sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-12522
EMPIRE RESORTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3714474
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
701 N. GREEN VALLEY PARKWAY, SUITE 200, HENDERSON, NV 89074
(Address of Principal Executive Offices) (Zip Code)
(702) 990-3355
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. |X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the issuer's common stock, as of May 3,
2007 was 29,488,886.
EMPIRE RESORTS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
------ --------------------- --------
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2007
(Unaudited) and December 31, 2006...............................1
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2007 and 2006..............2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2007 and 2006............3 - 4
Notes to Condensed Consolidated Financial Statements (Unaudited)....5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................23
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk...........................................................31
ITEM 4. Controls and Procedures............................................31
PART II OTHER INFORMATION
ITEM 6. Exhibits...........................................................32
Signatures.........................................................33
i
PART I--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
March 31,
2007 December 31,
(Unaudited) 2006
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,704 $ 9,471
Restricted cash 1,972 1,747
Accounts receivable 3,745 5,253
Prepaid expenses and other current assets 2,242 1,545
-------- --------
Total current assets 28,663 18,016
Property and equipment, net 31,490 31,703
Deferred financing costs, net of accumulated
amortization of $1,534 in 2007 and $1,364 in 2006 2,946 3,116
Deferred development costs 8,238 7,729
-------- --------
TOTAL ASSETS $ 71,337 $ 60,564
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit facility $ 7,617 $ 7,617
Accounts payable 2,775 3,734
Accrued expenses and other current liabilities 6,179 9,936
-------- --------
Total current liabilities 16,571 21,287
Senior convertible notes 65,000 65,000
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Total liabilities 81,571 86,287
-------- --------
Commitments and contingencies -- --
Stockholders' deficit:
Preferred stock, 5,000 shares authorized;
$0.01 par value -
Series B, 44 shares issued and outstanding -- --
Series E, $10.00 redemption value, 1,731
shares issued and outstanding 6,855 6,855
Common stock, $0.01 par value, 75,000 shares
authorized, 29,471 and 29,428 shares issued
and outstanding in 2007 and 2006,
respectively 295 294
Amount due from exercise of option -- (18,750)
Additional paid in capital 50,292 49,113
Accumulated deficit (67,676) (63,235)
-------- --------
Total stockholders' deficit (10,234) (25,723)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 71,337 $ 60,564
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
Three Months Ended
March 31,
---------------------
2007 2006
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REVENUES:
Racing $ 2,401 $ 4,630
Gaming 15,117 17,300
Food, beverage and other 1,447 1,276
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GROSS REVENUES 18,965 23,206
Less: Promotional allowances (550) (545)
-------- --------
NET REVENUES 18,415 22,661
-------- --------
COSTS AND EXPENSES:
Racing 2,065 3,109
Gaming 13,964 15,558
Food, beverage and other 553 508
Selling, general and administrative * 4,132 3,382
Depreciation 291 284
-------- --------
TOTAL COSTS AND EXPENSES 21,005 22,841
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LOSS FROM OPERATIONS (2,590) (180)
Amortization of deferred financing costs 170 146
Interest expense 1,491 1,470
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NET LOSS (4,251) (1,796)
Cumulative undeclared dividends on preferred stock 388 388
-------- --------
NET LOSS APPLICABLE TO COMMON SHARES $(4,639) $(2,184)
======== ========
Weight average common shares outstanding, basic and
diluted 29,437 26,324
======== ========
Loss per common share, basic and diluted $ (0.16) $ (0.08)
======== ========
* Includes stock-based compensation of $ 925 $ 1,241
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
Three Months Ended
March 31,
---------------------
2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: $ (4,251) $ (1,796)
Depreciation 291 284
Amortization of deferred financing costs 170 146
Allowance for doubtful accounts - Advances to
Litigation Trust 250 --
Stock-based compensation 925 1,241
Changes in operating assets and liabilities:
Restricted cash (VGM Marketing Account) (179) 2,079
Accounts receivable 1,508 (1,198)
Prepaid expenses and other current assets (698) 46
Accounts payable (767) (184)
Accrued expenses and other current liabilities (3,756) 362
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (6,507) 980
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (78) (36)
Advances to Litigation Trust (250) --
Restricted cash (Racing capital improvement) (40) 73
Deferred development costs (701) (385)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,069) (348)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility -- 141
Proceeds from exercise of stock options 18,815 42
Restricted cash (related to revolving credit facility) (6) (4)
Deferred financing costs paid -- (798)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,809 (619)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,233 13
CASH AND CASH EQUIVALENTS, beginning of period 9,471 6,992
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 20,704 $ 7,005
======== ========
(Continued)
3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
Three Months Ended
March 31,
---------------------
2007 2006
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 2,729 $ 2,887
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in settlement of preferred stock $ 190 $ 98
dividends
Non-cash additions to deferred development costs -- $ 70
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. SUMMARY OF BUSINESS AND BASIS FOR PRESENTATION
BASIS FOR PRESENTATION
The condensed consolidated financial statements and notes as of March 31,
2007 and for the three-month periods ended March 31, 2007 and 2006 are unaudited
and include the accounts of Empire Resorts, Inc. and subsidiaries ("Empire" or
"the Company" or "we").
We operate through three principal subsidiaries, Monticello Raceway
Management, Inc. ("Monticello Raceway Management"), Monticello Casino
Management, LLC ("Monticello Casino Management") and Monticello Raceway
Development Company, LLC ("Monticello Raceway Development"). Currently, only
Monticello Raceway Management has operations which generate revenue.
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and the footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements and
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
condensed consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006. The results of operations for the interim period should not be
indicative of results to be expected for the full year.
LIQUIDITY
We believe that we have access to sources of working capital that are
sufficient to fund our operations for the twelve months ended March 31, 2008. We
received $18.75 million in January 2007 as payment for 2.5 million shares of our
common stock issued as a result of an option exercised on December 28, 2006 and
we have approximately $2.4 million available from our revolving credit facility.
We believe that any significant capital requirements associated with our
development projects can be met by additional debt or equity issues when needed.
NATURE OF BUSINESS
During the past four years, we have concentrated on developing gaming
operations in New York State. Through our subsidiaries, we intend to develop a
gaming resort in Monticello, New York that includes harness horse racing, video
gaming machines ("VGMs") and an Indian casino. We continue to explore other
possible development projects.
RACEWAY AND VGM OPERATIONS
Monticello Raceway Management, a wholly owned subsidiary, is a New York
corporation that operates Monticello Raceway (the "Raceway"), a harness horse
racing facility and a VGM facility (Monticello Gaming and Raceway) in
Monticello, New York.
The Raceway began operation in 1958 and offers pari-mutuel wagering, live
harness racing and 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 County and Catskill Off Track Betting
facilities; (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.
5
A 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 has
authorized an allocation of up to 1,800 VGMs to the Raceway. Currently,
Monticello Raceway Management operates 1,587 VGMs on 45,000 square feet of floor
space at the Raceway.
ST. REGIS MOHAWK RESORT DEVELOPMENT
We had previously attempted to develop a casino with the St. Regis Mohawk
Tribe beginning in 1996. On April 6, 2000, the United States Department of the
Interior advised New York State Governor George Pataki that it had determined
that the acquisition of 29 acres adjacent to Monticello Raceway would be in the
best interest of the St. Regis Mohawk Tribe and would not be detrimental to the
community. Such determinations required the concurrence of the Governor of New
York in order for the project to proceed. For a period of time thereafter, the
St. Regis Mohawk Tribe agreed to work exclusively with Park Place Entertainment
Corporation (now part of Harrah's Entertainment, Inc.), which proposed to
develop a casino for the St. Regis Mohawk Tribe at the nearby Kutsher's Sporting
Academy. However, by Summer 2005, the needed approvals for a casino at Kutsher's
Sporting Academy had not materialized, and we and the St. Regis Mohawk Tribe's
leaders discussed the possibility of moving forward with the previously obtained
approvals for the casino project at Monticello Raceway.
On August 1, 2005, we entered into a letter agreement with the St. Regis
Mohawk Tribe pursuant to which the St. Regis Mohawk Tribe acknowledged that on
April 6, 2000, the United States Department of the Interior advised New York
State Governor George Pataki that the acquisition of 29 acres adjacent to the
Raceway would be in the best interest of the St. Regis Mohawk Tribe and would
not be detrimental to the community. Under the letter agreement, we and the St.
Regis Mohawk Tribe affirmed, subject to the requested concurrence by Governor
Pataki, all prior contracts to develop an Indian casino at the Raceway. The St.
Regis Mohawk Tribe further agreed to (1) satisfy all requirements for the Bureau
of Indian Affairs (the "BIA") in connection with the transfer of the 29 acres of
land to the United States government in trust for the St. Regis Mohawk Tribe,
(2) resolve any remaining issues for the finalization of the pre-existing
management agreement with one of our subsidiaries for the project previously
submitted to the National Indian Gaming Commission (the "NIGC"), (3) execute any
amendment or revision to such management agreement, or any collateral
agreements, that may be mutually agreed upon in such process, (4) support the
approval of such management agreement, as so amended or revised, by the NIGC and
(5) take any and all reasonably required steps to consummate the land to trust
transfer of the parcel pursuant to the April 6, 2000 determination as promptly
as practicable following the concurrence of the Governor of New York State.
The current plans for the St. Regis Mohawk Tribe casino resort at
Monticello Raceway include 160,000 square feet of gaming space for 3,500 slot
machines and 125 table games, with sufficient space to accommodate an additional
500 slot machines and a variety of food and beverage offerings and entertainment
venues.
On March 20, 2006, we submitted a proposed form of amended and restated
gaming facility management agreement (the "Gaming Facility Management
Agreement") and collateral agreements to the NIGC for review and approval or
disapproval. Until approved by the Chairman of the NIGC, the Gaming Facility
Management Agreement is not in force. Neither the St. Regis Mohawk Tribe nor the
St. Regis Mohawk Gaming Authority (the "Authority") has approved the Gaming
Facility Management Agreement. We expect, but cannot guarantee, that the St.
Regis Mohawk Tribe will approve the Gaming Facility Management Agreement.
Under the currently proposed form of the Gaming Facility Management
Agreement, the Authority will retain us to manage all casino style gaming
activities, other than horserace wagering and Class II gaming that may be
conducted on the land for seven years commencing upon the NIGC's approval of the
agreement. We would also be 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, we have agreed to assist the Authority to
obtain financing for the gaming enterprise and all related commercial
activities. In exchange for these services, we are entitled to receive a
management fee equal to 30% of the net revenues derived from the operations we
manage.
Under the currently proposed form of the Gaming Facility Management
Agreement, before we can pay ourselves our fee, we must first pay to the
Authority a minimum return of $516,667 per month. These minimum priority
payments are to be charged against the Authority's distribution of net revenues
and, when there is insufficient net revenue in a given month to pay the minimum
6
return, we are obligated to advance the funds necessary to compensate for the
deficiency, with the Authority reimbursing us in the next succeeding month or
months. The minimum return is required to be paid to the Authority every month
gaming is conducted, including on a pro rata basis during those months when
gaming is conducted only for part of a month.
While the terms of the currently proposed Gaming Facility Management
Agreement provide us with wide discretion as to the day-to-day management of the
gaming facilities, all major decisions or expenditures must first be approved by
a management business board to be comprised of four persons, two of whom are to
be appointed by the Authority and the other two of whom are to be appointed by
us.
In carrying out our duties as manager of the gaming facility, we are
required to provide the St. Regis Mohawk Tribe and other recognized Indian
tribes with certain preferences including giving preference in recruiting,
training and employment first to qualified members of the St. Regis Mohawk
Tribe, and secondly to other qualified Native Americans and the local community,
providing training programs for members of the St. Regis Mohawk Tribe; and in
entering into contracts for the supply of goods and services for the gaming
enterprise, giving preference first to qualified members of the St. Regis Mohawk
Tribe, and qualified business entities certified by the Authority or the St.
Regis Mohawk Tribe as being controlled by members of the St. Regis Mohawk Tribe,
and second to other qualified Native Americans and qualified business entities
certified by the Authority to be controlled by Native Americans and to the local
community.
We also entered into a gaming facility development and construction
agreement with the Authority and the St. Regis Mohawk Tribe (the "Gaming
Facility Development and Construction Agreement"), pursuant to which we were
granted the exclusive right to design, engineer, construct, furnish and develop
a Class III Indian casino resort with the St. Regis Mohawk Tribe, and we agreed
to help arrange financing of the project. In exchange for these services, the
Authority agreed to pay us a development fee equal to 5% of the first $505
million of the project's hard cost of construction , payable monthly as such
costs are incurred. However, the 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 Authority is required to pay
us these retained fees.
Similar to the Gaming Facility Management Agreement, in the execution of
our duties under the Gaming Facility Development and Construction Agreement, we
must first seek approval from a development business board before any major
decisions or material expenditures are made. The development business board
shall be comprised of four persons, two of whom are to be appointed by the
Authority and the other two of whom are to be appointed by us. Finally, similar
to the covenants of the Gaming Facility Management Agreement, the Gaming
Facility Development and Construction Agreement provides that any general
contractor hired by Monticello Raceway Development shall use its reasonable best
efforts to give, and to cause subcontractors to give, a hiring preference to
qualified members of the St. Regis Mohawk Tribe.
The plans are in a preliminary stage and are subject to approval by
relevant government authorities and the St. Regis Mohawk Tribe.
After notification from the St. Regis Mohawk Tribe, the BIA recommenced
the review process for the acquisition of the 29 acres adjacent to the Raceway
by the St. Regis Mohawk Tribe. On April 13, 2006 the St. Regis Mohawk Tribe was
notified that the BIA had completed its review of the Environmental Assessment
("EA") for a proposed transfer of land into trust for a casino at the Monticello
Raceway site. The review identified certain additional areas to address and the
St. Regis Mohawk Tribe completed the filing of the responses to those items on
July 5, 2006. Following this filing, the review of the EA by the BIA was
completed on September 12, 2006 and the document was made available for public
review and comment on that date. The St. Regis Mohawk Tribe provided the BIA
responses to all of the comments received during the comment period.
On December 21, 2006 the St. Regis Mohawk Tribe received a letter from the
BIA stating that the St. Regis Mohawk Tribe's Final EA has been deemed
sufficient, an Environmental Impact Study will be not be required and a Finding
of No Significant Impact ("FONSI") related to the proposed federal action
approving the request of the St. Regis Mohawk Tribe to take 29.31 acres into
trust for the purpose of building a Class III gaming facility to be located at
Monticello Raceway, in accordance with the Indian Gaming Regulatory Act of 1988
(the "Land-to-Trust Transfer") has been issued.
7
On February 19, 2007, New York Governor Eliot Spitzer issued his
concurrence with regard to the April 2000 Secretarial Determination which found
that gaming in Sullivan County by the St. Regis Mohawk would be in the best
interest of the St. Regis Mohawk Tribe and its members and would not be
detrimental to the surrounding communities. In addition, on February 19, 2007,
Governor Spitzer signed an amendment to the gaming compact between the St. Regis
Mohawk Tribe and New York State pursuant to which New York State would receive
20 percent of slot-machine revenues for the first two years after the St. Regis
Mohawk Tribe's Class III casino to be located at Monticello Raceway opens, 23
percent for the next two years and 25 percent thereafter.
On February 19, 2007 we were notified by the St. Regis Mohawk Tribe that,
on February 16, 2007, a complaint was filed in the United States District Court
for the Southern District of New York in the case of Sullivan County Farm
Bureau, Catskill Center for Conservation and Development, Inc., Orange
Environment, Inc. and Natural Resources Defense Council v. United States
Department of the Interior, Dirk Kempthorne, in his official capacity as
Secretary of the Interior, James E. Cason, in his official capacity as Associate
Deputy Secretary of the Interior and Acting Assistant Secretary of the Interior
for Indian Affairs and BIA. The claim alleges that the BIA violated the National
Environmental Policy Act ("NEPA") and the Administrative Procedure Act by
issuing a Finding of No Significant Impact without requiring an environmental
impact statement ("EIS") under NEPA. The plaintiffs are seeking an order
requiring the preparation of an EIS prior to the Department of the Interior's
granting final approvals for the proposed St. Regis Mohawk Casino at Monticello
Raceway and prior to the Department of the Interior's causing the transfer of
the subject land into federal trust.
On April 20, 2007, we and the St. Regis Mohawk Tribe filed a joint
stipulation pursuant to which we were both granted full rights as equal parties
to the federal government to assist in defense of the environmental review for
the St. Regis Mohawk Casino at Monticello Raceway.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION. Revenues represent (i) revenues from
pari-mutuel wagering earned from live harness racing and simulcast signals from
other tracks, (ii) the net win from VGMs and (iii) food and beverage sales, net
of promotional allowances, and other miscellaneous income. We recognize revenues
from pari-mutuel wagering earned from live harness racing and simulcast signals
from other tracks at the end of each racing day, before deductions of such
related expenses as purses, stakes and awards. Revenue from the VGM 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. We recognize revenues from
pari-mutuel wagering and VGM operations at the end of each day of operation. The
net win is included in the amount recorded in our condensed consolidated
financial statements as gaming revenue. We report incentives related to VGM play
and points earned in loyalty programs as a reduction of gaming revenue.
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 Breeders'
for their share of the net win and (iii) amounts paid 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 and the marketing
allowance from the New York State Lottery.
We currently have a point loyalty program ("Player's Club") for our VGM
customers which allows them to earn points based on the volume of their VGM
activity. The estimated redemption value of points earned by customers is
recorded as an expense in the period the points are earned. We estimate the
amount of points which will be redeemed and record the estimated redemption
value of those points as a reduction from revenue in promotional allowances. The
factors included in this estimation process include an overall redemption rate,
the cost of awards to be offered and the mix of cash, goods and services for
which the points will be redeemed. We use historical data to estimate these
amounts. The liability recorded for unredeemed points was approximately $195,000
and $202,000 at March 31, 2007 and December 31, 2006, respectively.
PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on
account, demand deposits and certificates of deposit with original maturities of
three months or less at acquisition. The Company maintains significant cash
balances with financial institutions which are not covered by the Federal
Deposit Insurance Corporation. The Company has not incurred any losses in such
8
accounts and believes it is not exposed to any significant credit risk on cash.
Approximately $1.1 million of cash is held in reserve according to the New York
State Lottery Rules and Regulations.
RESTRICTED CASH. We have three types of restricted cash accounts.
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 cash fund, 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 balances in this account
were approximately $279,000 and $239,000 at March 31, 2007 and December 31,
2006, respectively.
In April 2005, the New York law governing VGM operations was modified to
provide an increase in the revenues retained by the VGM operator. A portion of
that increase was designated as a reimbursement of marketing expenses incurred
by the VGM operator. The amount of revenues directed toward this reimbursement
is deposited in a bank account under the control of the New York State Lottery
and the VGM operator. The funds are transferred from this account to the
operator upon the approval by the Lottery officials of the reimbursement
requests submitted by the operator. The balances in this account were
approximately $1,255,000 and $1,076,000 at March 31, 2007 and December 31, 2006,
respectively.
In connection with our revolving credit agreement, we agreed to maintain a
restricted reserve bank account with the lending institution. The balances in
this account were approximately $438,000 and $432,000 at March 31, 2007 and
December 31, 2006, respectively.
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 March 31, 2007 or December 31, 2006.
In the normal course of business, we settle wagers for other racetracks and are
potentially exposed to credit risk. We have not experienced significant losses
regarding the settlement of wagers. These wagers are included in accounts
receivable.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost less
accumulated depreciation. We provide 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 20 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 related debt.
DEFERRED DEVELOPMENT COSTS. Deferred development costs are recorded at
cost. In connection with our development activities, we may make advances to
tribes for development assistance and to facilitate the establishment and
initial operations of tribal gaming authorities. We also incur costs associated
with development activities, including salaries of employees engaged in those
activities which we capitalize as deferred development costs. We provide
technical assistance, engage and pay attorneys and consultants and provide other
support for our Indian partners in matters relating to land claims against the
State of New York and agreements for development and operation of the proposed
casino developments.
We periodically review deferred development costs for impairment as
further described below.
9
IMPAIRMENT OF LONG-LIVED ASSETS. We periodically review the carrying value
of our 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 an issue as to whether that the carrying value
of such assets may not be recoverable, we will then estimate the future cash
flows generated by such assets (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 CONTINGENCIES. There are times when non-recurring events occur that
require management to consider whether an accrual for a loss contingency is
appropriate. Accruals for loss contingencies typically relate to certain legal
proceedings, customer and other claims and litigation. As required by Statement
of Financial Accounting Standards (" SFAS") No. 5, we determine whether an
accrual for a loss contingency is appropriate by assessing whether a loss is
deemed probable and can be reasonably estimated. We analyze our legal
proceedings, warranty and other claims and litigation based on available
information to assess potential liability. We develop our views on estimated
losses in consultation with outside counsel handling our defense in these
matters, which involves an analysis of potential results assuming a combination
of litigation and settlement strategies. The adverse resolution of any one or
more of these matters over and above the amounts that have been estimated and
accrued in the current condensed consolidated financial statements could have a
material adverse effect on our business, results of operations and financial
condition.
LOSS PER COMMON SHARE. We compute basic loss per share by dividing loss
applicable to common shares by the weighted-average common shares outstanding
for the period. Diluted loss per share reflects the potential dilution of
earnings that could occur if securities or 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 loss of the entity. Since the effect of
outstanding options and warrants is anti-dilutive with respect to losses, they
have been excluded from our computation of loss per common share. Therefore,
basic and diluted losses per common share for the three months ended March 31,
2007 and 2006 were the same.
The following table shows the approximate number of securities outstanding
at March 31, 2007 and 2006 that could potentially dilute basic income per share
in the future but were not included in the calculation of diluted loss per share
because their inclusion would have been anti-dilutive.
Outstanding at March 31,
------------------------
2007 2006
----------- ------------
Options 3,334,000 7,831,000
Warrants 250,000 250,000
Shares to be issued upon conversion of convertible debt 5,175,000 5,175,000
Unvested restricted stock 89,000 175,000
--------- ----------
Total 8,848,000 13,431,000
========= ==========
ADVERTISING. We expense the costs of general advertising, promotion and
marketing programs at the time the costs are incurred. Advertising expense was
approximately $289,000 and $233,000, respectively, for the three months ended
March 31, 2007 and 2006.
INCOME TAXES. We apply 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. We have established a
valuation allowance to eliminate deferred tax assets until amounts are expected
to be realized.
ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in
conformity with GAAP 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. We
use significant estimates including those related to customer incentives, bad
10
debts, inventories, estimated useful lives for depreciable and amortizable
assets, valuation reserves and estimated cash flows in assessing the
recoverability of long-lived assets, estimated liabilities for point based
customer loyalty programs, income taxes, contingencies and litigation. Actual
results may differ from estimates.
STOCK-BASED COMPENSATION. On January 1, 2006, we adopted SFAS No. 123
(revised 2004) (SFAS No. 123(R)), "SHARE-BASED PAYMENT," to account for
stock-based compensation. Among other items, SFAS No. 123(R) eliminates the use
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and the intrinsic value method of accounting and requires
companies to recognize in their financial statements the cost of services
received in exchange for awards of equity instruments based on the grant date
fair value of those awards. Generally, the fair value approach in SFAS No.
123(R) is similar to the fair value approach described in SFAS No. 123.
Effective January 1, 2003, our Company has adopted SFAS No. 123 and used the
Black-Scholes-Merton formula to estimate the fair value of stock options granted
to employees. We elected to use the modified prospective method for adoption,
which requires compensation expense to be recorded for all unvested stock
options and other equity-based compensation beginning in the first quarter of
adoption. For all unvested options outstanding as of January 1, 2006, the
previously measured but unrecognized compensation expense, based on the fair
value at the original grant date, has been or will be recognized in our
financial statements over the remaining vesting period. For equity-based
compensation awards granted or modified subsequent to January 1, 2006,
compensation expense, based on the fair value on the date of grant or
modification, has been or will be recognized in our consolidated financial
statements over the vesting period. Our Company also elected to continue to
estimate the fair value of stock options using the Black-Scholes-Merton formula.
RECENT ACCOUNTING PRONOUNCEMENTS.
In October 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") No. Financial Accounting Standard ("FAS") 123(R)-5,
Amendment of FSP FAS 123(R)-1, ("FSP FAS123(R)-5") to address whether a change
to an equity instrument in connection with an equity restructuring should be
considered a modification for the purpose of applying FSP No. FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FAS Statement No 123(R) ("FSP
FAS123(R)-1"). FSP FAS 123(R)-1 states that financial instruments issued to
employees in exchange for past or future services are subject to the provisions
of SFAS 123(R) unless the terms of the award are modified when the holder is no
longer an employee. In FSP FAS 123(R)-5, the FASB staff concluded that changes
to the terms of an award that are made solely due to an equity restructuring are
not considered modifications as described in FSP FAS 123(R)-1 unless the fair
value of the award increases, anti-dilution provisions are added, or holders of
the same class of equity instruments are treated unequally. FSP FAS 123(R)-5 is
effective for the first reporting period beginning after October 10, 2006. The
adoption of FSP FAS 123(R)-5 did not have a material impact on the Company's
condensed consolidated financial statements.
NOTE C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31, 2007 and
December 31, 2006:
(in thousands)
-------------------------
March 31, December 31,
2007 2006
----------- -------------
Land $ 770 $ 770
Land improvements 1,515 1,510
Buildings 4,583 4,583
Building improvements 24,513 24,513
Vehicles 140 140
Furniture, fixtures and equipment 3,022 2,949
-------- --------
34,543 34,465
Less - Accumulated depreciation (3,053) (2,762)
-------- --------
$ 31,490 $ 31,703
======== ========
11
Depreciation expense was approximately $291,000 and $284,000,
respectively, for the three months ending March 31, 2007 and 2006.
NOTE D. DEFERRED DEVELOPMENT COSTS
We have made payments to fund certain expenses of the St. Regis Mohawk
Tribe in connection with the development of a proposed Indian casino facility.
We also incur development costs associated with other development projects.
We may make advances to provide development assistance in connection with
the establishment and initial operations of tribal gaming authorities for New
York State gaming operations for the St. Regis Mohawk Tribe. Advances made by us
are non-interest-bearing and any repayment of them is ultimately dependent upon
the completion of the development of the projects.
We also capitalize costs directly associated with the development of real
estate for those Indian gaming facilities and other projects. Some of the costs
capitalized in connection with Indian casinos will be repaid, with no interest,
from the permanent financing for the project or from project cash flow. Costs
that are not reimbursed will be systematically charged to our operations over
the period covered by our management contract.
The following tables reflect activity in the deferred development cost
accounts for the three months ended March 31, 2007 and 2006.
Activity for Three
Months Ended March 31, 2007
----------------------------------------------
Balance Balance
January 1, March 31,
2007 Additions Impairment 2007
---------- ----------- ------------ ----------
(in thousands)
Advances to and payments on behalf
of the St. Regis Mohawk Tribe:
Advances for operations of Tribal
Gaming Authority $ 381 $ 182 $ -- $ 563
Legal fees and other professional
fees relating to casino resort
development 1,895 290 -- 2,185
------ ------ ------ ------
2,276 472 -- 2,748
Costs specifically associated
with site at Raceway 5,453 37 -- 5,490
------ ------ ------ ------
Total development costs $7,729 $ 509 $ -- $8,238
====== ====== ====== ======
12
Activity for Three
Months Ended March 31, 2006
----------------------------------------------
Balance Balance
January 1, March 31,
2006 Additions Impairment 2006
---------- ----------- ------------ ----------
(in thousands)
Advances to and payments on behalf
of the St. Regis Mohawk Tribe:
Advances for operations of Tribal
Gaming Authority $ 67 $ 78 $ -- $ 145
Legal fees and other professional
fees relating to casino resort
development 163 199 -- 362
------ ------ ------ ------
230 277 -- 507
------ ------ ------ ------
Costs specifically associated
with site at Raceway 5,328 37 -- 5,365
------ ------ ------ ------
Total development costs $5,558 $ 314 $ -- $5,872
====== ====== ====== ======
In connection with our development project with the St. Regis Mohawk Tribe
we have agreed to make payments to the tribe to support operations of the Tribal
Gaming Authority and will provide technical assistance, payment of professional
and legal consultants and other support as we seek the necessary licenses and
approvals to commence construction. Our payments to the St. Regis Mohawk Tribe
are estimated to be approximately $500,000 per month for the remainder of 2007.
NOTE E. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities is comprised of the
following at March 31, 2007 and December 31, 2006:
March 31, December 31,
2007 2006
---------- ------------
(in thousands)
-----------------------
Liability for horseracing purses $3,154 $4,862
Accrued interest 930 2,167
Accrued payroll 441 710
Accrued other 1,654 2,197
------ ------
Total accrued expenses and other current liabilities $6,179 $9,936
====== ======
13
NOTE F. SENIOR CONVERTIBLE NOTES
On July 26, 2004, we issued $65 million of 5.5% senior convertible notes
(the "notes") which are convertible into approximately 5.2 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 and
the holders have the right to demand that we repurchase the notes at par plus
accrued interest on July 31, 2009. 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.
The notes are our senior obligations, ranking senior in right of payment
to all of our 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 our 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 our guarantors and ranking equally in right of payment with any
existing and future senior indebtedness of such guarantor. The notes are secured
by our tangible and intangible assets, by a pledge of the equity interests of
each of our material subsidiaries and a mortgage on our property in Monticello,
New York.
The notes initially accrued interest at an annual rate of 5.5%, subject to
the occurrence of the "Trigger Event". All of the following events constitute a
Trigger Event under the notes: 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; and 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 of New York. Since these events have not occurred, the notes have accrued
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 our common stock at any time
prior to maturity, redemption or repurchase. The initial conversion rate is
72.727 shares per each $1,000 principal amount of notes, subject to adjustment.
This conversion rate was equivalent to an initial conversion price of $13.75 per
share. In the event that the notes convert prior to July 31, 2007, we 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 our option, in shares of our common stock at a 5% discount to the average
closing bid price of our common stock for the 10 trading days prior to the
conversion date.
Since the Trigger Event did not occur on or prior to July 31, 2005, the
initial conversion rate per each $1,000 principal amount of notes was reset to
$12.56 per share.
We recognized interest expense associated with the notes of approximately
$1.3 million in each of the three-month periods ended March 31, 2007 and 2006.
NOTE G. REVOLVING CREDIT FACILITY
On January 11, 2005, we entered into a credit facility with Bank of
Scotland. The credit facility provides for a $10 million senior secured
revolving loan (subject to certain reserves) that matures on January 11, 2008.
As security for borrowings under the facility, we agreed to have our wholly
owned subsidiary, Monticello Raceway Management, grant a mortgage on the Raceway
property and our material subsidiaries guarantee our obligations under the
credit facility. We also agreed to pledge our equity interests in all of our
current and future subsidiaries, maintain certain reserves, and grant a first
priority secured interest in all of our assets, now owned or later acquired.
This arrangement contains financial covenants.
At our option, loans under the credit facility bear interest at the rate
of prime plus 2% or LIBOR plus 4%. Bank of Scotland has also entered into an
14
Inter-creditor Agreement with The Bank of New York so that Bank of Scotland will
enjoy a first priority position notwithstanding the Indenture and security
documents entered into on July 26, 2004 in connection with our issuance of $65
million of senior convertible notes.
We recognized interest expense for the credit facility of approximately
$191,000 and $170,000, respectively, in the three months ended March 31, 2007
and 2006. At March 31, 2007 we were in compliance with the financial covenants
contained in our agreement with the Bank of Scotland.
15
NOTE H. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Notes F and G, our obligations with respect to our Senior
Convertible Notes and Revolving Credit Facility are guaranteed by our operating
subsidiaries.
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
ASSETS
Cash and cash equivalents $ 17,007 $ 3,697 $ -- $ -- $ 20,704
Restricted cash 438 1,534 -- -- 1,972
Accounts receivable -- 3,745 -- -- 3,745
Prepaid expenses and other assets 1,175 1,067 -- -- 2,242
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-company accounts 144,617 -- -- (144,617) --
Property and equipment, net 5 31,485 -- -- 31,490
Deferred financing costs, net 2,946 -- -- -- 2,946
Deferred development costs 162 8,076 -- -- 8,238
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 171,410 $ 49,604 $ -- $(149,677) $ 71,337
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Revolving credit facility $ 7,617 $ -- $ -- $ -- $ 7,617
Accounts payable 851 1,924 -- -- 2,775
Accrued expenses and other liabilities 1,058 5,121 -- -- 6,179
Inter-company accounts -- 51,035 93,582 (144,617) --
Senior convertible notes 65,000 -- -- -- 65,000
--------- --------- --------- --------- ---------
Total liabilities 74,526 58,080 93,582 (144,617) 81,571
Stockholders' equity (deficit) 96,884 (8,476) (93,582) (5,060) (10,234)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 171,410 $ 49,604 $ -- $(149,677) $ 71,337
========= ========= ========= ========= =========
16
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
ASSETS
Cash and cash equivalents $ 383 $ 9,088 $ -- $ -- $ 9,471
Restricted cash 432 1,315 -- -- 1,747
Accounts receivable -- 5,253 -- -- 5,253
Prepaid expenses and other assets 115 1,430 -- -- 1,545
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-company accounts 146,977 -- -- (146,977) --
Property and equipment, net 6 31,697 -- -- 31,703
Deferred financing costs, net 3,116 -- -- -- 3,116
Deferred development costs 125 7,604 -- -- 7,729
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 156,214 $ 56,387 $ -- $(152,037) $ 60,564
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Revolving credit facility $ 7,617 $ -- $ -- $ -- $ 7,617
Accounts payable 1,136 2,598 -- -- 3,734
Accrued expenses and other liabilities 2,313 7,623 -- -- 9,936
Inter-company accounts -- 53,395 93,582 (146,977) --
Senior convertible notes 65,000 -- -- -- 65,000
--------- --------- --------- --------- ---------
Total liabilities 76,066 63,616 93,582 (146,977) 86,287
Stockholders' equity (deficit) 80,148 (7,229) (93,582) (5,060) (25,723)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 156,214 $ 56,387 $ -- $(152,037) $ 60,564
========= ========= ========= ========= =========
17
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
REVENUES
Racing $ -- $ 2,401 $ -- $ -- $ 2,401
Gaming -- 15,117 -- -- 15,117
Food, beverage and other 166 1,281 -- -- 1,447
--------- --------- --------- --------- ---------
Gross revenues 166 18,799 -- -- 18,965
Less: Promotional allowances -- (550) -- -- (550)
--------- --------- --------- --------- ---------
Net revenues 166 18,249 -- -- 18,415
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 2,065 -- -- 2,065
Gaming -- 13,964 -- -- 13,964
Food, beverage and other -- 553 -- -- 553
Selling, general and administrative 2,623 1,509 -- -- 4,132
Depreciation 1 290 -- -- 291
--------- --------- --------- --------- ---------
Total costs and expenses 2,624 18,381 -- -- 21,005
--------- --------- --------- --------- ---------
Loss from operations (2,458) (132) -- -- (2,590)
Amortization of deferred financing costs 170 -- -- -- 170
Inter-company interest (income) expense
& other (1,115) 1,115 -- -- --
Interest expense 1,491 -- -- -- 1,491
--------- --------- --------- --------- ---------
Net loss $ (3,004) $ (1,247) $ -- $ -- $ (4,251)
========= ========= ========= ========= =========
18
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
REVENUES
Racing $ -- $ 4,630 $ -- $ -- $ 4,630
Gaming -- 17,300 -- -- 17,300
Food, beverage and other 5 1,271 -- -- 1,276
--------- --------- --------- --------- ---------
Gross revenues 5 23,201 -- -- 23,206
Less: Promotional allowances -- (545) -- -- (545)
--------- --------- --------- --------- ---------
Net revenues 5 22,656 -- -- 22,661
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 3,109 -- -- 3,109
Gaming -- 15,558 -- -- 15,558
Food, beverage and other -- 508 -- -- 508
Selling, general and
administrative 2,305 1,077 -- -- 3,382
Depreciation 1 283 -- -- 284
--------- --------- --------- --------- ---------
Total costs and
expenses 2,306 20,535 -- -- 22,841
--------- --------- --------- --------- ---------
Income (loss) from
operations (2,301) 2,121 -- -- (180)
Amortization of deferred
financing costs 146 -- -- -- 146
Inter-company interest
(income) expense & other (1,787) 1,787 -- -- --
Interest expense 1,470 -- -- -- 1,470
--------- --------- --------- --------- ---------
Net income (loss) $ (2,130) $ 334 $ -- $ -- $ (1,796)
========= ========= ========= ========= =========
19
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
Net cash used in operating activities $ (4,258) $ (2,249) $ -- $ -- $ (6,507)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment -- (78) -- -- (78)
Advances to Litigation Trust (250) -- -- -- (250)
Restricted cash (Racing capital
improvement) -- (40) -- -- (40)
Deferred development costs (37) (664) -- -- (701)
Advances to Empire Resorts, Inc. -- (2,360) -- 2,360 --
--------- --------- --------- --------- ---------
Net cash used in investing activities (287) (3,142) -- 2,360 (1,069)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds form exercise of stock options 18,815 -- -- -- 18,815
Restricted cash (related to revolving
credit facility) (6) -- -- -- (6)
Advances from subsidiaries 2,360 -- -- (2,360) --
--------- --------- --------- --------- ---------
Net cash provided by financing activities 21,169 -- -- (2,360) 18,809
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 16,624 (5,391) -- -- 11,233
Cash and cash equivalents, beginning of
period 383 9,088 -- -- 9,471
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 17,007 $ 3,697 $ -- $ -- $ 20,704
========= ========= ========= ========= =========
20
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------- ----------- -------------
Net cash provided by (used in)
operating activities $ (1,968) $ 2,948 $ -- $ -- $ 980
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment -- (36) -- -- (36)
Restricted cash (Racing capital
improvement) -- 73 -- -- 73
Deferred development costs (37) (348) -- -- (385)
Advances to Empire Resorts, Inc. -- (2,386) -- 2,386 --
--------- --------- --------- --------- ---------
Net cash used in investing activities (37) (2,697) -- 2,386 (348)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit
facility 141 -- -- -- 141
Proceeds from exercise of stock
options 42 -- -- -- 42
Restricted cash (related to
revolving credit facility) (4) -- -- -- (4)
Deferred financing costs paid (798) -- -- -- (798)
Advances from subsidiaries 2,386 -- -- (2,386) --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 1,767 -- -- (2,386) (619)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (238) 251 -- -- 13
Cash and cash equivalents, beginning
of period 635 6,357 -- -- 6,992
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period $ 397 $ 6,608 $ -- $ -- $ 7,005
========= ========= ========= ========= =========
21
NOTE I. STOCKHOLDERS' EQUITY
On January 30, 2007, we granted 10,000 options to all six of our
non-employee directors. The options vested upon grant, have a strike price of
$8.74 and expire ten years from the date of grant. In the three months ended
March 31, 2007, we recorded stock-based compensation expense of approximately
$452,000 for these grants based upon the estimated value of the options at the
date of grant. We also granted 15,000 options to two employees at that time.
These options vest over three years, have a strike price of $8.74 and expire ten
years from the date of grant. In the three months ended March 31, 2007, we
recorded stock-based compensation expense of approximately $11,000 for these
grants based upon the estimated value attributable to that period of service.
On March 8, 2006, we granted 10,000 options to all six of our non-employee
directors and an additional 5,000 options to the chairman of the Audit Committee
of the Board. The options vested upon grant, have a strike price of $4.26 and
expire ten years from the date of grant. In the three months ended March 31,
2006, we recorded stock-based compensation expense of approximately $249,000 for
these grants based upon the estimated value of the options at the date of grant.
Stock-based compensation expense included in selling, general and
administrative expenses is approximately $925,000 and $1.2 million respectively,
for the three months ended March 31, 2007 and 2006.
On March 8, 2007, we authorized issuance of 18,884 shares of our common
stock as payment of dividends due for the year ended December 31, 2006 on our
Series B preferred stock. The approximate value of $190,000 was recorded as a
reduction of retained earnings and an increase in common stock and additional
paid in capital in the three months ended March 31, 2007.
On March 8, 2006, we authorized issuance of 23,103 shares of our common
stock as payment of dividends due for the year ended December 31, 2005 on our
Series B preferred stock. The approximate value of $98,000 was recorded as a
reduction of retained earnings and an increase in common stock and additional
paid in capital in the three months ended March 31, 2006.
NOTE J. CONCENTRATION
One debtor, New York Off-Track Betting Corporation. represented
approximately 40% and 42% of the total outstanding accounts receivable as of
March 31, 2007 and December 31, 2006, respectively.
NOTE K. EMPLOYEE BENEFIT PLAN
Our eligible employees may participate in a Company-sponsored 401(k)
benefit plan. This Plan covers substantially all employees not eligible for
plans resulting from collective bargaining agreements and permits employees to
defer up to 15% of their salary up to statutory maximums. The plan also provides
for matching contributions by us of up to 100 % of the first 3% of salary
deferral and 66.7% of the next 3% of salary deferral. Our matching contributions
for the three months ended March 31, 2007 were approximately $57,000. As of
March 31, 2007, 124 employees participated in the plan. The plan was not in
effect during the three months ended March 31, 2006.
NOTE L. INCOME TAXES
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements. The interpretation prescribes a recognition
threshold and measurement attribute criteria for the financial statement
recognition and measurement of an uncertain tax position taken or expected to be
taken in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
We adopted the provisions of FIN 48 on January 1, 2007. The implementation
of FIN 48 did not have a material impact on our condensed consolidated financial
statements. We file tax returns in the U.S. federal jurisdiction and in various
states. All federal and state tax filings for the Company as of December 31,
2005 have been timely filed. The Company is subject to U.S. federal or state
22
income tax examinations by tax authorities for years after 2002. During the
periods open to examination, the Company has net operating loss and tax credit
carry forwards that have attributes from closed periods. Since these net
operating loss and tax credit carry forwards may be utilized in future periods,
they remain subject to examination.
As of March 31, 2007, we have not recorded any provisions for accrued
interest and penalties related to uncertain tax positions.
NOTE M. COMMITMENTS AND CONTINGENCIES
CASINO DEVELOPMENT. We are committed to provide development assistance in
connection with the establishment and initial operations of tribal gaming
authorities for New York State gaming operations for the St. Regis Mohawk Tribe.
We are also committed to incur costs associated with the development of a casino
resort with the St. Regis Mohawk Tribe. Our payments to the St. Regis Mohawk
Tribe are estimated to be approximately $500,000 per month for the remainder of
2007.
LITIGATION TRUST. On January 12, 2004, in order to better focus on our
business plan, all of our interests with respect to litigation against Harrah's
Operating Company, Inc. were transferred to a liquidating litigation trust. We
agreed to provide the litigation trust with a $2.5 million line of credit. As of
March 31, 2007 we have advanced $1,765,000 against that line of credit.
LEGAL PROCEEDINGS. We are 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, we believe any liability that may finally be determined with respect
to such legal proceedings should not have a material effect on our consolidated
financial position, results of operations or cash flows.
NOTE N. SUBSEQUENT EVENTS
On April 20, 2007, we and the St. Regis Mohawk Tribe filed a joint
stipulation pursuant to which we were both granted full rights as equal parties
to the federal government to assist in defense of the environmental review for
the St. Regis Mohawk Casino at Monticello Raceway.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and related notes thereto in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, including, but
not restricted to, the risks and uncertainties described in Item 1A of the
Company's Annual Report on Form 10-K for the year ended December 31, 2006, 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
23
forward-looking statements, even if our situation changes in the future. We
caution the reader that a number of important factors discussed herein, and in
other reports filed with the Securities and Exchange Commission, could affect
our actual results and cause actual results to differ materially from those
discussed in forward-looking statements.
OVERVIEW
We were organized as a Delaware corporation on March 19, 1993, and since
that time have served as a holding company for various subsidiaries engaged in
the hospitality and gaming industries.
Through our subsidiaries, we currently:
o own and operate Monticello Raceway (the "Raceway"), a harness horseracing
facility located in Monticello, New York, 90 miles Northwest of New York
City. At the Raceway, we conduct pari-mutuel wagering through the running of
live harness horse races, the import of simulcasting of harness and
thoroughbred horse races from racetracks across the country and the export
simulcasting of our races to offsite pari-mutuel wagering facilities.
o operate in conjunction with the New York State Lottery more than 1,500 video
gaming machines ("VGM") at the grandstand of the Raceway.
o have an agreement with the St. Regis Mohawk Tribe to develop and manage,
subject to regulatory approval, a Class III Indian casino on 29 acres of land
adjacent to the Raceway.
We plan to expand and diversify our business by marketing our services to
gaming and hospitality clients, seeking consulting relationships with additional
gaming clients and pursuing acquisitions, joint ventures or other growth
opportunities.
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 our VGM
operation, as well as the predevelopment, design, and negotiations of Indian
casinos. Predevelopment costs include expenses associated with legal fees,
accounting fees and costs relating to employees. Some of these costs have been
capitalized. We periodically review these capitalized costs for impairment. If
such review shows that the assets are impaired, the carrying value will be
reduced to fair value which could adversely affect the financial results in that
period.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain our earnings, if any, 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
consolidated financial condition, results of operations and capital
requirements. In addition, the payment of cash dividends is restricted by
financial covenants in our credit agreement with Bank of Scotland.
RACEWAY OPERATIONS AT MONTICELLO RACEWAY
Monticello Raceway Management, Inc., our wholly owned subsidiary, is a New
York corporation that operates the Raceway, a harness horse racing facility
located in Monticello, New York that includes our VGM operation.
Monticello Raceway harness horse racing 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.
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VIDEO GAMING OPERATIONS 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 June 30, 2004, we began operating
1,744 VGM on 45,000 square feet of floor space at Monticello Raceway. At March
31, 2007, the number of VGM in operation was 1,587. The VGM operation employs
approximately 300 employees.
On April 13, 2005, New York State enacted a law impacting VGM operations
that, among other things, established a vendor's marketing allowance which is
greater than that provided under the then existing New York law and eliminated
the provisions of the prior law which mandated that certain proceeds from video
lottery gaming be reinvested in the horse racing industry. Our vendor fee
previously was not sufficient to cover the significant costs of installation,
security, and operation of video lottery terminals while still providing a
sufficient return so as to ensure, among other things, that out-of-state
operators did not have a competitive advantage.
ST. REGIS MOHAWK RESORT DEVELOPMENT
We had previously attempted to develop a casino with the St. Regis Mohawk
Tribe beginning in 1996. On April 6, 2000, the United States Department of the
Interior advised New York State Governor George Pataki that it had determined
that the acquisition of 29 acres adjacent to Monticello Raceway would be in the
best interest of the St. Regis Mohawk Tribe and would not be detrimental to the
community. Such determinations required the concurrence of the Governor of New
York in order for the project to proceed. For a period of time thereafter, the
St. Regis Mohawk Tribe agreed to work exclusively with Park Place Entertainment
Corporation (now part of Harrah's Entertainment, Inc.), which proposed to
develop a casino for the St. Regis Mohawk Tribe at the nearby Kutsher's Sporting
Academy. However, by Summer 2005, the needed approvals for a casino at Kutsher's
Sporting Academy had not materialized, and we and the St. Regis Mohawk Tribe's
leaders discussed the possibility of moving forward with the previously obtained
approvals for the casino project at Monticello Raceway.
On August 1, 2005, we entered into a letter agreement with the St. Regis
Mohawk Tribe pursuant to which the St. Regis Mohawk Tribe acknowledged that on
April 6, 2000, the United States Department of the Interior advised New York
State Governor George Pataki that the acquisition of 29 acres adjacent to the
Raceway would be in the best interest of the St. Regis Mohawk Tribe and would
not be detrimental to the community. Under the letter agreement, we and the St.
Regis Mohawk Tribe affirmed, subject to the requested concurrence by Governor
Pataki, all prior contracts to develop an Indian casino at the Raceway. The St.
Regis Mohawk Tribe further agreed to (1) satisfy all requirements for the Bureau
of Indian Affairs (the "BIA") in connection with the transfer of the 29 acres of
land to the United States government in trust for the St. Regis Mohawk Tribe,
(2) resolve any remaining issues for the finalization of the pre-existing
management agreement with one of our subsidiaries for the project previously
submitted to the National Indian Gaming Commission (the "NIGC"), (3) execute any
amendment or revision to such management agreement, or any collateral
agreements, that may be mutually agreed upon in such process, (4) support the
approval of such management agreement, as so amended or revised, by the NIGC and
(5) take any and all reasonably required steps to consummate the land to trust
transfer of the parcel pursuant to the April 6, 2000 determination as promptly
as practicable following the concurrence of the Governor of New York State.
The current plans for the St. Regis Mohawk Tribe casino resort at
Monticello Raceway include 160,000 square feet of gaming space for 3,500 slot
machines and 125 table games, with sufficient space to accommodate an additional
500 slot machines and a variety of food and beverage offerings and entertainment
venues.
On March 20, 2006, we submitted a proposed form of amended and restated
gaming facility management agreement (the "Gaming Facility Management
Agreement") and collateral agreements to the NIGC for review and approval or
disapproval. Until approved by the Chairman of the NIGC, the Gaming Facility
Management Agreement is not in force. Neither the St. Regis Mohawk Tribe nor the
Authority has approved the Gaming Facility Management Agreement. We expect, but
cannot guarantee, that the St. Regis Mohawk Tribe will approve the Gaming
Facility Management Agreement.
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Under the currently proposed form of the Gaming Facility Management
Agreement, the Authority will retain us to manage all casino style gaming
activities, other than horserace wagering and Class II gaming that may be
conducted on the land for seven years commencing upon the NIGC's approval of the
agreement. We would also be 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, we have agreed to assist the Authority to
obtain financing for the gaming enterprise and all related commercial
activities. In exchange for these services, we are entitled to receive a
management fee equal to 30% of the net revenues derived from the operations we
manage.
Under the currently proposed form of the Gaming Facility Management
Agreement, before we can pay ourselves our fee, we must first pay to the
Authority a minimum return of $516,667 per month. These minimum priority
payments are to be charged against the Authority's distribution of net revenues
and, when there is insufficient net revenue in a given month to pay the minimum
return, we are obligated to advance the funds necessary to compensate for the
deficiency, with the Authority reimbursing us in the next succeeding month or
months. The minimum return is required to be paid to the Authority every month
gaming is conducted, including on a pro rata basis during those months when
gaming is conducted only for part of a month.
While the terms of the currently proposed Gaming Facility Management
Agreement provide us with wide discretion as to the day-to-day management of the
gaming facilities, all major decisions or expenditures must first be approved by
a management business board to be comprised of four persons, two of whom are to
be appointed by the Authority and the other two of whom are to be appointed by
us.
In carrying out our duties as manager of the gaming facility, we are
required to provide the St. Regis Mohawk Tribe and other recognized Indian
tribes with certain preferences including giving preference in recruiting,
training and employment first to qualified members of the St. Regis Mohawk
Tribe, and secondly to other qualified Native Americans and the local community,
providing training programs for members of the St. Regis Mohawk Tribe; and in
entering into contracts for the supply of goods and services for the gaming
enterprise, giving preference first to qualified members of the St. Regis Mohawk
Tribe, and qualified business entities certified by the Authority or the St.
Regis Mohawk Tribe as being controlled by members of the St. Regis Mohawk Tribe,
and second to other qualified Native Americans and qualified business entities
certified by the Authority to be controlled by Native Americans and to the local
community.
We also entered into a gaming facility development and construction
agreement with the Authority and the St. Regis Mohawk Tribe (the "Gaming
Facility Development and Construction Agreement"), pursuant to which we were
granted the exclusive right to design, engineer, construct, furnish and develop
a Class III Indian casino resort with the St. Regis Mohawk Tribe, and we agreed
to help arrange financing of the project. In exchange for these services, the
Authority agreed to pay us a development fee equal to 5% of the first $505
million of the project's hard cost of construction, payable monthly as such
costs are incurred. However, the 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 Authority is required to pay
us these retained fees.
Similar to the Gaming Facility Management Agreement, in the execution of
our duties under the Gaming Facility Development and Construction Agreement, we
must first seek approval from a development business board before any major
decisions or material expenditures are made. The development business board
shall be comprised of four persons, two of whom are to be appointed by the
Authority and the other two of whom are to be appointed by us. Finally, similar
to the covenants of the Gaming Facility Management Agreement, the Gaming
Facility Development and Construction Agreement provides that any general
contractor hired by Monticello Raceway Development shall use its reasonable best
efforts to give, and to cause subcontractors to give, a hiring preference to
qualified members of the St. Regis Mohawk Tribe.
The plans are in a preliminary stage and are subject to approval by
relevant government authorities and the St. Regis Mohawk Tribe.
After notification from the St. Regis Mohawk Tribe, the BIA recommenced
the review process for the acquisition of the 29 acres adjacent to the Raceway
by the St. Regis Mohawk Tribe. On April 13, 2006 the St. Regis Mohawk Tribe was
notified that the BIA had completed its review of the Environmental Assessment
("EA") for a proposed transfer of land into trust for a casino at the Monticello
Raceway site. The review identified certain additional areas to address and the
26
St. Regis Mohawk Tribe completed the filing of the responses to those items on
July 5, 2006. Following this filing, the review of the EA by the BIA was
completed on September 12, 2006 and the document was made available for public
review and comment on that date. The St. Regis Mohawk Tribe has provided to the
BIA responses to all of the comments received during the comment period and are
awaiting the decision by the BIA on those issues.
On December 21, 2006 the St. Regis Mohawk Tribe received a letter from the
BIA stating that the St. Regis Mohawk Tribe's Final EA has been deemed
sufficient, an Environmental Impact Study will be not be required and a Finding
of No Significant Impact ("FONSI") related to the proposed federal action
approving the request of the St. Regis Mohawk Tribe to take 29.31 acres into
trust for the purpose of building a Class III gaming facility to be located at
Monticello Raceway, in accordance with the Indian Gaming Regulatory Act of 1988
(the "Land-to-Trust Transfer") has been issued.
On February 19, 2007, New York Governor Eliot Spitzer issued his
concurrence with regard to the April 2000 Secretarial Determination which found
that gaming in Sullivan County by the St. Regis Mohawk would be in the best
interest of the St. Regis Mohawk Tribe and its members and would not be
detrimental to the surrounding communities. In addition, on February 19, 2007,
Governor Spitzer signed an amendment to the gaming compact between the St. Regis
Mohawk Tribe and New York State pursuant to which New York State would receive
20 percent of slot-machine revenues for the first two years after the St. Regis
Mohawk Tribe's Class III casino to be located at Monticello Raceway opens, 23
percent for the next two years and 25 percent thereafter.
On February 19, 2007 we were notified by the St. Regis Mohawk Tribe that,
on February 16, 2007, a complaint was filed in the United States District Court
for the Southern District of New York in the case of Sullivan County Farm
Bureau, Catskill Center for Conservation and Development, Inc., Orange
Environment, Inc. and Natural Resources Defense Council v. United States
Department of the Interior, Dirk Kempthorne, in his official capacity as
Secretary of the Interior, James E. Cason, in his official capacity as Associate
Deputy Secretary of the Interior and Acting Assistant Secretary of the Interior
for Indian Affairs and BIA. The claim alleges that the BIA violated the National
Environmental Policy Act ("NEPA") and the Administrative Procedure Act by
issuing a Finding of No Significant Impact without requiring an environmental
impact statement ("EIS") under NEPA. The plaintiffs are seeking an order
requiring the preparation of an EIS prior to the Department of the Interior's
granting final approvals for the proposed St. Regis Mohawk Casino at Monticello
Raceway and prior to the Department of the Interior's causing the transfer of
the subject land into federal trust.
On April 20, 2007, we and the St. Regis Mohawk Tribe filed a joint
stipulation pursuant to which we were both granted full rights as equal parties
to the federal government to assist in defense of the environmental review for
the St. Regis Mohawk Casino at Monticello Raceway.
MONTICELLO RACEWAY DEVELOPMENT
Monticello Raceway Development is a New York limited liability company
with the exclusive right to design, engineer, develop, construct, and furnish a
Class III Gaming facility that is proposed to be developed on 29 of the 232
acres of land at the Raceway in Monticello, 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 three months ended March 31, 2007 and 2006, Monticello Raceway
Development capitalized approximately $472,000 and $277,000, respectively, of
additional costs associated with advances and casino development projects.
Capitalized costs that are specifically related to our current Indian projects
are refundable under certain circumstances and amounts advanced are
non-interest-bearing. When the financing of the operation is completed the
deferred 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. At March 31, 2007, Monticello Raceway Development
employed two full-time employees.
27
COMPETITION
We believe that Monticello Raceway and the St. Regis Mohawk Casino 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 Indian 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 as it is less than 1,000 feet from the highway.
We are now facing increased competition for our VGM operation as a VGM
facility has opened at Yonkers Raceway. This newly renovated facility is much
closer to New York City than us and has approximately 5,500 VGMs, food and
beverage outlets and other amenities. The harness racing operation at this
facility has reopened as well and we believe that this has had an adverse effect
on certain elements or our racing revenues. In addition, several slot machine
facilities have opened in Pennsylvania and one, operated by the Mohegan Tribal
Gaming Authority, is within 65 miles of our Monticello property. We believe that
our operations for the three months ended March 31, 2007 have been adversely
affected by this competition when compared with the corresponding period in
2006.
A number of states are currently considering or implementing legislation
to legalize or expand gaming. Such legislation presents both potential
opportunities to establish new properties and potential competitive threats to
business at our existing property. The timing and occurrence of these events
remain uncertain.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Annual Report on Form 10-K for the year ended December 31, 2006
includes a discussion of the critical accounting policies and estimates that we
use in the preparation of our consolidated financial statements. There were no
significant changes in our critical accounting policies and estimates during the
three months ended March 31, 2007.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH
31, 2006.
REVENUES. Net revenues decreased approximately $4.2 million (18.7%) for
the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006.
Revenue from racing decreased by approximately $2.2 million (or 48.1%); revenue
from VGM operations decreases by approximately $2.2 million (or 12.6%) and food,
beverage and other revenue increased by approximately $171,000 (or 13.4%).
Complimentary expenses remained virtually unchanged.
The decrease in racing revenues was primarily a result of the reopening of
harness racing at Yonkers Raceway. During the period of time that Yonkers
Raceway was closed for construction of VGM facilities our operations benefited
from a greater allocation of revenues from OTB facilities. Yonkers Raceway
reopened for harness racing in late 2006 and was in operation for the entire
three months ended March 31, 2007. That facility was not open for harness racing
for the three months ended March 31, 2006.
We believe that our VGM operations were adversely affected by the opening
of a competing VGM facility at Yonkers Raceway in late 2006 and a slot machine
facility in Wilkes-Barre, Pennsylvania in January 2007. Our number of daily
visits decreased approximately 9% and the daily win per unit fell from $121.97
for the three months ended March 31, 2006 to $105.84 for the three months ended
March 31, 2007 (or 13.2%). The average number of machines in service was 1,587
for the three months ended March 31, 2007 compared to 1,576 for the
corresponding period in 2006.
Food, beverage and other revenue increased primarily as a result of
interest income on short-term investments included in that classification.
28
RACING COSTS. Racing costs decreased by approximately $1 million (or
33.6%) to approximately $2.1 million for the three months ended March 31, 2007.
This is less than the reduction in total racing revenues because the reduction
in our allocable share of OTB facility revenues does not correlate into a
corresponding reduction in operating costs at our facility.
GAMING COSTS. Gaming (VGM) costs decreased by approximately $1.6 million
(or 10.4%) to approximately $14.0 million for the three months ended March 31,
2007 compared with the corresponding period in 2006. This percentage decrease is
less than the percentage decrease in VGM revenues primarily as a result of
increases in labor and other operating costs which reduced the effect of the
reduction in VGM commissions payable to the New York State Lottery and our
horsemen.
FOOD, BEVERAGE AND OTHER COSTS. Food, beverage and other costs increased
approximately $45,000 (or 8.8%) to approximately $553,000 primarily as a result
of menu modifications and increased use of food and beverage items for
promotional events
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $750,000 for the three months
ended March 31, 2007 as compared to the three months ended March 31, 2006. This
increase was due primarily to increased marketing expenses of approximately
$400,000, the valuation reserve of $250,000 for advances to the Litigation
Trust, an increase in salaries and wages and professional fees of approximately
$415,000 offset by a reduction in stock-based compensation of approximately
$316,000.
INTEREST EXPENSE. Interest expense increased slightly (approximately
$21,000) as a result of higher interest rates on our bank line of credit.
LIQUIDITY AND CAPITAL RESOURCES
We believe that we have access to sources of working capital that are
sufficient to fund our operations for the twelve months ended March 31, 2008. We
received $18.75 million in January 2007 as payment for 2.5 million shares of our
common stock issued as a result of an option exercised on December 28, 2006 and
we have approximately $2.4 million available from our revolving credit facility.
We believe that any significant capital requirements associated with our
development projects can be met by additional debt or equity issues, when
needed.
Net cash used by operating activities during the three months ended March
31, 2007 was approximately $6.5 million compared to net cash provided by
operating activities for the three months ended March 31, 2006 of approximately
$1.0 million. The net change of approximately $7.5 million reflects primarily
the increase in net loss (approximately $2.5 million), initial collections from
the New York Lottery for the marketing allowance in 2006 (approximately $2.1
million) and a reduction in our purse liability in 2007 of approximately $2.0
million. Changes in other working capital and non-cash expenses amounted to
approximately $900,000 in cash used by operating activities.
Net cash used in investing activities was approximately $1.1 million for
three months ended March 31, 2007 consisting primarily of approximately $700,000
for deferred development costs and $250,000 for advances to the Litigation
Trust. During the three months ended March 31, 2006, net cash used in investing
activities was approximately $348,000, and consisted primarily of approximately
$385,000 in deferred development costs.
Net cash provided by financing activities for the three months ended March
31, 2007 was approximately $18.8 million and was almost entirely a result of the
proceeds from the exercise of options to purchase our common stock. In the
corresponding period in 2006, we paid approximately $798,000 in costs associated
with recording a mortgage on the Raceway property for the benefit of the holders
of our Senior Convertible Notes as required by the Indenture Agreement for those
notes. This expenditure was offset by approximately $141,000 in proceeds from
borrowings under our revolving credit facility and approximately $42,000
received as proceeds from the exercise of stock options.
29
On January 11, 2005, we entered into a credit facility with Bank of
Scotland, pursuant to which Bank of Scotland agreed to provide us with a $10
million senior secured revolving loan (subject to certain reserves) that was
scheduled to mature in two years. To secure the timely repayment of any
borrowings by us under this credit facility, among other things, we agreed to:
o cause Monticello Raceway Management to grant Bank of Scotland a mortgage over
the 232 acres of land and improvements in Monticello, New York owned by
Monticello Raceway Management;
o cause our material subsidiaries to guarantee our obligations under the credit
facility;
o pledge our equity interests in each of our current and future subsidiaries;
and
o grant Bank of Scotland a first priority secured interest in all of its
assets, now owned or later acquired.
Interest on any loans made pursuant to the credit facility bear interest,
at our option, at the rate of prime plus 2% or Libor plus 4%. In connection with
this credit facility, the Bank of New York, the noteholders' trustee under the
indenture, and Bank of Scotland, also entered into an Intercreditor Agreement so
that Bank of Scotland will have a first priority position, notwithstanding the
indenture and security documents we executed on July 26, 2004 in connection with
our issuance of $65 million of senior convertible notes due 2014. We anticipate
fully utilizing the available funds to meet our development and operating costs.
On December 12, 2005, we entered into an amendment to our credit facility
with Bank of Scotland. This amendment, which was effective as of November 30,
2005, among other things, (i) extended the maturity date of the loan agreement
from January 11, 2007 to January 11, 2008, (ii) increased our permissible
capital expenditures in each of 2005, 2006 and 2007 from $100,000 to $350,000
and (iii) deleted all references to the Cayuga Nation of New York and replaces
them with a reference to any Indian tribe that is developing a casino in
conjunction with us.
On March 8, 2007, we authorized issuance of 18,884 shares of our common
stock as payment of dividends due for the year ended December 31, 2006 on our
Series B preferred stock. The recorded value of these shares was approximately
$190,000.
On March 8, 2006, we issued 23,103 shares of common stock in payment of
dividends on our Series B Preferred Stock for the year ended December 31, 2005.
The recorded value of these shares was approximately $98,000.
As of December 31, 2006, we had net operating loss carry forwards of
approximately $115 million that expire between 2008 and 2026. 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. Our merger with the operations of Catskill Development, L.L.C. in 2004
limits the amount of usable net operating losses due to the change in control.
We are evaluating the impact of the limitations for future application.
OFF-BALANCE SHEET ARRANGEMENTS
On January 12, 2004, in order to better focus on the development of a VGM
program at the Raceway and the business arrangements with the Cayuga Nation of
New York, all our interests with respect to litigation against Harrah's
Operating Company, Inc. which alleged tortuous interference with contractual and
business relationships, were transferred to a liquidating litigation trust. We
agreed to provide the litigation trust with a $2.5 million line of credit.
Through March 31, 2007, a total of $1,765,000 had been disbursed to the
litigation trust. Due to the unpredictable nature of the litigation and the
pending motions currently under review, we have provided for a valuation
allowance of $1,765,000 against the receivable from the litigation trust. We
expect to make additional disbursements on this line of credit in 2007.
In connection with our development project with the St. Regis Mohawk Tribe
we have agreed to make payments to the tribe to support operations of the
Authority and will provide technical assistance, payment of professional and
legal consultants and other support as we seek the necessary licenses and
approvals to commence construction. Our payments to the St. Regis Mohawk Tribe
are estimated to be approximately $500,000 per month in 2007.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to market risk. Our
exposure to market risks related to fluctuations in interest rates is limited to
our variable rate borrowings of $7.6 million at March 31, 2007 under our
revolving credit facility. A change in interest rates of one percent on the
balance outstanding at March 31, 2007 would cause a change in total annual
interest costs of $76,000. The carrying values of these borrowings approximate
their fair values at March 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Management believes, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
We carried out an evaluation as of March 31, 2007 under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
its disclosure controls and procedures as required by Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective to timely alert them to any
material information (including our consolidated subsidiaries) that must be
included in our periodic Securities and Exchange Commission filings.
CHANGES IN OUR FINANCIAL REPORTING INTERNAL CONTROLS.
There has been no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended) during the fiscal quarter ended March 31, 2007
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
31
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
10.1 Amendment dated May 3, 2007 to the Second Amended and Restated Land
Purchase Agreement by and between the St. Regis Mohawk Gaming Authority
and Monticello Raceway Management, Inc.
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
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EMPIRE RESORTS, INC.
Dated: May 4, 2007 /s/ David P. Hanlon
-----------------------------------
David P. Hanlon
President and Chief
Executive Officer
Dated: May 4, 2007 /s/ Ronald J. Radcliffe
-----------------------------------
Ronald J. Radcliffe
Chief Financial Officer
33