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 September 30, 2004
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from __________ to __________
Commission file number 1-12522
EMPIRE RESORTS, INC.
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 13-3714474
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
RT 17B, P.O. BOX 5013, MONTICELLO, NEW YORK, 12701
(Address of Principal Executive Offices)
(845) 794-4100 ext 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
November 15, 2004 was 26,075,242.
Transitional Small Business Disclosure Format (check one): Yes No X
---
EMPIRE RESORTS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of September 30, 2004.... 3
Condensed Consolidated Statements of Operations for the three
and nine months Ended September 30, 2004 and 2003............. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003...................... 5
Notes to Condensed Consolidated Financial Statements............. 6-22
Item 2. Management's Discussion and Analysis or Plan of Operation........ 22-29
Item 3. Controls and Procedures.......................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 31
Item 6. Exhibits......................................................... 32
Signatures....................................................... 33
2
PART I
ITEM 1. FINANCIAL INFORMATION
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 14,190
Restricted cash 115
Accounts receivable 779
Prepaid expenses and other current assets 1,097
--------
Total current assets 16,181
Property and equipment, net 31,464
Advances- Tribal Gaming Authorities 540
Deferred financing costs, net of accumulated
amortization of $56 3,040
Deferred development costs 3,890
Gaming license and development costs 6,252
--------
Total assets $ 61,367
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable 2,995
Construction costs payable 2,714
Accrued expenses and other current liabilities 3,480
--------
Total current liabilities 9,189
Senior convertible notes 65,000
--------
Total liabilities 74,189
--------
Stockholders' deficit:
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 14,521
Accumulated deficit (34,459)
--------
Total stockholders' deficit (12,822)
--------
Total liabilities and stockholders' deficit $ 61,367
========
See accompanying notes to condensed consolidated financial statements.
3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 21,914 $ 2,641 $ 27,079 $ 7,473
-------- -------- -------- --------
Expenses:
Operating costs 20,789 1,488 27,645 4,209
Selling, general and administrative 1,688 956 7,740 3,764
Depreciation and amortization 316 178 336 526
Amortization of deferred financing costs 56 -- 300 --
Interest expense, net 598 166 870 497
-------- -------- -------- --------
Total expenses 23,447 2,788 36,891 8,996
-------- -------- -------- --------
Net loss (1,533) (147) (9,812) (1,523)
Dividends paid on preferred stock -- -- 30 --
Cumulative undeclared dividends
on preferred stock 388 -- 1,122 --
-------- -------- -------- --------
Net loss applicable to common shares $ (1,921) $ (147) $(10,964) $ (1,523)
======== ======== ======== ========
Weighted average common shares
outstanding, basic and diluted 26,075 18,219 24,905 18,219
======== ======== ======== ========
Loss per common share, basic and diluted $ (0.07) $ (0.01) $ (0.44) $ (0.08)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS)
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,812) $ (1,523)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 336 526
Amortization of deferred financing costs 300 --
Accrued interest -- 499
Stock-based compensation 2,227 --
Changes in operating assets and liabilities:
Restricted cash 7 (95)
Accounts receivable, net (20) 427
Prepaid expenses and other current assets (843) 34
Accounts payable (2,353) 633
Accrued expenses and other current liabilities 2,493 453
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,665) 954
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (27,959) (526)
Cash acquired from acquisition 18 --
Advances- Tribal Gaming Authorities (155) --
Gaming license and development costs (2,086) (1,577)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (30,182) (2,103)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 30,375 --
Proceeds from exercise of stock options and warrants 119 --
Stock issuance expenses (2,317) --
Proceeds from issuance of senior convertible notes 62,218 --
Excess of market value over carrying value of property
and equipment purchased (30,825) --
Repayment of promissory notes (5,073) --
Repayment of note payable, bank (3,470) --
Deferred financing costs (314) --
Preferred stock dividends paid (30) --
Members' capital contributions --- 1,314
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 50,683 1,314
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,836 165
CASH AND CASH EQUIVALENTS, beginning of period 1,354 644
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 14,190 $ 809
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 319 $ 503
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of promissory note and redemption of common stock $ 5,073 $ --
Accrued construction costs $ 2,714 $ --
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
Deferred financing costs of senior convertible notes $ 2,782 $ --
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 September 30,
2004, the unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and the unaudited Condensed
Consolidated Statement of Cash Flows for the nine months ended September 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 nine months ended September 30, 2004
and Cash Flows for the nine months ended September 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 nine months ended September 30, 2003 and Cash Flows for the nine
months ended September 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 CDL, a related party and recorded
at CDL's carrying value.
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 controlled 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 nine months ended September 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 nine-month periods ended September
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 shareholders' report on 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. The Company
incorporated under the name Alpha Hospitality Corporation and changed its name
to Empire Resorts, Inc. in May, 2003. During the past three years, the Company
has concentrated on developing gaming operations in New York State. As part of
this effort, the Company has divested itself of various ancillary interests and
terminated certain unprofitable operations.
Through its subsidiaries, the Company intends to develop a
multi-dimensional gaming resort in Monticello, New York that includes horse
racing, VGMs and a $500 million Native American casino entitled the Cayuga
Catskill Resort and other gaming and non-gaming resort development, to include
the development of Class III gaming facilities both within and outside the State
of New York, and Sullivan County. The Company also continues to explore numerous
other possible development projects.
6
The Company operates 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 the other
two subsidiaries are contingent upon the receipt of certain federal and state
regulatory approvals.
RACEWAY OPERATIONS
Monticello Raceway Management, a wholly owned subsidiary, 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 surrounding property that it subsequently purchased on July 26,
2004 from CDL, a related party, and recorded at CDL's carrying value.
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 which
allows a patron to play electronic versions of various lottery games of chance
and is similar in appearance to a traditional slot machine. On October 31, 2001,
the State of New York enacted a bill designating seven racetracks, including the
Raceway, to install and operate VGMs. Under the program, the New York State
Lottery made an initial allocation of 1,800 VGM's to the Raceway. On June 30,
2004, Monticello Raceway Management began operating 1,744 VGMs on 45,000 square
feet of floor space at the Raceway after completing approximately $24 million of
renovations to the facility.
CASINO DEVELOPMENT
On April 3, 2003, the Cayuga Nation of New York, (the "Cayuga
Nation"), 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
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 these 29
acres. 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 29 acre site be taken into trust by the
United States as a site for gaming activities.
There are two significant preconditions that must be met before the
Cayuga Nation can operate gaming on this 29 acre site. First, title to the land
must be transferred to the United States and accepted into trust for the benefit
of the Cayuga Nation. Second, the Cayuga Nation must enter into a Class III
gaming compact with the State of New York. On June 10, 2004, the Company issued
a press release announcing the Cayuga Nation and the State of New York entered
into a Memorandum of Understanding (the "MOU") pursuant to which, among other
things, the parties agreed that to help settle the Cayuga Nation's outstanding
land claim against the State of New York, the State of New York would enter into
a gaming compact with the Cayuga Nation authorizing the Cayuga Nation to operate
a Class III gaming facility at the Raceway following receipt of all requisite
state and federal approvals. The MOU set a target date of September 30, 2004 for
the implementation of all such necessary approvals. The September 30, 2004
target date under the MOU, however, expired without the implementation of the
necessary approvals. The Company has been advised by representatives of the
Cayuga Nation that they expect the Company to continue to pursue the objective
of their agreements and the Company has been informed of some continuing contact
between the Cayuga Nation and the State of New York. However, to the knowledge
of the Company, there are continuing differences between the parties in their
efforts to proceed under the MOU. Moreover, the most recent active proposals
under consideration vary in material respects from the framework outlined in the
MOU. Unless the differences between the parties are resolved expediously, it is
unlikely that the approvals contemplated by the MOU will be achieved prior to
the expiration of the agreements on December 31, 2004.
7
After December 31, 2004, the Cayuga Nation and the Company will be
free to either renew or modify the current agreements or to seek other partners.
The Company has been and intends to continue to explore future development
opportunities, including both gaming and non-gaming resort development. These
alternatives include the development of Class III gaming facilities both within
and outside the State of New York, including discussions with persons owning or
controlling other locations within and outside Sullivan County. The Company's
existing letter agreement with the Cayuga Nation contains broad language that
restricts the ability of the parties to hold certain discussions pertaining to
development of another Class III gaming facility within Sullivan County until
after December 31, 2004. The Company intends to respect the purposes and intent
of this agreement, but deems it prudent to be active in exploring its strategic
alternatives at this time.
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. The decision has been appealed
to the highest court of New York, the Court of Appeals, which may reverse this
ruling. 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.
On August 19, 2004, the Company entered into a letter agreement with
the Seneca-Cayuga Tribe of Oklahoma (the "Tribe"), a federally recognized Indian
Tribe, to develop a gaming facility in the Catskills region of New York. The
agreement provides for the Company to supply technical and financial assistance
to the Tribe and to serve as its exclusive partner in the development,
construction, financing, operation and management of the proposed casino. The
agreement is for a term of one year and became effective immediately. The
Company will also provide technical assistance and support relating to the
settlement of its land claim against the State of New York. The Company will
provide development assistance of $35,000 per month to the Tribe in connection
with the establishment and initial operations of a tribal gaming authority for
New York gaming operations.
The agreement calls for the Company and the Tribe to separately enter
into a management agreement and development agreement for the project through
good faith negotiations and submit the management agreement for approval to the
National Indian Gaming Commission. All of the provisions of the above agreements
relating to the management of the casino are subject to review and approval by
the National Indian Gaming Commission prior to becoming effective. Pending such
approval and as a result of such review, such provisions may be amended or
supplemented by the parties.
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 nine months ended
September 30, 2004, Monticello Raceway Development capitalized approximately
$3.5 million of costs associated with the casino development project. When
operations of the casino commence, the remaining costs after reimbursements will
be systematically recognized over a determinable period.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION. Revenues represent (i) revenues from
pari-mutual wagering, (ii) the net win from VGM's and (iii) food and beverage
sales, net of promotional allowances 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 bettors 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. The value of all
points outstanding as of September 30, 2004 was approximately $106,000.
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.
8
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 are 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.
Included in cash and cash equivalents was approximately $1.4 million segregated
for the Horsemen's share of the VGM revenue.
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, 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,
determined that no allowance is required at September 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
Land improvements 15 years
Building improvements 40 years
Buildings 40 years
DEFERRED FINANCING COSTS. Deferred financing costs are amortized on
the straight-line method over the term of the senior convertible notes. (see
note H )
DEFERRED DEVELOPMENT COSTS. Deferred development costs are stated at
cost. The Company capitalizes certain costs directly related to obtaining a
gaming license under a management agreement with a federally recognized Native
American Tribe. 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.
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 nine months ending September 30, 2004 and 2003 were the same. The
weighted average shares used in the loss per common share calculation for three
and nine months ending September 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.
9
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.
10
NOTE C. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro-forma statement of operations presents
information as if the merger, purchase of the property and equipment and the
issuance of the senior convertible notes 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 NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
Revenues $ 2,641 $ 7,473
-------- --------
Expenses:
Operating costs 1,488 4,209
Selling, general and administrative 3,170 9,238
Depreciation 178 526
Interest expense, net 893 3,234
-------- --------
Total expenses 5,729 17,207
-------- --------
Other income
Gain on sale of investment and related management contract -- 135
Recovery of insurance proceeds -- 500
Gain on extinguishment of debt -- 389
-------- --------
Total other income -- 1,024
-------- --------
Net loss (3,088) (8,710)
Cumulative undeclared dividends
On preferred stock 391 1,161
-------- --------
Net loss applicable to common shares $ (3,479) $ (9,871)
======== ========
Weighted average common shares
outstanding, basic and diluted 23,995 23,570
======== ========
Loss per common share, basic and diluted $ (0.14) $ (0.42)
======== ========
11
NOTE D. PROPERTY AND EQUIPMENT
(IN THOUSANDS)
September 30, 2004
Land $ 770
Land improvements 57
Buildings 4,505
Buildings improvements 23,709
Vehicles 129
Furniture, fixtures and equipment 2,630
---------
31,800
Less - Accumulated depreciation and amortization (336)
---------
$31,464
=========
Depreciation and amortization expense was approximately $316,000 and
$178,000, respectively, for the three months ending September 30, 2004 and 2003,
and approximately $336,000 and $526,000, respectively, for the nine months ended
September 30, 2004 and 2003.
NOTE E. ADVANCES TO TRIBAL GAMING AUTHORITIES
The Company has made payments to both the Cayuga Nation and the Tribe
to help cover development costs for the proposed gaming facilities and other
development projects. These advances are refundable under certain circumstances
and are non-interest-bearing. As of September 30, 2004, approximately $540,000
in total was advanced to both Tribal Gaming Authorities.
NOTE F. DEFERRED DEVELOPMENT COSTS
Under a special letter agreement between the Company and the Cayuga
Nation, the parties are to work exclusively with each other to develop a casino
in Sullivan County, New York 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.
When the 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 nine months ended September 30, 2004, Monticello
Raceway Development capitalized approximately $2.1 million of additional costs.
Capitalized costs that are specifically related to either of the Native American
projects are refundable under certain circumstances and are
non-interest-bearing. When the financing of the relevant operation is completed,
the gaming license and development costs will be evaluated for refund ability,
and when the operations of the proposed casino commence the balance, if any,
will be systematically recognized over a determinable period. These capitalized
costs are periodically reviewed for impairment.
NOTE H. SENIOR CONVERTIBLE NOTES
On July 23, 2004, the Company issued $65 million of 5.5% senior
convertible notes presently convertible into approximately 4.7 million shares of
common stock, subject to adjustment upon the occurrence or non-occurrence of
certain events. The notes were issued with a maturity date of July 31, 2014.
Interest is payable semi-annually on January 31 and July 31 to the persons who
are registered holders at the close of business on each January 15 and July 15
immediately preceding the applicable interest payment date.
12
The senior convertible notes are the Company's senior obligations,
ranking senior in right of payment to all of the Company's existing and future
subordinated indebtedness and ranking equally in right of payment with existing
and future senior indebtedness. The notes are guaranteed on a senior basis by
all of the Company's material subsidiaries. The guarantee of each material
subsidiary guarantor is a senior obligation of the guarantor, ranking senior in
right of payment to all existing and future subordinated indebtedness of the
Company's guarantors and ranking equally in right of payment with any existing
and future senior indebtedness of such guarantor.
The notes are secured by the Company's tangible and intangible assets
and by a pledge of the equity interests of each of the Company's material
subsidiaries.
The notes initially accrue interest at an annual rate of 5.5%. If one
of the following events (the "Trigger Event") does not occur on or before July
31, 2005: publication in the Federal Register of approval by the Secretary of
the Interior of a Class III gaming compact for the Cayuga Catskill Resort;
written approval of a gaming facility management agreement on behalf of the
chairman of the National Indian Gaming Commission; or the land in Monticello,
New York to be used for the development of the Cayuga Catskill Resort having
been transferred to the United States in trust for the Cayuga Nation, the notes
will accrue interest from and after July 31, 2005 at an annual rate of 8%. The
interest rate will return to 5.5% upon the occurrence of the Trigger Event.
The notes can be converted into shares of the Company's common stock
at any time prior to maturity, redemption or repurchase by the Company. The
initial conversion rate is 72.727 shares per each $1,000 principal amount of
notes, subject to adjustment. This conversion rate is equivalent to an initial
conversion price of $13.75 per share. In the event that the notes convert prior
to July 31, 2007, the Company will be required to make an additional make-whole
payment equal to the present value of all remaining scheduled payments of
interest on the notes to be converted through and including July 31, 2007,
assuming for such purpose that the interest rate in effect as of the conversion
date shall apply for all subsequent interest periods through July 31, 2007. Any
make-whole payment will be payable in cash or, at the Company's option, in
shares of the Company's common stock at a 5% discount to the average closing bid
price of the Company's common stock for the 10 trading days prior to the
conversion date.
If the Trigger Event has not occurred on or prior to July 31, 2005,
the initial conversion rate per each $1,000 principal amount of notes shall be
reset based on a 15% premium to the average closing bid price of our common
stock for the prior 10 trading days, provided, however, that the new initial
conversion rate shall not reflect an initial conversion price in excess of
$13.75 or less than $12.56 per share.
The Company will use its best efforts to cause, on or prior to April
22, 2005, if the Trigger Event shall have not yet occurred, the notes and the
guarantees to become secured by a mortgage on our 232 acres of land in
Monticello, New York (with such mortgage being released with respect to the site
of the Cayuga Catskill Resort being released as required to transfer such site
into trust with the United States).
Upon the occurrence of the Trigger Event, the indenture governing the
notes will permit the Company to incur up to an additional $150.0 million of
additional indebtedness or any amount of additional indebtedness that the
Company's consolidated fixed charge coverage ratio will be, after giving effect
to the incurrence thereof, greater than 2 to 1.
If the Company experiences a significant change of control, the holder
will have the right to either require the Company to repurchase the notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon or, in the event at least 90%
of the consideration received in connection with such change of control is
comprised of cash or cash equivalents, elect to receive a make-whole payment of
up to 16.5% of the outstanding principal amount of such holder's untendered
notes (depending when the change of control occurs).
Holders may require the Company to purchase all or part of their notes
at a purchase price of 100% of the principal amount of the notes plus accrued
and unpaid interest and liquidated damages, if any, on July 1, 2009.
The notes were sold by the initial purchaser in a Rule 144A private
offering to qualified institutional buyers and were not registered under the
Securities Act of 1933. In September of 2004, a shelf registration statement
covering the resale of the notes and the shares of common stock issuable upon
conversion of the notes was filed with the SEC and subsequently declared
effective on October 4, 2004.
There is no public market for the notes and the Company does not
intend to apply for listing of the notes on any securities exchange or for
quotation of the notes through any automated quotation system.
The Company, in association with the issuance of the senior
convertible notes, incurred approximately $3.1 million in costs. The deferred
financing costs will be capitalized and systematically amortized over the 10
year life of the notes. For the three months ended September 30, 2004, the
Company recognized approximately $56,000 in amortization expense.
For the three months ended September 30, 2004, the Company recognized
approximately $645,000 in interest expense associated with the senior
convertible notes.
13
On January 31, 2005, the interest payment due in association with the
senior convertible notes will be approximately $1.8 million.
NOTE I. 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. On July 26, 2004, approximately $5.3 million of proceeds from the
senior convertible notes was expended to pay in full the principal of the notes
and accrued interest to Bryanston Group and Beatrice Tollman.
Under the terms of the notes, interest accrued on the outstanding
principal amount at the rate of 7% per annum. For the three and nine months
ended September 30, 2004 the Company recognized approximately $26,000 and
$195,000 respectively, in interest expense associated with the promissory notes.
Berkshire Bank
On October 29, 2003, Monticello Raceway Management issued a $3,500,000
note to The Berkshire Bank. The Company entered into a surety agreement with The
Berkshire Bank to guarantee the note. The note was subsequently satisfied in
February 2004.
NOTE J. 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. On February 2, 2004, the
Company also issued 4,050,000 shares of our common stock to multiple investors
in a private placement. At September 30, 2004, the Company has outstanding
options to purchase approximately 965,000 shares of common stock at an average
exercise price of $4.81 per share and 250,000 warrants at an exercise price of
$7.50 per warrant.
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.
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 stock 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, 33.3% each year over three years starting at the date of
issuance and, 33.3% 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 $210,000 in the quarter ending September 30, 2004.
On August 13, 2004, the Company issued 20,000 incentive stock options
with a strike price of $8.63 to various employees. The option issuance provided
for the following vesting schedules, (i) 33.3% vested immediately, (ii) 33.3%
vested over a year, and (iii) the balance vested over two years. All options
expire ten years from the date of grant. On the date of issuance 6,667 options
were vested and the expense was recognized. The expense associated with this
grant was approximately $69,000 in the quarter ending September 30, 2004.
During the nine months ended September 30, 2004, the Company received
approximately $119,000 of proceeds from the exercising of stock options.
14
NOTE K. 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 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 operating
loss carry-forward may be applied in future years based upon the change of
control and existing income tax laws.
15
NOTE L. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note H, 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
SEPTEMBER 30, 2004
(UNAUDITED)
(IN THOUSANDS)
ASSETS EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
Cash and cash equivalents $ 8,830 $ 5,360 $ -- $ -- $ 14,190
Restricted cash -- 115 -- -- 115
Accounts receivable -- 779 -- -- 779
Prepaid expenses and other assets 205 892 -- -- 1,097
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-Company 140,407 -- -- (140,407) --
Property and equipment, net -- 31,464 -- -- 31,464
Advances- Tribal Gaming Authorities -- 540 -- -- 540
Deferred financing costs, net 3,040 -- -- -- 3,040
Deferred development costs -- 3,890 -- -- 3,890
Gaming license and development costs -- 6,252 -- -- 6,252
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 157,542 $ 49,292 $ -- $(145,467) $ 61,367
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 1,384 $ 1,611 $ -- $ -- $ 2,995
Construction costs payable -- 2,714 -- -- 2,714
Accrued expenses and other liabilities 797 2,683 -- -- 3,480
Inter-Company -- 46,825 93,582 (140,407) --
Senior convertible notes 65,000 -- -- -- 65,000
--------- --------- --------- --------- ---------
Total liabilities 67,181 53,833 93,582 (140,407) 74,189
Stockholders' Equity (Deficit): 90,361 (4,541) (93,582) (5,060) (12,822)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 157,542 $ 49,292 $ -- $(145,467) $ 61,367
========= ========= ========= ========= =========
16
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
REVENUES $ -- $ 21,914 $ -- $ -- $ 21,914
-------- -------- ------------- ------------- --------
EXPENSES:
Operating costs -- 20,789 -- -- 20,789
Selling, general and administrative 1,025 663 -- -- 1,688
Depreciation and amortization -- 316 -- -- 316
Amortization of deferred financing costs 56 -- -- -- 56
Intercompany interest (income) expense (951) 951 -- -- --
Interest expense, net 639 (41) -- -- 598
-------- -------- ------------- ------------- --------
Total expenses 769 22,678 -- -- 23,447
-------- -------- ------------- ------------- --------
NET LOSS $ (769) $ (764) $ -- $ -- $ (1,533)
======== ======== ============= ============= ========
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
REVENUES $ -- $ 2,641 $ -- $ -- $ 2,641
------------- ------- ------------- ------------- -------
EXPENSES:
Operating costs -- 1,488 -- -- 1,488
Selling general and administrative -- 956 -- -- 956
Depreciation and amortization -- 178 -- -- 178
Interest expense, net -- 166 -- -- 166
------------- ------- ------------- ------------- -------
Total expenses -- 2,788 -- -- 2,788
------------- ------- ------------- ------------- -------
NET LOSS $ -- $ (147) $ -- $ -- $ (147)
============= ======= ============= ============= =======
17
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
REVENUE $ -- $ 27,079 $ -- $ -- $ 27,079
-------- -------- ------------- ------------- --------
EXPENSES:
Operating costs -- 27,645 -- -- 27,645
Selling general and administrative 5,420 2,320 -- -- 7,740
Depreciation and amortization -- 336 -- -- 336
Amortization of deferred financing costs 56 244 -- -- 300
Intercompany interest (income) expense (951) 951 -- -- --
Interest expense, net 746 124 -- -- 870
-------- -------- ------------- ------------- --------
Total expenses 5,271 31,620 -- -- 36,891
-------- -------- ------------- ------------- --------
NET LOSS $ (5,271) $ (4,541) $ -- $ -- $ (9,812)
======== ======== ============= ============= ========
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
REVENUE $ -- $ 7,473 $ -- $ -- $ 7,473
------------- ------- ------------- ------------- -------
EXPENSES:
Operating costs -- 4,209 -- -- 4,209
Selling general and administrative -- 3,764 -- -- 3,764
Depreciation and amortization -- 526 -- -- 526
Interest expense, net -- 497 -- -- 497
------------- ------- ------------- ------------- -------
Total expenses -- 8,996 -- -- 8,996
------------- ------- ------------- ------------- -------
NET LOSS $ -- $(1,523) $ -- $ -- $(1,523)
============= ======= ============= ============= =======
18
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
Net cash used in operating activities $ (2,518) $ (5,147) $ -- $ -- $ (7,665)
-------- -------- ------------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment -- (27,959) -- -- (27,959)
Cash acquired from acquisition 18 -- -- -- 18
Advances- Tribal Gaming Authorities -- (155) -- -- (155)
Gaming license and development costs -- (2,086) -- (2,086)
Advances to subsidiaries (42,823) -- -- 42,823 --
-------- -------- ------------- -------- --------
Net cash used in investing activities (42,805) (30,200) -- 42,823 (30,182)
-------- -------- ------------- -------- --------
Cash flows from financing activities:
Proceeds from sale of stock 30,375 -- -- -- 30,375
Proceeds from exercise of
stock options and warrants 119 -- -- -- 119
Stock issuance expenses (2,317) -- -- -- (2,317)
Proceeds from issuance of senior
convertible notes 62,218 -- -- -- 62,218
Excess of market value over carrying
value of property and
equipment purchased (30,825) -- -- -- (30,825)
Advances from Empire Resorts -- 42,823 -- (42,823)
Repayment of promissory notes (5,073) -- -- -- (5,073)
Repayment of note payable, bank -- (3,470) -- -- (3,470)
Deferred financing costs (314) -- -- -- (314)
Preferred stock dividends paid (30) -- -- -- (30)
-------- -------- ------------- -------- --------
Net cash provided by financing activities 54,153 39,353 -- (42,823) 50,683
-------- -------- ------------- -------- --------
Net increase in cash and cash equivalents 8,830 4,006 -- -- 12,836
Cash and cash equivalents,
beginning of period -- 1,354 -- -- 1,354
-------- -------- ------------- -------- --------
Cash and cash equivalents,
end of period $ 8,830 $ 5,360 $ -- $ -- $ 14,190
======== ======== ============= ======== ========
19
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(IN THOUSANDS)
EMPIRE GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
RESORTS SUBSIDIARIES SUBSIDIARIES ENTRIES EMPIRE
Net cash provided by operating activities $ -- $ 954 $ -- $ -- $ 954
-------------- ------- -------------- -------------- -----------
Cash flows from investing activities:
Purchases of property and equipment -- (526) -- -- (526)
Gaming license and development costs -- (1,577) -- -- (1,577)
-------------- ------- -------------- -------------- -----------
Net cash used in investing activities -- (2,103) -- -- (2,103)
-------------- ------- -------------- -------------- -----------
Cash flows from financing activities:
Members' capital contributions -- 1,314 -- -- 1,314
-------------- ------- -------------- -------------- -----------
Net increase in cash and cash equivalents -- 165 -- -- 165
Cash and cash equivalents,
beginning of period -- 644 -- -- 644
-------------- ------- -------------- -------------- -----------
Cash and cash equivalents,
end of period $ -- $ 809 $ -- $ -- $ 809
============== ======= ============== ============== ===========
20
Note M. Related Party Transactions
On October 29, 2003, CDL, a related party, and Monticello Raceway
Management entered into a 48-year Ground Lease ("Ground Lease") with respect to
232 acres of land and the improvements located on such land. Under the terms of
the Ground Lease, Monticello Raceway Management agreed to pay CDL $1.8 million
per year, with the first payment deferrable until January 11, 2005, but accruing
interest at the rate of 4.5% per annum. On July 26, 2004, approximately $38
million of proceeds from the senior convertible notes was expended to terminate
the Ground Lease and acquire the fee interest in these 232 acres from CDL, a
related party. The property and equipment was recorded at CDL's carrying value.
The purchase provides for additional security to the holders of the senior
convertible notes and will allow the Company to benefit from certain real estate
tax credits resulting from its recent investment in improvements on the land.
NOTE N. COMMITMENTS AND CONTINGENCIES
CASINO DEVELOPMENT. On August 19, 2004, the Tribe and the Company
entered into a one year agreement in which the Company agreed to provide $35,000
per month to pay the expenses of establishing the tribal gaming authority or
similar organization to oversee its gaming activities and other related
purposes.
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 $21 million. The unpaid
balance of the original contract was approximately $2.5 million at September 30,
2004. On November 9, 2004 this obligation was paid in full.
LITIGATION TRUST. On January 12, 2004, in order to better focus on the
development of a VGM program at the Raceway and current business arrangements
with the Cayuga Nation 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 contractual and business relationships, were
transferred to a liquidating litigation trust. The Company agreed to provide the
litigation trust with a $2.5 million line of credit. For the nine months ending
September 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 multiple 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 that 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 until such time as management
deems it appropriate. Another 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 the 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.
21
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. On July 7, 2004, the Appellate Division of the New York State Supreme
Court 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 VGM operations is unconstitutional under New York law because such
legislation provides that a portion of the VGM 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 Attorney General of the State of New York filed a
notice of appeal with respect to this ruling that automatically stays the
decision of the appellate court and allows the Company to continue operating
VGM's 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, the Company would be forced to close its VGM operations.
The Company is 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 O. SUBSEQUENT EVENTS
On November 12, 2004, the Company entered into a binding agreement
with Concord Associates Limited Partnership and an affiliate for acquisition of
the Concord and Grossinger's Resort Hotels and Golf Courses. The acquisition
includes casino and hotel development sites, and a 72 hole golf course,
including the Monster, International, Challenger and Grossinger's Golf Courses.
Concord Associates Limited Partnership is a joint venture owned 46% by Reckson
Strategic Venture Partners, a real estate venture capital fund.
As consideration for the acquisition, the Company will issue 18
million shares of common stock to Concord Associates Limited Partnership,
representing approximately 40% of the total number of issued and outstanding
common shares of the Company after the closing, on a fully diluted basis and the
assumption of related debt. The closing is subject to certain approvals,
including a vote in favor of the transaction by a majority of the Company's
shareholders, and regulatory approval of at least one land to trust transfer for
a gaming facility at any of the casino development sites owned by the Company or
Concord Associates Limited Partnership.
On November 12, 2004, the State of New York and the Tribe announced
execution of a settlement agreement relating to the Tribe's land claims and
development of a Native American casino to be located in the Town of Thompson,
Sullivan County. The agreement provides that the State and Tribe shall enter
into a mutually satisfactory Class III gaming compact to operate a casino in the
Catskills, subject to approval of the Secretary of Interior. The Company has
urged the State and the Cayuga Nation to pursue a similar settlement agreement
prior to December 31, 2004, on which date the Company's agreements with the
Cayuga Nation terminate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Management's Discussion and Analysis of the Financial Condition
and Results of Operations should be read together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements in the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2003 filed by the Company under the
Securities Exchange Act of 1934.
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.
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 Catskill Development, L.L.C. ("CDL"), 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.
22
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
the Company. Monticello Raceway Management, which had previously held a
leasehold interest in the property, purchased the property from CDL, a related
party on July 26, 2004.
Since 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 now 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 video gaming machine ("VGM") operations after completing an
approximately $27 million renovation of our facility and installing 1,744 VGMs.
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, and an agreement with the Seneca-Cayuga Tribe of
Oklahoma (the "Tribe") a federally recognized Indian Tribe to develop a gaming
facility in the Catskills region of New York.
We have spent significant amounts of money generated principally
through the issuance of equity and debt in connection with our development
activities, primarily for the design, development, financing and construction of
the video gaming operation, as well as the predevelopment, design, and
negotiations of two Native American casinos. Predevelopment costs include
expenses associated with legal fees, accounting and audit fees and costs
relating to employees. Some of these costs have been capitalized. The Company
periodically reviews these capitalized costs for impairment. If such review
shows that the assets are impaired the carrying value will be reduced to fair
value.
The results of our VGM operations to date have been significantly
below expectations. After only three months of operations, our start up period
is still in progress. However, the results to date have been sufficiently
disappointing that we have made an effort to find areas that might be improved
on an expedited basis. A number of such areas have been identified, such as the
product mix of machines on the gaming floor, the need to enhance our program for
bus patrons (which was not commenced until two weeks after opening) and the need
to better balance operating expense with levels of activity. We have shown some
improvement as a result of these efforts and they are continuing. However, there
are a number of areas where our ability to improve operations is limited. For
example, our product mix is principally determined by the New York State Lottery
Commission after consultations with us and four VGM manufacturers. Further, the
funds available to us for marketing are limited as the program has been designed
so that New York State Lottery is to be primarily responsible for marketing for
the program. To date, the Lottery has not implemented an extensive marketing
effort for the program, which is still in its early stages. . Accordingly, we
are not able at this time to offer incentives that compete favorably with the
Atlantic City and the Connecticut Native American casinos. The Company and a
coalition of the other racetracks authorized to operate VGM's have presented a
comprehensive bill to certain key members of the New York State Legislature to
amend the split of gross gaming revenues to allow a significantly greater
percentage to be retained by the racetracks for operating expenses. Unless this
proposed amendment, or one with similar terms is adopted, we may not be able to
bring of our VGM operations to a point of sustaining profitability.
New business developments or other unforeseen events may occur,
resulting in the need to raise additional funds. We continue to explore
opportunities to develop additional gaming or related businesses in other
markets, whether through acquisition or development. Any such developments would
require us 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.
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. The decision has been 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 or any similar projects with the Tribe.
RACEWAY OPERATIONS
Monticello Raceway Management, Inc. 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.
23
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 County and Catskill Off Track Betting facilities ("OTB") (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), 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. The Monticello Raceway currently
features:
o 1,744 VGMs;
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 an
entertainment lounge with seating for 75 people.
MIGHTY M GAMING AT MONTICELLO RACEWAY
A 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, including the Raceway, to
install and operate VGMs. Under the program, the New York State Lottery made an
in initial allocation of 1,800 VGMs 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 VGMs on 45,000 square
feet of floor space at Monticello Raceway after completing approximately $24
million of renovations to the facility. The VGM operation employs approximately
350 employees. The operating results of the video gaming operation are reported
in the consolidated results of Empire Resorts. Operating results for the
pari-mutuel and VGM operations will be evaluated by management separately.
The primary competition for Mighty M Gaming at Monticello Raceway is
from Atlantic City and Connecticut's full service casinos and two racetracks
located within the New York City metropolitan area, Yonkers Raceway and Aqueduct
Raceway. Both racetracks have announced plans to proceed with the VGM program
and construction of facilities had commenced at Aqueduct Raceway. However, the
development program for Yonkers Raceway has yet to be finalized and construction
at both racetracks 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.
Two pending lawsuits, Dalton v. Pataki and Karr v. Pataki, seek to
enjoin the State of New York from proceeding with VGM 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
VGM operations. In overturning the trial court, the Appellate Division ruled
that the legislation permitting state sponsored VGM operations is
unconstitutional under New York law because such legislation provides that a
portion of the VGM 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 VGM 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 VGM 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 VGM
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
VGM 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 VGM 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 VGM legislation to be
constitutional. Absent such a ruling, to continue VGM operations at Monticello
Raceway, we would need the New York state legislature to modify the VGM
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 VGM 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.
24
CAYUGA CATSKILL RESORT DEVELOPMENT
On April 3, 2003, the Cayuga Nation, 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.
One of the April 3, 2003 agreements also provides 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. This 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.
As currently contemplated, the Cayuga Catskill Resort will be an
approximately $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 June 10, 2004, the Company issued a press release announcing the
Cayuga Nation and the State of New York entered into a Memorandum of
Understanding (the "MOU") pursuant to which, among other things, the parties
agreed that to help settle the Cayuga Nation's outstanding land claim against
the State of New York, the State of New York would enter into a gaming compact
with the Cayuga Nation authorizing the Cayuga Nation to operate a Class III
gaming facility at the Raceway following receipt of all requisite state and
federal approvals. The MOU set a target date of September 30, 2004 for the
implementation of all such necessary approvals. The September 30, 2004 target
date under the MOU, however, expired without the implementation of the necessary
approvals. The Company has been advised by representatives of the Cayuga Nation
that they expect the Company to continue to pursue the objective of the April 3,
2003 agreements and the Company has been informed of some continuing contact
between the Cayuga Nation and the State of New York. However, to the knowledge
of the Company, there are continuing differences between the parties in their
efforts to proceed under the MOU. Moreover, the most recent active proposals
under consideration vary in material respects from the framework outlined in the
MOU. Unless the differences between the parties are resolved expediously, it is
unlikely that the approvals contemplated by the MOU will be achieved prior to
the expiration of the agreements on December 31, 2004.
At such time, the Cayuga Nation and the Company will be free to either
renew or modify the current agreements or to seek other partners. The Company
has been and intends to continue to explore future development opportunities,
including both gaming and non-gaming resort development. These alternatives
include the development of Class III gaming facilities both within and outside
the State of New York, including discussions with persons owning or controlling
other locations within and outside Sullivan County. One of the Company's
existing agreements with the Cayuga Nation contains broad language that
restricts the ability of the parties to hold certain discussions pertaining to
development of another Class III gaming facility within Sullivan County until
after December 31, 2004. The Company intends to respect the purposes and intent
of this agreement, but deems it prudent to be active in exploring its strategic
alternatives at this time.
There are two significant preconditions that must be met before the
Cayuga Nation 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. Second, the Cayuga Nation must
enter into a Class III gaming compact with the State of New York.
25
OTHER CASINO DEVELOPMENT OPERATIONS
On August 19, 2004, the Company entered into a letter agreement with
the Tribe, to develop a gaming facility in the Catskills region of New York. The
agreement provides for the Company to supply technical and financial assistance
to the Tribe and to serve as its exclusive partner in the development,
construction, financing, operation and management of the proposed casino. The
agreement is for a term of one year and became effective immediately. The
Company will also provide technical assistance and support relating to the
settlement of its land claim against the State of New York. The Company will
provide development assistance of $35,000 per month to the Tribe in connection
with the establishment and initial operations of a tribal gaming authority for
New York gaming operations.
The agreement calls for the Company and the Tribe to separately enter
into a management agreement and development agreement for the project through
good faith negotiations and submit the management agreement for approval to the
National Indian Gaming Commission. All of the provisions of the above agreements
relating to the management of the casino are subject to review and approval by
the National Indian Gaming Commission prior to becoming effective. Pending such
approval and as a result of such review, such provisions may be amended or
supplemented by the parties.
On November 12, 2004, the State of New York and the Tribe announced
execution of a settlement agreement relating to the Tribe's land claims and
development of a Native American casino to be located in the Town of Thompson,
Sullivan County. The agreement provides that the State and Tribe shall enter
into a mutually satisfactory Class III gaming compact to operate a casino in the
Catskills, subject to approval of the Secretary of the Interior. The Company has
urged the State and the Cayuga Nation to pursue a similar settlement agreement
prior to December 31, 2004, on which date the Company's agreements with the
Cayuga Nation terminate.
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 203 acres of
land to provide for activities supportive of gaming, such as lodging, food
service and retail. Monticello Raceway Development's operating results are
reported in the consolidated results of Empire Resort's. 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 nine months ended
September 30, 2004, Monticello Raceway Development capitalized approximately
$3.5 million of additional costs associated with the casino development
projects. Capitalized costs that are specifically related to either of the
Native American projects are refundable under certain circumstances and are
non-interest-bearing. When the financing of the relevant operation is completed
the gaming license and development costs will be evaluated for refund ability
and when the operations of a proposed casino commence the balance, if any,
systematically recognized over a determinable period. These capitalized costs
are periodically reviewed for impairment. Should the Cayuga Nation of New York
fail to negotiate a Compact with the State of New York by December 31, 2004 or
the parties fail to agree to extend the agreements the Company will write off
the costs specifically related to the Cayuga Catskill Resort. At September 30,
2004, Monticello Raceway Development employed four full-time employees.
The Company believes that either of the management contracts with the
Cayuga Nation trust land casino or the agreements with the Tribe, with all
appropriate approvals, will generate more revenue in the first year of the
contract than the gaming related capitalized costs at September 30, 2004. Most
of the costs that are capitalized at September 30, 2004 will be reimbursed
through provisions of the contracts. We are currently evaluating the available
deferred tax asset to utilize when this revenue becomes realizable.
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 the 29 acres of trust land.
26
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
trust land. The deadline for the effectiveness of such agreement was extended on
June 25, 2004 to December 31, 2004. 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 September 30, 2004, Monticello
Casino Management did not have any full-time employees or operations.
COMPETITION
We believe that the Raceway and Cayuga Catskill Resort are uniquely
situated to be successful as the site 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 Mohegan Sun in
Connecticut. There are approximately one million adults living within 50 miles
of the Raceway and approximately 18.4 million adults living within 100 miles of
the Raceway with an average household income of approximately $76,000. The
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 no
direct competition at this time for our VGM operations within 85 miles of the
Raceway. However, 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
the Raceway that compete directly with our VGM operation. 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 each of them is at a competitive disadvantage given our site's
ease of access, our ability to offer horse racing and VGMs in addition to
regular casino gambling, and our belief that we and our partners are
considerably further along in the regulatory approval process than any other
competitor.
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 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.
The significant accounting estimates inherent in the preparation of
our financial statements include estimates associated with management's
evaluation of the recoverability of gaming related capitalized costs, accounts
receivable and advances to tribal gaming authorities.
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. Recognition of expenses associated with the issuance of
options could have a material effect on operating results in the interim period
that the options are issued.
27
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
The operations of the Company during the three months ended September 30,
2004 and 2003 were not similar due to the merger with CDL and its subsidiaries
and the commencement of new the VGM operations on June 30, 2004.
REVENUES. Revenues increased approximately $19 million for the quarter ended
September 30, 2004. The increase was due to the VGM operations that started June
30, 2004.
OPERATING COSTS. Operating costs increased approximately $19 million for the
quarter ended September 30, 2004 due to the start up and operating costs
associated with the VGM operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased approximately $732,000 in the third quarter of 2004 from
costs associated with the VGM operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
approximately $316,000 and $178,000 respectively for the quarters ended
September 30, 2004 and 2003. This variance was due to depreciation of building
improvements, furniture, fixtures and equipment additions relating to the VGM
operations.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
The operations of the Company during the nine months ended September 30,
2004 and 2003 were not similar due to the merger with CDL and its subsidiaries
and the commencement of the new VGM operations on June 30, 2004.
REVENUES. Revenues increased approximately $20 million for the nine months
ended September 30, 2004 due to the VGM operations.
OPERATING COSTS. Operating costs increased approximately $23 million for the
nine months ended September 30, 2004 due to the start up and operating costs
associated with the VGM operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased approximately $4 million for the nine months ended September
30, 2004 from stock-based compensation of approximately $2.2 million and costs
associated with the VGM operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
approximately $336,000 and $526,000 respectively for nine months ended September
30, 2004 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the nine months ended
September 30, 2004 totaled $7.7 million, which is primarily attributable to the
start-up costs associated with the VGM operations and increased payroll for new
employees.
Net cash used in investing activities in during the nine months ended
September 30, 2004 totaled $30.2 million, consisting primarily of approximately
$28 million in purchases of property and equipment and approximately $2.1
million in costs associated with the casino development project.
Net cash provided by financing activities during the nine months ended
September 30, 2004 totaled $50.7 million, which is primarily attributable to
approximately $30.4 million from the proceeds of the sale of stock through a
private placement and approximately $62.2 million from the sale of senior
convertible notes, offset by the excess of market value over carrying value that
was recorded as a reduction to equity for the related party purchase of the
property and equipment, stock issuance expenses of $2.3 million, $5.1 million
for the repayment of promissory notes, and the repayment of the $3.5 million
note issued to The Berkshire Bank. (See Notes H, I and J to the Financial
Statements)
To prepare the property at the Monticello Raceway for the VGM operations,
the Company had contractual obligations relating to construction of the VGM
renovations of approximately $21 million. The balance outstanding of the
original contract was approximately $2.5 million at September 30, 2004 and on
November 9, 2004 the balance was paid in full.
28
Monticello Raceway Management recorded a $3.5 million loss for the
nine months ending September 30, 2004, excluding inter-company allocations. The
net loss was mainly attributable to non-recurring costs associated with the
start-up of the VGM operations and the lease expense for the raceway property.
The pari-mutuel operation in the past has usually generated a yearly profit
however the Raceway has experienced a decrease in gross revenues due to a change
in the law allowing the State's OTB operations to take an unlimited number of
tracks effectively limiting the exposure of Monticello's races in the OTB, and a
dispute in regards to off track betting parlor Dark Day money. Dark day money is
revenue received from OTBs when racing is held at the Raceway and thoroughbred
racing facilities are closed. The Company estimates the disputed dark day money
at approximately $500,000 at September 30, 2004. If favorably resolved, the
Company will recognized the additional revenue.
Any revenue projections would be base on information without any historical
data due to the start-up of the new VGM operations, which produces the majority
of Monticello Raceway Management's revenue. It could be assumed that the revenue
flow from the VGM operations would follow a seasonal trend line with the winter
months producing fewer guests. Therefore, the Company does not believe the
revenue results for the third quarter of 2004 will be indicative of the yearly
total revenue.
On January 12, 2004, in order to better focus on the development of a VGM
program at the Raceway and current business arrangements with the Cayuga Nation
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 contractual and business relationships, were transferred to a
liquidating litigation trust. The Company agreed to provide the litigation trust
with a $2.5 million line of credit. For the nine months ending September 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.
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, a registration statement
covering 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.
On July 16, 2004, the Company sold $65 million of 5.5% senior convertible
notes, guaranteed by its material subsidiaries, that are presently convertible
into approximately 4.7 million shares of common stock at a conversion price of
$13.75 subject to adjustment upon the occurrence or non-occurrence of certain
events. The notes were issued on July 26, 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, from CDL, a related party, 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 notes were sold by the initial purchaser in a Rule 144A private
offering to qualified institutional buyers and were not registered under the
Securities Act of 1933. In September of 2004 a shelf registration statement
covering the resale of the notes and common stock issuable upon conversion of
the notes was filed with the SEC and subsequently declared effective October 4,
2004.
On July 26, 2004, approximately $5.3 million of proceeds from the senior
convertible notes was expended to pay in full the obligation of the promissory
notes payable and accrued interest due to the Bryanston Group and Beatrice
Tollman.
On July 26, 2004, approximately $38 million of proceeds from the senior
convertible notes was expended to terminate a ground lease covering 232 acres in
Monticello, New York, and the improvements thereon, owned by CDL, a related
party, by purchasing such 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.
On August 19, 2004, the Tribe, and the Company entered into a one year
agreement where the Company agreed to provide $35,000 per month to pay the
expenses of establishing the tribal gaming authority or similar organization for
the Tribe to oversee its gaming activities and other gaming related costs. These
advances will be refunded to the Company when the development project is
financed.
On November 12, 2004, the Company entered into a binding agreement
with Concord Associates Limited Partnership and an affiliate for acquisition of
the Concord and Grossinger's Resort Hotels and Golf Courses. The acquisition
includes casino and hotel development sites, and a 72 hole golf course,
including the Monster, International, Challenger and Grossinger's Golf Courses.
Concord Associates Limited Partnership is a joint venture owned 46% by Reckson
Strategic Venture Partners, a real estate venture capital fund.
As consideration for the acquisition, the Company will issue 18
million shares of common stock to Concord Associates Limited Partnership,
representing approximately 40% of the total number of issued and outstanding
common shares of the Company after the closing, on a fully diluted basis and the
assumption of related debt. The closing is subject to certain approvals,
including a vote in favor of the transaction by a majority of the Company's
shareholders, and regulatory approval of at least one land to trust transfer for
a gaming facility at any of the casino development sites owned by the Company or
Concord Associates Limited Partnership.
29
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 Exchange 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.
No change occurred in the Company's internal controls concerning financial
reporting during the third 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.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Monticello Harness Horsemen's Association, Inc. ("Horsemen",
"Horsemen's Association") has brought multiple actions against Monticello
Raceway Management and an Officer of one of the Company's subsidiaries.
One of the actions seeks 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 until such time as management deems it
appropriate. Another 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.
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 the 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.
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 VGM operations. In
overturning the trial court, the Appellate Division ruled that the legislation
permitting state sponsored VGM operations is unconstitutional under New York law
because such legislation provides that a portion of the VGM 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 VGM 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 Catskill Resort
and otherwise adversely affect the implementation of the Company's business
plan, as investors might be reluctant to invest given the uncertainty that such
a holding would create.
The opinion, however, separately affirmed the decision of the 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.
On August 5, 2004, we received a letter from a purchaser of $10 million of
notes, in our 5.5% $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 these claims
are 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.
31
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 6. EXHIBITS
10.1 Line of credit dated January 12, 2004 between Empire Resorts, Inc and
Catskill Litigation Trust and related promissory note.
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
32
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: November 15, 2004 /s/ ROBERT A. BERMAN
--------------------
Chief Executive Officer
Robert A. Berman
Dated: November 15, 2004 /s/ SCOTT A. KANIEWSKI
----------------------
Scott A. Kaniewski
Chief Financial Officer