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MNTG > SEC Filings for MNTG > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for MTR GAMING GROUP INC

Form 10-K for MTR GAMING GROUP INC


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis, including the critical accounting policies contained herein, should be read in conjunction with our consolidated financial statements and the related notes which are included elsewhere in this report.

Our historical operating results may not be indicative of our future results of operations because of the factors discussed in "Business-Cautionary Statement Forward-Looking Information" which is included 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 Churchill Downs, Inc.

In conjunction with the pending Mergers with Eldorado, in September 2013 we formed several entities to assist in facilitating the Mergers: Eclair Holdings Company, a wholly owned subsidiary ("NewCo" or "ERI"), Ridgeline Acquisition Corp., a wholly owned subsidiary of NewCo and Eclair Acquisition Company, LLC, a wholly owned subsidiary of NewCo. These entities had no assets or operations as of December 31, 2013. Refer to Part I, Item 1. "Business" above for additional information regarding the pending Mergers with Eldorado.

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. All of our properties generate positive cash flow, which is essential to debt service and to funding maintenance capital expenditures.

Mountaineer currently operates 2,096 slot machines, 12 poker tables and 39 casino table games and offers live thoroughbred horse racing during 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 began operating its newly constructed VLT gaming facility in June 2012 and currently operates 2,107 VLTs. In addition, Scioto Downs offers live harness horse racing from May through September, operating 90 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


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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.

Discontinued operations include (i) MTR Harness, Inc. and its interest in North Metro Harness Initiative, LLC; (ii) Jackson Racing, Inc. and its interest in Jackson Trotting Association, LLC; (iii) Binion's Gambling Hall & Hotel; and
(iv) the Ramada Inn and Speedway Casino.

Pending Mergers with Eldorado HoldCo LLC:

On September 9, 2013, the Company entered into the Merger Agreement with Eldorado, the parent company of Eldorado Resorts, LLC. Pursuant to the Merger Agreement, which was amended November 18, 2013 and February 13, 2014, the Company will combine with the parent company of Eldorado Resorts, LLC in a part cash, part 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 (a 50/50 joint venture with MGM Resorts International).

Under the terms of the Merger Agreement, the Company and Eldorado will become wholly-owned subsidiaries of ERI, which will become the new holding company for the Company, Eldorado, and their respective subsidiaries and will be renamed "Eldorado Resorts, Inc.," with its shares of common stock listed on the Nasdaq Stock Market. The holders of the Company's common stock and Eldorado membership interests prior to the mergers will together own all of the outstanding shares of common stock of ERI following the transaction.

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) $6.05 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 $35.0 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 $6.05 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.


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Completion of the Mergers is subject to a number of customary conditions, including the approval of the Merger Agreement by the Company's stockholders, the effectiveness of the amended registration statement filed by NewCo on February 13, 2014 with the SEC relating to the NewCo common stock to be issued in the Mergers, and the receipt of required regulatory approvals. The obligation of Eldorado and the Company to complete the Mergers is also conditioned on the combined adjusted EBITDA (as defined in the Merger Agreement) of the Company and Eldorado exceeding $115.0 million during the twelve months ending on the month end immediately preceding the closing of the Mergers. The Merger Agreement provides certain termination rights for both the Company and Eldorado, including a right of either the Company or Eldorado to terminate if the combined adjusted EBITDA of the Company and Eldorado does not exceed $115.0 million during the valuation period. The Merger Agreement also provides that, under certain circumstances, including in the event that (a) the Company's board of directors withdraws, modifies or qualifies its recommendation of the Merger Agreement,
(b) the Company fails to comply with its obligations to solicit approval of the Merger Agreement, (c) the Company fails to comply with its obligations not to solicit certain alternative transactions or competing proposals, or (d) the Company or its board of directors approves, recommends or endorses an alternative transaction or competing proposal, the Company will be obligated to pay a termination fee of $6.0 million to Eldorado and reimburse Eldorado for up to $1.0 million of its fees and expenses.

The terms of the transaction and Merger agreement are explained in greater detail in the registration statement on Form S-4 filed by NewCo with the Securities and Exchange Commission (the "SEC"), which is available on the SEC's website at www.sec.gov under "Eclair Holdings Company".

Property Development:

During the third quarter of 2012, we completed the final phase of construction on our gaming facility at Scioto Downs. The gaming facility build-out, which was fully operational in August 2012, is approximately 132,000 square feet, including 83,000 square feet of gaming space to accommodate up to 2,500 VLTs and four food and beverage outlets. The property includes a 100-seat casual dining restaurant and an 82-seat bar/lounge, as well as a 273-seat buffet.

During the second quarter of 2012, we entered into an agreement to manage and operate a new third party developed Wyndham 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 year ended December 31, 2013, our property slot win percentage is in the range of 7% - 9% of slot handle, and our table game win percentage is in the range of 19% - 21% of table game drop. We also review daily net win per slot and table as a measure of overall gaming performance. For the year ended December 31, 2013, our property daily net win per slot is in the range of $175 - $205, and for Presque Isle Downs and Mountaineer our daily net win per table is $887 and $1,313, respectively.

In addition, average daily room rate ("ADR") and revenue per available room ("RevPAR") are used to measure our hotel volume and efficiency. ADR is calculated by dividing total room revenue, including the retail value of promotional allowances (less service charges, if any) by total rooms occupied including complimentary rooms. We calculate ADR with and without the impact of complimentary rooms. RevPAR is calculated by dividing total room revenue including the retail value of promotional allowances (less service charges, if any) by total rooms available. Occupancy is calculated by dividing total occupied rooms, including complimentary rooms, by the total rooms


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available. The primary drivers in changes to our ADR and RevPAR calculations include: room inventory, which from time to time is impacted by renovations and maintenance; retail room rates, which are reviewed periodically and may fluctuate based on day of the week, group utilization, etc.; and the mix of cash and complimentary patron volumes which impact our occupancy levels. For the years ended December 31, 2013 and 2012, our ADR was $82 and $81, respectively, excluding complimentary rooms and $47 and $48, respectively, including complimentary rooms. Room inventory was consistent for 2013 compared to 2012, average room rates increased slightly between the two periods; however occupancy levels and revenue decreased slightly. RevPAR for the years ended December 31, 2013 and 2012 was approximately $42 and $43, respectively, including complimentary rooms.

Financial Summary:

The significant factors affecting our results for the year ended December 31, 2013, compared to the year ended December 31, 2012, were:


The increase in net revenues of $10.8 million for the year ended December 31, 2013, compared to the prior year, was primarily due to a full year of operations of our gaming facility at Scioto Downs which opened in June 2012. This increase was offset in part by decreases in net revenues at Presque Isle Downs and Mountaineer which were attributable to increased competition in Ohio.

As a result of the continued expansion of gaming in Ohio, all of our gaming facilities continue to experience 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 margins. In addition, we believe economic uncertainty, gaming market saturation 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 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.


Strategic transaction costs in 2013 of $4.4 million related to merger proposals including the pending mergers with Eldorado consisting primarily of legal, financial advisor, accounting and consulting costs.


Project opening expenses in 2012 of $2.7 million associated with the opening of our Scioto Downs gaming facility. There were no project opening costs during 2013.


Depreciation increase of $2.9 million due to Scioto Downs from the completion of the gaming facility, partially offset by decreases at Mountaineer and Presque Isle Downs due to full depreciation of certain assets and slot machines at those properties.


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The increase of $1.7 million in interest expense for the year ended December 31, 2013, compared to the prior year was due primarily to $1.3 million of capitalized interest recorded in 2012 related to the construction of our gaming facility at Scioto Downs.

Results of Operations

The results of continuing operations are summarized below:

                                                      2013        2012        2011
                                                             (in thousands)
  Revenues:
  Gaming                                            $ 454,583   $ 445,848   $ 385,300
  Pari-mutuel commissions                              11,163      10,368      10,206
  Food, beverage and lodging                           40,631      36,489      32,604
  Other                                                12,692      11,392      11,067


  Revenues                                            519,069     504,097     439,177
  Less promotional allowances(1)                      (21,278 )   (17,108 )   (14,302 )


  Net revenues                                        497,791     486,989     424,875


  Operating expenses:
  Gaming                                              266,703     267,195     244,268
  Pari-mutuel commissions                              11,267      11,083      11,410
  Food, beverage, lodging                              31,795      28,554      23,697
  Other                                                 8,309       7,374       6,271
  Marketing and promotions(1)                          16,249      13,926       9,403
  General and administrative                           64,732      62,738      52,963
  Strategic transaction costs                           4,365           -           -
  Project opening costs                                     -       2,705         197
  Depreciation                                         30,458      27,511      27,939
  Impairment loss                                           -           -         685
  Loss (gain) on the sale or disposal of property          38         (52 )       470


  Total operating expenses                            433,916     421,034     377,303


  Operating income                                     63,875      65,955      47,572
  Interest expense, net                               (69,539 )   (67,825 )   (60,014 )
  Loss on debt extinguishment                               -           -     (34,364 )
  Provision for income taxes                           (3,467 )    (3,577 )    (4,347 )


  Loss from continuing operations                   $  (9,131 ) $  (5,447 ) $ (51,153 )


(1)
The classification of costs related to discretionary coupons previously reported within marketing and promotions was revised to report such costs as a component of promotional allowances. All periods presented have been revised to reflect this revision.

Financial results for the year ended December 31, 2013 compared to the year ended December 31, 2012

Net Revenues

Net revenues for the year ended December 31, 2013, comprised of $465.7 million in gaming and pari-mutuel revenues (94% of total net revenues), $53.3 million of non-gaming revenues (11% of total net revenues) less $21.3 million of promotional allowances (-4% of total net revenues), increased $10.8 million, or 2.2%, compared to net revenues for the year ended December 31, 2012, comprised of $456.2 million in gaming and pari-mutuel revenues (94% of total net revenues), $47.9 million of


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non-gaming revenues (10% of total net revenues) less $17.1 million of promotional allowances (-4% of total net revenues). The increase was primarily attributable to the growth of gaming and food, beverage, and lodging revenues partially offset by increased promotional allowances, as discussed further in the following sections.

Gaming

Gaming revenues are comprised of the net win from our slot operations, table games and poker. Gaming revenues for the year ended December 31, 2013 of $454.6 million represents an $8.7 million, or 2.0%, increase compared to the prior year. The increase of $8.7 million is comprised of an increase in slot revenue of $17.8 million, offset by a decrease in poker and table gaming revenue of $1.1 million and $8.0 million, respectively. The increase in slot revenue was primarily due to the opening of our gaming facility at Scioto Downs in June 2012, which provided incremental gaming revenue of $55.2 million, offset in part by a decrease at Mountaineer Park and Presque Isle Downs of $17.2 million and $20.2 million, respectively. 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 two new racinos, which opened in April 2013 and December 2013, near Cleveland. The decrease in poker and table gaming 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 $21.4 million, or 10.9%, to $175.6 million for the year ended December 31, 2013, compared to the prior year. The decrease is comprised of a decrease in slot, poker and table gaming revenue of $17.2 million, $0.6 million and $3.6 million, respectively.

Gaming revenue at Presque Isle Downs decreased by $25.0 million, or 14.8%, to $144.6 million for the year ended December 31, 2013, compared to the prior year. The decrease is comprised of a decrease in slot, poker and table gaming revenue of $20.2 million, $0.5 million and $4.4 million, respectively.

Gaming revenue at Scioto Downs, increased by $55.2 million, or 69.6%, to $134.4 million for the year ended December 31, 2013, compared to the prior year. The increase over prior year is comprised entirely of VLT revenue and was due to a full year of operations during 2013 compared to the six months of operations in the prior year as the gaming facility opened in June 2012.

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 year ended December 31, 2013 of $11.2 million represents a $0.8 million, or 7.7%, increase compared to the prior year. The increase is primarily attributable to Scioto Downs due to increased patronage generated from the opening of the gaming facility in June 2012, as well as, year-round simulcasting being offered at the property during 2013 versus 2012 when an agreement with Beulah Park restricted the wagering to the period from May through October.

Pari-mutuel commissions at Mountaineer, increased by $0.1 million, or 1.7%, to $6.0 million for the year ended December 31, 2013, compared to the prior year.

Pari-mutuel commissions at Presque Isle Downs, increased by $0.1 million, or 3.3%, to $2.6 million for the year ended December 31, 2013, compared to the prior year.

Pari-mutuel commissions at Scioto Downs, increased by $0.6 million, or 31.5%, to $2.6 million for the year ended December 31, 2013, compared to the prior year.


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Food, Beverage and Lodging

Revenue from our food, beverage and lodging operations for the year ended December 31, 2013 of $40.6 million represents a $4.1 million, or 11.4%, increase compared to the prior year. The increase was primarily attributable to increased food offerings at Scioto Downs with the opening of its casual dining restaurant and center bar/lounge in June 2012 and the opening of its sports bar and buffet in August 2012, partially offset by decreases at Mountaineer, which was consistent with the decrease in gaming revenue and overall decline in patron traffic.

Food, beverage and lodging revenue at Mountaineer decreased by $1.1 million, or 5.3%, to $19.6 million for the year December 31, 2013, compared to the prior year. The decrease of $1.1 million is comprised of a decrease in food and beverage revenue of $0.9 million and a decrease in lodging revenue of $0.2 million.

Food and beverage revenue at Presque Isle Downs for the year ended December 31, 2013 of $11.1 million was flat compared to the prior year.

Food and beverage revenue at Scioto Downs increased by $5.3 million, or 111.3%, to $10.0 million for the year ended December 31, 2013, compared to the prior year.

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 year ended December 31, 2013 of $12.7 million represent a $1.3 million, or 11.4%, increase compared to the prior year. The increase is comprised primarily of a $1.7 million increase at Scioto Downs, which is primarily attributed to increased retail sales, additional entertainment offerings and commissions earned from check cashing and ATM services due to the new gaming facility, as well as, money received from the Ohio Racing Commission to provide support for racinos whose funds are provided from a portion of the taxes collected from casinos in Ohio; which was partially offset by decreases at Mountaineer and Presque Isle Downs of $0.2 million and $0.1 million, respectively, due to a decline in commissions earned from check cashing and ATM services as a result of decreased patron traffic.

Promotional Allowances

Promotional allowances increased by $4.2 million, or 24.4%, to $21.3 million for the year ended December 31, 2013, compared to the prior year. The increase was primarily attributable to an increase at Scioto Downs of $3.8 million and to a lesser extent an increase at Presque Isle Downs of $0.4 million. Promotional allowances at Mountaineer were flat to prior year. The increase at Scioto Downs was due to the opening of the gaming facility in June 2012, while the increase at Presque Isle Downs was related to an increase in promotional offerings required to compete with the significant and sustained increases in promotional offers at our direct competitors.

Operating Expenses

Gaming

Gaming expense for the year ended December 31, 2013 of $266.7 million represents a $0.5 million, or 0.2%, decrease compared to the prior year. The decrease of $0.5 million is comprised of a decrease in gaming taxes and assessments of $1.5 million; partially offset by an increase in other gaming operating costs of $0.5 million. The decrease in gaming taxes is due to the decline in gaming revenues at our Mountaineer and Presque Isle Downs properties; largely offset by an increase at Scioto Downs due to the increase in gaming revenues. Gaming taxes and assessments as a percentage of gaming


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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 . . .

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