<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-22521
MTR GAMING GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1103135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1461 GLENNEYRE STREET, SUITE F, LAGUNA BEACH, CALIFORNIA 92651
Address of principal executive offices
92651
Zip Code
(714) 376-3010
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (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
registrant was required to file such reports), and (2) has been the subject
to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
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
18,940,220
Outstanding at November 1, 1996
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MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1 - Financial Statements
Condensed and Consolidated Balance Sheets as of September 30, 1996 ................ 1
Condensed and Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1996 and 1995 .............. 3
Condensed and Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 ................................ 4
Notes to Condensed and Consolidated Financial Statements .......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................................... 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .......................................................... 21
Item 2 - Changes in Securities ...................................................... 23
Item 3 - Defaults Upon Senior Securities ............................................ 23
Item 4 - Submission of Matters to a Vote of Security Holders ........................ 23
Item 5 - Other Information .......................................................... 24
Item 6 - Exhibits and Reports on Form 8-K ........................................... 24
SIGNATURE PAGE ............................................................................. 26
</TABLE>
i
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PART I
FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 3,052,000 $ 807,000
Restricted cash ....................................... 457,000 426,000
Notes receivable from related parties, net of allowance
for doubtful accounts of $290,000 ................. 62,000 62,000
Accounts receivable, net of allowance
for doubtful accounts of $112,000 and
$70,000 for 1996 and 1995, respectively ........... 129,000 174,000
Deferred financing costs .............................. 776,000 388,000
Other current assets .................................. 258,000 115,000
------------ ------------
Total Current Assets .............................. 4,734,000 1,972,000
------------ ------------
Property:
Land .................................................. 371,000 371,000
Buildings ............................................. 16,153,000 15,716,000
Equipment and automobiles ............................. 2,363,000 2,021,000
Furniture and fixtures ................................ 2,635,000 2,258,000
Construction in progress .............................. 418,000 519,000
------------ ------------
21,940,000 20,885,000
Less Accumulated Depreciation ......................... (3,897,000) (2,785,000)
------------ ------------
18,043,000 18,100,000
------------ ------------
Net Assets of Discontinued
Oil and Gas Activities ................................ 2,616,000 2,616,000
------------ ------------
Other Assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $959,000 and $770,000 ............. 2,815,000 3,004,000
Deposits and other .................................... 28,000 55,000
------------ ------------
2,843,000 3,059,000
------------ ------------
TOTAL ASSETS ............................................... $ 28,236,000 $ 25,747,000
============ ============
</TABLE>
See accompanying notes to financial statements.
1
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ........ $ 841,000 $ 3,474,000
Other accrued liabilities .................... 2,305,000 2,257,000
Current
portion of long term debt ......................... 3,636,000 2,536,000
Current portion of redeemable common stock ... 586,000 991,000
------------ ------------
Total Current Liabilities ................ 7,368,000 9,258,000
------------ ------------
Accrued liabilities ............................... 23,000 490,000
------------ ------------
Deferred Income Taxes ............................. 1,430,000 1,529,000
------------ ------------
Long Term Debt .................................... 10,513,000 8,071,000
------------ ------------
Redeemable Common Stock ........................... 187,000 415,000
------------ ------------
Shareholders' Equity:
Common stock ................................. 2,000 2,000
Paid-in-capital .............................. 33,442,000 32,115,000
Note receivable from exercise of stock options 0 (69,000)
Accumulated deficit .......................... (24,729,000) (26,064,000)
------------ ------------
Total Shareholders' Equity ............... 8,715,000 5,984,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 28,236,000 $ 25,747,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Video lottery terminals ........... $ 10,067,000 $ 5,220,000 $ 21,967,000 $ 12,063,000
Pari-mutuel commissions ........... 1,232,000 1,266,000 3,397,000 3,312,000
Food, beverage and lodging ........ 1,396,000 1,064,000 2,969,000 2,454,000
Other ............................. 402,000 354,000 865,000 925,000
------------ ------------ ------------ ------------
Total Revenue ................. 13,097,000 7,904,000 29,198,000 18,754,000
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of video lottery terminals ... 6,343,000 3,573,000 14,371,000 8,198,000
Cost of pari-mutuel commissions ... 1,571,000 1,548,000 3,860,000 4,587,000
Cost of food, beverage and lodging 1,064,000 1,057,000 2,593,000 2,728,000
Cost of other revenues ............ 302,000 359,000 794,000 699,000
General and administrative expenses 1,044,000 1,985,000 3,330,000 4,544,000
Depreciation and amortization ..... 435,000 419,000 1,301,000 1,040,000
------------ ------------ ------------ ------------
Total Costs and Expenses ...... 10,759,000 8,941,000 26,249,000 21,796,000
------------ ------------ ------------ ------------
Operating Profit (Loss) ................ 2,338,000 (1,037,000) 2,949,000 (3,042,000)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest expense .................. (924,000) (202,000) (1,716,000) (911,000)
Change in accounting estimate
for interest amortization ..... 0 573,000 0 573,000
------------ ------------ ------------ ------------
(924,000) 371,000 (1,716,000) (338,000)
------------ ------------ ------------ ------------
Income (Loss) Before
Benefit for Income Taxes .......... 1,414,000 (666,000) 1,233,000 (3,380,000)
Benefit for Income Taxes ............... 34,000 31,000 100,000 96,000
------------ ------------ ------------ ------------
Net Income (Loss) ...................... $ 1,448,000 $ (635,000) $ 1,333,000 $ (3,284,000)
============ ============ ============ ============
Net Income (Loss) Per Share ............ $ 0.08 $ (0.04) $ 0.07 $ (0.21)
============ ============ ============ ============
Weighted Average Number
of Shares Outstanding ............. 18,702,179 16,397,809 18,378,890 15,685,573
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
3
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ........................................... $ 1,333,000 $(3,284,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by (Used in) Operating Activities:
Depreciation and amortization .......................... 1,301,000 1,040,000
Common stock issued and stock options granted
for services rendered .............................. 332,000 75,000
Common stock issued for interest expense ............... 569,000 315,000
Provision for (benefit from) settlement arrangements ... (579,000) 41,000
Provision for relocation and severance ................. 0 596,000
Provision for doubtful accounts ........................ 42,000 0
Deferred income taxes .................................. (100,000) (96,000)
Change in accounting estimate
for interest amortization .......................... 0 (573,000)
Net Changes in Assets and Liabilities:
Restricted cash ........................................ (31,000) 188,000
Prepaid expenses and other ............................. (143,000) 310,000
Net assets of discontinued operations .................. 0 (24,000)
Accounts payable and accrued liabilities ............... (2,173,000) 1,129,000
----------- -----------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................... $ 551,000 $ (283,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from shareholder ....................... 69,000 0
Deposits and other ..................................... 27,000 (12,000)
Capital expenditures ................................... (1,057,000) (4,669,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES ...................... $ (961,000) $(4,681,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan fees paid .............................................. (619,000) 0
Principal payments .......................................... (2,826,000) 0
Proceeds from issuance of notes payable ..................... 6,100,000 4,455,000
Proceeds from issuance of common stock and warrants ......... 0 27,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES ....................... $ 2,655,000 $ 4,482,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. 2,245,000 (482,000)
Cash, Beginning of Period ................................... 807,000 1,057,000
----------- -----------
Cash, End of Period ......................................... $ 3,052,000 $ 575,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
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MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. 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, 1995.
Note 2 - Contingencies
Corrective Action Plan. The Registrant has developed and is implementing a
corrective action plan to stop leakage from underground storage tanks at its
Mountaineer Race Track and Gaming Resort facility in Chester, West Virginia. In
1995, Management estimated the cost of the plan to be $140,000, consisting of
$60,000 in monitoring and operational costs to be expended in 1995 and 1996, and
$80,000 in capital expenditures to be incurred in 1996. The Registrant recorded
a provision of $140,000 in 1995 for these projected expenses. The Registrant
expended $45,000 relating to this contingency in the second half of 1995 and
$66,000 in the first nine months of 1996.
Settlement Agreements. In 1996 the Registrant negotiated significant
reductions in three previously accrued obligations, producing a $529,000
reduction in expense and current liabilities, as herein described: (i) In 1995
the Registrant recorded a provision for loss in the amount of $308,000 in
connection with a legal judgment which had been assessed against Mountaineer. In
June, 1996 the related lawsuit was dismissed upon payment of a $100,000
settlement payment; (ii) In September, 1996 the Registrant reached agreement in
a dispute over trade accounts payable. A $411,000 claim for professional fees
was satisfied in full upon payment of a $150,000 cash settlement in September.
(iii) In July, 1994 the Registrant entered into an agreement in settlement of
claims arising from a 1993 financial advisory agreement. In connection
therewith, the Registrant accrued a $150,000 liability and issued warrants to
purchase 145,000 shares of common stock with registration rights, exercisable at
a price of $6.25 per share through January 15, 1997. In September, 1996 the
settlement agreement was amended as follows: (a) the obligation to remit a
$150,000 payment was reduced to $90,000 in return for an immediate payment of
same, and (b) the exercise price of the previously issued warrants was reduced
to $3.00 per share and the exercise period was extended to January 15, 1998.
On September 26, 1996, the original term of Mountaineer's labor agreements
with approximately 50 mutuel and 9 video lottery employees expired. Prior to
that date Mountaineer and the union agreed to extend the terms of the contracts
for an additional 60 days. There can be no assurances that a new labor agreement
will be finalized prior to the expiration of the extended term.
5
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Note 3 - Income Taxes
The benefit for income taxes recorded in the accompanying statement of
operations for the three and nine months ended September 30, 1996 and September
30, 1995 results from non-tax deductible depreciation expense attributable to
the purchase method of accounting for the investment. At September 30, 1996, the
Registrant has recorded a non-current valuation allowance of approximately $8.7
million against its primary deferred tax assets (net operating loss
carryforwards for federal and state income tax purposes). At September 30, 1996,
the Registrant has approximately $23 million in net operating loss
carryforwards; the use of such net operating loss carryforwards earned from 1992
through 1995 are subject to certain limitations as a result of common stock
issuances. Due to limitations under the Alternative Minimum Tax rules of the Tax
Reform Act of 1986, the Registrant expects to make quarterly federal income tax
expenditures in the future. Such payments are not expected to have a material
impact on operations.
Note 4 - Discontinued Oil and Gas Activities
<TABLE>
<CAPTION>
BALANCE SHEET ITEMS
September 30 December 31
1996 1995
<S> <C> <C>
ASSETS
Term note receivable $ 177,000 $ 236,000
Production note receivable 150,000 150,000
Oil and gas activities:
Working interest in proved oil and gas properties 2,582,000 2,582,000
----------- -----------
2,909,000 2,968,000
----------- -----------
LIABILITIES
Accounts payable and accrued liabilities (293,000) (252,000)
Payable to related parties 0 (100,000)
----------- -----------
NET ASSETS $ 2,616,000 $ 2,616,000
=========== ===========
</TABLE>
The Registrant's remaining oil and gas assets are located in Michigan,
consisting of a 25% working interest in a 64% net revenue interest in proved
reserves. Thirty-four wells are located on the property which have been
inoperative since the Registrant acquired the property in December 1992. The
well sites require certain remedial activities, which include abandonment costs.
Management has estimated the cost of such remedial activities to range from
$1,200,000 to $2,000,000 should its current plan of operation with Fleur-David
not continue. Management expects to continue with its rework project with
Fleur-David to minimize the Registrant's costs associated with remediation and
abandonment of the wells in preparation for their eventual sale. The
Registrant's estimated cost of rework, as a 25% joint venture interest holder,
is $550,000, $257,000 of which has been paid through September 30, 1996 and the
remaining $293,000 included as a liability in the net assets of discontinued
operations in the accompanying September 30, 1996 condensed and consolidated
balance sheet.
Related Party Transactions
Sale of Oil and Gas Leases and Wells. In December 1994, the Registrant
entered into an arrangement to sell certain proved and unproven gas reserves
located in Southeast Ohio for notes valued at approximately $426,000 to a
corporation owned by the brother of an officer and major shareholder of the
Registrant. In connection therewith, the Registrant obtained two notes,
including a $300,000 note bearing interest at 8% per annum, payable at $10,000
per month beginning June 1995, and a $150,000 non-interest bearing note, payable
based on 50% of
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production revenues in excess of $10,000 per month secured by the assets sold.
The Registrant recorded a loss on the sale of these assets of $567,000 in 1994.
At September 30, 1996, the principal balance on the term note is approximately
$177,000 and the principal balance of the production note is $150,000.
Notes Payable. During 1994 and 1995, various corporate affiliates of Mr.
Arneault advanced an aggregate sum of approximately $100,000 to the Registrant's
ExCal subsidiary primarily to cover overhead expenses in connection with the
maintenance of leases and other costs associated with the Registrant's existing
oil and gas interests in Michigan and former interests in Ohio. In February
1996, such accrued amount, along with accrued interest thereon at the rate of
10% per annum, was converted into demand promissory notes in the principal
amount of $100,000 payable to such corporate affiliates of Mr. Arneault at the
rate of 10% per annum. The remaining principal balance of this obligation was
repaid in the third quarter of 1996. No material overhead expenses are expected
to be incurred in 1996 in connection with such property.
Note 5 - Licensing
In June 1996, Mountaineer's video lottery license was renewed through June
30, 1997.
Note 6 - Jackpot Settlement Agreement
In January 1993, the Registrant entered into a financing arrangement with
Jackpot Enterprises, Inc. ("Jackpot"). On March 2, 1995, the Registrant settled
the claim by Jackpot, effective June 25, 1994, by agreeing to issue shares of
its common stock with registration rights. The number of shares of common stock
to be issued is based on $512,500 divided by the closing market price per share
on the effective date of registration. The Registrant recorded a provision for
loss of $525,000 in connection with the settlement which is included in the
consolidated statement of operations for the year ended December 31, 1994.
The Registrant issued 125,000 shares to Jackpot on the date of the
settlement and, for every 60 days the registration statement remained unfiled,
the Registrant was obligated to issue an additional 12,500 shares, up to a
maximum of 125,000 additional shares. At September 30, 1996, 237,500 shares have
been issued under the terms of this agreement; 62,500 of such additional shares
were issued during the nine months ended September 30, 1996, to which a value of
$91,000 was ascribed and charged to accrued liabilities. The Registrant's
obligation to issue the final 12,500 of such additional shares accrued as of
October 20, 1996. The issuance of such shares has been, and will continue to be
reflected in the statement of stockholders' equity and no additional value or
consideration will be charged to operations.
Note 7 - Long-Term Debt
Construction Note Payable. In March 1996, Bennett Management & Development
Corporation and its parent, The Bennett Funding Group, Inc., filed for
protection from creditors under Chapter 11 of the Federal Bankruptcy Laws. The
Bankruptcy Court subsequently assigned a trustee to administer the affairs of
the estates while in bankruptcy. The Registrant has continued to remit interest
and principal payments to Bennett Management & Development Corporation under the
terms of the construction loan agreement, as amended January 1996. The
outstanding principal balance of the construction note payable is $8.8 million
at September 30, 1996. The Registrant paid $1.4 million and $1.2 million
respectively of principal and interest relating to the construction note in the
first nine months of 1996. In October 1996, several provisions of this loan
agreement were amended, as more fully described in Note 10, Subsequent Events.
Working Capital Term Note. On July 2, 1996, the Registrant's Mountaineer
subsidiary entered into a financing arrangement with a private lending firm for
a working capital loan and a
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commitment for first mortgage refinancing. The $5 million working capital term
loan is secured by a second mortgage on Mountaineer's real and personal property
and is guaranteed by the Registrant. The note evidencing the loan calls for 36
monthly payments of interest only at the rate of 12% per annum, and a default
rate of 22% per annum. The Registrant also agreed to issue the lender 183,206
shares of its common stock and warrants to purchase an additional 1,141,250
shares at $1.06 per share. The principal is to be repaid at the end of the three
year term, during which the loan is subject to, on each anniversary date,
additional fees in cash equal to 8% of the outstanding principal balance, stock
equal to 5% of the outstanding principal balance (valued at the average closing
bid price for the 30 business days immediately preceding the third business day
prior to the effective date or each anniversary, as the case may be), and
warrants to purchase 250,000 shares of common stock at $1.06 per share. Certain
restrictions are imposed limiting the Registrant's ability to incur additional
debt, make capital expenditures and increase management's compensation, and
anti-dilution provisions are included to protect the lender in the event the
Registrant issues additional securities at a price below $1.06 per share without
the consent of the lender.
As part of the transaction, the lender also provided a one year commitment
to lend Mountaineer up to $11.1 million of additional funds to be used to
refinance the current first mortgage held by Bennett Management & Development
Corp. The commitment is subject to customary conditions, including negotiation
of definitive loan agreements. In connection with the financial commitment, the
Registrant paid a $110,000 commitment fee and issued the lender additional
warrants to purchase 350,000 shares of common stock at $1.06 per share.
In order to assure compliance with provisions of the West Virginia
Racetrack Video Lottery Act concerning control over a licensee of the State
Lottery, the lender has agreed that it may not own, through the exercise of
warrants or otherwise, more than 5% of the Registrant's outstanding common stock
unless and until the West Virginia Lottery Commission either (i) approves the
lender or (ii) provides an advisory opinion approving an arrangement whereby the
lender may own but may not have voting rights to any shares in excess of the 5%
threshold. If the lender becomes disqualified after such Lottery Commission
approval, any shares held in excess of the 5% threshold, if registered, shall be
sold by the lender in the market; otherwise such shares may be put to the
Registrant at the then market price, said price payable in cash or in the form
of a note with interest only payable monthly at 24% per annum and all principal
due in one year.
The Registrant agreed to register the stock and warrants with the
Securities and Exchange Commission, subject to cash penalties if such
registration is not declared effective before seven and nine months from the
date of demand therefor by the lender. All warrants are exercisable for a term
of five years. The stock and warrants were registered in the fourth quarter of
1996 as more fully described in Note 10, Subsequent Events.
Net proceeds after repayment of a $250,000 loan from an affiliate of the
lender pending the closing, due diligence and loan origination fees, fees
associated with the take-out commitment and the costs of the transaction are
approximately $4.2 million. The Registrant charged $913,000 in cash and noncash
expenditures to deferred financing costs in connection with this financing.
Prepaid loan fees relating to the financing are being amortized over a 12 month
period. The Registrant paid $153,000 of interest on the working capital note in
the third quarter of 1996.
Trade Payables Term Note. In September 1995, the Registrant entered into an
agreement with its totalisator system supplier to convert $461,000 of
outstanding trade payables into a term note. Under the terms of the agreement,
the Registrant is required to make 21 monthly interest and principal payments of
$17,800 and, concurrently, eight (8) additional payments of approximately
$17,800 on various dates through May 31, 1997. The loan, which is unsecured,
bears interest at the rate of 12% per annum. The loan is subject to an
acceleration clause and other financial disincentives in the event of default.
At September 30, 1996, the outstanding principal balance is
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<PAGE> 11
$186,000. The Registrant paid $221,000 and $28,000 of principal and interest,
respectively, in the first nine months of 1996 related to this term note.
Settlement Term Note. In May 1996, the Registrant reached a settlement
agreement with the holder of 52,250 shares of redeemable common stock, valued at
$313,000 as further described in Note 9. Pursuant to the settlement agreement,
the Registrant agreed to pay $25,000 upon execution of the settlement agreement
and delivered a promissory note calling for a total of three payments of $5,000
due on August 1, 1996, November 1, 1996 and February 1, 1997; a payment of
$50,087 on May 1, 1997; and a total of four annual payments of $40,087 due on
May 1, 1998 through 2001. The promissory note, which is unsecured, does not bear
interest. The obligation to pay the amounts described above was discounted at
8%; at September 30, 1996 the remaining principal balance is $179,000. The
Registrant paid $26,000 of principal, and $4,000 of imputed interest in the
third quarter of 1996.
The Registrant charged $1.4 million and $911,000, respectively, to interest
expense relating to long term debt during the nine month periods ended September
30, 1996 and 1995. The Registrant capitalized $267,000 and $1,176,000 of
interest in the first three quarters of 1996 and 1995, respectively.
Note 8 - Short Term Notes Payable
In the first half of 1996, the Registrant entered into a series of
short-term note agreements with three lenders aggregating $1,100,000. Under the
terms of the agreements the Registrant was obligated to repay a total of
$1,302,000 in interest and principal in 1996. In addition, the Registrant issued
100,000 shares of its common stock, and warrants to purchase 50,000 shares of
its common stock at $0.80 per share, valued in the aggregate at $81,000 as
supplemental consideration for the loans. The short term note obligations were
paid in full in the second and third quarters of 1996. The Registrant charged
$302,000 to interest expense relating to short-term notes in the first nine
months of 1996, including amortization of deferred financing costs.
Note 9 - Other Capital Transactions
Common Stock Issued for Services Rendered. The Registrant incurred salaries
to key members of management totaling $204,000 which remained unpaid at December
31, 1995. On February 9, 1996, the board of directors approved two agreements to
issue a total of 466,676 shares of the Registrant's common stock in satisfaction
of $186,000 of these liabilities (plus accrued interest of $3,300 calculated at
the rate of 10% per annum) based on the closing market price of the stock on
that day of $.40625 per share. The agreements provide that for a term of one
year commencing February 9, 1996, in the event the initial holders propose to
sell any of the shares, they shall be required to notify the Registrant of such
intention and the Registrant may then elect, at any time before the proposed
date of sale, to purchase the shares at the price of $1.00 per share, payable
within two days after the date of such election. Otherwise, the shares may be
sold as proposed. In addition, the Registrant shall have the right at any time,
upon three days written notice, to purchase the shares for a price of $1.00 per
share within two days after such notice.
In November 1995, the Registrant entered into an agreement to compensate a
key consultant for services previously rendered to the Registrant. The agreement
provided for the issuance of 200,000 shares of the Registrant's common stock to
the consultant and registration of the shares on Form S-8 with the Securities
and Exchange Commission. The registration statement was filed on December 4,
1995, and the shares were issued effective January 19, 1996.
Incentive Plan Stock Options. In November 1995, the Registrant's board of
directors adopted an incentive stock option plan meeting the requirements of
Section 422 of the Internal Revenue Code, subject to shareholder approval. In
accordance with the plan, 500,000 shares were reserved
9
<PAGE> 12
for issuance on January 23, 1996 at an exercise price of $0.5625 per share,
based on the closing market price of the stock on that day. The options are
exercisable over a period of five years, subject to certain limitations. In
January 1996, the Registrant awarded options to purchase 400,000 shares under
this plan to two officers of the Registrant who also serve on the Registrant's
board of directors.
Board of Directors Stock Options. On January 23, 1996, the board of
directors granted to its two outside directors, Robert A. Blatt and Robert L.
Ruben, non-qualified stock options to purchase 50,000 shares and 75,000 shares
of the Registrant's common stock, respectively, at the fair market value of the
shares on the date of grant of $0.5625 per share. The options are immediately
exercisable for a term of five years.
Redeemable Common Stock. In 1992, the Registrant acquired all of the
capital stock of Golden Palace Casinos, Inc. in exchange for 4,311,000 shares of
the Registrant's common stock and the assumption of certain options, warrants
and convertible debentures of Golden Palace. With respect to 209,000 shares of
such stock, the Registrant granted the founders of Golden Palace put rights
requiring the Registrant, upon demand after February 1, 1993, to redeem such
shares at $6.00 per share (the "Redeemable Shares").
By two agreements dated as of June 30, 1995 and one agreement dated April
2, 1996 and amended as of June 18, 1996, in settlement of claims relating to the
Registrant's failure to redeem 156,750 of the Redeemable Shares upon demand, the
Registrant issued in the aggregate 500,166 shares of the Registrant's common
stock, of which 410,166 shares were to become redeemable at a price of $1.50 per
share over 24 months if such shares were not registered with the Securities and
Exchange Commission by June 30, 1996. Also pursuant to the agreements, upon
registration, any shares not then required to have been redeemed were subject to
a guaranteed sale price of $1.50 per share (to the extent the average closing
price of the common stock for the 90 trading days following the effective date
of the registration statement is below $1.50) to be made up through the issuance
of additional common stock.
With respect to 120,000 of such shares, however, the holder elected to
terminate the Registrant's right of redemption. As a result of such termination,
the Registrant recorded a $180,000 reduction in redeemable common stock
obligations and a corresponding $180,000 increase to paid in capital in the
Condensed and Consolidated Balance Sheet. Such shares remain subject to the
$1.50 price guarantee.
In July 1996, a promissory note in the amount of $235,000 was executed with
respect to 156,570 of such shares. By agreement dated November 1, 1996, however,
in consideration of the redemption of a payment of $31,000, the holder of such
shares agreed to relinquish the $1.50 price guarantee and the Registrant agreed
to terminate the right of redemption. Accordingly, thereafter, such shares will
be recorded as a reduction in redeemable common stock obligation and a
corresponding increase to paid-in-capital. See Note 10, Subsequent Events.
At September 30, 16,677 of the remaining 133,416 shares had been redeemed
by the Registrant in accordance with the agreement. Such shares have been
returned to authorized but unissued status. The 116,739 shares not redeemed as
of September 30, 1996 have been recorded as a redeemable common stock obligation
of $178,000. By virtue of the inclusion of such shares in a registration
statement that became effective as of October 31, 1996, however, such shares
will thereafter be recorded as a reduction in redeemable common stock
obligations and a corresponding increase in paid-in-capital. Such shares will
remain subject to the $1.50 price guarantee. See Note 10, Subsequent Events,
Form S-3 Registration Statement.
10
<PAGE> 13
The Registrant's obligation with respect to the remaining 52,250 Redeemable
Shares issued in connection with the acquisition of Golden Palace has been
settled by the delivery of a promissory note. See Note 7, Long-Term Debt,
Settlement Term Note.
Note 10 - Subsequent Events
Bennett Loan Amendment. Effective October 31, 1996, the loan agreement with
Bennett Management and Development was amended, in settlement of the
Registrant's lawsuit against Bennett. The Agreement modifies the schedule for
the principal amortization of Bennett's $10.2 million construction loan such
that instead of 36 equal monthly payments of $283,333, Mountaineer will make
principal payments of $75,000 per month from October through March and $125,000
per month from April through September. The remaining principal balance will
continue to be due on April 30, 1999. As a result of this provision, the
Registrant's current liability balances declined by $2.2 million and noncurrent
liabilities increased by a similar amount.
In the event the Bennett loan is not prepaid by December 31, 1997, then
either (i) the interest rate on any outstanding balance shall, as of January 1,
1998, increase from 12.5% to 14.5% if such rate increase is approved by
Mountaineer's other mortgage lender; or (ii) the monthly payments of principal
will increase to $100,000 from October through March and $200,000 from April
through September.
The settlement also modifies the Registrant's obligation to issue
additional shares of the Registrant's common stock to Bennett if the loan is not
prepaid by January 1, 1997. Whereas the Construction Loan Agreement had required
the Registrant to issue Bennett $2.5 million worth of the Registrant's common
stock on January 2, 1997 absent prepayment, the settlement permits the
Registrant, at its option, either to pay Bennett $500,000 in cash or issue
$750,000 in stock. Similarly, the Registrant may pay $750,000 in cash or issue
$1 million in stock if the Bennett loan is not prepaid by July 1, 1997, and pay
$1 million in cash or issue $1.25 million in stock if the loan is not prepaid by
December 31, 1997. If the Registrant elects to issue Bennett additional shares
of common stock, such shares will be subject to the Construction Loan
Agreement's requirement that, to the extent such issuance would otherwise result
in Bennett having voting rights of greater than 5% of the Registrant's issued
and outstanding shares, then the voting rights shall be transferred to the
Registrant's board of directors.
In the event the Trustee desires to sell any of the shares held by Bennett,
the settlement also grants the Registrant until December 31, 1997 the right to
match any bona fide offer presented to the Trustee by a non-affiliate to
purchase the shares. The settlement likewise grants the Registrant an option,
for the period commencing on the date Mountaineer has paid the Bennett loan in
full and terminating ten business days thereafter, to purchase all (but not
part) of the 1,530,000 shares currently held by Bennett for a price per share
equal to 90% of the average closing bid price of the shares as reported by
Nasdaq for the twenty (20) consecutive trading days immediately preceding the
date on which Mountaineer retires the loan, but in no event less than $1.125 per
share.
AGEL Settlement Agreement. As part of the October 31, 1996 amendment to the
Bennett loan agreement, American Gaming & Entertainment, Ltd. ("AGEL"), an
affiliate of Bennett which had performed management services at Mountaineer
pursuant to a June 2, 1994 management agreement, delivered an acknowledgment
that the management agreement had been terminated and that a June 30, 1995
settlement agreement among the Registrant, Mountaineer and AGEL was in effect.
That settlement agreement terminated the management agreement and settled the
accounts of the parties as of June 30, 1995.
Severance Agreement Settlement. On April 26, 1995, the Registrant entered
into a severance agreement with its former chief executive officer. In
connection therewith, the Registrant was obligated to pay approximately $440,000
over a period of two years. In addition, the Registrant
<PAGE> 14
repriced certain incentive options and was obligated to provide certain benefits
during the term of the agreement. In 1995, management discontinued payments
under the agreement due to their discovery of certain matters which they believe
nullified the agreement. At December 31, 1995, the Registrant had accrued an
estimated remaining liability of $400,000 in connection with the severance. In
October 1996, the severance agreement was amended as described below, resulting
in a $164,000 reduction in expenses and current liabilities: (i) a payment of
$100,000 was remitted to the former officer in October 1996; (ii) the Registrant
issued 100,000 shares of common stock with registration rights to the officer in
October 1996. The shares are valued at their fair market value of $1.02 per
share, on the date the amendment was executed; (iii) the former chief executive
officer waived his rights to receive salary and expense payments totaling
approximately $400,000, as described in the original agreement.
Form S-1 Registration Statement. On September 27, 1996, the Registrant
filed Form S-1 registration statement (file no. 33-12839) with the Securities
and Exchange Commission, with respect to the following shares and warrants
issued in connection with the Registrant's July 2, 1996 Working Capital Term
Note financing arrangement, described in Note 7, Long-Term Debt: (i) 183,206
shares of common stock currently outstanding and held by the lender, (ii)
warrants to purchase 1,492,860 shares at an exercise price of $1.06 per share,
(iii) warrants to purchase 50,000 shares at an exercise price of $0.80 per
share, and (iv) 1,542,860 shares of common stock issuable upon exercise of such
warrants. This registration statement was declared effective by the Commission
on November 14, 1996.
Form S-3 Registration Statement. On October 18, 1996, the Registrant filed
a Form S-3 registration statement (file no. 33-14475) with the Securities and
Exchange Commission, with respect to 4,836,340 shares of common stock which
include: (i) 878,250 shares of common stock issuable upon the exercise of
certain warrants of the Registrant which are exercisable at prices ranging from
$.01 to $4.00 per share (ii) 685,869 shares of common stock issuable upon the
exercise of certain options of the Registrant which are exercisable at prices
ranging from $1.06 to $2.00 per share, and (iii) 3,272,221 shares of outstanding
common stock. This registration statement was declared effective by the
Commission on October 31, 1996. Effective with the registration of the
warrants, the Registrant was relieved of its remaining redeemable common stock
obligation (valued at $773,000 in the September 30, 1996 Condensed and
Consolidated Balance Sheets). The registration statement included the shares
required to be registered as set forth in Note 9, Redeemable Common Stock.
Board of Directors Stock Options. On October 2, 1996, the board of
directors granted non-qualified stock options to purchase 75,000 shares of the
Registrant's common stock to each of its two outside directors. The options are
immediately exercisable for a term of five years. The exercise price of the
options is $1.06, the fair market value of the shares on the date of grant.
Incentive Plan Stock Options. On October 2, 1996 the Registrant's board of
directors adopted an incentive stock option plan meeting the requirements of
Section 422 of the Internal Revenue Code, subject to shareholder approval. In
accordance with the plan, 500,000 shares were reserved for issuance at an
exercise price of $1.06 per share, the fair market value of the stock on the
date of adoption. The shares are subject to certain limitations, and are
exercisable over a period of five years.
Redeemable Common Stock Settlement Agreement. On November 1, 1996, the
Registrant entered into an agreement with the holder of 156,750 redeemable
common shares. Under the terms of the agreement, the holder returned $37,000 in
principal and interest payments remitted by the Registrant in the third quarter
of 1996, and agreed to cancel the appurtenant $235,000 redeemable common stock
note obligation. In exchange, the Registrant paid $31,000 to the holder and
withdrew its right to repurchase the holder's redeemable common shares.
12
<PAGE> 15
Registrant Name Change. In October 1996, the Registrant's shareholders
approved an amendment to the Registrant's certificate of incorporation to change
the Registrant's name to "MTR Gaming Group, Inc."
Increase in Authorized Number of Shares. A proposal was accepted at the
Annual Shareholders Meeting in October 1996 to amend the Registrant's
Certificate of Incorporation to increase the number of authorized shares of the
Registrant's common stock from 25,000,000 shares to 50,000,000 shares. The
purpose of this amendment is to provide a sufficient number of shares for the
Registrant to honor its obligation to issue shares of its common stock under
various contractual agreements and to provide a sufficient number of shares to
be used for corporate purposes in the future. While the Registrant has no plans
to issue shares of its common stock other than pursuant to its current
contractual obligations or in the ordinary course of business, the authorization
of additional shares would also give the Registrant flexibility in the future to
utilize the common stock in seeking capital or in making acquisitions.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Registrant earned revenues for the respective three and nine month
periods in 1996 and 1995 as shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues
Video lottery operations $10,067,000 $5,220,000 $21,967,000 $12,063,000
Pari-mutuel commissions 1,232,000 1,266,000 3,397,000 3,312,000
Lodging, food and beverage 1,396,000 1,064,000 2,969,000 2,454,000
Other revenues 402,000 354,000 865,000 925,000
----------- ---------- ----------- -----------
Total Revenues $13,097,000 $7,904,000 $29,198,000 $18,754,000
=========== ========== =========== ===========
</TABLE>
The Registrant's Mountaineer Park, Inc. subsidiary has exhibited steady,
pronounced revenue growth under the expansion plan centered around video lottery
operations begun in September, 1994. The emergence of video lottery operations
as Mountaineer's profit center has significantly moderated the seasonality
experienced in prior year revenue trends.
The geographic area surrounding the Registrant's operating facilities in
West Virginia experienced extensive flooding and unusually heavy snowfall in the
first quarter of 1996. The Registrant's revenue increases have been achieved
despite these unusual weather conditions, which produced difficult travel
conditions. Flood and snow damage in portions of Ohio, West Virginia and Western
Pennsylvania reached levels resulting in their designation as a Federal disaster
areas. Mountaineer's facilities are situated well above the flood plain and did
not sustain any damage; Mountaineer's nearest competitor was extensively damaged
and ceased operations for approximately four weeks in the first quarter of 1996.
Video Lottery Operations. Mountaineer has operated video lottery terminals
("VLTs") in West Virginia since 1990; operations were conducted under a
provisional license until September 1994. The West Virginia Racetrack Video
Lottery Act, signed in March 1994, allowed the uninterrupted continuation of
video lottery games at Mountaineer and permitted the Registrant to increase its
number of VLTs from 165 to 400 on September 4, 1994. In July 1995, the
Registrant placed into operation an additional 400 VLTs, bringing the total
number of VLTs in operation to 800. Mountaineer has subsequently received
approval from the West Virginia Lottery Commission to
13
<PAGE> 16
add up to 200 more VLTs, which it intends to install within the next 12 months.
A summary of the video lottery gross winnings less patron payouts for the three
and nine months ended September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total gross wagers $ 32,793,000 $ 17,098,000 $ 75,010,000 $ 40,276,000
Less patron payouts (22,726,000) (11,878,000) (53,043,000) (28,213,000)
------------ ------------ ------------ ------------
Revenues - video lottery operations $ 10,067,000 $ 5,220,000 $ 21,967,000 $ 12,063,000
============ ============ ============ ============
Average daily net win per terminal $ 137 $ 71 $ 100 $ 83
============ ============ ============ ============
</TABLE>
Current year video lottery operations garnered 1996 versus 1995 revenue
increases of 93% for the third quarter and 86% for the nine month period.
Management attributes these increases to three factors: (i) expansion of video
lottery facilities in July, 1995, doubling the number of terminals from 400 to
800, and expanding the Speakeasy Gaming Saloon at Mountaineer Lodge by 8,000
square feet in December 1995; (ii) commencement of video slot operations in July
1996 on 350 of the 800 terminals already in use; and (iii) commencement of a
large scale marketing campaign aimed beyond the 40 mile radius from which
Mountaineer has traditionally drawn the bulk of its patrons.
The results of video lottery operations reflect a two-year trend of
significantly increasing aggregate net win, coupled with an increase in average
daily net win per terminal in 1996. The Registrant plans to pursue additional
growth in its video lottery operations. The aggressive newspaper marketing
campaign begun in July 1996 will continue at a moderately reduced level through
the winter months. Mountaineer plans to broadcast extensive "infomercial"
advertisements on television affiliates within a two hour driving radius,
beginning in December 1996.
Management has undertaken a large scale redecoration of its racetrack
grandstand video lottery facilities, including expansion of ancillary dining and
bar areas. Management believes it can draw and accommodate significantly heavier
patronage to the grandstand gaming facilities, which currently operate only on
the Registrant's 220 annual live race dates. For the three months ended
September 30, 1996, average daily net win on the 400 grandstand terminals was
$63 (including $0 for days when there was no live racing), compared to $210
earned on the lodge- based terminals.
Racing Operations. Under West Virginia Horse Racing Law, the Registrant is
required to race a minimum of 220 days per year and its racing revenues are
defined as commissions which are calculated as a portion of pari-mutuel wagering
handle after certain deductions. Mountaineer's pari-mutuel racing commissions
for the three and nine months ended September 30, 1996 and 1995 are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total pari-mutuel wagering handle $ 11,579,000 $ 11,896,000 $ 31,761,000 $ 31,138,000
Less patrons' winning tickets (9,172,000) (9,437,000) (25,162,000) (24,752,000)
------------ ------------ ------------ ------------
2,407,000 2,459,000 6,599,000 6,386,000
Less:
State and county pari-mutuel tax (133,000) (137,000) (379,000) (362,000)
Purses and Horsemen's Association (1,042,000) (1,056,000) (2,823,000) (2,712,000)
------------ ------------ ------------ ------------
Pari-mutuel commissions $ 1,232,000 $ 1,266,000 $ 3,397,000 $ 3,312,000
============ ============ ============ ============
</TABLE>
14
<PAGE> 17
For the nine months ended September 30, 1996, simulcast handle rose by $2.5
million to $$15.7 million, an increase of 19% compared to $13.2 million for the
same period in 1995. Management believes the increase resulted from renovations
to track betting facilities and an increase in the number of wagering days to
seven days per week at multiple locations, plus the introduction of simulcast
greyhound racing in the second quarter of 1995.
Live racing handle declined by $1.9 million, or 11%, for the nine
months ended September 30, 1996 from $18.0 million to $16.1 million for the
nine months ended September 30, 1995. Through the first three quarters of 1996,
Mountaineer has completed 170 days of the annually required 220 live racing
days compared to 179 days for the same period in 1995. Average daily purses,
which were $25,000 in the third quarter of 1995, have increased several times
during 1995 and 1996 to approximately $50,000 at September 30, 1996. Management
believes that live racing handle will increase as racing purses increase
following the concept that higher purses attract higher quality race
participants, which in turn captures the interest of wagerers from a larger
geographic region. In accordance with this philosophy, Mountaineer began
offering moderately funded stakes races of up to $20,000 per race during the
third quarter of 1996. More sizable stakes races may be offered if a favorable
revenue trend develops from this practice. Legislation was approved by the Ohio
General Assembly that permitted full-card simulcasting and off-track betting
beginning in September 1996. Management is unaware of any imminent plans for
competing Ohio racetracks to open any off-track betting sites near
Mountaineer's Chester, West Virginia facility.
Food, Beverage and Lodging Operations. Food, beverage and lodging revenues
accounted for a combined increase of 21% to $3.0 million for the nine months
ended September 30, 1996 from $2.5 million for the same nine-month period in
1995. Management believes that refurbishment of the lodge guest rooms early in
1995, in combination with other improvements at Mountaineer, contributed to a
32% lodging revenue increase to $825,000 from $627,000 for the same
period-to-period comparison. Forty-one guest rooms were unavailable for use in
the first four months of 1995 due to smoke damage experienced in the fourth
quarter of 1994. Food and beverage revenues reflected an increase of 17% to $2.1
million, from $1.8 million for the nine months ended September 30, 1995. A
comparison of third quarter food, beverage and lodging revenues reveals a 31%
increase from 1995 to 1996; management attributes the increase to direct
elements of the marketing campaign which commenced in July, 1995, as well as the
synergistic effects of heavier video lottery patronage.
Other Operating Revenues. Other sources of revenues decreased by $60,000 to
$865,000 for the nine month period ended September 30, 1996, compared to the
same period in 1995. Other operating revenues are primarily derived from the
sale of programs, parking and admission fees relating to Mountaineer's racing
activities and periodic boxing events.
Costs and Expenses
Operating costs and gross profit earned from operations for the three and
nine month periods ended September 30, 1996 and 1995 are as follows:
15
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Costs:
Video lottery operations $ 6,343,000 $ 3,573,000 $ 14,371,000 $ 8,198,000
Pari-mutuel commissions 1,571,000 1,548,000 3,860,000 4,587,000
Lodging, food and beverage 1,064,000 1,057,000 2,593,000 2,728,000
Other revenues 302,000 359,000 794,000 699,000
----------- ----------- ------------ ------------
Total Operating Costs $ 9,280,000 $ 6,537,000 $ 21,618,000 $ 16,212,000
=========== =========== ============ ============
Gross Profit (Loss):
Video lottery operations $ 3,724,000 $ 1,647,000 $ 7,596,000 $ 3,865,000
Pari-mutuel commissions (339,000) (282,000) (463,000) (1,275,000)
Lodging, food and beverage 332,000 7,000 376,000 (274,000)
Other revenues 100,000 (5,000) 71,000 226,000
----------- ----------- ------------ ------------
Total Gross Profit $ 3,817,000 $ 1,367,000 $ 7,580,000 $ 2,542,000
=========== =========== ============ ============
</TABLE>
Mountaineer's 56% increase in revenues resulting from the expanded scope of
entertainment offerings resulted in higher total costs, as expenses increased by
$5.4 million to $21.6 million in the first three quarters of 1996, an increase
of 33% from $16.2 million for the nine months ended September 30, 1995. Gross
profit from the Registrant's four profit centers nearly tripled from $2.5
million for the first three quarters of 1995 to $7.6 million for the same period
in 1996. Approximately half of the 1996 gross profits were earned in the third
quarter period.
Video Lottery Operations. Costs of VLTs increased by $6.2 million, or 75%,
from $8.2 million to $14.3 million for the nine months ended September 30, 1996,
compared to the nine months ended September 30, 1995, reflecting the increase in
statutory expenses directly related to the 82% increase in video lottery
revenues. Such expenses accounted for $5.5 million 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%, Breeders Classics 1%, Veterans Memorial 1%, and Employee
Pension Fund 0.5%. Taxes and assessments paid to these funds are included in
"Cost of Video Lottery Terminals" in the Consolidated Statement of Operations.
Statutory costs and assessments for the respective three and nine month periods
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
State of West Virginia $3,588,000 $1,782,000 $ 7,069,000 $3,781,000
Horsemen's Purse Fund 1,493,000 801,000 3,292,000 1,834,000
Other contract costs 723,000 386,000 1,593,000 887,000
---------- ---------- ----------- ----------
Total statutory costs $5,804,000 $2,969,000 $11,954,000 $6,502,000
========== ========== =========== ==========
</TABLE>
In addition, Mountaineer paid management fees of $258,000 to American
Gaming and Entertainment, Ltd. ("AGEL"), an affiliate of Bennett Management and
Development Corporation for the nine months ended September 30, 1995. The
Registrant's June 2, 1994 management agreement with AGEL was suspended pursuant
to a stay agreement effective June 30, 1995.
16
<PAGE> 19
On July 1, 1995, the Registrant and American Newco, a consulting firm owned
by two principals of AGEL, entered into a contract whereby American Newco agreed
to provide consulting services in connection with the Registrant's video lottery
operations at the rate of $10,000 per month, subject to increases of up to
$10,000 per month for additional services which may be provided, through March
17, 1997. The personal involvement of the two shareholders of American Newco as
consultants to the Registrant is a material element of the consulting agreement.
Such personal involvement has not been provided since October 15, 1995, as a
result, no consulting fees have been accrued in 1996. On May 10, 1996,
Management provided American Newco and AGEL with formal notice of termination of
the consulting and management agreements.
On October 31, 1996, the Bennett Management and Development loan agreement,
described in Note 7, Long-Term Debt, was amended. As part of the amendment, AGEL
delivered an acknowledgment that the management agreement had been terminated
and that a June 30, 1995 settlement agreement among the Registrant, Mountaineer,
and AGEL was in effect. That settlement agreement terminated the management
agreement and settled the accounts of the parties as of June 30, 1995. On May
14, 1996, the Registrant received written notice from a representative of
American Newco, Inc. demanding payment under the consulting agreement. Although
Management believes there are sufficient grounds to terminate the consulting
agreement without additional liability to the Registrant, there are no
assurances that such termination will not be successfully challenged or that the
Registrant will not incur additional liability in connection with the agreement.
Video lottery wages expense increased by $153,000 to $449,000 for the nine
months ended September 30, 1996, compared to $296,000 for the nine month period
in 1995. This increase was attributable to staff hired to support the operation
of the additional VLTs. Costs incurred by Mountaineer for utilities and
insurance due to enlarged facilities and expanded staffing increased by $135,000
to $327,000 from $192,000 for the same period-to-period comparison. Lease
expenses increased from $865,000 in the first nine months of 1995 to $1.1
million in the first nine months of 1996, reflecting the 400 additional VLTs
placed into service in the third quarter of 1995, mitigated by a March 1996
amendment to the video lottery terminal lease agreement which extended the
related lease payments over a longer term.
Racing Operations. Costs of pari-mutuel commissions declined $727,000, or
19%, from $4.6 million in the first three quarters of 1995 to $3.9 million in
the first three quarters of 1996. Totalisator lease expenses relating to live
racing declined $144,000 from the first nine months of 1995 versus 1996 due to
the negotiation of more favorable lease terms in December, 1995. Wages relating
to the Registrant's racing operations were reduced $393,00, from $1.9 million in
the first nine months of 1995 to $1.5 million during the same 1996 period.
On September 26, 1996, the original term of Mountaineer's labor agreement
with approximately 50 mutuel and 9 video lottery employees expired. Prior to
that date, Mountaineer and the union agreed to extend the contract term for an
additional 60 days. There can be no assurances that a new labor agreement will
be finalized prior to the expiration of the extended term.
The Registrant's 1996 expenses were reduced by $208,000 due to the
settlement of litigation for which a provision was accrued in 1995. Also, a
reduction in live race days from 179 in the first three quarters of 1995 to 170
in the same period of 1996 contributed to the reduction in expenses.
Food, Beverage and Lodging Operations. Direct expenses of the Registrant's
food and beverage operations increased from $1.6 million in the first nine
months of 1995 to $1.8 million during the corresponding period in 1996. The food
and beverage operation earned a gross profit of $364,000 in the first three
quarters of 1996, compared to a $221,000 loss in 1995, as higher
17
<PAGE> 20
revenues more fully absorbed the operation's fixed costs. Lodging direct costs
totaled $813,000 for the nine months ended September 30, 1996, compared to $1.1
million in 1995. Lodging operations achieved a small gross profit of $11,000 in
the 1996 period, compared to a $512,000 loss in the first nine months of 1995.
Certain unavoidable inefficiencies negatively impacted 1995 Lodge operating
expenses due to the widespread construction projects in progress throughout the
year. In the first nine months of 1996, Lodge wages and operating supplies
expenses were reduced $145,000 from the prior year period, despite the increased
patronage experienced in 1996.
Cost of Other Operating Revenues. Costs of other revenues decreased
$105,000 for the nine months ended September 30, 1996, compared to the same
period in 1995. This decrease was generally reflective of the decline in
revenues over the same periods.
General and Administrative Expenses. General and administrative expenses
decreased by $1.2 million to $3.3 million, or 36%, from $4.5 million for the
same nine month periods ended September 30, 1996 and 1995, respectively.
Management's efforts to reduce the cost of corporate operations produced a
decrease in corporate general and administrative expenses by $1.2 million, or
60%, from $2.0 million to $825,000 for the same period-to-period comparison.
Corporate general and administrative expenses for the first nine months of 1996
reflected the issuance of 200,000 shares, valued at $106,000 for the services
rendered by a key consultant and significant shareholder. The Registrant's 1995
corporate general and administrative expenses reflected a $596,000 provision for
corporate relocation and severance. In the third quarter of 1996, the Registrant
negotiated significant reductions in two previously accrued obligations,
producing a $321,000 reduction in corporate overhead expenses. General and
administrative expenses at Mountaineer remained stable, at $2.5 million in the
first nine months of 1995 and 1996, despite the expanded scope of Mountaineer's
operations and the assumption of certain corporate responsibilities.
Advertising Expense. Advertising Expense, included in General and
Administrative Expenses, increased by 11%, to $1.1 million for the nine months
ended September 30, 1996. Promotion of the Registrant's Mountaineer operation
cost $107,000 more in the first nine months of 1996 than the corresponding
period in 1995. The bulk of this increase occurred in the third quarter of 1996,
with the inception of an aggressive marketing campaign targeted at a
significantly larger geographic market. Mountaineer will supplement its
traditional newspaper advertising campaign with a more specifically targeted
direct mail program in the future. In addition, Mountaineer plans to commence
extensive "infomercial" advertising on television affiliates within a two hour
driving radius in December. Up to $330,000 of related broadcast costs will be
defrayed by a state grant to a convention and visitors bureau of which
Mountaineer is a member, as more fully described in the Liquidity and Sources of
Capital section appearing below.
CASH FLOWS
The Registrant's operations produced $551,000 of cash flow in the nine
months ended September 30, 1996, compared to a $283,000 consumption of cash for
the 1995 period. Current year noncash expenses include $1.3 million for
depreciation and amortization, $569,000 for interest expense, and $332,000 as
compensation for services rendered. In the first three quarters of 1996, the
Registrant satisfied four obligations for consideration which totaled $579,000
less than the liabilities' balances prior to settlement.
The Registrant invested $1.1 million for continued expansion and
development of its properties at Mountaineer in the first nine months of 1996,
compared to a $4.7 million investment in the 1995 nine month period. The
Registrant borrowed $1.1 million under short term borrowing arrangements in the
first half of 1996, all of which was repaid in the second and third quarters. A
$5 million working capital term loan was executed in July 1996. A portion of the
term loan
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<PAGE> 21
proceeds was used to liquidate trade accounts payable and accrued liabilities,
the balance of which was reduced by $2.2 million in 1996.
LIQUIDITY AND SOURCES OF CAPITAL
At September 30, 1996, the Registrant has current liabilities in excess of
current assets of approximately $2.6 million, of which $586,000 relates to
redeemable common stock obligations and $2.6 million represents the current
portion of long-term debt. The Registrant secured a series of short-term loans
in the second quarter of 1996 totaling $1.1 million to address cash flow
exigencies existing prior to the funding of the $5 million term loan in July
1996; the short-term notes have been repaid in full. At September 30, 1996, the
Registrant's unrestricted cash balance stood at $3.1 million, in addition to
$457,000 in cash deposits restricted under various financial instruments. The
Registrant is taking the following measures to address its near and long-term
capital needs:
$5 Million Working Capital Loan. On July 2, 1996, the Registrant and
Mountaineer entered into a financing arrangement with a private lending firm for
a working capital loan and a commitment for first mortgage refinancing. The $5
million loan is secured by a second mortgage on Mountaineer's real and personal
property and is guaranteed by the Registrant. The note evidencing the loan calls
for monthly payments of interest only at the rate of 12% per annum, and a
default rate of 22% per annum. The Registrant also agreed to issue the lender
183,206 shares of its common stock and warrants to purchase an additional
1,141,250 shares at $1.06 per share. The principal is to be repaid at the end of
the three year term, during which the loan is subject to, on each anniversary
date, additional fees of cash equal to 8% of the outstanding principal balance,
stock equal to 5% of the outstanding principal balance (valued at the average
closing bid price for the 30 days prior to each anniversary date), and warrants
to purchase 250,000 shares of common stock at $1.06 per share. The loan proceeds
will be used to substantially liquidate trade accounts payable, fund future
capital expenditures, and launch extensive television and print advertising
campaigns.
$11.1 Million First Mortgage Commitment. As part of the working capital
loan transaction, the lender also provided a one-year commitment to lend
Mountaineer up to $11.1 million of additional funds to be used to refinance the
current mortgage held by Bennett Management & Development Corporation. The
financing commitment is subject to customary conditions, including negotiation
of definitive loan agreements and no material adverse changes in Mountaineer's
business prior to closing. In connection with the financing commitment, the
Registrant agreed to pay a $110,000 commitment fee, issue a pledge of
Mountaineer's stock, and issue to the lender additional warrants to purchase
350,000 shares of common stock at $1.06 per share.
If the Registrant is able to close such financing, the loan terms provide
that the lender would be secured by a first mortgage on Mountaineer's real and
personal property and the guarantee of the Registrant. An initial financing
facility fee of $888,000 would be payable upon closing along with 550,000 shares
of the Registrant's common stock and warrants to purchase 1,632,140 shares at
$1.06 per share. The note evidencing the loan would provide for monthly payments
of interest only at the rate of 12% per annum. Principal would be payable at the
end of the three year term, during which the loan would be subject to, on each
anniversary date, additional financing facility fees of cash equal to 8% of the
outstanding principal balance, 550,000 shares of the Registrant's common stock
and warrants to purchase an additional 550,000 shares at $1.06 per share. The
loan proceeds would be used to pay the initial financing facility fee, repay the
Bennett loan and for working capital purposes. There are no assurances that such
a financing will be obtained on terms acceptable to Management.
Amendment of the Bennett Construction Loan Agreement. In March 1996,
Bennett Management & Development Corporation and its parent, The Bennett Funding
Group, Inc., filed
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<PAGE> 22
for protection from creditors under Chapter 11 of the Federal Bankruptcy Laws.
The Bankruptcy Court assigned a trustee to administer the Bennett companies
while in bankruptcy. In October, 1996, the Bennett loan agreement was amended as
follows: (i) Prior to amendment, Mountaineer was obligated to repay $8.7 million
in principal at the rate of $283,000 monthly for 31 months. The amended
amortization schedule provides for monthly principal payments of $75,000 from
October through March of each year, and $125,000 from April through September,
through March 1999. On April 30, 1999, the remaining principal balance would be
due. (ii) Whereas the Construction Loan Agreement had required the Registrant to
issue Bennett $2.5 million worth of the Registrant's common stock on January 2,
1997 absent prepayment, the settlement permits the Registrant, at its option,
either to pay Bennett $500,000 in cash or issue $750,000 in stock. Similarly,
the Registrant may pay $750,00 in cash or issue $1 million in stock if the
Bennett loan is not prepaid by July 1, 1997, and pay $1 million in cash or issue
$1.25 million in stock if the loan is not prepaid by December 31, 1997. If the
Registrant elects to issue Bennett additional shares of common stock, such
shares will be subject to the Construction Loan Agreement's requirement that, to
the extent such issuance would otherwise result in Bennett having voting rights
to greater than 5% of the Registrant's issued and outstanding shares, then the
voting rights shall be transferred to the Registrant's board of directors. (iii)
The amended loan agreement also grants the Registrant various priority rights to
purchase the shares held by Bennett at or below market price, at specified
dates.
Alternative Mortgage Financing. The Registrant is continuing to seek
alternative mortgage financing from a number of prospects on more favorable
terms and longer amortization periods than those currently in place. The
Registrant believes that its significant increases in revenues, reductions in
accounts payable from proceeds of the $5 million working capital loan and
improvements in Mountaineer's facilities will permit the Registrant to obtain
permanent financing on terms acceptable to Management. If such a facility is
offered, the Registrant will avail itself of the early liquidation clauses of
its existing loan agreements. There are no assurances that such a financing will
be obtained on terms acceptable to the Registrant.
Increase in Authorized Number of Shares. A proposal was accepted at the
Annual Shareholders Meeting to amend the Registrant's Certificate of
Incorporation to increase the number of authorized shares of the Registrant's
common stock from 25,000,000 to 50,000,000. The purpose of this amendment is to
provide a sufficient number of shares for the Registrant to honor its obligation
to issue shares of common stock under various agreements and to be used for
corporate purposes in the future. While the Registrant has no plans to issue
shares of common stock other than pursuant to current contractual obligations or
in the ordinary course of business, the authorization of additional shares would
also give the Registrant flexibility in future capital raising or acquisition
activities.
State Grant. In October 1996, a not-for-profit convention and visitors
bureau of which Mountaineer Park is a member received approval of a marketing
grant application from the West Virginia Division of Tourism. Under the terms of
the grant, Mountaineer will be reimbursed for up to $330,000 of advertising
expenses incurred as part of the convention and visitors bureau "infomercial"
advertising campaign. It is anticipated that expense reimbursements will occur
over a six month period commencing in December, 1996.
Unclaimed Pari-mutuel Winnings. After a statutory period under West
Virginia State law, and subject to approval by the West Virginia Racing
Commission, unclaimed winnings from pari-mutuel wagers at Mountaineer are
available to pay for capital improvements at Mountaineer. In August 1996, the
Racing Commission approved payment of $201,000 of such funds to Mountaineer for
barn repairs and improvements. Such payment from the Racing Commission is
expected during the fourth quarter of 1996.
Future Expansion. The Registrant intends to further expand its physical
renovation of Mountaineer in preparation for its marketing as a comprehensive
destination resort centered around extensive video gaming operations.
Significant increases in revenues were provided by
20
<PAGE> 23
Mountaineer's expanded gaming operations after the introduction of 400
additional video lottery terminals in July 1995 and the subsequent expansion of
the lodge based Speakeasy Gaming Saloon in December 1995. This trend has
continued on an accelerated pace since the introduction of video slots gaming in
July 1996. Mountaineer expects to expend approximately $1 million in the fourth
quarter on property, plant and equipment upgrades to accommodate this
anticipated increase in facilities patronage.
Mountaineer's revenue streams have historically exhibited seasonal peaks in
the summer months with declining patronage in the winter months. Management
believes that the emergence of video gaming as its dominant profit center will
reduce the severity of these seasonal fluctuations in revenue; however, there
are no assurances that this trend will be appreciably altered.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Mountaineer Park, Inc., and Winners Entertainment, Inc. v. Bennett
Management & Development Corporation, and Richard C. Breeden, United States
Bankruptcy Court Northern District of New York, Case Nos. 96-61376, 96-61377,
61378, 61379 (SDG). On July 1, 1996, the Registrant and Mountaineer filed an
adversary proceeding against Bennett Management & Development Corporation
("Bennett") in the United States Bankruptcy Court for the Northern District of
New York. In the complaint, the Registrant and Mountaineer sought compensatory
and punitive damages, recoupment and setoff, and other equitable relief,
including declaratory and injunctive relief for lender liability arising out of
Bennett's (i) insistence that Mountaineer enter a management agreement with
Bennett's financially troubled gaming affiliate, which, the complaint alleged,
misspent loan proceeds; (ii) bad faith refusals to honor the requests of the
West Virginia Lottery Commission to supply audited financial statements by the
deadline and then several extended deadlines; (iii) fraudulent
misrepresentations and omissions in connection with amendments of the parties'
Construction Loan Agreement -- particularly with respect to issuance of an
additional 1,020,000 shares of the Registrant's common stock to Bennett; and
(iv) conduct of its business generally, which has led to recent allegations of
civil and criminal wrongdoing by Bennett in matters unrelated to its loan to
Mountaineer, which, in turn, led Bennett to seek the protection of the
Bankruptcy Court.
With the filing of the complaint, the Registrant and Mountaineer also
brought on a motion by order to show cause for a temporary restraining order
prohibiting Bennett from (i) enforcing the repayment terms of the Construction
Loan Agreement and $10.2 million Promissory Note; (ii) claiming an event of
default; (iii) foreclosing pursuant to the deed of trust securing the repayment
obligation; or (iv) selling any of the Registrant's common stock held by
Bennett. At the July 1 hearing, the Bankruptcy Court denied the motion,
principally because the Registrant and Mountaineer had not defaulted on the
obligation to repay the loan and there was no evidence that such a default was
imminent. Thus, the Court concluded, there was no crisis warranting the
extraordinary relief sought. Despite denying the motion, the Court encouraged
the parties to engage in good faith negotiations.
By Amendment of Construction Loan Agreement dated September 19, 1996, which
the Bankruptcy Court approved by Order dated October 22, 1996, the Registrant
and Mountaineer settled all of their claims against Bennett. Accordingly,
commencing with the payment due October 31, 1996, instead of 36 equal monthly
payments of $283,333, Mountaineer will make principal payments of $75,000 per
month from October through March and $125,000 per month from April through
September. The remaining principal balance will continue to be due on April 30,
1999. In the event the Bennett loan is not prepaid by December 31, 1997, the
interest rate on any outstanding balance shall, as of January 1, 1998, increase
from 1.5% to 14.5% until paid in full;
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<PAGE> 24
provided, however, the (i) if the holder of the second trust on Mountaineer's
property (currently Madeleine, LLC pursuant to a Deed of Trust and Term Loan
Agreement dated as of July 2, 1996) for any reason does not approve such
interest rate increase, then the interest rate shall not increase; and (ii) in
lieu thereof, the monthly payments of principal will increase to $100,000 from
October through March and $200,000 from April through September.
The Amendment also modifies the Registrant's obligation to issue additional
shares of its common stock to Bennett if the loan is not prepaid by January 1,
1997. Whereas the Construction Loan Agreement as previously amended required the
Registrant to issue Bennett $2,500,000 worth of its common stock based on the
average market price for the 20 consecutive trading days preceding January 2,
1997, the Amendment permits the Registrant, at its option, either to pay Bennett
$500,000 in cash or issue common stock having a value of $750,000. Similarly,
The Registrant may pay $750,000 in cash or issue common stock having a value of
$1,000,000 if the Bennett loan is not prepaid by July 1, 1997, and pay
$1,000,000 in cash or issue common stock having a value of $1,250,000 if the
loan is not prepaid by December 31, 1997. If the Registrant elects to issue
Bennett additional shares of common stock, such shares will be subject to the
Construction Loan Agreement's requirement that, to the extent such issuance
would otherwise result in Bennett having voting rights to greater than 5% of the
Registrant's issued and outstanding shares, then the voting rights shall be
transferred to the Registrant's board of directors.
To the extent any shares previously issued pursuant to the Construction
Loan Agreement or to be issued pursuant to the Amendment are restricted
securities and are not eligible for public sale pursuant to Court order or
exemption, then such shares shall have piggyback registration rights until
December 31, 1997, with respect to any registered offering of shares by the
Registrant or any shareholder of the Registrant, except for registered offerings
undertaken in connection with the Term Loan Agreement dated as of July 2, 1996
among the Registrant, Mountaineer and Madeleine, LLC, and demand registration
rights after December 31, 1997 or any other time at which there is a registered
offering in connection with the Term Loan Agreement.
In the event the Trustee desires to sell any of the shares held by Bennett,
the Amendment also grants the Registrant until December 31, 1997 the right to
match any bona fide offer of a non-affiliate to purchase the shares. The
Amendment likewise grants the Registrant an option, for the period commencing on
the date Mountaineer has paid the Bennett loan in full and terminating ten
business days thereafter, to purchase all (but not part) of the 1,530,000 shares
currently held by Bennett for a price per share equal to 90% of the average
closing bid price of the shares as reported by Nasdaq for the twenty (20)
consecutive trading days immediately preceding the date on which Mountaineer
retires the loan, but in no event less than $1.125 per share.
As part of the Amendment, American Gaming & Entertainment, Ltd. ("AGEL"),
an affiliate of Bennett which had performed management services at Mountaineer
pursuant to a June 2, 1994 management agreement, delivered an acknowledgment
that the management agreement had been terminated and that a June 30, 1995
Settlement Agreement among the Registrant, Mountaineer, and AGEL was in effect.
That Settlement Agreement terminated the management agreement and settled the
accounts of the parties as of June 30, 1995.
As part of the settlement, the adversary proceeding was dismissed with
prejudice.
Evelyn Serpa, as the Committee and Guardian of Daniel David Barrett, Sr.,
v. Mountaineer Park, Inc., Charles Shiflett, Paul E. Anthony, Jr., and James
O'Brien, in the circuit Court of Hancock County, West Virginia, Civil Action No.
95-C-147G. Plaintiff's counsel has offered to settle the matter for $1 million,
the limit of Mountaineer's insurance policy then in effect. Mountaineer has
demanded that the insurer settled the claim for such amount. The Registrant has
been advised by counsel that under applicable law, if the insurer refuses to
settle the claim on such terms, then Mountaineer would not be responsible for
any judgment in excess of the limit of the
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<PAGE> 25
insurance policy. Accordingly, the Registrant does not believe that Mountaineer
will incur any material loss with respect to this claim.
Mountaineer Park, Inc. v. Lawrence L. Manypenny, et al, in the Circuit
Court of Hancock County, West Virginia, Civil Action No. 96-C-96W. In July of
1996, Mountaineer brought suit against Lawrence Manypenny for legal malpractice.
Mountaineer's complaint alleges that Mr. Manypenny negligently failed to file a
responsive plea on Mountaineer's behalf, resulting in the entry of a default
judgment against Mountaineer in the principal amount of $307,000. Mountaineer
seeks to recoup the $100,000 it paid in settlement of the judgment together with
its costs and attorney's fees incurred in its attempts to overturn the judgment.
Mr. Manypenny has answered the complaint (denying its allegations of
negligence), asserted a third-party claim in the nature of contribution,
alleging that to the extent his is liable to Mountaineer, Mr. Russell, the
Registrant's General Counsel, is liable to him, and asserted a counterclaim for
legal fees allegedly due him in the amount of $7,000. The Registrant has agreed
to provide Mr. Russell a defense to the third-party claim, as a Registrant
believes that the counterclaim and third-party claim are without merit.
Discovery in the case has just commenced.
Subsequent Event
Jay Hamilton v. Mountaineer Park, Inc., a West Virginia corporation,
and Charles McCallian, in the Circuit Court of Hancock County, West Virginia,
Civil Action No. 96-C-150G. On November 11, 1996, Mountaineer was served by a
complaint filed by a former employee alleging that Mountaineer had wrongfully
terminated his employment. The Complaint alleges that Mountaineer terminated
his employment in retaliation for his allegedly having reported to West
Virginia racing officials that Mountaineer had extended credit to patrons for
wagering in violation of state law. Though unrelated to any stated claim for
relief, the Complaint also alleges that between April and September 1994, a
Mountaineer employee made illegal cash payments totalling $7,750 to local
politicians in return for their support of video lottery at Mountaineer, and
that such money was that of Mountaineer.
The Registrant will deny the allegations of the Complaint and vigorously
defend the suit on the grounds that the allegations are flatly contradicted by
the employee's own written statement submitted to the state under penalty of
perjury in his application for unemployment compensation, that he had been
terminated for economic reasons as part of a consolidation.
Mountaineer will move to strike the allegations concerning cash payments to
local politicians on the grounds that such allegations constitute scandalous
matters unsupported by any evidence and that they have been interposed for an
improper purpose, and thus, an abuse of the Court's process. The Registrant
understands that the local politicians are considering separate suits against
the former employee for defamation. The Registrant believes that the law suit is
frivolous and that it will not incur any material liability as a result.
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
At the Registrant's annual meeting of shareholders, held on October 15,
1996, the following proposals were approved by a majority of the shareholders of
the corporation: (1) the election of
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<PAGE> 26
Edson R. Arneault, Robert A. Blatt, Robert L. Ruben, and Thomas K. Russell to
serve as directors of the Registrant until the next annual meeting of
shareholders; (2) an amendment to the Registrant's Certificate of Incorporation
changing the Registrant's name to "MTR Gaming Group, Inc."; (3) an amendment to
the Registrant's Certificate of Incorporation increasing the number of
authorized shares of the Registrant's Common Stock from 25,000,000 to
50,000,000; (4) ratification of the Registrant's 1996 Stock Option Plan; and (5)
confirmation of Corbin & Wertz as the Registrant's accountants and independent
auditors.
A proposal to amend the Registrant's Certificate of Incorporation to create
a new class of Preferred Stock was not approved by the shareholders, and a
proposal to amend the Registrant's Certificate of Incorporation to effect a one
for five reverse split of the Registrant's common stock was tabled by the board
of directors prior to the annual meeting and no vote was taken on the matter.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 (i) Certificate of Amendment of Restated Certificate of
Incorporation, filed as of October 18, 1996 (1)
10.1 Amendment of Construction Loan Agreement, dated September 19,
1996, between the Registrant and its wholly owned subsidiary,
Mountaineer Park, Inc., and Richard C. Breeden, solely in his
capacity as trustee of the estate of Bennett Management and
Development Corp. and Bennett Funding Group, Inc. (2)
10.2 Amended and Restated Mutual Release Agreement, dated September
19, 1996, between the Registrant and its wholly owned
subsidiary, Mountaineer Park, Inc., and Richard C. Breeden,
solely in his capacity as trustee of the estate of Bennett
Management and Development Corp. and Bennett Funding Group,
Inc. (3)
10.2 Acknowledgment by American Gaming and Entertainment, Ltd. and
Gamma of West Virginia, Inc. that the Settlement Agreement,
dated June 30, 1995, between the Registrant, Mountaineer Park,
Inc., American Gaming and Entertainment, Ltd. and Gamma of
West Virginia, Inc. is in full force and effect (4)
10.3 Settlement Agreement, dated June 30, 1995, between the
Registrant, Mountaineer Park, Inc., American Gaming and
Entertainment, Ltd. and Gamma of West Virginia, Inc. (5)
10.4 Order of the United States Bankruptcy Court, Northern District
of New York, dated October 22, 1996, approving settlement of
Winners Entertainment/ Mountaineer Park litigation (6)
10.5 Revision of July 13, 1994 Settlement Agreement between the
Registrant and Crystal Asset Management Group, Inc., dated
September 4, 1996
10.6 Settlement Agreement Amendment, dated October 4, 1996, between
the Registrant and Michael R. Dunn
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<PAGE> 27
10.7 Amendment of June 30, 1995 Settlement Agreement, dated
November 1, 1996, between the Registrant and Glenn Hall
10.8 Settlement Agreement, dated June 30, 1995, between the
Registrant and Michael Mapes
10.9 Promissory Note, dated July 1, 1996, from the Registrant to
Glenn Hall
10.10 Promissory Note, dated July 1, 1996, from the Registrant to
Michael Mapes
27 Financial Data Schedule
FOOTNOTES
(1) Incorporated by reference to Exhibit 2 of the Registrant's
Current Report on Form 8-K, filed November 1, 1996, File No.
000-20508
(2) Incorporated by reference to Exhibit 1 of the Registrant's
Current Report on Form 8-K, filed September 30, 1996, File No.
000-20508
(3) Incorporated by reference to Exhibit A of Exhibit 1 of the
Registrant's Current Report on Form 8-K, filed September 30,
1996, File No. 000-20508
(4) Incorporated by reference to Exhibit B of Exhibit 1 of the
Registrant's Current Report on Form 8-K, filed September 30,
1996, File No. 000-20508
(5) Incorporated by reference to Exhibit C of Exhibit 1 of the
Registrant's Current Report on Form 8-K, filed September 30,
1996, File No. 000-20508
(6) Incorporated by reference to Exhibit 1 of the Registrant's
Current Report on Form 8-K, filed November 1, 1996, File No.
000-20508
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on September 30, 1996,
File No. 000-2058, reporting an Amendment of Construction Loan Agreement, dated
September 19, 1996, between the Registrant's wholly owned subsidiary,
Mountaineer Park, Inc. and Richard C. Breeden, solely in his capacity as Trustee
of the Estate of Bennett Management & Development Corp. Subject to approval by
the United States Bankruptcy Court, the Amendment calls for settlement of all
claims of the Registrant and Mountaineer against Bennett and other claims
involving Bennett's affiliate, American Gaming & Entertainment, Ltd. The
Amendment would also modify the schedule of amortization of the principal of
Bennett's Construction Loan and the Registrant's obligation to issue additional
shares of its common stock if the loan is not repaid by January 1, 1997, and
grants to the Registrant certain rights to repurchase shares of its common stock
previously issued to Bennett.
The Registrant also filed a Current Report on Form 8-K on November 1,
1996, File No. 000-20508, reporting the approval by the United States Bankruptcy
Court of an Amendment of Construction Loan Agreement, dated September 19, 1996,
between Mountaineer and the Trustee of the Bennett estate, and a Certificate of
Amendment of Restated Certificate of Incorporation, filed with the State of
Delaware on October 18, 1996, changing the Registrant's name to "MTR Gaming
Group, Inc. and increasing its authorized number of common shares of stock from
25 million to 50 million.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MTR Gaming Group, Inc.
(Registrant)
/s/ EDSON R. ARNEAULT
- ---------------------------------------------------- November 13, 1996
Edson R. Arneault
President and Chief Executive Officer
/s/ THOMAS K. RUSSELL
- ---------------------------------------------------- November 13, 1996
Thomas K. Russell
Secretary, Treasurer and Chief Financial Officer
/s/ ROBERT L. RUBEN
- ---------------------------------------------------- November 13, 1996
Robert L. Ruben
Director
/s/ ROBERT A. BLATT
- ---------------------------------------------------- November 13, 1996
Robert A. Blatt
Director
26
<PAGE> 1
EXHIBIT 10.5
CRYSTAL ASSET MANAGEMENT GROUP, LTD.
919 Third Avenue, 11th Floor
New York, New York
(212) 922-3300
(212) 207-8206 (Facsimile)
September 4, 1996
Mr. Edson R. Arneault, Chairman
Winners Entertainment, Inc.
State Route 2
Chester, West Virginia 26034
Dear Ted:
The following constitutes the revision of the July 13, 1994 settlement
agreement by which Crystal Asset Management Group, Ltd. ("CAM") and Winners
Entertainment, Inc. ("WINS") fully settled all claims under a Financial
Advisory Agreement dated as of April 1, 1993 (the "July 13 Agreement").
1. Upon execution and delivery of this letter agreement to CAM's
counsel, WINS will deliver to CAM's counsel by wire transfer of collected funds
the amount of $90,000 in full satisfaction of the obligation to pay money as
set forth in paragraph 1 of the July 13 Agreement. Upon receipt of payment,
CAM's counsel will immediately forward the fully executed settlement to WINS.
2. The warrant to purchase 145,000 shares of WINS common stock issued
to CAM in connection with the July 13 Agreement is hereby amended such that (i)
the expiration date of the warrants is January 15, 1998; and (ii) from this
date until the expiration of the warrants, the strike price shall be $3.00 per
share (the strike price and number of warrants to be adjusted equitably in the
event of a forward or reverse split as provided in the form of warrant).
3. WINS will cause the common stock underlying the warrants to be
included for the sale when WINS next files a registration statement on Form S-1
or S-3 with the SEC and related blue sky registrations. It is contemplated
that WINS will file such a registration statement by September of 1996. WINS
will exert its best efforts to maintain the registration statement by one year
from the effective date of the registration statement. WINS' inclusion in the
registration statement of the shares underlying the warrants shall fully
satisfy WINS' obligations with respect to registration as set forth in
paragraph 2 of the July 13 Agreement.
4. No other amendment of the July 13 Agreement is intended hereby.
<PAGE> 2
Please indicate your agreement by countersigning the enclosed copy of
this letter and returning it to me with the payment.
Very truly yours,
CRYSTAL ASSET MANAGEMENT GROUP, LTD.
By: /s/ Hope S. Taitz
--------------------------------
Hope S. Taitz, Managing Director
AGREED AND ACCEPTED:
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
-------------------------------
Edson R. Arneault, Chairman
<PAGE> 1
EXHIBIT 10.6
SETTLEMENT AGREEMENT AMENDMENT
This Settlement Agreement Amendment ("Amendment") is made this 4th day
of October, 1996, by and between Winners Entertainment, Inc., and its
subsidiaries, Mountaineer Park, Inc., Mountaineer Magic, Inc., ExCal Energy
Corporation, Crystal Exploration Co., Inc., Golden Palace Casinos, Inc., and
SDR Corporation (collectively "Winners"), on the one hand, and Michael R. Dunn,
on the other.
WHEREAS, Dunn and Winners were parties to an Employment Agreement
dated May 10, 1994, pursuant to which Dunn held directorships and offices with
Winners, serving in those capacities until the parties terminated their
relationships; and
WHEREAS, Dunn and Winners terminated their relationships on an
amicable and mutually-agreed basis by a "Settlement Agreement" dated April 26,
1995, pursuant to paragraph 4(a) of which Dunn was to continue to receive
salary through May 9, 1997; and
WHEREAS, Winners as of this date has disputed certain terms and
requirements of the April 26, 1995, Settlement Agreement, including having not
paid all the salary otherwise required by paragraph 4(a) of that Settlement
Agreement; and
WHEREAS, to avoid litigation between them, Dunn and Winners desire to
resolve the outstanding obligations under the Settlement Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties to this Agreement, meaning to be bound, do hereby
agree as follows:
1. Final consideration due Dunn. Upon execution hereof, Winners
shall pay to Michael R. Dunn and Swidler & Berlin" the lump sum of $100,000 in
the form of a bank wire and shall issue forthwith to Michael R. Dunn shares of
Winners' common stock to be registered by Winners in connection with
registration efforts currently underway and expected to be completed not later
than February 1, 1997, which shall result in Dunn holding 100,000 freely
trading shares upon the effective date of the registration statement.
2. Waiver of all unearned entitlements. Dunn hereby agrees, at, as
of, and immediately upon the registration described above whereby Dunn is
holding the 100,000 freely trading shares of Winners' common stock contemplated
by paragraph 1 above, to waive those entitlements not yet provided but claimed
due him under the Settlement Agreement, including those due pursuant to
paragraph 4(a), (b) and (c) of the Settlement Agreement. This waiver expressly
excludes Dunn's entitlements as they relate to stock options contained in
paragraphs 4(d) and 5 of the Settlement Agreement.
3. Release provisions unchanged. Except for the foregoing provisions
of this Amendment, and those measures, if any, required to enforce the
provisions of this Amendment, the commitments, obligations, and agreements
contained in the Release and Indemnification provisions of paragraph 6 of the
Settlement Agreement are not affected hereby and are incorporated herein by
reference.
4. Consent to disclosure. Dunn hereby consents to disclosure by
Winners of this Settlement Agreement Amendment, including through and as part
of its filings on Forms 10-Q and/or 10-K.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Settlement
Agreement Amendment as of the day and year first above written.
MICHAEL R. DUNN WINNERS ENTERTAINMENT, INC.
/s/ Michael R. Dunn By: /s/ Edson R. Arneault
- ----------------------------- --------------------------------
MOUNTAINEER PARK, INC. MOUNTAINEER MAGIC, INC.
By: /s/ Edson R. Arneault By: /s/ Edson R. Arneault
- ----------------------------- --------------------------------
EXCAL ENERGY CORPORATION CRYSTAL EXPLORATION CO., INC.
By: /s/ Edson R. Arneault By: /s/ Edson R. Arneault
- ----------------------------- --------------------------------
SDR CORPORATION GOLDEN PALACE CASINOS, INC.
By: /s/ Edson R. Arneault By: /s/ Edson R. Arneault
- ----------------------------- --------------------------------
<PAGE> 1
EXHIBIT 10.7
AMENDMENT OF SETTLEMENT AGREEMENT
This Amendment of Settlement Agreement, entered this 1st day of
November, 1996 by and between Glenn Hall ("Hall") and MTR Gaming Group, Inc.
(formerly known as Winners Entertainment, Inc.) (the "Company"), is an
amendment of the Settlement Agreement entered as of June 30, 1995.
In consideration of the payments, mutual promises and covenants set
forth herein, the adequacy of which are hereby acknowledged, the parties wish
to amend the Settlement Agreement as follows:
1. Payment. Upon execution of this Amendment, the Company will pay Hall
the lump sum of $31,000.
2. Acknowledgment of Performance. Hall acknowledges that the Company has
performed all of its obligations under the Settlement Agreement to date.
Specifically, the Company has (i) delivered the promissory note as required by
Paragraph 6 of the Settlement Agreement; (ii) stood ready, willing, and able to
tender the payments called for under the promissory note, but has withheld
those payments as an accommodation to Hall in anticipation of the execution of
this Amendment; and (iii) has included Hall's Make-Up Shares, Expense Shares,
and Option Shares in a registration statement on file with the Securities and
Exchange Commission on Form S-3.
3. Cancellation of Promissory Note. Upon execution and delivery of this
Amendment and the payment referred to in paragraph 1 hereof, Hall will deliver
the original promissory note (in the original principal amount of $235,125) to
the Company marked "CANCELLED" at which time Hall will have no further rights
and the Company will have no further obligations under such promissory note.
4. Termination of Repurchase Right; Removal of Legend. Paragraph 10 of
the Settlement Agreement concerning the Company's right to repurchase Hall's
Make-Up Shares (as that term is defined in the Settlement Agreement) is hereby
deleted and any such right created thereby is extinguished. Upon Hall's
presentation of the certificate representing the Make-Up Shares to the
Company's transfer agent, the Company will direct the transfer agent to remove
the legend concerning the right of repurchase.
5. Issuance of Additional Shares. Paragraph 7 of the Settlement
Agreement concerning issuance of additional shares is hereby deleted and no
party shall have any further rights or obligations thereunder.
6. No Other Changes. No other changes to the terms of the Settlement
Agreement are intended hereby.
WITNESS the hands of Hall and the Company's duly authorized representative
as of the day and year first above written.
MTR GAMING GROUP, INC.
By: /s/ Edson R. Arneault
--------------------------------
Edson R. Arneault, President
By: /s/ Glenn Hall
-------------------------------
Glenn Hall
<PAGE> 1
EXHIBIT 10.8
SETTLEMENT AGREEMENT
SETTLEMENT AGREEMENT made as of June 30, 1995 by and between Winners
Entertainment, Inc., a Delaware corporation formerly known as Excalibur Holding
Corporation ("Winners"), and Michael Mapes, a resident of Wisconsin ("Mapes"):
WHEREAS, Winners and Mapes are parties to an Agreement and Plan of
Exchange dated August 31, 1992 ; (the "Exchange Agreement"), which became
effective on October 13, 1992, pursuant to which all the outstanding shares of
common stock of Golden Palace Casinos, Inc., a Minnesota corporation (Golden
Palace") were exchanged for stock of Winners; and
WHEREAS, Mapes has received 209,000 shares of Winners' common stock in
exchange for his 209,000 shares of Golden Palace common stock; and
WHEREAS, Winners included 52,500 (which number should have been
52,250) of Mapes's shares in a registration statement under the Securities Act
of 1933 (registration no. 33-564556 the "Registration Statement") filed on Form
S-1 for the purpose of registering 25% of the shares of Winners' stock issued
in exchange for the shares of Golden Palace; and
WHEREAS, Section 4.4(c) of the Exchange Agreement defines the term
"Founder" to include Mapes and certain other named individuals and Section
4.4(c) (i) [3] provides that:
[3] in connection with any underwritten public offering of [Winners]
securities (other than the ExCal 1992 Convertible Oil & Gas Program) register
for offer and sale 52,500 shares of [Winners] common stock for each Founder
which shares Mapes be either:
[a] purchased by the underwriter for the purchase price of at
least $6.00 per share (if the underwritten purchase price
is less than $6.00 per share, [Winners] Mapes pay the
difference between the underwritten purchase price and
$6.00 per share), or
[b] in the event that the prospective underwritten public
offering of [Winners] securities is not closed on or
before February 1, 1993, at each Founder's sole option and
request, [Winners] shall purchase said 52,500 shares of
[Winners] from such requesting Founder for the purchase
price of $6.00 per share.
WHEREAS, Section 4.4(b) of the Exchange Agreement provides in part
that:
[b] [Winners] shall, within 30 days of the Closing date, file
with the SEC a registration statement in appropriate form
covering 25% of the [Winners] stock received by each GPC
securities holder . . . ; and
WHEREAS, Section 4.4(c)(i)[2] of the Exchange Agreement granted Mapes
options, exercisable in increments of 10,000 per year, to purchase 50,000
restricted shares of Winners' common stock for $.01 per share, which shares
were not accorded any registration rights; and
- 1 -
<PAGE> 2
WHEREAS, the Registration Statement has not yet become effective; and
WHEREAS, pursuant to a February 1, 1994 Agreement for Purchase and
Sale of Securities, Mapes sold all 209,000 shares of his Winners common stock
in a private transaction; and
WHEREAS, Mapes has requested purportedly pursuant to Section
4.4(c)(i)[3][b] of the Exchange Agreement that Winners pay Mapes the difference
between $6.00 per share and the purchase price of 52,500 of his shares in the
private sale; and
WHEREAS, on October 21, 1994, Mapes filed suit against Winners (Civ.
No. 3-94-CV-1384, D. Minn.) alleging breach of the Exchange Agreement,
consequential damages, and costs and attorney's fees (the "Litigation"); and
WHEREAS, in order to avoid the expense and uncertainty of further
litigation, the parties wish to resolve their differences amicably.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Winners and Mapes agree as follows:
1. Acknowledgment of Mutual Mistake. Winners and Mapes acknowledge
that the number 52,500 with respect to the shares referred to in Section
4.4(c)(i)[3] in the Exchange Agreement and included in the Registration
Statement appeared as a product of mutual mistake, and such number should have
been 52,250.
2. Termination of Litigation. Upon execution and delivery of this
Settlement Agreement, Mapes will cause the Litigation to be dismissed without
prejudice. Upon either (i) delivery and registration of the Make-Up, Expense,
and Option Shares (as defined below) and issuance of any required Additional
Shares; or (ii) the execution and delivery of the promissory note referred to in
Section 6 of this Agreement, Mapes will cause the Litigation to be dismissed
with prejudice.
3. Issuance of Winners Common Stock.
(a) Make-Up Shares. Upon execution and delivery of this
Settlement Agreement, in consideration of Mapes's agreement to dismiss the
Litigation and enter this Agreement, Winners will cause its transfer agent to
issue Mapes 120,000 shares of Winners common stock, based on a value of $1.50
per share (the "Make-Up Shares"). Upon issuance, the Make-Up Shares shall be
validly issued, fully paid, and non-assessable. The certificate(s)
representing the Make-Up Shares shall bear the following restrictive legends:
1. THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOTE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT OR WINNERS ENTERTAINMENT, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO WINNERS ENTERTAINMENT, INC. STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION
- 2 -
<PAGE> 3
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
2. PURSUANT TO A SETTLEMENT AGREEMENT ENTERED BY THE ISSUER AND
MICHAEL MAPES, A COPY OF WHICH IS ON FILE WITH THE ISSUER, THE
ISSUER MAY REPURCHASE THESE SECURITIES AT A PRICE OF $1.50 PER
SHARE AND THE HOLDER OF THESE SECURITIES MAY BE ENTITLED TO THE
ISSUANCE OF ADDITIONAL SHARES.
As soon as the Make-Up Shares are registered as set forth in Section 5
below, or the federal securities laws otherwise permit the removal of the first
restrictive legend, Winners will promptly direct its transfer agent to remove
such legend. Further, if the right of repurchase is extinguished as set forth
herein, Winners will promptly direct its transfer agent to remove the second
legend.
(b) Expense Shares. As additional consideration for Mr. Mapes's
agreements hereunder, Winners will cause its transfer agent to issue Mapes
45,000 shares of Winners' common stock, based on a value of $1.50 per share
(the "Expense Shares") as compensation for Mapes's expenses, such as interest
and attorneys' fees. Upon issuance, the Expense Shares shall be validly
issued, fully paid, and non-assessable. The certificate(s) representing the
Expense Shares shall bear the following restrictive legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT OR WINNERS ENTERTAINMENT, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO WINNERS ENTERTAINMENT, INC. STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.
As soon as the Expense Shares are registered as set forth in Section 5
below, or the federal securities laws otherwise permit the removal of the
restrictive legend, Winners will promptly direct its transfer agent to remove
such legend.
(c) Option Shares. Upon Mapes's tendering payment in full for
the exercise of his option to purchase up to 30,000 shares of Winners common
stock pursuant to Section 4.4(c)(i)[2] of the Exchange Agreement, which granted
Mapes options to purchase 50,000 shares (the "Option Shares"), and upon
execution and delivery of this Agreement, Winners will cause its transfer agent
to issue Mapes the number of Option Shares for which he tenders payment. Upon
issuance, the Option Shares shall be validly issued, fully paid and
non-assessable. The certificate representing the Option Shares shall bear the
following restrictive legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS
AN EFFECTIVE
- 3 -
<PAGE> 4
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES,
THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER
SUCH ACT OR WINNERS ENTERTAINMENT, INC. RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY
TO WINNERS ENTERTAINMENT, INC. STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
As soon as the Option Shares are registered as set forth in Section 5
below, or the federal securities laws otherwise permit the removal of the
restrictive legend, Winners will promptly direct its transfer agent to remove
such legend.
4. Investment Representation.
(a) Access to Information. Mapes represents and warrants that he
has had access to all information available to Winners concerning its
condition, financial and otherwise, its management, its business and its
prospects. Mapes represents that he has received a copy of the Company's
Annual Report on Form 10-K for the fiscal years ended 1993 and 1994 and Form
10-Q for the Quarter ended March 31, 1995 (the "Disclosure Documents"). Mapes
represents that he has read the Disclosure Documents and has reviewed all
available information with his legal, financial and investment advisors to the
extent that he deemed such review necessary or appropriate. Mapes acknowledges
that he is aware that because of Winners' financial position and other factors,
the acquisition of the common stock involves a high degree of risk.
(b) Restricted Securities. Mapes understands and acknowledges
that, until registered, the shares of common stock to be issued under this
Settlement Agreement are restricted securities and are being acquired by Mapes
for his own account and not on behalf of any other person and are being
acquired for investment purposes and not for distribution. Mapes represents
that an investment in the common stock is a suitable investment for Mapes,
taking into consideration the restrictions on transferability affecting the
common stock. The company is the only person which may register the common
stock for public sale under the Securities Action 1933 (the "Act") and state
securities laws. Mapes agrees that he will not transfer or sell the common
stock without registration under the Act and any applicable state securities
laws unless exemptions from such registration requirements are available.
Mapes and Winners acknowledge that Mapes intends to sell 35,000 shares of the
common stock in a transaction intended to be exempt from the registration
requirements of the Act. Winners will recognize this sale and transfer the
shares on its records, provided that the purchaser executes and agreement
containing investment representations substantially identical to those
contained in this Settlement Agreement and a restrictive legend substantially
identical to that contained in Section 3(b) of this Settlement Agreement is
placed on the certificate representing the shares.
(c) Exempt Transactions. In the event Mapes sells any of the
Make-Up Shares prior to the effective date of the registration statement in a
transaction exempt from the Act's registration requirements, then Winners shall
receive a credit against the Note (if such Note is required to be executed and
delivered pursuant to Section 6 below) in an amount equal to the actual
purchase price of such shares, up to $1.50 per share multiplied by the number
of shares sold.
- 4 -
<PAGE> 5
5. Registration of Shares. Winners will use its best efforts to
cause a registration statement to become effective with the Securities and
Exchange Commission by June 30, 1996 (the "Registration Statement"). Such
Registration Statement shall include the Make-Up Shares, the Expense Shares,
and up to 20,000 of the Option Shares, provided such inclusion is not
prohibited by applicable law. If such registration statement is withdrawn
prior to its effective date, then Winners will include such shares in its next
registration statement. Winners' failure to register any shares required to be
registered by this Settlement Agreement shall not constitute a breach of this
Settlement Agreement so long as Winners shall not have registered shares after
the date of this Agreement for any other selling shareholder in a registration
that legally could have included Mapes as a selling shareholder.
6. Execution of Promissory Note. If the Registration Statement does
not become effective by June 30, 1996, for whatever reason, then Winners shall
execute and deliver to Mapes a promissory note in the form attached hereto as
Exhibit A (the "Note").
7. Issuance of Additional Shares. If the average closing market
price of Winners' common stock for the ninety (90) trading days immediately
following the effective date of the Registration Statement is less than $1.50
per share, then Winners shall issue Mapes that number of additional shares
required to satisfy the difference between $1.50 per share and such average
market price (the "Additional Shares"). Mapes's right to receive and Winners'
obligation to issue Additional Shares, however, shall apply only to the Make-Up
Shares.
8. Acknowledgment Concerning Registration Rights. Mapes hereby
acknowledges that the registration rights set forth in Section 4.4(b) of the
Exchange Agreement and the provisions of Section 4.4(c)(i)[3] are not
cumulative and that he was not entitled to the registration of more than 25% of
his Winners shares in any event. Further, Mapes acknowledges that, except as
set forth in this Agreement, he has no right to the registration of either any
shares that he currently owns or the 20,000 Option Shares that have not yet
vested.
9. Remaining Shares Unaffected. Nothing in this Agreement shall
affect Mapes's ability to buy or sell shares of Winners stock, including but
not limited to Mapes's right to exercise his option to purchase 20,000
additional shares of Winners common stock pursuant to the Exchange Agreement.
10. Right of Repurchase. After the execution and delivery of the
Note, Winners shall have the right to repurchase the Make-Up Shares at a price
of $1.50 per share. Mapes shall transfer and deliver the repurchased shares to
Winners in a manner reasonably acceptable to Winners' counsel and transfer
agent. Additionally, the amount then due on the Note shall be reduced by the
repurchase proceeds. Notwithstanding the foregoing, at any time, Mapes may, at
his election, by delivering written notice to Winners, extinguish the right of
repurchase, as to any or all of the Make-Up Shares. In such event, Winners
will receive a credit against the Note in an amount equal to $1.50 multiplied
by the number of shares as to which the right of repurchase has been
extinguished.
11. Mutual Releases. Upon either (i) registration of the Make-Up
Shares or (ii) execution and delivery of the Note, except for those obligations
expressly provided for in this Settlement Agreement, Winners and Mapes hereby
forever release and discharge the other and each of the other's officers,
directors, shareholders, employees, agents, affiliates, attorneys, successors,
and assigns of and from any and all claims, rights, duties, obligations, debts,
liabilities, damages, injuries, actions, and causes of action of every
- 5 -
<PAGE> 6
kind and nature, foreseen and unforeseen, contingent and actual, liquidated and
unliquidated, suspected and unsuspected, disclosed and undisclosed, including
without limitation all claims which either party has or might have arising from
or related to Exchange Agreement that were brought or could have been brought
in the Litigation. Notwithstanding the foregoing, it is expressly agreed by
the parties that Mapes's right, if any, to indemnity or contribution arising
out of Mapes's employment by Golden Palace Casinos shall not be affected by
this release or this Settlement Agreement.
Each party acknowledges that it has been advised by experienced and
knowledgeable counsel with respect to this Settlement Agreement generally and
this release specifically.
12. Further Documents. Winners and Mapes agree to execute such
further documents as may be necessary from time to time to give effect to the
purposes of this Settlement Agreement.
13. Conflict. To the extent this Agreement is in conflict with the
terms of the Exchange Agreement, the terms of this Agreement shall control with
respect to the rights of Mapes.
14. Third Party Beneficiaries. Winners and Mapes do not intend for
the terms of this Settlement Agreement to be enforceable by any third parties,
other than the assignees or successors, if any, of the signatories hereto.
This Agreement shall be binding on the parties, their heirs, successors, and
assigns.
15. Choice of Law. This Agreement shall be governed by, construed
and enforced in accordance with the laws of the State of Minnesota.
16. Merger and Integration. This Settlement Agreement, together with
the Note, if required to be executed hereunder, constitutes a single,
integrated written contract expressing the entire agreement of the parties
hereto with respect to the subject matter hereof. No covenants, agreements,
representations or warranties of any kind have been made by any party hereto,
except as specifically set forth in this Settlement Agreement. All prior
claims, discussion and negotiations have been and are merged and integrated
into, and are superseded by this Settlement Agreement and the Registration
Statement Agreement.
17. Notices. Any notice permitted or required by this Settlement
Agreement shall be by Certified U.S. Mail and shall be deemed received as of
the date on which such notice is delivered by the U. S. Postal Service. Notice
to the Company shall be addressed as follows:
Edson R. Arneault, President
Mountaineer Park, Inc.
P. O. Box 358
Chester, West Virginia 26034
with a copy to:
Robert Ruben, Esq.
Freer & McGarry, P.C.
1000 Thomas Jefferson St., NW
6th Floor
Washington, D.C. 20007
- 6 -
<PAGE> 7
Notice to Mapes shall be addressed as follows:
Mr. Michael Mapes
c/o Shallow Jewelers
8919 West Greenfield Ave.
West Allis, Wisconsin 53214
with a copy to:
Cortney S. LeNeave, Esq.
Hunegs, Stone, Koenig & LeNeave
608 Second Avenue, Suite 568
Minneapolis, Minnesota 55402
18. Attorney's Fees. In any action concerning the performance or
enforcement of the terms of this Settlement Agreement, the prevailing party
shall be entitled to an award of costs and reasonable attorney's fees.
WITNESS the hands of Mapes and Winners' duly authorized representative as
of the day and year first above written.
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
--------------------------------
Edson R. Arneault, President
By: /s/ Michael Mapes
--------------------------------
Michael Mapes
- 7 -
<PAGE> 1
EXHIBIT 10.9
PROMISSORY NOTE
$235,125.00 July 1, 1996
Chester, West Virginia
Winners Entertainment, Inc. ("Winners" or "Maker") makes this
Promissory Note (the "Note") in accordance with the provisions of a Settlement
Agreement between Maker and Glenn Hall entered as of June 30, 1995 (the
"Settlement Agreement"). This Note is made expressly subject to the relevant
provisions of the Settlement Agreement, including Sections 6 (Execution of
Promissory Note) and 10 (Right of Repurchase).
1. Promise to Pay. Makes promises to pay Glenn Hall the principal
sum of $235,125.00 plus simple interest on the outstanding balance from July 1,
1995 until paid in full at the rate of 12% per annum. Payment may be made in
twenty-four (24) equal monthly installments, on the first day of each month,
commencing thirty (30) days after execution of this Note, or August 1, 1996,
whichever is first and so long as any event of default has not occurred and
gone uncured. All payments of principal and interest shall be made at Route 8,
P.O. Box 8468, Hayward, Wisconsin 54843. Maker may prepay, in cash or in kind
in accordance with the terms hereof, all or any part of the amount due hereon
at any time, without penalty.
2. Event of Default; Notice and Cure. In the event Maker fails, for
any reason, to make a payment when due, such non-payment shall constitute an
Event of Default. If an Event of Default occurs, Maker shall have five
business days from the date of notice of such Event of Default to cure by
making full payment of the amount in default. Such payment shall constitute a
complete cure, as if the Event of Default never occurred. In the event Maker
fails to cure an Event of Default within the time set forth above, the entire
principal and any interest then accrued shall become immediately due and
payable.
3. Form of Payment; Payment in Kind. Hall agrees to accept Maker's
corporate checks as good payment, subject to collection of good funds in due
course upon negotiating such checks.
So long as Maker is not in default with respect to its repayment
obligations under the Note, and there is no Event of Default that has gone
uncured, then upon either (i) registration of the Make-Up Shares and the
removal of all restrictive legends from the certificate(s) representing such
shares, or (ii) the Make-Up Shares are in fact eligible for public sale under
Rule 144 promulgated under the Act (scheduled for June 30, 1997), then Maker
shall receive as a credit against any amounts then due under the Note, whether
principal or interest, an amount equal to the average closing market price of
Maker's common stock for the ninety (90) trading days commencing on the
effective date of the registration statement, or commencing June 30, 1997, as
the case may be, multiplied by 156,750. During such ninety (90) day period, no
payments of principal or interest shall become due.
Other events, which are set forth in Section 10 of the Settlement
Agreement (Right of Repurchase), may reduce the amount due under this Note or
serve to cancel this Note in its entirety.
4. Fees and Costs. Maker agrees to pay all expenses, costs and fees,
including reasonable attorneys' fees, incurred by Hall in endeavoring to
collect any amounts payable hereunder.
5. Transfer. Any attempt to sell, transfer, assign, or hypothecate
this Note, whether by Hall or any subsequent holder of this Note, shall be
invalid and ineffective unless such subsequent holder shall have provided
written acknowledgment in form and substance
<PAGE> 2
reasonably acceptable to Maker's counsel that this Note is made in accordance
with the provisions of a Settlement Agreement between Maker and Glenn Hall
entered as of June 30, 1995 (the "Settlement Agreement") and further that this
Note is made expressly subject to certain provisions of the Settlement
Agreement, including Sections 6 (Execution of Promissory Note) and 10 (Right of
Repurchase).
6. Governing Law. This Note is made under and governed by the laws
of the State of Minnesota.
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
--------------------------------
Edson R. Arneault, President
<PAGE> 1
EXHIBIT 10.10
PROMISSORY NOTE
$180,000.00 July 1, 1996
Chester, West Virginia
Winners Entertainment, Inc. ("Winners" or "Maker") makes this
Promissory Note (the "Note") in accordance with the provisions of a Settlement
Agreement between Maker and Michael Mapes entered as of June 30, 1995 (the
"Settlement Agreement"). This Note is made expressly subject to the relevant
provisions of the Settlement Agreement, including Sections 6 (Execution of
Promissory Note) and 10 (Right of Repurchase).
1. Promise to Pay. Makes promises to pay Michael Mapes the principal
sum of $180,000.00 plus simple interest on the outstanding balance from July 1,
1995 until paid in full at the rate of 12% per annum. Payment may be made in
24 equal monthly installments, on the first day of each month, commencing
thirty (30) days after execution of this Note, or August 1, 1996, whichever is
first and so long as any event of default has not occurred and gone uncured.
All payments of principal and interest shall be made to Michael Mapes c/o
Shallow Jewelers, 8919 West Greenfield Avenue, West Allis, Wisconsin 53214.
Maker may prepay, in cash or in kind in accordance with the terms hereof, all
or any part of the amount due hereon at any time, without penalty.
2. Event of Default; Notice and Cure. In the event Maker fails, for
any reason, to make a payment when due, such non-payment shall constitute an
Event of Default. If an Event of Default occurs, Maker shall have five
business days from the date of notice of such Event of Default to cure by
making full payment of the amount in default. Such payment shall constitute a
complete cure, as if the Event of Default never occurred. In the event Maker
fails to cure an Event of Default within the time set forth above, the entire
principal and any interest then accrued shall become immediately due and
payable.
3. Form of Payment; Payment in Kind. Mapes agrees to accept Maker's
corporate checks as good payment, subject to collection of good funds in due
course upon negotiating such checks.
So long as Maker is not in default with respect to its repayment
obligations under the Note, and there is no Event of Default that has gone
uncured, then upon either (i) registration of the Make-Up Shares and the
removal of all restrictive legends from the certificate(s) representing such
shares, or (ii) the Make-Up Shares are in fact eligible for public sale under
Rule 144 promulgated under the Act (scheduled for June 30, 1997), then Maker
shall receive as a credit against any amounts then due under the Note, whether
principal or interest, an amount equal to the average closing market price of
Maker's common stock for the ninety (90) trading days commencing on the
effective date of the registration statement, or commencing June 30, 1997, as
the case may be, multiplied by 120,000. During such ninety (90) day period, no
payments of principal or interest shall become due.
Other events, which are set forth in Section 10 of the Settlement
Agreement (Right of Repurchase), may reduce the amount due under this Note or
serve to cancel this Note in its entirety.
4. Fees and Costs. Maker agrees to pay all expenses, costs and fees,
including reasonable attorneys' fees, incurred by Mapes in endeavoring to
collect any amounts payable hereunder.
<PAGE> 2
5. Transfer. Any attempt to sell, transfer, assign, or hypothecate
this Note, whether by Mapes or any subsequent holder of this Note, shall be
invalid and ineffective unless such subsequent holder shall have provided
written acknowledgment in form and substance reasonably acceptable to Maker's
counsel that this Note is made in accordance with the provisions of a
Settlement Agreement between Maker and Michael Mapes entered as of June 30,
1995 (the "Settlement Agreement") and further that this Note is made expressly
subject to certain provisions of the Settlement Agreement, including Sections 6
(Execution of Promissory Note) and 10 (Right of Repurchase).
6. Governing Law. This Note is made under and governed by the laws
of the State of Minnesota.
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
---------------------------------
Edson R. Arneault, President
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<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,509,000
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