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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
COMMISSION FILE NO. 0-20508
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MTR GAMING GROUP, INC.
(exact name of Company as specified in its charter)
DELAWARE IRS NO. 84-1103135
(State of Incorporation) (IRS Employer Identification)
STATE ROUTE 2, SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA 26034
(Address of principal executive offices)
(304) 387-5712
(Company's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: COMMON STOCK $.00001 PAR VALUE
Name of each exchange on which registered: NASDAQ STOCK MARKET
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Indicate by check mark whether the Company (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K of Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Company's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K / /
The aggregate market value of the Company's common stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on March 20, 1998 (based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $49,970,319.
The Company's common stock outstanding at March 20, 1998 was 20,021,049
shares.
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TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS........................................................... 1
Company History......................................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:............. 1
Mountaineer Race Track & Gaming Resort--Chester, West Virginia.......... 1
Lodge Facilities...................................................... 2
Video Lottery Facilities.............................................. 2
Recreational Facilities............................................... 3
Trailer Park.......................................................... 3
Undeveloped Land...................................................... 3
Current Operations.................................................... 3
Racing Operations..................................................... 3
Video Lottery Operations.............................................. 4
Racetrack, Food and Beverage Operations............................... 4
Improvement Plan and Expanded Operations.............................. 5
Business Strategy..................................................... 6
Develop and Market Mountaineer Park as a Diversified Entertainment
Facility............................................................. 6
Expand Video Lottery Operations....................................... 6
Relocate Off-Track Wagering........................................... 7
Improve Live Racing Product and Commence Export Simulcasting Outside
Hub Area............................................................. 7
Commence Export Simulcasting Outside Hub Area......................... 8
Increasing Import Simulcasting........................................ 8
Marketing............................................................. 8
Competition........................................................... 8
Employees............................................................. 9
Regulation And Licensing.............................................. 9
Racing................................................................ 9
Video Lottery......................................................... 10
Discontinued Operations............................................... 13
Bartlett Field Leases--Ohio........................................... 13
Bartlett Field Wells--Ohio............................................ 13
Marathon-Otter Lake Field--Michigan................................... 14
Plan of Orderly Liquidation........................................... 14
ITEM 2. PROPERTIES........................................................ 15
Gaming, Racing and Other Entertainment................................ 15
Oil and Gas........................................................... 15
Equipment Leases...................................................... 15
ITEM 3. LEGAL PROCEEDINGS................................................. 16
Pending Litigation.................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 17
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................. 17
ITEM 6. SELECTED FINANCIAL DATA........................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 19
Results of Operations................................................. 19
Results of Continuing Operations
Years Ended December 31, 1997, 1996 and 1995........................ 19
Video Lottery Operations.............................................. 20
Parimutuel Commissions................................................ 20
Lodging, Food and Beverage............................................ 21
Other Revenues........................................................ 22
Operating Costs....................................................... 22
Video Lottery Terminals Operating Costs............................... 23
Parimutuel Commissions Operating Costs................................ 24
Lodging, Food and Beverage Operating Costs............................ 24
Costs of Other Operating Revenues..................................... 25
Marketing and Promotions Expense...................................... 25
Selling, General and Administrative Expenses, and Interest Expense.... 25
Nonrecurring Income................................................... 26
Liquidity and Sources of Capital...................................... 26
REDEEMABLE COMMON STOCK SETTLEMENTS................................... 26
LONG-TERM DEBT AND LINE OF CREDIT FINANCING........................... 27
CAPITAL IMPROVEMENTS.................................................. 27
ROAD IMPROVEMENTS..................................................... 28
INCREASE IN AUTHORIZED NUMBER OF SHARES............................... 28
OUTSTANDING OPTIONS AND WARRANTS...................................... 28
DEFERRED INCOME TAX BENEFIT........................................... 29
Commitments and Contingencies......................................... 29
Results of Discontinued Operations.................................... 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS...... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................... 30
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY............................ 30
Business Experience................................................... 30
ITEM 11. EXECUTIVE COMPENSATION........................................... 32
Summary Compensation Table............................................ 32
OPTION GRANTS IN 1997................................................. 33
FISCAL YEAR END OPTION VALUES......................................... 33
Section 16(a) Beneficial Ownership Reporting Compliance............... 33
Employment Agreement.................................................. 33
Compensation of Directors............................................. 35
Compensation Committee Interlocks and Insider Participation........... 35
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 37
Redeemable Common Stock............................................... 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K............ 40
SIGNATURES............................................................ 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
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ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly-owned subsidiaries, owns and operates
Mountaineer Racetrack and Gaming Resort ("Mountaineer Park"), 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 merged with
Pacific International Industries, Inc., which had been engaged in the contract
security guard services business in Southern California since its inception in
February 1987. Upon completion of the merger, the Company was renamed Excalibur
Security Services, Inc. to reflect its new line of business. After operating
unprofitably, the Company filed a voluntary petition for reorganization with the
U.S. Bankruptcy Court for the Central District of California in December 1990,
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court approved the
Company's sale of its security guard services business in May 1991, and
confirmed the Company's plan of reorganization in December 1991. The plan of
reorganization authorized the Company to acquire, primarily, specified gaming
and oil and gas businesses. Upon confirmation of the plan of reorganization, the
Company changed its name to Excalibur Holding Corporation. In connection with
management's decision to operate as a gaming company, the Company was renamed
Winners Entertainment, Inc. in August 1993. At the annual meeting of
stockholders on October 15, 1996, the stockholders of the Company approved a
change of the Company's name from Winners Entertainment, Inc. to MTR Gaming
Group, Inc.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially based upon a number of factors including, but not limited to, history
of losses, leverage and debt service, gaming regulation, dependence on key
personnel, competition, no dividends, continued losses from horse racing, road
improvements, costs associated with maintenance and expansion of Mountaineer
Park's infrastructure to meet the demands attending increased patronage, failure
to liquidate discontinued operations, cyclical nature of business, limited
public market and liquidity, lack of public market, shares eligible for future
sale, impact of anti-takeover measures, the Company's common stock being subject
to penny stock regulation and other risks detailed in the Company's Securities
and Exchange Commission filings.
MOUNTAINEER RACETRACK & GAMING RESORT--CHESTER, WEST VIRGINIA
Pursuant to a stock purchase agreement dated May 5, 1992, the Company
acquired all of the common stock of Mountaineer Park, Inc. ("Mountaineer Park"),
a West Virginia corporation, in December 1992. Mountaineer Park, 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 956 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.
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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 (closed circuit television)
thoroughbred horse and greyhound dog racing from other prominent racetracks
around the country. Mountaineer Park's main racetrack consists of an oval dirt
track approximately one mile in length. Inside the main track is a natural turf
(grass) track measuring seven furlongs or 7/8 of a mile. The racetrack 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 a restaurant and sandwich bar located in the clubhouse
and grandstand respectively. The grandstand building also houses the Hollywood
Grande Buffet which provides customers with low-cost meals featuring a variety
of foods from breakfast foods to prime rib and seats 120. In October 1997
Mountaineer converted a 2,400 square foot area of the Clubhouse into a
glass-enclosed meeting room which will accommodate approximately 200 people. In
addition to seating areas, the grandstand covers approximately 57,000 square
feet of interior space on the main and mezzanine levels containing 49 parimutuel
windows and food and beverage concession stands. The clubhouse covers
approximately 25,000 square feet of interior space containing 15 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 boxing
matches, some of which have been nationally televised. 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. Mountaineer's racetrack parking lots have a combined capacity
for over 2,900 vehicles.
LODGE FACILITIES
The Mountaineer Lodge (the "Lodge") is a two-story facility which overlooks
the par three, nine hole "executive" golf course near Mountaineer Park's main
entrance on West Virginia State Route 2. The Lodge offers 101 rooms, including
50 standard rooms (one double bed), 46 superior rooms (two double beds), and
five king rooms and suites. The Lodge's Gatsby Dining Room seats 125 patrons for
casual dining overlooking the golf course and an additional 68 patrons may be
seated on an outside deck, 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, the Company expanded its 5,000 square foot
Speakeasy Gaming Saloon with an 8,000 square foot addition. The capacity of the
Speakeasy Gaming Saloon now stands at 750. Extensive off-track wagering
facilities continue to be maintained at the Speakeasy Gaming Saloon. Patrons may
also purchase pizza and sandwiches from Big Al's Deli, which is located in the
Speakeasy and is open until closing. The Lodge parking lots have a combined
capacity for approximately 700 vehicles.
VIDEO LOTTERY FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer Park
offers video lottery gaming through 1,000 video lottery terminals ("VLTs")
located in the racetrack clubhouse, grandstand and Lodge. The Company purchased
and installed 400 VLTs in March of 1997 and has operating leases for the
remaining 600 VLTs. The racetrack houses 500 of the VLTs in its Riverside Gaming
Terrace on the second floors of the clubhouse and grandstand, and the Lodge
offers the remaining 500 VLTs in the Speakeasy Gaming Saloon, Derby Room and
Iron Horse Lounge. All of the VLTs allow a player to select from several game
themes, including up to four versions of draw poker, one version of blackjack
and two versions of keno.
In June of 1996, West Virginia law for the first time authorized VLT game
themes that simulate classic casino slot machines. On July 3, 1996, the Company
installed slot games on the first 350 of its VLTs. In October 1996, the Company
installed slot games on an additional 50 VLTs. In March, 1997, the Company
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purchased 400 VLTs with slot games and removed 200 older VLTs. The new slot
games include Double Diamond, a classic casino slot game with cherries, bars and
items that "spin" on video reels, and the internationally popular Black Rhino
game. These new games are offered in addition to blackjack, poker and keno.
RECREATIONAL FACILITIES
Mountaineer Park has 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 rates.
TRAILER PARK
The Company maintains a trailer park consisting of 61 individual lots on
approximately 11.5 acres located across West Virginia State Route 2 from the
Lodge and the entrance to Mountaineer Park. The lots are rented for fixed
monthly fees, mostly to individuals who are employed by Mountaineer Park 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 Park owns, as part of its 956 acre site, a 375 acre tract and a
contiguous 350 acre tract (purchased in February 1998) that are currently
undeveloped. The undeveloped acreage is located directly across West Virginia
State Route 2 from the Lodge and racetrack main entrance. On October 7, 1997,
Mountaineer Park acquired an option to purchase approximately 349 additional
contiguous acres. The option, for which Mountaineer Park paid $100,000, has a
duration of one year and entitles Mountaineer Park to purchase the property for
$600,000. Management has no current plans to develop 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
The Company is subject to annual licensing requirements established by the
West Virginia State Racing Commission (the "Racing Commission"). The Company's
license was renewed in December 1997, and will remain effective through December
1998.
The Company's 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, the Company 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
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Racing Commission. Such rates vary with each jurisdiction and may be more or
less favorable than the live racing commission rates. Out of its gross
commissions, the Company is required to distribute fixed percentages to its fund
for the payment of regular purses (the "regular purse fund"), the state of West
Virginia and Hancock County and, with respect to commissions derived from
simulcast operations, Mountaineer Park 's employee pension plan. After deducting
state and county taxes and, with respect to simulcast commission, simulcast fees
and expenses and employee pension plan contributions, approximately one-half of
the remainder of the commissions are payable to the regular purse fund.
Mountaineer Park also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer Park on the basis of
the amounts wagered at their respective facilities.
VIDEO LOTTERY OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 1997 for a period of one
year.
The Company 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, the Company's commission is fixed at 47% of the net win
after deducting an administration fee of up to 4% of gross terminal revenues
first paid to the State of West Virginia.
On March 26, 1996, the Company amended the master lease agreement pursuant
to which it leases the 600 leased VLTs 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.
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 Company's
existing VLTs. Management's target date for implementation of progressive gaming
play is the third quarter of 1998, although there can be no assurance that
progressive games will be successfully implemented by that date, or at all.
In March 1996, the West Virginia legislature approved the usage of video
game themes depicting symbols on reels, commonly referred to as "line games" or
"slot games" ("Slot Terminals") in addition to the poker, blackjack and keno
games previously permitted ("Card Terminals"). In July of 1996, Mountaineer Park
converted 350 Card Terminals into Slot Terminals. In October of 1996, another 50
VLTs were converted. On March 15, 1997, Mountaineer purchased and installed 400
new Slot Terminals and removed 200 older Card Terminals, resulting in an
increase in the number of VLTs currently in operation from 800 to 1,000,
consisting of 800 Slot Terminals and 200 Card Terminals.
RACETRACK, FOOD AND BEVERAGE OPERATIONS
The clubhouse restaurant is open a minimum of 220 days annually on live race
days (210 days beginning in 1998), and offers seating for 650 customers with
full lunch and dinner menus and a private
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buffet. Clubhouse customers include racing fans, local residents and private
social groups. Beverages and cocktails are also available in the grandstand
building at the Hollywood Knights Saloon, which services video lottery players,
as well as racing fans. The Hollywood Grande Buffet, which is adjacent to the
Hollywood Knights Saloon, provides customers with low-cost, all-you-can-eat
meals featuring a variety of foods from breakfast foods to prime rib. The
grandstand also offers Big Al's Deli II, which serves sandwiches, hotdogs and
pizza. Closed circuit television monitors displaying Mountaineer Park's live and
simulcast races are provided at every table in both the Clubhouse and grandstand
restaurant for the convenience of racing fans. The racetrack food and beverage
facilities are intended to complement the entertainment experience for racing
fans and video lottery players and, therefore, are designed to offer familiar
menus with moderate pricing in a comfortable atmosphere.
Lodge customers principally include local residents and business travelers
visiting nearby steel plants and other businesses on weekdays, with a larger
number of recreational customers and persons from non-local markets on weekends.
Lodge facilities also include the Gatsby Dining Room, which seats 125 patrons
for casual dining overlooking the golf course, and an additional 68 persons may
be seated on an outside deck, weather permitting. Food and beverages are also
available at the Lodge in Big Al's Deli located in the Speakeasy Gaming Saloon
and in the Iron Horse Lounge. Table and barstool seating is 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 and food and
beverage rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition of Mountaineer Park 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 racetrack grandstand and clubhouse, and an additional
$591,000 to convert a portion of existing Lodge space to gaming areas. In
response to 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 Park'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 fourteen
(14) 40-inch television monitors, seven (7) 13-inch screens, as well as four (4)
projection screens. The Company currently has available sixty-four (64) mutuel
windows in the racetrack facility and six (6) windows in the Speakeasy Gaming
Saloon. Patrons also have access to three (3) self-serve wagering machines at
the racetrack and two (2) at the Lodge.
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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 Park has hosted
approximately ten boxing events since December 1994, including nationally
televised bouts on ESPN and USA Cable. Mountaineer Park paid fixed fees and
provided certain lodging at no charge to the event promoters. Mountaineer Park
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.
In 1995 the Company restored forty-one (41) guest rooms that were damaged by
fire and in 1997 it completed a general renovation and upgrade of the sixty (60)
remaining guest rooms and common areas. The Lodge lobby and reception area were
renovated in 1996.
In 1996 and 1997, enhancements and expansion of the Speakeasy Gaming Saloon,
parking lot expansion and 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 PARK AS A DIVERSIFIED ENTERTAINMENT FACILITY
The Company believes that the Mountaineer Park racetrack facility has not
performed up to its potential in the past because it was utilized primarily to
conduct parimutuel racing, thereby limiting the facility's customer base and
under-utilizing its sizable infrastructure during non-racing times. The
expansion of video lottery operations and the introduction of bingo for local
senior citizen groups and simulcast boxing events at Mountaineer Park have begun
to remedy these deficiencies. Management believes that the addition of such
improvements and programs to those already completed will provide the right
product mix to attract an increasing number of visitors and more efficiently use
Mountaineer Park'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 revenues increase, so will the size of purses. Management believes that
this will attract 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 number and mix of machines
remained the same at December 31, 1997. The Company believes that its video
lottery revenues will continue to increase with the implementation of
progressive games, players' increased familiarity with the available games, and
the continuation of the Company's expanded marketing plan. The Company is also
continuing to study expansion of the Lodge's capacity and construction of a
convention facility to increase mid-week business. 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 Park is positioned to take advantage of any additional forms of
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gaming which may be legalized in West Virginia in the future. There can be no
assurances, however, that the state of West Virginia will authorize additional
gaming activities or that, if authorized, the Company would be permitted to
engage in such operations.
On March 14, 1998, the West Virginia State Legislature passed House Bill
4632, which, among other things, amended Section 29-22A-12(b)(5) of the
Racetrack Video Lottery Act of 1994 (regarding the number and location of video
lottery terminals). Upon its effective date, the amendment will permit
Mountaineer Park to change the ratio of VLTs located in the Lodge versus the
racetrack building from 1:1 to 2:1. The amendment will become effective ninety
(90) days after its passage unless vetoed by the Governor of West Virginia
within fifteen (15) days of the end of the legislative session, at which time
(April 8, 1998) the amendment becomes law. If the amendment becomes law,
Mountaineer Park intends to: (i) apply to the Lottery Commission for permission
to increase the number of VLTs from 1,000 to 1,200; (ii) purchase or lease 200
new Slot Terminals to be located in the Lodge, together with 100 VLTs to be
relocated from the racetrack; and (iii) construct a second addition of
approximately 8,000 square feet to the Speakeasy Gaming Saloon to house the 300
additional VLTs. If this plan is implemented, which management anticipates will
occur in 1998, Mountaineer Park will operate 800 VLTs at the Lodge and 400 at
the racetrack.
RELOCATE OFF-TRACK WAGERING
The Company recently relocated its primary simulcasting operations to the
Speakeasy Gaming Saloon at the Lodge. Management believes that by exposing video
lottery patrons to simulcast and live racing, new racing fans can be developed,
thereby increasing parimutuel operations. The Company also recently relocated
its simulcast facilities at the racetrack, creating off-track wagering areas
adjacent to the Hollywood Knight's Saloon in the grandstand's mezzanine level
(133 seats served by eight (8) 40-inch monitors and eight (8) 20-inch monitors)
and on the lower level of the grandstand (114 seats served by ten (10) 27-inch
monitors and one hundred thirty-one (131) 13-inch monitors). These new 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 AND COMMENCE EXPORT SIMULCASTING OUTSIDE HUB
AREA
The Company's ability to attract attendance at Mountaineer Park and wagering
on its live races is dependent, in part, upon the quality of the horses racing
at Mountaineer Park. Horse races at racetracks competing with Mountaineer Park,
and at the racetracks from which Mountaineer Park receives import simulcasts,
have often been of higher quality than Mountaineer Park's horse races, thereby
attracting a larger volume of wagering and higher average wagers than at
Mountaineer Park. Beginning in October 1994, Mountaineer Park has been able to
attract better quality horses by paying incrementally higher purses. The
increased purses reflect an increase in the minimum daily purses guaranteed
pursuant to Mountaineer Park's agreement with the horsemen's association, a
non-union entity which represents the jockeys in their dealings with Mountaineer
Park. 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. The Company anticipates that Mountaineer Park will be able to
continue increasing purse sizes to levels attractive to owners of mid-level
quality or better racehorses.
Mountaineer Park sponsored several stakes races in 1996 and 1997, with
purses of up to $25,000 per race. In September 1995, Mountaineer Park hosted the
West Virginia Breeders' Classics stakes races, with purses totaling $330,000
funded by state-wide video lottery tax revenue. Mountaineer Park broadcast
certain of these races to a number of other racetracks around the country and
intends to simulcast its regular card of live races commencing in the third or
fourth quarter of 1998. Wagering handles from participating racetracks are
commingled with Mountaineer Park's on-site wagering handle when it exports its
simulcast signal.
7
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. The Company
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, the Company anticipates that
Mountaineer Park 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 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. Further, commencement of export simulcasting
will involve substantial capital expenditures related to satellite uplink
equipment, lighting and camera equipment, which the Company estimates will be
approximately $2 million.
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 Park 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 Park's primary market includes approximately 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 consists of 3.4 million persons of gaming age who
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 is in the process of implementing a
comprehensive marketing program to capitalize on Mountaineer Park'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 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.
COMPETITION
Mountaineer Park's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia, Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio, and Ladbroke
located approximately 80 miles away from Mountaineer Park in Washington,
Pennsylvania. Wheeling Downs conducts parimutuel greyhound dog racing and video
lottery gaming. Thistledown conducts parimutuel thoroughbred horse racing but
not video lottery. Ladbroke conducts live harness racing and provides import
simulcasting, but does not have video lottery gaming. Other than
8
Wheeling Downs, Thistledown and Ladbroke, 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
two facilities in West Virginia, other than Mountaineer Park and Wheeling Downs,
offering video lottery, are located in the central and eastern parts of the
state and, as a result, management believes they do not compete to any
significant extent with Mountaineer Park for customers. In addition, one other
well-known resort located downstate, has sought legislative approval to operate
a land-based casino available only to its overnight guests. The Company does not
believe that such operations, if approved and implemented, would compete with
Mountaineer Park. 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 Park
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 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 of
Mountaineer Park's geographic market. Such facilities may offer more gaming
machines than Mountaineer Park as well as forms of gaming not available in West
Virginia.
EMPLOYEES
As of December 31, 1997, Mountaineer Park had approximately 480 full-time
employees and 30 part-time employees, of whom approximately 70 were represented
by a labor union under a collective bargaining agreement. During its peak season
in 1997, the Company had as many as approximately 700 employees, including
full-time temporary employees. The union representing mutuel clerks at the
racetrack has been expanded in recent years to cover certain employees providing
off-track betting services at the Lodge. The collective bargaining agreement was
extended until November 30, 2002. In September a vote was held on a proposal to
make approximately 200 other employees union members. Based on the information
available to the Company, the Company believes that the vote on the proposal to
expand the union coverage 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 this vote. As of December
31, 1997, 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
The Company's business is highly regulated. The ability of the Company to
remain in business and to operate profitably depends upon the Company's
continued ability to satisfy all applicable gaming laws and regulations.
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 Park may conduct races. In order to
conduct
9
simulcast racing, Mountaineer Park is required under West Virginia law to hold a
minimum of 220 (210 beginning in 1998) live race days each year. Mountaineer
Park was granted a license to conduct 220 live race days for 1997 and 210 for
1998.
West Virginia law requires that at least 80% of Mountaineer Park's employees
must be citizens and residents of West Virginia and must have been such for at
least one year. In addition, certain activities, such as simulcasting races,
require the consent of the representatives of a majority of the horse owners and
trainers at Mountaineer Park.
Mountaineer Park'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 Park's wagering handles. West
Virginia law fixes these percentages at three levels, 17.25%, 19% and 25%,
depending on the complexity of the wager, as previously discussed. 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
provisions of the Federal Interstate Horse Racing Act of 1978, which prohibits
Mountaineer Park from accepting off-track wagering on simulcast racing without
the approval of the Racing Commission and, subject to certain exceptions, of any
other currently operating track within 60 miles, or if none, of the closest
track in any adjoining state.
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, Mountaineer Park 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 (the
"Court") 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 Park was invalid. The Court's order was to
become effective in late November 1993, at which time video lottery gaming at
Mountaineer Park 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 (210 beginning in 1998) live racing dates, 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 Park, all of which
satisfy the eligibility requirements. 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 video lottery activities unless the matter is resubmitted to
the voters pursuant to a petition signed by at least 5% of the registered
voters, who must wait at least five years to bring such a petition. If approval
is denied, another vote on the issue may not be held for a period of two years.
Video lottery gaming was approved in Hancock County, the location of Mountaineer
Park, on May 10, 1994.
10
In order to qualify as a "video lottery game," as the term is defined under
the Lottery Act, a game must, among other things, be a game of chance which
utilizes an interactive electronic terminal device allowing input by an
individual player. Such a game may not be based on any of the following game
themes: roulette, dice, or baccarat card games. Moreover, video lottery machines
must meet strict hardware and software specifications, including minimum and
maximum pay-out requirements, and must be connected to the Lottery Commission's
central control computer by an on-line or dial-up communication system. Only
machines registered with and approved by the Lottery Commission may offer video
lottery games.
Under the Lottery Act, racetracks that conduct 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 Park's construction loan with Bennett Management &
Development Corporation ("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 a Bennett affiliate,
American Gaming & Entertainment, Ltd. ("AGEL"), performed management services
for the Company. These factors required the Company to seek Lottery Commission
approval of Bennett. Although Bennett initially failed to provide information
required by the Lottery Commission, the Lottery Commission relicensed
Mountaineer Park 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 an opinion dated May 9, 1996 to the effect that
because Bennett had the right to vote less than 5% of the outstanding stock of
the Company, and AGEL was no longer providing management services, Bennett could
not influence or control Mountaineer Park'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 Park prepaid the Bennett loan with funds
obtained through a new financing from Madeleine LLC. 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 Park, no Lottery Commission approval of Madeleine was
required in 1996 or 1997. Assuming the Lottery Commission does not change its
current position, if no new lender acquires the right to vote more than 5% of
the voting stock and does not obtain the right to take an active role in the
affairs of Mountaineer Park, no Lottery Commission approval will be required.
While the Company has no
11
reason to believe that its license is in jeopardy as a result of either loan, a
change in policy by the Lottery Commission could affect Mountaineer Park's
license and thus adversely affect the Company.
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.
Accordingly, should a party unaffiliated with the Company acquire 5% or more
of the voting stock of the Company in a manner inconsistent with the statute,
the Company's license could be jeopardized insofar as such party would be
required to undergo approval by the Lottery Commission. Under the Company's
Restated Certificate of Incorporation, any person who purchases 5% or more of
the Common Stock without first securing Lottery Commission approval to own such
shares, is subject to the Company's right to repurchase such shares from the
holder.
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 grandstand building of a
racetrack where parimutuel wagering is permitted; provided, however, that if a
racetrack was authorized by the Lottery Commission prior to November 1, 1993 to
operate video lottery machines in another area of the racetrack's facilities,
such racetrack may continue to do so as long as there is one video lottery
machine in the grandstand building for each machine located in another area of
the racetrack. Accordingly, Mountaineer Park may continue to operate video
lottery machines at the Lodge, provided that there are at least as many machines
located in the grandstand building of the racetrack.
On March 14, 1998, the West Virginia State Legislature passed House Bill
4632, which, among other things, amended Section 29-22A-12(b)(5) of the
Racetrack Video Lottery Act of 1994 (regarding number and location of video
lottery terminals). Upon its effective date, the amendment will permit
Mountaineer Park to change the ratio of VLTs located in the Lodge versus the
racetrack building from 1:1 to 2:1. The amendment will become effective ninety
(90) days after its passage unless vetoed by the Governor of West Virginia on or
before April 18, 1998, at which time the amendment will become law.
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
12
the State's general revenue fund, 15.5% is deposited in the racetrack's fund for
the payment of purses, and the remaining 9% 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 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.
The West Virginia Legislature passed two bills in 1997 which enhance various
aspects of Mountaineer Park's existing racing and video lottery operations. The
Company's ability to remain in the gaming business depends on the continued
political acceptability of gaming activities to both the public and state
governmental officials. In addition, the gaming laws impose high tax rates, and
fixed parimutuel commission rates which, if altered, may diminish the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Parimutuel Commissions."
Due to the political nature of gaming issues, and despite recent
appropriations towards educational and recreational purposes derived from funds
generated by gaming activities, it is unknown at this time whether state
officials will maintain the same policies towards gaming activities,
particularly video lottery gaming, as in the past. 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, 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 by Mr. Arneault and operated by his affiliate,
Century Energy Management Company, Inc. The wells were in need of repair and the
Company planned to incur rework costs to increase production and
13
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.
MARATHON-OTTER LAKE FIELD--MICHIGAN
In January 1992, ExCal acquired all the issued and outstanding shares of
Crystal Oil Company, Inc. ("Crystal"). Crystal's assets consisted of an average
of a 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 had undertaken no material drilling since then. In
December 1992, ExCal entered into a joint venture agreement with Fleur-David
Corporation ("Fleur-David"), then a minority stockholder of the Company, to
perform rework and remediation activities to re-establish production and provide
activities necessary for compliance with state environmental standards on the
acreage then held as well as any leases taken in the future within a defined
area of mutual interest. 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 $286,000 as of December 31, 1997, 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. During 1997, ExCal had no
revenues or expenses.
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, 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 Park. 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
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., whose principal stockholder
is the brother of Edson R. Arneault, the President and Chief Executive Officer
and a
14
Director 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 Relationships and Related 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 then 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 1998. 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 Park is comprised of a thoroughbred racetrack 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 956 acres (including approximately 725 undeveloped acres)
in Chester, West Virginia. The Mountaineer Park 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. Substantially
all of Mountaineer Park's assets are pledged to secure the debt evidenced by the
Second Amended and Restated Term Loan Agreement, dated as of July 2, 1996, as
amended and restated as of December 10, 1996, and as further amended and
restated as of July 2, 1997, among Mountaineer Park, Inc. the Company and
Madeleine LLC (the "Second Amended Term Loan Agreement").
OIL AND GAS
The Company's oil and gas interest constitutes a 25% working interest in a
64% net revenue interest in proved reserves with 34 net producible wells as well
as future development within a defined area of mutual interest 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.
EQUIPMENT LEASES
At December 31, 1996, in connection with video lottery and racing
operations, Mountaineer Park leased 800 video lottery machines, a totalisator
system, video tape and closed circuit television systems and other equipment
required for operations. During the first quarter of 1997, the Company agreed to
amend its master lease agreement, reducing the number of VLTs under lease to
600.
15
ITEM 3. LEGAL PROCEEDINGS
PENDING LITIGATION
OVELLE HOLDINGS, INC. V. MTR GAMING GROUP, INC., Circuit Court of Hancock,
West Virginia, Civil Action 97-C-133G. On July 24, 1997, the Company and
Mountaineer Park were served with a complaint filed by Ovelle Holdings, Inc.
claiming breach of contract and breach of the implied covenant of good faith and
fair dealing in connection with a financing commitment allegedly obtained by the
plaintiff for Mountaineer Park. The complaint seeks recovery of $350,000 in
fees, as well as lost profits on shares of the Company's stock the plaintiff
alleges it could have purchased upon the exercise of warrants it was to have
earned, and loan servicing fees, which lost profits and servicing fees are
alleged to exceed $75,000, pre-and post-judgment interest, and costs.
The Company and Mountaineer Park have filed a motion for summary judgment on
the grounds that letters authored by plaintiff constitute an admission that
plaintiff was unable to arrange closing of the subject financing by the express
deadline contained in the parties' agreement and that no agreement to extend the
closing date was reached. Thus, plaintiff did not satisfy the conditions
precedent to its right to compensation of any kind. Management therefore intends
to defend the action vigorously.
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 Park were served with a complaint by
George Jones, claiming breach and wrongful termination of Mr. Jones' employment
agreement with Mountaineer Park, retaliatory discharge, fraud, outrage, and
defamation. The complaint alleges, among other things, that Mountaineer Park
terminated Jones' employment in September of 1993 in retaliation for his efforts
to investigate alleged improper activities occurring at Mountaineer Park. 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 Park have answered the complaint, denying any
liability to Mr. Jones. Management has determined to defend the case vigorously
on the grounds that all of the claims should be dismissed because Mr. Jones'
employment was not terminated but rather abandoned by Mr. Jones, or, if
terminated was done so properly and justifiably. The Company and Mountaineer
Park will also defend against the retaliatory discharge claim based upon Mr.
Jones' own deposition testimony that whenever Mr. Jones raised with management
issues he perceived as problems, management acted promptly and properly to
address those concerns.
Although when the case was filed Mountaineer Park was advised that the
claims were covered by insurance, in April of 1997 Mountaineer Park was advised
by its insurance carrier that only the defamation claims against it are covered
by insurance, and that the carrier would provide a defense to all claims under a
reservation of rights. Discovery is in progress (after delays largely because
Mr. Jones' counsel had been unable to locate him).
JUANITA REINHOLD V. MOUNTAINEER PARK, INC., Circuit Court of Hancock County,
West Virginia, Civil Action No. 98-C-30 W. On February 26, 1998, Mountaineer
Park, Inc. was served with a complaint filed by Juanita Reinhold claiming
wrongful termination of employment and improper administration of a polygraph
test. The complaint alleges that pursuant to statute concerning such tests,
Mountaineer Park is criminally liable to the State of West Virginia and civilly
liable to the plaintiff. The complaint seeks $250,000 in compensatory damages
and a like amount in punitive damages.
The Company (including its subsidiaries) is also a defendant in various law
suits relating to routine matters incidental to its business.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on October 8,
1997, for the purpose of (i) electing three persons to serve as directors of the
Company until the next annual meeting of stockholders; (ii) ratifying the
adoption of the Company's 1996 Amended Stock Option Plan; and (iii) ratifying
the appointment of the Company's independent certified public accountants to
serve as auditors for the fiscal year ending December 31, 1997.
1. At the meeting, Edson R. Arneault, Robert L. Ruben and Robert A. Blatt
were elected as directors of the Company by the following vote:
VOTES
--------------------
FOR WITHHELD
---------- --------
Edson R. Arneault......................................... 14,783,312 901,261
Robert L. Ruben........................................... 14,787,962 896,611
Robert A. Blatt........................................... 14,785,962 898,611
2. The proposal to adopt the Company's 1996 Amended Stock Option Plan was
approved by the following vote:
FOR AGAINST NON-VOTES ABSTENTIONS
- ------------ ---------- ----------- -----------
13,939,973 1,154,210 270,407 319,983
3. The proposal to confirm the ratification of Corbin & Wertz as the
Company's Independent Public Accountants for the fiscal year ending December 31,
1997 was approved by the following vote:
FOR AGAINST ABSTENTIONS
- ------------ --------- -----------
15,215,288 141,185 328,100
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "MNTG". On March 20, 1998, the closing trade price for the Company's
Common Stock was $2.75. As of March 20, 1998, there were approximately 550
stockholders of record of the Company's Common Stock.
The following table sets forth the range of high and low trade price
quotations obtained from the National Quotations Bureau for the Common Stock for
the two fiscal years ended December 31, 1996 and 1997 and for the period of
January 1, 1998 through March 20, 1998. These quotes are believed to be
representative of inter-dealer quotations, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
HIGH LOW
--------- ---------
Year Ended December 31, 1996:
First Quarter........................................ 15/16 3/8
Second Quarter....................................... 1 9/16 19/32
Third Quarter........................................ 1 15/32 27/32
Fourth Quarter....................................... 1 9/16 29/32
17
HIGH LOW
--------- ---------
Year Ended December 31, 1997:
First Quarter........................................ 1 1/2 27/32
Second Quarter....................................... 1 11/32 1
Third Quarter........................................ 1 15/32 1 1/4
Fourth Quarter....................................... 2 15/32 1 7/16
Year Ending December 31, 1998:
First Quarter (January 1, 1998 through March 20,
1998).............................................. 2 3/4 2
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 1997, have been derived from the audited consolidated
financial statements of the Company, certain of which are included elsewhere in
this Report, and should be read in conjunction with those consolidated financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Revenues............................. $ 60,138,000 $ 40,204,000 $ 24,927,000 $ 14,656,000 $ 12,797,000
Income/(loss) from continuing
operations......................... $ 4,694,000 1,155,000 (5,313,000) (6,902,000) (5,913,000)
Income/(loss) per share from
continuing operations..............
Basic:............................... .24 .06 (.33) (.48) (.46)
Assuming dilution:................... .22 .06 (.33) (.48) (.46)
Discontinued operations data:
Revenues............................. -- -- -- 184,000 268,000
Loss from discontinued operations.... -- -- -- (640,000) (1,653,000)
Loss per share from discontinued
operations......................... -- -- -- (.04) (.13)
Balance Sheet Data:
Working Capital (Deficiency)......... 9,785,000 3,897,000 (7,453,000) (1,763,000) 313,000
Current Assets....................... 13,017,000 7,016,000 1,972,000 3,600,000 2,354,000
Current Liabilities.................. 3,232,000 3,119,000 9,425,000 5,363,000 2,041,000
Total assets--continuing
operations......................... 38,418,000 28,262,000 23,131,000 21,387,000 16,347,000
Net assets--discontinued
operations......................... 2,616,000 2,616,000 2,616,000 2,571,000 2,790,000
Total Liabilities.................... 25,921,000 20,612,000 19,763,000 14,200,000 6,040,000
Total Stockholders' Equity (Capital
Deficiency)........................ 15,113,000 10,266,000 5,984,000 9,758,000 13,097,000
18
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 common stock
of Mountaineer Park with the intent of enhancing its existing facilities for
promotion as a high quality gaming, racing and recreation 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 Park.
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Mountaineer Park has exhibited steady, pronounced revenue growth under its
expansion plan begun in September 1994. The emergence of video lottery as
Mountaineer Park's dominant profit center and the 1996 amendment of the West
Virginia video lottery law to permit the addition of Slot Terminals have allowed
the Company to generate increased revenues. Primarily as a result of this
significant increase in gaming revenues, the Company earned a $4.7 million
profit from continuing operations in 1997.
In 1996, the Company earned a $1.2 million profit from continuing operations
substantially as a result of the emergence of video lottery as Mountaineer
Park's dominant profit center and the 1996 amendment of the West Virginia
lottery law described above.
The Company incurred significant losses from continuing operations during
the year ended December 31, 1995 largely due to delays encountered in the
expansion of Mountaineer Park'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.
REVENUES
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Video Lottery Terminals.................. $49,187,000 $30,700,000 $16,479,000
Parimutuel Commissions................... 4,437,000 4,299,000 4,263,000
Lodging, Food and Beverage............... 5,417,000 3,945,000 3,046,000
Other.................................... 1,097,000 1,260,000 1,139,000
----------- ----------- -----------
$60,138,000 $40,204,000 $24,927,000
----------- ----------- -----------
----------- ----------- -----------
Total revenues increased by $19,934,000 from 1996 to 1997, an increase of
49.58%. Approximately $18.5 million of the increase was produced by video
lottery operations, while the parimutuel commissions and lodging, food, beverage
and other operations at Mountaineer Park contributed approximately $1.4 million
of additional revenues. Management believes the increase resulted primarily from
increased patronage resulting from the Company's expanded advertising
activities, the increase to 800 Slot Terminals in March 1997 (as compared to
1996 when the Company had no Slot Terminals until July of that year), greater
familiarity of customers with the Company's gaming machines, and other enhanced
facilities.
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 Park experienced extensive
19
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 Park's facilities are situated well above the flood plain and did
not sustain any damage; Mountaineer Park's nearest competitor was extensively
damaged and ceased operations for approximately four weeks in the first quarter
of 1996.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 60% from $30.7 million in
1996 to $49.2 million in 1997. Management believes the increase resulted
primarily from increased patronage resulting from the Company's expanded
advertising activities, the increase to 800 Slot Terminals in March 1997 (as
compared to 1996 when the Company had no Slot Terminals until July of that
year), greater familiarity of customers with the Company's gaming machines and
other enhanced facilities.
Revenues from video lottery operations increased 86%, from $16.5 million in
1995 to $30.7 million in 1996. In response to increased patronage and a trend
towards increased productivity of video lottery activities, Mountaineer Park
doubled the number of VLTs to 800 in June 1995. In December 1995, the Company
completed an expansion of its Lodge gaming facilities, allowing the placement of
half of its VLTs at the Lodge with the other half remaining in the racetrack
grandstand and clubhouse, in response to a perceived demand for more terminal
availability on days when live racing is not conducted. In July of 1996, after
passage of legislation permitting the use of Slot Terminals as opposed to only
Card Terminals, Mountaineer Park converted 350 Card Terminals into Slot
Terminals. Also in July of 1996 the Company began a large scale marketing
campaign aimed beyond the 40 mile radius from which the Company has
traditionally drawn the bulk of its patrons. In October of 1996, Mountaineer
Park converted an additional 50 Card Terminals to Slot Terminals. In March of
1997, Mountaineer Park 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.
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 1997. The Company plans to pursue additional
growth in its video lottery operations. The aggressive newspaper marketing
campaign begun in July 1996 continued through December 31, 1997 and is still
continuing. In January of 1997, Mountaineer also began broadcasting a 30 minute
"infomercial" advertisement on television affiliates within a two hour driving
radius.
The Company has completed a large scale redecoration of its racetrack
grandstand video lottery facilities, including expansion of ancillary dining and
bar areas. The Company has spent $18 million on this redecoration and expects to
incur no additional related material expense. Management believes that the
redecoration has made the facility more attractive to patrons and has and will
continue to have a positive effect on video lottery operations. Management
believes that the redecoration will draw and accommodate significantly heavier
patronage to the grandstand gaming facilities, which currently operate only on
the Company's 210 annual live race dates. For the twelve months ended December
31, 1997, average daily net win on the VLTs placed at the racetrack was $56
(including $0 for days when there was no live racing), compared to $224 earned
on the Lodge-based terminals for a facility-wide average of $140 per VLT per
day.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which means
the total amount wagered without regard to predetermined deductions, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place, or show bet. In parimutuel wagering,
patrons bet against each other rather than against the operator of the facility
or with pre-set
20
odds. The total wagering handle is composed of the amounts wagered by each
individual according to the wagering activity. The total amounts wagered form a
pool of funds from which winnings are paid based on odds determined solely by
the wagering activity. The racetrack acts as a stakeholder for the wagering
patrons and deducts from the amounts wagered a "take-out" or gross commission,
from which the racetrack pays state and county taxes and racing purses. The
Company's parimutuel commission rates are fixed as a percentage of the total
wagering handle or total amounts wagered. The Company earned an average
commission rate of 20% in each of the past three years.
For the twelve (12) months ended December 31, 1997, simulcast handle rose by
$1.2 million to $20.9 million, an increase of 6.1% compared to $19.7 million for
the same period in 1996. Management believes the increase resulted primarily
from increased video lottery attendance and cross-marketing from such activity.
Live racing handle for the year ended 1997 was $20.1 million, a decrease of
$300,000 from the year ended 1996, which management believes is immaterial.
During 1997 management raised average daily purses from $54,000 to $58,000 and
sponsored stakes races of up to $25,000 as compared with $20,000 in 1996.
Management believes that periodic increases in average daily purses and purses
for stakes races will attract higher quality race horses. Management believes
that over time such increases and improvements should lead to increased live
racing handle, or alternatively smaller decreases. Management also believes that
the enhanced quality of race horses should improve the Company's prospects in
export simulcasting. Management intends to continue its policy of increasing
average daily purses in fiscal year 1998 as well as sponsor substantially
increased stakes races.
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 primarily 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. 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.
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 Park 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. 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 Park's Chester, West Virginia facility.
In September 1995, Mountaineer Park 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 Park broadcast a simulcast signal
of the stakes races, earning commissions on $351,000 of handle wagered off-site.
Early in 1995, the Company expanded its off-track betting facilities in the
racetrack clubhouse, grandstand and the Lodge. In April 1995, Mountaineer Park
began offering greyhound off-track betting, which contributed $2.7 million to
increased simulcast handle in 1995.
LODGING, FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage accounted for a combined
increase of 37.3% to $5.4 million for the year ended December 31, 1997, from
$3.9 million for the same period in 1996. Restaurant, bar and concession
facilities produced $1.3 million of the revenue increase, while lodge revenues
increased $200,000. Food and beverage operations accounted for approximately
three quarters of the revenues earned by this profit center in 1997 and 1996.
Management believes that increased revenues from lodging, food and beverage
resulted primarily from enhanced video lottery facilities and related
advertising, which in turn led to increased consumption of food and beverages by
the Company's
21
customers, substantially as a result of the opening of Big Al's Deli in the
Speakeasy Gaming Saloon. The ratio of revenue from food and beverage to revenue
from lodging has remained constant, reflecting that Mountaineer Park has
historically drawn more day traffic than overnight stays.
Revenues earned from lodging, food and beverage 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. Restaurant, bar and concession facilities
produced $582,000 of the revenue increase, while Lodge revenues increased
$297,000. Food and beverage operations accounted for approximately three
quarters of the revenues earned by this profit center in both 1995 and 1994. A
fire in October 1994 caused 41 of the Lodge's 101 rooms to be unusable during
the fourth quarter of 1994 and the first four months of 1995.
OTHER REVENUES
Other sources of revenues consist primarily of non-core businesses such as
admission, programs, golf, tennis and swimming. While these lines of business
are not the Company's most profitable, the Company believes they are necessary
for the Company to continue to attract gaming patrons. Other revenues decreased
by $163,000, or 12.9%, from 1996 to 1997 and increased by $121,000 or 10.6% from
1995 to 1996. Operations in 1997 saw an immaterial decrease in revenue as a
result of the Company's decision to permit free parking for its customers at the
racetrack facility.
OPERATING COSTS
Total operating costs increased by 43.8% from $29.8 million in 1996 to $42.8
million in 1997. Approximately $11 million of the increase was attributable to
the cost of operating video lottery terminals, which includes applicable state
taxes and fees, and related advertising. The Company's increase in revenues in
1997 resulted in a 43.8% increase in cost of revenues, a 99.5% increase in
marketing and promotions expense, a 33.8% increase in general and administrative
expenses, and a 44.9% increase in depreciation and amortization. The increased
marketing and promotion expenses were due primarily to the Company's "Hancock
County: The Action's Closer Than You Think" infomercial, increases in direct
mail, print, radio and television advertising and increased prize giveaways. The
increase in general and administrative expenses was due primarily to (1)
additional personnel engaged in video lottery, housekeeping and security to
accommodate Mountaineer Park's larger crowds; (2) additional marketing and
promotional personnel, both to implement the Company's marketing plan and to
analyze the effectiveness of the Company's marketing efforts to obtain the
maximum long-term benefits of such efforts; and (3) professional fees related to
financing activity.
The expanded scope of operations which produced Mountaineer Park'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% increase in depreciation and amortization.
The increased marketing and promotion expenses were due primarily to (1) labor
costs associated with establishing a full-time marketing department; (2)
implementing a direct mail and print advertising campaign in locations where the
Company's primary competitors operated; and (3) Mountaineer Park's increased
promotions and prize give-aways. Gross profits from Mountaineer Park'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.
The gains resulting from the profitability of the video lottery operations
have been offset by the losses sustained by parimutuel commissions business;
however, the Company has been able to substantially reduce its losses due to the
improvement in VLT operations. Based on this trend, the Company is attempting to
expand the video lottery business, while attempting to reduce the losses of the
parimutuel
22
and lodging, food and beverage businesses, by increasing productivity, expanding
marketing efforts, increasing purse sizes and attracting higher quality jockeys
and horses to increase parimutuel wagering.
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Operating Costs
Video Lottery Terminals.................. $31,048,000 $19,865,000 $12,256,000
Parimutuel Commissions................... 6,072,000 5,257,000 5,064,000
Lodging, Food and Beverage............... 4,583,000 3,543,000 3,285,000
Other.................................... 1,095,000 1,092,000 1,195,000
----------- ----------- -----------
Total Operating Costs.................... $42,798,000 $29,757,000 $21,800,000
----------- ----------- -----------
----------- ----------- -----------
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Gross Profit (Loss)
Video Lottery Terminals.................. $18,139,000 $10,835,000 $ 4,223,000
Parimutuel Commissions................... (1,635,000) (958,000) (801,000)
Lodging, Food and Beverage............... 834,000 402,000 (239,000)
Other.................................... 2,000 168,000 (56,000)
----------- ----------- -----------
Total Gross Profit (Loss)................ $17,340,000 $10,447,000 $ 3,127,000
----------- ----------- -----------
----------- ----------- -----------
VIDEO LOTTERY TERMINALS OPERATING COSTS
Costs of video lottery revenue for 1997 increased by $11.2 million or 56.3%,
from $19.9 million to $31 million for the year ended December 31, 1996, compared
to 1997, reflecting an increase in statutory expenses (See note 15 of the
Consolidated Financial Statements). Such expenses accounted for $10.4 million of
the total cost increase with the additional expenses incurred in connection with
video lottery, housekeeping and security personnel.
Costs of video lottery revenues increased by $7.7 million, or 62%, from
$12.3 million to $19.9 million for the year ended December 31, 1996, compared to
1995, reflecting the increase in statutory expenses directly related to the 86%
increase in video lottery revenues. Such expenses accounted for $7.6 million of
the total cost increase.
Under the March 17, 1994, Racetrack Video Lottery Act, the following
statutory rates paid to certain entities are in effect.
State of West Virginia.................................................... 30.0%
Hancock County............................................................ 2.0%
Horseman's Association (racing purses).................................... 15.5%
Other..................................................................... 5.5%
----
Total Statutory Payments.................................................. 53.0%(1)
----
----
- ------------------------
(1) Excludes up to a 4% administrative fee charged by the State of West Virginia
based on revenues. In addition, rates are applied to revenues net of this 4%
administrative fee. (See Note 16 to the Consolidated Financial Statements of
the Company)
In addition to the above rates, the Company paid a 3% management fee (after
the State's 4% administrative fee), based on VLT revenues, to AGEL which began
on October 26, 1994, as approved by the Lottery Commission. This management
agreement was stayed in July 1995. A consulting agreement with American Newco
providing for fees of up to $20,000 per month, as discussed below, replaced the
23
management agreement. The Company was also required to pay additional management
fees of 8% of income before depreciation, amortization, taxes and interest.
Total management fees charged to the cost of VLTs in 1995 were $321,000. This
agreement has since been terminated and releases have been exchanged.
Nonetheless, AGEL has brought a suit against Mountaineer Park to recover $79,000
of management fees allegedly due under such agreement.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel commission revenue attributable to live racing increased by $815,000
to approximately $6 million in 1997. Purse expense (consisting of statutorily
determined percentages of live racing handle) dropped 2 1/2% to $1.9 million in
1997, which is consistent with the decrease in live handle. In connection with
simulcasting race operations, contractual fees paid to host tracks and
additional statutorily determined percentages of simulcast commissions
contributed to the purse fund for live racing increased $100,000 to $2.3 million
in 1997 consistent with the 6.1% increase in simulcasting wagers. Parimutuel
commissions revenue is reported net of these expenses in the Consolidated
Statement of Operations.
Costs of parimutuel commission revenue increased by $193,000 to
approximately $5.3 million in 1996. Purse expense dropped 7%, from $2.1 million
in 1995 to $2.0 million in 1996, reflecting the 7% decrease in live racing
wagers. Contractual fees paid to host tracks and the Horsemen's Association in
connection with simulcasting race operations increased $288,000 to $2.2 million
in 1996, consistent with the 11% increase in simulcasting wagers.
Direct and indirect wages and employee benefits attributable to racing
operations increased by $100,000 to approximately $2.5 million in 1997, while
lease expense increased by $91,000 to $788,000 due to an increase in simulcast
handle. Direct and indirect wages and employee benefits attributable to racing
operations remained stable at approximately $2.4 million in 1996 and 1995, while
lease expense was reduced by $106,000, or 13%, to $697,000 due primarily to the
negotiation of more favorable totalisator lease terms in December, 1995.
Other costs of parimutuel commission revenue increased in the aggregate by
approximately $758,000 from 1996 to 1997 primarily as a result of allocation of
overhead items including advertising, personnel and professional fees as
determined by management.
Salaries, payroll taxes and employee benefits increased from $2.2 million in
1994 to $2.5 million in 1995, partly as an accommodation due to certain
inefficiencies caused by Mountaineer's extensive construction activities in
1995. A general upgrade in maintenance activities contributed to this increase,
as well as a $65,000 increase in repair and maintenance supplies. The Company's
totalisator rents and payments of host track fees increased $177,000 in 1995
from the prior year as a result of the 24% increase in revenues achieved by its
off-track betting operations. Liability insurance expense in 1995 was $87,000
higher than the prior period, a reflection primarily of the increased volume of
business and an industry-wide increase in jockey insurance.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from $3.5
million in 1996 to $4.6 million in 1997. The lodging, food and beverage
operation earned a gross profit of $834,000 compared to $402,000 in 1996,
primarily as a result of the addition of sales by Big Al's Deli (which has
greater efficiencies as compared with a full service restaurant), better cost
control (including the addition of point of sale cash registers) and increased
customer attendance and related advertising. Lodging direct costs totaled
$1,466,000 for 1997 compared to $1,102,000 in 1996. Lodge wages and employee
benefits increased by $199,000 to $937,000 in 1997, while food and beverage
operation wages and employee benefits increased by $348,000 in 1997. Such
increases were caused as a result of an increase in service personnel in these
areas.
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Direct expenses of lodging, food and beverage operations increased from $3.3
million in 1995 to $3.5 million in 1996. The lodging, food and beverage
operation earned a gross profit of $402,000 in 1996, compared to a $239,000 loss
in 1995, as higher revenues more fully absorbed the operation's fixed costs.
Lodging direct costs totaled $1,102,000 for 1996, compared to $1,048,000 in
1995. Lodging operations broke even in 1996, compared to a $259,000 loss in
1995. Widespread construction projects in progress throughout the year
unavoidably increased Lodge operating expenses. Lodge wages and employee
benefits increased by $71,000 to $708,000 in 1996, while food and beverage
operation wages and employee benefits increased by $76,000 to $975,000 in 1996.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
racing programs, golf, tennis and swimming increased by $3,000 from $1,092,000
in 1996 to $1,095,000 in 1997.
Cost of other revenues declined by $103,000 from $1,195,000 in 1995 to
$1,092,000 in 1996, reflecting the discontinuance of certain shuttle bus and
valet services. The Company reactivated its shuttle bus service in 1997.
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense increased by $1,710,000 to $3,428,000 for
the year ended December 31, 1997 primarily due to increased advertising expenses
in connection with the Company's aggressive marketing campaign (commenced in
1996) and its infomercial advertising commenced in 1997.
Marketing and promotions expense increased by $574,000 to $1.7 million for
the year ended December 31, 1996. The bulk of this increase occurred in the
second half of 1996, with the inception of an aggressive marketing campaign
targeted at a significantly larger geographic market. In addition, in January
1997 Mountaineer Park commenced extensive infomercial advertising on television
affiliates within a two hour driving radius. In 1997 Mountaineer Park's
advertising costs were defrayed by a state grant in the amount of $330,000 from
a convention and visitors bureau of which Mountaineer Park is a member.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST EXPENSE
The Company's general and administrative expense increased by $1.4 million
to $5.5 million, or 33.8%, from $4.1 million for the year ended December 31,
1997 as compared to 1996 (which increase is consistent with the increase in
revenue). Such increase resulted primarily from an increase in service personnel
and professional fees.
The Company's general and administrative expenses decreased by $1.3 million
to $4.1 million, or 25% from $5.4 million for the years ended December 31, 1996
and 1995, respectively. In addition, several non-recurring charges affected
selling, general and administrative expenses as follows: provisions for
settlement of legal actions of $408,000 and doubtful notes receivable from
related parties of $290,000, and relocation and severance charges of $596,000 in
1995.
In 1997, the Company incurred $3,341,000 of interest expense. Interest
expense in 1997 included a $1.8 million one-time cash fee paid over the first
year of the extended loan term pursuant to the July 2, 1997 Seconded Amended and
Restated Term Loan Agreement the Company and Mountaineer Park entered with
Madeleine LLC. Approximately $860,000 of such fees remain to be expensed in
1998.
In 1996, the Company incurred $3.7 million of interest, of which $197,000
was capitalized to cost of self-constructed assets. Interest expense in 1996
included the amortization of $1.8 million of cash and non-cash fees paid at the
inception of various loan arrangements. Approximately $1.1 million of such fees
were expensed in 1997.
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Depreciation and amortization costs increased 44.9% from $1,667,000 in 1996
to $2,415,000 in 1997, reflecting increased capitalization of improvements
completed at Mountaineer Park's facilities and the purchase of 400 VLTs for $3.2
million.
Depreciation and amortization costs increased 11% from $1.5 million in 1995
to $1.7 million in 1996, reflecting the increased property, plant and equipment
balances carried at Mountaineer Park.
NONRECURRING INCOME
In 1997, the Company had no nonrecurring income.
In 1996, the Company negotiated significant reductions in four previously
accrued obligations, and as a result recorded $705,000 in non-recurring income.
The non-recurring income resulted from the following four items:
In 1995, the Company recorded a provision for loss in the amount of $308,000
in connection with a legal judgment which had been assessed against Mountaineer.
In June 1996, the related lawsuit was settled upon payment of a $100,000
payment.
In September 1996, the Company reached agreement in a dispute over trade
accounts payable by satisfying an obligation which had been accrued in the
amount of $411,000 as of December 31, 1995 by payment of a $150,000 cash
settlement in September 1996.
In July 1994, the Company entered into an agreement in settlement of claims
arising from a 1993 financial advisory agreement. In connection therewith, the
Company accrued a $150,000 liability and issued warrants to purchase 145,000
shares of common stock with registration rights, exercisable at a price of $6.25
per share through January 15, 1997. In September 1996, the settlement agreement
was amended as follows: (a) The obligation to remit the $150,000 payment was
reduced to $90,000 in return for the immediate payment of $90,000, and (b) The
exercise price of the previously issued warrants was reduced to $3.00 per share
and the exercise period was extended to January 15, 1998, when they expired.
In April 1995, the Company entered into a severance agreement with its
former chief executive officer. In connection therewith, the Company was
obligated to pay approximately $440,000 over a period of two years. As of
December 31, 1995, the Company had an accrued liability on its book relating to
the Severance Agreement of $400,000. In 1995, management discontinued payments
under the agreement due to the discovery of certain matters which it believed
nullified the agreement. In October 1996, the severance agreement was amended to
provide for the payment of $100,000 in full satisfaction of the Company's
obligation to make cash payments.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's working capital balance stood at $9,785,000 at December 31,
1997, and its unrestricted cash balance amounted to $7,715,000. Racing purses
are paid from funds contributed by the Company to bank accounts owned by the
horse owners who race at Mountaineer Park. At December 31, 1997, the balances in
these accounts exceeded the purse payment obligations by $712,000; this amount
is available for payment of future purse obligations at the discretion of the
Company and in accordance with the terms of its agreement with the HBPA.