<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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)
</TABLE>
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)
------------------------
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
21,822,401
Outstanding at May 10, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
<TABLE>
<CAPTION>
SECTION PAGE
- ------- --------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements................................ 3
Condensed and Consolidated Balance Sheet at March 31, 2000
and December 31, 1999..................................... 3
Condensed and Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999................ 4
Condensed and Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999................ 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............................................... 18
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................... 18
Item 2--Changes in Securities............................... 18
Item 3--Defaults upon Senior Securities..................... 18
Item 4--Submission of Matters to a Vote of Securities
Holders................................................... 19
Item 5--Other Information................................... 19
Item 6--Exhibits and Reports on Form 8-K.................... 19
SIGNATURE PAGE.............................................. 21
EXHIBIT INDEX............................................... 22
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 7,523,000 $ 7,380,000
Restricted cash........................................... 440,000 891,000
Accounts receivable, net of allowance for doubtful
accounts of $48,000 and $138,000........................ 1,458,000 1,026,000
Deferred financing costs.................................. 244,000 244,000
Income tax receivable..................................... 519,000
Deferred income taxes..................................... 1,526,000
Other current assets...................................... 2,115,000 1,575,000
----------- -----------
Total current assets........................................ 11,780,000 13,161,000
----------- -----------
Property and equipment, net................................. 55,947,000 52,756,000
Excess of cost of investments over net assets acquired, net
of accumulated amortization of $1,841,000
and $1,778,000............................................ 1,933,000 1,996,000
Deferred income taxes....................................... 330,000
Deferred financing costs, net of current portion............ 916,000 977,000
Deposits and other.......................................... 654,000 669,000
----------- -----------
3,833,000 3,642,000
----------- -----------
$71,560,000 $69,559,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 491,000 $ 1,453,000
Other accrued liabilities................................. 2,203,000 1,746,000
Current portion of capital leases......................... 1,871,000 561,000
Current portion of long-term debt......................... 6,705,000 7,982,000
----------- -----------
Total current liabilities................................... 11,270,000 11,742,000
----------- -----------
Long-term debt, less current portion........................ 23,336,000 26,409,000
Capital lease obligations, net of current portion........... 3,266,000 982,000
Deferred income tax......................................... 851,000 717,000
----------- -----------
Total liabilities........................................... 38,723,000 39,850,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Common stock.............................................. -- --
Paid in capital........................................... 36,479,000 36,454,000
Shareholder receivable.................................... (722,000) (457,000)
Accumulated deficit....................................... (2,920,000) (6,288,000)
----------- -----------
Total shareholders' equity.................................. 32,837,000 29,709,000
----------- -----------
$71,560,000 $69,559,000
=========== ===========
</TABLE>
3
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues
Gaming.................................................... $31,747,000 $18,916,000
Parimutuel commissions.................................... 1,100,000 914,000
Food, beverage and lodging................................ 2,966,000 1,809,000
Other..................................................... 443,000 342,000
----------- -----------
Total revenues.......................................... 36,256,000 21,981,000
Costs of revenue
Cost of gaming............................................ 18,465,000 11,521,000
Cost of parimutuel commissions............................ 1,315,000 1,217,000
Cost of food,beverage and lodging......................... 2,623,000 1,793,000
Cost of other revenue..................................... 371,000 284,000
----------- -----------
Total cost of revenues.................................. 22,774,000 14,815,000
----------- -----------
Gross Profit................................................ 13,482,000 7,166,000
----------- -----------
Selling, general and administrative expenses:
Marketing and promotions.................................. 1,561,000 840,000
General and administrative................................ 4,355,000 2,782,000
Depreciation and amortization............................. 1,540,000 1,024,000
----------- -----------
Total selling, general and administrative expenses...... 7,456,000 4,646,000
----------- -----------
Operating income............................................ 6,026,000 2,520,000
Interest income............................................. 69,000 83,000
Interest expense............................................ (820,000) (1,101,000)
----------- -----------
Income from operations before provision for income taxes.... 5,275,000 1,502,000
Provision for income taxes.................................. (1,907,000) (525,000)
----------- -----------
Net Income.................................................. 3,368,000 977,000
=========== ===========
NET INCOME PER SHARE-BASIC.................................. 0.16 0.05
NET INCOME PER SHARE-ASSUMING DILUTION...................... 0.13 0.04
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic....................................................... 21,337,885 20,896,322
=========== ===========
Diluted..................................................... 25,531,059 23,941,022
=========== ===========
</TABLE>
4
<PAGE>
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,368,000 $ 977,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred financing cost amortization.................... 61,000 127,000
Depreciation and amortization........................... 1,540,000 1,024,000
Deferred income taxes................................... 1,330,000 392,000
Changes in operating assets and liabilities
Accounts receivable net of allowance.................. (432,000) (160,000)
Notes receivable...................................... -- (81,000)
Income tax receivable................................. 519,000 --
Other current assets.................................. (540,000) (269,000)
Accounts payable and accrued liabilities.............. (505,000) 426,000
----------- -----------
Net cash provided by operating activities................... 5,341,000 2,436,000
----------- -----------
Cash flows from investing activities:
Restricted cash........................................... 451,000 46,000
Deposits and other........................................ 15,000 (55,000)
Capital expenditures...................................... (3,472,000) (4,977,000)
----------- -----------
Net cash used in investing activities....................... (3,006,000) (4,986,000)
----------- -----------
Cash flows used in financing activities
Shareholder receivable.................................... (265,000) --
Additional paid in capital................................ 25,000 --
Loan proceeds............................................. -- 720,000
Principal payment on long term debt and capital leases...... (1,952,000) --
Cash used by financing activities........................... (2,192,000) 720,000
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 143,000 (1,830,000)
Cash, Beginning of Period................................... 7,380,000 9,074,000
----------- -----------
Cash, End of Period......................................... $ 7,523,000 $ 7,244,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest................................................ 759,000 974,000
=========== ===========
Income taxes............................................ 42,000 103,000
</TABLE>
During the quarter ended March 31, 2000 the Company acquired fixed assets
via capital leases totaling $1,196,000.
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 has been included herein. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
NOTE 2--EQUITY TRANSACTIONS
In March of 2000, pursuant to various employment agreements, the Company
granted to various employees and its outside directors options to purchase, in
the aggregate, 270,000 shares of the Company's common stock. Also in March of
2000, the Board of Directors of the Company approved the Company's 2000 Employee
Stock Purchase Plan, for which the Company intends to reserve 825,000 shares, of
which 795,000 shares have been granted to various employees of the Company.
All of the options granted on March 13, 2000 are for a term of ten years
from the date of grant (except that 50,000 are for a term of five years), 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 $2.50 per
share, the estimated fair market value of the Company's common stock at the date
of grant.
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 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. At March 31, 2000, there is no valuation allowance. The Company and
its subsidiaries file a consolidated federal income tax return.
NOTE 4--LINE OF CREDIT
In January of 2000, pursuant to the carve out for equipment financing, found
in the Wells Fargo Credit Agreement, Mountaineer Park entered an $8 million
discretionary line of credit with PNC Leasing, LLC, pursuant to which
Mountaineer Park has borrowed $2,792,000.
NOTE 5--SUBSEQUENT EVENTS
On April 14, 2000, in connection with the exercise of nonqualified stock
options granted on January 23, 1996, Robert L. Ruben, Robert A. Blatt and Edson
R. Arneault, all of whom are officers and directors of the Company, delivered to
the Company promissory notes in the amounts of $42,186.75, $28,124.50, and
$168,747.00, respectively. The promissory notes are full recourse obligations,
bear interest
6
<PAGE>
MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SUBSEQUENT EVENTS (CONTINUED)
at 9% per year (the Prime Rate on that date), and are due and payable at the end
of a two-year term. The notes are secured by the shares of common stock (425,000
in the aggregate) underlying the options.
On April 26, 2000, the Company, upon the recommendation of the Compensation
Committee and the approval of the Board of Directors, and Edson R. Arneault, the
Company's president, chairman and chief executive officer, entered an amendment
of Mr. Arneault's employment agreement with the Company (the "Amendment"). Based
upon the requirement set forth in Article 5.09(l) of the Company's Credit
Agreement with Wells Fargo Bank that the Company maintain $8 million in key man
life insurance on the life of Mr. Arneault for a term ending December 23, 2004,
the Company extended the term of the employment agreement from January 31, 2004
until December 31, 2004. In order to induce Mr. Arneault to enter the Amendment,
the Amendment provides that during the final year of the agreement
Mr. Arneault's performance bonus will be equal to 1% of the gross operating
revenue of the Company to the extent such operating revenue exceeded the
operating revenue of the Company for the fiscal year ended December 31, 1999
(I.E., $113,421,000), subject to the terms and conditions applicable to such
performance bonus for prior years. The Amendment likewise provides that to the
extent total compensation for any calendar year would otherwise exceed the
amount the Company is permitted to deduct as compensation expense for federal
income tax purposes (the "IRS Maximum"), Mr. Arneault agrees to defer the time
for payment of any amounts above the IRS Maximum until the next calendar year in
which payment of such amount will not result in compensation exceeding the IRS
Maximum. In the event of termination of Mr. Arneault's employment in certain
circumstances, the Amendment also permits him to purchase certain residential
real property from the Company.
Also on April 26, 2000, the Company's Board of Directors authorized the
repurchase of up to $3 million of the Company's common shares. The repurchase
program authorizes management, at its discretion, to make purchases from time to
time over the next year in the open market. The Company intends to conduct the
repurchase program in accordance with Rule 10b-18 of the Exchange Act and to
extinguish any repurchased shares and return them to authorized but unissued
status.
7
<PAGE>
MTR GAMING GROUP, INC.
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,
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,
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").
The Company anticipates that Mountaineer Park, particularly gaming
operations, will continue to be the dominant factor in the Company's financial
condition for at least the remainder of the current fiscal year. Having obtained
its Nevada gaming licenses and taken over gaming operations at the Nevada
properties in the fourth quarter of 1999, the Company expects the financial
performance of those properties to improve as well.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
The Company earned revenues for the respective three-month periods in 2000
and 1999 as shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Video Lottery...................................... $31,747,000 $18,916,000
Parimutuel commissions............................. 1,100,000 914,000
Lodging, food & beverage........................... 2,966,000 1,809,000
Other Revenue...................................... 443,000 342,000
----------- -----------
Total Revenues................................... $36,256,000 21,981,000
=========== ===========
</TABLE>
8
<PAGE>
For the first quarter, the Company's total revenues increased by
$14.3 million from 1999 to 2000, an increase of 65%. Approximately
$12.0 million of the increase is attributable to gaming operations at
Mountaineer Park. Mountaineer Park's revenue from parimutuel commissions
increased by $186,000, or 20%; its lodging revenues increased by $55,000, or
17%; food and beverage revenues increased by $740,000 or 67% from $1.1 million
to $1.8 million; and other revenues at Mountaineer Park increased by $97,000 or
30%. The advent of coin drop slot machines was instrumental in the 63% increase
in gaming. This increase in gaming patrons in turn affected patron demand for
ancillary areas such as food and beverage and lodging. Better weather during the
first quarter of 2000 also contributed to the increases in revenue, as
Management believes that revenues from all sources at Mountaineer Park in 1999
were adversely affected by unusually harsh weather conditions during the month
of January.
The Nevada Properties contributed $1.6 million in gross revenue in the first
quarter of 2000, a $1.2 million or 304% increase from revenues of $398,000
during the first quarter of 1999. During the first quarter of 1999, the Speedway
Property was generally dark for renovation of hotel rooms and food and beverage
facilities and construction of the 15,600 square foot casino building and
parking lots. This property's hotel and food and beverage facilities were
re-opened in March 1999. The Company had no revenues from gaming operations at
either property through September 1999. On October 1, 1999, the Company took
over gaming operations at the two Nevada Properties. The gaming revenue for the
three months of operation in 2000 was $846,000. The sources of the remaining
revenues for the first quarter of 2000 were $413,000 from lodging, $331,000 from
food and beverage and $19,000 in other income. Total revenues generated by the
Speedway Property were $985,000, while the Reno Property's total revenues were
$624,000. The Grand Opening of the Speedway Property occurred March 1-5, 2000,
while the Reno Property's Grand Opening occurred April 26-30, 2000.
GAMING OPERATIONS
Revenues from gaming operations increased by 68% or $12.8 million from
$19 million in 1999 to $31.7 million in 2000. Management attributes this
extraordinary increase to the following factors, (1) the introduction of 400
coin drop slot machines in November of 1999; (2) the commencement of gaming
operations at the Nevada Properties in October of 1999; (3) the continued
aggressive marketing including the Grand Opening of the Speedway Property; and
(4) the expanded hours of operations for the track-based gaming machines at
Mountaineer Park commencing in June of 1999 (resulting in a 140% increase in the
net win per machines per day for such machines from $57 to $137).
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 June 14, 1999, in anticipation of adding coin drop machines,
the Company began increasing the number of days during which the machines
located at the racetrack remain in operation. Previously, those machines
operated only on live racing days and during special events. Also the Speedway
Gaming Room was built to house 72 new coin drop machines in the track's lower
grandstand. In November of 1999, Mountaineer Park introduced its first coin drop
machines. In the first quarter of 2000, the average daily win per coin drop
machine was $312 compared to $228 for ticket terminals.
For the first quarter of 2000, average daily net win for the track-based
machines was $137 compared to $326 earned on the Lodge-based terminals for a
facility-wide average of $253 per machine per day.
In March of 2000, the West Virginia State Legislature passed, and the
Governor signed into law, Senate Bill 462, which, upon its June effective date,
will remove the existing 2:1 ratio limitation for video slots at Mountaineer
Park's lodge versus the racetrack building. The Company plans, subject to
regulatory approval, to add 550 coin drop video slots at the Lodge by August of
2000 upon completion of the first phase of Mountaineer Park's expansion.
9
<PAGE>
A summary of the video lottery gross winnings less patron payouts ("net
win") for the three months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
Total gross wagers.............................. $ 194,359,000 $ 66,520,000
Less patron payouts............................. (163,458,000) (47,604,000)
------------- ------------
Revenues--video lottery operations............ $ 30,901,000 $ 18,916,000
============= ============
Average daily net win per terminal.............. $ 253 $ 163
============= ============
</TABLE>
Since October 1, 1999, the Company has operated gaming at its two Nevada
Properties. The Speedway Property had gaming revenues of $591,000 for the three
months ended March 31, 2000. The Reno Property's gaming revenues were $255,000
for the same period. Gaming revenues at the Speedway Property have significantly
improved since the Grand Opening in March of 2000. The Reno Property's Grand
Opening did not occur until after the first quarter.
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.
Mountaineer's parimutuel commissions for the three months ended March 31,
2000 and 1999 are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Simulcast racing parimutuel handle................. $ 5,490,000 $ 4,798,000
Live racing parimutuel handle...................... 4,479,000 3,546,000
Less patrons' winning tickets...................... (7,872,000) (6,604,000)
----------- -----------
2,097,000 1,740,000
Less:
State and county parimutuel tax.................... (119,000) (107,000)
Purses and Horsemen's Association.................. (878,000) (719,000)
----------- -----------
Revenues--parimutuel commissions................... $ 1,100,000 $ 914,000
=========== ===========
</TABLE>
Simulcast handle in the first three months of 2000 increased 14.4% to
$5.5 million compared to the same period in 1999. Live racing handle increased
by 26.3% from $3.5 million in 1999 to $4.5 million in 2000. Total revenues for
parimutuel commissions for the first quarter of 2000 increased 20.4% compared to
the same period in 1999. These increases are a function of the 19% increase in
the number of live racing days in 2000 (50 in 2000 compared to 42 in 1999) due
primarily to weather related cancellations during January of 1999.
10
<PAGE>
Mountaineer Park paid average daily live purses of $84,600 in the first
three months of 2000, an 18% increase over the $71,800 average for the
corresponding period of 1999.
While Management is encouraged by the increases in live and simulcast
parimutuel handle, 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 wagering pool lessens the impact a particular
wager will have on the pay-off odds). The commencement of export simulcasting
would involve substantial capital improvements (approximately $4-5 million).
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
originally believed that the arrangement would violate the State's racing
statute. The Company asked the Attorney General's Office to reconsider that
conclusion. At the same time, the Company pursued legislation to make plain that
the statute permitted the agreement. On March 11, 2000, the West Virginia State
Legislature passed House Bill 4487 amending the statute to permit such
agreements. On March 28, 2000, the Governor signed the bill into law. In
April of 2000, Mountaineer Park and its horsemen executed an updated version of
the cost-sharing agreement and submitted it to the Racing Commission for
approval at the Racing Commission's monthly meeting held on April 28, 2000. The
Racing Commission declined to hear the matter, citing the fact that the new law
will not become effective until June of 2000 and that the Attorney General had
not provided any further guidance. The Company will again ask the Racing
Commission to approve the cost sharing agreement. The Company does not
anticipate commencement of export simulcasting until approximately 120 days
after the Racing Commission approves the cost sharing agreement. Thus, no
assurances can be given that the Company will successfully commence export
simulcasting, or commence such activity by a date certain, or that the
anticipated results will be realized. See "Operating Costs" and "Parimutuel
Commissions Operating Costs."
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues accounted for a combined revenue
increase of 64% to $2,966,000 for the three months ended March 31, 2000 compared
to $1,809,000 during the first quarter of 1999. Company wide, restaurant, bar
and concession facilities produced $1,026,000 of the revenue increase, which is
an 88% increase over the first three months of 1999. Food and beverage revenues
increased $739,000 to $1.8 million at the West Virginia property in the first
quarter of 2000. Management believes that increased revenues from food and
beverage resulted primarily from enhanced gaming facilities and related
advertising, which in turn led to increase consumption of food and beverages by
the Company's patrons.
The increase in revenue for this profit center in Nevada was $287,000, with
$185,000 of the increase coming from the Speedway Property. Differences in
results for the Speedway Property are attributable primarily to the fact that
the property was fully operational for only one month in the first quarter of
1999 compared to three months in 2000.
Lodging revenues increased $131,000 for a 20% increase over the same period
in 1999. Of the increase in lodging revenues, $76,000 can be attributed to the
two Nevada Properties.
OTHER OPERATING REVENUES
Other sources of revenues increased by $101,000 to $443,000 for the three
months ended March 31, 2000 compared to the same period in 1999. Other operating
revenues are primarily derived from the golf course, the sale of programs,
parking, admission fees, lottery tickets, check cashing and ATM services. The
11
<PAGE>
increase in ATM service fees was $60,000 for the first quarter of 2000. While
these activities are non-core business activities, Management believes that they
are necessary to attract gaming patrons.
OPERATING COSTS
The Company's $14.3 million increase in revenues was accompanied by higher
total costs, as directly related expenses increased by $8.0 million to
$22.8 million in 2000 compared to 1999. Approximately $6.9 million of the
increase in operating costs is attributable to the gaming operations, which
includes applicable state taxes and fees. Parimutuel direct cost increased by
$98,000, while cost of lodging and food and beverage increased by $830,000. Of
the 46% increase in the cost of food and beverage and lodging, $334,000 can be
attributed to the Nevada Properties. The cost of other income increased by
$87,000 in 2000 to $371,000. The increase is due primarily to the operation of a
full-length golf course as opposed to a nine-hole executive course and increased
spending on entertainment offerings for patrons at Mountaineer Park.
The 65% increase in revenues was also accompanied by an 86% increase in
marketing and promotions expense. There was a 57% increase in general and
administrative expenses, and a 50% increase in depreciation and amortization. Of
the $721,000 increase in marketing and promotions, $322,000 of the increase was
incurred on behalf of the Nevada Properties and the Grand Opening of the
Speedway Property. The remaining increase in marketing and promotion expenses
was due primarily to increased prize giveaways and an increase in salaries and
related employee benefits. The increase in general and administrative expenses
was due primarily to (1) additional personnel engaged in maintenance,
housekeeping, surveillance and security to accommodate Mountaineer Park's larger
crowds; (2) an increase in employee benefits in the form of insurance and
employee meals; (3) financing fees and insurance costs along with professional
fees related to financing and acquisition activity, including consideration of
acquisitions that were not consummated; and (4) accrual of performance bonus
pursuant to an employment contract with the Company's president. The Nevada
Properties' general and administrative costs were $642,000 in 2000, compared to
$324,000 in 1999. The increase was due primarily to the fact that (i) the
Company operated the casinos at the Nevada Properties during the first quarter
of 2000 (but not during the first quarter of 1999); (ii) the Speedway Property
was open throughout the first quarter of 2000 compared to only one month during
1999 (due to construction); and (iii) higher patron volume.
Operating costs and gross profit earned from operations for the three months
ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating Costs:
Video lottery operations......................... $18,465,000 $11,521,000
Pari-mutuel commissions.......................... 1,315,000 1,217,000
Lodging, food and beverage....................... 2,623,000 1,793,000
Other revenues................................... 371,000 284,000
----------- -----------
Total Operating Costs:......................... $22,774,000 $14,815,000
=========== ===========
Gross Profit (Loss)
Video lottery operations......................... $13,282,000 $ 7,395,000
Pari-mutuel commissions.......................... (215,000) (303,000)
Lodging, food and beverage....................... 343,000 16,000
Other revenues................................... 72,000 58,000
----------- -----------
Total Gross Profit............................. $13,482,000 $ 7,166,000
=========== ===========
</TABLE>
12
<PAGE>
GAMING OPERATIONS
Costs of gaming operations increased by $6.9 million, or 60%, to
$18.5 million for the three months ended March 31, 2000, reflecting the increase
in statutory expenses directly related to the 68% increase in video lottery
revenues. Such expenses accounted for $6.3 million of the total cost increase.
Gaming machine lease expense decreased $325,000 due to the Company entering into
a capitalized lease for the new coin drop equipment. The prior ticketed machines
were rented. Wages and benefits increased for the three months ending March 31,
2000 by $274,000 due to the additional personnel required for coin drop slot
operations compared to paper-out machines as well as to accommodate increased
patron volume. For the quarter ending March 31, 2000, the Nevada Properties
incurred $658,000 in costs associated with gaming. In the first quarter of 1999,
the Company did not operate gaming in Nevada, so there were no gaming expenses.
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, Inc. for the sole benefit of Mountaineer
Park, Inc. employees. Assessments paid to the Horsemen's Purse Fund are returned
by the Lottery Commission to bank accounts administered by Mountaineer 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 Statements of Operations. Statutory costs and assessments,
including the State Administrative Fee, for the respective three-month periods
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Employees Pension Fund.............................. $ 152,000 93,000
Horsemen's Purse Fund............................... 4,742,000 2,888,000
----------- ----------
SUBTOTAL........................................ $ 4,894,000 2,981,000
State of West Virginia.............................. 9,179,000 5,589,000
Tourism Promotion Fund.............................. 918,000 559,000
Hancock County...................................... 612,000 373,000
Stakes Races........................................ 306,000 186,000
Miscellaneous state projects........................ 306,000 186,000
----------- ----------
$16,215,000 $9,874,000
=========== ==========
</TABLE>
PARIMUTUEL COMMISSIONS
Costs (the individual components of which are detailed below) of parimutuel
commissions increased by $98,000 or 8%, from $1.2 million in the first quarter
of 1999 to $1.3 million in the first quarter of 2000. One of the primary reasons
for this increase was the increase in the number of live racing days from 42 to
50. Purse expense (consisting of statutorily determined percentages of live
racing handle) increased by 28% or $95,000 to $440,000 in the first quarter of
2000, which is consistent with the increase 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 increased by $27,000 to $614,000
in the first quarter of 2000 (compared to $587,000 during the first quarter
13
<PAGE>
of 1999), which is consistent with the increase in simulcasting wagering.
Parimutuel commissions revenue is reported net of these expenses in the
Consolidated Statement of Operations.
Cost of parimutuel commissions also includes a $70,000 increase in wages and
benefits related to the increase in the number of live race meets and a decrease
of like amount for equipment rental, supplies and complimentary racing forms.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$1.8 million for the first three months of 1999 to $2.6 million for the same
period in 2000. Of the $830,000 increase, $445,000 is attributable to the Nevada
Properties. The food and beverage operations earned a gross profit of $238,000
for the first quarter of 2000 compared to a $62,000 loss for the same period in
1999, an increase of $300,000. Lodging operations earned a gross profit of
$105,000 for the first quarter of 2000 compared to $78,000 for the same period
in 1999, an increase of $27,000.
For these profit centers, the Nevada Properties' lost $42,000 for the three
months ended March 31, 2000, in comparison to a $31,000 gross profit for the
same period in 1999. These losses can be attributed to food and beverage
specials and the increase in staffing in anticipation of the Grand Openings.
Mountaineer Park's gross profit for these areas was $385,000 for the first
quarter of 2000, compared to a $25,000 loss in 1999. The increase in gross
profit resulted primarily from greater efficiency in the use of labor and
supplies. Further, food costs for the first quarter of 1999 (47% of sales)
suffered from excessive spoilage related to the inclement weather. Food costs
for the first three months of 2000 were 37% of sales.
COSTS OF OTHER OPERATING REVENUES
Cost of other revenues increased by $87,000 or 31% from $284,000 for the
three months ended March 31, 1999 to $371,000 for the three months ended
March 31, 2000. The cost of the golf course increased by $35,000 due to the move
from a nine-hole executive course to a full-length 18-hole course. Cost of
entertainment increased $22,000 for the first quarter of 2000 in comparison to
the same period in 1999.
MARKETING AND PROMOTIONS EXPENSE
Company wide, marketing expenses increased in the first quarter of 2000 to
$1,561,000 from $840,000. Of the $721,000 increase in marketing and promotions,
$322,000 of the increase was related to the Nevada Properties and the Grand
Opening of the Speedway Property. Marketing expenses at the Company's
Mountaineer Park operation increased 48% from $823,000 for the first quarter of
1999 to $1.2 million for the same period in 2000. In the first quarter of 1999,
Mountaineer Park was awarded a state grant in the amount of $133,000 in
advertising matching funds. The grant for 2000 will not be awarded until the
second quarter of 2000. Therefore, no reduction of advertising cost was booked
for such grants in the three months ended March 31, 2000. The remaining increase
in marketing and promotion expenses for the Mountaineer Park property was due
primarily to increases in prize giveaways to the Frequent Player Club members
and an increase in salaries and related employee benefits.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
General and administrative expense for the periods being compared increased
by $1,573,000 or 57% from $2,782,000 to $4,355,000. The reason for the increase
in general and administrative costs was twofold. First, with respect to
Mountaineer Park's operations, the increases are due primarily to a $691,000
increase in compensation and benefits and a $107,000 increase in repairs and
supplies. 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,
and the finalization of the refinancing of the Company's long-term debt, the
Company incurred increased professional fees related to evaluating acquisition
and financing opportunities (totaling approximately $443,000).
14
<PAGE>
Due to comparing three months of operations in 2000 to one month of
operations in 1999, general and administrative costs at the Speedway Property
increased by $195,000. In anticipation of expected growth at the Reno Property,
the Company engaged additional staff, causing an increase in salaries and
related benefits of $73,000. Also in Reno, leasing expense increased by $37,000
for equipment and signage added after the first quarter of 1999.
In the first quarter of 2000, the Company incurred $820,000 of interest
expense compared to $1.1 million in the first quarter of 1999. The decrease in
interest expense is attributable to the Company's refinancing of its long-term
debt, which reduced both the interest rate to approximately 9% and principal to
$30 million.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased by 50%, or $516,000, to
$1.5 million for the three months ended March 31, 2000. This increase reflects
the $16.9 million increase in the fixed asset balance at March 31, 2000 in
comparison to March 31, 1999. Depreciation expense for the Nevada Properties
increased by $232,000 to $455,000 for the three months ended March 31, 2000.
CASH FLOWS
The Company's operations produced $5.3 million in cash flow in the three
months ended March 31, 2000, compared to $2.4 million produced in the first
three months of 1999. Current year non-cash expenses included $1.5 million of
depreciation and amortization and $61,000 for the amortization of deferred
financing costs.
The Company invested $3.5 million in capital improvements in the first
quarter of 2000 versus $5.0 million in 1999. The Company invested $1.1 million
in capital assets related to the Nevada Properties in 2000 compared to
$2.6 million in 1999.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance as of March 31, 2000 was $510,000 and
its unrestricted cash balance was $7,523,000. Working capital has been affected
by the change in debt structure. At March 31, 2000, the Company's Credit
Agreement with Wells Fargo Bank required scheduled quarterly payments of
principal totaling $6.0 million in the next twelve months. The prior loans had
no scheduled payments of principal until the maturity date. This caused a $6.0
decrease in working capital. In April of 2000, however, the Company negotiated
an amendment of the Credit Agreement deferring principal repayments during the
first phase of Mountaineer Park's expansion program, which is expected to be
completed in August of 2000.
Racing purses are paid from funds contributed by the Company to bank
accounts owned by the horse owners who race at Mountaineer Park. At March 31,
2000, the balances in these accounts exceeded purse obligations by
$1.9 million. 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.
On December 27, 1999, the Company entered a $30,000,000 five-year senior
secured reducing, revolving credit facility with Wells Fargo Bank, N.A. The
Company has drawn the full $30 million available under the Wells Fargo loan and
used the proceeds, combined with approximately $5.3 million of the Company's
cash, to prepay amounts previously borrowed from Madeleine LLC from 1996 through
1998 and to pay the costs and fees related to the transactions.
The Wells Fargo loan bears interest as follows: for the first six months,
the interest rate, which is variable, will be the London Interbank Offered Rate,
(the "LIBOR"), plus a margin of 3%. This resulted in an interest rate of 9.16%.
Thereafter, the interest rate will be adjusted quarterly to LIBOR plus a margin
of 2.0 to 2.5%, depending upon the Company's leverage ratio, as defined.
Interest is payable not
15
<PAGE>
less frequently than quarterly. The Company may elect from time to time either
to continue to borrow on a LIBOR basis (with 1, 2, 3 or 6 month contracts) or to
convert to an interest rate based upon the Prime Rate or Federal Funds Rate plus
a margin of 1 to 1 1/2% depending upon the leverage ratio. Beginning 90 days
after closing, the maximum available credit line will be reduced by
$1.5 million per quarter, equating to a five-year amortization. Amounts prepaid
over and above such reductions may be re-borrowed, subject to a commitment fee
ranging from 37.5 to 50 basis points depending upon the leverage ratio.
Although the Credit Agreement requires the Company to reduce the outstanding
principal by $6 million per year (whereas the Company's previous financing
required payments of interest only), the Company believes that the combination
of positive cash flow trend and interest savings will prevent the Company from
suffering a material decrease in liquidity. On March 31, 2000 the Company made
the first payment of $1.5 million to reduce principal. In April of 2000, Wells
Fargo Bank agreed to defer the scheduled principal reduction payments during the
first phase of Mountaineer Park's expansion program.
The Credit Agreement permits the Company to finance separately up to
$8 million of additional senior indebtedness for the purchase or lease of gaming
equipment as well as up to $15 million of subordinated debt for capital
improvements. In January of 2000, pursuant to the carve out for equipment
financing, Mountaineer Park entered into an $8 million discretionary line of
credit with PNC Leasing, LLC, pursuant to which Mountaineer Park has borrowed
$2,792,000. Pursuant to the carve out for subordinated debt, the Company is
currently negotiating a $15 million subordinated, unsecured revolving line of
credit to finance capital improvements.
As set forth below, the Company is contemplating significant capital
improvements to prepare for the launch of an export simulcasting business at
Mountaineer Park. The Company has entered into an agreement with the Horsemen's
Benevolent and Protective Association, which, subject to regulatory approval,
could provide Mountaineer Park half of the $4 to 5 million estimated for the
completion of the project. Because the Company has not determined to proceed
with the project absent regulatory approval of the external cash, the amount
estimated below for such capital improvements is expressed net of this external
cash.
CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer Park facility including approximately tripling its
hotel room capacity, adding 55,000 square feet of additional gaming space, which
will house an additional 1100 video slot machines (subject to regulatory
approval), an arena, a spa, a parking garage and a convention center. The
construction of these projects will most likely commence in the second quarter
of 2000. The expansion project will be completed in phases as cash flow and
available lines of credit permit, will take approximately 18 months to complete,
and is estimated to cost approximately $50 million. The Company expects to
complete the first phase of the expansion by August of 2000. That phase calls
for approximately 32,000 square feet of new gaming space and the addition of 550
coin drop slot machines (subject to regulatory approval). Capital improvements
of a near-term nature include numerous smaller renovations costing a total of
approximately $1 million. The Company also expects modest capital expenditures
for further improvement and signage at the Nevada Properties. The Company also
intends to spend approximately $2 million to $2.5 million to develop export
simulcasting at Mountaineer Park during 2000, assuming regulatory approval of
the Company's cost-sharing agreement with its horsemen.
On June 22, 1999, Mountaineer Park entered into agreements to purchase for
$583,000 approximately 287.65 acres of real property (including two buildings)
previously subject to an October 7, 1997 option and located adjacent to its
Hancock County, West Virginia operation. Mountaineer Park had paid $100,000 for
an irrevocable option. Subject to resolution of certain title issues,
Mountaineer Park intends to close the purchases, which call for payment to be
made in the form of a $200,000 cash payment at closing and a $383,000 term note
bearing interest at 9% payable over five years.
16
<PAGE>
Management believes that except as set forth above, its cash balances, cash
flow from operations, and available lines of credit will be sufficient to cover
contemplated capital expenditures.
OUTSTANDING OPTIONS AND WARRANTS. As of March 31, 2000, there were
outstanding options and warrants to purchase 9,285,607 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
$16 million.
In March of 2000, pursuant to various employment agreements, the Company
granted to various employees and its outside directors options to purchase, in
the aggregate, 270,000 shares of the Company's common stock. Also in March of
2000, the Board of Directors of the Company approved the Company's 2000 Employee
Stock Purchase Plan, for which the Company intends to reserve 825,000 shares, of
which 795,000 shares have been granted to various employees of the Company
subject to shareholder approval of the Plan.
DEFERRED INCOME TAX BENEFIT. Based upon the pretax income of $5.3 million
earned as of March 31, 2000, Management believes that the Company will be able
to utilize its $3.5 million (as of December 31, 1999) of federal net operating
loss tax carry forwards. The utilization of federal net operating losses may be
subject to certain limitations.
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 $5.5 million 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. Also, the Company has
contracted to purchase a new communications software package for the gaming
equipment in West Virginia. The total cost to Mountaineer Park was
$1.7 million, all of which has been paid except for $458,000 that will become
due upon the vendor's completion of the contract, which is expected to occur
during the second quarter of 2000. 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.
SUBSEQUENT EVENTS
On April 14, 2000, in connection with the exercise of nonqualified stock
options granted on January 23, 1996, Robert L. Ruben, Robert A. Blatt and Edson
R. Arneault, all of whom are officers and directors of the Company, delivered to
the Company promissory notes in the amounts of $42,186.75, $28,124.50, and
$168,747.00, respectively. The promissory notes are full recourse obligations,
bear interest at 9% per year (the Prime Rate on that date), and are due and
payable at the end of a two-year term. The notes are secured by the shares of
common stock (425,000 in the aggregate) underlying the options.
On April 26, 2000, the Company, upon the recommendation of the Compensation
Committee and the approval of the Board of Directors, and Edson R. Arneault, the
Company's president, chairman and chief executive officer, entered an amendment
of Mr. Arneault's employment agreement with the Company (the "Amendment"). Based
upon the requirement set forth in Article 5.09(l) of the Company's Credit
17
<PAGE>
Agreement with Wells Fargo Bank that the Company maintain $8 million in key man
life insurance on the life of Mr. Arneault for a term ending December 23, 2004,
the Company extended the term of the employment agreement from January 31, 2004
until December 31, 2004. In order to induce Mr. Arneault to enter the Amendment,
the Amendment provides that during the final year of the agreement
Mr. Arneault's performance bonus will be equal to 1% of the gross operating
revenue of the Company to the extent such operating revenue exceeded the
operating revenue of the Company for the fiscal year ended December 31, 1999
(I.E., $113,421,000), subject to the terms and conditions applicable to such
performance bonus for prior years. The Amendment likewise provides that to the
extent total compensation for any calendar year would otherwise exceed the
amount the Company is permitted to deduct as compensation expense for federal
income tax purposes (the "IRS Maximum"), Mr. Arneault agrees to defer the time
for payment of any amounts above the IRS Maximum until the next calendar year in
which payment of such amount will not result in compensation exceeding the IRS
Maximum. In the event of termination of Mr. Arneault's employment in certain
circumstances, the Amendment also permits him to purchase certain residential
real property from the Company.
Also on April 26, 2000, the Company's Board of Directors authorized the
repurchase of up to $3 million of the Company's common shares. The repurchase
program authorizes management, at its discretion, to make purchases from time to
time over the next year in the open market. The Company intends to conduct the
repurchase program in accordance with Rule 10b-18 of the Exchange Act and to
extinguish any repurchased shares and return them to authorized but unissued
status.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no material market risk sensitive financial instruments or
interest therein, and held none at March 31, 2000. The Company's exposure to
market risk for changes in interest rates relate primarily to the Company's
long-term debt obligation pursuant to its credit agreement. The table below
presents the Company's credit agreements for which fair value is subject to
changing market interest rates:
ESTIMATED CASH INFLOW (OUTFLOW) BY YEAR OF PRINCIPAL MATURITY
<TABLE>
<CAPTION>
ESTIMATED CARRYING
----------------------------------------------------
AS OF MARCH 31, 2000
---------------------------------------------------- FAIR
2000 2001 2002 2003 2004 VALUE VALUE
-------- -------- -------- -------- -------- -------- --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Credit Agreement based on Libor plus
margin................................ 4,500 6,000 6,000 6,000 6,0000 28,500 28,500
</TABLE>
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, 1999.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM TITLE
- --------------------- ----------
<C> <S>
3.1 Restated Certificate of Incorporation for Winners
Entertainment, Inc. dated August 17, 1993 (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Winner's Entertainment, Inc. dated
October 10, 1996 (incorporated by reference to the Company's
report on Form 8-K filed November 1,1996).
3.3 Amended Bylaws of the Company (incorporated by reference to
the Company's report on Form 8-K filed February 20, 1998).
10.1 Master Lease dated January 27, 2000 between Mountaineer
Park, Inc. and PNC Leasing, LLC (incorporated by reference
to the Company's Report on Form 8-K filed February 4, 2000).
10.2 Schedule to Master Lease (incorporated by reference to the
Company's Report on Form 8-K filed February 4, 2000).
10.3 Supplement to Schedule to Master Lease (incorporated by
reference to the Company's Report on Form 8-K filed
February 4, 2000).
10.4 Bill of Sale dated January 27, 2000 from Mountaineer Park,
Inc. to PNC Leasing, LLC (incorporated by reference to the
Company's Report on Form 8-K filed February 4, 2000).
10.5 Guaranty made January 27, 2000 by the Company in favor of
PNC Leasing, LLC with respect to obligations of Mountaineer
Park, Inc. under Master Lease (incorporated by reference to
the Company's Report on Form 8-K filed February 4, 2000).
10.6. Promissory Note and Pledge Agreement dated April 14, 2000
made by Robert L. Ruben in favor of the Company (filed
herewith). Pursuant to Instruction 2 to Item 601 of
Regulation S-K, the Company has not attached substantially
identical documents between the Company and Robert A. Blatt
(principal amount $28,142.50 with respect to 50,000 shares)
and Edson R. Arneault (principal amount $168,747.00 with
respect to 300,000 shares).
10.7. Amendment of Employment Agreement dated April 26, 2000
between the Company and Edson R. Arneault (filed herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
19
<PAGE>
(b) Reports on Form 8-K
The Company filed the following current reports on Form 8-K during the three
months ended March 31, 2000 and thereafter:
A current report on Form 8-K was filed by the Company on February 4,
2000 (with the earliest event reported dated January 27, 2000) reporting
that the Company had obtained a credit facility from PNC Leasing, LLC.
A current report on Form 8-K was filed by the Company on May 3, 2000
(with the earliest event reported dated April 26, 2000) reporting that the
Company's board of directors had authorized the repurchase over a one-year
period of up to $3 million of the Company's common stock.
20
<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: May 15, 2000 MTR GAMING GROUP, INC.
By: /s/ EDSON R. ARNEAULT
-----------------------------------------
Edson R. Arneault
CHAIRMAN, PRESIDENT, AND
CHIEF FINANCIAL OFFICER
</TABLE>
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation for Winners
Entertainment, Inc. dated August 17, 1993................ *
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Winner's Entertainment, Inc. dated
October 10, 1996.......................................... *
3.3 Amended Bylaws of the Company............................. *
10.1 Master Lease dated January 27, 2000 between Mountaineer
Park, Inc. and PNC Leasing, LLC........................... *
10.2 Schedule to Master Lease.................................. *
10.3 Supplement to Schedule to Master Lease.................... *
10.4 Bill of Sale dated January 27, 2000 from Mountaineer
Park, Inc. to PNC Leasing, LLC............................ *
10.5 Guaranty made January 27, 2000 by the Company in favor
of PNC Leasing, LLC with respect to obligations of
Mountaineer Park, Inc. under Master Lease................. *
10.6 Promissory Note and Pledge Agreement dated April 14, 2000
made by Robert L. Ruben in favor of the Company........... 23
10.7 Amendment of Employment Agreement dated April 26, 2000
between the Company and Edson R. Arneault................. 26
27.1 Financial Data Schedule................................... 29
</TABLE>
- ---------------------------------
* Incorporated by reference.
22
<PAGE>
EXHIBIT 10.6
Promissory Note
$42,186.75
Chester, West Virginia
April 14, 2000
On or before the 14th day of April, 2002, the undersigned promises to
pay to the order of MTR Gaming Group, Inc. the sum of $42,186.75 together with
interest at the rate of 9% per annum, the prime rate on this date.
The maker, endorsers, sureties, guarantors and assignors of this note
severally waive demand, presentment of payment, protest and notice of protest,
and nonpayment, and agree and consent that the time for its payment may be
extended, or said note renewed from time to time and for any term or terms by
agreement between the holder and any of them without notice, and that after such
extension or extensions, renewal or renewals, the liabilities of all parties
shall remain as if no extension or renewal has been had. If this note is not
paid when due, and is given to an attorney for collection, or suit filed
thereon, the maker agrees to pay in addition to the unpaid principal and
interest, the costs of collection and reasonable attorney's fees.
/s/ ROBERT L. RUBEN
------------------------------
Robert L. Ruben
23
<PAGE>
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement made this 14th day of April, 2000, by and
between MTR Gaming Group, Inc., a Delaware corporation (the "Company"), and
Robert L. Ruben ("Pledgor"), an individual.
W I T N E S S E T H:
WHEREAS, on April 14, 2000, Pledgor exercised options to purchase
75,000 common shares of the Company (the "Shares") for $0.5625 per share, which
options were granted Pledgor on January 23, 1996 subject to the Company's July
29, 1998 Non-Qualified Stock Option Agreement (the "Agreement"); and
WHEREAS, in return for the Shares, Pledgor delivered to the Company the
sum of $0.75 cash and a Promissory Note (the "Note") pursuant to which Pledgor
agreed to pay the Company the original principal amount of $42,186.75 plus
interest, with payment due in full by the close of business on April 14, 2002;
and
WHEREAS, as security for the Note and the extension of the term,
Pledgor has agreed to pledge the Shares pursuant to the terms and conditions set
forth below.
NOW, THEREFORE, the parties agree as follows:
1. The term "Pledged Stock" as used herein shall mean and include all
of the Shares.
2. (a) As collateral security for the due payment of all indebtedness
of the Pledgor to the Company under the Note, the Pledgor hereby pledges,
assigns, hypothecates, delivers, and sets over to the Company all the Pledged
Stock, and hereby grants to the Company a security interest in all the Pledged
Stock and in any and all proceeds thereof and substitutions therefor.
(b) Pledgor shall herewith deliver to the Company any and all
stock certificates with respect to the Pledged Stock.
3. In the event of default by Pledgor under the Note, the Company,
without demand of performance or other demand or notice of any kind to Pledgor,
shall have all rights with respect to the Shares afforded to a secured party
under the Uniform Commercial Code. Pledgor acknowledges that the Note remains a
full recourse obligation of Pledgor.
4. Pledgor warrants and represents to the Company that upon delivery of
the Pledged Stock to the Company, this Stock Pledge Agreement creates and grants
a valid lien on and perfected security interest in the Pledged Stock, subject to
no prior security interest, lien, or encumbrance of any kind.
24
<PAGE>
5. The Pledgor shall at any time and from time to time upon the written
request of the Company execute and deliver such further documents and perform
such further acts as the Company may reasonably require to give effect to the
purposes of this Stock Pledge Agreement.
IN WITNESS WHEREOF, the parties have caused these presents to be duly
executed and delivered the day and year first above written.
MTR GAMING GROUP, INC.
/s/ Edson R. Arneault
-----------------------
By: Edson R. Arneault
Its: President
PLEDGOR
/s/ Robert L. Ruben
-----------------------
By: Robert L. Ruben
25
<PAGE>
EXHIBIT 10.7
AMENDMENT OF EMPLOYMENT AGREEMENT
This AMENDMENT OF EMPLOYMENT AGREEMENT, entered this 26th day of
April, 2000.
WHEREAS, as of February 1, 1999, MTR Gaming Group, Inc., a Delaware
corporation having its principal office at State Route 2 South, Chester, West
Virginia 26034, together with all of its subsidiaries whether now existing or
hereafter formed or acquired (collectively, the "Company"), and Edson R.
Arneault, 7400 Biscayne Way Southeast, Grand Rapids, Michigan 49456
("Executive") entered an employment agreement pursuant to which Executive is to
serve as president, chief executive officer and chairman of the Company for a
term ending January 31, 2004 (the "Employment Agreement"); and
WHEREAS, on December 27, 1999, the Company closed a credit facility
with Wells Fargo Bank pursuant to a Credit Agreement dated as of December 20,
1999 for a term ending December 23, 2004; and
WHEREAS, Section 5.09(l) of the Credit Agreement requires the Company
to maintain throughout the term of the credit facility key man life insurance on
Executive in the amount of $8,000,000; and
WHEREAS, the Company wishes to extend the term of the Employment
Agreement with Executive in order to accommodate the requirements of the
Company's lender, and the Executive is willing to extend the Employment
Agreement pursuant to the terms hereof.
NOW THEREFORE, the parties, in reliance upon the mutual promises and
covenants herein contained, do hereby agree as follows:
1. In Paragraph 2 of the Employment Agreement, the date January 31, 2004
is hereby replaced with the date December 31, 2004.
26
<PAGE>
2. Paragraph 4(c) of the Employment Agreement, concerning performance
bonus, is hereby amended by adding the following to the end of the existing
Paragraph 4(c):
"Subject to the same terms, conditions and provisos set forth
in this Paragraph 4(c) above with respect to calendar years
1999 through 2003, for calendar year 2004, unless Executive's
employment shall have been terminated for Cause (as defined in
Section 5(d) hereof), Executive shall be entitled to a cash
payment equal to 1% of the gross operating revenue of the
Company to the extent such operating revenue exceeded the
operating revenue of the Company for the fiscal year ended
December 31, 1999 (I.E., $113,421,000)."
3. Paragraph 4 of the Employment Agreement is hereby further amended by
the addition of the following Paragraph 4(j):
"Notwithstanding any provision to the contrary contained
herein, to the extent Executive's total compensation for any
calendar year would otherwise exceed the amount the Company is
permitted to deduct as compensation expense for federal income
tax purposes (the "IRS Maximum"), Executive hereby agrees to
defer the time for payment of any amounts above the IRS
Maximum until January of the next calendar year in which
payment of such amount will not result in compensation
exceeding the IRS Maximum. In no event, however, shall this
Paragraph 4(j) result in or be construed as a waiver of the
right to such compensation."
4. Paragraph 5(g) of the Employment Agreement is hereby amended by
adding the following at the end thereof:
"To the extent the Company purchases residential real
property for the use of Executive and/or the Company in
Nevada or other jurisdictions in which the Company conducts
or is seeking to conduct gaming operations, then in the
event of such termination of the Period of Employment,
Executive shall have the right to purchase such property on
the same terms and conditions.
With respect to any purchases pursuant to this Paragraph 5(g),
the Executive shall have forty-five (45) days in which to
notify the Company of his intent to exercise such right, with
closing to occur within a reasonable time thereafter. Further,
Executive's rights hereunder shall not be transferable."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
MTR GAMING GROUP, INC.
27
<PAGE>
/s/ Edson R. Arneault /s/ Robert L. Ruben
- ---------------------- -------------------
Edson R. Arneault Robert L. Ruben, Assistant Secretary,
Chairman of the Compensation
Committee
/s/ Robert A. Blatt
--------------------
Robert A. Blatt, Assistant Secretary,
Member of the Compensation
Committee
/s/ Edson R. Arneault
----------------------
Edson R. Arneault, President and
Chief Executive Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MTR GAMING
GROUP, INC. FINANCIAL STATEMENT AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,963,000
<SECURITIES> 0
<RECEIVABLES> 1,506,000
<ALLOWANCES> (48,000)
<INVENTORY> 0
<CURRENT-ASSETS> 11,780,000
<PP&E> 72,109,000
<DEPRECIATION> (16,162,000)
<TOTAL-ASSETS> 71,560,000
<CURRENT-LIABILITIES> 11,270,000
<BONDS> 26,602,000
0
0
<COMMON> 0
<OTHER-SE> 32,837,000
<TOTAL-LIABILITY-AND-EQUITY> 71,560,000
<SALES> 36,256,000
<TOTAL-REVENUES> 36,256,000
<CGS> 22,774,000
<TOTAL-COSTS> 30,230,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 820,000
<INCOME-PRETAX> 5,275,000
<INCOME-TAX> 1,907,000
<INCOME-CONTINUING> 3,368,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,368,000
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.13
</TABLE>
