| MTR GAMING GROUP INC ITEM 1A RISK FACTORS Risks Related to Our Business We will continue to depend on Mountaineer for the vast majority of our revenues, and, therefore, any risks faced by our Mountaineer operations will have a material impact on our results of operations |
| While we look to our takeover of the operation of Binion’s and, if we receive a slots license, the commencement of slot operations at Presque Isle Downs to diversify our revenue sources, we remain dependent upon Mountaineer for the vast majority of our revenues |
| Accordingly, we may be subject to greater risks than a geographically diversified gaming operation, including, but not limited to the following risks faced by our Mountaineer operations: · risks related to local and regional economic and competitive conditions, such as a decline in the number of visitors to Mountaineer, a downturn in the overall economy in Mountaineer’s market, a decrease in gaming activities in Mountaineer’s market or an increase in competition in Mountaineer’s market, including, but not limited to continuing and increasing competition from limited video lottery terminals in local bars and clubs in West Virginia and anticipated competition from gaming facilities in Pennsylvania; · impeded access to Mountaineer due to weather, floods, road construction or closures of primary access routes; · changes in local and state governmental laws and regulations (including changes in laws and regulations affecting gaming operations and taxes) applicable to Mountaineer; · work stoppages at Mountaineer; · risks related to acts of terrorism, international conflicts or breaches of security affecting Mountaineer or its market; and · natural and other disasters affecting Mountaineer’s market |
| The occurrence of any of these or similar events could have a material adverse effect on our business, financial condition and results of operations |
| Agreements with Horsemen and Parimutuel Clerks |
| We depend on agreements with our horsemen and parimutuel clerks to operate our business |
| The Federal Interstate Horse Racing Act, the state racing laws in West Virginia, Ohio, Pennsylvania, Michigan and Minnesota require that, in order to simulcast races, we have written agreements with the horse owners and trainers at those racetracks |
| In addition, in order to operate slot machines in West Virginia, we are required to enter into written agreements regarding the proceeds of the slot machines with a representative of a majority of the horse owners, trainers and breeders and a representative of a majority of the parimutuel clerks |
| We have the requisite agreements in place with the Mountaineer Horsemen until December 31, 2006 |
| With respect to the Mountaineer parimutuel clerks, we have a labor agreement in force until November 30, 2008, which the union has 20 ______________________________________________________________________ indicated it would like to confirm on an annual basis that the agreement relates to the proceeds of the slot machines |
| Scioto has the requisite agreements in place until November 30, 2012 |
| Jackson Trotting Association, LLC has the requisite agreements in place until December 31, 2008 |
| We anticipate that Presque Isle Downs and North Metro Harness will enter into any required agreements prior to commencement of racing operations |
| If we fail to maintain operative agreements with the horsemen, or if we fail to reach such agreements with horsemen at Presque Isle Downs and North Metro Harness, we will not be permitted to conduct live racing and export and import simulcasting at those racetracks, and, in West Virginia and Pennsylvania, we will not be permitted to operate our slot machines and in Minnesota we will not be able to operate our card room |
| In addition, our simulcasting agreements are subject to the horsemen’s approval |
| If we fail to renew or modify existing agreements on satisfactory terms, this failure could have a material adverse effect on our business, financial condition and results of operations |
| Minimum Live Racing Days |
| If we fail to meet the minimum live racing day requirements at Mountaineer, we would be prohibited under West Virginia law from conducting simulcast racing or renewing our gaming license at Mountaineer |
| In order to conduct simulcast racing or conduct gaming operations, Mountaineer is required under West Virginia law to apply for a minimum of 210 live race days each year and to obtain Racing Commission approval for any reduction in race days actually held during that year |
| Live racing days typically vary in number from year to year and are based on a number of factors, including the number of suitable race horses and the occurrence of severe weather, many of which are beyond our control |
| If we were unable to conduct simulcast racing or offer slot machine gaming at Mountaineer, this would have a material adverse effect on our business, financial condition, results of operations and ability to meet our payment obligations under our various debt instruments |
| Linkage of Slot Machines to State Central System |
| Our gaming operations at Mountaineer are dependent on our linkage to the West Virginia Lottery Commission’s central system |
| By West Virginia Lottery Commission directive, all of our slot machines are required to be connected to the SAMS 4dtta6 IGT central system maintained by the Lottery Commission |
| Our equipment is connected to the West Virginia Central System by telephone lines |
| This central system tracks all gaming activity in the State of West Virginia |
| If the operation of the central system were disrupted for any reason, including disruption of telephone service, we believe that the Lottery Commission would suspend all gaming operations within the State until normal operation of the system was restored |
| Any such suspension could cause a material disruption of our gaming operations and any of the foregoing difficulties could have a material adverse effect on our business, financial condition and results of operations |
| Pennsylvania’s gaming law likewise calls for slot machines to be linked to a state-owned central system |
| Accordingly, our planned slot operations at Presque Isle Downs will be dependent upon linkage to Pennsylvania’s planned central system and subject to the same risks of disruption as our West Virginia operations |
| Any such disruption of our planned Pennsylvania gaming operations could have a material adverse effect on our business, financial condition and results of operations |
| We may face disruption in developing and integrating our Pennsylvania, Michigan, and Minnesota, operations and other facilities we may expand or acquire |
| The development and integration of Presque Isle Downs, North Metro Harness, Jackson Harness and any other facilities we may expand or acquire in the future will require the dedication of management resources that may temporarily detract attention from our day-to-day business |
| The process of developing and integrating these operations also may interrupt the activities of that business, which could have a material adverse effect on our business, financial condition and results of operations |
| We cannot assure you that we will be able to manage the combined operations effectively or realize any of the anticipated benefits of these new operations or any other facilities we may expand or acquire in the future |
| 21 ______________________________________________________________________ For example, we face substantial risks and difficulties in developing Presque Isle Downs, which include, but are not limited to: unforeseen engineering, environmental, or geological problems; interference with existing operations; unanticipated cost increases; construction delays caused by, among other things, work stoppages or weather, among others, and other risks associated with building a racing operation |
| In addition, our racing license requires us to commence live racing by December 30, 2007 |
| If we do not complete the facility within this timeframe, or obtain regulatory approval to complete the facility at a later date, our racing license will be canceled, and without a racing license, we could not have a slots license |
| We expect to face similar risks and uncertainties in connection with the construction and integration of North Metro Harness |
| Moreover, we may be involved in construction of North Metro Harness and Presque Isle Downs simultaneously |
| Developing these two large projects simultaneously, while also maintaining and expanding our other facilities, may stress our management and financial resources as well as disrupt our business |
| Any of the foregoing difficulties could have a material adverse effect on our business, financial condition and results of operations |
| We do not yet have a license to operate slot machines at Presque Isle Downs |
| The Pennsylvania Gaming Control Board has not yet issued any Category 1 (racetrack) slot machine licenses, has only recently begun considering applications, and does not anticipate granting licenses until the summer of 2006 |
| Presque Isle Downs filed its application for a Category 1 license on December 28, 2005, the date established by the Gaming Control Board for such filings |
| While we believe that Presque Isle Downs satisfies the statutory criteria for licensure, and we are unaware of any facts or circumstances that would result in denial of a license, we cannot assure you that Presque Isle Downs will obtain the license |
| Nevertheless, we have commenced and intend to complete construction irrespective of slot licensing under the assumption that we will be granted a slots license as well as to satisfy the condition of our racing license that we commence live racing by December 30, 2007 |
| If for any reason we fail to obtain our slots license, we would likely be forced to sell Presque Isle Downs and would not obtain any of the revenue and profit from the project and could suffer losses |
| Our failure to obtain our slots license, or a substantial delay in obtaining that license, would have a material adverse effect on our business, financial condition and results of operations |
| Our Minnesota racing license is being challenged in court |
| An anti-gaming public interest group has sued the Minnesota Racing Commission, alleging that the commissioners discussed North Metro Harness’ application in violation of the state’s Open Meeting Law |
| The trial court granted the Racing Commission’s and North Metro Harness’ motions for summary judgment, and the anti-gaming group has appealed |
| The same group filed a request for judicial review of the Commission’s decision to grant the license |
| On March 28, 2006, the Minnesota Court of Appeals affirmed the decision of the Minnesota Racing Commission to grant North Metro’s licenses |
| Concerned Citizens has 30 days within which to seek further review by the Minnesota Supreme Court, subject to the discretion of that Court |
| If either court were to invalidate the license, we would not be permitted to build the racetrack and card room nor realize any of the anticipated revenue and profit |
| We may elect to increase our capital investment and/or financial risk in Minnesota |
| The Membership Control Agreement that governs our Minnesota joint venture required us to contribute dlra7dtta5 million of capital |
| The joint venture is pursuing approximately dlra40 million of construction financing that would be without recourse to us |
| If the joint venture cannot obtain the non-recourse financing on acceptable terms, we may elect to guaranty some or all of the financing (subject to the approval of our senior secured 22 ______________________________________________________________________ lenders) |
| In either event, the risk associated with our Minnesota joint venture would be greater than we originally contracted or contemplated |
| Some of our intellectual property is not protected by federally registered trademarks; we rely on common law rights |
| We hold eleven federally registered trademarks and own 58 internet domain names in connection with our business |
| Additionally, pursuant to an Intellectual Property License Agreement, Harrah’s has applied for trademarks with respect to “Binion’s,” which, if issued, will become part of our license |
| Apart from registered trademarks, we rely on common law rights, developed through use, with respect to our intellectual property |
| While we believe that our trademarks and common law rights are sufficient to permit us to use all of the intellectual property we are currently using, and that we are not infringing the intellectual property rights of others, we cannot assure you that no one will challenge our rights in the future |
| If we were to lose any of our intellectual property, it could have a material adverse effect on our business |
| We are subject to extensive regulation by gaming and racing authorities |
| Licensing Requirements |
| As owners and operators of gaming and parimutuel facilities, we are subject to extensive state and local regulation |
| State and local authorities require us and our subsidiaries to demonstrate suitability to obtain and maintain various licenses, and require that we have registrations, permits and approvals, to conduct gaming and racing operations, to sell alcoholic beverages and tobacco in our facilities and to operate our food service facilities |
| These regulatory authorities may, for any reason set forth in applicable legislation or regulation, limit, condition, suspend or revoke a license or registration to conduct gaming or racing operations or prevent us from owning the securities of any of our gaming or racing subsidiaries |
| In addition, we must periodically apply to renew many of our licenses or registrations |
| We cannot assure you that we will be able to obtain such renewals |
| There can be no assurance that we will be able to maintain our existing licenses, registrations, permits or approvals or obtain when necessary any new ones |
| In addition, to enforce applicable laws and regulations, regulatory authorities may levy substantial fines against or seize the assets of our company, our subsidiaries or the people involved in violating gaming laws or regulations |
| Potential Changes In Regulatory Environment |
| If current laws are modified, or if additional laws or regulations are adopted, it could have a material adverse effect on us |
| From time to time, legislators and special interest groups have proposed legislation that would restrict or prevent gaming or racing operations in the jurisdictions in which we operate |
| Other laws, such as smoking bans, do not specifically restrict gaming operations but, as a practical matter, make gaming facilities less attractive to gaming patrons and can result in substantially reduced revenues |
| Restriction on or prohibition of our gaming or racing operations, whether through legislation or litigation, could have a material adverse effect on our operating results |
| We pay substantial taxes and fees with respect to our operations |
| From time to time, federal, state and local legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming and racing industry |
| It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration of such laws |
| Changes in the tax laws or administration of those laws, if adopted, could have a material adverse effect on our business, financial condition and results of operations |
| 23 ______________________________________________________________________ We face significant competition from other gaming and racing facilities, and increased competition could have a material adverse effect on us |
| Gaming Operations |
| We face substantial competition in each of the markets in which our gaming facilities are located |
| Some of the competitors have significantly greater name recognition and financial and marketing resources than we do |
| All of our gaming operations primarily compete with other gaming operations in their geographic areas |
| New expansion and development activity is occurring in each of the relevant markets, which may be expected to intensify competitive pressures and could have a material adverse impact on us |
| Specifically, in West Virginia we continue to face increased competition from limited video lottery terminals in local bars and clubs |
| In addition, Pennsylvania’s new slot machine law contemplates the installation of slot machines at up to fourteen locations: seven racetracks (including Presque Isle Downs) each with up to 3cmam000 slots initially and with the ability to apply to the Gaming Control Board for up to 5cmam000 slots; five stand-alone slot parlors with the same number of machines as the racetracks; and two resort locations with up to 500 slots each |
| We anticipate that the Meadows, a harness racetrack approximately 40 miles southeast of Mountaineer, will install between 1cmam500 and 2cmam000 slot machines |
| Pennsylvania’s new law also calls for at least one of the stand-alone slot parlors to be located in downtown Pittsburgh (approximately an hour’s drive from us) |
| Additionally, the Pennsylvania Harness Horse Racing Commission, which may grant one more license, recently denied, on grounds of suitability of the applicants, two applications that proposed to build a track within our target market |
| Both of those applicants have appealed the denials |
| All of our 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 |
| In addition, casinos in Canada have likewise recently begun advertising in our target markets |
| Racing And Parimutuel Operations |
| Mountaineer’s racing and parimutuel operations compete directly for wagering dollars with Wheeling Downs, which is located approximately 50 miles from Mountaineer; Thistledown and Northfield Park, which are located approximately 85 miles to the northwest of Mountaneer in Cleveland, Ohio; and the Meadows, located approximately 40 miles southeast of Mountaineer in Washington, Pennsylvania |
| Wheeling Downs conducts parimutuel greyhound racing and video lottery gaming |
| Thistledown and Northfield Park conduct parimutuel horse racing but not video lottery gaming |
| The Meadows conducts live harness racing and provides import simulcasting, but does not yet have video lottery gaming |
| Upon implementation of slot machines in Pennsylvania, The Meadows also would be permitted to operate slot machines |
| Since commencing export simulcasting in August 2000, Mountaineer also competes with racetracks across the country to have its signal carried by off-track wagering parlors |
| Mountaineer also competes for wagering dollars with off-track wagering facilities in Ohio and Pennsylvania |
| In general, Mountaineer also competes with other tracks for participation by quality racehorses |
| Presque Isle Downs will face competition from other racetracks in Pennsylvania and off-track wagering facilities in Pennsylvania and West Virginia, as well as from any existing or future casinos in Western New York |
| Moreover, because Presque Isle Downs will be a new facility, all of its competitors will be more established |
| Scioto Downs competes directly with other racetracks in Ohio, including Beulah Park, a thoroughbred horse racetrack which is located approximately nine miles from Scioto; River Downs Horse Racing in Cincinnati, Ohio; and to a lesser extent, casino gambling on riverboats in Indiana and Native American lands in Michigan |
| Further, Scioto faces competition from off-track wagering facilities in Ohio, Pennsylvania and West Virginia |
| Jackson Trotting competes directly with other racetracks in Michigan, including Sports Creek Raceway, Northville Downs, Hazel Park Harness Raceway and Great Lakes Downs |
| 24 ______________________________________________________________________ Increased competition may require us to make substantial capital expenditures to maintain and enhance the competitive positions of our properties, including updating slot machines to reflect changing technology, refurbishing rooms and public service areas periodically, replacing obsolete equipment on an ongoing basis, and making other expenditures to increase the attractiveness and add to the appeal of our properties, including increased marketing and promotions |
| In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including shopping, athletic events, television and movies, concerts and travel |
| Increased competition from other gaming and racing facilities could have a material adverse effect on our business financial condition and results of operations |
| We depend on our key personnel |
| We are highly dependent on the services of Edson R Arneault, our Chairman and Chief Executive Officer, and other officers and key employees |
| We have entered into employment agreements with Mr |
| Arneault and certain other officers |
| However, the loss of the services of any of these individuals could have a material adverse effect on our business, financial condition and results of operations |
| Moreover, Mr |
| Arneault’s contract calls for him to step down as CEO as of December 31, 2006 but remain as chairman of the board until December 31, 2009 |
| Arneault do not extend his contract, or if we are unable to find a suitable replacement, it may have a material adverse effect on our business |
| Our business may be materially and adversely affected by recession or economic downturn; the seasonal nature of our business could also materially and adversely affect our cash flow |
| Our primary business involves leisure and entertainment |
| The economic health of the leisure and entertainment industry is affected by a number of factors that are beyond our control, including: (1) general economic conditions and economic conditions specific to our primary markets; (2) levels of disposable income of patrons; (3) increased transportation costs resulting in decreased travel by patrons; (4) local conditions in key gaming markets, including seasonal and weather-related factors; (5) increases in gaming and racing taxes or fees; (6) competitive conditions in the gaming, leisure and entertainment industry and in particular markets, including the effect of such conditions on the pricing of our products; (7) substantial price increases in the cost of energy in the United States; and (8) the relative popularity of entertainment alternatives to gaming and racing that compete for the leisure dollar |
| Any of these factors could materially adversely impact the leisure and entertainment industry generally, and as a result, our revenues and results of operations |
| In addition, our operations at Mountaineer, Scioto and Jackson Trotting and our planned operations at Presque Isle Downs and North Metro Harness, are typically seasonal in nature |
| Winter conditions may adversely affect transportation routes to our properties, as well as cause cancellations of live horse racing |
| As a result, unfavorable seasonal conditions could have a material adverse effect on our operations |
| We are subject to environmental laws and potential exposure to environmental liabilities |
| We are subject to various federal, state and local environmental laws and regulations that govern activities that may have adverse environmental effects, such as discharges to air and water, as well as the management and disposal of solid and hazardous wastes |
| Under such laws and regulations, we may incur costs to obtain permits and other approvals required for our activities and operations, or to achieve or maintain compliance |
| For example, we may incur future costs under existing and new regulations pertaining to stormwater and wastewater management at our racetracks |
| In addition, we may face penalties or other liabilities in the event that we fail to comply with these laws and regulations |
| For instance, water discharges from our racetrack operations at our Mountaineer facility were the subject of past enforcement actions by state regulators |
| We satisfied the requirements of those past proceedings, and implemented measures to maintain compliance on a going forward basis |
| Such costs and liabilities have not in the past had a material impact on our business or 25 ______________________________________________________________________ financial condition |
| We believe, but we cannot assure you, that compliance with environmental laws and regulations will not have such an impact in the future |
| We also are subject to laws and regulations that create liability and cleanup responsibility for releases of hazardous substances into the environment |
| Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on its property, without regard to whether the owner or operator knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred |
| The presence of, or failure to remediate properly, such substances may materially adversely affect the ability to sell or rent such property or to borrow funds using such property as collateral |
| Additionally, the owner of a site may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from a site |
| Based on currently available information, we believe, although we cannot assure you, that such liabilities will not have a material impact on our business (See “Business—Environmental Matters”) |
| The availability and cost of financing could have an adverse effect on our business |
| We intend to finance our current and future expansion projects primarily with cash flow from operations, borrowings under our bank credit facility, and incurrence of additional debt, including the contemplated amendment of our secured revolving credit facility, and may in the future seek equity capital |
| In order to consummate the additional debt financing we are seeking, we will require the prior consents of the holders of at least a majority in aggregate principal amount of our outstanding 9¾% Senior Notes due 2010 that are not owned by us or any of our affiliates |
| We cannot assure you that we will be able to obtain such consents |
| Our inability to obtain such consents would have a material adverse effect on our business, financial condition and results of operations |
| If we are unable to finance our current or future expansion projects, we will have to adopt one or more alternatives, such as reducing or delaying planned expansion, development and renovation projects as well as capital expenditures, and selling assets, restructuring debt, or obtaining additional debt or equity financing or joint venture partners, or further modifying our bank credit facility |
| These sources of funds may not be sufficient to finance our expansion, and other financing may not be available on acceptable terms, in a timely manner or at all |
| In addition, our existing indebtedness contains certain restrictions on our ability to incur additional indebtedness |
| If we are unable to secure additional financing, we could be forced to limit or suspend expansion, development and renovation projects, which may have a material adverse effect on our business, financial condition and results of operations |
| The concentration and evolution of the slot machine manufacturing industry could impose additional costs on us |
| A majority of our revenues are attributable to slot machines operated by us at our casinos and racinos |
| It is important, for competitive reasons, that we offer to our customers the most popular and up-to-date slot machine games with the latest technology |
| We are in the process of replacing our older slot machines with advanced interactive electronic games with TITO (ticket-in-ticket-out) technology which allows our customers to play their favorite slot machines longer with fewer interruptions and eliminates the problems associated with handling coins and tokens |
| We believe that a substantial majority of the slot machines sold in the United States in 2005 were manufactured by a few companies and that one company in particular provided a majority of all slot machines sold in the United States in 2005 |
| In recent years, prices of new slot machines have escalated faster than the rate of inflation |
| Furthermore, in recent years, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games, instead requiring casinos to enter into participating lease arrangements in order to acquire the machines |
| Participating slot machine lease arrangements typically require the payment of a fixed daily rental and may also include payment of a percentage of coin-in or net 26 ______________________________________________________________________ win amounts |
| Generally, a participating lease is substantially more expensive over the long term than the cost to purchase a new machine |
| For competitive reasons, we may be forced to purchase new slot machines or enter into participating lease arrangements that are more expensive than our current costs associated with the continued operation of our existing slot machines |
| If the newer slot machines do not result in sufficient incremental revenues to offset the increased investment and participating lease costs, it could hurt our profitability |
| In addition, because of damage to casinos caused by Hurricane Katrina there may be a shortage of new slot machines over the next 12 to 24 months, causing a substantial increase in the cost of slot machines or making certain slot machines unavailable to us |
| Risks Related to our Capital Structure Our substantial indebtedness could adversely affect our financial health |
| We continue to have a significant amount of indebtedness |
| Our substantial indebtedness could have important consequences to our financial health |
| For example, it could: · limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; · require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; · make it more difficult for us to satisfy our obligations with respect to our debt; · increase our vulnerability to general adverse economic and industry conditions; · place us at a competitive disadvantage compared to our competitors that are less leveraged; and · limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds |
| A failure to comply with those covenants could result in an event of default |
| Any of the above-listed factors could have a material adverse effect on our business, financial condition and results of operations |
| In addition, we may incur substantial additional indebtedness in the future, including, for example to fund our expansion and new acquisitions |
| The terms of our existing indebtedness do not fully prohibit us from doing so |
| If new debt is added to our current debt levels, the related risks that we now face could intensify |
| To service our indebtedness, we will require a significant amount of cash, which depends on many factors beyond our control |
| We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us in amounts sufficient to enable us to fund our liquidity needs with respect to our indebtedness |
| In addition, if we consummate significant acquisitions in the future, our cash requirements may increase significantly |
| We cannot assure you that we will be able to refinance any of our debt on attractive terms, commercially reasonable terms or at all |
| Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control |