form10q05558_06302008.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

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 incorporation or organization)
(I.R.S. Employer Identification No.)

701 N. Green Valley Parkway, Suite 200, Henderson, NV
89074
(Address of principal executive offices)
(Zip Code)

(702) 990-3355
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨     No x

 
The number of shares outstanding of the issuer’s common stock, as of August 5, 2008 was 33,913,351.


EMPIRE RESORTS, INC. AND SUBSIDIARIES
 
INDEX
 
PAGE NO.
     
 
     
 
1
     
 
2
     
 
3
     
 
4-19
     
19-23
     
23
     
24
     
     
     
 
     
25
     
25
     
 
26
 
 
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, 2008
(Unaudited)
    
December 31, 2007
  
ASSETS
            
Current assets:
            
Cash and cash equivalents
   $ 13,175     $ 15,008  
Restricted cash
     1,477       1,266  
Accounts receivable
     1,680       1,401  
Prepaid expenses and other current assets
     3,989       2,967  
Total current assets
     20,321       20,642  
Property and equipment, net
     30,412       30,860  
Deferred financing costs, net of accumulated amortization of $1,988 in 2008 and $1,783 in 2007
     2,492       2,697  
TOTAL ASSETS
   $ 53,225     $ 54,199  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                
                 
Current liabilities:
                
Revolving credit facility
   $ 7,617     $ ---  
Accounts payable
     2,761       3,530  
Accrued expenses and other current liabilities
     8,228       6,129  
Total current liabilities
     18,606       9,659  
Revolving credit facility
     ---       7,617  
Senior convertible notes
     65,000       65,000  
Total liabilities
     83,606       82,276  
                 
Commitments and contingencies
                
                 
Stockholders’ deficit:
                
Preferred stock, 5,000 shares authorized; $0.01 par value -
                
Series B, $29 per share liquidation value, 44 shares issued and outstanding
     ----       -----  
Series E, $10.00 per share redemption value, 1,731 shares issued and outstanding
     6,855       6,855  
Common stock, $0.01 par value, 75,000 shares authorized, 32,146 and 29,582 shares issued and outstanding in 2008 and 2007, respectively
     321       296  
Additional paid-in capital
     56,613       52,845  
Accumulated deficit
     (94,170 )     (88,073 )
Total stockholders’ deficit
     (30,381 )     (28,077 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
   $ 53,225     $ 54,199  

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 June 30,
    
Six Months Ended June 30,
  
   
2008
    
2007
    
2008
    
2007
  
REVENUES:
                        
Racing
   $ 1,604     $ 2,321     $ 3,529     $ 4,722  
Gaming
     15,324       16,454       28,539       31,571  
Food, beverage and other
     1,306       1,529       2,313       2,791  
Gross revenues
     18,234       20,304       34,381       39,084  
Less: Promotional allowances
     (589 )     (695 )     (1,085 )     (1,244 )
Net revenues
     17,645       19,609       33,296       37,840  
                                 
COSTS AND EXPENSES:
                                
Racing
     1,570       1,907       3,334       3,972  
Racing – settlement of Horsemen litigation
     1,250       ---       1,250       ---  
Gaming
     11,577       14,381       23,766       28,345  
Food, beverage and other
     535       644       947       1,197  
Selling, general and administrative
     2,929       4,346       6,293       8,477  
Depreciation
     307       293       609       586  
Total costs and expenses
     18,168       21,571       36,199       42,577  
                                 
Loss from operations
     (523 )     (1,962 )     (2,903 )     (4,737 )
                                 
Amortization of deferred financing costs
     (102 )     (44 )     (205 )     (214 )
Interest expense
     (1,424 )     (1,492 )     (2,870 )     (2,983 )
Interest income
     54       224       142       409  
                                 
NET LOSS
     (1,995 )     (3,274 )     (5,836 )     (7,525 )
Undeclared dividends on preferred stock
     (388 )     (388 )     (776 )     (776 )
NET LOSS APPLICABLE TO COMMON SHARES
   $ (2,383 )   $ (3,662 )   $ (6,612 )   $ (8,301 )
Weighted average common shares outstanding, basic and diluted
     30,578       29,489       30,104       29,463  
                                 
Loss per common share, basic and diluted
   $ (0.08 )   $ (0.12 )   $ (0.22 )   $ (0.28 )

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
   
Six Months Ended
June 30,
  
   
2008
    
2007
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net loss
   $ (5,836 )   $ (7,525 )
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
     609       586  
Amortization of deferred financing costs
     205       214  
Allowance for doubtful accounts – Advances to Litigation Trust
     ---       500  
Stock-based compensation
     519       2,379  
Changes in operating assets and liabilities:
                
Restricted cash (VGM Marketing Account)
     (473 )     728  
Accounts receivable
     (279 )     1,772  
Prepaid expenses and other current assets
     (1,022 )     (682 )
Accounts payable
     (769 )     (811 )
Accrued expenses and other current liabilities
     2,098       (2,861 )
NET CASH USED IN OPERATING ACTIVITIES
     (4,948 )     (5,700 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchases of property and equipment
     (161 )     (161 )
Advances to Litigation Trust
     ---       (500 )
Restricted cash (Racing capital improvement)
     269       (80 )
Deferred development costs
     ---       (1,353 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
     108       (2,094 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Proceeds from exercise of stock options
     14       18,932  
Proceeds from sale of common stock
     3,000       ---  
Restricted cash (Revolving credit facility)
     (7 )     (11 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
     3,007       18,921  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     (1,833 )     11,127  
CASH AND CASH EQUIVALENTS, beginning of period
     15,008       9,471  
CASH AND CASH EQUIVALENTS, end of period
   $ 13,175     $ 20,598  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid for interest during the period
   $ 2,870     $ 2,983  
                 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
                
FINANCING ACTIVITIES:
                
Common stock issued in settlement of preferred stock dividends
   $ 261     $ 190  
Non-cash additions to deferred development costs
   $ ---     $ 85  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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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, 2008 and for the three-month and six-month periods  ended June 30, 2008 and 2007 are unaudited and include the accounts of Empire Resorts, Inc. and subsidiaries (“Empire” or “the Company” or “we”).
 
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 (“GAAP”) for complete financial statements. These condensed consolidated financial statements 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, 2007.  The results of operations for the interim period are not necessarily indicative of results to be expected for the full year.
 
Liquidity
 
The holders of our Senior Convertible Notes ($65,000,000 principal balance due) have the right to demand repayment of the principal amount due on July 31, 2009.  We do not presently have a source for repayment of these notes and our operations are not expected to provide sufficient cash flow to make this repayment, should it be demanded.
 
Our credit facility with the Bank of Scotland requires repayment of approximately $ 7,155,000 (outstanding balance of $ 7,617,000 less restricted cash on deposit of $462,000) on May 29, 2009.
 
We believe that we have sources of working capital that are sufficient to fund our operations for the twelve months ending June 30, 2009.  We have sold 2,433,090 shares of our common stock to a major shareholder for $3 million under an agreement to sell 4.2 million shares for a total amount of approximately $5.2 million and we have approximately $2.4 million available through May, 2009 from our revolving credit facility. Subsequently, on July 31, 2008, we sold the remaining 1,766,910 shares for $2,178,600 pursuant to this agreement.  However, we do not presently have a source for repayment of our Senior Convertible Notes if the holders of those notes elect to exercise their right to demand repayment on July 31, 2009.
 
Beginning on April 1, 2008, the results of operations from our Video Gaming Machine (“VGM”) facility as described below have benefited and will continue to benefit from legislation that was passed on February 13, 2008, which increases our share of VGM revenues. Our VGM operations for the three and six months ended June 30, 2008 benefited by approximately $2 million as a result of this legislation.
 
Nature of Business
 
During the past four years, we have concentrated on developing gaming operations in New York State.  Through our subsidiaries, we currently own and operate Monticello Gaming and Raceway, a VGM and harness horseracing facility located in Monticello, New York.
 
On February 8, 2008, we entered into an Agreement to Form Limited Liability Company and Contribution Agreement (the “Contribution Agreement”) with Concord Associates, L.P. (“Concord”), pursuant to which we and Concord will form a limited liability company (the “LLC”).  In addition, pursuant to the Contribution Agreement, we will move our existing operations at Monticello Gaming and Raceway to 160 acres of land located in Kiamesha Lake, New York in order to develop an entertainment complex consisting of a hotel, convention center, VGM facility and harness horseracing track (the “Entertainment City Project”).  Concord will be responsible for the development of the Entertainment City Project.  Concord’s affiliate, George A. Fuller Company, will be the general contractor.  We will be responsible for development of the gaming facility and for managing and operating the hotel, gaming facility and harness horseracing track. We and Concord will share equally the fees that we each earn in connection with our respective development and management efforts, as well as share equally any distributions available following the repayment of any debt service and the payment of any preferred returns due to any of the members of the LLC.  We will receive a preference on the first $8 million of distributions.  Construction fees earned by George A. Fuller Company will not be shared with us.  The closing of the transaction is conditioned on, among other things, (i) distribution to us of $50 million (less amounts outstanding under our existing credit facility with Bank of Scotland that are to be assumed by the LLC); (ii) receipt of all necessary approvals for the transfer of our gaming and racing licenses, including from the Bank of Scotland, holders of our convertible senior notes, the New York State Racing and Wagering Board and the New York State Lottery; (iii) transfer of our obligations related to our credit facility to the LLC; (iv) entry into construction, development, casino development, casino and hotel management contracts; and (v) approval by our stockholders, if required by law.  No assurance can be given that the conditions to the closing of the transaction will be satisfied in order to complete the transaction, as planned. 
 
 
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In addition, we have set aside 29.31 acres of land adjacent to Monticello Gaming and Raceway for the development of a Class III casino. We will also continue to explore other possible development projects.
 
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.
 
Raceway and VGM Operations
 
Monticello Raceway Management, a wholly owned subsidiary, is a New York corporation that operates Monticello Raceway (the “Raceway”), a harness horse racing facility and a VGM facility (Monticello Gaming and Raceway) in Monticello, New York.
 
The Raceway began operation in 1958 and offers pari-mutuel wagering, live harness racing and simulcasting from various harness and thoroughbred racetracks across the country.  The Raceway derives its revenue principally from (i) wagering at the Raceway on live races run at the Raceway; (ii) fees from wagering at out-of-state locations on races simulcast from the Raceway using export simulcasting; (iii) revenue allocations, as prescribed by law, from betting activity at New York City, Nassau County and Catskill Off Track Betting facilities; (iv) wagering at the Raceway on races broadcast from out-of-state racetracks using import simulcasting; and (v) admission fees, program and racing form sales, the sale of food and beverages and certain other ancillary activities.
 
A VGM is an electronic gaming device which allows a patron to play electronic versions of various lottery games of chance and is similar in appearance to a traditional slot machine.  On October 31, 2001, the State of New York enacted a bill designating seven racetracks, including the Raceway, to install and operate VGMs.  Under the program, the New York State Lottery has authorized an allocation of up to 1,800 VGMs to the Raceway.  Currently, Monticello Raceway Management operates 1,587 VGMs on 45,000 square feet of floor space at the Raceway.
 
Note B.  Summary of Significant Accounting Policies
 
Loss Per Common Share.  We compute basic loss per share by dividing loss applicable to common shares by the weighted-average common shares outstanding for the period.  Diluted loss per share reflects the potential dilution of earnings that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity.  Since the effect of outstanding options and warrants is anti-dilutive with respect to losses, they have been excluded from our computation of loss per common share.  Therefore, basic and diluted losses per common share for the three and six months ended June 30, 2008 and 2007 were the same.
 
The following table shows the approximate number of securities outstanding at June 30, 2008 and 2007 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.
 
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Outstanding at June 30,
  
   
2008
    
2007
  
Options
     2,553,000       3,502,000  
Warrants
     250,000       250,000  
Shares to be issued upon conversion of convertible debt
     5,175,000       5,175,000  
Total
     7,978,000       8,927,000  
 
Fair Value.  Our financial instruments are comprised of current assets, current liabilities, a revolving credit facility and senior convertible notes at June 30, 2008 and December 31, 2007.  The fair value of the revolving credit facility approximates its carrying value, because this obligation had market-based interest rates.  The senior convertible notes are recorded at their carrying value, because there is no market for these senior convertible notes and it was impracticable to estimate fair value of these notes. Current assets and current liabilities approximate fair value due to their short term nature.
 
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 fair value, customer incentives, bad debts, estimated useful lives for depreciable and amortizable assets, valuation reserves, estimated cash flows in assessing the recoverability of long-lived assets and estimated liabilities for point based customer loyalty programs, income taxes, contingencies and litigation.  Actual results may differ from estimates.
 
Reclassifications.  Certain prior period amounts have been reclassified to conform to the current period presentation.
 
Recent Accounting Pronouncements.
 
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. We do not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on our consolidated financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of EITF 07-5 to have a material effect on our consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following Securities and Exchange Commission (“SEC”) approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. FAS 162 is not expected to have an impact on our consolidated financial statements.
 
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In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner reflecting their nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for interim periods and fiscal years beginning after December 15, 2008.  We will adopt FSP APB 14-1 effective January 1, 2009.  We do not expect the adoption of FSP APB 14-1 to have a material effect on our consolidated financial statements
 
Note C.  Deferred Development Costs
 
We have made payments to fund certain expenses of the Cayuga Nation of New York (the “Cayuga Nation”), the Seneca-Cayuga Tribe of Oklahoma (the “Seneca-Cayugas”) and the St. Regis Mohawk Tribe in connection with the development of proposed Indian tribal Class III casino facilities. We also incur expenses associated with other development projects.
 
We have been working to develop a Class III casino with various Indian tribes beginning in 1996.  Our most recent efforts have been in partnership with the St. Regis Mohawk Tribe focused on a site owned by us adjacent to our Monticello, New York facility.
 
However, as described in detail in our Form 10-K for the year ended December 31, 2008, we and the St. Regis Mohawk Tribe were unable to obtain the necessary approvals to proceed with this project. We believe that the agreements between us and the St. Regis Mohawk Tribe are no longer effective. On July 18, 2008, our subsidiaries, Monticello Raceway Management, Monticello Raceway Development and Monticello Casino Management entered into a settlement agreement with the St. Regis Mohawk Gaming Authority and the St. Regis Mohawk Tribe pursuant to which the parties agreed to release all claims against the other parties. The settlement is subject to certain conditions which, if met, will require the payment of additional reimbursements of approximately $400,000 to the St. Regis Mohawk Tribe.
 
In accordance with our accounting policy on impairment of long-lived assets, we reviewed the carrying value of the deferred development costs and determined that circumstances warranted the recognition of an impairment loss for the year ended December 31, 2007.  During the six months ended June 30, 2008, no development costs were deferred.
 
Note D. Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities is comprised of the following:
 
   
June 30, 2008
    
December 31, 2007
  
   
(in thousands)
  
Liability for horseracing purses
   $ 3,223     $ 1,113  
Accrued interest
     2,167       2,167  
Accrued payroll
     711       716  
Accrued other
     2,127       2,133  
Total accrued expenses and other current liabilities
   $ 8,228     $ 6,129  

As further discussed in Note K, $1.25 million was accrued for the settlement of the Horsemen litigation.
 
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Note E. Senior Convertible Notes
 
On July 26, 2004, we issued $65 million of 5.5% senior convertible notes (the “notes”), which are currently 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.
 
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 and 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%, which would be maintained with the occurrence of the “Trigger Event”.  Since the events that constitute the “Trigger Event” 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. All of the following events must occur to create the “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.
 
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.  This conversion rate was equivalent to an initial conversion price of $13.75 per share. 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. This rate would result in the issuance of 5,175,159 shares upon conversion.
 
We recognized interest expense associated with the notes of approximately $2.6 million in each of the six-month periods ended June 30, 2008 and 2007 and approximately $1.3 million in each of the three-month periods ended June 30, 2008 and 2007.
 
Note F.  Revolving Credit Facility
 
On January 11, 2005, we entered into a credit facility with Bank of Scotland.  The credit facility provides for a $10 million senior secured revolving loan (subject to certain reserves) that matures on May 29, 2009. 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 its 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.  The credit facility also contains an acceleration clause which states that Bank of Scotland may accelerate the maturity in the event of a default by the Company.
 
In connection with this credit facility, the Bank of Scotland has also entered into an Inter-creditor Agreement with The Bank of New York so that Bank of Scotland will be entitled to 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.
 
8
 
At our option, loans under the Credit Facility initially bore interest at the rate of prime plus 2% or LIBOR plus 4%. On June 21, 2007, we entered into an amendment to our credit facility with Bank of Scotland. The amendment, dated as of June 20, 2007, among other things, (i) extended the maturity date of the loan agreement from January 11, 2008 to January 7, 2009, (ii) amended the interest rates of loans under the credit facility to a rate of prime plus 1.5% until July 31, 2008 and prime plus 2.0% thereafter or LIBOR plus 3.5% until July 31, 2008 and LIBOR plus 4.0% thereafter and (iii) deleted all references to Interest Advances and Line of Credit Cash Collateral Advances such that the Loan Agreement now provides for total loans of up to $10 million.  In addition, pursuant to this amendment, we are required to maintain an unrestricted cash balance of an amount that, when added to the unused balance available under the credit facility, is not less than $5 million.  On March 14, 2008, we entered into an additional amendment to our credit facility with Bank of Scotland that extends the maturity date of the loan agreement from January 7, 2009 to May 29, 2009.
 
We recognized interest expense for the credit facility of approximately $124,000 and $192,000 in the three months ended June 30, 2008 and 2007, respectively and approximately $270,000 and $383,000 in the six months ended June 30, 2008 and 2007, respectively.   At June 30, 2008, we were in compliance with the financial covenants contained in our agreement with the Bank of Scotland.
 
Note G.  Fair Value Measurements
 
In the first quarter of 2008, we adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).

As permitted, we chose not to elect the fair value option as prescribed by FASB SFAS No. 159, The Fair Value Option For Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115, for our financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as senior convertible notes, accounts payable and accounts receivable are reported at their carrying values.

Our financial liabilities subject to recurring fair value measurements and the necessary disclosures are as follows:

(In thousands)
  
At June 30, 2008
    
Fair Value Measurements at June 30,
2008 using Fair Value Hierarchy
  
   
Cost
    
Fair Value
    
Level 1
    
Level 2
    
Level 3
  
    LIABILITIES:
                              
Revolving credit facility
   $ 7,617     $ 7,617     $ 7,617     $ ---     $ ---  
 
 
9

Note H. Supplemental Guarantor Information
 
As discussed in Notes E and F, our obligations with respect to our Senior Convertible Notes and Revolving Credit Facility are guaranteed by our material subsidiaries.
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2008
(Unaudited)
(In Thousands)
 
   
Empire Resorts, Inc.
    
Guarantor Subsidiaries
    
Non-Guarantor Subsidiaries
    
Eliminating Entries
    
Consolidated Empire
Resorts, Inc.
  
                               
ASSETS
                              
Cash and cash equivalents
   $ 5,128     $ 8,047     $ ---     $ ---     $ 13,175  
Restricted cash
     462       1,015       ---       ---       1,477  
Accounts receivable
     ---       1,680       ---       ---       1,680  
Prepaid expenses and other assets
     473       3,516       ---       ---       3,989  
Investments in subsidiaries
     5,060       ---       ---       (5,060 )     ---  
Inter-company accounts
     152,679       ---       ---       (152,679 )     ---  
Property and equipment, net
     ---       30,412       ---       ---       30,412  
Deferred financing costs, net
     2,492       ---       ---       ---       2,492  
TOTAL ASSETS
   $ 166,294     $ 44,670     $ ---     $ (157,739 )   $ 53,225  
                                         
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
                                        
                                         
Revolving credit facility
   $ 7,617     $ ---     $ ---     $ ---     $ 7,617  
Accounts payable
     774       1,987       ---       ---       2,761  
Accrued expenses and other liabilities
     2,375       5,853       ---       ---       8,228  
Inter-company accounts
     ---       59,097       93,582       (152,679 )     ---  
Senior convertible notes
     65,000       ---       ---       ---       65,000  
Total liabilities
     75,766       66,937       93,582       (152,679 )     83,606  
Stockholders' equity (deficit)
     90,528       (22,267 )     (93,582 )     (5,060 )     (30,381 )
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
   $ 166,294     $ 44,670     $ ---     $ (157,739 )   $ 53,225  

 
10
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2007
(In Thousands)
 
   
Empire Resorts, Inc.
    
Guarantor Subsidiaries
    
Non-Guarantor Subsidiaries
    
Eliminating Entries
    
Consolidated Empire
Resorts, Inc.
  
                               
ASSETS
                              
Cash and cash equivalents
   $ 11,192     $ 3,816     $ ---     $ ---     $ 15,008  
Restricted cash
     454       812       ---       ---       1,266  
Accounts receivable
     ---       1,401       ---       ---       1,401  
Prepaid expenses and other assets
     147       2,820       ---       ---       2,967  
Investments in subsidiaries
     5,060       ---       ---       (5,060 )     ---  
Inter-company accounts
     147,551       ---       ---       (147,551 )     ---  
Property and equipment, net
     2       30,858       ---       ---       30,860  
Deferred financing costs, net
     2,697       ---       ---       ---       2,697  
TOTAL ASSETS
   $ 167,103     $ 39,707     $ ---     $ (152,611 )   $ 54,199  
                                         
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
                                        
                                         
Accounts payable
   $ 664     $ 2,866     $ ---     $ ---     $ 3,530  
Accrued expenses and other liabilities
     2,391       3,738       ---       ---       6,129  
Inter-company accounts
     ---       53,969       93,582       (147,551 )     ---  
Revolving credit facility
     7,617       ---       ---       ---       7,617  
Senior convertible notes
     65,000       ---       ---       ---       65,000  
Total liabilities
     75,672       60,573       93,582       (147,551 )     82,276  
Stockholders' equity (deficit)
     91,431       (20,866 )     (93,582 )     (5,060 )     (28,077 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
   $ 167,103     $ 39,707     $ ---     $ (152,611 )   $ 54,199  
 
 
11
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2008
(Unaudited)
(In Thousands)
 
   
Empire
Resorts, Inc.
    
Guarantor
Subsidiaries
    
Non-Guarantor
Subsidiaries
    
Eliminating
Entries
    
Consolidated
Empire Resorts, Inc.
  
                               
REVENUES:
                              
Racing
   $ --     $ 1,604     $ --     $ --     $ 1,604  
Gaming
     --       15,324       --       --       15,324  
Food, beverage and other
     --       1,306       --       --       1,306  
Gross revenues
     --       18,234       --       --       18,234  
Less: Promotional allowances
     --       (589 )     --       --       (589 )
     Net revenues
     --       17,645       --       --       17,645  
                                         
COSTS AND EXPENSES:
                                        
Racing
     --       1,570       --       --       1,570  
Racing – settlement of Horsemen litigation
     --       1,250       --       --       1,250  
Gaming
     --       11,577       --       --       11,577  
Food, beverage and other
     --       535       --       --       535  
Selling, general and administrative
     1,690       1,239       --       --       2,929  
Depreciation
     1       306       --       --       307  
Total costs and expenses
     1,691       16,477       --       --       18,168  
Income (loss) from operations
     (1,691 )     1,168       --       --       (523 )
Amortization of deferred financing costs
     (102 )     --       --       --       (102 )
Inter-company interest income (expense) & other
     1,148       (1,148 )     --       --       --  
Interest expense
     (1,424 )     --       --       --       (1,424 )
Interest income
     39       15       --       --       54  
                                         
Net income (loss)
   $ (2,030 )   $ 35     $ --     $ --     $ (1,995 )

 
12

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2007
(Unaudited)
(In Thousands)
 
   
Empire
Resorts, Inc.
    
Guarantor
Subsidiaries
    
Non-Guarantor
Subsidiaries
    
Eliminating
Entries
    
Consolidated
Empire Resorts, Inc.
  
                               
REVENUES
                              
Racing
   $ --     $ 2,321     $ --     $ --     $ 2,321  
Gaming
     --       16,454       --       --       16,454  
Food, beverage and other
     --       1,529       --       --       1,529  
Gross revenues
     --       20,304       --       --       20,304  
Less: Promotional allowances
     --       (695 )     --       --       (695 )
     Net revenues
     --       19,609       --       --       19,609  
                                         
COSTS AND EXPENSES
                                        
Racing
     --       1,907       --       --       1,907  
Gaming
     --       14,381       --       --       14,381  
Food, beverage and other
     --       644       --       --       644  
Selling, general and administrative
     3,024       1,322       --       --       4,346  
Depreciation
     1       292       --       --       293  
Total costs and expenses
     3,025       18,546       --       --       21,571  
Income (loss) from operations
     (3,025 )     1,063       --       --       (1,962 )
Amortization of deferred financing costs
     (44 )     --       --       --       (44 )
Inter-company interest income (expense) & other
     1,109       (1,109 )     --       --       --  
Interest expense
     (1,492 )     --       --       --       (1,492 )
Interest income
     219       5       --       --       224  
                                         
Net loss
   $ (3,233 )   $ (41 )   $ --     $ --     $ (3,274 )
 
 
13
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2008
(Unaudited)
(In Thousands)
 
   
Empire
Resorts, Inc.
    
Guarantor
Subsidiaries
    
Non-Guarantor
Subsidiaries
    
Eliminating
Entries
    
Consolidated
Empire Resorts, Inc.
  
                               
REVENUES
                              
Racing
   $ --     $ 3,529     $ --     $ --     $ 3,529  
Gaming
     --       28,539       --       --       28,539  
Food, beverage and other
     --       2,313       --       --       2,313  
Gross revenues
     --       34,381       --       --       34,381  
Less: Promotional allowances
     --       (1,085 )     --       --       (1,085 )
     Net revenues
     --       33,296       --       --       33,296  
                                         
COSTS AND EXPENSES
                                        
Racing
     --       3,334       --       --       3,334  
Racing – settlement of Horsemen litigation
     --       1,250       --       --       1,250  
Gaming
     --       23,766       --       --       23,766  
Food, beverage and other
     --       947       --       --       947  
Selling, general and administrative
     3,739       2,554       --       --       6,293  
Depreciation
     2       607       --       --       609  
Total costs and expenses
     3,741       32,458       --       --       36,199  
Income (loss) from operations
     (3,741 )     838       --       --       (2,903 )
Amortization of deferred financing costs
     (205 )     --       --       --       (205 )
Inter-company interest income (expense) & other
     2,257       (2,257 )     --       --       --  
Interest expense
     (2,870 )     --       --       --       (2,870 )
Interest income
     123       19       --       --       142  
                                         
Net loss
   $ (4,436 )   $ (1,400 )   $ --     $ --     $ (5,836 )

 
14
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2007
(Unaudited)
(In Thousands)
 
   
Empire
Resorts, Inc.
    
Guarantor
Subsidiaries
    
Non-Guarantor
Subsidiaries
    
Eliminating
Entries
    
Consolidated
Empire Resorts, Inc.
  
                               
REVENUES
                              
Racing
   $ --     $ 4,722     $ --     $ --     $ 4,722  
Gaming
     --       31,571       --       --       31,571  
Food, beverage and other
     --       2,791       --       --       2,791  
Gross revenues
     --       39,084       --       --       39,084  
Less: Promotional allowances
     --       (1,244 )     --       --       (1,244 )
     Net revenues
     --       37,840       --       --       37,840  
                                         
COSTS AND EXPENSES
                                        
Racing
     --       3,972       --       --       3,972  
Gaming
     --       28,345       --       --       28,345  
Food, beverage and other
     --       1,197       --       --       1,197  
Selling, general and administrative
     5,646       2,831       --       --       8,477  
Depreciation
     2       584       --       --       586  
Total costs and expenses
     5,648       36,929       --       --       42,577  
Income (loss) from operations
     (5,648 )     911       --       --       (4,737 )
Amortization of deferred financing costs
     (214 )     --       --       --       (214 )
Inter-company interest income (expense) & other
     2,224       (2,224 )     --       --       --  
Interest expense
     (2,983 )     --       --       --       (2,983 )
Interest income
     385       24       --       --       409  
                                         
Net loss
   $ (6,236 )   $ (1,289 )   $ --     $ --     $ (7,525 )


15
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2008
(Unaudited)
(In thousands)
 
   
Empire Resorts, Inc.
    
Guarantor Subsidiaries
    
Non- Guarantor Subsidiaries
    
Eliminating Entries
    
Consolidated Empire Resorts, Inc.
  
                               
Net cash used in operating activities
   $ (3,943 )   $ (1,005 )   $ --     $ --     $ (4,948 )
Cash flows from investing activities:
                                        
Purchases of property and equipment
     --       (161 )     --       --       (161 )
Restricted cash (Racing capital improvement)
     --       269       --       --       269  
Advances to subsidiaries
     (5,128 )     --       --       5,128       --  
Net cash provided by (used in) investing activities
     (5,128 )     108       --       5,128       108  
Cash flows from financing activities:
                                        
Proceeds from exercise of stock options
     14       --       --       --       14  
Proceeds from sale of common stock
     3,000       --       --       --       3,000  
Restricted cash (Revolving credit facility)
     (7 )     --       --       --       (7 )
Advances from Empire Resorts, Inc.
     --       5,128       --       (5,128 )     --  
Net cash provided by financing activities
     3,007       5,128       --       (5,128 )     3,007  
Net increase (decrease) in cash and cash equivalents
     (6,064 )     4,231       --       --       (1,833 )
Cash and cash equivalents, beginning of period
     11,192       3,816       --       --       15,008  
Cash and cash equivalents, end of period
   $ 5,128     $ 8,047     $ --     $ --     $ 13,175  
 
 
16
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2007
(Unaudited)
(In Thousands)
 
   
Empire Resorts, Inc.
    
Guarantor Subsidiaries
    
Non- Guarantor Subsidiaries
    
Eliminating Entries
    
Consolidated Empire Resorts, Inc.
  
                               
Net cash used in operating activities
   $ (4,557 )   $ (1,143 )   $ --     $ --     $ (5,700 )
                                         
Cash flows from investing activities:
                                        
Purchases of property and equipment
     --       (161 )     --       --       (161 )
Advances to Litigation Trust
     (500 )     --       --       --       (500 )
Restricted cash (Racing capital improvement)
     --       (80 )     --       --       (80 )
Deferred development costs
     (79 )     (1,274 )     --       --       (1,353 )
Advances to Empire Resorts, Inc.
     --       (2,041 )     --       2,041       --  
Net cash used in investing activities
     (579 )     (3,556 )     --       2,041       (2,094 )
                                         
Cash flows from financing activities:
                                        
Proceeds form exercise of stock options
     18,932       --       --       --       18,932  
Restricted cash (related to revolving credit facility)
     (11 )     --       --       --       (11 )
Advances from subsidiaries
     2,041       --               (2,041 )     --  
Net cash provided by financing activities
     20,962       --       --       (2,041 )     18,921  
Net increase (decrease) in cash and cash equivalents
     15,826       (4,699 )     --       --       11,127  
Cash and cash equivalents, beginning of period
     383       9,088       --       --       9,471  
                                         
Cash and cash equivalents, end of period
   $ 16,209     $ 4,389     $ - -     $ --     $ 20,598  
 
17
 
Note I. Stockholders’ Equity
 
Stock-based compensation expense included in selling, general and administrative expenses is approximately $193,000 and $1,454,000 for the three months ended June 30, 2008 and 2007, respectively, and approximately $519,000 and $2,379,000 for the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, there was approximately $284,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our plans. That cost is expected to be recognized over a period of 2 years. This expected cost does not include the impact of any future stock-based compensation awards.
 
On February 24, 2008, we authorized issuance of 117,419 shares of our common stock as payment of dividends due for the year ended December 31, 2007 on our Series B preferred stock.  The approximate value of $261,000 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, 2008.
 
On March 8, 2007, we authorized issuance of 18,884 shares of our common stock as payment of dividends due for the year ended December 31, 2006 on our Series B preferred stock.  The approximate value of $190,000 was recorded as a reduction of retained earnings and an increase in common stock and additional paid-in capital in the six months ended June 30, 2007.
 
On March 24, 2008, we adopted a stockholders rights plan and initially declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of April 3, 2008. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $20 per unit. Under certain circumstances, if a person or group acquires 20 percent or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20 exercise price, shares of our common stock or that of any company into which we are merged having a value of $40. The rights expire on March 24, 2010. Because the rights may substantially dilute the stock ownership of a person or group attempting to take over our company without the approval of our Board of Directors, our rights plan could make it more difficult for a third-party to acquire us (or a significant percentage of our outstanding common stock) without first negotiating with our Board of Directors regarding that acquisition.
 
On March 31, 2008, we entered into an agreement with a major stockholder to issue 4.2 million shares of our common stock at a price per share of $1.233 for an aggregate amount of $5,178,600. This agreement was amended on April 28, 2008 and on June 26, 2008 to provide for the sale of 811,030 shares (for $1 million) on April 28, 2008, the sale of 811,030 shares (for $1 million) on May 30, 2008, the sale of 811,030 shares (for $1 million) on June 30, 2008, the sale of 811,030 shares (for $1 million) on July 31, 2008 and the sale of 955,880 shares ($1,178,600) on August 29, 2008, unless those terms are modified by mutual agreement.  During the three months ended June 30, 2008, we sold 2,433,090 shares for $3 million pursuant to this agreement. Subsequently on July 31, 2008, we sold the remaining 1,766,910 shares for $2,178,600 pursuant to this agreement.
 
Note J. Concentration
 
Two debtors, New York Off-Track Betting Corporation (“OTB”) and Nassau OTB, represented approximately 70% of the total outstanding accounts receivable as of June 30, 2008.  One debtor, New York OTB, represented approximately 39 % of the total outstanding accounts receivable as of December 31, 2007.
 
At June 30, 2008, we have cash on deposit with banks and other financial institutions in accounts with balances in excess of amounts covered by insurance from the FDIC and the SIPC. We have no reason to believe that there is risk of loss resulting from these circumstances.
 
Note K. Commitments and Contingencies
 
Legal Proceedings.  We are a party to various non-environmental legal proceedings and administrative actions, all arising from the ordinary course of business.  Although it is impossible to predict the outcome of any legal proceeding, we believe any liability that may finally be determined with respect to such legal proceedings should not have a material effect on our consolidated financial position, results of operations or cash flows.
 
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In connection with a new contract with the Monticello Harness Horsemen’s Association (the “Horsemen”) entered into as of July 1, 2008, we have agreed to pay $1.25 million to settle all pending litigation between us and the Horsemen, including Monticello Harness Horsemen’s Association, Inc. v. Monticello Raceway Management, Inc. pending in the Supreme Court of the State of New York, County of Sullivan and Monticello Harness Horsemen's Association, Inc. v. Monticello Raceway Management, Inc. pending in the Supreme Court of the State of New York, County of Sullivan.  At June 30, 2008, we have recorded the liability for that amount with $1 million being recorded as an addition to the purse liability and $250,000 reflected in other accrued liabilities.
 
The new contract with the Horsemen makes provision for, among other things; 1) the transfer of racing operations to the Concord site anticipated in connection with the Entertainment City Project, 2) an initial two (2) year term that extends for an additional twenty (20) years if construction financing for the Entertainment City Project is obtained prior to July 31, 2010, 3) payments from the date of execution until the opening of the new facility of the greater of 8.75% of VGM revenue or $5,000,000 on an annual basis, and 4) annual payments beginning with the opening of the new facility of $5,350,000 with an annual addition of $500,000 per year. In addition, the agreement requires that we reduce our purse liability to $600,000 (on the basis of cash collected) by December 31, 2008 and post a bond issued by a banking or insurance company with an “A” rating according to Best’s, in the amount of Seven Hundred Fifty Thousand Dollars ($750,000.00) securing our obligation to fund the Horsemen's purse account.
 
In connection with a $600,000 bond required by the New York State Lottery we placed a $150,000 certificate of deposit as collateral for a $150,000 Letter of Credit issued on our behalf to the bonding company as of June 11, 2008.

On July 18, 2008, our subsidiaries, Monticello Raceway Management, Monticello Raceway Development and Monticello Casino Management entered into a settlement agreement with the St. Regis Mohawk Gaming Authority and the St. Regis Mohawk Tribe pursuant to which the parties agreed to release all claims against the other parties. The settlement is subject to certain conditions which, if met, will require the payment of additional reimbursements of approximately $400,000 to the St. Regis Mohawk Tribe.

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, 2007.
 
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, 2007, 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.
 
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Overview
 
Empire Resorts, Inc. (“Empire,” the “Company,” “us” or “we”) was organized as a Delaware corporation on March 19, 1993, and since that time has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
 
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc., we currently own and operate Monticello Gaming and Raceway, a video gaming machine (“VGM”) and harness horseracing facility located in Monticello, New York, 90 miles Northwest of New York City.  At Monticello Gaming and Raceway, we conduct pari-mutuel wagering through the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and the export simulcasting of our races to offsite pari-mutuel wagering facilities.  In addition, we operate more than 1,500 VGMs as an agent for the New York State Lottery at Monticello Gaming and Raceway.
 
We also plan to grow and diversify our current business operations by marketing our management and consulting services to gaming and hospitality clients and pursuing joint ventures or other growth opportunities, including the commercial development of our existing real estate holdings.  We have an agreement, subject to certain conditions, with Concord Associates, L.P. (“Concord”) to develop a hotel, convention center, gaming facility and harness horseracing track on 160 acres of land located in Kiamesha Lake, New York (the “Entertainment City Project”).  Implementation of this project will involve the relocation of our current VGM facility and harness horseracing track to this new site.  Despite the current position of the Bureau of Indian Affairs (“BIA”), we are also continuing to explore the possibility of developing a Class III casino on the site adjacent to Monticello Gaming and Raceway.  The development of a Class III casino would, however, require either an amendment to the New York State Constitution to permit Class III casino gaming or an agreement with either the St. Regis Mohawk Tribe or another Indian tribe for the development of a Class III casino, together with the necessary federal and state regulatory approvals.  In addition, we are pursuing additional commercial and entertainment projects on the remaining 200 acres of land owned by the Company.
 
We have been working since 1996 to develop a Class III casino on a site 29.31 acre owned by us adjacent to our Monticello, New York facility.  As used herein, Class III gaming means a full casino including slot machines, on which the outcome of play is based upon randomness, and various table games including, but not limited to, poker, blackjack and craps. Initially, this effort was pursued through agreements with various Indian tribes.  Our most recent efforts were pursuant to agreements with the St. Regis Mohawk Tribe.  We were advised, however, that on January 4, 2008, the St. Regis Mohawk Tribe received a letter from the BIA denying the St. Regis Mohawk Tribe's request to take 29.31 acres into trust for the purpose of building a Class III gaming facility to be located at Monticello Gaming and Raceway.  In addition, our agreements with the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming Authority expired by their terms on December 31, 2007.
 
Thus, much of our ability to develop a successful business is now dependent on the success or failure of our ability to develop our interests in the Catskills region of the State of New York, and our financial results in the future will be based on different activities than those from our prior fiscal years.
 
Competition
 
We continue to face significant competition for our VGM operation from a VGM facility at Yonkers Raceway. In addition, several slot machine facilities have opened in Pennsylvania and one, operated by the Mohegan Tribal Gaming Authority, is within 65 miles of our Monticello property. The Yonkers facility is much closer to New York City than us and has approximately 5,500 VGMs, food and beverage outlets and other amenities. The harness racing operation at this facility has reopened as well. We believe that our operations for the three and six months ended June 30, 2008 have been adversely affected by this competition when compared with the corresponding period in 2007.
 
A number of states are currently considering or implementing legislation to legalize or expand gaming.  Such legislation presents both potential opportunities to establish new properties and potential competitive threats to business at our existing property. The timing and occurrence of these events remain uncertain.
 
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Critical Accounting Policies and Estimates
 
Our Annual Report on Form 10-K for the year ended December 31, 2007 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, 2008.
 
Results of Operations
 
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007.
 
Revenues.  Net revenues decreased approximately $2 million (or 10%) for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007.  Revenue from racing operations decreased by approximately $717,000 (or 31%); revenue from VGM operations decreased by approximately $1.1 million (or 7%) and food, beverage and other revenue decreased by approximately $255,000 (or 15%).  Complimentary expenses (“Promotional allowances”) decreased by approximately $106,000 (or 15%).
 
The decrease in racing revenues was primarily a result of continued competition from harness racing at the newly remodeled Yonkers Raceway. Among other things, the VGM operations at Yonkers Raceway allow for increased contributions to their purse amounts and could result in a more competitive racing product.
 
We believe that our VGM operations continue to be adversely affected by the opening of a competing VGM facility at Yonkers Raceway in late 2006 and slot machine facilities in Pennsylvania during 2007. Our number of daily visits decreased approximately 29% and the daily win per unit fell from $113.93 for the three months ended June 30, 2007 to $106.11 for the three months ended June 30, 2008 (or 7%).  The average number of machines in service was 1,587 in both periods.
 
Food, beverage and other revenue decreased primarily as a result of lower patron counts.
 
Racing costs.  Racing costs increased by approximately $913,000 (or 48%) to approximately $2.8 million for the three months ended June 30, 2008.  The primary reason for this increase was the cost of a settlement reached with our Horsemen of $1.25 million. Purses and other racing expenses decreased by approximately $337,000 (or 18%). This percentage is less than the percentage reduction in racing revenues and reflects the fact that some of our operating expenses are fixed in the short term and cannot be reduced immediately upon a reduction in revenues.
 
Gaming costs.  Gaming (VGM) costs decreased by approximately $2.8 million (or 20%) to approximately $11.6 million for the three months ended June 30, 2008 compared with the corresponding period in 2007. Of this amount, approximately $2 million (or 14%) is attributable to a change in the law which allows VGM operators to pay a lower percentage of VGM revenues to the New York State Lottery. The remainder of the decrease of approximately $800,000 (or 6%) reflects cost reductions to adjust to lower levels of customer visits.
 
Food, beverage and other costs.  Food, beverage and other costs decreased approximately $109,000 (or 17%) to approximately $535,000 primarily as a result of lower patron counts in 2008.
 
Selling, General and Administrative expenses.  Selling, general and administrative expenses decreased approximately $1.4 million (or 33%) for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007.  This decrease was due primarily to a reduction in stock-based compensation of approximately $1.3 million, a valuation reserve for advances to the Litigation Trust of $250,000 in 2007 and no such allowance in 2008, and reduced marketing expense in 2008 of approximately $121,000 offset by increases in professional fees and other expenses associated with development activities of approximately $271,000.
 
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Interest expense and income.  Interest expense decreased slightly (approximately $68,000) as a result of lower interest rates on our bank line of credit and interest income decreased by approximately $170,000 as a result of lesser amounts invested in 2008.
 
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007.
 
Revenues.  Net revenues decreased approximately $4.5 million (or 12%) for the six months ended June 30, 2008 compared to the six months ended June 30, 2007.  Revenue from racing decreased by approximately $1.2 million (or 25%); revenue from VGM operations decreased by approximately $3 million (or 10%) and food, beverage and other revenue decreased by approximately $478,000 (or 17%).  Complimentary expenses (“Promotional allowances”) decreased by approximately $159,000 (or 13%).
 
We believe that both our racing and VGM operations continue to be adversely affected by Yonkers Raceway and slot machine facilities in Pennsylvania as described earlier. The number of daily visits to our VGM facility decreased approximately 25% and the daily win per unit fell from $109.91 for the six months ended June 30, 2007 to $99.35 for the six months ended June 30, 2008 (or 11%).  The average number of machines in service was 1,587 in both periods.
 
Food, beverage and other revenue decreased primarily as a result of lower patron counts.
 
Racing costs.  Racing costs increased by approximately $612,000 (or 15%) to approximately $4.6 million for the six months ended June 30, 2008. The primary reason for this increase was the cost of a settlement reached with our Horsemen of $1.25 million. Purses and other racing expenses decreased by approximately $638,000 (or 16%). This percentage decrease is less than the percentage decrease in racing revenues because not all of our operating expenses will vary directly with revenue changes.
 
Gaming costs.  Gaming (VGM) costs decreased by approximately $4.6 million (or 16%) to approximately $23.8 million for the six months ended June 30, 2008 compared with the corresponding period in 2007.  Of this amount, approximately $2 million (or 7%) is attributable to a change in the law which allows VGM operators to pay a lower percentage of VGM revenues to the New York State Lottery. The remainder of the decrease of approximately $2.6 million (or 9%) reflects cost reductions to adjust to lower levels of customer visits.
 
Food, beverage and other costs.  Food, beverage and other costs decreased approximately $250,000 (or 21%) to approximately $947,000 primarily as a result of lower patron counts in 2008.
 
Selling, General and Administrative expenses.  Selling, general and administrative expenses decreased approximately $2.2 million (or 26%) for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007.  This decrease was due primarily to a reduction in stock-based compensation of approximately $1.9 million, a valuation reserve for advances to the Litigation Trust of $500,000 in 2007 and no such allowance in 2008, and reduced marketing expense in 2008 of approximately $464,000 offset by increases in professional fees and other expenses associated with development activities of approximately $664,000.
 
Interest expense and income.  Interest expense decreased slightly (approximately $113,000) as a result of lower interest rates on our bank line of credit and interest income decreased by approximately $267,000 as a result of lesser amounts invested in 2008.
 
Liquidity and Capital Resources
 
The holders of our Senior Convertible Notes ($65,000,000 principal balance due) have the right to demand repayment of the principal amount due on July 31, 2009.  We do not presently have a source for repayment of these notes and our operations will not provide sufficient cash flow to make this repayment, should it be demanded.
 
Our credit facility with the Bank of Scotland requires repayment of approximately $ 7,155,000 (outstanding balance of $ 7,617,000 less restricted cash on deposit of $462,000) on May 29, 2009.
 
We believe that we have sources of working capital that are sufficient to fund our operations for the twelve months ending June 30, 2009.  We have sold 2,433,090 shares of our common stock to a major shareholder for $3 million under an agreement to sell 4.2 million shares for a total amount of approximately $5.2 million and we have approximately $2.4 million available through May, 2009 from our revolving credit facility. Subsequently, on July 21, 2008, we sold the remaining 1,766,910 shares for $2,178,600 pursuant to this agreement.  However, we do not presently have a source for repayment of our Senior Convertible Notes if the holders of those notes elect to exercise their right to demand repayment on July 31, 2009.
 
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Beginning on April 1, 2008, the results of operations of our VGM facility have benefited and will continue to benefit from legislation that was passed on February 13, 2008, which increased our share of VGM revenues. Our VGM operations for the three and six months ended June 30, 2008 benefited by approximately $2 million as a result of this legislation.
 
Net cash used in operating activities during the six months ended June 30, 2008 was approximately $4.9 million compared to net cash used in operating activities for the six months ended June 30, 2007 of approximately $5.7 million, a decrease of approximately $800,000.
 
The most significant factor in the net change was that accrued expenses and other liabilities were reduced by approximately $2.9 million in 2007 compared with an increase of approximately $2.1 million in 2008 for a net positive effect of approximately $5 million; this was largely a result of a decrease in our purse liability of approximately $2.7 million in 2007 versus an increase in that account of approximately $2.1 million in 2008.
 
The relatively large changes in accounts receivable and the purse liability in 2007 are related to the higher revenues from racing in 2006 primarily due to the temporary closing of Yonkers Raceway. The higher revenues resulted in increased accounts receivable at December 31, 2006 and as those receivables were collected we directed a substantial amount of the collections to increased payments for purses during 2007. These payments had the effect of reducing the amount of the purse liability at June 30, 2007. In 2008, $1 million of the increase in the purse liability is a result of our litigation settlement with our horsemen. We are required by our new agreement with our horsemen to reduce our purse liability to $600,000 (on the basis of cash collected) by December 31, 2008.
 
Net cash provided by investing activities was approximately $108,000 for six months ended June 30, 2008 compared with net cash used of approximately $2.1 million in 2007. In 2008, we benefited from collections of restricted cash from the Racing Capital Improvement account of approximately $269,000. The primary uses in 2007 were advances to the Litigation Trust of $500,000 and deferred development costs of approximately $1.4 million.
 
Net cash provided by financing activities for the six months ended June 30, 2007 was approximately $18.9 million and was almost entirely a result of the proceeds from the exercise of options to purchase our common stock.  In 2008, we received $3 million from the sale of approximately 2.4 million shares of our common stock.
 
On February 24, 2008, we authorized issuance of 117,419 shares of our common stock as payment of dividends due for the year ended December 31, 2007 on our Series B preferred stock.  The recorded value of these shares was approximately $261,000.
 
On March 8, 2007, we authorized issuance of 18,884 shares of our common stock as payment of dividends due for the year ended December 31, 2006 on our Series B preferred stock.  The recorded value of these shares was approximately $190,000.
 
As of December 31, 2007, we had net operating loss carry forwards of approximately $136 million that expire between 2008 and 2027.  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 loss carry forwards due to the change in control.
 
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, 2008 under our revolving credit facility.  A change in interest rates of one percent on the balance outstanding at June 30, 2008 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, 2008.
 
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ITEM 4.  CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
We carried out an evaluation as of June 30, 2008 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, 2008 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 1. LEGAL PROCEEDINGS
 
In connection with a new contract with the Monticello Harness Horsemen’s Association (the “Horsemen”) entered into as of July 1, 2008, we have agreed to pay $1.25 million to settle all pending litigation between us and the Horsemen, including Monticello Harness Horsemen’s Association, Inc. v. Monticello Raceway Management, Inc. pending in the Supreme Court of the State of New York, County of Sullivan, under index #1765/03 and Monticello Harness Horsemen's Association, Inc. v. Monticello Raceway Management, Inc. pending in the Supreme Court of the State of New York, County of Sullivan, under index #3514/05. At June 30, 2008, we have recorded the liability for that amount with $1 million being recorded as an addition to the purse liability and $250,000 reflected in other accrued liabilities.
 
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 8, 2008
   /s/ David P. Hanlon
   
David P. Hanlon
   
President and Chief Executive Officer
     
Dated:  August 8, 2008
   /s/ Ronald J. Radcliffe
   
Ronald J. Radcliffe
   
Chief Financial Officer
 
 
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