As filed with the Securities and Exchange Commission on November 7, 1997
Registration No. 333-12839
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST EFFECTIVE AMENDMENT NO. 1
to the
REGISTRATION STATEMENT
on
FORM S-1
Under
THE SECURITIES ACT OF 1933
--------------------
MTR GAMING GROUP, INC.
(formerly known as Winners Entertainment, Inc.)
(Exact name of Company as Specified in its Charter)
Delaware 7993 84-1103135
----------------------- --------- ------------
(State or other jurisdiction (Primary (I.R.S. Employer
of incorporation or organi- SIC Code Identification
zation) Number) Number)
State Route 2 South
Chester, West Virginia
(304) 387-2167
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Edson R. Arneault
MTR GAMING GROUP, INC.
State Route 2 South
Chester, West Virginia 26034
(304) 387-5712
(Name, Address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Kenneth Zuckerbrot, Esq. David S. Guin, Esq.
Ross & Hardies Ross & Hardies
65 East 55th Street 150 North Michigan Avenue
New York, New York 10022 Suite 2500
Chicago, Illinois 60601
Approximate date of commencement of proposed sale to public: As soon as
practicable after this post effective amendment no. 1 to the registration
statement becomes effective.
<PAGE>
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Company hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Company shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
MTR GAMING GROUP, INC.
CROSS REFERENCE SHEET
Forepart of Registration Statement and Forepart of Registration
Outside Front Cover Page of Prospectus Statement and Outside Front
Cover Page of Prospectus
Inside Front and Outside Back Cover Pages Available Information; Outside
of Prospectus Back Cover Page of Prospectus
Summary Information, Risk Factors and Prospectus Summary; Summary
Ratio of Earnings to Fixed Charges Consolidated Financial and
Operating Data; Risk Factors
Use of Proceeds Use of Proceeds
Determination of Offering Price Not Applicable
Dilution Not Applicable
Selling Security Holders Selling Stockholders
Plan of Distribution Plan of Distribution
Description of Securities to be Description of Securities
Registered
Interests of Named Experts and Counsel Legal Matters; Experts
Information with Respect to the Business; Management; Price
Registrant Range of Common Stock;
Dividend Policy; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Executive Compensation;
Principal Stockholders;
Certain Transactions;
Consolidated and Interim
Financial Statements
Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act
Liabilities
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS
MTR GAMING GROUP, INC.
Warrants to purchase 889,734 shares
of Common Stock, par value $.00001 per share
992,787 shares of Common Stock, par value $.00001 per share
The registration statement (the "Registration Statement"), of which
this Prospectus forms a part, registers the offer and sale by certain
stockholders (the "Selling Stockholders") of MTR Gaming Group, Inc. ("MTR" or
the "Company"), formerly known as Winners Entertainment, Inc., of (i) warrants
to purchase up to an aggregate of 839,734 shares of common stock, par value
$.00001 per share (the "Common Stock") of the Company at a price of $1.06 per
share, subject to adjustment (the "$1.06 Warrants"); (ii) warrants to purchase
up to an aggregate of 50,000 shares of Common Stock at a price of $0.80 per
share, subject to adjustment (the "$.80 Warrants"); and (iii) 992,787 shares of
Common Stock. The $1.06 Warrants and the $0.80 Warrants are collectively
referred to herein as the "Warrants." Of the 992,787 shares of Common Stock
registered herein, 103,053 shares are currently outstanding and held by the
Selling Stockholders and 889,734 shares are issuable upon the exercise of the
Warrants held by the Selling Stockholders. The Selling Stockholders acquired the
outstanding shares of Common Stock and the Warrants offered hereby directly from
the Company in connection with a bridge loan agreement and a separate secured
working capital loan agreement (the "Term Loan Agreement" as hereinafter
defined) between a wholly-owned subsidiary of the Company, the Company as
guarantor and a private lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Selling Stockholders." In connection with the Term Loan Agreement, the
Company issued the private lender 183,206 shares of Common Stock and 1,492,860
Warrants to purchase shares of Common Stock. Prior to the date of the
Post-Effective Amendment of which this Prospectus forms a part, the private
lender transferred 80,153 shares of those 183,206 shares and 653,126 of those
1,492,860
<PAGE>
Warrants to two unaffiliated parties pursuant to the Registration Statement. The
Company will not receive any of the proceeds from the sale of the shares of
Common Stock and Warrants offered hereby by the Selling Stockholders. The
Warrants are exercisable through the close of business on July 2, 2001. Except
with respect to the exercise price, the $1.06 Warrants and $.80 Warrants are
identical. Assuming all of the Warrants are exercised, the Company will receive
approximately $930,118. The Company will use said proceeds for its working
capital purposes. See "Use of Proceeds."
The Common Stock is quoted on the NASDAQ SmallCap Market. On November
3, 1997, the high bid and low asked quotations of the Common Stock were $2 1/2
and $1 7/16 respectively. Prior to November 14, 1996, there had been no public
market for the Warrants. The Company does not intend to apply for listing or
quotation of the Warrants on any securities exchange or stock market and has no
contractual obligation to do so.
The Selling Stockholders may sell the securities registered herein from
time to time in transactions in the open market (including any securities
exchange or through any inter-dealer quotation system), in negotiated
transactions, or by a combination of these methods, at fixed prices that may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. The Selling Stockholders may effect these
transactions directly with the purchasers by selling the securities registered
herein to or through underwriters, agents, or broker-dealers, in each case who
may receive compensation in the form of discounts or commissions from the
Selling Stockholders or otherwise from the purchasers of such securities for
whom the underwriters, agents or broker-dealers may act as agent or to whom they
may sell as principal, or both. See "Plan of Distribution."
The Company will bear all of the expenses in connection with the
registration of the Common Stock and Warrants offered hereby, which expenses are
estimated to be 30,000. The Selling Stockholders will pay any brokerage
compensation in connection with their sale of the Common Stock and Warrants
registered herein.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" WHICH COMMENCES ON PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 6, 1997.
- ii -
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and copies of such material can be obtained from
the Public Reference Section of the Commission in Washington, D.C., at
prescribed rates and the Commission's EDGAR database which is on the internet at
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form S-1 (the "Registration Statement") pursuant to the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus (the "Prospectus") does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to the Registration
Statement, and exhibits and schedules thereto.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offering herein contained and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the facts herein set forth since the date hereof.
- iii -
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................8
USE OF PROCEEDS..............................................................15
DIVIDEND POLICY..............................................................15
CAPITALIZATION...............................................................17
PRICE RANGE OF COMMON STOCK..................................................17
SELECTED FINANCIAL DATA......................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................19
BUSINESS ....................................................................41
MANAGEMENT...................................................................64
EXECUTIVE COMPENSATION.......................................................65
CERTAIN TRANSACTIONS.........................................................72
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................77
SELLING STOCKHOLDERS.........................................................79
PLAN OF DISTRIBUTION.........................................................81
DESCRIPTION OF SECURITIES....................................................83
SHARES ELIGIBLE FOR FUTURE SALE..............................................92
DESCRIPTION OF CERTAIN INDEBTEDNESS..........................................95
LEGAL MATTERS................................................................96
EXPERTS......................................................................97
INDEX TO FINANCIAL STATEMENTS...............................................F-1
- iv -
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in the body
of this Prospectus and should be read in conjunction with the detailed
information and financial statements appearing elsewhere herein.
THE COMPANY
The Company, through wholly-owned subsidiaries, owns and operates
Mountaineer Race Track and Gaming Resort ("Mountaineer Park"), 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 merged with
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 of
reorganization authorized the Company to acquire, primarily, specified gaming
and oil and gas businesses. Upon confirmation of the plan of reorganization, 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.
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. ("Mountaineer"), 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.
<PAGE>
Racetrack Facilities
Mountaineer Park offers live horse racing before clubhouse and
grandstand viewing areas with enclosed seating for year-round racing. The track
also conducts simulcast (closed circuit television) thoroughbred horse and
greyhound dog racing from other prominent racetracks around the country.
Mountaineer Park'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
a restaurant and sandwich bar located in the clubhouse and grandstand
respectively. The grandstand building also houses the Hollywood Grande Buffet
which provides customers with low-cost meals featuring a variety of foods from
breakfast foods to prime rib and seats 120. In October 1997 Mountaineer
converted a 2,400 square foot area of the Clubhouse into a glass- enclosed
meeting room which will accommodate approximately 200 people. In addition to
seating areas, the grandstand covers approximately 57,000 square feet of
interior space on the main and mezzanine levels containing 42 parimutuel windows
and food and beverage concession stands. The clubhouse covers approximately
25,000 square feet of interior space containing 22 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. Mountaineer's racetrack parking lots have a
combined capacity for over 2,900 vehicles.
Lodge Facilities
The Mountaineer Lodge (the "Lodge") is a two-story facility which
overlooks the par three, nine hole "executive" golf course near Mountaineer
Park's main entrance on West Virginia State Route 2. The Lodge offers 101 rooms,
including 50 standard rooms (one double bed), 46 superior rooms (two double
beds), and five king rooms and suites. The Mountaineer Lodge Dining Room seats
125 patrons for casual dining overlooking the golf course and an additional 68
patrons may be seated on an outside deck, 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, the Company expanded its 5,000
square foot Speakeasy Gaming Saloon with an 8,000 square foot addition. The
- 2 -
<PAGE>
capacity of the Speakeasy Gaming Saloon now stands at 750. Extensive off-track
wagering facilities continue to be maintained at the Speakeasy Gaming Saloon.
The Lodge parking lots have a combined capacity for approximately 700 vehicles.
Video Lottery Facilities
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers video lottery gaming through 1,000 video lottery terminals ("VLTs")
located in the racetrack clubhouse, grandstand and Lodge. The Company purchased
and installed 400 VLTs in March of 1997 and has operating leases for the
remaining 600 VLTs. The racetrack houses 500 of the VLTs in its Riverside Gaming
Terrace on the second floors of the clubhouse and grandstand, and the Lodge
offers the remaining 500 VLTs in the Speakeasy Gaming Saloon, Derby Room and
Iron Horse Lounge. All of the VLTs allow a player to select from several game
themes, including up to four versions of draw poker, one version of blackjack
and two versions of keno.
In June of 1996, West Virginia law for the first time authorized VLT
game themes that simulate classic casino slot machines. On July 3, 1996, the
Company installed slot games on the first 350 of its VLTs. In October 1996, the
Company installed slot games on an additional 50 VLTs. In March, 1997, the
Company purchased 400 VLTs with slot games and removed 200 older VLTs. The new
slot games include Double Diamond, a classic casino slot game with cherries,
bars and items that "spin" on video reels, and the internationally popular Black
Rhino game. These new games are offered in addition to blackjack, poker and
keno.
Recreational Facilities
Mountaineer Park has 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 rates.
Trailer Park
The Company maintains a trailer park consisting of 61 individual lots
on approximately 11.5 acres located across West Virginia State Route 2 from the
Lodge and the entrance to Mountaineer Park. 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 hookups. The tenants pay all
utility expenses.
- 3 -
<PAGE>
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
State Route 2 from the Lodge and racetrack main entrance. On October 7, 1997,
Mountaineer acquired an option to purchase approximately 350 additional
contiguous acres. The option, for which Mountaineer paid $100,000, has a
duration of one year and entitles Mountaineer to purchase the property for
$600,000. Management has no current plans to develop such property.
Recent Developments
The Company announced its unaudited results of operations for the three
months ended June 30, 1997. Total revenues for the period were $15,597,000 as
compared to $8,517,000 for the three months ended June 30, 1996, which
represents a $7,080,000 or 83% increase. The Company reported net income of
$1,147,000 for the second quarter of 1997, or $.06 per share. This represents a
$1,042,000 increase from the $105,000 net income, or $.01 per share, reported
for the same period in 1996.
The Company also announced that its net win (gross wagers less payouts
to players) from video lottery operations for the second quarter of 1997
increased 107% to $12,732,000 from $6,142,000 for the second quarter of 1996, or
$138 per machine per day for the second quarter of 1997, as compared to $83 per
machine per day for the second quarter of 1996. The Company realized an increase
of $1,201,000 in operating income from $659,000 in the second quarter of 1996 to
$1,860,000 for the same period of 1997.
Total revenues for the first six months of 1997 were $27,839,000, up
$11,748,000, or 73%, from the $16,091,000 reported for the same period last
year. Net income increased to $1,448,000 or $.07 per share, for the first six
months of 1997 from a loss of $115,000, or $.01 per share, for the first six
months of 1996.
On July 2, 1996, Mountaineer negotiated a $5,000,000 secured working
capital loan agreement with a private lender (the "Term Loan Agreement"). The
Company acted as a Guarantor of this Term Loan Agreement. In connection with
this Term Loan Agreement the Company issued the lender 183,206 shares of Common
Stock, warrants to purchase 1,492,860 shares of Common Stock at $1.06 per share.
In connection with a separate $250,000 bridge loan which was repaid with the
proceeds of the $5,000,000 loan, the Company issued two other private lenders
warrants to purchase an aggregate of 50,000 shares of Common Stock at $.80 per
share. See "Management's Discussion of Financial Condition and Results of
Operations Liquidity and Capital Resources," "Selling Stockholders" and
"Description of Certain Indebtedness." Prior to the date of the Post-Effective
Amendment of which this Prospectus forms a part, the
- 4 -
<PAGE>
lender transferred 80,153 of its originally issued 183,206 shares and 653,126 of
its originally issued 1,492,806 Warrants to two unaffiliated parties pursuant to
the Registration Statement.
On December 10, 1996, Mountaineer borrowed $11.1 million pursuant to an
Amended and Restated Term Loan Agreement (the "Amended Term Loan Agreement").
This Amended Term Loan Agreement refinanced the Term Loan Agreement from the
same lender and allowed the Company to prepay the outstanding $8,711,273.16
balance of a construction loan made by Bennett Management and Development Corp.
of Syracuse, New York ("Bennett Loan"). The lender also provided Mountaineer a
$5,376,500 revolving line of credit to be used for capital improvements, the
acquisition of equipment and/or other gaming businesses, or the acquisition of
properties for use in the gaming and lottery businesses consistent with the
current business of Mountaineer Park. The Amended Term Loan Agreement is
guaranteed by the Company.
As part of the Amended Term Loan Agreement, the Company agreed to issue
the lender, over a period of thirteen months, an additional 550,000 shares of
the Company's Common Stock and warrants to purchase 1,632,140 shares of Common
Stock for $1.06 per share and paid Bridge Capital, LLC $100,000.
The warrants issued in connection with the Amended Term Loan Agreement,
as well as the warrants issued to the lenders in connection with the Term Loan
Agreement (which are being offered pursuant to this Prospectus), are entitled to
protection from dilution in certain circumstances. The Company agreed to
register the shares of Common Stock and warrants for public sale pursuant to the
terms of the warrants and the Registration Rights Agreement entered July 2,
1996. Amendment No. 1 to Registration Rights Agreement, which was entered in
connection with the Amended Term Loan Agreement, limits the lender's right to
demand registration to once per calendar year absent default by Mountaineer Park
or the Company, prepayment of the loan, or a change in control of the Company.
This Post-Effective Amendment is being filed to preserve the
effectiveness of the Registration Statement filed by the Company based on its
agreement to register the Common Stock and Warrants issued in connection with
the Term Loan Agreement, subject to cash penalties if it had not been declared
effective before seven and nine months from the date of the Term Loan Agreement.
Effective July 2, 1997, Mountaineer Park, the Company, and the private
lender further amended and restated the Amended Term Loan Agreement. The July 2,
1997, Second Amended and Restated Term Loan Agreement (the "Second Amended Term
Loan Agreement") (i) extended the term of the Amended Term Loan Agreement to
July 2, 2001 (compared to July 2, 1999); (ii) increased the total amount
borrowed to $21,476,500 (by virtue of Mountaineer drawing down the
- 5 -
<PAGE>
line of credit); (iii) eliminated certain fees that would have been due on each
anniversary of the Amended Term Loan Agreement; and (iv) called for payments of
interest only with the principal due at the end of the four year term.
The Second Amended Term Loan Agreement continues to be evidenced by
Mountaineer's Promissory Notes and continues to be secured by a first priority
Credit Line Deed of Trust with respect to Mountaineer's real property and a
perfected security interest evidenced by a UCC-1 Financing Statement with
respect to its personal property. The lender's rights pursuant to the Amended
Term Loan Agreement with respect to the 550,000 shares of the Company's stock
and warrants to purchase 1,632,140 additional shares issued thereunder are
unaffected by the Second Amended Term Loan Agreement. The Company continues to
guarantee the Second Amended Term Loan Agreement.
As consideration for the lender's entering the Second Amended Term Loan
Agreement, Mountaineer has agreed (i) to pay a one time fee of $1.8 million or
8.5% of the total amount borrowed, which may be paid over the first year of the
term; (ii) to pay interest at the rate of 13% (compared to 12% on the $16.1
million Amended Term Loan Agreement and 15% on the $5.4 million line of credit
under the Amended Term Loan Agreement); and (iii) to pay a call premium equal to
5% in the event of prepayment during the first year of the term, declining to 3%
during the second year, 2% in the third year, and 1% in the final year.
Mountaineer intends to use the additional proceeds toward the
construction of a convention facility and additional hotel rooms.
MTR, a Delaware corporation, was incorporated in 1988. The
Company's executive offices are located at State Route 2 South,
Chester, West Virginia 26034, Telephone: (304) 387-5712.
- 6 -
<PAGE>
The Offering
Securities Offered......... This Prospectus relates to an
offering by the Selling Stockholders
of (i) 889,734 Warrants, which, when
exercised, would entitle the holders
thereof to purchase, in the
aggregate 889,734 shares of Common
Stock, (ii) 889,734 shares of Common
Stock issuable upon exercise of the
Warrants, and (iii) 103,053 shares
of Common Stock which are
outstanding and held by the Selling
Stockholders. The Warrants and the
outstanding shares of Common Stock
were issued to the Selling Stock-
holders in a private transaction in
connection with the Term Loan Agree-
ment dated as of July 2, 1996
between a wholly-owned subsidiary of
the Company and one of the Selling
Stockholders. See "Selling
Stockholders."
Securities Outstanding..... As of October 14, 1997, the Company
had 19,814,291 shares of Common
Stock outstanding. Assuming that
all of the Warrants are exercised
and no other shares of Common Stock
are issued subsequent to October 14,
1997, the Company would have
20,704,025 shares of Common Stock
outstanding.
Use of Proceeds............ The Company will not receive any
proceeds from the sale of the
Warrants or the shares of Common
Stock offered by the Selling
Stockholders. To date, none of the
Warrants have been exercised. If
all of the Warrants are exercised,
the Company will receive estimated
additional net proceeds of $930,118.
The Company intends to utilize any
proceeds received from the exercise
of the Warrants as working capital.
There can be no assurance that any
of the Warrants will be exercised.
See "Use of Proceeds."
Risk Factors............... See "Risk Factors" for a discussion
of certain risk factors that should
- 7 -
<PAGE>
be considered by prospective
investors in connection with an
investment in the securities offered
hereby.
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. They should not be purchased by anyone who cannot afford the loss of his
or her entire investment. In analyzing this offering, prospective investors
should consider the following risk factors, as well as other information
contained in this Prospectus before making an investment in such securities.
Information contained in this Prospectus contains "forward-looking statements"
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends," or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The following
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
anticipated results indicated in such forward-looking statements. Other factors
could also cause actual results to vary materially from the future results
indicated in such forward-looking statements.
History of Losses. The Company has incurred operating and net losses from
its inception through the first quarter of 1996. Although the Company has
experienced revenue growth in recent periods and has operated at a profit since
the second quarter of 1996, such growth and profitability may not be sustainable
and may not be indicative of future results. The Company's ability to increase
revenues and generate profits will depend on numerous factors, many of which are
beyond the control of the Company's management. As of June 30, 1997, the Company
had an accumulated deficit of $23,461,000. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Leverage and Debt Service. The Company has significant interest expense and
principal repayment obligations under its long term indebtedness and
substantially all of the Company's assets are pledged to secure such debt. See
"Selected Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Description of Certain Indebtedness."
The Company's ability to service its debt will be dependent on its future
performance, which will be affected by prevailing
- 8 -
<PAGE>
economic conditions and financial, business, regulatory and other factors, many
of which are beyond the Company's control. Accordingly, no assurance can be
given that the Company will maintain a level of operating cash flow that will
permit it to service its obligations and to satisfy the financial covenants in
its loan agreements. If the Company is unable to generate sufficient cash flow
or is unable to refinance or extend its outstanding indebtedness, it will have
to adopt one or more alternatives, such as reducing or delaying future expansion
and capital expenditures, selling assets, restructuring debt or obtaining
additional equity capital. There is no assurance that any of these strategies
could be effected on satisfactory terms to the Company, if at all. Moreover, the
terms and financial covenants contained in certain of the Company's debt
instruments may restrict the Company's ability to compete effectively in the
gaming market by effectively preventing expansion of the Company's facilities or
other competitively advantageous capital expenditures, which may have an adverse
effect on the Company. See "Selected Financial Data", "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Certain Indebtedness."
Gaming Regulation. The Company's business is highly regulated. The
ability of the Company to remain in business, and to operate profitably depends
upon the Company's continued ability to satisfy all applicable gaming laws and
regulations.
The Company's horse racing operations are subject to extensive
regulation by the West Virginia Racing Commission (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 (210
beginning in 1998) live race days each year. The Racing Commission granted
Mountaineer a license to conduct a minimum of 220 live race days for 1997.
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. The Lottery Act provides that only licensed horse race or dog race
facilities may offer video gaming. Accordingly, the ability of the Company to
maintain its video lottery business requires it to comply fully with the Racing
Commission to qualify for its license under the Lottery Act.
The Lottery Act regulates the ability of horse race or dog race
facilities to offer video gaming. 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, or such other
number as may be
- 9 -
<PAGE>
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 Park), all of which currently
satisfy the eligibility requirements of the Lottery Act and are thus eligible to
offer video lottery gaming in the state. To provide video lottery gaming, the
voters of the county in which the facility is to be located must approve such
gaming in advance. If such approval is obtained, the facility may continue to
conduct video lottery gaming activities unless the matter is resubmitted to the
voters pursuant to a petition signed by at least five percent of the registered
voters in the county, who must wait at least five years subsequent to voter
approval to bring such a petition. If approval is denied, another vote 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.
Licenses granted by the Lottery Commission must be renewed by 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 suitability requirements, voids the
license. Accordingly, should a party unaffiliated with the Company acquire 5% or
more of the voting stock of the Company in a manner inconsistent with the
statute, the Company's license could be jeopardized insofar as such party would
be required to undergo approval by the Lottery Commission.
Under the Company's Certificate, any person who purchases 5% or more of
the Common Stock without first securing Lottery Commission approval to own such
shares, is subject to the Company's right to repurchase such shares from the
holder. See "Risk Factors - Impact of Anti-takeover Measures" and "Description
of Securities - Common Stock - Anti-takeover Provisions".
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.
- 10 -
<PAGE>
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.
The West Virginia Legislature passed two bills in 1997 which enhance
various aspects of Mountaineer's existing racing and video lottery operations.
The Company's ability to remain in the gaming business depends on the continued
political acceptability of gaming activities to both the public and state
governmental officials. In addition, the gaming laws impose high tax rates, and
fixed parimutuel commission rates which, if altered, may diminish the Company's
profitability.
Due to the political nature of gaming issues, and despite recent
appropriations towards educational and recreational purposes derived from funds
generated by gaming activities, it is unknown at this time whether state
officials will maintain the same policies towards gaming activities,
particularly video lottery gaming, as in the past. 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.
Dependence On Key Personnel. The Company is currently managed by a
small number of key management and operating personnel, whose efforts will
largely determine the Company's success. The success of the Company also depends
upon its ability to attract, hire and retain qualified operating, marketing,
financial and technical personnel. Competition for qualified personnel in the
gaming industry is intense and, accordingly, there can be no assurance that the
Company will be able to continue to hire or retain necessary personnel. The loss
of key management personnel, particularly Edson R. Arneault, the Company's
Chairman, President and Chief Executive Officer, would likely have a material
adverse effect on the Company. See "Management."
Competition. In recent years, the number of gaming options available
to consumers in the Company's principal markets has increased considerably.
Mountaineer's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia, Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio and Ladbroke,
located approximately 80 miles away from Mountaineer in Washington,
Pennsylvania. Wheeling Downs conducts parimutuel greyhound dog racing and video
lottery gaming. Thistledown conducts parimutuel thoroughbred horse racing but
not video lottery gaming. Ladbroke conducts live harness racing and provides
import simulcasting, but does not have video lottery gaming. The Company also
competes with statewide lotteries in West Virginia, Pennsylvania and Ohio, off-
- 11 -
<PAGE>
track and on-site wagering in Pennsylvania, and, to a lesser extent, destination
gaming facilities in Las Vegas and Atlantic City, as well as 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 has recently been approved in that state. To the extent
that either Pennsylvania or Ohio legalize any forms of casino gaming, and West
Virginia does not, the Company's video lottery operations might compete with any
such new gaming facilities located within driving distance of Mountaineer Park.
Such facilities may offer more gaming machines than Mountaineer, or gaming
machines which are superior to those offered by Mountaineer, as well as forms of
gaming not available in West Virginia. Taken together, such competition could
have a material adverse effect on the Company. See "Business-Competition."
No Dividends. The Company has not paid any dividends on its Common
Stock since its inception and does not currently foresee the payment of cash
dividends in the future. Furthermore, under the Company's Term Loan Agreement
and the Warrants issued to its lender thereunder, the Company is prohibited from
paying any dividends without the lender's consent. The Company currently intends
to retain all earnings, if any, to finance its operations.
Continued Losses from Horse Racing. To date, the Company has incurred
continued losses on the Company's parimutuel commission business, which have
been offset by gains in the video lottery business. The Company believes that
the racing business is currently unprofitable, and is attempting to minimize or
eliminate losses from such operations by increased marketing efforts, cost
cutting and enhancing the quality of racing activities. The Company believes
that its strategy of becoming a one-stop entertainment, recreation and gaming
destination resort will produce synergies which, in combination with its video
lottery operations, may maximize stockholder value. Nonetheless, there can be no
guarantees that this strategy will prove successful, that the Company's
unprofitable operations can become profitable or that the Company's profitable
operations will remain so. See "Management's Discussion and Analysis of
Financial Condition" and "Results of Operations."
Road Improvements. The Company has been informed that the State of West
Virginia is contemplating construction projects affecting State Route 2 (the
road Mountaineer Park fronts) both in Weirton (approximately 18 miles to the
south) and in Chester (approximately 8 miles to the north). While such road
improvements could ultimately benefit Mountaineer by improving traffic flow on
Route 2, while any construction is in progress, access to Mountaineer Park could
be impeded. If construction were to make travel to Mountaineer Park unduly
burdensome, patronage at Mountaineer Park could decline. In that event, the
Company's financial condition would be adversely affected. The materiality
- 12 -
<PAGE>
of such effect would be in proportion to any decline in patronage.
Failure to Liquidate Discontinued Operations. The Company owns certain
oil and gas properties in Michigan, which it is in the process of liquidating in
furtherance of the Company's determination to focus its efforts on its core
gaming, entertainment and recreation business. To date, the Company has been
unable to find a buyer for these properties. Should the Company be unable to
find a buyer at a price which management believes represents fair value for the
properties, the Company may be required to sell the properties at a loss or to
write down the value of these assets on its balance sheet.
Cyclical Nature of Business. The Company's primary business involves
leisure and entertainment. During periods of recession or economic downturn,
consumers may reduce or eliminate spending on leisure and entertainment
activities. In the event that the Company's primary demographic market suffers
adverse economic conditions, the Company's revenues may be materially adversely
effected. In addition, the operations of Mountaineer Park are typically seasonal
in nature. Winter conditions may adversely affect transportation routes to
Mountaineer Park, as well as cause cancellations of live horse racing. As a
result, adverse seasonal conditions could have a material adverse effect on the
operations of the Company.
Limited Public Market and Liquidity. The Company's Common Stock is
traded on the Nasdaq SmallCap Market and trading of the Common Stock in the
over-the-counter market is limited. A limited trading market could result in an
investor being unable to liquidate his or her investment. For continued listing
on the Nasdaq SmallCap Market, the Company, generally, must meet the following
requirements: either (a) $2 million in net tangible assets, or (b) market
capitalization of $35 million or (c) net income of $500,000 in latest fiscal
year or 2 of last 3 fiscal years; $1 million in market value of public float; a
minimum bid price of $1.00 per share; a minimum of 500,000 shares publicly held;
a minimum of 300 stockholders; and the election of two independent directors
before February 22, 1998. If the Company is unable to satisfy Nasdaq's
maintenance criteria in the future, its Common Stock will be subject to being
delisted, and trading, if any, in the Company's Common Stock would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." As a consequence of such delisting, an
investor would likely find it more difficult to dispose, or to obtain quotations
as to the price, of the Company's Common Stock.
Lack of Public Market. Prior to November 14, 1996, there was no market
for the Warrants. The Company does not intend to apply for listing of the
Warrants on any securities exchange or to seek approval for quotation through
any automated quotation system.
- 13 -
<PAGE>
There can be no assurance as to the development or liquidity of any market for
the Warrants. If an active market does not develop, the market price and
liquidity of the Warrants will be adversely affected.
Shares Eligible for Future Sale. As of October 14, 1997, the Company
had approximately 19,814,291 shares of Common Stock outstanding. In addition,
the Company is obligated to issue an additional 8,327,247 shares of Common Stock
upon the exercise of outstanding options and warrants. Of shares of Common Stock
currently outstanding, approximately 2,265,236 were issued in registered or
other offerings which rendered such shares freely tradable in the hands of the
holders thereof. Of the remaining 17,549,055 shares of Common Stock currently
outstanding which were not freely tradable by the holders thereof upon issuance
by the Company, the Company has registered the resale of 2,455,427 shares of
Common Stock by the holders thereof. 1,317,147 shares of Common Stock currently
outstanding remain "restricted securities" for purposes of the Act.
With respect to the shares of Common Stock to be issued upon the
exercise of outstanding options or warrants, the Company has previously
registered the resale of 3,040,396 of such shares by the holders thereof. The
remaining 5,286,851 shares of Common Stock issuable upon the exercise of
outstanding options and warrants will be "restricted securities" for purposes of
the Act when issued.
The Company is currently obligated to or intends to file future
registration statements to cover the resale of 6,515,685 shares of Common Stock
which are, or will when issued be, "restricted securities."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned "restricted
securities" for at least one year but less than two years and any affiliate of
the Company who has owned shares for at least one year, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the outstanding shares of the Company's Common Stock or the
average weekly trading volume in the Company's Common Stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. Such sales
under Rule 144 are also subject to certain provisions regarding the manner of
sale, notice requirements and the availability of current public information
about the Company. A stockholder who is not an affiliate of the Company at the
time of the sale and for at least 90 days prior to a proposed transaction and
who has beneficially owned "restricted securities" for two years is entitled to
sell such shares under Rule 144 without regard to the limitations described
above.
- 14 -
<PAGE>
Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could have an adverse impact on the
market price of Common Stock.
Impact of Anti-takeover Measures. Certain provisions of the Company's
Certificate may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Specifically, the Company's Certificate requires the Board of Directors (the
"Board") to consider a variety of factors other than the adequacy of the price
offered for the Company's securities in evaluating a takeover attempt. The
effect of this provision, in the event of a takeover attempt, may be to prevent
stockholders from receiving maximum returns on their shares in the short-term
and may deflate the price of the Company's Common Stock over the long-term.
Additionally, the Certificate provides the Company with a right to repurchase
any shares of Common Stock of the Company from any person who acquires more than
5% of the voting stock of the Company. This provision was adopted so that the
Company can remain in compliance with the Lottery Act, which requires advanced
approval of any acquisition of more than 5% of the Company's Common Stock.
Nonetheless, there can be no assurance that such provision can provide adequate
protection against the Company losing its qualification with the Lottery
Commission due to the acquisition by a third party, whether in the open market
or otherwise, of more than 5% of the Company's Common Stock, as the provision in
the Certificate applies only retroactively and the Lottery Act requires approval
of such acquisitions prospectively. See "Description of Securities - Common
Stock - Anti-Takeover Provisions."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Warrants or
the shares of Common Stock offered herein by the Selling Stockholders. If all of
the Warrants are exercised, the Company will receive estimated net proceeds of
approximately $1,622,431. The Company intends to utilize any proceeds received
from the exercise of the Warrants for working capital purposes. There can be no
assurance that any of the Warrants will be exercised.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not currently foresee the payment of cash dividends in the
future. Furthermore, the Company's Term Loan Agreement and the Warrants issued
to the lender thereunder prohibit the payment of any dividends without the
lender's consent. See
- 15 -
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Company currently intends to
retain any future earnings to finance its operations.
- 16 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997.
June 30, 1997
-------------
Actual As Adjusted (1)
------ ---------------
Short-term debt (excluding current
maturities of long-term debt) 0 0
Current portion of redeemable Common Stock 0 0
Current portion of long-term debt 29,000 29,000
---------- ----------
Total short-term debt 29,000 29,000
Long-term debt--noncurrent portion
12% Term Loan 16,100,000 16,100,00
15% Line of Credit 1,000,000 1,000,000
Other long-term debt bearing interest at
8% 101,000 101,000
----------- -----------
Total long-term debt--noncurrent portion 17,201,000 17,201,000
Redeemable Common Stock--noncurrent portion 0 0
Stockholders' equity:
Common Stock, Paid-in Capital 35,070,000 36,000,000
Accumulated deficit (23,461,000) (23,461,000)
------------- ------------
Total stockholders' equity 11,609,000 12,539,000
------------- ------------
Total capitalization 28,839,000 29,769,000
(1) As adjusted to reflect the receipt of the proceeds from the exercise
of the Warrants registered hereby.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the NASDAQ SmallCap Market
under the symbol "MNTG". On November 3, 1997, the high bid and low asked
quotations for the Company's Common Stock were $2 1/2 and $1 7/16 respectively.
As of September 30, 1997 there were
- 17 -
<PAGE>
approximately 577 stockholders of record of the Company's Common
Stock.
The following table sets forth the range of high and low bid quotations
obtained from the National Quotations Bureau for the Common Stock for the two
fiscal years ended December 31, 1995 and 1996 and for the first three quarters
of the fiscal year ending December 31, 1997. These quotes are believed to be
representative of inter-dealer quotations, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
High Low
Year Ended December 31, 1995:
First Quarter 1 15/16 1 1/16
Second Quarter 1 19/32 1 1/8
Third Quarter 1 9/16 1 1/16
Fourth Quarter 1 3/16 1 7/32
Year Ended December 31, 1996:
First Quarter 29/32 11/32
Second Quarter 1 17/32 9/16
Third Quarter 1 1/2 13/16
Fourth Quarter 1 9/16 7/8
Year Ending December 31, 1997:
First Quarter 1 9/16 3/4
Second Quarter 1 7/16 1
Third Quarter 1 17/32 1 3/16
Fourth Quarter
(as of November 3, 1997) 2 1/2 1 7/16
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the
five years ended December 31, 1996, have been derived from the audited
consolidated financial statements of the Company, certain of which are included
elsewhere in this Prospectus, and should be read in conjunction with those
consolidated financial statements (including the notes thereto) and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein. The selected financial data as of
and for the six months ended June 30, 1996, and June 30, 1997, have been derived
from the unaudited consolidated financial data of the Company which are included
elsewhere in this Prospectus and which in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the results of
- 18 -
<PAGE>
operations and financial condition for those periods. The financial data for the
six months ended June 30, 1997, are not necessarily indicative of results to be
expected for the year.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31 Six Months
Ended June 30,
1996 1995 1994 1993 1992 1997 1996
---- ---- ---- ---- ---- ---- ----
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $40,204,000 $24,927,000 $14,656,000 $12,797,000 $690,000 $27,839,000 $16,091,000
Net gain/(loss)
from continuing
operations 1,155,000 (5,313,000) (6,902,000) (5,913,000) (2,749,000) 1,448,000 (115,000)
Gain/(loss) per
share from
continuing
operations .06 (.33) (.48) (.46) (.42) .07 (.01)
Balance Sheet
Data:
Working Capital
(Deficiency) 3,897,000 (7,453,000) (1,808,000) 313,000 60,000 2,169,000 (4,406,000)
Current Assets 7,016,000 1,972,000 3,555,000 2,354,000 2,974,000 5,165,000 2,204,000
Current
Liabilities 3,119,000 9,425,000 5,363,000 2,041,000 2,914,000 2,996,000 10,616,000
Total Assets 30,878,000 25,747,000 23,958,000 19,137,000 16,812,000 33,003,000 25,614,000
Total Liabilities 20,612,000 19,763,000 14,200,000 6,040,000 5,641,000 21,394,000 19,031,000
Total
Stockholders'
Equity (Capital
Deficiency) 10,266,000 5,984,000 9,758,000 13,097,000 11,171,000 11,609,000 6,583,000
</TABLE>
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 common
stock of Mountaineer with the intent of enhancing its existing facilities for
promotion as a high quality gaming, racing and recreation 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
Prospectus. 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
- 19 -
<PAGE>
simulated "classic casino slot machine" games to VLTs ("Slot Terminals") have
significantly moderated the seasonality experienced in prior year revenue
trends. As a result of this 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
Years Ended December 31
1996 1995 1994
---- ---- ----
Video Lottery 30,700,000 $16,479,000 $7,481,000
Terminals
Parimutuel 4,299,000 4,263,000 3,768,000
Commissions
Lodging, Food and 3,945,000 3,046,000 2,276,000
Beverage
Other 1,260,000 1,139,000 1,131,000
--------- --------- ---------
40,204,000 $24,927,000 $14,656,000
========== =========== ===========
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
- 20 -
<PAGE>
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.
Video Lottery Operations
Revenues from video lottery operations increased 86%, from $16.5 million in
1995 to $30.7 million in 1996. Revenues from video lottery operations increased
120%, from $7.5 million in 1994 to $16.5 million in 1995. In response to
increased patronage and a trend towards increased productivity of video lottery
activities, Mountaineer doubled the number of VLTs to 800 in June 1995. Video
lottery revenues in the second half of 1995 surpassed $9.1 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 57%
over the $2.8 million of revenues earned in the final quarter of 1994. In
December 1995, the Company completed an expansion of its Lodge gaming
facilities, allowing the placement of half of its VLTs at the Lodge with the
other half remaining in the racetrack grandstand and clubhouse, in response to a
perceived demand for more terminal availability on days when live racing is not
conducted. In July of 1996, after passage of legislation permitting the use of
Slot Terminals as opposed to only card and keno game machines ("Card
Terminals"), Mountaineer converted 350 Card Terminals into Slot Terminals. Also
in July of 1996 the Company began a large scale marketing campaign aimed beyond
the 40 mile radius from which the Company has traditionally drawn the bulk of
its patrons. 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.
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
- 21 -
<PAGE>
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.
Parimutuel Commissions
Parimutuel commissions revenue is a function of wagering handle, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place, or show bet. The Company earned an
average commission rate of 20% in each of the past three years.
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. Live
racing handle declined by $1.6 million, or 8%, for the year ended December 31,
1996 to $20.4 million from $22.0 million for the year ended December 31, 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 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.
Both live and off-track wagering handles increased in 1995 from 1994,
yielding a 13% increase in parimutuel commissions to $4.3 million. 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. Purses increased from an average of $22,500 in 1994 to an
average of $25,000 in 1995.
In September 1995, Mountaineer Park hosted the West Virginia Breeders'
Classics, a night of stakes races with $330,000 in purses
- 22 -
<PAGE>
funded by taxes on statewide video lottery revenues. Mountaineer Park broadcast
a simulcast signal of the stakes races, earning commissions on $351,000 of
handle wagered off-site.
Early in 1995, the Company expanded its off-track betting facilities in
the racetrack clubhouse, grandstand and the Lodge, contributing to a 24%
increase in simulcast wagering handle from $14.3 million in 1994 to $17.8
million in 1995, representing an increase of $3.5 million. In April 1995,
Mountaineer Park began offering greyhound off-track betting, which contributed
$2.7 million to increased simulcast handle in 1995. The remaining $800,000
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.
Lodging, Food and Beverage
Revenues earned from 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. The increase is a reflection of
significantly greater attendance at the Company'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. A fire in October 1994 caused 41 of the Lodge's
101 rooms to be unusable during the fourth quarter of 1994 and the first four
months of 1995.
Food, beverage and lodging revenues decreased 3% from slightly more
than $2.3 million for 1993 to slightly under $2.3 million for 1994. Guest room
revenues decreased $50,000 or 8% from $621,000 to $571,000 for 1994 as compared
to the year ended 1993, which resulted from the reduction in available rooms due
to planned remodeling and construction. Additional negative impact on room
revenues was attributable to the fire damage sustained during the fourth quarter
of 1994.
Other Revenues
Other sources of revenues consist primarily of non-core businesses such
as admission, programs, golf, tennis and swimming. While these lines of business
are not the Company's most profitable, the Company believes they are necessary
for the Company to continue to attract gaming patrons. Other revenues increased
by $121,000, or 11% from 1995 to 1996. In total, other revenues were virtually
unchanged from 1994 to 1995, amounting to approximately
- 23 -
<PAGE>
$1.2 million each year. Operations in 1995 saw a moderate increase in revenues
relating to admission fees and program sales.
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% increase 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 operating costs increased by 62%, 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 $5.7 million in 1994 to $12.3 million in 1995. Parimutuel commissions
expense accounted for $500,000 of the increase, largely a reflection of the 13%
increase in commission revenues, and lodging, food and beverage operating costs
increased $900,000, exceeding the $770,000 revenue increase earned by those
operations. The gains resulting from the profitability of the video lottery
operations have been offset by the losses sustained by parimutuel commissions
and lodging, food and beverage businesses; however, the Company has been able to
substantially reduce its losses due to the improvement in VLT operations. Based
on this trend, the Company is attempting to expand the video lottery business,
while attempting to reduce the losses of the parimutuel and lodging, food and
beverage businesses, by increasing productivity, expanding marketing efforts,
increasing purse sizes and attracting higher quality jockeys and horses to
increase parimutuel wagering.
Years Ended December 31
Operating Costs 1996 1995 1994
---- ---- ----
Video Lottery Terminals $19,865,000 $12,256,000 $5,709,000
Parimutuel Commissions 5,257,000 5,064,000 4,563,000
Lodging, Food and 3,543,000 3,285,000 2,337,000
Beverage
Other 1,092,000 1,195,000 798,000
--------- ---------- ----------
$29,757,000 $21,800,000 $13,407,000
=========== =========== ===========
- 24 -
<PAGE>
Years Ended December 31
Gross Profit (Loss) 1996 1995 1994
---- ---- ----
Video Lottery Terminals $10,835,000 $4,223,000 $1,772,000
Parimutuel Commissions (958,000) (801,000) (795,000)
Lodging, Food and 402,000 (239,000) (61,000)
Beverage
Other 168,000 (56,000) 333,000
----------- ----------- ----------
$10,447,000 $3,127,000 $1,249,000
=========== ========== ==========
Video Lottery Terminals Operating Costs
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 on statutory assessments applicable to VLT
revenues increased from 35% of such revenues ("net win") prior to March 1994 to
53% of net win thereafter. This increase in assessment rate, coupled with the
120% increase in VLT revenues, resulted in a $4.5 million increase in state
taxes and statutory assessments from 1994 to 1995, to $8.4 million.
Approximately $2.5 million of 1995 statutory costs were contributed to
Mountaineer's horseowners' association in the form of live racing purse
payments, compared to $1.1 million in 1994, while $80,000 was contributed to
Mountaineer's employee pension fund in 1995, up from $31,000 in 1994.
VLT 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. Salaries, payroll taxes and employee benefits increased from
$503,000 in 1994 to $964,000 in 1995, and utilities increased from $125,000 to
$313,000, both increases resulting from increased personnel to service the
expanded number of gaming terminals and related increase in patronage.
On March 17, 1994, the State of West Virginia approved the continued
operation of VLTs, however, statutory rates paid to certain entities were
mandated at substantially higher amounts than those previously in effect as
follows:
March 18, 1994 March 17, 1994
and Beyond and Prior
State of West Virginia 30.0% 25.0% (1)
Hancock County 2.0% 0.0%
Horseman's Association 15.5% 10.0%
Other 5.5% 0.0%
----- -----
Total Statutory Payments 53.0% (2) 35.0%
----- -----
- 25 -
<PAGE>
(1) Increased from 20% to 25% in June 1993.
(2) Excludes up to a 4% administrative fee charged by the State of West
Virginia based on revenues. In addition, rates are applied to revenues
net of this 4% administrative fee.
In addition to the above rates, the Company paid a 3% management fee
(after the State's 4% administrative fee), based on VLT revenues, to American
Gaming and Entertainment, Ltd. ("AGEL") which began on October 26, 1994, as
approved by the Lottery Commission. This management agreement was stayed in July
1995. A consulting agreement with American Newco providing for fees of up to
$20,000 per month, as discussed below, replaced the management agreement. The
Company was also required to pay additional management fees of 8% of income
before depreciation, amortization, taxes and interest. Total management fees
charged to the cost of VLTs in 1994 were $133,000. From January 1, 1993 to March
1993 and from April 1993 to August 1993, the Company paid the lessor of its 165
VLTs 23% and 10% of net revenues, respectively. This agreement has since been
terminated.
Parimutuel Commissions Operating Costs
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.
Other costs of parimutuel commission revenue increased in the aggregate
by approximately $299,000 from 1995 to 1996.
Salaries, payroll taxes and employee benefits increased from $2.2
million in 1994 to $2.5 million in 1995, partly as an accommodation due to
certain inefficiencies caused by Mountaineer's extensive construction activities
in 1995. A general upgrade in maintenance activities contributed to this
increase, as well as a $65,000 increase in repair and maintenance supplies. The
Company'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 operations.
- 26 -
<PAGE>
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.
Lodging, Food and Beverage Operating Costs
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.
Mountaineer experienced an increase in lodging, food and beverage
operating costs from 1994 to 1995 of $948,000, $695,000 of which related to
increased costs attributable to food and beverage operations. Although cost of
sales rates 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 labor costs rose approximately $320,000 which was also
commensurate with the increase in revenues despite no appreciable change in
occupancy rates from 1994 to 1995.
Costs of Other Operating Revenues
Cost of other revenues, consisting primarily of non-core businesses
such as admission, 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 were higher by $422,000 or 64% from
$778,000 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.
- 27 -
<PAGE>
Selling, General and Administrative Expenses, and Interest Expense
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. General and administrative expenses decreased $104,000
from $6.7 million in 1994 to $6.6 million in 1995. Legal and other professional
fees decreased from $1.4 million in 1994 to $1.1 million in 1995. In addition,
several non-recurring charges affected selling, general and administrative
expenses as follows: a provision for settlement of legal actions of $525,000 and
development costs write-offs of $200,000 in 1994, and 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 in 1995.
General and administrative expenses at Mountaineer rose 4%, from $2.6
million in 1994 to $2.7 million in 1995. Advertising expenses increased from
$838,000 in 1994 to $935,000 in 1995 as revenues grew from $14.7 million to
$25.0 million. Salaries decreased from $1.3 million in 1994 to $961,382 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. During the years 1995 and 1994, the Company incurred noncash
expenses of $2.1 million and $2.9 million, respectively.
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 non-cash fees paid at the
inception of various loan arrangements. Approximately $1.1 million of such fees
remain to be expensed in 1997. 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.
Interest costs capitalized to construction activities in 1994 totalled
approximately $790,000, and financing costs deferred in the consolidated balance
sheet at December 31, 1994 were $1,628,000 to be amortized over the expected
term of the loan for construction activities (based on qualified assets) and
interest expenses; however, due to a settlement negotiated in 1995 with Bennett,
- 28 -
<PAGE>
$998,000 of such costs which were accrued on that date, were cancelled and not
amortized.
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. Depreciation and amortization expense
increased from $910,000 in 1994 to $1.5 million in 1996, a reflection of the
$5.9 million investment in property, plant and equipment during that period.
Depreciation and amortization expenses in 1994 increased $285,000 from a level
of $625,000 in 1993, largely as a result of the $3.4 million investment in
capital expenditures incurred in 1994. These investments were made as part of
the capital improvement and expansion program at Mountaineer Park.
Six Months Ended June 30, 1997 and 1996
- ---------------------------------------
Revenues
The Company earned revenues for the respective six-month periods in
1997 and 1996 as shown below:
Six Months Ended
June 30 June 30
1997 1996
------ -----
Video lottery operations $22,785,000 $11,900,000
Parimutuel commissions 2,246,000 2,165,000
Lodging, food and beverage 2,314,000 1,573,000
Other revenues 494,000 453,000
----------- -----------
$27,839,000 $16,091,000
----------- -----------
The Company's Mountaineer 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
federal disaster areas. Nonetheless, Mountaineer Park's facilities are situated
well above the flood plain and did not sustain any damage. Mountaineer Park's
nearest competitor was extensively
- 29 -
<PAGE>
damaged and ceased operations for approximately four weeks in the
first quarter of 1996.
Video Lottery Operations
Upon the enactment of the amendment of the video lottery law permitting
game themes simulating spinning reels or 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, for
the six months ended June 30, 1997 and 1996 is as follows:
Six Months Ended
June 30 June 30
1997 1996
------ -----
Total gross wagers $79,170,000 $42,217,000
Less patron payouts (56,385,000) (30,317,000)
------------ ------------
Revenues - video
lottery operations $22,785,000 $11,900,000
----------- -----------
Average daily net win per
terminal $ 136 $ 82
Revenues from video lottery operations nearly doubled, increasing by
91% from $11.9 million in the first six months of 1996 to $22.8 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, (ii)
commencement of extensive advertising in January, 1997, featuring a 30 minute
infomercial broadcast on television affiliates within a two hour driving radius,
and (iii) the purchase of 400 new Slot Terminals in March, 1997 to replace 200
Card Terminals retired at that time.
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 Slot Terminals. The aggressive
infomercial marketing campaign begun in January, 1997 will be followed by an
extensive
- 30 -
<PAGE>
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 six months ended June 30, 1997,
average daily net win on the 500 grandstand VLTs was $54 (including $0 for days
where there was no live racing), compared to $218 earned on the 500 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 host racetracks and simulcast
at Mountaineer Park. The Company's total parimutuel commissions for the six
months ended June 30, 1997 and 1996 are summarized below:
Six Months Ended
June 30 June 30
1997 1996
----------- ----------
Simulcast racing parimutuel
handle $10,801,000 $10,598,000
Live racing parimutuel handle 9,979,000 9,584,000
Less patrons' winning
tickets (16,462,000) (15,990,000)
------------ ------------
4,318,000 4,192,000
Less:
State and County parimutuel (253,000) (246,000)
tax
Purses and Horsemen's
Association (1,819,000) (1,781,000)
----------- -----------
Parimutuel Commissions $2,246,000 $2,165,000
========== ==========
Simulcast handle remained relatively constant in the first two quarters
of 1996 and 1997, increasing 2% to $10.8 million in the latter period. Live
racing handle increased by 4% from $9.6 million in 1996 to $10.0 million in
1997, primarily due to the cancellation of eight racing days in 1996 due to
severe weather. Mountaineer has completed 115 days of the annually required 220
days in the first six months of 1997, compared to 108 days completed in the
first two quarters of 1996.
Mountaineer paid average daily live purses of $42,000 in the first six
months of 1997 and $29,000 in the corresponding period of
- 31 -
<PAGE>
1996. Management believes that live racing handle will increase as racing purses
are raised, as 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 $25,000 per race during the second half of 1997, and a
featured night of racing in which over $100,000 of purses might be offered. More
sizable stakes races may be offered in the future 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:
o 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 fund
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.
o 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 conduced at Mountaineer, and vice
versa.
- 32 -
<PAGE>
o Beginning in 1998, the two thoroughbred tracks in West
Virginia will be required to schedule 210 days of the 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 47% to $2.3 million for the six months ended June 30, 1997. Management
attributes the increase to direct elements of the infomercial marketing campaign
which commenced in January, 1997, as well as the synergistic effects of heavier
video lottery patronage. Approximately $1,717,000 of the first half 1997
revenues were derived from food and beverage operations, compared to $1,134,000
in the first half of 1996. Mountaineer's lodge-based restaurant and bar venues
accounted for $436,000 of the revenue increase from 1996 to 1997, while
track-based venues contributed a revenue increase of $147,000. Mountaineer's
lodging operations also achieved significant revenues growth, increasing 36%
from $439,000 in the first half of 1996 to $596,000 in the corresponding 1997
period.
Other Operating Revenue
Other revenues increased by $41,000 to $494,000 for the six month
period ended June 30, 1997, compared to the same period in 1996. Other operating
revenues are primarily derived from the sale of live and simulcast racing
programs, parking and admission fees relating to Mountaineer's racing activities
and periodic boxing and concert events.
Operating Costs
Operating costs and gross profit earned from operations for the six
month periods ended June 30, 1997 and 1996 are as follows:
- 33 -
<PAGE>
Six Months Ended
Operating Costs June 30 June 30
1997 1996
--------- --------
$14,305,000 $8,028,000
Video lottery operations
Parimutuel commissions 2,791,000 2,497,000
Lodging, food and beverage 2,049,000 1,529,000
Other revenues 563,000 492,000
----------- -----------
Total Operating Costs 19,708,000 $12,546,000
----------- -----------
Six Months Ended
Gross Profit (Loss) June 30 June 30
1997 1996
------- -------
Video lottery operations $8,480,000 $3,872,000
Parimutuel commissions (545,000) (332,000)
Lodging, food and beverage 265,000 44,000
Other revenues (69,000) (39,000)
----------- -----------
Total Gross Profit $8,131,000 $3,545,000
----------- ----------
Mountaineer's 73% increase in revenues resulting from the expanded
scope of entertainment offerings resulted in higher total costs, as operating
costs increased by 57% to $19.7 million in the first two quarters of 1997. Gross
profit from the Company's four profit centers more than doubled from $3.5
million for the first two quarters of 1996 to $8.1 million for the same period
in 1997, an increase of 129%.
Video Lottery Operations
Costs of VLTs increased by $6.3 million, or 78% to $14.3 million for
the six months ended June 30, 1997, compared to the six months ended June 30,
1996, reflecting the increase in statutory expenses directly related to the 91%
increase in video lottery revenues. Such expenses accounted for $5.8 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
- 34 -
<PAGE>
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 the Company 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 Operations" in the Condensed and Consolidated Statements
of Operations. Statutory costs and assessments, including the State
Administrative Fee, for the respective six month periods are as follows:
Six Months Ended
June 30 June 30
1997 1996
------ -----
Employee Pension Fund $ 112,000 $ 58,000
Horsemen's Purse Fund 3,458,000 1,799,000
----------- -----------
Subtotal 3,570,000 1,857,000
State of West Virginia 7,167,000 3,844,000
Tourism Promotion Fund 669,000 348,000
Hancock County 446,000 232,000
Stakes Races 223,000 116,000
Veteran's Memorial 223,000 116,000
----------- -----------
$12,298,000 $ 6,513,000
=========== ===========
The remaining significant expenses incurred by video lottery operations
consist of VLT lease expense ($586,000 in the first half of 1997 compared to
$718,000 in 1996), direct and indirect wages and employee benefits ($863,000 in
1997 compared to $487,000 in the first half of 1996), and utilities, property
tax and insurance ($296,000 in 1997 versus $256,000 in 1996).
In March, 1997 the Company purchased 400 new Slot Terminals and retired
200 leased Card Terminals. VLT lease expense has declined from approximately
$108,000 per month in the first quarter of 1997 to approximately $89,000 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 increase moderately 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 $294,000, or 12%, from
$2.5 million in the first half of 1996 to $2.8 million in the first half of
1997. Simulcast host race fees and totalisator system and other lease expenses
remained stable at approximately
- 35 -
<PAGE>
$600,000 in the first six months of 1997 and 1996. Wages and benefits relating
to the Company's racing operations increased by $240,000, or 20%, to $1.4
million in the six months ended June 1997 compared to the prior period, largely
as a result of conducting 115 live race performances in 1997 compared to only
108 in the first six months of 1996.
Mountaineer's labor agreement with approximately 50 mutuel and 9 video
lottery employees has been extended to November 30, 1997. Management expects
that if a new labor agreement is not reached by November 30, 1997, the current
agreement will be extended on a month by month basis until a new agreement is
finalized. There can be no assurances that a new labor agreement will be
finalized prior to the expiration of this extended term.
The original term of Mountaineer's agreement with the Horsemen's
Benevolent and Protective Association, Inc. ("HBPA") has been extended until
December 31, 2000. The HBPA is the exclusive authorized bargaining
representative for all thoroughbred horse owners who participate in live races
conducted by Mountaineer. Mountaineer contributes all purse funds earned by such
horse owners, as well as compensation to the HBPA in an amount equal to 1.5% of
the amount paid for purses, from proceeds of its live and simulcast racing and
video lottery operations. The West Virginia Racetrack Video Lottery Act
conditions annual renewal of video lottery licenses upon, among other things,
the licensee's having an agreement regarding video lottery revenue with the
representatives of a majority of the horsemen, the parimutuel clerks, and the
breeders for the racetrack.
Food, Beverage and Lodging Operations
Operating costs of the Company's lodging, food and beverage operations
increased by 34% from $1,529,000 in the first half of 1996 to $2,049,000 in the
first six months of 1997, compared to a 47% increase in revenues during the same
periods. Direct expenses of the Company's food and beverage operations increased
from $1,030,000 in the first six months of 1996 to $1,492,000 during the
corresponding period in 1997. The food and beverage operation earned a gross
profit of $225,000 in the first six months of 1997, compared to $104,000 in 1996
as higher revenues more fully absorbed the operation's fixed costs. Lodging
direct costs totaled $557,000 for the six months ended June 30, 1997, compared
to $499,000 in 1996. Lodging operations achieved a gross profit of $39,000 in
the 1997 period, compared to a $60,000 loss in the first six months of 1996.
Costs of Other Revenues
Costs of other revenues increased by $71,000 from $492,000 for the six
month period ended June 30, 1996 to $563,000 for the six month period ended June
30, 1997. Costs of other revenues consist
- 36 -
<PAGE>
primarily of indirect and direct wages and employee benefits, and supplies and
other items purchased for resale.
General and Administrative Expenses
General and administrative expenses increased by $940,000 to $2.6
million in the first half of 1997 from $1.6 million for the six month period
ended June 30, 1996. Management's efforts to reduce the cost of corporate
overhead continued to yield beneficial results, as corporate general and
administrative expenses declined from $775,000 in the first half of 1996 to
$700,000 in the corresponding period of 1997, a level 24% below the $926,000
posted in the first half of 1995. General and administrative expenses at
Mountaineer increased to $1,885,000 in the first six months of 1997, compared to
$870,000 and $1,560,000 in the corresponding periods of 1996 and 1995,
respectively.
Wages and benefits expense at Mountaineer increased from $399 in the
first six months of 1996 to $688,000 for the same period in 1997, due to the
transfer of management employees from the corporate office to Mountaineer and
the hiring of support staff to administer the expanded scope of Mountaineer's
operations and its assumption of various corporate responsibilities.
Professional fees at Mountaineer also rose significantly, from $185,000 to
$602,000 for the six month periods ended June 30, 1996 and 1997, respectively.
Over $300,000 of the increased professional fees were incurred in pursuit of
financing alternatives. (See "Liquidity and Capital Resources" below).
Marketing and Promotions Expense
Marketing expenses of the Company's Mountaineer operation increased
from $443,000 in the first six months of 1996 to $1,355,00 in the first two
quarters of 1997, as management embarked on an aggressive regional marketing
campaign centered around its 30-minute infomercial broadcasts. Marketing and
promotions expense in the first six months of 1997 are net of approximately
$337,000 to be refunded to Mountaineer under the auspices of a state grant to a
convention and visitors bureau of which Mountaineer is a member. The Company has
qualified for an additional $271,000 in grant refunds to reimburse infomercial
production and broadcasting expenses to be incurred in the second half of 1997.
Patron inquiries from the infomercial are being compiled into a database for use
in direct mail marketing campaigns.
The Company has added to its marketing department staff, producing a
$72,000 increase in wage and benefits expense from the prior year period.
Significantly expanded marketing activities are reflected in the comparative
expense levels for the six months ending June 30, 1997 and 1996, respectively;
television advertising $381,000 versus $0, newspaper advertising $216,000 versus
$85,000, direct mail marketing $48,000 versus $5,000, and promotional events
- 37 -
<PAGE>
and discounts $356,000 versus $146,000. Management is currently analyzing the
potential benefits to be earned from the installation of player tracking
software in its VLTs, 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 increased by $131,000, or 15%,
from $866,000 for the six month period ended June 30, 1996 to $997,000 for the
corresponding period in 1997. Management expects depreciation expenses to
continue to increase in subsequent quarters as new capital improvements are
placed into service, most notably a $3.1 million purchase of 400 Slot Terminals
which became operational in March, 1997.
Cash Flows
The Company's operations produced $3.0 million of cash flow in the six
months ended June 30, 1997, compared to $627,000 produced in the first six
months of 1996. Current year noncash expenses include $997,00 for depreciation
and amortization and $1.1 million for the amortization of deferred financing
costs as interest expense.
The Company invested $5.0 million for continued expansion and
development of its properties at Mountaineer in the first six months of 1997
including a $3.1 million investment in Slot Terminals, compared to a $593,000
investment in the first six months of 1996. In the first quarter of 1997, the
Company settled certain common stock price guarantees relating to the 1992
acquisition of Mountaineer via a $100,000 cash payment and issuance of 100,000
shares of common stock.
In June, 1997, the Company borrowed $1.0 million against its line of
credit. On July 2, 1997, the Company and its lender amended and restated the
existing loan agreements, converting the line loan to a term loan, as further
described below, and subsequently, on July 7, 1997, the lender advanced the
remaining $4.4 million balance of the former line of credit to Mountaineer.
Liquidity and Capital Resources
The Company's working capital balance stood at $2.2 million at June 30,
1997, and its unrestricted cash balance amounted to $3.0 million. Racing purses
are paid from funds contributed by the Company to bank accounts owned by the
horse owners who race at Mountaineer. At June 30, 1997, the balances in these
accounts exceeded the purse payment obligations by $553,000; this amount is
available for payment of future purse obligations at the discretion of the
Company.
- 38 -
<PAGE>
Long-Term Debt and Line of Credit Amendment and Refinancing. Effective
July 2, 1997, Mountaineer and the Company amended and restated the Term Loan
Agreement, which had been previously amended and restated in the December, 1996
Amended Term Loan Agreement. The Amended Term Loan Agreement reflected an
increase in the amount borrowed from $5 million to $16.1 million, established a
$5,376,500 revolving line of credit, and converted the lender's position from
second to first trust holder.
The Second Amended Term Loan Agreement (i) extends the term of the
Amended Term Loan Agreement to July 2, 2001 (compared to July 2, 1999); (ii)
increases the total amount borrowed to $21,476,500 (by virtue of Mountaineer
drawing down the line of credit); (iii) eliminates from the Amended Term Loan
Agreement annual fees of cash in the amount of 8% of the outstanding principal
balance of the loan that would have been due each November 15 while the loan is
outstanding; and (iv) calls for payments of interest only with the principal due
at the end of the four year term. The Company continues to guarantee the Second
Amended Term Loan Agreement. The Company expects to have excess funds available
for investment as a result of this transaction.
As consideration for the lender's entering into the Second Amended Term
Loan Agreement, Mountaineer has agreed (i) to pay a one time fee of $1.8 million
or 8.5% of the total amount borrowed, which may be paid over the first year of
the term; (ii) to pay interest at the rate of 13% (compared to 12% on the $16.1
million Amended Term Loan Agreement and 15% on the $5.4 million line of credit
under the Amended Term Loan Agreement); and (iii) to pay a call premium equal to
5% in the event of prepayment during the first year of the term, declining to 3%
during the second year, 2% in the third year and 1% in the final year. In
connection with the Term Loan Agreement, the Company issued 183,206 shares of
Common Stock and warrants to purchase 1,492,860 shares of Common Stock at $1.06
per share and warrants to purchase 50,000 shares of Common Stock at $.80 per
share. In connection with the Amended Term Loan Agreement, the Company issued
550,000 additional shares of Common Stock and warrants to purchase 1,632,140
shares of Common Stock for $1.06 per share.
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, most likely to
occur in 1998 and 1999. The Company may invest in significant infrastructure
improvements, also being considered for 1998. The Company may separately finance
any construction activities that it executes of this magnitude. Capital
improvements of a near-term nature include numerous smaller renovations.
Management is considering the purchase of some or all of the 400 Slot Terminals
and 200 Card Terminals which it currently operates under a lease agreement.
Management is also contemplating the respective benefits and costs of installing
a point of sale
- 39 -
<PAGE>
computerized player tracking system in its video Slot Terminal network. The cost
of the system, if purchased, is expected to exceed $500,000.
Road Improvements. The Company has been informed that the State of West
Virginia is contemplating construction projects affecting State Route 2 (the
road Mountaineer fronts) both in Weirton (approximately 18 miles to the south)
and in Chester (approximately 8 miles to the north). While such road
improvements could ultimately benefit Mountaineer by improving traffic flow on
Route 2, while any construction is in progress, access to Mountaineer could be
impeded. If construction were to make travel to Mountaineer unduly burdensome,
patronage at Mountaineer could decline. In that event, the Company's financial
condition would be adversely affected. The materiality of such effect would be
in proportion to any decline in patronage. The Company may defer large scale
capital improvements pending further information about the proposed road
construction.
Increase in Authorized Number of Shares. On October 15, 1996, the
Company's shareholders voted 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 was to provide a
sufficient number of shares for the Company to honor its obligation to issue
shares of common stock under various agreements and for future corporate
purposes. 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.
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. The
utilization of federal net operating losses may be subject to certain
limitations; (See Note 3 in Notes to Condensed and Consolidated Financial
Statements).
Advertising Subsidy. In October, 1996 and June, 1997, a not-for-profit
convention and visitors bureau of which Mountaineer Park is a member received
approval of two marketing grant applications from the West Virginia Division of
Tourism. Under the terms of the grant, Mountaineer will be reimbursed for up to
$608,000 of advertising expenses incurred as part of Mountaineer's infomercial
advertising campaign to be broadcast in 1997. A partial refund of $169,000 was
received in May, 1997.
- 40 -
<PAGE>
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 Prospectus.
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 due to the lack of financial resources available to complete
its rework costs. The Company has valued such properties at $2,616,000 as of
June 30, 1996, net of $252,000 of accrued rework costs, which it believes
represents net realizable value for the properties. Nonetheless, given the
Company's difficulty in finding a buyer for the properties, it may be required
to sell the properties at a loss and on terms substantially less favorable to
the Company than initially foreseen or, alternatively, to write down the value
of such assets on its consolidated balance sheet.
BUSINESS
MOUNTAINEER RACE TRACK & GAMING RESORT
Racetrack Facilities
Mountaineer Park offers 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
- 41 -
<PAGE>
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 a restaurant and sandwich bar located in the clubhouse
and grandstand respectively. The grandstand building also houses the Hollywood
Grande Buffet which provides customers with low-cost meals featuring a variety
of foods from breakfast fare to prime rib and seats 120. In October 1997
Mountaineer converted a 2,400 square foot area of the Clubhouse into a
glass-enclosed meeting room which will accommodate approximately 200 people. In
addition to seating areas, the grandstand covers approximately 57,000 square
feet of interior space on the main and mezzanine levels containing 42 parimutuel
windows and food and beverage concession stands. The clubhouse covers
approximately 25,000 square feet of interior space containing 22 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 leases
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 (two
double beds), and five king rooms and suites. The Mountaineer Lodge Dining Room
seats 125 patrons for casual dining overlooking the golf course. In 1995, in
response to increased patronage of the off-track betting, video lottery gaming,
dining and bar facilities located at the Lodge, the Company expanded its 5,000
square foot Speakeasy Gaming Saloon with an 8,000 square foot addition. 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 700 vehicles.
- 42 -
<PAGE>
Video Lottery Facilities
In addition to live and simulcast parimutuel wagering, Mountaineer
offers video lottery gaming through 1,000 VLTs located in the racetrack
clubhouse, grandstand and the Lodge. Mountaineer purchased and on March 13,
1997, installed 400 new VLTs at the racetrack clubhouse. The 400 new VLTs are
Slot Terminals. At the same time, Mountaineer removed 200 older VLTs that were
Card Terminals, resulting in an increase in the number of VLTs currently in
operation from 800 to 1,000 consisting of 800 Slot Terminals and 200 Card
Terminals. 500 VLTs are located at the Lodge and the Speakeasy Gaming Saloon,
and 500 are located at the racetrack.
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
State Route 2 from the Lodge and racetrack main entrance. On October 7, 1997,
Mountaineer acquired an option to purchase approximately 350 additional
contiguous acres. The option, for which Mountaineer paid $100,000, has a
duration of one year and entitles Mountaineer to purchase the property for
$600,000. 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.
- 43 -
<PAGE>
Racing Operations
The Company is subject to annual licensing requirements established by
the Racing Commission. The Company's license was renewed in December 1996, and
will remain effective through December 1997.
The Company's 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, the Company 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, 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.
- 44 -
<PAGE>
Video Lottery Operations
The Company is subject to annual licensing requirements established by
West Virginia law. The Company's license was renewed in July 1997 for a period
of one year.
The Company 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, the Company'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.
On March 26, 1996, the Company amended the master lease agreement
pursuant to which it leases the 600 leased VLTs 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 is 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.
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
Company's existing VLTs. Management's target date for implementation of
progressive gaming play is the third quarter of 1998, although there can be no
assurance that progressive games will be successfully implemented by that date,
or at all.
In March 1996, the West Virginia legislature approved the usage of
video game themes depicting symbols on reels, commonly referred to as "line
games" or "slot games." On March 15, 1997, Mountaineer purchased and installed
400 new VLTs at the racetrack clubhouse. The 400 new VLTs offer simulated slot
machine games as well as card games and keno. At the same time, Mountaineer
removed 200 older VLTs that offered only card games and keno, resulting in an
increase in the number of VLTs currently in operation from 800 to 1,000,
consisting of 800 Slot Terminals and 200 Card Terminals.
- 45 -
<PAGE>
Racetrack, Food and Beverage Operations
The clubhouse restaurant is open a minimum of 220 days annually on live
race days (210 days beginning in 1998), 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 Hollywood Knights Saloon,
which services video lottery players, as well as racing fans. The grandstand
offers a buffet 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 Hollywood Grande
Buffet. Closed circuit television monitors displaying Mountaineer's live and
simulcast races are provided at every table in both the Clubhouse and grandstand
restaurant for the convenience of racing fans. 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.
Lodge customers principally include local residents and business
travelers visiting nearby steel plants and other businesses on weekdays, with a
larger number of recreational customers and persons from non-local markets on
weekends. Lodge facilities also include the Mountaineer Lodge Dining Room, which
seats 125 patrons for casual dining overlooking the golf course, and an
additional 68 persons may be seated on an outside deck, weather permitting. Food
and beverages are also available at the Lodge in Big Al's Deli located in the
Speakeasy Gaming Saloon and in the Iron Horse Lounge. Table and barstool seating
is 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 is 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.
- 46 -
<PAGE>
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 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 24 40-inch
television monitors, as well as 3 projection screens. 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 eight
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 60 remaining guest rooms and common areas in 1995.
- 47 -
<PAGE>
In 1996 and 1997, enhancements and expansion of the Speakeasy Gaming
Saloon, parking lot expansion and 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 Park as a Diversified
Entertainment Facility
The Company believes that the Mountaineer Park racetrack facility has
not performed up to its potential in the past because it was utilized primarily
to conduct parimutuel racing, thereby limiting the facility's customer base and
under-utilizing its sizable infrastructure during non-racing times. The
expansion of video lottery operations and the introduction of bingo for local
senior citizen groups and simulcast boxing events at Mountaineer Park have begun
to remedy these deficiencies. Management believes that the addition of such
improvements and programs to those already completed 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 revenues increase, so will the size of purses. Management believes that
this will attract 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
- 48 -
<PAGE>
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 additional forms of gaming
which may be legalized in West Virginia in the future. There can be no
assurances, however, that the state of West Virginia will authorize additional
gaming activities or that, if authorized, the Company would be permitted to
engage in such operations.
Relocate Off-Track Wagering
The Company recently relocated its primary simulcasting operations to
the Speakeasy Gaming Saloon at the Lodge. 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
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 and Commence Export Simulcasting
Outside Hub Area
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. The increased purses reflect an increase in
the minimum daily purses guaranteed pursuant to the Company's agreement with the
horsemen's association, a non-union entity which represents the jockeys 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. The Company anticipates that it
will be able to continue increasing purse sizes to levels attractive to owners
of mid-level quality or better racehorses.
Management 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 1998.
Wagering handles from participating racetracks are commingled with Mountaineer's
on-site wagering handle when it exports its simulcast signal.
- 49 -
<PAGE>
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. The Company
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, the Company 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
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 is in the process of implementing 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 through the issuance of reward certificates which are
redeemable for food and beverages, merchandise and other services, (ii)
- 50 -
<PAGE>
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.
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 and Ladbroke
located approximately 80 miles away from Mountaineer in Washington,
Pennsylvania. Wheeling Downs conducts parimutuel greyhound dog racing and video
lottery gaming. Thistledown conducts parimutuel thoroughbred horse racing but
not video lottery. Ladbroke conducts live harness racing and provides import
simulcasting, but does not have video lottery gaming. Other than Wheeling Downs,
Thistledown and Ladbroke, 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 two facilities in West
Virginia, other than Mountaineer and Wheeling Downs, offering video lottery, are
located in the central and eastern parts of the state and, as a result,
management believes they do not compete to any significant extent with
Mountaineer Park for customers. In addition, one other well-known resort located
downstate, has sought legislative approval to operate a land-based casino
available only to its overnight guests. The Company does not believe that such
operations, if approved and implemented, would compete with Mountaineer. 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
Park 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 is easily accessed with ample on-site parking. To the extent that
- 51 -
<PAGE>
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 of 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 September 30, 1997, Mountaineer had approximately 480 full-time
employees and 30 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 a vote was held on a proposal to make approximately 200 other
employees union members. Based on the information available to the Company, the
Company believes that the vote on the proposal to expand the union coverage 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 this 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 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.
- 52 -
<PAGE>
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 (210 in 1998) live race days each year. Mountaineer
was granted a license to conduct 220 (210 beginning in 1998) 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 Park.
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
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
- 53 -
<PAGE>
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 (210 in 1998) live racing dates, 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 Park, all of which
satisfy the eligibility requirements. 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 vote 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 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
- 54 -
<PAGE>
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
initially failed to 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 an opinion dated
May 9, 1996 to the effect that because Bennett had the right to vote less than
5% of the outstanding stock of Winners Entertainment, Inc., the Company's
previous name, 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.
- 55 -
<PAGE>
Mountaineer refinanced its loan with Bennett. Assuming the Lottery
Commission does not change its current position, if no new lender acquires the
right to vote more than 5% of the voting stock and does not obtain the right to
take an active role in the affairs of Mountaineer, no Lottery Commission
approval will be required. While the Company has no reason to believe that its
license is in jeopardy as a result of either loan, a change in policy by the
Lottery Commission could affect Mountaineer's license and thus adversely affect
the Company.
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.
- 56 -
<PAGE>
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 9% is divided among tourism promotion, Hancock County, the
Breeders' Classics, the Veterans Memorial Program and the Racetrack Employees
Pension Fund.
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, 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 by Mr. Arneault and
- 57 -
<PAGE>
operated by his affiliate, Century Energy Management Company, Inc. 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.
Marathon-Otter Lake Field - Michigan
In January 1992, ExCal acquired all the issued and outstanding shares
of Crystal Oil Company, Inc. ("Crystal"). Crystal's assets consisted of an
average of a 64% net revenue interest in approximately 3.4 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 had 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 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 $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
- 58 -
<PAGE>
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
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. ("DAVE"), whose principal
stockholder is the brother of Edson R. Arneault, the President and Chief
Executive Officer and a Director 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
- 59 -
<PAGE>
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 1998. 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".
Properties
Gaming, Racing and Other Entertainment
Mountaineer Park 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. Substantially all of
Mountaineer's assets are pledged to secure the debt evidenced by the Second
Amended and Restated Term Loan.
Oil and Gas
The Company's oil and gas interest constitutes a 25% joint venture in a
64% net revenue interest in 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 10 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
Equipment Leases
At December 31, 1996, in connection with video lottery operations,
Mountaineer leased 800 video lottery machines, a totalisator system, video tape
and closed circuit television systems and other equipment required for
operations. During the first quarter of 1997, the Company agreed to amend its
master lease agreement, reducing the number of VLTS under lease to 600. For
discussion of such equipment leases, see Note 7 of the Notes to Consolidated
Financial Statements included elsewhere in this Prospectus.
- 60 -
<PAGE>
Legal Proceedings
Pending Litigation
Ovelle Holdings, Inc. V. MTR Gaming Group, Inc., Circuit Court of
Hancock, West Virginia, Civil Action 97-C-133G. On July 24, 1997, the Company
and Mountaineer were served with a complaint filed by Ovelle Holdings, Inc.
claiming breach of contract and breach of the implied covenant of good faith and
dealing in connection with a financing commitment allegedly obtained by the
plaintiff for Mountaineer Park, Inc. The complaint seeks recovery of $350,000 in
fees, as well as lost profits on shares of the Company's stock the plaintiff
alleges it could have purchased, and loan servicing fees, which lost profits and
servicing fees are alleged to exceed $75,000, pre- and post-judgment interest,
and costs. Management believes that the claims of the plaintiff are without
merit and intends to vigorously defend the action. Management believes that the
matter will not result in any material liability to the Company, however, there
can be no assurance of such result.
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, lifetime 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
- 61 -
<PAGE>
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.
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
- 62 -
<PAGE>
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 not believe that the outcome of such litigation, in the aggregate, will
have any material adverse effect on the Company.
- 63 -
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the directors and
executive offices of the Company.
Name Age Position and Office Held
Edson R. Arneault 50 President, Chief Executive
Officer, Chairman of the Board
Robert L. Ruben 35 Assistant Secretary, Director
Robert A. Blatt 56 Assistant Secretary, Director
Business Experience
Edson R. Arneault, 50, has served as the Company's President and Chief
Executive Officer since April 26, 1995. He is also a member of the Company's
Board and an officer and director of the Company's subsidiaries, Mountaineer,
Golden Palace Casinos, Inc. ("Golden Palace") and ExCal. He has served as a
member of the Board since 1992, when he was elected President of ExCal. Mr.
Arneault is also a principal in numerous ventures directly or indirectly engaged
in the development, production and transportation of oil and gas. Since becoming
the President of the Company and Mountaineer, however, Mr. Arneault has devoted
virtually all his time and attention to the business of the Company. Mr.
Arneault is a certified public accountant, and has served as a tax partner with
Seidman and Seidman (now "BDO Seidman"), a public accounting firm, in Grand
Rapids, Michigan, from 1977 to 1980. Mr. Arneault is a member of the Independent
Producers Association of America, the Ohio Oil and Gas Association, the Michigan
Oil and Gas Association and the Michigan Association of Certified Public
Accountants. Mr. Arneault received his Bachelor of Science in Business
Administration from Bowling Green University in 1969, his Master of Arts from
Wayne State University in 1971; and his Masters in Business Administration from
Cleveland State University in 1978.
Robert L. Ruben, 35, is a principal in Freer, McGarry, Bodansky & Rubin,
P.C., a Washington, D.C. law firm, where he has practiced since 1991. Mr. Ruben
is also a director of Mountaineer and serves as assistant secretary of the
Company and Mountaineer and as Chairman of the Compensation Committee. 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
practices principally in the areas of commercial litigation and
corporate/securities law. Mr. Ruben
- 64 -
<PAGE>
received his Bachelor of Arts from the University of Virginia in 1983 and his
Juris Doctor from the Dickinson School of Law in 1986. He is a member of the
bars of the District of Columbia and the Commonwealth of Pennsylvania. Freer,
McGarry, Bodansky & Rubin, P.C. has served as counsel to the Company since
November of 1991, and Mr. Ruben has represented Mr. Arneault and various of his
affiliates since 1987.
Robert A. Blatt, 56, is the Chief Executive Officer of Island Golf
Resorts, L.L.C., Championship Golf Enterprises, L.L.C., Championship Golf
Antigua, Limited of St John's Antigua, CGE Shattuck, L.L.C., and CGE Niantic,
L.L.C.and a member of the board of directors of AFP Imaging Corporation. Mr.
Blatt is also a director of Mountaineer and Chairman of the Company's Finance
Committee. Since 1979 he has 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 or 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 the New York Stock
Exchange, Inc.
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 $100,000 in the fiscal year ended December 31, 1996.
- 65 -
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation
Awards Payouts
Other Restricted
Annual Stock Options LTIP All
Salary Bonus Comp. Awards SARs Payouts Other
Name Year ($)(1) ($) ($)(2) ($)(3) ($)(4) ($) Comp.
---- ---- -------- ----- -------- ------- -------- ----- -----
Edson R. Arneault(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chairman, President 1996 230,521 67,500 24,590 2,748 300,000 - -
and Chief Executive
Officer of MTR 1995 68,985 23,000 - 144,667 68,415 - -
Gaming Group, Inc. 1994 188,729 - 4,021 46,000(3) - - -
Thomas K. Russell(5) 1996 162,729 - 7,496 619 100,000 - -
Secretary, 1995 105,734 - - 41,554 357,316 - -
Treasurer, Chief
Financial Officer, 1994 134,075 - 2,898 - - - -
General Counsel and
Director of MTR
Gaming Group, Inc.
Compensation paid to all 1996 393,250 67,500 32,086 3,367 400,000 - -
officers and directors
as a group during 1996
</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.
(4) No options were granted in 1994. All options granted by the board of
directors in 1995 were approved by vote of the stockholders at the
Company's annual meeting of stockholders held September 11, 1995.
(5) See "Employment Agreements" below.
- 66 -
<PAGE>
OPTION GRANTS IN 1996
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.
<TABLE>
<CAPTION>
Potential
Realized Value at
Assumed Annual Rates
of Stock Price
Appreciation
for Option Term (2)
% of
Number of Total
Securities Options
Underlying Granted
Options in Fiscal Exercise Expiration
Name Granted(#)(1) Year Price Date 5% 10%
---- ------------- ---- ------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Edson R. 300,000 60% $.5625 Jan. 2001 $46,622 $103,024
Arneault
Thomas K. 100,000 20% $.5625 Jan. 2001 $15,541 $34,341
Russell
</TABLE>
(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 $.5625 per share, at annual compounded rates of
5% and 10%, respectively.
- 67 -
<PAGE>
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and
value of options held by each of the Company's executive officers named in the
Summary Compensation Table as of December 31, 1996. None of the named executive
officers exercised any stock options during fiscal year 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-
Underlying Unexercised the-Money Options at Year
Options at Fiscal Year End End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Edson R. 1,059,749 - 270,247 -
Arneault
Thomas K. 536,816 - 103,203 -
Russell
</TABLE>
(1) Based on the market price of the Company's Common Stock of $1.281 on
March 20, 1996, as reported by Nasdaq.
- 68 -
<PAGE>
TEN-YEAR OPTIONS/SAR REPRICINGS
The following table sets forth the number of options held by officers
of the Company subject to repricing during the fiscal year ended December 31,
1996. See table entitled "Option Grants in 1996".
<TABLE>
<CAPTION>
Market Exercise Length of
Price of Price at Original
Number of Stock at Time of Option Term
Options/SA Repricing Repricing New Remaining at
Rs Amended or or Exercise Date of
Fiscal Amendment Amendment Price Repricing or
Name Date Year ($) ($) ($) Amendment
<S> <C> <C> <C> <C> <C> <C>
Edson R.
Arneault Sep. 95 240,000 1.563 4.875 2.00 2 years
Thomas K. Sep. 95 240,000 1.563 4.875 2.00 2 years
Russell
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Under the provisions of Section 16(a) of the Exchange Act, the
Company's officers, directors and 10% beneficial stockholders are required to
file reports of their transactions in the Company's securities with the
Commission. Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, the Company believes that as of October 14, 1997, all of its
executive officers, directors and greater than 10% beneficial stockholders
complied with all filing requirements applicable to them during 1996.
Employment Agreements
Messrs. Arneault and Russell each have an employment agreement with the
Company. On March 1, 1997, the Company entered into a new three year employment
agreement with Mr. Arneault to reflect Mr. Arneault's responsibilities as
president and chairman of the Company which he assumed on April 26, 1995. The
new agreement replaced a May 10, 1994, agreement pursuant to which Mr. Arneault
served as president of ExCal Energy Corporation and vice president in charge of
political relations for the Company. The new agreement provides that Mr.
Arneault will receive a base salary with annual cost of living adjustments and
bonuses at the discretion of the Compensation Committee of the Board of
Directors. As of March 1, 1997, Mr. Arneault's base salary is $315,000 an
increase of 31% and he was awarded performance bonuses of $67,500 in December
1996 and July 1997. The Compensation Committee obtained the consent of the
Company's lender for the increase and bonuses. Mr. Russell has a three year
employment agreement with the Company that has been in effect since May 10,
1994. Pursuant to that agreement, Mr. Russell receives a base salary with annual
cost of
- 69 -
<PAGE>
living adjustments, and bonuses and stock options at the discretion of the
Board. Mr. Russell's employment agreement with the Company will expire May 9,
1998. Mr. Russell's base salary, giving effect to prior cost of living
adjustments, is $173,643.
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 employees' 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.
In the event that the termination of the employee's period of
employment occurs after there has been a change of control (as defined in the
agreement) of the Company and the termination is (i) not for cause, (ii) by
reason of the death or physical or mental disability of the employee or (iii)
the employee terminates his employment for good reason (as defined in the
agreement), 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 of 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 judgement are inconsistent with, 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 agreement provides that, during the term of the agreement, the
employee will not compete with the business or any contemplated business of the
Company either individually or as an officer, director, stockholder, employee,
agent, partner or consultant of any entity at any location within ninety miles
of any locations at which the Company does business or at which the employee
knows that the Company contemplates doing business.
- 70 -
<PAGE>
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 serving 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 that they incur in attending such meetings.
On January 23, 1996, Mr. Ruben and Mr. Blatt were granted options to
purchase 75,000 and 50,000 shares of the Company's Common Stock, respectively,
at the fair market value on the date of the 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. On September 19, 1997, Mssrs. Blatt and
Ruben were each granted non-qualified options to purchase 150,000 shares of the
Company's common stock at the fair market value on the date of grant of $1.34375
per share. All of the foregoing options were granted to Mssrs. Ruben and Blatt
as compensation for their services as directors and are exercisable at any time
and from time to time in whole of 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. Ruben and Mr. Blatt, the Company's two non-employee
directors (the "Committee"). The Committee is authorized to review 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. As a matter of policy and to assure
compliance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, the
decisions of the Compensation Committee are subject to ratification by a
majority of the Board.
- 71 -
<PAGE>
CERTAIN TRANSACTIONS
All of 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 of the stock of Crystal Exploration
Company, Inc. from Century Energy Management Company, Inc., another 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 of
directors 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 Partnership's
shares did not become effective before March 31, 1995, the March 30, 1995
modification of the agreement (i) reinstated the note with a principal amount of
$590,000 and increased the interest rate on the note representing the $590,000
balance 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 through
October 1, 1996, 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, 1995. 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.
- 72 -
<PAGE>
In December 1994, the Company entered into an arrangement to sell
certain of the 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 and a $150,0000 note payable from the portion of the monthly net revenues
of the wells in excess of $10,000. 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 $228,000. The purchaser
is delinquent on four of the Note payments which were due in the first six
months of 1997. The Company and the purchaser are negotiating arrangements to
bring the account current, and the Company believes the matter will be resolved
amicably. The Company is continuing to attempt to sell its remaining oil and gas
interests pursuant to the plan of liquidation.
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. The Company and Freer, McGarry, Bodansky & Rubin anticipate
that the law firm will perform legal services for the Company in the future.
In March 1994, the Company lent $50,000 to a non-affiliated company
(the "Judgment Debtor") 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 cancelled 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 the Judgment Debtor in the
amount of $64,737.47, including
- 73 -
<PAGE>
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.
Notes Payable to Related Parties
At December 31, 1995 the Company incurred salaries to key management, in
the amount of 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. Such shares have an approximate value of
$177,000, thus no additional compensation expense was recorded as a result of
this issuance of Common Stock.
Redeemable Common Stock
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.
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,
- 74 -
<PAGE>
based on the Average Market Price, the Company was required to issue 30,312
additional shares.
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 required to issue 30,159 additional shares.
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.
Under the terms of the note, the Company was 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 $0.01 per share.
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.
In connection with the December 1992 acquisition of Mountaineer, the
Company issued 469,072 shares of the Company's common stock which bore
registration rights guaranteed at $6.00 per share to be made up by the issuance
of additional shares of Common Stock if the Shares could not be registered and
sold at the guaranteed value. Between December 1996 and July 1997 the Company
obtained the cancellation of the price guarantee with respect to the holders of
438,730 of such shares in exchange for the payment of $555,100, the issuance of
150,000 shares of Common Stock (100,000 of which Shares were granted piggy back
registration rights) and the cancellation of promissory notes in the principal
amount of $302,000 plus accrued interest. The Company is attempting to negotiate
a settlement with the previous holder of
- 75 -
<PAGE>
the remaining 30,342 guaranteed shares. The holder has previously sold such
Shares pursuant to Rule 144. A November 1994 Amendment entitled the Company to a
credit against any liability to such holder in the amount of approximately
$50,000, the amount realized by the holder in sales of shares pursuant to Rule
144.
At October 14, 1997, 90,496 shares of redeemable Common Stock were
outstanding.
- 76 -
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 14, 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, the directors individually and the officers and directors as
a group. As of October 14, 1997, there were 19,814,291 shares of Common Stock
outstanding. All such shares were owned both beneficially and of record, except
as otherwise noted.
Amount and
Nature of
Beneficial Percentage of
Name and Address Ownership Class
Edson R. Arneault(1) 2,515,567 12.14%
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034
Thomas K. Russell(2) 640,626 3.15%
1461 Glenneyre Street,
Suite E
Laguna Beach, CA 92677
Robert L. Ruben(3) 338,228 1.68%
Freer, McGarry, Bodansky &
Rubin
1000 Thomas Jefferson
Street, N.W., Suite 600
Washington, DC 20007
Robert A. Blatt(4) 667,684 3.32%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue,
Suite 303
Larchmont, NY 10538
Bennett Management and 1,530,000 7.72%
Development Corp.(5)
2 Clinton Square
Syracuse, NY 13202
Madeleine LLC(6) 2,884,302 12.94%
450 Park Avenue
New York, NY 10022
- 77 -
<PAGE>
Donald G. Saunders(7) 1,827,685 8.88%
900 East Desert Inn Road
Suite 521
Las Vegas, NV 89109
Total Officers and 4,162,105 19.06%
Directors as a Group
(4 persons)(8)
(1) Includes 1,610,668 shares and options to acquire beneficial ownership of
1,059,749 shares within 60 days held by Mr. Arneault or his affiliates.
(2) Includes 103,810 shares and options to acquire beneficial ownership of
536,816 shares exercisable within 60 days held by Mr. Russell.
(3) Includes 38,228 shares and options to acquire beneficial ownership of
300,000 shares within 60 days held by Mr. Ruben.
(4) Includes 392,684 shares and options to acquire beneficial ownership of
275,000 shares exercisable within 60 days held by Mr. Blatt.
(5) Includes 780,000 shares for which voting rights have been assigned to the
Board to satisfy licensing requirements of the Lottery Commission.
(6) Includes 412,428 shares and options to acquire beneficial ownership of
2,471,874 shares within 60 days held by Madeleine LLC; provided, however,
that pursuant to an agreement with the Company, Madeleine LLC may not
exercise its warrant to the extent such exercise would result in its
ownership of 5% or more of the then issued and outstanding shares of common
stock of the Company without the prior approval of the West Virginia State
Lottery Commission.
(7) Includes 1,051,816 shares and options to acquire beneficial ownership of
625,869 shares within 60 days.
(8) Includes Messrs. Arneault, Russell, Blatt and Ruben.
- 78 -
<PAGE>
SELLING STOCKHOLDERS
General
On July 2, 1996, Mountaineer entered into the Term Loan Agreement. The
Company acted as a Guarantor of this Term Loan Agreement. In connection with
this Term Loan Agreement, the Company issued the lender 183,206 shares of Common
Stock, warrants to purchase 1,492,860 shares of Common Stock at $1.06 per share.
In connection with a separate $250,000 bridge loan which was repaid with the
proceeds of the $5,000,000 loan, the Company issued two other private lenders
warrants to purchase an aggregate of 50,000 shares of Common Stock at $.80 per
share. Prior to the date of the Post-Effective Amendment of which this
Prospectus forms a part, the private lender transferred 80,153 shares of its
originally issued 183,206 shares and 653,126 of its originally issued 1,492,860
Warrants to two unaffiliated parties to the Registration Statement.
On December 10, 1996, Mountaineer borrowed $11.1 million pursuant to
the Amended Term Loan Agreement. This Amended Term Loan Agreement refinanced the
Term Loan Agreement from the same lender and allowed the Company to prepay the
outstanding $8,711,273.16 balance of the Bennett Loan. The lender also provided
Mountaineer a $5,376,500 revolving line of credit to be used for capital
improvements, the acquisition of equipment and/or other gaming businesses, or
the acquisition of properties for use in the gaming and lottery businesses
consistent with the current business of Mountaineer Park. The Amended Term Loan
Agreement is guaranteed by the Company.
As part of the Amended Term Loan Agreement, the Company agreed to issue
the lender, over a period of thirteen months, an additional 550,000 shares of
the Company's Common Stock and warrants to purchase 1,632,140 shares of Common
Stock for $1.06 per share. In connection with the Amended Term Loan Agreement
and the Second Amended Term Loan Agreement, the Company paid Bridge Capital, LLC
$100,000.
The warrants issued in connection with the Amended Term Loan Agreement,
as well as the warrants issued to the lenders in connection with the Term Loan
Agreement (which are being offered pursuant to this Prospectus), are entitled to
protection from dilution in certain circumstances. The Company agreed to
register the shares of Common Stock and warrants for public sale pursuant to the
terms of the warrants and the Registration Rights Agreement entered July 2,
1996. Amendment No. 1 to Registration Rights Agreement, which was entered in
connection with the Amended Term Loan Agreement, limits the lender's right to
demand registration to once per calendar year absent default by Mountaineer Park
or the Company, prepayment of the loan, or a change in control of the Company.
- 79 -
<PAGE>
The Selling Stockholders have the right, at the Company's expense, to
have the shares of Common Stock and Warrants offered hereby, registered for the
offer and sale to the public under the Securities Act until (i) none of the
shares constitute Registrable Securities (as defined in the Registration Rights
Agreements and the Warrant Certificates) or (ii) all of such shares may be sold
under Securities Act Rule 144(k) subject to the Company obtaining an opinion of
counsel, and counsel for the Selling Stockholders concurring with such opinion,
that such conditions were satisfied.
In connection with the registration of the securities offered hereby,
the Company will supply prospectuses to the Selling Stockholders and use its
best efforts to qualify such securities for sale in certain states which may be
designated by the Selling Stockholders.
Stock Ownership
The table below sets forth the number of shares of Common Stock (i)
owned beneficially by each of the Selling Stockholders; and (ii) being offered
by each Selling Stockholder pursuant to this Prospectus; (iii) to be owned
beneficially by each Selling Stockholder after completion of the offering,
assuming that all of the Warrants held by the Selling Stockholders are exercised
and all of the shares offered hereby are sold and that none of the other shares
held by the Selling Stockholders, if any, are sold and (iv) the percentage of
outstanding shares of Common Stock to be owned by each Selling Stockholder after
completion of the offering, assuming that all of the shares offered hereby are
sold and that none of the other shares held by the Selling Stockholders, if any,
are sold. For purposes of this table each Selling Stockholder is deemed to own
beneficially (i) the shares of Common Stock underlying the Warrants held by
them, (ii) the issued and outstanding shares of Common Stock owned by the
Selling Stockholder as of October 14, 1997, and (iii) the shares of Common Stock
underlying any other options or warrants owned by the Selling Stockholder which
are exercisable as of October 14, 1997 or which will become exercisable within
60 days after October 14, 1997. Except as otherwise noted, none of such persons
or entities has had any material relationship with the Company during the past
three years.
- 80 -
<PAGE>
<TABLE>
<CAPTION>
Percentage
of
Outstanding
Number of Shares to be
Shares to be Owned
Owned Beneficially
Number of Beneficially After
Shares Number of After Completion
Beneficially Shares Completion of of
Selling Stockholders Owned Offered Offering Offering
-------------------- ----- ------- -------- -----------
<S> <C> <C> <C> <C>
Madeleine LLC 2,884,302 (1) 942,787 (2) 1,941,515 *
Bridge Capital 442,387 (3) 25,000 (4) 417,387 *
Brownstone Holding 581,517 (5) 25,000 (6) 556,517 *
--------- ---------
Total 3,908,206 992,787
</TABLE>
* Less than 1%
(1) Includes 412,428 shares currently outstanding and 2,471,874 shares issuable
upon the exercise of warrants exercisable within 60 days held by Madeleine
LLC.
(2) Includes 103,053 shares currently outstanding and 839,734 shares issuable
upon the exercise of the Warrants.
(3) Includes 25,000 shares issuable upon the exercise of warrants exercisable
within 60 days held by Bridge Capital; 137,476 shares currently outstanding
held by Capital One ("Capital One"), an affiliate of Bridge Capital; and
279,911 Warrants exercisable within 60 days held by Capital One.
(4) Includes 25,000 shares issuable upon exercise of Warrants.
(5) Includes 183,302 shares currently outstanding and 398,215 shares issuable
upon the exercise of warrants exercisable within 60 days.
(6) Includes 25,000 shares issuable upon exercise of Warrants.
PLAN OF DISTRIBUTION
Shares of Common Stock currently outstanding and shares of Common Stock
issuable upon exercise of the Warrants may be sold pursuant to this Prospectus
by the Selling Stockholders. These sales may occur in privately negotiated
transactions or in the over-the-counter market through brokers and dealers as
agents or to brokers and dealers as principals, who may receive compensation in
the form of discounts or commissions from the Selling Stockholders or from the
purchasers of the Common Stock for whom the broker-dealers may act as agent or
to whom they may sell as principal, or both. The Company has not been advised by
the Selling Stockholders
- 81 -
<PAGE>
that they have made any arrangements relating to the distribution of the shares
of Common Stock covered by this Prospectus. In effecting sales, broker-dealers
engaged by the Selling Stockholders may arrange for other broker-dealers to
participate. Broker- dealers will receive commissions or discounts from the
Selling Stockholders in amounts to be negotiated immediately prior to the sale.
Upon being notified by a Selling Stockholder that any material
arrangement (other than a customary brokerage account agreement) has been
entered into with a broker or dealer for the sale of shares through a block
trade, purchase by a broker or dealer, or similar transaction, the Company will
file a supplemented Prospectus pursuant to Rule 424(c) under the Securities Act
disclosing (a) the name of each such broker-dealer, (b) the number of shares
involved, (c) the price at which such shares were sold, (d) the commissions paid
or discounts or concessions allowed to such broker-dealer(s), (e) if applicable,
that such broker-dealer(s) did not conduct any investigation to verify the
information set out in the Prospectus, as supplemented, and (f) any other facts
material to the transaction.
Certain of the Selling Stockholders and any broker-dealers who execute
sales for the Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act by virtue of the number of shares of Common Stock
to be sold or resold by such persons or entities or the manner of sale thereof,
or both. If any of the Selling Stockholders, broker-dealers or other holders
were determined to be underwriters, any discounts or commissions received by
them or by brokers or dealers acting on their behalf and any profits received by
them on the resale of their shares of Common Stock might be deemed underwriting
compensation under the Securities Act.
The Company has advised the Selling Stockholders that any purchase or
sale of the Common Stock by them must be in compliance with Rules 10b-6 and
10b-7 under the Exchange Act. In general, Rule 10b-6 under the Exchange Act
prohibits any person connected with a distribution of the Company's Common Stock
(the "Distribution") from directly or indirectly bidding for, or purchasing for
any account in which he has a beneficial interest, any Common Stock or any right
to purchase Common Stock, or attempting to induce any person to purchase Common
Stock or rights to purchase Common Stock, until after he has completed his
participation in the Distribution (the "Distribution Period").
During the Distribution Period, Rule 10b-7 under the Exchange Act
prohibits the Selling Stockholders and any other person engaged in the
Distribution from engaging in any stabilizing bid or purchasing the Common Stock
except for the purpose of preventing or retarding a decline in the open market
price of the Common Stock. No such person may effect any stabilizing transaction
to facilitate
- 82 -
<PAGE>
any offering at the market. Inasmuch as the Selling Stockholders will be
reoffering and reselling the Common Stock at the market, Rule 10b-7 prohibits
them from effecting any stabilizing transaction with respect to the Common
Stock.
DESCRIPTION OF SECURITIES
Common Stock
The Company is currently authorized to issue 50,000,000 shares of
Common Stock, par value $.00001 per share. As of October 14, 1997, there were
19,814,291 shares of Common Stock issued and outstanding and held of record by
approximately 577 stockholders.
As of October 14, 1997, a total of 8,297,247 shares of Common Stock
were reserved for issuance pursuant to outstanding options and warrants of the
Company.
A majority of the outstanding shares of the Company's Common Stock must
be present at a duly called stockholders' meeting in order to have a quorum
under the Company's By-Laws. Only those stockholders of record as of the record
date, which may be fixed not more than 60 nor less than 10 days before the
meeting, or stockholder action in lieu of a meeting, are entitled to vote on the
subject matter before the stockholders. In most cases, if a quorum is present,
the affirmative vote of the majority of the shares represented at the meeting
constitutes an act of the stockholders. Consequently, the holders of one share
more than one-quarter of the outstanding Common Stock could exercise effective
control over the Company. The affirmative vote of a majority of all outstanding
shares entitled to vote, however, is required to amend the Company's
Certificate, as well as to accomplish certain other matters.
All shares of Common Stock are equal to each other with respect to
voting, liquidation, dividend and other rights. Owners of shares of Common Stock
are entitled to one vote for each share of Common Stock they own at any
stockholders' meeting. Holders of shares of Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefor, and upon liquidation are entitled to participate pro rata in
a distribution of assets available for such a distribution to stockholders. The
Term Loan Agreement restricts the payment of dividends to stockholders without
the lender's consent. There are no preemptive rights or privileges with respect
to any shares of Common Stock. The Common Stock of the Company does not have
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of directors may elect all of the directors if
they choose to do so.
- 83 -
<PAGE>
In such event, the holders of the remaining shares aggregating less than 50%
would not be able to elect any directors.
Anti-takeover Provisions
The Company's Certificate has two significant anti-takeover provisions.
Pursuant to Article VI of the Certificate, any "Acquisition Proposal" (defined
therein as a proposal by any person to (i) make a tender offer or exchange offer
for any equity securities of the Company, (ii) merge or consolidate the Company
with another corporation, or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company), requires the
Board to scrutinize such Acquisition Proposal within certain guidelines.
Specifically, the Certificate states that the Board, in exercising its judgment
with respect to the best interests of the Company, is authorized to give due
consideration to such factors as the Board determines to be relevant, including,
without limitation:
(i) the interests of the Company's stockholders;
(ii) whether the proposed transaction might violate
federal or state laws, or affect the Company's ability to obtain
required licenses;
(iii) the consideration being offered in the
proposed transaction, in relation not only to the then current market price for
the outstanding capital stock of the Company, but also to the market price for
the capital stock of the Company over a period of years, the estimated price
that might be achieved in a negotiated sale of the Company as a whole or in part
or through orderly liquidation, the premiums over market price for the
securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices, and the Company's
financial condition and future prospects; and
(iv) the social, legal and economic effects upon
employees, suppliers, customers and others having similar relationships with the
Company, and the communities in which the Company conducts its business.
The Certificate requires a supermajority of 80% of the outstanding
shares of the Company entitled to vote in the election of directors to amend or
repeal this provision.
In addition to this provision relating to the Board's response to a
takeover offer, in response to regulatory requirements of the Lottery Commission
requiring advance approval of persons who acquire 5% or more of the Company's
voting stock, Article VII of the Certificate provides the Company with the right
to redeem any shares acquired on the open market or otherwise. Specifically, the
Certificate prohibits any Person (a natural person or entity) from
- 84 -
<PAGE>
becoming the Beneficial Owner (as defined in conformance with Rule 13d-3 of the
Exchange Act) of five percent (5%) or more of the Company's Common Stock unless
such person agrees in writing delivered to the Company at its registered office
to:
(1) provide to the Gaming Authorities (defined in the Certificate as any
governmental authority regulating any form of gaming which has jurisdiction over
the Company or its subsidiaries) information regarding such Person, including,
without limitation, information regarding other gaming related activities of
such Person and financial statements and disclosures, in such form, and with
such updates, as may be requested and/or required by any Gaming Authority;
(2) respond to written and/or oral questions and inquiries that may be
propounded by any Gaming Authority; and
(3) consent to the performance of any personal background investigation
that may be required by any Gaming Authority, including, without limitation, an
investigation of any criminal record and/or alleged criminal activity of such
Person.
Notwithstanding such provisions, any and all issued and outstanding shares
of Common Stock held or otherwise owned by a Disqualified Holder (defined in the
Certificate as any Beneficial Owner of shares of Common Stock, or its
subsidiaries, whose holding of Common Stock may result, in the judgment of the
Board, in (i) the denial, loss or non-reinstatement of any license or franchise
from any governmental agency applied for or held by the Company or any
subsidiary to conduct any portion of the proposed or actual business of the
Company or any subsidiary, which license or franchise is conditioned upon some
or all of its holders of Common Stock meeting certain criteria, or (ii) the
disapproval, modification, or non-renewal of any contract under which the
Company or any of its subsidiaries has sole or shared authority to manage any
gaming operations) shall be subject to repurchase (such securities being defined
as the "Repurchase Securities") by the Company at any time at the sole
discretion of the Company by action of the Board. The terms and conditions of
such repurchase provided for by the Certificate are as follows:
(1) the repurchase price of the Repurchase Securities to be repurchased
pursuant to such provision shall be an amount equal to the Fair Market Value
(defined as the average closing price as quoted on Nasdaq for the 20 days
preceding the repurchase) of such Repurchase Securities or such other repurchase
price as required by either the DGCL, any state law applicable to the
determination that a Beneficial Owner is a Disqualified Holder or applicable
federal law;
(2) the repurchase price of such Repurchase Securities may be paid in cash,
or Corporation Debt Securities (defined as any debt
- 85 -
<PAGE>
securities of the Company which comprise all or a portion of the repurchase
price), or any combination thereof;
(3) if less than all of the Repurchase Securities held or otherwise
owned by one or more Disqualified Holders are to be repurchased, the Repurchase
Securities to be repurchased shall be selected in such manner as shall be
determined by the Company's Board in their sole discretion, which may include
selection of the most recently acquired Repurchase Securities, selection of
Repurchase Securities by lot, or selection of Repurchase Securities in such
other manner as shall be determined by the Company's Board;
(4) at least ten (10) days' written notice of the Repurchase Date shall
be given to the Beneficial Owner (and the record holder if such Person is not
the Beneficial Owner) of the Repurchase Securities selected to be repurchased
unless notice is waived in writing by any such holder) provided that the
Repurchase Date may be the date on which written notice is given if the cash or
Corporation Debt Securities necessary to effect the repurchase shall have been
deposited in trust for the benefit of such record holder and subject to
immediate withdrawal upon surrender of the certificates for the Repurchase
Securities to be repurchased;
(5) from and after the Repurchase Date or such earlier date as mandated
by either the DGCL, any state law applicable to the determination that a
Beneficial Owner is a Disqualified Holder or applicable federal law, any and all
rights of whatever nature which may be held by the Beneficial Owners of
Repurchase Securities selected for repurchase (including, without limitation,
any rights to vote or participate in dividends declared on securities of the
same class or series as such Repurchase Securities), shall cease and terminate
and such Beneficial Owners shall thenceforth be entitled only to receive the
cash or Corporation Debt Securities payable upon repurchase; and
(6) such other terms and conditions as the Board shall
determine.
All securities subject to this restriction bear a restrictive legend
stating the fact that such securities are subject to the repurchase option of
the Company and may not be transferred other than in accordance with the
Certificate.
Transfer Agent
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
Indemnification of Directors and Officers
Under Section 145 of the DGCL, a corporation may indemnify any
person who was or is a party or is threatened to be made a party to
- 86 -
<PAGE>
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
A corporation also may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation.
However, in such an action by or on behalf of a corporation, no
indemnification may be made in respect of any claim, issue or matter as to which
the person is adjudged liable to the corporation unless and only to the extent
that the court determines that, despite the adjudication of liability but in
view of all the circumstances, the person is fairly and reasonably entitled to
indemnification for such expenses which the court shall deem proper.
In addition, the indemnification provided by Section 145 shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. The Certificate and
By-laws of the Company are consistent with Section 145. The Certificate provides
that no director shall be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts and omissions not in good faith or which
involve intentional misconduct or knowing violation of the law; (iii) for acts
specified in Title 8, Section 174 of the DGCL, or (iv) for which the director
derived an improper personal benefit.
- 87 -
<PAGE>
In addition to the Certificate, the Company's By-laws provide
indemnification (the "Indemnity Provisions") for any person who is or was a
party to any threatened, pending or completed action, suit, or proceeding
whether civil, criminal, administrative, arbitrative, investigative procedure by
reason of the fact that he or she was a director, officer, employee, fiduciary
or agent of the Company or served in such capacity with another entity at the
Company's request (such persons are defined as an "Indemnified Party" or
"Indemnified Parties"). With respect to third party actions, the Indemnity
Provisions represent the Company's commitment to indemnify based on such persons
incurring expenses (including legal fees) judgments, fines, excise taxes, and
amounts paid in settlement based on civil or criminal matters. In the case of a
civil matter, the Indemnified Parties must have acted in good faith and in a
manner reasonably believed by that person to be in or not opposed to the best
interests of the Company. With respect to a criminal matter, the person must
have had no reasonable cause to believe that the conduct was unlawful.
With respect to derivative actions, Indemnified Parties are entitled to
indemnification for any and all expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection with the settlement or
defense of such actions. The Indemnified Party must show that he or she acted in
good faith and a manner reasonably believed by that person to be in or not
opposed to the best interests of the Company, except that no indemnification
shall be available if such person has been adjudged liable for negligence or
misconduct in performing his or her duties to the Company, unless the court in
which such action or suit was brought has determined upon application that,
despite the adjudication of liability but in view of all of the circumstances of
the case, the Indemnified Party is fairly and reasonably entitled to
indemnification for the expenses the court deems proper. Nonetheless, if the
Indemnified Party is successful on the merits or otherwise, he or she need not
show that the applicable standard of conduct was met. If not successful on the
merits, any indemnification may only be made if the Indemnified Party applies to
the Company for indemnification and (i) a majority vote of a quorum of the
Board, or (ii) if a quorum is not available or even if obtainable, or if a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (iii) by vote of the stockholders of the Company.
With respect to both derivative actions and third party actions, the
Indemnity Provisions also provide for the advancement of expenses, including
actual and reasonable attorneys' fees, incurred in defending or investigating
any action, suit, proceeding or claim, subject to a written affirmation by the
Indemnified Party or person requesting an advance for such Indemnified Party
that he or she has met the applicable standard of conduct and that he or she
will repay such advance if it is ultimately determined that he or she did not
meet the applicable standard of conduct.
- 88 -
<PAGE>
Notwithstanding the foregoing, the Company has discretion to impose as
conditions to any of the Indemnification Provisions, such requirements as may
appear appropriate in the specific case including but not limited to: (a) that
any counsel representing the person be mutually acceptable to the Company and
the Indemnified Party, (b) that the Company has the right to assume control of
the defense of such Indemnified Party, and (c) that the Company shall be
subrogated to the extent of any payments made by way of indemnification to all
of such Indemnified Party's right of recovery, and do everything necessary to
assure such rights of subrogation to the Company.
The rights of Indemnified Parties under the Indemnity Provisions are
not exclusive of any other rights Indemnified Parties may have under the
Certificate, any agreement, vote of stockholders, vote of disinterested
directors, any liability insurance policies or otherwise. The Company currently
maintains a Directors and Officers liability insurance policy with coverage of
$5,000,000. Although the Company believes the policy and its coverage limits to
be adequate, the policy may not provide coverage in all circumstances in which
the Company's directors and officers are entitled to indemnification and may not
cover the Company's total liability to its directors and officers even in cases
where coverage is provided.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Indemnified Parties pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such persons in connection with the securities being registered, the Company
will, unless in the opinion of its counsel, the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Description of Warrants
General
In connection with the Term Loan Agreement, the Company issued an
aggregate of 1,542,860 Warrants to three private lenders (the "Warrant
Holders"), all of which are presently outstanding. The Warrants were issued
pursuant to Warrant Certificates dated July 2, 1996, between the Company and
each of the Warrant Holders.
- 89 -
<PAGE>
Each Warrant entitles the holder thereof to purchase one share of
Common Stock (each a "Warrant Share") from the Company. The exercise price of
1,492,860 of the Warrants is $1.06 per share and the exercise price of 50,000 of
the Warrants is $0.80 per share, in each case subject to adjustment as described
below. Subject to certain limitations, the Warrants may be exercised at any time
beginning on July 2, 1996 until 5:00 p.m. Pacific Time on July 2, 2001 (the
"Expiration Date"). Warrants that are not exercised prior to the Expiration Date
will expire.
Exercise
In order to exercise all or any of the Warrants represented by a
Warrant Certificate, the holder thereof is required to surrender to the Company
a completed Exercise Agreement (as defined in the Warrant Certificate), a
Warrant Certificate and cash or certified check payable to the Company in an
amount equal to the then effective Purchase Price for the shares for which the
Warrant Certificate is being exercised. Certificates for Warrant Shares
purchased upon exercise of the Warrants will be delivered by the Company to the
holder thereof within five business days after the exercise. The Warrant Shares
shall, when issued, be duly authorized, validly issued, previously unissued,
fully paid and nonassessable and will be free from all taxes, liens and charges
with respect thereto.
Adjustments
The initial purchase price per Warrant shall be subject to adjustment
from time to time upon the occurrence of certain events including: (i) the
issuance or sale of any shares of Common Stock by the Company, (ii) the grant of
any rights to subscribe for or to purchase Common Stock, or any options for the
purchase of Common Stock or any securities convertible into or exchangeable for
Common Stock, (iii) the issuance or sale of convertible securities, whether or
not immediately exercisable, or (iv) the declaration of any dividend or the
making of any other distribution of any stock of the Company payable in Common
Stock, options or convertible securities. Upon the occurrence of such an event,
the holder shall be entitled to purchase the number of Warrant Shares equal to
that percentage of the total number of shares of Common Stock that the holder
was entitled to purchase immediately prior to such event; provided, however,
that if the issuance of securities is made to all holders of the Common Stock,
then the Warrant Holder shall be entitled to receive the number of shares which
such holder would have been entitled to receive had the holder exercised the
Warrants immediately prior to the event. Notwithstanding this fact, no
adjustment shall be made: (i) at any time prior to 30 months after repayment in
full of the outstanding amounts under the Second Amended Term Loan Agreement and
the Loan Commitment (if drawn down by the Company), if (a) the securities issued
in connection with such event exceed the holder's purchase price or if (b) the
event
- 90 -
<PAGE>
was approved in advance in writing by the holders of a majority of the shares of
Common Stock issuable on the exercise of the Warrants; and (ii) following the
date that is 30 months after the repayment in full of all of the outstanding
amounts under the Second Amended Term Loan Agreement and the Loan Commitment (if
drawn down by the Company); provided, that notwithstanding (i) and (ii) above,
the adjustments provided for in the event of the issuance of Common Stock of the
Company shall be made to the extent that such issuance involves the offer and/or
issuance of securities to all holders of any class of securities of the Company;
provided, further, that the provisions referenced above will not limit any
adjustments to be provided pursuant to other sections of the Warrant
Certificate. No adjustment need be made based on issuances of stock to
employees, directors or officers of the Company in any fiscal year, not to
exceed 4% of the issued and outstanding shares of Common Stock on the date of
issuance; Common Stock issued in the ordinary course of business, not to exceed
2% of the outstanding shares of Common Stock on the day of issuance; or any of
the Warrants or shares of Common Stock issued in connection with the Term Loan
Agreement or Loan Commitment. As of the date of this prospectus, no adjustment
has been required. The holder of the Warrants shall be entitled to participate
in any dividends declared by the Company or any rights to subscribe for the
purchase of Common Stock, options, or convertible securities to the same extent
as such holder would be entitled after giving full effect to the exercise of
such Warrants. Finally, should the Company undertake a subdivision or
combination of its Common Stock to either increase such shares into a greater
number or decrease such shares into a lesser number, the number of shares
purchasable under the Warrant Certificate are to be proportionately increased or
reduced. If conditions arise not otherwise covered by the anti-dilution
provisions discussed above, the Company is required to appoint a firm of
independent certified public accountants of recognized national standing, which
shall give their opinion on any adjustment necessary to preserve the exercise
rights of the Warrant Holder.
Reorganizations, Mergers, and Certain Other Transactions
If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, shall be effected so as to entitle the holders of the Common Stock
of the Company to receive stock, securities or assets with respect to or in
exchange for shares of Common Stock, then, prior to and as a condition of such
reorganization, reclassification, consolidation, merger, sale or conveyance, the
Warrant holder shall be entitled to receive in lieu of any Warrant Shares, such
shares of stock, securities, or assets as may be issued or payable in exchange
for a number of shares of Common Stock equal to the number of shares immediately
theretofore purchasable or receivable upon exercise of the rights under the
Warrant Certificate had such reorganization, reclassification, consolidation or
merger, sale or conveyance, not taken place.
- 91 -
<PAGE>
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to
receive notice of any meeting of the stockholders of the Company, to consent to
any action of the stockholders of the Company, to receive notice of any other
stockholder proceedings, or to any other rights as stockholders of the Company,
except with respect to dividend subscription rights and rights upon merger or
consolidation, as discussed above, and none of the rights of the Warrant Holder
shall give rise to liability for the purchase price of the Warrant Shares or as
a stockholder of the Company.
Additional Warrants
In connection with the Amended Term Loan Agreement, the Company issued
warrants to purchase 1,632,140 shares of Common Stock with terms substantially
similar to the warrants described above. None of the warrants issued in
connection with the Amended Term Loan Agreement, nor any of the shares of Common
Stock issuable upon the exercise thereof are registered hereby.
SHARES ELIGIBLE FOR FUTURE SALE
As of October 14, 1997, the Company had approximately 19,814,291 shares
of Common Stock outstanding. In addition, the Company is obligated to issue an
additional 8,327,247 shares of Common Stock upon the exercise of outstanding
options and warrants. Of shares of Common Stock currently outstanding,
approximately 2,265,236 were issued in registered or other offerings which
rendered such shares freely tradable in the hands of the holders thereof. Of the
remaining 17,549,055 shares of Common Stock currently outstanding which were not
freely tradable by the holders thereof upon issuance by the Company, the Company
has registered the resale of 2,455,427 shares of Common Stock by the holders
thereof and an additional 13, 776,481 shares are currently salable pursuant to
Rule 144. 1,317,417 shares of Common Stock currently outstanding remain
"restricted securities" for purposes of the Act.
With respect to the shares of Common Stock to be issued upon the
exercise of outstanding options or warrants, the Company has previously
registered the resale of 3,040,396 of such shares by the holders thereof. The
remaining 5,286,851 shares of Common Stock issuable upon the exercise of
outstanding options and warrants will be "restricted securities" for purposes of
the Act when issued.
The Company is currently obligated to or intends to file future
registration statements to cover the resale of 6,515,685 shares of Common Stock
which are, or will when issued be, "restricted securities."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has
- 92 -
<PAGE>
beneficially owned "restricted securities" for at least one year but less than
two years and any affiliate of the Company who has owned shares for at least one
year, is entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the outstanding shares of the Company's
Common Stock or the average weekly trading volume in the Company's Common Stock
on the Nasdaq National Market during the four calendar weeks preceding such
sale. Such sales under Rule 144 are also subject to certain provisions regarding
the manner of sale, notice requirements and the availability of current public
information about the Company. A stockholder who is not an affiliate of the
Company at the time of the sale and for at least 90 days prior to a proposed
transaction and who has beneficially owned "restricted securities" for two years
is entitled to sell such shares under Rule 144 without regard to the limitations
described above.
Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could have an adverse impact on the
market price of Common Stock.
Registration Rights
In addition to the shares of Common Stock and Warrants offered hereby,
the Company has previously filed registration statements to cover the sale of
5,495,823 shares of Common Stock which satisfied its obligations under several
registration rights agreements.
Notwithstanding the foregoing, the Company has several outstanding
registration rights obligations. Following is a brief description of the
registration rights which the Company has not yet satisfied.
Pursuant to the Second Amended Term Loan Agreement and the Warrant
Certificate issued in connection therewith, the Company is obligated, upon
demand, to file a registration statement with respect to 550,000 shares of the
Company's Common Stock issued to Madeleine LLC, warrants to purchase 1,632,140
shares of Common Stock held by Madeleine LLC, and the shares underlying such
warrants.
Pursuant to an agreement dated October 1, 1997, the Company granted
piggyback registration rights with respect to 150,000 shares underlying warrants
held by Jefferies & Company.
Pursuant to an agreement entered as of April 2, 1996, as amended June
18, 1996, the Company granted piggyback registration rights with respect to
30,159 shares held by Dorothy van Haaften.
Pursuant to a Letter Agreement dated March 25, 1996 between the Company
and Thomas K. Russell, Chief Financial Officer, General Counsel, Treasurer,
Secretary and member of the Board, the Company agreed to file a registration
statement on Form S-8 as soon as
- 93 -
<PAGE>
possible with respect to 103,810 shares of Common Stock held by Mr. Russell.
None of these shares are included in this Registration Statement.
Pursuant to a Letter Agreement dated March 25, 1996 between the Company and
Edson R. Arneault, the Company's President and Chief Executive Officer and
member of the Board, the Company agreed to file a registration statement on Form
S-8 as soon as possible with respect to 262,866 shares of Common Stock held by
Mr. Arneault. None of these shares are included in this Registration Statement.
Pursuant to an Agreement dated June 30, 1995 with Michael Mapes, the
Company granted piggyback registration rights with respect to 30,312 shares held
by Louis Haskell, Mr. Mapes' successor.
Pursuant to an Agreement dated May 31, 1994, as amended on January 12,
1995, between the Company and William E. Blair, Jr. and Bonnie Blair, the
Company is required to file a registration statement on Form S-8 with respect to
183,888 shares issuable upon exercise of options held by Mr. and Mrs. Blair.
None of these shares are included in this Registration Statement.
An Original Rider dated December 3, 1992 to a Stock Purchase Agreement
(Merger and Stock Exchange Agreement) for all of the outstanding shares of
Mountaineer dated November 28, 1994 between the Company and the previous owner
of Mountaineer and affiliates of such owner, contemplated the Company using its
best efforts to file a registration statement covering 469,072 shares issued in
connection with the acquisition of Mountaineer. Pursuant to an amendment to
Rider No. 4 to such an agreement, the Company agreed to use its reasonable best
efforts to cause a registration statement to become effective with respect to
such shares. In addition, the Company agreed that if any shares were sold
pursuant to Rule 144 during the period prior to effectiveness of the
registration statement or pursuant to the registration statement, within 20 days
of the effectiveness of such registration statement, at a price of less than
$6.00 per share based on the average closing bid price of the Company's Common
Stock as reported on Nasdaq for the ten days prior to the effective date of such
registration statement, the Company would issue additional registered shares in
an amount equal to the difference between the price received and $6.00. Between
December, 1996 and January, 1997, the Company obtained the cancellation of the
price guarantee with respect to the holders of 438,730 of such shares in
exchange for the payment of $555,100, the issuance of 150,000 shares of Common
Stock (100,000 of which shares were granted piggy back registration rights) and
the cancellation of promissory notes in the principal amount of $302,000 plus
accrued interest. The Company is attempting to negotiate a settlement with the
previous holder of the remaining 30,342 shares; however, there can be no
- 94 -
<PAGE>
assurance that such renegotiation will be successful. The holder of such 30,342
shares has previously sold such shares pursuant to Rule 144. Pursuant to the
amendment to Rider 4 discussed above, the Company is entitled to a credit
against any liability to such holder in the amount of approximately $50,000, the
amount realized by the holder in sales of shares pursuant to Rule 144.
Pursuant to various stock option plans and grants of options to
employees, directors and consultants of the Company, the Company intends to file
a registration statement on Form S-8 with respect to 3,688,047 shares of Common
Stock when issued subsequent to the exercise of such options. None of these
shares are included in this Registration Statement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On July 2, 1996, the Company as Guarantor and the Company's subsidiary,
Mountaineer, entered into the Term Loan Agreement for a $5,000,000 secured
working capital loan and a commitment for first mortgage refinancing. In
connection with the Term Loan Agreement, the Company agreed to issue the lender
183,206 shares of Common Stock and five-year Warrants to purchase an additional
1,492,860 shares at $1.06 per share, which are exercisable for a period of five
(5) years. Prior to the date of the Post-Effective Amendment of which this
Prospectus forms a part, the lender transferred 80,153 of its originally issued
183,206 shares and 653,126 of its originally issued 1,492,860 Warrants to two
unaffiliated parties pursuant to the Registration Statement. The shares of
Common Stock and Warrants issued to the lender and the shares of Common Stock
underlying such Warrants remain covered by this Registration Statement.
In December, 1996, the Company entered into the Amended Term Loan
Agreement. The lender also provided Mountaineer Park a $5,376,500 revolving line
of credit to be used for capital improvements, the acquisition of equipment
and/or other gaming businesses, or the acquisition of properties for use in the
gaming and lottery businesses consistent with the current business of
Mountaineer Park.
In connection with the Amended Term Loan Agreement, the Company agreed
to issue the lender, over a period of thirteen months, 550,000 shares of the
Company's common stock and warrants to purchase an additional 1,632,140 shares
for $1.06 per share and paid a fee of $100,000.
The shares and warrants issued in connection with both the Term Loan
Agreement and the Amended Term Loan Agreement are entitled to protection from
dilution in certain circumstances. The Registrant has agreed to register the
shares and warrants for public sale. The lender's right to demand registration
is limited to once per calendar year absent default by Mountaineer Park or the
- 95 -
<PAGE>
Company, prepayment of the loan, or a change in control of the Company.
In July, 1997, the Company entered into the Second Amended Term Loan
Agreement. The Second Amended Term Loan Agreement (i) extends the term of the
Amended Term Loan Agreement to July 2, 2001 (compared to July 2, 1999); (ii)
increases the total amount borrowed to $21,476,500 (by virtue of Mountaineer
drawing down the line of credit); (iii) eliminates from the Amended Term Loan
Agreement annual fees of cash in the amount of 8% of the outstanding principal
balance of the loan that would have been due on each anniversary of the Amended
Term Loan Agreement and stock and warrants of the Registrant that would have
been due each November 15 while the loan is outstanding; and (iv) calls for
payments of interest only with the principal due at the end of the four year
term.
The Second Amended Term Loan Agreement continues to be evidenced by
Mountaineer's Promissory Notes and continues to be secured by a first priority
Credit Line Deed of Trust with respect to Mountaineer's real property and a
perfected security interest evidenced by a UCC-1 Financing Statement with
respect to its personal property. The lender's rights pursuant to the Amended
Term Loan Agreement with respect to the 550,000 shares of the Company's stock
and warrants to purchase 1,632,140 additional shares issued thereunder are
unaffected by the Second Amended Term Loan Agreement. The Company continues to
guarantee the Second Amended Term Loan Agreement.
As consideration for the lender's entering the Second Amended Term Loan
Agreement, Mountaineer has agreed (i) to pay a one time fee of $1.8 million or
8.5% of the total amount borrowed, which may be paid over the first year of the
term; (ii) to pay interest at the rate of 13% (compared to 12% on the $16.1
million Amended Term Loan Agreement and 15% on the $5.4 million line of credit
under the Amended Term Loan Agreement); and (iii) to pay a call premium equal to
5% in the event of prepayment during the first year of the term, declining to 3%
during the second year, 2% in the third year, and 1% in the final year.
Mountaineer intends to use the additional proceeds toward the
construction of a convention facility and additional hotel rooms.
LEGAL MATTERS
The validity of the Warrants and the shares of Common Stock offered
hereby will be passed upon for the Company by Ross & Hardies, New York, New
York.
- 96 -
<PAGE>
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries included herein as of December 31, 1996 and 1995, and for each of
the years in the three year period ended December 31, 1996 have been audited by
Corbin & Wertz, independent certified public accountants, as set forth in their
opinion included herein. The financial statements referred to above have been
included herein in reliance upon such opinion given upon the authority of such
firm as experts in accounting and auditing.
- 97 -
<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-9
Notes to Consolidated Financial Statements ...............................F-12
Condensed and Consolidated Balance Sheets at December 31, 1996 and
June 30, 1997 (Unaudited)...............................................F-51
Condensed and Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1997 and 1996 (Unaudited) .........F-53
Condensed and Consolidated Statements of Cash flows for the Six
Months Ended June 30, 1997 and 1996 (Unaudited).........................F-54
Notes to Condensed and Consolidated Financial Statements (Unaudited)......F-55
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.
/s/ CORBIN & WERTZ
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
------------ -------------
Current assets:
<S> <C> <C>
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>
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
------------ -------------
Current liabilities:
<S> <C> <C>
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
------------- ------------- -------------
Revenues:
<S> <C> <C> <C>
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
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
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
------------- ------------- -------------
Cash flows from financing activities:
<S> <C> <C> <C>
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).
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
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").
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.
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
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.
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.
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
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
----------- -----------
----------- -----------
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.
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 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-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
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-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
$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-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 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-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 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-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 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-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
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.
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
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.
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.
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
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
==============
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.
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 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
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.
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.
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 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
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.
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.
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 10 - RELATED PARTY TRANSACTIONS - CONTINUED
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 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.
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 10 - RELATED PARTY TRANSACTIONS, CONTINUED
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.
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.
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
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-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
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-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
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-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 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.
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 11 - SHAREHOLDERS' EQUITY, CONTINUED
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.
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-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
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
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
expertise and fund 75% of the costs to perform rework and water-flood of
approximately $2,200,000 (see below).
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-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 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-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 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-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 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)
----------
----------
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 13 - INCOME TAXES, CONTINUED
At December 31, 1996 and 1995, significant components of the Company's net
deferred taxes are as follows:
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.
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 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).
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:
1996 1995 1994
---- ---- ----
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
-------------- -------------- --------------
-------------- -------------- --------------
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.
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 15 - VIDEO LOTTERY OPERATIONS, CONTINUED
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>
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
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 16 - RACING OPERATIONS - CONTINUED
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>
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,
F-47
<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
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.
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.
F-48
<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
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.
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.
F-49
<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 - CONTINUED
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-50
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30 December 31
1997 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $3,003,000 $4,226,000
Restricted cash 197,000 185,000
Accounts receivable, net of allowance 621,000 302,000
for doubtful accounts of $140,000
Deferred financing costs 0 1,066,000
Deferred income taxes 760,000 760,000
Other current assets 584,000 477,000
------- -------
Total Current Assets 5,165,000 7,016,000
--------- ---------
Property:
Land 371,000 371,000
Buildings 17,081,000 17,081,000
Equipment and automobiles 5,922,000 2,451,000
Furniture and fixtures 2,423,000 2,423,000
Construction in progress 1,816,000 326,000
--------- -------
27,613,000 22,652,000
---------- ----------
Less Accumulated Depreciation (5,070,000) (4,199,000)
---------- ----------
22,543,000 18,453,000
---------- ----------
Net Assets of Discontinued
Oil and Gas Activities 2,679,000 2,752,000
--------- ---------
Other Assets:
Excess of cost of investments over
net
assets acquired, net of accumulated 2,626,000 2,752,000
amortization of $1,148,000 and
$1,022,000
Deposits and other 53,000 41,000
------ ------
2,679,000 2,793,000
--------- ---------
TOTAL ASSETS 33,003,000 30,878,000
========== ==========
See accompanying notes to financial statements.
F-51
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable $ 892,000 $909,000
Other accrued liabilities 1,942,000 1,891,000
Current portion of long term debt 29,000 186,000
Current portion of deferred incomes taxes 133,000 133,000
Total Current Liabilities 2,996,000 3,119,000
--------- ---------
Deferred Income Taxes, Less Current Portion 1,197,000 1,263,000
--------- ---------
Long Term Debt, Less Current Portion 17,201,000 16,230,000
---------- ----------
Shareholders' Equity:
Common stock 2,000 2,000
Paid-in-capital 35,068,000 35,173,000
Accumulated deficit (23,461,000) (24,909,000)
----------- -----------
Total Shareholders' Equity 11,609,000 10,266,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,003,000 $ 30,878,000
=============== ============
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Video lottery operations $12,732,000 $6,142,000 $22,785,000 $11,900,000
Parimutuel commissions 1,197,000 1,157,000 2,246,000 2,165,000
Food, beverage and lodging 1,371,000 921,000 2,314,000 1,573,000
Other 297,000 297,000 494,000 453,000
------- ------- ------- -------
Total Revenue 15,597,000 8,517,000 27,839,000 16,091,000
---------- --------- ---------- ----------
Costs and Expenses:
Cost of video lottery operations 7,907,000 4,083,000 14,305,000 8,028,000
Cost of parimutuel commissions 1,509,000 1,361,000 2,791,000 2,497,000
Cost of food, beverage and lodging 1,212,000 848,000 2,049,000 1,529,000
Cost of other revenues 280,000 276,000 563,000 492,000
Marketing and promotions 777,000 231,000 1,355,000 433,000
General and administrative expenses 1,506,000 652,000 2,585,000 1,645,000
Depreciation and amortization 546,000 407,000 997,000 866,000
------- ------- ------- -------
Total Costs and Expenses 13,737,000 7,858,000 24,645,000 15,490,000
---------- --------- ---------- ----------
Operating Profit (Loss) 1,860,000 659,000 3,194,000 601,000
--------- ------- --------- -------
Other Income (Expense):
Interest income 16,000 6,000 44,000 10,000
Interest expense (762,000) (593,000) (1,856,000) (792,000)
-------- -------- ---------- --------
Total Other Expense (746,000) (587,000) (1,812,000) (782,000)
Income (Loss) Before Income Taxes 1,114,000 72,000 1,382,000 (181,000)
Benefit for Income Taxes 33,000 33,000 66,000 66,000
------ ------ ------ ------
Net Income (Loss) $1,147,000 $ 105,000 $1,448,000 $(115,000)
========== ========== ========== =========
Net Income (Loss) Per Share $ .06 $ .01 $ .07 $ (.01)
============ =========== ============ ===========
Weighted Average Number
of Shares Outstanding 19,764,291 18,274,708 19,742,267 18,217,246
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months
June 30, 1997 Ended
------------- June 30, 1996
-------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $1,448,000 $ (115,000)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Deferred financing costs amortization 1,066,000 230,000
Depreciation and amortization 997,000 866,000
Common stock issued and stock options granted for services - 292,000
rendered
Provision for doubtful accounts - 40,000
Provision for settlement (recoveries) 100,000 (208,000)
Deferred income taxes (66,000) (66,000)
Net Changes in Assets and Liabilities:
Restricted cash (12,000) 15,000
Prepaid expenses and other (426,000) (80,000)
Accounts payable and accrued liabilities (66,000) (347,000)
------- --------
CASH PROVIDED BY OPERATING ACTIVITIES $3,041,000 $ 627,000
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Settlement of prior acquisition costs (105,000) 0
Deposits and other (12,000) 28,000
Capital expenditures (4,961,000) (593,000)
---------- --------
CASH USED IN INVESTING ACTIVITIES $(5,078,000) $(565,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments (186,000) (1,076,000)
Loan proceeds 1,000,000 1,100,000
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES $ 814,000 $ 24,000
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,223,000) 86,000
Cash, Beginning of Period 4,226,000 807,000
--------- -------
Cash, End of Period $3,003,000 $ 893,000
---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
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 six months
ended June 30, 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 June 30, 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 with a $6.00 per share price
guarantee. In January 1997, the Company reached a settlement with the holders of
118,948 of such shares. 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. (See Note 12 Subsequent
Events with respect to the Company's settlement with the holder of 181,739
additional shares.)
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. On 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.
HBPA Agreement. On August 15, 1997, the original term of Mountaineer's
agreement with the Horsemen's Benevolent and Protective Association, Inc. (HBPA)
is due to expire. The HBPA is the exclusive authorized bargaining representative
for all thoroughbred horse owners who participate in live races conducted by
Mountaineer. Mountaineer contributes all purse funds earned by such horse
owners, as well as compensation to the HBPA in an amount equal to 1.5% of the
amount paid for purses, from proceeds of its live and simulcast racing and video
lottery operations. The West Virginia Racetrack Video Lottery Act conditions
annual renewal of video lottery licenses upon, among other things, the
licensee's having an agreement regarding video lottery revenue with the
representatives of a majority of the horsemen, the parimutuel clerks, and the
breeders for the racetrack. While the company believes that Mountaineer will be
able to reach an agreement with the HBPA in advance of the July 1, 1998 renewal
date, there can he no assurances. Non-renewal would have a material adverse
impact on the Company's financial condition. Further, State law concerning
annual renewal of Mountaineer s racing license (at December 31) requires
Mountaineer to have held 220 live racing meets during 1997 (a racing license, in
turn, is prerequisite to
F-55
<PAGE>
a video lottery license). In the event the horsemen refuse to race pending
execution of an agreement between Mountaineer and the HBPA, Mountaineer might
not be able to complete the required live race meets. Under such circumstances,
Mountaineer would petition the West Virginia Racing Commission for a reduction
of the number of required race meets pursuant to procedures provided by a 1997
amendment of the relevant statute. There can be no assurances, however, that
such request would be granted.
Note 3 Income Taxes
The benefit for income taxes recorded in the accompanying statement of
operations for the three and six months ended June 30, 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 June 30,
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 June 30, 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 Alterative
Minimum Tax rules of the Tax 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.
Also in 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 129, Disclosure of Information About Capital
Structure, which is effective for financial statements issued for periods ending
after December 15, 1997. The effect of adopting SFAS 129 has not yet been
determined.
Note 5 Employment Agreements
Officers. On March 1, 1997, the Company entered into a new three year
employment agreement with Edson R. Arneault to reflect Mr. Arneault's
responsibilities as president and chairman of the Company, which he assumed on
April 26, 1995. The new agreement replaced 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 Compensation Committee of the Board of
Directors. As of March 1, 1997, Mr. Arneault's base salary is $315,000, an
increase of 31%, and he was awarded performance bonuses of $67,500 in December
of 1996 and July of 1997. The Compensation Committee obtained the consent of the
Company's lender for the increase and bonuses.
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
F-56
<PAGE>
have no further obligation to pay the employee, other than compensation unpaid
at the date of termination.
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.
Other Employment Agreements. In the second quarter of 1997, the Company
entered into new employment agreements with certain employees for periods
ranging from one to three years. The agreements provide for certain salaries and
stock option incentives in the ordinary course of business, and provide for
certain mandatory severance payments in the event of early termination.
Future annual minimum payments under the Company's employment agreements as
of June 30, 1997 are as follows:
Years Ending
December 31,
--------------
1997 $ 525,000
1998 844,000
1999 675,000
2000 118,000
---- -------
$2,162,000
==========
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 10, 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,
and providing the Company a $5,376,500 revolving line of credit. The Company is
guarantor of the Amended and Restated Term Loan Agreement. Pursuant to the
restated loan agreement, Mountaineer must make monthly payments of interest only
at the rate of 12% per annum. In connection with this transaction, the Company
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). The shares and warrants were assigned an aggregate value of
approximately $777,000, which was recorded as deferred financing costs in the
Company's 1996 consolidated balance sheet included in its annual report on Form
10-K. On July 2, 1997, Mountaineer and its lender again amended and restated
this $16.1 million loan, and the Company therefore amortized the deferred
financing costs through June 30, 1997. (See Note 12, Subsequent Events). In the
event that the loan had not been prepaid by July 2, 1997, the Company would have
been 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 S25,000 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
F-57
<PAGE>
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 would 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.
OtherDebt. 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
$186,000 relating to these two notes in the first six months of 1997.
Annual Commitments. Future annual principal payments required under all
long-term indebtedness as of June 30, 1997 are as follows, after giving
appropriate effect to the July 2, 1997 refinancing:
Years Ending
December 31,
---------------
1997 $ 0
1998 29,000
1999 31,000
2000 33,000
2001 21,513,000
---- ----------
$21,606,000
===========
Interest Expense. The Company made interest payments on long-term debt
totaling $1,165,000 in the first half of 1997 and $659,000 in the first half of
1996.
Note 7 Line of Credit
As part of the Amended and Restated Term Loan Agreement, the Company's
lender provided Mountaineer a revolving line of credit which was originally
scheduled to expire on December 10, 1999. Under the terms of the agreement,
Mountaineer could borrow up to a maximum of $5,376,000. The agreement required
Mountaineer to pay interest monthly at 15% per annum on amounts borrowed with
all unpaid principal and interest due at maturity. Mountaineer drew $1,000,000
on the line of credit in June, 1997, which balance was outstanding at June 30
and July 2, 1997, when the loan was amended and restated. (See Note 12,
Subsequent Events). A facility fee of $376,000 became due at the December 10,
1996 loan closing. Pursuant to the loan agreement, $57,900 of these fees were
withheld from the proceeds of the December 10, 1996 term loan; the remaining
$318,450 were to be paid in eleven equal monthly installments of $28,950
commencing February 1, 1997. Such costs were amortized through June 30, 1997,
because of the July 2, 1997 amendment and restatement of the loan. As of June
30, 1997, the Company had recorded $205,000 as an accrued liability in the
accompanying condensed consolidated balance sheets relating to the line of
credit.
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
F-58
<PAGE>
accordance with the plan, 500,000 shares were reserved for issuance. As of
June 30, 1997, none of these options have been awarded.
On May 27, 1997, the Company's board of directors voted to amend the terms
of the options granted to certain officers and key employees of the Company on
May 28, 1992 such that, with respect to grantees of such options who are
currently employees of the Company or its subsidiaries (in the aggregate,
options to purchase 410,867 shares of the Company's common stock at a price of
$1.06 per share), the period during which such options may be exercised was
extended for a period of ninety (90) days. The options otherwise would have
expired on May 28, 1997. This action was taken in furtherance of the goal the
Company has previously set forth in its employee stock option plans: to provide
the participants with the maximum benefits and to provide an incentive to the
management of the Company to motivate their performance.
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 were previously allotted solely to the West
Virginia Breeders Classic 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
Classic 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.
F-59
<PAGE>
Note 10 Advertising Expense
Marketing and promotions expenses recorded in the first six months of 1997
are net of approximately $337,000 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. In June 1997, Mountaineer qualified for an additional
grant of $271,000, to reimburse infomercial production and broadcasting expenses
to be incurred in the second half of 1997.
Note 11 Discontinued Oil and Gas Activities
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. 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. 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 December 1994, the Company entered into an arrangement to sell certain
of the 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 $228,000. The purchaser is delinquent on four of the note payments
which were due in the first six months of 1997. The Company and the purchaser
are negotiating arrangements to bring the account current, and the Company
believes the matter will be resolved amicably. The Company is continuing to
attempt to sell its remaining oil and gas interests pursuant to the plan of
liquidation.
Note 12 Subsequent Events
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 with a $6.00 per share price
guarantee. In July 1997, the Company reached a settlement with Bill Blair,
Incorporated, which was the former majority shareholder of Mountaineer, and
holder of 181,739 of such shares. The settlement was part of a larger
transaction by which Mountaineer and the Company resolved all matters
outstanding with the holder and its president. Pursuant to the agreement, the
price guarantee was extinguished; Mr. Blair repaid in full the $78,000 balance
due on a promissory note; the Company paid a cash settlement of $200,000, and
canceled a note receivable in the amount of $240,000, and issued 50,000 shares
of restricted common stock. The Company had recorded a $240,000 provision for
doubtful accounts in 1995 in reference to the note receivable. In July 1997, the
Company will record a $278,000 reduction to paid-in-capital and a $78,000
reduction in notes receivable in connection with this transaction.
Long-Term Debt and Line of Credit Amendment and Restatement. Effective July
2, 1997, Mountaineer and the Company amended and restated their July 2, 1996
Term Loan Agreement, which had been previously amended and restated as of
December 10, 1996. The July 2, 1996 agreement related to a $5 million second
trust loan. The December 10, 1996 amendment and restatement (the "First Amended
Agreement") reflected an increase in the amount borrowed from $5 million to
$16.1 million, established a $5,376,000 revolving line of credit, and converted
the lender's position from second to first trust holder.
F-60
<PAGE>
The July 2, 1997 Second Amended and Restated Term Loan Agreement (the
"Second Amended Agreement") (i) extends the term of the loan to July 2, 2001
(compared to July 2, 1999); (ii) increases the total amount borrowed to
$21,476,500 (by virtue of Mountaineer drawing down the line of credit); (iii)
eliminates from the First Amended Agreement annual fees of cash in the amount of
8% of the outstanding principal balance of the loan that would have been due on
each anniversary of the term loan and stock and warrants of the Company that
would have been due each November 15 while the loan is outstanding; and (iv)
calls for payments of interest only with the principal due at the end of the
four year term. The lender's rights pursuant to the First Amended Agreement with
respect to the 550,000 shares of the Company's stock and warrants to purchase
1,632,140 additional shares issued thereunder are unaffected by the Second
Amended Agreement. The Company continues to guarantee the loan.
As consideration for the lender's entering into the Second Amended
Agreement, Mountaineer has agreed (i) to pay a one time fee of $1.8 million or
8.5% of the total amount borrowed, which may be paid over the first year of the
term; (ii) to pay interest at the rate of 13% (compared to 12% on the $16.1
million term loan and 15% on the $5.4 million line of credit under the First
Amended Agreement); and (iii) to pay a call premium equal to 5% in the event of
prepayment during the first year of the term, declining to 3% during the second
year, 2% in the third year, and 1% in the final year.
In connection with the First Amended Agreement, pursuant to a December 10,
1996 Fee Agreement, Mountaineer had agreed to pay a fee in the amount of
$277,000 to Bridge Capital, LLC, which arranged the transaction, in the event
Mountaineer refinanced the loan by July 2, 1997 and thus obtained a waiver of
the fee of $888,000 that would have been due pursuant to the First Amended
Agreement. On July 10, 1997, Mountaineer paid Bridge Capital, LLC $100,000 in
satisfaction of Mountaineer's obligations under the Fee Agreement.
F-61
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the distribution of the securities being registered
hereby, other than underwriting discounts and commissions.
Accountants' Fees and Expenses................................ $ 5,000
Legal Fees and Expenses........................................$10,000
Printing Expenses..............................................$10,000
Miscellaneous..................................................$ 5,000
-------
Total..................................................$30,000
Item 14. Indemnification of Directors and Officers
Under Section 145 of the DGCL a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
A corporation also may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation.
However, in such an action by or on behalf of a corporation, no
indemnification may be made in respect of any claim, issue or matter as to which
the person is adjudged liable to the corporation unless and only to the extent
that the court determines that, despite the adjudication of liability but in
view of all the
II-1
<PAGE>
circumstances, the person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper.
In addition, the indemnification provided by Section 145 shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. The Certificate and Bylaws
of the Company are consistent with Section 145. The Certificate provides that no
director shall be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except: i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
ii) for acts and omissions not in good faith or which involve intentional
misconduct or knowing violation of the law; iii) for acts for specified in Title
8, Section 174 of the DGCL, or iv) for which the director derived an improper
personal benefit.
In addition to the Certificate, the Company's By-laws provide
indemnification (the "Indemnity Provisions") for any person who is or was a
party to any threatened, pending or completed action, suit, or proceeding
whether civil, criminal, administrative, arbitrative, investigative procedure by
reason of the fact that he or she was a director, officer, employee, fiduciary
or agent of the Company or served in such capacity with another entity at the
Company's request (such persons are defined as an "Indemnified Party" or
"Indemnified Parties"). With respect to third party actions, the Indemnity
Provisions represent the Company's commitment to indemnify based on such persons
incurring expenses (including legal fees) judgments, fines, excise taxes, and
amounts paid in settlement based on civil or criminal matters. In the case of a
civil matter, the Indemnified Parties must have acted in good faith and in a
manner reasonably believed by that person to be in or not opposed to the best
interests of the Company. With respect to a criminal matter, the person must
have had no reasonable cause to believe that the conduct was unlawful.
With respect to derivative actions, Indemnified Parties are entitled to
indemnification for any and all expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection with the settlement or
defense of such actions. The Indemnified Party must show that he or she acted in
good faith and a manner reasonably believed by that person to be in or not
opposed to the best interests of the Company, except that no indemnification
shall be available if such person has been adjudged liable for negligence or
misconduct in performing his or her duties to the Company, unless the court in
which such action or suit was brought has determined upon application that,
despite the adjudication of liability but in view of all of the circumstances of
the case, the Indemnified Party is fairly and reasonably
II-2
<PAGE>
entitled to indemnification for the expenses the court deems proper.
Nonetheless, if the Indemnified Party is successful on the merits or otherwise,
he or she need not show that the applicable standard of conduct was met. If not
successful on the merits, any indemnification may only be made if the
Indemnified Party applies to the Company for indemnification and (i) a majority
vote of a quorum of the Board, or (ii) if a quorum is not available or even if
obtainable, or if a quorum of disinterested directly so directs, by independent
legal counsel in a written opinion, or (iii) by vote of the stockholders of the
Company.
With respect to both derivative actions and third party actions, the
Indemnity Provisions also provide for the advancement of expenses, including
actual and reasonable attorneys' fees, incurred in defending or investigating
any action, suit, proceeding or claim, subject to a written affirmation by the
Indemnified Party or person requesting an advance for such Indemnified Party
that he or she has met the applicable standard of conduct and that he or she
will repay such advance if it is ultimately determined that he or she did not
meet the applicable standard of conduct.
Notwithstanding the foregoing, the Company has discretion to impose as
conditions to any of the Indemnification Provisions, such requirements as may
appear appropriate in the specific case including but not limited to: a) that
any counsel representing the person be mutually acceptable to the Company and
the Indemnified Party, b) that the Company has the right to assume control of
the defense of such Indemnified Party, and c) that the Company shall be
subrogated to the extent of any payments made by way of indemnification to all
of such Indemnified Party's right of recovery, and do everything necessary to
assure such rights of subrogation to the Company.
The rights of Indemnified Parties under the Indemnity Provisions are not
exclusive of any other rights Indemnified Parties may have under the
Certificate, any agreement, vote of stockholders, vote of disinterested
directors, any liability insurance policies or otherwise. The Company currently
maintains a Directors and Officers liability insurance policy with coverage of
$5,000,000. Although the Company believes the policy and its coverage limits to
be adequate, the policy may not provide coverage in all circumstances in which
the Company's directors and officers are entitled to indemnification and may not
cover the Company's total liability to its directors and officers even in cases
where coverage is provided.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Indemnified Parties pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
II-3
<PAGE>
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
persons in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
On December 14, 1994, in payment of interest expense pursuant to an
amendment to an oil and gas property acquisition agreement, the Company issued
5,000 shares of Common Stock with an aggregate value of $4,700 to various oil
and gas partnerships. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On January 24, 1995, the Company issued 216,667 shares of Common Stock to
William and Bonnie Blair pursuant to their exercise of certain options to
purchase Common Stock at $0.50 per share. The options were issued to the Blairs
in December 1992 as employment compensation by the Company and all of the shares
were registered on Form S-8 filed with the Securities Exchange Commission on
January 20, 1995. This transaction was completed in reliance on the exemption
from registration provided by Section 4(2) of the Act.
On February 28, 1995, pursuant to a settlement agreement, the Company
authorized the issuance of up to 250,000 shares of Common Stock to Jackpot
Enterprises, Inc. The Company recorded a provision for loss of $525,000 in
connection with the settlement. By October 31, 1996, 250,000 of such shares had
been issued. This was a private transaction effected pursuant to Section 4(2) of
the Act.
On May 31, 1995, pursuant to a severance agreement, the Company issued
options to purchase 15,000 shares of Common Stock for $2.00 per share to Robin
L. Reynolds. The options vested at the date of issuance and are exercisable for
a term of five years. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On July 26, 1995, pursuant to a severance agreement, the Company issued
10,000 shares of Common Stock with an aggregate value of $6,563, to Robin L.
Reynolds. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
II-4
<PAGE>
On August 29, 1995, pursuant to a settlement agreement, the Company issued
56,532 shares of Common Stock with an aggregate value of $78,439 to Lawrence
Manypenny. This was a private transaction effected pursuant to Section 4(2) of
the Act.
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 378,415 shares of Common
Stock for $1.22 per share to Edson R. Arneault. The options vested upon
approval, are exercisable for a term of five years, and the underlying shares
are subject to registration on Form S-8. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 222,316 shares of Common
Stock for $1.22 per share to Thomas K. Russell. The options vested upon
approval, are exercisable for a term of five years, and the underlying shares
are subject to registration on Form S-8. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 222,316 shares of Common
Stock for $1.22 per share to Donald G. Saunders. The options vested upon
approval, are exercisable for a term of five years, and the underlying shares
are subject to registration on Form S-8. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On October 1, 1995, pursuant to a severance agreement, the Company issued
options to purchase 30,000 shares of Common Stock for $2.00 per share to Bobbe
A. Sigler. The options vested at the date of issuance and are exercisable for a
term of five years. The underlying shares are subject to registration on Form
S-8. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On November 14, 1995, pursuant to a settlement agreement, the Company
issued 201,750 shares of Common Stock to Glenn Hall. The shares were issued in
exchange for cancellation of $6.00 put rights in connection with 52,250 shares
issued to Mr. Hall in 1992 with an aggregate value of $313,500. This was a
private transaction effected pursuant to Section 4(2) of the Act.
On November 14, 1995, the Company issued 40,000 shares of Common Stock to
Glenn Hall pursuant to his exercise of certain options to purchase Common Stock
at $0.01 per share. This transaction was completed in reliance on the exemption
from registration provided by Section 4(2) of the Act.
On November 20, 1995, pursuant to a settlement agreement, the Company
issued 165,000 shares of Common Stock to Michael Mapes.
II-5
<PAGE>
The shares were issued in exchange for cancellation of $6.00 put rights in
connection with 52,250 shares issued to Mr. Mapes in 1992 with an aggregate
value of $313,500. This was a private transaction effected pursuant to Section
4(2) of the Act.
On November 20, 1995, the Company issued 30,000 shares of Common Stock to
Michael Mapes pursuant to his exercise of certain options to purchase Common
Stock at $0.01 per share. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On December 4, 1995, pursuant to a settlement agreement, the Company issued
60,850 shares of Common Stock with an aggregate value of $43,000 to Dublin
Energy Corporation. This was a private transaction effected pursuant to Section
4(2) of the Act.
On January 19, 1996, pursuant to a consulting agreement, the Company issued
200,000 shares of Common Stock with an aggregate value of $106,125 to Donald G.
Saunders. The issuance of the shares was authorized by the Company on November
17, 1995. The shares were registered on Form S-8 filed with the Securities
Exchange Commission on December 4, 1995. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On January 23, 1996, pursuant to an employee stock option plan, the Company
authorized the issuance of options to purchase 300,000 shares of Common Stock
for $0.5625 per share to Edson R. Arneault. The options vested upon issuance,
are exercisable for five years and the underlying shares are subject to
registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the Company
authorized the issuance of options to purchase 100,000 shares of Common Stock
for $0.5625 per share to Thomas K. Russell. The options vested upon issuance,
are exercisable for five years and the underlying shares are subject to
registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the Company
authorized the issuance of options to purchase 100,000 shares of Common Stock
for $0.5625 per share to an employee pool to be allocated by the Compensation
Committee of the Board of Directors. The options vested upon issuance, are
exercisable for five years and the underlying shares are subject to registration
on Form S-8.
On January 23, 1996, pursuant to a severance agreement, the Company issued
options to purchase 30,000 shares of Common Stock for $0.5625 per share to Julie
Waring. The options vested at the date of issuance and are exercisable for a
term of five years. The underlying shares are subject to registration on Form
S-8. This
II-6
<PAGE>
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 23, 1996, pursuant to an outside directors compensation
agreement, the Company issued options to purchase 75,000 shares of Common Stock
for $0.5625 per share to Robert L. Ruben. The options vested at the date of
issuance and are exercisable for a term of five years. The underlying shares are
subject to registration on Form S-8. This transaction was completed in reliance
on the exemption from registration provided by Section 4(2) of the Act.
On January 23, 1996, pursuant to an outside directors compensation
agreement, the Company issued options to purchase 50,000 shares of Common Stock
for $0.5625 per share to Robert A. Blatt. The options vested at the date of
issuance and are exercisable for a term of five years. The underlying shares are
subject to registration on Form S-8. This transaction was completed in reliance
on the exemption from registration provided by Section 4(2) of the Act.
On February 9, 1996, the Company approved the issuance of 362,866 shares of
Common Stock, valued at $0.40625 per share, to Edson R. Arneault in settlement
of $147,414 in accrued liabilities for services rendered prior to that date. The
shares are subject to registration on Form S-8. This was a private transaction
effected pursuant to Section 4(2) of the Act.
On February 9, 1996, the Company approved the issuance of 103,810 shares of
Common Stock, valued at $0.40625 per share, to Thomas K. Russell in settlement
of $42,173 in accrued liabilities for services rendered prior to that date. The
shares are subject to registration on Form S-8. This was a private transaction
effected pursuant to Section 4(2) of the Act.
On May 1, 1996, pursuant to a loan agreement, the Company issued 100,000
shares of Common Stock, with an aggregate value of $81,250, to AstraFund
Limited. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On July 2, 1996, pursuant to a bridge loan between Bridge Capital LLC and
the Company, the Company issued 25,000 warrants to purchase Common Stock for
$3,125. This was a private transaction effected pursuant to Section 4(2) of the
Act.
On July 2, 1996, pursuant to a bridge loan between Brownstone Holdings LLC
and the Company, the Company issued 25,000 warrants for $3,125. This was a
private transaction pursuant to Section 4(2) of the Act.
II-7
<PAGE>
On July 2, 1996, pursuant to the Term Loan Agreement, the Company issued
183,206 shares of Common Stock, with an aggregate value of $250,000, to
Madeleine LLC. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On July 2, 1996, pursuant to The Term Loan Agreement, the Company issued
warrants to purchase 1,492,860 shares of Common Stock for $1.06 per share to
Madeleine LLC. The warrants were exercisable upon issuance and expire on July 2,
2001. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On July 10, 1996, pursuant to a settlement agreement, the Company issued
133,416 shares of Common Stock to Dorothy van Haaften. This was a private
transaction effected pursuant to the exemption from registration provided by
Section 4(2) of the Act.
On July 26, 1996, pursuant to a severance agreement, the Company issued
15,000 shares of Common Stock, with an aggregate value of $7,500, to Bobbe A.
Sigler. The shares are subject to registration on Form S-8. This transaction was
completed in reliance on the exemption from registration provided by Section
4(2) of the Act.
In September of 1996, pursuant to a settlement agreement, the Company
issued 100,000 shares to Michael Dunn. This was a private transaction effected
pursuant to the exemption from registration provided by Section 4(2) of the Act.
In December of 1996, pursuant to the Second Amended Term Loan Agreement,
the Company issued 550,000 shares and warrants to purchase 1,632,140 shares to
Madeleine LLC. This was a private transaction effected pursuant to the exemption
from registration provided by Section 4(2) of the Act.
On January 3, 1997, pursuant to settlement agreement with C. Richard
Petticrew and John Burkhart, the Company issued in the aggregate 100,000 shares.
This was a private transaction effected pursuant to the exemption from
registration provided by Section 4(2) of the Act.
On March 14, 1997, pursuant to a settlement agreement, the Company issued
30,159 shares to Dorothy van Haaften. This was a private transaction effected
pursuant to the exemption from registration provided by Section 4(2) of the Act.
On March 14, 1997, pursuant to a settlement agreement, the Company issued
30,312 shares to Louis Haskell. This was a private transaction effected pursuant
to the exemption from registration provided by Section 4(2) of the Act.
II-8
<PAGE>
On July 1, 1997, pursuant to a settlement agreement, the Company issued
50,000 shares to Bill Blair, Incorporated. This was a private transaction
effected pursuant to the exemption from registration provided by Section 4(2) of
the Act.
On September 19, 1997, pursuant to an employee stock option plan, the
Company issued options to purchase 150,000 shares of Common Stock for $1.34375
per share to Edson R. Arneault. The options vested at the date of issuance and
are exercisable for a term of five years. The underlying shares are subject to
registration on Form S-8. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On September 19, 1997, pursuant to an employee stock option plan, the
Company issued options to purchase 150,000 shares of Common Stock for $1.34375
per share to Robert A. Blatt. The options vested at the date of issuance and are
exercisable for a term of five years. The underlying shares are subject to
registration on Form S-8. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On September 19, 1997, pursuant to an employee stock option plan, the
Company issued options to purchase 150,000 shares of Common Stock for $1.34375
per share to Robert L. Ruben. The options vested at the date of issuance and are
exercisable for a term of five years. The underlying shares are subject to
registration on Form S-8. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On September 19, 1997, pursuant to an employee stock option plan, the
Company issued options to purchase, in the aggregate, 300,000 shares of Common
Stock for $1.34375 per share to various employees of Mountaineer. The options
vested at the date of issuance and are exercisable for a term of five years. The
underlying shares are subject to registration on Form S-8. This transaction was
completed in reliance on the exemption from registration provided by Section
4(2) of the Act.
On October 1, 1997, pursuant to a financial advisory agreement, the Company
issued options to purchase 150,000 shares of Common Stock for 1.50 per share to
Jefferies & Company. The options are exercisable for a term of four years. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On October 1, 1997, pursuant to an agreement, the Company issued options to
purchase 30,000 shares of Common Stock to Nelson Robinson. The exercise price
for the first 10,000 options is $1.4375 per share, with the exercise price for
the remaining 20,000
II-9
<PAGE>
options to be determined when the options vest on the second and third
anniversaries of the agreement. The options are exercisable for a term of five
years. The underlying shares are subject to registration on Form S-8. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
Item 16. Exhibits
The following are filed either as exhibits to this Registration Statement
or incorporated by reference to the exhibits to prior Registration Statements
and reports of the Company as indicated:
Exhibit No.
or
Incorporation
Exhibit No. Item Title by Reference
----------- ---------- ------------
3.1 Restated Certificate of Incorporation for **
Winners Entertainment, dated August 17,
1993
3.2 By Laws *
3.3 Certificate of Amendment of Restated ++
Certificate of Incorporation of Winner's
Entertainment, Inc. dated October 10, 1996
4.1 Specimen of Common Stock Certificates *
4.2 Warrant Certificate No. 1 issued to ####
Madeleine LLC, dated July 2, 1996, to
purchase 891,250 shares of Common Stock of
Winners Entertainment, Inc. at $1.06 per
share for five years commencing July 2,
1996.
4.3 Warrant Certificate No. 6 issued to +++
Madeleine L.L.C., dated December 10, 1996,
to purchase 125,552 Shares of Common Stock
of MTR Gaming Group, Inc. at $1.06 per
share for five years commencing December
10, 1996.
5.1 Opinion of Ross & Hardies E-1
10.1 Amendment to June 27, 1994 Construction ###
Loan Agreement, dated October 31, 1995,
among Bennett Management & Development
Corporation, the Company and Mountaineer
10.2 Construction Loan Agreement Amendment ***
between the Mountaineer, Gamma of West
Virginia and Bennett Management &
Development Corp.
II-10
<PAGE>
10.3 Term Loan Agreement among Mountaineer Park, ####
Inc., Winners Entertainment, Inc. and
Madeleine LLC, dated July 2, 1996
10.4 First Amendment to Term Loan Agreement ####
among Mountaineer, the Company and
Madeleine LLC, dated July 2, 1996
10.5 Promissory Note by Mountaineer, Inc. to ####
Madeleine LLC, dated July 2, 1996
10.6 Security Agreement made by Mountaineer ####
Park, Inc. in favor of Madeleine LLC, dated
July 2, 1996
10.7 Deed of Trust, Leasehold Deed of Trust, ####
Security Agreement, Assignment, Fixture
Filing and Financing Statement by and among
Mountaineer Park, Inc., Deborah A. Sink and
Carl D. Andrews as Trustees, and Madeleine
LLC as the Secured Party, dated July 2,
1996
10.8 Stock Transfer Agreement between the ####
Company and Madeleine LLC, dated July 2,
1996
10.9 Registration Rights Agreement between ####
Madeleine LLC and Winners Entertainment,
Inc., dated July 2, 1996
10.10 Financing Commitment from Madeleine, LLC to ####
Mountaineer, dated July 2, 1996.
10.11 October 31, 1995 Amendment to June 27, 1994 ****
Construction Loan Agreement by and among
Bennett Management & Development
Corporation, Mountaineer, and the Company
10.20 November 28, 1995 Amendment to June 27, ****
1994 Construction Loan Agreement by and
among Bennett Management & Development
Corporation, Mountaineer, and the Company
10.12 Construction Loan Agreement for $10.2 ****
million between the Company, Mountaineer,
Gamma International, Ltd. and Bennett
Management & Development Corp.
10.13 January 12, 1996 Amendment to June 27, 1994 ****
Construction Loan Agreement by and among
Bennett Management & Development
Corporation, Mountaineer, and the Company
10.14 November 29, 1995 Agreement by and between ****
Autotote Systems, Inc. and Mountaineer
Park, Inc. for totalisator services
provided pursuant to an agreement dated
September 21, 1984, as amended. Letter
agreement dated April 12, 1995 attached as
Exhibit "A"
10.15 Totalisator Services Agreement between ****
Autotote Systems, Inc. dated November 29,
1995 and Mountaineer
II-11
<PAGE>
10.16 Master Lease Agreement #154920 and Schedule ****
2 thereto between IGT-North America and
Mountaineer for video lottery machine
equipment lease dated June 19, 1995
10.17 Amendment to Master Lease Agreement by and ****
among IGT-North America, Mountaineer and
the Company dated March 26, 1996
10.18 Note for $10.2 million between the Company, ****
Mountaineer and Bennett Management &
Development Corp.
10.19 Amendment, dated February 10, 1995, to #
Construction Loan Agreement, dated June 27,
1995, between Mountaineer Park, Inc. and
Bennett Management & Development
Corporation
10.20 Amendment, dated May 11, 1995, to #
Totalisator Services Agreement, dated March
15, 1988, between Autotote Limited and
Mountaineer
10.21 Master Lease Agreement, dated August 10, #
1994, between IGT-North America and
Mountaineer
10.22 Totalisator Services Agreement, dated #
March 15, 1988, between Autotote Limited
and Mountaineer Park, Inc.
10.23 Amendment, dated April 10, 1995, to ##
Construction Loan Agreement, dated June 27,
1994, between Mountaineer and Bennett
Management & Development Corporation
10.24 Amendment, dated July 7, 1995, to ##
Construction Loan Agreement, dated June 27,
1994, between Mountaineer and Bennett
Management & Development Corporation
10.25 Amendment dated September 19, 1996, to the +
Construction Loan Agreement, dated June 27,
1994, between Mountaineer and Bennett
Management & Development Corporation
10.26 Order Approving Settlement of Winners ++
Entertainment/Mountaineer Park Litigation;
United States Bankruptcy Court for the
Northern District of New York, dated
October 22, 1996
10.27 Settlement Agreement, dated December 19, *****
1996, between the Company, Mountaineer
Park, Inc., Dennis Ryll and Diane Ryll
10.28 Settlement Agreement, dated January 3, *****
1997, between the Company, Mountaineer
Park, Inc. and John Burkhart
10.29 Settlement Agreement, dated January 3, *****
1997, between the Company, Mountaineer
Park, Inc. and CTR Resources, Inc.
II-12
<PAGE>
10.30 Employment Agreement, dated March 1, 1997, #####
between MTR Gaming Group, Inc. and Edson R.
Arneault.
10.31 Settlement Agreement and Release, dated ######
July 1, 1997, between MTR Gaming Group Inc.
and Bill Blair, Incorporated.
10.32 Amended Term Loan Agreement, dated as of +++
July 2, 1996, as amended and restated as of
December 10, 1996, among Mountaineer Park,
Inc., MTR Gaming Group, Inc., and Madeleine
L.L.C.
10.33 Amended and Restated General Security +++
Agreement dated July 2, 1996, as amended
and restated as of December 10, 1996, made
by Mountaineer Park, Inc. in favor of
Madeleine L.L.C.
10.34 Credit Line Deed of Trust, Leasehold Deed +++
of Trust, Security Agreement, Assignment,
Fixture Filing and Financing Statement by
and among Mountaineer Park, Inc. as
grantor, Deborah A. Sink and Carl D.
Andrews as trustees, and Madeleine L.L.C.
as the secured party, dated December 10,
1996.
10.35 Promissory Note dated December 10, 1996 +++
made by Mountaineer Park, Inc. in the
principal amount of $16,100,000 in favor of
Madeleine L.L.C.
10.36 Registration Rights Agreement dated July 2, +++
1996 between Winners Entertainment, Inc.
and Madeleine L.L.C. (incorporated by
reference from the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1996, Exhibit 10(11))
10.37 Amendment No. 1 to Registration Rights +++
Agreement dated December 10, 1996 between
MTR Gaming Group, Inc. and Madeleine L.L.C.
10.38 Promissory Note dated December 10, 1996 +++
made by Mountaineer Park, Inc. in the
principal amount not to exceed $5,376,500
in favor of Madeleine L.L.C.
10.39 Second Amended Term Loan Agreement, dated ++++
as of July 2, 1996, as amended and restated
as of December 10, 1996, and as further
amended and restated as of July 2, 1997,
among Mountaineer Park, Inc., MTR Gaming
Group, Inc., and Madeleine L.L.C.
23.1 Consent of Ross & Hardies (included in E-1
Exhibit 5.1)
23.2 Consent of Corbin and Wertz E-3
27.0 Financial Data Schedule ####
II-13
<PAGE>
* Previously filed as an exhibit to the Company's Form 10-K for the Fiscal
Year ended December 31, 1989 and incorporated herein by reference thereto.
** Previously filed as an exhibit to the Company's Form 10-K for the Fiscal
Year ended December 31, 1993 and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Form 10-K for the Fiscal
Year ended December 31, 1994 and incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Form 10-K for the Fiscal
Year ended June 30, 1994 and incorporated herein by reference thereto.
*****Previously filed as an exhibit to the Company's Form 10-K for the Fiscal
Year ended December 3, 1996 and incorporated herein by reference thereto.
# Previously filed as an exhibit to the Company's 10- Q for the Quarter ended
March 31, 1995 and incorporated herein by reference thereto.
## Previously filed as an exhibit to the Company's 10- Q for the Quarter ended
June 30, 1995 and incorporated herein by reference thereto.
### Previously filed as an exhibit to the Company's 10- Q for the Quarter ended
September 30, 1995 and incorporated herein by reference thereto.
#### Previously filed as an exhibit to the Company's 10- Q for the Quarter ended
June 30, 1996 and incorporated herein by reference thereto.
#####Previously filed as an exhibit to the Company's 10-Q for the Quarter March
31, 1997 and incorporated herein by reference thereto.
###### Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1997 and incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Form 8-K dated September
30, 1996 and incorporated herein by reference thereto.
II-14
<PAGE>
++ Previously filed as an exhibit to the Company's Form 8-K dated November 1,
1996 and incorporated herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Form 8-K dated January 7,
1997.
++++ Previously filed as an exhibit to the Company's Form 8-K dated July 8,
1997.
II-15
<PAGE>
Item 17. Undertakings.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in the
periodic reports filed by the Company pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-16
<PAGE>
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to any provision or arrangement, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Chester, State of West
Virginia, on November 7, 1997.
MTR GAMING GROUP, INC.
(Company)
By: /s/Edson R. Arneault
Edson R. Arneault, President
and Chief Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/Edson R. Arneault Director, President, November 7, 1997
Edson R. Arneault Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
/s/Thomas K. Russell General Counsel, November 7, 1997
Thomas K. Russell Chief Financial Officer,
Secretary, Treasurer
/s/Robert L. Ruben Director, Assistant November 7, 1997
Robert L. Ruben Secretary
/s/Robert A. Blatt Director, Assistant November 7, 1997
Robert A. Blatt Secretary
<PAGE>
INDEX TO EXHIBITS
Opinion of Ross & Hardies E-1
Consent of Corbin & Wertz E-3
EXHIBIT 5.1
November 7, 1997
MTR Gaming Group, Inc.
State Route 2 South
Chester, West Virginia 26034
Re: MTR Gaming Group, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
You have requested our opinion with respect to the public offering and sale
by certain selling stockholders (the "Selling Stockholders") of MTR Gaming
Group, Inc., a Delaware corporation (the "Company"), pursuant to a Registration
Statement on Form S-1 (the "Registration Statement") of up to 992,787 shares of
the Company's common stock, $.00001 par value per share (the "Common Stock") and
up to 889,734 of the Company's outstanding warrants (the "Warrants") to purchase
889,734 shares of Common Stock held by the Selling Stockholders as described in
the Registration Statement. Of the 992,787 shares of Common Stock, (i) 103,053
shares are outstanding and held by the Selling Stockholders (the "Outstanding
Common Shares"), and (ii) 889,734 shares (the "Warrant Shares") are issuable
upon exercise of the Warrants.
In connection with this opinion we have examined the Term Loan Agreement,
the Amended Term Loan Agreement and the Second Amended Term Loan Agreement
between the Company as Guarantor, Mountaineer Park, Inc., a wholly owned
subsidiary of the Company, and one of the Selling Stockholders; the Registration
Rights Agreement dated as of July 2, 1996 and entered into by and among the
Company and one of the Selling Stockholders (the "Registration Rights
Agreement"); the Warrant Certificates dated July 2, 1996 representing the
Warrants; the Company's Certificate of Incorporation, as amended; the Company's
By-laws, as amended; records of applicable corporate proceedings of the Company;
and such other documents as we have deemed necessary as a basis for the opinion
herein expressed. With respect to such examination we have assumed the legal
capacity to sign and the genuineness of all signatures appearing on all
documents presented to us as originals, and the conformity to the originals of
all documents presented to us as conformed or reproduced copies. With respect to
factual matters relevant to such opinion, we have relied, without independent
verification thereof, upon representations, oral and written, of appropriate
executive officers, directors and responsible employees and agents of the
Company.
E-1
<PAGE>
Based upon the foregoing, and in reliance thereon, and subject to the
limitations and qualifications set forth herein, we are of the opinion that:
1. The Outstanding Common Shares are legally and validly issued, fully
paid, and non-assessable.
2. The Warrants are legally and validly issued, fully paid, and
non-assessable.
3. When issued and paid for in accordance with the Warrants, the Warrant
Shares will be legally and validly issued, fully paid and non-assessable shares.
We consent to the use of our name in the Registration Statement and the
related Prospectus under the caption "Legal Matters", and we consent to the
filing of this opinion as an Exhibit to the Registration Statement.
Very truly yours,
/s/ROSS & HARDIES
ROSS & HARDIES
E-2
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
MTR Gaming Group, Inc.
(formerly Winners Entertainment, Inc.)
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ Corbin & Wertz
Corbin & Wertz
Irvine, California
November 7, 1997
E-3
