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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended
DECEMBER 31, 1996
COMMISSION FILE NO. 0-20508
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)
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
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 incor-porated 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
20, 1997 (based on the closing sale price per share on the NASDAQ Stock Market
on that date) was $22,617,657
The Company's common stock outstanding at March 20, 1997 was 19,765,291 shares.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company History . . . . . . . . . . . . . . . . . . . . . . . . 1
Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . 1
Mountaineer Race Track and Gaming Resort . . . . . . . . . . 3
Current Operations . . . . . . . . . . . . . . . . . . . . . . 5
Improvement Plan and Expanded Operations . . . . . . . . . . . 8
Business Strategy . . . . . . . . . . . . . . . . . . . . . . 9
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Regulation and Licensing . . . . . . . . . . . . . . . . . . . 13
Discontinued Operations . . . . . . . . . . . . . . . . . . . 17
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Gaming, Racing and Other Entertainment . . . . . . . . . . . . 19
Equipment Leases . . . . . . . . . . . . . . . . . . . . . . . 19
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . 20
Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 20
Settled Litigation . . . . . . . . . . . . . . . . . . . . . 20
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 25
PART II
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . 25
ITEM 6 SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 25
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . 26
Results of Continuing Operations . . . . . . . . . . . . . . . 26
Results of Discontinued Operations . . . . . . . . . . . . . 35
Liquidity and Sources of Capital . . . . . . . . . . . . . . . 36
Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . 39
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 39
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . 39
Business Experience . . . . . . . . . . . . . . . . . . . . 39
Compliance with Section 16(a) of the Exchange Act . . . . . 40
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 41
Employment Agreements . . . . . . . . . . . . . . . . . . . 42
Compensation of Directors . . . . . . . . . . . . . . . . . 43
Compensation Committee Interlocks and Insider
Participation . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . 44
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 45
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 52
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ITEM 1.BUSINESS
COMPANY HISTORY
The Company, through wholly-owned subsidiaries, owns and operates Mountaineer
Race Track and Gaming Resort ("Mountaineer Park" or "Mountaineer"), a resort
facility in Chester, West Virginia, and owns a working interest in proven oil
and gas reserves in Michigan.
The Company was incorporated in March 1988 in Delaware under the name "Secamur
Corporation," a wholly owned subsidiary of Buffalo Equities, Inc. ("Buffalo"),
and later "spun-off" through the sale of its stock to the stockholders of
Buffalo in January 1989. In June 1989, the Company acquired through merger
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
authorized the Company to acquire, primarily, specified gaming and oil and gas
businesses. Upon confirmation of the plan, 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.
This report contains forward-looking statements that inherently involve risks
and uncertainties. Such statements generally are preceded by words such as
"expect," "plan," "believe," "intend," "may," or "anticipate." The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors as discussed herein.
MERGERS AND ACQUISITIONS
Mountaineer Race Track & Gaming Resort - Chester, West Virginia
Pursuant to a stock purchase agreement dated May 5, 1992, the Company acquired
all of the common stock of Mountaineer Park, Inc., a West Virginia corporation,
in December 1992. Mountaineer Park, the site of the Company's gaming business,
offers an entertainment complex and destination resort with hotel, dining and
lounge facilities, and outdoor activities including golf, swimming and tennis.
Mountaineer Park is situated on a 606-acre site on the Ohio River at the
northern tip of West Virginia's northwestern panhandle in Hancock County,
approximately 40 miles south of Youngstown, Ohio and 35 miles west of
Pittsburgh, Pennsylvania.
Hotel-Casino Site - Cripple Creek, Colorado
In January 1992, the Company acquired through merger all of the outstanding
capital stock of SDR Corporation ("SDR"), a Nevada corporation owned in part by
affiliates of the Company. A ten percent interest in SDR was subsequently issued
to an individual who assisted SDR in acquiring its principal asset -- an option
to purchase commercial lots in Cripple Creek, Colorado, some of
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which were zoned for hotels and gaming. After exercising the option in September
1992, the lots were eventually deeded back to the original owner in May 1993
when, due to the rapid saturation of the gaming market in Cripple Creek,
Management determined that the lots were less attractive than originally
assessed. Thereafter, SDR became inactive until it was formally dissolved in
March 1996.
Golden Palace Casinos - Oklahoma Indian Gaming Contract
In October 1992, the Company acquired all of the outstanding capital stock of
Golden Palace Casinos, Inc. ("GPC" or "Golden Palace"), a Minnesota corporation
organized to manage casinos on Indian reservations. Although Golden Palace had
no significant operations at the time of the acquisition, it held, through a
wholly owned subsidiary, a contract, to manage a casino planned for an Indian
reservation in Oklahoma, subject to the satisfaction of certain conditions.
Golden Palace also had $3 million cash. Shortly after the acquisition of Golden
Palace, the West Virginia Lottery Commission advised Management that, as a
condition to licensing of the Company's then-proposed video lottery operations
at Mountaineer Park, the Company could not engage in Indian gaming activities.
Consequently, in December 1992, the Company sold the subsidiary holding the
management contract and agreed not to engage in Indian gaming activities as long
as it conducted video lottery operations in West Virginia. Notwithstanding the
sale of the management contract, the acquisition of Golden Palace provided the
Company with sufficient funds to complete the acquisition of all of the
outstanding capital stock of Mountaineer Park, Inc., as described below.
Riverboat Casino Site - Tunica, Mississippi
In March 1993, the Company acquired an 80% interest owned by M&R Investment
Company in a joint venture which held a long-term ground lease for a riverboat
gaming development site in Tunica, Mississippi. The Company subsequently
acquired the remaining 20% interest in the joint venture from Regal Casinos,
Inc. In July 1993, the Company agreed to form a joint venture with Las Vegas
Entertainment Network ("LVEN") and BP, Ltd. to develop the Tunica project. The
joint venture agreement called for contributions of the ground lease by the
Company, working capital for initial development by LVEN, and construction and
opening financing and investment banking services by BP, Ltd. Later in 1993, the
Company and LVEN agreed to merge in a stock-for-stock transaction. Neither the
joint venture nor the merger with LVEN was consummated as a result of
disagreements over how to develop the Tunica site, and pursuant to a settlement
agreement reached in February 1994, the Company sold its interest in the Tunica
site to LVEN.
Oil and Gas Interests - Michigan and Ohio
In January 1992, the Company also acquired certain oil and gas interests which
have since been, or are in the process of being divested pursuant to the
Company's plan of orderly liquidation adopted in March 1993. Except for the
limited resources required to prepare its remaining oil and gas interests for
orderly liquidation, the Company has focused substantially all of its resources
on Mountaineer Park. (For discussion of the Company's oil and gas acquisitions
and plan of orderly liquidation, see Item 1 -- "Discontinued Operations," Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Discontinued Operations" and Notes 1 and 12 of "Notes
to Consolidated Financial Statements").
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Subsequent Event - Muskegon Race Course Letter of Intent
On February 5, 1997, the Company signed a letter of intent with Sports Valley
West Limited Partnership and Muskegon Race Course, Inc. that contemplated the
Company leasing, operating, and possibly acquiring the Muskegon Racetrack, a
horse racing and off-track betting facility on 94 acres located approximately 5
miles east of Lake Michigan and southeast of Muskegon Lake in Muskegon, Michigan
on terms set forth in the Company's Report on Form 8-K filed February 10, 1997.
Because of the seller's delays in supplying the required due diligence
materials, by letter dated April 4, 1997, the Company terminated the
transaction.
Subsequent Event - Other Hotel/Gaming Opportunity
The Company is currently negotiating with the owner of a hotel/gaming operation
located in a state other than West Virginia or Michigan to enter a joint venture
agreement for the development and operation of that property. There can be no
assurances, however, that such negotiations will result in a transaction.
BUSINESS - MOUNTAINEER RACE TRACK & GAMING RESORT
Racetrack Facilities
Mountaineer Park offers live thoroughbred horse racing before expansive
clubhouse and grandstand viewing areas with enclosed seating for year-round
racing. The track also conducts simulcast thoroughbred and greyhound racing
from other prominent racetracks. Mountaineer's main racetrack consists of an
oval dirt track approximately one mile in length. Inside the main track is a
natural turf (grass) track measuring seven furlongs or 7/8 of a mile. The
racetrack is equipped with two chutes for races of lengths from 4 1/2 furlongs
to over one mile. The racetrack buildings consist of the clubhouse and
grandstand which provide glass-enclosed stadium and box seating for
approximately 770 and 2,850 patrons, respectively. The buildings are each
three-stories and are connected by an enclosed walkway. Live and simulcast
racing can be viewed by approximately 1,200 dining patrons in two restaurants
located in the clubhouse and grandstand. In addition to seating areas, the
grandstand covers approximately 57,000 square feet of interior space on the main
and mezzanine levels containing 37 parimutuel windows and three food and
beverage concession stands. The clubhouse covers approximately 25,000 square
feet of interior space containing 14 parimutuel windows. The grandstand has an
indoor stage with a seating capacity of approximately 2,240, and has been the
site of several concerts and nationally televised boxing matches. The racetrack
apron, which is accessible from both buildings, provides racing fans with up-
close viewing of horses entering the racetrack and crossing the finish line.
The stable area accommodates approximately 1,250 horses and is located adjacent
to the main track. None of the horses are owned by Mountaineer or the Company,
however, Mountaineer provides stable space to horse owners whose horses race at
Mountaineer Park. Mountaineer Park's racetrack parking lots have a combined
capacity for over 2,900 vehicles.
Lodge Facilities
The Lodge is a two-story facility which overlooks the golf course at
Mountaineer's main entrance on West Virginia State Route 2. The Lodge offers 101
rooms, including 50 standard rooms (one double bed), 46 superior rooms
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(two double beds), and five king rooms and suites. The Mountaineer Lodge's
Gatsby Dining Room seats 125 patrons for casual dining overlooking the golf
course. An attached deck provides seats for an additional 68 patrons, weather
permitting. In 1995, in response to increased patronage of the off-track
betting, video lottery gaming, dining and bar facilities located at the Lodge,
Mountaineer expanded its 5,000 square foot Speakeasy Gaming Saloon with an 8,000
square foot addition, followed in 1996 by extensive remodeling of the Lodge
restaurant and the addition of Big Al's Deli in the Speakeasy Gaming Saloon.
Capacity of the Speakeasy Gaming Saloon now stands at 750. Extensive off-track
wagering facilities continue to be maintained at the Speakeasy Gaming Saloon.
Lodge parking lots have a combined capacity for approximately 576 vehicles.
Video Lottery Facilities
In addition to live and simulcast parimutuel wagering, Mountaineer offers video
lottery gaming through 1,000 video lottery terminals ("VLTs") located in the
racetrack clubhouse, grandstand and the Lodge. Mountaineer introduced 400 VLTs
in September 1994, replacing 165 older machines that had been operated since the
Company's acquisition of Mountaineer in December 1992. The replacement VLTs
allow players to select from several game themes, including up to four versions
of draw poker, one version of blackjack and two versions of keno, as well as
permit the player to determine which cards to hold while playing draw poker
("Card Terminals"). In June 1995, Mountaineer placed into operation 400
additional Card Terminals. Upon the enactment of an amendment to West
Virginia's video lottery law permitting VLTs to include simulated "classic
casino slot machine" games in addition to video card and keno games ("Slot
Terminals"), in July of 1996, Mountaineer converted 350 Card Terminals into Slot
Terminals. In October of 1996, 50 more Card Terminals were converted to Slot
Terminals. In March 1997, Mountaineer purchased and placed into operation 400
additional Slot Terminals and simultaneously removed 200 Card Terminals,
bringing the total number of VLTs in operation from 800 to 1,000, consisting of
800 Slot Terminals and 200 Card Terminals. The racetrack buildings house 500
of the VLTs, and the Lodge offers the remaining 500 VLTs, primarily, in the
Speakeasy Gaming Saloon.
Recreational Facilities
Mountaineer offers a par three nine-hole "executive" golf course, three tennis
courts, a volleyball court, a basketball court, two swimming pools and two
children's swimming pools. These facilities are made available for use by Lodge
guests and the general public at specified daily or seasonal fee rates.
Trailer Park
Located across West Virginia State Route 2 from the Lodge and the entrance to
Mountaineer Park, the Company maintains a trailer park consisting of 61
individual lots constituting approximately 11.5 acres. The lots are rented for
fixed monthly fees, mostly to individuals who are employed by Mountaineer in
racing operations. The Company is responsible for maintenance of the road and
grounds, refuse removal and providing water and sewage hook-ups. The tenants
pay all utility expenses.
Undeveloped Land
Mountaineer owns, as part of its 606 acre site, a 375 acre tract that is
currently undeveloped. The acreage is located directly across West Virginia
4
State Route 2 from the Lodge and racetrack main entrance. Management currently
has no plans for development of such property.
CURRENT OPERATIONS
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and video lottery operations, and, to a lesser extent, its
lodging, food and beverage operations. Additional revenues are generated from
greens fees and other recreational facilities fees.
Racing Operations
Mountaineer is subject to annual licensing requirements established by the West
Virginia State Racing Commission. Mountaineer's license was renewed in December
1996, through December 1997.
Revenue from racing operations is derived mainly from commissions earned on
parimutuel wagering on live races held at Mountaineer Park and on races
conducted at other "host" racetracks and broadcast live (i.e., import simulcast)
at Mountaineer Park. In parimutuel wagering, patrons bet against each other
rather than against the operator of the facility or with pre-set odds. The
dollars wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total handle or amounts wagered. With respect to Mountaineer
Park's live racing operations, such percentage is fixed by West Virginia law at
three levels, 17.25%, 19% and 25%, depending on the complexity of the wager.
The lower rate applies to wagering pools involving only win, place and show
wagers while the higher rates apply to pools involving wagers on specified
multiple events, such as trifecta, quinella and perfecta wagers. With respect
to simulcast racing operations, Mountaineer 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, and Mountaineer'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.
Mountaineer also receives the "breakage," which is the odd cents by which the
amounts payable on each dollar wagered in a parimutuel pool exceeds a multiple
of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer on the basis of the
amounts wagered at their respective facilities.
Video Lottery Operations
Mountaineer is subject to annual licensing requirements established by the West
Virginia State Lottery Commission. Mountaineer's license was renewed in July
1996 for a period of one year.
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Mountaineer derives revenue from the operation of video lottery games in the
form of net win on the gross terminal income, or the total cash deposited into a
VLT less the value of credits cleared for winning redemption tickets. Pursuant
to the Lottery Act, Mountaineer'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.
At December 31, 1996, 800 of the VLTs were leased under a master lease agreement
which requires the Company to insure the machines for their full replacement
value, pay any taxes, insurance and maintenance expenses and, upon the
expiration of the lease, allows Mountaineer to purchase the VLTs at fair market
value. Monthly payments for the first 400 VLTs were $72,378 from September 1994
through December 1995. The second 400 VLTs were free of rent for the first six
months after installation in late June 1995. The master lease agreement
provides that the Company may exercise an option to purchase the VLTs at the end
of the lease term at fair market value. Mountaineer accrued monthly lease
expenses of $70,743 during the deferral period of July through December 1995.
As of December 31, 1995, the Company had past due payments under the master
lease agreement of $190,093, constituting an event of default. On March 26,
1996, the master lease agreement was amended to reflect a new monthly
consolidated payment schedule as follows: (i) $0 in December 1995, January 1996
and February 1996, (ii) $119,471 in March and April 1996, (iii) $183,176 from
May through October 1996, and (iv) $119,471 from November 1996 through January
1999. In addition, the Company was obligated to make interest payments from
March through October 1996 at the rate of 15% of the past due periodic rental
payments under the master lease agreement, representing a total interest
obligation of $26,278.
On February 27, 1997 the Company agreed to purchase 400 Slot Terminals in
connection with its ongoing expansion of video lottery operations. The new Slot
Terminals were placed into operation on March 11, 1997, at which time 200 of the
original Card Terminals placed into service in September 1994 were returned to
their lessor (see Notes 9 and 18 of Consolidated Financial Statements). The
current complement of machines includes 800 Slot Terminals and 200 Card
Terminals.
Effective on the date of termination of the lease with respect to the 200 Card
Terminals replaced in March of 1997, the payment schedule of the September 1994
operating lease agreement, as amended March 26, 1996, will be further amended to
provide for a decrease in monthly payments from $119,471 to $100,185 through the
termination of the lease in January, 1999. There are no early termination
penalties in connection with this transaction. All other provisions of the
lease will remain unchanged.
In connection with the purchase of the 400 Slot Terminals, Mountaineer paid a
$793,520 down payment on February 27, 1997. The remaining $2,343,000 of
purchase price is due by June 18, 1997, although the Company may agree to an
earlier payment in exchange for an acceptable discount.
In 1995, the Lottery Commission approved the linking of VLTs to enhance the
amount that could be won on any single play of any single terminal within the
linked group. The Lottery Commission also approved nominal payout percentages
for this gaming option, commonly referred to as "Progressives", of up to 95%.
The Company expects to link approximately one-half of its VLTs into several
progressive playing groups located in the Riverside Gaming Terrace at the
racetrack and the Speakeasy Gaming Saloon at the Lodge. The Company's supplier
is working on the development of progressive gaming software for the
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Company's existing VLTs, however, there can be no assurance that progressive
games will be successfully developed or implemented.
Management Agreement - Video Lottery Operations
Pursuant to a construction loan with Bennett Management & Development
Corporation, American Gaming & Entertainment, Ltd. ("AGEL," formerly named Gamma
International, Ltd.) was engaged by Mountaineer pursuant to a June 2, 1994
management agreement (the "Management Agreement") to provide management services
for video lottery and other gaming activities at Mountaineer permitted under
West Virginia law, other than its parimutuel horse racing operations (the
"Permitted Activities"). Mountaineer was required to enter this Management
Agreement with AGEL as a condition to the Bennett Loan. Under the Management
Agreement, AGEL was entitled to receive a management fee of 3% of the gross
revenues of the Permitted Activities after a 4% administrative fee. In
addition, AGEL was entitled to receive 8% of the earnings before interest,
taxes, depreciation and amortization of all businesses conducted at or, in the
case of off-track betting, generated as a result of the operations at
Mountaineer, including the Permitted Activities and all parimutuel horse racing
operations.
Mountaineer's Management Agreement with AGEL was suspended pursuant to a Stay
Agreement effective June 30, 1995 until such time as Bennett complied with
certain requirements of the Lottery Commission. For the six months ended June
30, 1995, the Company paid AGEL $198,000, however, no additional payments were
made after June 30, 1995. Simultaneously, Mountaineer entered a Consulting
Agreement with American Newco, Inc., which was founded by two officers of AGEL,
to provide consulting services in connection with Mountaineer's video lottery
operations at the rate of $10,000 per month, subject to increases of up to
$10,000 per month for possible additional services to be provided through March
17, 1997. Also simultaneously, Mountaineer and AGEL entered a Settlement
Agreement, the June 30, 1995 effectiveness of which was conditioned upon the
termination of either the Stay Agreement or the Consulting Agreement in
accordance with certain specified contingencies, in which case the Management
Agreement would also terminate without further liability to Mountaineer.
However, the agreements also provided that if Bennett should fulfill certain
requirements of the Lottery Commission and declare no later than January 1, 1996
that it would continue as lender to Mountaineer on a permanent basis, the
Management Agreement would be reinstated prospectively and the Consulting
Agreement would terminate without further liability to Mountaineer.
Notwithstanding such agreements, the Company reached an agreement with AGEL as
of September 19, 1996, acknowledging the effectiveness of the June 30, 1995
settlement agreement and thereby terminating the Management Agreement. The
September 19, 1996 agreement was subject to approval by the United States
Bankruptcy Court in the Bennett bankruptcy estate, and a court order granting
such approval was issued on November 1, 1996.
The personal involvement of the two stockholders of American Newco in the
consulting activities was a material element of the Consulting Agreement. Such
personal involvement was not provided after October 15, 1995, and on May 10,
1996, the Company gave formal notice of termination of the Consulting Agreement,
and there has been no further communication between the parties since that time.
Management has taken the position that the Consulting Agreement has been
terminated and believes that the Company will not incur material liability in
connection therewith.
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Racetrack, Food and Beverage Operations
The clubhouse restaurant is open a minimum of 220 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
clubhouse at the Riverside Gaming Terrace bar, which services video lottery
players, as well as racing fans. The grandstand's Man 0' War restaurant offers
a sandwich shop primarily for bus and riverboat excursion tours and charter
groups and is open approximately 140 days annually. Renovation and expansion
were completed in March 1995 increasing dining capacity of the Man 0' War from
230 to 550. Closed circuit television monitors displaying Mountaineer's live
and simulcast races are provided at every table in both the Clubhouse and Man 0'
War Restaurants for the convenience of racing fans. In 1996, the Hollywood
Grand Buffet, with a seating capacity of 100, and the Hollywood Knights Saloon
were added to the mezzanine level of the grandstand. The racetrack food and
beverage facilities are intended to complement the entertainment experience for
racing fans and video lottery players and, therefore, are designed to offer
familiar menus with moderate pricing in a comfortable atmosphere.
The Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on week days, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Mountaineer Lodge's Gatsby Dining Room, which
seats 125 patrons (and 68 additional patrons on the attached deck, weather
permitting) for casual dining overlooking the golf course. Food and beverages
are also available at the Lodge at the Gatsby Lounge in the dining room, Big
Al's Deli in the Speakeasy Gaming Saloon and the Iron Horse Lounge. Table and
barstool seating are available in the Speakeasy Gaming Saloon and the Iron Horse
Lounge for the video lottery gaming and off-track wagering patrons accommodated
there. The Lodge and its food and beverage operations are operated in
combination with its entertainment facilities and are utilized principally to
increase racing attendance and video lottery play. Accordingly, the Company
maintains inexpensive room rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition of Mountaineer in December 1992, the Company has been
engaged in an ongoing effort to renovate and, more recently, enhance and expand
Mountaineer Park, which was first opened in 1951. Prior to West Virginia's
adoption of the Lottery Act in March 1994, the Company completed certain
renovations necessary to maintain the clubhouse and lower grandstand areas,
including upgrades to the plumbing and electrical systems, the installation of
new furniture and furnishings and the redesign of the grandstand parimutuel
(wagering) windows. These improvements were made during 1993.
In 1993, the Company commenced its capital improvement program, designed to
upgrade and expand Mountaineer Park's existing facilities to a level which would
allow its marketing as a more upscale gaming, racing, and recreational
destination resort.
In 1994 and 1995, the Company invested $8.9 million in building improvements,
furnishings, fixtures and equipment suitable for large scale gaming activities
in its race track grandstand and clubhouse, and an additional $591,000 to
convert a portion of existing Lodge space to gaming areas. In response to
8
increased patronage at its Lodge gaming areas, the Company embarked upon an
8,000 square foot expansion of the Lodge video lottery facilities in 1995.
Mountaineer has expanded its off-track betting facilities in both the racetrack
and Lodge locations. In 1994 and 1995, the Company invested $1.9 million in two
track-side restaurants offering seating for 1,200 racing patrons, with new 13-
inch television monitors located at each table, and a total of 32 overhead
monitors with 40-inch screens. A simulcast control center is located in the
clubhouse restaurant, which also offers video and graphic overlay capabilities.
This system enables the Company to promote upcoming events and Mountaineer's
other entertainment facilities, in addition to the day's live and off-track
racing schedule. In 1995, the Company completed the renovation of the Lodge
off-track betting facility, offering seating for 198 patrons in the Speakeasy
Gaming Saloon. The Lodge simulcasting facility is served by 14 40-inch
television monitors, as well as a 15-foot projection screen. The Company
currently has available 51 mutuel windows in the racetrack facility and six
windows in the Speakeasy Gaming Saloon.
The Company also created a boxing arena and entertainment stage, which it has
integrated into the grandstand seating. The stage is an integral component of
the Company's efforts to expand Mountaineer Park's customer base by offering
new, complementary forms of entertainment. Mountaineer has hosted concerts and
six boxing events since December 1994, including nationally televised bouts on
ESPN and USA Cable. Mountaineer paid fixed fees and provided certain lodging at
no charge to the event promoters. Mountaineer retained all proceeds from ticket
sales, food and beverage sales and program sales. Management intends to engage
in similar events to increase public awareness and thereby help to increase
future attendance at Mountaineer Park.
The Lodge lobby and reception area were renovated in 1994, followed by
restoration of 41 guest rooms damaged by fire and a general renovation and
upgrade of the common areas in 1995. In 1996, enhancements and expansion of the
Speakeasy Gaming Saloon, parking lot expansion and portions of general paving
were completed.
BUSINESS STRATEGY
The Company's business strategy is to increase revenues in all areas of
operations through the promotion and expansion of its video lottery business and
the enhancement of its racing and entertainment facilities.
Develop and Market Mountaineer as a Diversified Entertainment Facility
The Company believes that in the past the potential of the Mountaineer Park
racetrack facility has not been maximized. Use of the facility solely to
conduct parimutuel racing limited the facility's customer base and under-
utilized its sizable infrastructure during non-racing times. The expansion of
video lottery operations and the introduction of such diverse uses as bingo for
local senior citizen groups, concerts, and live and simulcast boxing events at
Mountaineer Park will provide the right product mix to attract an increasing
number of visitors and more efficiently use Mountaineer's facilities during non-
racing times. It is anticipated that the resulting benefits will be shared by
parimutuel, as well as by video lottery and other entertainment operations,
since patrons who traditionally do not visit horse racetracks may, once at
Mountaineer Park, be more inclined to wager on racing. In addition, because a
significant percentage of revenues from video lottery operations must be
contributed to the racing purse fund, as video lottery
9
revenues increase, so will the size of purses. Management believes that this
will have the effect of attracting better quality racehorses, further enhancing
Mountaineer Park's appeal to traditional horse racing fans who largely generate
the Company's parimutuel revenues.
Expand Video Lottery Operations
At December 31, 1996, the Company planned to expand its video lottery operations
by installing an additional 200 VLTs, which were authorized by the Lottery
Commission in 1995, to replace existing VLTs which had been placed in
operation in 1994. By March 13, 1997, the Company had accomplished its plan by
removing 200 older Card Terminals and adding 400 new Slot Terminals, resulting
in an increase in the number of VLTs in operation from 800 to 1,000, consisting
of 800 Slot Terminals and 200 Card Terminals. The Company believes that its
video lottery revenues will continue to increase with the installation of new
machines, the implementation of progressive and video slot games, and the
implementation of its expanded marketing plan. With its current involvement in
video lottery gaming and parimutuel racing, its substantial infrastructure and
grounds, and the attractive location of its facility, management believes that
Mountaineer is positioned to take advantage of any forms of gaming which may be
legalized in West Virginia. There can be no assurances, however, that the state
of West Virginia will in the future authorize additional gaming activities or
that, if authorized, Mountaineer would be permitted to offer such gaming
activities.
Relocate and Improve Off-Track Wagering Operations
The Company relocated its primary simulcasting operations to the Speakeasy
Gaming Saloon at the Lodge and expanded clubhouse simulcast facilities in 1995.
Improvements to simulcasting operations at the Riverside Gaming Terrace were
completed in 1996. Management believes that by exposing video lottery patrons
to simulcast and live racing, new racing fans can be developed, thereby
increasing parimutuel operations. The expanded clubhouse and improved Riverside
Gaming Terrace simulcast facilities are also expected to create additional
excitement and increase the level of activity at the racetrack on live race
days.
Improve Live Racing Product
The Company's ability to attract attendance at Mountaineer and wagering on its
live races is dependent, in part, upon the quality of the horses racing at
Mountaineer. Horse races at racetracks competing with Mountaineer, and at the
racetracks from which Mountaineer receives import simulcasts, have often been of
higher quality than Mountaineer's horse races, thereby attracting a larger
volume of wagering and higher average wagers than at Mountaineer Park. Beginning
in October 1994, Mountaineer has been able to attract better quality horses by
paying incrementally higher purses. Average daily purses, which were $25,000 in
the third quarter of 1995, were increased several times during 1995 and 1996 to
a high of approximately $55,000 in the third and fourth quarters of 1996.
Mountaineer reduced daily purses to approximately $35,000 late in the fourth
quarter of 1996, with the intention of raising them above the $50,000 level in
the second quarter of 1997. The increased purses reflect an increase in the
minimum daily purses guaranteed pursuant to Mountaineer's agreement with the
horsemen's association, a non-union entity which represents the horsemen in
their dealings with Mountaineer. Management's ability to increase further the
size of purses will depend on increased video lottery operations and, to a
lesser extent, expanded simulcast racing operations. Mountaineer anticipates
that it will be able to continue increasing purse
10
sizes to levels attractive to owners of mid-level or better quality racehorses.
Management has sponsored several stakes races in 1996, with purses of up to
$20,000 per race. In September 1995, Mountaineer hosted the West Virginia
Breeders Classics stakes races, with purses totaling $330,000 funded by state-
wide video lottery tax revenue. Mountaineer broadcast certain of these races to
a number of other racetracks around the country and, subject to clarification by
the West Virginia legislature of the applicable simulcast statute, intends to
simulcast its regular card of live races commencing in the fourth quarter of
1997. Wagering handles from participating racetracks would be aggregated with
Mountaineer's on-site wagering handle when it exports its simulcast signal.
Commence Export Simulcasting Outside Hub Area
Export simulcasting is a highly desirable source of revenue because the direct
costs associated with such operations are relatively low. Mountaineer believes
that the higher average purses anticipated from video lottery contributions will
improve the quality of races which it can export to other racetracks, off track
betting facilities, casinos and other gaming establishments once it has
completed its improvement plan. In order to make its races more attractive to
simulcast outlets, Mountaineer anticipates that it will experiment with
different post times, possibly adopting more evening racing days which are
preferable because they do not compete with live racing conducted by other host
tracks. Although the Company intends to pursue export simulcasting
possibilities vigorously, there can be no assurance that such opportunities will
prove realistic or that the Company will be successful in its pursuit of such
business.
Increasing Import Simulcasting
The Company intends to increase the number and quality of races it makes
available for wagering by simulcasting additional out-of-state races. Although
management does not anticipate that it will increase the number of import
signals it can receive simultaneously, it will increase the number of races
displayed with each available signal. In May 1995, Mountaineer introduced
simulcasts of off-track greyhound racing, and has since offered thoroughbred
and/or greyhound import simulcasting seven days per week. Because operating
expenses associated with simulcast racing are generally lower than those
associated with live racing, management believes that increases in the levels of
simulcast wagering would result in greater operating profits than similar
increases in live racing levels.
MARKETING
Mountaineer's primary market includes four million persons of gaming age who
reside within a one-hour drive, or approximately 50 miles, of the facility,
including the population centers of Pittsburgh, Pennsylvania, Youngstown/Warren
and Akron/Canton, Ohio, and Wheeling, West Virginia. A secondary market of 3.4
million persons of gaming age reside within a two-hour drive, including
Cleveland, Ohio and Morgantown, West Virginia. Both markets have an average
household income of approximately $26,000.
The Company has adopted and implemented a comprehensive marketing program to
capitalize on Mountaineer's recently expanded gaming facilities to create a
larger and more loyal customer base. The program includes (i) the Players Club,
a player rating and tracking system designed to reward qualified play
11
through the issuance of reward certificates which are redeemable for food and
beverages, merchandise and other services, (ii) entertainment programming
featuring boxing and other special events, (iii) attractive food and beverage
pricing, (iv) comprehensive advertising, and (v) a bus program. Some features
of the program are subject to approval by the Lottery Commission. Prior to the
formulation of the new marketing program, the Company's marketing efforts
consisted of limited television, radio and print advertising and promotional
events tied to major holidays or horse racing events.
In November 1996, Mountaineer's proposal for a $330,000 direct advertising grant
from the State of West Virginia was approved. Mountaineer matched the amount of
the grant and utilized the funds to produce an infomercial entitled "Hancock
County: the Action's Closer Than You Think." The infomercial is scheduled to
air from January 3, 1997 through August 30, 1997, three times per day, seven
days per week over cable networks in Mountaineer's target markets of Cleveland,
Akron, Canton and Youngstown, Ohio and Pittsburgh, Pennsylvania. The Company
believes that the infomercial will assist in generating additional video lottery
patronage and revenues and help temper the decrease of revenues which is
typically associated with horse racing at Mountaineer during the winter months.
COMPETITION
Mountaineer's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia and Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio. Wheeling
Downs conducts parimutuel greyhound dog racing and video lottery gaming.
Thistledown conducts parimutuel thoroughbred horse racing, but not video
lottery. Other than Wheeling Downs and Thistledown, there are currently no
facilities offering competitive parimutuel live thoroughbred or video lottery
gaming within a 100-mile radius of Mountaineer Park. As a result, although
there are facilities located more than 100 miles away, management does not
believe that such other facilities compete with Mountaineer Park for a
significant segment of its target customer base (although they do compete to
some extent for quality racehorses). In addition, none of those facilities, all
of which are located in Pennsylvania and Ohio, are currently licensed to offer
video lottery gaming. The one facility in West Virginia, other than Mountaineer
and Wheeling Downs, currently offering video lottery is located in the central
part of the state and, as a result, management believes it does not compete to
any significant extent with Mountaineer for customers. The Company understands
that a track in Charles Town, West Virginia intends to offer live thoroughbred
racing, import simulcast racing, and video lottery gaming in mid-1997. That
facility is located more than 200 miles from Mountaineer. Accordingly, the
Company does not believe that facility will compete with Mountaineer.
One other well-known resort located downstate has sought legislative approval to
operate a land-based casino. The Company also competes with statewide lotteries
in West Virginia, Pennsylvania and Ohio, on-site and off-track wagering in
Pennsylvania and other entertainment options available to consumers, including
live and televised professional and collegiate major sports events. The Company
will also compete with off-track wagering in Ohio, which was approved in 1996.
The Company is attempting to attract patrons by promoting Mountaineer as a
complete entertainment complex and destination resort offering a unique
combination of quality racing, video lottery wagering, dining, special events
and other entertainment options, all in a physically attractive setting which
12
is easily accessed with ample on-site parking. To the extent that Pennsylvania
or Ohio legalize any forms of casino gaming, the Company's video lottery
operations will compete with new gaming facilities located within driving
distances from Mountaineer's geographic market. Such facilities may offer more
gaming machines than Mountaineer as well as forms of gaming not available in
West Virginia.
EMPLOYEES
As of December 31, 1996, Mountaineer had approximately 478 full-time employees
and 25 part-time employees, of whom approximately 70 were represented by a labor
union under a collective bargaining agreement. The union representing mutuel
clerks at the race track has been expanded in recent years to cover certain
employees providing off-track betting services at the Lodge. On February 18,
1997, the collective bargaining agreement was extended until September 26, 1997.
In September 1996, a vote was held on a proposal to make approximately 200 other
Mountaineer employees members of an additional collective bargaining unit.
Based on information available to the Company, management believes that the vote
on this proposal to expand union coverage at Mountaineer was 72 against and 60
for, with 87 votes challenged and under review for eligibility. Pending the
outcome of such review, the Company is unable to predict the ultimate outcome of
the vote.
As of December 31, 1996, the Company also employed two persons in Orange County,
California. The Company believes that its employee relations are good, however,
there can be no assurance that if such expansion of the union is approved, the
Company's employee relations will remain on the same terms as in the past.
REGULATION AND LICENSING
Racing
The Company's horse racing operations are subject to extensive regulation by the
Racing Commission, which is responsible for, among other things, granting annual
licenses to conduct race meets, approving simulcasting post times, and other
matters. When granting licenses, the Racing Commission has the authority to
determine the dates on which Mountaineer may conduct races. In order to conduct
simulcast racing, Mountaineer is required under West Virginia law to hold a
minimum of 220 live race days each year. Mountaineer was granted a license to
conduct 220 live race days for 1997.
West Virginia law requires that at least 80% of Mountaineer's employees must be
citizens and residents of West Virginia and must have been such for at least one
year. In addition, certain activities, such as simulcasting races, require the
consent of the representatives of a majority of the horse owners and trainers at
Mountaineer.
Mountaineer's revenues from live racing operations are derived substantially
from its parimutuel commissions, which are fixed by the State of West Virginia
as percentages of Mountaineer's wagering handles. The West Virginia legislature
could change these percentages at any time, although the Company is not aware of
any current proposal to do so.
The Company's simulcast activities that occur outside of West Virginia could be
subject to regulation by other state racing commissions, as well as the
13
provisions of the Federal Interstate Horse Racing Act of 1978, which prohibits
Mountaineer from accepting off-track wagering on simulcast racing without the
approval of the Racing Commission and, subject to certain exceptions, of any
other currently operating track within 60 miles, or if none, of the closest
track in any adjoining state.
Video Lottery
The operation of video lottery games in West Virginia is subject to the Lottery
Act. Licensing and regulatory control is provided by the Lottery Commission.
Prior to the adoption of the Lottery Act in March 1994, the Company conducted
video lottery gaming pursuant to an agreement with the Lottery Commission which
authorized the Company to operate video lottery machines at the racetrack and
Lodge as part of a video lottery pilot project. Under the terms of the
agreement, the Company retained ownership or control of the video lottery
machines and other equipment it provided for use in video lottery gaming. In
March 1993, the Attorney General of West Virginia issued an opinion that, under
the West Virginia Constitution, video lottery machines could not be privately
owned. As a result of the Attorney General's opinion, the Company was unable to
renew its agreement with the Lottery Commission, which was scheduled to expire
in June 1993. In October 1993, the Supreme Court of West Virginia found that
the legislature had not adequately defined and authorized video lottery gaming
and, as a result, the Lottery Commission's authorization of video lottery gaming
at Mountaineer was invalid. The court's order was to become effective in late
November 1993, at which time video lottery gaming at Mountaineer would have had
to terminate. However, the court stayed its order pending consideration and
passage of satisfactory video lottery legislation. The subsequent adoption of
the Lottery Act has not been contested in or otherwise addressed by the court or
any other West Virginia court.
Under the Lottery Act, only parimutuel horse or dog racing facilities that were
licensed by the Racing Commission prior to January 1, 1994 and that conduct at
least 220 live racing dates for each dog or horse race meeting, or such other
number as may be approved by the Racing Commission, are eligible for licensure
to operate video lottery games. There are four racing facilities in West
Virginia (two horse racing and two dog racing), including Mountaineer, three of
which satisfy the eligibility requirements of 1996. The conduct of video
lottery gaming by a racing facility is subject to the approval of the voters of
the county in which the facility is located. If such approval is obtained, the
facilities may continue to conduct racing activities unless the matter is
resubmitted to the voters pursuant to a petition signed by at least 5% of the
registered voters, who must wait at least five years to bring such a petition.
If approval is denied, another election on the issue may not be held for a
period of two years. Video lottery gaming was approved in Hancock County, the
location of Mountaineer Park, on May 10, 1994.
In order to qualify as a "video lottery game," as the term is defined under the
Lottery Act, a game must, among other things, be a game of chance which utilizes
an interactive electronic terminal device allowing input by an individual
player. Such a game may not be based on any of the following game themes:
roulette, dice, or baccarat card games. Moreover, video lottery machines must
meet strict hardware and software specifications, including minimum and maximum
pay-out requirements, and must be connected to the Lottery Commission's central
control computer by an on-line or dial-up communication
14
system. Only machines registered with and approved by the Lottery Commission
may offer video lottery games.
Under the Lottery Act, racetracks that conduct video lottery gaming, as well as
persons who service and repair video lottery machines and validation managers
(persons who perform video lottery ticket redemption services), are required to
be licensed by the Lottery Commission. The licensing application procedures are
extensive and include inquiries into and an evaluation of the character,
background (including criminal record, reputation and associations), business
ability and experience of an applicant and the adequacy and source of the
applicant's financing arrangements. In addition, a racetrack applicant must
hold a valid racing license, have an agreement regarding video lottery revenues
with the representatives of a majority of the horsemen, the parimutuel clerks
and the breeders for the racetrack and post a bond or irrevocable letter of
credit in such amount as the Lottery Commission shall determine. Finally, no
license will be granted until the Lottery Commission determines that each person
who has "control" of an applicant meets all of the applicable licensing
qualifications. Persons deemed to have control of a corporate applicant
include: (i) any holding or parent company or subsidiary of the applicant who
has the ability to elect a majority of the applicant's board of directors or to
otherwise control the activities of the applicant; and (ii) key personnel of an
applicant, including any executive officer, employee or agent, who has the power
to exercise significant influence over decisions concerning any part of the
applicant's business operations. The Company's license application was approved
by the Lottery Commission in June 1995. From March 1994 until such approval,
the Company conducted video lottery gaming under a provision of the Lottery Act
that permitted any racetrack authorized by the Lottery Commission to conduct
video lottery gaming prior to November 1, 1993 to continue to do so for a
limited time without additional licensure.
Prior to Mountaineer's loan with Bennett, the Lottery Commission approved the
Company's license in September, 1994. During the relicensing proceedings prior
to July 1, 1995, the Lottery Commission required Bennett to submit audited
financial statements, based on the combined effect of Bennett's stock ownership
in the Company, its security interest pursuant to the deed of trust in
connection with the Bennett Loan, and the fact that AGEL, Bennett's affiliate,
performed management services for the Company. These factors required the
Company to seek Lottery Commission approval of Bennett. Although Bennett failed
to initially provide information required by the Lottery Commission, the Lottery
Commission relicensed Mountaineer in June, 1995, after which time Bennett
supplied the requisite information. In connection with the relicensing
proceedings held in June 1996, the Lottery Commission released a letter opinion
dated May 9, 1996 to the effect that because Bennett had the right to vote less
than 5% of the outstanding stock the Company, and AGEL, an affiliate of Bennett,
was no longer providing management services, Bennett could not influence or
control Mountaineer's business, and thus, Lottery Commission approval was not
required. Accordingly, no Lottery Commission approval of Bennett was required
in 1996.
On December 26, 1996, Mountaineer prepaid the Bennett loan with funds obtained
through a new financing from Madeleine L.L.C. Because the terms of the new
financing provide that Madeleine does not have the right to vote more than 5% of
the Company's voting stock or the right to take an active role in the affairs of
Mountaineer, no Lottery Commission approval of Madeleine was required in 1996.
While the Company has no reason to believe that its license will be affected by
either loan, a change in policy by the Lottery Commission could affect
Mountaineer's license and thus adversely affect the Company.
15
Licenses granted by the Lottery Commission must be renewed on July 1 of each
year. A license to operate video lottery games is a privilege personal to the
license holder and, accordingly, is non-transferable. In order for a license to
remain in effect, Lottery Commission approval is required prior to any change of
ownership or control of a license holder. Unless prior approval of the Lottery
Commission is obtained, the sale of five percent or more of the voting stock of
the license holder or any corporation that controls the license holder or the
sale of a license holder's assets (other than in the ordinary course of
business), or any interest therein, to any person not previously determined by
the Lottery Commission to have satisfied the licensing qualifications voids the
license.
Once licensed, a racetrack has the right to install and operate up to 400 video
lottery machines and may operate more than 400 machines only upon Lottery
Commission approval. The Company has received approval to operate a total of
1,000 machines.
Video Lottery machines may only be operated in the areas of the racetrack where
parimutuel wagering is permitted; provided, however, that if a racetrack was
authorized by the Lottery Commission prior to November 1, 1993 to operate video
lottery machines in another area of the racetrack's facilities, such racetrack
may continue to do so as long as there is one video lottery machine in the
parimutuel wagering area for each machine located in another area of the
racetrack. Accordingly, the Company may continue to operate video lottery
machines at the Lodge, provided that there are at least as many machines located
at Mountaineer's racetrack.
The Lottery Act imposes extensive operational controls relating to, among other
matters, security and supervision, access to the machines, hours of operation,
general liability insurance coverage and machine location. In addition, the
Lottery Act prohibits the extension of credit for video lottery play and
requires Lottery Commission approval before any video lottery advertising and
promotional activities are conducted. The Lottery Act provides for criminal and
civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be deposited
with the Lottery Commission to be shared in accordance with the provisions of
the Lottery Act. Under such provisions, each racetrack must electronically
remit to the Lottery Commission its "gross terminal income" (total cash
deposited into video lottery machines less the value of credits cleared for
winning redemption tickets). To ensure the availability of such funds to the
Lottery Commission, each racetrack must maintain in its account an amount equal
to or greater than the gross terminal income to be remitted. If a racetrack
fails to maintain this balance, the Lottery Commission may disable all of the
racetrack's 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
Breeders, Classics, the Veterans Memorial Program and the Racetrack Employees
Pension Fund.
Pursuant to both the Racing Commission's and Lottery Commission's regulatory
authority, the Company may be investigated by either body at virtually any
16
time. Accordingly, the Company must comply with all gaming laws at all times.
Should either body consider the Company to be in violation of any of the
applicable laws or regulations, each has the plenary authority to suspend or
rescind the Company's licenses. While the Company has no knowledge of any non-
compliance, and believes that it is in full compliance with all relevant
regulations, should the Company fail to comply, its business would be materially
adversely effected.
To date, the Company has obtained all governmental licenses, findings of
suitability, registrations, permits and approvals necessary for the operation of
its current gaming activities. However, no assurances can be given that any new
licenses or approvals that may be required in the future will be given or that
existing ones will be renewed.
Management is aware of nothing to indicate that West Virginia state officials
will change their policies toward gaming activities, particularly video lottery
gaming; however, there are no assurances that such policies will not be changed.
Any substantial unfavorable change in the enabling laws or tax rates on gaming
revenues could make the Company's business substantially more onerous, less
profitable or illegal, which would have a material adverse effect on the
Company's business.
DISCONTINUED OPERATIONS
Bartlett Field Leases - Ohio
In January 1992, the Company, through its wholly owned subsidiary, ExCal Energy
Corporation ("ExCal") acquired approximately 16,000 net developed acres and
16,800 net undeveloped acres (held by production) of oil and gas leases in the
Bartlett Field in Southeastern Ohio from Biscayne Petroleum Corporation, an
affiliate of Edson R. Arneault, the President and Chief Executive Officer and a
Director of the Company. Mr. Arneault was not affiliated with the Company at
the time of such acquisition. The Company agreed to provide funds to drill 40
gas wells on such properties, and in 1992, the Company attempted to raise the
required capital through a public offering. Due to the expiration of "Section
29" credits (a credit against Federal income taxes derived from gas produced
from Devonian Shale and "tight sands" formations from wells commenced before
January 1993), in December 1992, the Company abandoned the offering. As a
result, the Company recorded certain provisions for writedown of these
interests. During 1993, the Company allowed the leases for the net undeveloped
acreage to expire, and sold to third parties approximately 2,300 of net
developed acres. In December 1994, all of the remaining leases were sold
pursuant to the plan of orderly liquidation described below.
Bartlett Field Wells - Ohio
In January 1992, ExCal acquired 77 gas wells in the Bartlett Field from 18
limited partnerships controlled and operated by Mr. Arneault or his affiliates.
The wells were in need of repair and the Company planned to incur rework costs
to increase production and maximize the value of the assets. Aggregate annual
gas production was 100,000 to 150,000 MCF, and management believed that with
limited rework, production could be increased by at least 100%. In December
1994, all of the wells were sold pursuant to the plan of orderly liquidation
described below.
17
Marathon-Otter Lake Field - Michigan
In January 1992, ExCal acquired all the issued and outstanding shares of Crystal
Exploration Company, Inc. ("Crystal"). Crystal's assets consisted of an average
of 64% net revenue interest in approximately 3.3 million barrels of oil (proved
reserves) plus 34 oil and gas wells and related equipment in the Marathon-Otter
Lake Field in the State of Michigan. In 1991, the wells were shut-in by Crystal
which has undertaken no material drilling since then. In December 1992, ExCal
entered into a joint venture agreement with Fleur-David Corporation ("Fleur-
David"), a minority stockholder of the Company, to renegotiate the leases and to
perform rework and remediation activities to reestablish production and provide
activities necessary for compliance with state environmental standards. ExCal
contributed its net revenue interest in the proved reserves and agreed to pay
25% of on-going costs in exchange for a 25% interest in the joint venture. For
a 75% interest in the joint venture, Fleur-David agreed to provide technical
expertise and 75% of on-going costs. Fleur-David also obtained a covenant not
to sue for clean-up and abandonment costs from the State of Michigan by funding
$188,000 in an environmental escrow fund required by the state. Costs were
estimated at $2,200,000 and have included rework of wells, repairs to oil
storage tank batteries, acid treatments of producing formations, plugging,
clean-up, equipment removal, waste disposal and soil removal costs required by
the Michigan Department of Natural Resources. The Company is responsible to
provide 25%, or approximately $550,000 of such costs, of which approximately
$286,000 as of December 31, 1996 has been paid primarily from proceeds from the
exercise of certain stock options granted to Fleur-David by the Company, as well
as cash from continuing operations.
Plan of Orderly Liquidation
On March 31, 1993, the Company's Board approved a formal plan to divest its oil
and gas operations over a period of two years. This decision was based upon
several factors including (i) the anticipated potential of the Company's gaming
operations and the anticipated time to be devoted to it by management, (ii) the
expiration of "Section 29" credits, a credit against Federal income taxes
derived from gas produced from Devonian Shale and "tight sands" formations from
wells commenced before January 1993, and (iii) the impact of delays in
connection with a political controversy over video lottery in West Virginia
during 1993 which caused management to focus the Company's efforts and financial
resources on Mountaineer. To enhance the value of the properties for sale, the
plan of orderly liquidation provided for remediation costs to address certain
environmental matters and rework and development costs to increase future
production.
During 1993, the Company began disposition of the Bartlett Field oil and gas
leases by selling to third parties or, based on certain contingencies in the
acquisition agreement, returning to their previous owners, approximately 2,300
net developed acres. The Company received approximately $85,000 in connection
with the sale of the leases. The Company also allowed leases comprising 16,800
net undeveloped acres to expire. At December 31, 1993, the Company held net
developed acreage of 13,700 acres and reserves in the Bartlett Field of 902,200
MCF.
The plan of orderly liquidation also called for rework costs of approximately
$150,000 in connection with the Company's 77 Bartlett Field gas wells. Because
the wells were in various states of disrepair, the plan called for maintenance
of wells, acid treatments of producing formations and, in some cases, plugging
and abandonment, all for the purpose of increasing production
18
and the value of such assets for ultimate sale. In mid-1993, the Company
reduced its appropriation for such rework costs to $100,000, which was estimated
to increase net cash flows from production to a minimum of $25,000 per month.
However, after completion of only $50,000 of such rework costs, the Bartlett
Field wells and remaining Bartlett Field leases were sold in December 1994 to
Development & Acquisition Ventures in Energy, Inc. ("DEVAQ"), whose principal
stockholder is the brother of Edson R. Arneault, the President, Chief Executive
Officer and Chairman of the Company, for notes valued at approximately $426,000,
of which $150,000 (discounted to $126,000) is non-recourse, secured solely by
the assets sold. See "Certain Transactions".
At the time of the sale, the Company remained obligated on a $590,000, 9% note
to the previous owners of the Bartlett Field wells. On March 31, 1995, the note
was amended to provide the Company with a credit for the current value of 98,333
shares of the Company's Common Stock issued to the previous owners in March 1993
in the amount of $123,000. The amendment further provided for the $467,000
balance of the note to be paid in monthly payments of interest only at 10% from
May through October 1995, with principal amortized over 36 months thereafter
with a balloon payment after 12 months on October 1, 1996. The note was payable
at the option of the Company through the issuance of Common Stock on or before
November 1, 1995 at the then current market value, provided that such shares
were registered by the Company at the time of issuance. The Company paid
monthly interest payments in May and June 1995, and in October 1995, the note
was canceled in exchange for interest payments for the months of July, August
and September 1995, and 373,600 shares of the Company's Common Stock, subject to
registration rights and valued for purposes of the transaction at the then
current market value of $1.25 per share.
The Company intends to sell its sole remaining oil and gas interest in the
Marathon-Otter Lake Field during 1997. For further discussion of management's
plan of orderly liquidation, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Discontinued
Operations."
ITEM 2. PROPERTIES
Gaming, Racing and Other Entertainment
Mountaineer Race Track & Gaming Resort is comprised of a thoroughbred race track
and the Lodge providing video lottery gaming, off-track wagering, dining and
lounge facilities as well as facilities for golf, swimming, tennis and other
outdoor activities covering approximately 606 acres (including 375 undeveloped
acres) in Chester, West Virginia. The Mountaineer facility encompasses
approximately 4,100 feet of frontage on the Ohio River and approximately 2,500
feet of highway frontage straddling West Virginia State Route 2. At December
31, 1996, Mountaineer was encumbered by a first deed of trust in favor of
Madeleine L.L.C. aggregating $16.1 million in principal (principal balance of
approximately $16.1 million as of December 31, 1996).
Equipment Leases
At December 31, 1996, in connection with video lottery operations,
Mountaineer leased 800 VLTs. During the first quarter of 1997, the Company
agreed to amend its master lease agreement, reducing the number of leased
VLTs to 600. In connection with racing operations, Mountaineer leases
totalisator, video tape, photofinish, and closed circuit television systems
and other equipment required for
19
operations. For discussion of such equipment leases, see Note 9 of the Notes to
Consolidated Financial Statements.
Oil and Gas
The Company's oil and gas interest constitutes a 25% joint ventue interest in an
average 64% net revenue interest from proved reserves with 34 net producible
wells in the Marathon-Otter Lake field in Lapeer and Genesee Counties, Michigan.
Proved reserves are estimated at 3,314,800 BBL. For financial and other
information about the Company's oil and gas interests, see "Discontinued
Operations," "Management's Discussion and Analysis of Financial Condition" and
"Results of Operations - Results of Discontinued Operations," and Note 12 of the
Notes to Consolidated Financial Statements.
Office Lease
The Company moved the majority of its corporate operations to Mountaineer on
November 30, 1996 and officially moved its corporate headquarters to Mountaineer
on March 1, 1997. At December 31, 1996, the Company has approximately 400
square feet of office space in Laguna Beach, California under a month-to-month
lease with a monthly rental payment of $700.
ITEM 3. LEGAL PROCEEDINGS
SETTLED LITIGATION
During fiscal year 1996, the Company and Mountaineer settled a number of pending
cases and other claims as follows:
EVELYN SERPA, AS THE COMMITTEE AND GUARDIAN OF DANIEL DAVID BARRETT, SR., V.
MOUNTAINEER PARK, INC., ET. AL., Circuit Court of Hancock County, West Virginia,
Civil Action No. 95-C-147G. Mountaineer was served with a complaint in 1994 by
a jockey who sustained head injuries from a fall during a race at Mountaineer.
The plaintiff sought both compensatory and punitive damages. Mountaineer's
insurer has settled the case (subject to court approval) within the policy
limits and thus without material liability to the Company.
MOUNTAINEER PARK, INC., ET AL. V. BENNETT MANAGEMENT & DEVELOPMENT CORPORATION,
ET AL., United States Bankruptcy Court, Northern District of New York, Case Nos.
96-61376 (SDG), 96-61377 (SDG), 96-61378 (SDG), 96-61379 (SDG). On July 1,
1996, the Company and Mountaineer filed an adversary proceeding against Bennett
Management & Development Corporation ("Bennett") in the United States Bankruptcy
Court for the Northern District of New York. In the complaint, the Company and
Mountaineer sought compensatory and punitive damages, recoupment and setoff, and
other equitable relief, including declaratory and injunctive relief for lender
liability arising out of Bennett's (i) insistence that Mountaineer enter a
management agreement with Bennett's financially troubled gaming affiliate,
which, the complaint alleged, misspent loan proceeds; (ii) bad faith refusals to
honor the requests of the West Virginia Lottery Commission to supply audited
financial statements by the deadline and then several extended deadlines; (iii)
fraudulent misrepresentations and omissions in connection with amendments of the
parties' Construction Loan Agreement -- particularly with respect to issuance of
an additional 1,020,000 shares of the Company's common stock to Bennett; and
(iv) conduct of its business generally, which led to allegations of civil and
criminal wrongdoing by Bennett in matters unrelated to its loan to
20
Mountaineer, which in turn, led Bennett to seek the protection of the Bankruptcy
Court.
By Amendment of Construction Loan Agreement dated September 19, 1996, which the
Bankruptcy Court approved by Order dated October 22, 1996, the Company and
Mountaineer settled all of their claims against Bennett.
The settlement modified both the amortization schedule and the Company's
obligation to issue additional shares of its common stock to Bennett if the loan
was not prepaid by January 1, 1997. The settlement likewise granted to the
Company a release of any claims by Bennett's affiliate management company, which
had provided management services to Mountaineer pursuant to a 1994 management
agreement, and in the event Bennett wishes to sell any of its shares of the
Company's common stock on or before December 31, 1997, a right to match any
offer.
On December 26, 1996, Mountaineer prepaid in full the outstanding $8,711,000
balance of the construction loan.
JOYCE RICHARD BRANTLEY V. MOUNTAINEER PARK, INC., Case No. 94-C-124, Circuit
Court of Hancock County, West Virginia. In 1994, the Company was served with a
complaint by a former part-time employee for wrongful termination, claiming that
Mountaineer fired her as a result of a worker's compensation claim. The
complaint was not answered timely by the Company's outside counsel and, as a
result, a default judgment was entered by the Court in the amount of
approximately $308,000. The Company filed a motion to set aside the default
judgment, but prior to hearing of the motion, on June 24, 1996 the Company
settled the Brantley case by paying a lump sum of $100,000 in consideration for
a dismissal of the case with prejudice. The Company is seeking to recoup this
sum -- as well as its costs and attorney's fees in attempting to have the
default judgment set aside and in settling the matter. See MOUNTAINEER PARK,
INC. V. MANYPENNY discussed below.
CRYSTAL ASSET MANAGEMENT GROUP, LTD. In July 1994, the Company entered into an
agreement settling all claims of Crystal Asset Management Group, Ltd. ("CAM")
arising from an April 1993 financial advisory agreement. The Company agreed to
pay fees and expenses of $165,684 and to cancel previously issued warrants to
purchase 135,000 shares of common stock with registration rights at $7.00 per
share, and instead, issue warrants to purchase 145,000 shares of common stock
with registration rights, exercisable at $6.25 per share through December 1996.
Upon execution of the settlement agreement, the Company delivered the warrants
and made an initial payment of $15,000; however, no further payments were made.
In August 1996, the Company entered into an oral agreement, modifying the
settlement agreement. The oral agreement, which was subject to execution of a
definitive written agreement, provided for mutual releases of all claims in
exchange for the Company's payment of $90,000 in cash and reduction of the
exercise price of the previously issued warrants to $3.00 per share and
extension of the term thereof through December 1997. On September 4, 1996, the
parties settled the matter by execution of a definitive written agreement
containing such terms, followed by the Company's payment to CAM of $90,000.
MICHAEL R. DUNN. During the second quarter of 1995, the Company and Michael R.
Dunn, the former president and chairman of the Company, entered into an
agreement pursuant to which Mr. Dunn resigned from the Company and its
subsidiaries effective April 26, 1995. Pursuant to this agreement, the Company
agreed to pay Mr. Dunn bimonthly payments equal to his former salary for a
period of two years, certain medical and health benefits, and
21
indemnification for actions taken while he was an employee of the Company.
Subsequent to the agreement, the Company discovered circumstances which caused
Management to believe that the agreement should be rescinded. Bi-monthly
payments were made to Mr. Dunn through September 30, 1995, and no payments
thereafter. Mr. Dunn made demand for payment of unpaid installments under the
agreement, attorneys' fees incurred in pursuing his claim and unspecified
investment opportunity. By agreement dated October 4, 1996, the parties settled
their differences. In exchange for a waiver by Mr. Dunn of any claims under the
agreement or any further payments, the Company agreed to pay Mr. Dunn $100,000
and 100,000 shares of the Company's common stock subject to registration rights.
The remaining terms of the earlier agreement remained unchanged.
DARELYNN LEHTO V. WINNERS ENTERTAINMENT, INC., Civil Action No. 4-96-49, United
States District Court for the District of Minnesota (filed January 11, 1996).
Ms. Lehto's complaint alleged breach of provisions of an October 1992 stock
exchange agreement (through which Golden Palace became a wholly owned subsidiary
of the Company) requiring the Company under certain circumstances to repurchase
52,250 shares of the Company's stock from her at a price of $6 per share and to
use its best efforts to register such shares for sale to the public. By
agreement dated May 10, 1996, the Company settled its differences with Ms.
Lehto. Pursuant to the settlement agreement, the Company agreed to pay Ms.
Lehto $25,000 upon execution of the settlement agreement and delivered a
promissory note calling for a total of three payments of $5,000 due on August 1,
1996, November 1, 1996 and February 1, 1997; a payment of $50,087 on May 1,
1997; and a total of four payments of $40,087 due on May 1, 1998, 1999, 2000 and
2001. In consideration for the Company's execution of the settlement agreement,
the payment of $25,000 and delivery of the promissory note, Ms. Lehto has
dismissed the litigation with prejudice, the parties have exchanged mutual
releases, and Ms. Lehto has agreed to the cancellation of options previously
granted to her to purchase 50,000 shares of the Company's common stock at a
price of $.01 per share.
DOROTHY VAN HAAFTEN, a former director of Golden Palace Casinos, Inc.,
threatened to bring suit against the Company alleging breach of a provision of
an October 1992 stock exchange agreement (through which Golden Palace became a
wholly owned subsidiary of the Company) requiring the Company under certain
circumstances to repurchase 52,250 shares of the Company's common stock from her
at a price of $6 per share.
By agreement dated April 2, 1996, as amended June 18, 1996, the Company settled
its differences with Ms. van Haaften without the filing of any litigation. The
Company forgave a $10,000 loan made to Ms. van Haaften in 1993, released the
collateral therefor (1,666 shares of the Company's common stock), paid Ms. van
Haaften $10,000, and agreed to issue Ms. van Haaften 133,416 shares of the
Company's common stock and to register such shares. Because the shares were not
registered by June 30, 1996, the agreement required the Company to deliver a
promissory note in the principal amount of $200,125 (133,416 shares multiplied
by $1.50 per share). The note is payable in 24 monthly installments and bears
interest at 12% per year. For each $1.50 in principal paid by the Company, Ms.
van Haaften was required to return to the Company one share of common stock.
Per the note, the Company redeemed 16,677 shares (which were canceled and
returned to authorized but unissued status) when the October 31, 1996
effectiveness of the registration statement including the shares stayed the
Company's payment obligation for a period of 90 business days. Under the
agreement, the Company was entitled to a credit against the note in an amount
equal to the average closing market price of the stock for the 90 days
immediately following the effective date of the
22
registration statement (the "Average Market Price") multiplied by 133,416.
Accordingly, after a credit of $150,325.14, the outstanding balance of the note
as of October 31, 1996 was $27,362,99 which will effectively be eliminated by
the issuance of shares as discussed below.
The agreement likewise provided that in the event the Average Market Price was
less than $1.50 per share, then the Company would issue that number of
additional shares equal in value to the difference between $1.5O and such 90 day
average market price and to grant such shares piggyback registration rights.
The Company thus became obligated to issue 30,312 additional shares.
PENDING LITIGATION
WANDA ANDERSON, ADMINISTRATRIX OF THE ESTATE OF TERRY D. ELLIOTT V. MOUNTAINEER
PARK, INC., Circuit Court of Hancock County, West Virginia, Civil Action No. 97-
C-60G. On October 20, 1995, a horse which was stabled by one of the horse
owners at Mountaineer became loose and ran onto a highway resulting in an
automobile collision and the death of a motorist. On April 1, 1997, Mountaineer
was served with a complaint by the administratrix of the decedent's estate. The
matter is covered by insurance and management believes that if Mountaineer is
found to be liable the case will be adjudicated or settled within policy limits.
Accordingly, management believes that the matter will not result in any material
liability to Mountaineer or the Company. However, there can be no assurance
that Mountaineer will not be found liable, and if so, that the policy limits
will be adequate to cover such material liability.
HAMILTON V. MOUNTAINEER PARK, INC. ET AL., Circuit Court of Hancock County, West
Virginia, Civil Action No. 96-C-150R. On November 11, 1996, Mountaineer was
served with a complaint filed by a former employee alleging that Mountaineer had
wrongfully terminated his employment, in violation of an alleged oral, life-time
employment contract, in retaliation for his allegedly having reported to
Mountaineer officials and/or West Virginia racing officials that Mountaineer had
violated state and federal laws. Mr. Hamilton, who had served as Director of
Mutuels from about July of 1991 until his termination in July of 1995, alleges
that he complained that Mountaineer extended credit to officers, employees, and
patrons for wagering in violation of state law; that between April and September
of 1994, a Mountaineer employee made illegal cash payments on behalf of
Mountaineer of $7,750 to local politicians in return for their support of video
lottery legislation; and that Mountaineer committed other violations of state
and federal law.
The complaint seeks compensatory damages in the amount of $1,000,000,
prejudgment interest, and costs as well as punitive damages in the amount of
$5,000,000, reinstatement, back pay, front pay, compensation for pecuniary
losses, and attorneys' fees.
Mountaineer has answered the complaint, denying all allegations of wrongdoing
and liability. Mountaineer has also moved to dismiss the complaint with
prejudice on the grounds that (i) Mr. Hamilton's prior testimony under oath when
seeking unemployment compensation benefits (that his termination resulted solely
from a combining of departments) estops him from now claiming otherwise; (ii)
the claimed lifetime employment contract is unenforceable as a matter of West
Virginia law; and (iii) the complaint fails to state a claim for wrongful
discharge, discrimination, or intentional infliction of emotional distress. The
Company believes the lawsuit is frivolous and, therefore, that it will not incur
any material liability as a result.
23
Mountaineer has also moved to disqualify plaintiff's counsel on the grounds that
such counsel has a material conflict of interest by virtue of his current
attorney-client relationship as an expert witness on behalf of Mountaineer in
the SERPA case, which is pending in the same court. The motion was granted on
March 21, 1997. Hearings on Mountaineer's remaining motions have not yet been
scheduled, and discovery has not commenced. Plaintiff has not yet identified
replacement counsel.
The complaint also names as a defendant an employee of Mountaineer. Mountaineer
has advised the employee to engage separate counsel and has agreed to reimburse
the employee for his legal fees.
GEORGE JONES V. MOUNTAINEER PARK, INC. AND WINNERS ENTERTAINMENT, INC., Circuit
Court of Hancock County, West Virginia, Civil Action No.95-C-103G. On June 19,
1995, the Company and Mountaineer were served with a complaint by George Jones,
claiming breach and wrongful termination of Mr. Jones' employment agreement with
Mountaineer, retaliatory discharge, fraud, outrage, and defamation. The
complaint alleges, among other things, that Mountaineer terminated Jones'
employment in September of 1993 in retaliation for his efforts to investigate
alleged improper activities occurring at Mountaineer. Mr. Jones seeks an award
of compensatory damages in the amount of $1 million and a like amount in
punitive damages.
The Company and Mountaineer have answered the complaint, denying any liability
to Mr. Jones. Management has determined to defend the case vigorously on the
grounds that the defamation claim is barred by the statute of limitations, and
that all of the claims should be dismissed because Mr. Jones' employment was
properly and justifiably terminated. In April of 1997, Mountaineer was advised
by its insurance carrier that only the defamation claims against it are covered
by insurance. Discovery has only recently commenced in the case, largely
because Mr. Jones' counsel had been unable to locate him. The Company does not
believe that either the Company or Mountaineer will incur any material loss on
account of such claims.
MOUNTAINEER PARK, INC. V. MANYPENNY, Circuit Court of Hancock County, West
Virginia, Civil Action No. 96-C-96W. In July of 1996, Mountaineer brought suit
against Lawrence Manypenny for legal malpractice. Mountaineer's complaint
alleges that Mr. Manypenny negligently failed to file a responsive pleading on
Mountaineer's behalf, resulting in the entry of a default judgment against
Mountaineer in the principal amount of $308,000. Mountaineer seeks to recoup
the $100,000 it paid in settlement of the judgment together with its costs and
attorney's fees incurred in its attempts to overturn the judgment.
Mr. Manypenny has answered the complaint (denying its allegations of
negligence), asserted a third-party claim in the nature of contribution,
alleging that to the extent he is liable to Mountaineer, Mr. Russell, alleged to
have been Mountaineer's general counsel, is liable to him, and asserted a
counterclaim for legal fees allegedly due him in the amount of $7,000.
Mountaineer will seek summary judgment on the counterclaim based on accord and
satisfaction. Mountaineer has agreed to provide Mr. Russell a defense to the
third-party claim. Discovery has established that Mr. Manypenny has
professional liability insurance in an amount sufficient to satisfy any judgment
Mountaineer might obtain. There can be no assurance, however, that Mountaineer
will prevail in the litigation.
The Company (including its subsidiaries) is also a defendant in various law
suits relating to routine matters incidental to its business. Management does
24
not believe that the outcome of such litigation, in the aggregate, will have any
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders, held on October 15, 1996, the
following proposals were approved by a majority of the shareholders of the
Company: (1) the election of Edson R. Arneault, Robert A. Blatt, Robert L.
Ruben and Thomas K. Russell to serve as directors of the Company until the next
annual meeting of shareholders, (2) an amendment to the Company's certificate of
incorporation changing the Company's name to "MTR Gaming Group, Inc.," (3) an
amendment to the Company's certificate of incorporation increasing the
authorized number of shares of the Company's common stock from 25 million to 50
million, (4) ratification of the Company's 1996 employee stock option plan, and
(5) confirmation of Corbin & Wertz as the Company's accountants and independent
auditors.
A proposal to amend the Company's certificate of incorporation to create a new
class of preferred stock was not approved by the shareholders, and a proposal to
amend the Company's certificate of incorporation to effect a one for five
reverse split of the Company's common stock was tabled by the Board of Directors
prior to the annual meeting.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ SmallCap Market and trades
under the symbol "MNTG." The following table sets forth the high and low bid
prices of the Company's common stock during each of the quarterly periods
indicated, as reported by the National Quotation Bureau.
1997* 1996 1995
Bid Price Bid Price Bid Price
------------ ------------ -------------
Quarter Ended High Low High Low High Low
- ------------- ------------ ------------ -------------
March 31 1-9/16 3/4 29/32 11/32 1-31/32 1-3/32
June 30 1-17/32 9/16 1-11/16 1-1/8
September 30 1-1/2 13/16 1-5/8 1-1/16
December 31 1-9/16 7/8 1-1/4 1-7/32
_______________________
* For the period of January 1, 1997 through March 20, 1997
The high and low bid quotations set forth above reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, and may not necessarily
represent actual transactions. On March 20, 1997, the last reported sale price
was $1.281. The Company has never paid a dividend and does not intend to for
the foreseeable future. As of March 20, 1997, there were approximately 567
holders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the audited
consolidated financial statements of the Company 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
25
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein. Due to the Company's approval in March 1993 of a plan of
orderly liquidation of its oil and gas operations, the results of such
discontinued operations have been excluded from such data.
Year Ended December 31
(In thousands of dollars, except per-share data)
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Statement of Operations
Data:
Net revenues $ 40,204,000 $ 24,927,000 $ 14,656,000 $ 13,014,000 $690,000
Net income (loss) from
continuing operations 1,155,000 (5,313,000) (6,902,000) (5,913,000) (2,749,000)
Income (loss) per share
from continuing
operations .06 (.33) (.48) (.46) (.42)
Year Ended December 31
(In thousands of dollars, except per-share data)
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
Total Assets $ 30,878,000 $ 25,747,000 $ 23,958,000 $ 19,137,000 $ 16,812,000
Redeemable Common
Stock 0 1,406,000 2,208,000 2,208,000 1,618,000
Total liabilities 20,612,000 19,763,000 14,200,000 6,040,000 5,641,000
Stockholders' Equity 10,266,000 5,984,000 9,758,000 13,097,000 11,171,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In December, 1992 the Company acquired all of the outstanding stock of
Mountaineer Park, Inc. ("Mountaineer") with the intent of enhancing its existing
facilities for promotion as a high quality gaming and racing destination resort.
Shortly thereafter the Company determined to focus its business primarily on the
gaming industry, and de-emphasized its activity in other businesses in order to
more fully devote corporate resources to Mountaineer, as described elsewhere in
this report. See "Results of Discontinued Operations."
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mountaineer has exhibited steady, pronounced revenue growth under its expansion
plan begun in September 1994, principally in its video lottery gaming operation.
The emergence of video lottery as Mountaineer's dominant profit center and the
1996 amendment of the West Virginia video lottery law to permit the addition of
simulated "classic casino slot machine" games to video lottery terminals ("Slot
Terminals") have significantly moderated the seasonality experienced in prior
year revenue trends. As a result of this
26
significant increase in gaming revenues, the Company earned a $1.2 million
profit from continuing operations in 1996.
The Company incurred significant losses from continuing operations during the
years ended December 31, 1995 and 1994 largely due to delays encountered in the
expansion of Mountaineer's video lottery operations as a result of (i) the State
Attorney General's 1993 challenge of Mountaineer's contract with the Lottery
Commission; (ii) the State Supreme Court's ruling that video lottery was
unconstitutional pending the passage of proper enabling legislation; and (iii)
time required for the passage of such legislation. These delays, together with
legal settlement provisions, operating losses incurred in the horse racing
operations, and corporate overhead charges, resulted in losses from continuing
operations of $5.3 million in 1995, and $6.9 million in 1994.
REVENUES
Total revenues increased by $15.3 million from 1995 to 1996, an increase of 61%.
Video lottery operations accounted for $14.2 million of the increase, and
lodging, food and beverage operations contributed $899,000 of the increase. The
region surrounding Mountaineer experienced extensive flooding and unusually
heavy snowfall in the first quarter of 1996, producing difficult travel
conditions and resulting in portions of Ohio, West Virginia and Western
Pennsylvania being designated as Federal disaster areas. The Company's revenue
increases have been achieved despite these unusual weather conditions.
Mountaineer's facilities are situated well above the flood plain and did not
sustain any damage; Mountaineer's nearest competitor was extensively damaged and
ceased operations for approximately four weeks in the first quarter of 1996.
Total revenues increased by $10.3 million from 1994 to 1995, an increase of 70%.
Approximately $9.0 million of the increase was produced by video lottery
operations, while the parimutuel commissions and lodging, food, beverage and
other operations at Mountaineer contributed $1.3 million of additional revenues.
Years Ended December 31
-----------------------------------------
1996 1995 1994
---- ---- ----
Video Lottery Operations $ 30,700,000 $ 16,479,000 $ 7,481,000
Parimutuel Commissions 4,299,000 4,263,000 3,768,000
Lodging, Food and Beverage 3,945,000 3,046,000 2,276,000
Other 1,260,000 1,139,000 1,131,000
----------- ----------- ----------
$ 40,204,000 $ 24,927,000 $ 14,656,000
------------ ------------ ------------
------------ ------------ ------------
Video Lottery Operations
Mountaineer has operated video lottery terminals ("VLTs") in West Virginia since
December 1992; operations were conducted under a provisional license until
September 1994. The West Virginia Racetrack Video Lottery Act, signed in March
1994, allowed the uninterrupted continuation of video lottery games at
Mountaineer and permitted the Company to increase its number of VLTs from 165 to
400 on September 4, 1994. In July 1995, the Company placed into operation an
additional 400 VLTs, bringing the total number of VLTs in operation to 800. The
800 VLTs then in operation offered only card games and keno ("Card Terminals").
Upon the enactment of the amendment of the video lottery law permitting Slot
Terminals, in July of 1996 Mountaineer converted
27
350 Card Terminals into Slot Terminals. In October of 1996, Mountaineer
converted an additional 50 Card Terminals to Slot Terminals. In March of 1997,
Mountaineer purchased and installed 400 new Slot Terminals and removed 200
previously leased Card Terminals, bringing the total number of VLTs to 1,000 as
of March 13, 1997, consisting of 800 Slot Terminals and 200 Card Terminals.
A summary of video lottery net win (gross amounts wagered less winning patron
payouts) for the twelve and six month periods ended December 31, 1996 and 1995
is as follows:
Twelve Months Ended Six Months Ended
December 31 December 31
1996 1995 1996 1995
---- ---- ---- ----
Total gross wagers $104,819,000 $ 55,988,000 $ 62,602,000 $ 32,810,000
Less patron payouts (74,119,000) (39,509,000) (43,802,000) (23,174,000)
------------ ------------ ------------ ------------
Video Lottery Revenues $ 30,700,000 $ 16,479,000 $ 18,800,000 $ 9,636,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average Daily Net Win
Per Terminal $ 105 $ 75 $ 127 $ 65
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Current year video lottery operations versus 1995 garnered revenue increases of
86% for the twelve month period and 95% for the six month period. Management
attributes these increases to four factors: (i) expansion of video lottery
facilities in July, 1995, doubling the number of VLTs from 400 to 800, (ii)
expansion of the Speakeasy Gaming Saloon at Mountaineer Lodge by 8,000 square
feet in December 1995; (iii) commencement of video slot operations in July 1996
on 350 VLTs and 50 additional VLTs in October 1996 of the 800 VLTs already in
use; and (iv) commencement of a large scale marketing campaign in July 1996
aimed beyond the 40 mile radius from which Mountaineer has traditionally drawn
the bulk of its patrons.
Revenues from video lottery operations increased 120%, from $7.5 million in 1994
to $16.5 million in 1995. Video lottery revenues in the second half of 1995
surpassed $9.6 million, a level 28% higher than revenues earned in all of 1994.
A comparison of fourth quarter revenues shows that 1995 outperformed 1994 by
$1.6 million, an increase of 56% over the $2.8 million of revenue earned in the
final quarter of 1994.
The results of video lottery operations reflect a three-year trend of
significantly increasing aggregate net win, coupled with an increase in average
daily net win per terminal in 1996. The Company plans to pursue additional
growth in its video lottery operations. The aggressive newspaper marketing
campaign begun in July 1996 continued at a moderately reduced level through the
winter months. In January of 1997, Mountaineer also began broadcasting a 30
minute "infomercial" advertisement on television affiliates within a two hour
driving radius.
Management has undertaken a large scale redecoration of its racetrack grandstand
video lottery facilities, including expansion of ancillary dining and bar areas.
Management believes it can draw and accommodate significantly heavier patronage
to the grandstand gaming facilities, which currently operate only on the
Company's 220 annual live race dates. For the twelve months ended December 31,
1996, average daily net win on the 400 grandstand terminals was $43 (including
$0 for days when there was no live racing), compared to $167 earned on the
lodge-based terminals.
28
Parimutuel Commissions
Under West Virginia Horse Racing Law, the Company is required to race a minimum
of 220 days per year and its racing revenues are defined as commissions.
Parimutuel commission revenue is a function of wagering handle, with a higher
commission earned on more exotic wagers, such as a trifecta, than on single
horse wagers, such as a win, place or show bet. Mountaineer earned an average
commission rate of approximately 20% in each of the past three years.
Mountaineer's parimutuel racing commissions and wagering handle for the years
ended December 31, 1996, 1995, and 1994 are as follows:
Years Ended December 31
-----------------------------------------------------
1996 1995 1994
---- ---- ----
Live racing parimutuel handle $ 20,426,000 $ 22,028,000 $ 21,168,000
Simulcast racing parimutuel handle 19,673,000 17,791,000 14,307,000
------------- ------------- -------------
Total parimutuel handle 40,099,000 39,819,000 35,475,000
Less:
Patrons' winning tickets (31,766,000) (31,637,000) (28,246,000)
Purses and Horsemen's Association
Payments (3,547,000) (3,447,000) (3,019,000)
State and County parimutuel taxes (487,000 (472,000) (442,000
------------- ------------- -------------
Parimutuel Commissions $ 4,299,000 $ 4,263,000 $ 3,768,000
------------- ------------- -------------
------------- ------------- -------------
For the twelve months ended December 31, 1996, simulcast handle rose by $1.9
million to $19.7 million, an increase of 11% compared to $17.8 million for the
same period in 1995. Management believes the increase resulted from renovations
to track betting facilities and an increase in the number of wagering days to
seven days per week at multiple locations, plus the introduction of simulcast
greyhound racing in the second quarter of 1995. Early in 1995 Mountaineer
expanded its off-track betting facilities in both the racetrack
clubhouse/grandstand and the Lodge, leading to a 24% increase in simulcast
wagering handle from $14.3 million to $17.8 million, an increase of $3.5
million. In April 1995, Mountaineer began offering off-track betting on
greyhound racing, which contributed $2.7 million to the increased simulcast
handle. The remaining $.8 million increase is attributable to the enhancement
of Mountaineer's off-track betting facilities and more extensive offerings of
simulcast racing; for most of 1995 Mountaineer offered simulcast racing seven
days per week, compared to six days per week in 1994.
Live racing handle declined by $1.6 million, or 7%, for the year ended December
31, 1996 to $20.4 million from $22.0 million for the year ended December 31,
1995. Live wagering handle increased 4%, from $21.2 million in 1994 to $22.0
million in 1995, an increase which slightly surpassed the 3% increase in live
race days, from 220 in 1994 to 227 in 1995. Average daily purses, which were
$25,000 in the third quarter of 1995, increased several times during 1995 and
1996 to a high of approximately $55,000 in the third and fourth quarters of
1996. Mountaineer reduced daily purses to approximately $35,000 late in the
fourth quarter of 1996, with the intention of raising them above the $50,000
level in the second quarter of 1997. Management believes that live racing
handle will increase as racing purses increase following the concept that higher
purses attract higher quality race participants, which in turn captures the
interest of wagerers from a larger geographic region. In
29
accordance with this philosophy, Mountaineer began offering moderately funded
stakes races of up to $20,000 per race during the third quarter of 1996. More
sizable stakes races may be offered if a favorable revenue trend develops from
this practice. Legislation was approved by the Ohio General Assembly that
permitted full-card simulcasting and off-track betting beginning in September
1996. Management is unaware of any imminent plans for competing Ohio racetracks
to open any off-track betting sites near Mountaineer's Chester, West Virginia
facility. In September 1995, Mountaineer hosted the West Virginia Breeders'
Classics, a night of stakes races with $330,000 in purses funded by taxes on
statewide video lottery revenues. Mountaineer broadcasted a simulcast signal of
the stakes races, earning commissions on $351,000 of handle wagered off-site.
Lodging, Food, and Beverage Operations
Lodging, food and beverage revenues accounted for a combined increase of 30% to
$3.9 million for the year ended December 31, 1996 from $3.0 million for the same
period in 1995. Management believes that refurbishment of the lodge guest rooms
early in 1995, in combination with other improvements at Mountaineer,
contributed to a 37% lodging revenue increase to $1,091,000 from $794,000, for
the same period-to-period comparison. Forty-one guest rooms were unavailable
for use in the first four months of 1995 due to smoke damage experienced in the
fourth quarter of 1994. Food and beverage revenues reflected an increase of 27%
to $2.9 million from $2.3 million for the year ended December 31, 1995.
Management attributes the increase to direct elements of the marketing campaign
which commenced in July, 1996, as well as the synergistic effects of heavier
video lottery patronage.
Revenues earned from lodging, food and beverage activities increased 34%, from
$2.3 million earned in 1994 to $3.0 million in 1995. The increase is a
reflection of significantly greater attendance at the Mountaineer's video gaming
and off-track betting facilities, as well as a slight increase in live racing
attendance. Restaurant, bar and concession facilities produced $582,000 of the
revenue increase, while lodge revenues increased $194,000. Food and beverage
operations accounted for approximately three quarters of the revenues earned by
this profit center in both 1995 and 1994.
Other Revenues
Other revenues increased by $121,000, or 11% from 1995 to 1996. Other operating
revenues are primarily derived from the sale of programs, parking and admission
fees relating to Mountaineer's racing activities, and periodic spectator events
such as boxing matches or concerts. In addition, in 1996 Mountaineer received
$201,000 from the West Virginia Racing Commission to be used for barn
renovations.
Other revenues were virtually unchanged from 1994 to 1995, registering
approximately $1.1 million each year. Operations in 1994 benefited from an
$85,000 gain recorded upon the disposition of property, while 1995 saw a
moderate increase in revenues relating to admission fees and program sales.
Non-recurring Income
In 1996, the Company negotiated significant reductions in four previously
accrued obligations, producing an aggregate gain of $705,000. Trade accounts
payable and accrued liabilities totaling $1.3 million were settled in a series
of transactions in return for cash payments aggregating $440,000 and 100,000
shares of the Company's common stock, producing the gain.
30
OPERATING COSTS
The expanded scope of operations which produced Mountaineer's 1996 61%
revenue increase resulted in a 37% increase in cost of revenues, a 50%
increase in marketing and promotions expense, a 25% reduction in general and
administrative expenses, and an 11% reduction in depreciation and
amortization. Gross profits from Mountaineer's four profit centers nearly
tripled from $3.1 million to $10.4 million; $6.9 million of this amount was
earned in the last two quarters of 1996.
Total cost of revenues increased by 63%, from $13.4 million in 1994 to $21.8
million in 1995. Approximately $6.5 million of the increase was attributable to
the substantial growth in VLT revenues which more than doubled from 1994 to
1995. Parimutuel commissions expense accounted for $.5 million of the increase,
largely a reflection of its 13% increase in commission revenues, and lodging,
food and beverage cost of revenues increased $1.0 million, exceeding the
$770,000 revenue increase earned by that profit center.
Years Ended December 31
----------------------------------------------------
1996 1995 1994
---- ---- ----
Cost of Revenues:
Video Lottery Operations $ 19,865,000 $ 12,256,000 $ 5,709,000
Parimutuel Commissions 5,257,000 5,064,000 4,563,000
Lodging, Food and Beverage 3,543,000 3,285,000 2,337,000
Other Revenues 1,092,000 1,195,000 798,000
------------ ------------ ------------
Total Cost of Revenues $ 29,757,000 $ 21,800,000 $ 13,407,000
------------ ------------ ------------
------------ ------------ ------------
Gross Profit (Loss):
Video Lottery Operations $ 10,835,000 $ 4,223,000 $ 1,772,000
Parimutuel Commissions (958,000) (801,000) (795,000)
Lodging, Food and Beverage 402,000 (239,000) (61,000)
Other Revenues 168,000 (56,000) 333,000
------------ ------------ ------------
Gross Profit $ 10,447,000 $ 3,127,000 $ 1,249,000
Operating Income (Loss):
Marketing and Promotions (1,718,000) (1,144,000) (1,016,000)
General and Administrative (4,092,000) (5,420,000) (5,652,000)
Depreciation and Amortization (1,667,000) (1,504,000) (910,000)
------------ ------------ ------------
Operating Income (Loss) $ 2,970,000 $ (4,941,000) $ (6,329,000)
------------ ------------ ------------
------------ ------------ ------------
Video Lottery Operations
Costs of video lottery revenues increased by $7.7 milli