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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20508
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MTR GAMING GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1103135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
STATE ROUTE 2 SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA
---------------------------------------------------------
Address of principal executive offices
26034
-----
Zip Code
(304) 387-5712
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the Company: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Company was required to file such reports), and (2) has been
the subject to such filing requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark whether the Company has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.00001 PAR VALUE
-------------------------------
Class
19,764,291
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Outstanding at May 9, 1997
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MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed and Consolidated Balance Sheets
at March 31, 1997 and December 31, 1996.................. 1
Condensed and Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996....... 3
Condensed and Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996.............. 4
Notes to Condensed and Consolidated Financial Statements...... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................ 18
Item 2 - Changes in Securities.................................... 18
Item 3 - Defaults Upon Senior Securities.......................... 18
Item 4 - Submission of Matters to a Vote of Security Holders...... 18
Item 5 - Other Information........................................ 18
Item 6 - Exhibits and Reports on Form 8-K......................... 18
SIGNATURE PAGE........................................................... 20
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1997 1996
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 2,868,000 $ 4,226,000
Restricted cash ............................. 185,000 185,000
Accounts receivable, net of allowance
for doubtful accounts of $140,000 ........ 411,000 302,000
Deferred financing costs .................... 533,000 1,066,000
Deferred income taxes ....................... 760,000 760,000
Other current assets ........................ 518,000 477,000
------------ ------------
Total Current Assets .................... 5,275,000 7,016,000
------------ ------------
Property:
Land ........................................ 371,000 371,000
Buildings ................................... 17,081,000 17,081,000
Equipment and automobiles ................... 4,794,000 2,451,000
Furniture and fixtures ...................... 2,423,000 2,423,000
Construction in progress .................... 1,957,000 326,000
------------ ------------
26,626,000 22,652,000
Less Accumulated Depreciation ............... ( 4,587,000) ( 4,199,000)
------------ ------------
22,039,000 18,453,000
------------ ------------
Net Assets of Discontinued
Oil and Gas Activities ...................... 2,616,000 2,616,000
------------ ------------
Other Assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,085,000 and $1,022,000.. 2,689,000 2,752,000
Deposits and other .......................... 19,000 41,000
------------ ------------
2,708,000 2,793,000
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TOTAL ASSETS..................................... $ 32,638,000 $ 30,878,000
------------ ------------
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See accompanying notes to financial statements.
1
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
March 31 December 31
1997 1996
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................... $ 3,100,000 $ 909,000
Other accrued liabilities .................. 1,366,000 1,891,000
Current portion of long term debt .......... 118,000 186,000
Current portion of deferred income taxes. .. 133,000 133,000
------------ ------------
Total Current Liabilities ............. 4,717,000 3,119,000
------------ ------------
Deferred Income Taxes, Less Current Portion .... 1,230,000 1,263,000
------------ ------------
Long Term Debt, Less Current Portion ........... 16,229,000 16,230,000
------------ ------------
Shareholders' Equity:
Common stock ............................... 2,000 2,000
Paid-in-capital ............................ 35,068,000 35,173,000
Accumulated deficit ........................ (24,608,000) (24,909,000)
------------ ------------
Total Shareholders' Equity ............. 10,462,000 10,266,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .... $ 32,638,000 $ 30,878,000
------------ ------------
------------ ------------
See accompanying notes to financial statements.
2
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
1997 1996
---- ----
Revenues:
Video lottery terminals $ 10,053,000 $ 5,758,000
Parimutuel commissions 1,049,000 1,008,000
Food, beverage and lodging 943,000 652,000
Other 197,000 156,000
------------ -----------
Total Revenue 12,242,000 7,574,000
------------ -----------
Costs and Expenses:
Cost of video lottery terminals 6,398,000 3,945,000
Cost of parimutuel commissions 1,282,000 1,136,000
Cost of food, beverage and lodging 837,000 681,000
Cost of other revenues 283,000 216,000
Marketing and promotions 578,000 202,000
General and administrative expenses 1,079,000 993,000
Depreciation and amortization 451,000 459,000
------------ -----------
Total Costs and Expenses 10,908,000 7,632,000
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Operating Profit (Loss) 1,334,000 (58,000)
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Other Income (Expense):
Interest income 28,000 4,000
Interest expense (1,094,000) (199,000)
------------ -----------
(1,066,000) (195,000)
Income (Loss) Before
Benefit for Income Taxes 268,000 (253,000)
Benefit for Income Taxes 33,000 33,000
------------ -----------
Net Income (Loss) $ 301,000 $ (220,000)
------------ -----------
------------ -----------
Net Income (Loss) Per Share $ 0.02 $ (0.01)
------------ -----------
------------ -----------
Weighted Average Number
of Shares Outstanding 19,720,244 18,159,783
------------ -----------
------------ -----------
See accompanying notes to financial statements.
3
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MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................................ $ 301,000 $ (220,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Deferred financing costs amortization....................... 533,000 304,000
Depreciation and other amortization......................... 451,000 459,000
Common stock issued for services rendered................... 0 106,000
Provision for doubtful accounts and other provisions........ 0 130,000
Deferred income taxes....................................... (33,000) (33,000)
Net Changes in Assets and Liabilities:
Restricted cash............................................. 0 17,000
Other current assets........................................ (150,000) (39,000)
Accounts payable and accrued liabilities.................... (677,000) 73,000
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CASH PROVIDED BY
OPERATING ACTIVITIES................................... $ 425,000 $ 797,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Settlement of prior acquisition costs....................... (105,000) 0
Deposits and other.......................................... 22,000 (28,000)
Capital expenditures........................................ (1,631,000) (334,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES........................... $(1,714,000) $ (362,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments.......................................... (69,000) (59,000)
Proceeds from issuance of notes payable..................... 0 380,000
----------- -----------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................................. $ (69,000) $ 321,000
----------- -----------
NET INCREASE (DECREASE) IN CASH.................................. (1,358,000) 756,000
Cash, Beginning of Period........................................ 4,226,000 807,000
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Cash, End of Period.............................................. $ 2,868,000 $ 1,563,000
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</TABLE>
See accompanying notes to financial statements
4
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MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed and consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of Management, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation have been included
herein. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Note 2 - Commitments and Contingencies
CORRECTIVE ACTION PLAN. The Company has developed and is implementing a
corrective action plan to stop leakage from underground storage tanks at its
Mountaineer Race Track and Gaming Resort facility in Chester, West Virginia.
In 1995, Management estimated the cost of the plan to be $140,000, consisting
of $60,000 in monitoring and operational costs to be expended in 1995 and
1996, and $80,000 in capital expenditures to be incurred in 1996 and 1997.
The Company recorded a provision of $140,000 in 1995 for these projected
expenses and has entered into a service contract for the installation of
equipment and future operating costs. The Company's remaining liability at
March 31, 1997 is not material.
SETTLEMENT OF MOUNTAINEER PARK ACQUISITION PRICE GUARANTEE. In
connection with the December 1992 acquisition of Mountaineer Park, Inc. 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 $105,000 and issued
100,000 additional shares of the Company's common stock in January 1997.
LABOR 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. As of February 18, 1997, Mountaineer
and the union agreed to extend the terms of the agreement through September
26, 1997 while negotiating an agreement of longer duration.
Note 3 - Income Taxes
The benefit for income taxes recorded in the accompanying statement of
operations for the three months ended March 31, 1997 and 1996 results from
non-tax deductible depreciation expense attributable to the purchase method
of accounting for the Company's investment in Mountaineer Park, Inc. At
March 31, 1997, the Company has recorded a valuation allowance of
approximately $8.6 million against its primary deferred tax assets (net
operating loss carryforwards for federal and state income tax purposes). At
March 31, 1997, the Company has approximately $25.5 million in federal net
operating loss carryforwards and approximately $4.7 million in state net
operating loss carryforwards; the use of such net operating loss
carryforwards earned from 1992 through 1995 are subject to certain
limitations as a result of change of ownership due to common stock issuances.
Due to limitations under the Alternative Minimum Tax rules of the Tax
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Reform Act of 1986, the Company expects to make quarterly federal income tax
expenditures in the future. Such payments are not expected to have a
material impact on operations.
Note 4 - Financial Accounting Standards Board
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards 128, EARNINGS PER SHARE ("SFAS 128"), which is
effective for financial statements issued for periods ending after December
15, 1997. The effect of adopting SFAS 128 has not yet been determined.
Note 5 - Employment Agreement
On March 1, 1997, the Company entered a new three year employment
agreement with Edson R. Arneault to reflect Mr. Arneault's responsibilities as
president and chairman of the Company since April 26, 1995. The new agreement
replaces a May 10, 1994 employment agreement pursuant to which Mr. Arneault was
employed as president of the Company's wholly owned subsidiary, ExCal Energy
Corporation, and vice president in charge of political relations for the
Company. The new employment agreement provides that Mr. Arneault will receive
a base salary with annual cost of living adjustments and bonuses at the
discretion of the Board of Directors. As of March 1, 1997, Mr. Arneault's base
salary is $315,000.
The new agreement provides that if Mr. Arneault'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 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.
The new employment agreement provides that, during and after the term of
the agreement, Mr. Arneault will not directly or indirectly disclose
confidential information or trade secrets of the Company to any third party
(except as required by law) or use such information for other than Company
business without the prior written consent of the Company.
6
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Note 6 - Long-Term Debt
$16.1 MILLION TERM LOAN. On July 2, 1996, Mountaineer entered into a
financing arrangement with a private lending firm for a $5 million working
capital loan and an $11.1 million loan commitment. 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. The Company is guarantor of the Amended and Restated Term Loan
Agreement. 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 Company issued 126,921 shares
to the lender in the first quarter of 1997. 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, is amortizing the deferred financing costs
through June 30, 1997. If the loan is repaid prior to July 2, 1997, the
Company will be obligated to pay a $250,000 fee to non-affiliates of the
Company which facilitated the financing, and which amount is being accrued
evenly during the first six months of 1997. In the event that the loan is
not prepaid by July 2, 1997, the Company is obligated to pay an annual
administrative fee of $888,000 on that date, and various other cash and
noncash fees on future dates as summarized below:
- 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 dates (calculated using the closing price of the stock).
- On November 15, 1997, 1998 and 1999, warrants to purchase 250,000
shares of the Company's common stock at an exercise price of $1.06.
All warrants issued in connection with this provision and the following
provision 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 in the loan
agreement.
Management intends to refinance the $16.1 million term loan in its
entirety prior to July 2, 1997. 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
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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.
OTHER DEBT. At December 31, 1996, the Company owed principal balances
totaling $316,000 on two other term notes, as described more fully in Note 6
to the consolidated financial statements included in the Company's annual
report on form 10-K dated December 31, 1996. The Company made principal
payments totaling $69,000 relating to these two notes in the first quarter of
1997.
ANNUAL COMMITMENTS. Future annual principal payments required under all
long-term indebtedness as of March 31, 1997, are as follows:
Years Ending
December 31,
------------
1997 $ 117,000
1998 29,000
1999 16,131,000
2000 33,000
2001 37,000
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$ 16,347,000
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INTEREST EXPENSE. The Company made interest payments on long-term debt
totaling $489,000 in the first quarter of 1997 and $12,000 in the first
quarter of 1996. At March 31, 1997 the Company's remaining deferred
financing costs balance was $533,000.
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 March 31, 1997 and December 31, 1996, no principal or interest amounts
were outstanding. 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
March 31, 1997, the Company had recorded $157,000 as deferred financing costs
and $232,000 as an accrued liability in the accompanying condensed
consolidated balance sheets relating to the line of credit. Such costs are
expected to be amortized through June 30, 1997, since the Company anticipates
the refinancing of the term loans and the line, as described in Note 6.
Note 8 - Capital Transactions
INCENTIVE PLAN STOCK OPTIONS. On October 2, 1996, the Company's board
of directors adopted an incentive stock option plan meeting the requirements
of Section 422 of the Internal Revenue Code, subject to shareholder approval.
In accordance with the plan, 500,000 shares were reserved for issuance at an
exercise price of $1.06 per share, the fair market value of the stock on the
date of adoption. The shares are subject to certain limitations, and are
exercisable over a period of five years. As of March 31, 1997, none of these
options have been awarded.
8
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Note 9 - Enhanced Gaming Legislation and Other Regulatory Changes.
LEGISLATIVE ACTIONS. The West Virginia Legislature passed two bills in
1997 which enhance various aspects of Mountaineer's existing racing and video
lottery operations. Salient features of the bills are summarized below:
- The "sunset" provision of the Racetrack Video Lottery Act which would
have caused the Act's termination in 1997 was repealed.
- Beginning in 1998, the two West Virginia thoroughbred racetracks are
only required to schedule 210 days of live racing per year, down from
the current 220 day annual requirement. In addition, procedures have
been specified to allow further reductions in the required number of
live race days under certain conditions, subject to the approval of the
West Virginia Racing Commission.
- Effective July 1997, a portion of the taxes and assessments on video
lottery revenues which are administered by the West Virginia Lottery
Commission, which were previously allotted solely to the West Virginia
Breeders Classics Association, will be reallocated in the following
manner:
(i) The first $800,000 assessed on statewide video lottery operations
will be allocated to the West Virginia Breeders Classics
Association.
(ii) The next $200,000 assessed on statewide video lottery operations
will be allocated to Mountaineer to be used for the payment of
purses and promotional expenses of a stakes race to be known as
the West Virginia Derby.
(iii) After this annual statewide $1.0 million funding threshold is
reached, any further assessments paid will be returned to the
respective racetracks from which they were assessed. Any amounts
refunded to Mountaineer under this provision are required to be
disbursed evenly between capital improvement expenditures and
purse payments for the West Virginia Derby.
- Effective July 1997, Mountaineer and the other three racetracks in West
Virginia are permitted to export simulcast broadcasts of their live
races. To encourage intrastate simulcasting, the legislation exempts
from parimutuel taxation one-half of the racing handle wagered at other
West Virginia racetracks on live races conducted at Mountaineer, and
vice versa.
COMMISSION ACTION. In the first quarter of 1997, the West Virginia
Lottery Commission removed its prohibition on the installation of "player
tracking" software in video lottery terminals, to be used for the purpose of
target marketing.
Note 10 - Advertising Expense
Marketing and promotions expenses recorded in the first quarter of 1997
are net of approximately $169,000 to be refunded to the Company under the
auspices of a state grant to a convention and visitors bureau of which
Mountaineer is a member. Management expects to qualify for an additional
$161,000 in grant refunds in the second quarter of 1997.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - Three Months Ended March 31, 1997 Compared to Three
Months Ended March 31, 1996.
The Company earned revenues for the respective three month periods in 1997
and 1996 as shown below:
Three Months Ended
March 31
1997 1996
---- ----
Operating Revenues
Video lottery operations $ 10,053,000 $ 5,758,000
Parimutuel commissions 1,049,000 1,008,000
Lodging, food and beverage 943,000 652,000
Other revenues 197,000 156,000
Total Revenues $ 12,242,000 $ 7,574,000
------------- ------------
------------- ------------
The Company's Mountaineer Park, Inc. subsidiary has exhibited steady,
pronounced revenue growth under the expansion plan which began in 1994,
centered around video lottery operations. The emergence of video lottery
operations as Mountaineer's dominant profit center has significantly
moderated the seasonality experienced in prior year revenue trends.
The geographic area surrounding the Company's operating facilities in
West Virginia experienced extensive flooding and unusually heavy snowfall in
the first quarter of 1996. Flood and snow damage in portions of Ohio, West
Virginia and Western Pennsylvania reached levels resulting in their
designation as a Federal disaster areas. Mountaineer's facilities are
situated well above the flood plain and did not sustain any damage;
Mountaineer's nearest competitor was extensively damaged and ceased
operations for approximately four weeks in the first quarter of 1996.
VIDEO LOTTERY OPERATIONS. Mountaineer has operated video lottery
terminals ("VLTs") in West Virginia since 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 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 the video lottery gross winnings less patron payouts ("net
win") for the three months ended March 31, 1997 and 1996 is as follows:
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Three Months Ended
March 31
1997 1996
---- ----
Total gross wagers $ 34,762,000 $ 20,223,000
Less patron payouts (24,709,000) (14,465,000)
Revenues - video lottery operations $ 10,053,000 $ 5,758,000
------------- ------------
------------- ------------
Average daily net win per terminal $ 132 $ 79
------------- ------------
------------- ------------
Revenues from video lottery operations increased by 75% from $5.8
million in the first quarter of 1996 to $10.1 million in 1997. Management
attributes the increase to the following factors: (i) conversion of 350 Card
Terminals into Slot Terminals in July, 1996, followed by the conversion of 50
more Card Terminals into Slot Terminals in October 1996, and (ii)
commencement of extensive advertising in January 1997, featuring a 30 minute
infomercial broadcast on television affiliates within a two hour driving
radius.
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 since the inception of video slot games.
The aggressive infomercial marketing campaign begun in January 1997 will be
followed by an extensive direct mail marketing program designed to attract
repeat business. 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 three months ended March 31, 1997, average daily net win
on the 400 grandstand VLTs was $53 (including $0 for days when there was no
live racing), compared to $226 earned on the lodge-based VLTs.
PARIMUTUEL COMMISSIONS. The Company's revenues from racing operations
are derived mainly from Commissions earned on parimutuel wagering handle on
live races held at Mountaineer Park and on races conducted at other
thoroughbred and greyhound racetracks and simulcast at Mountaineer Park.
Mountaineer's parimutuel commissions for the three months ended March 31,
1997 and 1996 are summarized below:
Three Months Ended
March 31
1997 1996
---- ----
Simulcast racing parimutuel handle $ 5,435,000 $ 5,540,000
Live racing parimutuel handle 4,161,000 3,715,000
Less patrons' winning tickets ( 7,594,000) ( 7,318,000)
------------- ------------
2,002,000 1,937,000
Less:
State and county parimutuel tax ( 119,000) (115,000)
Purses and Horsemen's Association ( 834,000) (814,000)
------------- ------------
Revenues-parimutuel commissions $ 1,049,000 $ 1,008,000
------------- ------------
------------- ------------
Simulcast handle remained relatively constant in the first quarters of
1996 and 1997, dropping 2% to $5.4 million in the latter period. Live racing
handle increased by 12% from $3.7 million in 1996 to $4.2 million in 1997,
primarily due to the cancellation of eight racing days in 1996 due to severe
weather. Mountaineer has completed 50 days of the annually required 220 days
in the first quarter of 1997, compared to 44 days in 1996.
11
<PAGE>
Mountaineer paid average daily live purses of $40,000 in the first three
months of 1997 and $26,000 in the corresponding period of 1996. Management
believes that live racing handle will increase as racing purses are raised
following the concept that higher purses attract higher quality race
participants, which in turn captures the interest of wagerers from a larger
geographic region. In accordance with this philosophy, Mountaineer plans to
offer moderately funded stakes races of up to $20,000 per race during the
second quarter of 1997. 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 Park.
In 1997 the West Virginia legislature passed a bill which Management
believes will help the Company's live racing operations. The bill includes
the following important features:
- Effective July 1997, a portion of the taxes and assessments on video
lottery revenues which are administered by the West Virginia Lottery
Commission, which were previously allotted solely to the West Virginia
Breeders Classics Association, will be reallocated in the following
manner:
(i) The first $800,000 assessed on statewide video lottery
operations will be allocated to the West Virginia Breeders
Classics Association.
(ii) The next $200,000 assessed on statewide video lottery operations
will be allocated to Mountaineer to be used for the payment of
purses and promotional expenses of a stakes race to be known as
the West Virginia Derby.
(iii) After this annual statewide $1.0 million funding threshold is
reached, any further assessments paid will be returned to the
respective racetracks from which they were assessed. Any
amounts refunded to Mountaineer under this provision are
required to be disbursed evenly between capital improvement
expenditures and purse payments for the West Virginia Derby.
- Effective July 1997, Mountaineer and the other three racetracks in
West Virginia are permitted to export simulcast broadcasts of their
live races. To encourage intrastate simulcasting, the legislation
exempts from parimutuel taxation one-half of the racing handle wagered
at other West Virginia racetracks on live races conducted at
Mountaineer, and vice versa.
- Beginning in 1998, the two thoroughbred tracks in West Virginia will
be required to schedule 210 days of live racing annually, down from
the current 220 day minimum. Additionally, the bill specifies
procedures which will allow further reductions in the required number
of live race days if certain conditions exist, subject to approval by
the State Racing Commission.
FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging
revenues accounted for a combined increase of 45% to $943,000 for the three
months ended March 31, 1997. Management attributes the increase to direct
elements of the marketing campaign which commenced in January 1997, as well
as the synergistic effects of heavier video lottery patronage. Approximately
$683,000 of the first quarter 1997 revenues were derived from food and
beverage operations; $461,000 of 1996 first quarter revenues were
attributable to food and beverage operations.
12
<PAGE>
OTHER OPERATING REVENUES. Other sources of revenues increased by
$41,000 to $197,000 for the three month period ended March 31, 1997, compared
to the same period in 1996. Other operating revenues are primarily derived
from the sale of programs, parking and admission fees relating to
Mountaineer's racing activities and periodic boxing and concert events.
Costs and Expenses
Operating costs and gross profit earned from operations for the three
month periods ended March 31, 1997 and 1996 are as follows:
Three Months Ended
March 31
1997 1996
---- ----
Operating Costs:
Video lottery operations $ 6,398,000 $ 3,945,000
Pari-mutuel commissions 1,282,000 1,136,000
Lodging, food and beverage 837,000 681,000
Other revenues 283,000 216,000
------------- ------------
Total Operating Costs $ 8,800,000 $ 5,978,000
------------- ------------
------------- ------------
Gross Profit (Loss):
Video lottery operations $ 3,655,000 $ 1,813,000
Pari-mutuel commissions (233,000) (128,000)
Lodging, food and beverage 106,000 (29,000)
Other revenues (86,000) (60,000)
------------- ------------
Total Gross Profit $ 3,442,000 $ 1,596,000
------------- ------------
------------- ------------
Mountaineer's 62% increase in revenues resulting from the expanded scope
of entertainment offerings resulted in higher total costs, as expenses
increased by 47% to $8.8 million in the first quarter of 1997. Gross
profit from the Company's four profit centers more than doubled from $1.6
million for the first quarter of 1996 to $3.4 million for the same period in
1997.
VIDEO LOTTERY OPERATIONS. Costs of VLTs increased by $2.5 million, or
62%, to $6.4 million for the three months ended March 31, 1997, reflecting
the increase in statutory expenses directly related to the 75% increase in
video lottery revenues. Such expenses accounted for $2.4 million of the
total cost increase.
After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer is obligated to make payments from the remaining video lottery
revenues to certain funds administered by the West Virginia Lottery
Commission as follows: State Tax 30%, Horsemen's Purse Fund 15.5% Tourism
Promotion 3%, Hancock County Tax 2%, Stakes Races 1%, Veterans Memorial 1%,
and Employee Pension Fund 0.5%. Assessments paid to the Employee Pension
Fund are returned by the Lottery Commission to a defined contribution pension
plan administered by Mountaineer Park, Inc. for the sole benefit of
Mountaineer Park, Inc. employees. Assessments paid to the Horsemen's Purse
Fund are returned by the Lottery Commission to bank accounts administered by
Mountaineer for the sole benefit of horse owners who race at Mountaineer.
These funds are used exclusively to pay purses for thoroughbred races run at
Mountaineer, in amounts determined by Mountaineer in accordance with its
agreement with the Horsemen's Benevolent and Protective Association. Taxes
and assessments paid to all of these funds are included in "Cost of Video
Lottery Terminals" in the Consolidated Statement of Operations. Statutory
costs and assessments, including the State Administrative Fee, for the
respective three months period are as follows:
13
<PAGE>
Three Months Ended
March 31
1997 1996
---- ----
Employee Pension Fund $ 48,000 $ 28,000
Horsemen's Purse Fund 1,496,000 857,000
------------- ------------
Subtotal $ 1,544,000 $ 885,000
State of West Virginia 3,296,000 1,888,000
Tourism Promotion Fund 290,000 166,000
Hancock County 193,000 111,000
Stakes Races 97,000 55,000
Veteran's Memorial 97,000 55,000
------------- ------------
$ 5,517,000 $ 3,160,000
------------- ------------
------------- ------------
The remaining significant expenses incurred by video lottery operations
consist of VLT lease expense ($320,000 in the first quarter of 1997 compared
to $377,000 in 1996), direct and indirect wages and employee benefits
($391,000 in 1997 compared to $228,000 in the first quarter of 1996), and
utilities, property tax and insurance ($154,000 in 1997 versus $132,000 in
1996).
In March, 1997 the Company purchased 400 new Slot Terminals and retired
200 leased Card Terminals. VLT lease expense will decline from approximately
$108,000 per month in the first quarter of 1997 to approximately $80,000 per
month for the remainder of the lease term. Wages and benefits expense
increased from 1996 to 1997 in response to higher levels of patron play;
Management believes these costs will experience a moderate increase from the
levels experienced in the first quarter of 1997 due to the increase from 800
VLTs to 1000 VLTs in March, 1997 and anticipated growth in patron volume.
PARIMUTUEL COMMISSIONS. Costs of parimutuel commissions increased by
$146,000, or 13%, from $1.1 million in the first quarter of 1996 to $1.3
million in the first quarter of 1997. Totalisator and other lease expenses
remained stable at approximately $115,000 in the first quarters of 1997 and
1996. Wages and benefits relating to the Company's racing operations
increased by $120,000, or 25%, to $649,000 in the three months ended March
1997 compared to the prior period, largely as a result of conducting 50 live
race performances in 1997 compared to only 44 in the first quarter of 1996.
Mountaineer's labor agreement with approximately 50 mutuel and 9 video
lottery employees has been extended to September 26, 1997. There can be no
assurances that a new labor agreement will be finalized prior to the
expiration of this extended term.
FOOD, BEVERAGE AND LODGING OPERATIONS. Operating costs of the Company's
lodging, food and beverage operations increased by 23% from $681,000 in the
first quarter of 1996 to $837,000 in the first three months of 1997, compared
to a 45% increase in revenues from $652,000 to $943,000 during the same
periods. Direct expenses of the Company's food and beverage operations
increased from $449,000 in the first three months of 1996 to $580,000 during
the corresponding period in 1997. The food and beverage operation earned a
gross profit of $103,000 in the first three months of 1997, compared to
$13,000 in 1996 as higher revenues more fully absorbed the operation's fixed
costs. Lodging direct costs totaled $257,000 for the three months ended
March 31, 1997, compared to $232,000 in 1996. Lodging operations achieved a
gross profit of $3,000 in the 1997 period, compared to a $42,000 loss in the
first three months of 1996.
14
<PAGE>
COST OF OTHER OPERATING REVENUES. Costs of other revenues increased by
$67,000 from $216,000 for the three months ended March 31, 1996 to $283,000
for the three months ended March 31, 1997 compared to the same period in
1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $83,000 to $1.1 million, or 9%, from $1.0 million for
the three month periods ended March 31, 1997 and 1996, respectively.
Management's efforts to reduce the cost of corporate overhead continued to
yield beneficial results, as corporate general and administrative expenses
declined from $395,000 in the first quarter of 1996 to $367,000 in the
corresponding period of 1997, a level 20% below the $458,000 posted in the
first quarter of 1995. General and administrative expenses at Mountaineer
increased slightly from first quarter 1995 levels of $677,000, to $712,000 in
the first quarter of 1997. Management expects Mountaineer's general and
administrative expenses to increase more significantly than this $35,000
increase experienced from 1995 to 1997 due to the greatly expanded scope of
Mountaineer's operations and the assumption of various corporate
responsibilities.
MARKETING AND PROMOTIONS EXPENSE. Marketing expenses of the Company's
Mountaineer operation increased from $202,000 in the first three months of
1996 to $578,000 in the first quarter of 1997, as management embarked on an
aggressive regional marketing campaign centered around its 30-minute
infomercial broadcasts throughout portions of a two hour driving radius of
Mountaineer. Marketing and promotions expense in the first quarter of 1997
are net of approximately $169,000 to be refunded to Mountaineer under the
auspices of a state grant to a convention and visitors bureau of which
Mountaineer is a member. Management expects to qualify for an additional
$161,000 in grant refunds in the second quarter of 1997. Patron inquiries
from the infomercial are being compiled into a relational database for use in
future direct mail marketing campaigns. Management is currently analyzing
the potential benefits to be earned from the installation of player tracking
software in its video lottery terminals, to enhance its direct mail targeting
capabilities. The cost of the software, if purchased, is expected to exceed
$500,000.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses remained relatively constant for the first quarters of 1996 and
1997, declining slightly to $451,000 in the latter period. Management
expects depreciation expenses to increase in subsequent quarters as new
capital improvements are placed into service, most notably a $3.1 million
purchase of video lottery terminals which became operational in March 1997.
CASH FLOWS
The Company's operations produced $425,000 of cash flow in the three
months ended March 31, 1997, compared to $797,000 produced in the first three
months of 1996. Current year noncash expenses include $451,000 for
depreciation and amortization and $533,000 for the amortization of deferred
financing costs as interest expense.
The Company invested $1.6 million for continued expansion and
development of its properties at Mountaineer in the first three months of
1997, compared to a $334,000 investment in the first three months of 1996.
Also in the first quarter of 1997, the Company settled certain common stock
price guarantees relating to the 1992 acquisition of Mountaineer via a
$105,000 cash payment and issuance of 100,000 shares of common stock.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $558,000 at March 31,
1997, and its unrestricted cash balance amounted to $2,868,000. The March
31, 1997 accounts payable balance includes $2.3 million due on June 18, 1997
relating to the purchase of 400 new video Slot
15
<PAGE>
Terminals in March. The Company paid a $794,000 downpayment in connection
with this purchase in March, when 200 leased video Card Terminals were
retired, reducing future monthly lease payments from $119,000 to $100,000
until the lease maturity in January 1999. There are several conditions and
opportunities contemplated at the present time which have bearing on the
Company's near and long-term capital needs:
FINANCING. The Company repaid its 1994 $10.2 million construction
loan in December 1996, from the proceeds of new term debt financing totaling
$16.1 million. 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 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. 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. 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.
In connection with the December 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 March 31, 1997. Line
proceeds may be used, with prior lender approval, for purposes of capital
improvements and equipment purchases, gaming industry acquisitions or general
corporate purposes.
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer facility including approximately doubling its
hotel room capacity and constructing a regional convention center.
Management intends to finance any expansion program that it executes of this
magnitude.
Management is also contemplating the respective benefits and costs of
installing a point of sale computerized player tracking system in its video
Slot Terminal network. The cost of the system, if purchased, is expected to
exceed $500,000.
INCREASE IN AUTHORIZED NUMBER OF SHARES. On October 11, 1996, a
proposal was adopted at the 1995 Annual Shareholders Meeting to amend the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock from 25,000,000 to 50,000,000. The
purpose of this amendment is to provide a sufficient number of shares for the
Company to honor its obligation to issue shares of common stock under various
agreements and to be used for corporate purposes in the future. While the
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.
ACQUISITIONS. 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
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 supplying the required due diligence materials, by
letter dated April 4, 1997, the Company terminated the transaction.
16
<PAGE>
DEFERRED INCOME TAX BENEFIT. Management believes that the substantial
and steady revenue increases earned in the past three years will continue,
and ultimately occur in amounts which will allow the Company to utilize its
$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 3 in Notes
to Condensed and Consolidated Financial Statements.
ADVERTISING SUBSIDY. In October 1996, a not-for-profit convention and
visitors bureau of which Mountaineer Park is a member received approval of a
marketing grant application from the West Virginia Division of Tourism.
Under the terms of the grant, Mountaineer will be reimbursed for up to
$330,000 of advertising expenses incurred as part of Mountaineer's
infomercial advertising campaign to be broadcast in the first half of 1997.
A partial refund of $169,000 was received in May 1997.
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. 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.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Form 10-K for the year ended
December 31, 1996.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended (1)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation, filed as of October 18, 1996 (2)
3.3 By-Laws of the Company (1)
4.1 Warrant Certificate No. 9 issued to Madeleine L.L.C., dated July
2, 1996, to purchase 125,549 shares of common stock of MTR Gaming
Group, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
4.2 Warrant Certificate No. 10 issued to Madeleine L.L.C., dated July
2, 1996, to purchase 125,549 shares of common stock of MTR Gaming
Group, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
4.3 Warrant Certificate No. 19 issued to Madeleine L.L.C., dated July
2, 1996, to purchase 839,734 shares of common stock of MTR Gaming
Group, Inc. at $1.06 per share for five years commencing July 2,
1996 (3)
4.4 Warrant Certificate No. 20 issued to Brownstone Holdings, L.L.C.,
dated July 2, 1996, to purchase 373,215 shares of common stock of
MTR Gaming Group, Inc. at $1.06 per share for five years
commencing July 2, 1996 (3)
4.5 Warrant Certificate No. 21 issued to Capital One, Inc., dated
July 2, 1996, to purchase 279,911 shares of common stock of MTR
Gaming Group, Inc. at $1.06 per share for five years commencing
July 2, 1996 (3)
10.1 Employment Agreement, dated March 1, 1997, between MTR Gaming
Group, Inc. and Edson R. Arneault.
27 Financial Data Schedule
18
<PAGE>
FOOTNOTES
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on
Form 8-K, dated October 18, 1996, filed November 1, 1996.
(3) Except as herein described, such warrant certificate is
substantially identical to Warrant Certificate No. 1, dated July
2, 1996, issued by the Company to Madeleine L.L.C. Warrant
Certificate No. 1 is incorporated by reference from Exhibit 4(1)
of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the first
quarter of 1997 and thereafter:
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 (i) 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 of January and February 1997, and (iii) the
relocation of the Company's headquarters to West Virginia. SIGNATURES
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MTR GAMING GROUP, INC.
----------------------
(Company)
/s/ Edson R. Arneault May 14, 1997
- -----------------------------
Edson R. Arneault
President and Chief Executive Officer
/s/ Thomas K. Russell May 14, 1997
- -----------------------------
Thomas K. Russell
Secretary, Treasurer and Chief Financial Officer
/s/ Robert L. Ruben May 14, 1997
- -----------------------------
Robert L. Ruben
Director
/s/ Robert A. Blatt May 14, 1997
- -----------------------------
Robert A. Blatt
Director
20
<PAGE>
EMPLOYMENT AGREEMENT EXHIBIT 10.1
AGREEMENT made this lst day of March, 1997, by and between MTR Gaming
Group, Inc., a Delaware corporation having its principal office at State Route
2 South, Chester, West Virginia 26034, (the "Company"), and Edson R. Arneault,
7400 Biscayne Way Southeast, Grand Rapids, Michigan 49456 ("Executive").
Whereas, the Executive has been employed by the Company in the capacity of
President of the Company's wholly owned subsidiary, ExCal Energy Corporation,
and Vice President in Charge of Political Relations for the Company pursuant to
an Employment Agreement between the Company and the Executive dated May 10,
1994 (the "May 10 Agreement"); and
Whereas, the Executive has as of April 26, 1995 assumed the office of
President of the Company and its Mountaineer Park, Inc. subsidiary; and
Whereas, the parties wish to replace the May 10 Agreement by entering into
an agreement reflecting the present status of the Executive's employment
relationship to the Company;
Now, Therefore, the parties, in reliance upon the mutual promises and
covenants herein contained, do hereby agree as follows:
1. TERMINATION OF MAY 10 AGREEMENT. Upon execution and delivery of this
Agreement, the May 10 Agreement as well as any other prior written or oral
agreements with respect to employment shall terminate and be replaced by this
Agreement, upon which event neither party to the May 10 Agreement or any other
prior written or oral agreements with respect to employment shall have any
further rights or obligations thereunder.
2. TERM. The Company hereby agrees to employ Executive, and Executive
agrees to serve the Company, in the capacity of an executive officer of the
Company for a three year period commencing on March 1, 1997, (the "Employment
Date") and ending on March 1, 2000 (such period, subject to earlier termination
as provided herein, being referred to as the "Period of Employment").
3. DUTIES AND SERVICES. During the Period of Employment, Executive
agrees to serve the Company as President, Chief Executive Officer, and
Chairman, as well as President, Chief Executive Officer, and Chairman of
Mountaineer Park, Inc., and in such other offices and directorships of the
Company and of its subsidiaries and related companies (collectively,
"Affiliates") to which he may be elected or appointed, and to perform such
other reasonable and appropriate duties as may be requested of him by the board
of directors of the Company (the "Board of Directors"), in accordance with the
terms herein set forth. In performance of his duties, Executive shall be
subject to the direction of the Board of Directors. Excluding periods of
vacation and sick leave to which Executive is entitled, Executive shall devote
his full time, energy and skill during regular business hours to the business
and affairs of the Company and its affiliates and to the promotion of their
interests.
<PAGE>
4. COMPENSATION.
(a) BASE SALARY. The base salary of the Executive for his services
pursuant to the terms of this Agreement shall be $315,000 per year, payable in
equal monthly installments, or on such other terms as may mutually be agreed
upon by the Company and Executive. Executive's base salary shall be subject to
an automatic cost-of-living increase of five percent (5%) on each anniversary
of this Agreement, and shall be subject to period increase by the Compensation
Committee of the Board of Directors in its discretion.
(b) BONUS. Executive shall be entitled to such bonuses and other
benefits, such as stock or stock option awards, as the Compensation Committee
of the Board of Directors may periodically award in its discretion based on the
Executive's performance.
(c) HEALTH INSURANCE. Executive shall be entitled at his election
but at the Company's expense, either to participate in and receive benefits
under policies of health insurance maintained by the Company for its employees
or reimbursement for premiums paid by the Executive for comparable health
insurance.
(d) BENEFIT PLANS AND FRINGE BENEFITS. Executive shall receive such
employment fringe benefits and shall be entitled to participate in other
employee benefit plans, including without limitation any pension plan, profit-
sharing plan, savings plan, deferred compensation plan, stock option plan, life
insurance made available by the Company now or in the future to its executives
as the Compensation Committee of the Board of Directors may periodically award
in its discretion based on the Executive's performance, subject to and on a
basis consistent with the terms, conditions and overall administration of such
Benefit Plans.
(e) EXPENSES. All travel and other expenses incident to the
rendering of services by Executive hereunder shall be paid by the Company. If
any such expenses are paid in the first instance by Executive, the Company
shall reimburse him therefor on presentation of the appropriate documentation
required by the Internal Revenue Code of 1986, as amended (the "Code"), or
Treasury Regulations promulgated thereunder, or otherwise required under the
Company's policy with respect to such expenses. The Company recognizes that
the Executive and pursuant to prior Agreement has his principal office at 7199
Thornapple River Drive in Ada, Michigan and will frequently be required to
travel outside that area.
(f) VACATION. Executive shall be entitled to four (4) weeks paid
vacation to be taken at time or times mutually satisfactory to Executive and
the Company. Accrued vacation time not utilized by Executive due to business
commitments may be carried over the following year or paid to Executive at the
end of the year as additional compensation at Executive's election.
(g) WORKING FACILITIES. The Company shall provide Executive with an
office, secretarial, administrative and other assistance, and such other
facilities and services as shall be suitable to his position and
<PAGE>
appropriate for the performance of his duties. All such Working Facilities
shall be provided at the Company's corporate headquarters.
5. EARLY TERMINATION.
(a) Notwithstanding the provisions of Section 2 hereof, Executive
may be discharged by the Company for Cause (as defined in Section 5(d) hereof),
in which event the Period of Employment hereunder shall cease and terminate and
the Company shall have no further obligations or duties under this Agreement,
except for obligations accrued under Section 4 at the date of termination. In
addition, the Period of Employment shall cease and terminate upon the earliest
to occur of the following events: (i) the death of Executive or (ii) at the
election of the Board of Directors (subject to the Americans With Disabilities
Act), the inability of Executive by reason of physical or mental disability to
continue the proper performance of his duties hereunder for a period of 180
consecutive days. Upon termination of the Period of Employment pursuant to the
preceding sentence, the Company shall continue to pay to Executive or his
estate, as the case may be, the entire compensation otherwise payable to him
under Section 4(a) hereof for two years. (b) In the event Executive is
discharged by the Company other than for Cause (as defined in Section 5(d)
hereof) or other than pursuant to Section 5(a) hereof by reason of physical or
mental disability, Executive shall have no further obligations or duties under
this Agreement; provided, however, that Executive shall continue to be bound by
the provisions of Section 6 hereof if the Company performs its obligations
under this Section 5(b). In the event of termination of the Period of
Employment pursuant to the preceding sentence, the Company shall continue to
pay Executive the entire compensation otherwise payable to him under the
provisions of Section 4 hereof for the otherwise remaining Period of Employment
without any duty on the part of Executive to mitigate such payments; provided,
however, that if Executive should die prior to the end of such period, the
provisions of Section 5(a) hereof shall be applicable as though Executive's
employment hereunder had not been so terminated.
(c) Notwithstanding Section 5(b) hereof, in the event that there is
a Change in Control (as defined in Section 5(f) hereof), Executive shall have
no further obligations or duties under this Agreement; provided, however, that
Executive shall continue to be bound by the provisions of Section 6 hereof if
the Company performs its obligations under this Section 5(c). In the event of
termination of the Period of Employment pursuant to the preceding sentence, the
Company shall, in addition to paying the obligations accrued under Section 4 at
the date of termination, pay Executive, within 30 days of such termination, a
cash severance payment, with no duty by Executive to mitigate such payment, in
an amount equal to three times the annual base salary payable to Executive
under Section 4(a) on the day before such termination, but not to exceed the
amount that is deductible by the Company under the provisions of Code Section
280(G).
(d) For purposes of this Section 5, the term "Cause" shall mean (i)
conviction of a felony, (ii) embezzlement or misappropriation of funds or
property of the Company or any of its Affiliates, (iii) Executive's consistent
refusal to substantially perform, or willful misconduct in the substantial
performance of, his duties and obligations hereunder; or (iv) Executive's
<PAGE>
engaging in activity that the Board of Directors determines in its reasonable
judgment would result in the suspension or revocation of any video lottery,
parimutuel, or other gaming license or permit held by the Company or any of its
subsidiaries.
(e) For purposes of this Section 5, the term "Good Reason" shall
mean (i) the assignment to Executive of any duties or responsibilities which in
the reasonable judgment of Executive are inconsistent in any respect with
Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by Section
3, or any other action by the Company which in the reasonable judgment of
Executive results in a substantial diminishment in such position, authority,
duties or responsibilities; (ii) the Company's requiring relocation of
Executive, without his prior written consent, to a place of employment other
than Ada, Michigan, except for travel reasonably required in the performance of
Executive's responsibilities (it being understood that the Company's obligation
to provide Working Facilities only at its corporate headquarters shall not
constitute relocation for purposes of determining Good Reason); or (iii) the
Company's failure to substantially comply with the provisions of Section 4 of
this Agreement,
(f) For purposes of this Section 5, the term "Change in Control"
shall mean: (i) a change in control of a nature that would be required to be
reported in response to Item 6(c) of Schedule 14A, as in effect on the date
hereof, under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); (ii) any person, including a "group" as such term used in Section
13(d)(3) of the Exchange Act, becoming the beneficial owner, directly or
indirectly, of 20% or more of the combined voting power of the Company's
outstanding voting securities other than a person who was an officer or
director of the Company on the date of this Agreement; or (iii) individuals
who, as of the date hereof, constitute the Board of Directors ceasing for any
reason to constitute at least a majority of the Board of Directors.
(g) Upon the termination of the Executive's Period of Employment
pursuant to Section 2 or Section 5 hereof, the Executive shall have the right
to purchase from the Company the furnishings in the Executive's office for its
then depreciated book value.
6. CONFIDENTIALITY AND NON-COMPETITION:
(a) The Company and Executive acknowledge that the services to be
performed by Executive under this Agreement are unique and extraordinary and,
as a result of such employment, Executive will be in possession of confidential
information and trade secrets (collectively, "Confidential Material") relating
to the business practices of the Company and its affiliates. Executive agrees
that he will not, directly or indirectly, (i) disclose to any other person or
entity either during or after his employment by the Company or (ii) use, except
during his employment by the Company in the business and for the benefit of the
Company or any of its affiliates, any Confidential Material acquired by
Executive during his employment by the Company, without the prior written
consent of the Company or otherwise than as required by law or any rule or
regulation of any federal or state authority. Upon termination of his
employment with the Company for any reason, Executive
<PAGE>
agrees to return to the Company all tangible manifestations of Confidential
Materials and all copies thereof. All programs, ideas, strategies
approaches, practices or inventions created, developed, obtained or conceived
of by Executive prior to or during the term of his engagement by the Company,
shall be owned by and belong exclusively to the Company, provided that they
are related in any manner to its business or that of any of its Affiliates.
Executive shall (i) promptly disclose all such programs, ideas, strategies,
approaches, practices, inventions or business opportunities to the Company,
and (ii) execute and deliver to the Company, without additional compensation,
such instruments as the Company may require from time to time to evidence its
ownership of any such items.
(a) NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be made in writing and shall be
delivered in person, by facsimile transmission or mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
parties at the address stated above or to such other address as either party
shall have furnished in writing in accordance with this Section. Such
notices or communications shall be effective upon delivery if delivered in
person or by facsimile and either upon actual receipt or three (3) days
after mailing, whichever is earlier, if delivered by mail.
(b) PARTIES IN INTEREST. This Agreement shall be binding upon and
inure to the benefit of Executive, and it shall be binding upon and inure to
the benefit of the Company and any corporation succeeding to all or
substantially all of the business and assets of the Company by merger,
consolidation, purchase of assets or otherwise.
(c) ARBITRATION. Any disputes arising under the terms of this
Agreement shall be settled by binding arbitration between the parties in
Hancock County, West Virginia in a proceeding held under the rules of the
American Arbitration Association. In such proceeding, each party shall choose
one arbitrator and the two so chosen shall choose a third arbitrator. The vote
of two of the arbitrators shall be sufficient to determine an award.
(d) ENTIRE AGREEMENT. The May 10 Agreement having been canceled as
of the date of this Agreement, this Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Executive by the Company and contains all of the covenants
and agreements between the parties with respect to such employment in any
manner whatsoever. Any modification of this Agreement will be effective only
if it is in writing signed by the party to be charged.
(e) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to the choice of law or conflicts of laws rules and laws of such
jurisdiction.
(f) SEVERABILITY. In the event that any term or condition contained
in this Agreement shall for any reason be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
condition of this Agreement, but this Agreement shall be construed as
<PAGE>
if such invalid or illegal or unenforceable term or condition had never been
contained herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MTR GAMING GROUP, INC.
/S/ EDSON R. ARNEAULT By:/S/ THOMAS K. RUSSELL
- ------------------------------------------------------------------------------
Edson R. Arneault Thomas K. Russell, Secretary
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<PAGE>
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<PERIOD-START> JAN-01-1997
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