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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
COMMISSION FILE NO. 0-20508
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MTR GAMING GROUP, INC.
(exact name of Company as specified in its charter)
DELAWARE IRS NO. 84-1103135
(State of Incorporation) (IRS Employer
Identification)
STATE ROUTE 2, SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Company's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: COMMON STOCK $.00001 PAR VALUE
Name of each exchange on which registered: NASDAQ STOCK MARKET
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Indicate by check mark whether the Company (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K of Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Company's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K / /
The aggregate market value of the Company's common stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on March 23, 2001(based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $116,594,630.
The Company's common stock outstanding at March 23, 2001 was 22,208,501
shares.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................ 1
Company History........................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION:............................................ 1
Mountaineer Race Track & Gaming Resort -- Chester, West
Virginia................................................ 2
Lodge Facilities and Speakeasy Gaming Saloon.............. 2
Gaming Facilities......................................... 3
Recreational Facilities................................... 3
Trailer Park.............................................. 3
Undeveloped Land.......................................... 3
Current Operations at Mountaineer Park.................... 4
Racing Operations......................................... 4
Gaming Operations......................................... 5
Lodging, Food and Beverage Operations..................... 5
Ramada Inn and Speedway Casino -- North Las Vegas,
Nevada.................................................. 6
Ramada Inn and Speakeasy Casino -- Reno, Nevada........... 6
Operation of the Nevada Properties/Gaming Licensing....... 6
Business Strategy......................................... 7
Develop and Market Mountaineer Park as a Destination
Resort and Diversified Entertainment Facility........... 7
Increase Capacity through Expansion of Facilities and
Increasing Gaming Count................................. 7
Improve Financial Results of Racing Operations at
Mountaineer Park........................................ 8
Create and Cultivate Niche Market for Nevada Properties... 8
Competition............................................... 9
Employees................................................. 10
Regulation and Licensing.................................. 10
West Virginia Racing and Gaming Regulation................ 10
Nevada Gaming Regulation.................................. 12
Impact of Resort Hotel Legislation........................ 16
Compliance with Other Laws................................ 16
Restrictions on Share Ownership and Transfer.............. 16
Application of Environmental Regulations.................. 16
Discontinued Operations................................... 17
ITEM 2. PROPERTIES.......................................... 17
Hotel, Gaming, Racing and Other Property.................. 17
Equipment Leases.......................................... 18
ITEM 3. LEGAL PROCEEDINGS................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 18
ITEM 5.MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 18
ITEM 6. SELECTED FINANCIAL DATA............................. 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 19
Results of Operations..................................... 19
Twelve Months Ended December 31, 2000 Compared to Twelve
Month Ended December 31. 1999........................... 20
Gaming Operations......................................... 20
Parimutuel Commissions.................................... 21
Lodging, Food and Beverage................................ 22
Other Operating Revenues.................................. 22
Operating Costs........................................... 22
Gaming Operating Costs.................................... 23
Parimutuel Commissions Operating Costs.................... 24
Lodging, Food and Beverage Operating Costs................ 24
Costs of Other Operating Revenues......................... 25
Marketing and Promotions Expense.......................... 25
General and Administrative Expenses and Interest.......... 25
Twelve Months Ended December 31, 1999 Compared to Twelve
Months Ended December 31, 1998.......................... 25
Gaming Operations......................................... 26
Parimutuel Commissions.................................... 27
Lodging, Food and Beverage................................ 27
Other Operating Revenues.................................. 27
Operating Costs........................................... 28
Gaming Operating Costs.................................... 28
Parimutuel Commissions Operating Costs.................... 29
Lodging, Food and Beverage Operating Costs................ 29
Costs of Other Operating Revenues......................... 30
Marketing and Promotions Expense.......................... 30
General and Administrative Expense and Interest........... 30
Liquidity and Sources of Capital.......................... 31
Capital Improvements...................................... 31
Outstanding Options and Warrants.......................... 32
Commitments and Contingencies............................. 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET
RISKS..................................................... 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 33
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY.............. 34
Business Experience....................................... 34
ITEM 11. EXECUTIVE COMPENSATION............................. 36
OPTION GRANTS IN 2000..................................... 37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END OPTION VALUES.................................. 37
Section 16(a) Beneficial Ownership Reporting Compliance... 37
Employment Agreements..................................... 37
Compensation of Directors................................. 39
Compensation Committee Interlocks and Insider
Participation........................................... 39
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM
8-K....................................................... 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly owned subsidiaries, owns and operates the
Mountaineer Racetrack & Gaming Resort in Chester, West Virginia, the Ramada Inn
and Speedway Casino in North Las Vegas, Nevada, and the Ramada Inn and Speakeasy
Casino in Reno, Nevada.
The Company was incorporated in March 1988 in Delaware under the name
"Secamur Corporation," a wholly owned subsidiary of Buffalo Equities, Inc.
("Buffalo"), and later "spun-off" through the sale of its stock to the
stockholders of Buffalo in January 1989. In June 1989, the Company merged with
Pacific International Industries, Inc., which had been engaged in the contract
security guard services business in Southern California since its inception in
February 1987. Upon completion of the merger, the Company was renamed Excalibur
Security Services, Inc. to reflect its new line of business. After operating
unprofitably, the Company filed a voluntary petition for reorganization with the
U.S. Bankruptcy Court for the Central District of California in December 1990
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court approved the
Company's sale of its security guard services business in May 1991, and
confirmed the Company's plan of reorganization in December 1991. The plan of
reorganization authorized the Company to acquire, primarily, specified gaming
and oil and gas businesses. Upon confirmation of the plan of reorganization, the
Company changed its name to Excalibur Holding Corporation. In connection with
management's decision to operate as a gaming company, the Company was renamed
Winners Entertainment, Inc. in August 1993. At the annual meeting of
stockholders on October 15, 1996, the stockholders of the Company approved a
change of the Company's name from Winners Entertainment, Inc. to MTR Gaming
Group, Inc. During 1998, the Company divested its oil and gas operations and
since that time has operated only in the gaming and entertainment business.
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, expiration or non-renewal of Nevada gaming licenses, 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, weather or road conditions
limiting access to the Company's properties, 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 from time to time in the Company's Securities and Exchange
Commission filings. Further, the Company has no obligation and assumes no
obligation to update any forward-looking statements.
1
MOUNTAINEER RACETRACK & GAMING RESORT--CHESTER, WEST VIRGINIA
Pursuant to a stock purchase agreement dated May 5, 1992, the Company
acquired all of the common stock of Mountaineer Park, Inc. ("Mountaineer Park"),
a West Virginia corporation, in December 1992. Mountaineer Park offers
parimutuel wagering on live thoroughbred horse racing and simulcast horse and
greyhound racing as well as approximately 1,905 gaming machines as part of an
entertainment complex and destination resort with hotel, dining and lounge
facilities, entertainment and event center, health spa and outdoor activities
including golf, swimming and tennis. Mountaineer Park is situated on the Ohio
River at the northern tip of West Virginia's northwestern panhandle in Hancock
County, approximately 40 miles south of Youngstown, Ohio and 35 miles west of
Pittsburgh, Pennsylvania. Mountaineer Park owns approximately 1,311 acres of
real property in Hancock County, of which approximately 231 are west of State
Route 2 and are the site of the racetrack and Lodge; approximately 175 acres
comprise Mountaineer's Woodview Golf Course located approximately seven miles
south of the Mountaineer complex in the town of New Cumberland; and the
remainder of the acreage is available for future development.
Mountaineer Park offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. In August of 2000, Mountaineer Park also began exporting its signal to
other outlets in the United States and the Caribbean. Those outlets
(approximately 196 off-track wagering parlors thus far) simulcast Mountaineer
Park's races and conduct parimutuel wagering. Mountaineer Park receives a
negotiated fee in the form of either a percentage of the amount wagered or a
flat fee per day. Mountaineer Park also conducts parimutuel wagering on horse
and greyhound dog racing simulcast via closed circuit television from other
prominent racetracks around the country. Mountaineer Park's main racetrack
consists of an oval dirt track approximately one mile in length. Inside the main
track is a natural turf (grass) track measuring seven furlongs or 7/8 of a mile.
The racetrack buildings consist of the clubhouse and grandstand that provide
glass-enclosed stadium and box seating for approximately 770 and 2,850 patrons,
respectively. The buildings are each three stories and are connected by an
enclosed walkway. In addition to seating areas, the grandstand covers
approximately 57,000 square feet of interior space on the main and mezzanine
levels containing parimutuel windows and food and beverage concession stands.
The clubhouse covers approximately 25,000 square feet of interior space and
likewise offers parimutuel windows. The racetrack apron, which is accessible
from both buildings, provides racing fans with up-close viewing of horses
entering the racetrack and crossing the finish line. The stable area
accommodates approximately 1,250 horses and is located adjacent to the main
track. The racetrack parking lots have a combined capacity for over 2,900
vehicles.
In addition to parimutuel wagering on live horse racing and simulcast horse
and greyhound racing, Mountaineer Park offers three video lottery gaming areas
in its racetrack buildings: the Riverside Gaming Terrace, the Hollywood Knights,
and the Speedway.
LODGE FACILITIES AND SPEAKEASY GAMING SALOON
The Mountaineer Lodge (the "Lodge") is a two-story facility near Mountaineer
Park's main entrance on West Virginia State Route 2. The Lodge offers 101 rooms.
The Lodge's Gatsby Dining Room seats 125 patrons for casual dining. The Lodge is
also the site of the Speakeasy Gaming Saloon and the Downtown Chicago Gaming
Room. Encompassing 59,000 square feet (including a 32,000 square foot addition
that opened in August of 2000), the Speakeasy, together with adjacent smaller
rooms, houses over 70% of Mountaineer Park's 1,905 gaming machines, extensive
off-track wagering facilities and Big Al's Deli. The Lodge parking lots have a
combined capacity for approximately 2,300 vehicles.
2
GAMING FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers gaming through approximately 1,905 slot machines located in the racetrack
clubhouse, grandstand and Lodge. Of these machines, 873 machines are ticket
machines while 1,032 are the traditional coin drop, casino style slot machines.
Mountaineer Park owns 1,304 machines and leases the remaining 601. The racetrack
houses 30% of the machines in its Riverside Gaming Terrace on the second floors
of the clubhouse, the Hollywood Knights on the second floor of the grandstand,
and the Speedway Game Room on the lower level of the grandstand. The Lodge
offers the remaining 70% primarily in the Speakeasy Gaming Saloon and Downtown
Chicago Gaming Room. The gaming machines allow a player to select from several
game themes, including up to four versions of draw poker, blackjack, two
versions of keno, and various classic casino slot machine games.
RECREATIONAL FACILITIES
Mountaineer Park has three tennis courts, a volleyball court, a basketball
court, two swimming pools and two children's swimming pools. These facilities
are made available for use by Lodge guests and the general public at specified
daily or seasonal rates.
In January of 1999, Mountaineer Park purchased the Woodview Golf Course, an
eighteen-hole par 71 course measuring approximately 6,300 yards (subsequently
expanded to 6,550 yards) on a 175-acre tract, which is located approximately
seven miles from Mountaineer Park in New Cumberland, West Virginia. Mountaineer
Park operates a free shuttle bus service between the Lodge and the Woodview Golf
Course. See "Business Strategy"; "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Improvements."
In August of 2000, Mountaineer Park opened the Harvey E. Arneault Memorial
Arena and Events Centre. Known as the "Harv," this 65,000 square foot facility
is a tent-like fabric structure that seats approximately 5,000 patrons for
concerts, boxing matches and other entertainment offerings. The Harv has a
state-of-the-art stage, permanent bleachers and food and beverage concessions.
See "Business Strategy"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Improvements."
In February of 2001, Mountaineer Park opened its Spa and Fitness Centre.
Also a fabric structure, this 12,000 square foot facility has a full complement
of weight training and cardiovascular equipment as well as aerobics classes, a
health bar, locker rooms with steam and sauna rooms, a hair and nail salon and
treatment rooms for massage, facials and tanning. The spa offers both annual and
day memberships. See "Business Strategy"; "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Capital Improvements."
TRAILER PARK
The Company maintains a trailer park consisting of 61 individual lots on
approximately 11.5 acres located across West Virginia State Route 2 from the
Lodge and the entrance to Mountaineer Park. The lots are rented for fixed
monthly fees, mostly to individuals who are employed by Mountaineer Park or its
horsemen in racing operations. Mountaineer Park maintains the road and grounds,
removes refuse and provides water and sewage hook-ups. The tenants pay all
utility expenses.
UNDEVELOPED LAND
Mountaineer Park owns, as part of its 1,311 acres, contiguous tracts of 375
acres, 350 acres, 110 acres and 69 acres that are largely undeveloped.
Mountaineer Park has entered into contracts to acquire approximately 400
additional contiguous acres. Management has no definitive plans to develop such
property. Mountaineer Park also owns a 69-acre parcel in New Cumberland, West
Virginia on
3
which it intends to develop an RV park. See "Business Strategy"; and "Liquidity
and Sources of Capital."
CURRENT OPERATIONS AT MOUNTAINEER PARK
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and gaming operations and, to a lesser extent, its lodging, food
and beverage operations. Additional revenues are generated from ticket sales for
concerts and boxing events, ATM access fees and from greens fees, spa
memberships and other recreational facilities fees.
RACING OPERATIONS
The Company is subject to annual licensing requirements established by the
West Virginia State Racing Commission (the "Racing Commission"). The Company's
license was renewed in December 2000, and will remain effective through
December 2001.
The Company's revenue from racing operations is derived mainly from three
sources: commissions earned on parimutuel wagering on live races held at
Mountaineer Park; commissions earmed on races conducted at other "host"
racetracks and broadcast live (i.e., import simulcast) at Mountaineer Park; and,
since August 11, 2000, commissions earned or fees paid to Mountaineer Park by
other racetracks and off track wagering facilities that broadcast Mountaineer
Park's races live (i.e., export simulcast). In parimutuel wagering, patrons bet
against each other rather than against the operator of the facility or with
pre-set odds. The dollars wagered form a pool of funds from which winnings are
paid based on odds determined solely by the wagering activity. The racetrack
acts as a stakeholder for the wagering patrons and deducts from the amounts
wagered a "take-out" or gross commission, from which the racetrack pays state
and county taxes and racing purses. The Company's parimutuel commission rates
are fixed as a percentage of the total handle or amounts wagered. With respect
to Mountaineer Park's live racing operations, such percentage is fixed by West
Virginia law at three levels, 17.25%, 19% and 25%, depending on the complexity
of the wager. The lower rate applies to wagering pools involving only win, place
and show wagers while the higher rates apply to pools involving wagers on
specified multiple events, such as trifecta, quinella and perfecta wagers. With
respect to import simulcast racing operations, Mountaineer Park generally has
opted to apply the commission rates imposed by the jurisdictions of the host
racetracks, as it may do with the consent of the Racing Commission. Such rates
vary with each jurisdiction and may be more or less favorable than the live
racing commission rates. Out of its gross commissions, the Company is required
to distribute fixed percentages to its fund for the payment of regular purses
(the "regular purse fund"), the state of West Virginia and Hancock County and,
with respect to commissions derived from simulcast operations, Mountaineer
Park's employee pension plan. After deducting state and county taxes and, with
respect to simulcast commission, simulcast fees and expenses and employee
pension plan contributions, approximately one-half of the remainder of the
commissions are payable to the regular purse fund. With respect to export
simulcast racing operations, "guest" tracks and off track wagering outlets pay
"host" fees to Mountaineer Park that average 3% of the handle wagered on
Mountaineer Park's live races. Casinos and off track wagering facilities in
Nevada currently receive Mountaineer Park's live race signal from a disseminator
to whom Mountaineer Park pays a fee. The guest outlets then pay a flat daily fee
to Mountaineer Park. Out of its gross host fees, Mountaineer Park distributes a
fixed percentage to its fund for payment of regular purses and to Mountaineer
Park's employee pension plan. After deducting the amount due from the Horsemen
for capital improvements, approximately one-half of the remainder of the
commissions is payable to the purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
4
GAMING OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 2000 for a period of one
year.
The Company derives revenue from the operation of gaming in the form of net
win on the gross terminal income, or the total cash deposited into a machine
less the value of credits cleared for winning redemption tickets. Pursuant to
the West Virginia Racetrack Video Lottery Act of 1994, as amended (the "Lottery
Act"), the Company's commission is fixed at 47% of the net win after deducting
an administration fee of up to 4% of gross terminal revenues first paid to the
State of West Virginia.
The Company owns 1,304 machines and leases a total of 601 machines from four
manufacturers. The leases covering the leased machines provide for a fixed
monthly rental.
In June of 1998, the Lottery Act was amended to permit Mountaineer Park to
change the ratio of gaming machines located at the Lodge versus the racetrack
building from 1:1 to 2:1. Accordingly, in July of 1998, Mountaineer Park
increased the total number of machines, at such time, from 1,000 to 1,200 with
800 terminals in the Lodge and 400 in the racetrack building.
In June of 1999, the Lottery Act was again amended to permit the use of
machines that pay out winnings in coins or tokens, instead of paper tickets, and
to utilize symbols on mechanical rolling drums instead of video images. In
November of 1999, Mountaineer Park became the first of the State's racetracks to
operate these "coin drop" classic casino slot machines.
Although the Lottery Commission approved the linking of Video Slots in
progressive jackpot networks in 1995, the technology for video lottery
progressives has only recently become available. In January of 1999, Mountaineer
Park introduced progressives on a test basis with respect to a total of 100
machines in several networks or "banks" located in the Speakeasy and the
Riverside Gaming Terrace. In anticipation of the addition of progressive games,
Mountaineer Park obtained regulatory approval to increase the number of slots
from 1,200 to 1,355. In the fourth quarter of 2000, Mountaineer Park eliminated
its progressive games because the available games proved unpopular. Mountaineer
Park intends to implement progressive games again when new games are approved
for use in West Virginia.
Mountaineer Park currently operates approximately 1,905 gaming machines, of
which 1,032 are coin drop machines.
In March of 2000, the Lottery Act was again amended to remove the 2:1 ratio
limitation for slots at the Lodge versus the racetrack building, thus allowing
additional slots at the Lodge without regard to the number at the racetrack
building.
LODGING, FOOD AND BEVERAGE OPERATIONS
The Clubhouse restaurant is open a minimum of 210 days annually on live race
days and offers seating for 650 customers with full lunch and dinner menus and a
private buffet. Clubhouse customers include racing fans, local residents and
private social groups. Beverages and cocktails are also available in the
grandstand building at the Hollywood Knights Saloon, which services gaming
patrons as well as racing fans. A deli adjacent to the Hollywood Knights Saloon
provides customers with a variety of sandwiches and salads. The grandstand also
offers Big Al's Deli II, which serves sandwiches, hotdogs and pizza. Closed
circuit television monitors displaying Mountaineer Park's live and simulcast
races are provided at every table in both the Clubhouse and grandstand
restaurant for the convenience of racing fans. The racetrack food and beverage
facilities are intended to complement the entertainment experience for racing
fans and gaming players and, therefore, are designed to offer familiar menus
with moderate pricing in a comfortable atmosphere.
5
Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on weekdays, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Gatsby Restaurant, which seats 125 patrons for
casual dining. Food and beverages are also available at the Lodge in Big Al's
Delis located in the Speakeasy Gaming Saloon, the Downtown Chicago Gaming Room
and in the Iron Horse Lounge. Table and barstool seating is available in the
Speakeasy Gaming Saloon and the Iron Horse Lounge for the gaming and off-track
wagering patrons accommodated there. The Lodge and its food and beverage
operations are operated in combination with its entertainment facilities and are
utilized principally to increase racing attendance and gaming play. Accordingly,
the Company maintains inexpensive room and food and beverage rates.
RAMADA INN AND SPEEDWAY CASINO--NORTH LAS VEGAS, NEVADA
In May of 1998, the Company, through its wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc. ("Speakeasy Las Vegas"), purchased a 131-room hotel
and casino property (previously known as the Cheyenne Hotel & Casino) and has
renamed it the Ramada Inn and Speedway Casino (together with an adjacent 1/2
acre parcel purchased thereafter to augment parking, the "Speedway Property").
Since acquiring the Speedway Property, the Company has renovated 118 of the
hotel rooms, refurbished the restaurant, and constructed a 15,600 square foot
addition that houses the casino, and constructed a new swimming pool and parking
lots that now accommodate 474 cars. The Speedway Property sits on approximately
6.1 acres and consists of one two-story building and one three-story building.
The casino and restaurant have an auto-racing theme, as the Speedway Property is
the closest hotel and casino to the Las Vegas Motor Speedway.
The Speedway Property is located at 3227 Civic Center Drive in North Las
Vegas at the intersection of Cheyenne Avenue and Interstate 15. I-15 is a major
interstate freeway, which extends north into Utah and south past Downtown Las
Vegas, the Las Vegas "strip" and into the Los Angeles Basin. The Speedway
Property is approximately five miles from the Las Vegas Motor Speedway and three
miles from Nellis Air Force Base.
RAMADA INN AND SPEAKEASY CASINO--RENO, NEVADA
In May of 1998, the Company purchased a 262-room hotel and casino
(previously known as the Reno Ramada Plaza Hotel) and has renamed it the Ramada
Inn and Speakeasy Casino (the "Reno Property"). An eleven-story tower houses 236
of the Reno Property's hotel rooms, with 26 rooms contained in a separate
three-story structure. The Reno Property is located at 6th and Lake Streets in
Reno and has parking for approximately 238 cars. The tower also has a
restaurant, a deli and two bars. The Reno Property has an 8000 square foot
casino area. The property also has a 7,900 square foot convention facility
housed in a separate building.
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING
In September of 1999, the Nevada Gaming Commission issued the Company's
Nevada subsidiaries two-year licenses to conduct non-restricted gaming at the
Nevada Properties. The Gaming Commission also recognized the Company as a
publicly traded corporation (thus eliminating the need for each of the Company's
shareholders to seek regulatory approval) and found the individual applicants
suitable as well. Prior to receiving the licenses, and in order to preserve the
properties' exemptions from resort hotel legislation, the Company had leased the
casinos to an independent, licensed casino operator pursuant to leases that did
not provide any revenues to the Company. Accordingly, the Company did not
realize any gaming revenue from the Nevada Properties until October of 1999,
when it took over operation of the casinos. Currently, the Company operates
approximately 336 slot machines, eight blackjack tables, a craps table and one
roulette wheel at the Speedway Property and approximately 266 slot machines and
five blackjack tables at the Reno Property.
6
BUSINESS STRATEGY
The Company's business strategy involves further developing and expanding
its existing operations at Mountaineer Park, operating casinos at the Nevada
Properties, and seeking to acquire other gaming and/or parimutuel businesses
(with a particular emphasis on such opportunities in states bordering West
Virginia.
DEVELOP AND MARKET MOUNTAINEER PARK AS A DESTINATION RESORT AND DIVERSIFIED
ENTERTAINMENT FACILITY. Established in 1951 as a horse- racing venue,
Mountaineer Park historically focused its operations on parimutuel wagering and
related amenities. Following the appointment of Edson R. Arneault as Chairman
and Chief Executive Officer in April 1995, the Company has sought to capitalize
on the passage of the Lottery Act by repositioning the facility as a gaming
destination resort and diversified entertainment facility. The Company has
invested in excess of $77 million in expansion, renovation, and refurbishment of
Mountaineer Park and has incrementally increased the number of gaming machines
from 165 at the time of acquisition to approximately 1,905 in December of 2000
as legislative developments either permitted additional gaming machines or made
their operation more profitable. The Company has also undertaken an aggressive
marketing campaign involving print, radio and television advertisements,
including 30-minute "infomercials" aired in Mountaineer Park's target markets,
and direct mail.
INCREASE CAPACITY THROUGH EXPANSION OF FACILITIES AND INCREASING GAMING
COUNT. Mountaineer Park's successful marketing, enhanced facilities and improved
racing and gaming products have resulted in a paradigm shift: while weekends and
summer months, respectively, continue to produce higher volumes of patrons and
revenues than weekdays and winter months, respectively, commencing with the
fourth quarter of 1999, weekday gaming revenues have regularly produced results
previously seen only on weekends; and winter months (notwithstanding the
unusually harsh weather from November of 2000 through February of 2001) are
producing results previously seen only in summer months. Indeed, gaming revenue
for the month of February 2001 was $10.5 million compared to $11.5 million in
June of 2000. In order to capitalize on this momentum, in 2000 the Company began
a four-phased expansion. Phase One of the expansion included:
- Construction of the 60,000 square foot arena for concerts, boxing, and
other events (such as billiard tournaments, car shows and charitable
bingo) to drive gaming traffic (opened August of 2000).
- Expansion of the Speakeasy Gaming Saloon by approximately 32,000 square
feet to house 550 additional slots (opened August of 2000).
- Commencement of export simulcasting after making necessary capital
improvements, which will create new revenue source (opened August of
2000).
- Construction of 12,000 square foot full service spa and fitness center as
an amenity for hotel guests as well as for the local community (opened
February of 2001).
Phase Two of the expansion will include:
- Addition of approximately 220 hotel rooms and enclosed swimming pool to
satisfy demand at peak times and to permit marketing of convention
facilities and golf packages during off-peak times (scheduled for
completion by end of fiscal 2001).
- Further expansion of the Speakeasy Gaming Saloon by approximately 20,000
square feet to house, subject to regulatory approval, approximately 595
additional slots, bringing machine count to approximately 2,500 (scheduled
for completion by July of 2001).
- Construct convention facilities (approximately 25,000 square feet) to
allow promotion of group sales and to host special events (scheduled for
completion in August of 2001).
7
- Implement state-of-the-art automated player tracking to allow more
efficient use of marketing and promotions dollars (installation expected
by May of 2001).
Additional phases of the development, which are not scheduled for fiscal
2001 but remain contemplated as cash flow and available financing permit,
include constructing (or having third party construct and own) a new
championship golf course and golf training facility on undeveloped acreage and
developing housing, equestrian trails, and a river front shopping village.
Management's strategy is to implement the expansion plans as part of a plan
to create a destination resort that will both expand the Company's target market
and further distinguish Mountaineer Park from competitors whose facilities may
have some but not all of the entertainment venues available at Mountaineer Park.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Sources of Capital."
IMPROVE FINANCIAL RESULTS OF RACING OPERATIONS AT MOUNTAINEER PARK. The
Company has a two-pronged strategy for improving the financial results of its
horse racing business: (i) continue to improve the quality of the live racing
product by increasing average purses and sponsoring "stakes" races or
"championship" races; and (ii) make its live racing product more attractive to
wagerers by broadening the betting pool through the continued growth of
Mountaineer Park's new export simulcasting business.
Management believes that the enhanced quality of racehorses should improve
the Company's prospects in export simulcasting. The commencement of export
simulcasting activity has not only created a new source of revenue but the
related increase in gross dollars wagered on Mountaineer Park's live races has
also improved the quality of racing as a wagering product, as a greater and more
diverse wagering pool lessens the impact a particular wager will have on the
pay- off odds. Management continues to believe that the improvement of the
racing product through increasing average daily purses (though not necessarily
in the winter months) and sponsoring increased stakes races as part of the
development of the export simulcast business, together with cross marketing of
parimutuel wagering to slot patrons, will result in increased on-track handle as
well. See "Operating Costs" and "Parimutuel Commission Operating Costs."
CREATE AND CULTIVATE NICHE MARKET FOR NEVADA PROPERTIES. Management believes
that each of the Nevada properties possesses unique characteristics vis-a-vis
direct competitors. The Speedway Property is the closest full service hotel and
casino to the Las Vegas Motor Speedway and the only motor racing themed casino
in the United States. The property is further distinguished by expansive
interior and exterior murals that depict racing scenes and a distinct
auto-themed dining area. With its renovated hotel and new casino and bandstand,
the Speedway Property is well positioned to gain market share in the North Las
Vegas market. The Company's strategy is to maintain an aggressive print,
television, radio and direct mail campaign to focus on these unique
characteristics to drive customer traffic.
The Company's Speakeasy Casino in Reno provides an intimate atmosphere in
newly renovated space. And, while the casino is small, the hotel rooms are
spacious. Management believes that the property distinguishes itself from its
downtown Reno competitors by virtue of its luxuriousness and unique theme.
Management's strategy has been to market this property as an upscale spot for
locals and convenient hotel for tourists and travelers doing business in
downtown Reno. Management has also been marketing the property's 7,900 square
foot convention facility to drive casino traffic. Legislation passed in March of
2000 in California to permit Indian tribes to conduct casino gaming, however,
represents a threat to the tourist market. To mitigate the effect of this new
competition, management has begun courting the locals market through the local
radio and print media. As a second means of improving the return on the
Company's investment, management is studying the feasibility of reducing the
Company's capital exposure through the conversion and sale of some or all of the
hotel's guest rooms as time share units.
8
COMPETITION
The Company faces substantial competition in each of the markets in which
its gaming facilities are located. Some of the competitors have significantly
greater name recognition and financial and marketing resources than the Company.
All of the Company's gaming operations primarily compete with other gaming
operations in their geographic areas. New expansion and development activity
(with the exception of gaming in Mountaineer Park's target markets) is occurring
in each of the relevant markets, which may be expected to intensify competitive
pressures. All of the Company's gaming operations also compete to a lesser
extent with operations in other locations, including Native American lands,
riverboats and cruise ships, and with other forms of legalized gaming in the
United States, including state-sponsored lotteries, on- and off- track wagering,
high-stakes bingo, card parlors, and the emergence of Internet gaming. Several
states have considered legalized casino gaming and others may in the future.
Casinos in Canada have likewise recently begun advertising in Mountaineer Park's
target markets.
Specific competitive factors relating to the Company's primary gaming
markets include the following:
MOUNTAINEER PARK. In recent years, the number of gaming options available to
consumers in the Company's West Virginia area market has increased considerably.
Mountaineer Park's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia, Thistledown and
Northfield Park, located approximately 85 miles to the northwest in Cleveland,
Ohio and The Meadows, located approximately 80 miles away from Mountaineer Park
in Washington, Pennsylvania. Wheeling Downs conducts parimutuel greyhound dog
racing and video lottery gaming. Thistledown and Northfield conduct parimutuel
thoroughbred horse racing but not video lottery gaming. The Meadows conducts
live harness racing and provides import simulcasting, but does not have video
lottery gaming. Since commencing export simulcasting, Mountaineer Park also
completes with racetracks across the country to have its signal carried by
off-track wagering parlors. In general, Mountaineer Park competes with other
tracks for participation by quality racehorses. The Company also competes with
statewide lotteries in West Virginia, Pennsylvania and Ohio, off-track and
on-site wagering in Pennsylvania, and, to a lesser extent, destination gaming
facilities in Las Vegas, Atlantic City, and Canada as well as other
entertainment options available to consumers, including live and televised
professional and collegiate major sports events. The Company will also compete
with off-track wagering in Ohio. To the extent that Pennsylvania, Ohio or West
Virginia legalizes any forms of casino gaming, slot machines or video lottery
gaming, Mountaineer Park's gaming operations could compete with any such new
gaming facilities located within driving distance of Mountaineer Park. If
permitted under such new legislation, such facilities may offer more gaming
machines than Mountaineer Park, as well as forms of gaming not available in West
Virginia. Such competition could have a material adverse effect on the Company.
THE SPEEDWAY PROPERTY. The Company does not intend for the Speedway Property
to compete with the high-end luxury hotel/casinos along Las Vegas' famous Strip
(along Las Vegas Boulevard between Sahara Avenue and Tropicana Avenue). Although
the Strip is the main attraction for gaming patrons who travel to Las Vegas, the
Company believes that North Las Vegas constitutes a distinct segment of the Las
Vegas gaming market. Nevertheless, management recognizes that the Strip may
limit customer traffic to the North Las Vegas area. Even within the North Las
Vegas segment of the market, however, the Speedway Property faces substantial
competition from other small casinos. New properties, or major additions,
expansions or enhancements to competitors' existing properties could have a
material adverse effect on the Company.
THE RENO PROPERTY. The Reno Property competes with other properties in Reno,
Nevada and other Nevada gaming markets. The Reno Property's principal direct
competitors are those gaming facilities located in downtown Reno. There are
currently nine gaming facilities in downtown Reno with over
9
11,700 slot machines, 470 table games and 6,600 hotel rooms. These gaming
facilities are, in general, larger and have more amenities than the Reno
Property. New properties, or major additions, expansions or enhancements to
competitors' existing properties could have a material adverse effect on the
Company.
In March of 2000, California voters passed a proposition to permit Indian
tribes to conduct and operate slot machines, lottery games and banked and
percentage card games on Indian lands. The Nevada properties, particularly the
Reno Property, could be adversely affected as a result of this increased
competition.
EMPLOYEES
As of December 31, 2000, the Company had approximately 1,400 employees
(1,100 in connection with operations at Mountaineer Park and the remainder in
Nevada) of whom approximately 70 were represented by a labor union under a
collective bargaining agreement. The union representing mutuel clerks at the
racetrack has been expanded in recent years to cover certain employees providing
off-track betting services at the Lodge. The collective bargaining agreement was
extended until November 30, 2002. The Company believes that its employee
relations are good.
The Company anticipates that the number of employees for operations at
Mountaineer Park will increase materially in connection with the contemplated
expansion.
REGULATION AND LICENSING
GENERAL. All of the Company's gaming operations are subject to extensive
regulations and could be subjected at any time to additional or more restrictive
regulations. The Company is also subject to the provisions of West Virginia law
that govern the conduct of thoroughbred horse racing in West Virginia (the "West
Virginia Racing Act") and the operation of slots in West Virginia (the "Lottery
Act"). The Company's live racing, pari-mutuel wagering and slot operations are
contingent upon the continued governmental approval of such operations as forms
of legalized gaming. The Company also may be materially adversely affected by
legislation of additional forms of gaming activity, or expanded licensure,
within or near the Company's present or future markets.
The regulations and oversight applicable to the Company's operations are
intended primarily to safeguard the legitimacy of gaming activity and its
freedom from inappropriate or criminal influences. The Company's material
licenses are subject to annual or other periodic renewal and governmental
authorities may refuse to grant permission to continue to operate existing
facilities. The failure to obtain or maintain in effect required regulatory
approvals would have a material adverse effect upon the Company's business,
financial condition and results of operations.
WEST VIRGINIA RACING AND GAMING REGULATION. The powers and responsibilities
of the Racing Commission include, among other things, (i) granting permission
annually to maintain racing licenses and schedule race meets, (ii) approving
simulcasting activities, (iii) licensing all officers, directors, racing
officials and certain other employees of the Company and (iv) approving all
contracts entered into by the Company affecting racing and parimutuel wagering
operations. Such powers and responsibilities extend to the approval and/or
oversight of all aspects of racing and parimutuel wagering operations. In order
to conduct simulcast racing, Mountaineer Park is required under West Virginia
law to hold a minimum of 210 live race days each year. West Virginia law
requires that at least 80% of Mountaineer Park's employees must be citizens and
residents of West Virginia and must have been such for at least one year. In
addition, certain activities, such as simulcasting races, require the consent of
the representatives of a majority of the horse owners and trainers at
Mountaineer Park.
The Company's export simulcast activities that occur outside of West
Virginia are subject to regulation by other state racing commissions, as well as
the provisions of the Federal Interstate Horse
10
Racing Act of 1978, which prohibits Mountaineer Park from accepting off-track
wagering on simulcast racing without the approval of the Racing Commission and,
subject to certain exceptions, of any other currently operating track within 60
miles, or if none, of the closest track in any adjoining state. The Company has
received all necessary approvals to conduct its current operations at
Mountaineer Park; however, such approvals are subject to renewal and approval
annually. The failure to receive or retain approvals or renewals of approvals,
or a delay in receiving such approvals and renewals, could cause the reduction
or suspension of racing and parimutuel wagering as well as of gaming operations
at Mountaineer Park and have a material adverse effect upon the Company's
business, financial condition and results of operations.
Pursuant to the Lottery Act, each of the two West Virginia horse racetracks
and two West Virginia dog racetracks licensed prior to January 1, 1994 and which
conduct a minimum number of days of live racing, may apply for an annual license
to operate gaming at its racetrack. The Lottery Act likewise requires that the
operator of Mountaineer Park be subject to a written agreement with the horse
owners, breeders and trainers who race horses at that facility (the "Mountaineer
Park Horsemen") in order to conduct gaming operations. The Company is party to
the requisite agreement with the Mountaineer Park Horsemen, which expires on
January 1, 2004. The Lottery Act also requires that the operator of Mountaineer
Park be subject to a written agreement with the parimutuel clerks in order to
operate gaming. The Company is party to the requisite agreement with its
pari-mutuel clerks, which expires on November 30, 2002. The absence of an
agreement with the Mountaineer Park Horsemen or the parimutuel clerks at
Mountaineer Park, or the termination or non-renewal of such agreement, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Lottery Commission has broad powers to approve
and monitor all operations of the gaming machines, the specification of the
machines and the interface between the terminals and the West Virginia Central
Lottery System. The Lottery Commission also acts upon the Company's requests for
increases in the number of gaming machines. The Lottery Commission's denial of a
request to increase the number of machines at Mountaineer Park could limit the
Company's growth and thus adversely affect the Company's business, financial
condition and results of operations. In addition, the Lottery Commission
licenses all persons who control the licensed entity or are key personnel of the
gaming operation to ensure their integrity and absence of any criminal
involvement.
The conduct of gaming by a racing facility is subject to the approval of the
voters of the county in which the facility is located. If such approval is
obtained, the facilities may continue to conduct video lottery activities unless
the matter is resubmitted to the voters pursuant to a petition signed by at
least 5% of the registered voters, who must wait at least five years to bring
such a petition. If approval is denied, another vote on the issue may not be
held for a period of two years. Gaming was approved in Hancock County, the
location of Mountaineer Park, on May 10, 1994. If such approval were ever
revoked pursuant to the Lottery Act, it would have a material adverse effect on
the Company.
In order to qualify as a "video lottery game," as the term is defined under
the Lottery Act, a game must, among other things, be a game of chance, which
utilizes an interactive electronic terminal device allowing input by an
individual player. Such a game may not be based on any of the following game
themes: roulette, dice, or baccarat card games. Moreover, video lottery machines
must meet strict hardware and software specifications, including minimum and
maximum pay-out requirements, and must be connected to the Lottery Commission's
central control computer by an on-line or dial-up communication system. Only
machines registered with and approved by the Lottery Commission may offer video
lottery games.
Under the Lottery Act, racetracks that conduct gaming, as well as persons
who service and repair gaming machines and validation managers (persons who
perform video lottery ticket redemption services) are required to be licensed by
the Lottery Commission. The licensing application procedures are extensive and
include inquiries into, and an evaluation of, the character, background
(including criminal record, reputation and associations), business ability and
experience of an applicant and the
11
adequacy and source of the applicant's financing arrangements. In addition, a
racetrack applicant must hold a valid racing license, have an agreement
regarding video lottery revenues with the representatives of a majority of the
horsemen, the parimutuel clerks and the breeders for the racetrack and post a
bond or irrevocable letter of credit in such amount as the Lottery Commission
shall determine. Finally, no license will be granted until the Lottery
Commission determines that each person who has "control" of an applicant meets
all of the applicable licensing qualifications. Persons deemed to have control
of a corporate applicant include: (i) any holding or parent company or
subsidiary of the applicant who has the ability to elect a majority of the
applicant's board of directors or to otherwise control the activities of the
applicant; and (ii) key personnel of an applicant, including any executive
officer, employee or agent, who has the power to exercise significant influence
over decisions concerning any part of the applicant's business operations.
Video Lottery machines may only be operated in the grandstand building of a
racetrack where parimutuel wagering is permitted; provided, however, that if a
racetrack was authorized by the Lottery Commission prior to November 1, 1993 to
operate video lottery machines in another area of the racetrack's facilities,
such racetrack may continue to do so. Accordingly, Mountaineer Park may operate
video lottery machines at the Lodge as well as the racetrack.
The Lottery Act imposes extensive operational controls relating to, among
other matters, security and supervision, access to the machines, hours of
operation, general liability insurance coverage and machine location. In
addition, the Lottery Act prohibits the extension of credit for video lottery
play and requires Lottery Commission approval before any video lottery
advertising and promotional activities are conducted. The Lottery Act provides
for criminal and civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be
deposited with the Lottery Commission to be shared in accordance with the
provisions of the Lottery Act. Under such provisions, each racetrack must
electronically remit to the Lottery Commission its "gross terminal income"
(total cash deposited into video lottery machines less the value of credits
cleared for winning redemption tickets). To ensure the availability of such
funds to the Lottery Commission, each racetrack must maintain in its account an
amount equal to or greater than the gross terminal income to be remitted. If a
racetrack fails to maintain this balance, the Lottery Commission may disable all
of the racetrack's video lottery machines until full payment of all amounts due
is made. From the gross terminal income remitted by a licensee, the Lottery
Commission will deduct up to 4% to cover its costs of administering video
lottery at the licensee's racetrack and divide the remaining amounts as follows:
47% is returned to the racetrack, 30% is paid to the State's general revenue
fund, 15.5% is deposited in the racetrack's fund for the payment of purses, and
the remaining 7.5% is divided among tourism promotion, Hancock County, the
Racetrack Employees Pension Fund, and other programs.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any time.
Accordingly, the Company must comply with all gaming laws at all times. Should
either body consider the Company to be in violation of any of the applicable
laws or regulations, each has the plenary authority to suspend or rescind the
Company's licenses. While the Company has no knowledge of any non-compliance,
and believes that it is in full compliance with all relevant regulations, should
the Company fail to comply its business would be materially adversely affected.
NEVADA GAMING REGULATION. The laws, regulations, and supervisory procedures
of the Nevada Gaming Authorities are based upon declarations of public policy
which are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal
12
affairs and the safeguarding of assets and revenues, providing reliable record
keeping and requiring the filing of periodic reports with the Nevada Gaming
Authorities; (iv) the prevention of cheating and fraudulent practices; and
(v) to provide a source of state and local revenues through taxation and
licensing fees.
In order to operate non-restricted gaming at the Nevada Properties, the
Company, its Nevada subsidiaries and certain officers and directors are required
to be licensed or found suitable as operators and owners of a casino by the
Nevada Gaming Authorities. A gaming license requires the periodic payment of
fees and taxes and is not transferable. The Company has also been registered by
the Nevada Commission as a publicly traded corporation ("Registered
Corporation") and as such, it will be required periodically to submit detailed
financial and operating reports to the Nevada Commission and furnish any other
information that the Nevada Commission may require. No person may become a
stockholder of, or receive any percentage of profits from, the Company's Nevada
subsidiaries without first obtaining licenses and approvals from the Nevada
Gaming Authorities. In September of 1999, the Company and all relevant
affiliates obtained from the Nevada Gaming Authorities the necessary licenses or
approvals to engage in gaming activities at the Nevada Properties. With respect
to the licenses of the Nevada subsidiaries, the Nevada Gaming Authorities issued
licenses for a term of two years, after which the Company will have to apply for
and obtain permanent licenses in order to continue conducting gaming operations
at those locations.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Nevada Subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors, and certain key employees of the Nevada subsidiaries must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers,
directors, and key employees of the Company who are actively and directly
involved in gaming activities of the Nevada subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and in addition to their authority
to deny an application for a finding of suitability or licensing,, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Nevada subsidiaries, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or the Nevada subsidiaries to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and the Nevada subsidiaries must submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities, and similar financial transactions by the Company
and the Nevada subsidiaries will have to be reported to, or approved by, the
Nevada Commission.
If it were determined that the Company or its Nevada subsidiaries had
violated the Nevada Gaming Control Act or the regulations promulgated thereunder
(collectively, the "Nevada Act"), the gaming licenses could be limited,
conditioned, suspended, or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, the Nevada subsidiaries, the Company,
and the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
13
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than
10 percent of the Company's voting securities apply to the Nevada Commission for
a finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more then
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies, or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership,
or trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner of securities if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Nevada subsidiaries, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable
14
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation, or
similar transaction.
The Company must maintain a current stock ledger in Nevada, which may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company will also be required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act. Likewise, the Company may not
make a public offering of its securities without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire, or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors, and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates;
(ii) preserve the beneficial aspects of conducting business in the corporate
form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who is or proposes to become involved in a gaming venture
outside of Nevada is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $15,000 to pay the expenses of
investigation of the Nevada Board of their participation in such foreign gaming.
The revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages
15
in activities that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or employs a person in the foreign operation who has been
denied a license or finding of suitability in Nevada on the grounds of personal
unsuitability.
IMPACT OF RESORT HOTEL LEGISLATION. The Speedway Property and the Reno
Property are subject to legislation passed in 1991 by the Nevada Legislature,
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation are found in Section 463.1605 of the Nevada Revised Statutes
("NRS"). NRS 463.1605 essentially provides that the Nevada Commission shall not
approve a non-restricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel. A resort hotel is defined to include an establishment held out to the
public as a hotel with more than 200 rooms available for sleeping
accommodations, at least one bar with capacity for more than 30 patrons, and at
least one restaurant with capacity for more than 60 patrons. A county, city or
town may require resort hotels to meet standards in addition to those required
by NRS 463.1605 as a condition to issuance of a gaming license by the particular
county, city or town. The City of Reno has by ordinance adopted a 201-room
requirement for resort hotels. The Nevada Properties are exempt from NRS
463.1605 because these locations have held non-restricted gaming licenses. The
grandfathered exemptions, however, are lost in the event gaming is abandoned
within the meaning of the statute and local regulations. The March 1999
commencement of gaming operations at the Speedway Property and the April 1999
commencement at the Reno Property preserved the grandfathered status of the
Nevada Properties. Moreover, the Reno Property has more than 201 rooms and
therefore, under current ordinance, would qualify as a resort hotel. The failure
to keep the grandfathered exemptions to NRS 463.1605 and the local regulations
governing resort hotels (by abandonment of gaming operations) would have a
material adverse effect on the Company.
COMPLIANCE WITH OTHER LAWS. The Company and facilities are also subject to a
variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Nevada and West Virginia governing the serving
of alcoholic beverages. Mountaineer Park, Speakeasy Vegas and Speakeasy Reno
derive a significant portion of their other revenues from the sale of alcoholic
beverages. Any interruption or termination of the ability to serve alcoholic
beverages would have a material adverse effect on the Company's business,
financial condition and results of operations.
RESTRICTIONS ON SHARE OWNERSHIP AND TRANSFER. Unless prior approval of the
West Virginia Lottery Commission is obtained, the sale of five percent or more
of the voting stock of the license holder or any corporation that controls the
license holder or the sale of a license holder's assets (other than in the
ordinary course of business), or any interest therein, to any person not
previously determined by the Lottery Commission to have satisfied the licensing
qualifications, voids the license. With respect to the State of Nevada, any
beneficial holder of a Registered Corporation's voting securities (or rights to
acquire such securities), regardless of the number of shares owned, may be
required to file an application, be investigated and have his suitability as a
beneficial holder of the registered Corporation's voting securities determined
if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation. Nevada law requires any person
who acquires more than 5% of a Registered Corporation's voting securities to
report the acquisition to the Nevada Commission. The Nevada Act requires that
beneficial owners of more than 10% of the voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing.
APPLICATION OF ENVIRONMENTAL REGULATIONS. Generally, the Company and its
subsidiaries are subject to a variety of federal, state and local governmental
laws and regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. Failure to comply with such laws could result
16
in the imposition of severe penalties or restrictions on operations by
government agencies or courts that could materially adversely affect the
Company's operations. The Company does not have insurance to cover environmental
liabilities, if any, other than certain limited coverage with respect to the
Reno Property.
DISCONTINUED OPERATIONS
In January 1992, as part of its plan of reorganization, the Company, through
its wholly owned subsidiary, ExCal Energy Corporation, acquired from various
affiliates of the Company's president and chairman, Edson Arneault (prior to his
becoming an affiliate of the Company), oil and gas leases and wells in Ohio (the
"Ohio Interests") and an interest in oil wells in Michigan (the "Michigan
Interests"). Pursuant to an October 1993 Plan of Orderly Liquidation, in
December of 1994, the Company sold the Ohio Interests for notes valued at
approximately $426,000. In October of 1998, the Company exchanged the Michigan
Interests with an affiliate of its former joint venture partner for an
assignment of production payment in the amount of $2.5 million, which is
convertible at the Company's election into up to 25% of the equity of the
purchaser. In connection with the exchange of the Michigan Interests, the
Company likewise agreed to lend to the purchaser up to $500,000 for development
of the project and acquisition of related assets. At December 31, 2000, the
outstanding balance on such loan was $329,000, and the Company is no longer
obligated to advance additional sums. The loan is secured by substantially all
of the assets of the purchaser. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations";
Note 10 of the Notes to Consolidated Financial Statements; and "Certain
Relationships and Related Transactions".
ITEM 2. PROPERTIES
HOTEL, GAMING, RACING AND OTHER PROPERTY
Mountaineer Park is comprised of a thoroughbred racetrack and the Lodge
providing slot machine gaming, off-track wagering, dining and lounge, spa and
event facilities as well as facilities for swimming, tennis and other outdoor
activities covering approximately 1,143 acres (including approximately 912
undeveloped acres) in Chester, West Virginia. The Mountaineer Park facility
encompasses approximately 4,100 feet of frontage on the Ohio River. Mountaineer
Park also owns a 175-acre tract including the Woodview Golf Course in New
Cumberland, West Virginia, a 69-acre tract in New Cumberland slated for an RV
park and has contracts to purchase approximately 400 additional acres near the
resort.
The Speedway Property sits on approximately 6.1 acres and consists of one
two-story building and one three-story building with a total of 131 hotel rooms.
The Speedway Property also has a restaurant and lounge facilities, as well as
the newly constructed 15,600 square foot casino building with parking for 474
cars.
The Reno Property sits on approximately 1.74 acres in downtown Reno and
consists of an eleven-story tower that contains 236 of the Reno Property's hotel
rooms, with 26 rooms contained in a separate three-story structure. The Reno
Property is located at 6th and Lake Streets in Reno and has parking for
approximately 238 cars. The tower also has a restaurant, a deli and two bars.
The Reno Property has an 8000 square foot casino area and a convention facility
of approximately 7,900 square feet.
Substantially all of the Company's assets are pledged to secure the debt
evidenced by the Amended and Restated Credit Agreement dated as of August 15,
2000 among Mountaineer Park, Inc., Speakeasy Las Vegas, Speakeasy Reno, the
Company and Wells Fargo Bank, PNC Bank, N.A., National City Bank, and the Bank
of Scotland.
17
EQUIPMENT LEASES
At December 31, 2000, in connection with gaming and racing operations,
Mountaineer Park leased 601 gaming machines, a totalisator system, video tape
and closed circuit television systems and other equipment required for its
operations. At December 31, 2000, Speakeasy Las Vegas leased 219 slot machines,
outdoor signs, and coin-operated telephones required for its operations. At
December 31, 2000, Speakeasy Reno leased 178 slot machines, outdoor signs, a
dishwashing machine and coin operated telephones required for its business
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits, which have
arisen in the ordinary course of operating their businesses. The liability, if
any, arising from settlements or unfavorable outcomes of such lawsuits is
presently unknown.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on NASDAQ National Market under the
symbol "MNTG". On March 23, 2001, the closing trade price for the Company's
Common Stock was $5.25. As of March 23, 2001, there were approximately 779
stockholders of record of the Company's Common Stock.
The Company historically has not paid cash dividends and does not intend to
pay such dividends in the foreseeable future. Under the Company's and its
lenders' credit agreement, the Company is prohibited from paying any dividends
without the lenders' consent.
The following table sets forth the range of high and low bid price
quotations for the Common Stock for the two fiscal years ended December 31, 1999
and 2000 and for the period of January 1, 2001 through March 23, 2001. These
quotes are believed to be representative of inter-dealer quotations, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
HIGH LOW
-------- --------
Year Ended December 31, 1999:
First Quarter.......................................... $2.6875 $1.96875
Second Quarter......................................... 3.65625 2.5625
Third Quarter.......................................... 3.59375 2.50
Fourth Quarter......................................... 3.46875 2.375
Year Ending December 31, 2000:
First Quarter.......................................... 3.375 2.125
Second Quarter......................................... 5.125 2.25
Third Quarter.......................................... 9.0312 4.9375
Fourth Quarter......................................... 8.1875 4.00
Year Ending December 31, 2001
First Quarter (January 1, 2001 through March 23,
2001)................................................ 7.50 4.34375
18
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 2000, have been derived from the audited consolidated
financial statements of the Company, certain of which are included elsewhere in
this Report, and should be read in conjunction with those consolidated financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
FISCAL YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $170,574,000 $113,421,000 $83,110,000 $60,138,000 $40,204,000
Income from continuing
operations................ 15,061,000 6,995,000 10,423,000 4,694,000 1,155,000
Income per share from
continuing operations
Basic....................... .69 .33 .51 .24 .06
Assuming dilution........... .59 .28 .44 .22 .06
Discontinued operations
data:
Revenues.................... -- -- -- -- --
Loss from extraordinary
item...................... -- (756,000)
Loss from discontinued
operations................ -- -- (2,735,000) -- --
Loss per share from
discontinued operations in
1998; extraordinary item
in 1999...................
Basic....................... -- (.03) (.13) -- --
Assuming dilution........... -- (.03) (.11) -- --
BALANCE SHEET DATA:
Working Capital............. 12,311,000 1,419,000 12,457,000 9,785,000 3,897,000
Current Assets.............. 20,912,000 13,161,000 15,016,000 12,884,000 7,016,000
Current Liabilities......... 8,601,000 11,742,000 2,559,000 3,099,000 3,119,000
Total assets--continuing
operations................ 115,685,000 69,559,000 59,737,000 38,285,000 28,262,000
Net assets--discontinued
operations................ -- -- -- 2,616,000 2,616,000
Long-term obligations
(including capital
leases)................... 59,870,000 26,409,000 33,988,000 21,559,000 16,230,000
Total Liabilities........... 70,237,000 39,850,000 36,547,000 25,788,000 20,612,000
Total Stockholders'
Equity.................... 45,448,000 29,709,000 23,190,000 15,113,000 10,266,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 next fiscal year. Having obtained its Nevada gaming
licenses and taken over gaming operations at the Nevada properties in the
19
fourth quarter of 1999, the Company expects the financial performance of those
properties to improve as well.
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1999
Total revenues increased by $57.2 million from 1999 to 2000, an increase of
50.4%. Approximately $46.3 million of the increase was produced by gaming
operations at Mountaineer Park. Mountaineer Park's revenue from parimutuel
commissions increased by $1.3 million, or 29.6%; its lodging revenues increased
by $120,000, or 7.6%; food and beverage revenues increased by $1.1 million or
16.5% to $7.4 million; and other revenues increased by $627,000 or 25.4%.
The Nevada Properties contributed $10,811,000 in revenues in the year ended
December 31, 2000, a $7.6 million or 235.2% increase from revenues of $3,225,000
for the year ended December 31, 1999. 2000 was the first full year of gaming
operations for the Nevada Properties. The Company had no revenues from gaming
operations at either property during 1998 and through September 1999. On
October 1, 1999, the Company took over gaming operations at the two Nevada
Properties. The gaming revenue for 2000 was $6.2 million. The sources of the
remaining revenues for 2000 were $2.3 million from lodging (a $400,000 increase
over 1999), $2.1 million from food and beverage ($1.5 million increase from
1999) and $217,000 in other income.
GAMING OPERATIONS
Revenues from gaming operations increased 54.1% from $96.0 million in 1999
to $147.9 million in 2000. Management attributes the dramatic increase to the
following factors: (1) the increase in machine count from 1,355 to 1,905 by the
opening of the new Downtown Chicago Speakeasy Gaming Room in August of 2000;
(2) increases in foot traffic driven by new amenities as Mountaineer Park
becomes a destination resort; (3) the increasing contributions of gaming
revenues from the Nevada properties; (4) continued aggressive marketing and
(5) the growing popularity of our coin drop mechanical reel slot machines.
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 2000, the average daily win per coin drop machine was $312 compared
to $204 for other machines.
For the twelve months ended December 31, 2000, average daily net win for the
track-based gaming machines was $137 (including $0 for non-racing days when
those gaming rooms were closed), compared to $305 earned on the Lodge-based
terminals for a facility-wide average of $247 per machine per day. A summary of
the video lottery gross wagers less patron payouts ("net win") for the twelve
months ended December 31, 2000 and 1999 is as follows:
TWELVE MONTHS ENDED
DECEMBER 31
------------------------------
2000 1999
-------------- -------------
Total gross wagers............................. $1,028,786,000 $ 373,767,000
Less patron payouts............................ $ (887,141,000) $(278,435,000)
-------------- -------------
Revenue--video lottery operations.............. $ 141,645,000 $ 95,332,000
============== =============
Average daily net win per terminal (WV)........ $247 $200
============== =============
20
Since October 1, 1999, the Company has operated gaming at its two Nevada
Properties. The Speedway Property had gaming revenues of $4,244,000 for the year
ending December 31, 2000. The Reno Property's gaming revenues were $2.0 million
for the same period. The Company believes that with a more aggressive
advertising campaign and the building of a customer base, these amounts will
increase.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which means
the total amount wagered without regard to predetermined deductions, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place, or show bet. In parimutuel wagering,
patrons bet against each other rather than against the operator of the facility
or with pre-set odds. The total wagering handle is composed of the amounts
wagered by each individual according to the wagering activity. The total amounts
wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total wagering handle or total amounts wagered. The Company
earned an average commission rate of 20% in each of the past three years.
Parimutuel commissions for the twelve months ended December 31, 2000 and
1999 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Live racing parimutuel handle...................... $19,115,000 $19,824,000
Simulcast racing parimutuel handle................. 22,969,000 21,249,000
Less patrons' winning tickets...................... (33,231,000) (32,486,000)
----------- -----------
8,853,000 8,587,000
State and county parimutuel tax.................... (500,000) (485,000)
Purses and Horsemen's Association.................. (3,688,000) (3,598,000)
----------- -----------
Revenues--parimutuel commissions................... 4,665,000 4,504,000
Revenues--export simulcast......................... 1,172,000 --
----------- -----------
Revenues--parimutuel............................... $ 5,837,000 $ 4,504,000
=========== ===========
Because of the 32.2% increase in the average daily purses (from $83,750 in
1999 to $110,700 in 2000), increasing the number of live race days from the
mandated 210 days to 220 days, and the commencement of export simulcasting,
total revenues for parimutuel commissions for the year ending December 31, 2000
increased 29.6% in comparison to 1999. Live racing handle decreased 3.6% to
$19.1 million in 2000 from $19.8 million in 1999. Simulcast handle in 2000
increased by $1.7 million (8.1%) to $23.0 million in comparison to the same
period in 1999. Commissions for export simulcast, implemented on August 11,
2001, were $1.2 million. Management attributes the increase in parimutuel
revenue largely to advent of exporting of the simulcast signal and the
additional 10 live racing days.
To date, the results of export simulcasting have outpaced management's
expectations. Management expected average daily handle including export
simulcast of $250,000 to $300,000 during a ramp up period. During the fourth
quarter of 2000, the average daily handle was in fact $481,000. For the week
ending December 27, 2000, the daily average handle for export simulcast was
$776,000. Accordingly, management is cautiously optimistic that its export
simulcast business will continue to grow and that results from racing operations
will improve materially. The commencement of export simulcasting did involve
substantial capital improvements (approximately $4-5 million). In December of
1998,
21
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 statue. 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. The Racing Commission then approved the cost sharing
agreement. Accordingly, the Company commenced the exporting simulcasting signals
on August 11, 2000. See "Operating Costs," "Parimutuel Commission Operating
Costs," and "Liquidity and Sources of Capital."
LODGING, FOOD AND BEVERAGE
For the year ended December 31, 2000, revenues from lodging, food and
beverage were $13.5 million, which represents an increase of $3 million or 29.0%
compared to revenues of $10.4 million for the same period in 1999. Company wide,
restaurant, bar and concession facilities produced $2.5 million of the revenue
increase, while lodge revenues increased $460,000. At Mountaineer Park, food and
beverage revenues increased $1.1 million to $7.4 million in 2000. Management
believes that increased revenues from lodging, food and beverage at Mountaineer
Park resulted primarily from enhanced gaming facilities and related advertising,
which in turn led to larger patron volume. Of the $3.0 million increase in food,
beverage and lodging revenue, 60% or $1.8 million can be attributed to the
Nevada Properties.
OTHER OPERATING REVENUES
Other revenues increased by $854,000, or 33.7% from 1999 to 2000. Other
sources of revenues consist primarily of non-core businesses such as admission,
program sales, golf, special events, such as concerts and professional boxing
matches, check cashing and ATM services. Due to the opening of the "Harv", the
entertainment schedules was expanded which caused a $232,000 increase in ticket
sales in 2000 to $502,000. Revenues from ATM service fees were $668,000 in 2000
compared to $363,000 in 1999. Upon opening the new Downtown Chicago Gaming Room,
four additional ATM machines were installed to handle the resulting increase in
patronage. Also, commissions from the sale of West Virginia Lottery tickets
increased by $53,000 to $151,000 in 2000.
OPERATING COSTS
The Company's $57.2 million or 50.4% increase in revenues was accompanied by
higher total costs, as directly related expenses increased by $36.3 million or
49.3% to $109.9 million in 2000 compared to 1999. Approximately $29.8 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
$1.1 million, while cost of lodging and food and beverage increased by
$4.2 million. Of the 44.2% increase in the cost of food and beverage and
lodging, $2.3 million can be attributed to the Nevada Properties. The cost of
other income increased by $1.1 million in 2000 to $3.6 million. The increase is
due primarily to higher operating costs of the Harv, which is a larger facility
that enables Mountaineer Park to attract more popular (and therefore more
expensive) entertainers.
22
Operating Costs and gross profits earned from operations for the
twelve-month periods ended December 31, 2000 and 1999 are as follows:
YEARS ENDED
DECEMBER 31
--------------------------
2000 1999
------------ -----------
Operating Costs
Gaming............................................ $ 86,275,000 $56,431,000
Parimutuel Commissions............................ 6,410,000 5,300,000
Lodging, Food and Beverage........................ 13,612,000 9,441,000
Other............................................. 3,562,000 2,425,000
------------ -----------
Total Operating Costs........................... $109,859,000 $73,597,000
============ ===========
YEARS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Gross Profit (Loss)
Gaming............................................. $61,615,000 $39,521,000
Parimutuel Commissions............................. (573,000) (796,000)
Lodging, Food and Beverage......................... (152,000) 991,000
Other.............................................. (175,000) 108,000
----------- -----------
Total Gross Profit (Loss)........................ $60,715,000 $39,824,000
=========== ===========
GAMING OPERATING COSTS
Costs of gaming revenue for 2000 increased by $29.8 million or 52.9% from
$56.4 million to $86.3 million compared to the year ended December 31, 1999. The
increase is in proportion to the 54.1% increase in revenue. Costs of gaming
revenue in West Virginia increased by $26.1 million or 47.1% to $81.6 million in
2000, reflecting an of $24.8 million in statutory expenses directly related to
the 48.6% increase in gaming revenues. See Note 12 of the Consolidated Financial
Statements. Gaming machine lease expense decreased by $694,000 in comparison to
1999 primarily because of a change from operating leases to capital leases.
Wages and benefits as well as supplies expense increased from 1999 to 2000 by
$1.7 million in response to higher levels of patron play, patron volume and the
additional personnel required for coin drop slot operations compared to other
machines. There was $4.7 million of gaming expense in Nevada in 2000, the first
full year of gaming operations.
Under the Lottery Act, the following statutory rates paid to certain
entities are in effect.
State of West Virginia...................................... 30.0%
Hancock County.............................................. 2.0%
Horseman's Association (racing purses)...................... 15.5%
Other....................................................... 5.5%
----
Total Statutory Payments.................................. 53.0%(1)
====
- ------------------------
(1) Excludes up to a 4% administrative fee charged by the State of West Virginia
based on revenues. In addition, rates are applied to revenues net of this 4%
administrative fee. See Note 12 to the Consolidated Financial Statements of
the Company.
23
Statutory costs and assessments excluding the State Administrative fee for
the respective twelve-month periods are as follows:
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
2000 1999
----------- -----------
Employee Pension Fund.............................. $ 700,000 $ 474,000
Horseman's Purse Fund.............................. 21,695,000 14,703,000
----------- -----------
Subtotal......................................... 22,395,000 15,177,000
State of West Virginia............................. 41,990,000 28,457,000
Tourism Promotion Fund............................. 4,199,000 2,846,000
Hancock County..................................... 2,799,000 1,897,000
Stakes Races....................................... 1,400,000 949,000
Miscellaneous State Projects....................... 1,400,000 949,000
----------- -----------
Total............................................ $74,183,000 $50,275,000
=========== ===========
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel operations increased by $1.1 million to approximately $6.4 million in
2000. Costs that can be directly linked to export simulcasting accounted for
$678,000 of this increase. Also due to the demand for our signal, the racing
schedule was extended to 220 days. This caused a related increase in cost of
payroll and benefits of approximately $150,000. Purse expense (consisting of
statutorily determined percentages of live racing handle) decreased by $42,000,
or 3.7%, to $1.9 million in 2000, which is consistent with the 3.6% decrease in
live handle. (Additional contributions to racing purses equal to 15.5% of net
win from video lottery operations as required by statute are charged to gaming
operations.) 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
$200,000 to $2.4 million in 2000 consistent with the 8.1% increase in
simulcasting wagers. Parimutuel commissions revenue is reported net of these
expenses in the Consolidated Statement of Operations.
Exclusive of the costs of the expanded racing schedule, direct and indirect
wages and employee benefits attributable to racing operations increased by
$134,000 to approximately $3.5 million in 2000 due to expanded hours of OTB
operations trackside and a contractual increase in salaries.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from
$9.4 million in 1999 to $13.6 million in 2000. Of the $4.2 million increase in
expenses, $2.3 million is attributable to the Nevada Properties. Company wide,
food and beverage direct costs increased by $3.7 million to $10.5 million for a
loss of $1.1 million in 2000. Lodging direct costs totaled $3.1 million for 2000
compared to $2.7 million in 1999 resulting in a gross profit of $905,000.
The Nevada Properties reported an operating loss from food, beverage and
lodging of $304,000 compared to a gross profit of $207,000 for the year ending
December 31, 1999. These increases in costs are tied to increased food costs of
$900,000 due to specials aimed at driving casino traffic. Also due to the
increase patronage, (sales increased by $1.8 million) salaries, wages and
related benefits increased by $1.1 million.
Mountaineer Park's gross profit for these profit centers was $150,000 in
2000 compared to $800,000 in 1999. The decline in gross profit is attributable
to several factors, including increased cost for wages and employee benefits
($782,000), a 1.7% increase in the ratio of cost of food and beverage
24
to sales, translating into $500,000 increase in costs, and an increase in the
cost of food and beverage supplies ($346,000) due to increased sales volume.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
special event ticket sales, racing programs, golf and check cashing, increased
by 46.9% from $2.4 million in 1999 to $3.6 million in 2000. These increases can
be tied to the opening of The Harv and the accompanying increase in the number
of special events held in 2000.
MARKETING AND PROMOTIONS EXPENSE
Company wide, marketing and promotions expense increased to $9.7 million for
the year ended December 31, 2000 from $5.0 million for 1999. Of this $4.7
increase in marketing and promotions, $2.2 million is attributable to the Nevada
Properties. In 1999, the Nevada Properties had $200,000 in marketing and
promotional cost. Marketing and promotions expenses at Mountaineer Park
increased from $4.7 million in 1999 to $7.2 million in 2000. The increase can be
attributable to (1) the grand opening of The Harv and the nine special events
held in The Harv ($700,000); (2) the increase in prizes to member of the
Frequent Player's Club ($1.1 million); (3) the increase in other promotional
events in 2000 ($450,000); and (5) an increase in salaries and related employee
benefits ($265,00).
GENERAL AND ADMINISTRATIVE EXPENSES AND INTEREST
General and administrative expenses for the year ending December 31, 2000
increased by $4.5 million, or 31.0% from $14.4 million in 1999. General and
administrative costs for 2000 constituted 11.1% of gross sales in comparison to
12.7% for 1999. The dollar increase in general and administrative expense is
attributable to: (1) $1.4 million increase in general and administrative costs
generated by the Nevada Properties; and (2) increases in costs of security,
surveillance, housekeeping and maintenance staffs to accommodate Mountaineer
Park's larger crowds and expanded facilities ($2.3 million).
Interest expense (which does not include loss on debt extinguishment
reported as an extraordinary item) decreased by $1,213,000 compared to 1999.
This decrease to $3.1 million is the result of the December 1999 refinancing and
the August 2000 amended and restatement of the Company's credit facility, which
reduced the company's interest rate from 13% to 7.1875% as of March 8, 2001. See
"Liquidity and Sources of Capital."
Depreciation and amortization costs increased by 13.6% from $5.5 million in
1999 to $6.3 million in 2000. This increase reflects the $37.2 million increase
in fixed assets other than for construction in progress and the capital leasing
of new gaming devices. Depreciation for the Nevada Properties was $1.9 million.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
Total revenues increased by $30.3 million from 1998 to 1999, an increase of
36.5%. Approximately $26.3 million of the increase was produced by gaming
operations at Mountaineer Park. Mountaineer Park's revenue from parimutuel
commissions decreased by $292,000, or 6.1%; its lodging revenues increased by
$83,000, or 5.6%; food and beverage revenues increased by $1.3 million or 26.8%
to $6.3 million; and other revenues increased by $670,000 or 37.2%.
The Nevada Properties contributed $3.2 million in revenues in the year ended
December 31, 1999, a $2.2 million or 208.4% increase from revenues of $1,046,000
for the year ended December 31, 1998. In 1998, the Speedway Property was
generally dark during renovation of hotel rooms and food and beverage facilities
and construction of the 15,600 square foot casino building and parking lots. The
25
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 during
1998 and 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 1999 was $621,000. The sources of the remaining revenues
for 1999 were $1.9 million from lodging, $619,000 from food and beverage and
$60,000 in other income.
GAMING OPERATIONS
Revenues from gaming operations increased 39.1% from $69.0 million in 1998
to $96.0 million in 1999. Management attributes the dramatic increase to the
following factors: (1) the increase in machine count from 1,200 to 1,300 by
introducing 100 progressive machines; (2) the introduction of 400 coin drop slot
machines in November 1999; (3) the July 1998 increase in ratio (from 1:1 to 2:1)
of gaming machines located at the Lodge as compared to the racetrack building;
(4) continued aggressive marketing; and (5) the expanded hours of operation for
the track based gaming machines commencing in June of 1999 (resulting in a 37%
increase in the net win per machine per day for such machines).
In December 1998, Mountaineer Park leased 100 more gaming machines (62 in
the Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive slot banks. These machines were
placed in service on December 17, 1998 and therefore did not have a material
impact on operations for the year ended December 31, 1998.
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. During November and December of 1999, the average daily win per coin
drop machine was $251 compared to $147 for other types of machines.
For the twelve months ended December 31, 1999, average daily net win for the
track-based slots was $96 (including $0 for days when the track-based gaming
rooms were closed), compared to $261 earned on the Lodge-based terminals for a
facility-wide average of $200 per machine per day. A summary of the video
lottery gross wagers less patron payouts ("net win") for the twelve months ended
December 31, 1999 and 1998 is as follows:
TWELVE MONTHS ENDED
DECEMBER 31
-----------------------------
1999 1998
------------- -------------
Total gross wagers............................. $ 373,767,000 $ 240,164,000
Less patron payouts............................ $(278,435,000) $(171,172,000)
------------- -------------
Revenue--video lottery operations.............. $ 95,332,000 $ 68,992,000
============= =============
Average daily net win per terminal............. $200 $171
============= =============
Since October 1, 1999, the Company has operated gaming at its two Nevada
Properties. The Speedway Property had gaming revenues of $379,000 for the three
months ending December 31, 1999. The Reno Property's gaming revenues were
$242,000 for the same period.
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PARIMUTUEL COMMISSIONS
Parimutuel commissions for the twelve months ended December 31, 1999 and
1998 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
-------------------------
1999 1998
----------- -----------
Live racing parimutuel handle...................... $19,824,000 $21,594,000
Simulcast racing parimutuel handle................. 21,249,000 22,217,000
----------- -----------
(32,486,000) (34,661,000)
Less patrons' winning tickets...................... 8,587,000 9,150,000
State and county parimutuel tax.................... (485,000) (494,000)
Purses and Horsemen's Association.................. (3,598,000) (3,860,000)
----------- -----------
Revenues parimutuel commissions.................... $ 4,504,000 $ 4,796,000
=========== ===========
Despite a 26.9% increase in the average daily purses (from $66,000 in 1998
to $83,750 in 1999) and higher patron volume, total revenues for parimutuel
commissions for the year ending December 31, 1999 decreased 6.1% in comparison
to 1998. Live racing handle decreased 8% to $19.8 million in 1999 from
$21.6 million in 1998. Simulcast handle in 1999 decreased by $968,000 (4%) to
$21.2 million in comparison to the same period in 1998. 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 be