<PAGE> 1
As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-12839
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST EFFECTIVE AMENDMENT NO. 3
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) 387-5712
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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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:
DAVID S. GUIN, ESQ.
ROSS & HARDIES
150 NORTH MICHIGAN AVENUE
SUITE 2500
CHICAGO, ILLINOIS 60601
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this post effective amendment no. 3 to the registration
statement becomes effective.
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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> 4
MTR GAMING GROUP, INC.
CROSS REFERENCE SHEET
<TABLE>
<S> <C>
Forepart of Registration Statement and Outside Front Forepart of Registration
Cover Page of Prospectus Statement and Outside
Front Cover Page of
Prospectus
Inside Front and Outside Back Cover Pages of Prospectus Available Information;
Outside Back Cover Page
of Prospectus
Summary Information, Risk Factors and Ratio of Prospectus Summary;
Earnings to Fixed Charges Summary 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 Registered Description of Securities
Interests of Named Experts and Counsel Legal Matters; Experts
Information with Respect to the Registrant Business; Management;
Price 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 Indemnification Description of Securities
for Securities Act Liabilities
</TABLE>
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SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998.
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> 6
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
December 31, 1997, the high bid and low asked quotations of the
Common Stock were $1 31/32 and $2 1/16 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 February 6, 1998.
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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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY .......................................... 1
RISK FACTORS.................................................. 8
USE OF PROCEEDS............................................... 17
DIVIDEND POLICY............................................... 17
CAPITALIZATION................................................ 18
PRICE RANGE OF COMMON STOCK................................... 18
SELECTED FINANCIAL DATA....................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 20
BUSINESS...................................................... 48
MANAGEMENT.................................................... 70
EXECUTIVE COMPENSATION........................................ 71
CERTAIN TRANSACTIONS.......................................... 78
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................ 83
SELLING STOCKHOLDERS.......................................... 85
PLAN OF DISTRIBUTION.......................................... 87
DESCRIPTION OF SECURITIES..................................... 89
SHARES ELIGIBLE FOR FUTURE SALE............................... 98
DESCRIPTION OF CERTAIN INDEBTEDNESS...........................101
LEGAL MATTERS.................................................103
EXPERTS.......................................................103
INDEX TO FINANCIAL STATEMENTS.................................F-1
</TABLE>
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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.
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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
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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 hook-ups. The tenants
pay all utility expenses.
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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 September 30, 1997. Total revenues for the period were
$17,663,000 as compared to $13,076,000 for the three months ended September 30,
1996, which represents a $4,587,000 or 35% increase. The Company reported net
income of $2,181,000 for the third quarter of 1997, or $.10 per share. This
represents a $733,000 increase from the $1,448,000 net income, or $.08 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 nine months ended September 30,
1997 increased 69% to $37,185,000 from $21,967,000 for the same period in 1996,
or $144 per machine per day for the nine months ended September 30, 1997, as
compared to $100 per machine per day for the nine months ended September 30,
1996. The Company realized an increase of $687,000 in operating income from
$1,996,000 in the third quarter of 1996 to $2,683,000 for the same period of
1997.
Total revenues for the first nine months of 1997 were $45,502,000, up
$16,335,000 or 56%, from the $29,167,000 reported for the same period last
year. Net income increased to $3,629,000 or $.17 per share, for the first nine
months of 1997 from a net income of $1,333,000 or $.07 per share, for the first
nine 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
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"Description of Certain Indebtedness." 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
1,492,806 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
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(compared to July 2, 1999); (ii) increased the total amount borrowed to
$21,476,500 (by virtue of Mountaineer drawing down the 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.
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THE OFFERING
<TABLE>
<S> <C>
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 December 31, 1997, the Company had
19,989,291 shares of Common Stock outstanding.
Assuming that all of the Warrants are exercised
and no other shares of Common Stock are issued
subsequent to December 31, 1997, the Company would
have 20,879,025 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
</TABLE>
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<TABLE>
<S> <C>
be considered by prospective investors in
connection with an investment in the securities
offered hereby.
</TABLE>
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 of $13,076,000, $11,037,000, $12,242,000,
$15,597,000 and $17,663,000 for the last five fiscal quarters and has generated
quarterly profits 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. Some of these factors include prevailing economic
conditions, competition and the attractiveness of gaming as a leisure pastime.
As of September 30, 1997, the Company had an accumulated deficit of
$21,280,000. See "Selected Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Current Operations - Racing Operations - Video Lottery Operations - Improvement
Plan and Expanded - Operations - Develop and Market Mountaineer Park as a
Diversified Entertainment Facility."
LEVERAGE AND DEBT SERVICE. The Company has significant interest expense
of $2,636,000 and principal repayment obligations which amounted to $186,000 in
the period ended September 30, 1997. Substantially all of the Company's assets
are pledged to secure
- 8 -
<PAGE> 18
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 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. The
Company estimates that the minimum level of operating cash flow necessary for
it to service its operations and obligations, and to satisfy its financial
covenants in its loan agreements is $500,000. 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. See
"Business - Racing Operations" and "Business - Regulation and Licensing -
Racing."
The operation of video lottery games in West Virginia is subject to the
Lottery Act. Licensing and regulatory control is
- 9 -
<PAGE> 19
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. See "Business - Video Lottery Operations" and "Business -
Regulation and Licensing - Video Lottery."
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 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
- 10 -
<PAGE> 20
- - 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.
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Parimutuel Commissions."
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
- 11 -
<PAGE> 21
and Chief Executive Officer, would likely have a material adverse effect on the
Company. The Company does not maintain key man life insurance for Mr. Arneault
or any other employee. 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-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. See
"Dividend Policy" and "Description of Securities - Common Stock."
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
- 12 -
<PAGE> 22
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 - Parimutuel Commissions Operating Costs."
ROAD IMPROVEMENTS. During the third quarter of 1997, construction
projects commenced affecting West Virginia 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) and Ohio Routes 7 and 11. The
Company anticipates that the construction projects will be completed in
approximately May of 1998. 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 of such
effect would be in proportion to any decline in patronage. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and Capital Resources - Road Improvements."
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Discontinued Operations", "Business - Discontinued Operations" and
"Business - Properties."
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Continuing Operations Years Ended December 31, 1996, 1995 and 1994 - Revenues",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of
- 13 -
<PAGE> 23
Continuing Operations Nine Months Ended September 30, 1997 and 1996 - Revenues"
and "Business - Improvement Plan and Expanded Operations - Business Strategy -
Develop and Market Mountaineer Park as Diversified Entertainment Facility -
Expand Video Lottery Operations - Marketing."
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. See "Price
Range of Common Stock" and "Description of Securities."
LACK OF PUBLIC MARKET. Prior to December 31, 1997, 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. 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. See "Price Range of Common Stock" and "Description of
Securities."
SHARES ELIGIBLE FOR FUTURE SALE. As of December 31, 1997, the Company had
approximately 19,989,291 shares of Common Stock outstanding. In addition, the
Company is obligated to issue an additional 8,032,247 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 17,724,055 shares of Common Stock
currently outstanding which were not freely tradable by the holders thereof
upon issuance by the
- 14 -
<PAGE> 24
Company, the Company has registered the resale of 2,455,427 shares of Common
Stock by the holders thereof. 1,283,905 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
4,991,851 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 6,535,214 shares of Common Stock
which are, or will when issued be, "restricted securities." Of that 6,535,214
shares of Common Stock, 3,556,398 underlie various employee plans and grants.
See "Selling Stockholders", "Plan of Distribution", "Description of Securities
- -Common Stock" and "Shares Eligible for Future Sale."
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. See "Certain Transactions - Redeemable Common Stock."
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
- 15 -
<PAGE> 25
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."
COMPANY'S COMMON STOCK SUBJECT TO PENNY STOCK REGULATION. Penny stocks
generally are equity securities with a price of less than $5.00 per share other
than securities registered on certain national securities exchanges or quoted
on the Nasdaq National Market, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system. The market price of the Company's Common Stock may
continue at a price less than $5.00. Thus the Company's Common Stock is
subject to the "penny stock" rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse).
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document prescribed by the Commission relating to the penny stock
market. Such document must disclose the risks of investing in the penny stock
market including (i) a description of the nature and risk involved in the penny
stock market; (ii) a description of the duties of the broker-dealer to the
customer and the rights and remedies available; (iii) an explanation of the
name of "bid" and "ask" prices in the penny stock market; (iv) a description of
all significant terms used in the risk disclosure document; and (v) a toll free
number to provide information on disciplinary histories. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered
- 16 -
<PAGE> 26
representative and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the limited
market in penny stocks. Consequently, the "penny stock" rules may restrict the
ability of broker-dealers to sell the Company's securities. However, the
Commission, as it may determine consistent with the public interest and
protection of investors, may exempt, in whole or in part, any person or class
of persons, or any transaction or class of transactions, from the penny stock
requirements. Such exemptions shall include an exemption for brokers and
dealers based on the minimal percentage of broker's or dealer's commissions,
commission-equivalent, and markups received from transactions in penny stock.
See "Plan of Distribution."
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 $930,118. 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 "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.
- 17 -
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997.
September 30, 1997
------------------
Actual As Adjusted (1)
------ ---------------
<TABLE>
<S> <C> <C>
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
Term Loan 21,448,000 21,448,000
Other long-term debt bearing interest at 8% 130,000 130,000
--------- ---------
Total long-term debt--noncurrent portion 21,578,000 21,578,000
Redeemable Common Stock--noncurrent portion 0 0
Stockholders' equity:
Common Stock, Paid-in Capital 34,867,000 35,797,000
Accumulated deficit (21,280,000) (21,280,000)
------------ ------------
Total stockholders' equity 13,587,000 14,517,000
Total capitalization 35,194,000 36,124,000
</TABLE>
(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 December 31, 1997, the high bid and low asked quotations
for the Company's Common Stock were $1 31/32 and $2 1/16 respectively. As of
December 31, 1997 there were approximately 571 stockholders of record of the
Company's Common Stock.
- 18 -
<PAGE> 28
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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 13/16
Fourth Quarter 2 17/32 1 11/32
</TABLE>
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 nine
months ended September 30, 1996, and September 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 operations and
financial condition for those periods. The financial data for the nine months
ended September 30, 1997, are not necessarily indicative of results to be
expected for the year.
- 19 -
<PAGE> 29
<TABLE>
<CAPTION>
Fiscal Year Ended December 31 Nine Months
Ended September 30,
1996 1995 1994 1993 1992 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Gross revenues $40,204,000 $24,927,000 $14,656,000 $12,797,000 $690,000 $45,502,000 $29,167,000
Income/(loss) from
continuing
operations 1,155,000 (5,313,000) (6,902,000) (5,913,000) (2,749,000) 3,629,000 1,333,000
Income per share
from continuing
operations .06 (.33) (.48) (.46) (.42) .17 .07
Discontinued
operations data:
Revenues - - 184,000 268,000 236,000 - -
=========== =========== =========== =========== ========== =========== ===========
Loss from
discontinued
operations - - (640,000) (1,653,000) (1,668,000) - -
=========== =========== =========== =========== ========== =========== ===========
Loss per share from
discontinued
operations - - (.04) (.13) (.25) - -
=========== =========== =========== =========== ========== =========== ===========
Balance Sheet Data:
Working Capital
(Deficiency) 3,897,000 (7,453,000) (1,808,000) 313,000 60,000 7,204,000 (2,634,000)
Current Assets 7,016,000 1,972,000 3,555,000 2,354,000 2,974,000 11,187,000 4,734,000
Current Liabilities 3,119,000 9,425,000 5,363,000 2,041,000 2,914,000 3,983,000 7,368,000
Total assets -
continuing
operations 28,262,000 23,131,000 21,387,000 16,347,000 13,923,000 37,696,000 25,620,000
=========== =========== =========== =========== ========== =========== ===========
Net assets -
discontinued
operations 2,616,000 2,616,000 2,571,000 2,790,000 2,889,000 2,616,000 2,616,000
=========== =========== =========== =========== ========== =========== ===========
Total Liabilities 20,612,000 19,763,000 14,200,000 6,040,000 5,641,000 26,725,000 19,521,000
Total Stockholders'
Equity (Capital
Deficiency) 10,266,000 5,984,000 9,758,000 13,097,000 11,171,000 13,587,000 8,715,000
</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-
- 20 -
<PAGE> 30
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. The emergence of video lottery as
Mountaineer's dominant profit center and the 1996 amendment of the West
Virginia video lottery law to permit the addition of simulated "classic casino
slot machine" games to VLTs ("Slot Terminals") have allowed the Company to
generate increased revenues. 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
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
---------- ----------- -----------
<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
---------- ----------- -----------
40,204,000 $24,927,000 $14,656,000
========== =========== ===========
</TABLE>
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
- 21 -
<PAGE> 31
snowfall in the first quarter of 1996, producing difficult travel conditions and
resulting in portions of Ohio, West Virginia and Western Pennsylvania being
designated as Federal disaster areas. The Company's revenue increases have
been achieved despite these unusual weather conditions. Mountaineer's
facilities are situated well above the flood plain and did not sustain any
damage; Mountaineer's nearest competitor was extensively damaged and ceased
operations for approximately four weeks in the first quarter of 1996.
Total revenues increased by 10.3 million from 1994 to 1995, an increase of
70%. Approximately $9.0 million of the increase was produced by video lottery
operations, while the parimutuel commissions and lodging, food, beverage and
other operations at Mountaineer contributed $1.3 million of additional
revenues.
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
- 22 -
<PAGE> 32
winter months. In January of 1997, Mountaineer also began broadcasting a 30
minute "infomercial" advertisement on television affiliates within a two hour
driving radius.
The Company has substantially completed a large scale redecoration of its
racetrack grandstand video lottery facilities, including expansion of ancillary
dining and bar areas. The Company has spent $18 million on this redecoration
and expects to incur no additional material expense. Management believes that
the redecoration has made the facility more attractive to patrons and has and
will continue to have a positive effect on video lottery operations.
Management believes that the redecoration will draw and accommodate
significantly heavier patronage to the grandstand gaming facilities, which
currently operate only on the Company's 220 annual live race dates. For the
twelve months ended December 31, 1996, average daily net win on the 400
grandstand terminals was $43 (including $0 for days when there was no live
racing), compared to $167 earned on the lodge-based terminals.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which
means the total amount wagered without regard to predetermined deductions, 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. In parimutuel
wagering, patrons bet against each other rather than against the operator of
the facility or with pre-set odds. The total wagering handle is composed of
the amounts wagered by each individual according to the wagering activity. The
total amounts 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 wagering handle or total amounts wagered. 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
- 23 -
<PAGE> 33
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 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 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. 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.
- 24 -
<PAGE> 34
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 $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.
The increased marketing and promotion expenses were due primarily to (1) labor
costs associated with establishing a full-time marketing department; (2)
implementing a direct mail and print advertising campaign in locations where
the Company's primary competitors operated; and (3) Mountaineer's increased
promotions and prize give-aways. 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
- 25 -
<PAGE> 35
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.
<TABLE>
<CAPTION>
Years Ended December 31
Operating Costs 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
Beverage 3,543,000 3,285,000 2,337,000
Other 1,092,000 1,195,000 798,000
----------- ----------- -----------
$29,757,000 $21,800,000 $13,407,000
=========== =========== ===========
<CAPTION>
Years Ended December 31
Gross Profit (Loss) 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Video Lottery Terminals $10,835,000 $4,223,000 $1,772,000
Parimutuel Commissions (958,000) (801,000) (795,000)
Lodging, Food and
Beverage 402,000 (239,000) (61,000)
Other 168,000 (56,000) 333,000
----------- ----------- -----------
$10,447,000 $3,127,000 $1,249,000
=========== =========== ===========
</TABLE>
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.
- 26 -
<PAGE> 36
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:
<TABLE>
<CAPTION>
March 18, 1994 March 17, 1994
and Beyond and Prior
<S> <C> <C>
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%
----- -----
</TABLE>
(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.
- 27-
<PAGE> 37
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. 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
- 28 -
<PAGE> 38
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.
- 29 -
<PAGE> 39
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,
- 30 -
<PAGE> 40
$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.
NONRECURRING 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 four
items:
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.
In September 1996, the Company reached agreement in a dispute over
trade accounts payable by satisfying an obligation which had been accrued in
the amount of $411,000 as of December 31, 1995 by payment of a $150,000 cash
settlement in September 1996.
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 the 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, when they expired.
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. As of
December 31, 1995, the Company had an accrued liability on its book relating to
the Severance Agreement of $400,000. In 1995, management discontinued payments
under the agreement due to the discovery of certain matters which it believed
nullified the agreement. In October 1996, the
- 31 -
<PAGE> 41
severance agreement was amended to provide for the payment of $100,000
in full satisfaction of the Company's obligation to make cash payments.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
REVENUES
The Company earned revenues for the respective three and nine month
periods in 1997 and 1996 as shown below:
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues:
Video lottery operations $14,400,000 $10,067,000 $37,185,000 $21,967,000
Parimutuel commissions 1,214,000 1,232,000 3,460,000 3,397,000
Lodging, food and beverage 1,711,000 1,396,000 4,025,000 2,269,000
Other revenues 338,000 381,000 832,000 834,000
----------- ----------- ----------- -----------
Total Revenue $17,663,000 $13,076,000 $45,502,000 $29,167,000
=========== =========== =========== ===========
</TABLE>
The Company's Mountaineer Park, Inc. subsidiary has exhibited steady,
pronounced revenue growth under its expansion plan begun in September 1994.
The emergence of video lottery as Mountaineer's dominant profit center and the
1996 amendment of the West Virginia video lottery act to permit simulated
"classic casino slot machine" games to VLTs have allowed the Company to
generate increased revenues. As a result of this significant increase in
gaming revenues, the Company earned profits from continuing operations of $2.18
million and $3.63 million for the three and nine month periods ended September
30, 1997 respectively, compared to $1.45 million and $1.33 million for the same
periods in 1996.
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
- 32 -
<PAGE> 42
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 enactment of an amendment to 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 three and nine months ended September 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total gross wagers $49,265,000 $32,793,000 $128,435,000 $75,010,000
Less patron payouts (34,865,000) (22,726,000) (91,250,000) (53,043,000)
------------ ------------ ------------ ------------
Revenues - video
lottery operations $14,400,000 $10,067,000 $37,185,000 $21,967,000
------------ ------------ ------------ ------------
Average daily net
win per terminal $ 157 $ 137 $ 144 $ 100
============ ============ ============ ============
</TABLE>
Revenues from video lottery operations increased by 43% from $10.06
million in the three months ended September 30, 1996 to $14.4 million in 1997
and by 69% from $22 million in the first nine months of 1996 to $37.2 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 has been
coupled with an
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<PAGE> 43
extensive direct mail marketing program designed to attract repeat business.
Management has undertaken, and substantially completed during the summer of
1997, 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 on the Company's 220 (210
commencing in 1998) annual live race days and additional days as the market
demands. Programs to increase patronage at the grandstand facilities include
promotions, food discounts, and other cash and noncash incentives. For the
three and nine months ended September 30, 1997, average daily net win on the
500 grandstand VLTs was $73 and $60 respectively (including $0 for days when
the grandstand facilities were closed), compared to $235 and $227 earned on the
500 lodge-based VLTs, which operate 365 days per year.
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 and on races conducted at other thoroughbred and greyhound
racetracks and simulcast at Mountaineer. Mountaineer's parimutuel commissions
for the three and nine months ended September 30, 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Simulcast racing parimutuel
handle $5,290,000 $5,098,000 $16,091,000 $15,696,000
Live racing parimutuel handle 5,988,000 6,481,000 15,967,000 16,065,000
Less patrons' winning tickets (8,940,000) (9,172,000) (25,402,000) (25,162,000)
----------- ----------- ------------ ------------
2,338,000 2,407,000 6,656,000 6,599,000
Less:
State and county parimutuel tax (131,000) (133,000) (384,000) (379,000)
Purses and Horsemen's
Association (993,000) (1,042,000) (2,812,000) (2,823,000)
----------- ----------- ------------ ------------
Revenues-parimutuel commissions $1,214,000 $1,232,000 $3,460,000 $3,397,000
=========== =========== ============ ============
</TABLE>
Simulcast handle remained relatively constant for the comparative three and nine
month periods, increasing by 4% from $5.1 million to $5.3 million in the three
months ended September 30, 1996 and 1997 respectively, and increasing by 3%
from $15.7 million in the first nine months of 1996 to $16.1 million in 1997.
Live racing handle also remained relatively constant for the nine month periods
ending September 30,
- 34 -
<PAGE> 44
1996 and 1997, decreasing by less than 1% from $16.1 million to $16.0 million,
but decreased by 7.6% from $6.5 million to $6.0 million for the three month
periods ending September 30, 1996 and 1997. Mountaineer completed 176 of its
annually required 220 days of live racing in the first nine months of 1997,
compared to 170 days completed in the first nine months of 1996. Average live
race handle was $98,000 for each race day during the three months ended
September 30, 1997, compared to $105,000 for the same period in 1996 and $91,000
for each race day during the first nine months of 1997, compared to $95,000 for
the same period in 1996. Pursuant to legislation and agreement with the HBPA,
the minimum annual requirement has been reduced to 210 race days commencing
January 1, 1998.
Mountaineer paid average daily live purses of $49,000 and $44,000 during
the three and nine months ended September 30, 1997 and $38,000 and $32,000 in
the corresponding periods 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
has begun promoting moderately funded stakes races of up to $25,000 per race
during the third quarter of 1997, and a featured night of racing in October in
which over $100,000 of purses was 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. To
date, simulcasting in Ohio has remained at existing racing facilities.
Management is unaware of any imminent plans for competing Ohio racetracks to
open any off-track betting sites near Mountaineer, and it is unknown whether
the opening of such facilities would have a material adverse effect on the
business of Mountaineer.
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, and 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.
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<PAGE> 45
(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.
From July 1, 1997 through October 25, 1997, $354,000 of such
assessments had been funded.
- 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. Management believes that if demand for
simulcast broadcasts continues, Mountaineer may commence such
activities during 1998; however, there can be no assurance such
demand will continue or that it will be adequate to make such
operations profitable.
- 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. On August 15, 1997, the
HBPA executed an agreement with Mountaineer accepting the 210 day
minimum.
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined increase of
22.5% from $1.4 million to $1.7 million for the three months ended September
30, 1996 and 1997 respectively, and 36% from $3.0 million to $4.0 million for
the nine months ended September 30, 1996 and 1997 respectively. Management
attributes the increase to direct elements of the infomercial marketing
campaign which commenced in January 1997, discounting, coupons and other sales
promotions designed to attract heavier patronage, especially at the track
facilities, as well as
- 36 -
<PAGE> 46
the synergistic effects of heavier video lottery patronage. Approximately $3.0
million of the revenues for the first nine months of 1997 were derived from food
and beverage operations, compared to $2.1 million in the first nine months 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 growth in revenues, increasing 22% from $825,000 in
the first nine months of 1996 to $1.0 million in the corresponding 1997 period.
OTHER OPERATING REVENUES
Other sources of revenues remained stable, decreasing by only $2,000 to
$832,000 for the nine month period ended September 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.
During 1997 Mountaineer stopped charging patrons for parking.
- 37 -
<PAGE> 47
COSTS AND EXPENSES
Operating costs and gross profit earned from operations for the three and
nine month periods ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Costs:
Video lottery operations $8,894,000 $6,343,000 $23,199,000 $14,371,000
Parimutuel commissions 1,637,000 1,363,000 4,428,000 3,860,000
Lodging, food and
beverage 1,424,000 1,064,000 3,473,000 2,593,000
Other revenues 226,000 302,000 789,000 794,000
----------- ---------- ----------- -----------
Total Operating Costs $12,181,000 $9,072,000 $31,889,000 $21,618,000
=========== ========== =========== ===========
Gross Profit (Loss):
Video lottery operations $5,506,000 $3,724,000 $13,986,600 $7,596,000
Parimutuel commissions (423,000) (131,000) (968,000) (463,000)
Lodging, food and
beverage 287,000 332,000 552,000 376,000
Other revenues 112,000 79,000 43,000 40,000
----------- ---------- ----------- -----------
Total Gross Profit $5,482,000 $4,004,000 $13,613,000 $7,549,000
=========== ========== =========== ===========
</TABLE>
The Company's 56% increase in revenues resulting from the expanded scope
of entertainment offerings at Mountaineer resulted in higher total costs, as
operating costs increased by 48% to $31.9 million in the first nine months of
1997. As a result, gross profit from the Company's four profit centers
increased substantially from $7.5 million for the first nine months of 1996 to
$13.6 million for the same period in 1997, an increase of 80%.
VIDEO LOTTERY OPERATIONS
Costs of VLTs increased by $2.5 million, or 40%, to $8.9 million for the
three months ended September 30, 1997 versus 1996, and by $8.8 million, or 61%,
to $23.2 million for the nine months ended September 30, 1997, reflecting the
increase in statutory expenses directly related to the respective 43% and 69%
increases in video lottery revenues. Such expenses accounted for $8.2 million
of the total cost increase for the nine month period.
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
- 38 -
<PAGE> 48
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
for the sole benefit of Mountaineer 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 three and nine month periods are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Employee Pension Fund $70,000 $49,000 $182,000 $107,000
Horseman's Purse Fund 2,183,000 1,523,000 5,641,000 3,322,000
---------- ---------- ----------- -----------
Subtotal 2,253,000 1,572,000 5,823,000 3,429,000
State of West Virginia 4,545,000 3,096,000 11,712,000 6,940,000
Tourism Promotion Fund 423,000 295,000 1,092,000 643,000
Hancock County 282,000 197,000 728,000 429,000
Stakes Races 141,000 98,000 364,000 214,000
Veteran's Memorial 141,000 98,000 364,000 214,000
---------- ---------- ----------- -----------
$7,785,000 $5,356,000 $20,083,000 $11,869,000
========== ========== =========== ===========
</TABLE>
The remaining significant expenses incurred by video lottery operations
for the comparative three and nine month periods consist of VLT lease expense
($266,000 and $852,000 for the respective periods in 1997 compared to $350,000
and $1,068,000 in 1996), direct and indirect wages and employee benefits
($512,000 and $1,375,000 for the respective periods in 1997 compared to
$223,000 and $616,000 in 1996), and utilities, property tax and insurance
($144,000 and $440,000 for the respective periods in 1997 compared to $104,000
and $338,000 in 1996).
In March 1997, the Company purchased 400 new Slot Terminals and retired
200 leased Card Terminals. As a result, 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 continue to exceed prior year
- 39 -
<PAGE> 49
levels due to this increase in number of VLTs from 800 to 1000 in March 1997,
and anticipated high levels of patronage.
PARIMUTUEL COMMISSIONS
Costs of parimutuel commissions increased by $568,000, or 15%, from $3.9
million in the first nine months of 1996 to $4.4 million in the first nine
months of 1997. Only $66,000 of such increase (from $1,571,000 to $1,637,000)
was attributable to the three month period ending September 30. Host track
simulcast fees, totalisator and other lease expenses remained stable at
approximately $900,000 in the first nine months of 1997 and 1996. Wages and
benefits relating to the Company's racing operations increased by $254,000, or
13%, from $1.9 million to $2.2 million in the nine months ended September 1997
compared to the prior period, largely as a result of conducting 176 live race
performances in 1997 compared to only 170 in the first nine months of 1996.
Cost of supplies increased by $212,000, or 163%, from $130,000 to $342,000 for
the same period to period comparison.
Mountaineer's labor agreement with approximately 50 mutuel and 14 video
lottery employees has been extended until November 30, 2002.
On August 15, 1997, Mountaineer executed a new agreement with the HBPA,
the exclusive authorized bargaining representative for all thoroughbred horse
owners who participate in live races at 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. Mountaineer is
required to conduct a minimum of 210 live racing events annually during the
term of the agreement, down from a minimum threshold of 220 days under the
prior contract. Also, the minimum daily purse payment will increase from
$22,500 under the prior agreement to $30,000. The new contract, which expires
on January 1, 2001, contains no other material changes from the prior
agreement.
FOOD, BEVERAGE AND LODGING OPERATIONS
Operating costs of the Company's food, beverage and lodging operations
increased by 34% from $1.1 million to $1.4 million in the three months ended
September 30 and from $2.6 million to $3.5 million in the nine months ended
September 30, 1996 versus 1997, consistent with the increase in revenues from
such operations for the same comparative periods. Direct expenses of the
Company's food and beverage operations increased from $1.8 million in the first
nine months of 1996 to $2.6 million during the corresponding period in 1997.
The food and beverage operation earned a gross profit of $412,000 in
- 40 -
<PAGE> 50
the first nine months of 1997, compared to $364,000 in 1996 as higher revenues
more fully absorbed the operation's fixed costs. Lodging direct costs totaled
$864,000 for the nine months ended September 30, 1997, compared to $813,000 in
1996. Lodging operations achieved a gross profit of $140,000 in the 1997
period, compared to a $12,000 profit in the first nine months of 1996.
COST OF OTHER REVENUES
Cost of other revenues remained stable, decreasing by only $5,000 from
$794,000 for the nine months ended September 30, 1996 to $789,000 for the nine
months ended September 30, 1997. During the three months ended September 30,
such costs declined by $76,000, from $302,000 in 1996 to $226,000 in 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 $907,000 to $3.7 million
in the first nine months of 1997 from $2.8 million for the nine month period
ended September 30, 1996. $383,000 of such increase (from $748,000 to $1.3
million) was attributable to the three month period ending September 30.
Management's efforts to reduce the cost of corporate overhead continued to
yield beneficial results, as corporate general and administrative expenses
declined from $1.4 million in the first nine months of 1996 to $1.1 million in
the corresponding period of 1997. General and administrative expenses at
Mountaineer increased to $2.6 million in the first nine months of 1997,
compared to $1.5 million in the corresponding period of 1996. Wages and
benefits expense at Mountaineer increased from $619,000 in the first nine
months of 1996 to $1.1 million for the same period in 1997, due to the transfer
of management employees from the Company's corporate office to Mountaineer, 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 $308,000 to
$725,000 for the nine month periods ended September 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 at Mountaineer increased from $1.0 million in the first
nine months of 1996 to $2.4 million in the first nine months of 1997, as
Management embarked on an aggressive regional marketing campaign centered
around its 30-minute infomercial broadcasts. $460,000 of such increase (from
$617,000 to $1,077,000) was attributable to the three month period ending
- 41 -
<PAGE> 51
September 30. Marketing and promotions expense in the first nine months of
1997 are net of approximately $497,000 to be refunded to Mountaineer
under the auspices of two state grants to a convention and visitors bureau of
which Mountaineer is a member. The Company has also qualified to be reimbursed
for up to $110,000 of future expenses incurred in advertising programs
supported by these grants. 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 42%,
or $86,000 increase in wage and benefits expense from $203,000 to $289,000 for
the same period to period comparison. Significantly expanded marketing
activities are reflected in the comparative expense levels for the nine months
ending September 30, 1997 and 1996, respectively; television advertising
$611,000 versus $58,000, newspaper advertising $408,000 versus $256,000, radio
advertising $123,000 versus $9,000, and direct mail marketing $93,000 versus
$8,000. In addition, promotional events and discounts amounted to $758,000
versus $387,000, consisting of promotional events and discounts for video
lottery $336,000 versus $149,000, sales discounts and food and beverage coupons
at the track $173,000 versus $27,000, sales discounts and food and beverage
coupons at the lodge $205,000 versus $119,000, and other promotional events and
discounts $44,000 versus $92,000.
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 $1,000,000.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by $156,000 or 36%, from
$435,000 for the three months ended September 30, 1996 to $591,000 for the
corresponding period in 1997, and by $287,000, or 22%, from $1.3 million for
the nine month period ended September 30, 1996 to $1.6 million 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, and large scale redecoration
of Mountaineer's grandstand video lottery and ancillary dining and bar
facilities, which were substantially completed in the Summer of 1997.
CASH FLOWS
The Company's operations produced $5.5 million of cash flow in the nine
months ended September 30, 1997, compared to $551,000 produced in the first
nine months of 1996. Current year noncash
- 42 -
<PAGE> 52
expenses include $1.6 million for depreciation and amortization and $1.2
million for the amortization of deferred financing costs as interest expense.
The Company invested $5.1 million for continued expansion and development
of its properties at Mountaineer in the first nine months of 1997 including a
$3.1 million investment in Slot Terminals, compared to a $1.1 million
investment in the first nine months of 1996. In the first nine months of 1997,
the Company settled certain common stock price guarantees relating to the 1992
acquisition of Mountaineer via cash payments of $385,000 and the issuance of
150,000 shares of common stock.
In 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 the lender advanced the full amount of the $5.4 million line of
credit to Mountaineer. The Company paid cash loan fees of $920,000 during the
nine months ended September 30, 1997.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $7.2 million at September
30, 1997, and its unrestricted cash balance amounted to $8.4 million. Racing
purses are paid from funds contributed by the Company to bank accounts owned by
the horse owners who race at Mountaineer. At September 30, 1997, the balances
in these accounts exceeded the purse payment obligations by $762,000; this
amount is available for payment of future purse obligations at the discretion
of the Company and in accordance with the terms of its agreement with the HBPA.
The Company would expect this amount to grow during the winter as racing days
are curtailed and video lottery and simulcast revenues continue at a
comparatively less reduced rate.
Redeemable Common Stock Settlements. On October 13, 1992, the Company
acquired all of the issued and outstanding shares of Golden Palace Casinos,
Inc. ("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.
From 1995 until May 1996, the Company reduced the number of Redeemable
Shares by entering into settlement agreements with the holders of such
Redeemable Shares. The terms of these settlement agreements varied from holder
to holder, but generally included the issuance of make-up shares or a
promissory note to the holder, in exchange for the cancellation of the holder's
right to have its shares repurchased by the Company at a specified price. For
complete details regarding the various settlement agreements, see
- 43 -
<PAGE> 53
Note 11 - Shareholders' Equity - Redeemable Common Stock Settlements to the
Consolidated Financial Statements.
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.
Long-Term Debt and Line of Credit Refinancing. Effective July 2, 1997,
Mountaineer and the Company amended and restated the July 2, 1996 Term Loan
Agreement, which had been previously amended and restated as of December 10,
1996. The December 10, 1996 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 July 2, 1997 Second Amended Term Loan 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 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; (iv)
calls for payments of interest only with the principal due at the end of the
four year term; (v) eliminates annual warrants to purchase 250,000 shares of
the Company's common stock at $1.06 per share which would have been issued on
November 15, 1997, 1998 and 1999; and (vi) eliminates annual warrants to
purchase additional shares in a number to be calculated under a formula defined
in the Amended Term Loan Agreement, which would have been issued on November
15, 1997, 1998 and 1999. 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 Agreement. The Company continues to guarantee
the loan. As a result of this transaction and as a result of the combination
of financing and the Company's increased revenues and cash flows, the Company
was able to reduce its accounts payable balance from $909,000 at December 31,
1996 to $664,000 at September 30, 1997. In addition, as a result of the Second
Amended Term Loan
- 44 -
<PAGE> 54
Agreement the Company has excess funds available for investment, further
expansion at Mountaineer and, subject to regulatory approval, additional VLTs.
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 (as of September 30, 1997, the Company has paid $500,000 and
is obligated to pay the remaining $1.3 million in equal payments over the next
nine months); (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
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.
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 began to invest in significant
infrastructure improvements beginning with extensive paving in the fourth
quarter of 1997 and construction of a sewage treatment facility is planned 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, including a new entrance to the racetrack
clubhouse. 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 $1,000,000.
On October 7, 1997, Mountaineer entered into an agreement in which it
obtained an exclusive option to purchase 349 acres of real property located
adjacent to its Hancock County, West Virginia operation. Mountaineer paid
$100,000 in exchange for an irrevocable option to purchase the property for
$600,000 before October 1, 1998, with payment to be made in the form of a
$200,000 cash payment at closing and a $400,000 term note bearing interest at
9% payable over five years.
ROAD IMPROVEMENTS. During the third quarter of 1997, construction
projects commenced affecting West Virginia 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), and Ohio State Routes 7 and 11. Although
such road improvements could ultimately benefit Mountaineer by improving
traffic flow, while such 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, adversely affecting the
Company's financial condition.
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The materiality of such effect would be in proportion to any decline in
patronage. Although there can be no assurance as to the long-term effects of
such construction on the business of Mountaineer, the Company has experienced
no discernible impact on patronage since it commenced.
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 in the ordinary course of business, the authorization
of additional shares gives the Company flexibility in future capital raising or
acquisition activities.
OUTSTANDING OPTIONS AND WARRANTS. As of September 30, 1997, there were
outstanding options and warrants to purchase 6,397,247 shares of the Company's
common stock at below market price. Of this amount, options to purchase
2,818,914 shares are held by employees, former employees or directors of the
Company, and warrants to purchase 2,220,776 shares are held by the Company's
lender whose exercise rights are subject to a statutory ownership limitation
not to exceed 5% of the Company's outstanding voting shares without prior
approval of the West Virginia Lottery Commission. All but 70,000 of such
shares are subject to registration rights and will be included in a
registration statement which the Company intends to file with the Securities
and Exchange Commission.
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 $21.8
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. As of September 30, 1997, the deferred income taxes receivable
balance is approximately $1 million on the Condensed and Consolidated Balance
Sheet (See Note 3 in Notes to Condensed and Consolidated Financial Statements).
COMMITMENTS AND CONTINGENCIES
The Company has various commitments including those under various
consulting agreements, operating leases, and the Company's pension plan and
union contract. The Company has also entered into new employment agreements
with certain employees for periods ranging from one to three years.
Compensation under the employment agreements consists of both cash payments and
stock
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option commitments. The Company anticipates cash payments in the amount
of $1,861,000 over the next three years under the employment agreements. The
Company believes that it has the ability to meet all of its obligations under
the employment agreements. In addition, the Company is faced with certain
contingencies involving litigation and environmental remediation. These
commitments and contingencies are discussed in greater detail in Notes 9 and 10
to the Company's audited financial statements for the years ended December 31,
1996, 1995 and 1994, and Notes 2 and 5 to the Company's financial statements
for the nine months ended September 30, 1997 and 1996, included elsewhere
herein. Although there can be no assurance, the Company believes that cash
generated from operations will be sufficient to meet all of the Company's
currently anticipated commitments and contingencies.
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
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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. For the three and nine month periods ended September 30, 1996
and 1997, the Company had no revenues or expenses for discontinued operations.
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 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
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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.
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
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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.
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
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commission, simulcast fees and expenses and employee pension plan contributions,
approximately one-half of the remainder of the commissions are payable to the
regular purse fund.
Mountaineer also receives the "breakage," which is the odd cents by which
the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer on the basis of the
amounts wagered at their respective facilities.
VIDEO LOTTERY OPERATIONS
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.
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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.
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
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recently, enhance and expand Mountaineer Park, which was first opened in 1951.
Prior to West Virginia's adoption of the Lottery Act in March 1994, the Company
completed certain renovations necessary to maintain the clubhouse and lower
grandstand areas, including upgrades to the plumbing and electrical systems, the
installation of new furniture and furnishings and the redesign of the
grandstand parimutuel (wagering) windows. These improvements were made during
1993.
In 1993, the Company commenced its capital improvement program, designed
to upgrade and expand Mountaineer Park's existing facilities to a level which
would allow its marketing as a more upscale gaming, racing, and recreational
destination resort.
In 1994 and 1995, the Company invested $8.9 million in building
improvements, furnishings, fixtures and equipment suitable for large scale
gaming activities in its race track grandstand and clubhouse, and an additional
$591,000 to convert a portion of existing Lodge space to gaming areas. In
response to 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
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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.
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,
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1997, the Company had accomplished its plan by removing 200 older Card Terminals
and adding 400 new Slot Terminals, resulting in an increase in the number of
VLTs in operation from 800 to 1,000, consisting of 800 Slot Terminals and 200
Card Terminals. The Company believes that its video lottery revenues will
continue to increase with the installation of new machines, the implementation
of progressive and video slot games, and the implementation of its expanded
marketing plan. With its current involvement in video lottery gaming and
parimutuel racing, its substantial infrastructure and grounds, and the
attractive location of its facility, management believes that Mountaineer is
positioned to take advantage of any 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
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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.
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
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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) 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
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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 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 December 31, 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.
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
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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. West Virginia
law fixes these percentages at three levels, 17.25%, 19% and 25%, depending on
the complexity of the wager, as previously discussed. 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 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
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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 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
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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.
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.
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<PAGE> 71
Licenses granted by the Lottery Commission must be renewed on July 1 of
each year. A license to operate video lottery games is a privilege personal to
the license holder and, accordingly, is non-transferable. In order for a
license to remain in effect, Lottery Commission approval is required prior to
any change of ownership or control of a license holder. Unless prior approval
of the Lottery Commission is obtained, the sale of five percent or more of the
voting stock of the license holder or any corporation that controls the license
holder or the sale of a license holder's assets (other than in the ordinary
course of business), or any interest therein, to any person not previously
determined by the Lottery Commission to have satisfied the licensing
qualifications, voids the license.
Once licensed, a racetrack has the right to install and operate up to 400
video lottery machines and may operate more than 400 machines only upon Lottery
Commission approval. The Company has received approval to operate a total of
1,000 machines.
Video Lottery machines may only be operated in the areas of the racetrack
where parimutuel wagering is permitted; provided, however, that if a racetrack
was authorized by the Lottery Commission prior to November 1, 1993 to operate
video lottery machines in another area of the racetrack's facilities, such
racetrack may continue to do so as long as there is one video lottery machine
in the parimutuel wagering area for each machine located in another area of the
racetrack. Accordingly, the Company may continue to operate video lottery
machines at the Lodge, provided that there are at least as many machines
located at Mountaineer's racetrack.
The Lottery Act imposes extensive operational controls relating to, among
other matters, security and supervision, access to the machines, hours of
operation, general liability insurance coverage and machine location. In
addition, the Lottery Act prohibits the extension of credit for video lottery
play and requires Lottery Commission approval before any video lottery
advertising and promotional activities are conducted. The Lottery Act provides
for criminal and civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be
deposited with the Lottery Commission to be shared in accordance with the
provisions of the Lottery Act. Under such provisions, each racetrack must
electronically remit to the Lottery Commission its "gross terminal income"
(total cash deposited into video lottery machines less the value of credits
cleared for winning redemption tickets). To ensure the availability of such
funds to the Lottery Commission, each racetrack must maintain in its account an
amount equal to or greater than the gross terminal income to be remitted. If a
racetrack fails to maintain this balance, the Lottery Commission may disable
all of the racetrack's
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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 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
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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 re-establish 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 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
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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 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
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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.
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
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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, life-time employment contract, in retaliation for his allegedly
having reported to Mountaineer officials and/or West Virginia racing officials
that Mountaineer had violated state and federal laws. Mr. Hamilton, who had
served as Director of Mutuels from about July of 1991 until his termination in
July of 1995, alleges that he complained that Mountaineer extended credit to
officers, employees, and patrons for wagering in violation of state law; that
between April and September of 1994, a Mountaineer employee made illegal cash
payments on behalf of Mountaineer of $7,750 to local politicians in return for
their support of video lottery legislation; and that Mountaineer committed
other violations of state and federal law.
The complaint seeks compensatory damages in the amount of $1,000,000,
prejudgment interest, and costs as well as punitive damages in the amount of
$5,000,000, reinstatement, back pay, front pay, compensation for pecuniary
losses, and attorneys' fees.
Mountaineer has answered the complaint, denying all allegations of
wrongdoing and liability. Mountaineer has also moved to dismiss the complaint
with prejudice on the grounds that (i) Mr. Hamilton's prior testimony under
oath when seeking unemployment compensation benefits (that his termination
resulted solely from a combining of departments) estops him from now claiming
otherwise; (ii) the claimed lifetime employment contract is unenforceable as a
matter of West Virginia law; and (iii) the complaint fails to state a claim for
wrongful discharge, discrimination, or intentional infliction of emotional
distress. The Company believes the lawsuit is frivolous and, therefore, that
it will not incur any material liability as a result.
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
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Virginia, Civil Action No. 95-C-103G. On June 19, 1995, the Company and
Mountaineer were served with a complaint by George Jones, claiming breach and
wrongful termination of Mr. Jones' employment agreement with Mountaineer,
retaliatory discharge, fraud, outrage, and defamation. The complaint alleges,
among other things, that Mountaineer terminated Jones' employment in September
of 1993 in retaliation for his efforts to investigate alleged improper
activities occurring at Mountaineer. Mr. Jones seeks an award of compensatory
damages in the amount of $1 million and a like amount in punitive damages.
The Company and Mountaineer have answered the complaint, denying any
liability to Mr. Jones. Management has determined to defend the case
vigorously on the grounds that the defamation claim is barred by the statute of
limitations, and that all of the claims should be dismissed because Mr. Jones'
employment was properly and justifiably terminated. In April of 1997,
Mountaineer was advised by its insurance carrier that only the defamation
claims against it are covered by insurance. Discovery has only recently
commenced in the case, largely because Mr. Jones' counsel had been unable to
locate him. The Company does not believe that either the Company or
Mountaineer will incur any material loss on account of such claims.
Mountaineer Park, Inc. v. Manypenny, Circuit Court of Hancock County, West
Virginia, Civil Action No. 96-C-96W. In July of 1996, Mountaineer brought suit
against Lawrence Manypenny for legal malpractice. Mountaineer's complaint
alleges that Mr. Manypenny negligently failed to file a responsive pleading on
Mountaineer's behalf, resulting in the entry of a default judgment against
Mountaineer in the principal amount of $308,000. Mountaineer seeks to recoup
the $100,000 it paid in settlement of the judgment together with its costs and
attorney's fees incurred in its attempts to overturn the judgment.
Mr. Manypenny has answered the complaint (denying its allegations of
negligence), asserted a third-party claim in the nature of contribution,
alleging that to the extent he is liable to Mountaineer, Mr. Russell, alleged
to have been Mountaineer's general counsel, is liable to him, and asserted a
counterclaim for legal fees allegedly due him in the amount of $7,000.
Mountaineer will seek summary judgment on the counterclaim based on accord and
satisfaction. Mountaineer has agreed to provide Mr. Russell a defense to the
third-party claim. Discovery has established that Mr. Manypenny has
professional liability insurance in an amount sufficient to satisfy any
judgment Mountaineer might obtain. There can be no assurance, however, that
Mountaineer will prevail in the litigation.
The Company (including its subsidiaries) is also a defendant in various
law suits relating to routine matters incidental to its business. Management
does not believe that the outcome of such
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litigation, in the aggregate, will have any material adverse effect on the
Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive offices of the Company.
<TABLE>
<CAPTION>
Name Age Position and Office Held
- ----------------- --- -----------------------------
<S> <C> <C>
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
Thomas K. Russell 44 Chief Financial Officer,
Secretary and Treasurer
</TABLE>
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 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 partner in Ruben & Aronson, LLP, a Washington,
D.C. law firm. Previously, Mr. Ruben was a principal in Freer, McGarry,
Bodansky & Rubin, P.C., a Washington, D.C. law firm, where he practiced from
1991 to 1997. 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
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commercial litigation and corporate/securities law. Mr. Ruben 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. served as counsel to the Company from November of
1991 to December of 1997. Ruben & Aronson, LLP currently serves as counsel to
the company, 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.
Thomas K. Russell, 44, has served the Company as its Secretary, Treasurer,
Chief Financial Officer and General Counsel and was a member of the Company's
Board from December 1989 until October 8, 1997. Mr. Russell is also an officer
and director of ExCal, and Mountaineer. Mr. Russell is an attorney with
responsibility for the management of compliance, litigation and general legal
matters. From 1979 to 1989, he was a practicing attorney in Tustin and Palos
Verdes, California emphasizing business litigation, medical malpractice and
representation of American Indian Tribes in tribal and federal courts and
legislative and administrative matters. Since 1975, Mr. Russell has served as
an officer or director of various public and private corporations engaged in
the oil, mining, hotel, equipment leasing, wholesale travel and motion picture
businesses. Mr. Russell received his Bachelor of Arts in Marketing from
California State University at Fullerton in 1975 and his Juris Doctor from
Pepperdine University in 1978. He has been an active member of the State Bar
of California since 1979.
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 $100,000 in the fiscal year ended December 31, 1996.
- 71 -
<PAGE> 81
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------ ------------------------------------
Awards Payouts
------------------- ---------------
Restricted
Stock Options LTIP All
Salary Bonus Other Annual Comp. Awards SARs Payouts Other
Name Year ($)(1) ($) ($)(2) ($)(3) ($)(4) ($) Comp.
- -------------------- ----- ------- ------ ------------------ ---------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EDSON R. ARNEAULT(5)
Chairman, President
and Chief Executive
Officer of MTR
Gaming Group, Inc. 1996 230,521 67,500 24,590 2,748 300,000 - -
1995 68,985 23,000 - 144,667 68,415 - -
1944 188,729 - 4,021 46,000(3) - - -
THOMAS K. RUSSELL(5)
Secretary,
Treasurer, Chief
Financial Officer,
General Counsel and
Director of MTR 1996 162,729 - 7,496 619 100,000 - -
Gaming Group, Inc. 1995 105,734 - - 41,554 357,316 - -
1994 134,075 - 2,898 - - - -
Compensation paid
to all officers and
directors as a
group during 1996 1996 393,250 67,500 32,086 3,367 400,000 - -
</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.
- 72 -
<PAGE> 82
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)
------------------------------
Number of
Securities
Underlying % of Total Options
Options Granted in Fiscal Exercise Expiration
Name Granted(#)(1) Year Price Date 5% 10%
- ----------------- -------------------- -------------------- -------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
EDSON R. ARNEAULT 300,000 60% $.5625 Jan. 2001 $46,622 $103,024
THOMAS K. RUSSELL 100,000 20% $.5625 Jan. 2001 $15,541 $34,341
</TABLE>
(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 $.5625 per share, at annual compounded
rates of 5% and 10%, respectively.
- 73 -
<PAGE> 83
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and value
of options held by each of the Company's executive officers named in the
Summary Compensation Table as of December 31, 1996. None of the named
executive officers exercised any stock options during fiscal year 1996.
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options at
Options at Fiscal Year Year End ($)(1)
End
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Edson R. Arneault 1,059,749 - 270,247 -
Thomas K. Russell 536,816 - 103,203 -
</TABLE>
(1) Based on the market price of the Company's Common Stock of $1.281 on
March 20, 1996, as reported by Nasdaq.
- 74 -
<PAGE> 84
TEN-YEAR OPTIONS/SAR REPRICINGS
The following table sets forth the number of options held by officers of
the Company subject to repricing during the fiscal year ended December 31,
1996. See table entitled "Option Grants in 1996".
<TABLE>
<CAPTION>
Length of Original
Option Term
Number of Market Price of Exercise Price at Remaining at Date
Options/SARs Stock at Repricing Time of Repricing New Exercise Price of Repricing or
Name Date Amended Fiscal Year or Amendment ($) or Amendment ($) ($) 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. Russell Sep. 95 240,000 1.563 4.875 2.00 2 years
</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 December 31, 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 an
employment agreement with the Company. Pursuant to that agreement, Mr. Russell
receives a base salary with annual
- 75 -
<PAGE> 85
cost of 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.
- 76 -
<PAGE> 86
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.
- 77 -
<PAGE> 87
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.
- 78 -
<PAGE> 88
In December 1994, the Company entered into an arrangement to sell certain
of the proved and unproven gas reserves located in Southeast Ohio to
Development and Acquisition Ventures in Energy, Inc. for notes valued at
approximately $426,000. Mr. David Arneault is a principal of Development and
Acquisition Ventures in Energy, Inc., and is the brother of Mr. Edson R.
Arneault, 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 partner in the law
firm Ruben & Aronson, LLP, which has performed legal services for the Company.
The Company and Ruben & Aronson anticipate that the law firm will perform legal
services for the Company in the future. Mr. Ruben was a principal in the law
firm of Freer, McGarry, Bodansky & Rubin, P.C., which performed legal services
for the Company from 1991 until 1997. During the fiscal year ended December
31, 1996, the Company paid Freer, McGarry, Bodansky & Rubin the sum of $334,340
for legal services.
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
- 79 -
<PAGE> 89
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 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
- 80 -
<PAGE> 90
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 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
- 81 -
<PAGE> 91
amount of $302,000 plus accrued interest. The Company is attempting to
negotiate a settlement with the previous holder of 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 December 31, 1997, 90,496 shares of redeemable Common Stock were
outstanding.
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<PAGE> 92
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 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 December 31, 1997 there were 19,989,291 shares of Common
Stock outstanding. All such shares were owned both beneficially and of record,
except as otherwise noted.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address Ownership Percentage of Class
<S> <C> <C>
Edson R. Arneault(1)
MTR Gaming Group, Inc.
State Route 2 South
P.O. Box 356
Chester, WV 26034 2,795,567 13.20%
Thomas K. Russell(2)
1461 Glenneyre Street,
Suite E
Laguna Beach, CA 92677 629,376 3.07%
Robert L. Ruben(3)
Ruben & Aronson, LLP
1101 30th Street, N.W.
Suite 500
Washington, DC 20007 338,228 1.67%
Robert A. Blatt(4)
The CRC Group
Larchmont Plaza
1890 Palmer Avenue,
Suite 303
Larchmont, NY 10538 667,684 3.29%
Bennett Management and
Development Corp.(5)
2 Clinton Square
Syracuse, NY 13202 1,530,000 7.65%
Madeleine LLC(6)
450 Park Avenue
New York, NY 10022 2,884,302 12.84%
</TABLE>
- 83 -
<PAGE> 93
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address Ownership Precentage of Class
<S> <C> <C>
Donald G. Saunders(7)
900 East Desert Inn Road
Suite 521
Las Vegas, NV 89109 1,807,665 8.71%
Total Officers and Directors as a Group
(4 persons)(8) 4,430,855 19.89%
</TABLE>
(1) Includes 1,605,818 shares and options to acquire beneficial ownership of
1,189,749 shares within 60 days held by Mr. Arneault or his affiliates.
(2) Includes 103,810 shares and options to acquire beneficial ownership of
525,566 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
755,849 shares within 60 days.
(8) Includes Messrs. Arneault, Russell, Blatt and Ruben.
- 84 -
<PAGE> 94
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.
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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 December 31, 1997, and
(iii) the shares of Common Stock underlying any other options or warrants owned
by the Selling Stockholder which are exercisable as of December 31, 1997 or
which will become exercisable within 60 days after December 31, 1997. Except
as otherwise noted, none of such persons or entities has had any material
relationship with the Company during the past three years.
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<PAGE> 96
<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
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<PAGE> 97
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 Regulation M under
the Exchange Act. In general, Regulation M under the Exchange Act prohibits any
affiliated purchasers from bidding for or purchasing or attempting to induce any
person to bid for or purchase shares of Common Stock without compliance with the
provisions of Rule 102, until after they have completed their participation in
the Distribution (the "Distribution Period").
During the Distribution Period, Rule 102 under the Exchange Act
prohibits
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<PAGE> 98
any affiliated purchasers from bidding for, purchasing, or attempting to induce
any person to bid for or purchase shares of Common Stock. However, Rule 102
under the Exchange Act does not prohibit the following activities: odd-lot
transactions; transactions by close-end investment companies; redemptions by
commodity pools or limited partnerships; exercises of securities; offers to
sell or the solicitation of offers to buy; unsolicited purchases; and
transactions in Rule 144A securities.
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 December 31, 1997, there were
19,989,291 shares of Common Stock issued and outstanding. As of December 31,
1997 there were approximately 571 stockholders of record of the Company's Common
Stock.
As of December 31, 1997, a total of 8,032,247 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
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<PAGE> 99
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. 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.
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<PAGE> 100
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 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:
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<PAGE> 101
(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 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
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<PAGE> 102
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 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
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<PAGE> 103
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.
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
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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.
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
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<PAGE> 105
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.
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
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<PAGE> 106
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 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
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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.
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 December 31, 1997, the Company had approximately 19,989,291
shares of Common Stock outstanding. In addition, the Company is obligated to
issue an additional 8,032,247 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 17,724,055 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. 1,283,905 shares of Common Stock
currently outstanding remain "restricted securities" for purposes of the Act.
- 98 -
<PAGE> 108
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 4,991,851 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 6,535,214 shares of Common Stock
which are, or will when issued be, "restricted securities." Of that 6,535,214
shares of Common Stock, 3,556,398 underlie various employee plans and grants.
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.
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
- 99 -
<PAGE> 109
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 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,
-100-
<PAGE> 110
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 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
-101-
<PAGE> 111
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
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,
-102-
<PAGE> 112
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.
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.
-103-
<PAGE> 113
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995 ..............F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1996.........................F-5
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1996 ........................F-6
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996 .......................F-10
Notes to Consolidated Financial Statements ...............................F-12
Condensed and Consolidated Balance Sheets at December 31, 1996 and
September 30, 1997 (Unaudited)..........................................F-52
Condensed and Consolidated Statements of Operations for the Nine
Months Ended September 30, 1997 and 1996 (Unaudited) ...................F-54
Condensed and Consolidated Statements of Cash flows for the Nine
Months Ended September 30, 1997 and 1996 (Unaudited)....................F-55
Notes to Condensed and Consolidated Financial Statements (Unaudited)......F-56
F-1
<PAGE> 114
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> 115
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,226,000 $ 807,000
Restricted cash 185,000 426,000
Accounts receivable, net of allowance
for doubtful accounts of $140,000 and
$70,000 in 1996 and 1995, respectively 302,000 236,000
Deferred financing costs 1,066,000 388,000
Deferred income taxes 760,000 --
Other current assets 477,000 115,000
----------- -----------
Total current assets 7,016,000 1,972,000
----------- -----------
Property and equipment, net 18,453,000 18,100,000
----------- -----------
Net assets of discontinued oil and gas
gas activities 2,616,000 2,616,000
----------- -----------
Other assets:
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,022,000 and $770,000
in 1996 and 1995, respectively 2,752,000 3,004,000
Deposits and other 41,000 55,000
----------- -----------
2,793,000 3,059,000
----------- -----------
$30,878,000 $25,747,000
----------- -----------
----------- -----------
</TABLE>
F-3
<PAGE> 116
MTR GAMING GROUP, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 909,000 $ 3,474,000
Accrued liabilities 1,891,000 2,291,000
Current portion of long-term debt 186,000 2,536,000
Current portion of redeemable common
stock -- 991,000
Deferred income taxes 133,000 133,000
------------ ------------
Total current liabilities 3,119,000 9,425,000
Accrued liabilities -- 456,000
Long-term debt, less current portion 16,230,000 8,071,000
Deferred income taxes, less current portion 1,263,000 1,396,000
Redeemable common stock, 367,937 shares
issued and outstanding at December 31,
1995, net of current portion -- 415,000
------------ ------------
Total liabilities 20,612,000 19,763,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.00001,
50,000,000 shares authorized; 19,126,043
and 17,022,645 issued and outstanding
at December 31, 1996 and 1995, respectively 2,000 2,000
Common Stock subscribed, 525,848
shares at December 31, 1996 -- --
Paid-in capital 35,173,000 32,115,000
Receivable from exercise of stock options -- (69,000)
Accumulated deficit (24,909,000) (26,064,000)
------------ ------------
Total shareholders' equity 10,266,000 5,984,000
------------ ------------
$ 30,878,000 $ 25,747,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 117
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Video lottery terminals $ 30,700,000 $ 16,479,000 $ 7,481,000
Parimutuel commissions 4,299,000 4,263,000 3,768,000
Lodging, food and beverage 3,945,000 3,046,000 2,276,000
Other 1,260,000 1,139,000 1,131,000
------------ ------------ ------------
Total revenues 40,204,000 24,927,000 14,656,000
------------ ------------ ------------
Costs of revenues:
Cost of video lottery terminals 19,865,000 12,256,000 5,709,000
Cost of parimutuel commissions 5,257,000 5,064,000 4,563,000
Cost of lodging, food and beverage 3,543,000 3,285,000 2,337,000
Cost of other 1,092,000 1,195,000 798,000
------------ ------------ ------------
Total cost of revenues 29,757,000 21,800,000 13,407,000
------------ ------------ ------------
Gross profit 10,447,000 3,127,000 1,249,000
------------ ------------ ------------
Selling, general and administrative expenses:
Marketing and promotions 1,718,000 1,144,000 1,016,000
General and administrative 4,092,000 5,420,000 5,652,000
Depreciation and amortization 1,667,000 1,504,000 910,000
------------ ------------ ------------
Total selling, general and
administrative expenses 7,477,000 8,068,000 7,578,000
------------ ------------ ------------
Operating income (loss) 2,970,000 (4,941,000) (6,329,000)
Interest income 54,000 52,000 26,000
Interest expense (3,460,000) (557,000) (729,000)
Non-recurring income 705,000 - -
------------ ------------ ------------
Income (loss) before income taxes 269,000 (5,446,000) (7,032,000)
Benefit for income taxes 886,000 133,000 130,000
------------ ------------ ------------
Income (loss) from continuing
operations 1,155,000 (5,313,000) (6,902,000)
Discontinued operations:
Loss on disposal of oil and gas
operations - - (640,000)
------------ ------------ ------------
Net income (loss) $ 1,155,000 $ (5,313,000) $ (7,542,000)
============ ============ ============
Income (loss) per share:
Income (loss) from continuing operations $ 0.06 $ (0.33) $ (0.48)
Discontinued operations - - (0.04)
------------ ------------ ------------
Net income (loss) per share $ 0.06 $ (0.33) $ (0.52)
============ ============ ============
Weighted average number of shares
outstanding 19,242,458 16,226,743 14,523,377
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 118
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> 119
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> 120
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> 121
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> 122
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 1,155,000 $(5,313,000) $ (6,902,000)
Adjustments to reconcile income (loss)
to net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 1,667,000 1,504,000 910,000
Provision for settlements - 408,000 525,000
Non-recurring income (non-cash) (705,000) - -
Other non-cash provisions, net (83,000) - 255,000
Provision for accounts receivable 70,000 290,000 -
Common stock and options issued for
services rendered and amortization
of interest 1,321,000 77,000 1,340,000
Deferred income taxes (893,000) (133,000) (130,000)
Change in operating assets and
liabilities, net of effects of
acquired companies:
Prepaid management fees - 220,000 (220,000)
Prepaid purses - 352,000 (352,000)
Other current assets 231,000 54,000 63,000
Accounts payable (2,254,000) 1,676,000 1,221,000
Accrued liabilities (183,000) 1,418,000 (244,000)
------------ ------------ ------------
Cash provided by (used in) continuing
operations 326,000 553,000 (3,534,000)
------------ ------------ ------------
Loss from discontinued operations:
Oil and gas operations - - (640,000)
Adjustments to reconcile loss to
net cash used in discontinued
operating activities -
Provision for estimated loss on
sale of discontinued oil and gas
operations - - 567,000
------------ ------------ ------------
Cash used in discontinued operations - - (73,000)
------------ ------------ ------------
Net cash provided by (used in) operating
activities 326,000 553,000 (3,607,000)
------------ ------------ ------------
Cash flows from investing activities:
Restricted cash 241,000 220,000 (401,000)
Proceeds from insurance reimbursement - - 241,000
Repayments on notes receivable from
related parties - - 38,000
Deposits and other assets 14,000 17,000 (2,000)
Capital expenditures (1,767,000) (5,482,000) (3,444,000)
Net assets of discontinued oil and gas
operations - (45,000) (198,000)
------------ ------------ ------------
Net cash used in investing activities (1,512,000) (5,290,000) (3,766,000)
------------ ------------ ------------
Continued
</TABLE>
F-10
<PAGE> 123
MTR GAMING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments on long-term debt (10,469,000) (53,000) (150,000)
Proceeds from the issuance of long-term
debt 16,100,000 4,500,000 5,700,000
Payments on short-term notes (1,052,000) - -
Proceeds from issuance of short-term
notes 1,052,000 - -
Payments on notes payable to shareholders - - (70,000)
Finance costs paid (845,000) - (61,000)
Proceeds from issuance of common stock
for cash, net - - 2,193,000
Payments in connection with redeemable
common stock (250,000) - -
Proceeds from issuance of common stock
through exercise of stock options 69,000 40,000 200,000
------------ ------------ ------------
Net cash provided by financing activities 4,605,000 4,487,000 7,812,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,419,000 (250,000) 439,000
Cash and cash equivalents, beginning of
year 807,000 1,057,000 618,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,226,000 $ 807,000 $ 1,057,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow
information -
Cash paid during the year for:
Interest $ 2,493,000 $ 896,000 $ 204,000
------------ ------------ ------------
------------ ------------ ------------
Income taxes $ 25,000 $ 4,000 $ 5,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE> 124
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> 125
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> 126
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> 127
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. The Company evaluates
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. 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> 128
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> 129
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> 130
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> 131
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> 132
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:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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
----------- ------------
----------- ------------
</TABLE>
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> 133
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> 134
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> 135
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> 136
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:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1997 $ 186,000
1998 29,000
1999 16,131,000
2000 33,000
2001 37,000
--------------
$ 16,416,000
--------------
--------------
</TABLE>
F-24
<PAGE> 137
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> 138
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> 139
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> 140
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> 141
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:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1997 $ 1,964,000
1998 1,967,000
1999 522,000
2000 113,000
Thereafter 212,000
--------------
Total $ 4,778,000
==============
</TABLE>
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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:
<TABLE>
<CAPTION>
Shares Price Range
Available per Share
----------- -------------
<S> <C> <C>
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
-----------
-----------
</TABLE>
(1) Includes options to purchase 80,000 shares of common stock at $0.01 per
share.
F-37
<PAGE> 150
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 as follows: risk fee rates between 5.45% and 6.64%;
dividend yield of 0%; expected life of the options of 5 years; and volatility
factors of the expected market price of the Company's common stock of between
44% and 55%. 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.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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)
</TABLE>
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> 151
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
majeure (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> 152
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.
The Company continues to actively market its oil and gas properties for sale.
Remediation activities have continued in order to make the project more
saleable.
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
F-40
<PAGE> 153
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-41
<PAGE> 154
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-42
<PAGE> 155
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
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
Results of its operations for the
years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ --- $ --- $ 184,000
----------- ----------- -----------
Costs and expenses:
General and administrative --- --- 148,000
Operating costs --- --- 109,000
----------- ----------- -----------
Total costs --- --- 257,000
----------- ----------- -----------
Loss from operations $ --- $ --- $ (73,000)
</TABLE> =========== =========== ===========
Reserve Quantity Information
<TABLE>
<CAPTION>
Oil Gas
(in BBLs) (in MCF)
--------- --------
<S> <C> <C>
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 -
=========== ===========
</TABLE>
(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-43
<PAGE> 156
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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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:
<TABLE>
<S> <C>
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)
----------
----------
</TABLE>
F-44
<PAGE> 157
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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)
------------- --------------
------------- --------------
</TABLE>
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-45
<PAGE> 158
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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total Gross Wagers $ 104,819,000 $ 55,988,000 $ 23,214,000
Less Winning Patron Payouts (74,119,000) (39,509,000) (15,733,000)
-------------- -------------- --------------
Video Lottery Revenues $ 30,700,000 $ 16,479,000 $ 7,481,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The Company pays an administrative fee to the Lottery Commission not to exceed
4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds including two funds which directly or
indirectly benefit the Company. These amounts are included in "cost of video
lottery" in the consolidated statements of operations.
F-46
<PAGE> 159
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-47
<PAGE> 160
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-48
<PAGE> 161
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-49
<PAGE> 162
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-50
<PAGE> 163
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-51
<PAGE> 164
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,421,000 $ 4,226,000
Restricted cash 203,000 185,000
Accounts receivable, net of allowance
for doubtful accounts of $114,000 302,000
and $140,000 409,000
Deferred financing costs 462,000 1,066,000
Deferred income taxes 1,015,000 760,000
Other current assets 677,000 477,000
------------ ------------
Total Current Assets 11,187,000 7,016,000
------------ ------------
Property:
Land 371,000 371,000
Buildings 17,218,000 17,081,000
Equipment and automobiles 6,096,000 2,451,000
Furniture and fixtures 2,853,000 2,423,000
Construction in progress 1,656,000 326,000
------------ ------------
28,194,000 22,652,000
------------ ------------
Less Accumulated Depreciation (5,598,000) (4,199,000)
------------ ------------
22,596,000 18,453,000
------------ ------------
Net Assets of Discontinued
Oil and Gas Activities 2,616,000 2,616,000
------------ ------------
Other Assets:
Deferred financing costs 1,271,000
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,211,000 and $1,022,000 2,563,000 2,752,000
Deposits and other 79,000 41,000
------------ ------------
3,913,000 2,793,000
------------ ------------
TOTAL ASSETS $ 40,312,000 $ 30,878,000
============ ============
</TABLE>
See accompanying notes to financial Statements.
F-52
<PAGE> 165
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------------------- -----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 664,000 $ 909,000
Accrued Interest 1,346,000
Other accrued liabilities 1,811,000 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 3,983,000 3,119,000
--------------- -------------
Deferred Income Taxes, Less Current Portion 1,164,000 1,263,000
--------------- -------------
Long Term Debt, Less Current Portion 21,578,000 16,230,000
---------------- -------------
Shareholders' Equity:
Common stock 2,000 2,000
Paid-in-capital 34,865,000 35,173,000
Accumulated deficit (21,280,000) (24,909,000)
--------------- -------------
Total Shareholders' Equity 13,587,000 10,266,000
--------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 40,312,000 $ 30,878,000
=============== =============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 166
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
--------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Video lottery operations $ 14,400,000 $ 10,067,000 $ 37,185,000 $ 21,967,000
Parimutuel commissions 1,214,000 1,232,000 3,460,000 3,397,000
Food, beverage and lodging 1,711,000 1,396,000 4,025,000 2,969,000
Other 338,000 381,000 832,000 834,000
----------- ------------ ------------ ------------
Total Revenue 17,663,000 13,076,000 45,502,000 29,167,000
----------- ------------ ------------ ------------
Costs and Expenses:
Cost of video lottery operations 8,894,000 6,343,000 23,199,000 14,371,000
Cost of parimutuel commissions 1,637,000 1,571,000 4,428,000 3,860,000
Cost of food, beverage and lodging 1,424,000 1,064,000 3,473,000 2,593,000
Cost of other revenues 226,000 302,000 789,000 794,000
Marketing and promotions 1,077,000 617,000 2,432,000 1,050,000
General and administrative expenses 1,131,000 748,000 3,716,000 2,809,000
Depreciation and amortization 591,000 435,000 1,588,000 1,301,000
----------- ----------- ----------- -------------
Total Costs and Expenses 14,980,000 11,080,000 39,625,000 26,778,000
----------- ----------- ----------- -------------
Operating Profit (Loss) 2,683,000 1,996,000 5,877,000 2,389,000
----------- ----------- ----------- -------------
Other Income (Expense):
Interest income 54,000 21,000 98,000 31,000
Interest expense (780,000) (924,000) (2,636,000) (1,716,000)
Nonrecurring income 321,000 529,000
----------- ----------- ----------- -------------
Total Other Expense (726,000) (582,000) (2,538,000) (1,156,000)
Income (Loss) Before Income Taxes 1,957,000 1,414,000 3,339,000 1,233,000
Benefit for Income Taxes 224,000 34,000 290,000 100,000
----------- ----------- ----------- ----------
Net Income (Loss) $ 2,181,000 $ 1,448,000 $ 3,629,000 $1,333,000
=========== =========== =========== ==========
Net Income (Loss) Per Share $ .10 $ .08 .17 $ .07
=========== =========== =========== ==========
Weighted Average Number
of Shares Outstanding 21,378,434 18,702,179 20,881,375 18,378,890
=========== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 167
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months
September 30, September 30,
1997 1996
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 3,629,000 $ 1,333,000
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Deferred financing costs amortization 1,242,000 569,000
Depreciation and amortization 1,588,000 1,301,000
Common stock issued and stock options granted
for services rendered 75,000 332,000
Provision for doubtful accounts 42,000
Provision for settlement (recoveries) 100,000 (579,000)
Deferred income taxes (354,000) (100,000)
Net Changes in Assets and Liabilities:
Restricted cash (18,000) (31,000)
Prepaid expenses and other (367,000) (143,000)
Accounts payable and accrued liabilities (425,000) (2,173,000)
------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 5,470,000 $ 551,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable from shareholder 69,000
Deposits and other (38,000) 27,000
Settlement of prior acquisition costs (383,000)
Capital expenditures (5,125,000) (1,057,000)
------------ ------------
CASH USED IN INVESTING ACTIVITIES $ (5,546,000) $ (961,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan fees paid (920,000) (619,000)
Principal payments (186,000) (2,826,000)
Loan proceeds 5,377,000 6,100,000
------------ ----------
CASH PROVIDED BY FINANCING ACTIVITIES $ 4,271,000 $ 2,655,000
------------ ------------
NET INCREASE IN CASH 4,195,000 2,245,000
Cash, Beginning of Period 4,226,000 807,000
------------ ------------
Cash, End of Period $ 8,421,000 $ 3,052,000
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 168
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 nine months
ended September 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 September 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. The
Company recorded a $105,000 charge to paid-in-capital in connection with this
transaction.
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 additional guaranteed 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, the Company paid a cash settlement of $278,000
out of which Mr. Blair repaid in full the $78,000 balance due on a promissory
note, and the Company 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. The Company recorded a $278,000 reduction to paid-in-capital and a
$78,000 reduction in notes receivable in connection with this transaction.
Labor Agreement. On September 26, 1996, the original term of
Mountaineer's labor agreement with approximately sixty (60) mutuel and fourteen
(14) video lottery employees expired. In a series of extensions, Mountaineer and
the union have agreed to extend the term of the agreement through November 30,
1997 while negotiating an agreement of longer duration.
F-56
<PAGE> 169
HBPA Agreement. On August 15, 1997, Mountaineer executed a new
agreement with the Horsemen's Benevolent and Protective Association, Inc.
(HBPA). 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. Mountaineer is required to conduct a minimum of 210 live
racing events annually during the term of the agreement, down from a minimum
threshold of 220 days under the prior contract. Also, the minimum daily purse
payment will increase from $22,500 under the prior agreement to $30,000. The new
agreement, which expires on January 1, 2001, contains no other material changes
from the prior agreement.
Nonrecurring Income. In the first nine months of 1996, the Company
negotiated significant reductions in three previously accrued obligations, and
as a result recorded $529,000 in nonrecurring income. The nonrecurring 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 a cash payment of $100,000; (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, 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.
Note 3 - Income Taxes
The benefit for income taxes recorded in the accompanying statement of
operations for the three and nine months ended September 30, 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. and a $255,000 reduction in the valuation allowance for deferred tax assets
in the third quarter of 1997. At September 30, 1997, the Company has recorded a
valuation allowance of approximately $8.3 million against its primary deferred
tax assets (net operating loss carryforwards for federal and state income tax
purposes). At September 30, 1997, the Company has approximately $21.8 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 (AMT) rules of the Tax Reform Act
of 1986, the Company expects to make quarterly federal income tax expenditures
in the future. In the third quarter of 1997, the Company accrued a $65,000
provision for federal income taxes in connection with these AMT limitations.
Future 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 No. 128, Earnings Per Share ("SFAS 128") which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 will revise the standards for computing and presenting earnings
per share, as heretofore performed in accordance with Accounting Principles
Board Opinion No. 15. SFAS 128 will require restatement of all prior period
earnings per share
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information appearing in 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 No. 129, Disclosure of Information About
Capital Structure, which is effective for financial statements issued for
periods ending
after December 15, 1997.
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 recommendation of the Compensation Committee and upon
approval by 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 each 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 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, 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.
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
September 30, 1997 are as follows:
Years Ending
December 31,
1997 $ 280,000
1998 788,000
1999 675,000
2000 118,000
-----------
$1,861,000
===========
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Note 6 - Long-Term Debt
$21.5 Million Term Loan. On July 2, 1996, Mountaineer entered into a
financing arrangement with a private lending firm for a $5.0 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
(the "Amended Term Loan Agreement"), and providing the Company a $5,376,500
revolving line of credit. In connection with these transactions, the Company
agreed to pay various cash fees and 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 for the Amended Term Loan Agreement in full through June 30,
1997. The July 2, 1997 Second Amended Term Loan Agreement bore the following
revisions from the prior loan agreements:
i) The maturity date of the loan was extended to July 2, 2001.
ii) The principal amount borrowed was increased to $21,476,500 (by
drawing down the line of credit).
iii) Annual cash fees in the amount of 8% of the outstanding
principal balance due on each anniversary of the term loan
were eliminated.
iv) Annual warrants to purchase 250,000 shares of the Company's
common stock at an exercise price of $1.06, due to be issued
on November 15, 1997, 1998 and 1999 were eliminated.
v) Annual warrants to purchase additional shares in a number to
be calculated under a formula defined in the Amended Term Loan
Agreement, due to be issued on November 15, 1997, 1998 and
1999, were eliminated.
As consideration for the Second Amended Term Loan Agreement,
Mountaineer has agreed to pay the lender (i) a one time fee of $1.8 million,
which may be paid over the first year of the term; (ii) 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 Amended Term Loan Agreement); and (iii) 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. The Company continues to guarantee the loan, and the lender's
security position has been improved from second to first trust holder.
In connection with the Amended Term Loan Agreement, pursuant to a
December 10, 1996 Fee Agreement, Mountaineer agreed to pay Bridge Capital, LLC,
which had arranged the transaction, $277,500 in the event Mountaineer refinanced
the loan by July 2, 1997 and thus obtained a waiver of the $888,000 fee that
would have been due pursuant to the Amended Term Loan Agreement. In July 1997,
Mountaineer paid Bridge Capital, LLC $100,000 in satisfaction of Mountaineer's
obligations under the Fee 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
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Form 10-K dated December 31, 1996. The Company made principal payments totaling
$186,000 relating to these two notes in the first nine months of 1997.
Annual Commitments. Future annual principal payments required under
all long-term indebtedness as of September 30, 1997 are as follows:
Years Ending
December 31,
1997 $ 0
1998 29,000
1999 31,000
2000 33,000
2001 21,514,000
------------
$ 21,607,000
============
Interest Expense. The Company made interest payments on long-term debt
totaling $702,000 and $1,680,000, respectively, for the three and nine month
periods ended September 30, 1997.
Note 7 - Line of Credit
As part of the Amended Term Loan Agreement, the Company's lender
provided Mountaineer a revolving line of credit which was originally scheduled
to expire on December 26, 1999. Under the terms of the agreement, Mountaineer
could borrow up to a maximum of $5,376,500. 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 July 2, 1997, when the
loan was amended and restated. (See Note 6, Long-Term Debt.) A facility fee of
$376,000 became due at the December 26, 1996 closing of the Amended Term Loan
Agreement. Pursuant to the loan agreement, $57,900 of these fees were withheld
from the proceeds at closing; the remaining $318,450 was to have been paid in
eleven equal monthly installments of $28,950 commencing February 1, 1997.
However, such costs were amortized through June 30, 1997, since the Company
refinanced the line loan on July 2, 1997.
Note 8 - Capital Transactions
Earnings Per Share. The weighted average number of shares used in the
Company's earnings per share calculations assume the exercise of 1,597,476 and
1,126,211 stock options and warrants for the respective three and nine month
periods ended September 30, 1997 due to an increase in the average market price
of the Company's common stock over the exercise price of certain stock options
and warrants during those periods. This dilution was calculated in accordance
with the treasury stock method as mandated by Accounting Principles Board No.
15, and is reflected in the net income per share amounts appearing on the
Company's condensed and consolidated statements of operations.
Incentive Plan Stock Options. On October 2, 1996, the Company's board
of directors adopted, subject to shareholder approval, an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code of
1986. At the board's discretion, the options may or may not qualify for
favorable treatment under Section 422. In accordance with the plan, 500,000
shares were reserved for issuance. On August 14, 1997, the board adopted an
amendment to the plan increasing the number of shares reserved to 750,000. On
September 19, 1997, the board elected to grant in the aggregate all 750,000
options as non-qualified options to 14 key employees and directors (for their
services as directors) at an exercise price of $1.34 per share, the fair market
value of the stock on the date of the grant. The options are exercisable for a
term of five years. On October 8, 1997, the Company's shareholders ratified the
amended plan.
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On May 27, 1997 and again on August 26, 1997, the Company's board of
directors voted to amend the terms of 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, most recently for a period of 2 years. The options
originally would have expired on May 28, 1997. This action was taken in
continuation 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. The Company recorded
$71,902 of compensation expense as a result of the August amendment which will
be amortized over the two-year term of the options, as amended.
Outstanding Options and Warrants. The Company's stock option and
warrant activity during the nine months ended September 30, 1997 is as follows:
Shares Price Range
Available Per Share
---------- --------------
Balance, December 31, 1996 8,069,630 $ 0.01 - $4.00
Granted 750,000 $ 1.34
Canceled (189,133) $ 1.06
Exercised 10,000 $ 0.01
----------- --------------
Balance, September 30, 1997 8,620,497 $ 0.01 - $4.00
The weighted average exercise price of stock options and warrants
outstanding at September 30, 1997 is a follows:
Weighted Weighted Price Range
Average Average per Share
Exercise Price Remaining Life -----------
-------------- --------------
Outstanding stock $1.20 42 months $0.01 - $2.00
options and warrants $3.67 21 months $2.01 - $4.00
In the money stock $1.03 46 months $0.01 - $1.44
options and warrants
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 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
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conditions exist, subject to approval by the State Racing
Commission. On August 15, 1997, the HBPA executed an agreement
with Mountaineer accepting the 210 day minimum.
- Effective July 1997, a portion of the taxes and assessments on
video lottery revenues which were previously allotted solely
to the West Virginia Breeders Classics Association, will be
reallocated in the following manner:
(i) The first $800,000 assessed on statewide video
lottery operations will be allocated to the West
Virginia Breeders Classics Association.
(ii) The next $200,000 assessed on statewide video lottery
operations will be allocated to Mountaineer to be
used for the payment of purses and promotional
expenses of a stakes race to be known as the West
Virginia Derby.
(iii) After this annual statewide $1.0 million funding
threshold is reached, any further assessments paid
will be returned to the respective racetracks from
which they were assessed. Any amounts refunded to
Mountaineer under this provision are required to be
disbursed evenly between capital improvement
expenditures and purse payments for the West Virginia
Derby.
- Effective July 1997, Mountaineer and the other three
racetracks in West Virginia are permitted to export simulcast
broadcasts of their live races. To encourage intrastate
simulcasting, the legislation exempts from parimutuel taxation
one-half of the racing handle wagered at other West Virginia
racetracks on live races conducted at Mountaineer, and vice
versa.
Lottery 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. In June 1997, the West Virginia Lottery Commission
renewed Mountaineer's license to conduct video lottery operations. The renewed
license will remain in effect through June 30, 1998.
Note 10 - Advertising Expense
Marketing and promotions expenses recorded in the first nine months of
1997 are net of approximately $497,000 to be refunded to the Company under the
auspices of two state grants to a convention and visitors bureau of which
Mountaineer is a member. Through September 30, 1997 the Company had received
refunds totaling $315,000 under the grant programs.
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 sands
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 more profitable 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 $567,000 loss on the sale of these
assets. As of December 31, 1996, the principal balance on the notes receivable
approximated $228,000. As of September 30, 1997, the purchaser is delinquent on
four of the note payments which were due in the first nine 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 orderly liquidation.
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Note 12 - Subsequent Events
Land Purchase Option. On October 7, 1997, Mountaineer entered into an
agreement in which it obtained an exclusive option to purchase 349 acres of real
property located adjacent to its Hancock County, West Virginia operation.
Mountaineer paid $100,000 in exchange for an irrevocable option to purchase the
property for $600,000 before October 1, 1998, with payment to be made in the
form of a $200,000 cash payment at closing and a $400,000 term note bearing
interest at 9% payable over five years.
Capital Transactions and Consulting Agreements. On October 1, 1997, the
Company entered into a financial advisory agreement with an investment banking
firm to perform various consulting services. Under the terms of the agreement,
the Company issued warrants to purchase 150,000 shares of its common stock at an
exercise price of $1.50 per share. The warrants will be exercisable for a period
of four years. In addition, the consultant may qualify to earn additional fees
upon the successful completion of various financing projects.
Also on October 1, 1997, Mountaineer entered into a three year
contract with an employee benefits and governmental relations consultant. Under
the terms of the agreement the consultant will receive annual options to
purchase 10,000 shares of the Company's common stock on October 1, 1997, 1998
and 1999. The options will be exercisable for a period of five years from the
dates vested at an exercise price for each tranche equal to the market price of
the Company's common stock on the dates of vesting. The exercise price of the
first tranche of 10,000 options is $1.44 per share, the market price of the
Company's common stock on the date of grant. The fair value of these options
will be estimated in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Issued to Employees," and
will be amortized to expense over the service period.
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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,
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despite the adjudication of liability but in view of all the 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
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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
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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.
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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.
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On November 20, 1995, pursuant to a settlement agreement, the Company
issued 165,000 shares of Common Stock to Michael Mapes. 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
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<PAGE> 182
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 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.
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<PAGE> 183
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.
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<PAGE> 184
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
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<PAGE> 185
$1.4375 per share, with the exercise price for the remaining 20,000 options to
be determined when the options vest on the first and second 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:
<TABLE>
<CAPTION>
Exhibit No.
or
Incorporation
Exhibit No. Item Title by Reference
<S> <C> <C>
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.
</TABLE>
II-10
<PAGE> 186
<TABLE>
<S> <C> <C>
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
</TABLE>
II-11
<PAGE> 187
<TABLE>
<S> <C> <C>
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.
</TABLE>
II-12
<PAGE> 188
<TABLE>
<S> <C> <C>
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-2
27.0 Financial Data Schedule ####
</TABLE>
II-13
<PAGE> 189
* 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> 190
++ 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> 191
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.
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<PAGE> 192
(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.
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<PAGE> 193
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 February 6, 1998.
MTR GAMING GROUP, INC.
(Company)
By: /s/ Edson R. Arneault
------------------------------
Edson R. Arneault, President
and Chief Executive Officer
II-18
<PAGE> 194
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, February 6, 1998
Edson R. Arneault Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
/s/Thomas K. Russell General Counsel, February 6, 1998
Thomas K. Russell Chief Financial Officer,
Secretary, Treasurer
/s/Robert L. Ruben Director, Assistant February 6, 1998
Robert L. Ruben Secretary
/s/Robert A. Blatt Director, Assistant February 6, 1998
Robert A. Blatt Secretary
<PAGE> 195
INDEX TO EXHIBITS
Opinion of Ross & Hardies E-1
Consent of Corbin & Wertz E-3
<PAGE> 1
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> 2
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
<PAGE> 1
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
February 6, 1998
E-3
