MTR GAMING GROUP INC - 10-Q Quarterly Report

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

DELAWARE (State or other jurisdiction of incorporation)		84-1103135 (IRS Employer Identification Number)
STATE ROUTE 2 SOUTH, P.O. BOX 358, CHESTER, WEST VIRGINIA 26034 (Address of principal executive offices)

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

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

ITEM 1—FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(unaudited)

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

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

The accompanying unaudited condensed and consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included herein. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.

On January 1, 2002, the Company adopted Financial Accounting Standards Board Statement (SFAS) No. 142, "Goodwill and Other Intangible Assets". Under the new rules goodwill will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. Application of the non-amortization provisions of SFAS No. 142 resulted in an increase in net income of $62,500 and $125,000 for the three months and six months ended June 30, 2002, respectively and is expected to increase net income for 2002 by $250,000. The Company performed the first of its required impairment tests of goodwill and indefinite-lived intangible assets during the three months ended June 30, 2002. The results of this test indicated that no transition impairment charge is necessary.

On January 1, 2002, the Company also adopted Financial Accounting Standards Board Statement (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations", for a disposal of a segment of a business. The adoption of SFAS No. 144 did not have a significant impact on the earnings or the financial position of the Company for the three or six months ended June 30, 2002.

On January 1, 2001, the Company adopted Financial Accounting Standards Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in Other Comprehensive Income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. The adoption of SFAS No. 133 on January 1, 2001 resulted in a pretax loss of $139,000 ($92,000 loss net of taxes) from the cumulative effect of this accounting change being charged to earnings. The terms of the Company's financing require the Company to maintain an interest rate cap agreement until December 31, 2003 to manage interest rate risk and to lower its cost of borrowing. This contract falls within the scope of SFAS No. 133. The effect of adoption of the new accounting pronouncement was not material to the Company's results of operations or financial position.

As more fully discussed in Management's Discussion and Analysis, in April 2001 West Virginia amended its video lottery statute. The changes included eliminating the reconciliation and refund of the unused portion of the administrative fee; establishing a new distribution scheme for the portion of the racetrack's net win in excess of the racetrack's net win for the twelve months ending June 30, 2001 (referred to as Excess Net Terminal Income); establishing a 10% surcharge after deducting the administrative fee on Excess Net Terminal Income; and creating a separate capital reinvestment fund for each racetrack to which the State will contribute 42% of the surcharge applicable to each track. Generally, for each dollar a racetrack expends on eligible capital improvements for the racetrack and adjacent property, the track will receive a dollar from the capital reinvestment fund. Depending upon the amount of a project, any amount expended in excess of the balance in the capital reinvestment fund may be carried forward three subsequent years. The Company recognizes amounts due from the capital reinvestment fund as qualifying capital expenditures are identified. The Company's qualifying capital expenditures exceeded amounts contributed to the capital reinvestment fund at June 30, 2002 by approximately $36 million. Accordingly, the Company recognized a receivable of $1,580,000 representing its share of the capital reinvestment fund for the three months ended June 30, 2002.

The surcharge and the reduction in the net win retention percentage as a result of the new distribution scheme, after consideration of the amounts due from the capital reinvestment fund discussed in the preceding paragraph, had the affect of increasing statutory payments included in the cost of gaming for the three months and six months ended June 30, 2002 by approximately $1.9 million.

The Company has applied to the Pennsylvania State Horse Racing Commission for a license to build a thoroughbred horse racetrack and conduct parimutuel wagering in Erie, Pennsylvania. In the event the Company does not obtain the license, it will have to evaluate for recoverability and impairment certain deferred costs aggregating approximately $1.6 million consisting of land acquisition costs (other than the advance discussed below) and other costs relating to obtaining the license. In addition the Company would have to evaluate its purchase and sale or development alternatives regarding the property discussed below.

On March 22, 2002, the Company entered into an agreement whereby the Company advanced $2 million to a third-party for the purpose of acquiring certain real property in Erie County, Pennsylvania as an alternative site for the proposed racetrack. The loan agreement matures on the earliest of March 31, 2005, the date on which the Company exercises its option to purchase the property for One Dollar ($1) plus the cancellation of the indebtedness, or the date on which the borrower puts the property to the Company in lieu of the debt. Interest shall accrue at a floating rate equal to the Federal short-term rate as periodically announced by the Internal Revenue Service. The loan is secured by a first lien on the property and all of the outstanding shares of the borrower.

The advance and other land acquisition and licensing costs are included in deposits and other in the accompanying balance sheet.

During the three months ended June 30, 2002 holders of previously issued options to purchase the Company's common stock exercised options to purchase a total of 118,000 shares at prices ranging from $2.00 to $7.30 per share by delivery of cash proceeds totaling $682,800. During the three months ended June 30, 2001 holders of previously issued options exercised options to purchase 2,996,502 shares of the Company's common stock at prices ranging from $0.80 to $4.875 per share by delivery of cash proceeds and promissory notes totaling $4,197,269.

During the three months ended June 30, 2002, the Company did not grant any options to purchase shares of the Company's common stock.

In April of 2001, the company repurchased 10,000 shares of its common stock in the open market for $52,380 pursuant to its April 2000 $3 million stock repurchase program. The repurchased shares were cancelled and returned to authorized but unissued status.

The above-referenced transactions are reflected in the number of diluted shares outstanding for purposes of calculating earnings per share in the accompanying unaudited statements of operations.

The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109 (Statement 109), "Accounting for Income Taxes". Under Statement 109, an asset and liability method is used whereby deferred tax assets and liabilities are determined based upon temporary differences between bases used for financial reporting and income tax reporting purposes. Income taxes are provided based on the enacted tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. There is no valuation allowance at June 30, 2002 and 2001. The Company and its subsidiaries file a consolidated federal income tax return.

On April 3, 2001, in connection with the exercise of nonqualified stock options, Edson R. Arneault, Robert L. Ruben, Robert A. Blatt, James V. Stanton, and William D. Fugazy, Jr., all of whom were directors of the Company, delivered to the Company promissory notes in the amounts of $200,998.50, $79,499.25, $79,499.25, $174,999.25, and $174,999.25, respectively. The promissory notes were full recourse obligations, bore interest at 8% per year (the Prime Rate on that date), and were due and payable at the end of a two-year term. The notes were secured by the shares of common stock (450,000 in the aggregate) underlying the options. All of the promissory notes referred to above, including interest, have been repaid in full in cash. Currently, the Company has no loans outstanding to related parties.

In April 2002 the Company exercised the "Greenshoe" option contained in its Credit Agreement, thereby increasing the aggregate credit line from $75 million to $85 million.

On June 27, 2002, the Company entered into the Second Amended and Restated Credit Agreement with its bankers to increase the credit line from $85 to $100 million; increase the permitted borrowing for equipment from $13 million to $21 million; increase the amount permitted for investment/acquisitions from $15 million to $50 million; and increase the amount that can be invested for the expansion of Mountaineer by $35 million. The amendment also revised the commencement of the scheduled commitment reduction date from March 2003 to June 2003. This facility allows for interest only payments through the commencement of the scheduled commitment reduction at which time the loan balance is to be amortized to $60 million over the remainder of the term, at which point the entire balance becomes due and payable.

During the three months ended June 30, 2002 the Company borrowed an additional $14 million under its Credit Agreement. The interest rate on these borrowings based upon the Base Rate Loan classification ($4 million) was 5.75% and the Libor loan classification ($10 million) was 4.25%.

On June 12, 2001, Mountaineer Park, Inc. entered an agreement with Just-Mark Construction, Inc. for the construction of a 260-room hotel (by amendment, the number of rooms was later reduced to

258). In order to accommodate the fast-track building schedule, the agreement was designed to be amended (through change orders) as to scope of work and contract price for each phase of the development as construction progressed. For example, phase I covered the basic structure, phase II mechanical, electrical and plumbing, and phase III interior finishes. The contract as amended likewise carved out from the scope of work interior finishes for two "super suites," the relocation of the spa to the hotel building, and the construction of the Mahogany Room bar and retail plaza, which the Company completed separately. To date, the Company has paid Just-Mark $23.5 million for work completed.

During the second half of the year, the Company expects to make payments of $3.1 million to $4.0 million related to the construction of the hotel, super suites, spa relocation, and retail plaza. See "Liquidity and Sources of Capital—Capital Improvements."

On December 11, 2001, Mountaineer Park, Inc. entered into an agreement to purchase 256 acres of real property in Hancock County, West Virginia near Mountaineer Park. The purchase is expected to close in December 2002 (extended from original date of July 2002) with a payment of $3,500,000.

The Company is party to various lawsuits, which have arisen in the normal course of its business. The liability arising from unfavorable outcomes of lawsuits is not expected to have a material impact on the Company's financial condition or financial results.

On July 1, 2002 the Company opened an additional gaming room which houses the 500 video lottery machines previously approved by the West Virginia Lottery Commission on April 30, 2002. The Company financed the acquisition of the 500 video lottery machines pursuant to lease agreements for $4,431,358 with PNC Leasing under the master lease agreement. The lease agreements have terms of three years with an interest rate of 4.49%.

On July 31, 2002 the Board of Directors authorized the repurchase of up to an additional $3 million of the Company's outstanding shares of common stock. The shares, which may be purchased from time to time in open market transactions, depending on price, availability and the Company's cash position, will be cancelled and returned to authorized but unissued status. As of August 12, 2002, the Company had repurchased 270,000 shares for a total of $2,241,604. Since the start of the program in 2000, the Company has repurchased a total of 685,600 shares of common stock for a total cost of $5,237,516.

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

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" as well as the "Notes to Condensed and Consolidated Financial Statements" regarding the Company's strategies, plans, objectives, expectations, and future operating results are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. Actual results could differ materially based upon a number of factors including, but not limited to, weather conditions or road conditions limiting access to the Company's properties, adverse changes in West Virginia video lottery laws or the rates of taxation of video lottery operations, market acceptance of the Company's new hotel and related amenities at Mountaineer, which will involve higher price points than the Company's prior offerings, legalization of new forms of gaming in the Company's target markets, which would lead to increased competition, other competition, general economic conditions affecting the resort business, dependence upon key personnel, timely delivery and installation of slot machines, conversion of slot machines to higher bet limits, which is dependent upon vendors over whom the Company has no control, licensing and regulatory approval of the Company's planned Pennsylvania racetrack and successful cross-marketing of that property with Mountaineer, changes in the number of diluted shares, leverage and debt service, expiration or non-renewal of gaming licenses, costs associated with maintenance and expansion of Mountaineer Park's infrastructure to meet the demands attending increased patronage, costs and risks attending construction, expansion of operations, market acceptance of the Company's Nevada Properties and maintenance of "grandfathered' status of those properties, cyclical nature of business, limited public market and liquidity, shares eligible for future sale, impact of anti-takeover measures, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings and press releases. The Company does not intend to update publicly any forward-looking statements, except as may be required by law.

The Company, through wholly owned subsidiaries, owns and operates the Mountaineer Racetrack and Gaming Resort ("Mountaineer Park") in Chester, West Virginia, the Ramada Inn and Speedway Casino in North Las Vegas, Nevada (the "Speedway Property"), and the Ramada Inn in Reno, Nevada (the "Reno Property" or, collectively with the Speedway Property, the "Nevada Properties"). The Company's subsidiary, Presque Isle Downs, Inc., has applied to the Pennsylvania Horse Racing Commission for a license to build a thoroughbred racetrack in Erie, Pennsylvania.

The Company anticipates that Mountaineer Park, particularly through its gaming operations, will continue to be the dominant factor in the Company's financial condition. The three months ended June 30, 2002 was the third consecutive quarter in which the Speedway Property recorded positive EBITDA. The Company closed the casino at the Reno Property in July 2001 due to poor financial performance and listed the Reno Property for sale in April 2002. The Company plans to continue to operate the hotel through the summer months while it is on the market.

Despite record revenues, gaming revenues at Mountaineer Park were below the Company's expectations. Management attributes the shortfall to several factors including a smaller than expected contribution from slot machines that accept the increased bet limit (as compared to statistics from other gaming markets and an independent analysis of Mountaineer's market), weather conditions, and

at various points during the second quarter, certain slot machines that were not available for use by customers due to construction and the redesign of gaming areas. Moreover, management's expectation that a greater percentage of revenue growth will be realized as operating income and net income when the convention center, hotel and related amenities have been completed and absorbed has not yet materialized. To the contrary, during the first half of 2002, and particularly during the second quarter, disruption from construction and inefficiencies inherent in commencing new operations had a negative impact on the Company's margins. Nevertheless, management continues to believe that efficiencies will improve incrementally as the Company's business related to the new amenities matures. All of these amenities are designed to drive parimutuel and slot wagering, particularly during what have traditionally been off-peak operating hours.

The Company earned revenues for the respective three-month periods in 2002 and 2001 as shown below:

	THREE MONTHS ENDED JUNE 30
	2002		2001
OPERATING REVENUES
Gaming	$	58,031,000	$	47,208,000
Parimutuel commissions		2,597,000		2,087,000
Food, beverage and lodging		4,725,000		4,077,000
Other		1,775,000		919,000

Total revenues	$	67,128,000	$	54,291,000

For the second quarter of 2002, the Company's total revenues increased by $12.8 million, an increase of 24% compared to the same period in 2001. Approximately $11.3 million of the increase was produced by gaming operations at Mountaineer Park. Total commissions from parimutuel wagering increased $510,000 or 24%. Mountaineer's lodging revenues increased by $597,000 or 125%; food and beverage revenues increased by $440,000 or 19% from $2.4 million to $2.8 million; and other revenues at Mountaineer Park increased by $847,000 or 94%. The Nevada Properties contributed $2.6 million in gross revenue, a decrease of $826,000 as compared to the same period in 2001 due principally to the closing of the casino in Reno during July 2001. The Nevada Properties' revenues consisted of $1.7 million from gaming, $465,000 from lodging, $370,000 from food and beverage, and $26,000 from other revenues in the second quarter of 2002. Total revenues generated by the Speedway Property were $2.3 million, while the Reno Property's total revenues were $262,000. The increase in Speedway Property revenue was 7% from $2.1 million in 2001, while the Reno Property had a decrease in revenues of $970,000 from $1.2 million in 2001. The decrease in total revenues for the Nevada Properties and Reno Property is attributable to the closing of the casino and restaurant at the Reno Property during July 2001.

The Company's $12.8 million increase in revenues resulted in higher total costs, as directly related expenses increased by $10.9 million to $45.0 million in the second quarter of 2002 compared to the same period in 2001. Costs of gaming operations, including applicable state taxes and fees increased approximately $9.3 million. Pari-mutuel direct cost increased by $328,000, while cost of food, beverage and lodging increased by $268,000. West Virginia food and beverage operations and lodging accounted

for $452,000 and $185,000 respectively of the increase in the cost of food, beverage and lodging. These increases were partially offset by a decrease in the cost of food, beverage and lodging at the Nevada Properties of $369,000, due principally to the closing of the casino and restaurant at the Reno Property during July 2001. The cost of other income increased by $991,000 in 2002 to $2.2 million. The increase is due primarily to the opening of the Convention Center in August 2001 and cost increases associated with the Spa and Fitness Center and additional shows and special events at the Harv.

Operating costs and gross profits earned from operations for the three-month periods ended June 30, 2002 and 2001 are as follows:

	THREE MONTHS ENDED JUNE 30
	2002			2001
Operating Costs:
Gaming operations	$	36,491,000		$	27,163,000
Pari-mutuel commissions		2,015,000			1,687,000
Food, beverage and lodging		4,321,000			4,053,000
Other revenues		2,215,000			1,224,000

Total Operating Costs	$	45,042,000		$	34,127,000

Gross profit (loss):
Gaming operations	$	21,540,000		$	20,045,000
Parimutuel commissions		582,000			400,000
Food, beverage and lodging		404,000			24,000
Other revenues		(440,000	)		(305,000	)

Total Gross Profit	$	22,086,000		$	20,164,000

Revenues from gaming operations increased 23% from $47.2 million in 2001 to $58.0 million in 2002. This increase is attributed to the following factors: (1) the increase in machine count at Mountaineer Park from an average of 1,896 during the second quarter of 2001 to an average of 2,456 during the same period in 2002; (2) the increase in patronage driven by new amenities as Mountaineer Park develops into a destination resort; (3) marketing and promotion campaigns; and (4) changing game themes and equipment to meet changing patron interest and demand. The increase in gaming revenue was offset, though not materially, by the fact that the Reno Property's casino generated gaming revenue during the second quarter of 2001 but was closed throughout the second quarter of 2002.

A summary of gaming operations revenue for Mountaineer Park for the three months ended June 30, 2002 and 2001 is as follows:

	THREE MONTHS ENDED JUNE 30
	2002			2001
	(2,500 terminals)			(1,905 terminals)
Total gross wagers	$	551,150,000		$	401,674,000
Less patron payouts		(494,810,000	)		(356,601,000	)

Revenue-Gaming operations	$	56,340,000		$	45,073,000

Average daily net win per terminal	$	252		$	261

In the second quarter of 2002, the average net win per day for coin drop machines at Mountaineer Park was $279 and $183 for ticket terminals. For the same period, average daily net win for the track-based machines was $86 while the Lodge-based terminals earned $292 for a facility-wide average of $252 per machine per day. At the end of the second quarter of 2002 and 2001, Mountaineer Park operated a total of 2,500 and 1,905 slots, respectively.

Management notes that average daily net win per terminal during the first quarter of 2002 (with approximately the same number of terminals as during the second quarter of 2002) was $236. Accordingly, management believes that the apparent decrease in average daily net win per terminal comparing the second quarter of 2002 to 2001 reflects the absorption of a 31.2% increase in machine count and therefore indicates a strong upward trend in gaming revenues at Mountaineer Park.

The Company began operating gaming at its two Nevada Properties in October 1999, but discontinued gaming at the Reno Property in July 2001. The Speedway Property had gaming revenues of $1.7 million for the three months ended June 30, 2002, a 9.7% increase from $1.5 million for the same period in 2001. As a result of closing the casino at the Reno Property in July 2001 there were no gaming revenues for the three months ended June 30, 2002 as compared to revenues of $595,000 for the same period in 2001.

Costs of gaming operations increased by $9.3 million, or 34%, to $36.5 million for the three months ended June 30,

SECTION
PART I FINANCIAL INFORMATION
Item 1—Financial Statements		1
Condensed and Consolidated Balance Sheets at June 30, 2002 and December 31, 2001.		1
Condensed and Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001		2
Condensed and Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001.		3
Notes to Condensed and Consolidated Financial Statements		4
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3—Quantitative and Qualitative Disclosures about Market Risk		24
PART II OTHER INFORMATION
Item 1—Legal Proceedings		25
Item 2—Changes in Securities		25
Item 3—Defaults upon Senior Securities		25
Item 4—Submission of Matters to a Vote of Securities Holders		25
Item 5—Other Information		25
Item 6—Exhibits and Reports on Form 8-K		25
SIGNATURE PAGE		27
Exhibit Index		28

	JUNE 30 2002		DECEMBER 31 2001
ASSETS
Current assets:
Cash and cash equivalents	$	12,565,000	$	10,914,000
Restricted cash		724,000		724,000
Accounts receivable net of allowance for doubtful accounts of $70,000 and $60,000		3,588,000		2,418,000
Accounts receivable — Lottery Commission		1,580,000		—
Inventories		1,916,000		1,649,000
Deferred financing costs		873,000		692,000
Prepaid taxes		—		1,218,000
Deferred income taxes		149,000		149,000
Other current assets		1,957,000		1,511,000

Total current assets		23,352,000		19,275,000
Property and equipment, net		164,389,000		137,533,000
Other assets:
Excess of cost of investments over net assets acquired		1,492,000		1,492,000
Deferred income taxes		2,033,000		2,033,000
Deferred financing costs, net of current portion		1,744,000		1,744,000
Deposits and other		4,620,000		2,000,000

	$	197,630,000	$	164,077,000

LIABILITIES
Current liabilities:
Accounts payable	$	3,921,000	$	4,142,000
West Virginia Lottery Commission payable		1,479,000		1,230,000
Accrued payroll and payroll taxes		2,657,000		1,788,000
Other accrued liabilities		2,813,000		2,384,000
Accrued income taxes		1,092,000		—
Current portion of capital leases		4,996,000		5,094,000
Current portion of long-term debt		98,000		303,000

Total current liabilities		17,056,000		14,941,000
Long-term debt, less current portion		89,694,000		71,318,000
Capital lease obligations, net of current portion		5,176,000		6,966,000
Long-term deferred compensation		488,000		269,000
Deferred income taxes		3,515,000		3,515,000

Total liabilities		115,929,000		97,009,000
Shareholders' equity:
Common Stock		—		—
Paid in capital		50,877,000		49,259,000
Shareholder receivable		—		(4,065,000	)
Retained earnings		30,824,000		21,874,000

Total shareholders' equity		81,701,000		67,068,000

	$	197,630,000	$	164,077,000

	THREE MONTHS ENDED JUNE 30						SIX MONTHS ENDED JUNE 30
	2002			2001			2002			2001
Revenues:
Gaming	$	58,031,000		$	47,208,000		$	111,179,000		$	90,134,000
Parimutuel commissions		2,597,000			2,087,000			4,509,000			3,770,000
Food, beverage and lodging		4,725,000			4,077,000			8,169,000			7,421,000
Other		1,775,000			919,000			2,674,000			1,524,000

Total revenues		67,128,000			54,291,000			126,531,000			102,849,000

Costs of revenue:
Cost of gaming terminals		36,491,000			27,163,000			68,167,000			52,083,000
Cost of parimutuel commissions		2,015,000			1,687,000			3,687,000			3,210,000
Cost of food, beverage and lodging		4,321,000			4,053,000			7,593,000			7,690,000
Cost of other revenues		2,215,000			1,224,000			3,363,000			1,952,000

Total cost of revenues		45,042,000			34,127,000			82,810,000			64,935,000

Gross Profit		22,086,000			20,164,000			43,721,000			37,914,000

Selling, general and administrative expenses:
Marketing and promotions		3,541,000			3,478,000			6,500,000			5,832,000
General and administrative		8,249,000			5,799,000			15,364,000			11,478,000
Depreciation and amortization		3,409,000			2,273,000			6,387,000			4,335,000

Total selling, general and administrative expenses		15,199,000			11,550,000			28,251,000			21,645,000

Operating income		6,887,000			8,614,000			15,470,000			16,269,000

Interest income		50,000			60,000			118,000			115,000
Interest expense		(950,000	)		(899,000	)		(1,820,000	)		(1,962,000	)

Income from continuing operations before provision for income taxes and cumulative effect of accounting change		5,987,000			7,775,000			13,768,000			14,422,000
Provision for income taxes		2,096,000			2,641,000			4,819,000			4,901,000

Income from continuing operations before cumulative effect of accounting change		3,891,000			5,134,000			8,949,000			9,521,000
Cumulative effect of change in method of accounting for derivatives, net of tax benefit		—			—			—			(92,000	)

Net income	$	3,891,000		$	5,134,000		$	8,949,000		$	9,429,000

Net income per share (basic)	$	0.14		$	0.22		$	0.33		$	0.41
Net income per share (assuming dilution)	$	0.13		$	0.20		$	0.31		$	0.37
Weighted average number of shares outstanding:
Basic		27,059,881			23,549,810			27,004,197			22,886,113
Diluted		29,091,562			26,266,467			29,059,028			25,449,100

	SIX MONTHS ENDED JUNE 30
	2002			2001
Cash flows from operating activities:
Net income	$	8,949,000		$	9,429,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,387,000			4,335,000
Deferred income taxes		—			2,182,000
Deferred compensation		219,000			—
Changes in operating assets and liabilities:
Accounts receivable net of allowance		(2,750,000	)		(2,400,000	)
Prepaid taxes		1,218,000			1,168,000
Other current assets		(712,000	)		(1,427,000	)
Accounts payable and accrued liabilities		2,418,000			1,889,000

Net cash provided by operating activities		15,729,000			15,176,000
Cash flows from investing activities:
Restricted cash		—			(219,000	)
Deposits and other		(2,710,000	)		(359,000	)
Capital expenditures		(31,636,000	)		(24,681,000	)

Net cash used in investing activities		(34,346,000	)		(25,259,000	)
Cash flows from financing activities:
Shareholder receivable decrease (increase)		4,065,000			(611,000	)
Stock repurchase program		—			(52,000	)
Additional paid in capital		1,618,000			4,260,000
Loan proceeds		18,376,000			8,424,000
Principal payment on long term debt and capital leases		(3,211,000	)		(3,124,000	)
Deferred financing costs		(580,000	)		—

Cash provided by financing activities		20,268,000			8,897,000

NET INCREASE (DECREASE) IN CASH		1,651,000			(1,186,000	)
Cash, Beginning of Period		10,914,000			10,564,000

Cash, End of Period	$	12,565,000		$	9,378,000

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934