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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
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 22, 1999 (based on the closing sale price per share on the
NASDAQ Stock Market on that date) was $43,770,033.
The Company's common stock outstanding at March 22, 1999 was 20,896,322
shares.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.......................................................... 4
Company History......................................................... 4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:............. 4
Mountaineer Race Track & Gaming Resort--Chester, West Virginia.......... 5
Lodge Facilities and Speakeasy Gaming Saloon............................ 5
Video Lottery Facilities................................................ 5
Recreational Facilities................................................. 6
Trailer Park............................................................ 6
Undeveloped Land........................................................ 6
Current Operations...................................................... 6
Racing Operations....................................................... 6
Video Slot Operations................................................... 7
Lodging, Food and Beverage Operations................................... 8
Ramada Inn and Speedway Casino--North Las Vegas, Nevada................. 8
Ramada Inn and Speakeasy Casino--Reno, Nevada........................... 8
Operation of the Nevada Properties/Gaming Licensing..................... 9
Business Strategy....................................................... 9
Development and Marketing of Mountaineer Park as a Destination Resort
and Diversified Entertainment Facility............................... 9
Increasing Mid-Week Business.......................................... 9
Increase Patronage of Video Slots at Racetrack........................ 10
Improve Financial Results of Racing Operations at Mountaineer Park.... 10
Competition............................................................. 10
Mountaineer Park...................................................... 10
The Speedway Property................................................. 11
The Reno Property..................................................... 11
Employees............................................................... 11
Regulation And Licensing................................................ 11
General............................................................... 11
West Virginia Racing and Gaming Regulation............................ 12
Nevada Gaming Regulation.............................................. 14
Impact of Resort Hotel Legislation.................................... 17
Compliance with Other Laws............................................ 17
Restrictions on Share Ownership and Transfer.......................... 17
Application of Environmental Regulations.............................. 18
Discontinued Operations................................................. 18
ITEM 2. PROPERTIES........................................................ 18
Hotel, Gaming, Racing and Other Property................................ 18
Equipment Leases........................................................ 19
ITEM 3. LEGAL PROCEEDINGS................................................. 19
Pending Litigation...................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 20
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 20
ITEM 6. SELECTED FINANCIAL DATA........................................... 20
2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS..................................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 35
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY............................ 36
Business Experience..................................................... 36
ITEM 11. EXECUTIVE COMPENSATION........................................... 38
Summary Compensation Table.............................................. 38
OPTION GRANTS IN 1998................................................... 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES......................................................... 39
Section 16(a) Beneficial Ownership Reporting Compliance................. 39
Employment Agreements................................................... 39
Compensation of Directors............................................... 40
Compensation Committee Interlocks and Insider Participation............. 41
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K............ 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................
3
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, through wholly owned subsidiaries, owns and operates
Mountaineer Racetrack and Gaming Resort in Chester, West Virginia, the Ramada
Inn and Speedway Casino in North Las Vegas, Nevada, and the Ramada Inn and
Speakeasy Casino in Reno, Nevada. Pending licensing, the casinos at the
Company's Nevada properties have been leased to a non-affiliated licensed casino
operator pursuant to leases that are terminable by the Company on thirty days
notice. The Company also holds notes and an assignment of production payment
acquired in the disposition of its discontinued oil and gas business.
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, licensing and taxation
of gaming operations, lack of Nevada gaming licenses, dependence on key
personnel, competition, including competition from legalization of gaming in
states near the Company's gaming operations, no dividends, continued losses from
horse racing, costs associated with maintenance and expansion of Mountaineer
Park's infrastructure to meet the demands attending increased patronage, costs
and risks attending construction, expansion of operations, market acceptance of
the Company's Nevada properties and maintenance of "grandfathered" status of
those properties, failure to liquidate discontinued operations, cyclical nature
of business, Year 2000 issues, 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.
4
MOUNTAINEER RACETRACK & GAMING RESORT--CHESTER, WEST VIRGINIA
Pursuant to a stock purchase agreement dated May 5, 1992, the Company
acquired all of the common stock of Mountaineer Park, Inc. ("Mountaineer Park"),
a West Virginia corporation, in December 1992. Mountaineer Park offers
parimutuel wagering on live thoroughbred horse racing and simulcast horse and
greyhound racing as well as 1,300 video slot machines as part of 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.
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 a buffet which
provides customers with low-cost meals featuring a variety of foods from
breakfast foods to prime rib and seats 120. The Clubhouse also provides a 2,400
square feet 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
parimutuel windows and food and beverage concession stands. The clubhouse covers
approximately 25,000 square feet of interior space and likewise offers
parimutuel windows. The grandstand has an indoor stage with a seating capacity
of approximately 2,240, which is used for 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 AND SPEAKEASY GAMING SALOON
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 enclosed deck. The Lodge is also the site of the Speakeasy Gaming
Saloon. Encompassing 25,000 square feet (including a 12,000 square foot addition
that opened in July of 1998), the Speakeasy, together with adjacent smaller
rooms, houses 2/3 of Mountaineer Park's 1,300 video slot machines, extensive
off-track wagering facilities and Big Al's Deli, where patrons may purchase
pizza and sandwiches 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 1,300 video lottery terminals ("VLTs" or
"Video Slots") located in the racetrack clubhouse, grandstand and Lodge. The
Company owns 400 VLTs and leases the remaining 900 VLTs. The racetrack houses
1/3 of the VLTs in its Riverside Gaming Terrace on the second floors of the
clubhouse and grandstand, and the Lodge offers the remaining 2/3, which is the
maximum allowed by law, primarily in the
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Speakeasy Gaming Saloon. VLTs allow a player to select from several game themes,
including up to four versions of draw poker, blackjack, two versions of keno,
and various games that simulate classic casino slot machines.
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.
On January 22, 1999, the Company purchased the Woodview Golf Course, an
eighteen-hole par 71 course measuring approximately 6,300 yards on a 168-acre
tract, which is located approximately seven miles from Mountaineer Park in New
Cumberland, West Virginia. SEE "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Subsequent Events".
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 two years and entitles Mountaineer Park to purchase the property and
buildings for $600,000. Management has no definitive plans to develop such
property, but is considering construction of a championship golf course.
CURRENT OPERATIONS AT MOUNTAINEER PARK
The Company's operating revenues at Mountaineer Park are derived principally
from its racing and Video Slot operations and, to a lesser extent, its lodging,
food and beverage operations. Additional revenues are generated from ticket
sales for concerts and boxing events and 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 1998, and will remain effective through December
1999.
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
6
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 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 SLOT OPERATIONS
The Company is subject to annual licensing requirements established by West
Virginia law. The Company's license was renewed in July 1998 for a period of one
year.
The Company derives revenue from the operation of Video Slots 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.
The Company owns 400 VLTs and leases a total of 900 VLTs from three
manufacturers. The leases covering 800 of the leased VLTs provide for a fixed
monthly rental, while the lease for the remaining 100 VLTs calls for a
percentage of net win.
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 then in operation from 800 to 1,000, consisting
of 800 Slot Terminals and 200 Card Terminals.
In June of 1998, West Virginia's video lottery law was amended to permit
Mountaineer Park to change the ratio of VLTs located at the Lodge versus the
racetrack building from 1:1 to 2:1. Accordingly, in July of 1998, Mountaineer
Park installed in the Speakeasy 200 new VLTs and 100 VLTs previously operated in
the racetrack building, resulting in an increase in the total number of VLTs, at
such time, from 1,000 to 1,200 with 800 VLTs in the Lodge and 400 in the
racetrack building.
Although the Lottery Commission approved the linking of video slots in
progressive jackpot networks in 1995, the technology for video lottery
progressives has only recently become available. In January of 1999, Mountaineer
Park introduced progressives on a test basis with respect to a total of 100 VLTs
in several networks or "banks" located in the Speakeasy and the Riverside Gaming
Terrace. While the games have been popular with patrons--with one jackpot
reaching $140,000 by March--technical difficulties have required periodic shut
downs of those games. In anticipation of the addition of progressive Video
Slots, Mountaineer Park obtained regulatory approval to increase the number of
Video Slots from 1,200 to 1,355 and currently operates 1,300 Video Slots.
7
LODGING, FOOD AND BEVERAGE OPERATIONS
The Clubhouse restaurant is open a minimum of 210 days annually on live race
days and offers seating for 650 customers with full lunch and dinner menus and a
private buffet. Clubhouse customers include racing fans, local residents and
private social groups. Beverages and cocktails are also available in the
grandstand building at the Hollywood Knights Saloon, which services video
lottery players, as well as racing fans. A buffet 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, and an additional 68 persons on an enclosed deck overlooking
the golf course. 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.
RAMADA INN AND SPEEDWAY CASINO--NORTH LAS VEGAS, NEVADA
In May of 1998, the Company, through its wholly owned subsidiary, Speakeasy
Gaming of Las Vegas, Inc. ("Speakeasy Las Vegas"), purchased a 131-room hotel
and casino property (previously known as the Cheyenne Hotel & Casino) and has
renamed it the Ramada Inn and Speedway Casino (together with an adjacent 1/2
acre parcel purchased thereafter to augment parking, the "Speedway Property").
Since acquiring the Speedway Property, the Company has renovated ninety-five of
the hotel rooms, refurbished the restaurant, and constructed a 15,600 square
foot addition that houses the casino, and parking lots that now accommodate 474
cars. The Company is in the process of renovating the remaining hotel rooms and
plans to construct a new swimming pool. The Speedway Property sits on
approximately 6.1 acres and consists of one two-story building and one
three-story building. The casino and restaurant have an auto racing theme, as
the Speedway Property is the closest hotel and casino to the Las Vegas Motor
Speedway.
The Speedway Property is located at 3227 Civic Center Drive in North Las
Vegas at the intersection of Cheyenne Avenue and Interstate 15. I-15 is a major
interstate freeway, which extends north into Utah and south into the Los Angeles
Basin. The Property is approximately five miles from the Las Vegas Motor
Speedway and three miles from Nellis Air Force Base.
RAMADA INN AND SPEAKEASY CASINO--RENO, NEVADA
In May of 1998, the Company purchased a 262-room hotel and casino
(previously known as the Reno Ramada Plaza Hotel) and has renamed it the Ramada
Inn and Speakeasy Casino (the "Reno Property"). An eleven-story tower houses 236
of the Reno Property's hotel rooms, with 26 rooms contained in a separate
three-story structure. The Reno Property is located at 6th and Lake Streets in
Reno and has parking for approximately 238 cars. The tower also has a
restaurant, a deli and two bars. The Reno Property has an 8000 square foot
casino area for which the Company intends to implement a theme similar to the
Speakeasy concept in place at Mountaineer Park. The property also has a small
convention facility.
8
OPERATION OF THE NEVADA PROPERTIES/GAMING LICENSING
On November 12, 1998, the Company, Speakeasy Las Vegas, Speakeasy Reno, and
certain of the Company's officers and directors filed applications in the State
of Nevada for the permits and licenses required for the Company to operate
casinos at the two Nevada Properties. The Company is advised, however, that the
licensing process may take approximately one year to complete and that there can
be no assurances that the Company will obtain the necessary approvals. Until the
Company obtains these approvals, it will not be permitted to conduct gaming or
participate in any gaming revenues generated at the properties. Accordingly, the
Company's operating revenues from its Nevada properties are currently derived
from hotel, food and beverage operations. At the conclusion of the six month
period of free rent provided by the casino leases (September of 1999 for the
Speedway Casino and approximately October of 1999 for the Speakeasy Casino), the
Company will also generate revenue from the rental of those casinos (unless the
Company shall have received its Nevada gaming licenses and terminated the casino
leases). Upon receipt of its Nevada gaming licenses, the Company expects to earn
revenues from casino operations as well.
BUSINESS STRATEGY
The Company's business strategy involves further developing and expanding
its existing operations at Mountaineer Park, developing and, upon licensing,
operating casinos at the Nevada Properties, and seeking to acquire other
middle-market, lower priced (ranging from approximately $5 million to $50
million) gaming and/or parimutuel businesses.
DEVELOPMENT AND MARKETING OF MOUNTAINEER PARK AS A DESTINATION RESORT AND
DIVERSIFIED ENTERTAINMENT FACILITY. Established in 1951 as a horse racing venue,
Mountaineer Park has historically focused its operations on parimutuel wagering
and related amenities. Following the appointment of Edson R. Arneault as
Chairman and Chief Executive Officer in April 1995, the Company has sought to
capitalize on the passage of the Lottery Act by repositioning the facility as a
gaming destination resort and diversified entertainment facility. The Company
has invested in excess of $20 million in expansion, renovation, and
refurbishment of Mountaineer Park and has incrementally increased the number of
Video Slots from 165 at the time of acquisition to 1300 in December of 1998 as
legislative developments either permitted additional Video Slots or made their
operation more profitable. The Company has also undertaken an aggressive
marketing campaign involving print, radio and television advertisements,
including a 30-minute "infomercial" that has been airing since 1997 in
Mountaineer Park's target markets.
INCREASING MID-WEEK BUSINESS. As Mountaineer Park now operates near
capacity on weekends, the Company's strategy is to increase mid-week patronage
of Mountaineer Park's gaming facilities by offering more entertainment and
amenities. To that end, Mountaineer Park has increased the number of concerts to
be held in fiscal 1999 and has purchased a full-length golf course within a
ten-minute drive of the resort. The Company's strategy is to market mid-week
golf packages that include overnight stays at the Lodge. The Company is also
considering construction of a championship golf course, perhaps to be designed
by a well known golf course designer, on Mountaineer Park's undeveloped land to
enhance the Company's ability to market the property as a golf and gaming
resort. Commencing in 1998, the Company has been acquiring and seeking to
acquire additional acreage near Mountaineer Park for future development of a
diversified entertainment complex.
Also to increase patronage during the week, the Company is in the planning
stage of constructing a small regional convention center and approximately 120
additional hotel rooms at Mountaineer Park. Additional projects under
consideration include a spa adjacent to Mountaineer Park's swimming pool.
Management believes the diversification of activities could significantly expand
the Company's customer base and allow more families, vacationers, tourists,
business travelers, community groups and local residents to enjoy Mountaineer
Park, thereby increasing mid-week room occupancy, Video Slot revenue, off-track
betting revenue and food and beverage sales. Management will likely not commence
such
9
construction, however, until completion of a new sewer project (for which
Mountaineer Park has contracted with the Hancock County Public Service District)
to accommodate increased patronage. The Company expects the sewer to be
available in approximately December of 1999.
INCREASE PATRONAGE OF VIDEO SLOTS AT RACETRACK. The success of
Mountaineer's Lodge-based Video Slot operations in the Speakeasy Gaming Saloon
has left the Video Slots in the racetrack building underutilized. Currently, the
track-based Video Slots as well as food and beverage facilities are open only
during Mountaineer Park's 210 live race days or during special events such as
concerts and boxing matches. Both to maximize the Company's investment in its
racetrack-based Video Slots and associated amenities, and to relieve
overcrowding in the Speakeasy, the Company's strategy is to encourage patrons to
use the racetrack's Video Slots. Management may offer free or reduced price food
and beverage as well as providing more entertainment at the racetrack in order
to attract patrons. If this strategy proves successful, Mountaineer Park will
likely increase the number of days it opens its track-based Video Slot and food
and beverage facilities.
IMPROVE FINANCIAL RESULTS OF RACING OPERATIONS AT MOUNTAINEER PARK. The
Company has a two-pronged strategy for improving the financial results of its
horse racing business: (i) continue to improve the quality of the live racing
product by increasing average purses and sponsoring "stakes" races or
"championship" races; and (ii) make its live racing product more attractive to
wagerers by broadening the betting pool through the commencement of export
simulcasting.
Management believes that the enhanced quality of racehorses should improve
the Company's prospects in export simulcasting. Commencement of export
simulcasting activity would not only create a new source of revenue but the
anticipated related increase in gross dollars wagered on Mountaineer Park's live
races should also generate increases in live handle, as a greater and more
diverse wagering pool lessens the impact a particular wager will have on the
pay-off odds. Management intends to continue its policy of increasing average
daily purses (though not necessarily in the winter months) as well as sponsor
substantially increased stakes races attempting to develop an export simulcast
business. Management does not expect results from racing operations to improve
materially, despite larger daily purses, stakes races, better horses, and
reduced costs, unless and until Mountaineer Park also commences export
simulcasting. Commencement of export simulcasting will require significant
capital expenditures for equipment and facilities upgrades, and no assurance can
be given, however, that the Company will successfully commence export
simulcasting or that the anticipated results will be realized.
COMPETITION
The Company faces substantial competition in each of the markets in which
its gaming facilities are located. Some of the competitors have significantly
greater name recognition and financial and marketing resources than the Company.
All of the Company's gaming operations primarily compete with other gaming
operations in their geographic areas. New expansion and development activity
(with the exception of video lottery in Mountaineer Park's target markets) is
occurring in each of the relevant markets, which may be expected to intensify
competitive pressures. All of the Company's gaming operations also compete to a
lesser extent with operations in other locations, including Native American
lands, riverboats and cruise ships, and with other forms of legalized gaming in
the United States, including state-sponsored lotteries, on- and off- track
wagering, high-stakes bingo, card parlors, and the emergence of Internet gaming.
Several states have considered legalized casino gaming and others may in the
future.
Specific competitive factors relating to the Company's primary gaming
markets include the following:
MOUNTAINEER PARK. In recent years, the number of gaming options available
to consumers in the Company's West Virginia area market has increased
considerably. Mountaineer Park's principal direct competitors are Wheeling
Downs, located approximately 40 miles to the south in Wheeling, West Virginia,
Thistledown, located approximately 85 miles to the northwest in Cleveland, Ohio
and Ladbroke, located
10
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 gaming. Ladbroke conducts live harness racing and provides import
simulcasting, but does not have video lottery gaming. In general, Mountaineer
Park competes with other tracks for participation by quality racehorses. The
Company also competes with statewide lotteries in West Virginia, Pennsylvania
and Ohio, off-track and on-site wagering in Pennsylvania, and, to a lesser
extent, destination gaming facilities in Las Vegas and Atlantic City, as well as
other entertainment options available to consumers, including live and televised
professional and collegiate major sports events. The Company will also compete
with off-track wagering in Ohio, which has recently been approved in that state.
To the extent that Pennsylvania, Ohio or West Virginia legalizes any forms of
casino gaming, slot machines or video lottery gaming, the Company's Video Slot
operations could compete with any such new gaming facilities located within
driving distance of Mountaineer Park. If permitted under such new legislation,
such facilities may offer more gaming machines than Mountaineer Park, or gaming
machines which are superior to those offered by Mountaineer Park, as well as
forms of gaming not available in West Virginia. Such competition could have a
material adverse effect on the Company.
THE SPEEDWAY PROPERTY. The Company does not intend for the Speedway
Property to compete with the high-end luxury hotel/casinos along Las Vegas'
famous Strip. Although the Strip is the main attraction for gaming patrons who
travel to Las Vegas, the Company believes that North Las Vegas constitutes a
distinct segment of the Las Vegas gaming market. Nevertheless, management
recognizes that the strip may limit customer traffic to the North Las Vegas
area. Even within the North Las Vegas segment of the market, however, Speakeasy
Las Vegas faces substantial competition from other small casinos. New
properties, or major additions, expansions or enhancements to competitors'
existing properties, could have a material adverse effect on the Company.
THE RENO PROPERTY. The Reno Property competes with other properties in
Reno, Nevada and other Nevada gaming markets. The Reno Property's principal
direct competitors are those gaming facilities located in downtown Reno. There
are currently nine gaming facilities in downtown Reno with over 11,700 slot
machines, 470 table games and 6,600 hotel rooms. These gaming facilities are, in
general, larger and have more amenities than the Reno Property. New properties,
or major additions, expansions or enhancements to competitors' existing
properties could have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1998, Mountaineer Park had approximately 683 employees of
whom approximately 70 were represented by a labor union under a collective
bargaining agreement. During its peak season in 1998, the Company had as many as
approximately 750 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. As of
December 31, 1998, the Company also had one full-time and two part-time
employees in Orange County, California. The Company believes that its employee
relations are good.
REGULATION AND LICENSING
GENERAL. All of the Company's current and proposed gaming operations are
subject to extensive regulations and could be subjected at any time to
additional or more restrictive regulations. The Company is also subject to the
provisions of West Virginia law that govern the conduct of thoroughbred horse
racing in West Virginia (the "West Virginia Racing Act") and the operation of
Video Slots in West Virginia (the "Lottery Act"). The Company's live racing,
pari-mutuel wagering and Video Slot operations are contingent upon the continued
governmental approval of such operations as forms of legalized gaming. The
Company also may be materially adversely affected by legislation of additional
forms of gaming activity, or expanded licensure, within or near the Company's
present or future markets.
11
The regulations and oversight applicable to the Company's operations are
intended primarily to safeguard the legitimacy of gaming activity and its
freedom from inappropriate or criminal influences. The Company's material
licenses are subject to annual or other periodic renewal and governmental
authorities may refuse to grant permission to continue to operate existing
facilities. The failure to obtain or maintain in effect required regulatory
approvals would have a material adverse effect upon the Company's business,
financial condition and results of operations.
WEST VIRGINIA RACING AND GAMING REGULATION. The Company's operations at
Mountaineer Park are subject to regulation by the West Virginia State Racing
Commission (the "Racing Commission") under the West Virginia Racing Act, and by
the West Virginia State Lottery Commission under the Lottery Act. The powers and
responsibilities of the Racing Commission include, among other things, (i)
granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving simulcasting activities, (iii) licensing all officers,
directors, racing officials and certain other employees of the Company and (iv)
approving all contracts entered into by the Company affecting racing and
pari-mutuel wagering operations. Such powers and responsibilities extend to the
approval and/or oversight of all aspects of racing and pari-mutuel wagering
operations. In order to conduct simulcast racing, Mountaineer Park is required
under West Virginia law to hold a minimum of 210 live race days each year. West
Virginia law requires that at least 80% of Mountaineer Park's employees must be
citizens and residents of West Virginia and must have been such for at least one
year. In addition, certain activities, such as simulcasting races, require the
consent of the representatives of a majority of the horse owners and trainers at
Mountaineer Park.
If the Company commences export simulcast activities that occur outside of
West Virginia, such operations 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. The Company has
received all necessary approvals to conduct its current operations at
Mountaineer Park; however, such approvals are subject to renewal and approval
annually. The failure to receive or retain approvals or renewals of approvals,
or a delay in receiving such approvals and renewals, could cause the reduction
or suspension of racing and pari-mutuel wagering, as well as of Video Slot
operations, at Mountaineer Park and have a material adverse effect upon the
Company's business, financial condition and results of operations.
Pursuant to the Lottery Act, each of the two West Virginia horse racetracks
and two West Virginia dog racetracks licensed prior to January 1, 1994 and which
conduct a minimum number of days of live racing, may apply for an annual license
to operate Video Slots at its racetrack. The Lottery Act likewise requires that
the operator of Mountaineer Park be subject to a written agreement with the
horse owners, breeders and trainers who race horses at that facility (the
"Mountaineer Park Horsemen") in order to conduct Video Slots operations. The
Company is party to the requisite agreement with the Mountaineer Park Horsemen,
which expires on January 1, 2001. The Lottery Act also requires that the
operator of Mountaineer Park be subject to a written agreement with the
pari-mutuel clerks in order to operate Video Slots. The Company is party to the
requisite agreement with its pari-mutuel clerks which expires on November 30,
2002. The absence of an agreement with the Mountaineer Park Horsemen or the
pari-mutuel clerks at Mountaineer Park, or the termination or non-renewal of
such agreement, would have a material adverse affect on the Company's business,
financial condition and results of operations. The Lottery Commission has broad
powers to approve and monitor all operations of the video lottery terminals, the
specification of the terminals and the interface between the terminals and the
West Virginia Central Lottery System. In addition, the Lottery Commission
licenses all persons who control the licensed entity or are key personnel of the
video lottery operation to ensure their integrity and absence of any criminal
involvement.
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
12
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.
If such approval were ever revoked pursuant to the Lottery Act, it would have a
material adverse effect on the Company.
In order to qualify as a "video lottery game," as the term is defined under
the Lottery Act, a game must, among other things, be a game of chance which
utilizes an interactive electronic terminal device allowing input by an
individual player. Such a game may not be based on any of the following game
themes: roulette, dice, or baccarat card games. Moreover, video lottery machines
must meet strict hardware and software specifications, including minimum and
maximum pay-out requirements, and must be connected to the Lottery Commission's
central control computer by an on-line or dial-up communication system. Only
machines registered with and approved by the Lottery Commission may offer video
lottery games.
Under the Lottery Act, racetracks that conduct 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.
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.
In June of 1998, the Lottery Act was amended, permitting Mountaineer Park to
change the ratio of VLTs located in the Lodge versus the racetrack building from
1:1 to 2:1.
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
13
account an amount equal to or greater than the gross terminal income to be
remitted. If a racetrack fails to maintain this balance, the Lottery Commission
may disable all of the racetrack's video lottery machines until full payment of
all amounts due is made. From the gross terminal income remitted by a licensee,
the Lottery Commission will deduct up to 4% to cover its costs of administering
video lottery at the licensee's racetrack and divide the remaining amounts as
follows: 47% is returned to the racetrack, 30% is paid to the State's general
revenue fund, 15.5% is deposited in the racetrack's fund for the payment of
purses, and the remaining 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.
NEVADA GAMING REGULATION. The laws, regulations, and supervisory procedures
of the Nevada Gaming Authorities are based upon declarations of public policy
which are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) to provide a
source of state and local revenues through taxation and licensing fees.
In order to operate non-restricted gaming at the Nevada Properties, the
Company, Speakeasy Las Vegas, Speakeasy Reno and certain officers and directors
are required to be licensed as operators of a casino by the Nevada Gaming
Authorities. A gaming license requires the periodic payment of fees and taxes
and is not transferable. The Company has also applied to be registered by the
Nevada Commission as a publicly traded corporation ("Registered Corporation")
and as such, it will be required periodically to submit detailed financial and
operating reports to the Nevada Commission and furnish any other information
which the Nevada Commission may require. No person may become a stockholder of,
or receive any percentage of profits from, Speakeasy Las Vegas or Speakeasy Reno
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and all relevant affiliates filed applications for the
necessary licenses on November 12, 1998, but neither the Company nor its Nevada
subsidiaries has yet obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or the
Nevada Subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors, and certain key employees of the Nevada subsidiaries must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers,
directors, and key employees of the Company who are actively and directly
involved in gaming activities of the Nevada Subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and in addition to their authority
to
14
deny an application for a finding of suitability or licensing, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
After registration and licensing, if the Nevada Gaming Authorities were to
find an officer, director, or key employee unsuitable for licensing or
unsuitable to continue having a relationship with the Company or the Nevada
Subsidiaries, the companies involved would have to sever all relationships with
such person. In addition, the Nevada Commission may require the Company or the
Nevada subsidiaries to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
After registration and licensing, the Company and the Nevada subsidiaries
will be required to submit detailed financial and operating reports to the
Nevada Commission. Substantially all material loans, leases, sales of
securities, and similar financial transactions by the Company and the Nevada
subsidiaries will have to be reported to, or approved by, the Nevada Commission.
After licensing, if it were determined that the Nevada Gaming Control Act or
the regulations promulgated thereunder (collectively, the "Nevada Act") was
violated by the Company or its Nevada subsidiaries, the gaming licenses could be
limited, conditioned, suspended, or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Nevada subsidiaries, the
Company, and the persons involved could be subject to substantial fines for each
separate violation of the Nevada Act at the discretion of the Nevada Commission.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10
percent of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more then
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies, or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership,
or trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner of securities if the record owner, after request,
15
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Nevada subsidiaries, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
After registration and licensing, the Company will be required to maintain a
current stock ledger in Nevada which may be examined by the Nevada Gaming
Authorities at any time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
will also be required to render maximum assistance in determining the identity
of the beneficial owner. After registration and licensing, the Nevada Commission
will have the power to require the Company's stock certificates to bear a legend
indicating that the securities are subject to the Nevada Act. Likewise, the
Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire, or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes.
After registration and licensing, changes in control of the Company through
merger, consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities seeking
to acquire control of a Registered Corporation must satisfy the Nevada Board and
Nevada Commission in a variety of stringent standards prior to assuming control
of such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors, and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the
16
Registered Corporation's stockholders for the purposes of acquiring control of
the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who is or proposes to become involved in a gaming venture
outside of Nevada is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation of the Nevada Board of their participation in such foreign gaming.
The revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
IMPACT OF RESORT HOTEL LEGISLATION. The Speedway Property and the Reno
Property are subject to legislation passed in 1991 by the Nevada Legislature,
which is commonly referred to as the Resort Hotel Legislation. The key portions
of this legislation are found in Section 463.1605 of the Nevada Revised Statutes
("NRS"). NRS 463.1605 essentially provides that the Nevada Commission shall not
approve a nonrestricted gaming license for an establishment located in either
Clark County or Washoe County, Nevada, unless the establishment is a resort
hotel. A resort hotel is defined to include an establishment held out to the
public as a hotel with more than 200 rooms available for sleeping
accommodations, at least one bar with capacity for more than 30 patrons, and at
least one restaurant with capacity for more than 60 patrons. A county, city or
town may require resort hotels to meet standards in addition to those required
by NRS 463.1605 as a condition to issuance of a gaming license by the particular
county, city or town. The City of Reno has by ordinance increased the room
requirement for resort hotels to 300. The Nevada Properties are exempt from NRS
463.1605 because these locations have held non-restricted gaming licenses. The
grandfathered exemptions, however, are lost in the event gaming is abandoned
within the meaning of the statute and local regulations. The March 1999
commencement of gaming operations at the Speedway Property and the contemplated
April 1 commencement at the Reno Property will preserve the grandfathered status
of the Nevada properties. The failure to keep the grandfathered exemptions to
NRS 463.1605 and the local regulations governing resort hotels (by abandonment
of gaming operations) would have a materially adverse effect on the Company.
COMPLIANCE WITH OTHER LAWS. The Company and facilities are also subject to
a variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Nevada and West Virginia governing the serving
of alcoholic beverages. Mountaineer Park derives a significant portion of its
other revenues from the sale of alcoholic beverages to patrons of its
facilities, and the Company anticipates that the same will be true of Speakeasy
Las Vegas and Speakeasy Reno. Any interruption or termination of Mountaineer
Park's existing ability to serve alcoholic beverages or the inability of
Speakeasy Las Vegas or Speakeasy Reno to hold permits to serve alcoholic
beverages would have a material adverse effect on the Company's business,
financial condition and results of operations.
RESTRICTIONS ON SHARE OWNERSHIP AND TRANSFER. Unless prior approval of the
West Virginia Lottery Commission is obtained, the sale of five percent or more
of the voting stock of the license holder or any corporation that controls the
license holder or the sale of a license holder's assets (other than in the
ordinary course of business), or any interest therein, to any person not
previously determined by the
17
Lottery Commission to have satisfied the licensing qualifications, voids the
license. With respect to the State of Nevada, any beneficial holder of a
registered Corporation's voting securities (or rights to acquire such
securities), regardless of the number of shares owned, may be required to file
an application, be investigated and have his suitability as a beneficial holder
of the registered Corporation's voting securities determined if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation. Applicable Nevada law requires any person who
acquires more than 5% of a Registered Corporation's voting securities to report
the acquisition to the Nevada Commission. The Nevada Act requires that
beneficial owners of more than 10% of the voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing.
APPLICATION OF ENVIRONMENTAL REGULATIONS. Generally, the Company and its
subsidiaries are subject to a variety of federal, state and local governmental
laws and regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. While the Company believes that it and its
subsidiaries are presently in material compliance with all environmental laws,
failure to comply with such laws could result in the imposition of severe
penalties or restrictions on operations by government agencies or courts that
could materially adversely affect the Company's operations. The Company does not
have insurance to cover environmental liabilities, if any, other than certain
limited coverage with respect to the Reno Property.
DISCONTINUED OPERATIONS
In January 1992, as part of its plan of reorganization, the Company, through
its wholly owned subsidiary, ExCal Energy Corporation, acquired from various
affiliates of the Company's president and chairman, Edson Arneault (prior to his
becoming an affiliate of the Company), oil and gas leases and wells in Ohio (the
"Ohio Interests") and an interest in oil wells in Michigan (the "Michigan
Interests"). Pursuant to an October 1993 Plan of Orderly Liquidation, in
December of 1994, the Company sold the Ohio Interests for notes valued at
approximately $426,000. In October of 1998, the Company exchanged the Michigan
Interests to an affiliate of its former joint venture partner for an assignment
of production payment in the amount of $2.5 million, which is convertible at the
Company's election into up to 25% of the equity of the purchaser. In connection
with the exchange of the Michigan Interests, the Company likewise agreed to lend
to the purchaser up to $500,000 for development of the project and acquisition
of related assets. The loan is secured by substantially all of the assets of the
purchaser. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Discontinued Operations"; Note 13 of the Notes to
Consolidated Financial Statements; and "Certain Relationships and Related
Transactions".
ITEM 2. PROPERTIES
HOTEL, GAMING, RACING AND OTHER PROPERTY
Mountaineer Park is comprised of a thoroughbred racetrack and the Lodge
providing 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. Mountaineer Park also
owns a 168-acre tract including the Woodview Golf Course in New Cumberland, West
Virginia.
The Speedway Property sits on approximately 6.1 acres and consists of one
two-story building and one three-story building with a total of 131 hotel rooms.
The Property also has a restaurant and lounge facilities, as well as the newly
constructed 15,600 square foot casino building with parking for 474 cars.
18
The Reno Property sits on approximately 1.74 acres in downtown Reno and
consists of an eleven-story tower that contains 236 of the Reno Property's hotel
rooms, with 26 rooms contained in a separate three-story structure. The Reno
Property is located at 6th and Lake Streets in Reno and has parking for
approximately 238 cars. The tower also has a restaurant, a deli and two bars.
The Reno Property has an 8000 square foot casino area and a small convention
facility.
Substantially all of the Company's assets are pledged to secure the debt
evidenced by the Third Amended and Restated Term Loan Agreement, dated as of
July 2, 1996, as amended and restated as of December 10, 1996, as further
amended and restated as of July 2, 1997, and as of April 30, 1998, among
Mountaineer Park, Inc., Speakeasy Las Vegas, Speakeasy Reno, the Company and
Madeleine LLC.
EQUIPMENT LEASES
At December 31, 1998, in connection with video lottery and racing
operations, Mountaineer Park leased 900 video lottery machines, a totalisator
system, video tape and closed circuit television systems and other equipment
required for its operations.
ITEM 3. LEGAL PROCEEDINGS
PENDING LITIGATION
OVELLE HOLDINGS, INC. V. MTR GAMING GROUP, INC., Circuit Court of Hancock
County, 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 options to which plaintiff
claims entitlement, and loan servicing fees, 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. In January of 1999, the
plaintiff filed its opposition to the motion for summary judgment, asserting
that the Company interfered with plaintiff's performance and that time was not
of the essence in the agreement. The parties have agreed to submit to
non-binding mediation in an effort to resolve the matter amicably.
REINHOLD V. MOUNTAINEER PARK, INC., Circuit Court of Hancock County, West
Virginia, Civ. No. 98-30-W. On February 19, 1998 Juanita Reinhold filed a
complaint against Mountaineer Park, alleging wrongful termination of employment
and improper use of polygraph testing. Ms. Reinhold seeks $250,000 in
compensatory damages, $250,000 in punitive damages, plus costs and attorney's
fees. Mountaineer Park has answered the complaint, denying any liability on the
grounds that Ms. Reinhold's employment was properly terminated and the polygraph
examination was administered by the local law enforcement authorities, in the
presence of Ms. Reinhold's counsel, in connection with a police investigation.
The Company also filed a motion to disqualify the plaintiff's counsel on the
grounds that (i) he has a conflict of interest as a consequence of his former
service as counsel to and a member of the board of directors of Mountaineer
Park; and (ii) Mountaineer Park's pending unrelated action against him for legal
malpractice prevents him from rendering objective advice to his current client.
In the face of the motion, counsel moved to withdraw. At a hearing on October 5,
1998, the Court granted the motion to withdraw and permitted Mountaineer Park to
seek sanctions to recover its costs of prosecuting the motion to disqualify.
That motion for sanctions is still pending, no substitute counsel has yet filed
an appearance on behalf of the plaintiff, and there has been no further activity
in the case.
19
The Company (including its subsidiaries) is also a defendant in various law
suits relating to routine matters incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "MNTG". On March 22, 1999, the closing trade price for the Company's
Common Stock was $2.375. As of March 22, 1999, there were approximately 610
stockholders of record of the Company's Common Stock.
The following table sets forth the range of high and low bid price
quotations obtained from the National Quotation Bureau, LLC for the Common Stock
for the two fiscal years ended December 31, 1997 and 1998 and for the period of
January 1, 1999 through March 22, 1999. 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, 1997:
First Quarter......................................................... 1.46875 .78125
Second Quarter........................................................ 1.3125 1.00
Third Quarter......................................................... 1.4375 1.21875
Fourth Quarter........................................................ 2.46875 1.4375
Year Ending December 31, 1998:
First Quarter......................................................... 2.9375 2.00
Second Quarter........................................................ 3.46875 2.4375
Third Quarter......................................................... 2.50 1.625
Fourth Quarter........................................................ 2.84375 1.75
Year Ending December 31, 1999:
First Quarter (January 1, 1999 through March 22, 1999)................ 2.65625 1.96875
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the five
years ended December 31, 1998, 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
20
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,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Revenues............................. $ 83,110,000 $ 60,138,000 $ 40,204,000 $ 24,927,000 $ 14,656,000
Income/(loss) from continuing
operations......................... 10,423,000 4,694,000 1,155,000 (5,313,000) (6,902,000)
Income/(loss) per share from
continuing operations
Basic:............................... .51 .24 .06 (.33) (.48)
Assuming dilution:................... .44 .22 .06 (.33) (.48)
Discontinued operations data:
Revenues............................. -- -- -- -- 184,000
Loss from discontinued operations.... (2,735,000) -- -- -- (640,000)
Loss per share from discontinued
operations.........................
Basic................................ (.13) -- -- -- (.04)
Assuming dilution.................... (.11) -- -- -- (.04)
Balance Sheet Data:
Working Capital (Deficiency)......... 12,457,000 9,785,000 3,897,000 (7,453,000) (1,763,000)
Current Assets....................... 15,016,000 12,884,000 7,016,000 1,972,000 3,600,000
Current Liabilities.................. 2,559,000 3,099,000 3,119,000 9,425,000 5,363,000
Total assets-continuing operations... 59,737,000 38,285,000 28,262,000 23,131,000 21,387,000
Net assets-discontinued operations... -- 2,616,000 2,616,000 2,616,000 2,571,000
Total Liabilities.................... 36,547,000 25,788,000 20,612,000 19,763,000 14,200,000
Total Stockholders' Equity........... 23,190,000 15,113,000 10,266,000 5,984,000 9,758,000
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
In December 1992, the Company acquired Mountaineer Park with the intent of
enhancing its facilities for promotion as a high quality gaming, racing and
recreation resort. Shortly thereafter, the Company determined to focus primarily
on the gaming industry. The Company anticipates that Mountaineer Park,
particularly video lottery operations, will continue to be the dominant factor
in the Company's financial condition for at least the next fiscal year.
Ultimately, the profitability of the Speedway and Reno Properties, which the
Company acquired in the second quarter of 1998, will be directly related to
whether and when the Company obtains all necessary Nevada gaming approvals. The
Company has been advised that the licensing process may take approximately a
year to complete, and that there can be no assurance that the Company will
obtain such licenses.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997
Total revenues increased by $22,972,000 from 1997 to 1998, an increase of
38.2%. Approximately $19.8 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 $3.2 million of
additional revenues. Management believes the increase resulted primarily from
increased patronage resulting from the Company's expanded advertising
activities, the increase to 1,200 Video Slots in July 1998 (as compared to 800
from January 1 through March 12, 1997 and 1,000 thereafter) together with a
change in law that permitted Mountaineer Park to change the ratio of Video Slots
in the Lodge as compared to the racetrack building, the introduction of a
variety of Video Slots, the expansion of the Speakeasy Gaming Saloon and other
enhanced facilities.
The Nevada Properties contributed $1,046,000 in lodging, food and beverage
revenues in the year ended December 31, 1998. Since the May 1998 acquisition,
the Speedway Property has generally been dark during renovation of hotel rooms
and food and beverage facilities and construction of the 15,600 square foot
casino building and parking lots. There were no gaming operations at either
property during 1998.
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 40% from $49.2 million in
1997 to $69.0 million in 1998.
An amendment of the Lottery Law that became effective in June of 1998
permitted Mountaineer Park to change the ratio of Video Slots located in the
Lodge versus the racetrack building from 1:1 to 2:1. Terminals located in the
Lodge's Speakeasy Gaming Saloon are more popular than those at the racetrack and
account for significantly more revenue. To capitalize on the change in law, the
Company constructed a 12,000 square foot addition to the Lodge's Speakeasy
Gaming Saloon, obtained regulatory approval to increase the total number of
Video Slots from 1,000 to 1,200 (by leasing 200 new "nickel" machines), and
placed 800 Video Slots in the Lodge and 400 in the racetrack building (as of
July 2, 1998).
With the expansion of the Speakeasy, Mountaineer Park also doubled the size
of Big Al's Deli and added additional bar and entertainment facilities. These
changes, together with the Company's advertising campaign, are primarily
responsible for the dramatic increase in revenue. Management also believes that
the introduction of variety in Mountaineer Park's Video Slots--in terms of both
manufacturers and types of games (nickel-based as well as quarter-based)
contributed to the increased patronage. Previously, only one manufacturer had
been authorized to provide Video Slots in West Virginia.
In December 1998, Mountaineer Park leased 100 more Video Slots (62 in the
Speakeasy and 38 in the racetrack building) from a third manufacturer in
anticipation of initiating four progressive Video Slot
22
banks. These machines were placed in service on December 17, 1998 and therefore
did not have a material impact on operations for the year ended December 31,
1998.
For the twelve months ended December 31, 1998, average daily net win on the
VLTs placed at the racetrack was $68 (including $0 for days when there was no
live racing), compared to $243 earned on the Lodge-based terminals for a
facility-wide average of $171 per VLT per day. Management believes that the
increase from 500 Video Slots to 862 at the Lodge will result in a higher
overall net win for the facility. Both to maximize the Company's investment in
its racetrack-based Video Slots and associated amenities, and to relieve
overcrowding in the Speakeasy, the Company intends to encourage patrons to use
the racetrack's Video Slots. Management may offer free or reduced price food and
beverage as well as providing more entertainment at the racetrack in order to
attract patrons. If this strategy proves successful, Mountaineer Park will
likely increase the number of days it opens its track-based Video Slot and food
and beverage facilities. See "--Parimutuel Commissions" and "--Liquidity and
Sources of Capital--Capital Improvements."
A summary of the video lottery gross wagers less patron payouts ("net win")
for the twelve months ended December 31, 1998 and 1997 is as follows:
TWELVE MONTHS ENDED DECEMBER
31
------------------------------
1998 1997
-------------- --------------
Total gross wagers............................................................... $ 240,164,000 $ 171,138,000
Less patron payouts.............................................................. $ 171,172,000 $ 121,951,000
-------------- --------------
Revenue--
video lottery operations......................................................... $ 68,992,000 $ 49,187,000
-------------- --------------
Average daily net win per terminal............................................... $ 171 $ 140
-------------- --------------
-------------- --------------
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, which means
the total amount wagered without regard to predetermined deductions, with a
higher commission earned on a more exotic wager, such as a trifecta, than on a
single horse wager, such as a win, place, or show bet. In parimutuel wagering,
patrons bet against each other rather than against the operator of the facility
or with pre-set odds. The total wagering handle is composed of the amounts
wagered by each individual according to the wagering activity. The total amounts
wagered form a pool of funds from which winnings are paid based on odds
determined solely by the wagering activity. The racetrack acts as a stakeholder
for the wagering patrons and deducts from the amounts wagered a "take-out" or
gross commission, from which the racetrack pays state and county taxes and
racing purses. The Company's parimutuel commission rates are fixed as a
percentage of the total wagering handle or total amounts wagered. The Company
earned an average commission rate of 20% in each of the past three years.
23
Parimutuel commissions for the twelve months ended December 31, 1998 and
1997 are summarized below.
TWELVE MONTHS ENDED DECEMBER
31
------------------------------
1998 1997
-------------- --------------
Live racing parimutuel handle..................................................... $ 21,594,000 $ 20,100,000
Simulcast racing parimutuel handle................................................ 22,217,000 20,875,000
Less patrons' winning tickets..................................................... (34,661,000) (32,464,000)
-------------- --------------
9,150,000 8,511,000
State and county parimutuel tax................................................... (494,000) (493,000)
Purses and Horsemen's Association................................................. (3,860,000) (3,581,000)
-------------- --------------
Revenues--parimutuel commissions.................................................. $ 4,796,000 $ 4,437,000
For the twelve months ended December 31, 1998, live handle rose by $1.5
million to $21.6 million, an increase of 7.5% compared to $20.1 million for the
same period in 1997. Simulcast racing handle for the year ended 1998 was $22.2
million, an increase of $1.3 million from the year ended 1997. Management
believes these increases resulted primarily from increased video lottery
attendance and cross-marketing from such activity. During 1998 management raised
average daily purses from $58,000 to $66,000 and sponsored stakes races of up to
$35,000 as compared with $25,000 in 1997. In 1998, Mountaineer Park also had
larger championship races. For the August 1998 running of the West Virginia
Derby, Mountaineer Park's race participants were paid $345,000 in a single day,
with $200,000 funded by the State Racing Commission for the feature race.
While management is encouraged by the $2.8 million increase in parimutuel
handle and $359,000 increase in revenue, it does not view the increases in
handle and revenues as significant (in comparison to the increases in purses).
Management continues to believe that periodic increases in average daily purses
and purses for stakes races will attract higher quality racehorses. 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 racehorses should improve the Company's prospects
in export simulcasting. Commencement of export simulcasting activity would not
only create a new source of revenue but the anticipated related increase in
gross dollars wagered on the Company's live races should also generate increases
in live handle (as a greater and more diverse wagering pool lessens the impact a
particular wager will have on the pay-off odds). Management intends to continue
its policy of increasing average daily purses (though not necessarily in the
winter months) as well as sponsoring substantially increased stakes races and
attempting to develop an export simulcast business. Management does not expect
results from racing operations to improve materially, despite larger daily
purses, stakes races, better horses, and reduced costs, unless and until
Mountaineer Park also commences export simulcasting. No assurance can be given,
however, that the Company will successfully commence export simulcasting or that
the anticipated results will be realized. See "--Costs and Expenses" and
"--Parimutuel Commission Operating Costs."
LODGING, FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage accounted for a combined
increase of 38.4% to $7.5 million for the year ended December 31, 1998, from
$5.4 million for the same period in 1997. Restaurant, bar and concession
facilities produced $880,000 of the revenue increase, while lodge revenues
increased $1.2 million. Food and beverage operations accounted for approximately
67% of the revenues from this profit center in 1998 and 75% in 1997. This
variance is attributable to the Nevada Properties. In 1998, 93%, or $976,000, in
revenues generated by the Nevada Properties was from lodging. Management
believes that increased revenues from lodging, food and beverage at Mountaineer
Park resulted primarily
24
from enhanced video lottery facilities and related advertising, which in turn
led to increased consumption of food and beverages by the Company's customers.
Increases in food and beverage revenue at Mountaineer Park also resulted from
the expansion of food and beverage facilities in the Speakeasy in July of 1998.
OTHER OPERATING REVENUES
Other sources of revenues consist primarily of non-core businesses such as
admission, programs, golf, special events, such as concerts and professional
boxing matches, check cashing and ATM services. 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 increased
by $726,000, or 66.2% from 1998 to 1997. The increase in 1998 was caused by a
$268,000 increase in miscellaneous income, a $177,000 increase in check cashing
fees, a $147,000 increase in special event ticket sales, and a $143,000 increase
in ATM service fees.
OPERATING COSTS
Total operating costs increased by 31.6% from $41.1 million in 1997 to $54.1
million in 1998. Approximately $11.3 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 38.2% increase in
revenues in 1998 were accompanied by a 31.6% increase in cost of revenues, a
13.4% increase in marketing and promotions expense, a 33.1% increase in general
and administrative expenses, and a 58.3% increase in depreciation and
amortization. The increased marketing and promotion expenses were due primarily
to the continued broadcast of 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 maintenance, 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 and acquisition
activity, including consideration of acquisitions that were not consummated. The
Nevada Properties' general and administrative costs were $413,000 in 1998.
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 business by increasing productivity, expanding marketing efforts in a
more cost effective manner, increasing purse sizes, attracting higher quality
jockeys and horses, and pursuing export simulcasting to increase parimutuel
wagering. See "Parimutuel Commissions." Gross profit increased 52.5% in 1998
from $29.0 million compared to $19.0 million in 1997.
25
Operating Costs and gross profits earned from operations for the twelve
month period ended December 31, 1998 and 1997 are as follows:
YEARS ENDED DECEMBER 31
----------------------------
1998 1997
------------- -------------
Operating Costs
Video Lottery Terminals............................................................ $ 41,404,000 $ 30,081,000
Parimutuel Commissions............................................................. 4,963,000 5,591,000
Lodging, Food and Beverage......................................................... 6,522,000 4,268,000
Other.............................................................................. 1,212,000 1,171,000
------------- -------------
Total Operating Costs.............................................................. $ 54,101,000 $ 41,111,000
------------- -------------
------------- -------------
YEARS ENDED DECEMBER 31
----------------------------
1998 1997
------------- -------------
Gross Profit (Loss)
Video Lottery Terminals............................................................ $ 27,588,000 $ 19,106,000
Parimutuel Commissions............................................................. (167,000) (1,154,000)
Lodging, Food and Beverage......................................................... 977,000 1,149,000
Other.............................................................................. 611,000 (74,000)
------------- -------------
Total Gross Profit (Loss).......................................................... $ 29,009,000 $ 19,027,000
------------- -------------
------------- -------------
VIDEO LOTTERY TERMINALS OPERATING COSTS
Costs of video lottery revenue for 1998 increased by $11.3 million or 37.6%
from $30.1 million to $41.4 million for the year ended December 31, 1997,
compared to 1998, 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. VLT lease expense increased by $297,000 in
comparison to 1997 due to the new 200 machines installed in July 1998 and the
additional 100 machines installed in December 1998. Wages and benefits and
supplies expense increased from 1997 to 1998 by $280,000 in response to higher
levels of patron play and patron volume.
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 15 to the Consolidated Financial Statements of
the Company.)
26
Statutory costs and assessments including the State Administrative fee for
the respective twelve month periods are as follows:
TWELVE MONTHS ENDED
DECEMBER 31
----------------------------
1998 1997
------------- -------------
Employee Pension Fund.............................................................. $ 339,000 $ 241,000
Horseman's Purse Fund.............................................................. 10,511,000 7,480,000
Subtotal......................................................................... 10,850,000 7,721,000
State of West Virginia............................................................. 20,343,000 14,476,000
Tourism Promotion Fund............................................................. 2,034,000 1,448,000
Hancock County..................................................................... 1,356,000 965,000
Stakes Races....................................................................... 678,000 483,000
Veterans Memorial.................................................................. 678,000 482,000
------------- -------------
Total............................................................................ $ 35,939,000 $ 25,575,000
------------- -------------
------------- -------------
PARIMUTUEL COMMISSIONS OPERATING COSTS
Total costs (the individual components of which are detailed below) of
parimutuel commission revenue attributable to racing decreased by $628,000 to
approximately $5 million in 1998. One of the primary causes of this decrease is
the reduction of the required number of live racing from 220 days a year in 1997
to 210 days in 1998. Purse expense (consisting of statutorily determined
percentages of live racing handle) increased by $160,000, 8.1%, to $2.1 million
in 1998, which is consistent with the increase 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 $116,000 to $2.3 million
in 1998 consistent with the 7.4% increase in simulcasting wagers. Parimutuel
commissions revenue is reported net of these expenses in the Consolidated
Statement of Operations.
Direct and indirect wages and employee benefits attributable to racing
operations decreased by $322,000 to approximately $2.2 million in 1998, while
employee insurance benefits were also reduced by $226,000 in 1998 primarily as a
result of the reduction in the required number of live race days and
reallocation of the costs of certain personnel to other departments.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Direct expenses of lodging, food and beverage operations increased from $4.3
million in 1997 to $6.5 million in 1998. Of the $2.3 million increase in
expenses, $1.0 million is attributable to the Nevada Properties. The lodging,
food and beverage operation earned a gross profit of $977,000 compared to $1.1
million in 1997, a decrease of $172,000. The Nevada Properties' gross profit for
these areas was $22,000. The Speedway Property in North Las Vegas was not in
operation due to extensive remodeling since September 13, 1998. Lodging direct
costs totaled $2.2 million for 1998 compared to $821,000 in 1997. Direct costs
for lodging for the Nevada Properties were $976,000. Lodge wages and employee
benefits for the West Virginia property increased by $163,000 to $531,000 in
1998 from $368,000 in 1997, while food and beverage operation wages and employee
benefits increased by $296,000 in 1998. Such increases were caused as a result
of an increase in service personnel in these areas.
COSTS OF OTHER OPERATING REVENUES
Costs of other revenues, consisting primarily of non-core businesses such as
racing programs, golf, tennis and swimming and check cashing increased by
$41,000 from $1,171,000 in 1997 to $1,212,000 in 1998.
27
MARKETING AND PROMOTIONS EXPENSE
Marketing and promotions expense increased by $359,000 to $3,050,000 for the
year ended December 31, 1998 primarily due to increased advertising expenses in
connection with the Company's aggressive marketing campaign (commenced in 1996),
its infomercial advertising continuing in 1998 and an increase in concert
production costs. In 1998, Mountaineer Park's advertising costs were defrayed by
a state grant in the amount of $560,000, compared to a grant of $330,000 in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST
The Company's general and administrative expense increased by $2.6 million
to $10.5 million, or 33.1%, from $7.9 million for the year ended December 31,
1998 as compared to 1997 (which increase is consistent with the increase in
revenue). Such increase resulted primarily from an increase of $1.5 million in
service personnel as follows: housekeeping ($172,000); security ($435,000);
human resources ($100,000); accounting ($247,000); administrative ($218,000) and
maintenance departments ($303,000). The increases in accounting and
administrative salaries were caused in part by the additions of an Internal
Audit department and a Management Information Systems department. Professional
fees due to financing and acquisition activity (including acquisitions that were
considered but not consummated) increased by $375,000. The Nevada Properties had
general and administrative expenses totaling $413,000 in 1998.
In 1998, the Company incurred $4,259,000 of interest expense. Interest
expense in 1998 included $860,000 of a $1.8 million one-time cash fee paid over
the first year of the extended loan term pursuant to the July 2, 1997 Second
Amended and Restated Term Loan Agreement among the Company, Mountaineer Park and
Madeleine LLC. The increase in interest expense can be attributed to the
Company's increased borrowing in connection with the acquisition of the Nevada
Properties ($11.4 million).
Depreciation and amortization costs increased 58.3% from $2.4 million in
1997 to $3.8 million in 1998, reflecting increased capitalization of
improvements completed at Mountaineer Park's facilities such as the new
Clubhouse entry ($206,000) and the Speakeasy addition ($1.3 million).
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
Total revenues increased by $19.9 million from 1996 to 1997, an increase of
50%. Video lottery operations accounted for $18.5 million of the increase, and
lodging, food and beverage operations contributed $1.5 million of the increase.
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 conversion of 800 Video Slots from card and keno
games to "line" or "reel" games by March 1997 (as compared to 1996 when the
Company had no line games until July of that year), greater familiarity of
customers with the Company's gaming machines, and other enhanced facilities.
In July of 1996, after passage of legislation permitting the use of line
games as opposed to only card and keno games, Mountaineer Park converted 350
Video Slots to line games. 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 Video Slots to line games. In March of 1997,
Mountaineer Park purchased and installed 400 new Video Slots and removed 200
previously leased card-only games, bringing the total number of VLTs to 1,000 as
of March 13, 1997, consisting of 800 with line games and only 200 without. In
January of 1997, Mountaineer Park also began broadcasting the first 30-minute
"infomercial" advertisement on television affiliates within a two hour driving
radius.
28
A summary of the video lottery gross wagers less patron payouts ("net win")
for the twelve months ended December 31, 1996 and 1997 is as follows:
TWELVE MONTHS ENDED
DECEMBER 31
------------------------------
1997 1996
-------------- --------------
Total gross wagers............................................................... $ 171,138,000 $ 104,819,000
Less patron payouts.............................................................. $ 121,951,000 $ 74,119,000
-------------- --------------
Revenue--
video lottery operations......................................................... $ 49,187,000 $ 30,700,000
-------------- --------------
Average daily net win per terminal............................................... $ 140 $ 105
-------------- --------------
-------------- --------------
PARIMUTUEL COMMISSIONS
Parimutuel commissions for the twelve months ended December 31, 1997 and
1996 are summarized below.
TWELVE MONTHS ENDED
DECEMBER 31
----------------------------
1997 1996
------------- -------------
Live racing parimutuel handle...................................................... $ 20,100,000 $ 20,426,000
Simlucast racing parimutuel handle................................................. 20,875,000 19,673,000
Less patrons' winning tickets...................................................... (32,464,000) (31,766,000)
------------- -------------
8,511,000 8,333,000
State and county parimutuel tax.................................................... (493,000) (487,000)
Purses and Horsemen's Association.................................................. (3,581,000) (3,547,000)