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MNTG > SEC Filings for MNTG > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for MTR GAMING GROUP INC


12-Nov-2013

Quarterly Report


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

Cautionary Statement Regarding Forward-Looking Information

This report 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. Forward-looking statements include statements regarding our strategies, objectives and plans for future development or acquisitions of properties or operations, as well as expectations, future operating results and other information that is not historical information. When used in this report, the terms or phrases such as "anticipates", "believes", "projects", "plans", "intends", "expects", "might", "may", "estimates", "could", "should", "would", "will likely continue", and variations of such words or similar expressions are intended to identify forward-looking statements. Although our expectations, beliefs and projections are expressed in good faith and with what we believe is a reasonable basis, there can be no assurance that these expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements which are included elsewhere in this report. Such risks, uncertainties and other important factors include, but are not limited to:


our dependence on our West Virginia, Pennsylvania and Ohio casinos for the majority of our revenues and cash flows;


the successful operation of our video lottery terminals ("VLTs") gaming facility at Scioto Downs, our racetrack in Columbus, Ohio;


competitive and general economic conditions in our markets, including the location of our competitors (traditional and internet-based);


the ability to realize expense reductions and operating efficiencies;


the effect of economic, credit and capital market conditions on the economy and the gaming and entertainment industry;


weather or road conditions limiting access to our properties;


volatility and disruption of the capital and credit markets;


changes in, or failure to comply with, laws, regulations or the conditions of our West Virginia, Pennsylvania and Ohio gaming and racing licenses (or the failure to obtain renewals thereof), accounting standards or environmental laws (including adverse changes in the rates of taxation on gaming revenues) and delays in regulatory licensing processes;


construction factors relating to maintenance and expansion of operations;


the outcome of legal proceedings;


dependence upon key personnel and the ability to attract new personnel;


the ability to retain and attract customers;


the effect of war, terrorism, natural disasters and other catastrophic events;


the effect of disruptions to our systems and infrastructure;


our level of indebtedness and terms thereof;


the ability to refinance existing debt, or obtain additional financing, if and when needed, the cost of refinancing, and the impact of leverage and debt service requirements;


our ability to comply with certain covenants in our debt documents;


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the other factors set forth in Part I, Items 1A. "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Additionally, the proposed merger with Eldorado Resorts, as discussed elsewhere herein, and the related Merger Agreement and provisions therein, will create additional risks, uncertainties and other important factors including but not limited to:


business uncertainties and contractual restrictions while the Mergers are pending;


other entities may be discouraged from trying to acquire the Company for greater merger consideration;


the effect of purported stockholder class action/derivative complaints filed and that could potentially be filed against the Company and members of the Board of Directors; unfavorable outcomes in which could prevent or delay the mergers and result in substantial costs;


the incurrence of substantial transaction related costs; and


potential negative outcomes if the Merger Agreement is terminated.

In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Any forward- looking statement speaks only as of the date on which that statement is made, even if subsequently made available on our website or otherwise. We do not intend to update publicly any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as may be required by law.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes which are contained elsewhere in this report.

Overview

We were incorporated in March 1988 in Delaware under the name "Secamur Corporation," a wholly-owned subsidiary of Buffalo Equities, Inc. In 1996, we were renamed MTR Gaming Group, Inc. and, since 1998, we have operated only in the racing, gaming and entertainment businesses.

Through our wholly-owned subsidiaries, we own and operate Mountaineer Casino, Racetrack & Resort in Chester, West Virginia ("Mountaineer"), Presque Isle Downs & Casino in Erie, Pennsylvania ("Presque Isle Downs"), and Scioto Downs in Columbus, Ohio. We consider these three properties, which are located in contiguous states, to be our core assets. Scioto Downs, through its subsidiary RacelineBet, Inc., also operates Racelinebet.com, a national account wagering service that offers online and telephone wagering on horse races as a marketing affiliate of TwinSpires.com, an affiliate of Churchill Downs, Inc.

Our Properties:

We operate racino properties, all of which include gaming and dining facilities, and some of which include hotel, retail and other amenities. The majority of our revenue is gaming revenue, derived primarily from gaming on slot machines and, to a lesser extent, table games. Other revenues are derived from our racing operations, hotel, dining, retail and entertainment offerings. Our gaming operations are highly dependent on the volume and spending levels of our customers, which, in turn, may affect the prices we can charge for our hotel, dining and other amenities. Our properties generate significant operating cash flow, which is essential to debt service and to funding maintenance capital expenditures.

Mountaineer currently operates 2,073 slot machines, 12 poker tables and 39 casino table games, including blackjack, craps, roulette and other games, and offers live thoroughbred horse racing during


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the months of March through December, operating 210 live race days with on-site pari-mutuel wagering year-round.

Presque Isle Downs currently operates 1,720 slot machines, 9 poker tables and 37 casino table games. In addition, Presque Isle Downs offers live thoroughbred horse racing during the months of May through September, operating 100 live race days with pari-mutuel wagering year-round.

Scioto Downs currently operates 2,103 VLTs and offers live harness horse racing from May through September, operating 75 live racing days and year-round pari-mutuel wagering. Prior to the opening of the VLT facility, Scioto Downs' pari-mutuel wagering was restricted to the months of May through October pursuant to a previous agreement with Beulah Park, which limited the offering of pari-mutuel wagering to the months in which live racing was offered. Upon the opening of the VLT facility in June 2012, this agreement expired and Scioto Downs now offers year-round simulcasting.

Property Development:

During the second quarter of 2012, we entered into an agreement to manage and operate a new third party developed Wyndham property hotel to be located adjacent to our Presque Isle Downs property. The hotel broke ground in July 2012 and is expected to open in mid-2014.

Key Performance Metrics:

Certain key operating statistics specific to the gaming industry are used to review our results. These include slot handle and table game drop, which are volume indicators, and "win" or "hold" percentage. For the nine months ended September 30, 2013, our property slot win percentage is in the range of 7.7% to 8.3% of slot handle, and our table game win percentage is in the range of 19.5% to 21.0% of table game drop. We also review daily net win per slot and table as a measure of overall gaming performance. For the nine months ended September 30, 2013, our property daily net win per slot is in the range of $175 to $214, and for Presque Isle Downs and Mountaineer our daily net win per table is $920 and $1,356, respectively.

In addition, average daily room rate ("ADR") and revenue per available room ("RevPAR") are used to measure Mountaineer's hotel volume and efficiency. For the nine months ended September 30, 2013, our ADR was $82 excluding complimentary rooms and $47 including complimentary rooms. RevPAR for the three and nine months ended September 30, 2013 was approximately $45 and $42, respectively, including complimentary rooms.

Pending Mergers with Eldorado HoldCo LLC:

On September 9, 2013, the Company entered into a definitive agreement with the parent company of Eldorado Resorts, Eldorado HoldCo, LLC ("Eldorado"), pursuant to which MTR will combine with the parent company of Eldorado Resorts LLC in a stock merger. Eldorado Resorts is an owner and operator of gaming properties in Nevada and Louisiana, whose properties include Eldorado Reno, Eldorado Shreveport and Silver Legacy Resort Casino (a 50/50 joint venture with MGM Resorts International) ("Silver Legacy").

Specifically, the Company, Eclair Holdings Company, a wholly owned subsidiary of the Company ("NewCo"), Ridgeline Acquisition Corp., a wholly owned subsidiary of NewCo ("Merger Sub A"), Eclair Acquisition Company, LLC, a wholly owned subsidiary of NewCo ("Merger Sub B"), Eldorado, and Thomas Reeg, Robert Jones, and Gary Carano, as the representative of the members of Eldorado, entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the Company will merge with Merger Sub A and Eldorado will merge with Merger Sub B, with the Company and Eldorado as the surviving entities in such mergers (the "Mergers"). As a result of the


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Mergers, NewCo will become the holding company for the Company and Eldorado and be renamed "Eldorado Resorts, Inc.," with its shares of common stock listed on The Nasdaq Stock Market.

The Merger Agreement provides that, upon completion of the Mergers, the Company's stockholders will have the right to receive, at their election (but subject to customary procedures applicable to oversubscription for cash consideration), either (i) one share of NewCo common stock, or (ii) $5.15 in cash in exchange for each share of the Company's common stock they own immediately prior to completion of the Mergers (the "MTR Exchange Ratio"); provided that no more than $30.0 million in cash will be exchanged for the Company's shares of common stock. The members of Eldorado will collectively receive, in the aggregate, an amount of merger consideration equaling to the product of (a) Eldorado's adjusted EBITDA for the twelve months ending on the most recent month end preceding the closing date by at least twenty days (the "Report Date") and (b) 6.81, with such amount being adjusted for Eldorado's excess cash, outstanding debt, and working capital based upon an agreed upon working capital target for Eldorado, an amount equal to certain transaction expenses of the Company which is capped at $7.0 million, the value of Eldorado's interest in Silver Legacy, and the amount of restricted cash on Eldorado's balance sheet (if any) relating to the credit support required in connection with Silver Legacy's credit facility. The value of Eldorado's interest in Silver Legacy is equal to the product of (x) Eldorado's proportionate ownership interest in Silver Legacy which, through a subsidiary, is expected to be 50% at the closing of the Mergers, and (y) the product of (A) Silver Legacy's adjusted EBITDA for the twelve months ending on the Report Date and (B) 6.81, with such amount being adjusted for Silver Legacy's excess cash, outstanding debt, and working capital based upon an agreed upon working capital target for Silver Legacy, each such adjustment in proportion to Eldorado's ownership interest, the amount of the subordinated notes made by Eldorado to Silver Legacy, and Eldorado's portion of the difference between the capital accounts of the members of Silver Legacy. As a result, the members of Eldorado will receive, in the aggregate, the number of shares of NewCo common stock equal to quotient obtained by dividing the merger consideration as calculated in the two preceding sentences by an implied price per share of $5.15 for NewCo common stock (the "Eldorado Merger Shares"). The number of Eldorado Merger Shares issued to Eldorado members is subject to a post-closing adjustment based on a final post- closing calculation of the components of the Eldorado Valuation. The MTR Exchange Ratio and the number of Eldorado Merger Shares are subject to customary anti-dilution adjustments in the event of stock splits, stock dividends and similar transactions involving the Company's common stock. The Mergers are expected to qualify as tax-free transfers of property to NewCo for federal income tax purposes.

Other Strategic Developments

Other unsolicited non-binding proposals received by the Company are discussed in greater detail in Note 1 to our consolidated financial statements, which are included elsewhere in this report.


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Financial Summary:

The significant factors affecting our results for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, were:


The decrease in net revenues of $16.7 million for the three months ended September 30, 2013, compared to the prior year period, was primarily due to the impact of expanded gaming in Ohio. During the current year quarter, all of our gaming facilities experienced declines in net revenues, which we attribute to the opening of a new casino in Columbus during October 2012, that impacted our Scioto Downs property, and a new racino located near Cleveland that opened April 2013, which impacted both our Mountaineer and Presque Isle Downs facilities. In addition, both of our Mountaineer and Presque Isle Downs facilities continue to be impacted from the expansion of gaming in Cleveland with a casino that opened in May 2012.

As a result of the continued expansion of gaming in Ohio, all of our gaming facilities have experienced the impact of operating in a highly competitive environment. We have increased our promotional offerings at our properties in order to compete with the significant and sustained increases in promotional offers at many of our competitors. Although we believe that the current level of promotional offerings in the markets in which we operate will decrease to a normal and sustainable level, we are uncertain as to the timing. We will continue to prudently review our reinvestment levels and will make ongoing adjustments to ensure our properties reflect the appropriate level of offerings to sustain our profitability. In addition, we believe economic uncertainty and slower than anticipated economic recovery continues to impact overall gaming results in our regional markets.

All of our properties experience varying competitive pressures, from casinos in western Pennsylvania, western New York, northern West Virginia and eastern Ohio. We believe the expansion of gaming in Ohio, which includes casinos that opened in Cleveland in May 2012 and Columbus in October 2012 and additional casinos in Cincinnati and Toledo, as well as the installation of VLTs at existing horse race tracks near Cleveland, one of which opened in April 2013 and the other expected to open in December 2013 and the relocation of a racetrack to Austintown, Ohio, will have a negative impact on our results of operations at all our properties and such impact may be material. We intend to be proactive in our efforts to mitigate the effects of such competition, which include expanding marketing initiatives and proactively managing our cost structures at our properties.


During the three months ended September 30, 2013, we incurred $2.7 million in strategic transaction costs related to merger proposals including the pending merger with Eldorado. These fees consist primarily of legal, financial advisor, accounting and consulting costs.


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Results of Operations

Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months
Ended September 30, 2012

    The results of continuing operations are summarized below:

                                              Three Months Ended       Nine Months Ended
                                                September 30,            September 30,
                                               2013        2012        2013        2012
                                                      (unaudited, in thousands)
Revenues:
Gaming                                       $ 115,268   $ 132,020   $ 349,223   $ 339,664
Pari-mutuel commissions                          4,133       3,824       8,932       8,347
Food, beverage and lodging                      11,255      11,105      31,551      27,765
Other                                            3,791       3,583       9,582       8,141

Revenues                                       134,447     150,532     399,288     383,917
Less promotional allowances                     (5,584 )    (4,955 )   (16,321 )   (12,715 )

Net revenues                                   128,863     145,577     382,967     371,202

Operating expenses:
Gaming                                          68,073      76,630     204,345     204,006
Pari-mutuel commissions                          3,703       3,831       8,931       8,746
Food, beverage, lodging                          8,614       8,604      24,409      21,112
Other                                            2,679       2,358       6,519       5,596
Marketing and promotions                         4,187       4,986      11,948      10,325
General and administrative                      16,351      17,799      48,861      46,119
Strategic transaction costs                      2,723                   2,723
Project-opening costs                                -         222           -       2,718
Depreciation                                     7,691       7,880      22,782      19,979
Loss (gain) on the sale or disposal of
property                                           161           -          68          (4 )

Total operating expenses                       114,182     122,310     330,586     321,118

Operating income                                14,681      23,267      52,381      52,605
Interest expense, net                          (17,389 )   (17,202 )   (52,150 )   (50,483 )
Provision for income taxes                        (921 )      (729 )    (2,260 )    (2,077 )

(Loss) income from continuing operations     $  (3,629 ) $   5,336   $  (2,029 ) $      45

Financial results for the three months ended September 30, 2013 compared to the three months ended September 30, 2012

Net Revenues

Net revenues for the three months ended September 30, 2013, comprised of $119.4 million in gaming and pari-mutuel revenues (92% of total net revenues), and $15.0 million of non-gaming revenues (12% of total net revenues) less $5.6 million of promotional allowances (-4% of total net revenues), decreased $16.7 million, or 11.5%, compared to net revenues for the three months ended September 30, 2012, comprised of $135.8 million in gaming and pari-mutuel revenues (93% of total net revenues), and $14.7 million of non-gaming revenues (10% of total net revenues) less $5.0 million of promotional allowances (-3% of total net revenues). The decrease was primarily attributable to the following components.


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Gaming

Gaming revenues are comprised of the net win from our slot operations, table games and poker. Gaming revenues for the three months ended September 30, 2013 of $115.3 million represents a $16.7 million, or 12.7%, decrease compared to the prior year period. The decrease of $16.7 million is comprised of a decrease in slot revenue, table gaming revenue, and poker revenue of $15.3 million, $1.2 million, and $0.2 million, respectively. Slot revenue decreased by $5.2 million at Mountaineer, $4.7 million at Presque Isle Downs, and $5.4 million at Scioto Downs. The decrease in slot revenue at Mountaineer and Presque Isle Downs was primarily due to continued competitive pressures principally from the casino in Cleveland, which opened in May 2012, and the racino near Cleveland, which opened in April 2013. The decrease in slot revenue at Scioto Downs was primarily due to the incremental competition from an additional casino opening in Columbus in October 2012. The decrease in table gaming and poker revenue at our Mountaineer and Presque Isle Downs facilities were due to the same factors impacting our slot revenues.

Gaming revenue at Mountaineer decreased by $5.8 million, or 11.6%, to $44.2 million for the three months ended September 30, 2013, compared to the prior year period. The decrease is comprised of a decrease in slot, table gaming and poker revenue of $5.2 million, $0.5 million and $0.1 million, respectively.

Gaming revenue at Presque Isle Downs decreased by $5.5 million, or 12.6%, to $38.3 million for the three months ended September 30, 2013, compared to the prior year period. The decrease is comprised of a decrease in slot, table gaming and poker revenue of $4.7 million, $0.7 million and $0.1 million, respectively.

Gaming revenue at Scioto Downs, which decreased by $5.4 million, or 14.2% for the three months ended September 30, 2013 compared to the prior year period, is comprised entirely of slot revenue.

Pari-Mutuel Commissions

Pari-mutuel commissions consist of commissions earned from thoroughbred and harness racing and importing/exporting of simulcast signals from/to other race tracks. Pari-mutuel commissions for the three months ended September 30, 2013 of $4.1 million represents a $0.3 million, or 8.1%, increase compared to the prior year period.

Pari-mutuel commissions at Scioto Downs for the three months ended September 30, 2012 remained relatively flat at $0.9 million compared to the prior year period.

Pari-mutuel commissions at Mountaineer increased by $0.1 million, or 7.5%, to $1.9 million for the three months ended September 30, 2013 compared to the prior year period. The increase was due to better exposure to our export signal and a 7.2% increase in handle compared to an industry handle increase of 1.3%, according to Equibase. Pari-mutuel commissions at Presque Isle Downs increased by $0.1 million, or 12.6%, compared to the prior year period. The increase of $0.1 million is due to a change in the days of the week in which live racing occurs.

Food, Beverage and Lodging

Revenue from our food, beverage and lodging operations for the three months ended September 30, 2013 of $11.3 million represents a $0.2 million, or 1.3%, increase compared to the prior year period. The increase was primarily attributable to increased food offerings at Scioto Downs with the opening of the buffet and sports bar in August 2012, partially offset by decreases at Mountaineer and Presque Isle Downs, which was consistent with the decrease in gaming revenue and overall decline in patron traffic.


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Food, beverage and lodging revenue at Mountaineer decreased by $0.3 million, or 5.0%, to $5.2 million for the three months ended September 30, 2013, compared to the prior year period.

Food and beverage revenue at Presque Isle Downs decreased by $0.1 million, or 3.9%, to $3.2 million for the three months ended September 30, 2013, compared to the prior year period.

Food and beverage revenue at Scioto Downs increased by $0.6 million, or 24.8%, to $2.8 million for the three months ended September 30, 2013, compared to the prior year period.

Other Revenues

Other revenues are primarily derived from operations of Mountaineer's spa, fitness center, retail outlets and golf course; from the sale of programs, admission fees, and lottery tickets; from check cashing and ATM services; and from special events at our entertainment and convention centers. Other revenues for the three months ended September 30, 2013 of $3.8 million represent a $0.2 million, or 5.8%, increase compared to the prior year period. The increase is comprised primarily of a $0.2 million increase in entertainment revenues from our summer concert series, primarily attributable to our Scioto Downs facility which did not have the concert series in the prior year.

Promotional Allowances

Promotional allowances increased by $0.6 million, or 12.7%, to $5.6 million for the three months ended September 30, 2013, compared to the prior year period. The increase was primarily attributable to an increase at Scioto Downs, which reported an increase in promotional allowances of $0.9 million for the three months ended September 30, 2013, offset by decreases at Mountaineer and Presque Isle Downs of $0.2 million and less than $0.1 million, respectively, which is consistent with the fluctuation in food, beverage and lodging revenue at the properties.

Operating Expenses

Gaming

Gaming expense for the three months ended September 30, 2013 of $68.1 million represents an $8.6 million, or 11.2%, decrease compared to the prior year period. The decrease of $8.6 million is comprised of a decrease in gaming taxes and assessments of $8.0 million and other gaming operating costs of $0.6 million. The decrease in gaming taxes during the third quarter of 2013 is consistent with the decrease in gaming revenues. Gaming taxes and assessments as a percentage of gaming revenues varies by the states in which our properties operate. On a blended basis, our gaming taxes and assessments as a percentage of gaming revenue increased to 52.1% for the three months ended September 30, 2013, compared to 51.6% for the prior year period. This increase is partially due to a requirement at Scioto Downs, effective July 1, 2013, to remit 0.3% of its gross VLT revenue to provide funding support for programs that provide for gaming addiction and other related addiction services. As a result, the prospective effective tax rate for Scioto Downs will be 42.8%. In addition, due to our requirement at Presque Isle Downs to contribute a minimum $10.0 million annually as a local share assessment, our effective tax rate at the facility has . . .

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