<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 0-20508
------------------------
MTR GAMING GROUP, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1103135
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
STATE ROUTE 2 SOUTH, P.O. BOX 358, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Registrant's telephone number, including area code)
</TABLE>
------------------------
Indicate by check mark whether the Company: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.00001 PAR VALUE
Class
21,222,849
Outstanding at November 8, 1999
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<PAGE>
MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
<TABLE>
<CAPTION>
SECTION PAGE
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<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements................................ 3
Condensed and Consolidated Balance Sheets at September 30,
1999 and December 31, 1998................................ 3
Condensed and Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999 and
1998...................................................... 4
Condensed and Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............. 5
Notes to Condensed and Consolidated Financial Statements.... 6
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Item 3--Quantitative and Qualitative Disclosures about
Market Risk............................................... 22
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................... 22
Item 2--Changes in Securities............................... 22
Item 3--Defaults upon Senior Securities..................... 22
Item 4--Submission of Matters to a Vote of Securities
Holders................................................... 22
Item 5--Other Information................................... 23
Item 6--Exhibits and Reports on Form 8-K.................... 23
SIGNATURE PAGE.............................................. 24
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 9,296,000 $ 9,074,000
Restricted cash........................................... 1,431,000 239,000
Accounts receivable net of allowance for doubtful accounts
of $142,000 and $138,000................................ 1,052,000 1,041,000
Interest Receivable......................................... 40,000 0
Deferred financing costs.................................... 877,000 1,259,000
Deferred income taxes..................................... 1,359,000 2,417,000
Other current assets...................................... 906,000 986,000
------------ ------------
Total current assets........................................ 14,961,000 15,016,000
------------ ------------
Property:
Land...................................................... 4,994,000 4,317,000
Building.................................................. 33,042,000 27,204,000
Equipment and automobiles................................. 16,688,000 9,536,000
Furniture and fixtures.................................... 6,275,000 5,923,000
Construction in progress.................................. 4,700,000 3,244,000
------------ ------------
65,699,000 50,224,000
------------ ------------
Less accumulated depreciation............................. (13,337,000) (9,945,000)
------------ ------------
52,362,000 40,279,000
------------ ------------
Note receivable............................................. 429,000 333,000
------------ ------------
Other assets:
Excess of cost of investments over net assets acquired,
net of accumulated amortization of $1,715,000 and
$1,526,000.............................................. 2,059,000 2,248,000
Deferred income taxes..................................... 1,643,000
------------ ------------
Deposits and other........................................ 326,000 218,000
------------ ------------
2,385,000 4,109,000
------------ ------------
$ 70,137,000 $ 59,737,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 396,000 $ 624,000
Other accrued liabilities................................. 5,302,000 1,302,000
Current portion of long-term debt......................... 461,000 633,000
------------ ------------
Total current liabilities................................... 6,159,000 2,559,000
Long-term debt, less current portion........................ 35,026,000 33,988,000
------------ ------------
Shareholders' equity:
Common Stock..............................................
Paid in capital........................................... $ 36,335,000 $ 36,178,000
Shareholder receivable.................................... (704,000) (461,000)
Accumulated deficit....................................... (6,679,000) (12,527,000)
------------ ------------
Total shareholders' equity.................................. 28,952,000 23,190,000
------------ ------------
$ 70,137,000 $ 59,737,000
============ ============
</TABLE>
3
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Video lottery terminals................. $26,692,000 $20,840,000 $69,041,000 $50,313,000
Parimutuel commissions.................. 1,285,000 1,352,000 3,479,000 3,713,000
Food, beverage and lodging.............. 3,214,000 2,512,000 7,705,000 5,652,000
Other................................... 816,000 577,000 2,063,000 1,219,000
----------- ----------- ----------- -----------
Total revenues........................ 32,007,000 25,281,000 82,288,000 60,897,000
----------- ----------- ----------- -----------
Costs of revenue
Cost of video lottery terminals......... 15,583,000 12,249,000 40,449,000 30,101,000
Cost of parimutuel commissions.......... 1,391,000 1,017,000 4,027,000 3,537,000
Cost of food, beverage and lodging...... 2,644,000 2,240,000 6,828,000 4,795,000
Cost of other revenues.................. 970,000 320,000 1,898,000 718,000
----------- ----------- ----------- -----------
Total cost of revenues................ 20,588,000 15,826,000 53,202,000 39,151,000
----------- ----------- ----------- -----------
Gross Profit.............................. 11,419,000 9,455,000 29,086,000 21,746,000
----------- ----------- ----------- -----------
Selling, general and administrative
expenses:
Marketing and promotions................ 1,468,000 1,062,000 3,542,000 2,848,000
General and administrative.............. 3,496,000 2,696,000 9,627,000 6,948,000
Depreciation and amortization........... 1,283,000 683,000 3,581,000 2,243,000
----------- ----------- ----------- -----------
Total selling, general and
administrative expenses............. 6,247,000 4,441,000 16,750,000 12,039,000
----------- ----------- ----------- -----------
Operating income.......................... 5,172,000 5,014,000 12,336,000 9,707,000
----------- ----------- ----------- -----------
Interest income........................... 57,000 92,000 213,000 275,000
Interest expense.......................... (1,210,000) (1,233,000) (3,556,000) (3,055,000)
----------- ----------- ----------- -----------
(1,153,000) (1,141,000) (3,343,000) (2,780,000)
----------- ----------- ----------- -----------
Income before income taxes................ 4,019,000 3,873,000 8,993,000 6,927,000
Provision for income taxes................ (1,405,000) (23,000) (3,145,000) 27,000
----------- ----------- ----------- -----------
Net income................................ $ 2,614,000 $ 3,850,000 $ 5,848,000 $ 6,954,000
=========== =========== =========== ===========
Net income per share (basic)
Pre tax net income...................... $ 0.19 $ 0.19 $ 0.43 $ 0.34
Net income after income tax............. $ 0.12 $ 0.18 $ 0.28 $ 0.34
Net income per share (assuming dilution)
Pre tax net income...................... $ 0.16 $ 0.16 $ 0.37 $ 0.29
Net income after income taxes........... $ 0.10 $ 0.16 $ 0.24 $ 0.29
Weighted average number of shares
outstanding:
Basic................................... 21,141,690 20,861,322 21,015,217 20,301,137
=========== =========== =========== ===========
Diluted................................. 25,184,615 23,662,597 24,705,634 24,088,681
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,848,000 6,954,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred financing cost amortization.................... 382,000 346,000
Depreciation and amortization........................... 3,581,000 2,243,000
Deferred income taxes................................... 2,701,000 (33,000)
Changes in operating assets and liabilities
Accounts receivable net of allowance.................. (11,000) (96,000)
Other current assets.................................. 40,000 (316,000)
Accounts payable and accrued liabilities.............. 3,772,000 (1,001,000)
------------ ------------
Net cash provided by operating activities................... 16,313,000 8,097,000
------------ ------------
Cash flows from investing activities:
Restricted cash........................................... (1,192,000) 15,000
Net assets from discontinued activities................... 0 (77,000)
Notes receivable.......................................... (96,000) (461,000)
Deposits and other........................................ (108,000) (527,000)
Capital expenditures...................................... (15,475,000) (16,432,000)
------------ ------------
Net cash used in investing activities....................... (16,871,000) (17,482,000)
------------ ------------
Cash flows used in financing activities
Proceeds from exercise of stock options................... (86,000) 796,000
Loan proceeds............................................. 866,000 11,887,000
------------ ------------
Cash provided by financing activities....................... 780,000 12,683,000
NET INCREASE IN CASH........................................ 222,000 3,298,000
Cash, Beginning of Period................................... 9,074,000 7,715,000
------------ ------------
Cash, End of Period......................................... 9,296,000 11,013,000
------------ ------------
</TABLE>
5
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. For further information, refer
to the consolidated financial statements and notes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 2--EQUITY TRANSACTIONS
On February 24, 1999, the Board of Directors established the 1999 Stock
Incentive Plan (the "1999 Plan"). The 1999 Plan reserves for issuance 800,000
shares of the Company's common stock, of which the Board granted to employees in
the aggregate 750,000 non-qualified options to purchase shares of the Company's
common stock.
On February 24, 1999, the Company also granted to employees and consultants
outside of the Company's stock option plans options to purchase in the aggregate
135,000 shares of the Company's common stock.
On February 24, 1999, the Company also granted to employees, pursuant to the
Company's 1992 Employee Stock Option Plan, non-qualified options to purchase in
the aggregate 250,000 shares of the Company's common stock.
Also, on February 24, 1999, the Company granted to its independent directors
non-qualified options to purchase, in the aggregate, 50,000 shares of the
Company's common stock. The options vest in increments of 6,250 options after
attendance at meetings of the Board of Directors, audit committee or
shareholders.
All of the options granted on February 24, 1999 are for a term of five years
from the date of grant, and except for the grants to the Company's independent
directors, provide for immediate vesting. All of such options are exercisable at
the price of $2.00 per share, the estimated fair market value of the Company's
common stock at the date of grant.
During July and August of 1999, holders of previously-issued options to
purchase the Company's common stock exercised options to purchase a total of
415,867 shares at prices ranging from $.5625 to $1.06 per share by delivery of
cash, notes, and other common stock of the Company, resulting in a net increase
in the number of issued and outstanding shares of 356,686 for proceeds (cash and
notes) totaling $353,532 as well as the delivery of 59,181 shares of the
Company's common stock, which were cancelled and returned to authorized but
unissued status.
NOTE 3--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 upon temporary
differences between bases used for financial reporting and income taxes
reporting purposes. Income taxes
6
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
are provided based on the enacted tax rates in effect at the time such temporary
differences are expected to reverse. The Company's deferred taxes have been
reduced by $2,701,000 to reflect the tax consequences of the first nine months'
income. 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. In 1999, there is no value allowance being used by the
Company. As of September 30, the Company has federal net operating loss carry
forwards of approximately $2,407,000 for federal tax reporting purposes and
approximately $4,400,000 for California reporting purposes, expiring through
2011 and 2002, respectively. 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. The Company and its subsidiaries file a consolidated federal
income tax return.
NOTE 4--ACQUISITIONS
On January 21, 1999, the Company acquired an 18-hole golf course known as
the Woodview Golf Course, including real property, improvements, personal
property and equipment, located approximately seven miles from the Company's
Mountaineer Race Track and Gaming Resort. The purchase price was $843,000,
payment of which included the issuance of a promissory note of $600,000
(interest only at 8% per annum, with all principal due and payable after five
years), the assumption of bank debt of $158,000, the assumption of accounts
payable of $56,000 and $29,000 cash.
On May 3, 1999, the Company acquired, for a purchase price of $145,000,
approximately 110 acres of real property as well as a house and a mobile home
(located on the property) and all the personal property attendant to such real
property at the time of purchase. A portion of this real property adjoins the
350 acre undeveloped parcel acquired in 1998 near the Company's Mountaineer Race
Track & Gaming Resort.
7
<PAGE>
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, gaming regulation, licensing and taxation
of gaming operations, dependence on key personnel, competition, including
competition from legalization of gaming in states near the Company's gaming
operations, no dividends, continued losses from horse racing, costs associated
with maintenance and expansion of Mountaineer Park's infrastructure to meet the
demands attending increased patronage, costs and risks attending construction,
expansion of operations, market acceptance of the Company's Nevada Properties
and maintenance of "grandfathered" status of those properties, cyclical nature
of business, Year 2000 issues, limited public market and liquidity, shares
eligible for future sale, impact of anti-takeover measures, the Company's common
stock being subject to penny stock regulation and other risks detailed in the
Company's Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
The Company, through wholly-owned subsidiaries, owns and operates
Mountaineer Racetrack and Gaming Resort ("Mountaineer Park") in Chester, West
Virginia, the Ramada Inn and Speedway Casino in North Las Vegas, Nevada (the
"Speedway Property"), and the Ramada Inn and Speakeasy Casino in Reno, Nevada
(the "Reno Property" or, collectively with the Speedway Property, the "Nevada
Properties"). On September 23, 1999, the Company obtained the necessary licenses
from the state of Nevada to operate both of the Nevada Properties' casinos.
Before this, the casinos at the Nevada Properties had been leased to a
non-affiliated licensed casino operator. These leases were terminated effective
September 30, 1999, and the Company took over operation of the two casinos on
October 1, 1999.
In preparation for the introduction of coin drop slot machines at the West
Virginia property, in the months of August and September, the Company expended
$4,508,000 for new slot machines, surveillance equipment and other ancillary
equipment.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
For the third quarter, the Company's total revenues increased by $6.7
million from 1998 to 1999, an increase of 26.6%. Approximately $5.9 million of
the increase was produced by video lottery operations at Mountaineer Park.
Mountaineer Park's revenue from parimutuel commissions decreased by $67,000, or
5.0%; its lodging revenues increased by $19,000; food and beverage revenues
increased by $342,000 or 21.8% from $1,571,000 to $1,913,000; and other revenues
at Mountaineer Park increased by $235,000 or 41.3%.
The Nevada Properties contributed $829,000 in gross revenue, with $658,000
from lodging, $161,000 from food and beverage, and $10,000 from other revenues
in the third quarter of 1999. These Nevada Properties revenues represent a
$201,000 increase in lodging and a $140,000 increase in food and beverage in
comparison to the same three month period in 1998.
8
<PAGE>
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased by 28.1% from $20.8 million
in 1998 to $26.7 million in 1999. Management attributes the dramatic increase in
video slot revenue to the following factors: (i) the addition of 100 progressive
jackpot video slots during the first quarter of 1999 (raising the total machine
count from 1200 to 1300); (ii) continued aggressive marketing; and
(iii) expanded hours of operation for the track-based video slots (resulting in
a 44% increase in the net win per machine per day for such machines).
Since May 9, 1999, when Mountaineer Park paid its first large progressive
jackpot of approximately $240,000, Mountaineer has paid a total of approximately
$750,000 in large progressive jackpots. On June 14, 1999, in anticipation of
adding coin drop machines, the Company began increasing the number of days
during which machines located at the racetrack remain in operation. Previously,
those machines operated only on live racing days and during special events.
During the 1999 period, net win per Video Slot per day was $223 with
approximately 1,300 Video Slots in operation compared to $189 during the third
quarter of 1998 with 1,200 Video Slots in operation.
A summary of the video lottery gross winnings less patron payouts ("net
win") for the three months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total gross wagers................................. $94,510,000 $69,953,000
Less patron payouts................................ $67,818,000 $49,113,000
Revenue--video lottery operations.................. $26,692,000 $20,840,000
----------- -----------
Average daily net win per terminal................. $ 223 $ 189
=========== ===========
</TABLE>
In April of 1999, the Lottery Law was amended, effective June 11, 1999, to
permit Mountaineer Park to operate coin drop, mechanical reel Las Vegas-style
slot machines.
On November 5, 1999, Mountaineer park installed and began operating 156 coin
drop slots in its trackside gaming areas. The Company plans to ramp up to
approximately 400 coin drop slots facility-wide during the fourth quarter,
bringing the machine count to 1,355, which is the maximum number currently
permitted. The Company will convert additional machines to coin drop as player
preference dictates and, subject to regulatory approval, increase the machine
count. Conversion of a video slot to coin drop costs approximately $1,100 per
machine.
The Company expects video lottery revenue from Mountaineer Park to increase
substantially upon the full implementation of coin drop, mechanical reel slot
machines.
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
9
<PAGE>
fixed as a percentage of the total wagering handle or total amounts wagered.
Mountaineer Park's parimutuel commissions for the three months ended
September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Simulcast racing parimutuel handle................ $ 5,517,000 $ 6,011,000
Live racing parimutuel handle..................... 6,288,000 6,800,000
Less patrons' winning tickets..................... (9,336,000) (10,164,000)
----------- ------------
2,469,000 2,647,000
Less:
State and county parimutuel tax................... (137,000) (140,000)
Purses and Horsemen's Association................. (1,047,000) (1,155,000)
----------- ------------
Revenues--parimutuel commissions.................. $ 1,285,000 $ 1,352,000
=========== ============
</TABLE>
Despite a 5% increase in the number of live race days, a 21.4% increase in
average daily purses (from $70,700 in 1998 to $85,800 in 1999) and higher patron
volume, total revenues for parimutuel commissions for the third quarter of 1999
decreased 5.0% in comparison to the same period in 1998. Simulcast handle in the
third quarter of 1999 decreased by $494,000 to $5.5 million in comparison to the
same period in 1998. Live racing handle decreased by 7.5% from $6.8 million in
1998 to $6.3 million in 1999. Management attributes the decrease in parimutuel
revenue largely to the scheduling of special events such as concerts and boxing
matches on live race days. Management had hoped that new patrons drawn by
special events would likewise become parimutuel wagering and slot patrons. The
anticipated increase in slot revenue was realized; the increase in parimutuel
handle was not.
Management does not expect results from racing operations to improve
materially, despite larger daily purses, stakes races, better horses and larger
patron volume for the resort, unless and until Mountaineer Park also commences
export simulcasting. Export simulcasting would not only create a new source of
revenue but the anticipated related increase in gross dollars wagered on
Mountaineer Park's live races should also generate increases in live handle (as
a greater and more diverse pool lessens the impact a particular wager will have
on the pay-off odds). The commencement of export simulcasting would involve
substantial capital improvements, and Management continues to study the most
cost effective manner to implement export simulcasting. In December of 1998,
Mountaineer Park and its horsemen executed an agreement, subject to the approval
of the West Virginia Racing Commission, with respect to the sharing of the cost
of such capital improvements. The Racing Commission sought the advice of the
State Attorney General's Office, which believed that the arrangement would
violate the State's racing statute. The Company has asked the Attorney General's
Office to reconsider that conclusion and likewise intends (during the 2000
legislative session) to seek an amendment of the statute to permit the agreement
to become effective. Accordingly, the Company does not anticipate commencement
of export simulcasting until approximately the third quarter of 2000, and then
only if the Racing Commission approves the cost sharing agreement. Thus, no
assurances can be given that the Company will successfully commence export
simulcasting or that the anticipated results will be realized. See "Operating
Costs" and "Parimutuel Commission Operating Costs."
FOOD, BEVERAGE AND LODGING OPERATIONS
Total food, beverage and lodging revenues for the Company accounted for a
combined increase of 28.0% to $3.2 million for the three months ended September
30, 1999 compared to $2.5 million for the same period in 1998. Restaurant, bar
and concession facilities produced $482,000 of the revenue increase, while lodge
revenues increased $220,000, a 24% increase over the same period in 1998. Of the
increase in lodging revenues, $201,000 can be attributed to the two Nevada
Properties, principally because the
10
<PAGE>
Speedway Property was dark during the third quarter of 1998 due to construction.
Management believes that increased revenues from lodging, food and beverage
resulted primarily from enhanced video lottery facilities and related
advertising, which in turn led to increased consumption of food and beverages by
the Company's customers, and, with respect to the Nevada Properties, from the
commencement of full food and beverage operations in 1999. The ratio of revenue
from food and beverage to revenue from lodging has generally remained constant,
reflecting that the facilities have historically drawn more day traffic than
overnight stays. The Company's Nevada Properties contributed lodging, food and
beverage revenues of $819,000 in the quarter ended September 30, 1999 as opposed
to $478,000 for the same period in 1998.
OTHER OPERATING REVENUES
Other sources of revenues increased by $239,000 to $816,000 for the three
months ended September 30, 1999 compared to the same period in 1998. Other
operating revenues are primarily derived from the sale of programs, special
events tickets, parking, admission fees, check cashing, golf and ATM services.
Other operating revenues also included a refund for overpayment of prior years'
sales tax in the amount of $101,000. The ATM service fees, a new service
instituted in July of 1998, accounted for $117,000 in revenue for the third
quarter of 1999. Due to the purchase of the Woodview Golf Course, golf revenues
increased by $84,000 to $163,000. Ticket sales for special events increased by
$83,000 to $151,000. While these activities are non-core business activities,
Management believes that they are necessary to attract gaming patrons.
OPERATING COSTS
The Company's $6.7 million increase in revenues resulted in higher total
costs, as directly related expenses increased by $4.8 million to $20.6 million
in the third quarter of 1999 compared to the same period in 1998. Approximately
$3.3 million of the increase in operating costs is attributable to the video
lottery operations, which includes applicable state taxes and fees. The 26.6%
increase in revenue was also accompanied by a 38.2% increase in marketing and
promotions costs. General and administrative expenses increased by 29.7%. Direct
operating costs of the parimutuel department increased $374,000. Operating costs
of the Company's lodging, food and beverage operations increased by $404,000 or
18% to $2.6 million in the third quarter of 1999, of which $147,000 is
attributable to the Nevada Properties. Due to a greater number and variety of
special events, costs of other revenues increased by $650,000 in the third
quarter of 1999.
11
<PAGE>
Operating costs and gross profits earned from operations for the three-month
periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Costs
Video lottery operations........................... $15,583,000 $12,249,000
Parimutuel commissions............................. 1,391,000 1,017,000
Lodging, food and beverage......................... 2,644,000 2,240,000
Other revenues..................................... 970,000 320,000
----------- -----------
Total Operating Costs.......................... $20,588,000 $15,826,000
=========== ===========
Gross profit (Loss)
Video lottery operations........................... $11,109,000 $ 8,591,000
Parimutuel commissions............................. (106,000) 335,000
Lodging, food and beverage......................... 570,000 272,000
Other revenues..................................... (154,000) 257,000
----------- -----------
Total Gross Profit............................. $11,419,000 $ 9,455,000
=========== ===========
</TABLE>
VIDEO LOTTERY OPERATING COSTS
Costs of video lottery revenue increased by $3.3 million or 27.2% to $15.6
million for the three months ended September 30, 1999, reflecting an increase in
statutory expenses directly related to the 28.1% increase in video lottery
revenues. Such expenses accounted for $2.5 million of the total cost increase.
After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer Park is obligated to make payments from the remaining video lottery
revenues to certain funds administered by the West Virginia Lottery Commission
as follows: State Tax 30%, Horsemen's Purse Fund 15.5%, Tourism Promotion 3%,
Hancock County Tax 2%, Stakes Races 1%, Miscellaneous State Projects 1% and
Employee Pension Fund 0.5%. Assessments paid to the Employee Pension Fund are
returned by the Lottery Commission to a defined contribution pension plan
administered by Mountaineer Park for the sole benefit of Mountaineer Park
employees. Assessments paid to the Horsemen's Purse Fund are returned by the
Lottery Commission to bank accounts administered by Mountaineer Park for the
sole benefit of horse owners who race at Mountaineer Park. These funds are used
exclusively to pay purses for thoroughbred races run at Mountaineer Park, in
amounts determined by Mountaineer Park 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 "Costs of Video Lottery Terminals" in the
Consolidated Statement of
12
<PAGE>
Operations. Statutory costs and assessments, including the State Administrative
Fee, for the respective three month periods are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Employee Pension Fund.............................. $ 130,000 $ 102,000
Horsemen's Purse Fund.............................. 4,020,000 3,163,000
----------- -----------
SUBTOTAL....................................... $ 4,150,000 $ 3,265,000
State of West Virginia............................. $ 7,780,000 $ 6,557,000
Tourism Promotion Fund............................. 778,000 612,000
Hancock County..................................... 519,000 408,000
Stakes Races....................................... 259,000 204,000
Misc. State Projects............................... 259,000 204,000
----------- -----------
$13,745,000 $11,250,000
=========== ===========
</TABLE>
The Company incurred an additional significant expense in its video lottery
operations consisting of VLT lease expense ($515,000 in the third quarter of
1999 compared to $326,000 in 1998). This increase was due to the addition of 100
machines installed in December of 1998 and an increase in direct and indirect
wages and employee benefits for personnel added in order to service higher
levels of patron play and numbers of patrons. Utilities and waste disposal
increased by $38,000 in the third quarter of 1999 compared to the same period in
1998.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Costs (the individual components of which are detailed below) of parimutuel
commissions increased by $374,000, or 36.8%, from $1.0 million in the third
quarter of 1998 to $1.4 million in the third quarter of 1999. One of the primary
reasons for this increase was the increase in the number of live racing days
from 61 to 64 to compensate for the reduction of racing days that occurred in
the first quarter of 1999 due to inclement weather. Purse expense (consisting of
statutorily determined percentages of live racing handle) decreased by $57,000
to $618,000 in the third quarter of 1999, which is consistent with the decrease
in live handle. In connection with simulcasting race operations, contractual
fees paid to host tracks and additional statutorily determined percentages of
simulcast commissions contributed to the purse fund for live racing decreased by
$118,000 to $482,000 in the third quarter of 1999, which is consistent with the
decrease in simulcast wagering. Parimutuel commissions revenue is reported net
of these expenses in the Consolidated Statement of Operations.
Totalisator, other lease expenses, and outside services increased by $35,000
in the third quarter of 1999, due to the increase in both race days and in the
cost of leasing such equipment. Wages and benefits attributable to racing
operations increased $208,000 to $781,000 in the three months ended
September 30, 1999 because of expanded hours of OTB operations trackside to
accommodate cross-selling to slot players during the expanded hours of slot
operations. Due to a change in state mandated testing, veterinarian services
increased $49,000 in the third quarter of 1999. Utilities and waste disposal
increased by $15,000. Transmission phone line costs increased $45,000 to $52,000
for the three months ended September 30, 1999 primarily because of a change in
inter-departmental allocations of such costs.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Operating costs of the Company's lodging, food and beverage operations
increased by $404,000 from $2.2 million in the third quarter of 1998 to $2.6
million in the third quarter of 1999. Of this increase in expenses, $147,000 is
attributable to the Nevada Properties. In compliance with applicable
requirements of
13
<PAGE>
the State of Nevada, the Nevada Properties' restaurants were open 24 hours a
day, seven days a week even though the gaming facilities at these locations were
not fully operational. Of the remaining total costs, $2,046,000 is attributable
to Mountaineer Park ($1.7 million relates to food and beverage costs; $337,000
relates to lodging).
The $1.7 million in food and beverage operating cost at Mountaineer Park
represents a $304,000 or 21.7% increase compared to the third quarter of 1998.
This increase resulted from increased direct food costs ($228,000), increased
cost of utilities and waste disposal ($19,000), supplies ($56,000) and direct
labor and employee benefits costs ($92,000), due to increased patron volume.
Mountaineer Park's $337,000 in operating costs from lodging for the third
quarter of 1999 represents a $48,000 decrease from the 1998 period and resulted
primarily from decreased costs in telephone and cable services due to changes in
providers.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues consisting primarily of non-core businesses such as
racing programs, check cashing, golf, special events, tennis and swimming
increased by $650,000 from $320,000 in the third quarter of 1998 to $970,000 in
the third quarter of 1999. These increases can be attributed to the newly
acquired Woodview Golf Course ($150,000), special events costs ($416,000) and
racing program sales costs ($54,000).
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses at Mountaineer Park increased by 38.2% from $1,062,000
for the third quarter of 1998 to $1.5 million for the same period in 1999. This
increase resulted primarily from the introduction of a new advertising campaign
to promote the new coin drop slot machines, increased advertising for the West
Virginia Derby and a new point award system at the Frequent Players Club.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
General and administrative expense for the third quarter of 1999 increased
by $800,000 or 29.7% from $2.7 million to $3.5 million. The reason for the
increase in general and administrative costs was twofold. First, with respect to
operations, the increases are due primarily to: (i) a $63,000 increase in costs
of security, housekeeping and maintenance staff to accommodate Mountaineer
Park's larger crowds and (ii) additional general and administrative costs of
$494,000 generated by the Nevada Properties.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately
$5 million to $50 million) gaming and/or parimutuel businesses, professional
fees and travel expenses related to evaluating acquisition and financing
opportunities increased by approximately $148,000 during the quarter ended
September 30, 1999. Costs associated with Nevada gaming licensing were $93,000.
Year-over-year interest expense for the third quarter was flat at
$1.2 million as the Company did not incur any material new indebtedness or
change the economic terms of its financing arrangements.
14
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased 87.9%, or $600,000, to
$1.3 million for the three months ended September 30, 1999. This increase
reflects the increased capitalization of improvements completed at Mountaineer
Park, such as the 12,000 square foot addition to the Speakeasy Gaming Saloon,
the purchase of the Woodview Golf Course and the acquisition of the Nevada
Properties. Depreciation for the Nevada Properties was $305,000 for the third
quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenues increased from $60.9 million in the first three quarters of
1998 to $82.3 million in 1999, an increase of $21.4 million or 35.1%. Of this
increase, 87.4%, or $18.7 million, can be attributed to the video lottery
operations. Parimutuel commissions decreased by $234,000 for the nine months
ended September 30, 1999. Food, beverage, lodging and other operations
contributed $2.1 million of increased revenues for this period.
Management believes that gross revenue increased primarily because of
continued advertising activities, the increase to 1,300 Video Slots in
January 1999 (compared to 1,000 during the first and second quarters of 1998)
together with a change in law that permitted Mountaineer Park to change the
ratio of Video Slots in the Lodge as compared to the racetrack building from 1:1
to 2:1, which was implemented in July of 1998. In addition, the introduction of
progressive video slot networks, the expansion of the Speakeasy Gaming Saloon
during the third quarter of 1998, other enhanced facilities and the Nevada
Properties contributed to the significant increase in gross revenue for this
period.
VIDEO LOTTERY OPERATIONS
A summary of the video lottery gross wagers less patron payouts ("net win")
for the nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Total gross wagers.......................................... $ 244,701,000 $ 175,388,000
Less patron payouts......................................... (175,660,000) (125,075,000)
------------- -------------
Revenues--video lottery operations.......................... $ 69,041,000 $ 50,313,000
------------- -------------
Average daily net win per terminal.......................... $ 195 $ 173
------------- -------------
</TABLE>
PARIMUTUEL COMMISSIONS
Mountaineer's parimutuel commissions for the nine months ended
September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Simulcast racing parimutuel handle.......................... $ 16,212,000 $ 17,506,000
Live racing parimutuel handle............................... 15,622,000 17,253,000
Less patrons' winning tickets............................. (25,190,000) (27,586,000)
------------- -------------
6,644,000 7,173,000
Less
State and county parimutuel tax........................... (374,000) (384,000)
Purses and Horsemen's Association......................... (2,791,000) (3,076,000)
------------- -------------
Revenues--parimutuel commissions............................ $ 3,479,000 $ 3,713,000
============= =============
</TABLE>
15
<PAGE>
Simulcast handle decreased 7.4% from $17.5 million in the first nine months
of 1998 to $16.2 million for the same period in 1999. Live racing handle
decreased by 9.5% from $17.3 million in 1998 to $15.6 million in 1999.
The decreases occurred despite a 31.5% increase in daily purses for live
racing (from $62,600 in 1998 to $82,325 in 1999), the completion of virtually
the same number of live meets (163 of the annually required 210 days during 1999
compared to 164 during 1998), and higher patron volume at the resort. Management
attributes the decreases in parimutuel handle largely to the unavoidable
rescheduling of ten race days at less popular times occasioned by January's
inclement weather and competition for patrons' attention from Mountaineer Park's
other gaming and entertainment offerings.
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined increase of
36.3% or $2.1 million to $7.7 million for the nine months ended September 30,
1999. Restaurant, bar and concession facilities produced $1.2 million of the
revenue increase, which is a 32.3% increase over the first nine months of 1998.
Lodging revenues increased $832,000 for a 44.2% increase over the same period in
1998. Of the increase in lodging revenues, $766,000 can be attributed to the
Nevada Properties acquired in May 1998. Of the increase in food and beverage
revenues, $332,000 can be attributed to the Nevada Properties. Management
believes that increased revenues from lodging, food and beverage at Mountaineer
Park resulted primarily from greater patronage due to enhanced video lottery
facilities and related advertising. The ratio of revenue from food and beverage
to revenue from lodging for the West Virginia property has generally remained
constant, reflecting that Mountaineer Park has historically drawn more day
traffic than overnight stays.
OTHER OPERATING REVENUES
Other sources of revenues increased by $844,000 to $2,063,000 for the nine
month period ended September 30, 1999 compared to the same period in 1998. Other
operating revenues are primarily derived from the sale of racing programs, check
cashing fees, golf, special event admissions and ATM service fees.
The purchase of the Woodview Golf Course accounted for $194,000 of the
increase, and a sales tax refund accounted for $270,000. The balance of the
increase in other revenues is attributable to higher ATM service fees, check
cashing fees and special event ticket sales.
OPERATING COSTS
Operating costs and gross profit earned from operations for the nine month
periods ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Costs:
Video lottery operations.................................. $40,449,000 $30,101,000
Pari-mutuel commissions................................... 4,027,000 3,537,000
Lodging, food and beverage................................ 6,828,000 4,795,000
Other revenues............................................ 1,898,000 718,000
----------- -----------
Total Operating Costs................................... $53,202,000 $39,151,000
----------- -----------
Gross Profit (Loss)
Video lottery operations.................................. $28,592,000 $20,212,000
Pari-mutuel commissions................................... (548,000) 176,000
Lodging, food and beverage................................ 877,000 857,000
Other revenues............................................ 165,000 501,000
----------- -----------
Total Gross Profit...................................... $29,086,000 $21,746,000
=========== ===========
</TABLE>
16
<PAGE>
The Company's 35.1% increase in revenues resulted in higher total costs, as
expenses increased by 35.9% to $53.2 million in the first nine months of 1999.
Gross profit increased by 33.8% from the $21.7 million for the first three
quarters of 1998 to $29.1 million for the same period in 1999.
VIDEO LOTTERY OPERATING COSTS
Costs of video lottery operations increased by $10.3 million, or 34.4%, to
$40.4 million for the nine months ended September 30, 1999, reflecting the
increase in statutory expenses directly related to the 37.2% increase in video
lottery revenues. The State of West Virginia annually reconciles the State
Administrative Fee and the amount not utilized by the state is refunded every
year to Mountaineer Park on June 30(th), the end of the state's fiscal year. The
refund in June of 1999 was $1.1 million after payment of other statutory costs
and assessments. The benefit of this refund is reflected as a reduction of the
VLT costs for the second quarter of 1999.
Statutory costs and assessments, including the State Administrative Fee, for
the respective nine month periods are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
----------------- -----------
<S> <C> <C>
Employees Pension Fund...................................... $ 345,000 $ 247,000
Horsemen's Purse Fund....................................... 10,681,000 7,670,000
Subtotal.................................................... 11,026,000 7,917,000
State of West Virginia...................................... 20,673,000 15,677,000
Tourism Promotion Fund...................................... 2,067,000 1,484,000
Hancock County.............................................. 1,378,000 990,000
Stakes Races................................................ 689,000 495,000
Miscellaneous State Projects................................ 689,000 495,000
----------- -----------
$36,522,000 $27,058,000
=========== ===========
</TABLE>
VLT lease expenses were $1.7 million in the first nine months of 1999
compared to $947,000 in 1998 due to the addition of 300 machines. Direct and
indirect wages and employee benefits increased by $268,000 or 23.1% to
$1.4 million for the first nine months of 1999 because of additional service
personnel consistent with the increase from 1,000 to 1,300 machines.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Costs (the individual components of which are detailed below) of parimutuel
commissions increased by $490,000 to $4.0 million in the first three quarters of
1999. Purse expense (consisting of statutorily determined percentages of live
racing handle) decreased 9.7% to $1.5 million in the first three quarters of
1999, which is consistent with the 9.8% decrease in live handle. Parimutuel
commissions revenue is reported net of these expenses in the Consolidated
Statement of Operations.
Totalisator and other lease expenses increased by $37,000 to $446,000 during
the first nine months of 1999 due to an increase in the cost of leasing
equipment. Wages and benefits relating to the Company's racing operations
increased $42,000 to $2.0 million in the nine months ended September 30, 1999.
Due to a change in state mandated testing, cost of veterinarian services
increased $115,000 in 1999. Cost of transmission lines increased by $55,000 due
to increased import simulcasting. Utilities and waste disposal costs increased
by $66,000, and costs of outside services and dues and subscriptions increased
by $62,000 due to suppliers' price increases.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Operating costs of the Company's lodging, food and beverage operations
increased by $2.0 million or 42.4% to $6.8 million in the first nine months of
1999 from $4.8 million for the same period in 1998. Of this increase, $842,000
is attributable to the Nevada Properties ($268,000 for lodging costs and
$573,000 for
17
<PAGE>
food and beverage costs). Of the remaining total costs of $5.3 million, which
are attributable to Mountaineer Park, $4.3 million is attributable to food and
beverage costs and $1.0 million is attributable to lodging.
The $4.3 million in food and beverage operating cost at Mountaineer Park
represents a $1.2 million or 39.0% increase compared to the first nine months of
1998. This increase resulted primarily from increased direct food costs
($570,000), increased cost of utilities and waste disposal ($137,000), supplies
($118,000) and direct labor and employee benefits costs ($391,000). Apart from
the costs associated with food spoilage and overstaffing during January
(resulting from inclement weather), the increased costs are generally in line
with increased revenues from greater patronage during the first three quarters
of 1999.
Mountaineer Park's $1.0 million in operating costs from lodging for the
first three quarters of 1999 represents a $18,000 decrease from the 1998 period.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues increased by $1.2 million from $718,000 for the nine
months ended September 30, 1998 to $1.9 million for the nine months ended
September 30, 1999. These increases can be attributed primarily to Woodview Golf
Course, acquired in January of 1999 ($296,000), special events costs ($568,000),
gift shop costs ($40,000) and check cashing fees ($55,000).
MARKETING AND PROMOTIONS EXPENSE
Marketing expenses increased 24.4% from $2.8 million for the first three
quarters of 1998 to $3.5 million for the same period in 1999. The increase in
marketing costs was due primarily to the production and broadcast of Mountaineer
Park's new infomercial. Mountaineer Park also introduced a bus program and a new
point award system at the Frequent Players Club during this period. The increase
in marketing costs was also due to an increase in direct mail advertising,
promotion of the West Virginia Derby, and special marketing efforts regarding
coin drop slots.
During the first nine months of 1999, Mountaineer Park was awarded state
advertising matching funds in the amount of $266,000 compared to $398,000 during
the first nine months of 1998.
GENERAL AND ADMINISTRATIVE AND INTEREST EXPENSES
General and administrative expenses for the periods being compared increased
by $2.7 million or 38.6% from $6.9 million to $9.6 million. The reason for the
increase in general and administrative costs was twofold. First, with respect to
operations, the increases are due primarily to (1) a $797,000 increase in costs
of security, maintenance and housekeeping to accommodate Mountaineer Park's
larger crowds; (2) the third quarter 1998 addition of both internal
audit/control and management information systems departments at Mountaineer Park
and (3) additional general and administrative costs of $1.3 million generated by
the Nevada Properties.
Second, with respect to implementation of the Company's business strategy to
acquire other middle-market, lower priced (ranging from approximately
$5 million to $50 million) gaming and/or parimutuel businesses, professional
fees and travel expenses related to evaluating acquisition and financing
opportunities increased by approximately $677,000 during the first nine months
of 1999. The Company also incurred costs of $224,000 related to Nevada gaming
licensing.
In the first nine months of 1999, the Company incurred $3.6 million of
interest expense compared to $3.0 million of interest expense for the same
period in 1998. The increased interest expense is attributable to the Company's
increased borrowings pursuant to the April 30, 1998 Third Amended and Restated
Term Loan Agreement to finance the acquisition of the Nevada Properties. In the
first three quarters of 1998, interest expense included $346,000 of amortization
of loan fees, compared to $382,000 in the first three quarters of 1999.
18
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by 59.7%, or $1.3 million
to $3.6 million for the nine months ended September 30, 1999. This increase
reflects the increased capitalization of improvements completed at Mountaineer
Park's facilities, such as the 12,000 square foot addition to the Speakeasy
Gaming Saloon and the acquisition of both Woodview Golf Course and the Nevada
Properties. Depreciation for the Nevada Properties was $809,000 for the first
nine months of 1999.
CASH FLOWS
The Company's operations produced $16,313,000 in cash flow in the nine
months ended September 30, 1999, compared to $8,097,000 produced in the first
nine months of 1998. Current year non-cash expenses included $3.6 million of
depreciation and amortization and $382,000 for the amortization of deferred
financing costs.
The Company invested $10.5 million in capital improvements for the West
Virginia property in the first three quarters of 1999 versus $2.9 million in
1998. The Company also invested $5.0 million in capital assets related to the
Nevada Properties.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of September 30, 1999 was
$8,802,000 and its unrestricted cash balance was $9,296,000. Racing purses are
paid from funds contributed by the Company to bank accounts owned by the horse
owners who race at Mountaineer Park. At September 30, 1999, the balances in
these accounts exceeded purse obligations by $736,000, which 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.
LONG-TERM DEBT AND LINE OF CREDIT. As of September 30, 1999, the principal
balance outstanding under the Company's April 30, 1998 Third Amended and
Restated Term Loan Agreement with Madeleine LLC (the "Existing Credit Facility")
stood at $33,391,500. The Company also had additional credit available under
that facility in the aggregate amount of $6,550,000. All borrowings under the
facility bear interest at the rate of 13% annually and require monthly payments
of interest only with all principal and unpaid interest maturing in July of
2001. If the Company were to prepay the loans prior to July 3, 2000, the Company
would also be required to pay a call premium in the amount of approximately
$430,000.
FINANCING COMMITMENT. On October 27, 1999, the Company obtained a
commitment from Wells Fargo Bank for a $30 million credit facility (the "New
Commitment") to be used, together with the Company's cash on hand, to prepay the
Existing Credit Facility. The New Commitment provides for a five-year secured
reducing revolving credit facility. Initially, the interest rate, which is
variable, would be LIBOR plus 3% (approximately 9% if the loan were to close
today) but could be reduced to as low as LIBOR plus 2% if the Company were to
meet certain financial goals. THE BANK'S OBLIGATION TO FUND THE LOAN PURSUANT TO
THE NEW COMMITMENT IS SUBJECT TO EXECUTION OF DEFINITIVE AGREEMENTS AS WELL AS A
NUMBER OF OTHER CUSTOMARY CONDITIONS. ACCORDINGLY, WHILE THE COMPANY ANTICIPATES
THAT THE LOAN WILL BE CONSUMMATED PRIOR TO YEAR-END, THERE CAN BE NO ASSURANCE
THAT SUCH LOAN TRANSACTION WILL BE CONSUMMATED AT SUCH TIME OR AT ALL. MOREOVER,
THE DISCUSSION OF THE NEW COMMITMENT PROVIDED HEREIN IS NOT INTENDED TO SET
FORTH ALL OF THE MATERIAL TERMS, CONDITIONS AND COVENANTS THAT WOULD BE
CONTAINED IN THE DEFINITIVE AGREEMENT, WHICH THE COMPANY WILL FILE AS AN EXHIBIT
TO FORM 8-K IF THE TRANSACTION IS CONSUMMATED.
The New Commitment would require the Company on the date of closing to pay
the bank a fee of $600,000. Additionally, the Company would be required to pay a
fee of $450,000 to its financial advisor, which arranged the New Commitment, and
would incur other costs as a result of the transaction. The Company intends to
use the proceeds of the new loan and its cash to prepay the Existing Credit
Facility and its cash to pay the fees and costs of the loan transaction.
19
<PAGE>
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer Park facility including approximately tripling its
hotel room capacity and constructing a regional convention center and
auditorium. The Company also plans to expand its gaming facilities in West
Virginia and to develop the necessary parking area to accommodate the expected
number of patrons. The Company is also considering the development of a
championship golf course.
The Company does not intend, however, to implement its expansion plans until
Hancock County commences construction of a new sewer facility to service
Mountaineer Park's growing needs. To that end, the Company has been advised that
the construction of the sewer facility is scheduled to commence in November of
1999 for completion in July of 2000. Costs of waste disposal will likewise
remain higher until the project is completed.
On October 7, 1997, Mountaineer Park entered into an agreement by which it
obtained an exclusive option to purchase 349 acres of real property located
adjacent to its Hancock County, West Virginia operation. Mountaineer Park 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. The option period was subsequently extended until
October 1, 1999. The Company exercised this option with respect to approximately
328 acres and executed two separate purchase agreements for the acquisition of
two tracts (one consisting of 1.84 acres and the other approximately 326 acres)
comprising the acreage. A dispute has arisen, however, between Mountaineer Park
and the seller's lessee of the 1.84 acre parcel regarding the seller's ability
to convey insurable title to a portion of the property. As a result, the Company
initiated an action on July 16, 1999, in the Circuit Court of Hancock County,
West Virginia seeking a declaratory judgment in its favor. Upon a favorable
resolution of the action, the Company intends to complete the purchase of this
property.
On January 21, 1999, the Company purchased the 168-acre Woodview Golf Course
in New Cumberland, West Virginia. The purchase price of the course was $843,000,
primarily for a note and assumption of debt. The Company has spent approximately
$1.3 million renovating and improving the property and acquiring golf course
maintenance equipment.
On May 3, 1999, the Company acquired, for a purchase price of $145,000,
approximately 110 acres of real property including a house, a mobile home and
all the personal property attendant to such real property at the time of
purchase. A portion of this real property adjoins the 350+ acre undeveloped
parcel acquired in 1998 near the Company's Mountaineer Race Track & Gaming
Resort.
In June of 1999, the Company committed to spend approximately $1.7 toward
the purchase by all of West Virginia's racetracks of a new central system for
video lottery. See "Year 2000".
In August and September of 1999, the Company purchased $1,548,000 of
equipment related to the operation of the coin drop slot machines. This
equipment includes cash handling equipment for both the cashiers and the drop
teams, surveillance equipment and backup power supply. The Company purchased
four hundred coin drop machines from IGT for $2,960,000.
In September and October of 1999, the Company constructed its
Speedway-themed gaming room and bar in the lower grandstand at Mountaineer Park.
The new gaming room houses approximately seventy coin drop slot machines and was
completed at a cost of approximately $300,000 exclusive of gaming equipment.
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
employment agreements with certain employees for periods ranging from one to
five years. Compensation under the employment agreements consists of cash
payments and stock option commitments, and in some cases commitments to fund
deferred compensation plans. The Company anticipates cash payments in the amount
of approximately $2.5 million, exclusive of performance bonuses,
20
<PAGE>
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. Although there can be no
assurance, the Company believes that cash generated from operations and
available lines of credit will be sufficient to meet all of the Company's
currently anticipated commitments and contingencies.
Management believes that the Company will be able to fund its planned
capital improvements and other commitments discussed above whether or not it
consummates the loan transaction contemplated by the New Commitment. If the new
loan is consummated, then the Company believes it can meet its commitments
through a combination of cash on hand, cash flow from operations, greater cash
flow created by reduction of interest cost, sale of the Company's common stock
through the exercise of outstanding options and warrants, and subordinated debt
and/or separate equipment financing permitted under the New Commitment. If the
Company is not successful in closing the new loan, then Management believes the
Company will meet its commitments through cash on hand, cash flow from
operations, sale of the Company's common stock through the exercise of
outstanding options and warrants, and separate equipment financing.
OUTSTANDING OPTIONS AND WARRANTS. In February of 1999, pursuant to various
employment agreements and the Company's 1992 Employee Stock Option Plan, the
Company granted to various employees options to purchase, in the aggregate,
435,000 shares of the Company's common stock. Also in February of 1999, the
Board of Directors of the Company created the Company's 1999 Stock Incentive
Plan, for which the Company has reserved 800,000 shares. To date, the Company
has granted 750,000 shares to various employees of the Company pursuant to the
plan.
As of September 30, 1999, there were outstanding options and warrants to
purchase 8,330,000 shares of the Company's common stock. Of this amount,
warrants to purchase 1,757,813 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 either subject to
registration rights or have been included in registration statements that the
Company has filed with the Securities and Exchange Commission and which have
been declared effective. If all such options and warrants were exercised, the
Company would receive proceeds of approximately $13.3 million.
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
$11.4 million federal net operating loss tax carry forwards (as of December 31,
1998), 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.
YEAR 2000. The Company has analyzed Year 2000 issues with its computer and
software advisors and has assessed the impact of Year 2000 issues on the
Company's operations. Manufacturer's documentation of Year 2000 compliance has
been reviewed during this assessment. All information technology items, both
software and hardware, are now Year 2000 compliant. The one software package
that was not compliant was IGT's SAMS 3 System. This system is the central
communication package that allows communication between the video lottery
terminals on site and the Lottery Commission's software in Charleston, West
Virginia. To correct this problem, the Company upgraded the SAMS 3 System by
utilizing what is known as a SAS bridge, which is a casino standard protocol
that is Y2K compliant. The installation of the SAS bridge was completed in
September of 1999. In addition, the Company and the other West Virginia race
tracks have contracted with IGT to replace the SAMS 3 System with a SAMS 4
System that is Y2K compliant and includes other enhancements of the video
lottery program. The Lottery Commission approved the contract on June 25, 1999.
Installation of the SAMS 4 system should be completed by November 1999. The SAS
Bridge and SAMS 4 System will cost Mountaineer Park approximately $1.7 million.
Secured letters of credit have been issued to the manufacturer for this
expenditure.
21
<PAGE>
The Company believes that there are currently no other material Year 2000
issues to be disclosed.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at September 30, 1999. The Company's loans,
payables, or receivables to or from others (including loans, payables or
receivables to or from its subsidiaries or joint ventures) and the interest
thereon, are all expressed as dollar obligations and payable in dollars.
PART II
OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. In addition on November 15, 1999, the Company and
the plaintiff in the case styled Ovelle Holdings, Inc. v. MTR Gaming Group,
Inc., Civ. No. 97-C-133G (Hancock County) agreed to settle all claims for
$115,000.
ITEM 2--CHANGES IN SECURITIES
Not applicable
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of the Company was held on August 23,
1999 for the purpose of (i) electing directors of the Company, (ii) approving
the adoption of the Company's 1999 Stock Incentive Plan, and (iii) ratifying the
appointment of the Company's independent public accounts for the year ending
December 31, 1999. Proxies for the meeting were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934 and there was no
solicitation in opposition.
(a) The following directors were elected by the following vote:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Edson R. Arneault...................... 17,056,918 545,667
Robert L. Ruben........................ 17,061,118 541,467
Robert A. Blatt........................ 17,062,718 539,867
James V. Stanton....................... 17,091,718 510,867
William D. Fugazy, Jr.................. 17,091,418 511,167
</TABLE>
(b) The proposal to approve the adoption of the Company's 1999 Stock
Incentive Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
14,682,624 2,824,310 95,621
</TABLE>
22
<PAGE>
(c) The proposal to ratify the appointment of the independent public
accountants for the year ending December 31, 1999 was approved by the
following vote:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
17,305,441 272,844 24,300
</TABLE>
ITEM 5--OTHER INFORMATION
Not Applicable
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation, as amended (1)
Amended and Restated Articles of Incorporation, filed as of
3.2 October 18, 1996(2)
3.3 Amended Bylaws of the Company(3)
27.1 Financial Data Schedule(4)
</TABLE>
- ------------------------
(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 18, 1996, filed November 1, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated and filed on February 20, 1998.
(4) Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1933, the Company has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: November 15, 1999 MTR GAMING GROUP, INC.
By: /s/ EDSON R. ARNEAULT
-----------------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF FINANCIAL OFFICER
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MTR GAMING
GROUP, INC. FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 10,727,000 10,727,000
<SECURITIES> 0 0
<RECEIVABLES> 1,194,000 1,194,000
<ALLOWANCES> (142,000) (142,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,961,000 14,961,000
<PP&E> 65,699,000 65,699,000
<DEPRECIATION> (13,337,000) (13,337,000)
<TOTAL-ASSETS> 70,137,000 70,137,000
<CURRENT-LIABILITIES> 6,159,000 6,159,000
<BONDS> 35,026,000 35,026,000
0 0
0 0
<COMMON> 36,335,000 36,335,000
<OTHER-SE> (7,383,000) (7,383,000)
<TOTAL-LIABILITY-AND-EQUITY> 70,137,000 70,137,000
<SALES> 32,007,000 82,288,000
<TOTAL-REVENUES> 32,007,000 82,288,000
<CGS> 20,588,000 53,202,000
<TOTAL-COSTS> 26,835,000 69,952,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,210,000 3,556,000
<INCOME-PRETAX> 4,019,000 8,993,000
<INCOME-TAX> 1,405,000 3,145,000
<INCOME-CONTINUING> 2,614,000 5,848,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,614,000 5,848,000
<EPS-BASIC> .12 .28
<EPS-DILUTED> .10 .24
</TABLE>
