MTR GAMING GROUP INC, 10-Q, 1997-08-14

MTR GAMING GROUP INC
10-Q, 1997-08-14
MISCELLANEOUS AMUSEMENT & RECREATION

Previous: COLUMBIA BANCORP, 10-Q, 1997-08-14

Next: GUARDIAN REAL ESTATE ACCT OF GUARDIAN INS & ANN COMPANY INC, 10-Q, 1997-08-14

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
for the Quarterly Period Ended JUNE 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934

Commission File Number 0-20508
-------

MTR GAMING GROUP, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 84-1103135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

STATE ROUTE 2 SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA
---------------------------------------------------------
Address of principal executive offices

26034
--------
Zip Code

(304) 387-5712
--------------
Registrant's telephone number, including area code

Indicate by check mark whether the Company: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Company was required to file such reports), and (2) has been the
subject to such filing requirements for the past 90 days.
Yes X No
--- ---

Indicate by check mark whether the Company has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes X No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock,
as of the latest practicable date.

COMMON STOCK, $.00001 PAR VALUE
-------------------------------
Class
19,764,291
----------
Outstanding at August 12, 1997

<PAGE>

MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q

PART I -- FINANCIAL INFORMATION PAGE NO.

Item 1 -- Financial Statements

Condensed and Consolidated Balance Sheets
at March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . 1
Condensed and Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996. . . . . . . . 3
Condensed and Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996. . . . . . . . . . . . 4
Notes to Condensed and Consolidated Financial Statements. . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 11

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 21
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . 21
Item 3 - Defaults upon Senior Securities . . . . . . . . . . . . . . . 21
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . 21
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . 21
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 21

SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

<PAGE>

PART I
FINANCIAL INFORMATION

ITEM 1. -- FINANCIAL STATEMENTS

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
for doubtful accounts of $140,000 621,000 302,000
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 2,616,000 2,616,000
----------- -----------

Other Assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,148,000 and $1,022,000 2,626,000 2,752,000
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.

1
<PAGE>

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)

<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
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.

2
<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
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
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.

<PAGE>

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:

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 rendered 292,000
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
----------- -----------
----------- -----------
See accompanying notes to financial statements

<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

5
<PAGE>

reach an agreement with the HBPA in advance of the July 1, 1998 renewal date,
there can be 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 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 Alternative 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.

6
<PAGE>

The new agreement provides that if Mr. Arneault's period of employment
is terminated by reason of death or physical or mental incapacity, the
Company will continue to pay the employee or his estate the compensation
otherwise payable to the employee for a period of two years. If the
employee's period of employment is terminated for a reason other than death
or physical or mental incapacity or for cause, the Company will continue to
pay the employee the compensation that otherwise would have been due to him
for the remaining period of employment. If the employee's period of
employment is terminated for cause, the Company will have no further
obligation to pay the employee, other than compensation unpaid at the date of
termination.

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,

7
<PAGE>

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 $25,000 in annual audit fees, due on July 2, 1997, 1998, and 1999.

- On November 15, 1997, 1998 and 1999, a number of shares of the
Company's common stock equal to 5% of the outstanding principal balance
on such dates (calculated using the closing price of the stock).

- On November 15, 1997, 1998 and 1999, warrants to purchase 250,000
shares of the Company's common stock at an exercise price of $1.06. All
warrants issued in connection with this provision and the following
provision of the agreement 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.

OTHER DEBT. At December 31, 1996, the Company owed principal balances
totaling $316,000 on two other term notes, as described more fully in Note 6
to the consolidated financial statements included in the Company's annual
report on Form 10-K dated December 31, 1996. The Company made principal
payments totaling $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.

8
<PAGE>

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.

<PAGE>

Note 8 -- Capital Transactions

INCENTIVE PLAN STOCK OPTIONS. On October 2, 1996, the Company's board
of directors adopted an incentive stock option plan meeting the requirements
of Section 422 of the Internal Revenue Code, subject to shareholder approval.
In accordance with the plan, 500,000 shares were reserved for issuance. 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.

<PAGE>

COMMISSION ACTION. In the first quarter of 1997, the West Virginia
Lottery Commission removed its prohibition on the installation of "player
tracking" software in video lottery terminals, to be used for the purpose of
target marketing.

Note 10 -- Advertising Expense

Marketing and promotions expenses recorded in the first 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.

<PAGE>

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.

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.

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations -- Six Months Ended June 30, 1997 Compared to Six Months
Ended June 30, 1996.

The Company earned revenues for the respective six month periods in 1997
and 1996 as shown below:

<PAGE>

Six Months Ended
June 30
1997 1996
------------- -------------
Operating Revenues:
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
------------- -------------
Total Revenues $ 27,839,000 $ 16,091,000
------------- -------------
------------- -------------

The Company's Mountaineer Park, Inc. subsidiary has exhibited steady,
pronounced revenue growth under the expansion plan which began in 1994,
centered around video lottery operations. The emergence of video lottery
operations as Mountaineer's dominant profit center has significantly
moderated the seasonality experienced in prior year revenue trends.

The geographic area surrounding the Company's operating facilities in
West Virginia experienced extensive flooding and unusually heavy snowfall in
the first quarter of 1996. Flood and snow damage in portions of Ohio, West
Virginia and Western Pennsylvania reached levels resulting in their
designation as Federal disaster areas. Mountaineer's facilities are situated
well above the flood plain and did not sustain any damage; Mountaineer's
nearest competitor was extensively damaged and ceased operations for
approximately four weeks in the first quarter of 1996.

VIDEO LOTTERY OPERATIONS. Mountaineer has operated video lottery
terminals ("VLTs") in West Virginia since December 1992; operations were
conducted under a provisional license until September 1994. The West
Virginia Racetrack Video Lottery Act, signed in March 1994, allowed the
uninterrupted continuation of video lottery games at Mountaineer and
permitted the Company to increase its number of VLTs from 165 to 400 on
September 4, 1994. In July 1995, the Company placed into operation an
additional 400 VLTs, bringing the total number of VLTs in operation to 800.
The 800 VLTs then in operation offered only card games and keno ("Card
Terminals"). Upon the enactment of the amendment of the video lottery law
permitting game themes simulating spinning reels or classic casino slot
machines ("Slot Terminals"), in July of 1996 Mountaineer converted 350 Card
Terminals into Slot Terminals. In October of 1996, Mountaineer converted an
additional 50 Card Terminals to Slot Terminals. In March of 1997, Mountaineer
purchased and installed 400 new Slot Terminals and removed 200 previously
leased Card Terminals, bringing the total number of VLTs to 1,000 as of March
13, 1997, consisting of 800 Slot Terminals and 200 Card Terminals.

A summary of the video lottery gross winnings less patron payouts ("net
win") for the six months ended June 30, 1997 and 1996 is as follows:

Six Months Ended
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
------------- -------------
------------- -------------

<PAGE>

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 video slot games.
The aggressive infomercial marketing campaign begun in January 1997 will be
followed by an extensive direct mail marketing program designed to attract
repeat business. Management has undertaken a large scale redecoration of its
racetrack grandstand video lottery facilities, including expansion of
ancillary dining and bar areas. Management believes it can draw and
accommodate significantly heavier patronage to the grandstand gaming
facilities, which currently operate only on the Company's 220 annual live
race dates. For the six months ended June 30, 1997, average daily net win on
the 500 grandstand VLTs was $54 (including $0 for days when 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
thoroughbred and greyhound racetracks and simulcast at Mountaineer Park.
Mountaineer's parimutuel commissions for the six months ended June 30, 1997
and 1996 are summarized below:

Six Months Ended
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 tax (253,000) (246,000)
Purses and Horsemen's Association (1,819,000) (1,781,000)
------------ -------------
Revenues-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 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

<PAGE>

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:

- 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.

- Beginning in 1998, the two thoroughbred tracks in West Virginia will be
required to schedule 210 days of live racing annually, down from the
current 220 day minimum. Additionally, the bill specifies procedures
which will allow further reductions in the required number of live race
days if certain conditions exist, subject to approval by the State
Racing Commission.

FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging
revenues accounted for a combined increase of 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 REVENUES. Other sources of 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,

<PAGE>

parking and admission fees relating to Mountaineer's racing activities and
periodic boxing and concert events.

<PAGE>

Costs and Expenses

Operating costs and gross profit earned from operations for the six month
periods ended June 30, 1997 and 1996 are as follows:

Six Months Ended
June 30
1997 1996
------------- -------------
Operating Costs:
Video lottery operations $ 14,305,000 $ 8,028,000
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
------------- -------------
------------- -------------
Gross Profit (Loss):
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, 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 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:

<PAGE>

Six Months Ended
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 six months of 1997. Host track simulcast fees, totalisator and
other lease expenses remained stable at approximately $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 September 26, 1997. There can be no
assurances that a new labor agreement will be finalized prior to the
expiration of this extended term.

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. Management is involved in negotiations with the
HBPA for a new contract governing this relationship; however, there can be no
assurances that a new agreement will be consummated prior to the expiration
date of the current contract. 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

<PAGE>

horsemen, the parimutuel clerks, and the breeders for the racetrack. While
the Company believes that Mountaineer will be able to reach agreement with
the HBPA in advance of the July 1, 1998 renewal date, there can be 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 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.

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.

COST OF OTHER REVENUES. Costs of other revenues increased by $71,000
from $492,000 for the six months ended June 30, 1996 to $563,000 for the six
months ended June 30, 1997. Cost of other revenues consist primarily of
direct and indirect 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 $399,000 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 Sources of Capital
below).

MARKETING AND PROMOTIONS EXPENSE. Marketing expenses of the Company's
Mountaineer operation increased from $433,000 in the first six months of 1996
to $1,355,000 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

<PAGE>

infomercial production and broadcasting expenses to be incurred in the second
half of 1997. Patron inquiries from the infomercial are being compiled into
a relational 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 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 video lottery terminals,
to enhance its direct mail targeting capabilities. The cost of the software,
if purchased, is expected to exceed $500,000.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses 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 video 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 $997,000 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 video 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 $105,000 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 SOURCES OF CAPITAL

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.

LONG-TERM DEBT AND LINE OF CREDIT AMENDMENT AND REFINANCING. 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 December 10, 1996 amendment and restatement (the
"First Amended Agreement") reflected an

<PAGE>

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.

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 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.
The Company expects to have excess funds available for investment as a result
of this transaction.

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 video slot terminals and 200 video 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 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

<PAGE>

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.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this
document, including, without limitation, the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Liquidity and Sources of Capital" regarding the Company's strategies, plans,
objectives, expectations, and future operating results are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable at this time, it can give no
assurance that such expectations will prove to have been correct. Actual
results could differ materially based upon a number of factors, including but
not limited to weather conditions, road construction affecting major travel
routes to Mountaineer, adverse changes in West Virginia video lottery laws or
the rates of taxation of video lottery operations, legalization and
implementation of new forms of gaming by neighboring states, which would lead
to increased competition, loss of the services of the Company's president,
and general economic conditions affecting the resort business.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

PENDING LITIGATION

There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Form 10-K for the year ended
December 31, 1996.

SUBSEQUENT EVENTS

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

<PAGE>

$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.

WANDA ANDERSON, ADMINISTRATRIX OF THE ESTATE OF TERRY D. ELLIOTT V.
MOUNTAINEER PARK, INC., Circuit Court of Hancock, West Virginia, Civil Action
97-C-60G. On October 20, 1995, a horse which was stabled by one of the horse
owners at Mountaineer became loose and ran onto the highway resulting in an
automobile collision and death of a motorist. On April 1, 1997, Mountaineer
was served with a complaint by the administratrix of the decedent's estate.
The matter, which was covered by insurance, was settled within the policy
limits during the third quarter of 1997.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Articles of Incorporation, as amended (1)

3.2 Certificate of Amendment of Restated Certificate of
Incorporation, filed as of October 18, 1996 (2)

3.3 By-Laws of the Company (1)

10.1 Settlement Agreement and Release, dated July 1, 1997,
between MTR Gaming Group, Inc. and Bill Blair, Incorporated

27 Financial Data Schedule

FOOTNOTES

(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on Form 8-K,
dated October 18, 1996, filed November 1, 1996.

(b) Reports on Form 8-K

The Company filed the following Current Report on Form 8-K during the second
quarter of 1997 and thereafter:

On July 2, 1997, the Company filed a Current Report on Form 8-K, dated July 8,
1997, reporting under Item 5 (i) the second amendment and restatement of the
Company's July 2, 1996 Term

<PAGE>

Loan Agreement with Madeleine LLC, and (ii) a compromise fee agreement
between the Company and Bridge Capital, LLC, the party who arranged the
December 10, 1996 first amendment and restatement of the July 2, 1996 Term
Loan Agreement.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

MTR GAMING GROUP, INC.
----------------------
(Company)

/s/ Edson R. Arneault August 13, 1997
- -----------------------------
Edson R. Arneault
President and Chief Executive Officer

/s/ Thomas K. Russell August 13, 1997
- -----------------------------
Thomas K. Russell
Secretary, Treasurer and Chief Financial Officer

/s/ Robert L. Ruben August 13, 1997
- -----------------------------
Robert L. Ruben
Director

/s/ Robert A. Blatt August 13, 1997
- -----------------------------
Robert A. Blatt
Director

<PAGE>

EXHIBIT 10.1

SETTLEMENT AGREEMENT AND RELEASE

THIS AGREEMENT is made effective as of the 1st day of July, 1997 by
and between MTR Gaming Group, Inc. (f/k/a Winners Entertainment, Inc.) (the
"Company"), and Bill Blair, Incorporated (the "Shareholder").

WHEREAS, the Company and the Shareholder (as well as the then remaining
shareholders of Mountaineer Park, Inc.) entered into a Stock Purchase
Agreement dated May 5, 1992, as amended by that certain Rider No.1 dated May
5, 1992, as further amended by that certain Rider No.2 dated October 7, 1992,
as further amended by that certain Rider No.3 dated October 16, 1992, as
further amended by that certain Rider No.4 dated December 3, 1992, and as
further amended by that certain Amendment to Rider No 4 dated November 28,
1994 (collectively the "Stock Purchase Agreement"), whereby the Company
purchased from the Shareholder all of Shareholder's shares of common stock of
Mountaineer Park, Inc. ("Mountaineer Park") as part of a larger transaction
by which the Company acquired 100% of the common stock of Mountaineer Park;
and

WHEREAS, prior to the purchase of Mountaineer Park by the Company,
Mountaineer Park and its wholly owned subsidiary, Mountaineer Magic, Inc.,
owned and operated a race track and resort complex at Chester, West Virginia,
together with clubhouse dining facilities, a 101 room hotel, and a nine hole
golf course as well as operated 165 video lottery terminals pursuant to a
contract with the West Virginia Lottery Commission; and

WHEREAS, prior to the purchase of Mountaineer Park by the Company,
Mountaineer Park was unable to operate profitably and required the expansion
and enhancement of video lottery in order to achieve profitability; and

WHEREAS, as a material inducement for the Company to purchase
Mountaineer Park, the Shareholder provided a warranty that "The businesses of
[Mountaineer Park, Inc.] and [Mountaineer Magic, Inc.] are authorized by law
in West Virginia..."; and

WHEREAS, as part of the purchase price, the Company delivered to the
Shareholder 181,739 shares of the Company's common stock that were accorded
registration rights and were subject to a guaranteed price of $6.00 per share
upon such registration (the "Guaranteed Shares") such that (i) in the event
the Shareholder were to sell the Guaranteed Shares at a price per share less
than

<PAGE>

$6.00 per share pursuant to Rule 144 at any time prior to the date on which
the Company causes a registration statement on Form S-1 or SS-3 to become
effective (the "Effective Date"), the Company would be required to issue,
based on the average closing bid price of the Company's common stock as
reported by Nasdaq for the ten days prior to the Effective Date, that number
of shares as shall equal in value the difference between $6.00 per share and
the amount actually received by the Shareholder in such sales; and (ii) in
the event the Shareholder were to elect not to sell the Guaranteed Shares
prior to the Effective Date, then, so long as the Shareholder sells the
Guaranteed Shares within 20 days after the Effective Date, the Company shall
issue, based on the average closing bid price of the Guarantor's common stock
on the Effective Date, that number of shares as shall equal in value the
difference between $6.00 per share and the and the gross amount actually
received by such holders in such sales; and

WHEREAS, notwithstanding the Shareholder's warranty and representation, in
October of 1993, the Supreme Court of West Virginia ruled that the operation
of video lottery terminals in the State of West Virginia generally, and at
Mountaineer Park's facility specifically, was unconstitutional and therefore
illegal and that such operations would have to be terminated within thirty
(30) days (which, through a series of stays was extended until the end of the
1994 State legislative session); and

WHEREAS, the Company asserts that because Mountaineer Park's operation of
video lottery terminals was declared illegal, Mountaineer Park and the
Company have suffered substantial damages, including but not limited to (i)
millions of dollars spent pursuing court action, lobbying for video lottery
legislation, and funding operating losses at Mountaineer Park until the
passage of video lottery legislation that enabled it to operate profitably;
(ii) a precipitous drop in the market price of the Company's common stock;
(iii) delays in the ability to register the Company's common stock, causing
it to incur various contractual penalties; and (iv) lost Profits; and

WHEREAS, the Shareholder believes it has a valid claim against the Company
for breach of the price guaranty provisions and registration provisions of
the Stock Purchase Agreement; and

WHEREAS, prior to the acquisition of Mountaineer Park, Inc. by the Company,
the Company lent Shareholder the sum of $240,000, which was evidenced by a
promissory note (the "First Note"), but has not been repaid; and

WHEREAS, Shareholder's president made an April 29, 1996 promissory note in
favor of Mountaineer Park, Inc. in the principal amount of $62,000 (the
"Second Note"), the balance of which together with accrued interest is
$78,108.46, and which has not been paid; and

WHEREAS, the Company and the Shareholder have agreed to settle

<PAGE>

the aforementioned claims on the terms and conditions set forth herein in
order to avoid the expense and uncertainty of litigation:

NOW THEREFORE, in consideration for the mutual promises and benefits set
forth herein, and with full authority to enter into this Agreement and be
bound thereby, the Company and the Shareholder hereby agree as follows:

1. Recitals. The foregoing recitals are incorporated as if more fully set
forth herein.

2. Payment. In full and complete satisfaction of any claims that the
Shareholder had, has or may have against the Company arising out of the Stock
Purchase Agreement, the Company shall (i) pay to the Shareholder, the sum of
$278,108.46 out of which the Shareholder hereby irrevocably directs the
Company to withhold the sum of $78,108.46 in full payment of the Second Note
and all accrued interest (leaving a cash payment of $200,000; (ii) cancel
and return to Shareholder the First Note; and (iii) deliver to Shareholder
50,000 shares of the Company's common stock (the "New Shares"). The New
Shares shall bear a restrictive legend as required by the federal securities
laws.

3. Investment Representation.

(a) Access to Information. Shareholder represents and warrants that he has
had access to all public information concerning the Company's condition,
financial and otherwise, its management, its business and its prospects.
Shareholder represents that he has received a copy of the Company's Annual
Report on Form 10-K for the fiscal year ended 1996 and Form 10-Q for the
Quarter ended March 31, 1997 (the "Disclosure Documents"). Shareholder
represents that it has read the Disclosure Documents and has reviewed all
available information with its legal, financial and investment advisors to
the extent that it deemed such review necessary or appropriate. Shareholder
acknowledges that it is aware that because of the Company's financial
position and other factors, the acquisition of the common stock involves a
high degree of risk.

(b) Restricted Securities. Shareholder understands and acknowledges that,
unless registered, the New Shares are restricted securities and are being
acquired by Shareholder for its own account and not on behalf of any other
person and are being acquired for investment purposes and not for
distribution. Shareholder represents that an investment in the common stock
is a suitable investment for Shareholder, taking into consideration

<PAGE>

the restrictions on transferability affecting the common stock. The Company
is the only person which may register the common stock for public sale under
the Securities Act of 1933 (the "Act") and state securities laws. Shareholder
agrees that it will not transfer or sell the common stock without
registration under the Act and any applicable state securities laws unless
exemptions from such registration requirements are available.

4. Acknowledgment. The Shareholder acknowledges that upon delivery of the
payment and issuance and delivery of New Shares referred to in Section 2
above, except as stated herein, the Shareholder shall have no further rights
under the price guarantee or other provisions of the Stock Purchase Agreement.

5. Mutual Release. Upon delivery of the payment and issuance and delivery
of New Shares, except for those obligations expressly provided for in this
Agreement, the Company and the Shareholder hereby forever release and
discharge the other and each of the other's officers, directors,
shareholders, employees, agents, affiliates, attorneys, successors, and
assigns as appropriate of and from any and all claims, rights, duties,
obligations, debts, liabilities, damages, injuries, actions, and causes of
action of every kind and nature, foreseen and unforeseen, contingent and
actual, liquidated and unliquidated, suspected and unsuspected, disclosed and
undisclosed, including without limitation all claims which either party has
or might have arising from or related to the Stock Purchase Agreement.
Further, the Company expressly releases the Shareholder from any claim it may
have arising out of the warranty referred to in the fourth Recital of this
Agreement.

Each party acknowledges that it has been advised by experienced and
knowledgeable counsel with respect to this Settlement Agreement generally and
this release specifically.

6. Complete Agreement. This Agreement constitutes the full and complete
agreement between the parties.

7. Governing Law. This Agreement shall be construed in accordance with laws
of the State of West Virginia. Any claim arising out of this Agreement shall
be brought in a court of competent jurisdiction in the State of West
Virginia, and each party to this Agreement hereby consents to the
jurisdiction of such courts.

8. Third Parties, Successors and Assigns. All of the terms, warranties,
representations and covenants of this Amendment shall apply to and be binding
upon, and shall inure to the benefit off the parties hereto, and each of
their respective permitted

<PAGE>

successors and assignees, and there are no intended third party beneficiaries.

IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.

WITNESS/ATTEST MTR GAMING GROUP, INC.

By: /s/ EDSON R. ARNEAULT
---------------------
Edson R. Arneault, President

BILL BLAIR, INCORPORATED

By: /s/ WILLIAM E. BLAIR, JR.
--------------------------------
William E. Blair, Jr., President

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,200,000
<SECURITIES> 0
<RECEIVABLES> 761,000
<ALLOWANCES> 140,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,165,000
<PP&E> 27,613,000
<DEPRECIATION> 5,070,000
<TOTAL-ASSETS> 33,003,000
<CURRENT-LIABILITIES> 2,996,000
<BONDS> 17,201,000
0
0
<COMMON> 2,000
<OTHER-SE> 11,607,000
<TOTAL-LIABILITY-AND-EQUITY> 33,003,000
<SALES> 27,839,000
<TOTAL-REVENUES> 27,883,000
<CGS> 19,708,000
<TOTAL-COSTS> 24,645,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,856,000
<INCOME-PRETAX> 1,382,000
<INCOME-TAX> (66,000)
<INCOME-CONTINUING> 1,448,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,448,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07

</TABLE>