sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
/ / 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.
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 13-3714474
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
RT 17B, P.O. BOX 5013, MONTICELLO, NEW YORK, 12701
(Address of principal executive offices)
(845) 794-4100 ext 478
(Issuer's telephone number)
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
The number of shares outstanding of issuer's classes of common stock, as of
May 14, 2004 was 26,037,968.
EMPIRE RESORTS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 2004 3
Condensed Consolidated Statements of Operations for the three
months Ended March 31, 2004 and 2003...................................4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003................................5
Notes to Condensed Consolidated Financial Statements............... 6-15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................15-17
ITEM 3. Controls and Procedures...............................................18
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................19
ITEM 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities...................................20-21
ITEM 4. Submission of Matters to a Vote of Security Holders...................21
ITEM 6. Exhibits and Reports on Form 8-K......................................21
Signatures............................................................22
All items that are not applicable or to which the answer is negative have been
omitted from this report.
2
PART I
FINANCIAL INFORMATION
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2004
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,195
Restricted cash 155
Accounts receivable 1,007
Prepaid expenses and other current assets 288
--------
Total current assets 21,645
PROPERTY AND EQUIPMENT, NET 2,473
ADVANCES- CAYUGA NATION 470
DEFERRED DEVELOPMENT COSTS 2,440
GAMING LICENSE AND
DEVELOPMENT COSTS 4,899
--------
TOTAL ASSETS $ 31,927
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable $ 676
Accounts payable 4,158
Accrued expenses and other current liabilities 1,170
--------
Total current liabilities 6,004
NOTES PAYABLE, less current maturities 4,397
--------
Total liabilities 10,401
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000 shares
authorized, 25,898 issued and outstanding 259
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 42,472
Accumulated deficit (28,060)
--------
Total stockholders' equity 21,526
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,927
========
See accompanying notes to condensed consolidated financial statements.
3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2004 2003
-------- --------
REVENUES
Racetrack Revenue $ 2,511 $ 2,282
-------- --------
EXPENSES:
Purses awards and other 860 781
Operating costs 559 512
Selling, general and administrative 4,335 1,180
Depreciation 6 174
Amortization of deferred financing costs 244 --
Interest expense, net 160 166
-------- --------
Total expenses 6,164 2,813
-------- --------
NET LOSS (3,653) (531)
CUMULATIVE UNDECLARED DIVIDEND
ON PREFERRED STOCK 378 --
-------- --------
NET LOSS APPLICABLE TO COMMON SHARES $ (4,031) $ (531)
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 22,382 18,219
======== ========
LOSS PER COMMON SHARE, basic and diluted $ (0.18) $ (0.03)
======== ========
See accompanying notes to condensed consolidated financial statements.
4
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS)
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,653) $ (531)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 6 174
Amortization of deferred financing costs 244 --
Accrued interest 81 166
Stock based compensation 1,098 --
Changes in operating assets and liabilities:
Restricted cash (33) (14)
Accounts receivable, net (248) 494
Prepaid expenses and other current assets (34) 12
Accounts payable (1,189) (109)
Accrued expenses and other current liabilities 99 4
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,629) 196
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,351) (25)
Cash acquired from acquisition 18 --
Advances- Cayuga Nation(85) --
Gaming license and development costs (733) (209)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,151) (234)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 30,375 --
Proceeds from exercise of stock options and warrants 33 --
Stock issuance expenses (2,317) --
Repayment of note payable, bank (3,470) --
Members' capital contributions 300
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,621 300
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,841 262
CASH AND CASH EQUIVALENTS, beginning of period 1,354 644
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 20,195 $ 906
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 114 $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of promissory note and redemption of common stock $ 5,073 $ --
See accompanying notes to condensed consolidated financial statements.
5
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS FOR PRESENTATION
The Unaudited Condensed Consolidated Balance Sheet as of March 31, 2004 and
the Unaudited Condensed Consolidated Statement of Operations for the three
months ended March 31, 2004 include the accounts of Empire Resorts, Inc
("Empire" or "the Company") and certain of the assets and liabilities of
Catskill Development, L.L.C. ("CDL"), which were merged into the Company
effective January 12, 2004. The operations of CDL for the period January 1, 2004
through January 11, 2004 which were not significant, have been included in the
Unaudited Condensed Consolidated Statements of Operations and Cash Flows for the
three months ended March 31, 2004. For accounting purposes, CDL is deemed to
have been the acquirer in the merger. Accordingly, the comparative Unaudited
Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended March 31, 2003 represent the accounts of CDL only. The assets that
were not transferred through the merger are currently leased to the Company (see
note K ).
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting principles generally accepted in the
United States of America (GAAP), with the requirements of Form 10-QSB and
Regulation S-B as applicable to interim financial information and following
other requirements of the Securities and Exchange Commission (SEC) for interim
reporting. Accordingly, the unaudited consolidated financial statements do not
include all of the information and footnotes normally required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all normal and recurring
adjustments and accruals considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual shareholder's report included in the
Form 10-KSB for the year ended December 31, 2003.
NOTE A. NATURE OF BUSINESS
Empire 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, the Company has
concentrated most of its efforts on developing gaming operations in Monticello,
New York. As part of this effort we have divested ourselves of various ancillary
interests and terminated certain unprofitable operations.
The Company had no operating revenue during the fiscal year 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, raised approximately $28 million for
development and operations.
On January 12, 2004, the Company acquired certain of the assets and
liabilities of CDL, a lease for 200 acres of land with an option to acquire an
additional 20 acres, and 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"), in exchange for
80.25% of the Company's common stock, or 18,219,075 shares, calculated on a
post-merger, fully diluted basis ("the Merger"). Prior to the Merger, 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 was 100% owned by
certain affiliates of the Company.
Although Empire was 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, the Merger was accounted for
as a reverse acquisition, whereby CDL was considered the "acquirer" of Empire
for financial reporting purposes as CDL's members control more than 50% of the
post transaction combined company. Among other matters, reverse merger
accounting requires Empire to present in all financial statements and other
public information filings, prior historical and other information of CDL, and a
retroactive restatement of CDL historical shareholders investment for the
equivalent number of shares of common stock received in the Merger. Accordingly,
the accompanying consolidated financial statements present the results of
operations of CDL for the three months ended March 31, 2003 and reflect the
acquisition of Empire on January 1, 2004 under the purchase method of
accounting. Subsequent to January 1, 2004, the operations of the Company reflect
the combined operations of the former Empire and CDL.
6
RACEWAY OPERATIONS
Monticello Raceway Management, a wholly owned subsidiary of the Company, is
a New York corporation that operates Monticello Raceway (the "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.
The Raceway began operation in 1958 and offers pari-mutuel wagering and
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 the Raceway on live
races run at the Raceway; (ii) fees from wagering at out-of-state locations on
races simulcast from the 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 the 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.
VIDEO GAMING MACHINES
A video gaming machine (VGM) is an electronic gaming device which allows a
patron to play electronic versions of various lottery games of chance and is
similar in appearance to a traditional slot machine. On October 31, 2001, the
State of New York enacted a bill designating seven racetracks across the state,
including the Raceway, to install and operate video gaming machines. On May 15,
2003, New York State enacted legislation to enhance the incentives for
racetracks in the State to participate in the program. Under the program, the
New York State Lottery made an in initial allocation of 1,800 VGM's to the
Raceway. Participation in this program requires additional approvals by the New
York State Lottery, including satisfactory completion of construction of the
facilities at the Raceway and appropriate 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
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, these parties 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. On April 27, 2004, the Eastern Regional Office
("ERO") of the Bureau of Indian Affairs ("BIA") completed its review of the plan
by the Cayuga Nation and the Company to build a $500 million casino on a site
adjacent to the Raceway. The ERO recommended that a finding be made that the
project was in the best interests of the Cayuga Nation and not detrimental to
the surrounding community and recommended that the site be taken into to trust
by the United States as a site for gaming activities. Final approval by the BIA,
and approvals by the Governor of New York and the National Indian Gaming
Regulatory Commission are required in order for the Company to proceed with the
project. As a result of the Company's recent consolidation transaction with CDL,
all of the contracts related to this project were assigned to the Company and
the Company now owns 100% of all the CDL affiliates.
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 will be 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.
Monticello Raceway Development, in connection with its gaming and
development activities, 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. During the quarter ending
March 31, 2004 Monticello Raceway Development capitalized approximately $733,000
of costs associated with the casino development project. When operations of the
casino commence the costs will be systematically recognized over a determinable
period.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION. Wagering revenues are recognized at the end of each
racing day and are reflected 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 condensed consolidated
statement of operations.
7
PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation.
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. The Company maintains significant cash
balances with financial institutions in excess of the insurance provided by the
Federal Deposit Insurance Corporation ("FDIC"). The Company has not incurred any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash.
RESTRICTED CASH. Under New York State Racing, Pari-Mutuel Wagering and
Breeding Law, Monticello Raceway Management 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 Monticello Raceway Management petitions the Racing and Wagering
Board to certify that the noted expenditures are eligible for reimbursement 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 March 31, 2004. 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 is stated at cost less
accumulated depreciation. The Company provided for depreciation on property and
equipment used by applying the straight-line method over the following estimated
useful lives:
Estimated
Useful
Assets Lives
------ -----
Vehicles 5 years
Furniture, fixtures and equipment 5-7 years
DEFERRED DEVELOPMENT COSTS. Deferred development costs are stated at cost.
The Company capitalizes certain costs directly related to an agreement with a
the Cayuga Nation to obtain a gaming license. These capitalized costs are
periodically reviewed for impairment.
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.
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, the Company 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 are 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 of earnings 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 anti-dilutive with respect to losses, they
have been excluded from the Company's computation of loss per common share.
Therefore, basic and diluted losses per common share for the period ending March
31, 2004 were the same. The weighted average shares used in the loss per common
share calculation for the period ending March 31, 2003 reflects the number of
shares issued in the Merger.
ADVERTISING. The Company expenses the costs of general advertising,
promotion and marketing programs at the time the costs are incurred.
8
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.
STOCK BASED COMPENSATION. 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 reports the provisions on
a prospective basis.
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 (VIE's), 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 for SB-filers to the first fiscal year or interim period ending after
December 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.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current presentation.
9
NOTE C. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro-forma statement of operations presents
information as if the Merger took place at January 1, 2003. The pro-forma
amounts include certain adjustments primarily to present certain expenses which
resulted from the transaction and do not reflect the economics, if any, which
might be achieved from combining the company's results of operations. The Merger
was between companies under common control and accordingly assets and
liabilities acquired were recorded at book value.
The unaudited pro forma financial statements should be read together with
the financial statements and notes of the Company and the consolidated financial
statements of CDL for the year ended December 31, 2003.
MARCH 31, 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA RESULTS
-----------------
REVENUES
Racetrack Revenue $ 2,282
--------
EXPENSES:
Purses awards and other 781
Operating costs 512
Selling, general and administrative 4,032
Amortization of deferred financing costs 25
Interest expense, net 213
--------
Total expenses 5,563
--------
OTHER INCOME
Gain on sale of investment and related management contract 135
Gain on extinguishment of debt 419
Recovery of insurance proceeds 500
--------
1,054
--------
LOSS FROM OPERATIONS BEFORE MINORITY INTEREST (2,227)
MINORITY INTEREST 5
--------
NET LOSS (2,222)
CUMULATIVE UNDECLARED DIVIDEND
ON PREFERRED STOCK 388
--------
NET LOSS APPLICABLE TO COMMON SHARES $ (2,610)
========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 23,156
========
LOSS PER COMMON SHARE, basic and diluted $ (0.11)
========
10
NOTE D. PROPERTY AND EQUIPMENT
(IN THOUSANDS)
March 31, 2004
Construction in progress $2,219
Vehicles 122
Furniture, fixtures and equipment 138
------
2,479
Less - Accumulated depreciation 6
------
$2,473
======
Depreciation expense was approximately $6,000 and $174,000, respectively
for the periods ending March 31, 2004 and 2003.
NOTE E. ADVANCES TO CAYUGA NATION OF NEW YORK
The Company has made payments to the Cayuga Nation to help cover
development costs for the proposed gaming facility and other development
projects. These advances are refundable under certain circumstances and are
non-interest-bearing. A balance of $385,000 was recorded at the year ended
December 31, 2003 and an additional $85,000 during the period ending March 31,
2004.
NOTE F. DEFERRED DEVELOPMENT COSTS
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
and, as an inducement to enter into the transaction, the Cayuga Nation received
300,000 shares of the Company's common stock vesting over a twelve month period.
On April 9 and October 9, 2003, an aggregate of 200,000 shares of common stock
vested 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. 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 proposed
gaming facility with the Company and/or its other affiliates. This hotel will be
designated as the preferred 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 the Company's VGM operations
other lodging, entertainment, sports and/or retail facilities, which may be
developed or operated within a 15 mile radius of the proposed casino. The option
becomes exercisable only upon the opening date of the gaming facility. When
operations of the proposed casino commence, the deferred development costs will
be systematically recognized over a determinable period.
NOTE G. 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, 2003, the
Company through CDL had capitalized approximately $4.2 million. During the
quarter ended March 31, 2004, the Company capitalized approximately $733,000.
When operations of the proposed casino commence the gaming license and
development costs will be systematically recognized over a determinable period.
NOTE H. NOTES PAYABLE
Bryanston Group and Beatrice Tollman
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.
11
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
promissory notes in the sum of approximately $5.1 million to Bryanston Group and
Beatrice Tollman in exchange for their shares. The notes are payable over three
years pursuant to the following schedule:
Date Amount
1 Year Anniversary of Notes 13.33% of the Note Amounts
18 Month Anniversary of Notes 17.78% of the Note Amounts
2 Year Anniversary of Notes 22.22% of the Note Amounts
30 Month Anniversary of Notes 26.67% of the Note Amounts
3 Year Anniversary of Notes 20.00% of the Note Amounts
In addition, under the terms of the notes, interest accrues on the
outstanding principal amount at the rate of 7% per annum, and upon each
principal amount payment, the Company is required to pay all unpaid accrued
interest with respect to such principal amount payment. For the period ended
March 31, 2004 the Company recorded approximately $81,000 in interest expense
associated with the promissory notes.
Berkshire Bank
On October 29, 2003, Monticello Raceway Management issued a $3,500,000 note
to The Berkshire Bank. The Company entered into a surety agreement with The
Berkshire Bank to guarantee the note. The note was subsequently satisfied in
February 2004.
NOTE I. STOCK AND STOCK OPTION TRANSACTIONS
On January 30, 2004 the Company, with the assistance of Jefferies &
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 of the registered shares
increased by approximately $30 million, less expenses, the Company's funds for
development and operations. On February 13, 2004, the registration statement
with respect to the resale of the shares privately placed by Jefferies & Company
went effective.
In connection with the private placement letter agreement with Jefferies &
Company, Inc. dated October 30, 2003, Jefferies & Company, Inc. was issued
warrants to purchase 250,000 shares of common stock at $7.50 per-share for
general financial advisory services rendered relating to the consummation of the
private placement. In addition, $2.3 million of costs incurred were charged to
capital in relation to the transaction. At March 31, 2004 all of the Jefferies &
Company warrants were outstanding.
On January 30, 2004 David Matheson, who is the Chairman of the Board of
Directors of the Company, was granted 20,000 shares of the Company's common
stock for his service on a special committee of the board of directors
established to represent the Company with the regulatory matters in front of the
Bureau of Indian Affairs, the National Indian Gaming Commission and the State of
New York with respect to the Cayuga Nation gaming project. The expense
associated with this grant was $260,000 and was recognized in the period ending
March 31, 2004. On June 30, 2004, another 20,000 shares will be issued to Mr.
Matheson for these services and will be recorded in the second quarter. Mr.
Matheson abstained from all votes of the Board of Directors related to the
creation of this special committee and the establishment of his compensation.
On March 24, 2004, 10,000 options were granted to all seven non-employee
board members to purchase common stock at $11.97 per share. These options were
immediately vested and expire in ten years. Compensation expenses relating to
these grants totaling, approximately $838,000, were included in the results of
operations for the three months ended March 31, 2004.
During the three months ended March 31, 2004 approximately $33,000 was
received from the proceeds from the exercising of options.
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. 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.
12
NOTE J. 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:
(in thousands)
Net operating loss
Carry forwards $ 67,000
========
Deferred income tax asset 26,800
Valuation allowance (26,800)
--------
Deferred income tax asset, net $ --
========
The Company's merger with CDL will limit the Company's ability to use its
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 the Company's operations with CDL, however, will
not permit the Company 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 K. COMMITMENTS AND CONTINGENCIES
GROUND LEASE. On October 29, 2003, CDL and Monticello Raceway Management
entered into a 48-year ground lease ("Ground Lease") with respect to 200 acres
property and improvements located on such land. Under the terms of the Ground
Lease, Monticello Raceway Management will pay CDL $1.8 million per year with the
first payment deferrable until January 11, 2005, with such deferred rent
accruing interest at the rate of 4.5% per annum. 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, Monticello
Raceway Management 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. Pursuant to the terms of the merger the former members of
CDL, excluding the Company, retained their interest in the leasehold obligation
of Monticello Raceway Management, independent of the assets transferred in the
merger. 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
equal to the sum of 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 an amount equal to all
transfer taxes and closing costs incurred by the Company 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 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, 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 the 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.
CONSTRUCTION OBLIGATION. To prepare the property at the Monticello Raceway
for the VGM operation, the Company had contractual obligations relating to
construction of the VGM renovations of approximately $18.7 million. The balance
outstanding of the original contract was approximately $17.8 million at March
31, 2004. These contracts include a guaranteed completion of the renovations by
June 30, 2004.
LITIGATION TRUST. On 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 the Company, with respect to the litigation against
13
Caesers Entertainment, Inc which alleged tortuous interference with contract and
business relationships, were transferred to a liquidating 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 closing
(but following the redemption of the common stock held by The Bryanston Group
and Beatrice Tollman) were granted a 19.75% interest in the trust as a
liquidating dividend and the Company issued an irrevocable line of credit for
$2.5 million to the trust. 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. Registration statements,
concerning this distribution on Form S-1 were filed with the Securities and
Exchange Commission by the Litigation Trust and became effective on March 5, and
May 14, 2004 respectively. For the period ending March 31, 2004 the Company
released $255,000 in draws on the line of credit. Due to the unpredictable
nature of the litigation and the pending motions currently under review the
Company provided for a valuation allowance of $255,000 against the receivable
from the Litigation Trust for the current period ending March 31, 2004.
LEGAL PROCEEDINGS. The Monticello Harness Horsemen's Association, Inc.
("Horsemen's Association") has brought actions against Monticello Raceway
Management and an officer of the Company. One of the actions seeks the sum of
approximately $1.6 million to be credited to the horsemen's purse account, and
an additional $4 million in punitive damages. Another case is questioning a
racing series that purportedly violated the contract with Monticello Raceway
Management and Cliff Ehrlich as its President. 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 and Officer of the Company. 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 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 issues in the context of contract negotiations with the Horsemen's
Association that are ongoing. There are sharply disputed facts 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. There is further discovery pending.
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.
The Company was also a party to various non-environmental legal proceedings
and administrative actions, all arising from the ordinary course of business.
Although it is impossible to predict the outcome of any legal proceeding, the
Company believes any liability that may finally be determined with respect to
such legal proceedings should not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
14
NOTE L. SUBSEQUENT EVENTS
On April 29, 2004 the Company in settlement of all unpaid dividends due
through April 1, 2004 on its Series B Preferred shares, paid $30,000 in cash and
agreed to issue on or before June 30, 2004, 16,074 shares of Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
that involve risks and uncertainties. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
principally relating to the Company's ability to complete and fund its proposed
casino development project. The actual results may differ significantly from the
results discussed in the forward-looking statements.
OVERVIEW
Over the past two years the Company has taken steps to prepare itself for
the merger with CDL, and the subsequent control of operations and future
development of the Raceway. On April 27, 2004, the Eastern Regional Office
("ERO") of the Bureau of Indian Affairs ("BIA") completed its review of the plan
by the Cayuga Nation and the Company to build a $500 million casino on a site
adjacent to the Raceway. The ERO recommended that a finding be made that the
project was in the best interests of the Cayuga Nation and not detrimental to
the surrounding community and recommended that the site be taken into to trust
by the United States as a site for gaming activities. Final approval by the BIA,
and approvals by the Governor of New York and the National Indian Gaming
Regulatory Commission are required in order for the Company to proceed with the
project. As a result of the Company's recent consolidation transaction with CDL,
all of the contracts related to this project were assigned to the Company and
the Company now owns 100% of all the CDL affiliates.
The Company has spent significant amounts of money in connection with its
development activities, primarily for the design, development, financing and
construction of the VGM operation, as well as the predevelopment, design, and
negotiations of a Native American casino.
New business developments or other unforeseen events may occur, resulting
in the need to raise additional funds. The Company continues to explore
opportunities to develop additional gaming or related businesses in other
markets, whether through acquisition or development. Any such developments would
require the Company to obtain additional financing.
PLAN OF OPERATIONS
On January 12, 2004, the Company acquired all of its remaining partner's
interest in CDL and other related entities for developing gaming activities at
the Raceway. The Company consolidated all development and management rights with
respect to the Raceway and related gaming activities in exchange for 80.25% or
18,219,075 shares of the Company's outstanding common stock on a
post-transaction, fully diluted basis. Future operating results for the Company
will reflect its newly acquired operations and development of future businesses
located at Monticello Raceway and related properties. The Company's ability to
develop a successful business is therefore largely dependent on the success or
failure of different activities than those from its prior fiscal years.
On April 3, 2003, 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 of New
York 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 Nation a 30 acre
parcel of land in Monticello, New York to be used for gaming purposes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a brief discussion of the critical accounting policies
used in the preparation of the Company's financial statements, including those
accounting policies and methods used by the Company, which require subjective
judgments and are considered very important to the understanding of the
Company's financial condition.
REVENUE RECOGNITION. Wagering revenues are recognized at the end of each
racing day 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.
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, settles wagers for other racetracks
15
and is potentially exposed to credit risk. These wagers are included in accounts
receivable.
DEFERRED DEVELOPMENT COSTS. Deferred development costs are stated at cost.
The Company capitalizes certain costs directly related to an agreement with the
Cayuga Nation to obtain a gaming license. These capitalized costs are
periodically reviewed for impairment.
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.
STOCK BASED COMPENSATION. 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.
LITIGATION. 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 an amount that will materially increase the
liabilities of the Company as presented in the attached consolidated financial
statements.
RESULTS OF OPERATIONS
The Company's operations during the first quarter of the years 2004 and
2003 were not similar due to the merger of the Company and certain assets and
liabilities of CDL. The net loss was $3.7 million or $0.16 cents per share for
the first quarter of 2004, which compares with a net loss of approximately
$531,000 for the same period of 2003. After providing for dividends on preferred
stock, the net loss applicable to common shares in the first quarter 2004 was
$4.3 million or $0.18 per share.
Selling, general and administrative expenses increased to $4.3 million in
the first quarter of 2004 from $1.2 million in 2003 substantially as a result of
the recognition of stock based compensation expense and the start up costs
associated with the new VGM operations in Monticello, New York. Purses awards
and other expenses totaled approximately $860,000 in the first quarter of 2004
and approximately $781,000 in 2003. Accounts payable increased to $1.2 Million
in the first quarter of 2004 from $.1 Million in 2003 as a result, in part, of
the accrual of $450,000 representing deferred rent under the Ground Lease for
the Raceway site, which was entered into October 29, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the first quarter of 2004 totaled
$3.6 million, which is primarily attributable to the net loss for the period and
the payments of liabilities. The start up costs associated with the VGM
operations including the increased payroll for new employees was a significant
factor.
Net cash used in investing activities in the first quarter of 2004 totaled
$2.2 million, consisting primarily of $1.4 million in purchases of property and
equipment, including construction costs and approximately $733,000 in costs
associated with the casino development project.
Net cash obtained from financing activities in the first quarter of 2004
totaled $24.6 million, which is primarily attributable to the $30 million
received from the proceeds of the sale of stock through the private placement,
stock issuance expenses of $2.3 million and the repayment of the $3.5 million
note issued to The Berkshire Bank.
To prepare the property at the Monticello Raceway for the VGM operation,
the Company had contractual obligations relating to construction of the VGM
renovations of approximately $18.7 million. The balance outstanding of the
original contract was approximately $17.8 million at March 31, 2004. These
contracts include a guaranteed completion of the renovations by June 30, 2004.
16
On October 29, 2003, Monticello Raceway Management issued a $3,500,000 note
to The Berkshire Bank. The Company entered into a surety agreement with The
Berkshire Bank to guarantee the note. The note was subsequently satisfied in
February 2004.
On January 30, 2004 the Company, with the assistance of Jefferies &
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 of the registered shares
increased by approximately $30 million, less expenses, the Company's funds for
development and operations. On February 13, 2004, the registration statement
with respect to the resale of the shares privately placed by Jefferies & Company
went effective.
IMPACT OF INFLATION
The Company's results are affected by the impact of inflation on operating
costs. Historically, the Company has used cost containment programs and improved
operating efficiencies to offset the otherwise negative impact of inflation on
its operations.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent and belief
or current expectations of the Company and its management team. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among other things, whether
the Company will receive the necessary approvals to develop the casino, future
revenue opportunities, the future growth of the Company's customer base, future
capital needs, marketing and sales force, and other risks and uncertainties that
may be detailed herein, and from time-to-time, in the Company's other reports
filed with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
17
ITEM 3. CONTROLS AND PROCEDURES
The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in Rule
13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the "Exchange
Act")) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation, with the participation of the Chief Executive Officer
and Chief Financial Officer of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective, as of the end of the period covered by this report,
to provide reasonable assurance that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
In designing and evaluating the Company's disclosure and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, as ours are designed to do, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We believe that our disclosure controls and
procedures provide such reasonable assurance.
Management evaluated CDL's internal controls over financial reporting
following the merger between the Company and certain assets and liabilities of
CDL, and concluded that CDL's internal controls over financial reporting were
sufficient and no material changes were required to be made to CDL's internal
controls as a result of the merger.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Monticello Harness Horsemen's Association, Inc. ("Horsemen's
Association") has brought actions against Monticello Raceway Management and an
Officer of one of the Company's subsidiaries. One of the actions seeks the sum
of approximately $1.6 million to be credited to the horsemen's purse account,
and an additional $4 million in punitive damages. Another case is questioning a
racing series that purportedly violated the contract with Monticello Raceway
Management and Cliff Ehrlich as its President. 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 and Officer of one of the Company's subsidiaries. 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 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 issues in the context of contract negotiations with
the Horsemen's Association that are ongoing.
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.
The Company was also a party to various non-environmental legal proceedings
and administrative actions, all arising from the ordinary course of business.
Although it is impossible to predict the outcome of any legal proceeding, the
Company believes any liability that may finally be determined with respect to
such legal proceedings should not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
OPERATING ENVIRONMENT
We are a party to various other legal actions that have arisen in the
normal course of business. In the opinion of our 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.
19
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
On January 30, 2004 the Company, with the assistance of Jefferies &
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 of the registered shares
increased by approximately $30 million, less expenses, the Company's funds for
development and operations. On February 13, 2004, the registration statement
with respect to the resale of the shares privately placed by Jefferies & Company
went effective.
Number of Common
Name Shares
---- ------
The Lincoln Fund, LP 30,000
O33 Growth Partners I, LP 248,900
O33 Growth Partners II, LP 76,350
Oyster Pond Partners, LP 54,705
O33 Growth International Fund, Ltd. 120,045
The Animi Master Fund, Ltd. 300,000
Nausethold & Co. 66,325
Maril & Co. 233,675
Crestview Capital Master, LLC 300,000
PAR Investment Partners, LP 700,000
Senvest Master Fund, LP 45,000
Senvest International, LLC 45,000
Perfect World Partners, LLC 700,000
JB Partners, LP 250,000
AS Capital Partners, LLC 5,000
Forest Multi Strategy Master Fund SPC 25,000
Presidio Partners L.P. 135,000
Geary Partners L.P. 95,000
Brady Retirement Fund L.P. 18,700
Presidio Offshore Ltd. 1,300
Lagunitas Partners LP 25,000
Sam Berlzberg 30,000
BMO Nesbitt Burns Inc. 35,000
Allied Funding, Inc. 5,000
RAM Trading, Ltd. 425,000
JMB Capital Partners, LP 50,000
Schottenfeld Qualified Associates, LP 20,000
Infineon Financial Corp. 10,000
In consummating the above described private placements, the Company relied
upon the exemptions from registration provided by Sections 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), and Rule 506
promulgated thereunder based upon: representations from each investor that he,
she or it, (a) met one of the categories of accredited investor set forth in
Rule 501, (b) was acquiring the securities for his, her or its own account and
not with a view towards further distribution and (c) had such sufficient
knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks connected with the applicable investment, and
the fact that (a) no general solicitation of the securities was made by the
Company, (b) the securities issued were "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act, (c) the Company
placed appropriate restrictive legends on the certificates representing the
securities regarding the restricted nature of these securities and (d) prior to
the completion of each transaction, each investor was informed in writing of the
restricted nature of the securities, provided with all information regarding the
Company as required under Rule 502 of Regulation D and was given the opportunity
to ask questions of and receive additional information from the Company
regarding its financial condition and operations.
In connection with the private placement letter agreement with Jefferies &
Company, Inc. dated October 30, 2003, 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. In addition $2.3 million of costs was charged to capital in
relation to the transaction. At March 31, 2004 all of the Jefferies & Company
warrants were outstanding.
20
On January 30, 2004 David Matheson, who is the Chairman of the Board of
Directors of the Company, was granted 20,000 shares of the Company's common
stock for his service on the special committee established to represent the
Board of Directors and the Company with the regulatory matters with the Bureau
of Indian Affairs, the National Indian Gaming Commission and the State of New
York relating the Cayuga Nation gaming project. This expense associated with
this grant of $260,000 was recognized in the period ending March 31, 2004. On
June 30, 2004 another 20,000 shares will be issued for this service that will be
recorded in the second quarter. Mr. Matheson abstained from all votes of the
Board of Directors related to the creation of this special committee and the
establishment of his compensation.
On March 24, 2004, an additional 70,000 options were granted to board
members to purchase common stock at $11.97 per share. These options were
immediately vested and expire in ten years. Compensation expense totaling,
approximately $838,000, was included in the results of operations for the three
months ended March 31, 2004. During the three months ended March 31, 2004
approximately $33,000 was received from the proceeds from the exercising of
options.
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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On May 12, 2004, the Company held its annual meeting in New York, New
York;
b) The following Directors were elected based upon the following
tabulations of votes:
FOR WITHHELD
--- --------
Ralph J. Bernstein 15,350,297 6,010
John Sharpe 15,350,847 5,460
Paul A. deBary 15,304,847 51,460
(c) The second order of business was to consider and vote upon a proposal
to adopt the Company's 2004 stock option plan, which passed based upon
the following tabulations of votes.
FOR AGAINST WITHHELD
--------- ------- --------
13,614,566 69,374 13,047
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
(1) Our Current Report on Form 8-K dated January 12, 2004;
(2) Our Current Report on Form 8-K dated January 14, 2004;
(3) Our Current Report on Form 8-K dated February 2, 2004;
(4) Our Current Report on Form 8-K dated April 20, 2004;
(5) Our Current Report on Form 8-K dated May 4, 2004;
21
EMPIRE RESORTS, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 14, 2004 /s/ ROBERT A. BERMAN
-------------------------------------
Robert A. Berman
Chairman and Chief Executive Officer
Dated: May 14, 2004 /s/ SCOTT A. KANIEWSKI
-------------------------------------
Scott A. Kaniewski
Chief Financial Officer
22