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 June 30, 2004
/ / Transition report under Section 13 or 15(d) of the Exchange Act
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
Incorporation or Organization) Identification Number)
RT 17B, P.O. BOX 5013, MONTICELLO, NEW YORK, 12701
(Address of Principal Executive Offices)
(845) 794-4100 EXT 581
(Issuer's Telephone Number, Including Area Code)
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 August 13, 2004 was 26,074,942.
Traditional Small Business Disclosure Format (check one): Yes /X/ No / /
EMPIRE RESORTS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
------ --------------------- --------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of June 30, 2004...... 3
Condensed Consolidated Statements of Operations for the
three and six months Ended June 30, 2004 and 2003......... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2004 and 2003............... 5
Notes to Condensed Consolidated Financial Statements ......... 6-20
ITEM 2. Management's Discussion and Analysis or Plan of Operation..... 21-39
ITEM 3. Controls and Procedures....................................... 39
PART II OTHER INFORMATION
------- -----------------
ITEM 1. Legal Proceedings............................................. 40-41
ITEM 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities............................ 41
ITEM 4. Submission of Matters to a Vote of Security Holders........... 41
ITEM 6. Exhibits and Reports on Form 8-K.............................. 41-42
Signatures.................................................... 43
2
PART I
ITEM 1. FINANCIAL INFORMATION
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,804
Restricted cash 177
Accounts receivable 1,395
Prepaid expenses and other current assets 539
--------
Total current assets 5,915
PROPERTY AND EQUIPMENT, NET 27,325
ADVANCES- CAYUGA NATION 470
DEFERRED DEVELOPMENT COSTS 3,890
GAMING LICENSE AND
DEVELOPMENT COSTS 5,948
--------
TOTAL ASSETS $ 43,548
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable $ 676
Accounts payable 6,543
Construction costs payable 11,103
Accrued expenses and other current liabilities 1,574
--------
Total current liabilities 19,896
NOTES PAYABLE, less current maturities 4,397
--------
Total liabilities 24,293
--------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000 shares
authorized, 26,075 issued and outstanding 261
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
Additional paid in capital 45,065
Accumulated deficit (32,926)
--------
Total stockholders' equity 19,255
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,548
========
See accompanying notes to condensed consolidated financial statements.
3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
REVENUES:
Gaming Revenue $ 2,654 $ 2,550 $ 5,165 $ 4,832
-------- -------- -------- --------
EXPENSES:
Operating costs 4,027 1,428 6,856 2,721
Selling, general and administrative 3,127 1,628 6,052 2,808
Depreciation 14 174 20 348
Amortization of deferred financing costs -- -- 244 --
Interest expense, net 112 165 272 331
-------- -------- -------- --------
Total expenses 7,280 3,395 13,444 6,208
-------- -------- -------- --------
NET LOSS (4,626) (845) (8,279) (1,376)
DIVIDENDS PAID ON PREFERRED STOCK -- -- 30 --
CUMULATIVE UNDECLARED DIVIDENDS
ON PREFERRED STOCK 388 -- 734 --
-------- -------- -------- --------
NET LOSS APPLICABLE TO COMMON SHARES $ (5,014) $ (845) $ (9,043) $ (1,376)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 26,025 18,219 24,313 18,219
LOSS PER COMMON SHARE, basic and diluted $ (0.19) $ (0.05) $ (0.37) $ (0.08)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,279) $ (1,376)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 20 348
Loss on asset disposal -- (5)
Amortization of deferred financing costs 244 --
Accrued interest 224 333
Stock-based compensation 1,948 --
Changes in operating assets and liabilities:
Restricted cash (54) (53)
Accounts receivable, net (637) 362
Prepaid expenses and other current assets (285) 142
Accounts payable 1,194 301
Accrued expenses and other current liabilities 361 341
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,264) 393
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,113) (62)
Cash acquired from acquisition 18 --
Advances- Cayuga Nation (85) --
Gaming license and development costs (1,782) (722)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (16,962) (784)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 30,375 --
Proceeds from exercise of stock options and warrants 118 --
Stock issuance expenses (2,317) --
Repayment of note payable, bank (3,470) --
Preferred stock dividends paid (30) --
Members' capital contributions -- 1,143
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,676 1,143
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,450 752
CASH AND CASH EQUIVALENTS, beginning of period 1,354 644
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,804 $ 1,396
======== ========
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 $ --
Accrued construction costs $ 11,103 $ --
Common stock issued in settlement of preferred stock dividend $ 210 $ --
Common stock issued for development costs $ 1,450 $ --
Common stock issued in settlement of accounts payable $ -- $ 281
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 June 30,
2004, the unaudited Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 2004 and the unaudited Condensed Consolidated
Statement of Cash Flows for the six months ended June 30, 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 for the three and six months ended June 30, 2004 and Cash Flows for
the six months ended June 30, 2004. For accounting purposes, CDL is deemed to
have been the acquirer in the merger. Accordingly, the comparative unaudited
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and Cash Flows for the six months ended June 30, 2003
represent the accounts of CDL only. The assets that were not transferred through
the merger were leased to the Company and subsequently purchased on July 26,
2004 from a related party. (see notes L and M)
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 and six months ended June 30, 2003 and reflect
the acquisition of Empire as of 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.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the accounting principles generally accepted in
the United States of America (GAAP), and 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 and six-month periods ended June 30,
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 Resorts, Inc. 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.
We serve as the holding company for various subsidiaries engaged
primarily in the ownership, operation and development of gaming and recreational
activities. Through these subsidiaries, we intend to develop a multi-dimensional
gaming resort in Monticello, New York that includes horse racing, video gaming
machines and a $500 million Native American casino entitled the Cayuga Catskill
Resort. In April 2003, we and the Cayuga Nation of New York submitted all the
requisite applications with the Bureau of Indian Affairs and the National Indian
Gaming Commission to begin development of the Cayuga Catskill Resort. We believe
that our proposed multi-dimensional gaming project is uniquely situated to be
successful, as Monticello, New York is less than 90 miles northwest of New York
City, making it a shorter trip from the nation's most populous metropolitan area
than either Atlantic City or any regional Native American casino.
6
We operate through three principal subsidiaries, Monticello Raceway
Management, Inc. ("Monticello Raceway Management"), Monticello Casino
Management, LLC ("Monticello Casino Management") and Monticello Raceway
Development Company, LLC ("Monticello Raceway Development"). Currently, only
Monticello Raceway Management generates revenue, as the operations of our other
two subsidiaries are contingent upon the receipt of certain federal and state
regulatory approvals.
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
held a leasehold interest in the property which was subsequently purchased on
July 26, 2004, from a related party. (see notes L and M)
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. The 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.
MIGHTY M GAMING AT MONTICELLO RACEWAY
A video gaming machine ("VGM") is an electronic gaming device that
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.
Under the program, the New York State Lottery made an in initial allocation of
1,800 VGM's to the Raceway. On June 30, 2004, we began operating 1,744 video
gaming machines on 45,000 square feet of floor space at the Raceway after
completing approximately $27 million of renovations to the facility. The New
York State Lottery's video gaming facility at the Raceway will be one of seven
such facilities authorized in the State of New York.
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. These agreements were extended on June 25, 2004 until December 31,
2004. 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. Further approvals by
the BIA, 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 merger 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 232
acres of land at the Raceway. Monticello Raceway Development also has the
exclusive right to develop the remaining 203 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 six months ended
June 30, 2004, Monticello Raceway Development capitalized approximately $3.2
million of costs associated with the casino development project. When operations
of the casino commence the costs will be systematically recognized over a
determinable period.
7
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION. Gaming revenues represent (i)
revenues from pari-mutual wagering (ii) the net win from VGM's (iii) food and
beverage sales and other miscellaneous income. The Company recognizes revenues
from pari-mutual wagering earned from live harness racing and simulcast signals
from other tracks at the end of each racing day and are reflected at gross,
before deductions of such related expenses as purses, stakes and awards.
Revenues from the video lottery operations is the difference between the amount
wagered by bettors and the amount paid out to betters and is referred to as the
net win. Operating costs include (i) the amounts paid to the New York State
Lottery for the State's share of the net win (ii) amounts due to the Horsemen
and Breeder's for their share of the net win and (iii) for harness racing
purses, stakes and awards. Also included in operating costs are the costs
associated with the sale of food, beverage and other miscellaneous items.
The Company currently has a point loyalty program (Player's Club) for
its video lottery customers, which allows them to earn points based on the
volume of their video lottery activity. The points can be redeemed for various
services and merchandise throughout the gaming facility. The Company records the
points as an expense when they are redeemed by the customers. At June 30, 2004,
the facility had been operating for only one day and the potential liability for
redeeming points outstanding was immaterial.
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, which is not covered by the Federal
Deposit Insurance Corporation. 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. 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 June 30, 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 5-10 years
Furniture, fixtures and equipment 5-10 years
Leasehold improvements 40 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. These
capitalized costs are periodically reviewed for impairment.
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.
8
LOSS PER COMMON SHARE. The Company computes basic earnings per share
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 three and six months ending June 30, 2004 and 2003 were the same. The
weighted average shares used in the loss per common share calculation for three
and six months ending June 30, 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.
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 fair value
recognition provisions on a prospective basis.
RECLASSIFICATIONS. Certain prior period amounts have been
reclassified to conform to the current period 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.
PRO FORMA RESULTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
REVENUES
Gaming $ 2,550 $ 4,832
-------- --------
EXPENSES:
Operating costs 1,878 3,621
Selling, general and administrative 2,486 6,068
Interest expense, net 513 764
-------- --------
Total expenses 4,877 10,453
-------- --------
OTHER INCOME
Gain on sale of investment and related management contract -- 135
Recovery of insurance proceeds -- 500
Gain (loss) on extinguishment of debt (30) 389
-------- --------
Total other income (loss) (30) 1,024
-------- --------
NET LOSS (2,357) (4,597)
CUMULATIVE UNDECLARED DIVIDENDS
ON PREFERRED STOCK 392 779
-------- --------
NET LOSS APPLICABLE TO COMMON SHARES $ (2,749) $ (5,376)
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 23,522 23,340
======== ========
LOSS PER COMMON SHARE, basic and diluted $ (0.12) $ (0.23)
======== ========
10
NOTE D. PROPERTY AND EQUIPMENT
(IN THOUSANDS)
June 30, 2004
Leasehold improvements $ 25,060
Vehicles 130
Furniture, fixtures and equipment 2,155
------------
27,345
Less - Accumulated depreciation and amortization 20
-------------
$ 27,325
=============
Depreciation and amortization expense was approximately $14,000 and
$174,000, and $20,000 and $348,000, respectively for the three and six months
ending June 30, 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 six months ending June
30, 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. On April 9, 2004, an additional 100,000 shares vested and
approximately $1.5 million of additional cost was capitalized. 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. On June 25, 2004,
this agreement was extended through December 31, 2004. When operations of the
proposed casino commence, the deferred development costs will be systematically
recognized over a determinable period. These capitalized costs are periodically
reviewed for impairment.
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, Monticello Raceway Development through CDL had capitalized approximately
$4.2 million. During the six months ended June 30, 2004, Monticello Raceway
Development capitalized approximately $1.8 million of additional cost. When
operations of the proposed casino commence the gaming license and development
costs will be systematically recognized over a determinable period. These
capitalized costs are periodically reviewed for impairment.
NOTE H. NOTES PAYABLE
Bryanston Group and Beatrice Tollman
On January 9, 2004, the Company redeemed 2,392,857 shares of common
stock at a redemption price of $2.12 per share. In order to consummate this
redemption, the Company issued promissory notes in the sum of approximately $5.1
million.
11
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 three and six months ended June 30,
2004 the Company accrued approximately $89,000 and $170,000 respectively, in
interest expense associated with the promissory notes.
On July 23, 2004, the Company issued $65 million of 5 1/2%
Convertible Senior Notes (see Note M). On July 26, 2004, approximately $5.3
million of proceeds from the Convertible Senior Notes (see note M), that were
issued on July 23, 2004, was used to settle the obligation of the notes payable
and accrued interest to Bryanston Group and Beatrice Tollman.
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
In accordance with the merger agreement, 18,219,075 shares of our
common stock were issued pursuant to our acquisition of Monticello Raceway
Management, Monticello Casino Management, Monticello Raceway Development and
Mohawk Management, LLC, all of which may be sold to the public pursuant to a
registration statement under the Securities Act. We also recently issued
4,050,000 shares of our common stock to multiple investors in a private
placement. We also have outstanding options to purchase an aggregate of 945,028
shares of common stock at an average exercise price of $4.73 per share at June
30, 2004 and 250,000 warrants at an exercise price of $7.50 per warrant.
On April 29, 2004, the Company in settlement of all unpaid dividends
from the first quarter of 2004, due April 1, 2004 on the Series B Preferred
shares, paid $30,000 in cash. On June 11, 2004, the Company issued 16,074 shares
of common stock in settlement of all outstanding dividends from the year ending
December 31, 2003. The 16,074 shares were valued at approximately $210,000 and
recorded in the quarter ended June 30, 2004.
On May 20, 2004, the Company issued 109,500 incentive options with a
strike price of $14.25 to various employees. The option issuance provided a
variety of vesting schedules, including half immediately and half the following
year, 33% each year over three years starting at the date of issuance and, 33%
each year over three years starting after one year. All options expire ten years
from the date of grant. On the date of issuance 33,333 options were vested and
the expense recognized. The expense associated with this grant was approximately
$569,000 in the quarter ending June 30, 2004.
On January 30, 2004 David Matheson, 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 approximately $260,000 and was recognized in the
period ending March 31, 2004. On June 30, 2004, another 20,000 shares were
issued to Mr. Matheson for these services and were recorded in the second
quarter, and the expense associated with this grant was $281,000. 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.
During the six months ended June 30, 2004 the Company received
approximately $118,000 of proceeds from the exercising of stock 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 approximately
174,000 shares of common stock from June 30, 2003 through September 2003, having
an aggregate purchase price of approximately $1.1 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
$1.1 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.
13
NOTE K. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in note L, the Company obligations to pay principal,
premium, if any, and interest under certain debt are guaranteed on a joint and
several basis by substantially all of its operating subsidiaries. The guarantees
are full and unconditional and the guarantor subsidiaries are 100% owned by the
Company. The Company has determined that separate, full financial statements of
the guarantors, Monticello Raceway Management and Monticello Raceway
Development, would not be material to investors and, accordingly, supplemental
financial information for the guarantors is presented.
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)
ASSETS EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
------- ------------ ------------ ------- ------
Cash and cash equivalents $ 1,302 $ 2,502 $ -- $ -- $ 3,804
Restricted cash -- 177 -- -- 177
Accounts receivable -- 1,395 -- -- 1,395
Prepaid expenses and other assets 58 481 -- -- 539
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-Company 122,514 -- -- (122,514) --
Property and equipment, net -- 27,325 -- -- 27,325
Advances- Cayuga Nation -- 470 -- -- 470
Deferred development costs -- 3,890 -- -- 3,890
Gaming license and development costs -- 5,948 -- -- 5,948
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 128,934 $ 42,188 $ -- $(127,574) $ 43,548
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,465 $ 4,078 $ -- $ -- $ 6,543
Construction costs payable -- 11,103 -- -- 11,103
Accrued expenses and other liabilities 315 1,259 -- -- 1,574
Inter-Company -- 29,525 92,989 (122,514) --
Notes Payable less current maturities 5,073 -- -- -- 5,073
--------- --------- --------- --------- ---------
Total liabilities 7,853 45,965 92,989 (122,514) 24,293
Stockholders' Equity (Deficit): 121,081 (3,777) (92,989) (5,060) 19,255
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 128,934 $ 42,188 $ -- $(127,574) $ 43,548
========= ========= ========= ========= =========
14
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
------- ------- ---------- ---------- -------
Total Revenue $ -- $ 2,654 $ -- $ -- $ 2,654
------- ------- ---------- ---------- -------
EXPENSES:
Operating costs -- 4,027 -- -- 4,027
Selling, general and administrative 1,983 1,144 -- -- 3,127
Depreciation and amortization -- 14 -- -- 14
Interest expense, net 59 53 -- -- 112
------- ------- ---------- ----------- -------
Total expenses 2,042 5,238 -- -- 7,280
------- ------- ---------- ----------- -------
NET LOSS $(2,042) $(2,584) $ -- $ -- $(4,626)
======= ======= ========== ========= =======
THREE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
------- ------- ---------- ---------- -------
Total Revenue $ -- $ 2,550 $ -- $ -- $ 2,550
------- ------- ---------- --------- -------
EXPENSES:
Operating costs -- 1,428 -- -- 1,428
Selling general and administrative -- 1,628 -- -- 1,628
Depreciation and amortization -- 174 -- -- 174
Interest expense, net -- 165 -- -- 165
------- ------- ---------- --------- -------
Total expenses -- 3,395 -- -- 3,395
------- ------- ---------- --------- -------
NET LOSS $ -- $ (845) $ -- $ -- $ (845)
======= ======= ========== ========= =======
15
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
-------- ---------- ------------ --------- ----------
Total Revenue $ -- $ 5,165 $ -- $ -- $ 5,165
-------- ---------- ------------ --------- ----------
EXPENSES:
Operating costs -- 6,856 -- -- 6,856
Selling general and administrative 4,395 1,657 -- -- 6,052
Depreciation and amortization -- 20 -- -- 20
Amortization of deferred financing costs -- 244 244
Interest expense, net 107 165 -- -- 272
------- ---------- ----------- ---------- ----------
Total expenses 4,502 8,942 -- -- 13,444
------- ---------- ------------ ---------- ----------
NET LOSS $(4,502) $ (3,777) $ -- $ -- $ (8,279)
======= ========== ============ ========== ==========
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
-------- ---------- ------------ --------- ----------
Total Revenue $ -- $ 4,832 $ -- $ -- $ 4,832
------- ---------- ----------- ---------- ----------
EXPENSES:
Operating costs -- 2,721 -- -- 2,721
Selling general and administrative -- 2,808 -- -- 2,808
Depreciation and amortization -- 348 -- -- 348
Interest expense, net -- 331 -- -- 331
------- ---------- ----------- ---------- ------------
Total expenses -- 6,208 -- -- 6,208
------- ---------- ----------- ---------- -----------
NET LOSS $ -- $ (1,376) $ -- $ -- $ (1,376)
======= ========== =========== ========== ===========
16
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities $ (1,338) $ (3,926) $ -- $ -- $ (5,264)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment -- (15,113) -- -- (15,113)
Cash acquired from acquisition 18 -- -- -- 18
Advances- Cayuga Nation -- (85) -- -- (85)
Gaming license and development costs -- (1,782) -- (1,782)
Advances to subsidiaries (25,524) -- -- 25,524 --
--------- --------- ---------- ---------- ----------
Net cash used in investing activities (25,506) (16,980) -- 25,524 (16,962)
--------- --------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of stock 30,375 -- -- -- 30,375
Proceeds from exercise of
stock options and warrants 118 -- -- -- 118
Stock issuance expenses (2,317) -- -- -- (2,317)
Advances from Empire Resorts -- 25,524 -- (25,524)
Repayment of note payable, bank -- (3,470) -- -- (3,470)
Preferred stock dividends paid (30) -- -- -- (30)
--------- --------- ---------- ---------- ----------
Net cash provided by financing activities 28,146 22,054 -- (25,524) 24,676
--------- --------- ---------- ---------- ----------
Net increase in cash and cash equivalents 1,302 1,148 -- -- 2,450
Cash and cash equivalents,
beginning of period -- 1,354 -- -- 1,354
--------- --------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 1,302 $ 2,502 $ -- $ -- $ 3,804
========= ========= ========== ========== ==========
17
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
------- ---------- ----------- ---------- -----------
Net cash provided by operating activities $ -- $ 393 $ -- $ -- $ 393
------- ---------- ----------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment -- (62) -- -- (62)
Gaming license and development costs -- (722) -- -- (722)
------- ---------- ----------- ---------- -----------
Net cash used in investing activities -- (784) -- -- (784)
------- ---------- ----------- ---------- -----------
Cash flows from financing activities:
Members capital contributions -- 1,143 -- -- 1,143
------- ---------- ----------- ---------- -----------
Net increase in cash and cash equivalents -- 752 -- -- 752
Cash and cash equivalents,
beginning of period -- 644 -- -- 644
------- ---------- ----------- ---------- -----------
Cash and cash equivalents,
end of period $ -- $ 1,396 $ -- $ -- $ 1,396
======= ========== =========== ========== ===========
18
NOTE L. 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
232 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. At June 30, 2004,
Monticello Raceway Management has accrued approximately $1.3 million of lease
obligations including interest for the Raceway property. On July 26, 2004,
approximately $38 million of proceeds from Convertible Senior Notes was expended
to pay in full the obligations of the Ground Lease and purchase the leased
property from a related party, which terminates the lease with CDL. This
purchase will also allow the company to benefit from certain real estate tax
credits resulting from its recent investment in improvements on the land.
CONSTRUCTION OBLIGATION. To prepare the property at the Raceway for
the VGM operation, the Company had contractual obligations relating to
construction of the VGM renovations of approximately $23 million. The unpaid
balance of the original contract was approximately $11 million at June 30, 2004.
LITIGATION TRUST. On January 12, 2004, in order to better focus on
the development of a video gaming machine program at the 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 litigation against
Caesars Entertainment, Inc., which alleged tortuous interference with contract
and business relationships, were transferred to a liquidating litigation trust.
For the six months ending June 30, 2004 the Company advanced approximately
$250,000 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 approximately $250,000 against the receivable from
the Litigation Trust.
LEGAL PROCEEDINGS. The Monticello Harness Horsemen's Association,
Inc. ("Horsemen", "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. Management has
responded vigorously to contest the cases after attempts at an out-of-court
settlement proved fruitless.
Another action, seeks monetary 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.
19
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.
NOTE M. SUBSEQUENT EVENTS
On July 7, 2004, the Appellate Division of the New York State
Supreme Court issued an opinion in the appeal of the cases challenging the
legislation authorizing the VGM program and Native American Casinos. The opinion
affirmed the decision of lower court to uphold the constitutionality of the
provisions of the law that authorized expanded Native American casino gaming in
New York State and found that it was consistent with New York and federal laws.
The Appellate Division also ruled that the legislation permitting
state sponsored video gaming machine operations is unconstitutional under New
York law because such legislation provides that a portion of the video gaming
machine vendor fees be dedicated to breeding funds and enhancing purses in
violation of a constitutional mandate that such moneys be applied exclusively
to, or in aid or support of, education in the State of New York. We expect the
State of New York to promptly appeal this ruling under procedures that will stay
the decision and allow us to continue operating video gaming machines at the
Raceway. However, there can be no assurance that the State of New York will
ultimately prevail or, alternatively, that the authorizing legislation will be
amended in order for it to be constitutional. If the appellate court's findings
are ultimately upheld and the state legislature fails to enact corrective
legislation, we would be forced to close our video gaming machines and our
operations would be limited to the pari-mutuel operations of the Raceway and the
proposed development and management of the Cayuga Catskill Resort.
On July 16, 2004, the Company priced $65 million of 5 1/2%
Convertible Senior Notes guaranteed by its material subsidiaries and convertible
into 4,727,000 shares of common stock with a conversion price of $13.75, subject
to adjustment to a price of not less than $12.56 in certain events. The notes
were issued on July 23, 2004 with a maturity date of July 31, 2014. Interest is
payable semi-annually. The company used part of the offering proceeds for the
acquisition of 232 acres of land and buildings at the Raceway in Monticello, New
York, to repay certain indebtedness, to complete renovations at the Raceway, to
fund certain development costs in connection with the Cayuga Catskill Resort and
for general corporate purposes. The purchase of the 232 acres effectively
terminates the lease with CDL, a related party.
The notes were sold in a Rule 144A private offering to qualified
institutional buyers, were not registered under the Securities Act of 1933 and
may not be offered or sold in the United States except pursuant to an effective
registration statement under the Securities Act of 1933 or in accordance with an
applicable exemption from the registration requirements of the Securities Act of
1933.
On August 5, 2004, we received a letter from the purchaser of $10
million of notes in our 5 1/2% $65 million senior convertible note offering
demanding the immediate rescission of its full note purchase. This purchaser
claims that the offering circular with respect to these notes was misleading
because it failed to disclose the true status of the litigation settlement talks
between the Cayuga Nation of New York and the State of New York and the
existence of a competing claim in the same lawsuit by the Seneca Cayuga Tribe.
The purchaser further claims that had these disclosures been timely made by us,
the purchaser would not have participated in the note offering. We believe that
each of these claims is without merit and intend to vigorously defend any action
that may be brought against us with respect to the rescission of any note
purchases by this purchaser.
On July 26, 2004, approximately $5.3 million of proceeds from the
Convertible Senior Notes were expended to pay in full the obligation of the
notes payable and accrued interest to Bryanston Group and Beatrice Tollman.
On July 26, 2004, approximately $38 million of proceeds from the
Convertible Senior Notes were expended to pay in full the obligations of the
Ground Lease and accrued interest, and purchase the leased property. The
purchase of the property from a related party will allow the company to benefit
from certain real estate tax credits resulting from its recent investment in
improvements on the land. This purchase was a condition to the closing of the
Convertible Senior Notes.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. These forward-looking statements generally relate to
our strategies, plans and objectives for future operations and are based upon
management's current plans and beliefs or estimates of future results or trends.
Forward-looking statements also involve risks and uncertainties, which could
cause actual results to differ materially from those contained in any
forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, the following:
o A WORSENING OF GENERAL ECONOMIC AND MARKET CONDITIONS OR
INCREASES IN PREVAILING INTEREST RATE LEVELS, which may result
in reduced revenues, lower valuations for our subsidiaries or a
negative impact on the credit quality of our assets;
o CHANGES IN FOREIGN AND DOMESTIC LAWS, REGULATIONS AND TAXES,
which may result in higher costs and lower revenues for our
businesses, including as a result of unfavorable political
developments and changes in governmental policies;
o INCREASED COMPETITION AND CHANGES IN PRICING ENVIRONMENTS, which
may result in decreasing revenues and/or margins or loss of
market share;
o CONTINUED INSTABILITY AND UNCERTAINTY IN THE GAMING INDUSTRY,
associated with increased competition and the declining
popularity of horse racing;
o DEPENDENCE ON KEY PERSONNEL, the loss of which would severely
affect our ability to develop and implement our business
strategy;
o INABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL, which
would make it difficult to conduct our business and the
businesses of our subsidiaries;
o ADVERSE LEGAL AND REGULATORY DEVELOPMENTS THAT MAY AFFECT OUR
BUSINESS, such as court decisions or regulatory developments,
which could affect our current or planned operations or the
gaming industry generally, or in the environmental area, which
could affect our real estate development activities;
o WEATHER RELATED CONDITIONS AND SIGNIFICANT NATURAL DISASTERS,
INCLUDING HURRICANES, TORNADOES, WINDSTORMS, EARTHQUAKES AND
HAILSTORMS, which may impact our real estate holdings;
o INABILITY TO OBTAIN NECESSARY FINANCING FOR THE CAYUGA CATSKILL
RESORT, which could delay or prevent completion of the project;
o INABILITY OF OUR SUBSIDIARIES TO GENERATE OPERATING PROFITS AND
POSITIVE CASH FLOWS, which could result in our inability to meet
our ongoing obligations;
o CURRENT AND FUTURE LEGAL AND ADMINISTRATIVE CLAIMS AND
PROCEEDINGS, which may result in increased costs and diversion
of management's attention;
o INABILITY OR FAILURE TO OBTAIN NECESSARY REGULATORY APPROVAL,
including approvals of the development and gaming facility
management agreements between our subsidiaries and the Cayuga
Nation of New York, which could reduce the amount of revenues we
will receive, affect the nature of the operations or cause us to
abandon the Cayuga Catskill Resort project altogether;
o INABILITY OR FAILURE OF THE CAYUGA NATION OF NEW YORK TO SATISFY
VARIOUS LEGAL REQUIREMENTS THAT ARE PRECONDITIONS TO THE CAYUGA
NATION OF NEW YORK'S RIGHT TO CONDUCT THE INTENDED CASINO
BUSINESS AT THE CAYUGA CATSKILL RESORT, including the inability
to obtain required federal and state approvals or legislation
allowing the intended casino site to be held in trust by the
United States for the Cayuga Nation of New York, and the
inability or failure of the Cayuga Nation of New York to enter
into a gaming compact with the State of New York that is
federally approved, which would prevent development of the
Cayuga Catskill Resort;
o REGIONAL OR GENERAL INCREASES IN THE COST OF LIVING,
particularly in the northeastern United States, which may result
in lower demand for gaming; and
21
o RISKS ASSOCIATED WITH FUTURE ACQUISITIONS AND INVESTMENTS,
including changes in the composition of our assets and
liabilities through such acquisitions, diversion of management's
attention from normal daily operations of our business and
insufficient revenues to offset increased expenses associated
with acquisitions.
You should not place undue reliance on any forward-looking
statements, which are based on current expectations. Further, forward-looking
statements speak only as of the date they are made, and we will not update these
forward-looking statements, even if our situation changes in the future.
OVERVIEW
Empire Resorts, Inc. ("Empire Resorts" 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 and amusement industries. We were
incorporated under the name Alpha Hospitality Corporation and changed our name
to Empire Resorts in May, 2003. For much of our history, we concentrated on
riverboat casinos in the southern United States, with nominal holdings in the
Mid-Atlantic States. In 2002 this focus shifted. Specifically, we commenced the
liquidation of all of our holdings outside the Catskills region of the State of
New York. By the end of 2003, we had no direct operations or meaningful assets
other than a minority interest in CDL, the prior owner of approximately 232
acres of land in Monticello, New York, the sole stockholder of Monticello
Raceway Management and the controlling member of Monticello Casino Management.
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, In January 2004, we acquired from the members
of both CDL and Monticello Raceway Development all of the outstanding membership
interests and capital stock of Monticello Raceway Management, Monticello Casino
Management, Monticello Raceway Development and Mohawk Management, LLC in
exchange for 80.25% of our common stock, 18,219,075 shares, calculated on a
post-consolidation, fully diluted basis. Monticello Raceway Management,
Monticello Casino Management, Monticello Raceway Development and Mohawk
Management, LLC own all of the development and management rights with respect to
a Native American casino to be developed on 29 of the 232 acres of land in
Monticello, New York owned by CDL. Monticello Raceway Management, which held a
leasehold interest in the property, subsequently purchased from CDL the property
on July 26, 2004.
As we had no significant operations during the time of this
acquisition and the members of CDL and Monticello Raceway Development,
collectively, received a controlling interest as part of this acquisition, the
acquisition was accounted for as a reverse merger. Moreover, our ability to
develop a successful business is now solely 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.
We operate Monticello Raceway, a harness horse racing facility
located in Monticello, New York, 90 miles Northwest of New York City. On June
30, 2004, we began operating 1,744 video gaming machines after completing an
approximately $27 million renovation of our facility. Video gaming machines have
aided other similarly situated racetracks in generating new revenue streams. We
also have agreements with the Cayuga Nation of New York (the "Cayuga Nation") to
develop and manage a Native American Casino entitled the Cayuga Catskill Resort
adjacent to the Raceway. 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. As
currently contemplated, the Cayuga Catskill Resort is an approximate $500
million Class III Native American Gaming project with a Las Vegas style casino
that is expected to have 3,000 slot machines and 200 table games. Development of
the project is pending various government approvals and financing.
On April 27, 2004, the Eastern Regional Office of the Bureau of
Indian Affairs 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
Eastern Regional Office 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 Bureau
of Indian Affairs and the National Indian Gaming Regulatory Commission are
required in order for the Company to proceed with the project.
22
There are two significant preconditions that must be met before the
Cayuga Nation of New York can operate gaming at the Cayuga Catskill Resort.
First, title to the proposed 29-acre site must to transferred to the United
States and accepted into trust for the benefit of the Cayuga Nation of New York.
Second, the Cayuga Nation of New York must enter into a Class III gaming compact
with the State of New York. On June 10, 2004 the State of New York and the
Cayuga Nation entered into a Memorandum of Understanding that outlined a
procedure to settle issues relating to Catskill Cayuga Casino project. A
Memorandum of Understanding contemplates further negotiations toward a final
settlement agreement. Such a final settlement will require further agreements
and accommodations between the parties and may not be achieved or achieved in a
timely manner.
The Company has spent significant amounts of money generated
principally through the issuance of equity in connection with its development
activities, primarily for the design, development, financing and construction of
the video gaming operation, as well as the predevelopment, design, and
negotiations of a Native American casino. These amounts include expenses
associated with legal fees, accounting and audit fees and costs relating to
employees. Some of these costs have been capitalized. 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.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain our earnings, if any, and cash to finance
our growth and, therefore, do not anticipate paying any cash dividends on our
common stock in the foreseeable future. Any determination to pay dividends in
the future will be at the discretion of our board of directors and will depend
upon our financial condition, results of operations and capital requirements.
RISKS RELATED TO OUR BUSINESS
IF OUR VIDEO GAMING MACHINES AT MONTICELLO RACEWAY DO NOT INCREASE OUR REVENUES
AND OPERATING INCOME, IF LEGISLATION AUTHORIZING OUR VIDEO GAMING OPERATIONS IS
ULTIMATELY HELD TO BE UNCONSTITUTIONAL OR IF THE CAYUGA CATSKILL RESORT IS NOT
SUCCESSFULLY DEVELOPED, IT COULD ADVERSELY AFFECT OUR NET REVENUES AND THE
ABILITY TO MAKE PAYMENTS ON OUR OBLIGATIONS.
Our ability to generate revenues and to make payments on our
obligations will depend on our ability to generate cash flow from our current
and future operations. Our ability to generate sufficient cash flow will largely
depend on the success of the 1,744 video gaming machines that we recently
installed as part of our renovation of Monticello Raceway's grandstand building
and our ability to successfully develop and manage for the Cayuga Nation of New
York the Cayuga Catskill Resort. With respect to our video gaming machine
operations, on July 7, 2004, the Appellate Division of the Supreme Court of the
State of New York ruled that the legislation permitting state sponsored video
gaming machine operations is unconstitutional under New York law because such
legislation provides that a portion of the video gaming machine vendor fees be
dedicated to breeding funds and enhancing purses in violation of a
constitutional mandate that such moneys be applied exclusively to, or in aid or
support of, education in the State of New York. While the State of New York has
filed a notice of appeal to appeal this ruling, which notice of appeal stays the
decision and allows us to continue operating video gaming machines, there can be
no assurance that the State of New York will ultimately prevail or,
alternatively, that the authorizing legislation will be amended in order for it
to be constitutional. If the appellate court's findings are ultimately upheld
and the state legislature fails to enact corrective legislation, we would be
forced to shutter our video gaming machines and our operations would be limited
to the pari-mutuel operations of Monticello Raceway and the proposed development
and management of the Cayuga Catskill Resort.
In addition to ruling on the permitted use of net lottery revenues,
the court separately held that video gaming machines are valid, state operated
lotteries and, thus, fall within the exemption of lotteries from the general ban
on gambling in the State of New York. We cannot assure you that the plaintiffs
in the underlying litigation will not appeal this portion of the Appellate
Division's ruling. Should an appeal of such ruling be instituted, we cannot
assure you that the New York Court of Appeals will uphold the Appellate
Division's validation of this portion of the legislation.
23
Even assuming that the ultimate outcome of these court proceedings
permits us to continue operating video gaming machines at Monticello Raceway as
presently conducted, there can be no assurance that the video gaming machine
program at Monticello Raceway will draw sufficiently large crowds to Monticello
Raceway so as to increase local wagering to the point that we will realize a
profit from the initial video gaming machine installation. The operations and
placement of our video gaming machines, including the layout and distribution,
are under the jurisdiction of the New York State Lottery and the program
contemplates that a significant share of the responsibility for marketing the
program will be borne by the New York State Lottery. The New York State Lottery
may make decisions that we feel are not in the best interest of the Company and,
as a consequence, the profitability of our video gaming machine operations may
not reach the levels that we originally anticipated or may be slower than
expected in reaching those levels. Legislative changes made as a result of the
court proceedings could also alter the economics of our operations. Furthermore,
the legislation authorizing the implementation of video gaming machines at
Monticello Raceway expires in 2013 and no assurance can be given that the
authorizing legislation will be extended beyond this period. Similarly, the
development of the Cayuga Catskill Resort is subject to many regulatory,
competitive, economic and business risks beyond our control, and there can be no
assurance that it will be developed in a timely manner, or at all. Any failure
in this regard could have a material adverse impact on our operations, our
ability to service our debt obligations and our ability to generate net income.
AS A HOLDING COMPANY, WE ARE DEPENDENT ON THE OPERATIONS OF OUR SUBSIDIARIES TO
PAY DIVIDENDS OR MAKE DISTRIBUTIONS IN ORDER TO GENERATE INTERNAL CASH FLOW.
We are a holding company with no revenue generating operations,
owning all the capital stock or membership interests, as the case may be, of
Monticello Raceway Management, Monticello Casino Management and Monticello
Raceway Development. Consequently, our ability to make payments on our senior
convertible notes and to make any dividend or distribution on the shares of our
common stock issuable upon conversion of our senior convertible notes are
dependent on the earnings and the distribution of funds from these subsidiaries.
There can be no assurance that these subsidiaries will generate enough revenue
to pay cash dividends or make cash distributions to us in an amount necessary
for us to satisfy our obligations. In addition, these subsidiaries may enter
into contracts that limit or prohibit their ability to pay dividends or make
distributions. Should our subsidiaries be unable to pay dividends or make
distributions, our ability to meet our ongoing obligations would be jeopardized.
Specifically, without the payment of dividends or the making of distributions,
we would be unable to pay our employees, accounting professionals or legal
professionals, all of whom we rely on to manage our operations, ensure
regulatory compliance and sustain our public company status.
CHANGES IN THE LAWS, REGULATIONS, AND ORDINANCES (INCLUDING TRIBAL AND/OR LOCAL
LAWS) TO WHICH THE GAMING INDUSTRY IS SUBJECT, AND THE APPLICATION OF EXISTING
LAWS AND REGULATIONS, OR OUR INABILITY OR THE INABILITY OF OUR KEY PERSONNEL,
SIGNIFICANT STOCKHOLDERS, OR JOINT VENTURE PARTNERS TO OBTAIN OR RETAIN REQUIRED
GAMING REGULATORY LICENSES, COULD PREVENT THE COMPLETION OF OUR CURRENT CASINO
DEVELOPMENT PROJECTS, PREVENT US FROM PURSUING FUTURE DEVELOPMENT PROJECTS OR
OTHERWISE ADVERSELY IMPACT OUR RESULTS OF OPERATION.
The ownership, management and operation of gaming facilities are
subject to extensive federal, state, provincial, tribal and/or local laws,
regulations and ordinances that are administered by the relevant regulatory
agency or agencies in each jurisdiction. These laws, regulations and ordinances
vary from jurisdiction to jurisdiction, but generally concern the
responsibility, financial stability and character of the owners and managers of
gaming operations as well as persons financially interested or involved in
gaming operations, and often require such parties to obtain certain licenses,
permits and approvals. These laws, regulations and ordinances may also affect
the operations of our gaming facilities.
The rapidly-changing political and regulatory environment governing
the gaming industry (including gaming operations which are conducted on Native
American land) makes it impossible for us to accurately predict the effects that
an adoption of, changes in or application of the gaming laws, regulations and
ordinances will have on us. However, our failure or the failure of any of our
key personnel, significant stockholders or joint venture partners, to obtain or
retain required gaming regulatory licenses could prevent us from operating our
existing gaming enterprises like Monticello Raceway or expanding into new
markets, prohibit us from generating revenues in certain jurisdictions, and
subject us to sanctions and fines.
SHOULD WE OR ANY OF OUR STOCKHOLDERS BE FOUND UNSUITABLE BY ANY FEDERAL, STATE,
REGIONAL OR TRIBAL GOVERNMENTAL BODY TO OWN AN INTEREST IN A GAMING OPERATOR, WE
OR SUCH STOCKHOLDER COULD BE FORCED TO DIVEST OUR HOLDINGS IN SUCH GAMING
OPERATOR IN A SHORT PERIOD OF TIME AT BELOW MARKET PRICES.
24
As discussed above, we and certain of our principal stockholders are
required to be licensed or otherwise approved in each jurisdiction in which we
own, directly or indirectly, a significant ownership interest in a gaming
operator. These licenses generally expire after a relatively short period of
time and thus require frequent renewals and reevaluations. Obtaining these
licenses in the first place, and for purposes of renewals, normally involves
receiving a subjective determination of "suitability." A finding of
unsuitability could lead to a material loss of investment by either us or our
stockholders, as it would require divestiture of one's direct or indirect
interest in a gaming operator that conducts business in the licensing
jurisdiction. Consequently, should we or any stockholder ever be found to be
unsuitable by the federal government, the State of New York or the Cayuga Nation
of New York to own a direct or indirect interest in a company with gaming
operations, we or such stockholder, as the case may be, could be forced to
liquidate all interests in that entity. Should either of us be forced to
liquidate these interests within a relatively short period of time, we or such
stockholder would likely be forced to sell at a discount, causing a material
loss of investment value.
SEVERAL OF OUR FORMER OFFICERS AND DIRECTORS HAVE BEEN INDICTED OR CONVICTED ON
FRAUD CHARGES, AND OUR SUITABILITY DETERMINATION TO PARTICIPATE IN GAMING
ACTIVITIES COULD ACCORDINGLY BE ADVERSELY AFFECTED.
During 2002, certain affiliates of Bryanston Group, Inc. ("Bryanston
Group"), our former largest stockholder, and six of our former officers and
directors were indicted for various counts of tax and bank fraud. On September
5, 2003, one of these former directors pleaded guilty to felony tax fraud, and
on February 4, 2004, four additional 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 shares of our common stock.
This option was exercised on January 9, 2004 by issuing a promissory note to
Bryanston Group in exchange for our common stock, which note was retired on July
26, 2004. While none of the acts these individuals were charged with or
convicted of relate to their former positions with or ownership interests in us,
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 and convictions do
not relate to our operations, we could lose our gaming licenses or be forced to
liquidate certain or all of our gaming interests.
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. Atlantic City,
the second most popular gaming destination in the United States, with more than
10 full service hotel casinos, is only a two hour drive from New York City, the
highly popular Foxwoods Resort and Casino and the Mohegan Sun casino are each
only two and a half hour drives from New York City and Caesars Entertainment,
Inc., the world's largest gaming conglomerate, and Trading Cove Associates,
Inc., the developers of the Mohegan Sun casino, are each planning to develop
Native American casinos on properties that neighbor Monticello Raceway.
Additionally, on July 4, 2004, the State of Pennsylvania enacted a law allowing
for the operation of up to 61,000 slot machines at 14 gambling halls, including
seven racetracks, five stand-alone parlors, and two resorts. Pursuant to this
new law, slot machine facilities could be developed within 30 miles of
Monticello Raceway that compete directly with our video gaming machines.
Moreover, a number of well financed Native American tribes and gaming
entrepreneurs are presently seeking to develop casinos in New York and
Connecticut in areas that are 90 miles from New York City such as Bridgeport,
Connecticut and Southampton, New York. In contrast, we have limited financial
resources and are presently limited to the operation of a harness horse racing
facility and video gaming machines in Monticello, New York and are a one and a
half hour drive from New York City. No assurance can be given that we will be
able to compete successfully with the established Atlantic City casinos,
existing and proposed regional Native American casinos, slot machine facilities
in Pennsylvania or the casinos proposed to be developed by Caesars
Entertainment, Inc. and Trading Cove Associates, Inc. in the Catskills region
for local gaming customers.
BECAUSE OF THE UNIQUE STATUS OF NATIVE AMERICAN TRIBES, GENERALLY, AND THE
GOVERNANCE STRUCTURE OF THE CAYUGA NATION OF NEW YORK, IN PARTICULAR, OUR
ABILITY TO SUCCESSFULLY DEVELOP AND MANAGE THE CAYUGA CATSKILL RESORT WILL BE
SUBJECT TO UNIQUE RISKS.
25
We have no experience in managing or developing Native American
casinos, which present unique challenges. Native American tribes are governments
and possess the inherent power to adopt laws and regulate matters within their
jurisdiction. For example, tribes are generally immune from suit and other legal
processes unless they waive such immunity. Gaming at the Cayuga Catskill Resort
will be operated on behalf of the Cayuga Nation of New York's government, and
that government is subject to changes in leadership or governmental policies,
varying political interests, and pressures from the Cayuga Nation of New York's
individual members, any of which may conflict with our interests. Thus, disputes
between ourselves and the Cayuga Nation of New York may arise. With respect to
disputes concerning our gaming facility management agreement and development
agreement with the Cayuga Nation of New York, the Cayuga Nation of New York has
waived its sovereign immunity, although if for any reason that waiver should be
ineffective, we might be unable to enforce our rights under those agreements as
against the Cayuga Nation of New York. Also, it is possible that we might be
required to seek enforcement of our rights in a court or other dispute
resolution forum of the Cayuga Nation of New York, instead of state or federal
courts or arbitration. As discussed below, until our proposed amended and
restated gaming facility management agreement has been approved by the National
Indian Gaming Commission, and as amended and restated, approved by the Cayuga
Nation of New York, that agreement will not be valid or binding on the Cayuga
Nation of New York, and, by their terms and under relevant federal court
precedent, it is likely that some or all of the provisions of our other
agreements with the Cayuga Nation of New York are also inoperative until the
gaming facility management agreement has been approved by the National Indian
Gaming Commission.
The Cayuga Nation of New York has about 500 members, each belonging
to one of four remaining clans, with clan membership determined by matrilineal
succession. The Cayuga Nation of New York has not enjoyed a reservation or other
land base for more than two hundred years, and has no written constitution or
other governing documents. Instead, the Cayuga Nation of New York follows oral
traditions, customs and practices, including a centuries old "Great Law," and is
governed by a Council of Chiefs, Representatives and Clan Mothers (the
"Council"). Only two of the four clans in existence have a Clan Mother, one clan
is currently in the process of selecting a Clan Mother, and another clan can no
longer designate a Clan Mother because there are no full-blooded women members
of that clan. Each Clan Mother is responsible for selecting (and in certain
cases removing) two full blood men from among her Clan's members to serve a
life-long term as representatives on the Council. The Council may act only by
consensus at a meeting, with unanimous consent from those representatives in
attendance. The Council presently does not have regularly scheduled meetings,
and has no prior experience with gaming or any other substantial business
undertaking other than the Cayuga Catskill Resort. Accordingly, we could
encounter delays or other difficulties in dealing with matters that require
action by the Cayuga Nation of New York's government, including approvals of
desirable courses of action, contracts or contract modifications, which in turn
could adversely affect our successful development and management of the Cayuga
Catskill Resort.
Finally, Native American gaming is governed by unique laws,
regulations and requirements arising from the Indian Gaming Regulatory Act of
1988, as amended, the applicable Class III gaming compact, and gaming laws of
the applicable Native American tribe, and certain federal Indian law statutes or
judicial principles. A number of examples exist where Native American tribes
have successfully voided development or management-related contracts with
non-native parties because of these unique Native American aspects. For all of
the foregoing and other reasons, we may encounter difficulties in successfully
developing and managing the Cayuga Catskill Resort. Several companies with
gaming experience that have tried to become involved in the management and/or
development of Native American casinos have been unsuccessful. Due to our
limited Native American gaming experience, no assurance can be given that we
will be able to avoid the pitfalls that have befallen other companies in order
to create a successful gaming operation at the Cayuga Catskill Resort.
A TRANSFER OF THE PROPOSED CASINO SITE TO THE UNITED STATES, TO BE HELD IN TRUST
FOR THE BENEFIT OF THE CAYUGA NATION OF NEW YORK MIGHT NOT OCCUR OR MAY BE
DELAYED FOR A SUBSTANTIAL PERIOD OF TIME; AND UNTIL SUCH A TRANSFER OCCURS, IT
WILL NOT BE POSSIBLE FOR THE CAYUGA NATION OF NEW YORK TO OPERATE A CASINO AT
THE CAYUGA CATSKILL RESORT FOR US TO MANAGE.
Under the Indian Gaming Regulatory Act of 1988, the Cayuga Nation of
New York will be able to operate a casino at the Cayuga Catskill Resort only if
the casino is located on land held by the United States in trust for the Cayuga
Nation of New York (or subject to similar restrictions on transfer), and only if
the Cayuga Nation of New York exercises governmental powers over the casino
site. That same Act, however, generally prohibits Native American casinos on
land transferred into trust after October 17, 1988. An exception to this trust
land limitation is being pursued by the Cayuga Nation of New York, without an
assurance that it will be obtained.
26
One exception available for land transferred after October 17, 1988,
is that if, after consultation with the tribe and applicable state, local and
other nearby tribal officials, the Secretary of the Interior (who acts through
the Bureau of Indian Affairs) determines that a gaming establishment on the land
proposed for transfer would be in the best interest of the tribe and its
members, and would not be detrimental to the surrounding community, provided
that the Governor of the applicable State must concur. To date the instances are
very limited where this exception has been successful for off-reservation land.
Furthermore, historically the Bureau of Indian Affairs has been reluctant to
support accepting land into trust that is located a substantial distance from
the reservation of a tribe, and in the case of the Cayuga Nation of New York,
the site of the Cayuga Catskill Resort is a substantial distance from land
recognized to be a part of the original reservation of the Cayuga Nation of New
York. Nevertheless, on April 27, 2004, the Eastern Regional Office of the Bureau
of Indian Affairs recommended approval of the Cayuga Nation of New York's
request that the United States accept the proposed casino site into trust for
the benefit of the Cayuga Nation of New York. Final approval from the Secretary
of the Interior is still required, and the Secretary of the Interior is not
required to give deference to the Eastern Regional Office of the Bureau of
Indian Affairs' decision. Additionally, the Governor for the State of New York
must concur with any favorable determination by the Secretary of the Interior,
and the Governor's office has expressed reluctance to concur as long as a
substantial land claim by the Cayuga Nation of New York against the State of New
York remains unsettled.
If the 29 acres that we propose to transfer to the United States, to
be held in trust for the benefit of the Cayuga Nation, are not in fact
transferred, we will not be able to execute our current business plan of
developing and managing a casino for the Cayuga Nation of New York.
27
OUR GAMING FACILITY MANAGEMENT AGREEMENT AND DEVELOPMENT AGREEMENT WITH THE
CAYUGA NATION OF NEW YORK ARE NOT VALID OR EFFECTIVE UNTIL SUCH GAMING FACILITY
MANAGEMENT AGREEMENT IS APPROVED BY THE NATIONAL INDIAN GAMING COMMISSION, AND
THAT APPROVAL MIGHT NOT BE OBTAINED OR MIGHT BE OBTAINED ONLY AFTER WE AGREE TO
MODIFY TERMS THAT HAVE ALREADY BEEN AGREED TO BY THE CAYUGA NATION OF NEW YORK
THAT REDUCE OUR REVENUES UNDER THE AGREEMENTS OR OTHERWISE ADVERSELY AFFECT US.
No management contract for tribally operated Class II or Class III
gaming is valid until approved by the National Indian Gaming Commission, and
under current case law in New York, an agreement collateral to a management
contract, such as our development agreement, is likewise not valid until so
approved. The National Indian Gaming Commission has broad discretion to approve
or reject proposed management contracts, and by law the National Indian Gaming
Commission can approve management fees exceeding 30% of related net gaming
revenues only if the Chairman of the National Indian Gaming Commission is
satisfied that the capital investment required, and income projections, require
the additional fee. The Cayuga Nation of New York has agreed to pay us a 35%
management fee, and as well as other compensation under the development
agreement. Monticello Casino Management's gaming facility management agreement
with the Cayuga Nation of New York has been under review by the National Indian
Gaming Commission for over one year. On January 21, 2004, the National Indian
Gaming Commission issued its first objection letter, and in April 2004, we
submitted partial responses to these objections, including a revised gaming
facility management agreement, that has not yet been executed or otherwise
formally approved by the Cayuga Nation of New York, but which we expect will be
acceptable to the Nation. No assurance can be given that the National Indian
Gaming Commission will approve the gaming facility management agreement or that
further modifications to such agreement or the development agreement will not be
required prior to the National Indian Gaming Commission granting approval. Such
modifications could include a material reduction in the management fee or other
compensation we have negotiated with the Cayuga Nation of New York. As amended,
and approved by the National Indian Gaming Commission, the gaming facility
management agreement will require formal approval by the Cayuga Nation of New
York before it becomes effective. We expect, but cannot guarantee, that the
Cayuga Nation of New York will approve the gaming facility management agreement
as it is amended in order to obtain approval from the National Indian Gaming
Commission.
COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS COULD SUBSTANTIALLY DELAY OR, IN THE
EXTREME, PREVENT OUR DEVELOPMENT OF THE CAYUGA CATSKILL RESORT.
The National Environmental Policy Act requires federal agencies to
consider the environmental impacts of activities they perform, fund, or permit,
as well as alternatives to those activities and ways to mitigate or lessen those
impacts. Under the National Environmental Policy Act, federal agencies must
prepare an environmental assessment to determine whether the proposed action
will have a significant effect on the quality of the environment. If the agency
determines that the action will not have a significant effect on the
environment, it issues a finding of no significant impact, and the project can
move forward; if the agency finds to the contrary, it must then prepare an
environmental impact statement, detailing the environmental impacts,
alternatives, and mitigation measures.
For the Cayuga Catskill Resort to be developed, there are at least
two major federal actions that will require compliance with the National
Environmental Policy Act: (1) the Secretary of the Interior's decision to take
the 29 acre site into trust for the benefit of the Cayuga Nation of New York,
and (2) the National Indian Gaming Commission's approval of our gaming facility
management agreement. After reviewing the environmental assessment prepared for
this project, the Eastern Regional Office of the Bureau of Indian Affairs
recommended, in April, 2004, that the Secretary of the Interior find that taking
29-acre site into trust for the benefit of the Cayuga Nation of New York would
not have a significant effect on the environment, and therefore, a finding of no
significant impact should be issued. This recommendation is not binding on the
Secretary of the Interior or the National Indian Gaming Commission. The
Secretary of the Interior and the National Indian Gaming Commission may accept
or reject such recommendation, and a risk exists that in light of recent
positions taken by the Department of Justice, preparation of an environmental
impact statement may be required, which could delay the project. In any event,
even if a finding of no significant impact is issued, a risk exists that parties
opposed to the Cayuga Catskill Resort project will commence litigation
challenging the issuance of the finding of no significant impact, thereby
delaying or preventing the project.
28
A CLASS III GAMING COMPACT BETWEEN THE CAYUGA NATION OF NEW YORK AND THE STATE
OF NEW YORK MUST BE NEGOTIATED AND BECOME EFFECTIVE BEFORE THE CAYUGA NATION OF
NEW YORK CAN OPERATE A CASINO FOR US TO MANAGE.
The Cayuga Nation of New York cannot lawfully engage in Class III
gaming unless the Cayuga Nation of New York and the Governor for the State of
New York execute a Class III gaming compact that is approved or deemed approved
by the Secretary of the Interior. Although courts have invalidated two other
Class III gaming compacts between New York tribes and the State of New York due
to lack of legislative authority, the Governor has received requisite
legislative authorization to enter into a Class III gaming compact with the
Cayuga Nation of New York at the site of the Cayuga Catskill Resort. Under the
non-binding terms of the Memorandum of Understanding, the Cayuga Nation of New
York and the State of New York agreed to negotiate and enter into a gaming
compact that will authorize Class III gaming at the site of the Cayuga Catskill
Resort once the 29 acre site has been taken into trust by the United States for
the benefit of the Cayuga Nation of New York. The terms of this gaming compact
are not specified in the Memorandum of Understanding, and a draft of the
proposed compact has not been submitted by either the State of New York or the
Cayuga Nation of New York to the other for consideration. We expect the State of
New York to propose terms for a compact similar to those found in the compact
between the State of New York and the Seneca Nation. That compact obligates the
Seneca Nation to make payments to the State of New York in amounts of up to 25%
of that nation's net slot revenues. There is no assurance that the State of New
York and the Cayuga Nation of New York will reach an agreement upon the terms of
any revenue sharing arrangement or any other terms that will result in a compact
for Class III gaming. In addition, the State of New York has refused in the past
to negotiate a gaming compact with the Cayuga Nation of New York so long as its
land claim lawsuit remained unsettled, and therefore, if the land claim lawsuit
is not settled as contemplated by the Memorandum of Understanding, the State of
New York may refuse to enter into a gaming compact with the Cayuga Nation of New
York.
If the State of New York and the Cayuga Nation of New York reach
agreement and execute a compact for Class III gaming, under the Indian Gaming
Regulatory Act of 1988, that compact does not become effective until an approval
of the compact by the Secretary of the Interior has been published in the
Federal Register. Additionally, the compact could become effective, but only to
the extent it is consistent with the Indian Gaming Regulatory Act of 1988, upon
publication of a notice in the Federal Register that forty-five days have
elapsed after the compact was submitted for approval to the Secretary of the
Interior and the Secretary of the Interior neither approved nor disapproved the
compact. No assurance can be given that the Secretary of the Interior will
approve the terms of any compact agreed to by the Cayuga Nation of New York and
the State of New York. In particular, the existence of revenue sharing
provisions in a compact by which a state receives a share of tribal gaming
revenues has provided a basis for the Secretary of the Interior to disapprove a
compact. The Indian Gaming Regulatory Act of 1988 generally prohibits a state
from imposing a tax on tribes for the privilege of conducting gaming in the
state. The Seneca Nation-State of New York gaming compact was neither approved
nor disapproved within the required 45-day period, and therefore became
effective upon publication of a notice in the Federal Register. In the letter to
the Seneca Nation and the Governor of New York, the Secretary of the Interior
stated that the State of New York's right to receive up to 25% of gross gaming
revenues was primarily based on the State of New York's grant of an extensive
area in which the Seneca would have broad exclusive gaming rights. Because the
precise terms of a compact between the Cayuga Nation of New York and the State
of New York have not been formally proposed, let alone agreed upon, there can be
no assurance that the Secretary of the Interior will approve the future terms of
such a compact. If the Secretary of the Interior disapproves any agreed upon
compact, the compact will not become effective and the Cayuga Nation of New York
will not be able to conduct gaming under its terms. Since 2003, a bill has been
pending in Congress that would limit a State's right to share in a tribe's
gaming revenues unless the State provided the tribe a "substantial economic
benefit." We cannot predict if this or other legislation will be enacted or, if
enacted, would prevent a gaming compact between the Cayuga Nation of New York
and the State of New York.
IF FUNDS FROM THE OPERATIONS OF MONTICELLO CASINO MANAGEMENT AND MONTICELLO
RACEWAY DEVELOPMENT ARE INSUFFICIENT TO SUPPORT THEIR CASH REQUIREMENTS AND THE
CAYUGA NATION OF NEW YORK IS UNABLE TO OBTAIN ADDITIONAL FINANCING IN ORDER TO
SATISFY THESE REQUIREMENTS, EITHER ON ACCEPTABLE TERMS OR AT ALL, WE MAY BE
FORCED TO DELAY, SCALE BACK OR ELIMINATE SOME OF OUR EXPANSION AND DEVELOPMENT
GOALS, OR CEASE OPERATIONS RELATED TO THE CAYUGA CATSKILL RESORT ENTIRELY.
29
We anticipate that our reserves of cash, interest expected to be
earned on those reserves, and our anticipated revenues will be sufficient to
finance our and our subsidiaries' ongoing operations in 2004. However,
additional financing will be required to meet our obligations related to the
Cayuga Catskill Resort as soon as regulatory approvals are received and
substantive construction commences. It is likely that we will seek or require
additional capital at some point in 2004 or 2005 through either public or
private financings. Such financings may not be available when needed on terms
acceptable to us or at all. Moreover, any additional equity financings may be
dilutive to our stockholders, and any debt financing may involve restrictive
covenants. An inability to raise such funds when needed might require us to
delay, scale back or eliminate some of our expansion and development goals
related to the Cayuga Catskill Resort, or might require us to cease operations
entirely.
In addition, the construction of the Cayuga Catskill Resort may
depend upon the ability of the Cayuga Nation of New York to obtain financing for
the project. If such financing cannot be obtained on acceptable terms, it may
not be possible to complete this project. In order to assist the Cayuga Nation
of New York, we, or one of our subsidiaries, may be required to guarantee the
Cayuga Nation of New York's debt financing or otherwise provide support for the
obligations. Any guarantees by us or one of our subsidiaries or similar
off-balance sheet liabilities, if any, will increase our potential exposure in
the event of a default by the Cayuga Nation of New York.
OUR MANAGEMENT REVENUES FROM THE CAYUGA CATSKILL RESORT MAY BE ADVERSELY
AFFECTED BY MATTERS ADVERSE TO THE CAYUGA NATION OF NEW YORK THAT ARE UNRELATED
TO US.
When constructed, the Cayuga Catskill Resort, and its surrounding 29
acres of land, will be either owned by the Cayuga Nation of New York or be held
by the United States in trust for the benefit of the Cayuga Nation of New York.
We and our subsidiaries will derive revenues from the resort based on our
management and development contracts. If the Cayuga Nation of New York does not
adequately shield its gaming operations at the Cayuga Catskill Resort from
obligations arising from its other non-gaming operations, and the Cayuga Nation
of New York suffers a material adverse event such as insolvency, a default or
civil damages in a matter in which they did not have sovereign immunity,
creditors could attempt to seize some or all of the property or profits from the
Cayuga Catskill Resort. Such a result could lead to the voidance or indirect
modification by a court of our subsidiaries' management and development
contracts with the Cayuga Nation of New York, leading to a material adverse
affect on our operations. In addition, if creditors were to seize any or all of
the Cayuga Catskill Resort, our subsidiaries' management and development
agreements with the Cayuga Nation of New York would be rendered worthless, as
the ability to conduct casino style gambling on that property would no longer be
permissible.
PENDING LAWSUITS COULD THREATEN THE VIABILITY OF OUR BUSINESS PLAN.
Our ability to participate in New York's video gaming machine
program or to help develop and manage a Native American casino in conjunction
with the Cayuga Nation of New York could be materially adversely affected 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 video gaming machine
operations or permitting the construction of any new Native American casinos
within the State of New York. While the trial court initially dismissed both of
these cases in May of 2003, the plaintiffs filed an appeal of the trial court's
dismissal. On July 7, 2004, the Appellate Division of the Supreme Court of the
State of New York overturned the trial court's dismissal of certain of the
plaintiffs' claims in respect of video gaming machine operations. In overturning
the trial court, the Appellate Division ruled that the legislation permitting
state sponsored video gaming machine operations is unconstitutional under New
York law because such legislation provides that a portion of the video gaming
machine vendor fees be dedicated to breeding funds and enhancing purses in
violation of a constitutional mandate that such moneys be applied exclusively
to, or in aid or support of, education in the State of New York. Notwithstanding
this ruling, the court separately held that video gaming machines are valid,
state operated lotteries and, thus, fall within the exemption of lotteries from
the general ban on gambling in the State of New York. However, as the court was
unable to separate its finding that a video gaming machine is a legitimate
"lottery" from the enacting legislation that it believes unconstitutionally
directs vendor fees toward breeding funds and enhancing purses, the court held
the entire video gaming machine legislation to be unconstitutional.
30
The office of the Attorney General of the State of New York has
filed a notice of appeal with respect to the Appellate Division's invalidation
of the video gaming machine legislation. This notice of appeal stays the
appellate court's ruling while the State of New York proceeds to formally appeal
the decision to the New York Court of Appeals, New York State's highest court, a
process that we understand could take 18 months or longer. While the ruling is
stayed, we can continue to operate our video gaming machine facility at
Monticello Raceway in a manner consistent with past practices. However, no
assurance can be given that the Court of Appeals will overrule the Appellate
Division and find the video gaming machine legislation to be constitutional.
Absent such a ruling, to continue video gaming operations at Monticello Raceway,
we would need the New York state legislature to modify the video gaming machine
legislation to remove the provision that directs certain vendor fees be
dedicated toward breeding funds and enhancing purses. Again, no assurance can be
given that if the State of New York loses its appeal on the constitutionality of
the video gaming machine legislation that the State of New York will
subsequently enact the required corrective legislation. Should the State of New
York both lose its appeal and fail to enact corrective legislation, our
operations would be restricted to the operation of Monticello Raceway and our
proposed management and development of a Native American casino. No assurance
can be given that these operations, alone, will be sufficient to satisfy our
obligations.
Furthermore, we recently entered into an agreement in principal, as
discussed below, with the Monticello Horsemen's Association to settle three
outstanding law suits. Under the terms of this settlement agreement, we agreed
to negotiate, in good faith, increased purse levels at Monticello Raceway. As we
had originally intended to satisfy this obligation with revenue from our video
gaming machine operations, if video gaming machine operations are held to be
unconstitutional, corrective legislation is not enacted or corrective
legislation is enacted that eliminates the dedication of vendor fees to
enhancing purses, we may be unable to meet our obligations under this settlement
agreement, possibly leading to the reinstatement of the lawsuits by the
Monticello Horsemen's Association.
In addition to ruling on the constitutionality of video gaming
machines, on July 7, 2004, the Appellate Division of the Supreme Court of the
State of New York also upheld the trial court's validation of the legislation
authorizing the Governor of the State of New York to enter into gaming compacts
with federally recognized Native American tribes to provide for Class III gaming
on reservation land within the State of New York. We cannot assure you that the
plaintiffs in the underlying litigation will not appeal this portion of the
Appellate Division's ruling. Should an appeal of such ruling be instituted, we
cannot assure you that the New York Court of Appeals will uphold the Appellate
Division's validation of this legislation. Should the plaintiffs prevail on any
such appeal, we may be materially adversely affected. Additionally, any such
appeal, even prior to a definitive ruling on its merits, could adversely affect
the necessary financing efforts for the Cayuga Catskill Resort, as potential
investors might be reluctant to make such an investment given the uncertainty
that such an appeal would create.
A PURCHASER IN OUR 5 1/2% $65 MILLION SENIOR CONVERTIBLE NOTE OFFERING IS
DEMANDING RESCISSION OF ITS $10 MILLION NOTE PURCHASE.
On August 5, 2004, we received a letter from the purchaser of $10
million of notes in our 5 1/2% $65 million senior convertible note offering
demanding the immediate rescission of its full note purchase. This purchaser
claims that the offering circular with respect to these notes was misleading
because it failed to disclose the true status of the litigation settlement talks
between the Cayuga Nation of New York and the State of New York and the
existence of a competing claim in the same lawsuit by the Seneca Cayuga Tribe.
The purchaser further claims that had these disclosures been timely made by us,
the purchaser would not have participated in the note offering. We believe that
each of these claims is without merit and intend to vigorously defend any action
that may be brought against us with respect to the rescission of any note
purchases by this purchaser.
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THE CONTINUING DECLINE IN THE POPULARITY OF HORSE RACING AND INCREASING
COMPETITION IN SIMULCASTING COULD ADVERSELY IMPACT THE BUSINESS OF MONTICELLO
RACEWAY.
Since the mid 1980s, 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. Our business plan anticipates the possibility of
Monticello Raceway attracting new customers to its racetrack wagering operations
through video gaming machine operations and potential casino development in
order to offset the general decline in raceway attendance. However, even if the
numerous arrangements, approvals and legislative changes necessary for casino
development 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.
CERTAIN OF OUR STOCKHOLDERS MAY BE ENTITLED TO CERTAIN RESCISSION RIGHTS.
There is a possibility that we offered and sold certain shares of
common stock in violation of Section 5 of the Securities Act. 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 approximately 174,000 shares of common stock from June 30, 2003
through September 2003, having an aggregate purchase price of approximately $1.1
million. Such purchasers could be entitled to have the aggregate purchase price
of such shares refunded by us, plus interest. We cannot assure investors that we
have, 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, we will have to adjust our financial statements to reclassify up to
approximately $1.1 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 with high levels of expertise in those gaming areas in which we
propose to engage, without unreasonably increasing our labor costs, 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 the hiring of strategic key personnel at reasonable costs.
If any of our current senior managers were unable or unwilling to continue in
his or her present position, or we were unable to attract a sufficient number of
qualified employees at reasonable rates, our business, results of operations and
financial condition will be materially adversely affected.
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.
Monticello Raceway Management held a leasehold interest in the property that the
Raceway is located on, which it purchased from CDL, a related party on July 26,
2004 by exercising a purchase option under the lease.
32
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. The Raceway operation employs approximately 100 employees including
management. The operating results of the pari-mutuel operation are reported in
the consolidated results of Empire Resorts. Monticello Raceway Management
recorded a $3.8 million loss for the six months ending June 30, 2004. The net
loss was mainly attributable to the costs associated with the start-up of the
video gaming operation and the lease expense for the raceway property. The
pari-mutuel operation in the past has usually generated a yearly profit although
the first quarter, due to adverse weather in the region generally is not the
most profitable first quarter reporting period.
The Monticello Raceway currently features:
o 1,744 video lottery terminals;
o live harness horseracing;
o year-round simulcast pari-mutuel wagering on thoroughbred and
harness horseracing from across the country;
o a 5,000-seat grandstand and a 100-seat clubhouse with retractable
windows;
o parking spaces for 2,000 cars and 10 buses;
o a 350-seat buffet and food court with three outlets;
o a large central bar and an additional clubhouse bar; and
o an entertainment lounge with seating for 75 people.
MIGHTY M GAMING AT MONTICELLO RACEWAY
A video gaming machine is an electronic gaming device that 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. Under the
program, the New York State Lottery made an in initial allocation of 1,800 video
gaming machines to the Raceway. Construction contracts for these facilities were
signed and work on the necessary improvements began in February 2004. On June
30, 2004, we began operating 1,744 video gaming machines on 45,000 square feet
of floor space at Monticello Raceway after completing approximately $27 million
of renovations to the facility. The video gaming operation employs approximately
350 employees. The operating results of the video gaming operation will be
reported in the consolidated results of Empire Resorts. Operating results for
the pari-mutuel and video gaming operations will be recorded and evaluated by
management separately.
The New York State Lottery's video gaming facility at Monticello
Raceway is one of seven such facilities authorized in the State of New York. The
New York State Lottery recently reported that New York State's first two video
gaming machine racetracks, Saratoga Gaming and Raceway and Finger Lakes,
reported combined revenue of $8.8 million through March 1, 2004. Saratoga opened
on January 28th and reported approximately $6.3 million in revenues or $139 per
machine per day 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. While these figures cover a short duration and
significant differences exist in the market areas compared to Monticello
Raceway, these results are in line with the New York State Lottery's
expectations. Additional facilities at Vernon Downs, near Syracuse, New York,
and Buffalo Downs, near Buffalo, New York, are expected to open this year.
The primary competition for Mighty M Gaming at Monticello Raceway is
expected to be from two racetracks located within the New York City metropolitan
area, Yonkers Raceway and Aqueduct Raceway. Both racetracks have announced plans
to proceed with the program and construction of facilities has commenced at
Aqueduct Raceway. However, the development program for Yonkers Raceway has yet
to be finalized and construction at Aqueduct Raceway was 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. A similar program has recently been
authorized in Pennsylvania.
33
Two pending lawsuits, Dalton v. Pataki and Karr v. Pataki, seek to
enjoin the State of New York from proceeding with video gaming machine
operations or permitting the construction of any new Native American casinos
within the State of New York. The trial court initially dismissed both of these
cases in May of 2003. The plaintiffs filed an appeal of the trial court's
dismissal. On July 7, 2004, the Appellate Division of the Supreme Court of the
State of New York overturned the trial court's dismissal of certain of the
plaintiffs' claims in respect of video gaming machine operations. In overturning
the trial court, the Appellate Division ruled that the legislation permitting
state sponsored video gaming machine operations is unconstitutional under New
York law because such legislation provides that a portion of the video gaming
machine vendor fees be dedicated to breeding funds and enhancing purses in
violation of a constitutional mandate that such moneys be applied exclusively
to, or in aid or support of, education in the State of New York. Notwithstanding
this ruling, the court separately held that video gaming machines are valid,
state operated lotteries and, thus, fall within the exemption of lotteries from
the general ban on gambling in the State of New York. However, as the court was
unable to separate its finding that a video gaming machine is a legitimate
"lottery" from the enacting legislation that it believes unconstitutionally
directs vendor fees toward breeding funds and enhancing purses, the court held
the entire video gaming machine legislation to be unconstitutional.
The office of the Attorney General of the State of New York has
filed a notice of appeal with respect to the Appellate Division's invalidation
of the video gaming machine legislation. This notice of appeal stays the
appellate court's ruling while the State of New York proceeds to formally appeal
the decision to the New York Court of Appeals, New York State's highest court, a
process that we understand could take 18 months or longer. While the ruling is
stayed, we can continue to operate our video gaming machine facility at
Monticello Raceway in a manner consistent with past practices. However, no
assurance can be given that the Court of Appeals will overrule the Appellate
Division and find the video gaming machine legislation to be constitutional.
Absent such a ruling, to continue video gaming operations at Monticello Raceway,
we would need the New York state legislature to modify the video gaming machine
legislation to remove the provision that directs certain vendor fees be
dedicated toward breeding funds and enhancing purses. Again, no assurance can be
given that if the State of New York loses its appeal on the constitutionality of
the video gaming machine legislation that the State of New York will
subsequently enact the required corrective legislation. Should the State of New
York both lose its appeal and fail to enact corrective legislation, our
operations would be restricted to the operation of Monticello Raceway and our
proposed management and development of a Native American casino.
CASINO DEVELOPMENT
There are two significant preconditions that must be met before the
Cayuga Nation of New York can operate gaming at the Cayuga Catskill Resort.
First, title to the proposed 29 acre site must be transferred to the United
States and accepted into trust for the benefit of the Cayuga Nation of New York.
Second, the Cayuga Nation of New York must enter into a Class III gaming compact
with the State of New York. Recent events bear favorably on the Cayuga Nation of
New York's ability to satisfy these requirements.
On April 3, 2003, the Cayuga Nation of New York, a federally
recognized Indian 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. These agreements
were extended on June 25, 2004 to December 31, 2004. 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. On June 10, 2004, the State of New York entered into
a Memorandum of Understanding with the Cayuga Nation of New York pursuant to
which the State of New York agreed to negotiate and enter into a gaming compact
with the Cayuga Nation of New York that will authorize the Cayuga Nation of New
York to operate a full service casino at Monticello Raceway once the subject 29
acres are taken into trust for the benefit of the Cayuga Nation of New York by
the Bureau of Indian Affairs. Final approval by the BIA 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.
34
On July 7, 2004, the Appellate Division of the Supreme Court of the
State of New York upheld the trial court's validation of the legislation
authorizing the Governor of the State of New York to enter into gaming compacts
with federally recognized Native American tribes to provide for Class III gaming
on reservation land within the State of New York. Such decision may be appealed
to the highest court of New York, the Court of Appeals, which may reverse this
determination by the Appellate Division. In the event of a reversal by the Court
of Appeals, we may not be able to proceed with the development of the Cayuga
Catskill Resort.
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 will be developed on 29 of the 232
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 Developments operating results are
reported in the consolidated results of Empire Resorts. The first reporting
period reflected in Empire Resorts consolidated results was the period ending
March 31, 2004.
On April 3, 2003, Monticello Raceway Development entered into a
gaming facility development and construction agreement with the Cayuga Gaming
Authority and the Cayuga Nation of New York, pursuant to which the Cayuga
Catskill Gaming Authority granted Monticello Raceway Development the exclusive
right to design, engineer, construct, furnish and develop the Cayuga Catskill
Resort, and Monticello Raceway Development agreed to help arrange financing of
the project. In exchange for these services, the Cayuga Catskill Gaming
Authority has agreed to pay Monticello Raceway Development a development fee
equal to 5% of the first $505 million of the project's costs, payable monthly as
the project costs are incurred. However, the Cayuga Catskill Gaming Authority is
entitled to retain 10% of such development fees until the project is 50%
completed and then 5% until the project is completed. On the completion date,
the Cayuga Catskill Gaming Authority is required to pay Monticello Raceway
Development these retained fees. Additionally, Monticello Raceway Development is
authorized $10 million for reimbursement of all pre-development and construction
costs incurred in connection with those 29 acres from the Cayuga Nation of New
York.
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 six months ended
June 30, 2004, Monticello Raceway Development capitalized approximately $3.2
million of additional costs associated with the casino development project. When
operations of the casino commence the costs will be systematically recognized
over a determinable period. At June 30, 2004, Monticello Raceway Development did
not employ any full-time employees. The management contract for the trust land
casino is expected to generate approximately $30 million in revenue the first
year of the contract. We are currently evaluating our available deferred tax
asset to utilize when this revenue becomes realizable. The deadline for the
effectiveness of such agreement was extended on June 25, 2004 to December 31,
2004.
MONTICELLO CASINO MANAGEMENT
Monticello Casino Management was formed by us and CDL in July 2000
for the stated purpose of managing the operations of a casino and related gaming
activities on those 29 acres of land subject to Monticello Raceway Management's
land purchase option.
35
On April 3, 2003, Monticello Casino Management entered into a gaming
facility management agreement with the Cayuga Nation of New York and the Cayuga
Catskill Gaming Authority, an instrumentality of the Cayuga Nation of New York
which was formed to develop and conduct gaming operations on the 29 acres of
land subject to Monticello Raceway Management's land purchase option. The
deadline for the effectiveness of such agreement was extended on June 25, 2004
to December 31, 2004. Under this agreement, the Cayuga Catskill Gaming Authority
retained Monticello Casino Management to manage all casino style gaming
activities, other than horserace wagering, that may be conducted on the land for
seven years commencing upon the National Indian Gaming Commission's approval of
the agreement. Monticello Casino Management has also been retained to manage all
lawful commercial activities on the land related to gaming such as automatic
teller machines, food service, lodging and retail. At the same time, Monticello
Casino Management has agreed to assist the Cayuga Catskill Gaming Authority
obtain financing for the gaming enterprise and all related commercial
activities. In exchange for these services, Monticello Casino Management is
entitled to receive a management fee equal to 35% of the net revenues derived
from the operations it manages. Monticello Casino Management is entitled to pay
itself its management fee on or before the 25th day of each calendar month.
However, before Monticello Casino Management can pay itself its fee, it must
first pay to the Cayuga Catskill Gaming Authority a minimum return of
approximately $516,000 per month.
The Cayuga Catskill Resort is expected to feature:
o 160,000 square feet of gaming space with 3,000 slot machines and 200
table games, with sufficient space to accommodate an additional 1,000
slot machines;
o separate bingo and poker areas;
o nine restaurants, including a buffet;
o several bars and a nightclub;
o 5,000 parking spaces, including 4,200 covered spaces all located
directly underneath or adjacent to the casino;
o an enclosed retail corridor connected to Monticello Raceway;
o a central entertainment lounge; and
o a 40,000 square foot multi-function room.
Monticello Casino Management's financial results will be reflected
in the consolidated results of Empire Resorts. At June 30, 2004, Monticello
Casino Management did not have any full-time employees or any operations.
COMPETITIVE ADVANTAGES
We believe that the Monticello Raceway is uniquely situated to be
successful for enhanced gaming operations as the site is less than 90 miles
northwest of New York City, making it a shorter trip from the nation's most
populous metropolitan area than either Atlantic City or any regional Native
American casino, including Foxwoods and Mohegun Sun in Connecticut. There are
approximately one million adults living within 50 miles of Monticello Raceway
and approximately 18.4 million adults living within 100 miles of Monticello
Raceway with an average household income of approximately $76,000. Monticello
Raceway is directly adjacent to Highway 17, has highly visible signage and
convenient access and is less than 1,000 feet from the highway. There is
currently no direct competition for our video gaming machine operations within
85 miles of Monticello Raceway. Furthermore, while a number of prospective
competitors have expressed interest in sponsoring the development of another
Native American casino in the Monticello, New York area, we believe that our
site's ease of access, our ability to offer horse racing and video gaming
machines in addition to regular casino gambling, and our belief that we and our
partners are further along in the regulatory approval process than any other
competitor, can provide us with a competitive advantage.
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 AND EXPENSE RECOGNITION. Gaming revenues represent (i)
revenues from pari-mutual wagering (ii) the net win from VGMs (iii) food and
beverage sales and other miscellaneous income. The Company recognizes revenues
from pari-mutual wagering earned from live harness racing and simulcast signals
from other tracks at the end of each racing day and are reflected at gross,
before deductions of such related expenses as purses, stakes and awards.
Revenues from the video lottery operations is the difference between the amount
wagered by bettors and the amount paid out to betters and is referred to as the
net win. Operating costs include (i) the amounts paid to the New York State
Lottery for the State's share of the net win (ii) amounts due to the Horsemen
and Breeder's for their share of the net win and (iii) for harness racing
purses, stakes and awards. Also included in operating costs are the costs
associated with the sale of food, beverage and other miscellaneous items.
36
The Company currently has a point loyalty program (Player's Club) for
its video lottery customers, which allows them to earn points based on the
volume of their video lottery activity. The points can be redeemed for various
services and merchandise throughout the gaming facility. The Company records the
points as an expense when they are redeemed by the customers. At June 30, 2004,
VGM operations had been conducted for only one day and the potential liability
for redeeming points outstanding was immaterial.
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 June 30, 2004. The Company, in
the normal course of business, settles wagers for other racetracks 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. These
capitalized costs are periodically reviewed for impairment.
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 fair value
recognition 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
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
The operations of the Company during the three months ended June 30, 2004
and 2003 were not similar due to the merger with Catskill Development and its
subsidiaries.
REVENUES. Revenues increased approximately $104,000, or 4.1%, to $2.7
million for the quarter ended June 30, 2004 from $2.6 million for the quarter
ended June 30, 2003. The increase was due to the one day of VGM revenue of
approximately $310,000, offset by a decrease in racing revenue during the second
quarter.
OPERATING COSTS. Operating costs increased approximately $2.6 million to
$4.0 million for the quarter ended June 30, 2004 from $1.4 for the quarter ended
June 30, 2003. This increase in operating costs was due to the lease expense on
the Raceway facility of $450,000 and the costs associated with the start up of
the VGM operation.
37
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased to approximately $3.1 million in the second quarter of 2004
from $1.6 million in 2003, substantially as a result of stock-based compensation
of approximately $850,000 and the start up costs associated with the new video
gaming operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
approximately $14,000 and $174,000 respectively for the periods ended June 30,
2004 and 2003. This variance was due to Catskill Development's depreciation of
property and equipment which were not acquired in the merger with CDL.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
The operations of the Company during the six months ended June 30, 2004 and
2003 were not similar due to the merger with Catskill Development and its
subsidiaries.
REVENUES. Revenues increased approximately $333,000, or 7.0%, to $5.2
million for the six months ended June 30, 2004 from $4.8 million for the six
months ended June 30, 2003. The increase was due to the one day of VGM revenue
of approximately $310,000.
OPERATING COSTS. Operating costs increased approximately $4.1 million to
$6.9 million for the six months ended June 30, 2004 from $2.7 for the six months
ended June 30, 2003. This increase in operating costs was due to the lease
expense on the Raceway of $900,000 and the cost associated with the start up of
the VGM operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased to approximately $6.1 million for the six months ended June
30, 2004 from $2.8 million in 2003, substantially as a result of stock-based
compensation of approximately $1.9 million and the start up costs associated
with new VGM operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
approximately $20,000 and $348,000 respectively for six months ended June 30,
2004 and 2003. This variance was due to Catskill Development's depreciation of
property and equipment which were not acquired in the merger with CDL.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ending
June 30, 2004 totaled $5.3 million, which is primarily attributable to the net
loss for the period. The start up costs associated with the VGM operation;
including the increased payroll for new employees was a significant factor for
the increase in net loss.
Net cash used in investing activities in during the six months
ending June 30, 2004 totaled $17.0 million, consisting primarily of $15.1
million in purchases of property and equipment, and approximately $1.8 million
in costs associated with the casino development project.
Net cash provided by financing activities during the six months
ending June 30, 2004 totaled $24.7 million, which is primarily attributable to
the $30.4 million received from the proceeds of the sale of stock through the
private placement less 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
operations, the Company has contractual obligations relating to construction of
the VGM renovations of approximately $23 million. The balance outstanding of the
original contract was approximately $11 million at June 30, 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.
On April 29, 2004 the Company in settlement of all unpaid dividends
from the first quarter of 2004, due April 1, 2004 on its Series B Preferred
shares, paid $30,000 in cash, and on June 11, 2004 issued 16,074 shares of
common stock in settlement of all outstanding dividends from the year ending
December 31, 2003. The 16,074 shares were valued at approximately $210,000 and
recorded in the period ended June 30, 2004.
38
On July 16, 2004, the Company priced $65 million of 5 1/2%
Convertible Senior Notes guaranteed by its material subsidiaries and convertible
into 4,727,000 shares of common stock with a conversion price of $13.75, subject
to adjustment to a price of not less than $12.56 in certain events. The notes
were issued on July 23, 2004 with a maturity date of July 31, 2014. The Company
will make interest payments semi-annually. The company used part of the offering
proceeds to acquire 232 acres of land and buildings at the Monticello Raceway in
Monticello, New York, to repay certain indebtedness, to complete renovations at
the Monticello Raceway, to fund certain development costs in connection with the
Cayuga Catskill Resort and for general corporate purposes. The purchase of the
232 acres effectively terminates the lease with CDL, a related party.
On July 26, 2004, approximately $5.3 million of proceeds from the
Convertible Senior Notes was expended to pay in full the obligation of the notes
payable and accrued interest to Bryanston Group and Beatrice Tollman.
On July 26, 2004, approximately $38 million of proceeds from the
Convertible Senior Notes was expended to pay in full the obligations of the
Ground Lease and accrued interest in addition to the purchase the leased
property. Purchase of the land will allow the company to benefit from certain
real estate tax credits resulting from its recent investment in improvements on
the land.
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.
ITEM 3. CONTROLS AND PROCEDURES
The Company's 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.
No change occurred in the Company's internal controls concerning
financial reporting during the second quarter of the fiscal year ended December
31, 2004 that has materially effected, or is reasonably likely to materially
effect the Company's internal controls over financial reporting.
39
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Monticello Harness Horsemen's Association, Inc. ("Horsemen",
"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.
Another, seeks monetary 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. The trial court
initially dismissed both of these cases in May of 2003. The plaintiffs filed an
appeal of the trial court's dismissal. On July 7, 2004, the Appellate Division
of the Supreme Court of the State of New York overturned the trial court's
dismissal of certain of the plaintiffs' claims in respect of video gaming
machine operations. In overturning the trial court, the Appellate Division ruled
that the legislation permitting state sponsored video gaming machine operations
is unconstitutional under New York law because such legislation provides that a
portion of the video gaming machine vendor fees be dedicated to breeding funds
and enhancing purses in violation of a constitutional mandate that such moneys
be applied exclusively to, or in aid or support of, education in the State of
New York. The office of the Attorney General of the State of New York has filed
a notice of appeal with respect to the Appellate Division's invalidation of the
video gaming machine legislation. Should the State of New York both lose its
appeal and fail to enact corrective legislation, our operations would be
restricted to the operation of Monticello Raceway and our proposed management
and development of a Native American casino. Moreover, the continuation 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.
40
On July 7, 2004, the Appellate Division of the New York State
Supreme Court Court issued an opinion in the appeal of the cases challenging the
legislation authorizing the VGM program and Native American Casinos. The opinion
affirmed the decision of lower court to uphold the constitutionality of the
provisions of the law that authorized expanded Native American casino gaming in
New York State and found that it was consistent with New York and federal laws.
The Appellate Division also ruled that the legislation permitting
state sponsored video gaming machine operations is unconstitutional under New
York law because such legislation provides that a portion of the video gaming
machine vendor fees be dedicated to breeding funds and enhancing purses in
violation of a constitutional mandate that such moneys be applied exclusively
to, or in aid or support of, education in the State of New York. We expect the
State of New York to promptly appeal this ruling under procedures that will stay
the decision and allow us to continue operating video gaming machines at the
Raceway. However, there can be no assurance that the State of New York will
ultimately prevail or, alternatively, that the authorizing legislation will be
amended in order for it to be constitutional. If the appellate court's findings
are ultimately upheld and the state legislature fails to enact corrective
legislation, we would be forced to close our video gaming machines and our
operations would be limited to the pari-mutuel operations of the Raceway and the
proposed development and management of the Cayuga Catskill Resort.
OPERATING ENVIRONMENT
We are a party from time to time 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.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
On May 20, 2004, the Company issued 109,500 incentive options with a
strike price of $14.25 to various employees. The option issuance provided a
variety of vesting schedules, including half immediately and half the following
year, 33% each year over three years starting at the date of issuance and, 33%
each year over three years starting after one year. All options expire ten years
from the date of grant. On the date of issuance 33,333 options were vested and
the expense recognized. The expense associated with this grant was approximately
$569,000.
On April 29, 2004, the Company in settlement of all unpaid dividends
due April 1, 2004 on the Series B Preferred shares, paid $30,000 in cash, and on
June 11, 2004 issued 16,074 shares of common stock in settlement of all
outstanding dividends from the year ending December 31, 2003. The 16,074 shares
were valued at $210,000.
During the three months ended June 30, 2004 the Company received
approximately $85,000 of proceeds from the exercising of options.
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) Exhibits
4.1 Indenture dated as of July 26, 2004 among the Company, The Bank of
New York and the Guarantors named therein.
10.1 Security Agreement dated as of July 26, 2004 the Company, The Bank
of New York and the Guarantors named therein.
10.2 Pledge Agreement dated as of July 26, 2004 the Company, The Bank of
New York and the Guarantors named therein.
10.3 Registration Rights Agreement dated as of July 26, 2004 the Company,
the Guarantors named therein and Jefferies & Company, Inc.
41
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 July 27, 2004;
(2) Our Current Report on Form 8-K dated July 21, 2004;
(3) Our Current Report on Form 8-K dated July 20, 2004;
(4) Our Current Report on Form 8-K dated July 9, 2004;
(5) Our Current Report on Form 8-K dated June 30,2004;
(6) Our Current Report on Form 8-K dated June 11,2004;
(7) Our Current Report on Form 8-K dated May 4, 2004;
(8) Our Current Report on Form 8-K dated April 21, 2004.
42
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: August 16, 2004 /s/ Robert A. Berman
--------------------
Robert A. Berman
Chief Executive Officer
Dated: August 16, 2004 /s/ Scott A. Kaniewski
----------------------
Scott A. Kaniewski
Chief Financial Officer
43