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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended
DECEMBER 31, 1996
COMMISSION FILE NO. 0-20508
MTR GAMING GROUP, INC.
(Exact name of Company as specified in its charter)
DELAWARE IRS NO. 84-1103135
(State of Incorporation) (IRS Employer Identification)
STATE ROUTE 2 SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: Common Stock $.00001 par value
Name of each exchange on which registered: NASDAQ Stock Market
Indicate by check mark whether the Company (1) has filed reports required to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K of (Section 299.405 of this chapter) is not contained herein,
and will not be contained, to the best of Company's knowledge, in definitive
proxy or information statements incor-porated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the Company's common stock held by non-affiliates
(all persons other than executive officers or directors) of the Company on March
20, 1997 (based on the closing sale price per share on the NASDAQ Stock Market
on that date) was $22,617,657
The Company's common stock outstanding at March 20, 1997 was 19,765,291 shares.
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TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company History . . . . . . . . . . . . . . . . . . . . . . . . 1
Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . 1
Mountaineer Race Track and Gaming Resort . . . . . . . . . . 3
Current Operations . . . . . . . . . . . . . . . . . . . . . . 5
Improvement Plan and Expanded Operations . . . . . . . . . . . 8
Business Strategy . . . . . . . . . . . . . . . . . . . . . . 9
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Regulation and Licensing . . . . . . . . . . . . . . . . . . . 13
Discontinued Operations . . . . . . . . . . . . . . . . . . . 17
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Gaming, Racing and Other Entertainment . . . . . . . . . . . . 19
Equipment Leases . . . . . . . . . . . . . . . . . . . . . . . 19
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . 20
Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 20
Settled Litigation . . . . . . . . . . . . . . . . . . . . . 20
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 25
PART II
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . 25
ITEM 6 SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 25
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . 26
Results of Continuing Operations . . . . . . . . . . . . . . . 26
Results of Discontinued Operations . . . . . . . . . . . . . 35
Liquidity and Sources of Capital . . . . . . . . . . . . . . . 36
Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . 39
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 39
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . 39
Business Experience . . . . . . . . . . . . . . . . . . . . 39
Compliance with Section 16(a) of the Exchange Act . . . . . 40
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 41
Employment Agreements . . . . . . . . . . . . . . . . . . . 42
Compensation of Directors . . . . . . . . . . . . . . . . . 43
Compensation Committee Interlocks and Insider
Participation . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . 44
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 45
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 52
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ITEM 1.BUSINESS
COMPANY HISTORY
The Company, through wholly-owned subsidiaries, owns and operates Mountaineer
Race Track and Gaming Resort ("Mountaineer Park" or "Mountaineer"), a resort
facility in Chester, West Virginia, and owns a working interest in proven oil
and gas reserves in Michigan.
The Company was incorporated in March 1988 in Delaware under the name "Secamur
Corporation," a wholly owned subsidiary of Buffalo Equities, Inc. ("Buffalo"),
and later "spun-off" through the sale of its stock to the stockholders of
Buffalo in January 1989. In June 1989, the Company acquired through merger
Pacific International Industries, Inc., which had been engaged in the contract
security guard services business in Southern California since its inception in
February 1987. Upon completion of the merger, the Company was renamed Excalibur
Security Services, Inc. to reflect its new line of business. After operating
unprofitably, the Company filed a voluntary petition for reorganization with the
U.S. Bankruptcy Court for the Central District of California in December 1990,
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court approved the
Company's sale of its security guard services business in May 1991, and
confirmed the Company's plan of reorganization in December 1991. The plan
authorized the Company to acquire, primarily, specified gaming and oil and gas
businesses. Upon confirmation of the plan, the Company changed its name to
Excalibur Holding Corporation. In connection with management's decision to
operate as a gaming company, the Company was renamed Winners Entertainment, Inc.
in August 1993. At the annual meeting of stockholders on October 15, 1996, the
stockholders of the Company approved a change of the Company's name from Winners
Entertainment, Inc. to MTR Gaming Group, Inc.
This report contains forward-looking statements that inherently involve risks
and uncertainties. Such statements generally are preceded by words such as
"expect," "plan," "believe," "intend," "may," or "anticipate." The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors as discussed herein.
MERGERS AND ACQUISITIONS
Mountaineer Race Track & Gaming Resort - Chester, West Virginia
Pursuant to a stock purchase agreement dated May 5, 1992, the Company acquired
all of the common stock of Mountaineer Park, Inc., a West Virginia corporation,
in December 1992. Mountaineer Park, the site of the Company's gaming business,
offers an entertainment complex and destination resort with hotel, dining and
lounge facilities, and outdoor activities including golf, swimming and tennis.
Mountaineer Park is situated on a 606-acre site on the Ohio River at the
northern tip of West Virginia's northwestern panhandle in Hancock County,
approximately 40 miles south of Youngstown, Ohio and 35 miles west of
Pittsburgh, Pennsylvania.
Hotel-Casino Site - Cripple Creek, Colorado
In January 1992, the Company acquired through merger all of the outstanding
capital stock of SDR Corporation ("SDR"), a Nevada corporation owned in part by
affiliates of the Company. A ten percent interest in SDR was subsequently issued
to an individual who assisted SDR in acquiring its principal asset -- an option
to purchase commercial lots in Cripple Creek, Colorado, some of
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which were zoned for hotels and gaming. After exercising the option in September
1992, the lots were eventually deeded back to the original owner in May 1993
when, due to the rapid saturation of the gaming market in Cripple Creek,
Management determined that the lots were less attractive than originally
assessed. Thereafter, SDR became inactive until it was formally dissolved in
March 1996.
Golden Palace Casinos - Oklahoma Indian Gaming Contract
In October 1992, the Company acquired all of the outstanding capital stock of
Golden Palace Casinos, Inc. ("GPC" or "Golden Palace"), a Minnesota corporation
organized to manage casinos on Indian reservations. Although Golden Palace had
no significant operations at the time of the acquisition, it held, through a
wholly owned subsidiary, a contract, to manage a casino planned for an Indian
reservation in Oklahoma, subject to the satisfaction of certain conditions.
Golden Palace also had $3 million cash. Shortly after the acquisition of Golden
Palace, the West Virginia Lottery Commission advised Management that, as a
condition to licensing of the Company's then-proposed video lottery operations
at Mountaineer Park, the Company could not engage in Indian gaming activities.
Consequently, in December 1992, the Company sold the subsidiary holding the
management contract and agreed not to engage in Indian gaming activities as long
as it conducted video lottery operations in West Virginia. Notwithstanding the
sale of the management contract, the acquisition of Golden Palace provided the
Company with sufficient funds to complete the acquisition of all of the
outstanding capital stock of Mountaineer Park, Inc., as described below.
Riverboat Casino Site - Tunica, Mississippi
In March 1993, the Company acquired an 80% interest owned by M&R Investment
Company in a joint venture which held a long-term ground lease for a riverboat
gaming development site in Tunica, Mississippi. The Company subsequently
acquired the remaining 20% interest in the joint venture from Regal Casinos,
Inc. In July 1993, the Company agreed to form a joint venture with Las Vegas
Entertainment Network ("LVEN") and BP, Ltd. to develop the Tunica project. The
joint venture agreement called for contributions of the ground lease by the
Company, working capital for initial development by LVEN, and construction and
opening financing and investment banking services by BP, Ltd. Later in 1993, the
Company and LVEN agreed to merge in a stock-for-stock transaction. Neither the
joint venture nor the merger with LVEN was consummated as a result of
disagreements over how to develop the Tunica site, and pursuant to a settlement
agreement reached in February 1994, the Company sold its interest in the Tunica
site to LVEN.
Oil and Gas Interests - Michigan and Ohio
In January 1992, the Company also acquired certain oil and gas interests which
have since been, or are in the process of being divested pursuant to the
Company's plan of orderly liquidation adopted in March 1993. Except for the
limited resources required to prepare its remaining oil and gas interests for
orderly liquidation, the Company has focused substantially all of its resources
on Mountaineer Park. (For discussion of the Company's oil and gas acquisitions
and plan of orderly liquidation, see Item 1 -- "Discontinued Operations," Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Discontinued Operations" and Notes 1 and 12 of "Notes
to Consolidated Financial Statements").
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Subsequent Event - Muskegon Race Course Letter of Intent
On February 5, 1997, the Company signed a letter of intent with Sports Valley
West Limited Partnership and Muskegon Race Course, Inc. that contemplated the
Company leasing, operating, and possibly acquiring the Muskegon Racetrack, a
horse racing and off-track betting facility on 94 acres located approximately 5
miles east of Lake Michigan and southeast of Muskegon Lake in Muskegon, Michigan
on terms set forth in the Company's Report on Form 8-K filed February 10, 1997.
Because of the seller's delays in supplying the required due diligence
materials, by letter dated April 4, 1997, the Company terminated the
transaction.
Subsequent Event - Other Hotel/Gaming Opportunity
The Company is currently negotiating with the owner of a hotel/gaming operation
located in a state other than West Virginia or Michigan to enter a joint venture
agreement for the development and operation of that property. There can be no
assurances, however, that such negotiations will result in a transaction.
BUSINESS - MOUNTAINEER RACE TRACK & GAMING RESORT
Racetrack Facilities
Mountaineer Park offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. The track also conducts simulcast thoroughbred and greyhound racing
from other prominent racetracks. Mountaineer's main racetrack consists of an
oval dirt track approximately one mile in length. Inside the main track is a
natural turf (grass) track measuring seven furlongs or 7/8 of a mile. The
racetrack is equipped with two chutes for races of lengths from 4 1/2 furlongs
to over one mile. The racetrack buildings consist of the clubhouse and
grandstand which provide glass-enclosed stadium and box seating for
approximately 770 and 2,850 patrons, respectively. The buildings are each
three-stories and are connected by an enclosed walkway. Live and simulcast
racing can be viewed by approximately 1,200 dining patrons in two restaurants
located in the clubhouse and grandstand. In addition to seating areas, the
grandstand covers approximately 57,000 square feet of interior space on the main
and mezzanine levels containing 37 parimutuel windows and three food and
beverage concession stands. The clubhouse covers approximately 25,000 square
feet of interior space containing 14 parimutuel windows. The grandstand has an
indoor stage with a seating capacity of approximately 2,240, and has been the
site of several concerts and nationally televised boxing matches. The racetrack
apron, which is accessible from both buildings, provides racing fans with up-
close viewing of horses entering the racetrack and crossing the finish line.
The stable area accommodates approximately 1,250 horses and is located adjacent
to the main track. None of the horses are owned by Mountaineer or the Company,
however, Mountaineer provides stable space to horse owners whose horses race at
Mountaineer Park. Mountaineer Park's racetrack parking lots have a combined
capacity for over 2,900 vehicles.
Lodge Facilities
The Lodge is a two-story facility which overlooks the golf course at
Mountaineer's main entrance on West Virginia State Route 2. The Lodge offers 101
rooms, including 50 standard rooms (one double bed), 46 superior rooms
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(two double beds), and five king rooms and suites. The Mountaineer Lodge's
Gatsby Dining Room seats 125 patrons for casual dining overlooking the golf
course. An attached deck provides seats for an additional 68 patrons, weather
permitting. In 1995, in response to increased patronage of the off-track
betting, video lottery gaming, dining and bar facilities located at the Lodge,
Mountaineer expanded its 5,000 square foot Speakeasy Gaming Saloon with an 8,000
square foot addition, followed in 1996 by extensive remodeling of the Lodge
restaurant and the addition of Big Al's Deli in the Speakeasy Gaming Saloon.
Capacity of the Speakeasy Gaming Saloon now stands at 750. Extensive off-track
wagering facilities continue to be maintained at the Speakeasy Gaming Saloon.
Lodge parking lots have a combined capacity for approximately 576 vehicles.
Video Lottery Facilities
In addition to live and simulcast parimutuel wagering, Mountaineer offers video
lottery gaming through 1,000 video lottery terminals ("VLTs") located in the
racetrack clubhouse, grandstand and the Lodge. Mountaineer introduced 400 VLTs
in September 1994, replacing 165 older machines that had been operated since the
Company's acquisition of Mountaineer in December 1992. The replacement VLTs
allow players to select from several game themes, including up to four versions
of draw poker, one version of blackjack and two versions of keno, as well as
permit the player to determine which cards to hold while playing draw poker
("Card Terminals"). In June 1995, Mountaineer placed into operation 400
additional Card Terminals. Upon the enactment of an amendment to West
Virginia's video lottery law permitting VLTs to include simulated "classic
casino slot machine" games in addition to video card and keno games ("Slot
Terminals"), in July of 1996, Mountaineer converted 350 Card Terminals into Slot
Terminals. In October of 1996, 50 more Card Terminals were converted to Slot
Terminals. In March 1997, Mountaineer purchased and placed into operation 400
additional Slot Terminals and simultaneously removed 200 Card Terminals,
bringing the total number of VLTs in operation from 800 to 1,000, consisting of
800 Slot Terminals and 200 Card Terminals. The racetrack buildings house 500
of the VLTs, and the Lodge offers the remaining 500 VLTs, primarily, in the
Speakeasy Gaming Saloon.
Recreational Facilities
Mountaineer offers a par three nine-hole "executive" golf course, three tennis
courts, a volleyball court, a basketball court, two swimming pools and two
children's swimming pools. These facilities are made available for use by Lodge
guests and the general public at specified daily or seasonal fee rates.
Trailer Park
Located across West Virginia State Route 2 from the Lodge and the entrance to
Mountaineer Park, the Company maintains a trailer park consisting of 61
individual lots constituting approximately 11.5 acres. The lots are rented for
fixed monthly fees, mostly to individuals who are employed by Mountaineer in
racing operations. The Company is responsible for maintenance of the road and
grounds, refuse removal and providing water and sewage hook-ups. The tenants
pay all utility expenses.
Undeveloped Land
Mountaineer owns, as part of its 606 acre site, a 375 acre tract that is
currently undeveloped. The acreage is located directly across West Virginia
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State Route 2 from the Lodge and racetrack main entrance. Management currently
has no plans for development of such property.
CURRENT OPERATIONS
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and video lottery operations, and, to a lesser extent, its
lodging, food and beverage operations. Additional revenues are generated from
greens fees and other recreational facilities fees.
Racing Operations
Mountaineer is subject to annual licensing requirements established by the West
Virginia State Racing Commission. Mountaineer's license was renewed in December
1996, through December 1997.
Revenue from racing operations is derived mainly from commissions earned on
parimutuel wagering on live races held at Mountaineer Park and on races
conducted at other "host" racetracks and broadcast live (i.e., import simulcast)
at Mountaineer Park. In parimutuel wagering, patrons bet against each other
rather than against the operator of the facility or with pre-set odds. The
dollars wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total handle or amounts wagered. With respect to Mountaineer
Park's live racing operations, such percentage is fixed by West Virginia law at
three levels, 17.25%, 19% and 25%, depending on the complexity of the wager.
The lower rate applies to wagering pools involving only win, place and show
wagers while the higher rates apply to pools involving wagers on specified
multiple events, such as trifecta, quinella and perfecta wagers. With respect
to simulcast racing operations, Mountaineer generally has opted to apply the
commission rates imposed by the jurisdictions of the host racetracks, as it may
do with the consent of the Racing Commission. Such rates vary with each
jurisdiction and may be more or less favorable than the live racing commission
rates. Out of its gross commissions, the Company is required to distribute
fixed percentages to its fund for the payment of regular purses (the "regular
purse fund"), the state of West Virginia and Hancock County and, with respect to
commissions derived from simulcast operations, and Mountaineer's employee
pension plan. After deducting state and county taxes and, with respect to
simulcast commission, simulcast fees and expenses and employee pension plan
contributions, approximately one-half of the remainder of the commissions are
payable to the regular purse fund.
Mountaineer also receives the "breakage," which is the odd cents by which the
amounts payable on each dollar wagered in a parimutuel pool exceeds a multiple
of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer on the basis of the
amounts wagered at their respective facilities.
Video Lottery Operations
Mountaineer is subject to annual licensing requirements established by the West
Virginia State Lottery Commission. Mountaineer's license was renewed in July
1996 for a period of one year.
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Mountaineer derives revenue from the operation of video lottery games in the
form of net win on the gross terminal income, or the total cash deposited into a
VLT less the value of credits cleared for winning redemption tickets. Pursuant
to the Lottery Act, Mountaineer's commission is fixed at 47% of the net win
after deducting an administration fee of up to 4% of gross terminal revenues
first paid to the State of West Virginia.
At December 31, 1996, 800 of the VLTs were leased under a master lease agreement
which requires the Company to insure the machines for their full replacement
value, pay any taxes, insurance and maintenance expenses and, upon the
expiration of the lease, allows Mountaineer to purchase the VLTs at fair market
value. Monthly payments for the first 400 VLTs were $72,378 from September 1994
through December 1995. The second 400 VLTs were free of rent for the first six
months after installation in late June 1995. The master lease agreement
provides that the Company may exercise an option to purchase the VLTs at the end
of the lease term at fair market value. Mountaineer accrued monthly lease
expenses of $70,743 during the deferral period of July through December 1995.
As of December 31, 1995, the Company had past due payments under the master
lease agreement of $190,093, constituting an event of default. On March 26,
1996, the master lease agreement was amended to reflect a new monthly
consolidated payment schedule as follows: (i) $0 in December 1995, January 1996
and February 1996, (ii) $119,471 in March and April 1996, (iii) $183,176 from
May through October 1996, and (iv) $119,471 from November 1996 through January
1999. In addition, the Company was obligated to make interest payments from
March through October 1996 at the rate of 15% of the past due periodic rental
payments under the master lease agreement, representing a total interest
obligation of $26,278.
On February 27, 1997 the Company agreed to purchase 400 Slot Terminals in
connection with its ongoing expansion of video lottery operations. The new Slot
Terminals were placed into operation on March 11, 1997, at which time 200 of the
original Card Terminals placed into service in September 1994 were returned to
their lessor (see Notes 9 and 18 of Consolidated Financial Statements). The
current complement of machines includes 800 Slot Terminals and 200 Card
Terminals.
Effective on the date of termination of the lease with respect to the 200 Card
Terminals replaced in March of 1997, the payment schedule of the September 1994
operating lease agreement, as amended March 26, 1996, will be further amended to
provide for a decrease in monthly payments from $119,471 to $100,185 through the
termination of the lease in January, 1999. There are no early termination
penalties in connection with this transaction. All other provisions of the
lease will remain unchanged.
In connection with the purchase of the 400 Slot Terminals, Mountaineer paid a
$793,520 down payment on February 27, 1997. The remaining $2,343,000 of
purchase price is due by June 18, 1997, although the Company may agree to an
earlier payment in exchange for an acceptable discount.
In 1995, the Lottery Commission approved the linking of VLTs to enhance the
amount that could be won on any single play of any single terminal within the
linked group. The Lottery Commission also approved nominal payout percentages
for this gaming option, commonly referred to as "Progressives", of up to 95%.
The Company expects to link approximately one-half of its VLTs into several
progressive playing groups located in the Riverside Gaming Terrace at the
racetrack and the Speakeasy Gaming Saloon at the Lodge. The Company's supplier
is working on the development of progressive gaming software for the
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Company's existing VLTs, however, there can be no assurance that progressive
games will be successfully developed or implemented.
Management Agreement - Video Lottery Operations
Pursuant to a construction loan with Bennett Management & Development
Corporation, American Gaming & Entertainment, Ltd. ("AGEL," formerly named Gamma
International, Ltd.) was engaged by Mountaineer pursuant to a June 2, 1994
management agreement (the "Management Agreement") to provide management services
for video lottery and other gaming activities at Mountaineer permitted under
West Virginia law, other than its parimutuel horse racing operations (the
"Permitted Activities"). Mountaineer was required to enter this Management
Agreement with AGEL as a condition to the Bennett Loan. Under the Management
Agreement, AGEL was entitled to receive a management fee of 3% of the gross
revenues of the Permitted Activities after a 4% administrative fee. In
addition, AGEL was entitled to receive 8% of the earnings before interest,
taxes, depreciation and amortization of all businesses conducted at or, in the
case of off-track betting, generated as a result of the operations at
Mountaineer, including the Permitted Activities and all parimutuel horse racing
operations.
Mountaineer's Management Agreement with AGEL was suspended pursuant to a Stay
Agreement effective June 30, 1995 until such time as Bennett complied with
certain requirements of the Lottery Commission. For the six months ended June
30, 1995, the Company paid AGEL $198,000, however, no additional payments were
made after June 30, 1995. Simultaneously, Mountaineer entered a Consulting
Agreement with American Newco, Inc., which was founded by two officers of AGEL,
to provide consulting services in connection with Mountaineer's video lottery
operations at the rate of $10,000 per month, subject to increases of up to
$10,000 per month for possible additional services to be provided through March
17, 1997. Also simultaneously, Mountaineer and AGEL entered a Settlement
Agreement, the June 30, 1995 effectiveness of which was conditioned upon the
termination of either the Stay Agreement or the Consulting Agreement in
accordance with certain specified contingencies, in which case the Management
Agreement would also terminate without further liability to Mountaineer.
However, the agreements also provided that if Bennett should fulfill certain
requirements of the Lottery Commission and declare no later than January 1, 1996
that it would continue as lender to Mountaineer on a permanent basis, the
Management Agreement would be reinstated prospectively and the Consulting
Agreement would terminate without further liability to Mountaineer.
Notwithstanding such agreements, the Company reached an agreement with AGEL as
of September 19, 1996, acknowledging the effectiveness of the June 30, 1995
settlement agreement and thereby terminating the Management Agreement. The
September 19, 1996 agreement was subject to approval by the United States
Bankruptcy Court in the Bennett bankruptcy estate, and a court order granting
such approval was issued on November 1, 1996.
The personal involvement of the two stockholders of American Newco in the
consulting activities was a material element of the Consulting Agreement. Such
personal involvement was not provided after October 15, 1995, and on May 10,
1996, the Company gave formal notice of termination of the Consulting Agreement,
and there has been no further communication between the parties since that time.
Management has taken the position that the Consulting Agreement has been
terminated and believes that the Company will not incur material liability in
connection therewith.
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Racetrack, Food and Beverage Operations
The clubhouse restaurant is open a minimum of 220 days annually on live race
days, and offers seating for 650 customers with full lunch and dinner menus
and a private buffet. Clubhouse customers include racing fans, local residents
and private social groups. Beverages and cocktails are also available in the
clubhouse at the Riverside Gaming Terrace bar, which services video lottery
players, as well as racing fans. The grandstand's Man 0' War restaurant offers
a sandwich shop primarily for bus and riverboat excursion tours and charter
groups and is open approximately 140 days annually. Renovation and expansion
were completed in March 1995 increasing dining capacity of the Man 0' War from
230 to 550. Closed circuit television monitors displaying Mountaineer's live
and simulcast races are provided at every table in both the Clubhouse and Man 0'
War Restaurants for the convenience of racing fans. In 1996, the Hollywood
Grand Buffet, with a seating capacity of 100, and the Hollywood Knights Saloon
were added to the mezzanine level of the grandstand. The racetrack food and
beverage facilities are intended to complement the entertainment experience for
racing fans and video lottery players and, therefore, are designed to offer
familiar menus with moderate pricing in a comfortable atmosphere.
The Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on week days, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Mountaineer Lodge's Gatsby Dining Room, which
seats 125 patrons (and 68 additional patrons on the attached deck, weather
permitting) for casual dining overlooking the golf course. Food and beverages
are also available at the Lodge at the Gatsby Lounge in the dining room, Big
Al's Deli in the Speakeasy Gaming Saloon and the Iron Horse Lounge. Table and
barstool seating are available in the Speakeasy Gaming Saloon and the Iron Horse
Lounge for the video lottery gaming and off-track wagering patrons accommodated
there. The Lodge and its food and beverage operations are operated in
combination with its entertainment facilities and are utilized principally to
increase racing attendance and video lottery play. Accordingly, the Company
maintains inexpensive room rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition of Mountaineer in December 1992, the Company has been
engaged in an ongoing effort to renovate and, more recently, enhance and expand
Mountaineer Park, which was first opened in 1951. Prior to West Virginia's
adoption of the Lottery Act in March 1994, the Company completed certain
renovations necessary to maintain the clubhouse and lower grandstand areas,
including upgrades to the plumbing and electrical systems, the installation of
new furniture and furnishings and the redesign of the grandstand parimutuel
(wagering) windows. These improvements were made during 1993.
In 1993, the Company commenced its capital improvement program, designed to
upgrade and expand Mountaineer Park's existing facilities to a level which would
allow its marketing as a more upscale gaming, racing, and recreational
destination resort.
In 1994 and 1995, the Company invested $8.9 million in building improvements,
furnishings, fixtures and equipment suitable for large scale gaming activities
in its race track grandstand and clubhouse, and an additional $591,000 to
convert a portion of existing Lodge space to gaming areas. In response to
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increased patronage at its Lodge gaming areas, the Company embarked upon an
8,000 square foot expansion of the Lodge video lottery facilities in 1995.
Mountaineer has expanded its off-track betting facilities in both the racetrack
and Lodge locations. In 1994 and 1995, the Company invested $1.9 million in two
track-side restaurants offering seating for 1,200 racing patrons, with new 13-
inch television monitors located at each table, and a total of 32 overhead
monitors with 40-inch screens. A simulcast control center is located in the
clubhouse restaurant, which also offers video and graphic overlay capabilities.
This system enables the Company to promote upcoming events and Mountaineer's
other entertainment facilities, in addition to the day's live and off-track
racing schedule. In 1995, the Company completed the renovation of the Lodge
off-track betting facility, offering seating for 198 patrons in the Speakeasy
Gaming Saloon. The Lodge simulcasting facility is served by 14 40-inch
television monitors, as well as a 15-foot projection screen. The Company
currently has available 51 mutuel windows in the racetrack facility and six
windows in the Speakeasy Gaming Saloon.
The Company also created a boxing arena and entertainment stage, which it has
integrated into the grandstand seating. The stage is an integral component of
the Company's efforts to expand Mountaineer Park's customer base by offering
new, complementary forms of entertainment. Mountaineer has hosted concerts and
six boxing events since December 1994, including nationally televised bouts on
ESPN and USA Cable. Mountaineer paid fixed fees and provided certain lodging at
no charge to the event promoters. Mountaineer retained all proceeds from ticket
sales, food and beverage sales and program sales. Management intends to engage
in similar events to increase public awareness and thereby help to increase
future attendance at Mountaineer Park.
The Lodge lobby and reception area were renovated in 1994, followed by
restoration of 41 guest rooms damaged by fire and a general renovation and
upgrade of the common areas in 1995. In 1996, enhancements and expansion of the
Speakeasy Gaming Saloon, parking lot expansion and portions of general paving
were completed.
BUSINESS STRATEGY
The Company's business strategy is to increase revenues in all areas of
operations through the promotion and expansion of its video lottery business and
the enhancement of its racing and entertainment facilities.
Develop and Market Mountaineer as a Diversified Entertainment Facility
The Company believes that in the past the potential of the Mountaineer Park
racetrack facility has not been maximized. Use of the facility solely to
conduct parimutuel racing limited the facility's customer base and under-
utilized its sizable infrastructure during non-racing times. The expansion of
video lottery operations and the introduction of such diverse uses as bingo for
local senior citizen groups, concerts, and live and simulcast boxing events at
Mountaineer Park will provide the right product mix to attract an increasing
number of visitors and more efficiently use Mountaineer's facilities during non-
racing times. It is anticipated that the resulting benefits will be shared by
parimutuel, as well as by video lottery and other entertainment operations,
since patrons who traditionally do not visit horse racetracks may, once at
Mountaineer Park, be more inclined to wager on racing. In addition, because a
significant percentage of revenues from video lottery operations must be
contributed to the racing purse fund, as video lottery
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revenues increase, so will the size of purses. Management believes that this
will have the effect of attracting better quality racehorses, further enhancing
Mountaineer Park's appeal to traditional horse racing fans who largely generate
the Company's parimutuel revenues.
Expand Video Lottery Operations
At December 31, 1996, the Company planned to expand its video lottery operations
by installing an additional 200 VLTs, which were authorized by the Lottery
Commission in 1995, to replace existing VLTs which had been placed in
operation in 1994. By March 13, 1997, the Company had accomplished its plan by
removing 200 older Card Terminals and adding 400 new Slot Terminals, resulting
in an increase in the number of VLTs in operation from 800 to 1,000, consisting
of 800 Slot Terminals and 200 Card Terminals. The Company believes that its
video lottery revenues will continue to increase with the installation of new
machines, the implementation of progressive and video slot games, and the
implementation of its expanded marketing plan. With its current involvement in
video lottery gaming and parimutuel racing, its substantial infrastructure and
grounds, and the attractive location of its facility, management believes that
Mountaineer is positioned to take advantage of any forms of gaming which may be
legalized in West Virginia. There can be no assurances, however, that the state
of West Virginia will in the future authorize additional gaming activities or
that, if authorized, Mountaineer would be permitted to offer such gaming
activities.
Relocate and Improve Off-Track Wagering Operations
The Company relocated its primary simulcasting operations to the Speakeasy
Gaming Saloon at the Lodge and expanded clubhouse simulcast facilities in 1995.
Improvements to simulcasting operations at the Riverside Gaming Terrace were
completed in 1996. Management believes that by exposing video lottery patrons
to simulcast and live racing, new racing fans can be developed, thereby
increasing parimutuel operations. The expanded clubhouse and improved Riverside
Gaming Terrace simulcast facilities are also expected to create additional
excitement and increase the level of activity at the racetrack on live race
days.
Improve Live Racing Product
The Company's ability to attract attendance at Mountaineer and wagering on its
live races is dependent, in part, upon the quality of the horses racing at
Mountaineer. Horse races at racetracks competing with Mountaineer, and at the
racetracks from which Mountaineer receives import simulcasts, have often been of
higher quality than Mountaineer's horse races, thereby attracting a larger
volume of wagering and higher average wagers than at Mountaineer Park. Beginning
in October 1994, Mountaineer has been able to attract better quality horses by
paying incrementally higher purses. Average daily purses, which were $25,000 in
the third quarter of 1995, were increased several times during 1995 and 1996 to
a high of approximately $55,000 in the third and fourth quarters of 1996.
Mountaineer reduced daily purses to approximately $35,000 late in the fourth
quarter of 1996, with the intention of raising them above the $50,000 level in
the second quarter of 1997. The increased purses reflect an increase in the
minimum daily purses guaranteed pursuant to Mountaineer's agreement with the
horsemen's association, a non-union entity which represents the horsemen in
their dealings with Mountaineer. Management's ability to increase further the
size of purses will depend on increased video lottery operations and, to a
lesser extent, expanded simulcast racing operations. Mountaineer anticipates
that it will be able to continue increasing purse
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sizes to levels attractive to owners of mid-level or better quality racehorses.
Management has sponsored several stakes races in 1996, with purses of up to
$20,000 per race. In September 1995, Mountaineer hosted the West Virginia
Breeders Classics stakes races, with purses totaling $330,000 funded by state-
wide video lottery tax revenue. Mountaineer broadcast certain of these races to
a number of other racetracks around the country and, subject to clarification by
the West Virginia legislature of the applicable simulcast statute, intends to
simulcast its regular card of live races commencing in the fourth quarter of
1997. Wagering handles from participating racetracks would be aggregated with
Mountaineer's on-site wagering handle when it exports its simulcast signal.
Commence Export Simulcasting Outside Hub Area
Export simulcasting is a highly desirable source of revenue because the direct
costs associated with such operations are relatively low. Mountaineer believes
that the higher average purses anticipated from video lottery contributions will
improve the quality of races which it can export to other racetracks, off track
betting facilities, casinos and other gaming establishments once it has
completed its improvement plan. In order to make its races more attractive to
simulcast outlets, Mountaineer anticipates that it will experiment with
different post times, possibly adopting more evening racing days which are
preferable because they do not compete with live racing conducted by other host
tracks. Although the Company intends to pursue export simulcasting
possibilities vigorously, there can be no assurance that such opportunities will
prove realistic or that the Company will be successful in its pursuit of such
business.
Increasing Import Simulcasting
The Company intends to increase the number and quality of races it makes
available for wagering by simulcasting additional out-of-state races. Although
management does not anticipate that it will increase the number of import
signals it can receive simultaneously, it will increase the number of races
displayed with each available signal. In May 1995, Mountaineer introduced
simulcasts of off-track greyhound racing, and has since offered thoroughbred
and/or greyhound import simulcasting seven days per week. Because operating
expenses associated with simulcast racing are generally lower than those
associated with live racing, management believes that increases in the levels of
simulcast wagering would result in greater operating profits than similar
increases in live racing levels.
MARKETING
Mountaineer's primary market includes four million persons of gaming age who
reside within a one-hour drive, or approximately 50 miles, of the facility,
including the population centers of Pittsburgh, Pennsylvania, Youngstown/Warren
and Akron/Canton, Ohio, and Wheeling, West Virginia. A secondary market of 3.4
million persons of gaming age reside within a two-hour drive, including
Cleveland, Ohio and Morgantown, West Virginia. Both markets have an average
household income of approximately $26,000.
The Company has adopted and implemented a comprehensive marketing program to
capitalize on Mountaineer's recently expanded gaming facilities to create a
larger and more loyal customer base. The program includes (i) the Players Club,
a player rating and tracking system designed to reward qualified play
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through the issuance of reward certificates which are redeemable for food and
beverages, merchandise and other services, (ii) entertainment programming
featuring boxing and other special events, (iii) attractive food and beverage
pricing, (iv) comprehensive advertising, and (v) a bus program. Some features
of the program are subject to approval by the Lottery Commission. Prior to the
formulation of the new marketing program, the Company's marketing efforts
consisted of limited television, radio and print advertising and promotional
events tied to major holidays or horse racing events.
In November 1996, Mountaineer's proposal for a $330,000 direct advertising grant
from the State of West Virginia was approved. Mountaineer matched the amount of
the grant and utilized the funds to produce an infomercial entitled "Hancock
County: the Action's Closer Than You Think." The infomercial is scheduled to
air from January 3, 1997 through August 30, 1997, three times per day, seven
days per week over cable networks in Mountaineer's target markets of Cleveland,
Akron, Canton and Youngstown, Ohio and Pittsburgh, Pennsylvania. The Company
believes that the infomercial will assist in generating additional video lottery
patronage and revenues and help temper the decrease of revenues which is
typically associated with horse racing at Mountaineer during the winter months.
COMPETITION
Mountaineer's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia and Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio. Wheeling
Downs conducts parimutuel greyhound dog racing and video lottery gaming.
Thistledown conducts parimutuel thoroughbred horse racing, but not video
lottery. Other than Wheeling Downs and Thistledown, there are currently no
facilities offering competitive parimutuel live thoroughbred or video lottery
gaming within a 100-mile radius of Mountaineer Park. As a result, although
there are facilities located more than 100 miles away, management does not
believe that such other facilities compete with Mountaineer Park for a
significant segment of its target customer base (although they do compete to
some extent for quality racehorses). In addition, none of those facilities, all
of which are located in Pennsylvania and Ohio, are currently licensed to offer
video lottery gaming. The one facility in West Virginia, other than Mountaineer
and Wheeling Downs, currently offering video lottery is located in the central
part of the state and, as a result, management believes it does not compete to
any significant extent with Mountaineer for customers. The Company understands
that a track in Charles Town, West Virginia intends to offer live thoroughbred
racing, import simulcast racing, and video lottery gaming in mid-1997. That
facility is located more than 200 miles from Mountaineer. Accordingly, the
Company does not believe that facility will compete with Mountaineer.
One other well-known resort located downstate has sought legislative approval to
operate a land-based casino. The Company also competes with statewide lotteries
in West Virginia, Pennsylvania and Ohio, on-site and off-track wagering in
Pennsylvania and other entertainment options available to consumers, including
live and televised professional and collegiate major sports events. The Company
will also compete with off-track wagering in Ohio, which was approved in 1996.
The Company is attempting to attract patrons by promoting Mountaineer as a
complete entertainment complex and destination resort offering a unique
combination of quality racing, video lottery wagering, dining, special events
and other entertainment options, all in a physically attractive setting which
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is easily accessed with ample on-site parking. To the extent that Pennsylvania
or Ohio legalize any forms of casino gaming, the Company's video lottery
operations will compete with new gaming facilities located within driving
distances from Mountaineer's geographic market. Such facilities may offer more
gaming machines than Mountaineer as well as forms of gaming not available in
West Virginia.
EMPLOYEES
As of December 31, 1996, Mountaineer had approximately 478 full-time employees
and 25 part-time employees, of whom approximately 70 were represented by a labor
union under a collective bargaining agreement. The union representing mutuel
clerks at the race track has been expanded in recent years to cover certain
employees providing off-track betting services at the Lodge. On February 18,
1997, the collective bargaining agreement was extended until September 26, 1997.
In September 1996, a vote was held on a proposal to make approximately 200 other
Mountaineer employees members of an additional collective bargaining unit.
Based on information available to the Company, management believes that the vote
on this proposal to expand union coverage at Mountaineer was 72 against and 60
for, with 87 votes challenged and under review for eligibility. Pending the
outcome of such review, the Company is unable to predict the ultimate outcome of
the vote.
As of December 31, 1996, the Company also employed two persons in Orange County,
California. The Company believes that its employee relations are good, however,
there can be no assurance that if such expansion of the union is approved, the
Company's employee relations will remain on the same terms as in the past.
REGULATION AND LICENSING
Racing
The Company's horse racing operations are subject to extensive regulation by the
Racing Commission, which is responsible for, among other things, granting annual
licenses to conduct race meets, approving simulcasting post times, and other
matters. When granting licenses, the Racing Commission has the authority to
determine the dates on which Mountaineer may conduct races. In order to conduct
simulcast racing, Mountaineer is required under West Virginia law to hold a
minimum of 220 live race days each year. Mountaineer was granted a license to
conduct 220 live race days for 1997.
West Virginia law requires that at least 80% of Mountaineer's employees must be
citizens and residents of West Virginia and must have been such for at least one
year. In addition, certain activities, such as simulcasting races, require the
consent of the representatives of a majority of the horse owners and trainers at
Mountaineer.
Mountaineer's revenues from live racing operations are derived substantially
from its parimutuel commissions, which are fixed by the State of West Virginia
as percentages of Mountaineer's wagering handles. The West Virginia legislature
could change these percentages at any time, although the Company is not aware of
any current proposal to do so.
The Company's simulcast activities that occur outside of West Virginia could be
subject to regulation by other state racing commissions, as well as the
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provisions of the Federal Interstate Horse Racing Act of 1978, which prohibits
Mountaineer from accepting off-track wagering on simulcast racing without the
approval of the Racing Commission and, subject to certain exceptions, of any
other currently operating track within 60 miles, or if none, of the closest
track in any adjoining state.
Video Lottery
The operation of video lottery games in West Virginia is subject to the Lottery
Act. Licensing and regulatory control is provided by the Lottery Commission.
Prior to the adoption of the Lottery Act in March 1994, the Company conducted
video lottery gaming pursuant to an agreement with the Lottery Commission which
authorized the Company to operate video lottery machines at the racetrack and
Lodge as part of a video lottery pilot project. Under the terms of the
agreement, the Company retained ownership or control of the video lottery
machines and other equipment it provided for use in video lottery gaming. In
March 1993, the Attorney General of West Virginia issued an opinion that, under
the West Virginia Constitution, video lottery machines could not be privately
owned. As a result of the Attorney General's opinion, the Company was unable to
renew its agreement with the Lottery Commission, which was scheduled to expire
in June 1993. In October 1993, the Supreme Court of West Virginia found that
the legislature had not adequately defined and authorized video lottery gaming
and, as a result, the Lottery Commission's authorization of video lottery gaming
at Mountaineer was invalid. The court's order was to become effective in late
November 1993, at which time video lottery gaming at Mountaineer would have had
to terminate. However, the court stayed its order pending consideration and
passage of satisfactory video lottery legislation. The subsequent adoption of
the Lottery Act has not been contested in or otherwise addressed by the court or
any other West Virginia court.
Under the Lottery Act, only parimutuel horse or dog racing facilities that were
licensed by the Racing Commission prior to January 1, 1994 and that conduct at
least 220 live racing dates for each dog or horse race meeting, or such other
number as may be approved by the Racing Commission, are eligible for licensure
to operate video lottery games. There are four racing facilities in West
Virginia (two horse racing and two dog racing), including Mountaineer, three of
which satisfy the eligibility requirements of 1996. The conduct of video
lottery gaming by a racing facility is subject to the approval of the voters of
the county in which the facility is located. If such approval is obtained, the
facilities may continue to conduct racing activities unless the matter is
resubmitted to the voters pursuant to a petition signed by at least 5% of the
registered voters, who must wait at least five years to bring such a petition.
If approval is denied, another election on the issue may not be held for a
period of two years. Video lottery gaming was approved in Hancock County, the
location of Mountaineer Park, on May 10, 1994.
In order to qualify as a "video lottery game," as the term is defined under the
Lottery Act, a game must, among other things, be a game of chance which utilizes
an interactive electronic terminal device allowing input by an individual
player. Such a game may not be based on any of the following game themes:
roulette, dice, or baccarat card games. Moreover, video lottery machines must
meet strict hardware and software specifications, including minimum and maximum
pay-out requirements, and must be connected to the Lottery Commission's central
control computer by an on-line or dial-up communication
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system. Only machines registered with and approved by the Lottery Commission
may offer video lottery games.
Under the Lottery Act, racetracks that conduct video lottery gaming, as well as
persons who service and repair video lottery machines and validation managers
(persons who perform video lottery ticket redemption services), are required to
be licensed by the Lottery Commission. The licensing application procedures are
extensive and include inquiries into and an evaluation of the character,
background (including criminal record, reputation and associations), business
ability and experience of an applicant and the adequacy and source of the
applicant's financing arrangements. In addition, a racetrack applicant must
hold a valid racing license, have an agreement regarding video lottery revenues
with the representatives of a majority of the horsemen, the parimutuel clerks
and the breeders for the racetrack and post a bond or irrevocable letter of
credit in such amount as the Lottery Commission shall determine. Finally, no
license will be granted until the Lottery Commission determines that each person
who has "control" of an applicant meets all of the applicable licensing
qualifications. Persons deemed to have control of a corporate applicant
include: (i) any holding or parent company or subsidiary of the applicant who
has the ability to elect a majority of the applicant's board of directors or to
otherwise control the activities of the applicant; and (ii) key personnel of an
applicant, including any executive officer, employee or agent, who has the power
to exercise significant influence over decisions concerning any part of the
applicant's business operations. The Company's license application was approved
by the Lottery Commission in June 1995. From March 1994 until such approval,
the Company conducted video lottery gaming under a provision of the Lottery Act
that permitted any racetrack authorized by the Lottery Commission to conduct
video lottery gaming prior to November 1, 1993 to continue to do so for a
limited time without additional licensure.
Prior to Mountaineer's loan with Bennett, the Lottery Commission approved the
Company's license in September, 1994. During the relicensing proceedings prior
to July 1, 1995, the Lottery Commission required Bennett to submit audited
financial statements, based on the combined effect of Bennett's stock ownership
in the Company, its security interest pursuant to the deed of trust in
connection with the Bennett Loan, and the fact that AGEL, Bennett's affiliate,
performed management services for the Company. These factors required the
Company to seek Lottery Commission approval of Bennett. Although Bennett failed
to initially provide information required by the Lottery Commission, the Lottery
Commission relicensed Mountaineer in June, 1995, after which time Bennett
supplied the requisite information. In connection with the relicensing
proceedings held in June 1996, the Lottery Commission released a letter opinion
dated May 9, 1996 to the effect that because Bennett had the right to vote less
than 5% of the outstanding stock the Company, and AGEL, an affiliate of Bennett,
was no longer providing management services, Bennett could not influence or
control Mountaineer's business, and thus, Lottery Commission approval was not
required. Accordingly, no Lottery Commission approval of Bennett was required
in 1996.
On December 26, 1996, Mountaineer prepaid the Bennett loan with funds obtained
through a new financing from Madeleine L.L.C. Because the terms of the new
financing provide that Madeleine does not have the right to vote more than 5% of
the Company's voting stock or the right to take an active role in the affairs of
Mountaineer, no Lottery Commission approval of Madeleine was required in 1996.
While the Company has no reason to believe that its license will be affected by
either loan, a change in policy by the Lottery Commission could affect
Mountaineer's license and thus adversely affect the Company.
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Licenses granted by the Lottery Commission must be renewed on July 1 of each
year. A license to operate video lottery games is a privilege personal to the
license holder and, accordingly, is non-transferable. In order for a license to
remain in effect, Lottery Commission approval is required prior to any change of
ownership or control of a license holder. Unless prior approval of the Lottery
Commission is obtained, the sale of five percent or more of the voting stock of
the license holder or any corporation that controls the license holder or the
sale of a license holder's assets (other than in the ordinary course of
business), or any interest therein, to any person not previously determined by
the Lottery Commission to have satisfied the licensing qualifications voids the
license.
Once licensed, a racetrack has the right to install and operate up to 400 video
lottery machines and may operate more than 400 machines only upon Lottery
Commission approval. The Company has received approval to operate a total of
1,000 machines.
Video Lottery machines may only be operated in the areas of the racetrack where
parimutuel wagering is permitted; provided, however, that if a racetrack was
authorized by the Lottery Commission prior to November 1, 1993 to operate video
lottery machines in another area of the racetrack's facilities, such racetrack
may continue to do so as long as there is one video lottery machine in the
parimutuel wagering area for each machine located in another area of the
racetrack. Accordingly, the Company may continue to operate video lottery
machines at the Lodge, provided that there are at least as many machines located
at Mountaineer's racetrack.
The Lottery Act imposes extensive operational controls relating to, among other
matters, security and supervision, access to the machines, hours of operation,
general liability insurance coverage and machine location. In addition, the
Lottery Act prohibits the extension of credit for video lottery play and
requires Lottery Commission approval before any video lottery advertising and
promotional activities are conducted. The Lottery Act provides for criminal and
civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be deposited
with the Lottery Commission to be shared in accordance with the provisions of
the Lottery Act. Under such provisions, each racetrack must electronically
remit to the Lottery Commission its "gross terminal income" (total cash
deposited into video lottery machines less the value of credits cleared for
winning redemption tickets). To ensure the availability of such funds to the
Lottery Commission, each racetrack must maintain in its account an amount equal
to or greater than the gross terminal income to be remitted. If a racetrack
fails to maintain this balance, the Lottery Commission may disable all of the
racetrack's video lottery machines until full payment of all amounts due is
made. From the gross terminal income remitted by a licensee, the Lottery
Commission will deduct up to 4% to cover its costs of administering video
lottery at the licensee's racetrack and divide the remaining amounts as follows:
47% is returned to the racetrack, 30% is paid to the State's general revenue
fund, 15.5% is deposited in the racetrack's fund for the payment of purses, and
the remaining 7.5% is divided among tourism promotion, Hancock County, the
Breeders, Classics, the Veterans Memorial Program and the Racetrack Employees
Pension Fund.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any
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time. Accordingly, the Company must comply with all gaming laws at all times.
Should either body consider the Company to be in violation of any of the
applicable laws or regulations, each has the plenary authority to suspend or
rescind the Company's licenses. While the Company has no knowledge of any non-
compliance, and believes that it is in full compliance with all relevant
regulations, should the Company fail to comply, its business would be materially
adversely effected.
To date, the Company has obtained all governmental licenses, findings of
suitability, registrations, permits and approvals necessary for the operation of
its current gaming activities. However, no assurances can be given that any new
licenses or approvals that may be required in the future will be given or that
existing ones will be renewed.
Management is aware of nothing to indicate that West Virginia state officials
will change their policies toward gaming activities, particularly video lottery
gaming; however, there are no assurances that such policies will not be changed.
Any substantial unfavorable change in the enabling laws or tax rates on gaming
revenues could make the Company's business substantially more onerous, less
profitable or illegal, which would have a material adverse effect on the
Company's business.
DISCONTINUED OPERATIONS
Bartlett Field Leases - Ohio
In January 1992, the Company, through its wholly owned subsidiary, ExCal Energy
Corporation ("ExCal") acquired approximately 16,000 net developed acres and
16,800 net undeveloped acres (held by production) of oil and gas leases in the
Bartlett Field in Southeastern Ohio from Biscayne Petroleum Corporation, an
affiliate of Edson R. Arneault, the President and Chief Executive Officer and a
Director of the Company. Mr. Arneault was not affiliated with the Company at
the time of such acquisition. The Company agreed to provide funds to drill 40
gas wells on such properties, and in 1992, the Company attempted to raise the
required capital through a public offering. Due to the expiration of "Section
29" credits (a credit against Federal income taxes derived from gas produced
from Devonian Shale and "tight sands" formations from wells commenced before
January 1993), in December 1992, the Company abandoned the offering. As a
result, the Company recorded certain provisions for writedown of these
interests. During 1993, the Company allowed the leases for the net undeveloped
acreage to expire, and sold to third parties approximately 2,300 of net
developed acres. In December 1994, all of the remaining leases were sold
pursuant to the plan of orderly liquidation described below.
Bartlett Field Wells - Ohio
In January 1992, ExCal acquired 77 gas wells in the Bartlett Field from 18
limited partnerships controlled and operated by Mr. Arneault or his affiliates.
The wells were in need of repair and the Company planned to incur rework costs
to increase production and maximize the value of the assets. Aggregate annual
gas production was 100,000 to 150,000 MCF, and management believed that with
limited rework, production could be increased by at least 100%. In December
1994, all of the wells were sold pursuant to the plan of orderly liquidation
described below.
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Marathon-Otter Lake Field - Michigan
In January 1992, ExCal acquired all the issued and outstanding shares of Crystal
Exploration Company, Inc. ("Crystal"). Crystal's assets consisted of an average
of 64% net revenue interest in approximately 3.3 million barrels of oil (proved
reserves) plus 34 oil and gas wells and related equipment in the Marathon-Otter
Lake Field in the State of Michigan. In 1991, the wells were shut-in by Crystal
which has undertaken no material drilling since then. In December 1992, ExCal
entered into a joint venture agreement with Fleur-David Corporation ("Fleur-
David"), a minority stockholder of the Company, to renegotiate the leases and to
perform rework and remediation activities to reestablish production and provide
activities necessary for compliance with state environmental standards. ExCal
contributed its net revenue interest in the proved reserves and agreed to pay
25% of on-going costs in exchange for a 25% interest in the joint venture. For
a 75% interest in the joint venture, Fleur-David agreed to provide technical
expertise and 75% of on-going costs. Fleur-David also obtained a covenant not
to sue for clean-up and abandonment costs from the State of Michigan by funding
$188,000 in an environmental escrow fund required by the state. Costs were
estimated at $2,200,000 and have included rework of wells, repairs to oil
storage tank batteries, acid treatments of producing formations, plugging,
clean-up, equipment removal, waste disposal and soil removal costs required by
the Michigan Department of Natural Resources. The Company is responsible to
provide 25%, or approximately $550,000 of such costs, of which approximately
$286,000 as of December 31, 1996 has been paid primarily from proceeds from the
exercise of certain stock options granted to Fleur-David by the Company, as well
as cash from continuing operations.
Plan of Orderly Liquidation
On March 31, 1993, the Company's Board approved a formal plan to divest its oil
and gas operations over a period of two years. This decision was based upon
several factors including (i) the anticipated potential of the Company's gaming
operations and the anticipated time to be devoted to it by management, (ii) the
expiration of "Section 29" credits, a credit against Federal income taxes
derived from gas produced from Devonian Shale and "tight sands" formations from
wells commenced before January 1993, and (iii) the impact of delays in
connection with a political controversy over video lottery in West Virginia
during 1993 which caused management to focus the Company's efforts and financial
resources on Mountaineer. To enhance the value of the properties for sale, the
plan of orderly liquidation provided for remediation costs to address certain
environmental matters and rework and development costs to increase future
production.
During 1993, the Company began disposition of the Bartlett Field oil and gas
leases by selling to third parties or, based on certain contingencies in the
acquisition agreement, returning to their previous owners, approximately 2,300
net developed acres. The Company received approximately $85,000 in connection
with the sale of the leases. The Company also allowed leases comprising 16,800
net undeveloped acres to expire. At December 31, 1993, the Company held net
developed acreage of 13,700 acres and reserves in the Bartlett Field of 902,200
MCF.
The plan of orderly liquidation also called for rework costs of approximately
$150,000 in connection with the Company's 77 Bartlett Field gas wells. Because
the wells were in various states of disrepair, the plan called for maintenance
of wells, acid treatments of producing formations and, in some cases, plugging
and abandonment, all for the purpose of increasing production
18
<PAGE>
and the value of such assets for ultimate sale. In mid-1993, the Company
reduced its appropriation for such rework costs to $100,000, which was estimated
to increase net cash flows from production to a minimum of $25,000 per month.
However, after completion of only $50,000 of such rework costs, the Bartlett
Field wells and remaining Bartlett Field leases were sold in December 1994 to
Development & Acquisition Ventures in Energy, Inc. ("DEVAQ"), whose principal
stockholder is the brother of Edson R. Arneault, the President, Chief Executive
Officer and Chairman of the Company, for notes valued at approximately $426,000,
of which $150,000 (discounted to $126,000) is non-recourse, secured solely by
the assets sold. See "Certain Transactions".
At the time of the sale, the Company remained obligated on a $590,000, 9% note
to the previous owners of the Bartlett Field wells. On March 31, 1995, the note
was amended to provide the Company with a credit for the current value of 98,333
shares of the Company's Common Stock issued to the previous owners in March 1993
in the amount of $123,000. The amendment further provided for the $467,000
balance of the note to be paid in monthly payments of interest only at 10% from
May through October 1995, with principal amortized over 36 months thereafter
with a balloon payment after 12 months on October 1, 1996. The note was payable
at the option of the Company through the issuance of Common Stock on or before
November 1, 1995 at the then current market value, provided that such shares
were registered by the Company at the time of issuance. The Company paid
monthly interest payments in May and June 1995, and in October 1995, the note
was canceled in exchange for interest payments for the months of July, August
and September 1995, and 373,600 shares of the Company's Common Stock, subject to
registration rights and valued for purposes of the transaction at the then
current market value of $1.25 per share.
The Company intends to sell its sole remaining oil and gas interest in the
Marathon-Otter Lake Field during 1997. For further discussion of management's
plan of orderly liquidation, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Discontinued
Operations."
ITEM 2. PROPERTIES
Gaming, Racing and Other Entertainment
Mountaineer Race Track & Gaming Resort is comprised of a thoroughbred race track
and the Lodge providing video lottery gaming, off-track wagering, dining and
lounge facilities as well as facilities for golf, swimming, tennis and other
outdoor activities covering approximately 606 acres (including 375 undeveloped
acres) in Chester, West Virginia. The Mountaineer facility encompasses
approximately 4,100 feet of frontage on the Ohio River and approximately 2,500
feet of highway frontage straddling West Virginia State Route 2. At December
31, 1996, Mountaineer was encumbered by a first deed of trust in favor of
Madeleine L.L.C. aggregating $16.1 million in principal (principal balance of
approximately $16.1 million as of December 31, 1996).
Equipment Leases
At December 31, 1996, in connection with video lottery operations,
Mountaineer leased 800 VLTs. During the first quarter of 1997, the Company
agreed to amend its master lease agreement, reducing the number of leased
VLTs to 600. In connection with racing operations, Mountaineer leases
totalisator, video tape, photofinish, and closed circuit television systems
and other equipment required for
19
<PAGE>
operations. For discussion of such equipment leases, see Note 9 of the Notes to
Consolidated Financial Statements.
Oil and Gas
The Company's oil and gas interest constitutes a 25% joint ventue interest in an
average 64% net revenue interest from proved reserves with 34 net producible
wells in the Marathon-Otter Lake field in Lapeer and Genesee Counties, Michigan.
Proved reserves are estimated at 3,314,800 BBL. For financial and other
information about the Company's oil and gas interests, see "Discontinued
Operations," "Management's Discussion and Analysis of Financial Condition" and
"Results of Operations - Results of Discontinued Operations," and Note 12 of the
Notes to Consolidated Financial Statements.
Office Lease
The Company moved the majority of its corporate operations to Mountaineer on
November 30, 1996 and officially moved its corporate headquarters to Mountaineer
on March 1, 1997. At December 31, 1996, the Company has approximately 400
square feet of office space in Laguna Beach, California under a month-to-month
lease with a monthly rental payment of $700.
ITEM 3. LEGAL PROCEEDINGS
SETTLED LITIGATION
During fiscal year 1996, the Company and Mountaineer settled a number of pending
cases and other claims as follows:
EVELYN SERPA, AS THE COMMITTEE AND GUARDIAN OF DANIEL DAVID BARRETT, SR., V.
MOUNTAINEER PARK, INC., ET. AL., Circuit Court of Hancock County, West Virginia,
Civil Action No. 95-C-147G. Mountaineer was served with a complaint in 1994 by
a jockey who sustained head injuries from a fall during a race at Mountaineer.
The plaintiff sought both compensatory and punitive damages. Mountaineer's
insurer has settled the case (subject to court approval) within the policy
limits and thus without material liability to the Company.
MOUNTAINEER PARK, INC., ET AL. V. BENNETT MANAGEMENT & DEVELOPMENT CORPORATION,
ET AL., United States Bankruptcy Court, Northern District of New York, Case Nos.
96-61376 (SDG), 96-61377 (SDG), 96-61378 (SDG), 96-61379 (SDG). On July 1,
1996, the Company 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 Company 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 Company's common stock to Bennett; and
(iv) conduct of its business generally, which led to allegations of civil and
criminal wrongdoing by Bennett in matters unrelated to its loan to
20
<PAGE>
Mountaineer, which in turn, led Bennett to seek the protection of the Bankruptcy
Court.
By Amendment of Construction Loan Agreement dated September 19, 1996, which the
Bankruptcy Court approved by Order dated October 22, 1996, the Company and
Mountaineer settled all of their claims against Bennett.
The settlement modified both the amortization schedule and the Company's
obligation to issue additional shares of its common stock to Bennett if the loan
was not prepaid by January 1, 1997. The settlement likewise granted to the
Company a release of any claims by Bennett's affiliate management company, which
had provided management services to Mountaineer pursuant to a 1994 management
agreement, and in the event Bennett wishes to sell any of its shares of the
Company's common stock on or before December 31, 1997, a right to match any
offer.
On December 26, 1996, Mountaineer prepaid in full the outstanding $8,711,000
balance of the construction loan.
JOYCE RICHARD BRANTLEY V. MOUNTAINEER PARK, INC., Case No. 94-C-124, Circuit
Court of Hancock County, West Virginia. In 1994, the Company was served with a
complaint by a former part-time employee for wrongful termination, claiming that
Mountaineer fired her as a result of a worker's compensation claim. The
complaint was not answered timely by the Company's outside counsel and, as a
result, a default judgment was entered by the Court in the amount of
approximately $308,000. The Company filed a motion to set aside the default
judgment, but prior to hearing of the motion, on June 24, 1996 the Company
settled the Brantley case by paying a lump sum of $100,000 in consideration for
a dismissal of the case with prejudice. The Company is seeking to recoup this
sum -- as well as its costs and attorney's fees in attempting to have the
default judgment set aside and in settling the matter. See MOUNTAINEER PARK,
INC. V. MANYPENNY discussed below.
CRYSTAL ASSET MANAGEMENT GROUP, LTD. In July 1994, the Company entered into an
agreement settling all claims of Crystal Asset Management Group, Ltd. ("CAM")
arising from an April 1993 financial advisory agreement. The Company agreed to
pay fees and expenses of $165,684 and to cancel previously issued warrants to
purchase 135,000 shares of common stock with registration rights at $7.00 per
share, and instead, issue warrants to purchase 145,000 shares of common stock
with registration rights, exercisable at $6.25 per share through December 1996.
Upon execution of the settlement agreement, the Company delivered the warrants
and made an initial payment of $15,000; however, no further payments were made.
In August 1996, the Company entered into an oral agreement, modifying the
settlement agreement. The oral agreement, which was subject to execution of a
definitive written agreement, provided for mutual releases of all claims in
exchange for the Company's payment of $90,000 in cash and reduction of the
exercise price of the previously issued warrants to $3.00 per share and
extension of the term thereof through December 1997. On September 4, 1996, the
parties settled the matter by execution of a definitive written agreement
containing such terms, followed by the Company's payment to CAM of $90,000.
MICHAEL R. DUNN. During the second quarter of 1995, the Company and Michael R.
Dunn, the former president and chairman of the Company, entered into an
agreement pursuant to which Mr. Dunn resigned from the Company and its
subsidiaries effective April 26, 1995. Pursuant to this agreement, the Company
agreed to pay Mr. Dunn bimonthly payments equal to his former salary for a
period of two years, certain medical and health benefits, and
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<PAGE>
indemnification for actions taken while he was an employee of the Company.
Subsequent to the agreement, the Company discovered circumstances which caused
Management to believe that the agreement should be rescinded. Bi-monthly
payments were made to Mr. Dunn through September 30, 1995, and no payments
thereafter. Mr. Dunn made demand for payment of unpaid installments under the
agreement, attorneys' fees incurred in pursuing his claim and unspecified
investment opportunity. By agreement dated October 4, 1996, the parties settled
their differences. In exchange for a waiver by Mr. Dunn of any claims under the
agreement or any further payments, the Company agreed to pay Mr. Dunn $100,000
and 100,000 shares of the Company's common stock subject to registration rights.
The remaining terms of the earlier agreement remained unchanged.
DARELYNN LEHTO V. WINNERS ENTERTAINMENT, INC., Civil Action No. 4-96-49, United
States District Court for the District of Minnesota (filed January 11, 1996).
Ms. Lehto's complaint alleged breach of provisions of an October 1992 stock
exchange agreement (through which Golden Palace became a wholly owned subsidiary
of the Company) requiring the Company under certain circumstances to repurchase
52,250 shares of the Company's stock from her at a price of $6 per share and to
use its best efforts to register such shares for sale to the public. By
agreement dated May 10, 1996, the Company settled its differences with Ms.
Lehto. Pursuant to the settlement agreement, the Company agreed to pay Ms.
Lehto $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 payments of $40,087 due on May 1, 1998, 1999, 2000 and
2001. In consideration for the Company's execution of the settlement agreement,
the payment of $25,000 and delivery of the promissory note, Ms. Lehto has
dismissed the litigation with prejudice, the parties have exchanged mutual
releases, and Ms. Lehto has agreed to the cancellation of options previously
granted to her to purchase 50,000 shares of the Company's common stock at a
price of $.01 per share.
DOROTHY VAN HAAFTEN, a former director of Golden Palace Casinos, Inc.,
threatened to bring suit against the Company alleging breach of a provision of
an October 1992 stock exchange agreement (through which Golden Palace became a
wholly owned subsidiary of the Company) requiring the Company under certain
circumstances to repurchase 52,250 shares of the Company's common stock from her
at a price of $6 per share.
By agreement dated April 2, 1996, as amended June 18, 1996, the Company settled
its differences with Ms. van Haaften without the filing of any litigation. The
Company forgave a $10,000 loan made to Ms. van Haaften in 1993, released the
collateral therefor (1,666 shares of the Company's common stock), paid Ms. van
Haaften $10,000, and agreed to issue Ms. van Haaften 133,416 shares of the
Company's common stock and to register such shares. Because the shares were not
registered by June 30, 1996, the agreement required the Company to deliver a
promissory note in the principal amount of $200,125 (133,416 shares multiplied
by $1.50 per share). The note is payable in 24 monthly installments and bears
interest at 12% per year. For each $1.50 in principal paid by the Company, Ms.
van Haaften was required to return to the Company one share of common stock.
Per the note, the Company redeemed 16,677 shares (which were canceled and
returned to authorized but unissued status) when the October 31, 1996
effectiveness of the registration statement including the shares stayed the
Company's payment obligation for a period of 90 business days. Under the
agreement, the Company was entitled to a credit against the note in an amount
equal to the average closing market price of the stock for the 90 days
immediately following the effective date of the
22
<PAGE>
registration statement (the "Average Market Price") multiplied by 133,416.
Accordingly, after a credit of $150,325.14, the outstanding balance of the note
as of October 31, 1996 was $27,362,99 which will effectively be eliminated by
the issuance of shares as discussed below.
The agreement likewise provided that in the event the Average Market Price was
less than $1.50 per share, then the Company would issue that number of
additional shares equal in value to the difference between $1.5O and such 90 day
average market price and to grant such shares piggyback registration rights.
The Company thus became obligated to issue 30,312 additional shares.
PENDING LITIGATION
WANDA ANDERSON, ADMINISTRATRIX OF THE ESTATE OF TERRY D. ELLIOTT V. MOUNTAINEER
PARK, INC., Circuit Court of Hancock County, West Virginia, Civil Action No. 97-
C-60G. On October 20, 1995, a horse which was stabled by one of the horse
owners at Mountaineer became loose and ran onto a highway resulting in an
automobile collision and the death of a motorist. On April 1, 1997, Mountaineer
was served with a complaint by the administratrix of the decedent's estate. The
matter is covered by insurance and management believes that if Mountaineer is
found to be liable the case will be adjudicated or settled within policy limits.
Accordingly, management believes that the matter will not result in any material
liability to Mountaineer or the Company. However, there can be no assurance
that Mountaineer will not be found liable, and if so, that the policy limits
will be adequate to cover such material liability.
HAMILTON V. MOUNTAINEER PARK, INC. ET AL., Circuit Court of Hancock County, West
Virginia, Civil Action No. 96-C-150R. On November 11, 1996, Mountaineer was
served with a complaint filed by a former employee alleging that Mountaineer had
wrongfully terminated his employment, in violation of an alleged oral, life-time
employment contract, in retaliation for his allegedly having reported to
Mountaineer officials and/or West Virginia racing officials that Mountaineer had
violated state and federal laws. Mr. Hamilton, who had served as Director of
Mutuels from about July of 1991 until his termination in July of 1995, alleges
that he complained that Mountaineer extended credit to officers, employees, and
patrons for wagering in violation of state law; that between April and September
of 1994, a Mountaineer employee made illegal cash payments on behalf of
Mountaineer of $7,750 to local politicians in return for their support of video
lottery legislation; and that Mountaineer committed other violations of state
and federal law.
The complaint seeks compensatory damages in the amount of $1,000,000,
prejudgment interest, and costs as well as punitive damages in the amount of
$5,000,000, reinstatement, back pay, front pay, compensation for pecuniary
losses, and attorneys' fees.
Mountaineer has answered the complaint, denying all allegations of wrongdoing
and liability. Mountaineer has also moved to dismiss the complaint with
prejudice on the grounds that (i) Mr. Hamilton's prior testimony under oath when
seeking unemployment compensation benefits (that his termination resulted solely
from a combining of departments) estops him from now claiming otherwise; (ii)
the claimed lifetime employment contract is unenforceable as a matter of West
Virginia law; and (iii) the complaint fails to state a claim for wrongful
discharge, discrimination, or intentional infliction of emotional distress. The
Company believes the lawsuit is frivolous and, therefore, that it will not incur
any material liability as a result.
23
<PAGE>
Mountaineer has also moved to disqualify plaintiff's counsel on the grounds that
such counsel has a material conflict of interest by virtue of his current
attorney-client relationship as an expert witness on behalf of Mountaineer in
the SERPA case, which is pending in the same court. The motion was granted on
March 21, 1997. Hearings on Mountaineer's remaining motions have not yet been
scheduled, and discovery has not commenced. Plaintiff has not yet identified
replacement counsel.
The complaint also names as a defendant an employee of Mountaineer. Mountaineer
has advised the employee to engage separate counsel and has agreed to reimburse
the employee for his legal fees.
GEORGE JONES V. MOUNTAINEER PARK, INC. AND WINNERS ENTERTAINMENT, INC., Circuit
Court of Hancock County, West Virginia, Civil Action No.95-C-103G. On June 19,
1995, the Company and Mountaineer were served with a complaint by George Jones,
claiming breach and wrongful termination of Mr. Jones' employment agreement with
Mountaineer, retaliatory discharge, fraud, outrage, and defamation. The
complaint alleges, among other things, that Mountaineer terminated Jones'
employment in September of 1993 in retaliation for his efforts to investigate
alleged improper activities occurring at Mountaineer. Mr. Jones seeks an award
of compensatory damages in the amount of $1 million and a like amount in
punitive damages.
The Company and Mountaineer have answered the complaint, denying any liability
to Mr. Jones. Management has determined to defend the case vigorously on the
grounds that the defamation claim is barred by the statute of limitations, and
that all of the claims should be dismissed because Mr. Jones' employment was
properly and justifiably terminated. In April of 1997, Mountaineer was advised
by its insurance carrier that only the defamation claims against it are covered
by insurance. Discovery has only recently commenced in the case, largely
because Mr. Jones' counsel had been unable to locate him. The Company does not
believe that either the Company or Mountaineer will incur any material loss on
account of such claims.
MOUNTAINEER PARK, INC. V. MANYPENNY, 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 pleading on
Mountaineer's behalf, resulting in the entry of a default judgment against
Mountaineer in the principal amount of $308,000. 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 he is liable to Mountaineer, Mr. Russell, alleged to
have been Mountaineer's general counsel, is liable to him, and asserted a
counterclaim for legal fees allegedly due him in the amount of $7,000.
Mountaineer will seek summary judgment on the counterclaim based on accord and
satisfaction. Mountaineer has agreed to provide Mr. Russell a defense to the
third-party claim. Discovery has established that Mr. Manypenny has
professional liability insurance in an amount sufficient to satisfy any judgment
Mountaineer might obtain. There can be no assurance, however, that Mountaineer
will prevail in the litigation.
The Company (including its subsidiaries) is also a defendant in various law
suits relating to routine matters incidental to its business. Management does
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<PAGE>
not believe that the outcome of such litigation, in the aggregate, will have any
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders, held on October 15, 1996, the
following proposals were approved by a majority of the shareholders of the
Company: (1) the election of Edson R. Arneault, Robert A. Blatt, Robert L.
Ruben and Thomas K. Russell to serve as directors of the Company until the next
annual meeting of shareholders, (2) an amendment to the Company's certificate of
incorporation changing the Company's name to "MTR Gaming Group, Inc.," (3) an
amendment to the Company's certificate of incorporation increasing the
authorized number of shares of the Company's common stock from 25 million to 50
million, (4) ratification of the Company's 1996 employee stock option plan, and
(5) confirmation of Corbin & Wertz as the Company's accountants and independent
auditors.
A proposal to amend the Company's certificate of incorporation to create a new
class of preferred stock was not approved by the shareholders, and a proposal to
amend the Company's certificate of incorporation to effect a one for five
reverse split of the Company's common stock was tabled by the Board of Directors
prior to the annual meeting.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ SmallCap Market and trades
under the symbol "MNTG." The following table sets forth the high and low bid
prices of the Company's common stock during each of the quarterly periods
indicated, as reported by the National Quotation Bureau.
1997* 1996 1995
Bid Price Bid Price Bid Price
------------ ------------ -------------
Quarter Ended High Low High Low High Low
- ------------- ------------ ------------ -------------
March 31 1-9/16 3/4 29/32 11/32 1-31/32 1-3/32
June 30 1-17/32 9/16 1-11/16 1-1/8
September 30 1-1/2 13/16 1-5/8 1-1/16
December 31 1-9/16 7/8 1-1/4 1-7/32
_______________________
* For the period of January 1, 1997 through March 20, 1997
The high and low bid quotations set forth above reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, and may not necessarily
represent actual transactions. On March 20, 1997, the last reported sale price
was $1.281. The Company has never paid a dividend and does not intend to for
the foreseeable future. As of March 20, 1997, there were approximately 567
holders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the audited
consolidated financial statements of the Company included elsewhere in this
Report, and should be read in conjunction with those consolidated financial
statements (including the notes thereto) and with "Management's Discussion and
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<PAGE>
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein. Due to the Company's approval in March 1993 of a plan of
orderly liquidation of its oil and gas operations, the results of such
discontinued operations have been excluded from such data.
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars, except per-share data)
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues $ 40,204,000 $ 24,927,000 $ 14,656,000 $ 13,014,000 $690,000
Net income (loss) from
continuing operations 1,155,000 (5,313,000) (6,902,000) (5,913,000) (2,749,000)
Income (loss) per share
from continuing
operations .06 (.33) (.48) (.46) (.42)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars, except per-share data)
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $ 30,878,000 $ 25,747,000 $ 23,958,000 $ 19,137,000 $ 16,812,000
Redeemable Common
Stock 0 1,406,000 2,208,000 2,208,000 1,618,000
Total liabilities 20,612,000 19,763,000 14,200,000 6,040,000 5,641,000
Stockholders' Equity 10,266,000 5,984,000 9,758,000 13,097,000 11,171,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In December, 1992 the Company acquired all of the outstanding stock of
Mountaineer Park, Inc. ("Mountaineer") with the intent of enhancing its existing
facilities for promotion as a high quality gaming and racing destination resort.
Shortly thereafter the Company determined to focus its business primarily on the
gaming industry, and de-emphasized its activity in other businesses in order to
more fully devote corporate resources to Mountaineer, as described elsewhere in
this report. See "Results of Discontinued Operations."
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mountaineer has exhibited steady, pronounced revenue growth under its expansion
plan begun in September 1994, principally in its video lottery gaming operation.
The emergence of video lottery as Mountaineer's dominant profit center and the
1996 amendment of the West Virginia video lottery law to permit the addition of
simulated "classic casino slot machine" games to video lottery terminals ("Slot
Terminals") have significantly moderated the seasonality experienced in prior
year revenue trends. As a result of this
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<PAGE>
significant increase in gaming revenues, the Company earned a $1.2 million
profit from continuing operations in 1996.
The Company incurred significant losses from continuing operations during the
years ended December 31, 1995 and 1994 largely due to delays encountered in the
expansion of Mountaineer's video lottery operations as a result of (i) the State
Attorney General's 1993 challenge of Mountaineer's contract with the Lottery
Commission; (ii) the State Supreme Court's ruling that video lottery was
unconstitutional pending the passage of proper enabling legislation; and (iii)
time required for the passage of such legislation. These delays, together with
legal settlement provisions, operating losses incurred in the horse racing
operations, and corporate overhead charges, resulted in losses from continuing
operations of $5.3 million in 1995, and $6.9 million in 1994.
REVENUES
Total revenues increased by $15.3 million from 1995 to 1996, an increase of 61%.
Video lottery operations accounted for $14.2 million of the increase, and
lodging, food and beverage operations contributed $899,000 of the increase. The
region surrounding Mountaineer experienced extensive flooding and unusually
heavy snowfall in the first quarter of 1996, producing difficult travel
conditions and resulting in portions of Ohio, West Virginia and Western
Pennsylvania being designated as Federal disaster areas. The Company's revenue
increases have been achieved despite these unusual weather conditions.
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.
Total revenues increased by $10.3 million from 1994 to 1995, an increase of 70%.
Approximately $9.0 million of the increase was produced by video lottery
operations, while the parimutuel commissions and lodging, food, beverage and
other operations at Mountaineer contributed $1.3 million of additional revenues.
Years Ended December 31
-----------------------------------------
1996 1995 1994
---- ---- ----
Video Lottery Operations $ 30,700,000 $ 16,479,000 $ 7,481,000
Parimutuel Commissions 4,299,000 4,263,000 3,768,000
Lodging, Food and Beverage 3,945,000 3,046,000 2,276,000
Other 1,260,000 1,139,000 1,131,000
----------- ----------- ----------
$ 40,204,000 $ 24,927,000 $ 14,656,000
------------ ------------ ------------
------------ ------------ ------------
Video Lottery Operations
Mountaineer has operated video lottery terminals ("VLTs") in West Virginia since
December 1992; 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 Company to increase its number of VLTs from 165 to
400 on September 4, 1994. In July 1995, the Company placed into operation an
additional 400 VLTs, bringing the total number of VLTs in operation to 800. The
800 VLTs then in operation offered only card games and keno ("Card Terminals").
Upon the enactment of the amendment of the video lottery law permitting Slot
Terminals, in July of 1996 Mountaineer converted
27
<PAGE>
350 Card Terminals into Slot Terminals. In October of 1996, Mountaineer
converted an additional 50 Card Terminals to Slot Terminals. In March of 1997,
Mountaineer purchased and installed 400 new Slot Terminals and removed 200
previously leased Card Terminals, bringing the total number of VLTs to 1,000 as
of March 13, 1997, consisting of 800 Slot Terminals and 200 Card Terminals.
A summary of video lottery net win (gross amounts wagered less winning patron
payouts) for the twelve and six month periods ended December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
Twelve Months Ended Six Months Ended
December 31 December 31
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total gross wagers $104,819,000 $ 55,988,000 $ 62,602,000 $ 32,810,000
Less patron payouts (74,119,000) (39,509,000) (43,802,000) (23,174,000)
------------ ------------ ------------ ------------
Video Lottery Revenues $ 30,700,000 $ 16,479,000 $ 18,800,000 $ 9,636,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average Daily Net Win
Per Terminal $ 105 $ 75 $ 127 $ 65
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Current year video lottery operations versus 1995 garnered revenue increases of
86% for the twelve month period and 95% for the six month period. Management
attributes these increases to four factors: (i) expansion of video lottery
facilities in July, 1995, doubling the number of VLTs from 400 to 800, (ii)
expansion of the Speakeasy Gaming Saloon at Mountaineer Lodge by 8,000 square
feet in December 1995; (iii) commencement of video slot operations in July 1996
on 350 VLTs and 50 additional VLTs in October 1996 of the 800 VLTs already in
use; and (iv) commencement of a large scale marketing campaign in July 1996
aimed beyond the 40 mile radius from which Mountaineer has traditionally drawn
the bulk of its patrons.
Revenues from video lottery operations increased 120%, from $7.5 million in 1994
to $16.5 million in 1995. Video lottery revenues in the second half of 1995
surpassed $9.6 million, a level 28% higher than revenues earned in all of 1994.
A comparison of fourth quarter revenues shows that 1995 outperformed 1994 by
$1.6 million, an increase of 56% over the $2.8 million of revenue earned in the
final quarter of 1994.
The results of video lottery operations reflect a three-year trend of
significantly increasing aggregate net win, coupled with an increase in average
daily net win per terminal in 1996. The Company plans to pursue additional
growth in its video lottery operations. The aggressive newspaper marketing
campaign begun in July 1996 continued at a moderately reduced level through the
winter months. In January of 1997, Mountaineer also began broadcasting a 30
minute "infomercial" advertisement on television affiliates within a two hour
driving radius.
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
Company's 220 annual live race dates. For the twelve months ended December 31,
1996, average daily net win on the 400 grandstand terminals was $43 (including
$0 for days when there was no live racing), compared to $167 earned on the
lodge-based terminals.
28
<PAGE>
Parimutuel Commissions
Under West Virginia Horse Racing Law, the Company is required to race a minimum
of 220 days per year and its racing revenues are defined as commissions.
Parimutuel commission revenue is a function of wagering handle, with a higher
commission earned on more exotic wagers, such as a trifecta, than on single
horse wagers, such as a win, place or show bet. Mountaineer earned an average
commission rate of approximately 20% in each of the past three years.
Mountaineer's parimutuel racing commissions and wagering handle for the years
ended December 31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Live racing parimutuel handle $ 20,426,000 $ 22,028,000 $ 21,168,000
Simulcast racing parimutuel handle 19,673,000 17,791,000 14,307,000
------------- ------------- -------------
Total parimutuel handle 40,099,000 39,819,000 35,475,000
Less:
Patrons' winning tickets (31,766,000) (31,637,000) (28,246,000)
Purses and Horsemen's Association
Payments (3,547,000) (3,447,000) (3,019,000)
State and County parimutuel taxes (487,000 (472,000) (442,000
------------- ------------- -------------
Parimutuel Commissions $ 4,299,000 $ 4,263,000 $ 3,768,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
For the twelve months ended December 31, 1996, simulcast handle rose by $1.9
million to $19.7 million, an increase of 11% compared to $17.8 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. Early in 1995 Mountaineer
expanded its off-track betting facilities in both the racetrack
clubhouse/grandstand and the Lodge, leading to a 24% increase in simulcast
wagering handle from $14.3 million to $17.8 million, an increase of $3.5
million. In April 1995, Mountaineer began offering off-track betting on
greyhound racing, which contributed $2.7 million to the increased simulcast
handle. The remaining $.8 million increase is attributable to the enhancement
of Mountaineer's off-track betting facilities and more extensive offerings of
simulcast racing; for most of 1995 Mountaineer offered simulcast racing seven
days per week, compared to six days per week in 1994.
Live racing handle declined by $1.6 million, or 7%, for the year ended December
31, 1996 to $20.4 million from $22.0 million for the year ended December 31,
1995. Live wagering handle increased 4%, from $21.2 million in 1994 to $22.0
million in 1995, an increase which slightly surpassed the 3% increase in live
race days, from 220 in 1994 to 227 in 1995. Average daily purses, which were
$25,000 in the third quarter of 1995, increased several times during 1995 and
1996 to a high of approximately $55,000 in the third and fourth quarters of
1996. Mountaineer reduced daily purses to approximately $35,000 late in the
fourth quarter of 1996, with the intention of raising them above the $50,000
level in the second quarter of 1997. 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
29
<PAGE>
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. In September 1995, Mountaineer hosted the West Virginia Breeders'
Classics, a night of stakes races with $330,000 in purses funded by taxes on
statewide video lottery revenues. Mountaineer broadcasted a simulcast signal of
the stakes races, earning commissions on $351,000 of handle wagered off-site.
Lodging, Food, and Beverage Operations
Lodging, food and beverage revenues accounted for a combined increase of 30% to
$3.9 million for the year ended December 31, 1996 from $3.0 million for the same
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 37% lodging revenue increase to $1,091,000 from $794,000, 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 27%
to $2.9 million from $2.3 million for the year ended December 31, 1995.
Management attributes the increase to direct elements of the marketing campaign
which commenced in July, 1996, as well as the synergistic effects of heavier
video lottery patronage.
Revenues earned from lodging, food and beverage activities increased 34%, from
$2.3 million earned in 1994 to $3.0 million in 1995. The increase is a
reflection of significantly greater attendance at the Mountaineer's video gaming
and off-track betting facilities, as well as a slight increase in live racing
attendance. Restaurant, bar and concession facilities produced $582,000 of the
revenue increase, while lodge revenues increased $194,000. Food and beverage
operations accounted for approximately three quarters of the revenues earned by
this profit center in both 1995 and 1994.
Other Revenues
Other revenues increased by $121,000, or 11% from 1995 to 1996. Other operating
revenues are primarily derived from the sale of programs, parking and admission
fees relating to Mountaineer's racing activities, and periodic spectator events
such as boxing matches or concerts. In addition, in 1996 Mountaineer received
$201,000 from the West Virginia Racing Commission to be used for barn
renovations.
Other revenues were virtually unchanged from 1994 to 1995, registering
approximately $1.1 million each year. Operations in 1994 benefited from an
$85,000 gain recorded upon the disposition of property, while 1995 saw a
moderate increase in revenues relating to admission fees and program sales.
Non-recurring Income
In 1996, the Company negotiated significant reductions in four previously
accrued obligations, producing an aggregate gain of $705,000. Trade accounts
payable and accrued liabilities totaling $1.3 million were settled in a series
of transactions in return for cash payments aggregating $440,000 and 100,000
shares of the Company's common stock, producing the gain.
30
<PAGE>
OPERATING COSTS
The expanded scope of operations which produced Mountaineer's 1996 61%
revenue increase resulted in a 37% increase in cost of revenues, a 50%
increase in marketing and promotions expense, a 25% reduction in general and
administrative expenses, and an 11% reduction in depreciation and
amortization. Gross profits from Mountaineer's four profit centers nearly
tripled from $3.1 million to $10.4 million; $6.9 million of this amount was
earned in the last two quarters of 1996.
Total cost of revenues increased by 63%, from $13.4 million in 1994 to $21.8
million in 1995. Approximately $6.5 million of the increase was attributable to
the substantial growth in VLT revenues which more than doubled from 1994 to
1995. Parimutuel commissions expense accounted for $.5 million of the increase,
largely a reflection of its 13% increase in commission revenues, and lodging,
food and beverage cost of revenues increased $1.0 million, exceeding the
$770,000 revenue increase earned by that profit center.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cost of Revenues:
Video Lottery Operations $ 19,865,000 $ 12,256,000 $ 5,709,000
Parimutuel Commissions 5,257,000 5,064,000 4,563,000
Lodging, Food and Beverage 3,543,000 3,285,000 2,337,000
Other Revenues 1,092,000 1,195,000 798,000
------------ ------------ ------------
Total Cost of Revenues $ 29,757,000 $ 21,800,000 $ 13,407,000
------------ ------------ ------------
------------ ------------ ------------
Gross Profit (Loss):
Video Lottery Operations $ 10,835,000 $ 4,223,000 $ 1,772,000
Parimutuel Commissions (958,000) (801,000) (795,000)
Lodging, Food and Beverage 402,000 (239,000) (61,000)
Other Revenues 168,000 (56,000) 333,000
------------ ------------ ------------
Gross Profit $ 10,447,000 $ 3,127,000 $ 1,249,000
Operating Income (Loss):
Marketing and Promotions (1,718,000) (1,144,000) (1,016,000)
General and Administrative (4,092,000) (5,420,000) (5,652,000)
Depreciation and Amortization (1,667,000) (1,504,000) (910,000)
------------ ------------ ------------
Operating Income (Loss) $ 2,970,000 $ (4,941,000) $ (6,329,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Video Lottery Operations
Costs of video lottery revenues increased by $7.7 million, or 62%, from $12.3
million to $19.9 million for the year ended December 31, 1996, compared to 1995,
reflecting the increase in statutory expenses directly related to the 86%
increase in video lottery revenues. Such expenses accounted for $7.6 million of
the total cost increase. Taxes and statutory assessments applicable to video
lottery increased from 35% of video lottery revenues ("net win") prior to March
1994 to 53% of net win thereafter. This increase in assessment rate, coupled
with the 120% increase in video lottery revenues, resulted in a $5.0 million
increase in taxes and statutory assessments from 1994 to 1995, to $9.0 million.
31
<PAGE>
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" in the Consolidated Statement of Operations. Statutory costs and
assessments for the respective twelve month periods are as follows:
Years Ended December 31
----------------------------------------
1996 1995 1994
---- ---- ----
State of West Virginia $ 9,695,000 $5,325,000 $2,371,000
Horsemen's Purse Fund 4,645,000 2,470,000 1,070,000
Other contract costs 2,247,000 1,195,000 468,000
----------- ---------- ----------
Total statutory costs $16,587,000 $8,990,000 $3,909,000
----------- ---------- ----------
----------- ---------- ----------
The remaining significant expenses incurred by video lottery operations consist
of VLT terminal lease expense ($1.4 million in 1996 versus $1.3 million in
1995), direct and indirect wages and employee benefits ($1.1 million in 1996
versus $759,000 in 1995), and utilities, property tax and insurance ($481,000 in
1996 versus $209,000 in 1995). Management expects lease expenses to decline to
approximately $1.2 million in 1997. Generally, wages and property expenses are
expected to increase only moderately due to increased patronage of existing
video lottery facilities; a physical expansion of such facilities would produce
a more significant increase in wages and property expenses. In March, 1997,
Mountaineer purchased 400 new video lottery terminals and retired from
operations 200 of the leased terminals placed into operation in 1994.
Video lottery terminal lease expenses increased from $790,000 in 1994 to $1.3
million in 1995, a reflection largely of the increased number of terminals
leased, from 165 prior to September 1994, to 400 from September, 1994 through
June, 1995, and 800 thereafter. Direct and indirect wages and employee benefits
increased from $477,000 in 1994 to $759,000 in 1995, and utilities, property tax
and insurance increased from $167,000 to $209,000, both increases resulting from
the expanded number of gaming terminals and related increases in patronage.
Parimutuel Commissions
Costs of parimutuel commission revenue increased by $193,000 to approximately
$5.3 million in 1996. Purse expense dropped 7%, from $2.1 million in 1995 to
$2.0 million in 1996, reflecting the 7% decrease in live racing wagers.
Contractual fees paid to host tracks and the Horsemen's Association in
connection with simulcasting race operations increased $288,000 to $2.2 million
in 1996, consistent with the 11% increase in simulcasting wagers. Parimutuel
commissions revenue is reported net of these expenses in the Consolidated
Statement of Operations.
Direct and indirect wages and employee benefits attributable to racing
operations remained stable at approximately $2.4 million in 1996 and 1995, while
lease expense was reduced by $106,000, or 13%, to $697,000 due to the
negotiation of more favorable totalisator lease terms in December, 1995.
32
<PAGE>
Other costs of parimutuel commission revenue increased in the aggregate by
approximately $299,000 from 1995 to 1996.
Direct and indirect wages and employee benefits increased from $2.1 million in
1994 to $2.4 million in 1995, partly as an accommodation to Mountaineer's
extensive construction activities in 1995. A general upgrade in maintenance
activities contributed to this increase, as well as to a $65,000 increase in
repair and maintenance supplies. Mountaineer's totalisator rents and payments of
host track fees increased $177,000 in 1995 from the prior year as a result of
the 24% increase in revenues achieved by its off-track betting operation.
Liability insurance expense in 1995 was $87,000 higher than the prior period, a
reflection of the increased volume of business and an industry-wide increase in
jockey insurance.
Mountaineer's labor agreement with approximately sixty (60) mutuel and nine (9)
video lottery employees has been extended to September 26, 1997 while
Mountaineer and the union engage in discussions regarding a new contract. There
can be no assurances that a new labor agreement will be finalized prior to the
expiration of the current contract.
Lodging, Food and Beverage and Operations
Direct expenses of lodging, food and beverage operations increased from $3.3
million in 1995 to $3.5 million in 1996. The lodging, food and beverage
operation earned a gross profit of $402,000 in 1996, compared to a $239,000 loss
in 1995, as higher revenues more fully absorbed the operation's fixed costs.
Lodging direct costs totaled $1,102,000 for 1996, compared to $1,048,000 in
1995. Lodging operations broke even in 1996, compared to a $259,000 loss in
1995. Widespread construction projects in progress throughout the year
unavoidably increased Lodge operating expenses. Lodge wages and employee
benefits increased by $71,000 to $708,000 in 1996, while food and beverage
operation wages and employee benefits increased by $76,000 to $975,000 in 1996.
In 1995, $695,000 of the $948,000 increase in this segment's operating costs
were attributable to food and beverage operations. Although cost of sales rates
for food and beverage increased only slightly from 42% in 1994 to 44% in 1995,
this cost category increased by $303,000 in proportion to the $582,000 increase
in sales. Food and beverage wage and employee benefit costs rose approximately
$252,000 to $899,000 in 1995, also commensurate with the increase in revenues.
Hotel wage and employee benefit costs increased approximately $260,000 to
637,000 in 1995, in response to the upgraded service levels which produced a
$194,123 increase in revenues despite no appreciable change in occupancy rates
from 1994 to 1995.
Cost of Other Revenues
Cost of other revenues, consisting primarily of non-core businesses such as
admissions, programs, golf, tennis and swimming declined by $103,000 from
$1,195,000 in 1995 to $1,092,000 in 1996, reflecting the discontinuance of
certain shuttle bus and valet services.
Cost of other revenues were higher by $397,000 or 50% from $798,000 to $1.2
million for 1995 as compared to 1994, notwithstanding flat revenues for these
operations in 1995. Approximately 81% of such increase was directly
attributable to expanded hours of operation and increased staffing and scope of
off-track betting operations.
33
<PAGE>
Marketing and Promotions Expense
Marketing and promotions expense increased by $574,000 to $1.7 million for the
year ended December 31, 1996. The bulk of this increase occurred in the second
half of 1996, with the inception of an aggressive marketing campaign targeted at
a significantly larger geographic market. Mountaineer will supplement its
traditional newspaper and radio advertising campaign with a more specifically
targeted direct mail program in the future. In addition, Mountaineer has
commenced extensive infomercial advertising on television affiliates within a
two hour driving radius in January 1997. Up to $330,000 of related broadcast
costs will be defrayed by a state grant from 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.
Marketing and promotions expense increased only slightly from $1,016,000 in 1994
to $1,144,000 in 1995 as revenues in this period grew from $14.7 million to
$24.9 million.
General and Administrative Expenses
The Company's general and administrative expenses decreased by $1.3 million
to $4.1 million, or 25%, from $5.4 million for the years ended December 31,
1996 and 1995, respectively. Management's efforts to reduce the cost of
corporate operations produced a decrease in corporate general and
administrative expenses by $1.4 million, or 44%, from $3.2 million to $1.8
million for the same period-to-period comparison. Corporate general and
administrative expenses in 1996 reflected the issuance of 666,000 shares and
275,000 stock options valued at $347,000 for services rendered by two
officers and an employee. The Company's 1995 general and administrative
expenses reflected several non-recurring charges affecting general and
administrative expenses as follows: provisions for settlement of legal
actions of $408,000 and doubtful notes receivable from related parties of
$290,000, and relocation and severance charges of $596,000. General and
administrative expenses at Mountaineer increased from $2.2 million in 1995 to
$2.3 million in 1996 due to the expanded scope of Mountaineer's operations
and the assumption of certain corporate responsibilities.
The Company's general and administrative expenses decreased $232,000 from
$5.7 million in 1994 to $5.4 million in 1995. Salaries decreased from $1.3
million in 1994 to $961,000 in 1995; 1994 compensation includes $600,000 in
non-cash expense incurred in connection with stock options on the Company's
common stock issued below market in connection with an employment agreement
with a former stockholder of Mountaineer. Legal and other professional fees
decreased from $1.4 million in 1994 to $1.1 million in 1995. The Company's
1994 general and administrative expenses reflected a $525,000 provision for
settlement of legal actions and a $200,000 write-off of development costs.
Interest Expense
In 1996, the Company incurred $3.7 million of interest, of which $197,000 was
capitalized to cost of self-constructed assets. Interest expense in 1996
includes the amortization of $1.8 million of cash and noncash fees paid at the
inception of various loan arrangements, as more fully described in "Liquidity
and Sources of Capital." Approximately $1.1 million of such fees remain to be
expensed in 1997.
34
<PAGE>
Interest expense decreased 24% from $729,000 in 1994 to $557,000 in 1995 despite
the increased construction loan balances carried in 1995. Of the interest
incurred in 1995, $1.1 million was capitalized to the cost of construction
compared to only $790,000 capitalized in 1994 due to higher levels of
construction activity in 1995.
Depreciation and Amortization
Depreciation and amortization costs increased 11% from $1.5 million in 1995 to
$1.7 million in 1996, reflecting the increased property, plant and equipment
balances carried at Mountaineer. In the past three years, the Company has
invested approximately $10.7 million in capital improvements, primarily as part
of its expansion and improvement program at Mountaineer, as described more fully
in Item 1, "Improvement Plan and Expanded Operations."
Depreciation and amortization costs increased from $910,000 in 1994 to $1.5
million in 1995, a reflection of the $5.9 million investment in property, plant
and equipment during that period. These investments also were made as part of
the capital improvement and expansion program at Mountaineer Park.
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Company's Board approved a formal plan to divest the
Company of certain oil and gas operations the Company owns in Michigan through a
plan of orderly liquidation. This decision was based upon several factors
including (i) the anticipated potential of the Company's gaming operations and
the anticipated time to be devoted to it by management, (ii) the expiration of
"Section 29" credits, a credit against federal income taxes derived from gas
produced from Devonian Shale and "tight sands" formations from wells commenced
before January 1993, (iii) the impact of delays in connection with the West
Virginia Supreme Court litigation and subsequent passage of enabling legislation
for video lottery during 1994 which caused management to focus the Company's
efforts and financial resources on Mountaineer Park, and (iv) the Company's
desire to continue to place its primary emphasis on its gaming and recreational
businesses. That plan of orderly liquidation provided for certain rework,
remediation and development costs to address environmental matters, increased
production and enhancement of the value of such properties for sale.
Descriptions of the oil and gas properties and financial information relating to
operating results and balance sheet items as of December 31, 1994 and 1995 and
as of June 30, 1996 have been disclosed as "Discontinued Operations" for
purposes of this report.
Although the Company has prepared a plan of liquidation with respect to these
properties, it has thus far been unable to effect a liquidation of its Michigan
properties. The Company has valued such properties at $2,616,000 as of December
31, 1996, net of $264,000 of accrued rework costs, which it believes represents
net realizable value for the properties.
35
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
At December 31, 1996, the Company's working capital balance stood at $3.9
million, including $4.2 million of unrestricted cash balances. Included in the
year-end working capital balance is $1.1 million of deferred financing costs
which will be amortized to interest expense over the first two quarters of 1997.
Trade accounts payable and current accrued liabilities totaled $2.8 million at
December 31, 1996.
Management believes that the substantial and steady revenue increases earned
in the past three years will continue, and ultimately occur in amounts which
will allow the Company to fully utilize its $25.5 million federal net
operating loss tax carryforwards, although there are no assurances that
sufficient income will be earned in future years to do so. Federal NOL's may
be subject to certain limitations; see Note 13 of Notes to Consolidated
Financial Statements. First quarter (unaudited) operating revenues have
increased from $4.7 million in 1995 to $7.6 million in 1996, and to
approximately $11.8 million in 1997. Based upon such trends, the Company
believes that cash flow from operations and cash on hand will be sufficient
to meet its operating needs for fiscal 1997. Notwithstanding the foregoing,
the Company's existing $16.1 million term loan provides for annual fees of
cash, if not refinanced by July 2, 1997, and cash, stock and warrants, if the
Company does not refinance by November 15 of each year, which will result in
substantial cost and dilution as more fully described in Note 6 of Notes to
Consolidated Financial Statements. The Company has engaged a nationally
recognized investment banking firm as a financial advisor and placement agent
in such refinancing and believes that it will be able to refinance this debt
before July 2 or November 15, 1997. Although management believes it can
complete its refinancing plans on acceptable terms prior to July 2, 1997,
there can be no assurances that it will be completed by that date, or at all.
The Company repaid its 1994 $10.2 million construction loan in 1996, prior to
its scheduled maturity, in accordance with previously announced intentions. New
term debt financing was placed in 1996 in two tranches, a $5 million facility in
July 1996 which was amended and restated as a $16.1 million note in December
1996. Management plans to refinance the $16.1 million term loan in 1997; the
loan agreement calls for interest-only payments of approximately $161,000 per
month for 36 months, with all principal due in December 1999. The Company
expects to pay a $250,000 fee in connection with the planned 1997 prepayment of
the loan; if the contemplated refinancing is not consummated prior to July 2,
1997, the Company is obligated to pay a cash fee of $888,000.
In connection with the December tranche of the term loan financing, the Company
negotiated a revolving line of credit in a maximum amount of $5.4 million, all
of which remains available for borrowing at December 31, 1996. Line proceeds
may be used, with prior lender approval, for purposes of capital improvements
and equipment purchases, gaming industry acquisitions or general corporate
purposes.
In 1996, the Company issued or was obligated to issue approximately 2.6
million shares of stock. Approximately 908,000 shares were issued to lenders
as part of various financing arrangements that existed in 1996, and an
additional 633,000 shares were issued in satisfaction of existing redeemable
common stock obligations. The Company issued 926,000 shares in 1996 as
payment for services rendered by employees and outside professionals; of this
amount, 666,000 shares represent payment for accrued wages earned prior to
1996 by corporate officers and an employee who owns more than 5% of the
Company's common stock. The Company issued 175,000 shares in 1996 as partial
consideration for previously accrued liabilities which were settled in full
in 1996.
36
<PAGE>
In October 1996, the Securities and Exchange Commission (SEC) declared effective
the Company's Form S-3 shelf registration statement pertaining to 4.8 million
shares of common stock held by various selling shareholders. In November 1996,
the SEC declared effective the Company's Form S-1 registration statement which
registered 1.7 million shares of common stock and warrants to purchase 1.5
million of such shares. The Company did not offer any shares for sale pursuant
to such registration statements.
In October 1996, the Company's shareholders approved an amendment to the
Company's certificate of incorporation to increase the number of authorized
shares of the Company's common stock from 25 million to 50 million. The purpose
of this amendment is to provide a sufficient number of shares for the Company to
honor its obligations to issue shares of common stock under various agreements
and to be used for corporate purposes in the future. While the Company 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 Company flexibility in future capital
raising or acquisition activities.
The Company intends to continue to improve its Mountaineer property in 1997. In
March, 1997, the Company purchased 400 new video lottery terminals (VLTs) at a
cost of approximately $3.1 million, and returned 200 leased VLTs to the lessor.
The net additional 200 VLTs are housed within Mountaineer's existing gaming
facilities.
The Company may pursue strategic business acquisitions in 1997 if management
believes that a beneficial complement to its existing gaming operations would
result. In accordance with this plan, in February 1997, the Company entered
into a non-binding letter of intent to lease or purchase real property and
equipment currently used in the operation of a harness racetrack in Michigan.
The letter of intent contemplated the Company lending $900,000 on a secured,
non-recourse basis to the current owner. Because of the seller's delays in
providing due diligence materials, however, the Company elected not to proceed
with the acquisition plan.
Mountaineer has received approval for financial awards from two West Virginia
State agencies. In the fourth quarter of 1996, the West Virginia Racing
Commission returned to Mountaineer $201,000 of unclaimed winnings from
parimutuel wagers, formerly escheated to the State, for capital improvements to
its barn area. In the first half of 1997, Mountaineer will be reimbursed by the
West Virginia Division of Tourism for up to $330,000 of advertising expenses to
be incurred in 1997 as part of an infomercial advertising campaign.
CASH FLOWS
The Company's continuing operations have produced $326,000 and $553,000 of cash
in 1996 and 1995, respectively, and consumed cash of $3.5 million in 1994.
In 1996, the Company issued common stock and warrants valued at $1.4 million
in connection with loan transactions entered into by Mountaineer, and issued
stock and notes valued at $1.4 million in satisfaction of redeemable common
stock obligations and various legal settlements. These stock issuances,
combined with $378,000 in stock and options issued for services rendered,
provided a source of operating cash in 1996. The Company consumed $2.4
million in cash balances in 1996 to reduce its accounts payable and accrued
liability balances from $5.8 million to $2.8 million.
37
<PAGE>
The Company invested $1.8 million in capital improvements in 1996, including
$197,000 of capitalized interest costs, following investments of $5.5 million in
1995 and $3.4 million in 1994.
The Company paid cash loan fees totaling $845,000 in connection with various
loan arrangements entered into in 1996. The Company secured a series of short-
term loans totaling $1.1 million in 1996; the loans have been paid in full. The
Company also refinanced its 1994 term loan in 1996, as more fully described in
"Liquidity and Sources of Capital," above. Principal payments of long-term debt
totaled $10.5 million in the current year, while $16.1 million of long-term debt
proceeds were secured in 1996.
At December 31, 1996, the Company's unrestricted cash balances stood at $4.2
million, in addition to $185,000 in cash deposits restricted under various
financial instruments.
OUTLOOK
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results could differ
materially.
The Company believes that the major challenges in seeking legislation for and
establishing a market for the Company's video lottery operations, from which the
Company derives the bulk of its revenues, are behind it. Management expects
that gross handle and net win (gross handle less payouts to patrons) from video
lottery operations will continue to increase in fiscal year 1997, primarily as a
result of the Company's infomercial and other advertising, the increase from 800
to 1,000 VLTs, including the increase from 400 to 800 of those VLTs to Slot
Terminals. These increased revenues, in turn, should permit the Company to
continue increasing its live racing purses and thus improve the quality of its
live racing product and permit the Company to sell its signal for simulcasting
by other tracks and off-track betting facilities, which is a source of revenue
the Company has never had. Any material unfavorable change in West Virginia
video lottery laws or the rates at which such operations are taxed or otherwise
assessed, as well as competition in the event Ohio or Pennsylvania determine to
permit video lottery or other new forms of gaming, could materially affect the
Company's results. By the same token, any favorable changes in the video
lottery law or regulations such as coin out, increased betting limits, or
progressive jackpots would likely improve the Company's results. There can also
be no assurance that the Company will be able to profitably market its racing
product for export simulcasting. The Company also plans to continue to
diversify Mountaineer's sources of revenue through live concerts, boxing, and
other entertainment events.
The Company also hopes to enhance the revenues and profitability of Mountaineer
by constructing 100 to 125 additional hotel rooms, a small convention facility
and perhaps a bowling alley. Management believes that this additional capacity
would permit the Company to increase its weekday business. Many factors,
including but not limited to securing financing, attracting additional
employees, loan covenants, competition, and general economic conditions
affecting the resort business could materially affect Management's decision
and/or ability to carry out such expansion.
In addition to plans for enhancing or expanding operations at Mountaineer, the
Company is actively seeking other gaming and entertainment opportunities.
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<PAGE>
Management is particularly interested in projects that would permit the Company
to duplicate its Speakeasy Gaming Saloon concept, incorporating either video
lottery or other forms of gaming. There are few such opportunities, however,
and the Company will be competing with larger, more experienced gaming companies
which have more capital for acquisitions. The Company's ability to consummate
such acquisitions could also be limited by restrictions contained in the
Company's agreements with its lenders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and accompanying footnotes are set forth on pages F-3
through F-58 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding the directors and officers
of the Company as of March 20, 1997.
<TABLE>
<CAPTION>
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Edson R. Arneault 49 President, Chief Executive Officer and Chairman of the Board 1995
Thomas K. Russell 44 Secretary, Treasurer, Chief Financial Officer,
General Counsel and Director 1989
Robert A. Blatt 56 Director 1995
Robert L. Ruben 35 Director 1995
</TABLE>
BUSINESS EXPERIENCE
Mr. Arneault has served as the Company's President, Chief Executive Officer and
Chairman since April 26, 1995. He is also an officer and director of the
Company's subsidiaries, Mountaineer, Golden Palace and ExCal. He has served as
a member of the Company's Board since 1992, when he was elected President of
ExCal. Mr. Arneault is also president and chief executive officer of Century
Energy Management Company, Inc., which he founded in 1987, and general partner
or sponsor of numerous partnerships directly or indirectly engaged in the
development and production of oil and gas. Mr. Arneault also engages in oil and
gas leasing, drilling and operation through Biscayne Petroleum Corporation,
which he founded in 1987. Since becoming the President of the Company in 1995,
however, Mr. Arneault has devoted full time and attention to the business of the
Company. Mr. Arneault is a certified public accountant and served as a tax
partner with Seidman and Seidman (now "BDO Seidman"), a public accounting firm
in Grand Rapids, Michigan, from 1977 to 1980 and is a member of the Michigan
Association of Certified Public Accountants. Mr. Arneault is responsible for
the management of daily operations of the Company, including supervision of
video lottery gaming, parimutuel racing, financing and development activities.
Mr. Arneault also has been the Company's liaison
39
<PAGE>
with the West Virginia Lottery Commission and Legislature with respect to
Mountaineer Park's video lottery operations.
Thomas K. Russell has served the Company as its Secretary, Treasurer, Chief
Financial Officer, General Counsel and a Director since December 1989. Mr.
Russell is also an officer and director of Mountaineer and ExCal. Mr. Russell
is an attorney with responsibility for the management of compliance, financial
reporting and general legal matters of the Company. From 1979 to 1989, he was a
practicing attorney in Southern California emphasizing business litigation,
medical malpractice and representation of American Indian Tribes in tribal and
federal courts and legislative and administrative matters. Since 1975, Mr.
Russell has served as an officer or director of various public and private
corporations engaged in the oil, mining, hotel, equipment leasing wholesale
travel and motion picture businesses. Mr. Russell received his Bachelor of Arts
in Marketing from California State University at Fullerton in 1975, and his
Juris Doctor from Pepperdine University in 1978. He has been an active member
of the State Bar of California since 1979.
Mr. Blatt is the Chief Executive Officer of Island Golf Resorts, L.L.C.,
Championship Golf Enterprises, L.L.C. and Golf Development Services, Limited of
St. John's Antigua, and a member of the board of directors of AFP Imaging
Corporation. Since 1979, he had been chairman and majority owner of CRC Group,
Inc. and related entities, a developer, owner, and operator of shopping centers
and other commercial properties, and since 1985, a member (seat owner) of the
New York Stock Exchange, Inc. From 1959 through 1991, Mr. Blatt served as
director, officer and principal of numerous public and private enterprises. Mr.
Blatt received his Bachelor of Science in Finance from the University of
Southern California in 1962 and his Juris Doctor from the University of
California at Los Angeles in 1965. He is a member of the State Bar of
California (inactive) and a Registered General Principal, NASD and New York
Stock Exchange, Inc.
Mr. Ruben is a principal in Freer, McGarry, Bodansky & Rubin, P.C., a
Washington, D.C. law firm, where he has practiced since 1991. From 1986 to
1988, Mr. Ruben was associated with the firm of Bishop, Cook, Purcell &
Reynolds, which later merged with Winston & Strawn, and from 1989 to 1991 Mr.
Ruben was associated with the firm of Wickens, Koches & Brooks. Mr. Ruben is a
graduate of the University of Virginia and the Dickinson School of Law and
practices principally in the areas of commercial litigation and
corporate/securities law. Freer, McGarry, Bodansky & Rubin has served as
counsel to the Company since November 1991, and Mr. Ruben has represented Mr.
Arneault and various of his affiliates since 1987.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Company's executive
officers and directors and persons who own more than ten percent of the
Company's common stock to file reports of ownership of the Company's common
stock and any other equity securities of the Company with the Securities and
Exchange Commission (SEC) and the NASD. Executive officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely upon
its review of the copies of such forms received by the Company, the Company
believes that all of its executive officers, directors and greater than ten
percent shareholders complied with all filing requirements applicable to them
during 1996.
40
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded, paid to or earned by
the most highly compensated executive officers of the Company whose compensation
exceeded $100,000 in the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Restricted All
Annual Stock Options/ LTIP Other
Salary Bonus Comp. Awards SARs Payouts Comp.
Name Year ($)(1) ($) ($)(2) ($)(3) (#) ($) ($)
---- ---- ------ --- ------ ------ --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edson R. Arneault
President, Chief 1996 230,521 67,500 24,590 2,748 300,000 - - - - - -
Executive Officer 1995 68,985 23,000 - - - 144,667 618,415 - - - - - -
and Chairman of 1994 188,729 - - - 4,021 46,000 - - - - - - - - -
MTR Gaming Group
Thomas K. Russell
Secretary, Treasurer, 1996 162,750 - - - 7,496 619 100,000 - - - - - -
Chief Financial 1995 105,734 - - - - - - 41,554 357,316 - - - - - -
Officer, General 1994 134,075 - - - 2,789 - - - - - - - - - - - -
Counsel and Director
of MTR Gaming Group
</TABLE>
- -------------------------
(1) Mr. Arneault's salary was $213,652 in 1995, of which $144,667 was paid in
the form of a stock award on February 9, 1996. Mr. Russell's salary was
$147,288 in 1995, of which $41,554 was paid in the form of a stock award on
February 9, 1996. During 1996, said amounts, together with interest at the
rate of 10% per annum, were converted to shares of the Company's common
stock at the market value of the shares on February 9, 1996, the effective
date of the conversion.
(2) Includes accrued 1996 vacation compensation of $13,618 and 1996 per diem
allowances of $10,972 paid to Mr. Arneault, and accrued 1996 vacation
compensation of $7,496 paid to Mr. Russell.
(3) 1996 payments to Messrs. Arneault and Russell include interest paid on
accrued 1995 salaries; 1995 payments to Messrs. Arneault and Russell
represent the value of common stock paid to them in lieu of accrued 1995
salaries.
The following table contains information concerning the grant of stock options
during fiscal year 1996 to the Company's executive officers named in the Summary
Compensation Table.
OPTION/SAR GRANTS IN 1996
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term (2)
Options Employees in Base Price Expiration --------------------
Name Granted (#)(1) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---- -------------- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Edson R. Arneault 300,000 60% .5625 Jan. 2001 46,622 103,024
Thomas K. Russell 100,000 20% .5625 Jan. 2001 15,541 34,341
</TABLE>
- --------------------------
41
<PAGE>
(1) In January 1996, the Board of Directors granted incentive stock options to
certain executive officers, key personnel and employees to purchase, in the
aggregate, 500,000 shares of the Company's common stock for a price of
$.5625 per share, the market price of the stock on the date of grant. Such
incentive stock options were approved by the shareholders in October 1996.
(2) In accordance with the rules of the Securities and Exchange Commission,
"Potential Realizable Value" has been calculated assuming an aggregate five
year appreciation of the fair market value of the Company's common stock on
the date of the grant, or $.5625 per share, at annual compounded rates of
5% and 10%, respectively.
The following table sets forth information regarding the number and value of
options held by each of the Company's executive officers named in the Summary
Compensation Table during fiscal 1996. None of the named executive officers
exercised any stock options during fiscal 1996.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(1)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- ---- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Edson R. Arneault 0 0 1,059,749 / 0 270,247
Thomas K. Russell 0 0 536,816 / 0 103,203
__________________________
(1) Based on the market price of the Company's common stock at $1.281 on March 20, 1996, as reported by NASDAQ.
</TABLE>
EMPLOYMENT AGREEMENTS
Messrs. Arneault and Russell each has an employment agreement with the Company.
Each agreement provides for a three year term of employment with an automatic
renewal of the three-year term on each anniversary date unless either party
provides written notice of cancellation of the renewal. On January 23, 1996,
the Board of Directors elected to provide such notification and, as a result,
the agreements will terminate on May 9, 1998.
Each employment agreement provides that the employee will receive a base salary
with annual cost of living adjustments, increases contingent on certain events
and bonuses at the discretion of the Board of Directors. As of December 31,
1996, Mr. Arneault's base salary is $240,345 and Mr. Russell's base salary is
$165,375.
Each agreement provides that if the employee's period of employment is
terminated by reason of death or physical or mental incapacity, the Company will
continue to pay the employee or his estate the compensation otherwise payable to
the employee for a period of two years. If the employee's period of employment
is terminated for a reason other than death or physical or mental incapacity or
for cause, the Company will continue to pay the employee the compensation that
otherwise would have been due to him for the remaining period of employment. If
the employee's period of employment is terminated for cause, the Company will
have no further obligation to pay the employee, other than compensation unpaid
at the date of termination. The term "cause" is defined by the agreement as (i)
conviction of a felony, (ii) embezzlement or
42
<PAGE>
misappropriation of funds or property of the Company or its affiliates, or (iii)
refusal to substantially perform, or willful misconduct in the performance of,
his duties and obligations under the agreement.
In the event that the termination of the employee's period of employment occurs
after there has been a change of control of the Company and (i) the termination
is not for cause or by reason of the death or physical or mental disability of
the employee or (ii) the employee terminates his employment for good reason,
then the employee will have the right to receive within thirty days of the
termination, a sum that is three times his annual base salary, but not to exceed
the amount deductible by the Company under the Internal Revenue Code of 1986.
The term "change of control" means (i) any change of control of the Company that
would be required to be reported on Schedule 14A under the Exchange Act, (ii)
any person becoming the direct or indirect beneficial owner or 20% or more of
the Company's outstanding voting securities, other than a person who was an
officer or director of the Company on the date of the agreement or (iii) the
circumstance in which the present directors do not constitute a majority of the
Board. The term "good reason" means (i) the assignment to the employee of any
duties that in the employee's judgment are inconsistent, or constitute a
diminution of the employee's position, authority, duties or responsibilities,
(ii) the employee's involuntary relocation or (iii) the Company's failure to
comply with the compensation provisions of the agreement.
Each employment agreement provides that, during the term of the agreement, the
employee will not directly or indirectly compete with the business, or any
contemplated business of the Company at any location within ninety miles of any
locations at which the Company does business or at which the employee knows the
Company contemplates doing business.
The Company expects to enter a new three year employment agreement with Mr.
Arneault at an annual base salary of $315,000 to reflect Mr. Arneault's
responsibilities as president and chairman of the Company.
COMPENSATION OF DIRECTORS
Mr. Ruben and Mr. Blatt are entitled to receive a fee of $2,500 for each
quarterly Board meeting that they attend and are also entitled to be reimbursed
for out-of-pocket expenses incurred in attending Board meetings. Mr. Blatt is
also entitled to a fee of $3,000 per month for services as Chairman of the
Finance Committee. Directors who are employees of the Company do not receive
compensation for attendance at Board meetings, but are entitled to reimbursement
for expenses they incur in attending such meetings.
On January 23, 1996, Messrs. Blatt and Ruben were granted non-qualified options
to purchase 50,000 and 75,000 shares of the Company's common stock,
respectively, at the fair market value on the date of grant of $0.5625 per
share. On October 2, 1996, Messrs. Blatt and Ruben were each granted
non-qualified options to purchase 75,000 shares of the Company's common stock at
the fair market value on the date of grant of $1.06 per share. The options are
exercisable at any time and from time to time in whole or in part for a period
of five years from the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On November 8, 1995, the Board voted to form an executive compensation committee
consisting of Mr. Mr. Blatt and Mr. Ruben, the Company's two non-employee
directors (the "Committee). The Committee is authorized to review
43
<PAGE>
all compensation matters involving directors and executive officers and
Committee approval is required for any compensation to be paid to executive
officers or directors who are employees of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 20, 1997, the ownership of the
Company's common stock by persons owning more than 5% of such stock, and the
ownership of such stock by the executive officers named in the Summary
Compensation Table and the directors, individually, and the officers and
directors as a group. As of March 20, 1997, there were 19,765,291 shares of
common stock outstanding. For purposes of this section, only voting shares to
which interest holders are entitled to receive within 60 days of March 20, 1997
are included in the number of shares outstanding. All such shares were owned
both beneficially and of record, except as otherwise noted.
Amount and Nature of Percentage
Name and Address Beneficial Ownership % of Class
- ---------------- -------------------- ----------
Edson R. Arneault 2,685,067 (2) 12.89%
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034
Madeleine, L.L.C. 2,298,124 (1) 10.60%
450 Park Avenue
New York, NY 10022
Donald Saunders 1,677,685 (3) 8.23%
900 East Desert Inn Road
Suite 521
Las Vegas, NV 89109
Bennett Management and
Development Corp. 1,530,000 (4) 7.74%
2 Clinton Square
Syracuse, NY 13202
Thomas K. Russell 640,626 (5) 3.16%
1461 Glenneyre Street
Suite E
Laguna Beach, CA 92651
Robert A. Blatt 466,684 (6) 2.35%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue
Suite 303
Larchmont, NY 10538
Robert L. Ruben 188,228 (7) 0.95%
Freer, McGarry, Bodansky & Rubin
1000 Thomas Jefferson St., NW
Suite 600
Washington, DC 20007
All officers and directors as a Group (4 persons) 3,980,605 (8)
18.40%
- --------------------------
(1) Includes 381,527 common shares owned by Madeleine and 1,916,597 common
shares issuable upon the exercise of warrants which are currently
exercisable. By agreement with the Company, however, Madeleine may not
exercise its warrants to the extent such exercise would result in Madeleine
owning greater than 5% of the then issued and outstanding shares of the
Company without the prior approval of the West Virginia Lottery Commission.
44
<PAGE>
(2) Includes 1,625,318 common shares owned by Mr. Arneault and his affiliates
and 1,059,749 common shares issuable upon the exercise of options which are
currently exercisable.
(3) Includes 1,051,816 common shares owned by Mr. Saunders and his affiliates
and 625,869 common shares issuable upon the exercise of options which are
currently exercisable.
(4) Includes 1,530,000 common shares owned by Bennett, of which voting rights
to 780,000 shares have been assigned to the Board of Directors of the
Company to satisfy licensing requirements of the West Virginia Lottery
Commission.
(5) Includes 103,810 common shares owned by Mr. Russell and 536,816 common
shares issuable upon the exercise of options which are currently
exercisable.
(6) Includes 341,684 common shares owned by Mr. Blatt and 125,000 common shares
issuable upon the exercise of options which are currently exercisable.
(7) Includes 38,228 common shares owned by Mr. Ruben and 150,000 common shares
issuable upon the exercise of options which are currently exercisable.
(8) Includes Messrs. Arneault, Russell, Blatt and Ruben.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All the Company's oil and gas leases were acquired by its subsidiary, ExCal, in
January 1992 from Biscayne Petroleum Corporation, of which Edson R. Arneault was
president. At the time of this acquisition, Mr. Arneault was not affiliated
with the Company. As a result of this transaction, Mr. Arneault became ExCal's
president. The acquisition of such leases was part of a larger transaction
involving (i) the acquisition by ExCal of 77 operating wells formerly owned by
limited partnerships (the "Partnerships") controlled by Mr. Arneault, (ii) the
acquisition of all the stock of Crystal Exploration Company, Inc. from Century
Energy Management Company, Inc., an affiliate of Mr. Arneault, and (iii) the
employment of Mr. Arneault by ExCal for a period of three years at a salary of
$120,000 per year and participation in other board approved compensation plans.
Such leases were acquired in exchange for $100,000 cash, a $790,000 non-interest
bearing note (of which $100,000 was paid on December 31, 1992, the balance being
due during 1993) and 50,000 shares of the Company's Common Stock. The Company
and the Partnerships entered into modifications of their original agreement
dated March 25 and November 17, 1993, March 30, August 10 and September 30,
1994, and March 30, and October 1, 1995. Under the terms of the March 25, 1993
modification of the note, the balance remaining to be paid by the Company to the
Partnerships was $590,000. Pursuant to the modification, the Company paid
$100,000 cash and issued 98,333 shares of its Common Stock to the Partnerships,
which, based on the then current market value of the Common Stock, satisfied the
Company's obligation thereunder. The shares issued to the Partnerships,
together with 5,000 additional shares issued in consideration of the
Partnerships' agreement to extend the date for registration from September 15,
1994 to October 15, 1994, were to be registered for public sale under the
Securities Act. Because the registration statement covering the Partnerships'
shares did not become effective before March 31, 1995, the March 30, 1995
modification of the agreement reinstated the note with a principal amount of
$590,000 and increased the interest rate on the note to 10%, (ii) reduced the
balance to $467,084 by crediting the note with the average share price of the
Company's Common Stock for the first 14 days that the shares were eligible for
sale under Rule 144, and (iii) amended the payment schedule to provide for
payments of interest only from May 1, 1995
45
<PAGE>
through October 1, 1995 and twelve payments of principal and interest from
November 1, 1995 through October 1, 1996 calculated on a 36 month amortization
schedule with a balloon payment of the unpaid balance on October 1, 1996.
Pursuant to the October 1, 1995 modification, the outstanding balance of the
note was retired through the issuance of 373,600 shares of the Company's Common
Stock.
On December 16, 1994, ExCal entered into an agreement to sell its Ohio oil and
gas leases pursuant to the Company's March 1993 plan of orderly liquidation to
Development & Acquisition Ventures in Energy, Inc. ("DEVAQ"), a corporation that
is controlled by David T. Arneault, the brother of Edson R. Arneault. The buyer
agreed to pay ExCal a total of $450,000 in the form of (i) a promissory note in
the amount of $300,000 bearing interest at 8% per annum and payable in monthly
installments of $10,000 beginning six months after the sale and (ii) $150,000
payable from the portion of the monthly net revenues of the wells in excess of
$10,000. In addition, if the leases are sold, ExCal is to receive any unpaid
balance of the $150,000 plus 50% of the payments received from the sale. The
bid submitted by DEVAQ was the highest of four independent bids received by the
Company. Through December 31, 1996 DEVAQ was current in its payments under the
notes, although the Company has made provisions from time to time for Edson R.
Arneault to make certain principal and interest payments on behalf of DEVAQ.
During 1994 and 1995, various corporate affiliates of Mr. Arneault advanced an
aggregate sum of approximately $100,000 to ExCal primarily to cover overhead
expenses in connection with the maintenance of leases and other costs associated
with the Company's existing oil and gas interests in Michigan and the Company's
former interests in Ohio. In February 1996, such accrued amount, along with
accrued interest at the rate of l0% per annum, was converted into a demand
promissory note in the principal amount of $100,218 payable to Mr. Arneault at
the rate of 10% per annum.
To assist Fleur-David Corporation, the Company's joint venture partner in rework
activities related to the Company's plan of orderly liquidation of its oil and
gas interests in Michigan, Mr. Arneault purchased 25,000 shares of the Company's
Common Stock held by Fleur-David in July 1995 in a private transaction.
During 1995 and 1996, Thomas K. Russell and Mark C. Russell, his brother, each
purchased a working interest in the Marathon-Otter Lake oil and gas reserves in
Michigan, owned in part by the joint venture between the Company and Fleur-David
for an aggregate amount of approximately $60,000. The subject working interests
and others were offered by Fleur-David to raise capital to finance further
rework and remediation activities at the property.
Mr. Robert Ruben, a member of the Company's Board, is a principal in the law
firm of Freer, McGarry, Bodansky & Rubin, P.C., which has performed legal
services for the Company since 1991. During the fiscal year ended December 31,
1996, the Company paid Freer, McGarry, Bodansky & Rubin the sum of $334,340 for
legal services and cost relating thereto. The Company and Freer, McGarry,
Bodansky & Rubin anticipate that the law firm will perform legal services for
the Company in the future.
The Company has a note receivable for $240,000 from a stockholder of the Company
as of December 31, 1996, 1995 and 1994, as well as additional non-interest
bearing advances of $62,000 made in 1994, which were subsequently converted into
an additional note. The $240,000 note receivable bears interest at 8% per
annum, is due on demand, and is unsecured. No demand has
46
<PAGE>
been made by the Company's management through December 31, 1996, as management
believes recovery is doubtful.
In March 1994, the Company lent $50,000 to a non-affiliated company for a term
of seven days in exchange for a promissory note bearing interest at 8% per
annum. During 1995, the Company recorded a provision for loss in the amount of
$50,000. In April 1996, the Company and the recipient renegotiated and canceled
the original note, and executed a replacement confessed judgment promissory note
in the principal amount of $58,333 at 8% per annum, all due and payable August
4, 1996. On March 13, 1997, the Company obtained a default judgment against
MPTV in the amount of $64,737.47, including principal, accrued interest and
legal costs. Post-judgment interest will accrue at 10% per annum. The Company
intends to pursue all available legal remedies to enforce the judgment, however,
there are no assurances that MPTV has adequate assets to satisfy the judgment.
During 1995, the Company incurred salaries to key management, which remained
unpaid; at December 31, 1995, such amounts accrued were approximately
$204,000. In February 1996, management agreed to accept an aggregate of
466,676 shares of the Company's Common Stock in satisfaction of the amounts
due them. At the time of issuance, such shares had an approximate value of
$177,000, thus no additional compensation expense was recorded as a result of
this issuance of Common Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements (Included in Part II of this Report):
Independent Auditors' Report (F-2)
Consolidated Balance Sheets as of December 31, 1996 and 1995 (F-3)
Consolidated Statements of Operations for each of the years in the three-
year period ended December 31, 1996 (F-5)
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended December 31, 1996 (F-6)
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 1996 (F-10)
Notes to Consolidated Financial Statements (F-12)
(a) 2. Financial Statement Schedules (Included in Part IV of this Report):
Schedule II - Valuation Allowances for the years ended December 31, 1996,
1995 and 1994
Schedules I, III, IV, VII, IX, XI, XII, XIII and XIV are not applicable
and have therefore been omitted.
(a) 3. Exhibits:
3.1 Articles of Incorporation, as amended (1)
47
<PAGE>
3.2 Certificate of Amendment of Restated Aticles of Incorporation, filed as
of October 18, 1996, increasing authorized number of common shares to 50
million (6)
3.3 By-Laws of the Company (1)
4.1 Warrant Certificate No. 1., dated July 2, 1996, issued to Madeleine
L.L.C. to purchase 891,250 shares of common stock of Winners
Entertainment, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
4.2 Warrant Certificate No. 2., dated July 2, 1996, issued to Madeleine
L.L.C. to purchase 250,000 shares of common stock of Winners
Entertainment, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
4.3 Warrant Certificate No. 3., dated July 2, 1996, issued to Bridge Capital,
L.L.C. to purchase 25,000 shares of common stock of Winners
Entertainment, Inc. at $.80 per share for five years commencing July 2,
1996 (3)
4.4 Warrant Certificate No. 4., dated July 2, 1996, issued to Brownstone
Holdings, L.L.C. to purchase 25,000 shares of common stock of Winners
Entertainment, Inc. at $.80 per share for five years commencing July 2,
1996 (3)
4.5 Warrant Certificate No. 5., dated July 2, 1996, issued to Madeleine
L.L.C. to purchase 350,000 shares of common stock of Winners
Entertainment, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
10.1 Notice of Termination, dated May 9, 1996, of Consulting Agreement, dated
July 1, 1995, between Mountaineer Park, Inc. and American Newco, Inc. and
Management Agreement, dated June 2, 1994, between Winners Entertainment,
Inc. and American Gaming & Entertainment, Inc. (2)
10.2 Substitute and Replacement Confessed Judgment Promissory Note, dated
April 4, 1996, by MPTV, Inc. to Winners Entertainment, Inc. (2)
10.3 Letter Agreement, dated March 25, 1996, between the Winners
Entertainment, Inc. and Edson R. Arneault (2)
10.4 Letter Agreement, dated March 25, 1996, between Winners Entertainment,
Inc. and Thomas K. Russell (2)
10.5 Promissory Note, dated June 1, 1996, made by Mountaineer Park, Inc. in
the principal amount of $250,000 in favor of AstraFund, Ltd. (3)
10.6 Note Secured by Real Estate Mortgage, dated June 6, 1996, made by
Mountaineer Park, Inc. in the principal amount of $250,000 in favor of
Bridge Capital, L.L.C. (3)
10.7 Agreement of Unconditional Guaranty, dated June 6, 1996, between
Mountaineer Park, Inc. and Bridge Capital, L.L.C. (3)
10.8 Credit Line Deed of Trust, dated June 6, 1996, between Mountaineer Park,
Inc. and Penny Loucas, Trustee (3)
48
<PAGE>
10.9 Term Loan Agreement, dated July 2, 1996, between Mountaineer Park, Inc.,
Winners Entertainment, Inc. and Madeleine L.L.C. (3)
10.10 First Amendment to Term Loan Agreement, dated July 2, 1996, between
Mountaineer Park, Inc., Winners Entertainment, Inc. and Madeleine L.L.C.
(3)
10.11 Promissory Note, dated July 2, 1996, made by Mountaineer Park, Inc. in
the principal amount of $5 million in favor of Madeleine L.L.C. (3)
10.12 Security Agreement, dated July 2, 1996, between Mountaineer Park, Inc.
and Madeleine L.L.C. (3)
10.13 Deed of Trust, Leasehold Deed of Trust, Security Agreement, Assignment,
Fixture Filing and Financing Statement, dated July 2, 1996, between
Mountaineer Park, Inc., Deborah A. Sink and Carl D. Andrews, Trustees,
and Madeleine L.L.C. (3)
10.14 Stock Transfer Agreement, dated July 2, 1996, between Winners
Entertainment, Inc. and Madeleine L.L.C. (3)
10.15 Registration Rights Agreement, dated July 2, 1996, between Winners
Entertainment, Inc. and Madeleine L.L.C. (3)
10.16 Financing Commitment, dated July 2, 1996, to Mountaineer Park, Inc. and
Winners Entertainment, Inc. from Madeleine L.L.C. (3)
10.17 Agreement, dated May 10, 1996, between Winners Entertainment, Inc. and
Darelynn Lehto (3)
10.18 Settlement Agreement, dated April 2, 1996, between Winners Entertainment,
Inc. and Dorothy van Haaften (3)
10.19 Amendment, dated June 18, 1996, of Settlement Agreement, dated April 2,
1996, between Winners Entertainment, Inc. and Dorothy van Haaften (3)
10.20 Amendment of Construction Loan Agreement, dated September 19, 1996,
between Mountaineer Park, Inc. and Richard C. Breeden, solely in his
capacity as Trustee of the Estate of Bennett Management & Development
Corp. and Bennett Funding Group, Inc. (5)
10.21 Amended and Restated Mutual Release Agreement, dated September 19, 1996,
between Mountaineer Park, Inc. and Richard C. Breeden, solely in his
capacity as Trustee of the Estate of Bennett Management & Development
Corp. and Bennett Funding Group, Inc. (5)
10.22 Acknowledgment, dated September 19, 1996, by American Gaming &
Entertainment, Ltd. and Gamma of West Virginia, Inc. that Settlement
Agreement, dated June 30, 1995, between Winners Entertainment, Inc.,
Mountaineer Park, Inc., American Gaming & Entertainment, Ltd. and Gamma
of West Virginia, Inc. is in full force and effect (5)
10.23 Settlement Agreement, dated June 30, 1996, between Winners Entertainment,
Inc., Mountaineer Park, Inc., American Gaming & Entertainment, Ltd. and
Gamma of West Virginia, Inc. (5)
49
<PAGE>
10.24 Order of the United States Bankruptcy Court, Northern District of New
York, dated October 22, 1996, approving Amendment of Construction Loan
Agreement, dated September 19, 1996, between Mountaineer Park, Inc. and
Richard C. Breeden, solely in his capacity as Trustee of the Estate of
Bennett Management & Development Corp. and Bennett Funding Group, Inc.
(6)
10.25 Revision of Settlement Agreement, dated September 4, 1996, revising
Settlement Agreement, dated July 13, 1994, between Winners Entertainment,
Inc. and Crystal Asset Management Group, Ltd. (4)
10.26 Settlement Agreement Amendment, dated October 4, 1996, amending
Settlement Agreement, dated April 26, 1995, between Winners
Entertainment, Inc., and subsidiaries, and Michael R. Dunn (4)
10.27 Amendment of Settlement Agreement, dated November 1, 1996, amending
Settlement Agreement, dated June 30, 1995, between Winners Entertainment,
Inc. and Glenn Hall (4)
10.28 Settlement Agreement, dated June 30, 1995, between Winners Entertainment,
Inc. and Michael Mapes (4)
10.29 Promissory Note, dated July 1, 1996, made by Winners Entertainment, Inc.
in the principal amount of $235,125 in favor of Glenn Hall (4)
10.30 Promissory Note, dated July 1, 1996, made by Winners Entertainment, Inc.
in the princiapl amount of $180,000 in favor of Michael Mapes (4)
10.31 Amended and Restated Term Loan Agreement, dated July 2, 1996, amended and
restated December 10, 1996, between Mountaineer Park, Inc., MTR Gaming
Group, Inc. and Madeleine L.L.C. (7)
10.32 Amended and Restated General Security Agreement, dated July 2, 1996,
amended and restated December 10, 1996, between Mountaineer Park, Inc.
and Madeleine L.L.C. (7)
10.33 Credit Line Deed of Trust, Leasehold Deed of Trust, Security Agreement,
Assignment, Fixture Filing and Financing Statement, dated December 10,
1996, between Mountaineer Park, Inc. as grantor, Deborah A. Sink and Carl
D. Andrews as trustees, and Madeleine L.L.C. as the secured party (7)
10.34 Promissory Note, dated December 10, 1996, made by Mountaineer Park, Inc.
in the principal amount of $16.1 million in favor of Madeleine L.L.C. (7)
10.35 Amendment No. 1, dated December 10, between MTR Gaming Group, Inc. and
Madeleine L.L.C. to Registration Rights Agreement, dated July 2, 1996,
between Winners Entertainment, Inc. and Madeleine L.L.C. (7)
10.36 Settlement Agreement, dated December 19, 1996, between the Company,
Mountaineer Park, Inc., Dennis Ryll and Diane Ryll
10.37 Settlement Agreement, dated January 3, 1997, between the Company,
Mountaineer Park, Inc. and John Burkhart
10.38 Settlement Agreement, dated January 3, 1997, between the Company,
Mountaineer Park, Inc. and CTR Resourses, Inc.
50
<PAGE>
10.39 Settlement Agreement, dated January 3, 1997, between the Company,
Mountaineer Park, Inc. and C. Richard Petticrew
21 List of subsidiaries of MTR Gaming Group, Inc.
23 Consent of Corbin & Wertz
27 Financial Data Schedule
- ------------------------
(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994
(2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q,
for the quarter ended March 31, 1996
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q,
for the quarter ended June 30, 1996
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q,
for the quarter ended September 30, 1996, filed November 14, 1996
(5) Incorporated by reference from the Company's Current Report on Form 8-K,
dated September 19, 1996, filed September 27, 1996
(6) Incorporated by reference from the Company's Current Report on Form 8-K,
dated October 18, 1996, filed November 1, 1996
(7) Incorporated by reference from the Company's Current Report on Form 8-K,
dated December 26, 1996, filed January 7, 1997
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the fourth
quarter of 1996 and thereafter:
On November 1, 1996, the Company filed a Current Report on Form 8-K, dated
October 18, 1996, reporting under Item 5 (i) the approval by the United States
Bankruptcy Court for the Northern District of New York of an Amendment of
Construction Loan Agreement, dated September 19, 1996, between Mountaineer and
Richard C. Breeden, acting solely in his capacity as trustee of Bennett
Management & Development Corporation, and (ii) a Certificate of Amendment of
Restated Certificate of Incorporation, filed with the State of Delaware on
October 18, 1996, changing the Company's name to "MTR Gaming Group, Inc." and
increasing the authorized number of common shares of the Company from 25 million
to 50 million.
On January 7, 1997, the Company filed a Current Report on Form 8-K, dated
December 26, 1996, reporting under Item 5 (i) the prepayment in full by the
Company of the $8,711,273.16 balance of a construction loan made by Bennett
Management & Development Corporation, and (ii) the terms of an Amended and
Restated Term Loan Agreement and Amended and Restated General Security Agreement
in connection with an $11.1 million term loan and a $5,376,500 revolving line of
credit from Madeleine LLC.
On February 10, 1997, the Company filed a Current Report on Form 8-K, dated
February 5, 1997, reporting under Item 5 a non-binding letter of intent whereby
the Company proposes to lease, operate and possibly purchase the Muskegon Race
Course, a harness racetrack in Muskegon, Michigan.
On March 21, 1997, the Company filed a Current Report on Form 8-K, dated March
1, 1997, reporting under Item 5 (i) an increase in the number of video lottery
terminals at Mountaineer to 1,000, (ii) video lottery net win at Mountaineer for
the months on January and February 1997, and (iii) the relocation of the
Company's headquarters from California to West Virginia.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MTR GAMING GROUP, INC.
By: /s/ EDSON R. ARNEAULT
----------------------------
Edson R. Arneault, President
and Chief Executive Officer
Date: April 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature Capacity
- --------- --------
/S/ EDSON R. ARNEAULT Chairman and Director
- -------------------------------------
Edson R. Arneault
/S/ THOMAS K. RUSSELL Chief Financial Officer and
- ------------------------------------- Director
Thomas K. Russell
/S/ ROBERT A. BLATT Director
- -------------------------------------
Robert A. Blatt
/S/ ROBERT L. RUBEN Director
- --------------------------------------
Robert L. Ruben
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Operations for each of
the years in the three-year period ended December 31, 1996. . . . . . . . .F-5
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . .F-6
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-12
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MTR Gaming Group, Inc.
We have audited the accompanying consolidated balance sheets of MTR Gaming
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MTR Gaming Group,
Inc. and its subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
CORBIN & WERTZ
Irvine, California
March 24, 1997
F-2
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,226,000 $ 807,000
Restricted cash 185,000 426,000
Accounts receivable, net of allowance
for doubtful accounts of $140,000 and
$70,000 in 1996 and 1995, respectively 302,000 236,000
Deferred financing costs 1,066,000 388,000
Deferred income taxes 760,000 -
Other current assets 477,000 115,000
----------- ------------
Total current assets 7,016,000 1,972,000
----------- ------------
Property and equipment, net 18,453,000 18,100,000
----------- ------------
Net assets of discontinued oil and gas
gas activities 2,616,000 2,616,000
----------- ------------
Other assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,022,000 and $770,000
in 1996 and 1995, respectively 2,752,000 3,004,000
Deposits and other 41,000 55,000
----------- ------------
2,793,000 3,059,000
----------- ------------
$ 30,878,000 $ 25,747,000
----------- ------------
----------- ------------
</TABLE>
Continued
F-3
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 909,000 $ 3,474,000
Accrued liabilities 1,891,000 2,291,000
Current portion of long-term debt 186,000 2,536,000
Current portion of redeemable common
stock - 991,000
Deferred income taxes 133,000 133,000
----------- ------------
Total current liabilities 3,119,000 9,425,000
Accrued liabilities - 456,000
Long-term debt, less current portion 16,230,000 8,071,000
Deferred income taxes, less current portion 1,263,000 1,396,000
Redeemable common stock, 367,937 shares
issued and outstanding at December 31,
1995, net of current portion - 415,000
----------- ------------
Total liabilities 20,612,000 19,763,000
----------- ------------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.00001,
50,000,000 shares authorized; 19,126,043
and 17,022,645 issued and outstanding
at December 31, 1996 and 1995, respectively 2,000 2,000
Common Stock subscribed, 525,848
shares at December 31, 1996 - -
Paid-in capital 35,173,000 32,115,000
Receivable from exercise of stock options - (69,000)
Accumulated deficit (24,909,000) (26,064,000)
----------- ------------
Total shareholders' equity 10,266,000 5,984,000
----------- ------------
$ 30,878,000 $ 25,747,000
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Video lottery terminals $ 30,700,000 $ 16,479,000 $ 7,481,000
Parimutuel commissions 4,299,000 4,263,000 3,768,000
Lodging, food and beverage 3,945,000 3,046,000 2,276,000
Other 1,260,000 1,139,000 1,131,000
------------ ------------ ------------
Total revenues 40,204,000 24,927,000 14,656,000
------------ ------------ ------------
Costs of revenues:
Cost of video lottery terminals 19,865,000 12,256,000 5,709,000
Cost of parimutuel commissions 5,257,000 5,064,000 4,563,000
Cost of lodging, food and beverage 3,543,000 3,285,000 2,337,000
Cost of other 1,092,000 1,195,000 798,000
------------ ------------ ------------
Total cost of revenues 29,757,000 21,800,000 13,407,000
------------ ------------ ------------
Gross profit 10,447,000 3,127,000 1,249,000
------------ ------------ ------------
Selling, general and administrative
expenses:
Marketing and promotions 1,718,000 1,144,000 1,016,000
General and administrative 4,092,000 5,420,000 5,652,000
Depreciation and amortization 1,667,000 1,504,000 910,000
------------ ------------ ------------
Total selling, general and
administrative expenses 7,477,000 8,068,000 7,578,000
------------ ------------ ------------
Operating income (loss) 2,970,000 (4,941,000) (6,329,000)
Interest income 54,000 52,000 26,000
Interest expense (3,460,000) (557,000) (729,000)
Non-recurring income 705,000 - -
------------ ------------ ------------
Income (loss) before income taxes 269,000 (5,446,000) (7,032,000)
Benefit for income taxes 886,000 133,000 130,000
------------ ------------ ------------
Income (loss) from continuing
operations 1,155,000 (5,313,000) (6,902,000)
Discontinued operations:
Loss on disposal of oil and gas
operations - - (640,000)
------------ ------------ ------------
Net income (loss) $ 1,155,000 $ (5,313,000) $ (7,542,000)
------------ ------------ ------------
------------ ------------ ------------
Income (loss) per share:
Income (loss) from continuing operations $ 0.06 $ (0.33) $ (0.48)
Discontinued operations - - (0.04)
------------ ------------ ------------
Net income (loss) per share $ 0.06 $ (0.33) $ (0.52)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares
outstanding 19,242,458 16,226,743 14,523,377
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
Receivable
From
Common Stock Shares of Additional Exercise
------------------- Common Stock Paid-in of Stock Accumulated
Shares Amount Subscribed Capital Options Deficit Total
------ ------ ------------ ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 13,591,497 $ 1,000 - $ 26,305,000 $ - $(13,209,000) $ 13,097,000
Shares received in connection with
settlement with LVEN (250,000) - - (750,000) - - (750,000)
Shares issued for cash, net of
commissions 786,199 - - 2,193,000 - - 2,193,000
Shares issued from exercise of stock
options 50,000 - - 200,000 - - 200,000
Shares issued for services rendered
and interest 147,500 - - 210,000 - - 210,000
Shares issued in connection with
financing arrangement 285,000 - - 1,710,000 - - 1,710,000
Shares issued for accounts payable 10,681 - - 40,000 - - 40,000
Compensation for stock options issued
below fair value - - - 600,000 - - 600,000
Net loss - - - - - (7,542,000) (7,542,000)
---------- ------- --------- ------------ -------- ------------ ------------
Balances, December 31, 1994 14,620,877 1,000 - 30,508,000 - (20,751,000) 9,758,000
</TABLE>
Continued
F-6
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
Receivable
From
Common Stock Shares of Additional Exercise
------------------- Common Stock Paid-in of Stock Accumulated
Shares Amount Subscribed Capital Options Deficit Total
------ ------ ------------ ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued from exercise of stock
options 286,667 - - 109,000 (69,000) - 40,000
Shares issued for services rendered
and interest 77,332 - - 42,000 - - 42,000
Shares issued in connection with
financing arrangement 225,000 1,000 - 1,349,000 - - 1,350,000
Cancellation of price guarantee in
connection with financing arrangement - - - (3,060,000) - - (3,060,000)
Shares issued to replace price guarantee
in connection with financing arrangement 1,020,000 - - 1,530,000 - - 1,530,000
Shares forfeited by Company (510,000),
retained by creditor, in connection with
financing arrangement - - - 478,000 - - 478,000
Shares issued for redeemable common stock 666,433 - - 802,000 - - 802,000
Shares issued in connection with legal
settlement 175,000 - - 414,000 - - 414,000
</TABLE>
Continued
F-7
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
Receivable
From
Common Stock Shares of Additional Exercise
------------------- Common Stock Paid-in of Stock Accumulated
Shares Amount Subscribed Capital Options Deficit Total
------ ------ ------------ ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued for notes payable 60,850 - - 43,000 - - 43,000
Cancellation of shares issued in
1994 for services rendered (97,500) - - (100,000) - - (100,000)
Adjustment to shares outstanding (12,014) - - - - - -
Net loss - - - - - (5,313,000) (5,313,000)
---------- ------- --------- ------------ -------- ------------ ------------
Balances, December 31, 1995 17,022,645 2,000 - 32,115,000 (69,000) (26,064,000) 5,984,000
Shares issued in connection with
legal settlements 175,000 - - 236,000 - - 236,000
Shares issued for services
rendered by related parties 719,476 - - 309,000 - - 309,000
Shares issued in connection
with financing agreements 442,829 - 465,377 953,000 - - 953,000
Shares issued for capital raising
activities 207,500 - - 175,000 - - 175,000
Expense recorded in connection with
options issued to outside
Directors - - - 69,000 - - 69,000
</TABLE>
Continued
F-8
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
Receivable
From
Common Stock Shares of Additional Exercise
------------------- Common Stock Paid-in of Stock Accumulated
Shares Amount Subscribed Capital Options Deficit Total
------ ------ ------------ ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Cash collected on receivable from
exercise of stock options - - - - 69,000 - 69,000
Shares reclassed from redeemable
common stock and issued in
connection with settlements 558,593 - 60,471 1,165,000 - - 1,165,000
Value recorded in connection with
warrants issued in connection
with financing agreements - - - 401,000 - - 401,000
Cancellation of price guarantees
through cash payment - - - (250,000) - - (250,000)
Net income - - - - - 1,155,000 1,155,000
---------- ------- --------- ------------ -------- ------------ ------------
Balances, December 31, 1996 19,126,043 $ 2,000 525,848 $ 35,173,000 $ - $(24,909,000) $ 10,266,000
---------- ------- --------- ------------ -------- ------------ ------------
---------- ------- --------- ------------ -------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 1,155,000 $(5,313,000) $ (6,902,000)
Adjustments to reconcile income (loss)
to net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 1,667,000 1,504,000 910,000
Provision for settlements - 408,000 525,000
Non-recurring income (non-cash) (705,000) - -
Other non-cash provisions, net (83,000) 255,000
Provision for accounts receivable 70,000 290,000 -
Common stock and options issued for
services rendered and amortization
of interest 1,321,000 77,000 1,340,000
Deferred income taxes (893,000) (133,000) (130,000)
Change in operating assets and
liabilities, net of effects of
acquired companies:
Prepaid management fees - 220,000 (220,000)
Prepaid purses - 352,000 (352,000)
Other current assets 231,000 54,000 63,000
Accounts payable (2,254,000) 1,676,000 1,221,000
Accrued liabilities (183,000) 1,418,000 (244,000)
------------ ------------ ------------
Cash provided by (used in) continuing
operations 326,000 553,000 (3,534,000)
------------ ------------ ------------
Loss from discontinued operations:
Oil and gas operations - - (640,000)
Adjustments to reconcile loss to
net cash used in discontinued
operating activities -
Provision for estimated loss on
sale of discontinued oil and gas
operations - - 567,000
------------ ------------ ------------
Cash used in discontinued operations - - (73,000)
------------ ------------ ------------
Net cash provided by (used in) operating
activities 326,000 553,000 (3,607,000)
------------ ------------ ------------
Cash flows from investing activities:
Restricted cash 241,000 220,000 (401,000)
Proceeds from insurance reimbursement - - 241,000
Repayments on notes receivable from
related parties - - 38,000
Deposits and other assets 14,000 17,000 (2,000)
Capital expenditures (1,767,000) (5,482,000) (3,444,000)
Net assets of discontinued oil and gas
operations - (45,000) (198,000)
------------ ------------ ------------
Net cash used in investing activities (1,512,000) (5,290,000) (3,766,000)
------------ ------------ ------------
</TABLE>
Continued
F-10
<PAGE>
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments on long-term debt (10,469,000) (53,000) (150,000)
Proceeds from the issuance of long-term
debt 16,100,000 4,500,000 5,700,000
Payments on short-term notes (1,052,000) - -
Proceeds from issuance of short-term
notes 1,052,000 - -
Payments on notes payable to shareholders - - (70,000)
Finance costs paid (845,000) - (61,000)
Proceeds from issuance of common stock
for cash, net - - 2,193,000
Payments in connection with redeemable
common stock (250,000) - -
Proceeds from issuance of common stock
through exercise of stock options 69,000 40,000 200,000
------------ ------------ ------------
Net cash provided by financing activities 4,605,000 4,487,000 7,812,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,419,000 (250,000) 439,000
Cash and cash equivalents, beginning of
year 807,000 1,057,000 618,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,226,000 $ 807,000 $ 1,057,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow
information -
Cash paid during the year for:
Interest $ 2,493,000 $ 896,000 $ 204,000
------------ ------------ ------------
------------ ------------ ------------
Income taxes $ 25,000 $ 4,000 $ 5,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Secamur Corporation was incorporated on March 7, 1988. Effective June 19, 1989,
Secamur Corporation and Pacific International Industries, Inc., dba Excalibur
Securities Services, completed a merger accounted for under the pooling-of-
interests method. Prior to the merger, Secamur Corporation had no operations.
Secamur Corporation subsequently changed its name to Excalibur Security
Services, Inc. During 1991, Excalibur Security Services, Inc. formally changed
its name to Excalibur Holding Corporation.
Due to the inability of Excalibur Security Services, Inc. to attain profitable
operations, its Board of Directors, on December 28, 1990, filed a voluntary
petition for reorganization with the U.S. Bankruptcy Court in the Central
District of California for protection under Chapter 11 of the U.S. Bankruptcy
Code and in May 1991, Excalibur Holding Corporation sold the assets of its
discontinued security guard business. Effective January 15, 1992, a formal plan
was approved by the Bankruptcy Court to operate oil and gas activities and to
devote Excalibur Holding Corporation's efforts to the acquisition of new
businesses.
In January 1992, Excalibur Holding Corporation formed ExCal Energy Corporation
("ExCal") as a wholly-owned subsidiary to acquire certain assets of various
companies which were controlled by the newly appointed president of ExCal for
the purpose of establishing oil and gas operations.
During 1992, Excalibur Holding Corporation acquired all of the outstanding
common stock of Golden Palace Casinos, Inc. ("Golden Palace"), an entity with no
significant operations and cash of approximately $3,200,000. Excalibur Holding
Corporation utilized substantially all of the cash obtained from Golden Palace
Casinos to finance the acquisition of all of the outstanding common stock of
Mountaineer Park, Inc. ("Mountaineer") (see Note 2), which operates a
thoroughbred horse racing track, off-track betting facilities and 800 (1,000
effective March 1997 - see Note 18) video lottery terminals on a 606 acre
facility in the northern panhandle of West Virginia. Mountaineer also operates
a 101 room inn adjacent to the track, dining facilities, as well as a nine-hole
executive golf course and other recreational facilities. Certain operations are
regulated by agencies within the state of West Virginia through annual licensing
(see Notes 15 and 16). At December 31, 1996, all significant licenses were in
effect. Excalibur Holding Corporation started a major renovation of this
facility in 1993 with cash expenditures incurred through December 31, 1996 of
approximately $12,815,000.
Because of the significant acquisitions by Excalibur Holding Corporation in the
gaming industry and the long-term potential of such acquisitions, it has, and
continues to be management's strategy to focus its efforts on such
opportunities. On March 31, 1993, management decided to adopt a formal plan of
orderly liquidation of its oil and gas properties and is effecting an orderly
sale of such assets having sold approximately 30% of such assets in 1994 (see
Note 12).
During 1993, Excalibur Holding Corporation formally changed its name to Winners
Entertainment, Inc. Subsequently, in October 1996, the shareholders of Winners
approved an amendment to the certificate of incorporation changing Winner's name
to MTR Gaming Group, Inc. ("MTR").
F-12
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of MTR
and its wholly-owned subsidiaries (collectively the "Company"). All significant
intercompany transactions have been eliminated in consolidation. The accounts
of the Company's acquired companies include the operations from the consummation
dates.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reported periods. Actual results could materially differ from those
estimates. Significant estimates made by management include, but are not
limited to, the provision for losses on uncollectible accounts receivable, the
net realizability of oil and gas assets, and the recoverability of property and
equipment and goodwill through future operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
These consolidated historical financial statements contain financial instruments
whereby the fair market value of the financial instruments could be different
than that recorded on a historical basis in the accompanying consolidated
financial statements. The financial instruments consist of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and long-
term debt. The carrying amounts of the Company's financial instruments
generally approximate their fair values as of December 31, 1996.
CONCENTRATION OF CREDIT RISK
The Company maintains, at times, cash balances at certain financial institutions
in excess of amounts insured by Federal agencies.
RISKS AND UNCERTAINTIES
SEASONALITY
The operations of Mountaineer have historically been seasonal in nature. Winter
conditions may adversely affect transportation routes to Mountaineer, as well as
cause cancellations of live horse racing. However, management believes that the
emergence of video lottery as its dominant profit center has significantly
moderated historical seasonal fluctuations on revenue. There can be no
assurances that this moderating trend will continue to be achieved in future
periods.
F-13
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LICENSING
The Company is licensed for horse racing and its video lottery activities
through the West Virginia State Racing and Lottery Commissions (the
"Commissions"), respectively. The Company's licenses are renewed on an annual
basis at the discretion of the Commissions. The loss of one or both of these
licenses would have a material adverse effect on the Company' operations.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply, its business would be materially adversely effected.
Management is aware of nothing to indicate that West Virginia state officials
will change their policies toward gaming activities, particularly video lottery
gaming; however, there are no assurances that such policies will not be changed.
Any substantial unfavorable change in the enabling laws or tax rates on gaming
revenues could make the Company's business substantially more onerous, less
profitable or illegal, which would have a material adverse effect on the
Company's business.
DISCONTINUED OPERATIONS
The Company adopted a formal plan in March 1993 to discontinue operations of its
oil and gas operations under a plan of orderly liquidation (see Note 12). The
net assets and operating results of the oil and gas segment are shown separately
in the accompanying consolidated financial statements as discontinued
operations. Although management still retains certain assets to maximize their
ultimate value upon disposition, management believes that the classification as
discontinued operations remains appropriate.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers highly liquid investments with a remaining maturity of 90
days or less from the purchase date to be cash equivalents. Cash equivalents
consist primarily of overnight repurchase agreements at December 31, 1996.
Restricted cash includes short-term certificates of deposit (see Note 9) and
unredeemed winning tickets from its racing operations (see Note 16).
DEFERRED FINANCING COSTS
The Company capitalizes certain loan costs in connection with its financing
activities (see Notes 5, 6 and 7) and these costs are amortized over the
expected term of the related loans using a method that approximates the
effective interest method. Amortization of these costs totaling $1,845,000,
$452,000 and $1,280,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, has been reflected as interest expense in the accompanying
consolidated statements of operations.
F-14
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation. Major
betterments are capitalized while routine repairs and maintenance are charged to
expense when incurred. The Company capitalizes direct materials and labor, and
allocates interest during construction periods. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings 20 to 40 years
Furniture and fixtures 5 to 7 years
Equipment and automobiles 3 to 15 years
Interest is capitalized to construction in progress based on the product
resulting from applying the Company's cost of borrowing rate to qualifying
assets under active redevelopment. Interest capitalized in 1996, 1995, and 1994
was $197,000 $1,127,000 and $790,000, respectively.
Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which such impairment is determined by
management. To date, management has not identified any impairment of property
and equipment.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". The Company
adopted SFAS 121 in 1996, as required. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of (see
Note 4). The result of such adoption was not material.
EXCESS OF COST OF INVESTMENTS OVER NET ASSETS ACQUIRED, NET
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefited.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill is being amortized on the straight-line
method over an expected fifteen year life. The methodology that management used
to project results of operations forward eleven years, which represents the
remaining life of the goodwill as of December 31, 1996, was based on a five-year
trend line of expected cash flows. At December 31, 1996, no impairment of
goodwill was determined by management.
Amortization expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 is $252,000,
$251,000 and $251,000, respectively.
F-15
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing and off-track betting at the time wagers are made. Such
commissions are a designated portion of the wagering handle as determined by the
West Virginia Racing Commission (the "Racing Commission"). Such revenues are
shown net of the taxes assessed by state and local agencies, as well as purses
and contract amounts paid to the Horsemen's Benevolent Protection Association
(see Note 16).
Revenues from video lottery represent the net win earned on video slot, poker,
keno or blackjack wagers. Net win is the difference between wagers placed and
winning payouts to patrons, and is recorded at the time wagers are made (see
Note 15).
Revenues from food and beverage are recognized at the time of sale and revenues
from lodging are recognized on the date of stay.
Other revenues consist primarily of fees earned from activities ancillary to the
Company's racing activities, such as parking and program sales. Such revenues
are recorded at the time services are rendered.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR STOCK-BASED
COMPENSATION," which defines a fair value based method of accounting for stock-
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. In 1996, the Company adopted
the provisions of SFAS 123 which relate to non-employee stock-based
compensation, and has elected to account for its stock-based compensation to
employees under APB 25.
ADVERTISING
The Company generally expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 1996, 1995 and 1994 was $1,433,000,
$898,000 and $815,000, respectively. The Company has included $211,000 of
prepaid advertising costs in "other current assets" in the accompanying
consolidated balance sheet as of December 31, 1996 related to infomercial costs
incurred in 1996. Such costs will be expensed at the time of the first airing
of the infomercial, which is expected to take place in early 1997.
F-16
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "ACCOUNTING FOR INCOME
TAXES." Under Statement 109, an asset and liability method is used whereby
deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations. The
Company and its subsidiaries file a consolidated federal income tax return.
PER SHARE INFORMATION
Per share information is computed by dividing net income (loss) for the year by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. The effect of common stock equivalents
are excluded from the calculation if they would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
MOUNTAINEER PARK, INC.
On December 4, 1992, the Company acquired all of the issued and outstanding
common shares of Mountaineer, in a tax-free exchange. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of the
acquired business have been consolidated with those of the Company commencing on
December 4, 1992. The purchase price was allocated to the acquired assets and
assumed liabilities based on their respective fair values. The purchase price
exceeded the estimated fair value of the net assets acquired by $2,774,000,
which has been recorded as excess of cost of investment over net assets acquired
(see Note 1).
In connection with the acquisition, the Company issued 529,676 shares which bear
registration rights, guaranteed at a per share value of $6.00. Upon
registration, the Company is obligated to issue additional shares should a
market value per share deficiency exist. The Company granted put rights to the
holder (a bank) of 60,604 of the aforementioned shares at $6.00 per share, all
of which became exercisable on or before December 31, 1995 (see Note 11).
In December 1996, the Company reached a settlement agreement with the holder of
135,529 shares which bore a $6.00 per share price guarantee. The Company paid a
$250,000 cash settlement in December 1996 in exchange for a cancellation of the
price guarantee (see Note 11).
F-17
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 2 - MERGERS AND ACQUISITIONS, CONTINUED
In December 1996, the Company reached a settlement agreement with the holder of
2,514 shares which bore a $6.00 per share price guarantee. The Company paid a
$3,500 cash settlement in December 1996 in exchange for the cancellation of the
price guarantee.
In January 1997, the Company reached a settlement agreement with holders of
118,948 shares which bore a $6.00 per share price guarantee. The Company issued
stock and cash, as more thoroughly described in Note 18, in exchange for the
cancellation of the price guarantee.
As of December 31, 1996, 212,081 shares remain outstanding, excluding the
118,948 shares described above, with $6.00 price guarantees as a result of the
acquisition of Mountaineer.
GOLDEN PALACE CASINOS, INC.
On October 13, 1992, the Company acquired all of the outstanding capital stock
of Golden Palace Casinos, Inc. ("Golden Palace"), a Minnesota corporation
organized to manage casinos on Indian reservations. Although Golden Palace had
no significant operations at the time of the acquisition, it held, through a
wholly-owned subsidiary, a contract to manage a casino planned for an Indian
reservation in Oklahoma, subject to the satisfaction of certain conditions.
Shortly after the acquisition of Golden Palace, the West Virginia Lottery
Commission advised Management that, as a condition to licensing of the Company's
then-proposed video lottery operations at Mountaineer, the Company could not
engage in Indian gaming activities. Consequently, in December 1992, the Company
sold the subsidiary holding the management contract and agreed to not otherwise
engage in Indian gaming activities as long as it conducted video lottery
operations in West Virginia. Notwithstanding the sale of the management
contract, the acquisition of Golden Palace, which had substantial cash on hand,
provided the Company with sufficient funds to complete the acquisition of all of
the outstanding capital stock of Mountaineer. In connection therewith, the
Company granted put rights to the holders of 209,000 shares issued in
connection with the acquisition of Golden Palace (see Note 11 "Redeemable Common
Stock") at $6.00 per share should such shares not have been registered by
February 1, 1993. The shares were not registered by February 1, 1993. The
Company has entered into various settlement agreements with the holders of these
put rights as more thoroughly described in Note 11.
In addition, on the acquisition date, the Company issued options to holders of
Golden Palace options to purchase (a) 190,000 shares of the Company's common
stock at $2.00 per share (all such options remain outstanding as of December 31,
1996, are fully vested and expire in 1997), (b) 200,000 shares of the Company's
common stock at $.01 per share; options to purchase 70,000 shares at $.01 were
exercised in 1995 and 50,000 options were canceled in 1996 by agreement with the
holder - see Note 11 (there remain, as of December 31, 1996, 80,000 $.01 options
outstanding which are fully vested and expire in 1997), and (c) warrants to
purchase 283,250 shares of the Company's common stock at $2.40 per share which
are fully vested and expire in 1997.
F-18
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 2 - MERGERS AND ACQUISITIONS, CONTINUED
LVEN
On August 12, 1993, the Company entered into a letter of intent with Las Vegas
Entertainment Network, Inc. ("LVEN") to acquire, through merger, the issued and
outstanding shares of LVEN. Pursuant to the letter of intent, the Company also
issued 250,000 shares of its common stock for $750,000 in cash. The letter of
intent provided for other terms to be negotiated; however, the parties were
unable to consummate a definitive agreement and the merger was not effected.
The Company and LVEN later reached a settlement arrangement in 1994 (see Note
3).
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN
RIVERBOAT GAMING
On March 2, 1993, the Company, as assignee, entered into an agreement with M&R
Investment Company ("M&R") for an assignment of an 80% interest in a ground
lease zoned for riverboat gaming in Tunica, Mississippi. The ground lease
covered a riverboat gaming site approved by the US Army Corps of Engineers. The
Company paid $106,937 on September 6, 1993 and $40,000 in rental payments in
accordance with the terms of the agreement. On March 9, 1993, the Company
entered into a joint venture arrangement with Regal Casinos, the remaining
leaseholder, to construct and operate a riverboat. On April 21, 1993, the
Company agreed to purchase Regal's 20% interest in the venture for $50,000 in
cash and 50,000 shares of its common stock valued at $300,000.
On July 30, 1993, the Company entered into a joint venture arrangement with LVEN
and BP Group, Ltd., which agreed to assist in the funding, construction and
operation of the riverboat. On February 25, 1994, the Company entered into a
settlement agreement with LVEN (see Note 2), whereby the Company sold its
interest in the ground lease valued at $728,000 at December 31, 1993, and was
repaid its note receivable of $200,000, totaling $928,000. Consideration
received was 250,000 shares of the Company's common stock owned by LVEN valued
at $750,000, and the balance in cash. No significant gain or loss resulted from
this sale of the Company's interest and note receivable.
The parties mutually agreed to be released from all claims which may have
existed as a result of the abandonment of the proposed merger between the
Company and LVEN.
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, property and equipment consists of the following:
1996 1995
------------ ------------
Land $ 371,000 $ 371,000
Buildings 17,081,000 15,716,000
Equipment 2,451,000 2,021,000
Furniture and fixtures 2,423,000 2,258,000
Construction in progress 326,000 519,000
----------- -----------
22,652,000 20,885,000
Less accumulated depreciation (4,199,000) (2,785,000)
----------- -----------
$ 18,453,000 $ 18,100,000
----------- -----------
F-19
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 4 - PROPERTY AND EQUIPMENT, CONTINUED
Depreciation expense charged to operations related to property and equipment
during the years ended December 31, 1996, 1995 and 1994 was $1,415,000,
$1,252,000 and $658,000, respectively.
NOTE 5 - SHORT-TERM DEBT
In 1996 Mountaineer entered into a series of short-term financing arrangements
with certain lenders. Under the terms of the agreements, Mountaineer received
net proceeds of $1,052,000 and was obligated to repay a total of $1,250,000. In
addition, the Company issued 175,000 shares of its common stock valued at
$137,000. These short-term obligations were paid in full in 1996. The Company
has reflected $335,000 (including the aforementioned $137,000) as interest
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1996 in connection with these obligations.
NOTE 6 - LONG-TERM DEBT
CONSTRUCTION NOTE PAYABLE
On June 27, 1994, Mountaineer entered into a financing arrangement (the "Loan
Agreement") with Bennett Management and Development Corporation ("Bennett") for
construction and redevelopment activities at Mountaineer. Pursuant to the Loan
Agreement, Bennett advanced Mountaineer $10,200,000 for construction with
interest payable at 12.5% per annum, subject to a default rate of 14.5% per
annum. Mountaineer received advances of $5,700,000 from Bennett in 1994 and the
remaining $4,500,000 in 1995. The loan balance was paid in full in 1996 and
all liens evidencing Bennett's collateral interest in property owned by
Mountaineer were released.
In a series of amendments to the loan agreements and forbearance agreements
which were executed between July 7, 1995 and October 31, 1996, certain terms of
the Bennett loan agreement were amended by the parties; a summary of the Bennett
loan transactions is described below.
In 1995 and 1994, the Company issued 510,000 shares of common stock to Bennett
that had a $6.00 price guarantee. These shares were valued at $3,060,000 in the
aggregate and were recorded as deferred financing costs. In July 1995, the
Company and Bennett agreed to cancel the aforementioned price guarantee in
exchange for the issuances to Bennett of 1,020,000 shares of common stock at an
estimated fair value of $1,530,000. The Company capitalized $1,530,000 as
deferred financing costs. This amount was amortized to interest expense through
December 1996. In the event the Company paid the outstanding indebtedness by
October 1, 1995, the original 510,000 shares would have been returned to the
Company. The Company did not pay the debt by October 1, 1995. Accordingly, the
510,000 shares were forfeited to Bennett and were valued on October 1, 1995 at
their estimated fair value of approximately $478,000. This amount was recorded
as additions to deferred financing costs and was amortized from October 1995
through December 1996.
F-20
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 6 - LONG-TERM DEBT, CONTINUED
Bennett has transferred the voting rights with respect to its shares to the
Board of Directors of the Company to the extent such voting rights would exceed
5% of all voting rights held in connection with the Company's issued and
outstanding shares. Bennett has agreed not to acquire additional common stock
of the Company so that Bennett will not be permitted to vote more than 5% of the
Company's common stock. Through December 31, 1997 the Company has the right to
match any bona fide offer of a non-affiliate to purchase Bennett's shares, in
the event that Bennett were to contemplate a sale of stock.
$5 MILLION TERM NOTE
On July 2, 1996, Mountaineer entered into a financing arrangement with a private
lending firm for a $5 million working capital loan and a $11.1 million loan
commitment to refinance the Company's construction loan with Bennett. The note
evidencing the loan called for 36 monthly payments of interest only at the rate
of 12% per annum. The Company also agreed to issue the lender 183,206 shares of
its common stock, warrants to purchase an additional 1,142,860 shares at $1.06
per share and pay a $400,000 loan fee. All warrants are exercisable for a term
of five years. The stock and warrants were registered during 1996.
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 first mortgage held by Bennett. In connection with the financial
commitment, the Company 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 (which were fully vested at the issuance date and expire in 2001).
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 Company'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 share 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
Company 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 for a period of one
year at which time all principal and unpaid interest become due.
The Company assigned values of approximately $250,000 and $191,000 related to
the aforementioned common shares and warrants issued in connection with the
financing. Such amounts were capitalized as deferred financing costs along with
the aforementioned fees. All deferred financing costs relating to the financing
were amortized by December 31, 1996 because of the amendment as noted below.
F-21
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 6 - LONG-TERM DEBT, CONTINUED
$16.1 MILLION AMENDED AND RESTATED TERM NOTE
On December 26, 1996, Mountaineer amended and restated its July 2, 1996 term
loan agreement, increasing the amount of principal borrowed from $5.0 million to
$16.1 million. MTR, the Parent of Mountaineer, is guarantor of the Amended and
Restated Term Loan Agreement. Mountaineer also entered into a revolving line of
credit agreement with the same lender on December 26, 1996, as more fully
described in Note 7.
The restated loan agreement bears interest at the rate of 12% per annum, and
calls for payments of interest only until the maturity date of December 26,
1999, at which time all principal and unpaid interest is due. In connection
with this transaction, the Company has agreed to issue 550,000 shares of its
common stock and warrants to purchase an additional 1,632,140 shares of the
Company's common stock at an exercise price of $1.06 per share (which were fully
vested at the date of issuance and expire in 2001). Both the shares and the
warrants will be issued in thirteen equal monthly installments commencing
December 26, 1996. The shares and warrants were assigned an aggregate value of
approximately $777,000, which was recorded as deferred financing costs in the
accompanying 1996 consolidated balance sheet. The Company anticipates that it
will refinance this $16.1 million loan by July 2, 1997 and, therefore, plans to
amortize the deferred financing costs through June 30, 1997. The stock and
warrants were registered during 1996.
Annual fees to be paid to the lender under the provisions of the Amended and
Restated Term Loan Agreement are summarized as follows:
- - Annual administrative fees totaling 8% of the outstanding principal
balance.
- - Up to $25,000 in annual audit fees, due on July 2, 1997, 1998, and 1999.
- - On November 15, 1997, 1998 and 1999, a number of shares of the Company's
common stock equal to 5% of the outstanding principal balance on such date
(calculated using the closing price of the stock).
- - On November 15, 1997, 1998 and 1999, warrants to purchase 250,000 shares of
the Parent's common stock at an exercise price of $1.06. All warrants
issued in connection with this provision and the following provisions of
the agreement will be effective for a period of five years.
- - On November 15, 1997, 1998 and 1999, additional warrants to purchase a
number of shares to be calculated by a formula, as defined.
The restated term loan agreement bears certain restrictive financial covenants
affecting future transactions to be entered into by the Company. These
covenants include, but are not limited to, restrictions on the ability of the
Company to incur additional debt, lend money, acquire other businesses, make
capital expenditures, or increase management's compensation. Anti-dilution
provisions are included in the agreement limiting the number of securities
which can be issued at prices below $1.06 per share without the lender's prior
approval. The Company was in compliance with, or had obtained a waiver for non-
compliance with, all such restrictive financial covenants at December 31, 1996.
F-22
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 6 - LONG-TERM DEBT, CONTINUED
TRADE NOTE PAYABLE
In September 1995, Mountaineer entered into an agreement with its Totalisator
system supplier to convert $461,167 of outstanding trade payables into a term
note. Under the terms of the agreement, Mountaineer is required to make 21
monthly interest and principal payments of $17,800 and 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. As of December 31, 1996 and 1995, the outstanding principal
balance was $138,000 and $408,000, respectively.
OTHER NOTES PAYABLE
On December 4, 1992, the Company issued a 10% note in the principal amount of
$93,750 payable to an unrelated party in connection with the acquisition of
Mountaineer. At December 31, 1994, the outstanding principal balance of the
note was $43,000. In 1995, the Company converted the note into 60,850 shares of
its common stock.
In May 1996, the Company reached a settlement agreement with the holder of
52,250 shares of redeemable common stock, valued at $313,000 (see Note 2).
Pursuant to the settlement agreement, the Company agreed to pay $25,000 upon
execution of the settlement agreement and delivered an unsecured, non-interest
bearing 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 obligation to pay the amounts described above was discounted
at 8%. As of December 31, 1996, the remaining principal balance on this note was
$178,000.
ANNUAL COMMITMENTS
Future annual principal payments under all long-term indebtedness as of December
31, 1996 are as follows:
Years Ending
December 31,
------------
1997 $ 186,000
1998 29,000
1999 16,131,000
2000 33,000
2001 37,000
-------------
$ 16,416,000
-------------
-------------
F-23
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 7 - LINE OF CREDIT
As part of the Amended and Restated Term Loan Agreement, the Company's lender
has provided a line of credit which expires on December 26, 1999. Under the
terms of the agreement, the Company may borrow up to a maximum of $5,376,000.
The Company is required to pay interest monthly at 15% per annum on amounts
borrowed with all unpaid principal and interest due at maturity. As of December
31, 1996, no principal or interest amounts were outstanding. The borrowings are
secured by substantially all of the Company's assets as defined under the
agreement. The Company is required to comply with certain financial covenants
which are more thoroughly described under the agreement. As of December 31,
1996, the Company was in compliance with, or had obtained a waiver for non-
compliance with, all such financial covenants.
Annual facility fees of $376,000 are due on January 1, 1998 and 1999 pursuant to
the agreement. The first annual facility fee of $376,000 became due at the
December 26, 1996 loan closing. Pursuant to the loan agreement, $57,900 of
these fees were withheld from the proceeds of the December 26, 1996 term loan;
the remaining $318,450 will be paid in eleven equal monthly installments of
$28,950 commencing February 1, 1997. As of December 31, 1996, the Company had
recorded $318,450 as deferred financing costs and $318,450 as an accrued
liability in the accompanying 1996 consolidated balance sheet. The Company
expects to amortize such costs through June 30, 1997 because it anticipates the
refinancing of the aforementioned term loans and the line.
NOTE 8 - NON-RECURRING INCOME
In 1996, the Company negotiated significant reductions in four previously
accrued obligations, and as a result recorded $705,000 in non-recurring income
The non-recurring income resulted from the following: (i) In 1995, the Company
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 settled upon payment of a $100,000 payment; (ii) In
September 1996, the Company reached agreement in a dispute over trade accounts
payable. A $411,000 claim for professional fees, which was accrued as of
December 31, 1995, was satisfied in full upon payment of a $150,000 cash
settlement in September 1996; (iii) In July 1994, the Company entered into an
agreement in settlement of claims arising from a 1993 financial advisory
agreement. In connection therewith, the Company 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 the $150,000 payment was reduced to $90,000 in return for an
immediate payment of $90,000, 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; (iv) In April 1995, the Company entered into a
severance agreement with its former chief executive officer. In connection
therewith, the Company was obligated to pay approximately $440,000 over a period
of two years. In addition, the Company 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. As of
December 31, 1995, the Company had accrued an estimated remaining liability of
$400,000 in connection with the severance.
F-24
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 8 - NON-RECURRING INCOME, CONTINUED
In October 1996, the severance agreement was amended as follows: (a) A cash
payment of $100,000 was remitted to the former officer in October 1996; (b) the
Company issued 100,000 shares of common stock with registration rights to the
officer in October 1996. These shares were valued at $124,000; (c) The former
chief executive officer waived his rights to receive salary and expense payments
totaling approximately $400,000 as described in the original agreement.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
MOUNTAINEER BOND REQUIREMENTS
Mountaineer is required to maintain bonds in the aggregate amount of $95,000,
as of December 31, 1996, for the benefit of the Lottery Commission through June
30, 1997. The bonding requirement has been satisfied via the issuance of a
$20,000 surety bond and three letters of credit aggregating $75,000, each of
which is collateralized by certain bank deposits.
JACKPOT SETTLEMENT AGREEMENT
In January 1993, the Company entered into a financing arrangement with Jackpot
Enterprises, Inc. ("Jackpot"), the proceeds of which were to be used for
redevelopment activities at Mountaineer. Pursuant to such arrangement, Jackpot
initially provided the Company with a $600,000 letter of credit collateralized
by Mountaineer's land and improvements to insure the performance of the Company
obligations with respect to racing and video lottery activities under its
agreements with the State of West Virginia. For its letter of credit, the
Company's issued Jackpot 30,000 shares of its common stock which were valued at
$90,000.
The Company and Jackpot were unable to consummate the overall financing
arrangement. The agreement provided that if financing could not be reached due
to certain contingencies, the Company would be required to issue 250,000 shares
of its common stock as liquidated damages. On March 2, 1995, management settled
such claim effective June 25, 1994, agreeing to issue shares of its common stock
with registration rights. The number of shares of common stock to be issued was
based on $512,500 divided by the closing market price per share on the effective
date of registration. In the event the Company did not register the shares by
May 2, 1995, the Company was, and continued to be, required to issue 12,500
shares on such date and 12,500 shares each 60 days that such registration was
not effective up to a maximum of 250,000 shares. The Company recorded a
provision for loss of $525,000 in connection with the settlement which is
included in the accompanying consolidated statement of operations for the year
ended December 31, 1994.
In 1996 and 1995, the Company issued 75,000 and 175,000 shares, respectively, of
its common stock pursuant to the settlement agreement, and accordingly recorded
a $111,000 and $414,000 reduction in accrued liabilities. As of December 31,
1996, the Company had fulfilled all obligations under the settlement agreement.
F-25
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
TOTALISATOR SYSTEM OPERATING LEASE
The Company leased its Totalisator system under an operating lease which was
amended November 28, 1995 (see below). Under the terms of the lease prior to
amendment, the Company was obligated to pay the lessor approximately $1,500 per
live race performance, plus .5% of the wagered handle in excess of $300,000.
The Company was also paying $300 per live race day ($550 if no live race
performance), plus .5% of simulcast handle in excess of $60,000, per simulcast
race day.
Under the amended lease terms, the Company must pay the greater of $1,000 per
live race performance or 0.55% of the live racing handle. In addition, the
Company must pay the greater of $300 per live race day ($550 if no live race
performance) per simulcast race day or 0.55% of the simulcast racing handle.
For the years ended December 31, 1996, 1995 and 1994, the rent expense under the
lease was approximately $396,000, $529,000 and $495,000, respectively, which is
included in "cost of parimutuel commissions" in the accompanying consolidated
statements of operations.
VIDEO LOTTERY TERMINALS OPERATING LEASE
In September 1994, Mountaineer entered into a master operating lease agreement
for 400 new video lottery terminals which was scheduled to expire September
1997. The monthly lease payments on these 400 video lottery terminals were
$72,378, plus taxes, insurance and maintenance costs (see discussions of
amendment to the master lease below).
On April 7, 1995, Mountaineer amended its payment schedule to the master lease
to provide for 400 additional video lottery terminals which were installed in
June 1995. In connection with this lease addition, Mountaineer was obligated to
pay 36 monthly installments of $82,533 beginning in January 1996 through
December 1998 for these 400 additional video lottery terminals. Mountaineer has
normalized the rent expense over the 42 month lease term (see discussion of
amendment to the master lease below).
On March 26, 1996, periodic rental payments under the master lease agreement
were amended to reflect a new consolidated payment schedule. Under the new
agreement, the Company will make monthly payments of approximately $119,000 in
March and April 1996, $183,000 from May through October 1996 and $119,000 from
November 1996 through January 1999. In addition to the amounts reflected above,
the Company made interest payments from March through October 1996 at a rate of
15% on certain past due rental payments under the previous agreement for a total
interest obligation of approximately $26,000 (see Note 18).
For the years ended December 31, 1996, 1995 and 1994, video lottery rent
expense was approximately $1,394,000, $1,294,000 and $1,203,000, respectively,
which is included in "costs of video lottery" in the accompanying consolidated
statements of operations. As of December 31, 1996, the Company has recorded
deferred rent obligations of approximately $286,000 in the accompanying
consolidated balance sheet, which is included in accrued liabilities.
PHOTOFINISH SYSTEM OPERATING LEASE
Mountaineer leases its timing and photofinish equipment under an operating lease
at a cost of $235 per live race day. The lease agreement expires in May 1998.
The Company made lease payments totaling $52,000 in 1996, $50,000 in 1995 and
$48,000 in 1994.
F-26
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
RACING VIDEOTAPE SYSTEM OPERATING LEASE
Effective April 15, 1996, the Company amended the lease agreement through which
a related party provides Mountaineer with videotape and closed circuit
television systems. At the time that the lease agreement was executed,
Mountaineer's majority shareholder also owned stock in the lessor. Under the
terms of the amendment, the Company received a $9,000 credit to be applied
against accrued lease obligations and secured a reduction in future minimum
lease payment obligations; all other lease terms remain unchanged.
The Company leases the equipment at a minimum cost of $400 per live race day
($500 prior to April 15, 1996) and $125 per simulcast race day under an
operating lease expiring in October 2002. In addition, the lease calls for
incremental daily payments if more than one simulcast program is offered on any
particular day, under the following tiered schedule: $65 for a second simulcast
program, a total of $35 for a third and/or fourth program, and $65 for a fifth
program. Rental payments made pursuant to this lease for the years ended
December 31, 1996, 1995 and 1994 were approximately $230,000, $207,000 and
$162,000, respectively.
CORPORATE OFFICE LEASE
To reduce overhead costs, the Company has moved to progressively smaller offices
on three occasions since 1994. On January 1, 1994, the Company moved and
entered into a lease for a period of 36 months at a 4,300 square foot office in
San Juan Capistrano, California. On November 1, 1995, the Company moved into a
smaller 880 square foot office in Laguna Beach, California pursuant to a 12
month lease. On February 15, 1996, the San Juan Capistrano office was subleased
through December 15, 1996, the termination date for the underlying lease. The
Company moved the majority of its corporate offices to Mountaineer on November
30, 1996 and officially moved its corporate headquarters to Mountaineer on March
1, 1997. As of December 31, 1996, the Company has approximately 400 square feet
of office space in Laguna Beach, California under a month-to-month lease with a
monthly rental payment of $700. Rent expense for the Company's corporate
offices included in the accompanying consolidated statements of operations
amounted to $15,000, $78,000 and $84,000 for 1996, 1995 and 1994, respectively.
FUTURE MINIMUM LEASE PAYMENTS
Future annual minimum payments under all material operating leases as of
December 31, 1996 are as follows:
Years Ending
December 31,
------------
1997 $ 1,964,000
1998 1,967,000
1999 522,000
2000 113,000
Thereafter 212,000
-------------
Total $ 4,778,000
-------------
-------------
F-27
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
LITIGATION
The Company was served with a complaint in 1994 by a jockey who sustained head
injuries from a fall during a race at Mountaineer. The plaintiff is seeking
both compensatory and punitive damages. The matter is covered by insurance.
Management of the Company has been advised by its carrier that the case has been
settled within policy limits, subject to court approval. Accordingly,
management believes that the matter will not result in any material liability.
The Company has been served with a civil complaint by a former employee alleging
wrongful termination. The complaint also contains allegations of violations of
state and Federal criminal laws. The plaintiff is seeking $1 million in
compensatory damages, $5 million in punitive damages and other relief. The
claims are not covered by the Company's insurance. The Company denies all
allegations and plans to defend its position vigorously. Management of the
Company does not believe that the ultimate outcome of this matter will have a
material adverse affect on the Company's consolidated results of operations or
financial position.
The Company is party to various other lawsuits which have arisen in the normal
course of its business. Certain matters are covered by insurance, after the
Company meets certain deductible requirements, generally $2,500 per occurrence.
It is the opinion of management, that the liability, if any, arising from such
lawsuits would not have a material adverse effect on the Company's consolidated
financial statements.
ENVIRONMENTAL CONSIDERATIONS
The Company has developed and is implementing a corrective action plan in
connection with leakage from underground storage tanks at Mountaineer.
Management has estimated the cost of corrective action to be approximately
$143,000 for the cost of equipment to be installed in 1995 and 1996 and for
remediation in 1996 and 1997. The Company recorded a provision for anticipated
expenditures of $143,000 in the accompanying 1995 statement of operations under
"general and administrative" expenses, and has entered into a service contract
for the installation of equipment and future remediation costs. The Company's
remaining liability at December 31, 1996 is immaterial.
COMMON STOCK REGISTRATION RIGHTS
The Company is obligated to register on a best-efforts basis approximately
1,256,676 shares of its common stock and 5,878,520 shares of its common stock
underlying certain options and warrants, which if not registered, could have an
adverse impact on the Company's future financial operations or cause substantial
dilution to existing shareholders. As discussed elsewhere, the Company has
certain price guarantees to sellers of its common stock, which as of March 31,
1997, and based on a closing stock price per share of $1 9/32, the Company would
have to issued approximately 781,000 additional shares of its common stock to
satisfy such obligations. Estimated costs of the registration are not considered
significant to the consolidated financial statements taken as a whole. There
are no assurances that such registration will be effected.
F-28
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
PENSION PLAN
Mountaineer has a qualified defined contribution plan covering substantially all
of its employees (the "Plan"). The Plan was ratified retroactively on March 18,
1994 by the legislature of the State of West Virginia. The Plan contributions
are based on .25% of the race track and simulcast wagering handles, and
approximately 0.5% of the net revenues of video lottery activities beginning
March 18, 1994. Contributions to the Plan for the years 1996, 1995, and 1994
were $250,000, $179,000, and $106,000, respectively.
INSURANCE PROCEEDS FROM INVOLUNTARY CONVERSION OF ASSETS
In 1994, the Company experienced two fires at Mountaineer, believed to be caused
by arson, in which the Company received approximately $241,000 of insurance
proceeds. The Company realized a nominal gain based on the net carrying value
of the assets destroyed in the fire.
MANAGEMENT AGREEMENT AND CONSULTING AGREEMENTS
In October 1994, the Company entered into a management agreement with American
Gaming and Entertainment, Ltd. (formerly Gamma International, Ltd.) ("AGEL"), an
affiliate of Bennett, to provide services for development activities,
implementation of accounting and information systems, and certain personnel
activities. In June, 1995, the management agreement was replaced with a
consulting agreement with an affiliate of AGEL. In May 1996, the Company gave
formal notice of termination of the consulting agreement, and there has been no
further communication between the parties since that time. Management has taken
the position that the consulting agreement has been terminated and believes that
the Company will not incur material liability in connection therewith.
Management and consulting fees charged to cost of video lottery expense in
connection with these agreements totaled zero in 1996, $321,000 in 1995 and
$133,000 in 1994; no fees were earned in 1996 and no amounts were due in
connection with either of these agreements as of December 31, 1996.
UNION AGREEMENT
On September 26, 1996, the original term of Mountaineer's labor agreement with
approximately sixty (60) mutuel and nine (9) video lottery employees expired.
The Company and the union have subsequently agreed to extend the terms of the
contract through September 26, 1997 while engaging in discussions pursuant to
the execution of an agreement of longer duration.
NOTE 10 - RELATED PARTY TRANSACTIONS
EMPLOYMENT CONTRACTS
Effective December 4, 1992 (acquisition date), Mountaineer entered into
employment agreements with two former shareholders. In connection therewith,
the Company granted options to purchase 400,000 shares of its common stock at
$.50 per share. At the time the fair value of the Company's common stock,
subject to transferability restrictions, was approximately $3.50 per share. As
a result, Mountaineer recorded compensation expense of $600,000 for the year
ended December 31, 1994; no amounts were charged in 1995 or 1996. The
agreements have been terminated by mutual consent without further obligation of
the parties.
F-29
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 10 - RELATED PARTY TRANSACTIONS, CONTINUED
In addition, the Company has entered into various employment agreements with
certain officers and key management employees for periods of up to three years
expiring 1997 through 1999. The agreements provide for certain salaries, stock
and stock option incentives in the ordinary course of business.
Future annual minimum payments under the employment agreements as of December
31, 1996 are as follows:
Years Ending
December 31,
------------
1997 $ 937,000
1998 553,000
1999 322,000
-------------
$ 1,812,000
-------------
-------------
NOTES PAYABLE AND RECEIVABLE FROM RELATED PARTIES
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/shareholder that bore interest at 6.25% per annum. The note was paid in
full in January 1994.
The Company has a note receivable for $240,000 from a shareholder of the Company
at December 31, 1995 and 1994, as well as additional non-interest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bears interest
at 8% per annum and is due on demand. No demand has been made by the Company's
management through December 31, 1996 as management believes recovery is
doubtful. During 1995, the Company recorded a provision for loss in the amount
of $240,000 which is included in "general and administrative" expenses in the
accompanying 1995 consolidated statement of operations.
In March 1994, the Company loaned $50,000 to a non-affiliated company for a term
of seven days in exchange for a promissory note bearing interest at 8% per
annum. During 1995, the Company recorded a provision for loss in the amount
of $50,000 which is included in "general and administrative" expenses in the
accompanying consolidated statement of operations. In April 1996, the Company
and the recipient renegotiated, canceled the original note, and executed a
substitute and replacement confessed judgment promissory note in the principal
amount of $58,333 at 8% per annum, all due and payable August 4, 1996. No
payment of the amounts due on the note has been received through December 31,
1996. In March 1997, the Company obtained a default judgment against the debtor
as more thoroughly described in Note 18.
COMMON STOCK ISSUED FOR SERVICES RENDERED
The Company incurred salaries to officers totaling $177,000 which remained
unpaid as of December 31, 1995. On February 9, 1996, the Company agreed to
issue a total of 466,676 shares of the Company's common stock in satisfaction of
these unpaid salaries. The fair value of these shares approximated the value of
the services rendered. 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 Company of
F-30
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 10 - RELATED PARTY TRANSACTIONS, CONTINUED
such intention and the Company 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 Company 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.
On January 19, 1996, the Company issued 200,000 shares of the Company's common
stock at a value of $101,000 to an employee and shareholder for services
rendered. The fair value of such shares has been reflected as "general and
administrative expenses" in the accompanying 1996 consolidated statement of
operations.
See Note 11 for additional related party transactions.
NOTE 11 - SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
During 1996, the Company changed its authorized shares from 25,000,000 to
50,000,000.
LIMITATIONS ON DIVIDENDS
Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its shareholders
as a result of its accumulated deficit as of December 31, 1996.
REDEEMABLE COMMON STOCK SETTLEMENTS
As discussed in Note 2, on October 13, 1992, the Company acquired all of the
issued and outstanding shares of Golden Palace in exchange for shares of the
Company'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 Company granted the founders of Golden Palace put rights requiring
the Company, upon demand, to redeem such shares at $6.00 per share (the
"Redeemable Shares") if the shares were not registered by February 1, 1993.
During 1995, holders of 104,500 of the Redeemable Shares received an aggregate
of 276,750 make-up shares, and in 1996 the holder of 52,250 Redeemable Shares
received 133,416 make-up shares for a total of 410,166 "Settlement Shares." The
holders of the Settlement Shares were granted registration rights and the right
to that number of additional shares necessary to make up the difference, if any,
between $1.50 per share and the average market value of the Company's common
stock for the ninety (90) trading days immediately following the effective date
of the registration of the Settlement Shares (the "Average Market Price"). In
the event the Settlement Shares were not registered by June 30, 1996, the
Company was to issue promissory notes in the principal amount of $1.50
multiplied by the number of Settlement Shares and bearing interest at the rate
of 12% per annum and payable in 24 monthly installments. For each $1.50 of
principal paid on the notes, however, the holder was required to return a
Settlement Share to the Company. Also, the notes were to be reduced by an
amount equal to the Average Market Price multiplied by the number of Settlement
Shares.
F-31
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
With respect to 120,000 of the Settlement Shares, the holder elected to
terminate the Company's $1.50 per share repurchase right. Accordingly, the
Company was not required to issue a promissory note with respect to these
Settlement Shares. However, based on the Average Market Price, the Company is
required to issue 30,312 additional shares, which are included in common stock
subscribed in the accompanying 1996 consolidated statement of shareholders'
equity.
With respect to 156,750 shares of the Settlement Shares, the Company issued a
note in the amount of $235,000 (156,750 shares multiplied by $1.50). However,
by an amended settlement agreement dated November 1, 1996, in exchange for a
cash payment of $31,000 and the cancellation of the Company's right to
repurchase the Settlement Shares for $1.50 per share, the holder canceled the
promissory note and relinquished the right to receive additional shares.
With respect to the holder of 133,416 Settlement Shares, the Company issued a
note in the amount of $200,000. The Company redeemed 16,677 shares (which were
canceled and return to authorized but unissued status) upon the October 31, 1996
effectiveness of a registration statement that included the Settlement Shares.
Such effectiveness stayed the Company's payment obligation for a period of 90
business days. Based on the Average Market Price, the Company was entitled to a
credit against the note in an amount of $150,000. However, based on the Average
Market Price, the Company is required to issue 30,159 additional shares, which
are included in common stock subscribed in the accompanying 1996 consolidated
statement of shareholders' equity.
Pursuant to a May 10, 1996 settlement agreement with the final holder of 52,250
of the Redeemable Shares, the Company agreed to pay the holder $25,000 upon the
execution of the agreement and issue a $225,000 non-interest bearing promissory
note in exchange for the cancellation of put rights in connection with the
Redeemable Shares. The Company discounted the note at 8%. The outstanding
balance under the note as of December 31, 1996 amounted to $178,000 and is
included on the accompanying 1996 consolidated balance sheet in long-term debt.
Under the terms of the note, the Company is obligated to pay $5,000 on February
1, 1997, $50,000 in May 1997, and four annual May payments of $40,000 from 1998
through 2001. The holder also agreed to the cancellation of options to purchase
50,000 shares of the Company's common stock for $.01 per share.
As discussed in Note 2, the Company granted put rights to the holder (a bank) of
60,604 shares at $6.00 per share, all of which became exercisable on or before
December 31, 1995. Such rights were not exercised as of December 31, 1995.
Accordingly, the Company has reduced redeemable common stock and has increased
shareholders' equity in the accompanying 1996 consolidated statement of
shareholders' equity.
In connection with the aforementioned settlements, the Redeemable Shares have
been reclassified to common stock during 1996, the Company reduced redeemable
common stock obligations by $1,406,000, recorded long-term debt of $241,000, and
increased additional paid-in capital by $1,165,000 during 1996 which is included
in the accompanying 1996 consolidated statement of shareholders' equity.
F-32
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
COMMON STOCK AND OPTIONS ISSUED FOR SERVICES
From time to time in the ordinary course of business, the Company has issued
restricted common stock in exchange for services, interest and obligations. The
Board of Directors has determined the fair value of such shares based on the
fair market value of freely tradable shares, plus a discount for restrictions
under Rule 144, as determined through NASDAQ market quotations. Such values
are charged to operations or have extinguished obligations depending upon the
nature of the agreements.
In connection with certain employment agreements, the Company has granted two
former shareholders of Mountaineer an option to purchase 400,000 shares of the
Company's common stock at $.50 per share. The options were exercisable January
1993 and have no expiration. The excess of the estimated value of these shares
of $3.50 each over their option price is included as compensation expense over
the two-year term of the employment agreements, as amended. Compensation
expense included in the consolidated statements of operations for the year ended
December 31, 1994 was $600,000.
During the year ended December 31, 1994, the Company issued 50,000 shares valued
at approximately $110,000 for services rendered, and the value of such shares
was charged to the 1994 consolidated statement of operations. In addition, the
Company issued in 1994, 10,681 shares of its common stock for certain accounts
payable valued at $40,000.
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations.
During 1995, 216,667 shares were exercised for $108,000 of which $69,000
remained unpaid as of December 31, 1995. As of December 31, 1995, this
receivable from the exercise of these stock options is shown as a reduction in
shareholders' equity. Payment of the remaining $69,000 obligation was received
in 1996.
During the year ended December 31, 1996, the Company issued 52,800 shares valued
at approximately $31,000 for services rendered, and the value of such shares was
charged to the 1996 consolidated statement of operations.
During the year ended December 31, 1996, the Company issued 207,500 shares
valued at approximately $175,000 for services rendered by a financial consultant
in connection with capital raising activities in 1994. The value of the shares
was charged to general and administrative expenses in the 1994 consolidated
statement of operations and was reflected as an accrued liability on the 1995
accompanying consolidated balance sheet. In 1996, the Company recorded a
reduction to accrued liabilities and an increase to additional paid-in capital
of $175,000.
SHARES ISSUED FOR CASH
From January 1994 through May 1994, the Company issued 727,866 shares of its
common stock for $2,193,000, net of commissions of $146,000 and 58,333
restricted shares of its common stock. The 58,333 shares were issued for a
capital raising activity and thus are effectively charged to consolidated
shareholders' equity. In 1994, the Company received $200,000 for the exercise
of options to purchase 50,000 shares of its common stock.
F-33
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
STOCK OPTION PLANS
In May 1992, the Board of Directors approved the grant of non-qualified options
to purchase 600,000 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of $1.06 per share and is fully vested as of the date of grant.
The exercise price approximated the fair value of the shares at the date of
grant; such options expire in May 1997.
In October 1992, the Board of Directors adopted an incentive stock option plan
meeting the requirements of Section 422 of the Internal Revenue Code. The plan
reserves 1,200,000 shares for issuance which were granted effective October
1992. The options are exercisable at the then fair market value of $4.875 per
share (unless such options are granted to a 10% shareholder, in which case the
exercise price would be no less than 110% of the then fair market value), and
are exercisable over a period of five (5) years, subject to certain
restrictions. Options to acquire approximately 1,200,000 shares are exercisable
as of December 31, 1996 and 1995, and no options have been exercised to date.
In December 1994, the Board of Directors adopted an amendment to reprice the
options to $2.00 per share; shareholder approval was obtained on September 11,
1995.
In May 1995, the Board of Directors approved the grant of non-qualified options
to purchase 823,047 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of approximately $1.22 per share and is fully vested as of the
date of grant. The exercise price approximates the fair value of the shares at
the date of grant; such options expire in September 1998. Shareholder approval
was obtained on September 11, 1995.
In November 1995, the Board of Directors adopted an incentive stock option plan
meeting the requirements of Section 422 of the Internal Revenue Code (see above
for certain requirements under Section 422). The plan reserves 500,000 shares
for issuance which were granted effective January 23, 1996. The options are
exercisable at the then fair market value of $.5625 per share, and are
exercisable immediately, expire in 2001, and are subject to certain
restrictions.
BOARD OF DIRECTORS STOCK OPTIONS
On January 23, 1996, the Board of Directors granted to two outside directors,
non-qualified stock options to purchase a total of 125,000 shares of the
Company's common stock, at the fair market value of the shares on the date of
grant of $.5625 per share. The options are immediately exercisable for a term
of five years. The value of these options was calculated at $19,000 and was
charged to the 1996 consolidated statement of operations and was reflected as an
increase to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
In October 1996, the Board of Directors adopted, subject to shareholder
approval, an incentive stock option plan meeting the requirements of section 422
of the Internal Revenue Code (see above for certain requirements under Section
422). The plan reserves 500,000 shares for issuance which have not been granted
to date.
F-34
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
On October 2, 1996, the Board of Directors granted two outside directors, non-
qualified stock options to purchase a total of 150,000 shares of the Company's
common stock, at the fair market value of the shares on the date of grant of
$1.06 per share. The options are immediately exercisable for a term of five
years. The value of these options was calculated at $50,000 and was charged to
the 1996 consolidated statement of operations and was reflected as an increase
to additional paid-in capital in the accompanying 1996 statement of
shareholders' equity.
During each of the years in the three year period ended December 31, 1996, stock
option and warrant activity is as follows:
Shares Price Range
Available per Share
----------- -------------
Balance, January 1, 1994 3,259,750 $0.01-$8.00
Granted 1,155,000 $3.00-$6.25
Canceled (605,000) $7.00
Exercised (50,000) $4.00
-----------
Balance, December 31, 1994 3,759,750 $0.01-$8.00
Granted 868,047 $1.21-$2.00
Canceled (81,500) $8.00
Exercised (286,667) $0.01-$0.50
-----------
Balance, December 31, 1995 4,259,630
Granted 3,980,000 $0.56-$1.06
Canceled (170,000) $0.01-$3.00
Exercised -
-----------
Balance, December 31, 1996 8,069,630(1) $0.01-$8.00
-----------
-----------
Exercisable at December 31, 1996 8,047,547
-----------
-----------
(1) Includes options to purchase 80,000 shares of common stock at $0.01 per
share.
PRO FORMA STOCK OPTION INFORMATION
Pro forma information regarding net income (loss) is required by SFAS 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method pursuant to SFAS 123, rather than the method
pursuant to APB 25 as discussed in Note 1. The fair value of these options was
estimated at the date of grant based on an independent third party appraisal.
F-35
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
The appraiser's valuation model (the "Model") was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Model requires the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options; changes in the subjective input assumptions can
materially affect the fair value estimate.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows.
1996 1995
Net income (loss):
As reported $ 1,155,000 $ (5,313,000)
Pro forma $ 1,104,000 $ (5,503,000)
Net income (loss) per share:
As reported $ 0.06 $ (0.33)
Pro forma $ 0.06 $ (0.34)
NOTE 12 - DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management. In February 1993, the Company decided not to
continue to pursue funds in the public market to undertake the drilling of oil
and gas properties primarily due to the expiration of "Section 29" credits, a
credit against federal income taxes for gas produced from Devonian shale or
tight formations from wells commenced before January 1993. As discussed
further, the Company sold certain interests in these oil and gas assets in
December 1994. Certain interests are currently under rework, to be later sold
after management has enhanced the ultimate value of such interests.
The following is a summary of the significant accounting policies and a
description of other issues pertaining to the oil and gas operations.
F-36
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 12 - DISCONTINUED OPERATIONS, CONTINUED
SIGNIFICANT ACCOUNTING POLICIES
The Company follows the successful efforts method of accounting for its oil and
gas activities. Costs of property acquisitions, successful exploratory wells,
all development costs, and support equipment are capitalized. Costs of
unsuccessful exploratory wells are expensed when determined to be nonproductive.
Production costs, overhead and all exploratory drilling costs are expensed as
incurred. The carrying value of proved and unproved reserves are subjected to a
"ceiling test" based on the sum of (a) discounted future net cash flows from
proven reserve estimates, (b) the cost of properties not being amortized and (c)
the lower of cost or fair value of estimated unproved reserves; impairment of
the carrying value of such reserves is charged to operations. Costs of
abandonment and remedial work are expensed over the life of the net future
production cash flows.
Depletion of the cost of producing oil and gas properties has been computed
on the unit-of-production method. Due to the Company's decision to
discontinue these operations, no depletion has been recorded since the assets
have been adjusted to their net realizable value.
The accompanying consolidated financial statements reflect the operating results
and balance sheet items of its oil and gas operations separately from continuing
operations pursuant to the plan of divestiture. The assets of the discontinued
operations are shown net of the allocated liabilities.
In 1993, management believed that the operations would have been sold within a
period of one to two years, but due to certain delays and cash flow
considerations, management was not able to complete its rework on the properties
in the state of Michigan within the time originally estimated. Management does
not intend to retain the interest for the purpose of operating the wells.
Standardized measures of discounted future net cash flows and changes therein
relating to proved oil and gas reserves are not presented since the Company does
not intend to produce any oil and gas on a continuing basis.
REMAINING OIL AND GAS INTERESTS
The Company's remaining assets are located in Michigan, consisting of a 25%
working interest in a 64% net revenue interest in proved reserves and 34 wells
which have been inoperative since the Company's ownership. Fleur-David
Corporation is currently in the process of reworking the wells, which upon
commencement of production, is expected to enable the wells to generate
production of approximately 3,315,000 barrels (BBLs) of oil, over a period of
ten years, with approximately 65% of such reserves recoverable over a period of
four years. Leases, for which the 34 wells are located, are held by force
majure (by production).
In December 1993, the Company entered into an agreement with Fleur-David
Corporation, whereby the Company contributed its 64% (original interest) working
interests in proved reserves. Fleur-David assumed a note payable of $375,000,
plus accrued interest from the Company, and paid approximately $250,000 in well
lease maintenance costs. In addition, Fleur-David was granted options to
purchase 121,500 shares of the Company's common stock at the then fair market
value of $4.00 each. Fleur-David was also to provide substantially all the
expertise and fund 75% of the costs to perform rework and water-flood of
approximately $2,200,000 (see below).
F-37
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 12 - DISCONTINUED OPERATIONS, CONTINUED
The Michigan 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 initial rework and eventual waterflood project with Fleur-David to minimize
the Company's costs associated with remediation and abandonment of the wells.
The Company's estimated cost of rework and waterflood, as a 25% joint venture
interest holder, is $550,000, $286,000 of which has been paid through December
31, 1996, and the remaining $264,000 included as a liability in the net assets
of discontinued operations in the accompanying 1996 consolidated balance sheet.
Fleur-David also obtained a covenant not to sue for clean-up and abandonment
costs from the State of Michigan, as required by the joint venture, by
depositing $188,000 into an environmental escrow account required by the
state. The Company retains a 25% joint venture interest in an average 64% net
revenue interest in the project. An adjustment to the carrying value of
these oil and gas proved reserves was not effected since the additional costs
incurred, and to be incurred by Fleur-David, enhance the value of the
interest retained by the Company by a corresponding amount.
OIL AND GAS LEASES
Certain leases were acquired in 1992 as part of the Company's plan of
reorganization from Biscayne Petroleum Corporation. On March 25, 1993, the
seller agreed to amend certain terms of the acquisition agreement, which, as so
amended, provided for the payment of $50,000 in 1993 and the issuance of 226,286
shares of the Company's common stock in satisfaction of the purchase price. The
March 1993 amendment also rescinded the issuance of 20,000 shares in December
1992 for $100,000 of debt and $20,000 of interest. The purchase price remained
unchanged, after the amendment discussed above, at $2,000,000. The leases, held
by production, were assigned for consideration, along with the 77 wells
discussed below, in December 1994.
OIL AND GAS WELLS
Certain oil and gas interests, consisting of 77 producing wells, were acquired
in 1992 as part of the Company's plan of reorganization from Biscayne Petroleum
Corporation. On March 25, 1993, the sellers agreed to convert the outstanding
principal balance of an unpaid acquisition note of $590,000, into 98,333 shares
of the Company's common stock subject to registration rights and a put right at
a price of $6.00 per share and payment of $100,000 in March 1993.
In September 1994, the Company negotiated certain additional terms extending the
date by which the registration of the 98,333 shares was required to be effected
to March 31, 1995, as amended. However, because the registration was not
effected as of March 31, 1995, subject to the terms of the agreement, the
Company was obligated to pay $590,000, less the average market value of the
98,333 shares of common stock from April 1, 1995 to April 15, 1995, in 12 equal
monthly installments, together with interest at 9% per annum beginning April 1,
1995.
F-38
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 12 - DISCONTINUED OPERATIONS, CONTINUED
On March 31, 1995, the agreement was amended to extend the payment term and
amounts such that the note will be interest only at 10% per annum from April 1,
1995 until October 1, 1995, at which time the outstanding principal balance will
be amortized over 36 months with a balloon payment due on October 1, 1996,
together with unpaid interest thereon. On October 1, 1995, the parties agreed
to convert the entire principal balance of $467,000 into 373,600 shares of the
Company's common stock based on a value of $1.25 per share. At such time, the
put right of $6.00 per share was canceled and accordingly, the 98,333 shares
discussed above, plus the 373,600 shares (471,933) are reflected in the
accompanying consolidated statement of shareholders' equity during the year
ended December 31, 1995.
In September 1993, the Company recorded a provision of $1,471,000 for an
estimated loss on the disposal of its leases and 77 wells located in
Southeastern Ohio. The Company's estimate was based on the current conditions
in the gas market, estimated costs to prepare such sites for sale, lease
expirations (see reserve quantity information below) and sales commissions.
SALE OF OIL AND GAS LEASES AND WELLS
In December 1994, the Company 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 party related to an officer and shareholder of the
Company. In connection therewith, the Company obtained two notes, a $300,000
note, bearing interest at 8% per annum, payable $10,000 per month beginning May
1995, and a $150,000 non-interest bearing note, payable based on 50% of excess
revenues over $10,000 per month from production, secured by the assets sold.
The Company recorded a loss on the sale of these assets of $567,000. As of
December 31, 1996, the principal balance on the notes receivable approximated
$288,000.
NOTES PAYABLE
During 1994 and 1995, various corporate affiliates of the Company's chief
executive officer advanced an aggregate sum of approximately $100,000 to ExCal
primarily to cover overhead expenses in connection with the maintenance of
leases and other costs associated with the Company'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 a demand promissory note in the principal amount of
$100,218 payable to the chief executive officer at the rate of 10% per annum.
No material overhead expenses were incurred in 1996.
The following summarizes the net assets of the discontinued operations as of
December 31, 1996 and 1995 and the results of its operations for each of the
years in the three-year period ended December 31, 1996.
F-39
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 12 - DISCONTINUED OPERATIONS, CONTINUED
Balance sheet items
December 31
-----------
1996 1995
---- ----
Assets:
Cash $ - $ -
Receivable from sale of assets 288,000 386,000
Oil and gas activities -
Proved oil and gas properties 2,582,000 2,582,000
----------- -----------
2,870,000 2,968,000
Less liabilities:
Accrued liabilities (254,000) (352,000)
----------- -----------
Net assets $ 2,616,000 $ 2,616,000
----------- -----------
----------- -----------
Results of its operations for the
years ended December 31, 1996, 1995 and 1994
--------------------------------------------
1996 1995 1994
---- ---- ----
Revenues $ --- $ --- $ 184,000
----------- ----------- -----------
Costs and expenses:
General and administrative --- --- 148,000
Operating costs --- --- 109,000
----------- ----------- -----------
Total costs --- --- 257,000
----------- ----------- -----------
Loss from operations $ --- $ --- $ (73,000)
----------- ----------- -----------
----------- ----------- -----------
Reserve Quantity Information
----------------------------
Oil Gas
(in BBLs) (in MCF)
------------ ------------
Proved developed:
Balances, January 1, 1994 2,134,800 902,200
Revisions of previous estimates 1,180,000 (1) -
Production - (99,000)
Sales of assets - (803,200)
----------- -----------
Balances, December 31, 1994 3,314,800 -
Activity - -
----------- -----------
Balances, December 31, 1995 3,314,800 -
Activity - -
----------- -----------
Balances, December 31, 1996 3,314,800 -
----------- -----------
----------- -----------
(1) In 1994, management determined that certain reserves existed in an
additional formation (Berea) which had not has been previously included in
the Company's reserve analysis.
F-40
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 13 - INCOME TAXES
The following summarizes the benefit for income taxes for the years ended
December 31:
1996 1995 1994
---- ---- ----
Current:
Federal $ 5,000 $ - $ -
State 2,000 - -
---------- ---------- ----------
7,000 - -
---------- ---------- ----------
Deferred:
Federal (757,000) (113,000) (110,000)
State (136,000) (20,000) (20,000)
---------- ---------- ----------
(893,000) (133,000) (130,000)
---------- ---------- ----------
Benefit for income taxes $ (886,000) $ (133,000) $ (130,000)
---------- ---------- ----------
---------- ---------- ----------
The difference between the federal income tax benefit using a 34% tax rate and
the benefit recorded in the accompanying statements of operations for 1995 and
1994 related primarily to increases in the valuation allowances in each year. A
reconciliation of the expected statutory Federal income tax provision from
continuing operations to the benefit for income taxes for the year ended
December 31, 1996 is as follows:
Provision for income taxes at a
federal statutory rate of 34% $ 91,000
Increase (reduction) in income taxes resulting
from:
Changes in the valuation allowance for
deferred tax assets allocated to income
tax benefit (835,000)
State income taxes 2,000
Depreciation and amortization, not
deductible for income tax purposes 145,000
Legal settlement and other reserves,
principally due to accrual for financial
reporting purposes (264,000)
Other (25,000)
----------
Benefit for income taxes $ (886,000)
----------
----------
At December 31, 1996 and 1995, significant components of the Company's net
deferred taxes are as follows:
F-41
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 13 - INCOME TAXES, CONTINUED
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 8,944,000 $ 8,893,000
Depreciation 27,000 17,000
Deferred rent 115,000 -
Reserves and allowances 237,000 690,000
-------------- --------------
9,323,000 9,600,000
Less valuation allowance (8,563,000) (9,600,000)
-------------- --------------
Total deferred tax assets $ 760,000 $ -
-------------- --------------
-------------- --------------
Deferred tax liability -
Non-deductible tax basis (1,396,000) (1,529,000)
-------------- --------------
Total deferred tax liability $ (1,396,000) $ (1,529,000)
-------------- --------------
-------------- --------------
The Company's valuation allowance decreased during 1996 by approximately
$1,037,000.
At December 31, 1996, the Company has net operating loss carry forwards of
approximately $25.5 million for federal income tax reporting purposes and
approximately $4.7 million for state reporting purposes, expiring through 2010.
The Tax Reform Act of 1986 includes provisions which limit the Federal net
operating loss carry forwards available for use in any given year if certain
events, including a significant change in stock ownership, occur. Because of
such limitations, the Company may only utilize net operating loss carry forwards
of approximately $1,500,000 per year for such losses of approximately $3,200,000
incurred prior to December 1992.
NOTE 14 - SEGMENT REPORTING
The Company operates in two segments, oil and gas and gaming. The Company has
not presented segment information in accordance with Statement of Financial
Accounting Standards No. 14, "FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE" because its oil and gas operations have been discontinued, are
separately disclosed in the accompanying consolidated financial statements and
will not be significant in the future.
NOTE 15 - VIDEO LOTTERY OPERATIONS
On March 17, 1994, the West Virginia State Legislature expressly authorized the
operation of up to 400 video lottery terminals through December 31, 1994,
subject to voter approval in a Hancock County referendum, which was approved on
May 10, 1994. The statute authorizing the operation of video lottery terminals
expires, unless extended, on June 13, 1997. In 1995, the Company received
approval from the West Virginia Lottery Commission (the "Lottery Commission") to
operate up to 1,000 video lottery terminals, and subsequently increased the
number of terminals in operation from 400 to 800 (see Note 18).
F-42
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 15 - VIDEO LOTTERY OPERATIONS, CONTINUED
One half of all video lottery terminals must be located in the racetrack
grandstand and clubhouse, while the balance may be located at the Company's on-
site lodge, as long as parimutuel wagering is operated therein. The Company is
subject to annual licensing requirements established by the Lottery Commission;
its license has been renewed through June 1997.
In March 1996, the West Virginia code was amended to permit game themes
depicting symbols on reels, commonly referred to as "line games" or "video slot
games".
A summary of video lottery gross wagers, less winning patron payouts, for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total Gross Wagers $ 104,819,000 $ 55,988,000 $ 23,214,000
Less Winning Patron Payouts (74,119,000) (39,509,000) (15,733,000)
-------------- -------------- --------------
Video Lottery Revenues $ 30,700,000 $ 16,479,000 $ 7,481,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The Company pays an administrative fee to the Lottery Commission not to exceed
4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds including two funds which directly or
indirectly benefit the Company. These amounts are included in "cost of video
lottery" in the consolidated statements of operations.
Amounts contributed to these funds for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
HBPA purses $ 4,645,000 $ 2,470,000 $ 1,070,000
Company pension plan 150,000 80,000 31,000
West Virginia general fund 8,989,000 4,780,000 2,371,000
West Virginia Breeders'
Classic fund 300,000 159,000 62,000
Hancock County general fund 599,000 319,000 125,000
West Virginia tourism promotion
fund 899,000 478,000 187,000
Veterans Memorial fund 300,000 159,000 63,000
----------- ----------- -----------
$15,882,000 $ 8,445,000 $ 3,909,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-43
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 16 - RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Race Track and
Gaming Resort. Under West Virginia Horse Racing Law, the Company's commission
revenue is a designated portion of the parimutuel wagering handle (amounts
wagered).
The West Virginia Racing Commission (the "Racing Commission") authorized a
minimum of 220 days of racing; the Company was in compliance with this provision
in years reported. The Company is subject to annual licensing requirements
established by the Racing Commission, which has renewed the Company's license
through December 31, 1997.
On August 5, 1994, the Company renewed its contract with the West Virginia
Horsemen's Benevolent Protection Association ("HPBA") for a period of three
years. In connection therewith, the Company is required to provide average
daily horse racing purses of at least $22,500, as well as operate a certain
number of races per day based on criteria provided in the contract.
The Company pays purses into a fund established for the benefit of participating
horsemen for each day on which live racing is conducted. Under the provisions
of the August 15, 1994 agreement between Mountaineer and the HBPA, the Company
has a contractual obligation to pay the horsemen a percentage (the "Earned
Commission") of the live and simulcast (satellite off-track wagering) race
handle less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues). Prior to May 1996, by mutual agreement, the actual amounts
funded to the horsemen's account equaled advertised purses as opposed to the
Earned Commission. Accordingly, the Company recorded an accrued liability in
the amount of $85,000 as of December 31, 1995 as the Earned Commission amount
was in excess of the advertised purse amounts (amount actually funded).
Effective April 1996, the Company redefined its funding obligation such that
Earned Commission amounts are funded. As a result, there is no accrued
liability in connection with unpaid purses as of December 31, 1996. All unpaid
purse amounts reflected in accrued liabilities as of December 31, 1995 were
satisfied by December 1996.
A summary of the parimutuel handle and deductions, including satellite off-track
wagering, for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total parimutuel handle $ 40,099,000 $ 39,819,000 $ 35,475,000
Less patrons' winning
tickets and breakage (31,766,000) (31,637,000) (28,246,000)
------------ ------------ ------------
8,333,000 8,182,000 7,229,000
Less:
Parimutuel tax paid to:
West Virginia and Hancock
County (487,000) (472,000) (442,000)
Purses and Horsemen's
Association (3,547,000) (3,447,000) (3,019,000)
------------ ------------ ------------
$ 4,299,000 4,263,000 $ 3,768,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-44
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 17 - STATEMENTS OF CASH FLOWS
The statements of cash flows exclude the effects of non-cash investing and
financing activities for all periods presented. Supplemental disclosures of
significant non-cash activities are as follows:
1996
In 1996, the Company satisfied $204,000 of accrued officers compensation via
the issuance of 466,676 shares of common stock with a market value of
$177,000. Also in 1996, the Company issued 200,000 shares of common stock,
valued at $101,000, to an employee and shareholder. These amounts were
included in general and administrative expense in the accompanying 1996
consolidated statement of operations.
The Company amended an April 1995 severance agreement with its former chief
executive officer in October, 1996. The amendment reduced certain payment
obligations, as described in further detail in Note 8. The Company also issued
100,000 shares of common stock, valued at $124,000, pursuant to the amended
severance agreement.
In connection with the Jackpot settlement, as described more thoroughly in Note
9, the Company issued 75,000 shares of common stock, valued at $111,000, in
final satisfaction of liabilities accrued as of December 31, 1995.
The Company issued shares of common stock and warrants to purchase shares of
common stock to various lenders in connection with financing arrangements more
fully described in Notes 5, 6 and 7. In the aggregate, 908,206 shares (includes
465,377 shares of common stock subscribed) of common stock, valued at $953,000,
and 3,175,000 warrants, valued at $401,000, were issued in 1996. These amounts
were recorded as deferred financing costs and interest expense in the
accompanying consolidated financial statements.
In 1996, the Company issued 207,500 shares of common stock, valued at
$175,000, in satisfaction of compensation owed in connection with 1994
capital raising activities. The value of such shares was charged to general
and administrative expenses in the accompanying 1994 consolidated statement
of operations and was reflected as an accrued liability on the December 31,
1995 accompanying consolidated balance sheet.
During 1996, the Company issued 275,000 stock options, as more thoroughly
described in Note 11, to its outside directors at a value of $69,000.
During 1996, the Company issued 558,593 shares of common stock and is committed
to issue 60,471 shares of common stock, valued at $1,165,000, and a promissory
note as satisfaction of $1,406,000 of redeemable common stock included on the
accompanying 1995 consolidated balance sheet.
See Note 8 for other non-cash transactions.
1995
In 1995, the Company satisfied obligations with respect to 202,833 redeemable
common shares, valued at $1,217,000, through the issuance of 463,600 additional
shares of its common stock.
F-45
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 17 - STATEMENTS OF CASH FLOWS, CONTINUED
The Company issued 225,000 shares to Bennett for loan fees; these amounts, plus
285,000 shares valued at $1,710,000 (aggregate $3,060,000 of costs) were
reversed in 1995 due to the cancellation of the $6.00 price guarantee. In
satisfaction of such, the Company ultimately issued 1,020,000 additional shares
valued at $1,530,000 and relinquished its rights to the original 510,000 shares
at a value of $478,000. Such costs were accounted for as deferred finance
costs, interest and capitalized interest to its construction in progress.
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations. Certain services were
rendered in 1995 which were to be satisfied through the issuance of common
stock; however, the parties canceled 97,500 shares issued in 1994 which were
valued at $100,000. Such amounts are reflected as a reduction from
shareholders' equity with a corresponding increase in accrued liabilities.
In connection with the Jackpot settlement, the Company issued 175,000 shares of
its common stock in satisfaction of non-current accrued liabilities totaling
$414,000 ($525,000 accrued at December 31, 1994).
Certain finance fees totaling $997,500 which were accrued as deferred finance
costs in at December 31, 1995, were canceled due to the amendment by the Company
and Bennett. In addition, in 1995, the Company issued 60,850 shares in
satisfaction of a note payable of approximately $43,000.
1994
During 1994, the Company issued 50,000 common shares for various services
rendered valued at $110,000. The Company also issued 10,681 and 97,500 shares
of its common stock valued at $40,000 and $100,000, respectively for certain
accounts payable and other current assets. The Company recorded compensation
expense of $600,000 as a result of options to purchase the Company's common
stock at below market values granted to two former shareholders of Mountaineer.
From July 1994 to December 1994, the Company issued 285,000 common shares valued
at $1,710,000, accrued $200,000 in loan commissions to be paid in 1995, and
accrued $998,000 of construction financing costs which was satisfied through the
issuance of common stock. Components of such costs of $1,568,000, $709,000 and
$631,000 are excluded from cash expended for deferred financing costs, buildings
and improvements and interest expense, respectively.
In December 1994, the Company accrued a liability for the Jackpot settlement
costs of $525,000 which was satisfied through the issuance of its common stock
in 1995 and 1996.
During 1994, the Company had certain non-cash provisions, net of benefits,
reflected in operations aggregating a net benefit of $29,000.
F-46
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
NOTE 18 - SUBSEQUENT EVENTS
PURCHASE COMMITMENT
On February 27, 1997 the Company agreed to purchase 400 video lottery terminals
in connection with its ongoing expansion of video lottery operations for a total
of $3,137,000. The new terminals were placed into operation on March 11, 1997,
at which time 200 original terminals placed into service in September 1994 were
returned to the lessor without penalty. The current complement of machines
include 800 terminals which offer up to four versions of draw poker, one version
of blackjack, two versions of keno, and video slot games. Of the remaining
terminals, 200 terminals offer four different video poker, keno and blackjack
games.
Effective at the date of return, the payment schedule of the September 1994
operating lease agreement, as amended March 26, 1996, is to be further amended.
Under the amended schedule, monthly payments will decrease from $119,471 to
$100,185, through the termination of the lease in January, 1999. All other
lease terms remained unchanged. There are no early termination penalties in
connection with this amendment.
In connection with the purchase of the new 400 terminals, Mountaineer paid a
$794,000 down payment on February 27, 1997. The remaining $2,343,000 purchase
price is due by June 18, 1997.
NOTE RECEIVABLE
As more fully described in Note 10, in March 1994, the Company loaned $50,000 to
a non-affiliated Company. The loan was in default on December 31, 1996,
accordingly the Company obtained a default judgment against the debtor in March,
1997 in the amount of $65,000, including principal, accrued interest and legal
costs. Post-judgment interest accrues at 10% per annum. It is unknown at this
time if the debtor has sufficient assets with which to satisfy the judgment.
SETTLEMENT OF MOUNTAINEER PARK ACQUISITION PRICE GUARANTEE
In connection with the December 1992 acquisition of Mountaineer (see Note 2) the
Company issued certain shares of the Company's common stock which bore
registration rights guaranteed at $6.00 per share. In January 1997, the Company
reached a settlement with the holders of 118,948 shares which bore the $6.00 per
share price guarantee. In exchange for a cancellation of the price guarantee,
the Company paid a cash settlement of $102,000 and issued 100,000 additional
shares of the Company's common stock in January 1997.
F-47
<PAGE>
MTR GAMING GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts receivable $ 70,000 $ 70,000 $ - $ 140,000
Allowance for doubtful notes receivable 290,000 - - 290,000
Allowance for deferred tax assets 9,600,000 - (1,037,000) 8,563,000
----------- ----------- ------------ -----------
$ 9,960,000 $ 70,000 $ (1,037,000) $ 8,993,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Year ended December 31, 1995:
Allowance for accounts receivable $ 94,000 $ - $ (24,000) $ 70,000
Allowance for doubtful notes receivable - 290,000 - 290,000
Allowance for deferred tax assets 6,868,000 2,732,000 - 9,600,000
----------- ----------- ------------ -----------
$ 6,962,000 $ 3,022,000 $ (24,000) $ 9,960,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Year ended December 31, 1994:
Allowance for doubtful accounts receivable $ 40,000 $ 54,000 $ - $ 94,000
Allowance for deferred tax assets 3,467,000 3,401,000 - 6,868,000
----------- ----------- ------------ -----------
$ 3,507,000 $ 3,455,000 $ - $ 6,962,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
<PAGE>
EXHIBIT 10.36
SETTLEMENT AGREEMENT AND RELEASE
THIS AGREEMENT is made effective as of the ____ day of December, 1996 by and
between MTR Gaming Group, Inc. (f/k/a/ Winners Entertainment, Inc.) (the
"Company"), and Dennis Ryll and Diane Ryll (the "Shareholders").
WHEREAS, the Company and the Shareholders (as well as the then remaining
shareholders of Mountaineer Park, Inc.) entered into a Stock Purchase Agreement
dated May 5, 1992, as amended by that certain Rider No.1 dated May 5, 1992, as
further amended by that certain Rider No.2 dated October 7, 1992, as further
amended by that certain Rider No.3 dated October 16, 1992, as further amended by
that certain Rider No.4 dated December 3, 1992, and as further amended by that
certain Amendment to Rider No. 4 dated November 28, 1994 (collectively the
"Stock Purchase Agreement"), whereby the Company purchased from the Shareholders
all of Shareholder's shares of common stock of Mountaineer Park, Inc.
("Mountaineer Park") as part of a larger transaction by which the Company
acquired 100% of the common stock of Mountaineer Park; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park and its wholly owned subsidiary, Mountaineer Magic, Inc., owned and
operated a race track and resort complex at Chester, West Virginia, together
with clubhouse dining facilities, a 101 room hotel, and a nine hole golf course
as well as operated 165 video lottery terminals pursuant to a contract with the
West Virginia Lottery Commission; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park was unable to operate profitably and required the expansion and enhancement
of video lottery in order to achieve profitability; and
WHEREAS, as a material inducement for the Company to purchase Mountaineer Park,
the Shareholders provided a warranty that "The businesses of [Mountaineer Park,
Inc.] and [Mountaineer Magic, Inc.] are authorized by law in West Virginia...";
and
WHEREAS, as part of the purchase price, the Company delivered to the
Shareholders 135,529 shares of the Company's common stock that were accorded
registration rights and were subject to a guaranteed price of $6.00 per share
upon such registration (the "Guaranteed Shares") such that (i) in the event the
Shareholder were to sell the Guaranteed Shares at a price per share less than
$6.00 per share pursuant to Rule 144 at any time prior to the date on which the
Company causes a registration statement on Form S-1 or S-3 to become effective
(the "Effective Date"), the Company would be required to issue, based on the
average closing bid price of the Company's common stock as reported by Nasdaq
for the ten days prior to the Effective Date, that number of shares as shall
equal in value the difference between $6.00 per share and the amount actually
received by the Shareholders in such sales; and (ii) in the event the
Shareholders were to elect not to sell the Guaranteed Shares prior to the
Effective Date, then, so long as the Shareholders sell the Guaranteed Shares
within 20 days after the Effective Date, the Company shall issue, based on the
average closing bid price of the Guarantor's common stock on the Effective Date,
that number of shares as shall equal in value the difference between $6.00 per
share and the and the gross amount actually received by such holders in such
sales; and
WHEREAS, notwithstanding the Shareholder's warranty and representation, in
October of 1993, the Supreme Court of West Virginia ruled that the operation of
video lottery terminals in the State of West Virginia generally, and at
Mountaineer Park's facility specifically, was unconstitutional and therefore
illegal and that such operations would have to be terminated within thirty
1
<PAGE>
(30) days (which, through a series of stays was extended until the end of the
1994 State legislative session); and
WHEREAS, the Company asserts that because Mountaineer Park's operation of video
lottery terminals was declared illegal, Mountaineer Park and the Company have
suffered substantial damages, including but not limited to (i) millions of
dollars spent pursuing court action, lobbying for video lottery legislation, and
funding operating losses at Mountaineer Park until the passage of video lottery
legislation that enabled it to operate profitably; (ii) a precipitous drop in
the market price of the Company's common stock; (iii) delays in the ability to
register the Company's common stock, causing it to incur various contractual
penalties; and (iv) lost Profits; and
WHEREAS, the Shareholders believe it has a valid claim against the Company for
breach of the price guaranty provisions and registration provisions of the Stock
Purchase Agreement; and
WHEREAS, the Company and the Shareholders have agreed to settle the
aforementioned claims on the terms and conditions set forth herein in order to
avoid the expense and uncertainty of litigation:
NOW THEREFORE, in consideration for the mutual promises and benefits set forth
herein, and with full authority to enter into this Agreement and be bound
thereby, the Company and the Shareholders hereby agree as follows:
1. RECITALS. The foregoing recitals are incorporated as if more fully set
forth herein.
2. PAYMENT. In full and complete satisfaction of any claims that the
Shareholders had, has, or may have against the Company arising out of the Stock
Purchase Agreement, the Company shall pay to the Shareholders, the sum of
$250,000.
3. ACKNOWLEDGMENT. The Shareholders acknowledge that upon delivery of the
payment referred to in Section 2 above, except as stated herein, the
Shareholders shall have no further rights under the price guarantee or other
provisions of the Stock Purchase Agreement.
4. MUTUAL RELEASE. Upon delivery of the payment, except for those obligations
expressly provided for in this Agreement, the Company and the Shareholders
hereby forever release and discharge the other and each of the other's officers,
directors, shareholders, employees, agents, affiliates, attorneys, successors,
and assigns as appropriate of and from any and all claims, rights, duties,
obligations, debts, liabilities, damages, injuries, actions, and causes of
action of every 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 the Stock Purchase Agreement. Further,
the Company expressly releases the Shareholders from any claim it may have
arising out of the warranty referred to in the fourth Recital of this 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.
5. COMPLETE AGREEMENT. This Agreement constitutes the full and complete
agreement between the parties.
2
<PAGE>
6. GOVERNING LAW. This Agreement shall be construed in accordance with laws
of the State of West Virginia. Any claim arising out of this Agreement shall be
brought in a court of competent jurisdiction in the State of West Virginia, and
each party to this Agreement hereby consents to the jurisdiction of such courts.
7. THIRD PARTIES, SUCCESSORS AND ASSIGNS. All of the terms, warranties,
representations and covenants of this Amendment shall apply to and be binding
upon, and shall inure to the benefit of the parties hereto, and each of their
respective permitted successors and assignees, and there are no intended third
party beneficiaries.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first above written.
WITNESS/ATTEST MTR GAMING GROUP, INC.
By:/s/ EDSON R. ARNEAULT
- ------------------------------ --------------------------------
Edson R. Arneault, President
/s/ DENNIS RYLL
- ------------------------------ -----------------------------------
Dennis Ryll
/s/ DIANE RYLL
- ------------------------------ -----------------------------------
Diane Ryll
3
<PAGE>
EXHIBIT 10.37
SETTLEMENT AGREEMENT AND RELEASE
THIS AGREEMENT is made effective as of the ____ day of December, 1996 by and
between MTR Gaming Group, Inc. (f/k/a/ Winners Entertainment, Inc.) (the
"Company"), and John Burkhart (the "Shareholder").
WHEREAS, the Company and the Shareholder (as well as the then remaining
shareholders of Mountaineer Park, Inc.) entered into a Stock Purchase Agreement
dated May 5, 1992, as amended by that certain Rider No.1 dated May 5, 1992, as
further amended by that certain Rider No.2 dated October 7, 1992, as further
amended by that certain Rider No.3 dated October 16, 1992, as further amended by
that certain Rider No.4 dated December 3, 1992, and as further amended by that
certain Amendment to Rider No. 4 dated November 28, 1994 (collectively the
"Stock Purchase Agreement"), whereby the Company purchased from the Shareholder
all of Shareholder's shares of common stock of Mountaineer Park, Inc.
("Mountaineer Park") as part of a larger transaction by which the Company
acquired 100% of the common stock of Mountaineer Park; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park and its wholly owned subsidiary, Mountaineer Magic, Inc., owned and
operated a race track and resort complex at Chester, West Virginia, together
with clubhouse dining facilities, a 101 room hotel, and a nine hole golf course
as well as operated 165 video lottery terminals pursuant to a contract with the
West Virginia Lottery Commission; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park was unable to operate profitably and required the expansion and enhancement
of video lottery in order to achieve profitability; and
WHEREAS, as a material inducement for the Company to purchase Mountaineer Park,
the Shareholder provided a warranty that "The businesses of [Mountaineer Park,
Inc.] and [Mountaineer Magic, Inc.] are authorized by law in West Virginia...";
and
WHEREAS, as part of the purchase price, the Company delivered to the Shareholder
59,474 shares of the Company's common stock that were accorded registration
rights and were subject to a guaranteed price of $6.00 per share upon such
registration (the "Guaranteed Shares") such that (i) in the event the
Shareholder were to sell the Guaranteed Shares at a price per share less than
$6.00 per share pursuant to Rule 144 at any time prior to the date on which the
Company causes a registration statement on Form S-1 or S-3 to become effective
(the "Effective Date"), the Company would be required to issue, based on the
average closing bid price of the Company's common stock as reported by Nasdaq
for the ten days prior to the Effective Date, that number of shares as shall
equal in value the difference between $6.00 per share and the amount actually
received by the Shareholder in such sales; and (ii) in the event the Shareholder
were to elect not to sell the Guaranteed Shares prior to the Effective Date,
then, so long as the Shareholder sells the Guaranteed Shares within 20 days
after the Effective Date, the Company shall issue, based on the average closing
bid price of the Guarantor's common stock on the Effective Date, that number of
shares as shall equal in value the difference between $6.00 per share and the
and the gross amount actually received by such holders in such sales; and
WHEREAS, notwithstanding the Shareholder's warranty and representation, in
October of 1993, the Supreme Court of West Virginia ruled that the operation of
video lottery terminals in the State of West Virginia generally, and at
Mountaineer Park's facility specifically, was unconstitutional and therefore
illegal and that such operations would have to be terminated within thirty
1
<PAGE>
(30) days (which, through a series of stays was extended until the end of the
1994 State legislative session); and
WHEREAS, the Company asserts that because Mountaineer Park's operation of video
lottery terminals was declared illegal, Mountaineer Park and the Company have
suffered substantial damages, including but not limited to (i) millions of
dollars spent pursuing court action, lobbying for video lottery legislation, and
funding operating losses at Mountaineer Park until the passage of video lottery
legislation that enabled it to operate profitably; (ii) a precipitous drop in
the market price of the Company's common stock; (iii) delays in the ability to
register the Company's common stock, causing it to incur various contractual
penalties; and (iv) lost Profits; and
WHEREAS, the Shareholder believes it has a valid claim against the Company for
breach of the price guaranty provisions and registration provisions of the Stock
Purchase Agreement; and
WHEREAS, the Company and the Shareholder have agreed to settle the
aforementioned claims on the terms and conditions set forth herein in order to
avoid the expense and uncertainty of litigation:
NOW THEREFORE, in consideration for the mutual promises and benefits set forth
herein, and with full authority to enter into this Agreement and be bound
thereby, the Company and the Shareholder hereby agree as follows:
1. RECITALS. The foregoing recitals are incorporated as if more fully set
forth herein.
2. PAYMENT. In full and complete satisfaction of any claims that the
Shareholder had, has, or may have against the Company arising out of the Stock
Purchase Agreement, the Company shall (i) pay to the Shareholder, the sum of
$50,800; and (ii) deliver to Shareholder 50,000 additional shares of the
Company's stock (the "New Shares"). The New Shares shall have "piggyback"
registration rights and shall, until such registration, bear a restrictive
legend as required by the federal securities laws.
3. INVESTMENT REPRESENTATION.
(a) ACCESS TO INFORMATION. Shareholder represents and warrants that he
has had access to all public information concerning the Company's condition,
financial and otherwise, its management, its business and its prospects.
Shareholder represents that he has received a copy of the Company's Annual
Report on Form 10-K for the fiscal year ended 1995 and Form 10-Q for the Quarter
ended September 30, 1996 (the "Disclosure Documents"). Shareholder 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. Shareholder acknowledges that
he is aware that because of the Company's financial position and other factors,
the acquisition of the common stock involves a high degree of risk.
(b) RESTRICTED SECURITIES. Shareholder understands and acknowledges that,
until registered, the New Shares are restricted securities and are being
acquired by Shareholder for his own account and not on behalf of any other
person and are being acquired for investment purposes and not for distribution.
Shareholder represents that an investment in the common stock is a suitable
investment for Shareholder, 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 Act of
1933 (the "Act") and state securities laws. Shareholder
2
<PAGE>
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.
4. ACKNOWLEDGMENT. The Shareholder acknowledges that upon delivery of the
payment and issuance and delivery of New Shares referred to in Section 2 above,
except as stated herein, the Shareholder shall have no further rights under the
price guarantee or other provisions of the Stock Purchase Agreement.
5. MUTUAL RELEASE. Upon delivery of the payment and issuance and delivery of
New Shares, except for those obligations expressly provided for in this
Agreement, the Company and the Shareholder hereby forever release and discharge
the other and each of the other's officers, directors, shareholders, employees,
agents, affiliates, attorneys, successors, and assigns as appropriate of and
from any and all claims, rights, duties, obligations, debts, liabilities,
damages, injuries, actions, and causes of action of every 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 the Stock Purchase Agreement. Further, the Company expressly
releases the Shareholder from any claim it may have arising out of the warranty
referred to in the fourth Recital of this 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.
6. COMPLETE AGREEMENT. This Agreement constitutes the full and complete
agreement between the parties.
7. GOVERNING LAW. This Agreement shall be construed in accordance with laws
of the State of West Virginia. Any claim arising out of this Agreement shall be
brought in a court of competent jurisdiction in the State of West Virginia, and
each party to this Agreement hereby consents to the jurisdiction of such courts.
8. THIRD PARTIES, SUCCESSORS AND ASSIGNS. All of the terms, warranties,
representations and covenants of this Amendment shall apply to and be binding
upon, and shall inure to the benefit of the parties hereto, and each of their
respective permitted successors and assignees, and there are no intended third
party beneficiaries.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first above written.
WITNESS/ATTEST MTR GAMING GROUP, INC.
By:/s/ EDSON R. ARNEAULT
- ------------------------------ --------------------------------
Edson R. Arneault, President
/s/ JOHN BURKHART
- ------------------------------ -----------------------------------
John Burkhart
3
<PAGE>
EXHIBIT 10.38
SETTLEMENT AGREEMENT AND RELEASE
THIS AGREEMENT is made effective as of the ____ day of December, 1996 by and
between MTR Gaming Group, Inc. (f/k/a/ Winners Entertainment, Inc.) (the
"Company"), and CTR Resources Corporation (the "Shareholder").
WHEREAS, the Company and the Shareholder (as well as the then remaining
shareholders of Mountaineer Park, Inc.) entered into a Stock Purchase Agreement
dated May 5, 1992, as amended by that certain Rider No.1 dated May 5, 1992, as
further amended by that certain Rider No.2 dated October 7, 1992, as further
amended by that certain Rider No.3 dated October 16, 1992, as further amended by
that certain Rider No.4 dated December 3, 1992, and as further amended by that
certain Amendment to Rider No. 4 dated November 28, 1994 (collectively the
"Stock Purchase Agreement"), whereby the Company purchased from the Shareholder
all of Shareholder's shares of common stock of Mountaineer Park, Inc.
("Mountaineer Park") as part of a larger transaction by which the Company
acquired 100% of the common stock of Mountaineer Park; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park and its wholly owned subsidiary, Mountaineer Magic, Inc., owned and
operated a race track and resort complex at Chester, West Virginia, together
with clubhouse dining facilities, a 101 room hotel, and a nine hole golf course
as well as operated 165 video lottery terminals pursuant to a contract with the
West Virginia Lottery Commission; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park was unable to operate profitably and required the expansion and enhancement
of video lottery in order to achieve profitability; and
WHEREAS, as a material inducement for the Company to purchase Mountaineer Park,
the Shareholder provided a warranty that "The businesses of [Mountaineer Park,
Inc.] and [Mountaineer Magic, Inc.] are authorized by law in West Virginia...";
and
WHEREAS, as part of the purchase price, the Company delivered to the Shareholder
2,514 shares of the Company's common stock that were accorded registration
rights and were subject to a guaranteed price of $6.00 per share upon such
registration (the "Guaranteed Shares") such that (i) in the event the
Shareholder were to sell the Guaranteed Shares at a price per share less than
$6.00 per share pursuant to Rule 144 at any time prior to the date on which the
Company causes a registration statement on Form S-1 or S-3 to become effective
(the "Effective Date"), the Company would be required to issue, based on the
average closing bid price of the Company's common stock as reported by Nasdaq
for the ten days prior to the Effective Date, that number of shares as shall
equal in value the difference between $6.00 per share and the amount actually
received by the Shareholder in such sales; and (ii) in the event the Shareholder
were to elect not to sell the Guaranteed Shares prior to the Effective Date,
then, so long as the Shareholder sell the Guaranteed Shares within 20 days after
the Effective Date, the Company shall issue, based on the average closing bid
price of the Guarantor's common stock on the Effective Date, that number of
shares as shall equal in value the difference between $6.00 per share and the
and the gross amount actually received by such holders in such sales; and
WHEREAS, notwithstanding the Shareholder's warranty and representation, in
October of 1993, the Supreme Court of West Virginia ruled that the operation of
video lottery terminals in the State of West Virginia generally, and at
Mountaineer Park's facility specifically, was unconstitutional and therefore
illegal and that such operations would have to be terminated within thirty
1
<PAGE>
(30) days (which, through a series of stays was extended until the end of the
1994 State legislative session); and
WHEREAS, the Company asserts that because Mountaineer Park's operation of video
lottery terminals was declared illegal, Mountaineer Park and the Company have
suffered substantial damages, including but not limited to (i) millions of
dollars spent pursuing court action, lobbying for video lottery legislation, and
funding operating losses at Mountaineer Park until the passage of video lottery
legislation that enabled it to operate profitably; (ii) a precipitous drop in
the market price of the Company's common stock; (iii) delays in the ability to
register the Company's common stock, causing it to incur various contractual
penalties; and (iv) lost Profits; and
WHEREAS, the Shareholder believes it has a valid claim against the Company for
breach of the price guaranty provisions and registration provisions of the Stock
Purchase Agreement; and
WHEREAS, the Company and the Shareholder have agreed to settle the
aforementioned claims on the terms and conditions set forth herein in order to
avoid the expense and uncertainty of litigation:
NOW THEREFORE, in consideration for the mutual promises and benefits set forth
herein, and with full authority to enter into this Agreement and be bound
thereby, the Company and the Shareholder hereby agree as follows:
1. RECITALS. The foregoing recitals are incorporated as if more fully set
forth herein.
2. PAYMENT. In full and complete satisfaction of any claims that the
Shareholder had, has, or may have against the Company arising out of the Stock
Purchase Agreement, the Company shall pay to the Shareholder, the sum of $3,500.
3. ACKNOWLEDGMENT. The Shareholder acknowledges that upon delivery of the
payment referred to in Section 2 above, except as stated herein, the Shareholder
shall have no further rights under the price guarantee or other provisions of
the Stock Purchase Agreement.
4. MUTUAL RELEASE. Upon delivery of the payment, except for those obligations
expressly provided for in this Agreement, the Company and the Shareholder hereby
forever release and discharge the other and each of the other's officers,
directors, shareholders, employees, agents, affiliates, attorneys, successors,
and assigns as appropriate of and from any and all claims, rights, duties,
obligations, debts, liabilities, damages, injuries, actions, and causes of
action of every 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 the Stock Purchase Agreement. Further,
the Company expressly releases the Shareholder from any claim it may have
arising out of the warranty referred to in the fourth Recital of this 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.
5. COMPLETE AGREEMENT. This Agreement constitutes the full and complete
agreement between the parties.
2
<PAGE>
6. GOVERNING LAW. This Agreement shall be construed in accordance with laws
of the State of West Virginia. Any claim arising out of this Agreement shall be
brought in a court of competent jurisdiction in the State of West Virginia, and
each party to this Agreement hereby consents to the jurisdiction of such courts.
7. THIRD PARTIES, SUCCESSORS AND ASSIGNS. All of the terms, warranties,
representations and covenants of this Amendment shall apply to and be binding
upon, and shall inure to the benefit of the parties hereto, and each of their
respective permitted successors and assignees, and there are no intended third
party beneficiaries.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first above written.
WITNESS/ATTEST MTR GAMING GROUP, INC.
By:/s/ EDSON R. ARNEAULT
- ------------------------------ --------------------------------
Edson R. Arneault, President
CTR RESOURCES CORPORATION
By:/s/ JOHN TEEPLE
- ------------------------------ --------------------------------
John Teeple, President
3
<PAGE>
EXHIBIT 10.39
SETTLEMENT AGREEMENT AND RELEASE
THIS AGREEMENT is made effective as of the ____ day of December, 1996 by and
between MTR Gaming Group, Inc. (f/k/a/ Winners Entertainment, Inc.) (the
"Company"), and C. Richard Petticrew (the "Shareholder").
WHEREAS, the Company and the Shareholder (as well as the then remaining
shareholders of Mountaineer Park, Inc.) entered into a Stock Purchase Agreement
dated May 5, 1992, as amended by that certain Rider No.1 dated May 5, 1992, as
further amended by that certain Rider No.2 dated October 7, 1992, as further
amended by that certain Rider No.3 dated October 16, 1992, as further amended by
that certain Rider No.4 dated December 3, 1992, and as further amended by that
certain Amendment to Rider No. 4 dated November 28, 1994 (collectively the
"Stock Purchase Agreement"), whereby the Company purchased from the Shareholder
all of Shareholder's shares of common stock of Mountaineer Park, Inc.
("Mountaineer Park") as part of a larger transaction by which the Company
acquired 100% of the common stock of Mountaineer Park; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park and its wholly owned subsidiary, Mountaineer Magic, Inc., owned and
operated a race track and resort complex at Chester, West Virginia, together
with clubhouse dining facilities, a 101 room hotel, and a nine hole golf course
as well as operated 165 video lottery terminals pursuant to a contract with the
West Virginia Lottery Commission; and
WHEREAS, prior to the purchase of Mountaineer Park by the Company, Mountaineer
Park was unable to operate profitably and required the expansion and enhancement
of video lottery in order to achieve profitability; and
WHEREAS, as a material inducement for the Company to purchase Mountaineer Park,
the Shareholder provided a warranty that "The businesses of [Mountaineer Park,
Inc.] and [Mountaineer Magic, Inc.] are authorized by law in West Virginia...";
and
WHEREAS, as part of the purchase price, the Company delivered to the Shareholder
59,474 shares of the Company's common stock that were accorded registration
rights and were subject to a guaranteed price of $6.00 per share upon such
registration (the "Guaranteed Shares") such that (i) in the event the
Shareholder were to sell the Guaranteed Shares at a price per share less than
$6.00 per share pursuant to Rule 144 at any time prior to the date on which the
Company causes a registration statement on Form S-1 or S-3 to become effective
(the "Effective Date"), the Company would be required to issue, based on the
average closing bid price of the Company's common stock as reported by Nasdaq
for the ten days prior to the Effective Date, that number of shares as shall
equal in value the difference between $6.00 per share and the amount actually
received by the Shareholder in such sales; and (ii) in the event the Shareholder
were to elect not to sell the Guaranteed Shares prior to the Effective Date,
then, so long as the Shareholder sells the Guaranteed Shares within 20 days
after the Effective Date, the Company shall issue, based on the average closing
bid price of the Guarantor's common stock on the Effective Date, that number of
shares as shall equal in value the difference between $6.00 per share and the
and the gross amount actually received by such holders in such sales; and
WHEREAS, notwithstanding the Shareholder's warranty and representation, in
October of 1993, the Supreme Court of West Virginia ruled that the operation of
video lottery terminals in the State of West Virginia generally, and at
Mountaineer Park's facility specifically, was unconstitutional and therefore
illegal and that such operations would have to be terminated within thirty
1
<PAGE>
(30) days (which, through a series of stays was extended until the end of the
1994 State legislative session); and
WHEREAS, the Company asserts that because Mountaineer Park's operation of video
lottery terminals was declared illegal, Mountaineer Park and the Company have
suffered substantial damages, including but not limited to (i) millions of
dollars spent pursuing court action, lobbying for video lottery legislation, and
funding operating losses at Mountaineer Park until the passage of video lottery
legislation that enabled it to operate profitably; (ii) a precipitous drop in
the market price of the Company's common stock; (iii) delays in the ability to
register the Company's common stock, causing it to incur various contractual
penalties; and (iv) lost Profits; and
WHEREAS, the Shareholder believes it has a valid claim against the Company for
breach of the price guaranty provisions and registration provisions of the Stock
Purchase Agreement; and
WHEREAS, the Company and the Shareholder have agreed to settle the
aforementioned claims on the terms and conditions set forth herein in order to
avoid the expense and uncertainty of litigation:
NOW THEREFORE, in consideration for the mutual promises and benefits set forth
herein, and with full authority to enter into this Agreement and be bound
thereby, the Company and the Shareholder hereby agree as follows:
1. RECITALS. The foregoing recitals are incorporated as if more fully set
forth herein.
2. PAYMENT. In full and complete satisfaction of any claims that the
Shareholder had, has, or may have against the Company arising out of the Stock
Purchase Agreement, the Company shall (i) pay to the Shareholder, the sum of
$50,800; and (ii) deliver to Shareholder 50,000 additional shares of the
Company's stock (the "New Shares"). The New Shares shall have "piggyback"
registration rights and shall, until such registration, bear a restrictive
legend as required by the federal securities laws.
3. INVESTMENT REPRESENTATION.
(a) ACCESS TO INFORMATION. Shareholder represents and warrants that he
has had access to all public information concerning the Company's condition,
financial and otherwise, its management, its business and its prospects.
Shareholder represents that he has received a copy of the Company's Annual
Report on Form 10-K for the fiscal year ended 1995 and Form 10-Q for the Quarter
ended September 30, 1996 (the "Disclosure Documents"). Shareholder 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. Shareholder acknowledges that
he is aware that because of the Company's financial position and other factors,
the acquisition of the common stock involves a high degree of risk.
(b) RESTRICTED SECURITIES. Shareholder understands and acknowledges that,
until registered, the New Shares are restricted securities and are being
acquired by Shareholder for his own account and not on behalf of any other
person and are being acquired for investment purposes and not for distribution.
Shareholder represents that an investment in the common stock is a suitable
investment for Shareholder, 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 Act of
1933 (the "Act") and state securities laws. Shareholder
2
<PAGE>
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.
4. ACKNOWLEDGMENT. The Shareholder acknowledges that upon delivery of the
payment and issuance and delivery of New Shares referred to in Section 2 above,
except as stated herein, the Shareholder shall have no further rights under the
price guarantee or other provisions of the Stock Purchase Agreement.
5. MUTUAL RELEASE. Upon delivery of the payment and issuance and delivery of
New Shares, except for those obligations expressly provided for in this
Agreement, the Company and the Shareholder hereby forever release and discharge
the other and each of the other's officers, directors, shareholders, employees,
agents, affiliates, attorneys, successors, and assigns as appropriate of and
from any and all claims, rights, duties, obligations, debts, liabilities,
damages, injuries, actions, and causes of action of every 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 the Stock Purchase Agreement. Further, the Company expressly
releases the Shareholder from any claim it may have arising out of the warranty
referred to in the fourth Recital of this 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.
6. COMPLETE AGREEMENT. This Agreement constitutes the full and complete
agreement between the parties.
7. GOVERNING LAW. This Agreement shall be construed in accordance with laws
of the State of West Virginia. Any claim arising out of this Agreement shall be
brought in a court of competent jurisdiction in the State of West Virginia, and
each party to this Agreement hereby consents to the jurisdiction of such courts.
8. THIRD PARTIES, SUCCESSORS AND ASSIGNS. All of the terms, warranties,
representations and covenants of this Amendment shall apply to and be binding
upon, and shall inure to the benefit of the parties hereto, and each of their
respective permitted successors and assignees, and there are no intended third
party beneficiaries.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first above written.
WITNESS/ATTEST MTR GAMING GROUP, INC.
By:/s/ EDSON R. ARNEAULT
- ------------------------------ --------------------------------
Edson R. Arneault, President
/s/ C. RICHARD PETTICREW
- ------------------------------ -----------------------------------
C. Richard Petticrew
3
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF MTR GAMING GROUP, INC.
1. Mountaineer Park, Inc., a West Virginia corporation, is a wholly owned
subsidiary of MTR Gaming Group, Inc. and does business under the name
"Mountaineer Race Track & Gaming Resort."
2. ExCal Energy Corporation, a Michigan corporation, is a wholly owned
subsidiary of MTR Gaming Group, Inc. and operates under the name
"ExCal."
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MTR Gaming Group, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (333-14475) and the Registration Statements on Forms S-8
(33-74322, 33-88652, 33-64733, 33-78224) of our report dated February 28, 1997
appearing in the Annual Report on Form 10-K of MTR Gaming Group, Inc. (formerly
Winners Entertainment, Inc.) for the year ended December 31, 1996.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
April 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,411,000
<SECURITIES> 0
<RECEIVABLES> 442,000
<ALLOWANCES> (140,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,016,000
<PP&E> 22,652,000
<DEPRECIATION> (4,199,000)
<TOTAL-ASSETS> 18,453,000
<CURRENT-LIABILITIES> 3,119,000
<BONDS> 16,230,000
0
0
<COMMON> 2,000
<OTHER-SE> 10,264,000
<TOTAL-LIABILITY-AND-EQUITY> 30,878,000
<SALES> 40,204,000
<TOTAL-REVENUES> 40,204,000
<CGS> 29,757,000
<TOTAL-COSTS> 37,234,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 705,000
<INTEREST-EXPENSE> 3,460,000
<INCOME-PRETAX> 269,000
<INCOME-TAX> (886,000)
<INCOME-CONTINUING> 1,155,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,155,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
