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 JUNE 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-12522
EMPIRE RESORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3714474
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
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 |_| Non-accelerated filer |X|
The number of shares outstanding of the issuer's common stock, as of August 10,
2006 was 26,883,469.
EMPIRE RESORTS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
------ --------------------- --------
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2006
(Unaudited) and December 31, 2005.......................................... 1
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2006 and 2005.................. 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2006 and 2005............................ 3 - 4
Notes to Condensed Consolidated Financial Statements (Unaudited)................. 5 - 25
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 25 -33
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....................... 33
ITEM 4. Controls and Procedures.......................................................... 33
PART II OTHER INFORMATION
------- -----------------
ITEM 4. Submission of Matters to a Vote of Security Holders.............................. 34
ITEM 6. Exhibits......................................................................... 34
Signatures....................................................................... 35
ii
PART I--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
June 30, 2006 December 31,
(Unaudited) 2005
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,376 $ 6,992
Restricted cash 2,725 4,716
Accounts receivable 5,632 3,358
Prepaid expenses and other current assets 1,267 1,112
-------- --------
Total current assets 20,000 16,178
Property and equipment, net 32,110 32,536
Deferred financing costs, net of accumulated amortization of $1,024 in
2006 and $709 in 2005 3,455 2,973
Deferred development costs 6,382 5,558
-------- --------
TOTAL ASSETS $ 61,947 $ 57,245
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit facility $ 7,617 $ 7,476
Accounts payable 3,549 3,529
Accrued expenses and other current liabilities 11,984 8,455
-------- --------
Total current liabilities 23,150 19,460
Senior convertible notes 65,000 65,000
-------- --------
Total liabilities 88,150 84,460
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,
26,793 and 26,312 shares issued and outstanding
in 2006 and 2005,
respectively 268 263
Additional paid in capital 25,015 21,728
Accumulated deficit (58,341) (56,061)
-------- --------
Total stockholders' deficit (26,203) (27,215)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 61,947 $ 57,245
======== ========
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 Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
REVENUES:
Racing $ 5,174 $ 3,607 $ 9,804 $ 6,579
Gaming 19,825 17,564 37,125 30,815
Food, beverage and other 1,636 1,208 2,911 2,091
------ ------ ------ ------
GROSS REVENUES 26,635 22,379 49,840 39,485
Less: Promotional allowances (753) (426) (1,297) (842)
------ ------ ------ ------
NET REVENUES 25,882 21,953 48,543 38,643
------ ------ ------ ------
COSTS AND EXPENSES:
Racing 3,322 2,430 6,431 4,612
Gaming 16,656 15,380 32,214 28,531
Food, beverage and other 658 467 1,167 859
Selling, general and administrative 3,641 2,698 7,023 5,103
Impairment loss - deferred development costs -- 2,318 -- 2,318
Depreciation 286 280 569 557
------ ------ ------ ------
TOTAL COSTS AND EXPENSES 24,563 23,573 47,404 41,980
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 1,319 (1,620) 1,139 (3,337)
Amortization of deferred financing costs 170 146 316 283
Interest expense 1,535 992 3,005 1,996
------ ------ ------ ------
NET LOSS (386) (2,758) (2,182) (5,616)
Cumulative undeclared dividends on preferred stock 388 388 776 776
------ ------ ------ ------
NET LOSS APPLICABLE TO COMMON SHARES $ (774) $ (3,146) $ (2,958) $ (6,392)
====== ====== ====== ======
Weighted average common shares outstanding, basic and diluted 26,647 26,101 26,487 26,094
====== ====== ====== ======
Net loss per common share, basic and diluted $ (0.03) $ (0.12) $ (0.11) $ (0.24)
====== ====== ====== ======
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)
Six Months Ended
June 30,
----------------
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,182) $ (5,616)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 569 557
Amortization of deferred financing costs 316 283
Allowance for doubtful accounts - Advances to Litigation Trust 80 145
Impairment loss - deferred development costs -- 2,318
Stock-based compensation 2,222 1,037
Changes in operating assets and liabilities:
Restricted cash (VGM Marketing Account) 1,968 --
Accounts receivable (2,274) (963)
Prepaid expenses and other current assets (154) (154)
Accounts payable 117 (809)
Accrued expenses and other current liabilities 3,530 1,832
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,192 (1,370)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (143) (1,915)
Advances - Litigation Trust (80) (145)
Restricted cash (Racing capital improvement) 30 7
Deferred development costs (922) (2,237)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,115) (4,290)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility 141 5,737
Proceeds from exercise of stock options 971 23
Restricted cash (related to revolving credit facility) (7) (400)
Deferred financing costs paid (798) (539)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 307 4,821
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,384 (839)
CASH AND CASH EQUIVALENTS, beginning of period 6,992 7,164
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 10,376 $ 6,325
======== ========
(Continued)
3
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
Six Months Ended
June 30,
----------------
2006 2005
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 3,122 $ 1,969
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in settlement of preferred stock dividends $ 98 $ 142
Noncash additions to deferred development costs $ 98 $ 595
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 June
30, 2006 and for the three and six month periods ended June 30, 2006 and 2005
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, 2005. The results of operations for the interim period should not be
indicative of results to be expected for the full year.
To conform to the 2006 presentation, certain amounts in the prior year
condensed consolidated financial statements have been reclassified.
LIQUIDITY
We believe that we have access to sources of working capital that are
sufficient to fund our operations for the year ended December 31, 2006. The
results of operations of our video gaming machine ("VGM") facility have been
improved by the changes in the amount of revenue retained by VGM agents and we
have approximately $2.4 million available from our revolving credit facility.
Any significant capital requirements associated with our development projects
can be met by additional debt or equity issues, if available.
NATURE OF BUSINESS
During the past three 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, VGM's
and an Indian casino as well as to develop another Indian casino in New York
State. 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 (Mighty M Gaming at Monticello 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
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racetracks using import simulcasting; and (v) admission fees, program and racing
form sales, the sale of food and beverages and certain other ancillary
activities.
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 1,576 VGMs on 45,000 square feet of floor
space at the Raceway.
ST. REGIS MOHAWK RESORT DEVELOPMENT
Beginning in 1996, we attempted to develop a casino with the St. Regis
Mohawk Tribe and in 2000 received certain federal approvals needed to build a
casino with the St. Regis Mohawk Tribe adjacent to the Raceway that would have
been managed by an affiliate of our predecessor, Catskill Development, L.L.C.,
("CDL"). Such approvals required the concurrence of the Governor of New York.
Prior to the issuance of such a concurrence, in April 2000, 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. Subsequently,
the St. Regis Mohawk Tribe worked exclusively on obtaining the necessary
approvals for the Kutsher's project until the summer of 2005, when we and
leaders of the St. Regis Mohawk Tribe discussed the possibility of moving
forward with the previously obtained approvals for the casino project at the
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 Governor Pataki.
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.
Under the currently proposed form of the Gaming Facility Management
Agreement, the St. Regis Mohawk Gaming Authority (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.
6
Under 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 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 costs, payable monthly as the project 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.
CAYUGA CATSKILL RESORT DEVELOPMENT
On April 3, 2003, we, the Cayuga Nation of New York and the Cayuga
Catskill Gaming Authority, an instrumentality of the Cayuga Nation of New York
formed to develop and conduct gaming operations, signed an initial form of
gaming facility management agreement and related agreements. The agreements
provided for us to supply technical and financial assistance to the Cayuga
Nation of New York and to serve as its exclusive partner in the development,
construction, financing, operation and management of a proposed casino in the
Monticello area. The principal agreements were extended in December 2005 to
December 31, 2006. Subsequent to entering into our initial agreement with the
Cayuga Nation of New York, but prior to the execution of our recent extensions,
leadership issues arose within the Cayuga Nation of New York, which resulted in
the suspension of federal processing of the applications made under our earlier
agreements. Efforts are underway to attempt to resolve the leadership issues
within the Cayuga Nation of New York. In our extension agreements and a separate
letter agreement, each of which were approved by some, but not all, of the
7
members of the Cayuga Nation Council, we have indicated our willingness to
continue to work with the Cayuga Nation of New York to develop a casino in the
Catskills region of the State of New York and made certain arrangements to
accommodate the renewal of our agreements with the St. Regis Mohawk Tribe. These
arrangements contemplate that the Cayuga Nation of New York may acquire
sovereign land and develop a casino and hotel resort on such land. These new
agreements are subject to various uncertainties relating to their validity and
enforceability which can only be resolved by the Cayuga Nation of New York as a
sovereign entity. While we continue to make an effort to observe our obligations
under these agreements, we cannot predict how or when these uncertainties will
be resolved.
In order for the Cayuga Nation of New York to be authorized to develop
and operate a gaming facility it must either 1) receive federal and state
approvals similar to those that have been received or are being sought in
connection with our project with the St. Regis Mohawk Tribe or 2) be exempted
from such requirements as the result of a land claim settlement agreement with
the State of New York. There are significant preconditions that must occur
before such a settlement can occur. First, legislation must be passed by the New
York State legislature. Second, similar legislation must be passed by the United
States Congress. Third, title to a site must be transferred to the United States
and accepted into trust for the benefit of the Cayuga Nation of New York.
Fourth, the Cayuga Nation of New York must enter into a Class III gaming compact
with the State of New York. The negotiations between the interested parties are
complex and have been affected by a variety of factors, including political
opposition, court decisions concerning the status of the land claims and
internal differences within the Cayuga Nation of New York.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION. Revenues represent (i) revenues from
pari-mutual 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-mutual 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-mutual 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 Breeder's
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 $177,000
and $150,000 at June 30, 2006 and December 31, 2005, 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
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.
8
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 $123,000 and $153,000 at June 30, 2006 and December 31, 2005,
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 $2,183,000 and $4,151,000 at June 30, 2006 and December 31, 2005,
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 $419,000 and $412,000 at June 30,
2006 and December 31, 2005, 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 June 30, 2006 or December 31, 2005.
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.
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
9
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 year. 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 and six months ended June 30, 2006 and
2005 were the same.
The following table shows the securities outstanding at June 30, 2006
and 2005 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 June 30,
-----------------------
2006 2005
---- ----
Options 7,393,000 2,351,000
Warrants 250,000 250,000
Shares issuable upon conversion of convertible debt 5,175,000 4,727,000
Unvested restricted stock 89,000 175,000
---------- ---------
Total 12,907,000 7,503,000
========== =========
ADVERTISING. We expense the costs of general advertising, promotion and
marketing programs at the time the costs are incurred. Advertising expense was
approximately $502,000 and $735,000, respectively, for the three and six months
ended June 30, 2006 and approximately $162,000 and $340,000, respectively, for
the three and six months ended June 30, 2005.
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
debts, inventories, estimated useful lives for depreciable and amortizable
assets, valuation reserves and estimated cash flows in assessing the
10
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. In December 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share Based
Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) supersedes Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
amends SFAS No. 95, "Statement of Cash Flows." 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. Our Company adopted SFAS No. 123(R), using the
modified-prospective method, beginning January 1, 2006. Based on the terms of
our plans, our Company did not have a cumulative effect related to its plans.
Our Company also elected to continue to estimate the fair value of stock options
using the Black-Scholes-Merton formula. In the first quarter of 2006, the
adoption of SFAS No. 123(R) did not have a material impact on our first quarter
stock-based compensation expense. Further, we believe the adoption of SFAS No.
123(R) will not have a material impact on our Company's future stock-based
compensation expense. As of June 30, 2006, there was approximately $2.6 million
of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under our plans. That cost is expected to be
recognized over a period of 3 years. This expected cost does not include the
impact of any future stock-based compensation awards.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified
to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS.
SFAS NO. 155
In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an
Amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155
allows financial instruments that contain an embedded derivative and that
otherwise would require bifurcation to be accounted for as a whole on a fair
value basis, at the holders' election. SFAS No. 155 also clarifies and amends
certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is
effective for all financial instruments acquired or issued in fiscal years
beginning after September 15, 2006. We do not expect that the adoption of SFAS
No. 155 will have a material impact on our consolidated financial condition or
results of operations.
SFAS NO. 156
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets--an Amendment of FASB Statement No. 140" ("SFAS No. 156").
SFAS No. 156 provides guidance on the accounting for servicing assets and
liabilities when an entity undertakes an obligation to service a financial asset
by entering into a servicing contract. This statement is effective for all
transactions in fiscal years beginning after September 15, 2006. We do not
expect that the adoption of SFAS No. 156 will have a material impact on our
consolidated financial condition or results of operations.
FIN NO. 48
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are currently reviewing this
new standard to determine its effects, if any, on our consolidated results of
operations or financial position.
11
NOTE C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 2006 and
December 31, 2005:
(in Thousands)
-----------------------
June 30, December
2006 31, 2005
-------- --------
Land $ 770 $ 770
Land improvements 1,495 1,495
Buildings 4,589 4,583
Building improvements 24,464 24,454
Vehicles 127 120
Furniture, fixtures and equipment 2,858 2,738
-------- --------
34,303 34,160
Less - Accumulated depreciation (2,193) (1,624)
-------- --------
$ 32,110 $ 32,536
======== ========
Depreciation expense was approximately $286,000 and $569,000,
respectively, for the three and six months ending June 30, 2006 and
approximately $280,000 and $557,000, respectively, for the three and six months
ending June 30, 2005.
NOTE D. DEFERRED DEVELOPMENT COSTS
We have made payments to fund certain expenses of the St. Regis Mohawk
Tribe (the "Mohawks") 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 Cayuga Nation of New York and the
Mohawks. 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 six months ended June 30, 2006 and 2005.
12
Activity for Six Months
Ended June 30, 2006
-----------------------
Balance
January 1, Balance
2006 Additions Impairment June 30, 2006
---- --------- ---------- -------------
(in thousands)
Advances to and payments on behalf of the St
Regis Mohawk Tribe:
Advances for operations of Tribal Gaming
Authority $ 67 $ 165 $ -- $ 232
Legal fees and other professional fees relating
to casino resort development 163 597 -- 760
------- ------- ------- -------
230 762 -- 992
Costs specifically associated with site at Raceway 5,328 62 -- 5,390
------- ------- ------- -------
Total development costs $ 5,558 $ 824 $ -- $ 6,382
======= ======= ======= =======
Activity for Six Months
Ended June 30, 2006
-----------------------
Balance
January 1, Balance
2005 Additions Impairment June 30, 2006
---- --------- ---------- -------------
(in thousands)
Advances to and payments on behalf of the
Cayuga Nation of New York:
Advances for operations of Tribal Gaming Authority $ 305 $ 370 $ -- $ 675
Legal fees and other professional fees relating
to casino resort development 2,202 1,650 -- 3,852
Value of common stock issued to Tribe in
connection with exclusive development agreement 3,890 -- -- 3,890
------- ------- ------- -------
6,397 2,020 -- 8,417
------- ------- ------- -------
Advances to and payments on behalf of the
Seneca-Cayuga Tribe of Oklahoma:
Advances for operations of Tribal Gaming Authority 620 -- (620) --
Legal fees and other professional fees relating
to casino resort development 1,123 575 (1,698) --
------- ------- ------- -------
1,743 575 (2,318) --
------- ------- ------- -------
Costs specifically associated with site at Raceway 5,580 237 -- 5,817
------- ------- ------- -------
Total development costs $13,720 $ 2,832 $(2,318) $14,234
======= ======= ======= =======
In connection with our development project with the Mohawks 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 tribe are estimated to be approximately $29,000 per month for the
remainder of 2006.
13
NOTE E. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities is comprised of the
following at June 30, 2006 and December 31, 2005:
June 30, Dec. 31,
2006 2005
-------- --------
(in thousands)
------------------
Liability for horseracing purses $ 6,380 $ 3,328
Accrued interest 2,167 2,284
Accrued payroll 627 624
Accrued other 2,810 2,219
------- -------
Total accrued expenses and other current liabilities $11,984 $ 8,455
======= =======
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.
14
We recognized interest expense associated with the notes of
approximately $1.3 million and $2.6 million, respectively, for the three and six
months ended June 30, 2006 and approximately $894,000 and $1.8 million,
respectively, for the three and six months ended June 30, 2005.
NOTE G. REVOLVING CREDIT FACILITY
On January 11, 2005, we entered into a credit facility with Bank of
Scotland (the "Credit Facility"). 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 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
$235,000 and $405,000, respectively, in the three and six months ended June 30,
2006 and approximately $98,000 and $208,000, respectively, in the three and six
months ended June 30, 2005. At June 30, 2006 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
JUNE 30, 2006
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
ASSETS
Cash and cash equivalents $ 155 $ 10,221 $ -- $ -- $ 10,376
Restricted cash 419 2,306 -- -- 2,725
Accounts receivable -- 5,632 -- -- 5,632
Prepaid expenses and other assets 85 1,182 -- -- 1,267
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-company accounts 150,184 -- -- (150,184) --
Property and equipment, net 8 32,102 -- -- 32,110
Deferred financing costs, net 3,455 -- -- -- 3,455
Deferred development costs 62 6,320 -- -- 6,382
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 159,428 $ 57,763 $ -- $(155,244) $ 61,947
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT )
Revolving credit facility $ 7,617 $ -- $ -- $ -- $ 7,617
Accounts payable 1,059 2,490 -- -- 3,549
Accrued expenses and other liabilities 2,417 9,567 -- -- 11,984
Inter-company accounts -- 56,602 93,582 (150,184) --
Senior convertible notes 65,000 -- -- -- 65,000
--------- --------- --------- --------- ---------
Total liabilities 76,093 68,659 93,582 (150,184) 88,150
Stockholders' equity (deficit) 83,335 (10,896) (93,582) (5,060) (26,203)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 159,428 $ 57,763 $ -- $(155,244) $ 61,947
========= ========= ========= ========= =========
16
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
ASSETS
Cash and cash equivalents $ 636 $ 6,356 $ -- $ -- $ 6,992
Restricted cash 412 4,304 -- -- 4,716
Accounts receivable -- 3,358 -- -- 3,358
Prepaid expenses and other assets 86 1,026 -- -- 1,112
Investments in subsidiaries 5,060 -- -- (5,060) --
Inter-company accounts 152,108 -- -- (152,108) --
Property and equipment, net 11 32,525 -- -- 32,536
Deferred financing costs, net 2,973 -- -- -- 2,973
Deferred development costs -- 5,558 -- -- 5,558
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 161,286 $ 53,127 $ -- $(157,168) $ 57,245
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Revolving credit facility $ 7,476 $ -- $ -- $ -- $ 7,476
Accounts payable 982 2,547 -- -- 3,529
Accrued expenses and other liabilities 2,461 5,994 -- -- 8,455
Inter-company accounts -- 58,526 93,582 (152,108) --
Senior convertible notes 65,000 -- -- -- 65,000
--------- --------- --------- --------- ---------
Total liabilities 75,919 67,067 93,582 (152,108) 84,460
Stockholders' equity (deficit) 85,367 (13,940) (93,582) (5,060) (27,215)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 161,286 $ 53,127 $ -- $(157,168) $ 57,245
========= ========= ========= ========= =========
17
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
REVENUES
Racing $ -- $ 5,174 $ -- $ -- $ 5,174
Gaming -- 19,825 -- -- 19,825
Food, beverage and other 3 1,633 -- -- 1,636
--------- --------- --------- --------- ---------
Gross revenues 3 26,632 -- -- 26,635
Less: Promotional allowances -- (753) -- -- (753)
--------- --------- --------- --------- ---------
Net revenues 3 25,879 -- -- 25,882
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 3,322 -- -- 3,322
Gaming -- 16,656 -- -- 16,656
Food, beverage and other -- 658 -- -- 658
Selling, general and administrative 2,113 1,528 -- -- 3,641
Depreciation 1 285 -- -- 286
--------- --------- --------- --------- ---------
Total costs and expenses 2,114 22,449 -- -- 24,563
--------- --------- --------- --------- ---------
Income (loss) from operations (2,111) 3,430 -- -- 1,319
Amortization of deferred financing costs 170 -- -- -- 170
Inter-company interest (income) expense
& other (721) 721 -- -- --
Interest expense 1,535 -- -- -- 1,535
--------- --------- --------- --------- ---------
Net income (loss) $ (3,095) $ 2,709 -- -- $ (386)
========= ========= ========= ========= =========
18
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
REVENUES
Racing $ -- $ 3,607 $ -- $ -- $ 3,607
Gaming -- 17,564 -- -- 17,564
Food, beverage and other -- 1,208 -- -- 1,208
--------- --------- --------- --------- ---------
Gross revenues -- 22,379 -- -- 22,379
Less: Promotional allowances -- (426) -- -- (426)
--------- --------- --------- --------- ---------
Net revenues -- 21,953 -- -- 21,953
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 2,430 -- -- 2,430
Gaming -- 15,380 -- -- 15,380
Food, beverage and other -- 467 -- -- 467
Selling, general and administrative 1,817 881 -- -- 2,698
Impairment loss - deferred development
costs 2,318 2,318
Depreciation -- 280 -- -- 280
--------- --------- --------- --------- ---------
Total costs and expenses 1,817 21,756 -- -- 23,573
--------- --------- --------- --------- ---------
Income (loss) from operations (1,817) 197 -- -- (1,620)
Amortization of deferred financing costs 146 -- -- -- 146
Inter-company interest (income) expense
& other (1,300) 1,300 -- -- --
Interest expense 992 -- -- -- 992
--------- --------- --------- --------- ---------
Net loss $ (1,655) $ (1,103) -- -- $ (2,758)
========= ========= ========= ========= =========
19
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
REVENUES
Racing $ -- $ 9,804 $ -- $ -- $ 9,804
Gaming -- 37,125 -- -- 37,125
Food, beverage and other 8 2,903 -- -- 2,911
--------- --------- --------- --------- ---------
Gross revenues 8 49,832 -- -- 49,840
Less: Promotional allowances -- (1,297) -- -- (1,297)
--------- --------- --------- --------- ---------
Net revenues 8 48,535 -- -- 48,543
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 6,431 -- -- 6,431
Gaming -- 32,214 -- -- 32,214
Food, beverage and other -- 1,167 -- -- 1,167
Selling, general and administrative 4,418 2,605 -- -- 7,023
Depreciation 2 567 -- -- 569
--------- --------- --------- --------- ---------
Total costs and expenses 4,420 42,984 -- -- 47,404
--------- --------- --------- --------- ---------
Income (loss) from operations (4,412) 5,551 -- -- 1,139
Amortization of deferred financing costs 316 -- -- -- 316
Inter-company interest (income) expense
& other (2,508) 2,508 -- -- --
Interest expense 3,005 -- -- -- 3,005
--------- --------- --------- --------- ---------
Net income (loss) $ (5,225) $ 3,043 -- -- $ (2,182)
========= ========= ========= ========= =========
20
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
(IN THOUSANDS)
Consolidated
Empire Guarantor Non-Guarantor Eliminating Empire
Resorts, Inc. Subsidiaries Subsidiaries Entries Resorts, Inc.
------------- ------------ ------------ ------- -------------
REVENUES
Racing $ -- $ 6,579 $ -- $ -- $ 6,579
Gaming -- 30,815 -- -- 30,815
Food, beverage and other 3 2,088 -- -- 2,091
--------- --------- --------- --------- ---------
Gross revenues 3 39,482 -- -- 39,485
Less: Promotional allowances -- (842) -- -- (842)
--------- --------- --------- --------- ---------
Net revenues 3 38,640 -- -- 38,643
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Racing -- 4,612 -- -- 4,612
Gaming -- 28,531 -- -- 28,531
Food, beverage and other -- 859 -- -- 859
Selling, general and administrative 3,451 1,652 -- -- 5,103
Impairment loss - deferred development
costs 2,318 2,318
Depreciation -- 557 -- -- 557
--------- --------- --------- --------- ---------
Total costs and expenses 3,451 38,529 -- -- 41,980
--------- --------- --------- --------- ---------
Income (loss) from operations (3,448) 111 -- -- (3,337)
Amortization of deferred financing costs 283 -- -- -- 283
Inter-company interest (income) expense
& other (2,600) 2,600 -- -- --
Interest expense 1,996 -- -- -- 1,996
--------- --------- --------- --------- ---------
Net loss $ (3,127) $ (2,489) -- -- $ (5,616)
========= ========= ========= ========= =========
21
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 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 $ (2,569) $ 6,761 $ -- $ -- $ 4,192
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment -- (143) -- -- (143)
Advances - Litigation Trust (80) -- -- -- (80)
Restricted cash (Racing capital
improvement) -- 30 -- -- 30
Deferred development costs (62) (860) -- -- (922)
Advances to Empire Resorts, Inc. -- (1,924) -- 1,924 --
--------- --------- --------- --------- ---------
Net cash used in investing activities (142) (2,897) -- 1,924 (1,115)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility 141 -- -- -- 141
Proceeds form exercise of stock options 971 -- -- -- 971
Restricted cash (related to revolving
credit facility) (7) -- -- -- (7)
Advances from subsidiaries 1,924 -- -- (1,924) --
Deferred financing costs paid (798) -- -- -- (798)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 2,231 -- -- (1,924) 307
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (480) 3,864 -- -- 3,384
Cash and cash equivalents, beginning of
period 635 6,357 -- -- 6,992
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 155 $ 10,221 $ -- $ -- $ 10,376
========= ========= ========= ========= =========
22
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005
(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 $(1,603) $ 233 $ -- $ -- $(1,370)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment -- (1,915) -- -- (1,915)
Advances - Litigation Trust (145) -- -- -- (145)
Restricted cash (Racing capital
improvement) -- 7 -- -- 7
Deferred development costs -- (2,237) -- -- (2,237)
Advances to subsidiaries (4,970) -- -- 4,970 --
--------- --------- --------- --------- ---------
Net cash used in investing activities (5,115) (4,145) -- 4,970 (4,290)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit
facility 5,737 -- -- -- 5,737
Proceeds from exercise of stock
options 23 -- -- -- 23
Restricted cash (related to
revolving credit facility) (400) -- -- -- (400)
Deferred financing costs paid (539) -- -- -- (539)
Advances from Empire Resorts, Inc. 4,970 -- (4,970) --
--------- --------- --------- --------- ---------
Net cash provided by financing
activities 4,821 4,970 -- (4,970) 4,821
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (1,897) 1,058 -- -- (839)
Cash and cash equivalents, beginning
of period 1,903 5,261 -- -- 7,164
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period $ 6 $ 6,319 $ -- $ -- $ 6,325
========= ========= ========= ========= =========
23
NOTE I. STOCKHOLDERS' EQUITY
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 six months ended
June 30, 2006, we recorded stock-based compensation expense of $249,000 for
these grants based upon the estimated value of the options at the date of grant.
On January 7, 2005, 10,000 options were granted to all six of our
non-employee directors to purchase common stock at $8.51 per share. These
options were immediately vested and expire in ten years. Compensation expense
relating to these grants of approximately $380,000 in total was included in the
results of operations for the six months ended June 30, 2005.
On March 18, 2005, we issued 30,000 incentive stock options with a
strike price of $8.26 to an employee that vest over one year. The expense
associated with this grant was $0 and approximately $10,000 for the three and
six months ended June 30, 2006, respectively, and approximately $131,000 and
$137,000 for the three and six months ended June 30, 2005, respectively .
Stock-based compensation expense included in selling, general and
administrative expenses is approximately $981,000 and $2,222,000, respectively,
for the three and six months ended June 30, 2006 and approximately $478,000 and
$1,037,000, respectively, for the three and six months ended June 30,2005.
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 six months ended June 30, 2006.
On February 16, 2005, we issued 12,640 shares of common stock in
settlement of all outstanding dividends from the year ending December 31, 2004.
The shares were valued at approximately $142,000 and recorded in the six months
ended June 30, 2005.
On May 23, 2005, options that were granted to certain officers and our
former Chief Executive Officer who resigned from their respected positions were
guaranteed a one year extension of their expiration date. These options were
issued at $2.12 in 2003. Under normal circumstances, options expire three months
after affiliation. This extension resulted in approximately $234,000 of
compensation expense in the quarter ended June 30, 2005.
NOTE J. CONCENTRATION
One debtor represented approximately 58% of the total outstanding
accounts receivable as of June 30, 2006 and three debtors represented
approximately 52% of the total outstanding accounts receivable as of December
31, 2005.
NOTE K. 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 Mohawks. We are also
committed to incur costs associated with the development of a casino resort with
the Mohawks.
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
June 30, 2006, we have advanced $1,090,000 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
24
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.
ARBITRATION WITH HORSEMEN'S ASSOCIATION. Our contract with the
Monticello Harness Horsemen's Association (the "Horsemen") has expired. Among
other things, this contract provides for the amount of revenues from our VGM
operations that we allocate to racing purses. We have not been successful in
negotiations to renew this contract and, in March 2006, we and the Horsemen
agreed to submit the matter to the New York State Racing and Wagering Board for
binding arbitration. The outcome of that arbitration could have a significant
negative impact on our operating results.
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, 2005.
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, 2005, which
could cause actual results to differ materially from those contained in any
forward-looking statement. Many of these factors are beyond our ability to
control or predict.
You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we will not update these
forward-looking statements, even if our situation changes in the future. 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-mutual 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-mutual 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 (the "Mohawks") to develop
and manage, subject to regulatory approval, a Class III Indian casino on 29
acres of land adjacent to the Raceway.
25
o have an agreement with the Cayuga Nation of New York (the "Cayuga Nation")
to develop and manage, subject to regulatory approval, a Class III Indian
casino resort and hotel at a location in Sullivan County, New York to be
determined in the future.
We plan to grow 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 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.
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 June
30, 2006, the number of VGM in operation was 1,576. 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.
26
ST. REGIS MOHAWK RESORT DEVELOPMENT
We had previously attempted to develop a casino with the Mohawks in
2000. Specifically, the Mohawks received certain federal approvals needed in
2000 to build a casino at the Raceway that would have been managed by the
Company's predecessor, Catskill Development, L.L.C. However, in April 2000, the
Mohawks agreed to work exclusively with Park Place Entertainment Corporation,
now part of Harrah's Entertainment, Inc., which proposed to develop a casino for
the Mohawks 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 the Mohawks' tribal leaders engaged the Company to discuss the
possibility of moving forward with the previously obtained approvals for the
casino project at the Raceway.
On August 1, 2005, we entered into a letter agreement with the Mohawks
pursuant to which the Mohawks 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 at Monticello Raceway would be in the best
interest of the Mohawks and would not be detrimental to the community. Under the
letter agreement, the Company and the Mohawks affirmed, subject to the requested
concurrence by Governor Pataki, all of their prior contracts to develop an
Indian casino at the Raceway (the "St. Regis Mohawk Casino"). The Mohawks
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 Mohawks, (2) resolve any remaining
issues for the finalization of the pre-existing management agreement with one of
the Company's 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 Governor Pataki.
On March 17, 2006, through our subsidiaries, we entered into a series
of agreements with the Mohawks which provide for the development, construction,
financing, operation and management of a Class III Indian casino on land
adjacent to the Raceway. On March 20, 2006, we submitted these agreements to the
NIGC for review. All of the provisions of these agreements relating to the
management of the casino are subject to review and approval by the NIGC and the
Secretary of the Interior prior to becoming effective. Pending such approval and
as a result of such review, such provisions may be amended or supplemented by
the parties.
We were advised that on April 13, 2006 the Mohawks were notified that
the BIA 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 areas of the EA which must be addressed and
the Mohawks completed the filing of the responses to those items on July 5,
2006.
CAYUGA CATSKILL RESORT DEVELOPMENT
On April 3, 2003, Monticello Casino Management, the Cayuga Nation and
the Cayuga Catskill Gaming Authority (the "Cayuga Authority"), an
instrumentality of the Cayuga Nation formed to develop and conduct gaming
operations signed an initial form of gaming facility management agreement and
related agreements. The agreements provided for us to supply technical and
financial assistance to the Cayuga Nation and to serve as its exclusive partner
in the development, construction, financing, operation and management of a
proposed casino in the Monticello area. The principal agreements were extended
in December 2005 to December 31, 2006. Our agreements with the Cayuga Nation
were entered into through our principal subsidiaries. Subsequent to entering
into our initial agreement with the Cayuga Nation, leadership issues have arisen
within the Cayuga Nation. We entered into the extension agreement with members
of the Cayuga Council who are working to form a provisional government. Efforts
are underway to attempt to resolve the leadership issues within the Cayuga
Nation and we cannot predict the outcome of these efforts.
A major factor influencing the success of our efforts to assist the
Cayuga Nation in developing and operating a gaming facility has been the ability
of the Cayuga Nation to achieve a land claim settlement agreement with the State
of New York. There are significant preconditions that must occur before such a
settlement can occur. First, legislation must be passed by the New York State
legislature. Second, similar legislation must be passed by the United States
27
Congress. Third, title to a site must be transferred to the United States and
accepted into trust for the benefit of the Cayuga Nation. Fourth, the Cayuga
Nation must enter into a Class III gaming compact with the State of New York.
The negotiations between the interested parties are complex and we anticipate
that there may be changes to our initial agreements. Moreover, the potential
value of these claims has been significantly adversely affected by recent court
decisions relating to such claims.
CAYUGA NATION LEADERSHIP ISSUES
We have been advised that on July 18, 2005, Mr. Franklin Keel, the
Regional Director of the Eastern Regional Division of the BIA sent letters to
two groups of members of the Cayuga Nation currently seeking federal recognition
of their tribal leadership. Mr. Keel did not grant federal recognition to either
group, but offered to assist with mediation or other means of conflict
resolution. Although the degree to which the Cayuga Nation honors our current
agreements with respect to the planned Cayuga Catskill Resort is ultimately an
internal matter for the Cayuga Nation, the question of federal recognition is a
matter that may affect the approval process for any management agreement by the
NIGC. We have indicated our support for efforts to resolve the leadership and
federal representation issues as promptly as possible through mediation or other
conflict resolution means.
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 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 six months ended June 30, 2006 and 2005, Monticello Raceway
Development capitalized approximately $824,000 and $2.2 million, 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 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
June 30, 2006, Monticello Raceway Development employed two full-time employees.
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 and is less than 1,000 feet from the highway. There is no
direct competition at this time for our VGM operations within 85 miles of the
Raceway. However, on July 4, 2004, the State of Pennsylvania enacted a law
allowing for the operation of up to 61,000 slot machines at 14 gambling halls,
including seven racetracks, five stand-alone parlors, and two resorts. Pursuant
to this new law, slot machine facilities could be developed within 30 miles of
the Raceway that compete directly with our VGM operation. Furthermore, while a
number of prospective competitors have expressed interest in sponsoring the
development of another Indian casino in the Monticello, New York area, we
believe that each of them is at a competitive disadvantage given our site's ease
of access, our ability to offer horse racing and VGM in addition to regular
casino gambling, and our belief that we and our partners are considerably
further along in the regulatory approval process than any other competitor.
28
We expect to face increased competition for our VGM operation later in
2006 when a VGM facility opens at Yonkers Raceway. This property is much closer
to New York City than our facility and it is expected to be an attractive
property with as many as 5,500 VGMs, food and beverage outlets and other
amenities. The harness racing operation at this facility will reopen as well and
we believe that this will have an adverse effect on certain elements or our
racing revenues as noted in our discussion and analysis of our results of
operations that follows.
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 (such as Pennsylvania). 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, 2005
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
six months ended June 30, 2006.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005.
REVENUES. Net revenues increased approximately $3.9 million (17.9%) for
the quarter ended June 30, 2006 compared to the quarter ended June 30, 2005.
Revenue from racing increased by approximately $1.6 million (43.5%); revenue
from VGM operations increased by approximately $2.3 million (12.9%) and food,
beverage and other revenue increased by approximately $428,000 (35.4%).
Complimentary expenses increased by approximately $327,000.
The VGM operations experienced an increase in daily visits of
approximately 5% and the daily win per unit increased from $112.15 for the three
months ended June 30, 2005 to $138.23 for the three months ended June 30, 2006
(23.2%). The average number of machines in service was 1,721 for the three
months ended June 30, 2005 compared to 1,576 for the corresponding period in
2006. We attribute much of the improvement in VGM revenues to our continuing
marketing efforts in the geographical areas served by our facility.
The increase in racing revenues was primarily a result of increased
revenue allocations from OTB facilities. The track that normally shares in those
allocations with us was not in operation for the three months ended June 30,
2006 and our allocable share was increased significantly as a result. That track
had been in operation in the corresponding period in 2005. We believe that our
future racing revenues will be reduced significantly when that track, which has
been closed since July 2005, reopens as our allocable share of OTB revenues will
decrease.
RACING COSTS. Racing costs increased by approximately $892,000 (or
36.7%) to approximately $3.3 million for the three months ended June 30, 2006.
This is primarily as a result of increases in racing purses reflecting the share
of our increased revenues which we allocate to racing purses for our horsemen.
Our racing purse costs could increase substantially in the future as a result of
current arbitration proceedings with our horsemen as described in more detail in
the following section.
GAMING COSTS. Gaming (VGM) costs increased by approximately $1.3
million (or 8.3%) to approximately $16.7 million for the three months ended June
30, 2006 compared with the corresponding period in 2005. This percentage
increase is less than the percentage increase in VGM revenues almost solely as a
result of the increase in fees for VGM agents (an additional 3% of VGM revenue)
and the marketing allowance granted to VGM agents by the New York State Lottery
as reimbursement for qualified marketing expenses incurred by the agents.
29
FOOD, BEVERAGE AND OTHER COSTS. These costs increased by approximately
$191,000 (or 40.9%) to approximately $658,000 for the three months ended June
30, 2006 compared with the corresponding period in 2005. This increase is
consistent with the increase in revenues for this classification.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $943,000 for the three months
ended June 30, 2006 as compared to the three months ended June 30, 2005. This
increase was due primarily to an increase in stock-based compensation of
approximately $502,000, an increase in other compensation of approximately
$254,000, increased marketing costs of approximately $479,000 and a reduction of
other expenses of approximately $292,000.
IMPAIRMENT LOSS - DEFERRED DEVELOPMENT COSTS. During the three months
ended June 30, 2005, our review of the carrying value of deferred development
costs indicated that we should provide for an impairment of the deferred costs
associated with our efforts to develop a casino resort with the Seneca-Cayuga
Tribe of Oklahoma. For a variety of reasons, it became apparent that the
probability of recovering those costs was very low and we recognized a loss of
approximately $2.3 million in that quarter. No such indicators of impairment
arose during the three months ended June 30, 2006.
INTEREST EXPENSE. Interest expense was approximately $1.5 million and
$992,000, respectively, for the quarters ended June 30, 2006 and 2005. Our
senior convertible notes issued in July 2004 provided for an annual interest
rate of 5.5% for the three months ended June 30, 2005 and a rate of 8% for the
three months ended June 30, 2006. This resulted in an increase in interest
expense of approximately $406,000. The remainder of the increase is due to
interest on our revolving credit line which had approximately $7.6 million
outstanding at June 30, 2006.
SIX MONTHS ENDED JUNE, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005.
REVENUES. Net revenues increased approximately $9.9 million (25.6%) for
the six months ended June 30, 2006 compared to the six months ended June 30,
2005. Revenue from racing increased by approximately $3.2 million (49.0%);
revenue from VGM operations increased by approximately $6.3 million (20.5%) and
food, beverage and other revenue increased by approximately $820,000 (39.2%).
Complimentary expenses increased by approximately $455,000.
The VGM operations experienced an increase in daily visits of
approximately 6% and the daily win per unit increased from $98.24 for the six
months ended June 30, 2005 to $130.15 for the six months ended June 30, 2006
(32.5%). The average number of machines in service was 1,733 for the six months
ended June 30, 2005 compared to 1,576 for the corresponding period in 2006. As
noted in the discussion of the quarterly results, we attribute much of the
improvement in VGM revenues to our continuing marketing efforts in the
geographical areas served by our facility.
The increase in racing revenues was primarily a result of increased
revenue allocations from OTB facilities. The track that normally shares in those
allocations with us was not in operation for the six months ended June 30, 2006
and our allocable share was increased significantly as a result. That track had
been in operation in the corresponding period in 2005. We believe that our
future racing revenues will be reduced significantly when that track, which has
been closed since July 2005, reopens as our allocable share of OTB revenues will
decrease.
RACING COSTS. Racing costs increased by approximately $1.8 million (or
39.4%) to approximately $6.4 million for the six months ended June 30, 2006.
This is primarily as a result of increases in racing purses reflecting the share
of our increased revenues which we allocate to racing purses for our horsemen.
Our racing purse costs could increase substantially in the future as a result of
current arbitration proceedings with our horsemen as described in more detail in
the following section.
GAMING COSTS. Gaming (VGM) costs increased by approximately $3.7 (or
12.9%) million to approximately $32.2 million for the six months ended June 30,
2006 compared with the corresponding period in 2005. This percentage increase is
less than the percentage increase in VGM revenues almost solely as a result of
the increase in fees for VGM agents (an additional 3% of VGM revenue) and the
marketing allowance granted to VGM agents by the New York State Lottery as
reimbursement for qualified marketing expenses incurred by the agents.
30
FOOD, BEVERAGE AND OTHER COSTS. These costs increased by approximately
$308,000 (or 35.9%) to approximately $1,167,000 for the six months ended June
30, 2006 compared with the corresponding period in 2005. This increase is
consistent with the increase in revenues for this classification.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.9 million for the six months
ended June 30, 2006 as compared to the first six months of 2005. This increase
was due primarily to an increase in stock-based compensation of approximately
$1.2 million, an increase in other compensation of approximately $541,000,
increased marketing costs of approximately $615,000 and a reduction of other
expenses of approximately $423,000.
IMPAIRMENT LOSS - DEFERRED DEVELOPMENT COSTS. During the six months
ended June 30, 2005, we recognized an impairment loss of approximately $2.3
million related to our efforts to develop a casino resort with Seneca-Cayuga
Tribe of Oklahoma. No such indicators of impairment arose during the six months
ended June 30, 2006.
INTEREST EXPENSE. Interest expense was approximately $3.0 million and
$2.0 million, respectively, for the six months ended June 30, 2006 and 2005. Our
senior convertible notes issued in July 2004 provided for an annual interest
rate of 5.5% for the six months ended June 30, 2005 and a rate of 8% for the six
months ended June 30, 2006. This resulted in an increase in interest expense of
approximately $812,000. The remainder of the increase is due to interest on our
revolving credit line which had approximately $7.6 million outstanding at June
30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
We believe that we have access to sources of working capital that are
sufficient to fund our operations for the remainder of the year ended December
31, 2006. The results of operations of our VGM facility have been improved by
the changes in the amount of revenue retained by VGM agents and we have
approximately $2.4 million available from our revolving credit facility. Any
significant capital requirements associated with our development projects can be
met by additional debt or equity issues, if available.
Net cash provided by operating activities during the six months ended
June 30, 2006 was approximately $4.1 million compared to net cash used in
operating activities for the six months ended June 30, 2005 of approximately
$1.4 million. The net change of approximately $5.5 million reflects primarily
the reduction in net loss, collections from the New York Lottery for the
marketing allowance (approximately $2.0 million in restricted cash receipts), an
increase in receivables of approximately $1.3 million and an increase in accrued
expenses and other current liabilities of approximately $1.7 million.
Net cash used in investing activities was approximately $1.1 million
for six months ended June 30, 2006, consisting primarily of approximately
$922,000 for deferred development costs. During the six months ended June 30,
2005, net cash used in investing activities was approximately $4.3 million, and
consisted primarily of approximately $1.9 million for a new paddock and
equipment at the Raceway and approximately $2.2 million in costs associated with
casino development projects.
Net cash provided from financing activity for the six months ended June
30, 2006 was approximately $307,000. 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 $971,000 received as proceeds from the exercise of stock options.
For the six months ended June 30, 2005, net cash provided by financing
activities was approximately $4.8 million. This represented the proceeds from
borrowings under our revolving credit facility of approximately $5.7 million
offset by payment of financing costs of approximately $539,000 and a restricted
cash account of approximately $400,000 associated with the establishment of that
agreement.
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:
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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 is effective as of
November 30, 2005, among other things, (i) extends the maturity date of the loan
agreement from January 11, 2007 to January 11, 2008, (ii) increases our
permissible capital expenditures in each of 2005, 2006 and 2007 from $100,000 to
$350,000 and (iii) deletes 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.
Our contract with the Monticello Harness Horsemen's Association (the
"Horsemen") has expired. Among other things, this contract provides for the
amount of revenues from our VGM operations that we allocate to racing purses. We
have not been successful in negotiations to renew this contract and, in March
2006, we and the Horsemen agreed to submit the matter to the New York State
Racing and Wagering Board for binding arbitration. The outcome of that
arbitration could have a significant negative impact on our operating results.
We presently allocate 7.51% of our VGM revenues to racing purses for the
Horsemen. During our earlier contract negotiations with the Horsemen, their
representatives made a demand that that amount be 9.25% on the first $50,000,000
of VGM revenues and 8.25% on revenues exceeding $50,000,000. On the basis of our
2006 operations, if the Horsemen were to receive the amount that they are
demanding, based upon last years numbers, the expenses and net loss would
increase by approximately $1.0 million.
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, 2005, we had net operating loss carry forwards of
approximately $91 million that expire between 2008 and 2025. 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,
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 June
30, 2006, a total of $1,090,000 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 $1,090,000 against
the receivable from the litigation trust. We expect to make additional
disbursements on this line of credit in fiscal year 2006.
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In connection with our development project with the Mohawks 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 tribe are estimated to
be approximately $29,000 per month in 2006.
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 June 30, 2006 under our
revolving credit facility. A change in interest rates of one percent on the
balance outstanding at June 30, 2006 would cause a change in total annual
interest costs of $76,000. The carrying values of these borrowings approximate
their fair values at June 30, 2006.
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. Also, we have investments in certain unconsolidated
entities. As we do not control these entities, our disclosure controls and
procedures with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated subsidiaries.
We carried out an evaluation as of June 30, 2006, 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
June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 17, 2006, the Company held its annual meeting in
Monticello, New York;
(b) The following Directors were elected based upon the following
tabulations of votes:
FOR WITHHELD
---------- --------
Joseph E. Bernstein 20,212,131 600,382
Frank Catania 20,206,292 606,226
ITEM 6. EXHIBITS
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
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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: August 10, 2006 /s/ David P. Hanlon
----------------------------------------
David P. Hanlon
President and Chief Executive Officer
Dated: August 10, 2006 /s/ Ronald J. Radcliffe
----------------------------------------
Ronald J. Radcliffe
Chief Financial Officer
35