sec document
As filed with the Securities and Exchange Commission on December 19, 2003
Registration No. 333-110543
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMPIRE RESORTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3714474
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
c/o Monticello Raceway
Route 17B
Monticello, New York 12701
(845) 794-4100, ext. 478
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Scott A. Kaniewski
Chief Financial Officer
Empire Resorts, Inc.
707 Skokie Boulevard, Suite 600
Northbrook, Illinois 60062
(847) 418-3804
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service of Process)
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Copies to:
Robert H. Friedman, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
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Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 19, 2003
PROSPECTUS
679,149 SHARES OF COMMON STOCK
EMPIRE RESORTS, INC.
This prospectus relates to the offer and sale by the selling
stockholders identified in this prospectus of up to an aggregate 679,149 shares
of our common stock. We will not receive any proceeds from the sale of our
common stock under this prospectus.
The selling stockholders may offer their shares of common stock at any
of the following prices, which may reflect discounts from the prevailing market
prices at the time of sale:
o Fixed prices that may be changed
o Market prices prevailing at the time of sale
o Prices related to such prevailing market prices
o At negotiated prices
o Varying prices determined at the time of sale
Our common stock is listed on the Nasdaq Small Cap Market under the
symbol "NYNY" and on the Boston Stock Exchange under the symbol "NYN." The last
reported sale price for our common stock on December 18, 2003 was $8.84 per
share.
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is _______________, 2003.
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................1
The Company....................................................................1
The Offering...................................................................8
Risk Factors...................................................................8
Where You Can Find More Information...........................................15
Special Note Regarding Forward-Looking Statements.............................16
Incorporation By Reference....................................................16
Use of Proceeds...............................................................18
Selling Stockholders..........................................................18
Plan of Distribution..........................................................20
Legal Matters.................................................................22
Experts.......................................................................22
Financial Statements.........................................................F-1
You should rely only on the information contained in this prospectus or
any accompanying supplemental prospectus and the information specifically
incorporated by reference. We have not authorized anyone to provide you with
different information or make any additional representations. This is not an
offer of these securities in any state or other jurisdiction where the offer is
not permitted. You should not assume that the information contained in or
incorporated by reference into this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of each of such
documents.
ii
PROSPECTUS SUMMARY
This summary represents a summary of all material terms of the offering
and only highlights the more detailed information that appears elsewhere, or
incorporated by reference, in this prospectus. This prospectus may not contain
all the information important to you as an investor. Accordingly, you should
carefully read this entire prospectus before deciding whether to invest in our
common stock.
Unless the context otherwise requires, all references to "we," "us," or
"the Company" in this prospectus refer collectively to Empire Resorts, Inc., a
Delaware corporation, and its subsidiaries.
THE COMPANY
We had no revenue during the fiscal year ended December 31, 2002 and
for the nine months ended September 30, 2003 and sustained net operating losses
of approximately $9.5 million and $5.39 million, respectively, during such
periods.
We were incorporated in Delaware in 1993 and our common stock is traded
on the Nasdaq Small Cap Market under the symbol "NYNY" and the Boston Stock
Exchange under the symbol "NYN".
Our principal executive offices are located at Monticello Raceway,
Route 17B, Monticello, New York 12701. Our telephone number is (845) 794-4100,
ext 478.
GENERAL
While initially formed as a holding company for a diverse portfolio of
gaming related investments, over the past eighteen months we have concentrated
primarily on the development of gaming operations in the Catskills region of
upstate New York. To that end, we have liquidated nearly all of our holdings
unrelated to this endeavor and increased our minority interest in Catskill
Development, L.L.C., the sole stockholder of Monticello Raceway Management,
Inc., the owner of Monticello Raceway, a harness horse racing facility located
in Monticello, New York and the holder of a 48 year ground lease for 200 acres
of land adjacent to Monticello Raceway. In addition, on July 3, 2003, we entered
into a Securities Contribution Agreement with Catskill Development, L.L.C.,
Americas Tower Partners and the members of Monticello Raceway Development
Company, LLC, pursuant to which we agreed, subject to the satisfaction or waiver
of various conditions, to acquire all of the outstanding equity interests of
Monticello Raceway Management, Inc., Monticello Casino Management, LLC,
Monticello Raceway Development Company, LLC and Mohawk Management, LLC, and to
acquire all of the rights to operate Monticello Raceway in exchange for 80.25%
of our common stock, calculated on a post-transaction, fully diluted basis.
Following this transaction, we intend to (i) consolidate our operations with
Monticello Raceway Management, Inc., Monticello Casino Management, LLC,
Monticello Raceway Development Company, LLC and Mohawk Management, LLC, (ii)
operate Monticello Raceway, (iii) develop a video lottery terminal program at
Monticello Raceway and (iv), in conjunction with the Cayuga Nation of New York,
develop a resort-style tribal gaming facility on land adjacent to Monticello
Raceway.
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COMMON OWNERSHIP
Each of us, Catskill Development, L.L.C., Monticello Raceway
Management, Inc., Monticello Casino Management, LLC, Monticello Raceway
Development Company, LLC and Mohawk Management, LLC are under some level of
common control.
CATSKILL DEVELOPMENT, L.L.C.
Catskill Development, L.L.C. has three classes of economic ownership
interests, with each class corresponding to one of Catskill Development,
L.L.C.'s three businesses. Class A economic ownership interests represent the
right to receive distributions and allocations from Catskill Development,
L.L.C.'s casino and wagering operations; Class B economic ownership interests
represent the right to receive distributions and allocations from Catskill
Development, L.L.C.'s horseracing and other pari-mutuel activities; and Class C
economic ownership interests represent the right to receive distributions and
allocations from Catskill Development, L.L.C.'s real estate ownership and
development operations. Through Alpha Monticello, Inc., a wholly owned
subsidiary, we indirectly hold approximately 48%, 37% and 25%, respectively, of
Catskill Development, L.L.C.'s Class A, Class B and Class C economic ownership
interests.
Watertone Holdings, L.P., which is controlled by Robert A. Berman, our
chief executive officer, a member of our board of directors and our former
chairman, and Scott A. Kaniewski, our chief financial officer and a former
member of our board of directors, holds approximately 15%, 13% and 25%,
respectively, of Catskill Development, L.L.C.'s Class A, Class B and Class C
economic ownership interests.
Americas Tower Partners, which is controlled by Joseph E. Bernstein, a
member of our board of directors, Ralph J. Bernstein, a member of our board of
directors, and Morad Tahbaz, Catskill Development, L.L.C.'s president, our
president and a member of our board of directors, holds approximately 33%, 25%
and 25%, respectively, of Catskill Development, L.L.C.'s Class A, Class B and
Class C economic ownership interests.
MONTICELLO RACEWAY MANAGEMENT, INC.
Catskill Development, L.L.C. owns all of the issued and outstanding
capital stock of Monticello Raceway Management, Inc. Thomas W. Aro, our
executive vice president, secretary and a former member of our board of
directors, and Morad Tahbaz are each members of Monticello Raceway Management,
Inc.'s board of directors.
MONTICELLO CASINO MANAGEMENT, LLC
Catskill Development, L.L.C. owns 60% of the membership interests of
Monticello Casino Management, LLC and we, through a wholly owned subsidiary,
indirectly own 40% of the membership interests of Monticello Casino Management,
LLC. Robert A. Berman, Ralph J. Bernstein, Thomas W. Aro and Morad Tahbaz are
each members of the board of managers of Monticello Casino Management, LLC.
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MOHAWK MANAGEMENT, LLC
Catskill Development, L.L.C. owns 60% of the membership interests of
Mohawk Management, LLC and we, through a wholly owned subsidiary, indirectly own
40% of the membership interests of Mohawk Management, LLC. Robert A. Berman,
Ralph J. Bernstein, Thomas W. Aro and Morad Tahbaz are each members of the board
of managers of Mohawk Management, LLC.
MONTICELLO RACEWAY DEVELOPMENT COMPANY, LLC
The membership interests of Monticello Raceway Development Company, LLC
are owned 50% by Americas Tower Partners, 41% by Robert A. Berman, 7.65% by
Scott A. Kaniewski, .05% by two affiliates of Mr. Kaniewski and 1.3% by Philip
B. Berman, our vice president of project coordination. Joseph E. Bernstein,
Ralph J. Bernstein, Philip B. Berman and Scott A. Kaniewski are each members of
the board of managers of Monticello Raceway Development Company, LLC.
A diagram summarizing the current ownership structure of us, Catskill
Development, L.L.C., Monticello Raceway Management, Inc., Monticello Casino
Management, LLC, Monticello Raceway Development Company, LLC and Mohawk
Management, LLC is provided on the following page.
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[GRAPHIC OMITTED]
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(1) Includes a .025% membership interest held by Kaniewski Family Limited
Partnership, with respect to which Mr. Kaniewski is the general partner and a 1%
limited partner (with sole voting and disposition rights) and a .025% membership
interest held by KFP Trust, with respect to which Stacey Kaniewski, Mr.
Kaniewski's wife, is the sole trustee, and with respect to which, Mr.
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Kaniewski's children are its sole beneficiaries. Mr. Kaniewski disclaims
beneficial ownership of all interests held by KFP Trust.
(2) The diagram shows only those partners of Americas Tower Partners and
Watertone Holdings, LP that serve as executive officers or directors of us,
Catskill Development, L.L.C., Monticello Raceway Management, Inc., Monticello
Casino Management, LLC, Mohawk Management, LLC or Monticello Raceway Development
Company, LLC.
(3) Joseph E. Bernstein beneficially owns a 1% economic interest and 50% voting
power in Americas Tower Partners, and the JB Trust, in which Mr. Bernstein's
mother, Helen Bernstein, is sole trustee and Mr. Bernstein's children are
ultimate beneficiaries, beneficially owns a 49% economic interest, with no
voting rights. Joseph E. Bernstein and the JB Trust beneficially own, 2% and
98%, respectively, of (a) 35% of the interests of Americas Tower Partners in
Catskill Development, L.L.C., which comprises an economic ownership interest of
33%, 25% and 25%, respectively, of Catskill Development, L.L.C.'s casino and
wagering operations, horseracing and other pari-mutuel activities, and real
estate ownership and development operations and (b) 35% of Americas Tower
Partners' 75% membership interest in Monticello Raceway Development Company,
LLC. By virtue of a 50% voting control position in Americas Tower Partners,
Joseph E. Bernstein is deemed to be the beneficial owner of 35% of the interest
of Americas Tower Partners in Catskill Development, L.L.C. and Monticello
Raceway Development Company, LLC. Mr. Bernstein disclaims beneficial ownership
of the assets of the JB Trust.
(4) Certain members of Catskill Development, L.L.C., owning in the aggregate
less than 2.5% of the membership interests of Catskill Development, L.L.C., are
not shown in this diagram.
(5) Of Catskill Development, L.L.C.'s seven members, the vast majority of
Catskill Development, L.L.C.'s economic ownership interests are held by Alpha
Monticello, Inc., Watertone Holdings, LP, Americas Tower Partners and Monticello
Realty L.L.C. In addition, under Catskill Development, L.L.C.'s operating
agreement, Alpha Monticello, Inc., Watertone Holdings, LP, Americas Tower
Partners and Monticello Realty L.L.C. are the only members of Catskill
Development, L.L.C. with voting rights, with each of these four members entitled
to one vote on all matters submitted to members for a vote.
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THE RACETRACK AND VIDEO LOTTERY INITIATIVE
Following our proposed consolidation with Monticello Raceway
Management, Inc., Monticello Casino Management, LLC, Monticello Raceway
Development Company, LLC and Mohawk Management, LLC, we will own all of the
rights to operate Monticello Raceway, a harness horse racing facility located in
Monticello, New York. Recently, Monticello Raceway was granted the right to
install and operate up to 1,800 video lottery terminals on behalf of the New
York State Lottery. Video lottery terminals, or VLTs, are video gaming devices
that appear very similar to traditional slot machines. During the past decade, a
number of racetracks have implemented VLT programs, with the general result
being a significant increase in racetrack revenue. To construct a facility
suitable to house the VLTs at Monticello Raceway, however, will cost
approximately $20 million. Whether we will be able to raise this money on
reasonable terms, or at all, is uncertain at this time. Moreover, Monticello
Raceway's right to install these VLTs remains subject to, among other
uncertainties, reaching an accord with the horsemen at Monticello Raceway over
how the VLT revenues are to be allocated and receiving a final approval from the
New York State Lottery of the VLT facility's design, staffing and proposed
operation. We cannot assure investors that we will quickly, if ever, be able to
reach an accord with the horsemen at Monticello Raceway or receive all of the
required approvals from the New York State Lottery in order to commence VLT
operations.
ANCILLARY GAMING AGREEMENTS
On April 3, 2003, we, the Cayuga Nation of New York, the Cayuga
Catskill Gaming Authority, Catskill Development, L.L.C., Monticello Raceway
Development Company, LLC and Monticello Casino Management, LLC, the latter two
of which are jointly owned by us, Catskill Development, L.L.C. and certain of
our affiliates, entered into a series of agreements that provide for the joint
development of a resort-style tribal gaming facility on land adjacent to
Monticello Raceway. The principal agreements include: (i) a Land Purchase
Agreement, (ii) a Gaming Facility Management Agreement, (iii) a Gaming Facility
Development and Construction Agreement and (iv) a Special Letter Agreement.
o Under the Land Purchase Agreement, Catskill Development, L.L.C.
has agreed to convey fee simple title to approximately 29 acres
of land adjacent to Monticello Raceway to the United States, in
trust, for the benefit of the Cayuga Nation of New York, in
exchange for $10,000,000 to be paid by the Cayuga Catskill Gaming
Authority.
o Under the Gaming Facility Management Agreement, the Cayuga
Catskill Gaming Authority has agreed to retain Monticello Casino
Management, LLC to manage the development of the proposed tribal
gaming facility for a monthly management fee of 35% of the
facility's net revenues, as determined in accordance with the
rules prescribed by the National Indian Gaming Commission.
o Under the Gaming Facility Development and Construction Agreement,
the Cayuga Catskill Gaming Authority has agreed to appoint
Monticello Raceway Development Company, LLC as its agent with the
exclusive right to design, engineer, develop, construct, and
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furnish the proposed tribal gaming facility until the expiration
or termination of the Gaming Facility Management Agreement. For
these services, Monticello Raceway Development Company, LLC is to
be paid a fee equal to 5% of the total project costs, which costs
may not exceed $505,000,000.
o Under the Special Letter Agreement, we, Catskill Development,
L.L.C., and the Cayuga Nation of New York have agreed to work
exclusively with each other to develop the proposed tribal gaming
facility and to issue to the Cayuga Nation of New York 300,000
shares of our common stock, vesting over a twelve month period,
as consideration for this exclusive arrangement. This letter
agreement also provides for Catskill Development, L.L.C. to fund
the Cayuga Nation of New York's development costs with respect to
the proposed tribal gaming facility and for the Cayuga Nation of
New York to participate with Catskill Development, L.L.C. and/or
us and our affiliates in the ownership of a to-be-developed hotel
that will be designated as the gaming facility's preferred
provider. The letter agreement further provides for a reciprocal
ten-year option to acquire up to a 33.33% ownership interest in
other lodging, entertainment, sports and/or retail facilities
which may be developed or operated within a 15 mile radius of the
gaming facility.
In order for both of Monticello Casino Management, LLC and Monticello
Raceway Development, LLC to carry out their obligations under these agreements,
we will likely need to raise significant financing from outside investors.
However, such financing is not likely to be available on reasonable terms, or at
all, until the Gaming Facility Management Agreement has been approved by the
National Indian Gaming Commission and the Land Purchase Agreement has been
approved by the Bureau of Indian Affairs. Specifically, the Indian Gaming
Regulatory Act requires that all agreements relating to the management of tribal
casinos first be approved by the National Indian Gaming Commission before they
can become effective. In addition, the Indian Gaming Regulatory Act further
requires that the Bureau of Indian Affairs pre-approve all arrangements to
transfer land to the United States in trust for a Native American tribe, as is
being proposed in the Land Purchase Agreement. Obtaining such approvals,
however, can take years and no assurance can be given that these approvals will
be obtained at all. While we expect these agreements will receive an expedited
review from the National Indian Gaming Commission and Bureau of Indian Affairs,
as the Bureau of Indian Affairs has previously approved a similar arrangement
with respect to the same site, prompt approval cannot be assured. Moreover, the
ability to proceed after receipt of these regulatory approvals will be subject
to current market conditions and the fact that neither we nor any of our
partners have had significant casino gaming experience. As a result, we can
provide no assurance that we will ever be able to secure these needed funds on
reasonable terms or at all.
Our ability to participate in New York's VLT program or to help develop
and manage a Native American casino in conjunction with the Cayuga Nation of New
York could also be hampered by the outcome of two pending lawsuits that seek to
enjoin the State of New York from proceeding with the VLT program or permitting
the construction of any new Native American casinos within the State of New
York's borders. While the trial court recently dismissed both of these cases,
the plaintiffs have announced that they intend to appeal. Should an appellate
court overrule the trial court and reinstate these lawsuits, and should the
plaintiffs ultimately prevail on all or part of their claims, our business
strategy could be seriously adversely affected. Moreover, a reinstatement of
these lawsuits, even prior to a definitive ruling on the merits of the cases,
7
would hamper fundraising efforts and adversely affect the implementation of our
business plan, as investors might be reluctant to invest given the uncertainty
that such a holding would create.
THE OFFERING
This prospectus relates to the offer and sale, from time to time, of up
to 679,149 shares of our common stock by the selling stockholders listed below.
The shares of common stock being offered under this prospectus were acquired
from us by the selling stockholders pursuant to private placements in which we
agreed to register the resale of such common stock with the Securities and
Exchange Commission.
Our registration of the resale of our common stock does not necessarily
mean that all or any portion of such common stock will be offered for resale by
the selling stockholders. While we will not receive any proceeds from the sale
of our common stock under this prospectus, we have agreed to bear the expenses
of registering the shares under all federal and state securities laws.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE
RISK FACTORS LISTED BELOW ARE THOSE THAT WE CONSIDER TO BE MATERIAL TO AN
INVESTMENT IN OUR COMMON STOCK AND THOSE WHICH, IF REALIZED, COULD HAVE MATERIAL
ADVERSE EFFECTS ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS AS
SPECIFICALLY DISCUSSED BELOW. IN SUCH AN EVENT, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. BEFORE
YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS, INCLUDING
THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS,
TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE OUR COMMON STOCK. THIS
SECTION INCLUDES OR REFERS TO CERTAIN FORWARD-LOOKING STATEMENTS. YOU SHOULD
REFER TO THE EXPLANATION OF THE QUALIFICATIONS AND LIMITATIONS ON SUCH
FORWARD-LOOKING STATEMENTS DISCUSSED ON PAGE 16.
WE CURRENTLY FACE A LIQUIDITY SHORTFALL.
We had no revenue in 2002, and at October 1, 2003 our current
liabilities exceed current assets by $1,018,743. In addition, to begin the
development of a Native American casino, we will need to raise substantial
capital from outside investors. We expect to raise these needed funds through
either debt or equity financing. Our ability to secure debt financing, however,
is questionable, as we will likely have over $5 million in subordinated debt
following the consolidation's closing due to a closing condition that certain
shares of our common stock be redeemed, and our assets will consist almost
entirely of Monticello Raceway, a small harness horse racing facility located in
Monticello, New York, and various contractual rights related to the development
of a Native American casino, which contracts may not be directly financeable
until some of them have been approved by the National Indian Gaming Commission
and/or the Bureau of Indian Affairs. Nevertheless, should we be able obtain debt
financing, such debt will likely contain restrictions that limit or prohibit our
future actions, and allow the lender to accelerate the loan upon a default. Our
ability to secure equity financing is also highly uncertain, given current
market conditions and the fact that neither we nor our subsidiaries have any
8
significant casino gaming experience. In addition, any future equity financing
will dilute the equity position of our stockholders and no assurance can be
given that equity financing can be obtained on reasonable terms or at all.
WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS THAT EXPRESSES DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
The opinion of Friedman Alpren & Green LLP, our independent auditors
with respect to our financial statements as of December 31, 2001 and 2002,
contains an explanatory paragraph that expresses substantial doubt as to our
ability to continue as a going concern. This opinion indicates that substantial
doubt exists regarding our ability to continue to remain in business as
currently structured. Such an opinion may adversely affect our ability to obtain
new financing on reasonable terms or at all.
Currently, we are not actively involved in any operating business and
serve as a holding company that is entirely dependent on the operations of
companies in which we hold non-controlling interests, and their ability and
willingness to make dividends or distributions to us, in order to provide us
with internal cash flow.
Under our existing structure we are entirely reliant on dividends or
distributions from Catskill Development, L.L.C. in order to generate internal
cash flow. However, Catskill Development, L.L.C. must first satisfy numerous
senior obligations before it can make any significant distributions to us, as
discussed below. Unless we are able to successfully complete our efforts to
restructure and recapitalize, our ability to satisfy our ongoing operating
expenses will be very difficult, since it is unlikely that we will receive
distributions from our subsidiaries in the near future. As a result, we could be
forced to liquidate substantially all of our assets and terminate our operations
as a going concern or seek bankruptcy court protection. If we continue to have
no active business activities, it is possible that we could be considered to be
engaged solely in the business of investing or trading in securities, which is
subject to regulation under the Investment Company Act of 1940. In such event,
we would be required to register as an investment company and could be expected
to incur significant registration and compliance costs. It is not our intention
to operate as such a holding company.
CERTAIN CREDITORS AND MEMBERS OF CATSKILL DEVELOPMENT, L.L.C. NEED TO BE PAID
OFF BEFORE WE CAN RECEIVE ANY SUBSTANTIAL RETURN ON OUR PRINCIPAL ASSET.
Members of Catskill Development, L.L.C. have contributed funds to
finance the purchase of Monticello Raceway and its ongoing efforts to develop a
resort-style Native American casino. These contributions and a mortgage on the
property (together with cumulative interest thereon compounded at 10% per annum)
must be repaid before any net earnings from Catskill Development L.L.C.'s
operations will be available for distribution to us. As of October 1, 2003, the
aggregate amount needed to satisfy payment of both said contributions and
mortgage (with interest) was approximately $49,500,000. As a result, unless we
complete our planned consolidation with Catskill Development, L.L.C., we will
only receive a return of the funds we contributed (and the cumulative interest
thereon), until distributions from operating income and/or proceeds from the
sale of the assets exceed the amount necessary to meet these obligations.
9
POSSIBLE RESCISSION RIGHTS.
There is a possibility that we may have offered and sold certain shares
of common stock in violation of Section 5 of the Securities Act of 1933, as
amended. As a result, the purchasers of such shares may be entitled to a number
of remedies, including a one year rescission right with respect to any shares of
common stock which have been improperly sold to them. Specifically, the
transactions in question relate to the sale of 579,149 shares of common stock
from April 15, 2003 through September 2003, that had an aggregate purchase price
of $4,632,649. Such purchasers could be entitled to have the aggregate purchase
price of such shares refunded by us, plus interest. We cannot assure you that we
have, or will be able to obtain, capital sufficient to fund any such
repurchases, if required.
Currently, Empire Resorts has reported this risk of rescission as a
contingent liability in the notes to its financial statement. however, if it
becomes likely that a rescission offer will have to be made, empire resorts will
have to adjust its financial statements to reclassify up to $4,632,649 from
stockholders' equity to a liability.
THE SUCCESS OF OUR EFFORTS TO CONSOLIDATE OUR OPERATIONS WITH CATSKILL
DEVELOPMENT, L.L.C. IS SUBJECT TO THE SATISFACTION OR WAIVER OF CERTAIN
CONDITIONS.
Our current business plan calls for us to consolidate our interests
with Catskill Development, L.L.C. under the Securities Contribution Agreement
entered into on July 3, 2003. This transaction, however, is subject to a number
of conditions to closing, including, without limitation, receiving stockholder
approval, obtaining a tax opinion that the consolidation will qualify as a tax
free transaction under the Internal Revenue Code, obtaining a fairness opinion
from an independent advisory firm attesting to the fairness of the
consolidation's terms from a financial point of view and the effectiveness of a
registration statement registering the stock being issued to Catskill
Development, L.L.C., Americas Tower Partners and BKB, LLC as part of the
consolidation. If these conditions to closing are not achieved prior to January
31, 2004, any of the parties is free to elect not to proceed with the
consolidation. We believe that the consolidation is necessary in order for the
partners in Catskill Development, L.L.C. to better achieve their strategic
objectives and to provide the Company with longer term financial stability
through the acquisition of an operating business. If consummated, this
transaction will eliminate the mortgage on Monticello Raceway and the need for
capital account requirements to be met before we have access to the revenues
from raceway operations. Failure to complete the transaction would therefore
seriously impair our ability to obtain new financing on reasonable terms and our
long-term viability.
GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR RESULTS.
The business operations of Catskill Development, L.L.C. are affected by
economic conditions. Since our principal investment is our interest in Catskill
Development, L.L.C., a deepening recession or downturn in the general economy,
or in the Catskill Development, L.L.C.'s region, could result in fewer customers
visiting Monticello Raceway or wagering on its races at an off-track location,
which would consequently adversely affect our results as well.
10
THE CONTINUING DECLINE IN THE POPULARITY OF HORSE RACING AND INCREASING
COMPETITION IN SIMULCASTING COULD ADVERSELY IMPACT CATSKILL DEVELOPMENT,
L.L.C.'S BUSINESS.
There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the amount wagered at
Monticello Raceway. Catskill Development, L.L.C.'s business plan anticipates the
possibility of Monticello Raceway attracting new customers to its racetrack
wagering operations through potential casino development or video lottery
operations in order to offset the general decline in raceway attendance.
However, even if the numerous arrangements, approvals and legislative changes
necessary for casino development or video lottery operations occur, Monticello
Raceway may not be able to maintain profitable operations. Public tastes are
unpredictable and subject to change. Any decline in interest in horse racing or
any change in public tastes may adversely affect Monticello Raceway's revenues
and, therefore, limit its ability to make a positive contribution to our
results.
GAMING ACTIVITIES ARE DEPENDENT ON GOVERNMENTAL REGULATION AND APPROVALS.
CHANGES IN SUCH REGULATION OR THE FAILURE TO OBTAIN OR MAINTAIN SUCH APPROVALS
COULD ADVERSELY AFFECT US.
The current or future gaming operations of Catskill Development, L.L.C.
are contingent upon continued governmental approval of these operations as forms
of legalized gaming. Its current or future gaming operations are subject to
extensive governmental regulation and could be subjected at any time to
additional or more restrictive regulation, or banned entirely. It may be unable
to obtain, maintain or renew all governmental licenses, registrations, permits
and approvals necessary for the operation of their pari-mutuel wagering and
other gaming facilities. Licenses to conduct live horse racing and simulcast
wagering by Catskill Development, L.L.C. must be obtained annually from New York
State's regulatory authority. A significant change to current racing law, or the
loss, or non-renewal, of licenses, registrations, permits or approvals may
materially impact on our revenue share allocations, limit the number of races it
can conduct or the form or types of pari-mutuel wagering it offers, and could
have a material adverse effect on its business. In addition, Catskill
Development, L.L.C. currently devotes significant financial and management
resources to complying with the various governmental regulations to which its
operations are subject. Any significant increase in governmental regulation
would increase the amount of its resources devoted to governmental compliance,
could substantially restrict its business, and could consequently materially
adversely affect our results.
THE GAMING INDUSTRY IN THE NORTHEASTERN UNITED STATES IS HIGHLY COMPETITIVE,
WITH MANY OF OUR COMPETITORS BETTER KNOWN AND MORE WELL FINANCED THAN US.
The gaming industry in the Northeastern United Stated is highly
competitive and increasingly run by multinational corporations that enjoy
widespread name recognition, established brand loyalty, decades of casino
11
operation experience and a diverse portfolio of gaming assets. This is
particularly true in Atlantic City. In contrast, Catskill Development, L.L.C.
has limited financial resources and is currently limited to the operation of a
harness horse racetrack in Monticello, New York. Moreover, even if Catskill
Development, L.L.C. is successful in installing video lottery terminals at
Monticello Raceway and/or developing a Native American casino on its property it
would still face competitive disadvantages if Park Place Entertainment
Corporation, the world's largest gaming conglomerate, and/or Trading Cove
Associates, the developers of the hugely successful Mohegan Sun casino in
Connecticut, are successful on building a Native American casino on neighboring
properties.
WE, AND CERTAIN OF OUR AFFILIATES, ARE REQUIRED TO BE APPROVED BY VARIOUS
GOVERNMENTAL AGENCIES IN ORDER TO OWN AN INTEREST, OR PARTICIPATE IN, GAMING
ACTIVITIES.
As part of gaming regulation, we and our affiliates are generally
required to be licensed or otherwise approved in each jurisdiction, which
generally involves a determination of suitability with respect to us and our
affiliates, and our and their officers, directors and significant investors. For
example, the New York Racing & Wagering Board upon a determination that it is
inconsistent with the public interest, convenience or necessity or with the best
interests or racing generally that any person continue to be a shareholder (of
record or beneficially) in any entity that is licensed to engage in racing
activities or that owns 25% or more of such licensed entity, may direct such
shareholder to dispose of its interest in such entity.
SEVERAL OF OUR FORMER OFFICERS AND DIRECTORS WERE INDICTED AND OUR SUITABILITY
TO PARTICIPATE IN GAMING ACTIVITIES IS SUBJECT TO ONGOING REVIEW OF OUR MANAGERS
AND OWNERS BY GAMING REGULATORS.
During 2002, six former officers or directors of the Company were
charged in indictments alleging certain criminal activities. These included:
Monty Hundley, who resigned in March 1995, Howard Zukerman who resigned in April
1997, Sanford Freedman who resigned in March 1998, Stanley Tollman who resigned
as Chairman, President and Chief Operating Officer in February 2002, James
Cutler who resigned in February 2002 and Brett Tollman (son of Stanley Tollman)
who resigned in June 2002. None of the acts these individuals are charged with
relate to their roles or activities with us and we are not charged with any
wrongdoing. However, ownership of Bryanston Group, Inc., our principal
shareholder can be associated with Monty Hundley and/or Stanley Tollman through
their relationships with its beneficial owners and was managed by Brett Tollman.
In December, we entered into to an agreement with Bryanston Group, Inc. and with
certain of these officers and other related parties in an effort to remove them
from a position to control the Company or to participate in the results of any
gaming activities. Such arrangements, and the status of our current officers,
directors and other investors, are subject to ongoing review and evaluation by
various governmental agencies that regulate and license gaming activities. In
the event that any of our officers, directors or investors was found to be
unsuitable, current or future licenses or other approvals could be revoked or
denied or conditioned upon the divestiture or termination of such individual or
investor's interests.
12
OUR BUSINESS PLAN CONTEMPLATES ENTERING INTO AN AGREEMENT WITH A NATIVE AMERICAN
TRIBE FOR THE PURPOSE OF JOINTLY DEVELOPING A CASINO IN MONTICELLO, NEW YORK.
THE ENFORCEMENT OF CONTRACTUAL RIGHTS AGAINST NATIVE AMERICAN TRIBES, HOWEVER,
IS DIFFICULT.
Federally recognized Native American tribes are independent
governments, subordinate to the United States, with sovereign powers, except as
those powers may have been limited by treaty or the United States Congress. Such
tribes maintain their own governmental systems and often their own judicial
systems and have the right to tax, and to require licenses and to impose other
forms of regulation and regulatory fees, on persons and businesses operating on
their lands. As sovereign nations, federally recognized Native American tribes
are generally subject only to federal regulation. States do not have the
authority to regulate them, unless such authority has been specifically granted
by Congress, and state laws generally do not directly apply to them and to
activities taking place on their lands, unless they have a specific agreement or
compact with the state or federal government allowing for the application of
state law. Any contract we enter into with a federally recognized Native
American tribe or nation to jointly develop a casino will likely provide that
the law of the State of New York will be the governing law of such contract. We
cannot assure you, however, that these choice of law clauses would be
enforceable, leading to uncertain interpretation of our rights and remedies
under such contracts.
Federally recognized Native American tribes also generally enjoy
sovereign immunity from suit similar to that of the states and the United States
federal government. In order to sue a Native American tribe (or an agency or
instrumentality of a Native American tribe), the Native American tribe must have
effectively waived its sovereign immunity with respect to the matter in dispute.
There can be no assurance that any Native American tribe we jointly develop a
casino with will be willing to waive its rights to sovereign immunity, thus
undermining our ability to enforce our rights under any contract with such
tribe. Moreover, even if a Native American tribe effectively waives its
sovereign immunity, there exists an issue as to the forum in which a lawsuit can
be brought against the tribe. Federal courts are courts of limited jurisdiction
and generally do not have jurisdiction to hear civil cases relating to matters
concerning Native American lands or the internal affairs of Native American
governments. Federal courts may have jurisdiction if a federal question is
raised by the lawsuit, but that is unlikely in a typical contract dispute.
Diversity of citizenship, another common basis for federal court jurisdiction,
is not generally present in a suit against a tribe because a Native American
tribe is not considered a citizen of any state. Accordingly, in most commercial
disputes with tribes, the jurisdiction of the federal courts, may be difficult
or impossible to obtain.
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF THEIR SERVICES WOULD ADVERSELY
AFFECT OUR OPERATIONS.
If we are unable to maintain our key personnel and attract new
employees, the execution of our business strategy may be hindered and our growth
limited. We believe that our success is largely dependent on the continued
employment of our senior management and other key personnel. If one or more of
these individuals were unable or unwilling to continue in their present
positions, our business could be seriously harmed.
13
FUTURE SALES OF OUR COMMON STOCK MAY ADVERSELY AFFECT ITS PRICE.
Approximately 18,219,075 shares of our common stock will be issued
pursuant to our proposed consolidation with Catskill Development, L.L.C., all of
which shares will be immediately available for resale. In addition, we are
obligated to issue an additional 100,000 shares of common stock to the Cayuga
Nation of New York under the Special Letter Agreement discussed above. If the
holders of these shares were to attempt to sell a substantial amount of their
holdings at once, the market price of our common stock would likely decline. We
also has outstanding options to purchase an aggregate of 840,528 shares of
common stock at an exercise price of $2.66 per share. As the exercise price for
many of these options is well below the current market price of our common
stock, these options are likely to be exercised, causing existing stockholders
to experience substantial dilution, and, most likely, a consequential drop in
the common stock's market price. Moreover, the perceived risk of this potential
dilution could cause stockholders to attempt to sell their shares and investors
to "short" the stock, a practice in which an investor sells shares that he or
she does not own at prevailing market prices, hoping to purchase shares later at
a lower price to cover the sale. As each of these events would cause the number
of shares of our common stock being offered for sale to increase, the common
stock's market price would likely further decline. All of these events could
combine to make it very difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, LEADING TO THE POSSIBILITY OF
ITS VALUE BEING DEPRESSED AT A TIME WHEN STOCKHOLDERS WANT TO SELL THEIR
HOLDINGS.
The market price of our common stock has in the past been, and may in
the future continue to be, volatile. For instance, between January 1, 2001 and
November 13, 2003, the closing price of our common stock has ranged between $.95
and $20.00. A variety of events may cause the market price of our common stock
to fluctuate significantly, including but not necessarily limited to:
o quarter to quarter variations in operating results;
o adverse news announcements; and
o market conditions for the gaming industry.
In addition, the stock market in recent years has experienced
significant price and volume fluctuations for reasons unrelated to operating
performance. These market fluctuations may adversely affect the price of our
common stock at a time when an investor wants to sell its interest in us.
OUR LARGE AMOUNT OF UNISSUED PREFERRED STOCK MAY DETER POTENTIAL ACQUIRERS.
Our Board of Directors has the authority, without further action by the
stockholders, to issue up to 3,269,304 shares of preferred stock on such terms
and with such rights, preferences and designations, including, without
limitation restricting dividends on our common stock, dilution of the common
stock's voting power and impairing the liquidation rights of the holders of our
common stock, as the Board may determine without any vote of the stockholders.
Issuance of such preferred stock, depending upon the rights, preferences and
designations thereof may have the effect of delaying, deterring or preventing a
14
change in control. In addition, certain "anti-takeover" provisions of the
Delaware General Corporation Law, among other things, may restrict the ability
of stockholders to authorize a merger, business combination or change of
control. Failure to consummate such a proposed merger, business combination or
change in control could result in investors missing an opportunity to sell their
interests in us at a significant premium over the market price.
OUR OFFICERS AND DIRECTORS CAN CONTROL THE OUTCOME OF ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL.
Our executive officers, directors and entities affiliated with them
beneficially own, in the aggregate, approximately 48% of our outstanding common
stock. These stockholders, when acting together, are therefore able to exercise
considerable influence over the outcome of all matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate transactions, such as mergers or other business combinations. This
concentration of ownership may lead to actions being taken by us that are
inconsistent with the best interests of all stockholders such as lax corporate
governance by the board or resistance to acquisition offers.
OUR PROPOSED CONSOLIDATION WITH CATSKILL DEVELOPMENT, L.L.C. MAY LIMIT OUR
ABILITY TO USE OUR CURRENT NET OPERATING LOSS CARRYFORWARDS, POTENTIALLY
INCREASING OUR FUTURE TAX LIABILITY.
As of December 31, 2002, we had net operating loss carryforwards of
approximately $66,500,000 set to expire between 2008 and 2022. As the Internal
Revenue Code allows us to offset future income against these net operating loss
carryforwards, should we earn a profit in the near future our tax liability
would be greatly reduced, if not eliminated. The consolidation of our operations
with Catskill, however, may trigger certain provisions of the Internal Revenue
Code that would limit the future utilization of our net operating loss
carryforwards. Generally speaking, if these rules are applicable, we will only
be permitted to utilize that portion of our net operating loss carryforwards per
year equal to the fair market value of our stock on the effective date of the
proposed consolidation with Catskill, multiplied by the federal long-term tax
exempt rate on such date (currently 4.74% for the month of November).
Furthermore, even if our proposed consolidation with Catskill Development,
L.L.C. is never consummated, our ability to use these net operating loss
carryforwards might otherwise be restricted should we exercise our option to
redeem Bryanston Group, Inc.'s holdings in us, as its shares currently represent
approximately 45% of our voting equity.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities
and Exchange Commission for the resale of the common stock being offered under
this prospectus. This prospectus does not contain all the information set forth
in the registration statement. You should refer to the registration statement
and its exhibits for additional information. Whenever we make references in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for the copies of the actual contract,
agreement or other document.
15
You should rely only on the information and representations provided or
incorporated by reference in this prospectus or any related supplement. We have
not authorized anyone else to provide you with different information. The
selling stockholders will not make an offer to sell these shares in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or any supplement is accurate as of any date other than the date
on the front of each such document.
The Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov, which contains reports, proxy and information statements,
and other information regarding us. You may also read and copy any document we
file with the Securities and Exchange Commission at its Public Reference Room,
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the Public Reference Room.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and documents incorporated by reference into this
prospectus contain 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, that are not historical facts but rather are
based on current expectations, estimates and projections about our business and
industry, our beliefs and assumptions. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks", "estimates" and variations of these
words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" beginning on page 8 and elsewhere in this prospectus and documents
incorporated by reference into this prospectus. You are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus or as of the date of
any document incorporated by reference into this prospectus. We undertake no
obligation to update these statements or publicly release the results of any
revisions to the forward-looking statements that we may make to reflect events
or circumstances after the date of this prospectus or the date of any document
incorporated into this prospectus or to reflect the occurrence of unanticipated
events.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with them, which means that we can disclose
important information to you by referring to those documents. The information we
incorporate by reference is considered to be a part of this prospectus and
information that we file later with the SEC will automatically update and
replace this information. We incorporate by reference the documents listed below
and any future filings we make with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended prior to the termination of this offering:
16
(1) Our Amendment No. 1 to Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 2003;
(2) Our Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 2003;
(3) Our quarterly report on Form 10-QSB for the fiscal quarter ended June 30,
2003;
(4) Our Amendment No. 1 to Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2003;
(5) Our Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2003;
(6) Our Amendment No. 1 to our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2002;
(7) Our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2002;
(8) Our Current Report on Form 8-K/A filed on November 3, 2003;
(9) Our Current Report on Form 8-K filed on October 31, 2003;
(10) Our Current Report on Form 8-K filed on October 8, 2003;
(11) Our Current Report on Form 8-K filed on July 30, 2003;
(12) Our Current Report on Form 8-K filed on July 10, 2003;
(13) Our Current Report on Form 8-K filed on June 24, 2003;
(14) Our Current Report on Form 8-K filed on May 16, 2003;
(15) Our Current Report on Form 8-K filed on April 21, 2003;
(16) Our Current Report on Form 8-K filed on April 14, 2003;
(17) Our Current Report on Form 8-K filed on April 11, 2003;
(18) Our Current Report on Form 8-K filed on April 7, 2003;
(19) Our Current Report on Form 8-K filed on March 24, 2003;
(20) Our Current Report on Form 8-K filed on March 18, 2003;
(21) Our Current Report on Form 8-K/A filed on February 21, 2003;
(22) Our Current Report on Form 8-K filed on February 21, 2003;
17
(23) Our Current Report on Form 8-K filed on February 13, 2003;
(24) Our Current Report on Form 8-K/A filed on February 10, 2003;
(25) Our Current Report on Form 8-K filed on February 4, 2003;
(26) Our Current Report on Form 8-K filed on January 17, 2003;
(27) Our Current Report on Form 8-K/A filed on January 16, 2003; and
(28) The description of our common stock contained in our Registration Statement
on Form 8-A12B, as filed with the Securities and Exchange Commission on
June 20, 2001.
You may request a copy of these filings (excluding the exhibits to such
filings which we have not specifically incorporated by reference in such
filings) at no cost, by writing or telephoning us at:
Empire Resorts, Inc.
707 Skokie Boulevard, Suite 600
Northbrook, Illinois 60062
Attention: Comptroller
(847) 418-3804
USE OF PROCEEDS
The selling stockholders will receive all the proceeds from the sale of
our common stock under this prospectus.
SELLING STOCKHOLDERS
The following table sets forth the name of each of the selling
stockholders, the number of shares beneficially owned by each of the selling
stockholders, the number of shares that may be offered under this prospectus and
the number of shares of common stock owned by each of the selling stockholders
after the offering is completed. Except for the Cayuga Nation of New York,
ReedSmith LLP (formerly Parker Duryee Rosoff & Haft, P.C.), certain current
and/or former member of ReedSmith LLP (formerly Parker Duryee Rosoff & Haft,
P.C.) listed below and Demetrius & Company, L.L.C. none of the selling
stockholders has been an officer, director or had any material relationship with
us within the past three years.
On April 3, 2003, we, the Cayuga Nation of New York, the Cayuga
Catskill Gaming Authority, Catskill Development, L.L.C., Monticello Raceway
Development Company, LLC and Monticello Casino Management, LLC, the latter of
which are jointly owned by us and Catskill Development, L.L.C., entered into a
series of agreements that provide for the joint development of a resort-style
Native American hotel/casino in Monticello, New York. Please see the "Recent
Developments" subsection of the section entitled "The Company" on page 1 for a
more detailed discussion of this transaction and the extent of our pre-existing
relationship with the Cayuga Nation of New York.
18
From 1997 through 2002, ReedSmith LLP (formerly Parker Duryee Rosoff &
Haft, P.C.) served as our primary outside legal counsel. Each of Robert J.
Miller, William Griffith, William Bagliebter, Sidney Rosoff, Arthur Brown,
Michael DiGiovanna, Aaron Shmulewitz, Herbert F. Kozlov and Marc Powers is, or
was at one time during the past three years, a member of ReedSmith LLP (formerly
Parker Duryee Rosoff & Haft, P.C.).
We engaged Demetrius & Company, L.L.C. in April 2003 to advise us with
respect to mandatory Securities and Exchange Commission financial disclosure
issues. Furthermore, we continue to use Demetrius & Company, L.L.C. for such
purposes on an ongoing basis. On November 13, 2003, Demetrius & Company, L.L.C.
agreed to accept 4,767 shares of our common stock in exchange for the full
satisfaction of $50,053.50 in unpaid fees owed to them for these services.
Number of Common
Number of Shares/Percentage of
Common Shares Number of Class to Be Owned
Owned Prior to Common Shares After Completion of
Name the Offering to be Offered the Offering
---- --------- -------------- --------------------
Cayuga Nation of New York 200,000 100,000 *
Stanley Silverstein 40,000 25,000 *
Donald G. Glascoff, Jr. 6,250 6,250 --
Linda Gutman 6,250 6,250 --
Momar Corporation 50,000 50,000 --
Champion Communications, Ltd. 12,500 12,500 --
Catskill Holding Group, LLC 300,000 300,000 --
Robert Carleton 15,625 15,625 --
Charles M. Banacos 11,793 11,793 --
Joseph E. Harris 5,000 5,000 --
Burton Eisenberg 1,000 1,000 --
Shaul Golan 17,000 17,000 --
Robert and Karen Spitalnick 6,452 6,452 --
Harvey Brenner 3,226 3,226 --
Elliot Steigman 3,000 3,000 --
Robert J. Miller 3,206 3,206 --
William Griffith 3,206 3,206 --
William Bagliebter 3,206 3,206 --
Sidney Rosoff 3,206 3,206 --
Arthur Brown 3,206 3,206 --
Michael DiGiovanna 3,206 3,206 --
Aaron Shmulewitz 3,206 3,206 --
Herbert F. Kozlov 6,409 6,409 --
Marc Powers 3,206 3,206 --
ReedSmith LLP 27,778 27,778 --
Hospitality Innvestors, LLC 11,452 11,452 --
Ezra Dabah 25,000 25,000 --
The Edelweiss Condominium Tenancy in Common 5,000 5,000 --
Andrew J. Groveman 5,000 5,000 --
19
Number of Common
Number of Shares/Percentage of
Common Shares Number of Class to Be Owned
Owned Prior to Common Shares After Completion of
Name the Offering to be Offered the Offering
---- -------------- -------------- --------------------
Andrew J. Green 5,000 5,000 --
Demetrius & Company, L.L.C. 4,767 4,767
---------
* less than 1%
Our registration of the shares included in this prospectus does not
necessarily mean that each of the selling stockholders will opt to sell any of
the shares offered hereby. The shares covered by this prospectus may be sold
from time to time by the selling stockholders so long as this prospectus remains
in effect.
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling stockholders, as
well as on behalf of their donees, pledgees, transferees or other
successors-in-interest, if any, who may sell shares received as gifts, pledges,
distributions or other non-sale related transfers. Neither we, nor the selling
stockholders, have employed an underwriter for the sale of common stock by the
selling stockholders. The selling stockholders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, not is
there an underwriter or coordinating broker acing in connection with the
proposed sale of the shares by the selling stockholders. We will bear all
expenses in connection with the preparation of this prospectus and registration
of the shares. The selling stockholders will bear brokerage commissions and
similar selling expenses associated with the sale of their common stock.
The selling stockholders may offer their shares of common stock from
time to time directly or through pledgees, donees, transferees or other
successors in interest in one or more of the following transactions (which may
include block transactions):
o On the Nasdaq Small Cap Market or any stock exchange or automated
quotation system on which the shares of common stock may be
listed at the time of sale
o In negotiated transactions
o In the over-the-counter market
o Put or call option transactions relating to the shares
o Short sales relating to the shares
o In a combination of any of the above transactions
The selling stockholders may offer their shares of common stock at any
of the following prices, which may reflect discounts from the prevailing market
prices at the time of sale:
20
o Fixed prices that may be changed
o Market prices prevailing at the time of sale
o Prices related to such prevailing market prices
o At negotiated prices
o Varying prices determined at the time of sale
The selling stockholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling stockholders and/or the
purchasers of shares of common stock for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Any broker-dealer acquiring common stock from the selling stockholders
may sell the shares either directly, in its normal market-making activities,
through or to other brokers on a principal or agency basis or to its customers.
Any such sales may be at prices then prevailing on the Nasdaq Small Cap Market
or at prices related to such prevailing market prices or at negotiated prices to
its customers or a combination of such methods. The selling stockholders and any
broker-dealers that act in connection with the sale of the common stock
hereunder might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended; any commissions received by
such broker-dealers and any profit on the resale of shares sold by them as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act of 1933, as amended. We have agreed to indemnify certain of
the selling stockholder against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended. The selling stockholders
may agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act of 1933, as amended.
Because selling stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act of 1933, as amended, the
selling stockholders will be subject to the prospectus delivery requirements of
such Act. We have informed the selling stockholders that the anti-manipulative
provisions of Regulation M promulgated under the Securities and Exchange Act of
1934 may apply to their sales in the market.
The selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act
of 1933, as amended, provided they meet the criteria and conform to the
requirements of such Rule.
If we are notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
post-effective amendment to the registration statement of which this prospectus
is a part under the Securities Act of 1933, as amended, disclosing:
21
o the name of each such selling stockholder and of the
participating broker-dealer(s);
o the number of shares involved;
o the price at which such shares were sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
o other facts material to the transaction.
In addition, if we are notified by a selling stockholder that a donee,
pledgee, transferee or other successor-in-interest intends to sell more than 500
shares, we will file an appropriate supplement to this prospectus.
Except for Momar Corporation, none of the selling stockholders is a
broker-dealer or an affiliate of a broker-dealer. Momar Corporation is an
affiliate of United Equities Company, LLC, a broker-dealer registered under
Section 15 of the Securities Exchange Act of 1934, as amended. Momar Corporation
purchased its shares of common stock being offered for resale in this prospectus
in the ordinary course of business, and, at the time of that purchase, Momar
Corporation had no agreements or understandings, directly or indirectly, with
any person to distribute these shares of common stock.
There can be no assurance that the selling stockholders will sell any
or all of the shares offered by them under this prospectus.
LEGAL MATTERS
The validity of the shares of common stock offered hereby have been
passed upon by Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue,
New York, New York 10022.
EXPERTS
The consolidated financial statements of Empire Resorts, Inc.
incorporated in this prospectus by reference to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002 have been so incorporated in
reliance on the report of Friedman Alpren & Green LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Catskill Development, L.L.C.
and its subsidiaries included in this prospectus, have been audited by Bachrach,
Waschitz & Waschitz, LLP, independent public accountants, and are included
herein in reliance upon the reports of said firm and upon the authority of said
firm as experts in accounting and auditing.
22
The financial statements of Monticello Raceway Development Company, LLC
included in this prospectus, have been audited by Bachrach, Waschitz & Waschitz,
LLP, independent public accountants, and are included herein in reliance upon
the reports of said firm and upon the authority of said firm as experts in
accounting and auditing.
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CATSKILL DEVELOPMENT, LLC
Report of Bachrach, Waschitz & Waschitz, LLP, Independent Auditors...................................................F-3
Consolidated Balance Sheets as of December 31, 2001 and 2002.........................................................F-4
Consolidated Income Statements for the years ended December 31, 2001 and 2002........................................F-5
Consolidated Statements of Changes in Members' Equity for the years ended
December 31, 2001 and 2002...........................................................................................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2002.................................F-7
Notes to Consolidated Financial Statements December 31, 2001 and 2002................................................F-8
Report of Bachrach, Waschitz & Waschitz, LLP, Independent Auditors..................................................F-7
Consolidated Balance Sheet as of September 30, 2003.................................................................F-8
Consolidated Income Statement for the nine months ended September 30, 2003..........................................F-9
Consolidated Statement of Changes in Members' Equity for the nine months ended
September 30, 2003..................................................................................................F-20
Consolidated Statement of Cash Flows for the nine months ended September 30, 2003...................................F-21
Notes to Consolidated Financial Statements September 30, 2003.......................................................F-22
Report of Bachrach, Waschitz & Waschitz, LLP, Independent Auditors..................................................F-31
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001..........................................F-32
Consolidated Income Statements for the nine months ended September 30, 2002
and the year ended December 31, 2001............ .................................................................F-33
Consolidated Statements of Changes in Members' Equity for the nine months ended
September 30, 2002 and the year ended December 31, 2001.............................................................F-34
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002
and the year ended December 31, 2001...............................................................................F-35
Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001.................................F-36
INDEX TO FINANCIAL STATEMENTS OF MONTICELLO RACEWAY DEVELOPMENT COMPANY, LLC
Report of Bachrach, Waschitz & Waschitz, LLP, Independent Auditors..................................................F-44
Balance Sheets as of December 31, 2001 and 2002.....................................................................F-45
Income Statements for the years ended December 31, 2001 and 2002....................................................F-46
F-1
Statements of Changes in Members' Equity for the years ended
December 31, 2001 and 2002..........................................................................................F-47
Statements of Cash Flows for the years ended December 31, 2001 and 2002.............................................F-48
Notes to Financial Statements December 31, 2001 and 2002............................................................F-49
Report of Bachrach, Waschitz & Waschitz, LLP, Independent Auditors..................................................F-50
Balance Sheets as of September 30, 2002 and 2003....................................................................F-51
Income Statements for the nine months ended September 30, 2002 and 2003.............................................F-52
Statements of Changes in Members' Equity for the nine months ended
September 30, 2002 and 2003.........................................................................................F-53
Statements of Cash Flows for the nine months ended September 30, 2002 and 2003......................................F-54
Notes to Financial Statements September 30, 2002 and 2003...........................................................F-55
INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EMPIRE RESOR
Condensed Consolidated Pro Forma Balance Sheet as of September 30, 2003.............................................F-56
Condensed Consolidated Pro Forma Statements of Operations for the year ended
December 31, 2002...................................................................................................F-57
Condensed Consolidated Pro Forma Statements of Operations for the nine months ended
September 30, 2003..................................................................................................F-58
Notes to Pro Forma Condensed Consolidated Financial Statements......................................................F-59
F-2
REPORT OF INDEPENDENT AUDITORS
To the Members of
Catskill Development, LLC
We have audited the accompanying consolidated balance sheets of Catskill
Development, LLC as of December 31, 2002 and 2001, and the related consolidated
income statements, changes in member's equity and cash flows for the years ended
December 31, 2002 and 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Catskill
Development, LLC at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for the years ended December 31, 2002 and
2001, in conformity with United States generally accepted accounting principles.
/s/ Bachrach, Waschitz & Waschitz, LLP
June 25, 2003
Monticello, New York
F-3
Catskill Development, LLC
Consolidated Balance Sheets
December 31, 2002 and 2001
(Audited)
December 31, 2002 December 31, 2001
----------------- -----------------
ASSETS
Current Assets:
Cash & Cash Equivalents $ 643,864 $ 1,358,469
Restricted Cash 42,376 78,070
Other Current Assets 1,368,792 806,306
----------- -----------
Total Current Assets 2,055,032 2,242,845
----------- -----------
Net Property and Equipment 5,856,246 6,443,420
----------- -----------
Real Estate Development 6,068,469 5,740,599
----------- -----------
Total Assets $13,979,747 $14,426,864
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 2,585,909 $ 1,720,227
----------- -----------
Total Current Liabilities 2,585,909 1,720,227
----------- -----------
Long-Term Debt:
Notes Payable 6,821,375 6,201,250
----------- -----------
Total Long-Term Debt 6,821,375 6,201,250
----------- -----------
Members' Equity 4,572,463 6,505,387
----------- -----------
Total Liabilities and Members' Equity $13,979,747 $14,426,864
=========== ===========
See Notes To Consolidated Financial Statements
F-4
Catskill Development, LLC
Consolidated Income Statements
For the Years Ended December 31, 2002 and 2001
(Audited)
December 31, 2002 December 31, 2001
----------------- -----------------
Race Track Revenues:
Gross Wagering and Simulcasting $11,147,184 10,285,654
Non-Wagering 211,975 216,765
----------- -----------
Total Race Track Revenues 11,359,159 10,502,419
Costs and Expenses
Purses, Awards and Other 3,932,168 3,700,717
Operating Costs 2,297,216 2,216,592
General and Administrative 2,974,895 3,038,589
Depreciation 755,601 743,716
----------- -----------
Total Racetrack Costs and Expenses 9,959,880 9,699,614
----------- -----------
Net Profit From Racing Operations 1,399,279 802,805
----------- -----------
Real Estate Development Expenses:
General and Administrative 74,412 113,320
Legal Expenses 2,644,369 2,228,077
Interest Expenses 620,704 564,024
----------- -----------
Total Real Estate Development Expense 3,339,485 2,905,421
Other Income:
Interest Income 7,282 31,384
----------- -----------
Net (Loss) $(1,932,924) (2,071,232)
=========== ===========
See Notes To Consolidated Financial Statements
F-5
Catskill Development, LLC
Consolidated Statements of Changes in Member's Equity
For the Years Ended December 31, 2002 and 2001
(Audited)
Preferred Other Total
Capital Capital Accumulated Members
Contributions Contributions Deficit Equity
------------ ------------ ------------ ------------
Balance December 31, 2000 $ 15,703,893 $ 400 $ (8,152,474) $ 7,551,819
Capital Contributions 1,024,800 -- -- 1,024,800
Net (Loss) -- -- (2,071,232) (2,071,232)
------------ ------------ ------------ ------------
Balance December 31, 2001 16,728,693 400 (10,223,706) 6,505,387
Capital Adjustment (3,900) -- 3,900 --
Net (Loss) -- -- $ (1,932,924) $ (1,932,924)
------------ ------------ ------------ ------------
Balance December 31, 2002 $ 16,724,793 $ 400 $(12,152,730) $ 4,572,463
============ ============ ============ ============
See Notes To Consolidated Financial Statements
F-6
Catskill Development, LLC
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001
(Audited)
December 31, 2002 December 31, 2001
----------------- ------------------
Operating Activities:
Net Loss $(1,932,924) $(2,071,232)
Adjustments to reconcile net loss to net cash
Provided(Used) by operating activities:
Depreciation 755,601 743,716
Loss on Asset Disposal 2,819 --
Accrued Interest Not Paid 620,125 563,750
(Increase) Decrease in:
Restricted Cash 35,694 213,052
Other Current Assets (562,486) (126,507)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 865,682 144,125
----------- -----------
Net Cash Used by Operating Activities (215,489) (533,096)
----------- -----------
Investing Activities:
Purchase of Property, Plant and Equipment (171,246) (143,521)
Real Estate Development (327,870) (111,465)
----------- -----------
Net Cash Used in Investing Activities (499,116) (254,986)
----------- -----------
Financing Activities:
Member Contributions -- 1,024,800
----------- -----------
Net Cash Provided by Financing Activities -- 1,024,800
----------- -----------
Net Increase (Decrease) in Cash (714,605) 236,718
Cash at Beginning of Year 1,358,469 1,121,751
----------- -----------
Cash at End of Year $ 643,864 $ 1,358,469
=========== ===========
Supplemental Disclosures:
Interest Paid $ 579 $ 274
See Notes To Consolidated Financial Statements
F-7
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
This summary of significant accounting policies of Catskill Development,
LLC (the Company) is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management who is responsible for their
integrity and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
A. Organization and Business Activity
----------------------------------
In October 1995, Catskill Development, LLC, a New York limited liability
company, was formed to pursue the development of a proposed Native American
Casino in Monticello, New York (the "Casino Project"). The Company's
business plan envisioned three distinct lines of business: a) casino
activities; b) real estate related activities; and c) the gaming operations
related to Monticello Raceway (the "Raceway") including pari-mutuel and
future Video Lottery Terminal ("VLT") operations. Monticello Raceway
Management. Inc. (MRMI), a New York Corporation, is a wholly owned
subsidiary and was formed to hold the pari-mutuel license. Mohawk
Management, LLC (MM), a New Your Limited Liability Company, is 60% owned by
the Company and was formed to manage the St. Regis Mohawk Casino.
Monticello Casino Management, LLC (MCM), a New York Limited Liability
Company, is 60% owned by the Company and was formed to manage any other
Native American Casino at the Raceway. Both MM and MCM are inactive at this
time.
Currently, the Company conducts pari-mutuel wagering on live race meetings
for Standard bred horses and participates in intrastate and interstate
simulcast wagering at the Raceway in Monticello, New York. The Company's
operations are subject to regulation by the New York State Racing and
Wagering Board.
The Company continues to pursue a Native American Casino Project at the
Raceway. However, to this point it has been unsuccessful (see Note 6).
B. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Monticello Raceway
Managements, Inc, Mohawk Management, LLC and Monticello Casino Management,
LLC. All significant intercompany balances and transactions have been
eliminated in consolidation.
C. Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America required
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
F-8
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimated.
D. Concentrations of Credit Risk
-----------------------------
The Company maintains significant cash balances with financial institutions
in excess of the insurance provided by the Federal Deposit Insurance
Corporation (FDIC).
The Company, in the normal course of business, settles wagers for other
racetracks and is thereby exposed to credit risk. However, receivables are
generally not a significant portion of the Company's total assets and are
comprised of a large number of accounts.
E. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on account, demand deposits and
certificates of deposits with original maturities of less than three months
at acquisition.
F. Restricted Cash
---------------
Under New York States Racing, Pari-Mutuel Wagering and Breeding Law the
track is obliged to withhold a certain percentage of certain types of
wagers towards the establishment of a pool of money the use of which is
restricted to the funding of approved capital improvements, repairs and/or
certain advertising expenses. Periodically during the year the track
petitions the Racing and Wagering Board to certify that the noted
expenditures are eligible for re-imbursement from the capital improvement
fund. The unexpended balance is shown as restricted cash on the balance
sheet.
G. Property and Equipment
----------------------
Plant and equipment are recorded at cost. Depreciation is calculated using
the straight-line basis over the estimated useful lives of the related
assets as follows: 15 years for grandstands and buildings, 5 to 7 years for
equipment and 7 years for furniture and fixtures.
H. Real Estate Development
-----------------------
In connection with its real estate activities, the Company capitalizes
certain legal, architectural, engineering and environmental study fees ---
as well as other costs directly related to the development of its real
estate. (See Note 2)
I. Impairment of Assets
--------------------
In the event that facts and circumstances indicate that the carrying amount
of tangible assets or groups of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimate future undiscounted cash flows associated with the assets would be
compared to the assets' carrying amount to determine if a write-down to
market value or discounted cash flow value is required. Management has
determined that no impairment of assets has occurred.
F-9
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
J. Inventory
---------
Inventory is recorded at the lower of cost or market on a first in, first
out basis.
K. Revenue Recognition
-------------------
Wagering revenues are recognized gross of purses, stakes and awards and
pari-mutual wagering taxes. The costs relating to these amounts are shown
as "Purses, Awards and Other" in the accompanying Income Statements.
L. Advertising
-----------
The Company expenses the costs of general advertising, promotion and
marketing programs at the time the costs are incurred.
M. Income Taxes
------------
The Company was formed as a limited liability company and elected to be
treated as a partnership for tax purposes, and thus no income tax expense
is recorded in the statements. Income of the Company is taxed to the
members in their respective returns. All income from the 100% owned
subsidiary is passed to the Company because of a management contract
between the companies. Therefore no tax accrual is needed on the
subsidiary's records.
2. FIXED ASSETS
------------
December 31, 2002 December 31, 2001
----------------- -----------------
Land $ 770,000 $ 770,000
Buildings & Improvements 8,517,724 8,414,664
Furniture, Fixture & Equipment 1,253,302 1,195,613
----------- -----------
Subtotal 10,541,026 10,380,277
----------- -----------
Less: Accumulated Depreciation 4,684,780 3,936,857
----------- -----------
Net Property and Equipment $ 5,856,246 $ 6,443,420
=========== ===========
Depreciation expense was $755,601 for the year ended December 31, 2002 and
$743,716 for the year ended December 31, 2001. The above land and buildings
are security for the mortgage described in Note 3.
The Company is in the business of developing real estate for additional
gaming activities. For the years ended December 31, 2002 and 2001, the
Company had capitalized $327,870 and $111,645, respectively to continue its
efforts.
3. MEMBERS EQUITY AND SENIOR OBLIGATION
------------------------------------
The members of the Company have contributed considerable amounts of money
to the Company to fund the purchasing of the Raceway and pursuing the
approval and development of a Native American Casino on a portion of the
Raceway property. These contributions (and a priority return of 10% per
F-10
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
annum) and the mortgage described below, (with interest compounded at 10%
per annum) must be repaid before any net earnings from operations would be
available for distribution to the Company's other members. As of December
31, 2002 the aggregate amount needed to satisfy the payment of said
contributions (with priority returns) to certain members of the Company is
$29,991,362.
These preferred capital balances are subordinate to a mortgage, payable to
two members, (the "Senior Obligation"), which at December 31, 2002, and
December 31, 2001 was $6,821,375 and $6,201,250 respectively including
accrued interest at 10% per annum. All payments accrue and the principal
and accrued interest totaling $8,052,550 is due September 15, 2004.
Currently, any cash flow from the operations of the Raceway are being
retained by the Company for working capital purposes and to fund litigation
and development expenses in conjunction with other potential gaming
operations at the track. As a result, the Company is not expected to make
any distributions with respect to certain other members' interests until
the Company has achieved additional net revenues sufficient to discharge
the payment of the Senior Obligation, accrued interest, preferred capital
balance and priority returns.
The Company was formed as a limited liability company, therefore its
members individual liability is limited under the appropriate laws of the
State of New York. The Company will cease to exist July 1, 2025. The
Company's distinct lines of business: (A) casino development; (B) real
estate related activities; and (C) the gaming operations related to
Monticello Raceway including pari-mutuel and future Video Lottery Terminal
operations are owned as follows: (after the transaction of February 12,
2002 noted below and the transaction of December 10, 2002 described in Note
6 - Commitments and Contingencies)
Casino Real Estate Racing
------ ----------- ------
Voting Members:
---------------
Alpha Monticello, Inc. 48.310 25.000 36.870
Americas Tower Partners 20.000 25.000 25.000
Monticello Realty, LLC 20.000 22.500 22.500
Watertone Holdings, LP 9.190 25.000 13.130
Non-Voting Members:
-------------------
Cliff Ehrlich 1.375 1.375 1.375
Fox-Hollow Lane, LLC 1.000 1.000 1.000
Shamrock Strategies, Inc. 0.125 0.125 0.125
On February 12, 2002, Alpha Monticello, Inc. (a wholly owned subsidiary of
Empire Resorts, Inc. ("Empire"), a member of the Company, entered into an
agreement with Watertone Holdings LP ("Watertone"), also a member of the
Company, providing for the acquisition of 47.5% of Watertone's economic
interests in the casino and racetrack business components of the Company.
The transaction contemplated by this agreement closed on March 12, 2002.
F-11
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
4. RELATED PARTY TRANSACTIONS
--------------------------
As explained in Notes 1G and 2 the Company is in the business of developing
real estate for additional gaming activities. In connection with this
development the Company has paid various consulting fees to related parties
consisting of members or directors of Catskill Development, LLC. From
inception through December 31, 2002 the Company has capitalized as
development costs $868,574 of such related party transactions.
5. OPERATING LEASES
----------------
At December 31, 2002 the Company had commitments under operating leases
which end in 2006 for various pieces of equipment requiring annual lease
payments for the twelve months ending December 31 as follows:
2003 $ 151,321
2004 140,121
2005 18,451
2006 8,808
----------
Total $ 318,701
==========
Lease expense was $165,721 and $153,208 for the years ended December 31,
2002 and 2001 respectively.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Monticello Harness Horsemen's Association, Inc. has brought an action
against Monticello Raceway Management, Inc. and one of the members of the
Company seeking the sum of $1,300,0000 to be credited to the horsemen's
purse account. The suit claims that revenues received by the Raceway from
various simulcasting sources were not properly credited to their horsemen's
purse account. Management has responded vigorously to contest the case
after attempts at out-of-court settlement proved fruitless. On June 19,
2003 the case was dismissed because of lack of subject matter jurisdiction.
The plaintiff is expected to file a complaint in the proper court or to
seek alternative dispute resolution. There are disputed issues of fact
between the parties, which makes an estimate of the outcome or the amount
or range of loss difficult to gauge. In accordance with Statement of
Financial Accounting Standards No. 5, the amount of the loss, if any that
may be ultimately realized has not been reflected in the accompanying
financial statements.
In July 1996, the Company and its members entered into a series of
agreements with the Mohawk Tribe related to the development of a casino on
land adjacent to the Monticello Raceway in Monticello, New York. Pursuant
to such agreements, the Mohawk Tribe was to purchase certain land from the
Company and various affiliates of the Company were to help with the
development of a casino on the land and manage any resulting casino. More
particularly, the Tribe entered into a Gaming Facility Management Agreement
with Mohawk Management LLC ("MM"). Pursuant to such Agreement, MM was to be
provided with the exclusive right to manage the Monticello Casino for seven
(7) years from its opening and to receive certain fees for the provision of
F-12
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
management and related services.
Completion of the project contemplated by the agreements with the Mohawk
Tribe was subject to certain conditions, including the obtaining of
relevant federal and State governmental approvals. The Company, in
conjunction with its affiliates, assumed responsibility for and undertook,
seeking and obtaining all local, state and federal approvals required or
necessary to construct and operate the Casino Project. By letter dated
April 6, 2000, addressed to Governor George Pataki, Kevin Gover, Assistant
Secretary of the Department of the Interior, advised and notified the
Governor of New York that the Company's proposed casino project with the
Mohawk Tribe had been approved and specifically requested that the Governor
concur. However, on April 22, 2000, the Company became aware of a purported
letter agreement between the Mohawk Tribe and Park Place Entertainment
Corporation ("PPE"), which agreement (with two irrelevant exceptions)
purportedly gave PPE the exclusive rights to develop and manage any casino
development the Mohawk Tribe may have in the State of New York.
Since 2000, the Company has been engaged in litigation with Park Place
Entertainment ("PPE") alleging tortuous interference with contract and
business relationship in regard to the Company's agreements with the St.
Regis Mohawk Tribe. On March 14, 2003, attorneys for the Plaintiffs filed a
motion requesting the District Court to vacate a judgment, which was
adverse to the Company, issued on August 26th, 2002, on the ground that new
evidence has been found that has a material bearing on important issues
affecting the judgment. The motion indicates that audio tapes of certain
conversations concerning the transaction at issue in the case were made
available to the plaintiffs by Presidents, R.C., the plaintiff in another
case against PPE and that the tapes provide evidence which raise material
issues regarding important issues in the case and the positions taken by
the defendant. The motion requests that the judgment be vacated and that
the Plaintiffs be permitted to continue discovery and file amended
pleadings to reflect the evidence contained in the case. Although the
Company has been advised by the attorneys handling the case that the new
evidence relates to substantial important issues, it does not relate to all
of the issues or charges in the Plaintiff's original complaint or all of
the issues covered by the pending appeal in the case by the Plaintiffs.
Accordingly, no assurance can be given that the motion will be granted or
that, if granted, it will provide relief sufficient to permit the
Plaintiffs to proceed with a trial or provide evidence that will be
available for purposes of the record in the appeal.
Legal fees in connection with the aforementioned litigation amounted to
$2,644,389 and $2,228,077 for the years ended December 31, 2002 and 2001
respectively.
The Company is also a party to a various non-environmental legal
proceedings and administrative actions, all arising from the ordinary
course of business. Although it is impossible to predict the outcome of any
legal proceeding, the Company believes any liability that may finally be
determined with respect to such legal proceedings should not have a
material effect on The Company's consolidated financial position, results
of operations or cash flows.
F-13
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In October 23, 2002, the Company retained CIBC World Markets Corporation to
help it review its strategic alternatives and assist in maximizing the
value of its assets. The Company is in negotiations with a federally
recognized Native American tribe in New York and various casino management
and development entities with respect to the development of a Native
American Casino. The development of a casino at the Raceway will require
consummation of arrangements with these parties and various reviews and
approvals. No assurances can be given that such arrangements will be
entered into or that any approvals will be obtained.
On December 10, 2002, Empire reached an agreement with Bryanston Group,
Inc. ("Bryanston") (a former member of the Company) and certain other
affiliates regarding certain obligations due from and claims against the
Company. Included in the agreement with Bryanston is the acquisition of
Bryanston's interest in Catskill Development, including its voting
membership interest and preferred capital account in the Company. Bryanston
has agreed to transfer such interests to Empire.
7. VIDEO LOTTERY TERMINALS
-----------------------
In October 2001, the New York State Legislature passed a bill that expanded
the nature and scope of gaming in the state ("VLT Legislation"). The bill
was signed by the Governor on October 31, 2001. The provision of the VLT
Legislation relevant to the Company include: a) authority given to the
Governor to negotiate casino licenses for up to three Native American
casinos in the Catskills; and b) the authority for several of New York's
racetracks, including the Raceway, to operate video lottery terminal
("VLT") in their facilities. The VLT operation will be conducted by the New
York State Lottery (the "Lottery") with the racetracks functioning largely
as agents for the Lottery.
The Company received a letter from the Lottery, dated March 21, 2002,
advising the Raceway that the Lottery has completed its initial review of
the Raceway's business plan for the operation of VLT's at the Raceway
during the initial three year trial period approved by the State
Legislature. Based on such review, the Lottery has made an initial
allocation of 1,800 VLT's to the Raceway and has approved the maximum
permitted rate for compensation of 25% of revenues generated after payout
of prizes for the Raceway. The law currently provides that the Raceway must
apply 35% in the first year, escalating to 45% in years two and three, of
its compensation to enhance purses at the Raceway and each year must
dedicate 5% of its compensation to a State Breeding Development Fund.
The business plan was submitted at the request of the Lottery, and in
accordance with Lottery procedures, does not represent a final decision
with respect to the implementation of VLT's by the Company. The business
plan includes certain assumptions recommended by the Lottery and other
estimates considered preliminary by the Company The Lottery has not yet
established a firm start date or adopted regulations with regard to the
program.
On May 16, 2002, the New York State Legislature passed a bill that further
expanded the October 2001 VLT Legislation. This bill extends the test
period under the current law from three years to a period ending December
31, 2007. Further, the bill authorizes each track to enter into an
F-14
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
agreement with the organization representing its horsemen to reduce the
percentage of its vendor fees dedicated to enhancing purses at such track
during the initial three years, to an amount not less than 25 percent. That
bill was signed by the Governor on May 29, 2002. In addition, the Company's
ability to proceed with the VLT program may be impacted by its plans with
respect to casino development at the site.
8. SUBSEQUENT EVENTS
-----------------
On February 4, 2003 the Company entered into a Letter of Intent with
Empire, its partner in developing gaming activities at the Monticello
Raceway (the "Raceway") and other related entities. The agreement provides
for Empire to acquire a 48 year ground lease on the Raceway and contiguous
properties, together with all of the Company's development and management
rights with respect to the site and related gaming activities, in exchange
for an 80.25% position in Empire's common stock.
The Letter of Intent provides for the Company to lease its 230-acre Raceway
property to Empire for a period of 48 years for an annual base rent of
$1,800,000. Lease terms are to contain certain options for Empire to
acquire title to portions of the property. Empire will have the right to
purchase a 29-acre parcel for the purpose of placing it in trust for a
Native American Tribe or Nation at the purchase price of $1. The exercise
of such option will require obtaining necessary federal and state
approvals. In addition, the remaining property may be purchased within two
years of the opening of a casino at the present value of the ground lease
at the time of such exercise.
The agreement is subject to the execution of definitive agreements,
approvals by Empire's Board of Directors and an opinion that the
transaction will be tax-free to all parties and other technical
requirements, including a fairness opinion. No assurance can be given that
the transactions provided for in the Letter of Intent will ultimately occur
or will occur at the times and on the terms and conditions contained in the
Letter of Intent.
On April 3, 2003, the Cayuga Nation, a New York State based federally
recognized Indian Nation (the "Cayuga Nation"), the Company and certain of
the Company affiliates, including a subsidiary of the Company entered into
a series of agreements which provide for the development of a trust land
casino adjacent to the Raceway. In furtherance of these transactions, on
April 10, 2003, the Cayuga Nation, Empire and the Company, officially filed
with the Eastern Regional Office of the Bureau of Indian Affairs, an
application requesting that the Secretary of the Interior acquire in trust
on behalf of the Cayuga Nation a 30 acre parcel of land in Monticello, New
York to be used for gaming purposes. This transaction, if completed, gives
Empire control of the Raceway and all development rights for the proposed
Native American casino and any potential future video lottery terminal
operations. The Company believes this will strengthen our ability to obtain
new financing on reasonable terms and our long-term viability and hopes
that this transaction will close sometime in the third quarter of 2003,
although there are a number of approvals that must be obtained and
conditions that must be met.
F-15
Catskill Development, LLC
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
On May 15, 2003, New York State enacted legislation to enhance the
incentives for racetracks in the State to participate in the State's Video
Lottery program. Although legislation had authorized the program earlier,
none of the racetracks authorized to participate in the program had found
the terms sufficiently attractive to justify the investment required to
participate in the program. Under the newly enacted legislative amendments,
the initial term of the program has been extended to 10-years from the date
of inception and permits year round operations with extended hours.
Approximately 29% of total VLT revenue received is to be distributed to the
tracks and their horsemen/ breeders associations. A percentage of VLT
revenues is to be made available to provide gradually increasing purses for
the horsemen and for a breeding fund, thus improving the quality of racing
at the track. During the initial eighteen months of the program, the NY
State Lottery has the ability to approve the opening of temporary VLT
structures -- while more comprehensive construction takes place.
Pursuant to the original legislation, the New York State Lottery made an
allocation of 1,800 VLT's to Monticello Raceway. If market conditions
permit, additional machines may be added without the need for additional
legislation.
F-16
ACCOUNTANTS' REPORT
To the Members of
Catskill Development, LLC.
We have reviewed the accompanying consolidated balance sheet of Catskill
Development, LLC as of September 30, 2003 and the related consolidated income
statement, changes in members equity, and cash flows for the nine months then
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these consolidated financial statements is the
representation of the management of Catskill Development, LLC.
A review consists principally of inquires of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope that an
audit in accordance with generally accepted auditing standard, the objective of
which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for them
to be in conformity with generally accepted accounting principles.
As discussed in Note 10 certain conditions indicate that the Company may be
unable to continue as a going concern. The accompanying financial statements do
not include any adjustments to the financial statements that might be necessary
should the Company be unable to continue as a going concern.
/s/ Bachrach, Waschitz & Waschitz, LLP
October 30, 2003
Monticello, New York
F-17
Catskill Development, LLC
Consolidated Balance Sheet
September 30, 2003
(Unaudited)
September 30, 2003
------------------
ASSETS
Current Assets:
Cash & Cash Equivalents $ 809,179
Restricted Cash 137,217
Accounts Receivable 601,403
Inventory 6,183
Prepaid Expenses 297,077
Other Current Assets 3,186
-----------
Total Current Assets 1,854,245
-----------
Property, Plant and Equipment
Land 770,000
Building and Improvements 9,004,824
Furniture, Fixtures and Equipment 1,292,159
-----------
Subtotal 11,066,983
Less: Accumulated Depreciation 5,211,186
-----------
Net Property, Plant and Equipment 5,855,797
-----------
Real Estate Development 7,645,213
-----------
Total Assets $15,355,255
===========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts Payable 2,821,736
Notes Payable - Senior Obligation 5,000,000
Accrued Interest Payable 2,320,500
Other Current Liabilities 502,571
Accrued Expenses $ 65,308
-----------
Total Current Liabilities 10,710,155
-----------
Members' Equity 4,645,140
-----------
Total Liabilities and Members' Equity $15,355,255
===========
See Accompanying Notes And Accountant's Report
F-18
Catskill Development, LLC
Consolidated Income Statement
For the Nine Months Ended September 30, 2003
(Unaudited)
September 30, 2003
------------------
Race Track Revenues:
Gross Wagering and Simulcasting $ 7,337,205
Non-Wagering 135,353
Total Race Track Revenues 7,472,558
---------------
Costs and Expenses
Purses, Awards and Other 2,524,030
Operating Costs 1,684,435
General and Administrative 2,484,025
Depreciation 526,408
---------------
Total Costs and Expenses 7,218,898
---------------
Net Profit From Racing Operations $ 253,660
---------------
Real Estate Development Expenses:
General and Administrative 154,048
Legal Expenses 1,125,448
Interest Expenses 499,628
---------------
Total Real Estate Development Expense 1,779,124
---------------
Other Income:
Interest Income 2,847
---------------
Net (Loss) $ (1,522,617)
===============
See Accompanying Notes And Accountant's Report
F-19
Catskill Development, LLC
Consolidated Statements of Changes in Member's Equity
For the Nine Months Ended September 30, 2003
(Unaudited)
Preferred Other Total
Capital Capital Accumulated Members
Contributions Contributions Deficit Equity
------------ ------------ ------------ ------------
Balance December 31, 2002 $ 16,724,793 $ 400 $(12,152,731) $ 4,572,462
Capital Contributions 1,314,498 -- -- 1,314,498
Other 280,797 280,797
Net (Loss) -- -- (1,522,617) (1,522,617)
------------ ------------ ------------ ------------
Balance September 30, 2003 $ 18,320,088 400 (13,675,348) 4,645,140
============ ============ ============ ============
See Accompanying Notes And Accountant's Report
F-20
Catskill Development, LLC
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 2003
(Unaudited)
September 30, 2003
------------------
Operating Activities:
Net Loss $(1,522,617)
Adjustments to reconcile net loss to net cash
Provided(Used) by operating activities:
Depreciation 526,408
Accrued Interest Not Paid 499,125
(Increase) Decrease in:
Restricted Cash (94,841)
Accounts Receivable 426,912
Inventory 830
Prepaid Expenses 16,354
Other Current Assets 16,847
Increase (Decrease) in:
Accounts Payable 632,473
Other Current Liabilities 494,740
Accrued Expenses (42,713)
-----------
Net Cash Provided (Used) by Operating Activities 953,518
-----------
Investing Activities:
Purchase of Property, Plant and Equipment (525,957)
Real Estate Development (1,576,744)
-----------
Net Cash Used in Investing Activities (2,102,701)
-----------
Financing Activities:
Member Contributions 1,314,498
-----------
Net Cash Provided by Financing Activities 1,314,498
-----------
Net Increase (Decrease) in Cash 165,315
Cash at Beginning of Period 643,864
-----------
Cash at End of Period $ 809,179
===========
Supplemental Disclosures:
Interest Paid $ 503
Non-Cash Settlement of Accounts Payable Liability $ 280,797
See Accompanying Notes And Accountant's Report
F-21
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
This summary of significant accounting policies of Catskill Development,
LLC (the Company) is presented to assist in understanding the Company's
financial statements. These accounting policies have been consistently
applied in the preparation of the financial statements, and all normal and
recurring adjustments and accruals considered necessary for a fair
presentation have been included. Operating results for the nine month
period ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003
A. Organization and Business Activity
----------------------------------
In October 1995, Catskill Development, LLC, a New York limited liability
company, was formed to pursue the development of a proposed Native American
Casino in Monticello, New York (the "Casino Project"). The Company's
business plan envisioned three distinct lines of business: a) casino
activities; b) real estate related activities; and c) the gaming operations
related to Monticello Raceway (the "Raceway") including pari-mutuel and
future Video Lottery Terminal ("VLT") operations. Monticello Raceway
Management. Inc. (MRMI), a New York Corporation, is a wholly owned
subsidiary and was formed to hold the pari-mutuel license. . Mohawk
Management, LLC (MM), a New Your Limited Liability Company, is 60% owned by
the Company and was formed to manage the St. Regis Mohawk Casino.
Monticello Casino Management, LLC (MCM), a New York Limited Liability
Company, is 60% owned by the Company and was formed to manage any other
Native American Casino at the Raceway. Both MM and MCM are inactive at this
time.
Currently, the Company conducts pari-mutuel wagering on live race meetings
for Standard bred horses and participates in intrastate and interstate
simulcast wagering at the Raceway in Monticello, New York. The Company's
operations are subject to regulation by the New York State Racing and
Wagering Board.
The Company continues to pursue a Native American Casino Project at the
Raceway. However, to this point it has been unsuccessful (see Note 8).
B. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company's subsidiaries, Monticello Raceway Managements, Inc, Mohawk
Management, LLC and Monticello Casino Management, LLC. All significant
inter-company balances and transactions have been eliminated in
consolidation.
C. Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America required
management to make estimates and assumptions that affect the reported
F-22
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimated.
D. Concentrations of Credit Risk
-----------------------------
The Company maintains significant cash balances with financial institutions
in excess of the insurance provided by the Federal Deposit Insurance
Corporation (FDIC).
The Company, in the normal course of business, settles wagers for other
racetracks and is thereby exposed to credit risk. However, receivables are
generally not a significant portion of the Company's total assets and are
comprised of a large number of accounts.
E. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on account, demand deposits and
certificates of deposits with original maturities of less than three months
at acquisition.
F. Restricted Cash
---------------
Under New York States Racing, Pari-Mutuel Wagering and Breeding Law the
track is obliged to withhold a certain percentage of certain types of
wagers towards the establishment of a pool of money the use of which is
restricted to the funding of approved capital improvements, repairs and/or
certain advertising expenses. Periodically during the year the track
petitions the Racing and Wagering Board to certify that the noted
expenditures are eligible for re-imbursement from the capital improvement
fund. The unexpended balance is shown as restricted cash on the balance
sheet.
G. Property, and Equipment
-----------------------
Plant and equipment are recorded at cost. Depreciation is calculated using
the straight-line basis over the estimated useful lives of the related
assets as follows: 15 years for grandstands and buildings, 5 to 7 years for
equipment and 7 years for furniture and fixtures.
H. Real Estate Development
-----------------------
In connection with its real estate activities, the Company capitalizes
certain legal, architectural, engineering and environmental study fees as
well as other costs directly related to the development of its real estate.
(See Note 2)
I. Impairment of Assets
--------------------
In the event that facts and circumstances indicate that the carrying amount
of tangible assets or groups of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimate future undiscounted cash flows associated with the assets would be
compared to the assets' carrying amount to determine if a write-down to
F-23
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
market value or discounted cash flow value is required. Management has
determined that no impairment of assets has occurred.
J. Inventory
---------
Inventory is recorded at the lower of cost or market on a first in, first
out basis.
K. Revenue Recognition
-------------------
Wagering revenues are recognized gross of purses, stakes and awards and
pari-mutual wagering taxes. The costs relating to these amounts are shown
as "Purses, Awards and Other" in the accompanying Income Statements.
L. Advertising
-----------
The Company expenses the costs of general advertising, promotion and
marketing programs at the time the costs are incurred.
M. Income Taxes
------------
The Company was formed as a limited liability company and elected to be
treated as a partnership for tax purposes, and thus no income tax expense
is recorded in the statements. Income of the Company is taxed to the
members in their respective returns. All income from the 100% owned
subsidiary is passed to the Company because of a management contract
between the companies. Therefore no tax accrual is needed on the
subsidiary's records.
2. FIXED ASSETS
------------
September 30, 2003
------------------
Land $ 770,000
Buildings & Improvements 9,004,824
Furniture, Fixtures & Equipment 1,292,159
-----------
Subtotal 11,066,983
Less: Accumulated Depreciation 5,211,186
-----------
Net Property and Equipment $ 5,855,797
===========
Depreciation expense was $526,408 = for the nine months ended September 30,
2003. The above land and buildings are security for the mortgage described
in Note 3.
The Company is in the business of developing real estate for additional
gaming activities. For the nine months ended September 30, 2003, the
Company had capitalized $1,576,744 to continue its efforts.
3. MEMBERS EQUITY AND SENIOR OBLIGATION
------------------------------------
The members of the Company have contributed considerable amounts of money
to the Company to fund the purchasing of the Raceway and pursuing the
approval and development of a Native American Casino on a portion of the
F-24
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
Raceway property. These contributions (and a priority return of 10% per
annum) and the mortgage described below, (with interest compounded at 10%
per annum) must be repaid before any net earnings from operations would be
available for distribution to the Company's other members. As of September
30, 2003 the aggregate amount needed to satisfy the payment of said
contributions (with priority returns) to certain members of the Company is
$34,717,799.
These preferred capital balances are subordinate to a mortgage, payable to
two members, (the "Senior Obligation"), which at September 30, 2003 was
$7,320,500 including accrued interest at 10% per annum. The Senior
Obligation matures on September 15, 2004. Currently, any cash flow from the
operations of the Raceway are being retained by the Company for working
capital purposes and to fund litigation and development expenses in
conjunction with other potential gaming operations at the track. As a
result, the Company is not expected to make any distributions with respect
to certain other members' interests until the Company has achieved
additional net revenues sufficient to discharge the payment of the Senior
Obligation, accrued interest, preferred capital balance and priority
returns.
The Company was formed as a limited liability company, therefore its
members individual liability is limited under the appropriate laws of the
State of New York. The Company will cease to exist July 1, 2025. The
Company's distinct lines of business: (A) casino development; (B) real
estate related activities; and (C) the gaming operations related to
Monticello Raceway including pari-mutuel and future Video Lottery Terminal
operations are owned as follows:
Casino Real Estate Racing
------------- -------------- -----------
Voting Members
Alpha Monticello, Inc. 48.310 25.000 36.870
Americas Tower Partners 20.000 25.000 25.000
Monticello Realty, LLC 20.000 22.500 22.500
Watertone Holdings, LP 9.190 25.000 13.130
Non-Voting Members
Cliff Ehrlich 1.375 1.375 1.375
Fox-Hollow Lane, LLC 1.000 1.000 1.000
Shamrock Strategies, Inc. 0.125 0.125 0.125
4. RELATED PARTY TRANSACTIONS
--------------------------
As explained in Notes 1G and 2 the Company is in the business of developing
real estate for additional gaming activities. In connection with this
development the Company has paid various consulting fees to related parties
consisting of members or directors of Catskill Development, LLC. From
inception through September 30, 2003 the Company has capitalized as
development costs $976,858 of such related party transactions.
F-25
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
5. OPERATING LEASES
----------------
At September 30, 2003 the Company had commitments under operating leases
which end in 2006 for various pieces of equipment requiring annual lease
payments for the twelve months ending September 30 as follows:
2004 $150,121
2005 43,247
2006 13,209
--------
Total $206,577
========
Lease expense was $118,594 for the nine months ended September 30, 2003.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Monticello Harness Horsemen's Association, Inc. has brought an action
against Monticello Raceway Management, Inc. and one of the members of the
Company seeking the sum of $1,562,776 to be credited to the horsemen's
purse account and an additional $4,000,000 in punitive damages. The suit
claims that revenues received by the Raceway from various simulcasting
sources were not properly credited to their horsemen's purse account. A
separate action seeking $50,000 questions the proper assignment of stalls
to the Horseman. Management has responded vigorously to contest the case
after attempts at out-of-court settlement proved fruitless. There are
disputed issues of fact between the parties, which makes an estimate of the
outcome or the amount or range of loss difficult to gauge. In accordance
with Statement of Financial Accounting Standards No. 5, the amount of the
loss, if any that may be ultimately realized has not been reflected in the
accompanying financial statements.
In July 1996, the Company and its members entered into a series of
agreements with the Mohawk Tribe related to the development of a casino on
land adjacent to the Monticello Raceway in Monticello, New York. Pursuant
to such agreements, the Mohawk Tribe was to purchase certain land from the
Company and various affiliates of the Company were to help with the
development of a casino on the land and manage any resulting casino. More
particularly, the Tribe entered into a Gaming Facility Management Agreement
with Mohawk Management LLC ("MM"). Pursuant to such Agreement, MM was to be
provided with the exclusive right to manage the Monticello Casino for seven
(7) years from its opening and to receive certain fees for the provision of
management and related services.
Completion of the project contemplated by the agreements with the Mohawk
Tribe was subject to certain conditions, including the obtaining of
relevant federal and State governmental approvals. The Company, in
conjunction with its affiliates, assumed responsibility for and undertook,
seeking and obtaining all local, state and federal approvals required or
necessary to construct and operate the Casino Project. By letter dated
April 6, 2000, addressed to Governor George Pataki, Kevin Gover,
F-26
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
Assistant Secretary of the Department of the Interior, advised and notified
the Governor of New York that the Company's proposed casino project with
the Mohawk Tribe had been approved and specifically requested that the
Governor concur. However, on April 22, 2000, the Company became aware of a
purported letter agreement between the Mohawk Tribe and Park Place
Entertainment Corporation ("PPE"), which agreement (with two irrelevant
exceptions) purportedly gave PPE the exclusive rights to develop and manage
any casino development the Mohawk Tribe may have in the State of New York.
Since 2000, the Company has been engaged in litigation with Park Place
Entertainment ("PPE") alleging tortuous interference with contract and
business relationship in regard to the Company's agreements with the St.
Regis Mohawk Tribe. On March 14, 2003, attorneys for the Plaintiffs filed a
motion requesting the District Court to vacate a judgment, which was
adverse to the Company, issued on August 26th, 2002, on the ground that new
evidence has been found that has a material bearing on important issues
affecting the judgment. The motion indicates that audio tapes of certain
conversations concerning the transaction at issue in the case were made
available to the plaintiffs by Presidents, R.C., the plaintiff in another
case against PPE and that the tapes provide evidence which raise material
issues regarding important issues in the case and the positions taken by
the defendant. The motion requests that the judgment be vacated and that
the Plaintiffs be permitted to continue discovery and file amended
pleadings to reflect the evidence contained in the case. Although the
Company has been advised by the attorneys handling the case that the new
evidence relates to substantial important issues, it does not relate to all
of the issues or charges in the Plaintiff's original complaint or all of
the issues covered by the pending appeal in the case by the Plaintiffs.
Legal fees in connection with the aforementioned litigation amounted to
$1,125,448 for the nine months ended September 30, 2003.
The Company is also a party to a various non-environmental legal
proceedings and administrative actions, all arising from the ordinary
course of business. Although it is impossible to predict the outcome of any
legal proceeding, the Company believes any liability that may finally be
determined with respect to such legal proceedings should not have a
material effect on The Company's consolidated financial position, results
of operations or cash flows.
In October 23, 2002, the Company retained CIBC World Markets Corporation to
help it review its strategic alternatives and assist in maximizing the
value of its assets. The Company is in negotiations with a federally
recognized Native American tribe in New York and various casino management
and development entities with respect to the development of a Native
American Casino. The development of a casino at the Raceway will require
consummation of arrangements with these parties and various reviews and
approvals. No assurances can be given that such arrangements will be
entered into or that any approvals will be obtained.
On July 3, 2003 the Company entered into a Definitive Agreement with Empire
Resorts, Inc (Empire), its partner in developing gaming activities at the
Raceway and other related entities. The agreement provides for Empire to
acquire a 48 year ground lease on the Raceway and contiguous properties,
F-27
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
together with all of the Company's development and management rights with
respect to the site and related gaming activities, in exchange for an
80.25% position in Empire's common stock.
The Definitive Agreement provides for the Company to lease its 230-acre
Raceway property to Empire for a period of 48 years for an annual base rent
of $1,800,000. The Lease terms are to contain certain options for the
Company to acquire title to portions of the property. The exercise of such
option will require obtaining necessary federal and state approvals to
create a Native American gaming facility on the property. If such an
approval is reached, the Company will have the ability to apply any
proceeds that Catskill receives for the Casino project, in relation to the
land placed in trust, and apply those proceeds against the negotiated
purchase price.
7. VIDEO LOTTERY TERMINALS
-----------------------
In October 2001, the New York State Legislature passed a bill that expanded
the nature and scope of gaming in the state ("VLT Legislation"). The bill
was signed by the Governor on October 31, 2001. The provision of the VLT
Legislation relevant to the Company include: a) authority given to the
Governor to negotiate casino licenses for up to three Native American
casinos in the Catskills; and b) the authority for several of New York's
racetracks, including the Raceway, to operate video lottery terminal
("VLT") in their facilities. The VLT operation will be conducted by the New
York State Lottery (the "Lottery") with the racetracks functioning largely
as agents for the Lottery.
The Company received a letter from the Lottery, dated March 21, 2002,
advising the Raceway that the Lottery has completed its initial review of
the Raceway's business plan for the operation of VLT's at the Raceway
during the initial three year trial period approved by the State
Legislature. Based on such review, the Lottery has made an initial
allocation of 1,800 VLT's to the Raceway
The business plan was submitted at the request of the Lottery, and in
accordance with Lottery procedures, does not represent a final decision
with respect to the implementation of VLT's by the Company. The business
plan includes certain assumptions recommended by the Lottery and other
estimates considered preliminary by the Company The Lottery has not yet
established a firm start date or adopted regulations with regard to the
program.
On May 15, 2003, New York State enacted legislation to enhance the
incentives for racetracks in the State to participate in the State's Video
Lottery program. Although legislation had authorized the program earlier,
none of the racetracks authorized to participate in the program had found
the terms sufficiently attractive to justify the investment required to
participate in the program. Under the newly enacted legislative amendments,
the initial term of the program has been extended to 10-years from the date
of inception and permits year round operations with extended hours.
Approximately 29% of total VLT revenue received is to be distributed to the
tracks and their horsemen/ breeders associations. A percentage of VLT
revenues is to be made available to provide gradually increasing purses for
the horsemen and for a breeding fund, thus improving the quality of racing
F-28
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
at the track. During the initial eighteen months of the program, the NY
State Lottery has the ability to approve the opening of temporary VLT
structures -- while more comprehensive construction takes place. Pursuant
to the original legislation, the New York State Lottery made an allocation
of 1,800 VLT's to Monticello Raceway. If market conditions permit,
additional machines may be added without the need for additional
legislation.
On July 17, 2003 The New York State Supreme Court decided that the
Legislature did not violate the state constitution when it authorized the
governor to sign accords with Indian tribes allowing them to build six new
casinos. Judge Joseph Teresi, an Albany County judge, also ruled that
racetracks could install video lottery terminals and the state could take
part in interstate lotteries.
8. CASINO DEVELOPMENT
------------------
On April 3, 2003, the Cayuga Nation, a New York State based federally
recognized Indian Nation (the "Cayuga Nation"), the Company and certain of
the Company affiliates, including a subsidiary of the Company entered into
a series of agreements which provide for the development of a trust land
casino adjacent to the Raceway. In furtherance of these transactions, on
April 10, 2003, the Cayuga Nation, Empire and the Company, officially filed
with the Eastern Regional Office of the Bureau of Indian Affairs, an
application requesting that the Secretary of the Interior acquire in trust
on behalf of the Cayuga Nation a 30 acre parcel of land in Monticello, New
York to be used for gaming purposes. This transaction, if completed, gives
Empire control of the Raceway and all development rights for the proposed
Native American casino and any potential future video lottery terminal
operations. The Company believes this will strengthen our ability to obtain
new financing on reasonable terms and our long-term viability and hopes
that this transaction will close sometime in the fourth quarter of 2003,
although there are a number of approvals that must be obtained and
conditions that must be met.
9. SUBSEQUENT EVENTS
-----------------
On October 29, 2003, MRMI consummated a $3,500,000 loan agreement with The
Berkshire Bank. Pursuant to the terms of a planned consolidation with
Empire, MRMI is scheduled to become a wholly owned subsidiary of Empire.
Prior to the consummation of the loan, the Company and MRMI entered into a
48 year lease with regard to the Monticello Raceway property, which
includes an option to purchase the property. The loan is secured by a
leasehold mortgage, a pledge of raceway revenues and security interests in
certain equipment. The leasehold mortgage loan bears interest at 8.75% and
matures in two years, with monthly principal and interest payments based on
a 48 month amortization schedule. Proceeds from the loan are to be used
primarily to pay for design and development costs and site work in
connection with the planned improvements to Monticello Raceway in
preparation for video lottery operations. Total costs of the improvements
are expected to exceed $20,000,000. Empire has entered into a surety
agreement with The Berkshire Bank to guarantee the loan. A portion of the
proceeds from the loan is also expected to pay certain administrative
expenses of Empire.
F-29
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2003
10. GOING CONCERN
-------------
The Company has sustained net losses over the past few years and, at
September 30, 2003, had a net working capital deficit of $8,855,870. The
calculation of the deficit includes the liability of the Senior Obligation
that is secured by a mortgage on the Raceway property, which at September
30, 2003 was $7,320,500. This obligation is due September 15, 2004 with a
maturity liability of $8,052,550. If the proposed consolidation occurs
described in Note 6, the Senior Obligation will be satisfied thru the
consideration included in the transaction and the liability will be removed
from the financial statements. The removal of the Senior Obligation from
the current liabilities would reduce the working capital deficit to
$1,535,370. To meet current and future obligations associated with the
operations of the Company, the Company through a subsidiary and affiliate
has raised additional capital (See Note 9).
As described in Note 6, on July 3, 2003 the Company entered into an
agreement with Empire. The agreement with Empire has been approved by a
special committee of the Company's Board of Directors in September 2003 The
special committee engaged Kane Reece Associates to act as its financial
advisor in connection with the proposed consolidation. In connection with
its engagement, the special committee requested that Kane Reece Associates
evaluate the fairness of the consolidation's terms to Empire and its
stockholders from a financial point of view. On September 8, 2003, Kane
Reece Associates delivered a written opinion to Empire's special committee
stating that, as of that date and based on and subject to the matters
described in its opinion, the consolidation's terms were fair, from a
financial point of view, to the holders of Empire's common stock.
Additional requirements are still outstanding to include an opinion that
the transaction will be tax-free to all parties. No assurance can be given
that such transaction will ultimately occur or will occur at the times or
on the terms and conditions contained in the agreement.
The Company's consolidated financial statements have been presented on the
basis that the Company is a going concern. Accordingly, the consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities or any other adjustments that might
result should the Company be unable to continue as a going concern.
F-30
REPORT OF INDEPENDENT AUDITORS
To the Members of
Catskill Development, LLC
We have audited the accompanying consolidated balance sheets of Catskill
Development, LLC as of September 30, 2002 and December 31, 2001, and the related
consolidated statements of income, changes in members equity and cash flows for
the nine months ended September 30, 2002 and the year ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Catskill
Development, LLC at September 30, 2002 and December 31, 2001, and the
consolidated results of its operations and its cash flows for the nine months
ended September 30, 2002 and the year ended December 31, 2001, in conformity
with United States generally accepted accounting principles.
/s/ Bachrach, Waschitz & Waschitz, LLP
February 5, 2003
Monticello, New York
F-31
Catskill Development, LLC
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Audited)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Current Assets:
Cash & Cash Equivalents $ 955,504 $ 1,358,469
Restricted Cash 114,578 78,070
Accounts Receivable 566,800 645,931
Inventory 7,533 7,428
Prepaid Expenses 272,608 135,774
Other Current Assets 15,746 17,173
----------- -----------
Total Current Assets 1,932,769 2,242,845
----------- -----------
Property, Plant and Equipment
Land 770,000 770,000
Building and Improvements 8,447,824 8,414,664
Furniture, Fixtures and Equipment 1,301,489 1,195,613
-----------
Subtotal 10,519,313 10,380,277
Less: Accumulated Depreciation 4,495,570 3,936,857
----------- -----------
Net Property, Plant and Equipment 6,023,743 6,443,420
----------- -----------
Real Estate Development 5,776,206 5,740,599
----------- -----------
Total Assets $13,732,718 $14,426,864
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts Payable 2,394,691 1,436,971
Other Current Liabilities 701 179,743
Accrued Expenses 90,736 103,513
----------- -----------
Total Current Liabilities $ 2,486,128 $ 1,720,227
----------- -----------
Long-Term Debt:
Notes Payable - Senior Obligation 5,000,000 5,000,000
Accrued Interest Payable 1,655,000 1,201,250
-----------
Total Long-Term Debt 6,655,000 6,201,250
----------- -----------
Members' Equity 4,591,590 6,505,387
----------- -----------
Total Liabilities and Members' Equity $13,732,718 $14,426,864
=========== ===========
See Notes To Consolidated Financial Statements
F-32
Catskill Development, LLC
Consolidated Income Statements
For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001
(Audited)
September 30, 2002 December 31, 2001
------------------ -----------------
Race Track Revenues:
Gross Wagering and Simulcasting $ 8,520,953 10,285,654
Non-Wagering 176,925 216,765
----------- -----------
Total Race Track Revenues 8,697,878 10,502,419
----------- -----------
Costs and Expenses
Purses, Awards and Other 3,001,331 3,700,717
Operating Costs 1,736,805 2,216,592
General and Administrative 2,339,930 3,038,589
Depreciation 566,390 743,716
----------- -----------
Total Racetrack Costs and Expenses 7,644,456 9,699,614
----------- -----------
Net Profit From Racing Operations 1,053,422 802,805
Real Estate Development Expenses:
General and Administrative 42,371 113,320
Legal Expenses 2,476,420 2,228,077
Interest Expenses 454,230 564,024
----------- -----------
Total Real Estate Development Expense 2,973,021 2,905,421
Other Income:
Interest Income 5,802 31,384
----------- -----------
Net (Loss) $(1,913,797) (2,071,232)
=========== ===========
See Notes To Consolidated Financial Statements
F-33
Catskill Development, LLC
Consolidated Statements of Changes in Member's Equity
For the Nine Months Ended September 30, 2002
and the Year Ended December 31, 2001
(Audited)
Preferred Other Total
Capital Capital Accumulated Members
Contributions Contributions Deficit Equity
------------- ------------- ----------- ------------
Balance December 31, 2000 $ 15,703,893 $ 400 $ (8,152,474) $ 7,551,819
Capital Contributions 1,024,800 -- -- 1,024,800
Net (Loss) -- -- (2,071,232) (2,071,232)
------------ ------------ ------------ ------------
Balance December 31, 2001 16,728,693 400 (10,223,706) 6,505,387
Net (Loss) -- -- $ (1,913,797) $ (1,913,797)
------------ ------------ ------------ ------------
Balance September 30, 2002 $ 16,728,693 $ 400 $(12,137,503) $ 4,591,590
============ ============ ============ ============
See Notes To Consolidated Financial Statements
F-34
Catskill Development, LLC
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001
(Audited)
September 30, 2002 December 31, 2001
------------------ -----------------
Operating Activities:
Net Loss $(1,913,797) $(2,071,232)
Adjustments to reconcile net loss to net cash
Provided(Used) by operating activities:
Depreciation 566,390 743,716
Accrued Interest Not Paid 453,750 563,750
Loss on Asset Disposal 2,819 --
(Increase) Decrease in:
Restricted Cash (36,508) 213,052
Accounts Receivable 79,131 (131,449)
Inventory (105) 590
Prepaid Expenses (136,834) (5,568)
Other Current Assets 1,427 9,920
Increase (Decrease) in:
Accounts Payable 957,720 (78,884)
Other Current Liabilities (179,042) 219,934
Accrued Expenses (12,777) 3,075
----------- -----------
Net Cash Used by Operating Activities (217,826) (533,096)
----------- -----------
Investing Activities:
Purchase of Property, Plant and Equipment (149,532) (143,521)
Real Estate Development (35,607) (111,465)
----------- -----------
Net Cash Used in Investing Activities (185,139) (254,986)
----------- -----------
Financing Activities:
Member Contributions -- 1,024,800
----------- -----------
Net Cash Provided by Financing Activities -- 1,024,800
----------- -----------
Net Increase (Decrease) in Cash (402,965) 236,718
Cash at Beginning of Year 1,358,469 1,121,751
----------- -----------
Cash at End of Year $ 955,504 $ 1,358,469
=========== ===========
Supplemental Disclosures:
Interest Paid $ 480 $ 274
See Notes To Consolidated Financial Statements
F-35
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
This summary of significant accounting policies of Catskill Development,
LLC (the Company) is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management who is responsible for their
integrity and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
A. Organization and Business Activity
----------------------------------
In October 1995, Catskill Development, LLC, a New York limited liability
company, was formed to pursue the development of a proposed Native American
Casino in Monticello, New York (the "Casino Project"). The Company's
business plan envisioned three distinct lines of business: a) casino
activities; b) real estate related activities; and c) the gaming operations
related to Monticello Raceway (the "Raceway") including pari-mutuel and any
potential future Video Lottery Terminal ("VLT") operations. Monticello
Raceway Management. Inc. (MRMI), a New York Corporation, is a wholly owned
subsidiary and was formed to hold the pari-mutuel license.
Currently, the Company conducts pari-mutuel wagering on live race meetings
for Standardbred horses and participates in intrastate and interstate
simulcast wagering at the Raceway in Monticello, New York. The Company's
operations are subject to regulation by the New York State Racing and
Wagering Board.
The Company continues to pursue a Native American Casino Project at the
Raceway. However, to this point it has been unsuccessful (see Note 6).
B. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Monticello Raceway
Managements, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
C. Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America required
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimated.
F-36
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
D. Concentrations of Credit Risk
-----------------------------
The Company maintains significant cash balances with financial institutions
in excess of the insurance provided by the Federal Deposit Insurance
Corporation (FDIC).
The Company, in the normal course of business, settles wagers for other
racetracks and is thereby exposed to credit risk. However, receivables are
generally not a significant portion of the Company's total assets and are
comprised of a large number of accounts.
E. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on account, demand deposits and
certificates of deposits with original maturities of less than three months
at acquisition.
F. Restricted Cash
---------------
Under New York States Racing, Pari-Mutuel Wagering and Breeding Law the
track is obliged to withhold a certain percentage of certain types of
wagers towards the establishment of a pool of money the use of which is
restricted to the funding of approved capital improvements, repairs and/or
certain advertising expenses. Periodically during the year the track
petitions the Racing and Wagering Board to certify that the noted
expenditures are eligible for re-imbursement from the capital improvement
fund. The unexpended balance is shown as restricted cash on the balance
sheet.
G. Property, Plant and Equipment
-----------------------------
Plant and equipment are recorded at cost. Depreciation is calculated using
the straight-line basis over the estimated useful lives of the related
assets as follows: 15 years for grandstands and buildings, 5 to 7 years for
equipment and 7 years for furniture and fixtures.
H. Real Estate Development
-----------------------
In connection with its real estate activities, the Company capitalizes
certain legal, architectural, engineering and environmental study fees as
well as other costs directly related to the development of its real estate.
(See Note 2)
I. Impairment of Assets
--------------------
In the event that facts and circumstances indicate that the carrying amount
of tangible assets or groups of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimate future undiscounted cash flows associated with the assets would be
compared to the assets' carrying amount to determine if a write-down to
market value or discounted cash flow value is required. Management has
determined that no impairment of assets has occurred.
J. Inventory
---------
Inventory is recorded at the lower of cost or market on a first in, first
out basis.
F-37
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
K. Revenue Recognition
-------------------
Wagering revenues are recognized gross of purses, stakes and awards and
pari-mutual wagering taxes. The costs relating to these amounts are shown
as "Purses, Awards and Other" in the accompanying Income Statements.
Revenues from simulcasts are recognized as of the day of the race.
L. Advertising
-----------
The Company expenses the costs of general advertising, promotion and
marketing programs at the time the costs are incurred.
M. Income Taxes
------------
The Company was formed as a limited liability company and elected to be
treated as a partnership for tax purposes, and thus no income tax expense
is recorded in the statements. Income of the Company is taxed to the
members in their respective returns. All income from the 100% owned
subsidiary is passed to the Company because of an agency agreement between
the companies. Therefore no tax accrual is needed on the subsidiary's
records.
2. FIXED ASSETS
------------
Depreciation expense was $566,390 for the nine months ended September 30,
2002 and $743,716 for the year ended December 31, 2001.
The Company is in the business of developing real estate for additional
gaming activities. As of September 30, 2002 and December 31, 2001, the
Company had capitalized $47,515 and $111,645, respectively to continue its
efforts.
3. MEMBERS EQUITY AND SENIOR OBLIGATION
------------------------------------
The members of the Company have contributed considerable amounts of money
to the Company to fund the purchasing of the Raceway and pursuing the
approval and development of a Native American Casino on a portion of the
Raceway property. These contributions (and a priority return of 10% per
anum) and the mortgage described below, (with interest compounded at 10%
per annum) must be repaid before any net earnings from operations would be
available for distribution to the Company's other members. As of September
30, 2002 the aggregate amount needed to satisfy the payment of said
contributions (with priority returns) to certain members of the Company is
$29,304,137.
These preferred capital balances are subordinate to a mortgage, payable to
two members, (the "Senior Obligation"), which at September 30, 2002, and
December 31, 2001 was $6,665,000 and $6,201,250 respectively including
accrued interest at 10% per annum. All payments accrue and the principal
and accrued interest totaling $8,052,550 is due September 15, 2004.
Currently, any cash flow from the operations of the Raceway are being
retained by the Company for working capital purposes and to fund litigation
and development expenses in conjunction with other potential gaming
operations at the track. As a result, the Company is not expected to make
any distributions with respect to certain other members' interests until
F-38
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
the Company has achieved additional net revenues sufficient to discharge
the payment of the Senior Obligation, accrued interest, preferred capital
balance and priority returns.
The Company was formed as a limited liability company, therefore its
members individual liability is limited under the appropriate laws of the
State of New York. The Company will cease to exist July 1, 2025. The
Company's distinct lines of business: (A) casino development; (B) real
estate related activities; and (C) the gaming operations related to
Monticello Raceway including pari-mutuel and any potential future Video
Lottery Terminal operations are owned as follows: (after the transaction of
February 12, 2002 noted below and the transaction of December 12, 2002
described in Note 8 - Subsequent Events)
Casino Real Estate Racing
------ ----------- ------
Voting Members:
---------------
Alpha Monticello, Inc. 48.310 25.000 36.870
Americas Tower Partners 20.000 25.000 25.000
Monticello Realty, LLC 20.000 22.500 22.500
Watertone Holdings, LP 9.190 25.000 13.130
Non-Voting Members:
-------------------
Cliff Ehrlich 1.375 1.375 1.375
Fox-Hollow Lane, LLC 1.000 1.000 1.000
Shamrock Strategies, Inc. 0.125 0.125 0.125
On February 12, 2002, Alpha Monticello, Inc. (a wholly owned subsidiary of
Alpha Hospitality Corporation ("Alpha"), a member of the Company, entered
into an agreement with Watertone Holdings LP ("Watertone"), also a member
of the Company, providing for the acquisition of 47.5% of Watertone's
economic interests in the casino and racetrack business components of the
Company. The transaction contemplated by this agreement closed on March 12,
2002.
4. RELATED PARTY TRANSACTIONS
--------------------------
As explained in Notes 1G and 2 the Company is in the business of developing
real estate for additional gaming activities. In connection with this
development the Company has paid various consulting fees to related parties
consisting of members or directors of Catskill Development. LLC. For the
nine months ended September 30, 2002 and the year ended December 31, 2001
the Company expensed in general and administrative expenses $111,000 and
$113,668 respectively of such costs. From inception through September 30,
2002 the Company has capitalized as development costs $600,574 of such
related party consulting fees.
F-39
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
5. OPERATING LEASES
----------------
At September 30, 2002 the Company had commitments under operating leases
which end in 2006 for various pieces of equipment requiring annual lease
payments for the twelve months ending September 30th as follows:
2003 $ 155,221
2004 150,121
2005 50,951
2006 13,212
--------------------------
Total $ 369,505
==========================
Lease expense was $148,539 for the nine months ended September 30, 2002 and
$153,208 for the year ended December 31, 2001.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Monticello Harness Horsemen's Association, Inc. has brought an action
against Monticello Raceway Management, Inc. and one of the members of the
Company seeking the sum of $1,300,0000 to be credited to the horsemen's
purse account. The suit claims that revenues received by the Raceway from
various simulcasting sources were not properly credited to their horsemen's
purse account. Management has responded vigorously to contest the case
after attempts at out-of-court settlement proved fruitless. A motion is
pending to dismiss the action for lack of subject matter jurisdiction. Such
dismissal would not prevent the Plaintiff from bringing suit in the proper
court or to seek alternative dispute resolution. There are disputed issues
of fact between the parties, which makes an estimate of the outcome or the
amount or range of loss difficult to gauge. In accordance with Statement of
Financial Accounting Standards No. 5, the amount of the loss, if any that
may be ultimately realized has not been reflected in the accompanying
financial statements.
In July 1996, the Company and its members entered into a series of
agreements with the Mohawk Tribe related to the development of a casino on
land adjacent to the Monticello Raceway in Monticello, New York. Pursuant
to such agreements, the Mohawk Tribe was to purchase certain land from the
Company and various affiliates of the Company were to help with the
development of a casino on the land and manage any resulting casino. More
particularly, the Tribe entered into a Gaming Facility Management Agreement
with Mohawk Management LLC ("MM"). Pursuant to such Agreement, MM was to be
provided with the exclusive right to manage the Monticello Casino for seven
(7) years from its opening and to receive certain fees for the provision of
management and related services.
Completion of the project contemplated by the agreements with the Mohawk
Tribe was subject to certain conditions, including the obtaining of
relevant federal and State governmental approvals. The Company, in
conjunction with its affiliates, assumed responsibility for and undertook,
seeking and obtaining all local, state and federal approvals required or
necessary to construct and operate the Casino Project. By letter dated
F-40
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
April 6, 2000, addressed to Governor George Pataki, Kevin Gover, Assistant
Secretary of the Department of the Interior, advised and notified the
Governor of New York that the Company's proposed casino project with the
Mohawk Tribe had been approved and specifically requested that the Governor
concur. However, on April 22, 2000, the Company became aware of a purported
letter agreement between the Mohawk Tribe and Park Place Entertainment
Corporation ("PPE"), which agreement (with two irrelevant exceptions)
purportedly gave PPE the exclusive rights to develop and manage any casino
development the Mohawk Tribe may have in the State of New York.
On November 13, 2000, the Company (also known as the "Plaintiffs") joined
in a suit filed in United States District Court, Southern District of New
York against PPE, alleging entitlement to substantial damages as a
consequence of, among other things, PPE's wrongful interference with
several agreements between Catskill and the Tribe pertaining to the
proposed Casino Project. The Plaintiffs alleged tortuous interference with
contract and prospective business relationships, unfair competition and
state anti-trust violations and sought over $6 billion in damages. On May
11, 2001, the District Court granted PPE's motion to dismiss three of the
four claims made by Plaintiffs. However, on May 30, 2001, the Plaintiffs
moved for reconsideration of that ruling, and, on reconsideration, the
Court reinstated one of the dismissed claims, with Plaintiffs' claims of
tortuous interference with contract and prospective business relationship
remaining after such decision. On August 22, 2002, U.S. District Court
Judge Colleen McMahon granted PPE's motion for summary judgment.
The Company has filed a notice of appeal with respect to the dismissal of
its case against PPE and has retained the firm of Mayer, Brown, Rowe and
Maw to represent it in the appeal. It is expected that briefs in the appeal
will be filed within the next four months and that a decision on the appeal
should be rendered within eighteen months. Although management believes
that the Company and its related parties have meritorious arguments in the
appeal, no assurance can be given that the appeal will be successful or
that, even if the appeal is successful as a whole or in part, the
litigation will ultimately be resolved in a manner advantageous to the
Company.
The Company is also a party to a various non-environmental legal
proceedings and administrative actions, all arising from the ordinary
course of business. Although it is impossible to predict the outcome of any
legal proceeding, the Company believes any liability that may finally be
determined with respect to such legal proceedings should not have a
material effect on The Company's consolidated financial position, results
of operations or cash flows.
7. VIDEO LOTTERY TERMINALS
-----------------------
In October 2001, the New York State Legislature passed a bill that expanded
the nature and scope of gaming in the state ("VLT Legislation"). The bill
was signed by the Governor on October 31, 2001. The provision of the VLT
Legislation relevant to the Company include: a) authority given to the
Governor to negotiate casino licenses for up to three Native American
casinos in the Catskills; and b) the authority for several of New York's
racetracks, including the Raceway, to operate video lottery terminal
("VLT") in their facilities. The VLT operation will be conducted by the New
York State Lottery (the "Lottery") with the racetracks functioning largely
as agents for the Lottery.
F-41
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
The Company is currently working with the New York State Lottery to explore
the feasibility of installing VLT's at the Raceway. The Company received a
letter from the Lottery, dated March 21, 2002, advising the Raceway that
the Lottery has completed its initial review of the Raceway's business plan
for the operation of VLT's at the Raceway during the initial three year
trial period approved by the State Legislature. Based on such review, the
Lottery has made an initial allocation of 1,800 VLT's to the Raceway and
has approved the maximum permitted rate for compensation of 25% of revenues
generated after payout of prizes for the Raceway. The law currently
provides that the Raceway must apply 35% in the first year, escalating to
45% in years two and three, of its compensation to enhance purses at the
Raceway and each year must dedicate 5% of its compensation to a State
Breeding Development Fund.
The business plan was submitted at the request of the Lottery, and in
accordance with Lottery procedures, does not represent a final decision
with respect to the implementation of VLT's by the Company. The business
plan includes certain assumptions recommended by the Lottery and other
estimates considered preliminary by the Company. Using these estimates and
assumptions, the plan does not show levels of operating income currently
considered adequate by the Company to go forward with the project. The
Company continues to evaluate the appropriateness of making the required
expenditures necessary for VLT operations relative to the length of the
test period, the ultimate level of return on investment, and the
implementation date for the program. The Lottery has not yet established a
firm start date or adopted regulations with regard to the program. On May
16, 2002, the New York State Legislature passed a bill that further
expanded the October 2001 VLT Legislation. This bill extends the test
period under the current law from three years to a period ending December
31, 2007. Further, the bill authorizes each track to enter into an
agreement with the organization representing its horsemen to reduce the
percentage of its vendor fees dedicated to enhancing purses at such track
during the initial three years, to an amount not less than 25 percent. That
bill was signed by the Governor on May 29, 2002. In addition, the Company's
ability to proceed with the VLT program may be impacted by its plans with
respect to casino development at the site. Currently, the legislature is
considering an additional bill, which if passed, could extend the operating
hours for VLT's and provide a larger percentage of revenues to the
racetracks. Accordingly, no assurance can be given that the Company will
decide to proceed with the operation of VLT's at the Raceway.
8. SUBSEQUENT EVENTS
-----------------
In October 23, 2002, the Company retained CIBC World Markets Corporation to
help it review its strategic alternatives and assist in maximizing the
value of its assets. The Company is in negotiations with a federally
recognized Native American tribe in New York and various casino management
and development entities with respect to the development of a Native
American Casino. The development of a casino at the Raceway will require
consummation of arrangements with these parties and various reviews and
approvals. No assurances can be given that such arrangements will be
entered into or that any approvals will be obtained.
On December 10, 2002, Alpha reached an agreement with Bryanston Group, Inc.
("Bryanston") (a former member of the Company) and certain other affiliates
F-42
Catskill Development, LLC
-------------------------
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
regarding certain obligations due from and claims against the Company.
Included in the agreement with Bryanston is the acquisition of Bryanston's
interest in Catskill Development, including its voting membership interest
and preferred capital account in the Company. Bryanston has agreed to
transfer such interests to Alpha.
On February 4, 2003 Catskill Development, LLC entered into a Letter of
Intent with Alpha Hospitality Corporation (Alpha), its partner in
developing gaming activities at the Monticello Raceway (the "Raceway") and
other related entities. The agreement provides for Alpha to acquire a 48
year ground lease on the Raceway and contiguous properties, together with
all of Catskill's development and management rights with respect to the
site and related gaming activities, in exchange for an 80.25% position in
Alpha's common stock.
The Letter of Intent provides for Catskill to lease its 230-acre Raceway
property to Alpha for a period of 48 years for an annual base rent of
$1,800,000. Lease terms are to contain certain options for Alpha to acquire
title to portions of the property. Alpha will have the right to purchase a
29-acre parcel for the purpose of placing it in trust for a Native American
Tribe or Nation at the purchase price of $1. The exercise of such option
will require obtaining necessary federal and state approvals. In addition,
the remaining property may be purchased within two years of the opening of
a casino at the present value of the ground lease at the time of such
exercise.
The agreement is subject to the execution of definitive agreements,
approvals by Alpha's Board of Directors and an opinion that the transaction
will be tax-free to all parties and other technical requirements, including
a fairness opinion. No assurance can be given that the transactions
provided for in the Letter of Intent will ultimately occur or will occur at
the times and on the terms and conditions contained in the Letter of
Intent.
F-43
REPORT OF INDEPENDENT AUDITORS
To the Members of
Monticello Raceway Development, LLC
We have audited the accompanying balance sheets of Monticello Raceway
Development Company, LLC as of December 31, 2002 and 2001, and the related
income statements, changes in member's equity and cash flows for the years ended
December 31, 2002 and 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Monticello Raceway Development
Company, LLC at December 31, 2002 and 2001, and the results of its operations
and its cash flows for the years ended December 31, 2002 and 2001, in conformity
with United States generally accepted accounting principles.
/s/ Bachrach, Waschitz & Waschitz, LLP
July 18, 2003
Monticello, New York
F-44
Monticello Raceway Development Company, LLC
Balance Sheets
December 31, 2002 and December 31, 2001
(Audited)
December 31, 2002 December 31, 2001
----------------- -----------------
ASSETS
Current Assets:
Due From Members $ 200 $ 200
-------------- ----------
Total Assets $ 200 $ 200
============== ==========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ - $ -
-------------- ----------
Total Current Liabilities - -
-------------- ----------
Members' Equity 200 200
-------------- ----------
Total Liabilities and Members' Equity $ 200 $ 200
============== ==========
See Notes To Financial Statements
F-45
Monticello Raceway Development Company, LLC
Income Statements
For the Years Ended December 31, 2002 and 2001
(Audited)
December 31, 2002 December 31, 2001
--------------------- ------------------------
Revenues $ - $ -
----------------------- ------------------------
Costs and Expenses - -
----------------------- ------------------------
Net Income $ - $ -
======================= ========================
See Notes To Financial Statements
F-46
Monticello Raceway Management Company, LLC
Statements of Changes in Member's Equity
For the Years Ended December 31, 2002 and 2001
(Audited)
Total
Members
Equity
------------------------
Balance December 31, 2000 $ 200
Net Income -
------------------------
Balance December 31, 2001 200
Net Income -
------------------------
Balance December 31, 2002 $ 200
========================
See Notes To Financial Statements
F-47
Monticello Raceway Development Company, LLC
Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001
(Audited)
December 31, 2002 December 31, 2001
------------------------ ------------------------
Operating Activities:
Net Income $ - $ -
Net Cash (Provided) Used by Operating Activities - -
------------------------ ------------------------
Investing Activities:
Net Cash (Provided) Used in Investing Activities - -
------------------------ ------------------------
Financing Activities:
Net Cash Provided (Used) by Financing Activities - -
------------------------ ------------------------
Net Increase (Decrease) in Cash - -
Cash at Beginning of Year - -
------------------------ ------------------------
Cash at End of Year $ - -
======================== ========================
Supplemental Disclosures:
Interest Paid $ - $ -
See Notes To Financial Statements
F-48
MONTICELLO RACEWAY DEVELOPMENT COMPANY, LLC
-------------------------------------------
Notes to Financial Statements
December 31, 2002 and 2001
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
This summary of significant accounting policies of Monticello Raceway
Development Company, LLC (the Company) is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
A. Organization and Business Activity
----------------------------------
In October 1995, Monticello Raceway Development Company, LLC (the
"Company") a New York limited liability company, was formed to provide
exclusive services under a 25-year agreement with Catskill Development, LLC
to develop, manage and lease all projects on the 230 acres owned by
Catskill Development, LLC. in Monticello, New York.
Catskill Development, LLC continues to pursue a Native American Casino
Project at Monticello Raceway. However, to this point it has been
unsuccessful. Therefore the company is inactive.
F-49
ACCOUNTANTS' REPORT
To the Members of
Monticello Raceway Development Company, LLC.
We have reviewed the accompanying balance sheets of Monticello Raceway
Development Company, LLC as of September 30, 2003 and 2002, and the related
income statements, changes in members equity, and cash flows for the nine months
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these consolidated financial statements is the
representation of the management of Monticello Raceway Development Company, LLC.
A review consists principally of inquires of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope that an
audit in accordance with generally accepted auditing standard, the objective of
which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for them
to be in conformity with generally accepted accounting principles.
/s/ Bachrach, Waschitz & Waschitz, LLP
October 30, 2003
Monticello, New York
F-50
Monticello Raceway Development Company, LLC
Balance Sheets
September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
-------------------- -----------------------
ASSETS
Current Assets:
Due From Members $ 200 $ 200
-------------------- -----------------------
Total Assets $ 200 200
==================== =======================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ - $ -
-------------------- -----------------------
Total Current Liabilities - -
-------------------- -----------------------
Members' Equity 200 200
-------------------- -----------------------
Total Liabilities and Members' Equity $ 200 $ 200
==================== =======================
See Accompanying Notes And Accountant's Report
F-51
Monticello Raceway Development Company, LLC
Income Statements
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
----------------------- -----------------------
Revenues $ - $ -
----------------------- -----------------------
Costs and Expenses - -
----------------------- -----------------------
Net Income $ - $ -
======================= =======================
See Accompanying Notes And Accountant's Report
F-52
Monticello Raceway Management Company, LLC
Statements of Changes in Member's Equity
For Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Total
Members
Equity
---------------
Balance December 31, 2001 $ 200
Net Income -
---------------
Balance September 30, 2002 $ 200
===============
Balance December 31, 2002 $ 200
Net Income -
---------------
Balance September 30, 2003 $ 200
===============
See Accompanying Notes And Accountant's Report
F-53
Monticello Raceway Development Company, LLC
Statements of Cash Flows
For Nine Months Ended September 30, 2003 and 2002
(Unaudited)
September 30, 2003 September 30, 2002
------------------ ------------------
Operating Activities:
Net Income $ - $ -
Net Cash (Provided) Used by Operating Activities - -
-------------- --------------
Investing Activities:
Net Cash (Provided) Used in Investing Activities - -
-------------- --------------
Financing Activities:
Net Cash Provided (Used) by Financing Activities - -
-------------- --------------
Net Increase (Decrease) in Cash - -
Cash at Beginning of Year - -
-------------- --------------
Cash at End of Year $ - $ -
============== ==============
Supplemental Disclosures:
Interest Paid $ - $ -
See Accompanying Notes And Accountant's Report
F-54
Monticello Raceway Development Company, LLC
Notes to Financial Statements
September 30, 2003 and 2002
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
This summary of significant accounting policies of Monticello Raceway
Development Company, LLC (the Company) is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
A. Organization and Business Activity
----------------------------------
In October 1995, Monticello Raceway Development Company, LLC (the
"Company") a New York limited liability company, was formed to provide
exclusive services under a 25-year agreement with Catskill Development, LLC
to develop, manage and lease all projects on the 230 acres owned by
Catskill Development, LLC. in Monticello, New York.
Catskill Development, LLC continues to pursue a Native American Casino
Project at Monticello Raceway. However, to this point it has been
unsuccessful. Therefore the company is inactive.
F-55
Condensed Consolidated Pro Forma Balance Sheet
as of September 30, 2003
(in thousands, except for per share data)
(Unaudited)
Pro Forma
Historical Statements (Consolidated
------------------------ Empire Resorts
Empire Catskill and Catskill
Resorts Development Adjustments Development)
--------- --------- -------------- ---------
Assets
Current Assets
Cash .......................................... $ 126 $ 809 $ -- $ 935
Receivables and other current assets .......... 12 1,045 -- 1,057
--------- --------- ------------- ---------
Total current assets .......................... 138 1,854 -- 1,992
Net property and equipment .................... -- 5,856 (5,856) A --
Investments and advances in affiliates ........ 7,651 -- (7,651) C --
Development costs Cayuga Nation ............... 1,056 -- -- 1,056
Deferred costs - leased property
development ............................... -- 7,645 -- 7,645
--------- --------- ------------- ---------
Total assets ............................ $ 8,845 $ 15,355 $ (13,507) $ 10,693
========= ========= ============= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ......... $ 1,048 $ 3,389 $ -- $ 4,437
Accrued payroll and related liabilities ....... 108 -- -- 108
Notes payable ................................. -- 7,321 (7,321) D --
--------- --------- ------------- ---------
Total current liabilities ............... 1,156 10,710 (7,321) 4,545
--------- --------- ------------- ---------
Long-term debt
Notes payable ................................. -- 5,073 F 5,073
Capital
Common stock .................................. 59 166 B 225
Contributed capital and other ................. -- 18,320 (18,320)G --
Preferred stock ............................... 6,855 -- -- 6,855
Paid in capital ............................... 116,774 -- (7,651)C
(115,999)E
7,321 D
(166)B
(5,856)A
18,320 G 12,743
Deficit ....................................... (115,999) (13,675) 115,999 E (13,675)
Treasury stock ................................ -- -- (5,073)F (5,073)
--------- --------- ------------- ---------
Total capital ........................... 7,689 4,645 (11,259) 1,075
--------- --------- ------------- ---------
Total liabilities and
capital ................................. $ 8,845 $ 15,355 $ (13,507) $ 10,693
========= ========= ============= ==========
F-56
Condensed Consolidated Pro Forma Statements of Operations
for the year ended December 31, 2002
(in thousands, except for per share data)
(Unaudited)
Pro Forma
Historical Statements (Consolidated
--------------------- Empire Resorts
Empire Catskill and Catskill
Resorts Development Adjustments Development)
-------- -------- ------------- --------
Revenues ............................................... $ -- $ 11,359 $ -- $ 11,359
-------- -------- ------------- --------
Costs and Expenses
Pari-mutuel wagering purses ............................ -- 3,932 -- 3,932
Rent - Monticello Raceway lease ........................ -- -- 1,800 J 1,800
Selling, general, administrative and
other ................................................ 2,627 7,991 -- 10,618
Interest ............................................... 459 620 (620) I 814
355 H
Depreciation ........................................... 77 756 (756) K 77
Pre-opening and development costs ...................... 24 -- -- 24
-------- -------- ------------- --------
Total costs and expenses ......................... 3,187 13,299 779 17,265
-------- -------- ------------- --------
Other income (loss)
Interest Income......................................... 7 7
Impairment loss - Casino Ventures ...................... (3,000) -- -- (3,000)
Gain on sale of investments and related
management contract .................................. 3,277 -- -- 3,277
Impairment loss on investment .......................... (6,934) -- 6,934 M --
Gain on extinguishment of debt ......................... 326 -- -- 326
-------- -------- ------------- --------
Total other net income ........................... (6,331) 7 6,934 610
-------- -------- ------------- --------
Net loss before minority interest ...................... (9,518) (1,933) 6,155 (5,296)
Minority interest ............................ 18 -- -- 18
-------- -------- ------------- --------
Net loss ............................................... (9,500) (1,933) 6,155 (5,278)
======== ======== ============= ========
Cumulative undeclared dividends on ..................... (174) -- -- (174)
preferred stock
Loss applicable to common shares ....................... (9,674) (1,933) 6,155 (5,452)
======== ======== ============= ========
Weighted average common shares ......................... 4,615 16,643 (2,393)B 18,865
outstanding, basic and diluted
======== ======== ============= ========
Loss per common share, basic and diluted ............... $ (2.10) $ (0.12) $ -- $ (0.29)
======== ======== ============= ========
F-57
Condensed Consolidated Pro Forma Statements of Operations
for the nine months ended September 30, 2003
(in thousands, except for per share data)
(Unaudited)
Pro Forma
(Consolidated
Historical Historical Empire Resorts
Empire Catskill and Catskill
Resorts Development Adjustments Development)
-------- -------- ------------- --------
Revenues ........................................................ $ -- $ 7,472 $ -- $ 7,472
-------- -------- ------------- --------
Costs and Expenses
Pari-mutuel wagering purses ..................................... -- 2,524 -- 2,524
Rent - Monticello Raceway lease ................................. -- -- 1,200 J 1,200
Selling, general, administrative and
other ......................................................... 5,474 5,448 -- 10,922
Interest ........................................................ 556 500 (500) I 822
266 H
Depreciation .................................................... -- 526 (526) K --
-------- -------- ------------- --------
Total costs and expenses .................................. 6,030 8,998 440 15,468
-------- -------- ------------- --------
Other income (loss)
Interest Income................................................ 3 3
Equity in loss of affiliate ................................... (381) -- 381 L --
Gain on sale of investments and related
management contract ......................................... 135 -- -- 135
Gain on extinguishment of debt ................................ 389 -- -- 389
Recovery of insurance proceeds ................................ 500 -- -- 500
-------- -------- ------------- --------
Total other net income .................................... 643 3 381 1,027
-------- -------- ------------- --------
Net loss ........................................................ (5,387) (1,523) (59) (6,969)
======== ======== ============= ========
Cumulative undeclared dividends on
preferred stock ................................................. (1,161) -- -- (1,161)
Net loss applicable to common shares ............................ $ (6,548) $ (1,523) $ (59) $ (8,130)
======== ======== ============= ========
Weighted average common shares .................................. 5,351 16,643 (2,393)B 19,601
outstanding, basic and diluted
======== ======== ============= ========
Loss per common share, basic and diluted ........................ $ (1.23) $ (0.09) $ -- $ (0.41)
======== ======== ============= ========
F-58
Empire Resorts, Inc. and Subsidiaries
Notes to Pro Forma Condensed
Consolidated Financial Statements
The following are brief descriptions of the pro forma adjustments to the balance
sheets and statements of operations of Empire Resorts and Catskill Development
to reflect the consolidation. Empire Resorts is acquiring from Catskill
Development's members certain assets and liabilities and all of their equity
holdings of Monticello Casino Management, Monticello Raceway Management and
Mohawk Management. After the distribution of Empire Resorts' stock to the
members of both Catskill Development and Monticello Raceway Development pursuant
to the consolidation, the members of Monticello Raceway Development and Catskill
Development will hold 80.25% of the outstanding common stock of Empire Resorts.
Prior to consummation of the transaction, the claims in certain litigation by
Catskill Development are to be assigned to a trust for the beneficial owners
thereof, including certain stockholders of Empire Resorts and Empire Resorts is
to provide a $2.5 million line of credit to the trust to cover expenses of the
trust.
Although Empire Resorts is the legal survivor in the consolidation and remains
the registrant with the Securities and Exchange Commission, under the accounting
principals generally accepted in the United States, the merger is to be
accounted for as a reverse acquisition. Catskill Development is considered the
"Acquirer" of Empire Resorts for financial reporting purposes as its members
will control more than 50% of the post transitory combined company. Among other
things, this requires Empire Resorts to present all financial statements after
completion of the consolidation, prior historical financial and other
information of Catskill Development and requires a retroactive restatement of
Catskill Development's historical members' investment for the equivalent number
of shares of common stock received in the consolidation.
The pro forma financial statements that represent the consolidated financial
position of Catskill Development and Empire Resorts includes estimates. These
estimates could and most likely will vary, possibly substantially, from the
actual results that will be reported in future reporting periods after the date
of the closing. Prior to the formal closing, new approvals, regulations,
ratification of contracts and certified appraisals may be disclosed in future
public filings, possibly changing a reader's evaluation of the consolidation. In
addition, subsequent public filings may contain information different from the
information in these pro forma financial statements.
The condensed consolidated pro-forma balance sheet is based upon the historical
balance sheets of Empire Resorts, Monticello Raceway Development and Catskill
Development as of September 30, 2003 and assumes the consolidation took place on
that date. The condensed statements of operations for the year ended December
31, 2002 and the for the nine months ended September 30, 2003 are based upon the
historical statements of Empire Resorts, Monticello Raceway Development and
Catskill Development for those periods. The pro-forma statements of operations
have been adjusted to reflect the assumption that the consolidation took place
on January 1, 2002.
The unaudited pro forma financial statements should be read together with the
financial statements and notes of Empire Resorts, which are incorporated by
reference from Empire Resorts' Annual Report on Form 10-KSB for the year ended
December 31, 2002 and Quarterly Reports on Form 10-QSB for the quarters ended
March 31, June 30 and September 30, 2003, and the consolidated financial
F-59
statements of Catskill Development for the year ended December 31, 2002 and the
nine months ended September 30, 2003.
PRO FORMA ADJUSTMENTS TO THE CONDENSED CONSOLIDATED BALANCE SHEET ARE AS
FOLLOWS:
(A) Net property and equipment of Catskill Development distributed to the
members of Catskill Development following the consolidation (which will no
longer include Empire Resorts).
(B) Issuance of approximately 16,643,000 shares of Empire Resorts' common stock
in connection with the consolidation. The table below summarizes the
changes to Empire Resorts' capitalization that will result from the
consolidation. The outstanding balance of common stock and options
outstanding as of July 2003 was used for the presentation of these pro
forma financial statements. At the date of the closing of the
consolidation, the shares of common stock issued will reflect the actual
amount of shares outstanding as of that date.
Number of shares of common stock outstanding prior
to the consolidation (approximated) .................................. 5,711,000
Number of shares of common stock to be redeemed (see note F) ......... (2,393,000)
Outstanding options (approximated) ................................... 778,000
Shares issued in consolidation to members of both Catskill Development
and Monticello Raceway
Development (approximated) ........................................... 16,643,000
Total percentage of shares to be issued pursuant to the consolidation
(actual) ............................................................. 80.25%
Reconciliation of Actual Shares Outstanding as of December 31, 2002 and September 30, 2003 to present
December 31, 2002 September 30, 2003
(in thousands) (in thousands)
Original outstanding shares as reported 4,615 5,351
Elimination of shares redeemed (See F) (2,393) (2,393)
Shares issued to Catskill members in connection with the
consolidation 16,643 16,643
------ ------
Pro forma outstanding shares 18,865 19,601
====== ======
(C) To eliminate Empire Resorts' investment in Catskill Development recorded on
Empire Resorts' balance sheet at September 30, 2003 in the amount of
$7,651,000.
(D) Contribution of long term debt and related interest by certain members of
Catskill Development to the new consolidated entity in consideration of the
consolidation.
F-60
(E) Elimination of Empire Resorts' recorded deficit, as the accounting
acquiree.
(F) Redemption of Empire Resorts' common stock of certain stockholders in
exchange for approximately $5,073,000 of individual long-term
non-convertible 7% notes payable, which was a condition of the
consolidation.
(G) Elimination of contributed capital of Catskill Development as the
accounting acquirer.
PRO FORMA ADJUSTMENTS TO THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS ARE
AS FOLLOWS:
(H) Records the interest expense for the year ended December 31, 2002 and the
nine months ended September 30, 2003 as a result of Item F above.
(I) Elimination of interest on long term debt (see (D)) related to certain
members of Catskill Development.
(J) Reflects recognition of rent expense to be paid to Catskill Development for
the year ended December 31, 2002 and for the nine months ended September
30, 2003.
(K) Elimination of depreciation of net property and equipment distributed by
Catskill Development to its members not including Empire Resorts.
(L) Elimination of Empire Resorts' recorded loss in equity of affiliate for the
nine months ended September 30. 2003 included in the operations of Catskill
Development.
(M) Elimination of loss based upon impairment recognized in 2002 on the
investment in Catskill Development.
F-61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
------- -------------------------------------------
The following table sets forth the various expenses which will be paid
by us in connection with the securities being registered. With the exception of
the Securities and Exchange Commission registration fee, all amounts shown are
estimates.
SEC registration fee............................................ $551.63
Legal fees and expenses (including Blue Sky fees)............... $2,500.00
Accounting Fees and Expenses.................................... $2,500.00
Miscellaneous ................................................ $4,448.37
=============
Total ............................................ $10,000.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
------- -----------------------------------------
As permitted by the Delaware General Corporation Law ("DGCL"), Empire
Resorts, Inc.'s Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to Empire Resorts, Inc. for monetary damages
for breach of fiduciary duty of care as a director. Liability is not eliminated
for (i) any breach of the director's duty of loyalty to Empire Resorts, Inc. or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment of
dividends or stock purchases or redemptions pursuant to Section 174 of the DGCL,
or (iv) any transaction from which the director derived an improper personal
benefit.
Empire Resorts, Inc.'s by-laws provide that Empire Resorts, Inc. shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that he is or was a director, officer, employee or an agent of Empire
Resorts, Inc. or is or was serving at the request of Empire Resorts, Inc. as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the defense or settlement of such action,
suit or proceeding, to the fullest extent and in the manner set forth in and
permitted by the DGCL, as from time to time in effect, and any other applicable
law, as from time to time in effect. Such right of indemnification is not be
deemed exclusive of any other rights to which such director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of each such person.
Empire Resorts, Inc. has also obtained a directors' and officers'
insurance and company reimbursement policy in the amount of $5,000,000. The
policy insures directors and officers against unindemnified loss arising from
certain wrongful acts in their capacities and would reimburse Empire Resorts,
Inc. for any losses incurred due to Empire Resorts, Inc.'s lawful
indemnification of its directors and officers.
II-1
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing provisions, Empire Resorts, Inc. has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
ITEM 16. EXHIBITS.
------- --------
Exhibit No.
4.1 Specimen Certificate of the Registrant's Common Stock
(incorporated by reference to the Registrant's registration
statement on Form SB-2 dated November 5, 1993)
5.1** Legality Opinion
15.1* Letter of Bachrach, Waschitz & Waschitz, LLP
23.1* Consent of Friedman Alpren & Green LLP, independent public
accountants
23.2* Consent of Bachrach, Waschitz & Waschitz, LLP, independent public
accountants
23.3** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP, included
in Exhibit No. 5.1
24.1** Power of Attorney
-------
*Filed herewith
** Previously filed
ITEM 17. UNDERTAKINGS.
------- ------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing,, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
II-2
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining liability under the Securities
Act, treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Monticello, State of New York on the 19th day of
December, 2003.
Empire Resorts, Inc.
(Registrant)
By: /s/ Robert A. Berman
-------------------------------------------
Robert A. Berman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/S/ * Chairman of the Board of December 19, 2003
Directors
-------------------------------
David Matheson
Chief Executive Officer and
Director (Principal Executive
Officer)
/s/ Robert A. Berman December 19, 2003
-------------------------------
Robert A. Berman
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Signature Title Date
--------- ----- ----
Chief Financial Officer
(Principal Accounting and
/S/ * Financial Officer) December 19, 2003
-------------------------------
Scott A. Kaniewski
/S/ * President and Director December 19, 2003
-------------------------------
Morad Tahbaz
/S/ * Director December 19, 2003
-------------------------------
Paul deBary
/S/ * Director December 19, 2003
-------------------------------
John Sharpe
/S/ * Director December 19, 2003
-------------------------------
David P. Hanlon
/S/ * Director December 19, 2003
-------------------------------
Arthur I. Sonnenblick
/S/ * Director December 19, 2003
-------------------------------
Joseph E. Bernstein
/S/ * Director December 19, 2003
-------------------------------
Ralph J. Bernstein
* BY: /s/ Robert A. Berman
-----------------------
Robert A. Berman
Attorney-in-fact
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