sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________________ to __________________.
Commission file number: 1-12522
EMPIRE RESORTS, INC
(Name of small business issuer as specified in its charter)
DELAWARE 13-4141279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ROUTE 17B PO BOX 5013 MONTICELLO, NY 12701
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (845) 794-4100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $ .01 par value Nasdaq Small-Cap Market
Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenue for its most recent year. None.
As of March 22, 2004, the estimated aggregate market value of the voting
common equity held by non-affiliates was approximately $33,000,000.
As of March 22, 2004, 25,898,468 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE The information required by Items 9 through
12 and 14 of this Annual Report on Form 10-KSB is incorporated by reference from
the issuer's definitive proxy materials for its next Annual Meeting of
Stockholders, which proxy materials are to be filed with the Securities and
Exchange Commission not later than April 29, 2004.
Transitional small business disclosure format (check one): Yes |_| No |X|
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Empire Resorts, Inc ("Empire" or the "Company") was organized as a
Delaware corporation on March 19, 1993, and since that time has served as a
holding company for various subsidiaries engaged in the ownership, development
and operation of gaming facilities. We were incorporated under the name Alpha
Hospitality Corporation and changed our name to Empire in May, 2003.
During the past three years, we have concentrated most of our efforts on
developing gaming operations in Monticello, New York. As part of this effort we
have disposed of various ancillary interests and terminated certain unprofitable
operations. In March 2002 we sold our interests in a casino project in
Greenville, Mississippi, and in June 2003 we sold our ownership in Casino
Ventures, LLC.
The Company had no operating revenue during the fiscal years ended
December 31, 2003 and 2002. On January 30, 2004, the Company closed a private
sale of 4,050,000 shares of common stock, to multiple investors, at a price of
$7.50 per share. This sale, net of closing expenses, increased by approximately
$30 million our funds for development and operations.
During the past three years we also increased and restructured our
economic interest in Catskill Development, LLC ("CDL"). CDL is a New York
limited liability company that was formed in 1995 and owned Monticello Raceway,
a harness horse racing facility located on 229 acres in Monticello, New York,
approximately 90 miles northwest of New York City in the Catskill Mountains. In
March 2002 we entered into an agreement with Watertone Holdings, LP, a member of
CDL that is controlled by Robert Berman, our chief executive officer, and Scott
Kaniewski, our chief financial officer, whereby Watertone Holdings, LP
transferred 47.5% of its economic interest in CDL's racetrack and casino
businesses to us in exchange for 575,874 shares of our common stock. Then, in
December 2002, we once again increased our ownership interest in CDL by issuing
1,394,200 shares of Series E Preferred Stock to Bryanston Group, Inc. (the
"Bryanston Group"), the Company's former controlling shareholder controlled by
certain prior members of our senior management, in exchange for all of Bryanston
Group interest in CDL. Finally, in July 2003, we agreed to acquire 100% of CDL's
operating and development entities. These entities, Monticello Raceway
Management, Inc. ("Monticello Raceway Management"), Monticello Casino
Management, LLC ("Monticello Casino Management"), Monticello Raceway Development
Company, LLC ("Monticello Raceway Development") and Mohawk Management, LLC
("Mohawk Management"), were acquired for 80.25% of the Company's common stock,
or 18,219,075 shares, calculated on a post-merger, fully diluted basis.
The acquisition was completed on January 12, 2004. Future reporting of the
new operations will be accounted for as a reverse merger and as if the merger
occurred on January 1, 2004, because there were no significant operations during
that period. Monticello Raceway Management was a wholly owned subsidiary of CDL.
Each of Monticello Casino Management and Mohawk Management was 60% owned by CDL
and 40% owned indirectly by the Company and Monticello Raceway Development. The
Company previously did not own any direct interest in Monticello Raceway
Development.
MONTICELLO RACEWAY MANAGEMENT. Monticello Raceway Management is a New York
corporation that operates Monticello Raceway, a harness horse racing facility
located in Monticello, New York, and holds a leasehold interest in 200 of the
229 acres of land. Monticello Raceway Management reported its financial results
with CDL on a consolidated basis through December 31, 2003.
MONTICELLO CASINO MANAGEMENT. Monticello Casino Management is a New York
limited liability company that has the exclusive right to manage, on behalf of
the Cayuga Nation of New York, any Class III Gaming operations and related
activities that may occur on 29 of the 229 acres of land at the Monticello
Raceway in Monticello, New York. Currently, Monticello Casino Management has no
operations, employees or assets other than its gaming management rights. Since
inception, Monticello Casino Management has had no reportable revenue, net
income or losses.
1
MONTICELLO RACEWAY DEVELOPMENT. Monticello Raceway Development is a New
York limited liability company with the exclusive right to design, engineer,
develop, construct, and furnish a Class III Gaming facility that is being
developed on 29 of the 229 acres of land at the Monticello Raceway in
Monticello, New York. Monticello Raceway Development also has the exclusive
right to develop the remaining 200 acres of land to provide for activities
supportive of gaming, such as lodging, food service and retail. Currently,
Monticello Raceway Development has no operations, employees or assets other than
its development rights. Monticello Raceway Development has had no reportable
revenue, net income or losses.
MOHAWK MANAGEMENT. Mohawk Management is a New York limited liability
company originally formed to operate, in conjunction with the St. Regis Mohawk
Tribe, a Class III Gaming facility on 29 of the 229 acres of land at the
Monticello Raceway in Monticello, New York. The agreements with respect to these
facilities have expired. Currently, Mohawk Management has no operations,
employees or assets. Since inception, Mohawk Management has had no reportable
revenue, net income or losses.
RACETRACK OPERATIONS
Monticello Raceway began operation in 1958. It is currently operated by
Monticello Raceway Management and offers pari-mutuel wagering on live harness
racing throughout the year, along with year round simulcasting from various
harness and thoroughbred racetracks across the country. Monticello Raceway
derives its revenue principally from (i) wagering at Monticello Raceway on live
races run at Monticello; (ii) fees from wagering at out-of-state locations on
races run at Monticello Raceway using export simulcasting; (iii) revenue
allocations, as prescribed by law, from betting activity at New York City,
Nassau and Catskill Off Track Betting facilities (certain of such revenues are
shared with Yonkers Raceway based on a pro rata market share calculation updated
monthly); (iv) wagering at Monticello Raceway on races broadcast from
out-of-state racetracks using import simulcasting; and (v) admission fees,
program and racing form sales, the sale of food and beverages and certain other
ancillary activities.
SIMULCASTING. Over the past several years, import and, particularly,
export simulcast racing has become an increasingly vital part of Monticello
Raceway's revenue stream. Simulcasting is the process by which live horse races
held at one facility (the "host track") are transmitted simultaneously to other
locations that allow patrons at each receiving off track betting location (the
"OTB") to place wagers on the race being broadcast. Monies are collected at the
OTB and the information with respect to the total amount wagered is
electronically transmitted to the host track. In effect, all of the amounts
wagered at the OTBs are combined into the appropriate pools at the host track
with the final odds and payouts determined based upon all the monies in the
pools.
With the exception of a few holidays, Monticello Raceway offers its
patrons simulcast racing from several race tracks year round, including such
tracks as Churchill Downs, Hollywood Park, Santa Anita, Gulfstream Park,
Aqueduct, Belmont Park and Saratoga Racecourse. In addition, races of national
interest, such as the Kentucky Derby, Preakness Stakes and Breeders' Cup
supplement the regular simulcast program.
PAR-MUTUEL WAGERING AND TRACK EARNINGS. All of Monticello Raceway's gaming
revenue is derived from pari-mutuel wagering and the aforementioned legislated
revenue allocations from certain of New York State operated OTBs. In pari-mutuel
wagering, patrons bet against each other rather than against the operator of the
facility or with pre-set odds. The dollars wagered form a pool of funds from
which winnings are paid based on odds determined solely by the wagering
activity. The racetrack acts as a stakeholder for the wagering patrons and
deducts from the amounts wagered a "take-out" or gross commission, from which
the racetrack pays state and county taxes and racing purses. Monticello
Raceway's pari-mutuel commission rates are fixed as a percentage of the total
handle or amounts wagered. With respect to Monticello Raceway's live racing
operations, such percentage is fixed by New York law at four levels, 17%, 19%,
25% and 36%, depending on the complexity of the wager. The lower rate applies to
wagering pools involving only win, place and show wagers while the higher rates
apply to pools involving wagers on more complex on-track bets. With respect to
import simulcast-racing operations, Monticello Raceway generally applies the
commission rates imposed by the jurisdictions of the host racetracks, and
approved by the New York State Racing and Wagering Board. Such rates may vary
with each jurisdiction and are considerably less favorable than the on-track
live racing commission rates. With respect to export simulcast racing
operations, "guest" tracks and off-track wagering outlets pay "host" fees to
Monticello Raceway that average 3% of the handle wagered on Monticello Raceway's
live races of which a portion is allocated to the Raceway's purse account.
Casinos and off-track wagering facilities in Nevada and Connecticut currently
receive Monticello Raceway's live race signal from a disseminator to whom
Monticello Raceway pays a fee.
2
The racing industry in New York, inclusive of Monticello Raceway, has
experienced a decline in business over many years. Attendance and the amounts
being wagered on live races are down from past years. Several developments have
contributed to this overall decline in attendance in the racing industry. One
has been the rapid growth of what is known as account wagering. Account wagering
allows an individual to place a wager on a horserace while at home by telephone
or over the Internet using an account established with an OTB or Internet
entity. Commissions received by the racetrack from account wagering are
significantly less than if the person places a wager at the racetrack, thus
causing a decline in the racetrack's revenue. Another factor adversely affecting
the New York racing industry has been an overall increase of gaming competition
in the surrounding region. The existing gaming industry in the northeastern
United States is highly competitive, as full service casinos are now available
in Connecticut, New Jersey and Western New York, where patrons are offered the
opportunity to wager on table games and slot machines and, in certain locations,
horseracing. Moreover, there are numerous publicly owned off-track betting
facilities throughout the State of New York, which further impacts negatively on
on-track attendance (SEE ITEM 1. BUSINESS - COMPETITION). In addition,
attendance at Monticello Raceway has been adversely affected by overall economic
conditions in the Catskills region.
VIDEO GAMING MACHINES
A video gaming machine (VGM) is an electronic gaming device. It allows a
patron to play electronic versions of various lottery games of chance and is
similar in appearance to a traditional slot machine. During the past decade, the
operation of these gaming devices at racetracks in several states outside New
York has been authorized, with a portion of the revenues dedicated to increasing
purses. The results have been uniformly successful at significantly enhancing
state lottery revenues and improving the economics of the racetrack's
operations.
On October 31, 2001, the State of New York enacted a bill designating
seven racetracks across the state, including Monticello Raceway, as approved
locations for the New York State Lottery to install and operate video gaming
machines, The program provided for the racetrack operators to serve as agents
for the Lottery. However, as originally designed none of the racetracks
authorized to participate in the program found the terms conducive to the level
of investment required to participate in the program. On May 15, 2003, New York
State enacted legislation to enhance the incentives for racetracks in New York
State to participate in the program. These included extending the initial term
of the program to 10-years from the date that the first facility is placed in
service and permitting year round operations. Approximately 29% of the net
revenue of the program is to be distributed to the tracks and their horsemen/
breeders associations, including funds to provide gradually increasing purses
for the horsemen and for a breeding fund, thus improving the quality of racing
at the tracks.
During the initial eighteen months of the program, the New York State
Lottery has the ability to approve the opening of temporary facilities, until
more comprehensive construction can take place. Under the program, the New York
State Lottery has made an in initial allocation of 1,800 VGM's to Monticello
Raceway. If market conditions permit, additional machines may be added without
the need for additional legislation. Participation in this program will require
additional approvals by the New York State Lottery, including satisfactory
completion of construction of the facilities at Monticello Raceway, and staffing
and training. Construction contracts for these facilities were signed and work
on the necessary improvements began in February 2004. While the construction and
staffing activities have proceeded on schedule to date, due to the nature of
such activities, no assurance can be given that successful implementation will
be achieved by the current anticipated commencement target of early July, 2004.
CASINO DEVELOPMENT
In 1988, Congress passed the Indian Gaming Regulatory Act, which permits a
Native American tribe to petition the Governor of its host state for a
tribal-state compact permitting casino gaming on such tribe's reservation and/or
on lands to be acquired and held in trust by the Unites States Government for
the benefit of such tribe. As part of the 2001 legislation that permitted the
installation of video gaming machines at racetracks, the New York State
legislature also granted the governor the right to negotiate with Native
American tribes and enter into compacts permitting three resort style casinos in
the Catskills and three in the Buffalo-Niagara Falls area. This legislation only
permits the governor to approve tribal-state compacts with federally recognized
tribes that are located in New York.
3
Since 1995, CDL has been working to develop a 29 acre parcel of land at
the racetrack into a full service resort-style casino in conjunction with a
recognized Native American Nation. A 29 acre site was identified to be deeded to
the United States Government in trust for the use and benefit of a Native
American tribe and for the tribe to conduct gaming activities on the site. This
site was originally planned to be used for a casino to be owned and operated by
the St Regis Mohawk Tribe, and CDL incurred considerable expenditures in
connection with the effort. However, after extensive local, state and federal
reviews had been conducted, the St. Regis Mohawk Tribe elected to pursue the
development of another location in the Catskills with another gaming company,
Caesar's Entertainment, Inc. ("CZR"), formerly Park Place Entertainment. See
"Other Business Activities and Past Developments - LITIGATION CONCERNING
RELATIONS WITH THE ST. REGIS MOHAWK TRIBE" below.
On April 3, 2003, the Cayuga Nation of New York, a federally recognized
Indian Nation (the "Cayuga Nation"), CDL and certain of CDL's 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 and the
Company and its affiliate, CDL, 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 29
acre parcel of land in Monticello, New York to be used for gaming purposes. As a
result of the Company's recent consolidation transaction with CDL, all of these
contracts were assigned to Empire and the Company now owns 100% of all the
related entities.
OTHER BUSINESS ACTIVITIES AND PAST DEVELOPMENTS
THE BAYOU CADDY'S JUBILEE CASINO
The Bayou Caddy's Jubilee Casino began its operation in Greenville,
Mississippi in November 1995 and was the second casino operating in a very
discrete market. The operations were meeting or exceeding all of management's
expectations. In early 1997 a third casino opened in Greenville and it became
clear that the market would not expand sufficiently to accommodate the
additional capacity. After considerable deliberation, management took the
decision to exit the Greenville market and on March 2, 1998, we sold our
interest in the Greenville Inn & Suites and the Bayou Caddy's Jubilee Casino to
Greenville Casino Partners, L.P., an entity in which we held a 25% (subsequently
reduced to approximately 19% for capital call adjustments) interest, and with
which we entered into a hotel management contract. In March 2002, Greenville
Casino Partners, L.P. sold all of the entity's operations and assets to JMBS
Casino LLC. The Company's proceeds from the sale were $2.8 million. Prior to the
sale we assigned our related hotel management contract to Greenville C.P., Inc.
for an additional $510,000. An additional $1 million was held in escrow for 18
months pending any claims the purchaser may have against Greenville Casino
Partners, L.P. In April 2003 we received $135,000 in full settlement of the
escrow and have no further interest is held in the entity.
THE JUBILATION CASINO VESSEL
On July 8, 1999, we, through our subsidiary, Jubilation Lakeshore, Inc.,
contributed our inactive gaming vessel, Bayou Caddy's Jubilation Casino
("Jubilation"), to Casino Ventures, LLC, in exchange for $150,000 in cash and a
note of approximately $1.4 million, plus a non-managing membership interest in
Casino Ventures.
In December 2002, we recognized a $3 million impairment loss reflecting a
casualty loss on the Jubilation vessel.
Effective June 30, 2003, the Company and PDS Special Situations, LLC
("PDS"), a Nevada limited liability company, entered into an agreement for PDS
to purchase the Company's membership interest in Casino Ventures, LLC and all of
the Company's former debt agreements. The Company sold 75% of its issued and
outstanding equity interests in Casino Ventures, LLC in exchange for $10,000,
with the remaining interest owned by the Company, which totaled 18% then being
sold and transferred for an additional $40,000 upon the procurement from the
other 7% interest holders' membership interests. The Company recorded $10,000 of
proceeds from the sale of its interest and will record the additional $40,000
proceeds upon the receipt of the final payment. The net effect of the sale in
the 2003 consolidated financial statements was a loss of approximately $30,000.
4
LITIGATION CONCERNING RELATIONS WITH THE ST. REGIS MOHAWK TRIBE
Since its formation in October 1995, CDL has pursued the development of
Monticello Raceway as three distinct lines of business: a) operation of
Monticello Raceway, including pari-mutuel and potential future video gaming
machines; b) casino development activities; and c) real estate development and
related activities. CDL's plan was to contract with the St. Regis Mohawk Tribe
and to secure the necessary state and federal approvals for the construction and
operation of a casino.
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 proposed casino project had been
approved and specifically requested that the Governor concur. However, on April
22, 2000, the Company became aware of a letter agreement between the Mohawk
Tribe and CZR. Such agreement provided for CZR to have the exclusive rights to
develop and manage any casino development the Mohawk Tribe might have in the
State of New York.
On November 13, 2000, CDL and related entities, including our subsidiary,
Alpha Monticello, Inc. (the "Plaintiffs"), joined in a suit filed in United
States District Court, Southern District of New York against CZR, alleging
entitlement to substantial damages as a consequence of, among other things, its
wrongful interference with several agreements between CDL and the St. Regis
Mohawk Tribe pertaining to the proposed Native American casino project.
On August 22, 2002, U.S. District Court Judge Colleen McMahon granted
CZR's motion for summary judgment on the Plaintiffs' claim for interference with
business relationships and dismissed the Plaintiffs' contractual interference
and other claims. Initially, the Plaintiffs pursued an appeal of this judgment.
However, on March 14, 2003, attorneys for the plaintiffs filed a motion
requesting the District Court to vacate this judgment on the ground that new
evidence had been found. In October 2003, the earlier judgment was vacated in
order to allow the Court to consider the effect of the new evidence following a
brief period of additional discovery. Briefs on this issue were filed in
December, 2003.
As of January 12, 2004, in order to better focus on the development of a
video gaming machine program at Monticello Raceway and current business
arrangements with the Cayuga Nation of New York and as a condition to the
consolidation transaction with CDL, all interests of the plaintiffs, including
any interest of Empire, with respect to the claims in such litigation were
transferred to a liquidating litigation trust (the "Litigation Trust"). Two
members of the Company's board of directors, Paul A. deBary, and Joseph E.
Bernstein, serve as co-trustees for the Litigation Trust. For these services,
Messrs. deBary and Bernstein will each receive $60,000 per year and 1% and 4%,
respectively, of any proceeds that the Litigation Trust receives from the
ongoing litigation, or any future litigation that may be brought by the
Litigation Trust. In connection with the organization of the trust, the
Company's common stockholders of record immediately before the merger are to
receive Empire's interest in the trust as a liquidating dividend. The Company
also issued an irrevocable line of credit for $2.5 Million to the trust to cover
future expenses. Pursuant to the terms of the Declaration of Trust establishing
the trust, in the event of a recovery in the litigation, the Company is to
receive payments to reimburse it for prior litigation expenses of $7.5 Million
and to repay any draws on the line of credit. After such payments and
reimbursements and the payment of all fees and expenses of the trust, any
remaining amount recovered is to be distributed pro rata to the Litigation
Trust's beneficiaries. Except for these arrangements, the Company has no further
interest in, or control over, the related litigation. A registration statement
concerning this distribution on Form S-1 was filed with the Securities and
Exchange Commission by the Litigation Trust and became effective on March 5,
2004.
COMPETITION
Generally, Monticello Raceway does not compete directly with other harness
racing tracks in New York State for live racing patrons. However, Monticello
Raceway does face intense competition for off-track wagering at numerous gaming
sites within the State of New York and the surrounding region. The inability to
provide larger purses for the races at Monticello Raceway is a significant
limitation on its ability to compete for off-track wagering revenues.
THE NEW YORK LOTTERY'S VIDEO GAMING PROGRAM. The New York State Lottery's
video gaming facility at Monticello Raceway will be one of seven such facilities
authorized in the State. Of these, two have recently commenced operations. The
New York State Lottery recently reported that New York State's first two VGM
racetracks, Saratoga Gaming and Raceway and Finger Lakes, reported a combined
$8.8 million in revenues through March 1, 2004. Saratoga opened on January 28th
and reported approximately $6.3 million in revenues or $139 per machine per day
5
for its first 34 days. Finger Lakes opened on February 18th and, during the
first 13 days, reported revenues of approximately $2.5 million or $190 per
machine per day. These figures are for short duration and there are significant
differences in the market areas as compared with Monticello Raceway. However,
the results are in line with the New York State Lottery's expectations for the
program. Additional facilities at Vernon Downs, near Syracuse, New York, and
Buffalo Downs, near Buffalo, New York, are also expected to open this year.
The primary competition for the Monticello Raceway facility for this
program is expected to be from two racetracks located within the New York
metropolitan area, Yonkers Raceway and Aqueduct Raceway. Both have announced
plans to proceed with the program and construction of facilities was commenced
at Aqueduct. However, the development program for Yonkers has yet to be
finalized and construction at Aqueduct has been suspended pending the resolution
of certain legal issues. In addition, proposals have been made for the
implementation of a similar program in New Jersey, which would include a
facility at the Meadowlands racetrack. Implementation of this program and a
similar one being considered in Pennsylvania will require legislation to be
enacted.
COMPETING NATIVE AMERICAN CASINOS. In April 2000, the St. Regis Mohawk
Tribe announced that they and CZR plan to build and manage a $500 million tribal
casino and resort in the Catskill Mountains. In May 2000, CZR obtained an option
to purchase Kutsher's Resort Hotel and Country Club in Monticello, New York, as
the site for this casino. As currently announced, CZR plans on turning this
facility, located approximately 5 miles from Monticello Raceway, into a 750 room
hotel with a 130,000 square foot casino, 15,000 square foot meeting hall,
numerous restaurants and a luxury spa.
Of the tribes that have submitted applications to the U.S. Department of
the Interior to acquire land in the Catskills for gaming purposes, the St. Regis
Mohawk Tribe is the only applicant, other than the Cayugas, that clearly meets
the conditions contained in the 2001 authorizing legislation with respect to
being both federally recognized and located in New York State. Another federally
recognized tribe, the Stockbridge Munsee Band of Mohegans, asserting aboriginal
roots in New York State, has also applied for approval to develop a Catskills
casino. Their partners, Trading Cove Associates, developers of the successful
Mohegan Sun in Connecticut, have purchased an option on 300 acres to build a
$600 million casino hotel on a site approximately five miles east of Monticello
Raceway.
The St. Regis Mohawks and the Stockbridge-Munsee Band of Mohicans have
recently held scoping meetings for the purposes of preparing a Federal
Environmental Impact Statement. Neither applicant completed the State
Environmental Review. Accordingly, we do not believe that federal approval of
their applications is imminent at this time or that any federal land to trust
application for the Catskill's region is closer to approval than the application
of the Cayuga Nation for the proposed Cayuga-Monticello Casino at Monticello
Raceway. We cannot predict, however, whether or when such approvals might be
obtained. Moreover, even following such an approval, the Cayuga Nation and the
Company will need to secure additional approvals from the State of New York and
the National Indian Gaming Commission, and the proposed casino will need to be
financed and constructed, before the Company can generate revenues from the
project.
Other New York based federally recognized Native American tribes or tribes
with historical ties to New York have expressed an interest in operating casinos
in the Catskill's area, but have not yet submitted applications. Two of these,
the Oneida Nation and the Seneca Nation, have already been active in the
development of casinos in Western New York. In July 1993, the Oneida Nation
opened "Turning Stone," a casino featuring 24-hour table gaming and electronic
gaming machines with approximately 90,000 square feet of gaming space, near
Syracuse, New York. In October 1997, the facility was expanded to include a
hotel, expanded gaming facilities, a golf course and a convention center. There
are also plans for a further expansion consisting of 50,000 square feet of
gaming space, 300 additional hotel rooms and a water park. The Seneca Nation
completed their negotiations with New York State and on January 1, 2003 opened a
casino in Niagara Falls, New York. The casino offers full Las Vegas style
gambling with slot machines and table games. Although the Oneida Nation and the
Seneca Nation have expressed an interest in operating a casino in the Catskills
and have been actively engaged in preliminary development work, they have not
yet publicly identified a site or submitted federal applications. In addition,
two out of state tribes, the Wisconsin Oneidas, and the Cayuga-Seneca's have
each expressed interest in submitting applications but neither has done so.
In February 1992, the Mashantucket Pequot Nation opened Foxwoods Resorts
Casino ("Foxwoods"), a casino hotel facility in Ledyard, Connecticut (located in
the far eastern portion of such state), an approximately three-hour drive from
New York City and an approximately two and one-half hour drive from Boston,
Massachusetts, which currently offers 24-hour gaming and contains approximately
6,412 slot machines, 350 table games and over 1,400 rooms and suites, 24
restaurants, 17 retails stores, entertainment and a year-round golf course.
Also, a high-speed ferry operates seasonally between New York City and Foxwoods.
The Mashantucket Pequot Nation has also announced plans for a high-speed train
linking Foxwoods to the interstate highway and an airport outside Providence,
Rhode Island.
6
In October 1996, the Mohegan Nation opened the Mohegan Sun Casino Resort
("Mohegan Sun") in Uncasville, Connecticut, located 10 miles from Foxwoods.
Developed by Sun International Hotels, Ltd., Mohegan Sun has approximately 6,100
slot machines and 282 tables, off-track horse betting, bingo, 32 food and
beverage outlets, and retail stores and completed the first phase of an
expansion project that included a 115,000 square foot casino, a 10,000 seat
arena, 40 retail shops, dining venues and two additional parking garages,
accommodating up to 5,000 cars, in September 2001. The second phase included a
1,200 hotel guest room 34 story tower with convention facilities and a spa and
was opened in the summer of 2002.
A number of groups are seeking recognition as federally-recognized Indian
tribes in the hopes of operating casinos near the New York metropolitan area. A
State designated Indian reservation exists for the Schaghticoke Tribe in the
Berkshire mountain area in Northwestern Connecticut. The Schaghticokes have
recently received Federal recognition; however, the State of Connecticut has
appealed the BIA's decision. There have been periodic proposals for locating a
Native American casino in the City of Bridgeport, Connecticut. Should a
federally-recognized tribe be successful in doing so, it would no doubt have an
economic impact on any casinos in the Catskills since Bridgeport is somewhat
closer to a large portion of the New York metropolitan area. In addition, the
Shinnecock tribe, which has a state reservation in Eastern Long Island, has
applied for Federal recognition. If they are successful, they could also apply
for a compact to locate a casino on the current reservation close to
Southampton, New York and approximately 90 miles from New York City, although
there is currently no legislative authorization for the Governor to approve such
a compact. However, should the Shinnecock tribe be successful in obtaining the
required federal and state approvals and proceeds to build a gaming facility on
their reservation, it would also be expected to have some level of economic
impact on any casinos which might then exist in the Catskills.
In Atlantic City there are currently 12 casino hotels. Moreover,
substantial new expansion and development activity has recently been completed,
is under construction, or has been announced in Atlantic City, including the
summer of 2003 opening of the Borgata Casino developed by MGM and Boyd Gaming
and the expansions at Harrah's, Tropicana and Showboat.
NEW STATE LEGISLATION
Legislation permitting other forms of casino gaming has been proposed,
from time to time, in various states, including those bordering the State of New
York. Six states have legalized riverboat gambling while others are considering
its approval. Several states are also considering, or have approved, large-scale
land-based racinos based at their state's racetracks. The business and
operations of Monticello Raceway could be adversely affected by such
competition, particularly if casino and/or racino gaming was permitted in
jurisdictions nearer New York City. Currently, casino gaming, other than Native
American gaming, is not allowed in New York, Connecticut, Pennsylvania or in
areas of New Jersey outside of Atlantic City. However, proposals have been
introduced to expand legalized gaming in those locations. Management is unable
to predict whether any such legislation will be enacted or whether, if passed,
it would have a material adverse impact on its proposed casino or Monticello
Raceway's video gaming machine operations.
GOVERNMENT REGULATION - MONTICELLO RACEWAY
As the owner and operator of a harness horse racing facility in New York
State, the Company's subsidiary, Monticello Raceway Management, is subject to
various regulatory requirements. The operation of a video gaming venue as an
agent of the New York Lottery also involves continuing compliance with detailed
licensing requirements. Since we completed our planned acquisition of CDL's
assets, including Monticello Raceway Management, we are also subject to many of
these requirements, including background checks of and licensing of our
executive officers, all VGM employees and significant stockholders. Monticello
Raceway Management received its harness racing license for 2004 subsequent to a
review of its acquisition by the Company. In addition, Monticello Raceway
Management and the Company have received temporary Video Gaming Agent Licenses,
pending further background checks by the New York State Police.
7
All horse racing and pari-mutuel wagering, both on-track and off-track, in
the State of New York is overseen by the New York State Racing and Wagering
Board (the "Board") and subject to the rules and regulations provided under the
Racing, Pari-mutuel Wagering and Breeding Law of 1983, as amended (the "Racing
and Wagering Law").
HARNESS RACING LICENSES. The Racing and Wagering Law requires the Company
to have Monticello Raceway Management's racetrack operating license renewed on
an annual basis. In this regard, the Board has the right to deny such a renewal
should any of Monticello Raceway Management's officers, directors or
stockholders, or any party owning stock or a share of the profits, or
participating in the management of Monticello Raceway Management, including the
Company (i) is convicted of a crime involving moral turpitude, (ii) engage in
bookmaking or other forms of illegal gambling, (iii) is found guilty of any
fraud or misrepresentation in connection with racing or breeding, (iv) violates
or attempts to violate any law, rule or regulation of any racing jurisdiction
for which suspension from racing might be imposed in such jurisdiction, (v)
violates any rule, regulation or order of the Board, or (vi) is found to have
experience, character or general fitness inconsistent with the best interests of
racing generally. The Board also has the right to deny license renewal for a
failure, in the opinion of the Board, to properly maintain Monticello Raceway.
As certain of these standards depend upon the subjective determination of the
Board, the Company's continued ability to operate Monticello Raceway cannot be
assured. Furthermore, under the Racing and Wagering Law, no more than eight
corporations or associations may be licensed by the Board in any one year to
conduct a pari-mutuel meet or meets of harness racing. While Monticello Raceway
Management has always been able to secure such a license in the past, there can
be no assurance of its ability to do so in the future should new harness
racetracks open up in the State of New York.
Certain of the Company's and Monticello Raceway Management's employees and
stockholders are also subject to New York State licensing requirements. These
individuals can be denied a license or have theirs revoked should they commit
any of the acts described above which would jeopardize the Monticello Raceway
Management's license renewal.
RESTRICTIONS ON STOCK OWNERSHIP. Since the Company is now the sole owner
of Monticello Raceway, whenever a stockholder of the Company that holds 25% or
more of the Company's outstanding stock decides to transfer any shares of his
stock, the Racing and Wagering Law requires that the transferee must file an
affidavit with the Board stating that he will be the sole beneficial owner of
such transferred stock, and whether or not he (i) has been convicted of a crime
involving moral turpitude, (ii) has been engaged in bookmaking or other forms of
illegal gambling, (iii) has been found guilty of any fraud or misrepresentation
in connection with racing or breeding, (iv) has been guilty of any violation or
attempt to violate any law, rule or regulation of any racing jurisdiction for
which suspension from racing might be imposed in such jurisdiction, or (v) has
violated any rule, regulation or order of the Board. If the transferee is not,
or will not be, the sole beneficial owner of the transferred stock, then he must
annex to his affidavit the terms of the agreement or understanding pursuant to
which he will hold the stock, including a detailed statement of any other
party's interest in such stock. Upon submission of this affidavit, should the
Board determine that it is inconsistent with the public interest, convenience or
necessity, or with the best interests of racing generally, for such transferee
to be a stockholder of record, or the beneficial owner of any interest in Empire
or a party that owns 25% or more of its stock, the Board has the right to order
such transferee to dispose of his stock or interest within a specified period of
time. Furthermore, any stock certificate denoting an equity interest in Empire
is required to bear a legend that states: "This certificate of stock is
transferable only subject to the provisions of section three hundred three of
the racing, pari-mutuel wagering and breeding law."
In addition to the restrictions described above, the Racing and Wagering
Law requires that any stockholder of Empire must be required, upon the written
demand of the Company, to sell his stock to the Company, at a price to be fixed
in the manner otherwise provided by law, provided such demand is made pursuant
to the written direction of the Board; and from and after the date of the making
of such demand, prohibiting the transfer of such certificate of stock, except to
the Company. Upon completion of our acquisition of Monticello Raceway
Management, our stock ownership automatically became subject to these
restrictions. Moreover, these transfer restrictions and the possibility of state
mandated divestiture could impair the marketability of our stock and cause it to
trade at a discount.
RACING RIGHTS. As a licensed harness horse racetrack, Monticello Raceway
is entitled to hold one or more harness horse race meetings each year from
January 1 through December 31, exclusive of December 25, when live racing in the
State of New York is prohibited. Of the amounts wagered on its live races,
Monticello Raceway is allowed to retain 17% of Regular Bets (a single bet or
wager on one horse), 19% of Multiple Bets (a single bet or wager on two horses
such as an "exacta"), 25% of Exotic Bets (a single bet or wager on three or more
horses such as a "trifecta"), 36% of Super Exotic Bets (a single bet or wager on
six or more horses such as a "pick six") and the breaks. Of the amounts
retained, Monticello Raceway normally must pay a tax of between 1%-7%, depending
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on the type of wager. Furthermore, of the net amount retained by Monticello
Raceway from its live races, 6%-15% must be dedicated to racetrack purses,
depending on the type of wager, in addition to that amount of retained earnings
that must be allocated to track purses as provided in its agreement with the
track's representative horsemen's association.
BOND POSTING. Each year, Monticello Raceway Management is required to
execute and file with the State Comptroller a bond to be fixed by the state tax
commission not exceeding $250,000, with sureties approved by the attorney
general, that it will keep its books and records and make reports as required by
the Racing and Wagering Law, that it will pay to the state all taxes imposed by
the Racing and Wagering Law, that it will distribute to the patrons of
pari-mutuel pools conducted by it all sums due upon presentation of winning
tickets held by them, and that it will otherwise comply with all of the
provisions of the Racing and Wagering Law and with the rules and regulations
prescribed by the Board and the state tax commission. Should Monticello Raceway
Management or the Company fail to post such a bond, each of us would be subject
to fines or having our racing licenses suspended, thus causing a material
adverse effect on our businesses.
BOOKS AND RECORDS. Throughout the year, Monticello Raceway Management must
maintain its books and records so as to clearly show by a separate record the
total amount of money contributed to every pari-mutuel pool including daily
double pools, if any. Furthermore, the state tax commission must, at all
reasonable times, be given access to the Monticello Raceway Management `s books
and records for the purpose of examining and checking the same and ascertaining
whether or not the proper amount or amounts due New York State are being paid.
LICENSES FOR SIMULCAST FACILITIES. In order for Monticello Raceway to
display and accept pari-mutuel wagers on the simulcast of horse races from
outside racetracks, it must first obtain a license from the Board, in addition
to the license required of it to carry out live harness horse racing. To obtain
such a license, an applicant is required to submit a "plan of operation" to the
Board, which should contain, among other things, a feasibility study denoting
the revenue earnings expected from the simulcast facility and the costs expected
to operate such facility; the security measures to be employed to protect the
transmission of wagering data to effectuate common wagering pools; and a
description of the management groups responsible for the operation of the
simulcast facility. Even though an applicant's plan may be acceptable to the
Board, the Board still has the right to deny a simulcast license should it
determine that simulcast wagering may cause any reduction of the total number of
racing events conducted on an annual or daily basis at the receiving track, or
should the receiving track applying for such license fail to enter into a
written agreement with the sending track. As with its live harness horse racing
license, there can be no assurance of the Company's ability following our
acquisition of Monticello Raceway, to continue to secure this license, the loss
of which would result in a material adverse effect on each of our businesses.
IN-STATE SIMULCASTING RESTRICTIONS. Absent special permission from the
Board, Monticello Raceway may only transmit its signal to a receiving track in
New York so long as that track is not also conducting a harness race meeting
during the same time and the signal from Monticello Raceway has been made
available to all authorized receiving tracks in the State of New York. The
amount retained by Monticello Raceway from the total deposits in pools wagered
on in-state simulcast racing events must be equal to the retained percentages
applicable to the in-state sending track. Of this retained amount, generally 50%
is required to be dedicated to increasing local purses.
SIMULCASTING OF OUT-OF-STATE THOROUGHBRED RACES. Monticello Raceway's
ability to simulcast thoroughbred races from racetracks outside of New York
State is subject to the reaching of an agreement with its representative
horsemen's association and a number of limitations under the Racing and Wagering
Law. Specifically, the Racing and Wagering Law provides that except during the
period in which live thoroughbred racing is conducted at Saratoga Race Course
(July 21 to September 1, 2003), Monticello Raceway may accept wagers and display
the live full-card simulcast signal from up to two (or three between January
15-April 15) thoroughbred tracks located in another state. How much of these
wagers that Monticello Raceway is able to retain depends on how it collects the
bets. If wagers from an out-of-state race are combined with those placed in
other states in order to create a single uniform pari-mutuel pool, the
percentage of wagers collected by Monticello Raceway that it can retain is
subject to the laws of the jurisdiction in which the sending track is located.
If, however, pools are only being shared within the State of New York,
Monticello Raceway is allowed to retain 18% of Regular Bets, 21% of Multiple
Bets, 26% of Exotic Bets, 36% of Super Exotic Bets and the breaks. Of the sum
retained by Monticello Raceway from these races, approximately 1%-5% must be
paid to either state taxing authorities or non-profit organizations, depending
on the day the race is held and the type of wager. Also, of the net amount
retained by Monticello Raceway from these simulcast activities, normally 50%
must be dedicated to racetrack purses.
9
While thoroughbred races are being run at Saratoga Race Course, Monticello
Raceway may only accept wagers and display the live simulcast signal from up to
two thoroughbred tracks located in another state, and only so long as Monticello
Raceway also accepts wagers on all thoroughbred races then being run in the
State of New York.
SIMULCASTING OF RACES RUN BY OUT-OF-STATE HARNESS TRACKS. Subject to a
written agreement with Monticello Raceway's representative horsemen's
association, Monticello Raceway may accept wagers and display the signal of up
to five out-of-state harness tracks. However, Monticello Raceway may not accept
wagers or display the simulcast signal from an out-of-state harness track on
more than four days in any week unless in the immediately preceding calendar
month an average of four or more live racing programs per week were conducted,
nor may Monticello Raceway accept wagers on more than five days in any week
unless in the immediately preceding calendar month an average of five or more
live harness racing programs per week were conducted at Monticello Raceway. If
wagers from a race from an out-of-state track are combined with those placed in
other states in order to create a single uniform pari-mutuel pool, the
percentage of wagers collected by Monticello Raceway that it can retain is
subject to the laws of the jurisdiction in which the sending track is located.
If, however, pools are only being shared within the State of New York,
Monticello Raceway is allowed to retain 19% of Regular Bets, 21% of Multiple
Bets, 27% of Exotic Bets, 36% of Super Exotic Bets and the breaks. Distribution
of the amounts retained by Monticello Raceway must be consistent with how
retained wagers are distributed from its live events.
NEW YORK STATE LOTTERY REGULATION OF VIDEO GAMING OPERATIONS
All video gaming activities in the State of New York are overseen by the
New York State Division of the Lottery (the "Division") and subject to the rules
and regulations governing video lottery gaming issued under and pursuant to the
authority of Part C, Chapter 383, Laws of New York 2001 as amended by Chapter 85
of the Laws of New York 2002, as amended by Chapter 63 of the Laws of New York
2003 known as the "video lottery gaming law," which incorporate, among other
things, the following requirements:
VIDEO GAMING AGENT LICENSE. The video lottery gaming law requires the
Company and Monticello Raceway Management to apply for and obtain a video
lottery gaming agent license. The Company and Monticello Raceway Management
applied for video lottery gaming agent licenses on December 12, 2003 and
received temporary video lottery gaming agent licenses on January 14, 2004. The
Division has the right to deny a permanent video lottery gaming license to the
Company or Monticello Raceway on the basis of any of the following criteria: (i)
the failure of either company to prove by clear and convincing evidence that it
is suitable for licensure in accordance with the regulations; (ii) the failure
of either company to provide information, documentation and assurances required
by the Act or regulations, or requested by the Division, or failure of either
company to reveal any fact material to suitability, or the supplying of
information which is untrue or misleading as to a material fact pertaining to
the suitability criteria; (iii) the conviction of either company, or of any
principal thereof, of any felony offense, as such is defined by New York Penal
Law Section 10.00(5), a misdemeanor under Article 225 of the New York Penal Law
as amended and supplemented or equivalent offense, or a misdemeanor under
Section 180.35, 180.40, 180.45, 180.50, 180.51, 180.52 or 180.53 of the Penal
law or equivalent offense; (iv) the Company or Monticello Raceway Management has
otherwise been determined by the Division to be a person whose prior activities,
criminal record, if any, or reputation, habits and associations pose a threat to
the effective regulation of video lottery gaming or create or enhance the
chances of unfair or illegal practices, methods, and activities in the conduct
of the video lottery gaming or has failed to provide any information reasonably
required to investigate either company for a license or to reveal any fact
material to such application, or has furnished any information which is untrue
or misleading in connection with such application; (v) current prosecution or
pending charges in any jurisdiction of the Company or Monticello Raceway
Management or of any person who is required to be qualified under these
regulations as a condition of a video lottery gaming licensure, for any of the
offenses enumerated in (iii) above; provided, however, that at the request of
either company or the person charged, the Division shall defer decision upon
such application during the pendency of such charge; (vi) the pursuit by the
Company or Monticello Raceway Management or any person who is required to be
licensed under the regulations as a condition of a video lottery gaming license
of economic gain in an occupational manner or context which is in violation of
the criminal or civil public policies of New York State, if such pursuit creates
an appearance of or a reasonable belief that the participation of such person in
video lottery gaming operations would be inimical to the policies of the Act or
to video lottery gaming in New York State; and (vii) the commission by the
Company or Monticello Raceway Management or any person who is required to be
licensed under the regulations of any act or acts which would constitute any
offense under (iii) above, even if such conduct has not been or may not be
prosecuted under the criminal laws of New York State or any other jurisdiction
or has been prosecuted under the criminal laws of New York State or any other
jurisdiction and such prosecution has been terminated in a manner other than
with a conviction.
10
Certain of the Company's and Monticello Raceway Management's employees and
stockholders are also subject to New York State licensing requirements. These
individuals can be denied a license or have theirs revoked should they commit
any of the acts described above which would jeopardize the Company's or
Monticello Raceway Management's license.
BONDING OF VIDEO LOTTERY GAMING AGENTS. The Division requires a bond or
other surety agreement to be obtained by Monticello Raceway Management prior to
conducting video lottery gaming operations, including but not limited to a
letter of credit, issued by a surety company or bank authorized to transact
business in New York and approved by the New York State Insurance Department or
New York State Banking Department as to solvency and responsibility, from any
licensed video lottery gaming agent in such amount as the Division may
determine, based on an established formula, so as to avoid monetary loss to New
York State because of video lottery gaming agent's activities or those of a
third party. The surety shall cover, at a minimum, seventy-one (71%) percent of
the total of four (4) days of estimated average daily sales. The figure for
estimated sales will be established for each video lottery gaming agent at
commencement of the game and may be adjusted from time to time thereafter by the
Division. The bond or other surety agreement shall name as beneficiaries the
Division and the State of New York.
FINANCIAL STABILITY OF VIDEO LOTTERY GAMING AGENTS. The Company and
Monticello Raceway Management must assure the financial integrity of video
lottery gaming operations by the maintenance of a video lottery gaming bankroll,
or equivalent provisions, adequate to pay prizes to video lottery gaming patrons
when due. At startup, Monticello Raceway Management shall be required to
maintain a daily video lottery gaming bankroll at least equal to: $500.00 per
terminal plus the single highest available progressive or non-progressive
jackpot at the facility.
CONTINUING ASSESSMENT OF FINANCIAL CONDITION. Neither the Company or
Monticello Raceway Management shall consummate a material debt transaction
without the prior written approval of the Division which approval shall not be
unreasonably withheld.
Neither the Company or Monticello Raceway Management shall guarantee the
debt of another, whether by co-signature or otherwise, or assume the debt of
another; or enter into any agreement to place an encumbrance on its facility to
secure the debts of another without the prior written approval of the Division
which approval shall not be unreasonably withheld.
FAILURE TO DEMONSTRATE FINANCIAL STABILITY. In the event that the Company
or Monticello Raceway Management fails to demonstrate financial stability, the
Division may take such action as is necessary to fulfill the purposes of the
video lottery gaming law and to protect the public interest, including, but not
limited to: issuing conditional licenses, approvals or determinations;
establishing an appropriate cure period; imposing reporting requirements in
excess of those otherwise mandated by these regulations; placing such
restrictions on the transfer of cash or the assumption of liabilities as is
necessary to insure future compliance with the financial stability standards;
requiring the maintenance of reasonable reserves or the establishment of
dedicated or trust accounts to insure future compliance with the financial
stability standards; requiring a special audit, with such plan to be approved by
the Division and conducted by an independent accounting firm at the expense of
the Company or Monticello Raceway Management; charging interest on any
outstanding amount of sales due the Division; or suspending, revoking or denying
licensure.
SUBMISSION AND REVIEW OF THE VIDEO LOTTERY GAMING SYSTEMS OF INTERNAL
CONTROL. The procedures of the system of internal control are designed to ensure
all of the following: (i) that assets of the Company, Monticello Raceway
Management and the Division are safeguarded, (ii) that the financial records of
the Company and Monticello Raceway Management are accurate and reliable, (iii)
that the transactions of the Company and Monticello Raceway Management's
operation are performed only as authorized by the Act, the video lottery gaming
law and the rules and regulations promulgated thereunder, (iv) that
accountability for assets is maintained in accordance with generally accepted
accounting principles, (v) that only authorized personnel have access to assets,
(vi) that recorded accountability for assets is compared with actual assets at
reasonable intervals and appropriate action is taken with respect to any
discrepancies, (vii) that the functions, duties, and responsibilities are
appropriately segregated and performed in accordance with sound practices by
competent, qualified, licensed personnel and that no employee of the Company or
Monticello Raceway Management is in a position to perpetuate and conceal errors
or irregularities in the normal course of the employee's duties, (viii) that
gaming is conducted with integrity and in accordance with the Act, the video
lottery gaming law and the rules and regulations promulgated thereunder, and
(ix) that the Company and Monticello Raceway Management comply with all federal,
state, and local tax laws, codes, and reporting requirements. Monticello Raceway
Management has received approval from the Division of its proposed internal
control processes for its video gaming operations.
The Division may require, at its option, that the Company or Monticello
Raceway Management provide an annual report, to be included in its annual
11
financial report, of an independent certified public accountant licensed to
practice in New York, that the Company or Monticello Raceway Management has, in
all respects, followed its approved internal control plan, which report shall
not, in case of a dispute between the Company and Monticello Raceway Management
and the Division, be binding upon the Division.
CONDUCT OF BUSINESS WITH NON-GAMING VENDORS; AGENT RESPONSIBILITIES. It is
the responsibility of the Company and Monticello Raceway Management to ensure
that all qualifying non-gaming vendors with which it seeks to conduct business
have first obtained from the Division a non-gaming vendor identification number
or, as necessary, a license.
NOTIFICATION OF ANTICIPATED OR ACTUAL CHANGES IN DIRECTORS, OFFICERS OR
EQUIVALENT LICENSEES OF VIDEO LOTTERY GAMING AGENTS AND HOLDING COMPANIES. The
Company and Monticello Raceway Management must immediately notify the Division,
in writing, as soon as is practicable, of the proposed appointment, appointment,
proposed nomination, nomination, election, intended resignation, resignation,
incapacitation or death of any member of, or partner in, its board of directors
or partnership, as applicable, or of any officer or other person required to be
licensed as a principal or key employee. The Division will undertake any review
of the license necessitated by the change.
NOTIFICATION CONCERNING CERTAIN NEW PRINCIPALS OF PUBLICLY TRADED HOLDING
COMPANIES. The Company or Monticello Raceway Management must immediately notify
the Division in writing if either company becomes aware that, with regard to the
Company, any person has acquired: (i) five (5) percent or more of any class of
equity securities, (ii) the ability to control the holding company, or (iii) the
ability to elect one or more directors of the Company. If the Company either
files or is served with any Schedule 13D, Schedule 13G or Section 13F filing
under the Securities Exchange Act of 1934, copies of any such filing shall be
immediately submitted to the Division by the Company.
NATIVE AMERICAN CASINOS
If the Company succeeds in developing a casino with a recognized Native
American tribe or nation, such casino operation would be subject to special
federal and state laws applicable to the gaming industry generally and to the
distribution of gaming equipment.
The operation of casinos, and of all gaming on Native American land, is
subject to the Indian Gaming Regulatory Act of 1988, as amended, which is
administered by the National Indian Gaming Commission, an independent agency
within the United States Department of the Interior, which exercises primary
federal regulatory responsibility over Native American gaming. The National
Indian Gaming Commission has exclusive authority to issue regulations governing
tribal gaming activities, approve tribal ordinances for regulating Class II and
Class III Gaming (as described below), approve management agreements for gaming
facilities, conduct investigations and generally monitor tribal gaming. Certain
responsibilities under the Indian Gaming Regulatory Act of 1988, as amended,
(such as the approval of per capita distribution plans to tribal members and the
approval of transfer of lands into trust status for gaming) are retained by the
Bureau of Indian Affairs. The Bureau of Indian Affairs also has responsibility
to review and approve land leases and other agreements relating to Native
American lands. Criminal enforcement is the exclusive responsibility of the
United States Department of Justice, except to the extent such enforcement
responsibility is shared with the state in which the tribal land is located
under the tribal-state compact and under the federal law that recognizes the
tribe.
The National Indian Gaming Commission is empowered to inspect and audit
all Native American gaming facilities, to conduct background checks on all
persons associated with Class II Gaming, to hold hearings, issue subpoenas, take
depositions, adopt regulations and assess fees and impose civil penalties for
violations of the Indian Gaming Regulatory Act of 1988, as amended. The Indian
Gaming Regulatory Act of 1988, as amended, also prohibits illegal gaming on
Native American land and theft from Native American gaming facilities. The
National Indian Gaming Commission has adopted rules implementing specific
provisions of the Indian Gaming Regulatory Act of 1988, as amended, which
govern, among other things, the submission and approval of tribal gaming
ordinances or resolutions and require a Native American tribe to have the sole
proprietary interest in and responsibility for the conduct of any gaming. Tribes
are required to issue gaming licenses only under articulated standards, to
conduct or commission financial audits of their gaming enterprises, to perform
or commission background investigations for primary management officials and key
employees and to maintain their facilities in a manner that adequately protects
the environment and the public health and safety. These rules also set out
review and reporting procedures for tribal licensing of gaming operation
employees.
12
Additionally, the National Indian Gaming Commission established the
Minimum Internal Control Standards, or MICS, that require each tribe or its
designated tribal government body or agency to establish and implement tribal
MICS by February 4, 2000.
Under the Indian Gaming Regulatory Act of 1988, as amended, except to the
extent otherwise provided in a tribal-state compact, Native American tribal
governments have primary regulatory authority over Class III Gaming on land
within a tribe's jurisdiction. However, the National Indian Gaming Commission
has the right to review tribal gaming ordinances and to approve such ordinances
only if they meet specific requirements relating to (1) the ownership, security,
personnel background, record keeping and auditing of a tribe's gaming
enterprises; (2) the use of the revenues from such gaming; and (3) the
protection of the environment and the public health and safety.
The Indian Gaming Regulatory Act of 1988, as amended, classifies games
that may be conducted on Native American lands into three categories. "Class I
Gaming" includes social games solely for prizes of minimal value or traditional
forms of Native American gaming engaged in by individuals as part of, or in
connection with, tribal ceremonies or celebrations. "Class II Gaming" includes
bingo, pull-tabs, lotto, punch boards, tip jars, certain non-banked card games
(if such games are played legally elsewhere in the state), instant bingo and
other games similar to bingo, if those games are played at the same location
where bingo is played. "Class III Gaming" includes all other forms of gaming,
such as slot machines, video casino games (e.g., video blackjack and video
poker), so-called "table games" (e.g., blackjack, craps and roulette) and other
commercial gaming (e.g., sports betting and pari-mutuel wagering).
Class I Gaming on Native American lands is within the exclusive
jurisdiction of Native American tribes and is not subject to the Indian Gaming
Regulatory Act of 1988, as amended. Class II Gaming is permitted on Native
American lands if (1) the state in which the Native American lands lie permits
such gaming for any purpose by any person, organization or entity; (2) the
gaming is not otherwise specifically prohibited on Native American lands by
federal law; (3) the gaming is conducted in accordance with a tribal ordinance
or resolution which has been approved by the National Indian Gaming Commission;
(4) a Native American tribe has sole proprietary interest and responsibility for
the conduct of gaming; (5) the primary management officials and key employees
are tribally licensed; and (6) several other requirements are met. Class III
Gaming is permitted on Native American lands if the conditions applicable to
Class II Gaming are met and, in addition, the gaming is conducted in conformance
with the terms of a tribal-state compact (a written agreement between the tribal
government and the government of the state within whose boundaries the tribe's
lands lie).
Tribal-State Compacts. The Indian Gaming Regulatory Act of 1988, as
amended, requires states to negotiate in good faith with Native American tribes
that seek to enter into tribal-state compacts for the conduct of Class III
Gaming. Such tribal-state compacts may include provisions for the allocation of
criminal and civil jurisdiction between the state and the Native American tribe
necessary for the enforcement of such laws and regulations, taxation by the
Native American tribe of gaming activities in amounts comparable to those
amounts assessed by the state for comparable activities, remedies for breach of
compacts, standards for the operation of gaming and maintenance of the gaming
facility, including licensing and any other subjects that are directly related
to the operation of gaming activities. While the terms of tribal-state compacts
vary from state to state, compacts within one state tend to be substantially
similar. Tribal-state compacts usually specify the types of permitted games,
establish technical standards for gaming, set maximum and minimum machine payout
percentages, entitle the state to inspect casinos, require background
investigations and licensing of casino employees and may require the tribe to
pay a portion of the state's expenses for establishing and maintaining
regulatory agencies. Some tribal-state compacts are for set terms, while others
are for indefinite duration.
Any Native American casino that the Company hopes to help jointly develop
therefore would be subject to the requirements and restrictions contained in the
compact its Native American partner is able to reach with the State of New York.
As compacts in each state tend to be substantially similar, the Company's casino
could expect to be subject to a compact much the same as the compact that
governs the operation of the Seneca Niagara Falls Casino between the Seneca
Nation of Indians and the State of New York.
The following is a summary of the material terms of the compact between
the Seneca Nation of Indians (the "Tribe") and the State of New York, dated
April 12, 2002 (the "Compact"):
(1) The Tribe is authorized to conduct on its reservation those Class III
gaming activities specifically enumerated in the Compact or amendments thereto.
13
The forms of Class III gaming authorized under the Compact include baccarat,
bang, beat the dealer, best poker hand, blackjack, Caribbean stud poker,
chuck-a-luck, craps, gaming devices, hazard, joker seven, keno, let it ride
poker, minibaccarat, pai gow poker, red dog, roulette, sic bo, super pan, under
and over seven, wheel games, casino war, Spanish blackjack, multiple action
blackjack and three card poker.
(2) All gaming employees must obtain and maintain a gaming employee
license issued by the Tribe in accordance with the terms set forth in the
Compact.
(3) All non-gaming employees must obtain and maintain a non-gaming
employee license issued by the Tribe in accordance with the terms set forth in
the Compact.
(4) Any enterprise or individual providing gaming services or gaming
equipment to the Tribe is required to hold a valid, current gaming enterprise
license issued by the Tribe in accordance with the terms set forth in the
Compact.
(5) Upon request, the Tribe is required to submit to the State of New York
copies of all reports, letters and other documents relating to its Class III
gaming activities filed with the National Indian Gaming Commission.
(6) Each year, the Tribe is required to submit audited financial
statements to the State of New York.
(7) The Tribe must reimburse the State of New York for certain of its
costs associated with the oversight of the Compact.
(8) The term of the Compact shall be for 14 years, with an automatic 7
year renewal unless one of the parties objects within 120 days of the Compact's
expiration.
(9) The Tribe waives any defense which it may have by virtue of sovereign
immunity with respect to any action brought in United States District Court to
enforce an arbitration award under the Compact.
EMPLOYEES
As of December 31, 2004, the Company had 9 full-time employees, including
our Chief Executive Officer.
ITEM 2. DESCRIPTION OF PROPERTIES.
We lease approximately 140 square feet of office space in a building
located at 707 Skokie Boulevard, Suite 600, Northbrook, Illinois, 60062 on a
monthly basis. The monthly rent for this office space is approximately $2,000.
Through one of our subsidiaries, we also lease a warehouse in Greenville,
Mississippi. The rent is $850 monthly.
Our primary asset is our leased property in Monticello, New York. The
Company's principal place of business is at Monticello Raceway, a 229 acre
property located on Route 17B in Monticello, New York. Facilities at the site
include the racetrack, which includes an enclosed grandstand with a capacity of
4,500, a clubhouse restaurant facility with a capacity for 200 customers,
pari-mutuel wagering facilities (including simulcasting), a paddock, exterior
barns, and related facilities for the horses, drivers, and trainers. In
addition, a parking area with approximately 5,000 spaces is provided for
customers.
On October 29, 2003, CDL and Monticello Raceway Management entered into a
48 year ground lease (the "Ground Lease") with respect to 200 acres of land in
Monticello, New York and all buildings and improvements allocated on such land
owned by CDL that are not subject to the Land Purchase Agreement (the "Leased
Property"). Under the terms of the Ground Lease, Monticello Raceway Management
will pay CDL $1.8 million per year. The first year's payment is due on October
28, 2004, the subsequent payments are subject to annual adjustments consistent
with the consumer price index, payable in equal monthly installments. However,
Monticello Raceway Management has the right, at its option, to defer its monthly
rental payments for up to 12 months after the first year, with such deferred
rent accruing interest at the rate of 4.5% per annum. Pursuant to the terms of
the merger of the Company and CDL on January 12, 2004, the former members of CDL
retained their interest in the leasehold obligation, independent of the assets
transferred in the combination. Satisfaction of this obligation by the Company
does not represent a discriminatory distribution or a dividend of any kind
between the Company and CDL.
14
During the first three years of the Ground Lease, Monticello Raceway
Management may, at its option, purchase the Leased Property for a purchase price
equal to the sum of (x) the rent payable for the year in which Monticello
Raceway Management exercises this purchase option divided by 5% (which would
equal $36 million in the first year of the Ground Lease) and (y) an amount equal
to all transfer taxes and closing costs incurred by CDL as seller. Monticello
Raceway Management may not assign its rights under the Ground Lease, sublet any
part of the Leased Property, nor enter into a transaction or series of
transactions that would result in a change of control of Monticello Raceway
Management without the consent of CDL. However, in the event that CDL withholds
its consent to such assignment of the Ground Lease or the subletting of all or
part of the Leased Property, Monticello Raceway Management may exercise its
option to purchase the Leased Property even after the first three years of the
Ground Lease have expired.
Under the terms of the Ground Lease, absent CDL's prior written consent,
Monticello Raceway Management is required to use the Leased Property solely for
racing, gaming, entertainment, retail, lodging, food service, any other use
related to so-called "tourism" and other ancillary and related activities.
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION CHALLENGING NEW YORK GAMING LEGISLATION
Our ability to participate in New York's VGM program or to help develop
and manage a Native American casino in conjunction with the Cayuga Nation of New
York could be hampered by the outcome of two pending lawsuits, DALTON V. PATAKI
and KARR V. PATAKI, that seek to enjoin the State of New York from proceeding
with the VGM program or permitting the construction of any new Native American
casinos within the State of New York's borders. While the trial court dismissed
both of these cases in May of 2003, the plaintiffs have filed an appeal. Briefs
have been submitted in the appeal and oral arguments were heard in December of
2003, but a decision on the appeal has not been rendered. Should the 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,
would hamper fundraising efforts for the Cayuga Monticello Resort and otherwise
adversely affect the implementation of our business plan, as investors might be
reluctant to invest given the uncertainty that such a holding would create.
CLAIMS AGAINST CAESAR'S ENTERTAINMENT
As more fully described above in Item 1 under "Other Business Activities
and Past Developments," on November 13, 2000, CDL and certain affiliates filed
an action against CZR in the United States District Court for the Southern
District of New York alleging that CZR tortuously interfered with our contract
and prospective business relationships with the St. Regis Mohawk Tribe, engaged
in unfairly competitive behavior and had violated certain state imposed
anti-trust protections. On August 22, 2002, U.S. District Court Judge Colleen
McMahon granted CZR's motion for summary judgment on the Plaintiffs' claim for
interference with business relationships and dismissed or confirmed the
dismissal of the Plaintiffs' contractual interference and other claims. On March
14, 2003, attorneys for the plaintiffs filed a motion requesting the District
Court to vacate this judgment on the ground that new evidence had been found. In
October 2003, the earlier judgment was vacated in order to allow the Court to
consider the effect of the new evidence following a brief period of additional
discovery. Briefs on this issue were filed in December, 2003. There is no
assurance that the new evidence will provide a basis for a decision favorable to
the plaintiffs, result in a different judgment or even permit the additional
evidence to be available for purposes of the record in an appeal. The interests
of the plaintiffs with respect to the claims in such litigation were transferred
to a grantor trust in connection with the consolidation transaction with CDL,
and the Company's indirect interests in connection with such claims were
converted into units of ownership of the trust and distributed to its
shareholders of record prior to the consolidation as a dividend liquidating
those interests. A registration statement concerning this distribution on Form
S-1 was filed with the Securities and Exchange Commission by the Catskill
Litigation Trust and became effective on March 5, 2004.
15
CLAIMS BY THE HORSEMEN'S ASSOCIATION AGAINST MONTICELLO RACEWAY MANAGEMENT, INC.
The Monticello Horsemen's Association has filed a number of suits against
Monticello Raceway Management Inc. and Cliff Ehrlich, as its President. One
action, seeking money damages of approximately $500,000, claims (i) that certain
monies (approximately $80,000), which should have been used solely for
"overnight purses," were expended by the raceway for a special racing series
known as the William Sullivan Series, (ii) that management has not increased
purses to the horsemen for overnight racing as requested by the horsemen and
(iii) that management is improperly holding up approximately $400,000 in an
account balance that is earmarked for payment of purses at such time as
management deems it appropriate. A second action seeks approximately $2 million
in damages claiming that management has withheld various simulcasting and OTB
revenues from the horsemen's purse account and deducted various unauthorized
simulcasting expenses. Management has responded vigorously to this litigation
and at the same time will seek, if possible, to resolve these cases in the
context of contract negotiations with the Horsemen's Association that began in
March of 2004.
Should the litigation proceed, however, counsel has advised the Company
that, (i) with regard to the $80,000 expended for the William Sullivan Pacing
Series, management was within its contract rights to apply that money towards
the racing series since the racing series met the definition of "overnight
purses," (ii) the $400,000 sought in accelerated purses will not have to be paid
in the manner that the Horsemen seek, but that eventually, those monies will be
required to be paid out in additional purses, and (iii) that there will be a
favorable outcome on the causes of action seeking damages for failure to
properly account for the OTB revenues as well as the issue of the deduction of
expenses for simulcasting. There are sharp disputed issues of fact with regard
to the cause of action seeking a greater share of the simulcasting revenue, and
at this time, no estimate can be given of the outcome of this cause of action or
the amount of potential loss.
Another action by the Horsemen's Association sought an injunction
preventing the management from consolidating the barn area by removing
approximately 50% of the barns and moving horsemen to different barns and also
seeks money damages for such conduct. A temporary restraining order at the
inception of the case was vacated after a hearing and the decision of management
to consolidate the barn area and deny stall space to certain horsemen was upheld
by the Court on the injunction motion. Management responded vigorously to this
litigation as it challenged the management's rights clause in the contract.
There is further discovery pending. However, in the opinion of counsel to the
Company, there will be no monetary loss as a result of this litigation.
OPERATING ENVIRONMENT
We and our subsidiaries are subject to various other legal actions which
may arise in the normal course of business. In the opinion of our management,
except as described above, the resolution of these other matters will not have a
material and adverse effect on the consolidated financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None to be reported.
16
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET PRICES
Our common stock trades on the Nasdaq Small-Cap Market System and the
Boston Stock Exchange under the symbols NYNY and NYN, respectively. The
following table sets forth the range of high and low close prices for our common
stock as reported by the Nasdaq System. These quotations represent prices
between dealers and do not reflect retail mark-ups, mark-downs or commissions.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
FISCAL 2003
High $10.69 $10.65 $16.74 $14.76
Low 1.94 8.11 9.31 8.21
FISCAL 2002
High $13.50 $13.20 $ 8.20 $ 2.27
Low 10.52 5.70 1.50 1.39
As of March 22, 2004, 25,898,468 shares of our common stock were issued
and outstanding.
DIVIDENDS COMMON STOCK
We have never declared or paid cash dividends on our common stock. We
intend to retain all future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable future. In
connection with the organization of the litigation trust, the Company's common
stockholders of record immediately before the merger are to receive the
Company's interest in the trust as a liquidating dividend.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2003 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted average exercise under equity compensation plans
outstanding options, price of outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))
------------- -------------------------- ---------------------------- -------------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders 821,228 2.67 88,400
Equity compensation plans not
approved by security holders 0 0 0
-------- ----- -------
Total
821,228 2.67 88,400
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SALE AND EXCHANGE OF UNREGISTERED SECURITIES
Under a special letter agreement among the Company, Catskill, and the
Cayuga Nation, the parties are to work exclusively with each other to develop a
casino, and as an inducement to enter into the transaction, the Cayuga Nation is
to receive 300,000 shares of the Company's common stock vesting over a twelve
month period. On April 9 and October 9, 2003, the Company issued to the Cayuga
Nation an aggregate of 200,000 shares of common stock at a market value of
$10.56 and $13.84 per share, respectively. An additional 100,000 shares vest,
and the expense will be recognized, on April 9, 2004.
From April 15, 2003 through September 2003, the Company sold 579,149
shares of common stock having an aggregate purchase price of approximately $4.6
million. Such purchasers could be entitled to have the aggregate purchase price
of such shares refunded by the Company, plus interest.
On January 30, 2004 the Company closed a private sale of 4,050,000 shares
of common stock, to multiple investors, at a price of $7.50 per share. This
sale, net of expenses, increased by approximately $30 million our funds for
development and operations.
On January 30, 2004 in connection with the private placement, Jefferies &
Company, Inc, was issued warrants to purchase 250,000 shares of our common stock
at $7.50 per-share for general financial advisory services rendered in
connection with the consummation of the private placement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Much of the information contained in this report is historical. However,
other matters discussed in this report, including statements in this Item and
under Item 1 contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. We believe that, in making any such forward looking statements, our
expectations have been based on reasonable assumptions, but any statement about
future events may be influenced by factors that could cause actual outcomes and
results to be materially different from those projected.
These forward-looking statements include statements relating to our
anticipated financial performance and business prospects and/or statements
preceded by, followed by or that include the words "believe," "anticipate,"
"intend," "estimate," "expect," "project," "could," "plans," "seeks" and similar
expressions. These forward-looking statements speak only as of their date. We do
not undertake any obligation to update or revise publicly any of these
forward-looking statements, whether as a result of new information, future
events or otherwise, even if experience or future events make it clear that any
expected results expressed or implied by these forward-looking statements will
not be realized. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, these expectations may not prove to
be correct or we may not achieve the anticipated financial results, savings or
other benefits. These forward-looking statements are necessarily estimates
reflecting the best judgment of our senior management and involve a number of
risks and uncertainties, some of which may be beyond our control that could
cause actual results to differ materially from those suggested.
OVERVIEW
During the past three years, the Company has concentrated most of its
efforts on developing gaming operations in Monticello, New York. As part of this
effort, the Company has disposed various ancillary interests and terminated
certain unprofitable operations. For instance, in March 2002, the Company sold
its interests in a casino project in Greenville, Mississippi, and in June 2003
the Company sold its ownership in Casino Ventures, LLC.
Our ability to develop a successful business is therefore largely
dependent on the success or failure of our ability to develop our interests in
Monticello, New York, and our financial results in the future will be based on
different activities than those from our prior fiscal years.
18
The Company had no operating revenue during the fiscal years ended
December 31, 2003 and 2002. On January 30, 2004, the Company closed a private
sale of 4,050,000 shares of common stock, to multiple investors, at a $7.50
sales price. This sale increased our current cash assets, net of expenses, by
approximately $30 million for development and operating costs.
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. If such an adverse event occurs, the trading price
of our common stock could decline, and you could lose all or part of your
investment.
AS A HOLDING COMPANY, THE COMPANY IS DEPENDENT ON THE OPERATIONS OF
MONTICELLO RACEWAY MANAGEMENT, MONTICELLO CASINO MANAGEMENT, MONTICELLO RACEWAY
DEVELOPMENT AND MOHAWK MANAGEMENT, AND THEIR ABILITY TO PAY DIVIDENDS OR MAKE
DISTRIBUTIONS, IN ORDER TO GENERATE INTERNAL CASH FLOW. Empire Resorts is a
holding company, owning all the capital stock or membership interests, as the
case may be, of Monticello Raceway Management, Monticello Casino Management,
Monticello Raceway Development and Mohawk Management. Empire Resorts is
therefore dependent on these companies to pay dividends or make distributions in
order to generate internal cash flow and to satisfy its obligations. There can
be no assurance, however, that these subsidiaries will generate enough revenue
to pay cash dividends or make cash distributions. In addition, these
subsidiaries may enter into contracts that limit or prohibit their ability to
pay dividends or make distributions.
THE ABILITY OF THE COMPANY TO SUCCESSFULLY MANAGE AND DEVELOP A NATIVE
AMERICAN CASINO IS UNCERTAIN GIVEN EMPIRE RESORTS' LACK OF EXPERIENCE WITH
NATIVE AMERICAN CASINOS. The Company has no experience in managing or developing
Native American casinos. Native American casinos are unique gaming ventures that
require highly skilled and knowledgeable managers given the complexity of
regulation governing their operation. In addition, as the respective interests
of the Native American tribe and the casino's management company are not always
aligned, avoiding disputes can sometimes prove difficult. As a result of these
special features, several companies with gaming experience that have tried to
become involved in the management and/or development of Native American casinos
have been unsuccessful. No assurance can be given that the Company, given its
lack of Native American gaming experience, will be able to avoid the pitfalls
that have befallen other companies in order to create a successful gaming
enterprise in conjunction with the Cayuga Nation of New York.
GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR RESULTS. The business
operations of Monticello Raceway Management are affected by economic conditions.
A recession or downturn in the general economy, or in the Catskills 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.
19
THE CONTINUING DECLINE IN THE POPULARITY OF HORSE RACING AND INCREASING
COMPETITION IN SIMULCASTING COULD ADVERSELY IMPACT THE BUSINESS OF THE
RACETRACK. 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. The Company's business plan anticipates the possibility of
Monticello Raceway attracting new customers to its racetrack wagering operations
through potential casino development or video gaming 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 gaming 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 the
Company are contingent upon continued governmental approval of these operations
as forms of legalized gaming and are subject to extensive governmental
regulation and could be subjected at any time to additional or more restrictive
regulation, or banned entirely. We may be unable to obtain, maintain or renew
all governmental licenses, registrations, permits and approvals necessary for
the operation of our pari-mutuel wagering and other gaming facilities. Licenses
to conduct live horse racing and simulcast wagering by the Company 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, we currently devote significant financial and management
resources to complying with the various governmental regulations to which our
operations are subject. Any significant increase in governmental regulation
would increase the amount of our resources devoted to governmental compliance,
could substantially restrict our 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 BETTER FINANCED THAN
US. The gaming industry in the Northeastern United States is highly competitive
and increasingly run by multinational corporations that enjoy widespread name
recognition, established brand loyalty, decades of casino operation experience
and a diverse portfolio of gaming assets. This is particularly true in Atlantic
City. In contrast, the Company has limited financial resources and is currently
limited to the operation of a harness horse racetrack in Monticello, New York.
Moreover, even if we are successful in installing video gaming machines at
Monticello Raceway and/or developing a Native American casino on our property,
we would still face competitive disadvantages if Caesar's 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 in 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 of 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.
IF WE DO NOT MEET CERTAIN REGULATORY SUITABILITY REQUIREMENTS, WE MAY BE
FORCED TO SELL OUR OWNERSHIP INTEREST IN CERTAIN GAMING ACTIVITIES AT A
DISCOUNT. The Company is required to be licensed or otherwise approved in each
20
jurisdiction where a gaming entity in which it has a significant ownership
interest operates. Obtaining such a license normally involves receiving a
determination of "suitability." Consequently, should we ever be found to be
unsuitable by the State of New York to participate in gaming operations, we
would be forced to liquidate all of our interests in Monticello Raceway
Management, Monticello Casino Management, and Monticello Raceway Development in
a prescribed period of time, as each of these entities is either involved in, or
plans to be involved in, gaming activities in the State of New York. Moreover,
should we ever be ordered by the State of New York to sell all of our interests
in Monticello Raceway Management, Monticello Casino Management, and Monticello
Raceway Development within a relatively short period of time, we would likely be
forced to sell these interests at a discount, thus causing the value of the
stock to diminish.
SEVERAL OF THE COMPANY'S FORMER OFFICERS AND DIRECTORS HAVE BEEN INDICTED
OR CONVICTED ON FRAUD CHARGES, AND THE COMPANY'S SUITABILITY DETERMINATION TO
PARTICIPATE IN GAMING ACTIVITIES COULD ACCORDINGLY BE ADVERSELY AFFECTED. During
2002, certain affiliates of Bryanston Group, our former largest stockholder, and
six of our former officers and directors were indicted for various counts of tax
and bank fraud. Moreover, on September 5, 2003, one of these former directors
who is also an affiliate of Bryanston Group, Brett Tollman, pleaded guilty to
felony tax fraud. On February 4, 2004, four more of these former officers and
directors were convicted of tax and bank fraud. In December 2002, we entered
into an agreement with Bryanston Group and certain of these individuals pursuant
to which we acquired a three year option to repurchase their common stock in the
Company. This option was exercised on January 9, 2004 by issuing a note to
Bryanston Group in exchange for their common stock. While none of the acts these
individuals have been charged with relate to their former positions with or
ownership interests in the Company, there can be no assurance that none of the
various governmental agencies that now, or in the future may, regulate and
license our gaming related activities will factor in these indictments in
evaluating our suitability. Should a regulatory agency fail to acknowledge that
these indictments are not related to our operations, we could lose our gaming
licenses or be forced to liquidate certain or all of our gaming interests.
AS A RESULT OF THE RECENT MERGER TRANSACTION THE COMPANY REDEEMED
2,392,857 SHARES OF ITS COMMON STOCK, CAUSING THE ASSUMPTION OF LIABILITIES. One
of the conditions to the closing of our recent merger was to redeem from
Bryanston Group and Beatrice Tollman an aggregate of 2,392,857 shares of common
stock at $2.12 per share. The total cost of this redemption was approximately $5
million, which the Company paid by issuing a note. The terms of this note
require approximately 13% of the principal to be paid on the first anniversary
of issuance and for the whole note to be repaid within three years. No assurance
can be given that the Company will have enough revenue or cash on hand to repay
this indebtedness when it becomes due.
AS A RESULT OF THE RECENT MERGER TRANSACTION, THE COMPANY'S USE FOR
FEDERAL INCOME TAX PURPOSES OF ITS ACCUMULATED NET OPERATING LOSSES TO OFFSET
FUTURE INCOME WILL BE LIMITED. As of December 31, 2003, the Company had net
operating loss carry-forwards of approximately $67 million set to expire between
2008 and 2023. Our recent merger, however, triggered certain provisions of the
Internal Revenue Code that will limit the future use of the Company's net
operating loss carry-forwards to offset its future federal taxable income.
Generally speaking, following the merger, we will only be permitted to use that
portion of our net operating loss carry-forwards per year (subject to certain
carry-forward rules) equal to the fair market value of our stock immediately
prior to the merger, multiplied by the federal long-term tax exempt rate on such
date (4.58% for the month of February, 2004).
FEDERALLY RECOGNIZED NATIVE AMERICAN TRIBES ALSO GENERALLY ENJOY SOVEREIGN
IMMUNITY FROM LITIGATION SIMILAR TO THAT OF A STATE 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 that we attempt to
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.
21
WE COULD FAIL TO COMPLETE THE VGM OPERATION ON TIME AND WITHIN BUDGET.
There can be no assurance that we will complete all portions of the VGM
operation on time or within budget. Construction projects such as the
construction of the VGM operation are subject to significant development and
construction risks, any of which could cause unanticipated cost increases and
delays.
These include the following:
o shortages of energy, material and skilled labor;
o delays in obtaining or inability to obtain necessary permits,
licenses and approvals;
o changes in law applicable to VGM projects;
o changes to the plans or specifications;
o weather interferences or delays;
o engineering problems;
o labor disputes and work stoppages;
o disputes with contractors;
o environmental and real property issues;
o fire, earthquake and other natural disasters; and
o change in political, financial or economic conditions, including as
a result of international conflict.
The casino portion of the VGM operation is scheduled to be completed and
opened in July 2004. However, opening the operation by this date assumes that
there are no unforeseen difficulties or delays. The construction design
documents for the VGM operation will be subject to revisions during the
construction of the facility. Such revisions could result in inefficiencies or
modifications to the design documents that could cause actual construction costs
to exceed budgeted amounts. For example, certain items may need to be modified
or replaced after they have been purchased, constructed or installed in order to
conform with the final design documents or building code requirements. There can
be no assurance that changes in the scope of the project will not be required,
even though they are not part of the general contractor's guaranteed maximum
price. The total remaining cost to design, develop, construct, equip and open
the VGM operation is expected to be approximately $23.4 million.
MONTICELLO CASINO MANAGEMENT AND MONTICELLO RACEWAY DEVELOPMENT HAVE
ENTERED INTO AGREEMENTS WITH THE CAYUGA NATION OF NEW YORK WHICH MAY NOT BE
FINANCEABLE UNTIL SOME OF THEM ARE APPROVED BY THE NATIONAL INDIAN GAMING
COMMISSION AND/OR THE BUREAU OF INDIAN AFFAIRS. Monticello Casino Management and
Monticello Raceway Development have entered into a management and development
agreement with the Cayuga Nation of New York, giving Monticello Casino
Management and Monticello Raceway Development exclusive management and
development rights over any gaming enterprise on 29 acres of land adjacent to
Monticello Raceway that is developed by the Cayuga Nation of New York. In order
for Monticello Casino Management and Monticello Raceway Development to carry out
their obligations under these agreements, the Company will likely need to raise
financing from outside investors. However, such financing is not likely to be
available on reasonable terms, or at all, until the management agreement has
been approved by the National Indian Gaming Commission and the Bureau of Indian
Affairs has approved the transfer of those 29 acres of land to the United States
of America in trust for the Cayuga Nation of New York. Obtaining such approvals,
however, can take several years and no assurance can be given that these
approvals will be obtained at all. While the Company expects these agreements to
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.
CDL AND/OR MONTICELLO RACEWAY MANAGEMENT MAY NOT BE ABLE TO TRANSFER LAND
TO THE UNITED STATES OF AMERICA IN TRUST FOR THE CAYUGA NATION OF NEW YORK FOR
THE PURPOSE OF DEVELOPING A NATIVE AMERICAN CASINO. The Indian Gaming Regulatory
Act provides that all "off-reservation" gambling projects on lands to be
transferred and held in trust by the United States of America for the benefit of
a Native American tribe must be expressly authorized by the Bureau of Indian
Affairs. Specifically, the statute states that gaming may not be conducted on
lands acquired by the United States of America in trust for the benefit of a
Native American tribe after October 17, 1988, unless the Bureau of Indian
22
Affairs, after consultation with the tribe and appropriate state and local
officials, determines that a gaming establishment on newly acquired lands would
be in the best interest of the tribe and its members, would not be detrimental
to the surrounding community, and the governor of the state in which the gaming
activity is to be conducted concurs with the Bureau of Indian Affair's
determination. While in 2000 the Bureau of Indian Affairs approved an
application to transfer the same 29 acres of land subject to the Land Purchase
Agreement to the United States of America in trust for the benefit of the St.
Regis Mohawk Tribe, no assurance can be given that the Bureau of Indian Affairs
will again approve such a transfer. Absent this approval, it would be very
difficult for the Company to execute its current business plan of jointly
developing a Native American casino with the Cayuga Nation of New York.
PENDING LAWSUITS COULD THREATEN THE VIABILITY OF OUR BUSINESS PLAN. The
Company's ability to help develop and manage a Native American casino in
conjunction with the Cayuga Nation of New York could be hampered by the outcome
of two pending lawsuits that seek to enjoin the State of New York from
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 appealed this decision. Should an appellate court
overrule the trial court and reinstate these lawsuits, and should the plaintiffs
ultimately prevail, the Company's business would be restricted to the operation
of Monticello Raceway and video gaming machines. Moreover, a reinstatement of
these lawsuits, even prior to a definitive ruling on the merits of the cases,
would hamper fundraising efforts and adversely affect the implementation of
Empire Resorts' business plan, as the Cayuga Nation of New York and investors
might abandon the Native American casino project or be reluctant to invest given
the uncertainty that such a holding would create.
CERTAIN STOCKHOLDERS OF THE COMPANY MAY BE ENTITLED TO CERTAIN RESCISSION
RIGHTS. There is a possibility that the company 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, having an aggregate
purchase price of approximately $4.6 million. Such purchasers could be entitled
to have the aggregate purchase price of such shares refunded by the Company,
plus interest. The Company cannot assure investors that it has, or will be able
to obtain, capital sufficient to fund any such repurchases, if required.
Currently, the Company has reported this risk of rescission as a contingency in
the notes to its financial statement. However, if it becomes likely that a
rescission offer will have to be made, the Company will have to adjust its
financial statements to reclassify up to approximately $4.6 million from
stockholders' equity to a liability.
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.
IF WE ARE UNABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES OR ARE REQUIRED TO SUBSTANTIALLY INCREASE OUR LABOR COSTS, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY
ADVERSELY AFFECTED. The operation of business requires qualified executives,
managers and skilled employees with gaming industry experience and
qualifications to obtain the requisite licenses. We may have difficulty
attracting and retaining a sufficient number of qualified employees and may be
required to pay a higher level of compensation that we have estimated in order
to do so. If we are unable to attract and retain a sufficient number of
qualified employees or are required to substantially increase our labor costs,
our business, results of operations and financial condition will be materially
adversely affected.
FUTURE SALES OF OUR COMMON STOCK MAY ADVERSELY AFFECT ITS PRICE. Recently
18,219,075 shares of our common stock were issued pursuant to our merger with
CDL, of which 204,965 of such shares may be resold in the public markets without
restriction and 18,014,110 of such shares may be sold in the public markets
pursuant to volume restrictions of Rule 144 of the Rules and Regulations of the
Securities Act of 1933, as amended. We also recently issued 4,050,000 shares of
our common stock to multiple investors in a private placement. 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 have outstanding options to purchase an aggregate of 821,228
shares of common stock at an average exercise price of $2.66 per share and
250,000 warrants at an exercise price of $7.50 per warrant. As the exercise
price for many of these options and warrants are well below the current market
23
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,
2002 and March 15, 2004, the closing price of our common stock has ranged
between $1.39 and $16.74. 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.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BYLAWS DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS AND COULD PREVENT YOU FROM
REALIZING A PREMIUM RETURN ON YOUR INVESTMENT IN THE COMPANY'S COMMON STOCK.
Concurrently with the closing of the merger, the Company amended its certificate
of incorporation and bylaws in order to divide its board of directors into three
classes of directors, with each class constituting one-third of the total number
of directors and the members of each class serving staggered three-year terms.
The classification of the board of directors will make it more difficult for
stockholders to change the composition of the board of directors because only a
minority of the directors can be elected at once. The classification provisions
could also discourage a third party from accumulating the Company's stock or
attempting to obtain control of the Company, even though this attempt might be
beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances the Company's stockholders could be
deprived of opportunities to sell their shares of common stock at a higher price
than might otherwise be available. In addition, pursuant to the Company's
certificate of incorporation, the Company's 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 the
Company's common stock, dilution of the common stock's voting power and
impairing the liquidation rights of the holders of the Company's common stock,
as its board of directors may determine. Issuance of such preferred stock,
depending upon its rights, preferences and designations, may also have the
effect of delaying, deterring or preventing a change in control.
OUR LARGE AMOUNT OF UN-ISSUED 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 our Board of Directors 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 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.
24
RESULTS OF OPERATIONS
The Company had no operating revenue during the fiscal years ended
December 31, 2003 and 2002.
Net loss was approximately $8 million for the year ended December 31, 2003
which compares with a net loss of approximately $9.5 million for the same period
of 2002. After providing for dividends on preferred stock, the net loss
applicable to common shares was approximately $9.6 million or $1.74 per share in
2003 compared to a net loss of approximately $9.7 million or $2.10 per share in
2002.
MISSISSIPPI
THE BAYOU CADDY'S JUBILEE CASINO
The Bayou Caddy's Jubilee Casino began its operation in Greenville in
November 1995 and was the second casino operating in a very discrete market. The
operations were meeting or exceeding all of management's expectations. In early
1997 a third casino opened in Greenville and it became clear that the market
would not expand sufficiently to accommodate the additional capacity. After
considerable deliberation, management took the decision to exit the Greenville
market and on March 2, 1998, we sold our interest in the Greenville Inn & Suites
and the Bayou Caddy's Jubilee Casino to Greenville Casino Partners, L.P., an
entity in which we held a 25% (subsequently reduced to approximately 19% for
capital call adjustments) interest, and with which we entered into a hotel
management contract. In March 2002, Greenville Casino Partners, L.P. sold all of
the entity's operations and assets to JMBS Casino LLC. Our proceeds from the
sale were approximately $2.8 million. Prior to the sale we assigned our related
hotel management contract to Greenville C.P., Inc. for an additional $510,000.
An additional $1 million was held in escrow for 18 months pending any claims the
purchaser may have against Greenville Casino Partners, L.P. In April 2003 we
received $135,000 in full settlement of the escrow and have no further interest
in the entity.
THE JUBILATION CASINO VESSEL
On July 8, 1999, the Company through our subsidiary, Jubilation Lakeshore,
Inc., contributed our inactive gaming vessel, Bayou Caddy's Jubilation Casino
("Jubilation"), to Casino Ventures, LLC, in exchange for $150,000 in cash, a
promissory note of approximately $1.4 million plus a non-managing membership
interest in Casino Ventures.
In December 2002, we recognized a $3 million impairment loss reflecting a
casualty loss on the Jubilation vessel.
Effective June 30, 2003, the Company and PDS Special Situations, LLC
("PDS"), a Nevada limited liability company, entered into an agreement for PDS
to purchase the Company's membership interest in Casino Ventures, LLC and all of
the Company's former debt agreements. The Company sold 75% of its issued and
outstanding equity interests in Casino Ventures, LLC in exchange for $10,000,
with the remaining interest owned by the Company, which totaled 18% then being
sold and transferred for an additional $40,000 upon the procurement from the
other 7% interest holders' membership interests. The Company recorded $10,000 of
proceeds from the sale of its interest and will record the additional $40,000
proceeds upon the receipt of the final payment. The net effect of the sale in
the 2003 consolidated financial statements was a loss of approximately $30,000.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2003, the Company had net cash used in
operating activities of $3.3 million. The uses were the result of a net loss of
approximately $8 million includes gain on sale of investment and management
contract of $135,000, equity in loss of affiliate of approximately $1.6 million,
and stock based compensation to employees and affiliates of approximately $3
million.
Cash used in investing activities of approximately $409,000 consisted of
$145,000 of proceeds from the sale of investments and related management
contract, offset by approximately $455,000 of additional investments and
advances in CDL and approximately $113,000 used in the purchase of property and
equipment.
25
Cash provided by financing activities of approximately $3.5 million was
substantially attributable to approximately $4.7 million in proceeds from the
sale of stock which was used to repay approximately $1.5 million of a note
payable. There is a possibility that the Company 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 were 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 approximately $4.6 million. Such purchasers could be entitled to have the
aggregate purchase price of such shares refunded by the Company, plus interest.
The Company cannot assure investors that it has, or will be able to obtain,
capital sufficient to fund any such repurchases, if required.
The Company was indebted to Societe Generale for a $1.6 million note due
in installments plus accrued interest at 16% per annum. Installment payments in
the amount of $400,000 each plus accrued interest were due in both February and
March 2003, respectively, with the balance due in June 2003. On February 28,
2003, the Company entered into an amendment to extend the February and March
2003 payments until April 15, 2003. On April 15, 2003, the Company entered into
a second amendment to the agreement was entered into requiring principal
payments of $150,000 in cash and $100,000 plus accrued interest of $89,000
through the issuance of common stock. The balance of approximately $1.4 million
due on June 15, 2003 plus accrued interest was paid in full on June 20, 2003
after entering into an additional five day extension agreement with the lender.
The Company had no operations in the past two years. It has incurred an
accumulated deficit and current net losses of approximately $119 million and
$110 million as of December 31, 2003 and 2002, respectively. In March 2002, the
Company sold its investment in Greenville Casino Partners, LP ("GCP") along with
its related supervisory management contract for an aggregate amount of
approximately $3.3 million in cash. In April of 2003, the final proceeds of
$135,000 were received.
On October 29, 2003, Monticello Raceway Management, Inc. consummated a
$3.5 million loan agreement with The Berkshire Bank. 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. This obligation was paid in full on February 4,
2004.
Although the Company is subject to continuing litigation, the ultimate
outcome of which cannot presently be determined, management believes any
additional liabilities that may result from pending litigation in excess of
insurance coverage will not be in an amount that will materially increase the
liabilities of the Company as presented in the attached consolidated financial
statements.
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance
sheet arrangements such as guarantees on loans and financial commitments,
indemnification arrangements, and retained interests in asset transferred to an
unconsolidated entity for securitization purposes. Notwithstanding the
foregoing, on October 29, 2003, the Company entered into a surety agreement in
favor of the Berkshire Bank to guarantee a $3.5 million loan made to Monticello
Raceway Management, Inc. This loan was subsequently repaid in February, 2004. On
January 12, 2004, the Company also entered into an agreement with the Litigation
Trust pursuant to which the Company will provide the Litigation Trust with a
$2.5 million line of credit to finance the litigation. This agreement is not
expected to have a material current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Management periodically reviews the carrying value of its investment and
advancement in CDL and deferred development cost in relation to historical
results, as well as management's best estimate of future trends, events and
26
overall business climate. If such reviews indicate that the carrying value of
such assets may not be recoverable, we would then estimate the future cash flows
(undiscounted and without interest charges). If such future cash flows are
insufficient to recover the carrying amount of the assets, then impairment is
triggered and the carrying value of any impaired assets would then be reduced to
fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS. The FASB issued FIN 46, "Consolidation
of Variable Interest Entities," in January 2003, and subsequently modified it in
December 2003. This Interpretation provides guidance on the identification of
entities for which control is achieved through means other than through voting
rights, so called variable interest entities (VIEs), and how to determine when
and which business enterprises should consolidate variable interest entities. If
an entity is identified as the variable interest entity's primary beneficiary,
the entity is required to consolidate the variable interest entity. In December
2003, the FASB issued FIN 46R with respect to variable interest entities created
before January 31, 2003, which among other things, revised the implementation
date to the first fiscal year or interim period ending after March 15, 2004,
with the exception of Special Purpose Entities. The Company is currently
evaluating the potential impact the adoption of this interpretation will have on
its consolidated financial statements.
In May 2003, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 changes the
accounting for certain financial instruments, which under previous guidance
could be classified as equity or mezzanine equity, by now requiring those
instruments to be classified as liabilities (or assets in some circumstances) in
the statement of financial position. The company has determined that SFAS No.
150 will not affect its financial position or results of operations.
In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104,"Revenue Recognition." SAB No. 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is following the guidance of SAB
No. 104.
STOCK OPTIONS. Effective January 1, 2003, the Company adopted the fair
value provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123) on a prospective basis.
Awards granted under the Company's three stock option plans and awards granted
to non-employees have been included in loss from operations for the year ended
December 31, 2003. Net loss for the year ended December 31, 2002 is less than
that which would have been recognized if the fair value based method had been
applied to all awards since the original effective date of SFAS 123.
The following table illustrates the effect on operation and loss per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period:
Year Ended
December 31, 2003 December 31, 2002
(in thousands except per share data)
Loss as reported:
Applicable to common shares .............. $ (9,579) $ (9,674)
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards granted modified or
settled during each period, net of related
tax effects .............................. -- (80)
Pro forma net loss:
Applicable to common shares ............. (9,579) (9,754)
Loss, basic as reported ................. (1.74) (2.10)
Basic, pro forma ........................ (1.74) (2.11)
Diluted as reported ..................... (1.74) (2.10)
Diluted, pro forma ....................... $ (1.74) $ (2.11)
27
SUBSEQUENT EVENTS
INVESTMENT IN MONTICELLO, NEW YORK
The acquisition of Monticello Raceway Management, Monticello Casino
Management, Monticello Raceway Development Company, and Mohawk Management for
80.25% of the Company's common stock, or 18,219,075 shares, calculated on a
post-merger, fully diluted basis was completed January 12, 2004.
ASSIGNMENT OF LITIGATION CLAIMS
On January 12, 2004 in order to better focus on the implementation of the
New York State Lottery's video gaming machine program and the development of
other gaming operations at Monticello Raceway and as a condition to the closing
of the consolidation with CDL, all claims relating to certain litigation against
parties alleged to have interfered with CDL's relations with the St. Regis
Mohawk Tribe, along with the rights to any proceeds from any judgment or
settlement that may arise from such litigation, were transferred to a grantor
trust in which the Company's common stockholders of record immediately before
the merger's closing (but following the redemption of the common stock held by
Bryanston Group and Beatrice Tollman) will have a 19.75% interest, with the
members of CDL and Monticello Raceway Development immediately before the
merger's closing owning the remaining 80.25%. The Company will separately enter
into an agreement with the Litigation Trust pursuant to which the Company will
provide the trust with a $2.5 million line of credit to finance the litigation.
However, aside from performing its obligations under this line of credit,
neither the Company nor any of its post-merger subsidiaries will have any future
involvement with the ongoing litigation or any future suits that may arise. Paul
A. deBary, a member of the Company's board of directors, and Joseph E.
Bernstein, a member of the Company's board of directors and a managing director
of Americas Tower Partners, have agreed to serve as co-trustees for the
Litigation Trust. For these services, Messrs. deBary and Bernstein will each
receive $60,000 per year and 1% and 4%, respectively, of any proceeds that the
Litigation Trust receives from the ongoing litigation, or any future litigation
that may be brought by the Litigation Trust. Moreover, any proceeds received by
the Litigation Trust shall first be applied to pay the expenses of the
Litigation Trust, including compensation of the trustees, second, to provide for
a reserve, if necessary, for future expenses of the Litigation Trust, third, to
repay the Company, in addition to any amounts borrowed under the line of credit,
up to $7.5 million to compensate the Company for other previously incurred
expenses in connection with the litigations, with the remaining amount to be
distributed pro rata to the Litigation Trust's beneficiaries. A registration
statement concerning this distribution on Form S-1 was filed with the Securities
and Exchange Commission by the Catskill Litigation Trust and became effective on
March 5, 2004.
STOCK REDEMPTION
On December 10, 2002, the Company entered into a recapitalization
agreement with Stanley Tollman, Beatrice Tollman (Stanley Tollman's wife), Monty
Hundley, Bryanston Group and Alpha Monticello, a wholly owned subsidiary of the
Company. Under this agreement, each of Bryanston Group and Beatrice Tollman
granted the Company a three year option to redeem from them up to 2,326,857 and
66,000 shares of the Company's common stock, respectively, at a redemption price
of $2.12 per share, payable in cash or by promissory note. Bryanston Group and
Beatrice Tollman also granted Robert A. Berman, the Company's chief executive
officer, an irrevocable three year proxy to vote these shares of common stock at
his discretion.
On January 9, 2004 prior to the closing of the merger with CDL, in
accordance with the terms of the restated contribution agreement, the Company
redeemed all of the shares of the Company's common stock that were subject to
the recapitalization agreement and that were held by Bryanston Group and
Beatrice Tollman. In order to consummate this redemption, the Company issued a
promissory note in the sum of approximately $5.1 million to Bryanston Group and
Beatrice Tollman in exchange for their shares. The note is payable over three
years pursuant to the following schedule:
28
Date Amount
---- ------
(1 Year Anniversary of Note) (13.33% of the Note Amount)
(18 Month Anniversary of Note) (17.78% of the Note Amount)
(2 Year Anniversary of Note) (22.22% of the Note Amount)
(30 Month Anniversary of Note) (26.67% of the Note Amount)
(3 Year Anniversary of Note) (20.00% of the Note Amount)
In addition, under the terms of the note, interest would accrue on the
outstanding principal amount at the rate of 7% per annum, and upon each
principal amount payment, the Company will also be required to pay all unpaid
accrued interest with respect to such principal amount payment.
PRIVATE PLACEMENT
On January 30, 2004 the Company closed a private sale of 4,050,000 shares
of common stock, to multiple investors, at a price of $7.50 per share. This
sale, net of expenses, increased by approximately $30 million our funds for
development and operations.
ITEM 7. FINANCIAL STATEMENTS.
See Index to Financial Statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the CEO
and CFO have concluded that as of the end of the period covered by this report,
the Company's disclosure controls and procedures are effective to provide
reasonable assurance that the information required to be disclosed by the
Company in reports that it files or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and timely reported as provided in the
Securities and Exchange Commission rules and forms. The Company periodically
reviews the design and effectiveness of our internal controls over financial
reporting, including compliance with various laws and regulations that apply to
the Company's operations. The Company makes modifications to improve the design
and effectiveness of its internal control structure and may take other
corrective action if the Company's reviews identify deficiencies or weaknesses
in its controls. No changes occurred during the year ended December 31, 2003 in
the Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be set forth in this Item will be incorporated
by reference from the Company's proxy statement to be filed no later than April
29, 2004 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
ITEM 10. EXECUTIVE COMPENSATION
The information required to be set forth in this Item will be incorporated
by reference from the Company's proxy statement to be filed no later than April
29, 2004 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required to be set forth in this Item will be incorporated
by reference from the Company's proxy statement to be filed no later than April
29, 2004 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be set forth in this Item will be incorporated
by reference from the Company's proxy statement to be filed no later than April
29, 2004 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
The following documents are filed or part of this report:
1. FINANCIAL REPORTS
EMPIRE RESORTS, INC.
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheet........................................ F-2
Consolidated Statements of Operations............................. F-3
Consolidated Statements of Stockholders' Equity................... F-4
Consolidated Statements of Cash Flows............................. F-5
Notes to Consolidated Financial Statements........................ F-7
CATSKILL DEVELOPMENT, LLC
Independent Auditors' Report .................................... F-28
Consolidated Balance Sheet ...................................... F-29
Consolidated Statements of Operations ........................... F-30
Consolidated Statements of Stockholders' Equity ................. F-31
Consolidated Statements of Cash Flow ............................ F-32
Notes to Consolidated Financial Statements ....................... F-34
2. EXHIBITS
3.1 Certificate of Incorporation, dated March 19, 1993. (1)
3.2 Certificate of Amendment of Certificate of Incorporation, dated
August 15, 1993. (1)
3.3 Certificate of Amendment of Certificate of Incorporation, dated
December 18, 1996. (1)
3.4 Certificate of Amendment of Certificate of Incorporation, dated
September 22, 1999. (1)
3.5 Certificate of Amendment of the Certificate of Incorporation, dated
June 13, 2001. (1)
3.6 Certificate of Amendment to the Certificate of Incorporation, dated
May 15, 2003. (1)
3.7 Certificate of Amendment to the Certificate of Incorporation,
January 12, 2004. (1)
3.8 Second Amended and Restated By-Laws, as of Feb. 12, 2002. (1)
3.9 Amendment No. 1 to the Second Amended and Restated By-Laws, dated
November 11, 2003. (1)
4.1 Form of Common Stock Certificate, incorporated by reference to the
Company's Proxy Statement, filed with the Securities and Exchange
Commission (the "SEC") on May 8, 2002.
4.2 Certificate of Designations, Preferences and Rights of Preferred
Stock, Series B, dated July 31, 1996. (1)
4.3 Certificate of Designation setting forth the Preferences, Rights and
Limitations of Series B Preferred Stock and Series C Preferred
Stock, dated May 29, 1998. (1)
4.4 Certificate of Amendment to the Certificate of Designation setting
forth the Preferences, Rights and Limitations of Series B Preferred
Stock and Series C Preferred Stock, dated June 13, 2001. (1)
4.5 Certificate of the Designations, Powers, Preferences and Rights of
the Series E Preferred Stock, dated December 10, 2002. (1)
30
4.6 Certificate of Amendment of Certificate of the Designations, Powers,
Preferences and Other Rights and Qualifications of the Series E
Preferred Stock, dated January 12, 2004. (1)
10.1 Form of Indemnification Agreement between the Company and directors
and executive officers of the Company. (2)
10.2 1993 Stock Option Plan. (2)
10.3 1998 Stock Option Plan. (3)
10.4 Form of Amended and Restated Contribution Agreement (with exhibits)
between the Company and Watertone Holdings, LP, dated as of February
8, 2002. (4)
10.5 Form of Stock Option Agreement by and between the Company and Robert
Berman. (4)
10.6 Form of Stock Option Agreement by and between the Company and Scott
Kaniewski. (4)
10.7 Irrevocable Proxy and Voting Agreement granted by Bryanston Group,
Inc. to Robert Berman for a duration of three years, dated April 30,
2002, incorporated by reference to the Company's Current Report on
Form 8-K, filed with the SEC on May 1, 2002.
10.8 Recapitalization Agreement, dated December 10, 2002, by and between
Alpha Hospitality Corporation, Alpha Monticello, Inc., Bryanston
Group, Inc., Stanly Tollman, Beatrice Tollman and Monty Hundley,
incorporated by reference to the Company's Current Report on Form
8-K/A, filed with the SEC on February 10, 2003.
10.9 Land Purchase Agreement and Shared Facilities Agreement between the
Cayuga Catskill Gaming Authority and Catskill Development, L.L.C.
(5)
10.10 Gaming Facility Management Agreement among the Cayuga Nation, the
Cayuga Catskill Gaming Authority and Monticello Casino Management,
LLC. (5)
10.11 Gaming Facility Development and Construction Agreement among the
Cayuga Nation, the Cayuga Catskill Gaming Authority and Monticello
Raceway Development Company, LLC. (5)
10.12 Letter Agreement among Empire Resorts, Inc. (fka Alpha Hospitality
Corporation), Catskill Development, LLC and the Cayuga Nation. (5)
10.13 Securities Contribution Agreement, dated July 3, 2003, by and among
Empire Resorts, Inc., Catskill Development, L.L.C., Americas Tower
Partners and BKB, L.L.C., incorporated by reference to the Company's
Current Report on Form 8-K, filed with the SEC on July 10, 2003.
10.14 Surety Agreement, dated October 29, 2003, made by the Company in
favor of The Berkshire Bank, incorporated by reference to the
Company's Current Report on Form 8-K, filed with the SEC on October
31, 2003.
10.15 Amended and Restated Securities Contribution Agreement, dated
December 12, 2003, by and among Empire Resorts, Inc., Catskill
Development, L.L.C., and members of both Catskill Development and
Monticello Raceway Development, incorporated by reference to the
Company's Current Report on Form 8-K, filed with the SEC on January
13, 2004.
10.16 Form of Securities Purchase Agreement, dated as of January 26, 2004,
among the Company and the purchasers identified on the signature
pages thereto. (1)
10.17 Form of Registration Rights Agreement, dated as of January 26, 2004,
by and among the Company and the investors signatory thereto. (1)
10.18 Five Year Warrant issued to Jefferies & Company, Inc., dated January
30, 2004, to purchase 250,000 shares of Common Stock at an exercise
price of $7.50 per share. (1)
10.19 Registration Rights Agreement, dated as of January 30, 2004, by and
among the Company and Jefferies & Company, Inc. (1)
10.20 Amended and Restated Employment Agreement by and between the Company
and Robert A. Berman, dated as of January 12, 2004.(1)
10.21 Amended and Restated Employment Agreement by and between the Company
and Scott A. Kaniewski, dated as of January 12, 2004. (1)
14.1 Code of Ethics. (1)
21.1 List of Subsidiaries. (1)
23.1 Consent of Independent Certified Public Accountants. (1)
23.2 Consent of Independent Certified Public Accountants. (1)
31.1 Section 302 Certification of Principal Executive Officer. (1)
31.2 Section 302 Certification of Principal Financial Officer. (1)
32.1 Section 906 Certification of Principal Executive Officer. (1)
32.2 Section 906 Certification of Principal Financial Officer. (1)
----------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 33-64236), filed with the SEC on June 10, 1993 and as
amended on September 30, 1993, October 25, 1993, November 2, 1993 and
November 4, 1993, which Registration Statement became effective November
5, 1993. Such Registration Statement was further amended by Post Effective
Amendment filed on August 20, 1999.
(3) Incorporated by reference to the Company's Proxy Statement, filed with the
SEC on August 25, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the SEC on February 26, 2002.
(5) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the SEC on November 3, 2003.
31
(b) Reports on Form 8-K in the last quarter covered by this report.
Current Report on Form 8-K
Date filed - October 8, 2003
Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
Current Report on Form 8-K
Date filed - October 31, 2003
Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
Amendment to Current Report on Form 8-K
Date filed - November 3, 2003
Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required to be set forth in this Item will be incorporated
by reference from the Company's proxy statement to be filed no later than April
29, 2004 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on the 26th day of March 2004.
EMPIRE RESORTS, INC
By: /s/ Robert A. Berman
----------------------------------
Robert A. Berman
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below hereby constitutes and appoints Robert A. Berman and Scott A. Kaniewski
his true and lawful attorney-in-fact and agent, with full power of substitution
and re-substitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-KSB and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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/ David Matheson Chairman of the Board and Director March 26, 2004
--------------------------
David Matheson
/s/ Robert A. Berman Chief Executive Officer and March 26, 2004
-------------------------- Director (Principal Executive
Robert A. Berman Officer)
/s/ Scott A. Kaniewski Chief Financial Officer (Principal March 26, 2004
-------------------------- Accounting and Financial Officer)
Scott A. Kaniewski
/s/ David P. Hanlon Vice Chairman of the Board and March 26, 2004
-------------------------- Director
David P. Hanlon
/s/ Morad Tahbaz President and Director March 26, 2004
--------------------------
Morad Tahbaz
/s/ Paul deBary Director March 26, 2004
--------------------------
Paul deBary
/s/ John Sharpe Director March 26, 2004
--------------------------
John Sharpe
33
Signature Title Date
/s/ Ralph J. Bernstein Director March 26, 2004
--------------------------
Ralph J. Bernstein
/s/ Arthur I. Sonnenblick Director March 26, 2004
--------------------------
Arthur I. Sonnenblick
/s/ Joseph Bernstein Director March 26, 2004
--------------------------
Joseph Bernstein
34
FRIEDMAN
ALPREN & 1700 BROADWAY
GREEN LLP NEW YORK, NY 10019
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS 212-842-7000
FAX 212-842-7001
www.nyccpas.com
INDEPENDENT AUDITORS' REPORT
----------------------------
TO THE STOCKHOLDERS OF EMPIRE RESORTS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of EMPIRE
RESORTS, INC. AND SUBSIDIARIES as of December 31, 2003, and the related
consolidated statements of operations, changes in cash flows and stockholders'
equity for the years ended December 31, 2003 and 2002. 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 auditing standards generally
accepted in the United States of America. 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 EMPIRE RESORTS, INC. AND
SUBSIDIARIES as of December 31, 2003, and the results of its operations and its
cash flows for the years ended December 31, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Friedman Alpren & Green LLP
-----------------------------------
Friedman Alpren & Green LLP
New York, New York
March 5, 2004
F-1
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash $ 18
Other current assets 17
---------
Total current assets 35
INVESTMENT AND ADVANCES IN AFFILIATE 5,542
DEFERRED DEVELOPMENT COSTS 2,440
---------
TOTAL ASSETS $ 8,017
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,489
Accrued payroll and related liabilities 35
---------
Total current liabilities 1,524
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,75,000 shares
authorized, 5,987 issued 60
Preferred stock, 5,000 shares authorized
$.01 par value;
Series B, 44 issued and outstanding --
Series E, $10.00 Redemption Value, 1,731
issued and outstanding 6,855
Capital in excess of par value 118,218
Accumulated deficit (118,640)
---------
Total stockholders' equity 6,493
---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 8,017
=========
See accompanying notes to consolidated financial statements.
F-2
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2003 2002
---- ----
REVENUES: $ -- $ --
------- -------
COSTS AND EXPENSES:
Selling, general and administrative 6,865 2,627
Interest 556 459
Depreciation -- 77
Pre-opening and development costs -- 24
------- -------
Total costs and expenses 7,421 3,187
------- -------
OTHER LOSS
Equity in loss of affiliate (1,631) --
Impairment loss on investment (6,934)
Impairment loss - Casino Ventures -- (3,000)
Gain on sale of investments and related
management contract 135 3,277
Recovery of insurance proceeds 500 --
Gain on extinguishment of debt 389 326
------- -------
Total other loss (607) (6,331)
------- -------
LOSS FROM OPERATIONS BEFORE
MINORITY INTEREST (8,028) (9,518)
MINORITY INTEREST -- 18
------- -------
NET LOSS (8,028) (9,500)
======= =======
CUMULATIVE UNDECLARED DIVIDENDS
ON PREFERRED STOCK (1,551) (174)
------- -------
LOSS APPLICABLE TO COMMON SHARES (9,579) (9,674)
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 5,501 4,615
======= =======
LOSS PER COMMON SHARE, basic and diluted $ (1.74) $ (2.10)
======= =======
See accompanying notes to consolidated financial statements.
F-3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Preferred Stock Preferred Stock Preferred Stock
Series B Series C Series D
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------
Balances, December 31, 2001 ................. 821 $ 8 135 $ 1 1 $ 0
===========================================================================
Preferred stock dividend
payable in common stock ..................
Stock compensation to employees .............
Preferred stock converted to debt ........... (1)
Common stock issued from
exercise of stock options ................
Preferred stock converted to
common stock ............................. (777) (8) (135) (1)
Long term debt converted to
common stock .............................
Common Stock issued to acquire interest in
Catskill Development, LLC ("CDL") ........
Preferred stock issued in settlement
of debt & to acquire additional
interest in CDL ..........................
Purchase of Treasury Shares .................
Net loss ....................................
---------------------------------------------------------------------------
Balances, December 31, 2002 ................. 44 $ 0 0 $ 0 0 $ 0
===========================================================================
Declared and paid Preferred dividends .......
Stock based compensation ....................
Common stock issued from
exercise of stock options and warrants ...
Common stock issued in settlement
of liabilities ...........................
Common stock issued for payment
of interest ..............................
Retirement of Treasury Shares ...............
Common stock issued thru private
placement sales ..........................
Common stock issued for investment CDL ......
Common stock issued for deferred
development cost .........................
Net loss ....................................
---------------------------------------------------------------------------
Balances, December 31, 2003 ................. 44 $ 0 0 $ 0 0 $ 0
===========================================================================
Preferred Stock Capital in
Series E Common Stock Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit
-----------------------------------------------------------------------------------
Balances, December 31, 2001 ................. 0 0 2,629 $ 26 $92,196 $ (95,173)
===================================================================================
Preferred stock dividend
payable in common stock .................. 415 4 5,768 (5,772)
Stock compensation to employees ............. 5 0 39
Preferred stock converted to debt ........... (1,079)
Common stock issued from
exercise of stock options ................ 8 1 32
Preferred stock converted to
common stock ............................. 946 10 2,489
Long term debt converted to
common stock ............................. 324 3 372
Common Stock issued to acquire interest in
Catskill Development, LLC ("CDL") ........ 576 5 6,929
Preferred stock issued in settlement
of debt & to acquire additional
interest in CDL .......................... 1,731 6,855
Purchase of Treasury Shares ................. (5) 0 (35)
Net loss .................................... (9,500)
-----------------------------------------------------------------------------------
Balances, December 31, 2002 ................. 1,731 $6,855 4,898 $ 49 $106,711 $(110,445)
===================================================================================
Declared and paid Preferred dividends ....... 41 1 166 (167)
Stock based compensation .................... 25 0 3,012
Common stock issued from
exercise of stock options and warrants ... 120 1 229
Common stock issued in settlement
of liabilities ........................... 46 1 414
Common stock issued for payment
of interest .............................. 21 0 320
Retirement of Treasury Shares ............... 0 (35)
Common stock issued thru private
placement sales .......................... 605 6 4,682
Common stock issued for investment CDL ...... 31 0 281
Common stock issued for deferred
development cost ......................... 200 2 2,438
Net loss .................................... (8,028)
-----------------------------------------------------------------------------------
Balances, December 31, 2003 ................. 1,731 $6,855 5,987 $ 60 $118,218 $(118,640)
===================================================================================
See accompanying notes to consolidated financial statements.
F-4
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(8,028) $(9,500)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of investment and related
management contract ............................. (135) (3,277)
Gain on extinguishments of debt ................... (389) (326)
Equity in loss of affiliate ....................... 1,631 --
Impairment loss on investment ..................... -- (6,934)
Impairment loss - Casino Ventures ................. -- 3,000
Minority interest ................................. -- (18)
Depreciation ...................................... -- 77
Stock based compensation .......................... 3,012 44
Interest settled with common stock ................ 320 --
Interest amortized on loan discount ............... -- 73
Changes in operating assets and liabilities:
Other current assets .............................. 29 9
Other non-current assets .......................... -- 207
Accounts payable and accrued expenses ............. 675 1,173
Accrued payroll and related liabilities ........... (409) 215
------- -------
NET CASH USED IN OPERATING ACTIVITIES ............................... (3,294) (1,389)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment and related management contract 145 3,277
Investments and advances in affiliate .......................... (455) --
Purchases of property and equipment ............................ (113) (694)
Decrease in other assets ....................................... 14 --
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................. (409) 2,583
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock .................................... 4,688 --
Proceeds from exercise of stock options and warrants ........... 230 33
Repayment of note payable ...................................... (1,500) --
Repayment of related party long-term debt ...................... -- (1,751)
Proceeds from related party long-term debt- Casino Ventures .... 129 678
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .......................................... 3,547 (1,040)
------- -------
NET INCREASE (DECREASE) IN CASH ..................................... (156) 154
CASH, beginning of year ............................................. 174 20
------- -------
CASH, end of year ................................................... $ 18 $ 174
======= =======
See accompanying notes to consolidated financial statements.
F-5
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2003 2002
---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the year $ 250 $ 129
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in conversion of long-term debt and
accrued interest $ -- $ 375
======== ========
Common stock issued in settlement of preferred stock dividends $ 167 $ 5,772
======== ========
Common stock issued for investment in affiliate $ 281 $ 6,934
======== ========
Common stock issued in conversion of preferred stock $ -- $ 2,499
======== ========
Common stock in Treasury for retirement $ -- $ 35
======== ========
Retirement of treasury stock $ 35 $ --
======== ========
Common stock issued in settlement of liabilities to Bryanston $ -- $ 1,904
======== ========
Common stock issued for deferred development costs $ 2,440 $ --
======== ========
Common stock issued in settlement of liabilities $ 415 $ --
======== ========
See accompanying notes to consolidated financial statements.
F-6
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Empire Resorts, Inc ("Empire" or the "Company") was organized as a
Delaware corporation on March 19, 1993, and since that time has served as a
holding company for various subsidiaries engaged in the ownership, development
and operation of gaming facilities. We were incorporated under the name Alpha
Hospitality Corporation and changed our name to Empire in May, 2003.
During the past three years, we have concentrated most of our efforts on
developing gaming operations in Monticello, New York. As part of this effort we
have disposed of various ancillary interests and terminated certain unprofitable
operations. In March 2002, we sold our interests in a casino project in
Greenville, Mississippi, and in June 2003 we sold our ownership in Casino
Ventures, LLC.
During that time we also increased our economic interest in Catskill
Development, LLC (CDL) that was formed in 1995 and before the ratification of
our merger, controlled Monticello Raceway, a harness horse racing facility
located on 229 acres in Monticello, New York, approximately 90 miles northwest
of New York City in the Catskill Mountains. In March 2002 we entered into an
agreement with Watertone Holdings, LP, a member of CDL that is controlled by
Robert Berman, our chief executive officer, and Scott Kaniewski, our chief
financial officer, whereby Watertone Holdings, LP transferred 47.5% of its
economic interest in CDL's racetrack and casino businesses to us in exchange for
575,874 shares of our common stock. In December 2002, we again increased our
ownership interest in CDL by issuing 1.3 million shares of Series E Preferred
Stock to Bryanston Group, Inc. ("Byranston Group"), a corporation controlled by
certain prior members of our senior management, in exchange for all of Bryanston
Group's interest in CDL, and in July 2003 we proposed the acquisition of
Monticello Raceway Management, Inc. ("Monticello Raceway Management"),
Monticello Casino Management, LLC ("Monticello Casino Management"), Monticello
Raceway Development Company, LLC ("Monticello Raceway Development") and Mohawk
Management, LLC ("Mohawk Management") for 80.25%, or 18,219,075 shares, of the
Company's common stock, calculated on a post-merger, fully diluted basis.
The merger was completed January 12, 2004 (see note 13). Future reporting
of the new operations will be accounted for as a reverse merger and as if the
transaction occurred on January 1, 2004, because there were no significant
operations during that period. Monticello Raceway Management was a wholly owned
subsidiary of CDL and each of Monticello Casino Management and Mohawk Management
was 60% owned by CDL and 40% owned indirectly by the Company and Monticello
Raceway Development. The Company previously did not own any direct interest in
Monticello Raceway Development.
MONTICELLO RACEWAY MANAGEMENT. Monticello Raceway Management is a New York
corporation that operates Monticello Raceway, a harness horse racing facility
located in Monticello, New York, and holds a leasehold interest in most of the
property where the Monticello Raceway is located in Monticello, New York.
Monticello Raceway Management reported its financial results with CDL on a
consolidated basis through December 31, 2003,
MONTICELLO CASINO MANAGEMENT. Monticello Casino Management is a New York
limited liability company with the exclusive right to manage, on behalf of the
Cayuga Nation of New York, any Class III Gaming operations and related
activities that may occur on the land to be placed in trust where the Monticello
Raceway is located in Monticello, New York. Currently, Monticello Casino
Management has no operations, employees or assets other than its gaming
management rights. Since inception, Monticello Casino Management has had no
reportable revenue, net income or losses.
MONTICELLO RACEWAY DEVELOPMENT COMPANY. Monticello Raceway Development is
a New York limited liability company with the exclusive right to design,
engineer, develop, construct, and furnish a Class III Gaming facility that is
being developed on the land to be placed in trust where the Monticello Raceway
is located in Monticello, New York. Monticello Raceway Development also has the
exclusive right to develop the remaining acres of land to provide for activities
supportive of gaming, such as lodging, food service and retail. Currently,
Monticello Raceway Development has no operations, employees or assets other than
its development rights. Monticello Raceway Development has had no reportable
revenue, net income or losses.
F-7
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MOHAWK MANAGEMENT. Mohawk Management is a New York limited liability
company originally formed to operate, in conjunction with the St. Regis Mohawk
Tribe, a Class III Gaming facility in Monticello, New York. Currently, Mohawk
Management has no operations, employees or assets. Since inception, Mohawk
Management has had no reportable revenue, net income or losses.
On November 19, 2002, the Company received a letter from NASDAQ stating
that it had fallen below the minimum stockholders' equity requirement of $2.5
million as of the Company's fiscal quarter ended September 30, 2002. As a result
of our recapitalization, the Company issued 1,730,696 shares of Series E
Preferred Stock with a $10 redemption value per share, which increased the
Company's stockholders' equity over $6 million, well in excess of the minimum
stockholder equity requirement. On January 16, 2003, the Company filed a Current
Report on Form 8-K demonstrating compliance. On January 17, 2003, the Company
received a letter from NASDAQ stating that based on the 8-K filing, it had
determined the Company complies with the minimum stockholders' equity
requirement and the matter was closed.
During 2002, six former officers or directors of the Company were charged
or convicted 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. Stanley Tollman is
currently a resident of London, England and has not returned to the United
States to answer these charges. None of the acts these individuals are charged
with relate to their roles or activities with the Company and the Company is not
charged with any wrongdoing. However, ownership of Bryanston Group, Inc.
("Bryanston Group"), our former 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 2002, the
Company entered into to an agreement with Bryanston Group and with certain of
these officers and other related parties in an effort to remove Bryanston Group
from a position to control the Company or to participate in the results of any
gaming activities. On September 5, 2003, Brett Tollman, pled guilty to felony
tax fraud. On February 4, 2004, Monty Hundley, Howard Zuckerman, Sanford
Freedman and James Cutler, each a former officer or director of the Company,
were convicted of tax and bank fraud.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize our revenues according to the type of
contract or activity that generates the proceeds. The Company has not had
operations to generate revenue in the past two years.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation.
CASH. The Company at December 31, 2003 maintained its cash in one bank,
which, at times, may have exceeded federally insured limits. The Company has not
incurred any losses in such accounts and believes it is not exposed to any
significant credit risk on cash.
CASH EQUIVALENTS. We consider all highly liquid instruments purchased with
a maturity of three months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost less
accumulated depreciation and amortization. The Company provided for depreciation
and amortization on property and equipment by applying the straight-line method
over the estimated useful lives.
F-8
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED DEVELOPMENT COSTS. Deferred development costs are stated at cost.
The Company capitalizes certain costs directly related to an agreement with a
Native American Tribe to obtain a gaming license. These capitalized costs are
periodically reviewed for impairment.
GOODWILL AND OTHER INTANGIBLES. On January 1 2002 the Company adopted SFAS
No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 eliminates the
amortization of goodwill and indefinite-lived intangible assets and initiates an
annual review for impairment.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. In June 2002, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (FAS) 146, "Accounting for Costs Associated with Exit or
Disposal Activities," which supercedes Emerging Issues Task Force (EITF) Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective for exit and
disposal activities initiated after December 31, 2002. FAS 146 requires
recognition of a liability for costs associated with an exit or disposal
activity when the liability is incurred, rather than when the entity commits to
an exit plan under EITF Issue 94-3. The Company evaluated the amounts that would
be recovered from assets and required to settle liabilities of certain inactive
operations. As a result of this evaluation the Company recognized a gain of
approximately $389,000 during the year ended December 31, 2003.
DISCLOSURE REQUIREMENTS FOR GUARANTEES. In November 2002, the FASB issued
Financial Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 sets forth the disclosures required to be made by a guarantor in
its financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company was a surety on a loan for a
subsidiary of CDL at December 31, 2003 that was subsequently paid off in
February of 2004. On January 12, 2004 the Company also entered into an agreement
with the Litigation Trust pursuant to which the Company will provide the trust
with a $2.5 million line of credit to finance the litigation. The adoption of
FIN 45 is not expected to have a material effect on the Company's financial
position or results of its operations
INVESTMENTS. The Company accounted for its investment in CDL under the
cost method until December 12, 2002, at which time we adopted the equity method.
On December 12, 2002, the Company acquired Bryanston Group's voting and certain
economic interests in CDL. The Company's investment of 25% in the operating
results of CDL for the year ended December 31, 2003 are included in the
financial statements using the equity method.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically reviews the
carrying value of its long-lived assets in relation to historical results, as
well as management's best estimate of future trends, events and overall business
climate. If such reviews indicate that the carrying value of such assets may not
be recoverable, we would then estimate the future cash flows (undiscounted and
without interest charges). If such future cash flows are insufficient to recover
the carrying amount of the assets, then impairment is triggered and the carrying
value of any impaired assets would then be reduced to fair value.
EARNINGS (LOSS) PER COMMON SHARE. The Company complies with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the year.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Since the effect of outstanding options and
warrants is antidilutive, they have been excluded from the Company's computation
of loss per common share. Therefore, basic and diluted loss per common share for
the years ended December 31, 2003 and 2002 were the same.
F-9
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES. The Company applies the asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in future taxable or
deductible amounts, based on enacted tax laws and rates for the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS. The FASB issued FIN 46, "Consolidation
of Variable Interest Entities," in January 2003, and subsequently modified it in
December 2003. This Interpretation provides guidance on the identification of
entities for which control is achieved through means other than through voting
rights, so called variable interest entities (VIEs), and how to determine when
and which business enterprises should consolidate variable interest entities. If
an entity is identified as the variable interest entity's primary beneficiary,
the entity is required to consolidate the variable interest entity. In December
2003, the FASB issued FIN 46R with respect to variable interest entities created
before January 31, 2003, which among other things, revised the implementation
date to the first fiscal year or interim period ending after March 15, 2004,
with the exception of Special Purpose Entities. The Company is currently
evaluating the potential impact the adoption of this interpretation will have on
its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
Company adopted SFAS No. 150 on July 1, 2003 and does not expect this statement
to materially impact the Company's financial statements.
In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104,"Revenue Recognition." SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The Company believes it is following the guidance of SAB
104.
In December 2002, the FASB issued Statements of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123, This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Effective January 1, 2003 the Company adopted
this standard and will report the provisions on a prospective basis. The Company
in 2003 recognized stock based compensation of approximately $3 million.
The following table illustrates the effect on operation and loss per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period:
Year Ended
December 31, 2003 December 31, 2002
(in thousands except per share data)
Loss as reported:
Applicable to common shares .............. $ (9,579) $ (9,674)
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards granted modified or
settled during each period, net of related
tax effects .............................. $ -- $ (80)
Pro forma net loss:
applicable to common shares .............. $ (9,579) $ (9,754)
Loss, basic as reported ....................... $ (1.74) $ (2.10)
Basic, pro forma ......................... $ (1.74) $ (2.11)
Diluted as reported ...................... $ (1.74) $ (2.10)
Diluted, pro forma ....................... $ (1.74) $ (2.11)
F-10
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the 2002 presentation.
NOTE 3. INVESTMENT IN GREENVILLE CASINO PARTNERS
The Bayou Caddy's Jubilee Casino began its operation in Greenville in
November 1995 and was the second casino operating in a very discrete market. The
operations were meeting or exceeding all of management's expectations. In early
1997 a third casino opened in Greenville and it became clear that the market
would not expand sufficiently to accommodate the additional capacity. After
considerable deliberation, management made the decision to exit the Greenville
market and on March 2, 1998, we sold our interest in the Greenville Inn & Suites
and the Bayou Caddy's Jubilee Casino to Greenville Casino Partners, L.P., an
entity in which we held a 25% (subsequently reduced to approximately 19% for
capital call adjustments) interest, and with which we entered into a hotel
management contract. In March 2002, Greenville Casino Partners, L.P. sold all of
the entity's operations and assets to JMBS Casino LLC. Our proceeds were
approximately $2.8 million. Prior to the sale we assigned our related hotel
management contract to Greenville C.P., Inc. for an additional $510,000. An
additional $1 million was held in escrow for 18 months pending any claims the
purchaser may have against Greenville Casino Partners, L.P. In April 2003 the
Company received $135,000 in full settlement of the escrow and has no further
interest in the entity.
On March 31, 2003, the Company settled an action it brought in the Circuit
Court of Washington County, Mississippi against Investors Insurance Company of
America, Tanenbaum Harber Co. Inc. and Aon Risk Services, Inc. of Pennsylvania
for breach of contract concerning the breakaway of the Company's Bayou Caddy's
Jubilee Casino in 1998. The Company accepted a total settlement of $500,000 from
all parties involved and received the money in the second quarter of 2003.
NOTE 4. DEFERRED DEVELOPMENT COSTS
On April 3, 2003, the Cayuga Nation of New York, a federally recognized
Indian Nation (the "Cayuga Nation"), CDL and certain of CDL's affiliates,
including a subsidiary of the Company, entered into a series of agreements which
provide for the development of a casino adjacent to the Monticello Raceway, on
Trust Land. In furtherance of these transactions, on April 10, 2003, the Cayuga
Nation, the Company and its affiliate, CDL, 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
29 acre parcel of land in Monticello, New York to be used for gaming purposes.
Under a special letter agreement among the Company, CDL, and the Cayuga
Nation, the parties are to work exclusively with each other to develop a casino.
In order to assist the Cayuga Nation in the development process the Company
agreed to issued 300,000 shares of common stock to the Cayuga Nation that vest
over a twelve month period. On April 9 and October 9, 2003, the Company issued
an aggregate of 200,000 shares of common stock at a market value of $10.56 and
$13.84 per share, respectively. An additional 100,000 shares vest and will be
issued on April 9, 2004. The agreement also provides for the Company to fund
development costs of the Cayuga Nation on a monthly basis and for the Cayuga
Nation to participate in the ownership of a to-be-developed hotel within five
miles of the Casino by the Company and its other affiliates. This hotel will be
designated as the preferred
F-11
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provider to the proposed casino by the Cayuga Nation. 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
casino. The special letter agreement will terminate on April 30, 2004, unless
the trust land application of the Cayuga Nation, and the casino management
agreement have received the required federal approvals. When operations of the
casino commence the deferred development costs will be systematically recognized
over a determinable period.
NOTE 5. INVESTMENT AND ADVANCES IN AFFILIATES
The Company's principal asset at December 31, 2003 was its 25% interest in
Monticello Raceway. The Company's investment and advances in CDL at December 31,
2003 and 2002 was approximately $5.5 million and $6.4 million, respectively.
ASSIGNMENT OF LITIGATION CLAIMS
In July 1996, CDL entered into a series of agreements with the St. Regis
Mohawk Tribe related to the development and management of the proposed Native
American Casino, subject to federal, state and local approvals.
By letter dated April 6, 2000, the Assistant Secretary of the Department of
the Interior advised and notified the Governor of New York that the proposed
Casino Project had been approved and specifically requested that the Governor
concur. However, on April 22, 2000, the Company became aware of a letter
agreement between the Mohawk Tribe and Caesar's Entertainment, Inc. ("CZR")
formerly Park Place Entertainment, which gave CZR the exclusive rights to
develop and manage any casino development the St. Regis Mohawk Tribe might have
in the State of New York.
On November 13, 2000, CDL and related entities, including Alpha Monticello,
Inc. ("AMI"), a wholly-owned subsidiary of the Company (the "Plaintiffs"),
joined in a suit filed in United States District Court, Southern District of New
York against CZR, alleging entitlement to substantial damages as a consequence
of, among other things, its wrongful interference with several agreements
between CDL and the St. Regis Mohawk Tribe pertaining to the proposed Native
American Casino Project.
On August 22, 2002, U.S. District Court Judge Colleen McMahon granted CZR's
motion for summary judgment on the Plaintiffs' claim for interference with
business relationships and dismissed or confirmed the dismissal of the
Plaintiffs' contractual interference and other claims.
On March 14, 2003, attorneys for the plaintiffs filed a motion requesting
the District Court to vacate this judgment on the ground that new evidence had
been found. In October 2003, the earlier judgment was vacated in order to allow
the Court to consider the effect of the new evidence following a brief period of
additional discovery. Briefs on this issue were filed in December, 2003. There
is no assurance that the new evidence will provide a basis for a decision
favorable to the plaintiffs, result in a different judgment or even permit the
additional evidence to be available for purposes of the record in an appeal.
On January 12, 2004 in order to better focus on the implementation of the
New York State Lottery's video gaming machine program and the development of
other gaming operations at Monticello Raceway and as a condition to the closing
of the consolidation with CDL, all claims relating to certain litigation against
parties alleged to have interfered with CDL's relations with the St. Regis
Mohawk Tribe, along with the rights to any proceeds from any judgment or
settlement that may arise from such litigation, were transferred to a grantor
trust in which the Company's common stockholders of record immediately before
the merger's closing (but following the redemption of the common stock held by
Bryanston Group and Beatrice Tollman) will have a 19.75% interest, with the
members of CDL and Monticello Raceway Development immediately before the
merger's closing owning the remaining 80.25%. The Company will separately enter
into an agreement with the Litigation Trust pursuant to which the Company will
provide the trust with a $2.5 million line of credit to finance the litigation.
However, aside from performing its obligations under this line of credit,
neither the Company nor any of its post-merger subsidiaries will have any future
F-12
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
involvement with the ongoing litigation or any future suits that may arise. Paul
A. deBary, a member of the Company's board of directors, and Joseph E.
Bernstein, a member of the Company's board of directors and a managing director
of Americas Tower Partners, have agreed to serve as co-trustees for the
Litigation Trust. For these services, Messrs. deBary and Bernstein will each
receive $60,000 per year and 1% and 4%, respectively, of any proceeds that the
Litigation Trust receives from the ongoing litigation, or any future litigation
that may be brought by the Litigation Trust. Moreover, any proceeds received by
the Litigation Trust shall first be applied to pay the expenses of the
Litigation Trust, including compensation of the trustees, second, to provide for
a reserve, if necessary, for future expenses of the Litigation Trust, third, to
repay the Company, in addition to any amounts borrowed under the line of credit,
up to $7.5 million to compensate the Company for other previously incurred
expenses in connection with the litigations, with the remaining amount to be
distributed pro rata to the Litigation Trust's beneficiaries. A registration
statement concerning this distribution on Form S-1 was filed with the Securities
and Exchange Commission by the Catskill Litigation Trust and became effective on
March 5, 2004.
NEW YORK STATE LOTTERY VIDEO GAMING MACHINES
On October 31, 2001, the State of New York enacted a bill granting seven
racetracks across the state, including Monticello Raceway, the right for the New
York State Lottery to install video gaming machines on their premises. The video
gaming machines (VGM) operation will be conducted by the New York State Lottery
with the racetracks functioning as agents for the Lottery. Ownership and
maintenance of the VGM system is borne by the State Lottery.
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
Gaming 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. Approximately 29% of total VGM net revenue received is to
be distributed to the tracks and their horsemen/breeders associations. A
percentage of VGM revenues are 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 VGM structures while more comprehensive construction takes place.
Pursuant to the original legislation, the New York State Lottery made an
allocation of 1,800 VGMs to Monticello Raceway. If market conditions permit,
additional machines may be added without the need for additional legislation.
Participation in this program will require additional approvals by the New York
State Lottery and the construction of additional facilities at Monticello
Raceway, which is currently underway. Although work on the implementation of
these items is proceeding, no assurance can be given that successful
implementation will be achieved.
ADDITIONAL SUBSIDIARY OWNERSHIP
On July 3, 2003, the Company signed an agreement to merge its interests and
rights in CDL and certain of its affiliates into the Company. The agreement
provides for the Company to acquire through Monticello Raceway Management a 48
year ground lease on the Monticello Raceway site and contiguous properties,
together with all of CDL's development and management rights with respect to the
site and related gaming activities, as well as the raceway operations, in
exchange for 80.25% of our outstanding common stock on a post-transaction, fully
diluted basis. Prior to consummation of the transaction, the claims in certain
litigation by CDL were to be assigned to a trust.
On January 12, 2004, 18,219,075 shares of common stock were issued and all
requirements were finalized (see note 13). As a result, CDL transferred to the
Company all of its operations at the Monticello Raceway and all development and
management rights with respect to Native American gaming, video gaming machines
and real estate development activities, including all rights and obligations of
CDL under any agreement with respect to the development, construction and
operation of the proposed Native American casino. As a result of this
transaction, the Company acquired Monticello Raceway Management, Monticello
Raceway Development, Mohawk Management and all of the equity of Monticello
Casino Management that the Company did not own.
On October 29, 2003, CDL and Monticello Raceway Management entered into a
48 year operating ground lease (the "Ground Lease") with respect to 200 acres of
land in Monticello, New York and all buildings and improvements allocated on
F-13
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such land owned by CDL that are not subject to the Land Purchase Agreement (the
"Leased Property"). Under the terms of the Ground Lease, Monticello Raceway
Management will pay CDL $1.8 million per year. The first year's payment is due
on October 28, 2004 and the subsequent payments are subject to annual
adjustments consistent with the consumer price index, payable in equal monthly
installments. However, Monticello Raceway Management has the right, at its
option, to defer its monthly rental payments for up to 12 months after the first
year, with such deferred rent accruing interest at the rate of 4.5% per annum.
Pursuant to the terms of the merger of the Company and CDL on January 12, 2004,
the former members of CDL retained their interest in the leasehold obligation,
independent of the assets transferred in the combination. Satisfaction of this
obligation by the Company does not represent a discriminatory distribution or a
dividend of any kind between the Company and CDL.
NATIVE AMERICAN CASINO DEVELOPMENT
In 1988, Congress passed the Indian Gaming Regulatory Act, which permits a
Native American tribe to petition the Governor of its host state for a "compact"
permitting casino gaming on such tribe's reservation and/or on lands to be
acquired and held in trust by the United States Government for the benefit of
such tribe. As part of the October 2001 legislation permitting the installation
of video gaming machines at certain racetracks in the State of New York, the New
York State legislature granted the governor the right to negotiate with Native
American tribes and approve up to six resort-style casinos. Specifically, the
legislation permits three tribal resort style casinos in the Catskills and three
in the Buffalo-Niagara Falls area.
Since 1995, CDL had been attempting to develop a 29 acre parcel of land at
the racetrack into a full service resort-style casino in conjunction with a
recognized Native American nation. It is the Company's intent to obtain all the
requisite federal and state approvals for the 29 acre site to be deeded to the
United States Government in trust for the use and benefit of a Native American
tribe and for the tribe to conduct gaming activities on the site. This site was
originally planned to be used for a casino to be owned and operated by the St.
Regis Mohawk Tribe, and CDL incurred considerable expenditures in connection
with the effort. However, after extensive local, state and federal reviews had
been conducted, the St. Regis Mohawk Tribe elected to pursue the development of
another location in the Catskills with CZR. During the last two quarters of
2002, CDL retained CIBC World Markets Corporation to evaluate its strategic
alternatives and began negotiations with a federally recognized Native American
Tribe in New York and various casino management and development entities with
respect to the site and its properties generally
On April 3, 2003, the Cayuga Nation, CDL and certain of CDL's affiliates,
including Alpha Monticello, Inc., 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, the Company and its affiliate, CDL, 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 29 acre parcel of land in Monticello, New York to be used for
gaming purposes.
OPERATING RESULTS CDL
The Company accounts for its investment in CDL using the equity method. A
loss of approximately $6.5 million and $1.9 million was recognized by CDL for
the years ended December 31, 2003 and 2002 respectively. The loss in 2003 was
mostly due to the write-off of assets relating to the development of a business
relationship with the St. Regis Mohawk Tribe. The Company's 25% interest
resulted in a loss of approximately $1.6 million, which is reflected in the
Company's financial statements at December 31, 2003 as a reduction of investment
on the balance sheet and in the other loss on the statement of operations.
Presented below is a summary of the audited consolidated Balance Sheet and
audited Statement of Operations of CDL for the year ended December 31, 2003 and
2002:
F-14
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
BALANCE SHEET 2003 2002
Total assets $ 13,825 $ 13,980
Total liabilities 15,487 9,407
-------- --------
Members' equity (deficit) $ (1,662) $ 4,573
======== ========
STATEMENT OF OPERATIONS 2003 2002
Revenues $ 9,735 $ 11,359
Costs and expenses (12,021) (13,299)
Other Income 5 7
Development costs write-off (4,243) --
-------- --------
Loss for period $ (6,524) $ (1,933)
======== ========
25% Share recorded by Empire $ (1,631) $ --
======== ========
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro-forma balance sheet and statement of
operations presents information as if the merger took place at the beginning of
Empire's fiscal year. The pro-forma amounts include certain adjustments
primarily to present certain expenses which result from the transaction and do
not reflect the economics, if any, which might be achieved from combining the
companies.
The unaudited pro forma financial statements should be read together with
the financial statements and notes of Empire and the consolidated financial
statements of CDL for the year ended December 31, 2003.
The pro forma financial statements that represent the consolidated
financial position of CDL and Empire are based on estimates and historical cost.
These estimates could and most likely will vary, possibly substantially, from
the actual results that will be reported in a future reporting period after the
date of the merger. The possibility of approvals, regulations, ratification of
contracts, certified appraisals and general operational transactions could
impact on a reader's ability to evaluate the transaction, possibly differently
than the information the pro-forma portrays.
PRO FORMA CONSOLIDATED BALANCE SHEET OF MERGED CDL AND EMPIRE UNAUDITED
December 31, 2003
(in thousands)
Total assets ............................................... $10,772
Total liabilities .......................................... 10,625
-------
Stockholders/Members
Equity (deficit) ........................................... $ 147
=======
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF MERGED CDL AND EMPIRE
December 31, 2003
(in thousands except per share data)
Revenues ................................... $ 9,735
Costs and expenses ......................... (20,260)
Other income or (loss) ..................... (602)
Development costs write-off ................ (4,243)
--------
Net Loss ................................... (15,370)
Cumulative undeclared dividends
on preferred stock ...................... (1,551)
Loss Applicable to
Common Shares .............................. $(16,921)
========
Loss per Share basic and
diluted, 21,813 shares outstanding ...... (.78)
F-15
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BERKSHIRE BANK OBLIGATION
On October 29, 2003, Monticello Raceway Management, Inc. consummated a
$3.5 million loan agreement with The Berkshire Bank. Pursuant to the terms of
the merger with CDL on January 12, 2004, Monticello Raceway Management is now a
wholly owned subsidiary of the Company. The loan was secured by a leasehold
mortgage, a pledge of raceway revenues and security interests in certain
equipment. The leasehold mortgage loan bore interest at 8.75% and matured in two
years, with monthly principal and interest payments based on a 48 month
amortization schedule. Pursuant to the terms of the merger with CDL obligations
under these commitments were transferred to the Company through the subsidiary
at the closing on January 12, 2004. This obligation was paid in full on February
4, 2004.
NOTE 6. INVESTMENT IN CASINO VENTURES, L.L.C.
On July 8, 1999, we, through our subsidiary, Jubilation Lakeshore, Inc.,
contributed our inactive gaming vessel, Bayou Caddy's Jubilation Casino
("Jubilation"), to Casino Ventures, LLC, in exchange for $150,000 in cash, a
promissory note of approximately $1.4 million plus a non-managing membership
interest in Casino Ventures.
In December 2002, the Company recognized a $3 million impairment loss
reflecting a casualty loss on the Jubilation vessel following a severe storm.
Effective June 30, 2003, the Company and PDS Special Situations, LLC
("PDS"), a Nevada limtied liability company, entered into an agreement for PDS
to purchase the Company's membership interest in Casino Ventures, LLC and all of
the Company's former debt agreements. The Company sold 75% of its issued and
outstanding equity interests in Casino Ventures, LLC in exchange for $10,000,
with the remaining interest owned by the Company, which totaled 18% then being
sold and transferred for an additional $40,000 upon the procurement from the
other 7% interest holders' membership interests. The Company recorded $10,000 of
proceeds from the sale of its interest and will record the additional $40,000
proceeds upon the receipt of the final payment. The net effect of the sale in
the 2003 consolidated financial statements was a loss of approximately $30,000.
NOTE 7. PROPERTY AND EQUIPMENT
At the end of December 31, 2003 the Company did not directly own any
property or equipment.
NOTE 8. LONG-TERM DEBT
On July 31, 2000, the Company received a $1.2 million loan from the holder
of the Company's Series D Preferred Stock, Societe Generale. Simultaneously with
the closing of that loan, the lender also received 12,000 warrants exercisable
at a price of $24.00 per share, which expired in July 2003. Relative to the $1.2
million principal amount of the loan and warrants issued, the Company allocated
approximately $213,000 as the estimated value of the warrants issued with the
loan. This amount was amortized as additional interest expense and an increase
to notes payable over the life of the loan using the effective interest method
until the loan was repaid in December 2002. The balance of $944,000 plus accrued
interest was exchanged for a $1.6 million note due with installments plus 16%
interest of $400,000 due in both February and March and the balance of $800,000
in June 2003.
In June, 2003, the Company settled all of its notes payable to Societe
Generale.
F-16
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 10, 2002, the Company entered into a recapitalization
agreement with Stanley Tollman, Beatrice Tollman (Stanley Tollman's wife), Monty
Hundley, Bryanston Group and Alpha Monticello, a wholly owned subsidiary of the
Company. Under this agreement, both Bryanston Group and Beatrice Tollman granted
the Company a three year option to redeem from them up to 2,326,857 and 66,000
shares of the Company's common stock, respectively, at a redemption price of
$2.12 per share, payable in cash or by promissory note. Bryanston Group and
Beatrice Tollman also granted Robert A. Berman, the Company's Chief Executive
Officer, an irrevocable three year proxy to vote these shares of common stock at
his discretion.
On January 9, 2004 prior to the closing of the merger with CDL, in
accordance with the terms of the restated contribution agreement, the Company
redeemed all of the shares of the Company's common stock that were subject to
the recapitalization agreement and that were held by Bryanston Group and
Beatrice Tollman. In order to consummate this redemption, the Company will need
to pay these parties by issuance of a promissory note in the sum of
approximately $5.1 million. The promissory note is payable over three years
pursuant to the following schedule:
Date Amount
---- ------
(1 Year Anniversary of Note) (13.33% of the Note Amount)
(18 Month Anniversary of Note) (17.78% of the Note Amount)
(2 Year Anniversary of Note) (22.22% of the Note Amount)
(30 Month Anniversary of Note) (26.67% of the Note Amount)
(3 Year Anniversary of Note) (20.00% of the Note Amount)
In addition, under the terms of the note, interest will accrue on the
outstanding principal amount at the rate of 7% per annum, and upon each
principal amount payment, the Company would also be required to pay all unpaid
accrued interest with respect to such principal amount payment.
Interest expenses on related party debt totaled approximately $459,000 for
the year ended December 31, 2002.
NOTE 9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
At December 31, 2003 the Company's primary asset was our ownership
interest in various operations of CDL, which owns the raceway and property in
Monticello, New York. The Company's principal place of business is at Monticello
Raceway, a 229 acre property located on Route 17B in Monticello, New York.
Facilities at the site include the racetrack, which includes an enclosed
grandstand with a capacity of 4,500, a clubhouse restaurant facility with a
capacity for 200 customers, pari-mutuel wagering facilities (including
simulcasting), a paddock, exterior barns, and related facilities for the horses,
drivers, and trainers. In addition, a parking area with approximately 5,000
spaces is provided for customers.
On October 29, 2003, CDL and Monticello Raceway Management entered into a
48 year operating ground lease (the "Ground Lease") with respect to 200 acres of
land in Monticello, New York and all buildings and improvements allocated on
such land owned by CDL that are not subject to the Land Purchase Agreement (the
"Leased Property"). Under the terms of the Ground Lease, Monticello Raceway
Management will pay CDL $1.8 million per year. The first year's payment is due
on October 28, 2004 and the subsequent payments are subject to annual
adjustments consistent with the consumer price index, payable in equal monthly
installments. However, Monticello Raceway Management has the right, at its
option, to defer its monthly rental payments for up to 12 months after the first
year, with such deferred rent accruing interest at the rate of 4.5% per annum.
Pursuant to the terms of the merger of the Company and CDL on January 12, 2004,
the former members of CDL retained their interest in the leasehold obligation,
independent of the assets transferred in the combination. Satisfaction of this
obligation by the Company does not represent a discriminatory distribution or a
dividend of any kind between the Company and CDL.
During the first three years of the Ground Lease, Monticello Raceway
Management may, at its option, purchase the leased property for a purchase price
F-17
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equal to the sum of (x) the rent payable for the year in which Monticello
Raceway Management exercises this purchase option divided by 5% (which would
equal $36 million in the first year of the Ground Lease) and (y) an amount equal
to all transfer taxes and closing costs incurred by CDL as seller. Monticello
Raceway Management may not assign its rights under the Ground Lease, sublet any
part of the Leased Property, nor enter into a transaction or series of
transactions that would result in a change of control of Monticello Raceway
Management without the consent of CDL. However, in the event that CDL withholds
its consent to such assignment of the Ground Lease or the subletting of all or
part of the Leased Property, Monticello Raceway Management may exercise its
option to purchase the Leased Property even after the first three years of the
Ground Lease have expired.
Under the terms of the Ground Lease, absent CDL's prior written consent,
Monticello Raceway Management is required to use the Leased Property solely for
racing, gaming, entertainment, retail, lodging, food service, any other use
related to so-called "tourism" and other ancillary and related activities.
Paul deBary, a director of the Company, provided consulting and
restructuring advice to the Company during 2002. The Company issued to him
25,000 shares at a market price of $2.12 per share in January 2003.
All current transactions between the Company and its officers, directors
and principal stockholders or any affiliates thereof are, and in the future such
transactions will be, on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
LITIGATION
In March 2002 the Company settled an action brought by Global Trading
Group, Inc. in the U. S. District Court for the Northern District of
Mississippi. The plaintiff alleged entitlement to a finder's fee arising out of
the sale of the Jubilee Casino and was seeking contractual and compensatory
damages. The Company reached, and recorded on its books, a settlement on this
case for approximately $118,000 of which $53,000 was settled through the
issuance of 5,000 shares of common stock.
On November 6, 2002, we, and several of our affiliates were named as
defendants in an action brought by D.F.S., LLC and Fedele Scutti in United
States District Court for the Western District Court of New York. This suit was
discontinued on merits by the plaintiff on August 8, 2003 and the Company has
received the Court's final order.
The Company is a party to various other legal actions that have arisen in
the normal course of business. In the opinion of the Company's management, the
resolution of these other matters will not have a material and adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
LITIGATION ACQUIRED IN 2004 MERGER
The Monticello Horsemen's Association has filed a number of suits against
Monticello Raceway Management Inc. and Cliff Ehrlich, as its President. One
action, seeking money damages of approximately $500,000, claims that certain
monies (approximately $80,000), which should have been used solely for
"overnight purses," were expended by the raceway for a special racing series
known as the William Sullivan Series, that management has not increased purses
to the horsemen for overnight racing as requested by the horsemen and that
management is improperly holding up approximately $400,000 in an account balance
that is earmarked for payment of purses at such time as management deems it
appropriate. A second action seeks approximately $2 million in damages claiming
that management has withheld various simulcasting and OTB revenues from the
horsemen's purse account and deducted various unauthorized simulcasting
expenses. Management has responded vigorously to this litigation and at the same
time will seek, if possible, to resolve these cases in the context of contract
negotiations with the Horsemen's Association that began in March of 2004.
Should the litigation proceed, however, counsel has advised the Company
that, (i) with regard to the $80,000 expended for the William Sullivan Pacing
Series, management was within its contract rights to apply that money towards
the racing series since the racing series met the definition of "overnight
purses," (ii) the $400,000 sought in accelerated purses will not have to be paid
in the manner that the Horsemen seek, but that eventually, those monies will be
F-18
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
required to be paid out in additional purses, and (iii) that there will be a
favorable outcome on the causes of action seeking damages for failure to
properly account for the OTB revenues as well as the issue of the deduction of
expenses for simulcasting. There are sharp disputed issues of fact with regard
to the cause of action seeking a greater share of the simulcasting revenue and,
at this time, no estimate can be given of the outcome of this cause of action or
the amount of potential loss.
Another action by the Horsemen's Association sought an injunction
preventing the management from consolidating the barn area by removing
approximately 50% of the barns and moving horsemen to different barns and also
sought money damages for such conduct. A temporary restraining order at the
inception of the case was vacated after a hearing and the decision of management
to consolidate the barn area and deny stall space to certain horsemen was upheld
by the Court on the injunction motion. Management responded vigorously to this
litigation as it challenged the management's rights clause in the contract.
There is further discovery pending. However, in the opinion of counsel to the
Company, there will be no monetary loss as a result of this litigation.
Our ability to participate in New York's VGM program or to help develop
and manage a Native American casino in conjunction with the Cayuga Nation of New
York could be hampered by the outcome of two pending lawsuits, DALTON V. PATAKI
and KARR V. PATAKI, that seek to enjoin the State of New York from proceeding
with the VGM program or permitting the construction of any new Native American
casinos within the State of New York's borders. While the trial court dismissed
both of these cases in May of 2003, the plaintiffs have filed an appeal. Briefs
have been submitted in the appeal and oral arguments were heard in December of
2003, but a decision on the appeal has not been rendered. 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,
could hamper fundraising efforts for the Cayuga Monticello Resort and otherwise
adversely affect the implementation of our business plan, as investors might be
reluctant to invest given the uncertainty that such a holding would create.
NOTE 10. STOCKHOLDERS' EQUITY
COMMON STOCK
On June 13, 2001, the Company authorized the satisfaction of liabilities
to Bryanston Group aggregating $1,904,000 by agreeing to issue approximately
238,000 shares of its common stock at a price of $8 per share, which was the
closing market price on that date. Such shares were issued in January 2002.
In the first quarter of 2002, the Company issued approximately 415,000
shares of the Company's common stock in connection with dividends on the Series
B and C Preferred Stock.
In January 2002, the Company issued approximately 622,000 and 324,000
shares of common stock (a total of approximately 946,000 shares) for
approximately 777,000 shares of Series B Preferred Stock and all of the Series C
Preferred Stock, respectively.
In February of 2002, the Company issued approximately 576,000 shares of
the Company's common stock in connection with the Company increasing its
investment in the future revenue stream of CDL by acquiring 47.5% of Watertone
Holdings, LP's economic interest in certain CDL business components.
In the year ending December 31, 2002, the Company issued approximately
56,000 shares of the Company's common stock in connection with the conversion of
the Societe Generale convertible debt. In December 2002, the Company exchanged
the remainder of the convertible debt and other equities held by Societe
Generale in exchange for a $1.6 million note due June 2003.
F-19
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 10, 2002, the Company entered into an agreement with the
holder of the Company's Series D Preferred Stock and a Note due July 2003, which
had an aggregate outstanding balance of approximately $2.4 million. The
agreement provided for the cancellation of such Preferred Stock and Note
instruments and the issuance of a new Note under a restructuring agreement. The
new Note was settled in 2003.
On December 12, 2002, the Company announced an agreement with Bryanston
Group and certain other affiliates regarding certain obligations due from and
claims against the Company's. The Company's remaining indebtedness to Bryanston
Group was $1.5 million. The Company also owed Stanley Tollman approximately $1.5
million and Monty Hundley approximately $267,000 in deferred compensation. The
parties agreed to release the Company from all claims in exchange for
distribution to them of equity in the Company in the form of shares in a special
class of the Company's Series E Preferred Stock having a total aggregate
liquidation amount of approximately $3.3 million. This Series E Preferred Stock
is non-convertible, has no fixed date of redemption or liquidation, and provides
for cumulative dividends at 8% per annum. Dividends to holders of the Company's
common stock and other uses of the Company's net cash flow are subject to
priorities for the benefit of the Series E Preferred Stock. The Series E
Preferred Stock is subject to redemption at the option of the Company at any
time at a price equal to its liquidation value plus accrued dividends to the
date of redemption.
In addition to ensuring compliance with all NASDAQ regulations, the
Company carried out the Recapitalization in order to maintain its NASDAQ
listing. On November 19, 2002, the Company received a letter from NASDAQ stating
that it had fallen below the minimum stockholders' equity requirement of $2.5
million as of the Company's fiscal quarter ended September 30, 2002. As a result
of the Recapitalization discussed above, the Company issued 1,700,000 shares of
Series E Preferred Stock with a redemption value of $10, which increased the
Company's stockholders' equity to in excess of $6 million. On January 10, 2003,
the Company received an extension from NASDAQ until January 17, 2003 to file
with the SEC a public document demonstrating compliance. On January 16, 2003,
the Company filed a Current Report on Form 8-K demonstrating compliance with the
minimum stockholders' equity requirement. On January 17, 2003, the Company
received a letter from NASDAQ stating that based on the 8-K filing, it had
determined the Company complies with the minimum stockholders' equity
requirement and the matter was closed.
PRIVATE PLACEMENTS
From April 15, 2003 through September 2003, the Company sold 579,149
shares of common stock , that had an aggregate purchase price of approximately
$4.6 million. There is a possiblity that such purchasers could be entitled to
have the aggregate purchase price of such shares refunded by the Company, plus
interest.
PREFERRED STOCK AND DIVIDENDS
The Company's Series B Preferred Stock, 44,258 shares outstanding, has
voting rights of .8 votes per preferred share, is convertible to .8 shares of
common stock for each share of preferred stock and carries a liquidation value
of $29 per share, a cumulative dividend of $2.90 per share, payable quarterly,
which increases to $3.77 per share if the cash dividend is not paid within 30
days of the end of each quarter. In the event the dividend is not paid by
January 30 following the year for which such dividend has accrued, the dividend
will be payable in common stock. In January 2003, the Company declared and
issued dividends on the Series B Preferred Stock for the 2002 year amounting to
40,498 shares of the Company's common stock. After the January 2003 common stock
issuance, there were no dividends in arrears.
The Company has undeclared dividends on Series B Preferred Stock of
approximately $166,000 at December 31, 2003 which will be recorded when
declared.
The Series D Preferred Stock was retired after the recapitalization of
December 2002.
In December of 2002, the Company issued 1,730,696 shares of Series E
Preferred Stock to Bryanston Group with an option in favor of the Company to
reacquire, at any time, or from time to time, and without prior notice, up to
that number of shares of Preferred Stock adjusted for any subsequent dividend
for the purchase price of $10.00 per share. The Preferred Purchase Option shall
be
F-20
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exercised by delivery to the Stockholder of a written notice signed by an
officer or director of the Company. The Company shall pay for the Preferred
Option Shares it has elected to repurchase by cash or, in its sole discretion,
delivery to the Stockholder of a Note.
This special class of preferred stock is non-voting and non-convertible,
has no fixed date of redemption or liquidation, and provides for cumulative
dividends at 8% per annum based upon the liquidation value. Dividends to holders
of the Company's common stock and other uses of the Company's net cash flow are
subject to priorities for the benefit of this preferred stock.
The Company has undeclared dividends on Series E Preferred Stock of
approximately $1.4 million at December 31, 2003 which will be recorded when
declared.
NOTE 11. STOCK OPTIONS AND WARRANTS
2002, 1998 AND 1993 STOCK OPTION PLANS
In May 1998 and June 1993, the Company's Board of Directors adopted the
1998 and 1993 Stock Option Plans providing for incentive stock options ("ISO")
and non-qualified stock options ("NQSO"). The Company has reserved 400,000 and
90,000 shares of common stock for issuance upon the exercise of options to be
granted under the 1998 and 1993 Stock Option Plans, respectively. The exercise
price of an ISO or NQSO will not be less than 100% of the fair market value of
the Company's common stock at the date of the grant. The maximum term of each
option granted under each plan is ten years; however, options granted to an
employee owning greater than 10% of the Company's common stock will have a
maximum term of five years. On June 3, 2003 the 1993 Stock Option Plan expired.
In 2001 and 2000, the Company re-priced certain stock options, which,
under Financial Accounting Standards Board Interpretation Number 44 ("FIN44"),
requires them to be accounted for under variable plan accounting. The
application of FIN 44, which was effective July 1, 2000, resulted in non-cash
compensation expense of approximately $44,000 during the year ended December 31,
2002.
In April 2002, Robert Berman received a proxy from the Company's largest
shareholder granting him the right to use the votes of that shareholder to
appoint four of the seven members of the Company's board of directors. Messrs.
Berman and Kaniewski at that time were issued approximately 591,000 options
under the 2002 Stock Option Plan to purchase common shares at $17.49 per share.
On January 9, 2003, the Company cancelled all of its options outstanding
except for 5,500. On that day the Company awarded options to purchase
approximately 854,000 shares of its common stock at $2.12 per share. Included in
the award were approximately 829,000 options, which were exercisable immediately
and approximately 25,000 options to employees of affiliated companies, which
vested on July 9, 2003.
On August 5, 2003, an additional 90,000 options were granted to new board
members to purchase common stock at $7.00 per share. These options were
immediately vested and expire in ten years. Total stock compensation expense, of
approximately $3 million was included in the results of operations for the year
ended December 31, 2003.
During the year ended December 31, 2002 options to purchase approximately
154,000 of the Company's common stock at exercise prices of $4.40 were cancelled
due to the removal of responsibilities, resignation and termination of former
affiliates. The option expiration rules are defined in the 1993 and 1998 stock
option agreements.
The following table sets forth each grant on the day of the grant using
the Black Scholes option pricing model weighted average assumptions used for
such grants:
2003 2002
---- ----
Weighted Average Fair Value of Options Granted $ 2.59 $17.49
Dividend Yeild 0% 0%
Expected Volitility 271.8 123.82
Risk-free Interest Rate 3.05% 4.75%
Expected Life 5-10 years 5-10 years
F-21
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes approximate stock option activity,
excluding the simultaneous cancellations and re-issuances in 2003 and 2002, as
noted above:
Weighted
Average
Range of Exercise
Number of Exercise Price Per
Shares Price Share
------------------------------------------------------------------------------------------------
Options outstanding at January 1, 2002 238,000 $4.40 $4.40
Granted in 2002 591,000 $17.49 $17.49
Exercised in 2002 (8,000) $4.40 $4.40
Cancelled in 2002 (154,000) $4.40 $4.40
---------
Options outstanding at
December 31, 2002 667,000 $4.40-17.49 $16.01
Granted in 2003 943,000 $2.12-7.00 $2.59
Exercised or expired in 2003 (127,000) $2.12 $2.12
Cancelled in 2003 (662,000) $4.40-17.49 $16.09
---------
Options outstanding at
December 31, 2003 821,000
=========
The following table summarizes information regarding stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
------------------------------ ------------------------------
Weighted
Number Average Number Weighted
Range of Outstanding Remaining Exercisable Average
Exercise at Contractual at Exercise
Prices Dec 31, 2003 Life in Years Dec 31, 2003 Price
2.12 725,500 9.0 725,500 2.12
4.40 5,500 6.5 5,500 4.40
7.00 90,000 9.5 90,000 7.00
------- -------
821,000 821,000
======= =======
NOTE 12. INCOME TAXES
The Company and all of its subsidiaries file a consolidated federal income
tax return. At December 31, 2003, the estimated Company's deferred income tax
asset was comprised of the tax benefit associated with the following items based
on the statutory tax rates currently in effect:
2003
(in thousands)
Net operating loss
Carry forwards .............................. $ 67,000
--------
Deferred income tax asset ...................... 26,800
Valuation allowance ......................... (26,800)
--------
Deferred income tax asset, net ................. $ --
========
F-22
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our merger with CDL will limit our ability to use our current net
operating loss carry forwards, potentially increasing our future tax liability.
As of December 31, 2003, the Company had net operating loss carry forwards of
approximately $67 million that expire between 2008 and 2023. The Internal
Revenue Code allows the offset of these net operating loss carry forwards
against income earned in future years, thus reducing the tax liability in future
years. The merger of our operations with CDL, however, will not permit us to use
the entire amount of the net operating losses due to the change in control of
the Company. A limited amount of the net loss carry-forward may be applied in
future years based upon the change of control and existing income tax laws.
NOTE 13. SUBSEQUENT EVENTS
ACQUISITION OF CDL ENTITIES AND DEVELOPMENT RIGHTS
On January 12, 2004, the Company concluded its acquisition of 100% of the
ownership interest in CDL operating and development entities in exchange for
80.25% of the Company's outstanding common stock, or 18,219,075 shares
calculated on a post-merger, fully diluted basis (the merger). Although Empire
is the legal survivor in the merger and remains the registrant with the
Securities and Exchange Commission, under accounting principles generally
accepted in The United States of America, the merger was accounted for as a
reverse acquisition, whereby CDL is considered the acquirer of Empire for
financial reporting. This requires Empire to present in all financial statements
and other public fillings after completion of the merger, prior historical
financials and other information of CDL and requires a retroactive restatement
of CDL historical shareholders investment for the equivalent number of shares of
common stock received in the merger.
ASSIGNMENT OF LITIGATION CLAIMS
On January 12, 2004, in order to better focus on the development of a VGM
program at Monticello Raceway and current business arrangements with the Cayuga
Nation of New York, while at the same time not abandoning the interests of their
stakeholders in the claims against CZR, Gary Melius, Ivan Kaufman and Walter
Horn, the parties made it a condition to the merger closing that CDL, Monticello
Raceway Development and Mohawk Management assign all of their claims emanating
from the above described actions against CZR, Gary Melius, Ivan Kaufman and
Walter Horn, along with their rights to any proceeds from any judgment or
settlement that may arise from any litigation relating to such subject matter,
to a grantor trust in which the Company's common stockholders of record
immediately before the merger's closing (but following the redemption of the
common stock held by Bryanston Group and Beatrice Tollman) will have a 19.75%
indirect interest, with the members of CDL and Monticello Raceway Development
immediately before the merger's closing owning the remaining 80.25%. The Company
will separately enter into an agreement with the Litigation Trust pursuant to
which the Company will provide the trust with a $2.5 million line of credit to
finance the litigation. However, aside from performing its obligations under
this line of credit, neither the Company nor any of its post-merger subsidiaries
will have any future involvement with the ongoing litigation or any future suits
that may arise. Paul A. deBary, a member of the Company's board of directors,
and Joseph E. Bernstein, a member of the Company's board of directors and a
managing director of Americas Tower Partners, have agreed to serve as
co-trustees for the Litigation Trust. For these services, Messrs. deBary and
Bernstein will each receive $60,000 per year and 1% and 4%, respectively, of any
proceeds that the Litigation Trust receives from the ongoing litigation, or any
future litigation that may be brought by the Litigation Trust. Moreover, any
proceeds received by the Litigation Trust shall first be applied to pay the
expenses of the Litigation Trust, including compensation of the trustees,
second, to provide for a reserve, if necessary, for future expenses of the
Litigation Trust, third to repay the Company, in addition to any amounts
borrowed under the line of credit, up to $7.5 million to compensate the Company
F-23
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for other previously incurred expenses in connection with the CZR, Gary Melius,
Ivan Kaufman and Walter Horn litigations, and then for the remaining amount to
be distributed pro rata to the Litigation Trust's beneficiaries. A registration
statement concerning this distribution on Form S-1 was filed with the Securities
and Exchange Commission by the Catskill Litigation Trust and became effective on
March 5, 2004.
BERKSHIRE BANK OBLIGATION
On October 29, 2003, Monticello Raceway Management, Inc. consummated a
$3.5 million loan agreement with The Berkshire Bank. This obligation was paid in
full on February 4, 2004.
PRIVATE PLACEMENT
On January 30, 2004 the Company closed a private sale of approximately 4
million shares of common stock, to multiple investors, at a price of $7.50 per
share. This sale, net of expenses, increased by approximately $30 million our
funds for development and operations.
In connection with the above private placement, Jefferies & Company, Inc.
was issued warrants to purchase 250,000 shares of our common stock at $7.50 per
share for general financial advisory services rendered relating to the
consummation of the private placement.
STOCK REDEMPTION
One of the conditions to the closing of our recent merger was to redeem
from Bryanston Group and Beatrice Tollman an aggregate of 2.3 million shares of
common stock at $2.12 per share. The total cost of this redemption was
approximately $5 million which the Company paid by issuing a note. The terms of
this note require approximately 13% of the principal to be paid on the first
anniversary of issuance and for the whole note to be repaid within three years.
No assurance can be given that the Company will have enough revenue or cash on
hand to repay this indebtedness when it becomes due.
VGM IMPROVEMENTS
Construction began in February 2004 on the leasehold improvements at
Monticello Raceway necessary to begin operating 1,800 VGM's authorized by the
State of New York. The proceeds from the private sale of stock will be used to
fund these improvements. The total remaining costs to design, develop,
construct, equip and open the VGM operation is expected to be approximately
$23.4 Million.
DIRECTOR CONVICTIONS FEBRUARY 4, 2004
On February 4, 2004, four former officers or directors of the Company were
convicted of tax and bank fraud. These four individuals were Monty Hundley,
Howard Zuckerman, Sanford Freedman and James Cutler. None of the acts that led
to the conviction of these individuals for tax and bank fraud were related to
their roles or activities with the Company and the Company has not been, nor
will be, charged with any wrongdoing.
F-24
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. UNAUDITED QUARTERLY DATA (IN THOUSANDS)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2003
Total revenue ............ $ -- $ -- $ -- $ --
Net loss ................. (1,493) (1,638) (2,251) (2,646)
Net loss applicable
to common shares ..... (1,880) (2,030) (2,642) (3,027)
Net loss per common
Share, basic and diluted $ (.38) $ (.38) $ (.46) $ (.51)
2002
Total revenue ............ $ 0 $ 0 $ 0 $ 0
Net income (loss) ........ 2,495 (856) (7,543) (3,596)
Net income (loss) applicable
to common shares ..... 2,105 (924) (7,611) (3,244)
Net income (loss) per common
Share, basic ......... 0.54 (0.19) (1.56) (0.73)
diluted ....... $ 0.45 $ (0.19) $ (1.56) $ (0.73)
F-25
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
AND
INDEPENDENT AUDITORS' REPORT
F-26
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
TABLE OF CONTENTS
Independent Auditors' Report F-28
Consolidated Financial Statements
Balance Sheet F-29
Statement of Operations F-30
Statement of Changes in Members' Equity (Deficiency) F-31
Statement of Cash Flows F-32
Notes to Consolidated Financial Statements F-34
F-27
FRIEDMAN
ALPREN & 1700 BROADWAY
GREEN LLP NEW YORK, NY 10019
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS 212-842-7000
FAX 212-842-7001
www.nyccpas.com
INDEPENDENT AUDITORS' REPORT
TO THE MEMBERS OF CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of CATSKILL
DEVELOPMENT, LLC AND SUBSIDIARIES as of December 31, 2003, and the related
consolidated statements of operations, changes in members' equity (deficiency)
and cash flows for the year then ended. 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 audit. The financial
statements of CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES as of December 31, 2002
were audited by other auditors, whose report dated June 25, 2003 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES as of December 31, 2003, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Friedman Alpren & Green LLP
February 16, 2004
F-28
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
---- ----
Current assets
Cash and cash equivalents $ 1,354,150 $ 643,864
Restricted cash 122,346 42,376
Accounts receivable 758,281 1,033,565
Prepaid expenses and other current assets 237,152 335,227
------------ ------------
Total current assets 2,471,929 2,055,032
Property and equipment - at cost, less accumulated
depreciation 6,558,447 5,856,246
Deferred loan costs - at cost, less accumulated
amortization of $22,179 in 2003 243,964 --
Advances - Cayuga Nation 385,000 --
Gaming license and development costs 4,166,026 6,068,469
------------ ------------
$ 13,825,366 $ 13,979,747
============ ============
LIABILITIES AND MEMBERS' EQUITY (DEFICIENCY)
Current liabilities
Note payable, bank $ 3,469,652 $ --
Accounts payable 3,859,269 2,470,060
Accrued expenses and other current liabilities 654,528 115,849
------------ ------------
Total current liabilities 7,983,449 2,585,909
Notes payable, members 7,503,513 6,821,375
Commitments -- --
Members' equity (deficiency) (1,661,596) 4,572,463
------------ ------------
$ 13,825,366 $ 13,979,747
============ ============
F-29
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
Racetrack revenues
Gross wagering and simulcasting $ 9,565,972 $ 11,147,184
Nonwagering 169,100 211,975
------------ ------------
9,735,072 11,359,159
------------ ------------
Racetrack costs and expenses
Purses, awards and other 3,299,815 3,932,168
Operating costs 2,277,846 2,297,216
General and administrative 3,484,537 2,974,895
Interest expense 53,373 --
Depreciation and amortization 725,351 755,601
------------ ------------
9,840,922 9,959,880
------------ ------------
Income (loss) from racing operations (105,850) 1,399,279
------------ ------------
Gaming license and development expenses
General and administrative 200,565 74,412
Legal 1,296,836 2,644,369
Interest 682,691 620,704
------------ ------------
Total gaming license and development expenses 2,180,092 3,339,485
------------ ------------
Development costs 4,243,475 --
------------ ------------
Interest income 5,496 7,282
------------ ------------
Net loss $ (6,523,921) $ (1,932,924)
============ ============
F-30
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 2003 AND 2002
Total
Preferred Other Members'
Capital Capital Accumulated Equity
Contributions Contributions Deficit (Deficiency)
------------- ------------- ------------ ------------
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
Capital contributions 735,297 -- -- 735,297
Capital acquisition costs (445,435) -- -- (445,435)
Net loss -- -- (6,523,921) (6,523,921)
------------ ------------ ------------ ------------
Balance, December 31, 2003 $ 17,014,655 $ 400 $(18,676,651) $ (1,661,596)
============ ============ ============ ============
F-31
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
Cash flows from operating activities
Net loss $(6,523,921) $(1,932,924)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 725,351 755,601
Development costs 4,243,475 --
Loss on disposal of property and equipment -- 2,819
Accrued interest on notes payable, members 682,138 620,125
Interest paid with proceeds from note payable, bank 2,552 --
Changes in assets and liabilities
Restricted cash (79,970) 35,694
Accounts receivable 275,284 (382,384)
Prepaid expenses and other current assets 98,075 (180,102)
Accounts payable 1,574,567 1,033,089
Accrued expenses and other current liabilities (179,787) (167,407)
----------- -----------
Net cash provided by (used in) operating activities 817,764 (215,489)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,382,068) (171,246)
Advances - Cayuga Nation (385,000) --
Gaming license and development costs (2,001,306) (327,870)
----------- -----------
Net cash used in investing activities (3,768,374) (499,116)
----------- -----------
Cash flows from financing activities
Proceeds from note payable, bank 3,379,264 --
Repayment of note payable, bank (30,348) --
Loan costs (52,520) --
Capital acquisition costs (90,000) --
Members' capital contributions 454,500 --
----------- -----------
Net cash provided by financing activities 3,660,896 --
----------- -----------
Net increase (decrease) in cash 710,286 (714,605)
Cash and cash equivalents, beginning of year 643,864 1,358,469
----------- -----------
Cash and cash equivalents, end of year $ 1,354,150 $ 643,864
=========== ===========
F-32
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003
2003 2002
---- ----
Supplemental cash flow disclosures
Interest paid $ 28,626 $ 579
Noncash investing and financing activities
Deferred loan costs paid with loan proceeds 118,184 --
Accrued deferred loan costs 95,439 --
Noncash additions to leasehold improvements 23,305 --
Noncash additions to gaming license and
development costs 339,726 --
Accrued capital acquisition costs 355,435 --
Settlement of accounts payable by minority owner 280,797 --
F-33
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
General
In October 1995, Catskill Development, LLC (the "Company"), 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, was a wholly owned subsidiary and was formed to hold the
pari-mutuel license. Mohawk Management, LLC, a New York limited liability
company, was 60% owned by the Company and was formed to manage the St.
Regis Mohawk Casino. Monticello Casino Management, LLC, a New York limited
liability company, was 60% owned by the Company and was formed to manage
any other Native American casino at the Raceway. Both Mohawk Management,
LLC and Monticello Casino Management, LLC were inactive at December 31,
2003 and 2002.
The Company conducted pari-mutuel wagering on live race meetings for
standardbred horses and participated in intrastate and interstate
simulcast wagering at the Raceway in Monticello, New York. The Company's
operations were subject to regulation by the New York State Racing and
Wagering Board.
Empire Merger
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
provided for the Company's members to exchange all of the Company's assets
and obligations, except for the ownership of the 230-acre Raceway property
and the senior obligation which was settled as part of the merger, as well
as its development and management rights with respect to the site and
related gaming activities, for an 80.25% position in Empire's common
stock.
The assets transferred include all rights and obligations associated
with the litigation discussed in Note 7. The Company will also transfer
all of its interest in MRMI, Mohawk Management, LLC, and Monticello Casino
Management, LLC to Empire. Empire will account for this exchange as a
reverse merger.
(Continued)
F-34
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company will retain the land and buildings of the Raceway and
contiguous properties. On October 29, 2003, the Company and MRMI entered
into a 48-year ground lease ("Ground Lease") with respect to 200 acres of
the Raceway property and improvements located on such land that are not
subject to the Land Purchase Agreement. Pursuant to the terms of the
consolidation with Empire, MRMI will become a wholly owned subsidiary of
Empire. The covenants of the agreement of the land lease to MRMI will
still be fulfilled. Under the terms of the Ground Lease, MRMI will pay the
Company $1,800,000 per year, due on October 28, 2004 for the first year.
The subsequent payments are payable in equal monthly installments, subject
to annual adjustments consistent with the Consumer Price Index. During the
second year of the lease, MRMI has the right, at its option, to defer its
monthly rental payments for up to 12 months, with such deferred rent
accruing interest at the rate of 4.5% a year.
During the first three years of the Ground Lease, MRMI may, at its
option, purchase the Leased Property for a purchase price equal to the sum
of the rent payable for the year in which MRMI exercises this purchase
option, divided by 5% (which would equal $36,000,000 in the first year of
the Ground Lease), and an amount equal to all transfer taxes and closing
costs incurred by the Company as seller. MRMI may not assign its rights
under the Ground Lease, sublet any part of the Leased Property, nor enter
into a transaction or series of transactions that would result in a change
of control of MRMI without the consent of the Company. However, in the
event that the Company withholds its consent to such assignment of the
Ground Lease or the subletting of all or part of the Leased Property, MRMI
may exercise its option to purchase the Leased Property even after the
first three years of the Ground Lease have expired.
Under the terms of the Ground Lease, absent the Company's prior
written consent, MRMI is required to use the Leased Property solely for
racing, gaming, entertainment, retail, lodging, food service, any other
use related to so-called "tourism", and other ancillary and related
activities.
On January 12, 2004, the acquisition was completed and all aspects
of the agreement satisfied. Future reporting of the new operations of the
Company will be accounted for as if the consolidation occurred on January
1, 2004, because there was no significant operations during that period..
(Continued)
F-35
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Video Gaming Machines
In October 2001, the New York State Legislature passed a bill that
expanded the nature and scope of gaming in the state ("VGM Legislation").
The bill was signed by the Governor on October 31, 2001.
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 VGM'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 VGM's to the Raceway.
Construction began in February 2004 on Monticello Raceway
Management's leasehold improvements at Monticello Raceway necessary to
begin operating 1,800 VGM's authorized by the State of New York.
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. At December 31, 2003, the
Company is awaiting approval from the Bureau of Indian Affairs and the
State of New York to proceed with the Casino project.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the subsidiaries in which the Company has more than a 50%
interest and include Monticello Raceway Management Inc., Mohawk
Management, LLC and Monticello Casino Management, LLC. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Significant
assumptions are employed in determining the recoverability of gaming
license and development costs.
(Continued)
F-36
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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").
Cash and Cash Equivalents
Cash and cash equivalents include cash on account, demand deposits
and certificates of deposit with original maturities of three months or
less at acquisition.
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.
Accounts Receivable
Accounts receivable are reported at the amount outstanding.
Management expects to collect the entire amount and, accordingly, has
determined that no allowance is required at December 31, 2003 and 2002.
The Company, in the normal course of business, settled wagers for
other racetracks and is potentially exposed to credit risk. These wagers
are included in accounts receivable.
Property and Equipment
Property 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.
Leasehold improvements are amortized over the term of the lease on a
straight-line basis.
(Continued)
F-37
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gaming License and Development Costs
In connection with its gaming and development activities, the
Company capitalizes certain legal, architectural, engineering and
environmental study fees, as well as other costs directly related to the
gaming license and development of the real estate.
Long-Lived Assets
The Company tests its long-lived assets whenever events or changes
in circumstances indicate that the carrying value of such assets may not
be recoverable. In such cases, the Company would estimate the future net
undiscounted cash flows generated by those assets. If such future cash
flows are insufficient to recover the carrying amount of the assets, the
Company would recognize an impairment loss and reduce the carrying value
of any impaired assets to fair value.
Deferred Loan Costs
Deferred loan costs are amortized on the straight-line method over
the term of the note.
Revenue Recognition
Wagering revenues are recognized at gross, before deductions of such
related expenses as purses, stakes and awards. The costs relating to these
amounts are shown as "Purses, awards and other" in the accompanying
consolidated statement of operations.
Advertising
The Company expenses the costs of general advertising, promotion and
marketing programs at the time the costs are incurred. For the years ended
December 31, 2003 and 2002, total costs incurred were $50,471 and $17,842,
respectively.
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 Monticello
Raceway Management Inc. was passed to the Company because of a management
contract between the companies. Therefore no tax accrual is needed on the
subsidiary's records.
(Continued)
F-38
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2 - PROPERTY AND EQUIPMENT
2003 2002
---- ----
Land $ 770,000 $ 770,000
Buildings and improvements 8,781,079 8,517,724
Leasehold improvements in progress 1,030,881 --
Furniture, fixtures and equipment 1,364,439 1,253,302
----------- -----------
11,946,399 10,541,026
Less - Accumulated depreciation 5,387,952 4,684,780
----------- -----------
$ 6,558,447 $ 5,856,246
=========== ===========
Depreciation expense was $703,172 and $755,601 as of December 31,
2003 and 2002, respectively. The above land and buildings are security for
the mortgage described in Note 6.
3 - ADVANCES TO CAYUGA NATION OF NEW YORK
The Company has made payments to the Cayuga Nation of New York to
help cover development costs for the proposed gaming facility and other
development projects. These advances are refundable under certain
circumstances and are noninterest-bearing. A balance of $385,000 was paid
during the year ended December 31, 2003.
(Continued)
F-39
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 - GAMING LICENSE AND DEVELOPMENT COSTS
In connection with the development of real estate for additional
gaming activities, the Company has incurred various costs. As of December
31, 2002, the Company had capitalized $6,068,409. During the year ended
December 31, 2003, the Company incurred an additional $2,341,032.
During the fourth quarter of 2003, negotiations with the St. Regis
Mohawks, one of the Nations that the Company was in discussions with to
develop gaming facilities, ended. Pursuant to its policy of assessing the
recoverability of its long-lived assets, the Company wrote off those
development costs directly related to the project involving the St. Regis
Mohawks. Accordingly, the Company recognized as a loss previously
capitalized costs totaling approximately $4,243,000. The Company is
currently working with the Cayuga Nation to develop these gaming
facilities.
5 - NOTE PAYABLE, BANK
On October 29, 2003, MRMI consummated a $3,500,000 note with The
Berkshire Bank. The note is secured by a leasehold on the property, a
pledge of raceway revenues and security interests in certain equipment.
The note bears interest at 8.75% and matures on November 1, 2005, with
monthly principal and interest payments based on a 48-month amortization
schedule. Empire entered into a surety agreement with The Berkshire Bank
to guarantee the note. Included in cash and cash equivalents are a cash
collateral reserve and a payment reserve totaling $125,000 and 55,869,
respectively. Interest expense for the year ended December 31, 2003 was
$53,373. The note was subsequently satisfied in February 2004.
6 - MEMBERS' EQUITY (DEFICIENCY) AND SENIOR OBLIGATION
The members of the Company have contributed various equity and debt
to the Company to fund the purchase of the Raceway and the pursuit of the
approval and development of a Native American Casino on a portion of the
Raceway property. At December 31, 2003 and 2002, the aggregate amount
needed to satisfy the preferred capital contributions (with priority
returns of 10%) was $33,815,495 and $34,717,799, respectively.
(Continued)
F-40
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - MEMBERS' EQUITY (DEFICIENCY) AND SENIOR OBLIGATION (Continued)
These preferred capital balances were subordinate to a mortgage,
payable to two members (the "Senior Obligation"), which at December 31,
2003 and 2002 was $7,503,513 and $6,821,375, respectively, including
accrued interest at 10% a year.
As part of the Empire merger, the members agreed to exchange their
preferred capital contributions and senior obligations for Empire common
stock without any premium.
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 on July 1, 2025.
The Company's distinct lines of business: (A) casino development; (B) real
estate-related activities; and (C) the gaming operations were owned at
December 31, 2003, as follows:
Real
Casino 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
Pursuant to the terms of the merger with Empire, Alpha Monticello
and all the non-voting members are no longer members of the Company. The
remaining members of the company are as follows:
Real
Estate
------
Voting Members
Americas Tower Partners 33.34
Monticello Realty, LLC 33.33
Watertone Holdings, LP 33.33
(Continued)
F-41
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 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 December 31 as follows:
2004 $ 142,621
2005 18,034
2006 8,814
---------
$ 169,469
=========
Lease expense was $156,721 and $165,721 for the years ended December
31, 2003 and 2002,respectively.
Legal Proceedings
The Monticello Harness Horsemen's Association, Inc. ("Horsemen's
Association") has brought actions against Monticello Raceway Management,
Inc. and one of the members of the Company. One of the actions seeks the
sum of $1,562,803, to be credited to the horsemen's purse account, and an
additional $4,000,000 in punitive damages. Another case is questioning a
racing series that purportedly violated the contract with MRMI. Management
has responded vigorously to contest the cases after attempts at an
out-of-court settlement proved fruitless.
The Horsemen's Association has filed a number of suits against
Monticello Raceway Management Inc. and Cliff Ehrlich, as its President.
One action, seeking money damages of approximately $500,000, claims that
certain monies (approximately $80,000) which should have been used solely
for "overnight purses" were expended by the raceway for a special racing
series known as the William Sullivan Pacing Series, that management has
not increased purses to the horsemen for overnight racing as requested by
the horsemen, and that management is improperly holding up approximately
$400,000 in an account that is earmarked for payment of purses at such
time as management deems it appropriate. A second action seeks
approximately $2,000,000 in damages, claiming that management has withheld
various simulcasting and OTB revenues from the horsemen's purse account
and deducted various unauthorized simulcasting expenses. Management has
responded vigorously to this litigation, and at the same time will seek,
if possible, to resolve these issues in the context of contract
negotiations with the Horsemen's Association that are scheduled to begin
in March 2004.
(Continued)
F-42
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings (Continued)
Should the litigation proceed, however, counsel has advised the
Company that, (i) with regard to the $80,000 expended for the William
Sullivan Pacing Series, management was within its contract rights to apply
that money towards the racing series since the racing series met the
definition of "overnight purses", (ii) the $400,000 sought in accelerated
purses will not have to be paid in the manner that the Horsemen's
Association seeks, but eventually those monies will be required to be paid
out in additional purses, and (iii) there will be a favorable outcome on
the causes of action seeking damages for failure to properly account for
the OTB revenues as well as the issue of the deduction of expenses for
simulcasting. There are sharply disputed issues of fact with regard to the
cause of action seeking a greater share of the simulcasting revenue and,
at this time, no estimate can be given of the outcome of this cause of
action or the amount of potential loss.
Another action by the Horsemen's Association sought an injunction
preventing management from consolidating the barn area by removing
approximately 50% of the barns and moving horsemen to different barns and
also seeks money damages for such conduct. A temporary restraining order
at the inception of the case was vacated after a hearing, and the decision
of management to consolidate the barn area and deny stall space to certain
horsemen was upheld by the Court on the injunction motion. Management
responded vigorously to this litigation as it challenged management's
rights clause in the contract. There is further discovery pending.
However, in the opinion of counsel to the Company, there will be no
monetary loss as a result of this litigation.
The Company's ability to participate in New York's VGM program or to
help develop and manage a Native American casino in conjunction with the
Cayuga Nation of New York could be hampered by the outcome of two pending
lawsuits, Dalton v. Pataki and Karr v. Pataki, that seek to enjoin the
State of New York from proceeding with the VGM program or permitting the
construction of any new Native American casinos within the State of New
York's borders. While the trial court dismissed both of these cases in May
2003, the plaintiffs have filed an appeal. Briefs have been submitted in
the appeal and oral arguments were heard in December 2003, but a decision
on the appeal has not been rendered. 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, the Company's 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, could hamper fundraising efforts for the Cayuga Monticello Resort
and otherwise adversely affect the implementation of the Company's
business plan, as investors might be reluctant to invest given the
uncertainty that such a holding would create.
(Continued)
F-43
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - COMMITMENTS AND CONTINGENCIES (Continued)
In July 1996, the Company and its members entered into a series of
agreements with the St. Regis Mohawk Tribe, related to the development of
a casino on land adjacent to the Monticello Raceway in Monticello, New
York. Since 2000, the Company has been engaged in litigation with Caesars
Entertainment, Inc. ("CZR"), formerly Park Place Entertainment ("PPE"),
alleging tortious interference with contract and business relationships in
regard to the Company's agreements with the St. Regis Mohawk Tribe.
The Company was also a party to various nonenvironmental 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.
8 - RELATED PARTY TRANSACTIONS
Under the terms of the Ground Lease, MRMI will pay the Company
$1,800,000 per year, due on October 28, 2004 for the first year. The
subsequent payments are payable in equal monthly installments, subject to
annual adjustments consistent with the Consumer Price Index. During the
second year of the lease, MRMI has the right, at its option, to defer its
monthly rental payments for up to 12 months, with such deferred rent
accruing interest at the rate of 4.5% a year.
9 - SUBSEQUENT EVENTS
Merger with Empire
In July 2003, Empire proposed the acquisition of MRMI, Monticello
Casino Management, Monticello Raceway Development and Mohawk Management
for 80.25% of Empire's common stock. The merger was completed on January
12, 2004.
(Continued)
F-44
CATSKILL DEVELOPMENT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 - SUBSEQUENT EVENTS (Continued)
Assignment of Litigation Claims
On January 12, 2004, the parties made it a condition to the
acquisition closing that the Company, Empire, Monticello Raceway
Development and Mohawk Management assign all of their claims emanating
from the actions against various parties, along with their rights to any
proceeds from any judgment or settlement that may arise from any
litigation relating to such subject matter, to a grantor trust in which
Empire common stockholders of record, immediately before the
consolidation's closing, will have a 19.75% indirect interest, and with
the members of the Company and Monticello Raceway Development, immediately
before the consolidation's closing, owning the remaining 80.25%. Neither
the Company nor any of its subsidiaries will have any future involvement
with the ongoing litigation or any future suits that may arise.
F-45