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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.: 0-20508
MTR GAMING GROUP, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation) |
84-1103135 (IRS Employer Identification Number) |
STATE ROUTE 2 SOUTH, P.O. BOX 358,
CHESTER, WEST VIRGINIA
26034
(Address of principal executive offices)
(304) 387-5712
(Registrant's telephone number, including area code)
Indicate by check mark whether the Company: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
COMMON STOCK, $.00001 PAR VALUE
Class
27,799,435
Outstanding at November 11, 2003
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q
ii
PART 1
FINANCIAL INFORMATION
ITEM 1—FINANCIAL STATEMENTS
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(unaudited)
| |
SEPTEMBER 30, 2003 |
DECEMBER 31, 2002 |
||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS |
||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 29,828,000 | $ | 14,398,000 | ||||
| Restricted cash | 1,074,000 | 860,000 | ||||||
| Accounts receivable net of allowance for doubtful accounts of $101,000 and $98,000 in 2003 and 2002, respectively | 5,969,000 | 4,522,000 | ||||||
| Accounts receivable — Lottery Commission | 2,793,000 | — | ||||||
| Inventories | 2,654,000 | 2,414,000 | ||||||
| Deferred financing costs | 1,784,000 | 902,000 | ||||||
| Prepaid taxes | 5,000 | 4,360,000 | ||||||
| Deferred income taxes | 823,000 | 823,000 | ||||||
| Other current assets | 2,855,000 | 1,531,000 | ||||||
| Total current assets | 47,785,000 | 29,810,000 | ||||||
Property: |
||||||||
| Land | 11,851,000 | 12,087,000 | ||||||
| Building | 147,860,000 | 137,422,000 | ||||||
| Equipment and automobiles | 65,939,000 | 59,929,000 | ||||||
| Furniture and fixtures | 15,042,000 | 17,870,000 | ||||||
| Construction in progress | 2,227,000 | 248,000 | ||||||
| 242,919,000 | 227,556,000 | |||||||
| Less accumulated depreciation | (50,545,000 | ) | (46,981,000 | ) | ||||
| 192,374,000 | 180,575,000 | |||||||
| Other assets: | ||||||||
| Goodwill and other intangibles | 15,679,000 | 1,492,000 | ||||||
| Note receivable | 2,220,000 | — | ||||||
| Deferred income taxes | 3,863,000 | 2,213,000 | ||||||
| Deferred financing costs, net of current portion | 5,999,000 | 1,452,000 | ||||||
| Deposits and other | 10,461,000 | 6,375,000 | ||||||
| 38,222,000 | 11,532,000 | |||||||
| $ | 278,381,000 | $ | 221,917,000 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,744,000 | $ | 5,259,000 | ||||
| West Virginia Lottery Commission payable | 792,000 | 1,576,000 | ||||||
| Accrued payroll and payroll taxes | 2,192,000 | 2,542,000 | ||||||
| Accrued tax liability | 3,919,000 | — | ||||||
| Accrued liabilities | 4,708,000 | 2,847,000 | ||||||
| Accrued interest | 6,612,000 | 244,000 | ||||||
| Current portion of capital leases | 5,347,000 | 6,532,000 | ||||||
| Current portion of long-term debt | 949,000 | 162,000 | ||||||
| Total current liabilities | 27,263,000 | 19,162,000 | ||||||
Long-term debt, less current portion |
133,356,000 |
96,429,000 |
||||||
| Capital lease obligations, net of current portion | 3,110,000 | 6,945,000 | ||||||
| Long-term deferred compensation | 2,817,000 | 915,000 | ||||||
| Deferred income taxes | 11,299,000 | 7,977,000 | ||||||
| Total liabilities | 177,845,000 | 131,428,000 | ||||||
Shareholders' equity: |
||||||||
| Common Stock | — | — | ||||||
| Paid in capital | 55,644,000 | 53,236,000 | ||||||
| Retained earnings | 44,892,000 | 37,253,000 | ||||||
| Total shareholders' equity | 100,536,000 | 90,489,000 | ||||||
| $ | 278,381,000 | $ | 221,917,000 | |||||
1
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| |
THREE MONTHS ENDED SEPTEMBER 30 |
NINE MONTHS ENDED SEPTEMBER 30 |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
2003 |
2002 |
|||||||||||
| Revenues: | |||||||||||||||
| Gaming | $ | 70,312,000 | $ | 66,401,000 | $ | 191,819,000 | $ | 177,580,000 | |||||||
| Parimutuel commissions | 3,762,000 | 2,238,000 | 8,194,000 | 6,747,000 | |||||||||||
| Food, beverage and lodging | 7,210,000 | 6,424,000 | 17,631,000 | 14,593,000 | |||||||||||
| Other | 2,779,000 | 2,131,000 | 5,528,000 | 4,805,000 | |||||||||||
| Total revenues | 84,063,000 | 77,194,000 | 223,172,000 | 203,725,000 | |||||||||||
| Less promotional allowances | (1,415,000 | ) | (1,586,000 | ) | (3,760,000 | ) | (4,333,000 | ) | |||||||
| Net revenues | 82,648,000 | 75,608,000 | 219,412,000 | 199,392,000 | |||||||||||
Costs of revenue: |
|||||||||||||||
| Cost of gaming | 41,889,000 | 39,758,000 | 117,684,000 | 107,925,000 | |||||||||||
| Cost of parimutuel commissions | 2,560,000 | 1,934,000 | 6,086,000 | 5,620,000 | |||||||||||
| Cost of food, beverage and lodging | 5,195,000 | 4,696,000 | 13,117,000 | 12,289,000 | |||||||||||
| Cost of other revenues | 2,357,000 | 2,855,000 | 5,619,000 | 6,218,000 | |||||||||||
| Total cost of revenues | 52,001,000 | 49,243,000 | 142,506,000 | 132,052,000 | |||||||||||
| Gross Profit | 30,647,000 | 26,365,000 | 76,906,000 | 67,340,000 | |||||||||||
| Selling, general and administrative expenses: | |||||||||||||||
| Marketing and promotions | 2,082,000 | 2,778,000 | 5,752,000 | 6,692,000 | |||||||||||
| General and administrative | 10,981,000 | 8,922,000 | 29,905,000 | 24,125,000 | |||||||||||
| Depreciation and amortization | 4,783,000 | 3,825,000 | 13,376,000 | 10,212,000 | |||||||||||
| Total selling, general and administrative expenses | 17,846,000 | 15,525,000 | 49,033,000 | 41,029,000 | |||||||||||
| Operating income | 12,801,000 | 10,840,000 | 27,873,000 | 26,311,000 | |||||||||||
Other income (expense): |
|||||||||||||||
| Gain (Loss) on sale of property (net) | (11,000 | ) | — | 432,000 | — | ||||||||||
| Interest income | 94,000 | 8,000 | 231,000 | 126,000 | |||||||||||
| Interest expense | (3,457,000 | ) | (1,249,000 | ) | (8,347,000 | ) | (3,069,000 | ) | |||||||
| Income before provision for income taxes | 9,427,000 | 9,599,000 | 20,189,000 | 23,368,000 | |||||||||||
| Provision for income taxes | (3,438,000 | ) | (3,375,000 | ) | (7,329,000 | ) | (8,195,000 | ) | |||||||
| Net income | $ | 5,989,000 | $ | 6,224,000 | $ | 12,860,000 | $ | 15,173,000 | |||||||
Net income per share (basic) |
$ |
0.22 |
$ |
0.23 |
$ |
0.46 |
$ |
0.56 |
|||||||
| Net income per share (assuming dilution) | $ | 0.21 | $ | 0.22 | $ | 0.45 | $ | 0.52 | |||||||
| Weighted average number of shares outstanding: | |||||||||||||||
| Basic | 27,798,876 | 27,102,859 | 27,809,212 | 27,037,446 | |||||||||||
| Diluted | 28,364,874 | 28,801,910 | 28,630,987 | 28,944,501 | |||||||||||
2
MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| |
NINE MONTHS ENDED SEPTEMBER 30 |
|||||||
|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 12,860,000 | $ | 15,173,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 13,486,000 | 10,212,000 | ||||||
| Deferred compensation | 1,180,000 | 440,000 | ||||||
| Deferred income taxes | — | 15,000 | ||||||
| Gain on Disposal | (432,000 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (4,059,000 | ) | (1,110,000 | ) | ||||
| Prepaid taxes | 4,360,000 | 1,218,000 | ||||||
| Other current assets | (1,356,000 | ) | (470,000 | ) | ||||
| Accounts payable and accrued liabilities | 3,704,000 | 2,577,000 | ||||||
| Net cash provided by operating activities | 29,743,000 | 28,055,000 | ||||||
Cash flows from investing activities: |
||||||||
| Restricted cash | 278,000 | 45,000 | ||||||
| Purchase of Scioto Downs (net of cash acquired of $1,345,000) | (18,390,000 | ) | — | |||||
| Deposits and other | (6,253,000 | ) | (3,055,000 | ) | ||||
| Proceeds from sale of property | 769,000 | — | ||||||
| Capital expenditures | (12,877,000 | ) | (40,184,000 | ) | ||||
| Net cash used in investing activities | (36,473,000 | ) | (43,194,000 | ) | ||||
Cash flows from financing activities: |
||||||||
| Shareholder receivable | — | 4,065,000 | ||||||
| Stock repurchase program | (3,823,000 | ) | (2,667,000 | ) | ||||
| Proceeds from exercise of stock options | 2,397,000 | 2,030,000 | ||||||
| Financing cost paid | (6,471,000 | ) | (718,000 | ) | ||||
| Proceeds of senior notes offering | 128,448,000 | 20,376,000 | ||||||
| Principal payments on long term-debt and capital leases | (98,391,000 | ) | (5,796,000 | ) | ||||
| Cash provided by financing activities | 22,160,000 | 17,290,000 | ||||||
| Net increase in cash and cash equivalents | 15,430,000 | 2,151,000 | ||||||
| Cash and Cash Equivalents, Beginning of Period | 14,398,000 | 10,914,000 | ||||||
| Cash and Cash Equivalents, End of Period | $ | 29,828,000 | $ | 13,065,000 | ||||
3
MTR GAMING GROUP, INC
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed and consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included herein. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2—GAMING OPERATIONS
On April 21, 2001, the West Virginia Legislature passed HB 102, which was signed into law and became effective on that date. The law, which among other things, established a new distribution scheme for the portion of each racetrack's net win in excess of that racetrack's net win (gross wagers less patron payouts) for the twelve months ending June 30, 2001. For Mountaineer, the threshold is $160 million. After deducting the State Lottery Commission's 4% administrative fee this "Excess Net Terminal Income"—as it is referred to in the law—is subject to a 10% surcharge. Further, after deducting the administrative fee and the surcharge from the Excess Net Terminal Income, the racetracks will receive 42% (as opposed to 47%) of the remaining net win. The Company exceeded the Excess Net Terminal Income threshold during the latter part of March 2003 through June 2003, and as a result incurred additional statutory payments (net) of approximately $3,569,000. The Company exceeded the Excess Net Terminal Income threshold during April through June 2002 and incurred additional statutory payments of $1.9 million. The Bill also created a capital reinvestment fund to which the State contributes 42% of the surcharge applicable to each track. Generally, for each dollar a racetrack expends on eligible capital improvements for the racetrack and adjacent property, the racetrack will receive a dollar from the capital reinvestment fund. Depending upon the cost of a project, any amount expended in excess of the balance in the capital reinvestment fund may be carried forward three subsequent years. The Company recognizes amounts due from the capital reinvestment fund as qualifying capital expenditures are incurred and amounts are available in the capital reinvestment fund. The Company's qualifying capital expenditures exceeded amounts contributed to the capital reinvestment fund at September 30, 2003 by approximately $37 million. Accordingly, the Company recognized a receivable of $2,793,000 representing its share of the capital reinvestment for the nine months ended September 30, 2003.
On March 25, 2003 the West Virginia Lottery Commission approved the addition of 500 slot machines at Mountaineer Park. Approximately 200 of the additional machines have been installed and it is anticipated the additional 300 authorized machines will be installed as patron demand dictates.
NOTE 3—RACETRACK OPERATIONS
In September 2002 (formal order entered November 19, 2002), the Company's wholly owned subsidiary, Presque Isle Down, Inc., was granted a license by the Pennsylvania State Horse Racing Commission to conduct thoroughbred horse racing and parimutuel wagering in Erie, Pa. The Company plans to build a state-of the-art horse racing facility with dirt and turf racing that will also offer concerts, entertainment and fine food and casual dining. In December 2002, affiliates of Magna Entertainment Corp. (Magna) and Penn National Gaming Inc. (Penn National) filed appeals in the Pennsylvania Commonwealth Court challenging the grant of the license. On June 19, 2003, pursuant to
4
a settlement agreement with the Company, Magna filed a motion to dismiss its appeal with prejudice, indicating that it was waiving the claims raised in the appeal. On June 25, 2003, the Company reached an agreement in principle (and subsequently reduced to writing) with Penn National pursuant to which Penn National agreed to withdraw its appeal in consideration for the Company's agreement to purchase Penn National's off track wagering facility in Erie for $7 million upon MTR's commencement of parimutuel wagering in Erie and to offer comparable employment to Penn National's employees at the Erie facility. On June 26, 2003, the Court issued its Opinion and Order in which it denied Penn National's petition for review, finding that the Racing Commission had not committed an error of law in granting the license. However, notwithstanding Magna's motion to withdraw its appeal, the Court granted Magna's petition, holding that Magna had timely requested and should have received a formal hearing to be conducted in accordance with Pennsylvania's Administrative Agency Law. The Court therefore vacated the Racing Commission's November 19, 2002 Order, with regard to Magna, and remanded the case to the Racing Commission for a formal hearing.
On July 17, 2003, the Pennsylvania State Horse Racing Commission unanimously reinstated Presque Isle Downs' license to build a thoroughbred racetrack and conduct parimutuel wagering in Erie. On August 4, 2003, Pittsburgh Palisades Park, LLC filed a challenge of the July 17 reinstatement in the Commonwealth Court of Pennsylvania. The Company and the Racing Commission have filed motions for Summary Relief, which the Commonwealth Court has agreed to hear in conjunction with the appeal on December 10, 2003. The Company believes the Racing Commission acted in accordance with all applicable laws and the directives of the court's June decision. The Company plans to break ground for construction as soon as practicable after the Racing Commission's order reinstating our license becomes final and non-appealable.
On July 29, 2003, Keystone Downs, LLC (Keystone Downs) an entity in which the Company will own no more than 50% and intends to manage through a management agreement, filed an application to build a new thoroughbred racetrack with parimutuel wagering in Allegheny County, Pennsylvania, northeast of Pittsburgh. Keystone Downs is one of several applicants for the remaining license in Pennsylvania and the licensing process is expected to be highly competitive. Accordingly, there can be no assurance that Keystone Downs will receive a license, that it will be able to execute its plans, or that it will be profitable. If Keystone Downs is successful in obtaining a license, the required investment by the Company will be dependent upon several factors including the number of other investors participating in the project and their respective ownership interest; provisions of legislation if passed in Pennsylvania relative to legalizing slot machines (including applicable license fees); construction cost which will depend on the final architectural design and amenities to be included; and the availability and terms of project financing.
NOTE 4—ACQUISITION OF SCIOTO DOWNS
On July 31, 2003 the Company consummated its acquisition of Scioto Downs, Inc. (Scioto Downs), which owns and operates a harness horse racing facility with parimutuel wagering in Columbus, Ohio. The acquisition was made as part of the Company's strategy to diversify and leverage the Company's expertise by building or acquiring other middle-market gaming and/or parimutuel businesses in states that border West Virginia. The Company agreed to pay $32.00 per share, in cash, for the 595,767 outstanding shares of Scioto Downs' common stock. Each Scioto Downs shareholder could have elected to receive, instead of the $32.00 per share amount, an amount per share equal to $17.00 plus ten annual contingent earnout payments (commencing the first calendar year in which Scioto Downs is permitted to conduct new forms of gaming) based upon 10% of the growth of Scioto Downs' EBITDA compared to the average of Scioto Downs' EBITDA for the three years ended October 31, 2002. Holders of 10,707 shares elected to receive the contingent earnout payments. Total consideration approximated $19.7 million (including approximately $839,000 of transaction costs). The purchase price was funded with cash on hand derived substantially from the Company's March 2003 issuance of senior unsecured notes. At the date of the acquisition the Company also had advances to Scioto Downs of $2.1 million.
5
The acquisition has been accounted for under the purchase method and Scioto Downs' results have been included in the Company's consolidated results from the date of acquisition. The purchase price has been allocated to the assets acquired based upon appraisals of estimated fair values. Such estimated values are preliminary and may change as more facts become known.
The unaudited proforma combined historical results, assuming Scioto Downs had been acquired at the beginning of 2003 and 2002 respectively, are estimated to be as follows:
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
2003 |
2002 |
||||||||
| Total Revenues | $ | 85,559,000 | $ | 79,804,000 | $ | 228,384,000 | $ | 209,850,000 | ||||
| Net Income | 5,900,000 | 5,706,000 | 11,803,000 | 13,398,000 | ||||||||
| Net Income per share – Basic | $ | 0.21 | $ | 0.21 | $ | 0.42 | $ | 0.50 | ||||
| Net Income per share – Diluted | $ | 0.21 | $ | 0.20 | $ | 0.41 | $ | 0.46 | ||||
The proforma results include the additional depreciation of the property and interest expense on the debt incurred to finance the purchase. The unaudited proforma results of operation have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would actually have resulted had the Scioto Downs acquisition occurred as of January 1, 2003 and 2002, respectively.
NOTE 5—EQUITY TRANSACTIONS
During the three months ended September 30, 2003, there were no options exercised to purchase the Company's common stock. During the three months ended September 30, 2002, option holders exercised options to purchase 304,000 shares of the Company's common stock at prices ranging from $1.3438 to $2.00 per share by delivery of cash proceeds totaling $411,000.
During the nine months ended September 30, 2003, holders of previously issued options to purchase the Company's common stock exercised options to purchase a total of 1,532,500 shares of the Company's stock at prices ranging from $2.00 to $2.50 per share by delivery of cash proceeds of $2,397,000 and 408,773 shares of common stock (in connection with the exercise price and applicable withholding taxes). During the nine months ended September 30, 2002, holders of previously issued options to purchase the Company's common stock exercised options to purchase a total of 600,500 shares of the Company's stock at prices ranging from $1.3438 to $7.30 per share by delivery of cash proceeds of $2,030,000.
During the three months ended September 30, 2002 the Company repurchased and retired 290,000 shares of its common stock in the open market for $2,401,300.
During the nine months ended September 30, 2003 and September 30, 2002 the Company repurchased and retired 554,700 and 310,318 shares of its common stock in the open market for $3,823,000 and $2,667,000, respectively.
On May 13, 2003, pursuant to the 2002 Employee Stock Incentive Plan, the Company granted to twenty-four employees non-qualified options to purchase a total of 205,000 shares of the Company's common stock for $8.00 per share, the market price on the date of grant as quoted on the Nasdaq Stock Market. The options vest over three years and have a term of ten years. The 2002 Plan is a broadly based plan as defined by Nasdaq Marketplace Rules (i.e., one in which officers and directors of the Company receive fewer than half of the total number of options granted). Also on May 13, 2003, pursuant to the various employment agreements, the Company granted non-qualified options to purchase a total of 125,000 shares of the Company's common stock for $8.00 per share. These options
6
vest immediately and have terms of five years (with respect to 100,000) and ten years (for the remaining 25,000).
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," (Statement No. 123) to employee stock-based awards.
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
2003 |
2002 |
||||||||||
| Net Income, as reported | $ | 5,989,000 | $ | 6,224,000 | $ | 12,860,000 | $ | 15,173,000 | ||||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | — | — | — | — | ||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | (85,000 | ) | (19,000 | ) | (549,000 | ) | (155,000 | ) | ||||||
| Pro Forma net income | $ | 5,904,000 | $ | 6,205,000 | $ | 12,311,000 | $ | 15,018,000 | ||||||
| Earnings per share: | ||||||||||||||
| Basic, as reported | $ | 0.22 | $ | 0.23 | $ | 0.46 | $ | 0.56 | ||||||
| Basic, pro forma | $ | 0.21 | $ | 0.23 | $ | 0.44 | $ | 0.56 | ||||||
| Diluted, as reported | $ | 0.21 | $ | 0.22 | $ | 0.45 | $ | 0.52 | ||||||
| Diluted, pro forma | $ | 0.21 | $ | 0.22 | $ | 0.43 | $ | 0.52 | ||||||
NOTE 6—SALE OF PROPERTY
On March 11, 2003 the Company completed the sale of its hotel/casino property in Reno, Nevada. The terms of the sale included $787,500 cash at closing (exclusive of closing costs) and a seven-year promissory note of $2,162,500, secured by a first mortgage on the property and a guarantee by the purchaser's principals. The purchasers are not affiliated with the Company. The sale after consideration of closing costs resulted in a loss of approximately $18,000. The loss on the sale of the Reno Property is included in "gain on sale of property" on the Condensed and Consolidated Statements of Operations included in this report, which also includes a gain of $450,000 from the sale of land at Mountaineer Park in connection with a State road widening project.
NOTE 7—INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109 (Statement 109), "Accounting for Income Taxes". Under Statement 109, an asset and liability method is used whereby deferred tax assets and liabilities are determined based upon temporary differences between bases used for financial reporting and income tax reporting purposes. Income taxes are provided based on the enacted tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. There is no valuation allowance at September 30, 2003 and 2002. The Company and its subsidiaries file a consolidated federal income tax return.
NOTE 8—LONG-TERM DEBT
On March 25, 2003 the Company consummated the private sale of $130 million of 9.75% senior unsecured notes. The net proceeds after discounts, fees and expenses of the offering were approximately $123.9 million, of which $93.4 million was used to repay all amounts outstanding and due under the Second Amended and Restated Credit Agreement. The remaining proceeds were for
7
general corporate purposes. The senior unsecured notes mature on April 1, 2010. On or prior to Apri1, 2006 the Company may redeem up to 35% of the aggregate principal amount of the senior unsecured notes, plus accrued and unpaid interest, with the net cash proceeds of certain public offerings of the Company's stock. On or after April 1, 2007, the Company may redeem all or a portion of the senior unsecured notes at a premium that will decrease over time as set forth in the agreement, plus accrued and unpaid interest.
On March 28, 2003, the Company entered into the Third Amended and Restated Revolving Credit Agreement in the amount of $50 million with Wells Fargo Bank. Under the Third Amended and Restated Credit Agreement, up to $3.0 million will be available for use in connection with letters of credit, and up to $10.0 million in short term funds will be available for use under a "swing line" facility on same day notice to lenders. Obligations under the Third Amended and Restated Credit Agreement are guaranteed by each of the Company's operating subsidiaries. Borrowings under the Third Amended and Restated Credit Agreement and the subsidiary guarantees are secured by substantially all of the assets of the Company and the assets of the subsidiary guarantors. Future subsidiaries will be required to enter into similar pledge agreements and guarantees. In general, borrowings under the Third Amended and Restated Credit Agreement will bear interest based, at the Company's option, on either the agent bank's base rate or LIBOR, in each case plus a margin. The applicable margin will be based on the leverage ratio at the time and will range form 75 to 275 basis points for base rate loans and 200 to 400 basis points for LIBOR loans. Loans under the Third Amended and Restated Credit Agreement mature in 2008, five years after the date of execution of the Credit Agreement. The Credit Agreement contains financial covenants that require the Company to satisfy, on a consolidated basis, specified quarterly financial tests. As of September 30, 2003 no drawings have been made on the credit facility. However, a letter of credit for $645,000 is outstanding.
On November 12, 2003 the Credit Agreement was amended (effective September 30, 2003) to give consideration to the Scioto Downs acquisition.
NOTE 9—SUBSEQUENT EVENTS
During October 2003, the Company acquired 130 acres of real property in Erie Pennsylvania for approximately $2.7 million as part of an alternative site for the proposed racetrack. The Company also acquired 315 acres of real property in West Virginia in connection with its expansion plans for approximately $243,000.
Also during October 2003, the Company was registered as a publicly traded holding company by the Nevada Gaming Commission (the "Nevada Commission") without limitations. In addition, the Company and Mountaineer Park Inc. were approved by the Nevada Commission to participate in pari-mutuel to share in the revenues from the conduct of off-track parimutuel race wagering in Nevada. Speakeasy Gaming of Las Vegas, Inc. obtained a nonrestricted gaming license to conduct gaming operations at the Company's property in North Las Vegas without limitations. Likewise, the individuals who applied for required licenses and/or findings of suitability were approved. The approvals granted by the Nevada Commission were conditioned upon an additional employee applying for a finding of suitability.
NOTE 10—RECENTLY ISSUED ACCOUNTING STANDARDS