Blatt(5)
10.4 Deferred Compensation Agreement dated June 1, 1999, between the Company and
Robert L. Ruben(5)
27.1 Financial Data Schedule(5)
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(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 18, 1996, filed November 1, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated and filed on February 20, 1998.
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(4) Incorporated by reference from the Company's Current Report on Form 10-Q
dated and filed on May 10, 1999.
(5) Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1933, the Company has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
MTR GAMING GROUP, INC.
Date: August 16, 1999 By: /s/ EDSON R. ARNEAULT
------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF FINANCIAL OFFICER
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