EMPIRE
RESORTS, INC. AND SUBSIDIARIES
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PAGE NO.
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4-16
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17-24
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24
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24
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25
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27
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27
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28
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29
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE
RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except for per share data)
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June
30,
2009
(Unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
6,351 |
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$ |
9,687 |
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Restricted
cash
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|
2,398 |
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|
969 |
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Accounts
receivable
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2,038 |
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1,570 |
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Prepaid
expenses and other current assets
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3,020 |
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|
3,500 |
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Total
current assets
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13,807 |
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15,726 |
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Property
and equipment, net
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29,367 |
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29,908 |
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Deferred
financing costs, net of accumulated amortization of $2,397 in
2009 and $2,193 in 2008
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2,082 |
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2,287 |
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Other
assets
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|
535 |
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1,175 |
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TOTAL
ASSETS
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$ |
45,791 |
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$ |
49,096 |
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LIABILITIES
AND STOCKHOLDERS’ DEFICIT
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Current
liabilities:
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Revolving
credit facility
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$ |
6,917 |
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$ |
7,617 |
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Senior
convertible notes
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|
65,000 |
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65,000 |
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Accounts
payable
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|
2,404 |
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2,969 |
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Accrued
expenses and other current liabilities
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7,168 |
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5,881 |
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Total
current liabilities
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81,489 |
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81,467 |
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Commitments
and contingencies
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Stockholders’
deficit:
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Preferred
stock, 5,000 shares authorized; $0.01 par value -
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Series
A, $1,000 per share liquidation value, none issued and
outstanding
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---- |
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---- |
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Series
B, $29 per share liquidation value, 44 shares issued and
outstanding
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---- |
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---- |
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Series
E, $10 per share redemption value, 1,731 shares issued and
outstanding
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6,855 |
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6,855 |
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Common
stock, $0.01 par value, 75,000 shares authorized, 34,038 and 33,913 shares
issued and outstanding in 2009 and 2008, respectively
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340 |
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339 |
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Additional
paid-in capital
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62,482 |
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59,379 |
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Accumulated
deficit
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(105,375 |
) |
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(98,944 |
) |
Total
stockholders’ deficit
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(35,698 |
) |
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(32,371 |
) |
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$ |
45,791 |
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$ |
49,096 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMPIRE
RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except for per share data) (Unaudited)
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Three
Months
Ended
June 30,
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Six
Months
Ended
June 30,
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REVENUES:
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Racing
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$ |
2,176 |
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$ |
1,604 |
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$ |
4,100 |
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$ |
3,529 |
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Gaming
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13,973 |
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15,324 |
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26,172 |
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28,539 |
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Food,
beverage and other
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1,171 |
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1,306 |
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2,112 |
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2,313 |
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Gross
revenues
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17,320 |
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18,234 |
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32,384 |
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34,381 |
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Less:
Promotional allowances
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(951 |
) |
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(589 |
) |
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(1,642 |
) |
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(1,085 |
) |
Net
revenues
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16,369 |
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17,645 |
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30,742 |
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33,296 |
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COSTS
AND EXPENSES:
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Racing
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1,662 |
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1,570 |
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3,304 |
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3,334 |
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Racing
– settlement of Horsemen litigation
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--- |
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1,250 |
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--- |
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1,250 |
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Gaming
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10,741 |
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11,577 |
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20,506 |
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23,766 |
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Food,
beverage and other
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439 |
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535 |
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801 |
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947 |
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Selling,
general and administrative
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3,379 |
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2,736 |
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5,871 |
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5,774 |
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Stock-based
compensation
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2,581 |
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193 |
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2,993 |
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|
519 |
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Depreciation
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308 |
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307 |
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619 |
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|
609 |
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Total
costs and expenses
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19,110 |
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18,168 |
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34,094 |
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36,199 |
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Loss
from operations
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(2,741 |
) |
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(523 |
) |
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(3,352 |
) |
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(2,903 |
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Amortization
of deferred financing costs
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(102 |
) |
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(102 |
) |
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(205 |
) |
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|
(205 |
) |
Interest
expense
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(1,386 |
) |
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(1,424 |
) |
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(2,777 |
) |
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(2,870 |
) |
Interest
income
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|
3 |
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|
54 |
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|
14 |
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|
142 |
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NET
LOSS
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(4,226 |
) |
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(1,995 |
) |
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(6,320 |
) |
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(5,836 |
) |
Undeclared
dividends on preferred stock
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|
(388 |
) |
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(388 |
) |
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(776 |
) |
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(776 |
) |
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NET
LOSS APPLICABLE TO COMMON SHARES
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$ |
(4,614 |
) |
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$ |
(2,383 |
) |
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$ |
(7,096 |
) |
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$ |
(6,612 |
) |
Weighted
average common shares outstanding, basic and diluted
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|
34,038 |
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30,578 |
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|
33,991 |
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30,104 |
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Loss
per common share, basic and diluted
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$ |
(0.14 |
) |
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$ |
(0.08 |
) |
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$ |
(0.21 |
) |
|
$ |
(0.22 |
) |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMPIRE
RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
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Six
Months Ended
June
30,
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$ |
(6,320 |
) |
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$ |
(5,836 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
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|
619 |
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|
609 |
|
Amortization
of deferred financing costs
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|
205 |
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|
205 |
|
Stock-based
compensation
|
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|
2,993 |
|
|
|
519 |
|
Changes
in operating assets and liabilities:
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|
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|
Restricted
cash –NYS Lottery and Purse Accounts
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|
(1,418 |
) |
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|
(473 |
) |
Accounts
receivable
|
|
|
(468 |
) |
|
|
(279 |
) |
Prepaid
expenses and other current assets
|
|
|
480 |
|
|
|
(1,089 |
) |
Accounts
payable
|
|
|
(565 |
) |
|
|
(769 |
) |
Accrued
expenses and other current liabilities
|
|
|
1,287 |
|
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|
2,098 |
|
Other
assets
|
|
|
640 |
|
|
|
67 |
|
NET
CASH USED IN OPERATING ACTIVITIES
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|
(2,547 |
) |
|
|
(4,948 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(78 |
) |
|
|
(161 |
) |
Restricted
cash - Racing capital improvement
|
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|
(11 |
) |
|
|
269 |
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
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|
(89 |
) |
|
|
108 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
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|
|
|
|
|
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|
Proceeds
from exercise of stock options
|
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|
--- |
|
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|
14 |
|
Proceeds
from issuance of common stock
|
|
|
--- |
|
|
|
3,000 |
|
Repayment
on revolving credit facility
|
|
|
(700 |
) |
|
|
--- |
|
Restricted
cash - Revolving credit facility
|
|
|
--- |
|
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|
(7 |
) |
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(700 |
) |
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|
3,007 |
|
|
|
|
|
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NET
DECREASE IN CASH AND CASH EQUIVALENTS
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|
(3,336 |
) |
|
|
(1,833 |
) |
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
9,687 |
|
|
|
15,008 |
|
CASH
AND CASH EQUIVALENTS, end of period
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|
$ |
6,351 |
|
|
$ |
13,175 |
|
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|
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SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
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|
Cash
paid for interest during the period
|
|
$ |
2,777 |
|
|
$ |
2,870 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND
|
|
|
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FINANCING
ACTIVITIES:
|
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|
|
|
|
|
|
|
Common
stock issued in settlement of preferred stock dividends
|
|
$ |
111 |
|
|
$ |
261 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
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, 2009 and
for the three-month and six-month periods ended June 30, 2009 and 2008 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 our Annual Report on Form
10-K for the year ended December 31, 2008. The results of operations
for the interim period are not indicative of results to be expected for the full
year.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. Our
ability to continue as a going concern is dependent upon a determination
that we did not have the obligation to repurchase our senior convertible
notes on July 31, 2009, and/or our ability to arrange financing with other
sources to fulfill our obligations under the Loan Agreement, as defined below,
and senior convertible notes, if required. As described in Note J, we
are continuing our efforts to obtain financing, but there is no assurance that
we will be successful in doing so. These factors, as well as continuing net
losses and negative cash flows from operating activities, raise substantial
doubt about our ability to continue as a going concern. These condensed
consolidated financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern.
On July
27, 2009, we entered into an amended loan agreement (the “Loan
Agreement”) reflecting the assignment of our revolving credit agreement from
Bank of Scotland to The Park Avenue Bank. One of the provisions of
the Loan Agreement is a short term maturity date of July 28, 2009. On
July 29, 2009, we received a notice of the occurrence of an event of default
under the Loan Agreement as a result of our failure to pay the principal due on
July 28, 2009 (see Note J).
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory judgment
action in the Supreme Court of the State of New York in Sullivan County, in
which we named as defendants the trustee, i.e., The Bank of New York Mellon
Corporation, The Depository Trust Company and twelve entities claiming interests
in the notes. In the action, we allege two causes of action, one
seeking a declaration by the Court that the defendants failed to properly
exercise any option pursuant to Section 3.07(a) of the indenture to require us
to purchase their interest in the notes, and the other cause of action seeking a
declaration that the three entities which gave the purported notice of default
have not invoked the Default Consequences under the indenture. We did not make
the interest payment on the notes of $2.6 million that was due on July 31,
2009. We are obligated to pay interest on overdue installments of
interest at a rate of 9% (see Notes D and J) and will be in default on such
payment if it is not made by August 31, 2009. The same three entities that gave
us the notice on August 3, 2009 also gave written notice to us on August 11,
2009, asserting that we were in default under the indenture for not paying the
interest due on July 31, 2009.
If the
notes have been validly exercised pursuant to the purported right to demand
repayment of the notes, we do not have an immediate source of repayment for our
obligations under the Loan Agreement or the senior convertible
notes. Moreover, our current operations will not provide sufficient
cash flow to repay these obligations at maturity, if we are required to do
so.
A failure
to repurchase the notes when required would result in an event of default under
the indenture and could result in a cross-default under any other credit
agreement to which we may be a party at such time. In addition, an
event that may constitute a change in control under the indenture may also be
events of default under any credit agreement or other agreement governing future
debt. These events permit the lenders under such credit agreement or
other agreement to accelerate the debt outstanding thereunder and, if such debt
is not paid, to enforce security interests in the collateral securing such debt
or result in our becoming involved in an insolvency proceeding.
Nature
of Business
We have
concentrated on developing gaming operations in New York
State. Through our subsidiaries, we currently own and operate
Monticello Casino and Raceway, a video gaming machine (“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”) to develop an entertainment complex
consisting of a hotel, convention center, VGM facility and harness horseracing
track on 160 acres of land located in Kiamesha Lake, New York.
On March
23, 2009, we entered into a new agreement (the “Agreement”), with Concord,
pursuant to which we (or a wholly-owned subsidiary reasonably acceptable to
Concord) shall be retained by Concord Empire Raceway Corp. (“Raceway Corp.”), a
subsidiary of Concord, to provide advice and general managerial oversight with
respect to the operations at the harness track (the “Track”) to be constructed
at that certain parcel of land located in the Town of Thompson, New York and
commonly known as the Concord Hotel and Resort (the “Concord
Property”). The Agreement has a term of forty years (the
“Term”).
As a
result of the execution of the Agreement, the Contribution Agreement, dated
February 8, 2008, as amended on December 20, 2008 and January 30, 2009, and
which became terminable by either party in accordance with its terms on February
28, 2009, terminated and became of no further force and effect.
The
closing of the transactions contemplated by the Agreement is to take place on
the date that Concord or its subsidiary secures and closes on (but not
necessarily funds under) financing (the “Financing”) in the minimum aggregate
amount of $500 million (including existing equity) from certain third-party
lenders in connection with the development of the Track and certain gaming
facilities (the “Concord Gaming Facilities”) on the Concord Property (the
“Closing Date”).
Upon the
commencement of operations at the Concord Gaming Facilities (the “Operations
Date”) and for the duration of the Term, Concord shall cause Raceway Corp. to
pay to the Company an annual management fee in the amount of $2 million, such
management fee to be increased by five percent on each five year anniversary of
the Operations Date (the “Empire Management Fee”). The Empire
Management Fee shall be prorated for the initial year in which the Track is open
for business by the number of months in which the Track is open to the
public. Concord agreed that the Empire Management Fee to be paid to
us will be senior to payments due in connection with the Financing.
In
addition to the Empire Management Fee, commencing on the Operations Date and for
the duration of the Term, Concord shall cause Raceway Corp. to pay us an annual
fee in the amount of two percent of the total revenue wagered with respect to
video gaming machines and/or other alternative gaming located at the
Concord Property after payout for prizes, less certain fees payable to the State
of New York, the Monticello Harness Horsemen’s Association, Inc. and the New
York State Horse Breeding Fund (“Adjusted Gross Gaming Revenue
Payment”). Commencing upon the Operations Date and for the duration
of the Term, in the event that the Adjusted Gross Gaming Revenue Payment paid to
us is less than $2 million per annum, Concord shall guaranty and pay to us the
difference between $2 million and the Adjusted Gross Gaming Revenue Payment
distributed to us with respect to such calendar year.
Upon a
sale or other voluntary transfer of the Concord Gaming Facilities to any person
or entity who is not an affiliate of Concord (the “Buyer”), Raceway Corp. may
terminate the Agreement upon payment to us of $25 million; provided, that the
Buyer shall enter into an agreement with us whereby the Buyer shall agree to pay
the greater of (i) the Adjusted Gross Gaming Revenue Payment or (ii) $2 million
per annum to the Company for the duration of the Term of the
Agreement.
In the
event that the Closing Date has not occurred on or before July 31, 2010, the
Agreement may be terminated by either Concord or us by written
notice.
In the
past, we have also made efforts to develop a 29.31 acre parcel of land adjacent
to Monticello Casino and Raceway as the site for the development of a Class III
casino and may pursue additional commercial and entertainment projects on the
remaining 200 acres of land owned by the Company that encompass the site of our
current gaming and racing facility. We will also continue to explore other
possible development projects.
We
operate through three principal subsidiaries, Monticello Raceway Management,
Inc. (“MRMI”), Monticello Casino Management, LLC (“Monticello Casino
Management”) and Monticello Raceway Development Company, LLC (“Monticello
Raceway Development”). Currently, only MRMI has operations which
generate revenue. During 2008, for administrative purposes, we merged
eight of our inactive subsidiaries into one entity.
On June
11, 2009, MRMI entered into a management services agreement, dated as of June
10, 2009, with Sportsystems Gaming Management at Monticello, LLC
(“Sportsystems”), a wholly owned subsidiary of Delaware North Companies, whereby
MRMI retained Sportsystems to provide MRMI with management and consulting
services in connection with the video gaming, food service, and related
hospitality businesses conducted by MRMI for a term of three years.
Raceway
and VGM Operations
MRMI
operates Monticello Raceway (the “Raceway”), a harness horse racing facility and
a VGM facility (Monticello Casino 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, MRMI
operates 1,290 VGMs on 45,000 square feet of floor space at the
Raceway. Pursuant to our efforts to improve profitability, the number
of VGMs is being reduced and reconfigured to improve utilization, with a target
VGM count of approximately 1,100 machines.
Note
B. Summary of Significant Accounting Policies
Restricted cash. During the
quarter ended June 30, 2009, we have added a restricted cash account to those
described in the Notes to our Consolidated Financial Statements, included in our
Annual Report on Form 10-K for the year ended December 31, 2008. In
connection with our VGM operations, we agreed to maintain a restricted bank
account with a balance of $400,000. The New York State Lottery can
make withdrawals directly from this account if they have not received their
share of net win when due. As of June 30 2009, there were no
withdrawals made from this account.
Loss Per Common
Share. We compute basic loss per share by dividing loss
applicable to common shares by the weighted-average common shares outstanding
for the period. Diluted loss per share reflects the potential
dilution of earnings that could occur if securities or contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the loss of the entity. Since the
effect of outstanding options and warrants is anti-dilutive with respect to
losses, they have been excluded from our computation of loss per common
share. Therefore, basic and diluted losses per common share for the
three months and six months ended June 30, 2009 and 2008 were the same. The
following table shows the approximate number of securities outstanding at June
30, 2009 and 2008 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.
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
6,640,000 |
|
|
|
2,553,000 |
|
Warrants
|
|
|
--- |
|
|
|
250,000 |
|
Shares
to be issued upon conversion of convertible debt
|
|
|
5,175,000 |
|
|
|
5,175,000 |
|
Total
|
|
|
11,815,000 |
|
|
|
7,978,000 |
|
Fair Value. In the
first quarter of 2008, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements”, for financial assets and
liabilities and elected the deferral option available for one year for
non-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).
On January 1, 2009, we adopted the remaining provisions of SFAS No.157 as
it relates to nonfinancial assets and liabilities that are not recognized or
disclosed at fair value on a recurring basis. The adoption of the remaining
provision of SFAS No. 157 did not materially impact our condensed consolidated
financial statements.
As
permitted, we chose not to elect the fair value option as prescribed by
Financial Accounting Standards Board (“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.
Our
financial instruments are comprised of current assets and current liabilities,
which include our revolving credit facility and senior convertible notes at June
30, 2009 and December 31, 2008. 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 and
contingencies. Actual results may differ from estimates.
Subsequent Events. These financial
statements were approved by management and the Board of Directors and were
issued on August 17, 2009. Management has evaluated subsequent events
through this date.
Reclassifications. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
Recent
Accounting Pronouncements.
In
June 2009, the FASB issued SFAS No. 168, The “FASB Accounting
Standards Codification” and the Hierarchy of Generally Accepted Accounting
Principles. This standard replaces SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles, and establishes only two levels of
U.S. GAAP, authoritative and non-authoritative. The FASB Accounting
Standards Codification (the “Codification”) will become the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases
of the Securities and Exchange Commission (“SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered,
non-SEC accounting literature not included in the Codification will become
non-authoritative. This standard is effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. We will begin to use the new guidelines and
numbering system prescribed by the Codification when referring to GAAP in the
third quarter of 2009. As the Codification does not change or alter
existing GAAP, it will not have any impact on our consolidated financial
statements.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends the
consolidation guidance applicable to variable interest entities and is effective
for fiscal years beginning after November 15, 2009. The adoption
of SFAS 167 will not have an impact on our consolidated financial
statements.
In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140”. The new standard
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires greater
transparency of related disclosures. SFAS No. 166 is effective for fiscal
years beginning after November 15, 2009. The adoption of SFAS
166 will not have an impact on our consolidated financial
statements.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”), which is effective for interim and annual fiscal periods ending after
June 15, 2009. This standard establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued. This standard sets forth the period after the balance sheet
date during which we should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which we should recognize events or transactions occurring
after the balance sheet date in our financial statements and the disclosures
that we should make about events or transactions that occurred after the balance
sheet date.
Note
C. Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
Liability
for horseracing purses
|
|
$ |
2,089 |
|
|
$ |
1,297 |
|
Accrued
interest
|
|
|
2,165 |
|
|
|
2,167 |
|
Accrued
payroll
|
|
|
752 |
|
|
|
895 |
|
Accrued
other
|
|
|
2,162 |
|
|
|
1,522 |
|
Total
accrued expenses and other current liabilities
|
|
$ |
7,168 |
|
|
$ |
5,881 |
|
Note
D. 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 each holder had 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 subordinated to our senior obligations and those of our subsidiaries, yet
rank senior in right of payment to all of our existing and future subordinated
indebtedness. The notes are secured by our tangible and intangible
assets and by a pledge of the equity interests of each of our subsidiaries and a
mortgage on our property in Monticello, New York. The first position
in this collateral is also held by The Park Avenue Bank and on July 29, 2009,
The Park Avenue Bank delivered a notice to The Bank of New York advising that,
as a result of the occurrence of the event of default under the Loan Agreement,
a standstill period has commenced under the Intercreditor Agreement with respect
to the collateral. The standstill period will continue until the
earlier to occur of: (i) The Park Avenue Bank’s express waiver or
acknowledgement of the cure of the applicable event of default in writing
or the occurrence of the discharge of the Loan Agreement secured obligations,
and (ii) the date that is 90 days from the date of the Bank of New York’s
receipt of the standstill notice.
The notes
initially accrued interest at an annual rate of 5.5%, which would be maintained
with the occurrence of the “Trigger Event”, as defined. 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. The holders of the notes have the option to convert the notes
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.
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory
judgment action in the Supreme Court of the State of New York in Sullivan
County, in which we named as defendants the trustee, i.e., The Bank of New York
Mellon Corporation, The Depository Trust Company and twelve entities claiming
interests in the notes. In the action, we allege two causes of
action, one seeking a declaration by the Court that the defendants failed to
properly exercise any option pursuant to Section 3.07(a) of the indenture to
require us to purchase their interest in the notes, and the other cause of
action seeking a declaration that the three entities which gave the purported
notice of default have not invoked the Default Consequences under the indenture.
We did not make the interest payment on the notes of $2.6 million that was due
on July 31, 2009. We are obligated to pay interest on overdue
installments of interest at a rate of 9% (see Note J) and will be in default on
such payment if it is not made by August 31, 2009. The same three entities that
gave us the notice on August 3, 2009 also gave written notice to us on August
11, 2009, asserting that we were in default under the indenture for not paying
the interest due on July 31, 2009.
A failure
to repurchase the notes when required would result in an event of default under
the indenture and could result in a cross-default under any other credit
agreement to which we may be a party at such time. In addition, an
event that may constitute a change in control under the indenture may also be
events of default under any credit agreement or other agreement governing future
debt. These events permit the lenders under such credit agreement or
other agreement to accelerate the debt outstanding thereunder and, if such debt
is not paid, to enforce security interests in the collateral securing such debt
or result in our becoming involved in an insolvency proceeding.
We
recognized interest expense associated with the notes of approximately $1.3
million and $2.6 million in each of the three-month and six-month periods ended
June 30, 2009 and 2008.
Note
E. Revolving Credit Facility
On
January 11, 2005, we entered into a credit facility with Bank of
Scotland. The credit facility provided for a $10 million senior
secured revolving loan (subject to certain reserves) that matured on July 24,
2009. As security for borrowings under the facility, we agreed to have our
wholly owned subsidiary, MRMI, grant a mortgage on the Raceway property and our
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 also entered into an
Intercreditor Agreement with The Bank of New York so that the lender under this
credit facility 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.
On June
21, 2007, we entered into an amendment to our credit facility with Bank of
Scotland. The amendment, 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. We have
the right to elect the method of determining the interest rate to be
applied. 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 entered into three
additional amendments extending the maturity date to July 24,
2009.
We
recognized interest expense for the credit facility of approximately $86,000 and
$124,000 in the three months ended June 30, 2009 and 2008, respectively and
approximately $177,000 and $270,000 in the six months ended June 30, 2009 and
2008, respectively.
On July
27, 2009, we entered into the Loan Agreement with The Park Avenue Bank
reflecting the assignment of the credit facility to it from the Bank of
Scotland. In connection with that transaction, we made a cash payment of
$2.5 million to reduce the principal amount outstanding to approximately $4.4
million. One of the provisions of the Loan Agreement is a short term
maturity date of July 28, 2009. On July 29, 2009, we received a
notice of the occurrence of an event of default under the Loan Agreement as a
result of our failure to pay the principal due on July 28, 2009 (see Note
J).
Note
F. Stockholders’ Equity
Stock-based
compensation expense is approximately $2,581,000 and $193,000 for the three
months ended June 30, 2009 and 2008, respectively, and approximately
$2,993,000 and $519,000 for the six months ended June 30, 2009 and 2008,
respectively. As of June 30, 2009, there was approximately $3.2 million of total
unrecognized compensation cost related to non-vested share-based compensation
awards granted under our plans. That cost is expected to be
recognized over the remaining vesting period of two years. This expected cost
does not include the impact of any future stock-based compensation
awards.
During
the period from April 15, 2009 to June 8, 2009, we granted approximately 3.2
million options to directors and officers at exercise prices that varied from
$1.11 to $1.78 (exercise price was determined by using the closing stock price
on the day of grant), but the grants were subject to stockholder approval of an
amendment to increase the number of shares in our 2005 Equity Incentive Plan.
Stockholder approval was obtained on June 16, 2009 on which date the stock price
was $1.57. The stock-based compensation expense related to these
grants was approximately $1.5 million for the three and six months ended June
30, 2009.
Options
that were granted to three officers and an employee, who have resigned during
the second quarter, would have otherwise expired in thirty or ninety days
subsequent to the termination date, based on the equity incentive plan under
which the options were issued, but were extended to dates mutually agreed upon
in the respective termination agreements, as permitted under the
plan. The modification resulted in stock-based compensation expense
of approximately $832,000 in the three and six months ended June 30,
2009.
Options
that were granted to four directors, who have resigned in March 2009, would have
otherwise expired on the date of termination or in thirty days based
on the equity incentive plan under which the options were issued, but were
extended to the original expiration dates set forth for the respective options,
as permitted under the plan. The modification resulted in stock-based
compensation expense of approximately $0 and $123,000 in the three and six
months ended June 30, 2009.
On March
9, 2009, we authorized issuance of 124,610 shares of our common stock as payment
of dividends due for the year ended December 31, 2008 on our Series B preferred
stock. The approximate value of these shares when issued was
$111,000.
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 these shares when issued
was $261,000.
Note
G. Concentration
Two
debtors, New York Off-Track Betting Corporation (“OTB”) and Nassau OTB,
represented approximately 44% and 17%, respectively, of the total outstanding
accounts receivable as of June 30, 2009. Two debtors, New York OTB
and Nassau OTB, represented approximately 41% and 18%, respectively, of the
total outstanding accounts receivable as of December 31, 2008.
Note
H. Employee Benefit Plan
Effective
with the payroll period beginning March 23, 2009, we amended our sponsored
401(k) Plan to discontinue Company matching contributions for salaried
employees.
On April
23, 2009, our union employees agreed to, among other things, the removal of the
Company’s 401(k) contribution match. As a result, we discontinued the
Company matching contributions for both union employees and non-union hourly
employees on May 4, 2009.
Note
I. Commitments and Contingencies
On April
8, 2009, we entered into an agreement with Eric Reehl (the “Reehl Agreement”)
pursuant to which Mr. Reehl was appointed to serve as our chief restructuring
officer effective as of April 13, 2009. We initially agreed to pay
Mr. Reehl a retainer of $20,000 per month commencing as of the execution of the
Reehl Agreement for a term of three months. On July 9, 2009, we
entered into an amended and restated agreement with Nima Asset Management LLC
(“Nima”) that superseded the Reehl Agreement (the “Consulting Agreement”),
pursuant to which Nima agreed to provide, at the request of the Board of
Directors, the services of Eric Reehl as acting chief restructuring officer
and/or chief financial officer. Nima will assist in our efforts to
identify, negotiate and secure additional debt and/or equity capital and will
coordinate our restructuring efforts. We will pay Nima a retainer of
$20,000 per month for a term of six months from April 8, 2009, to continue on a
monthly basis unless terminated by either party on 30-days notice. In
the event that we achieve, exchange or otherwise modify or resolve conclusively
our first and second mortgage indebtedness sufficient to effect a restructuring
transaction or series of transactions approved by us before September 30, 2009,
we will pay to Nima (or its designee) a cash amount of $300,000 less all
amounts previously paid as a retainer.
On June
1, 2009, our Board of Directors appointed Joseph E. Bernstein to serve as our
chief executive officer. We entered into an employment agreement with
Mr. Bernstein, dated as of June 1, 2009 (the “Bernstein
Agreement”). Pursuant to the Bernstein Agreement, Mr. Bernstein will
serve as our chief executive officer through an initial term ending December 31,
2009, subject to an automatic one-year renewal if a debt restructuring
transaction (as defined in the Bernstein Agreement) has occurred during the
initial six month term. Mr. Bernstein will be paid an annual salary
of $500,000. In addition, Mr. Bernstein is entitled to participate in
any annual bonus plan maintained by us for our senior executives and our equity
based incentive programs to the extent such programs are put into place and
maintained for our senior executives, each on such terms and conditions as may
be determined from time to time by the Compensation Committee of the Board of
Directors, and with respect to his participation in equity based incentive
programs, to the extent consistent with the Bernstein Agreement and commensurate
with his position.
Pursuant
to the Bernstein Agreement, on June 8, 2009, Mr. Bernstein received an option
grant of a 5-year non-qualified stock option to purchase 500,000 shares of our
common stock pursuant to the 2005 Equity Incentive Plan, at an exercise price
per share of $1.78, vesting 33% six months following the grant date, 33% on the
first anniversary of the grant and 34% 18 months following the grant, subject to
earlier vesting as provided in the Bernstein Agreement. Pursuant to
the Bernstein Agreement, on June 8, 2009, Mr. Bernstein received an additional
option grant of a 10-year non-qualified stock option to purchase 1,000,000
shares, at an exercise price per share of $1.78, subject to the consummation of
a debt restructuring transaction with an entity sourced by Mr.
Bernstein. In addition, pursuant to the Bernstein Agreement, the
vesting of Mr. Bernstein’s April 27, 2009 grant of 250,000 was changed to vest
upon a debt restructuring transaction.
On June
3, 2009, Empire and MRMI entered into a letter agreement with KPMG Corporate
Finance LLC (“KPMGCF”) whereby we retained KPMGCF as our exclusive financial
advisor to raise up to $75 million in newly sourced capital to address pending
maturity and contractual issues relating to the notes. Such agreement
provides for KPMGCF to assist with and receive compensation in connection with
certain amounts raised by us from sources other than KPMGCF. The
letter agreement was included as an exhibit to our Current Report on Form 8-K,
filed with the SEC on June 9, 2009.
On June
11, 2009, MRMI entered into a management services agreement (the “Agreement”)
with Sportsystems, a wholly owned subsidiary of Delaware North Companies, dated
as of June 10, 2009, whereby MRMI retained Sportsystems to provide MRMI with
management and consulting services in connection with the video gaming, food
service, and related hospitality businesses conducted by MRMI for a term of
three years. Sportsystems will be paid a base management fee of 0.75%
of the gross gaming revenue of MRMI. In addition, Sportsystems will
earn an incentive fee equal to 20% of any improvement of EBITDA over a base
EBITDA of $9.4 million after accounting for the base management fee, subject to
adjustment under certain circumstances. If the planned Concord Hotel
and Casino commences gaming operations during the term of the Agreement, MRMI
and Sportsystems have agreed to renegotiate in good faith to make changes to the
method by which the management and incentive fees are calculated as are
reasonable, appropriate and equitable under the circumstances.
MRMI may
terminate the Agreement without cause (i) at any time prior to September 30,
2009 subject to payment of all accrued management and incentive fees plus the
sum of $1,000,000, (ii) at any time after June 10, 2010 if MRMI’s EBITDA has not
increased over the immediately preceding twelve month period at the annual
cumulative rate of at least 3% or (iii) in the event that the operation of
MRMI’s gaming business results in MRMI incurring an operating loss over a period
of twelve consecutive months. MRMI may also terminate the Agreement
(i) if Sportsystems fails in a material manner to perform or observe any
provision of the Agreement, subject to Sportsystems’ opportunity to cure certain
failures, (ii) if Sportsystems enters into bankruptcy or other insolvency
proceedings, unless an involuntary bankruptcy or insolvency petition is
dismissed within 60 days after it is filed (iii) under certain circumstances if
a supervisory employee of Sportsystems commits fraud, malfeasance, gross
negligence or material misrepresentation in connection with the gaming or
hospitality businesses of MRMI or (iv) any state or federal court or other
governmental agency having jurisdiction over the horse racing or gaming
businesses of MRMI or Sportsystems suspends or revokes any gaming license held
by Sportsystems, orders MRMI to discontinue retention of the Sportsystems
pursuant to the Agreement or advises MRMI that its authority to operate its
gaming or horse racing businesses will be suspended or revoked unless the
affiliation between MRMI and Sportsystems is terminated. Sportsystems
may terminate the Agreement (i) if MRMI fails to pay the management fees in
connection with the Agreement, (ii) if MRMI materially fails to perform or
observe any provision of the Agreement, subject to MRMI’s opportunity to cure
certain failures or (iii) if MRMI enters into bankruptcy or other insolvency
proceedings and fails to assume the Agreement as an executory contract within 90
days after the commencement of such bankruptcy proceeding. If the
Agreement is terminated in accordance with the foregoing sentence, Sportsystems
will be entitled to receive a termination payment representing the estimated
management fees for the remainder of the term of the Agreement. If
there is a lease, sale or change of control of MRMI as described in the
Agreement, and the successor to MRMI does not assume the terms of the Agreement
in a form acceptable to Sportsystems, MRMI will pay liquidated damages to
Sportsystems not to exceed $500,000.
On June
29, 2009, we entered into an employment agreement with Charles Degliomini, to
continue to serve as our Executive Vice President (the “Degliomini
Agreement”). The Degliomini Agreement provides for a term ending on
June 29, 2012 (the “Degliomini Term”) unless Mr. Degliomini’s employment is
terminated by either party in accordance with the provisions
thereof. Mr. Degliomini is to receive a base salary at the annual
rate of $225,000 for the first year of the Degliomini Term, $243,500 for the
second year of the Degliomini Term and $250,000 for the third year of the
Degliomini Term and such incentive compensation and bonuses, if any, (i) as the
Compensation Committee of the Board of Directors in its discretion may
determine, and (ii) to which the Mr. Degliomini may become entitled pursuant to
the terms of any incentive compensation or bonus program, plan or agreement from
time to time in effect in which he is a participant. The first year
salary represents a pay reduction of 10% from the previously agreed upon salary
for Mr. Degliomini, consistent with the salary reduction imposed upon all
employees. As an additional incentive for entering into the
agreement, Mr. Degliomini received an option to purchase 300,000 shares of our
common stock on April 23, 2009 pursuant to the Company’s 2005 Equity Incentive
Plan. In the event that we terminate Mr. Degliomini's employment with
Cause (as defined in the Degliomini Agreement) or Mr. Degliomini resigns without
Good Reason (as defined in the Degliomini Agreement), our obligations are
limited generally to paying Mr. Degliomini his base salary through the
termination date. In the event that we terminate Mr. Degliomini's
employment without Cause or Mr. Degliomini resigns with Good Reason, we are
generally obligated to continue to pay Mr. Degliomini's compensation for the
lesser of (i) 18 months or (ii) the remainder of the term of the Degliomini
Agreement and accelerate the vesting of the options granted in contemplation of
the Degliomini Agreement, which options shall remain exercisable through the
remainder of its original 5 year term. In the event that we terminate
Mr. Degliomini's employment without Cause or Mr. Degliomini resigns with Good
Reason on or following a Change of Control (as defined in the Degliomini
Agreement), we are generally obligated to continue to pay Mr. Degliomini's
compensation for the greater of (i) 24 months or (ii) the remainder of the term
of the Degliomini Agreement and accelerate the vesting of the options granted in
contemplation of the Degliomini Agreement, which options shall remain
exercisable through the remainder of its original 5 year term.
On June
29, 2009, we entered into an employment agreement with Clifford Ehrlich, to
continue to serve as the President and General Manager of MRMI (the “Ehrlich
Agreement”). The Ehrlich Agreement provides for a term ending on June 29, 2012
(the “Ehrlich Term”) unless Mr. Ehrlich’s employment is terminated by either
party in accordance with the provisions thereof. Mr. Ehrlich is to
receive a base salary at the annual rate of $225,000 for the first year of the
Ehrlich Term, $243,500 for the second year of the Ehrlich Term and $250,000 for
the third year of the Ehrlich Term and such incentive compensation and bonuses,
if any, (i) as the Compensation Committee of the Board of Directors in its
discretion may determine, and (ii) to which the Mr. Ehrlich may become entitled
pursuant to the terms of any incentive compensation or bonus program, plan or
agreement from time to time in effect in which he is a
participant. The first year salary represents a pay reduction of 10%
from the previously agreed upon salary for Mr. Ehrlich, consistent with the
salary reduction imposed upon all employees. As an additional
incentive for entering into the agreement, Mr. Ehrlich received an option to
purchase 300,000 shares of our common stock on April 23, 2009 pursuant to the
Company’s 2005 Equity Incentive Plan. In the event that we terminate
Mr. Ehrlich's employment with Cause (as defined in the Ehrlich Agreement) or Mr.
Ehrlich resigns without Good Reason (as defined in the Ehrlich Agreement), our
obligations are limited generally to paying Mr. Ehrlich his base salary through
the termination date. In the event that we terminate Mr. Ehrlich's
employment without Cause or Mr. Ehrlich resigns with Good Reason, we are
generally obligated to continue to pay Mr. Ehrlich's compensation for the lesser
of (i) 18 months or (ii) the remainder of the term of the Ehrlich Agreement and
accelerate the vesting of the options granted in contemplation of the Ehrlich
Agreement, which options shall remain exercisable through the remainder of its
original 5 year term. In the event that we terminate Mr. Ehrlich's
employment without Cause or Mr. Ehrlich resigns with Good Reason on or following
a Change of Control (as defined in the Ehrlich Agreement), we are generally
obligated to continue to pay Mr. Ehrlich's compensation for the greater of (i)
24 months or (ii) the remainder of the term of the Ehrlich Agreement and
accelerate the vesting of the options granted in contemplation of the Ehrlich
Agreement, which options shall remain exercisable through the remainder of its
original 5 year term.
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 (see Note
J).
Note
J. Subsequent Events
In July
2009, MRMI reached a settlement agreement with Suffolk Regional Off-Track
Betting Corporation (“Suffolk OTB”), pursuant to which Suffolk OTB paid
MRMI approximately $1.93 million, approximately half of which we are obligated
to fund to our purse escrow account to be used for the payment of purses for
live harness racing at the Raceway.
On July
9, 2009, we entered into the Consulting Agreement with Nima that superseded the
Reehl Agreement. Pursuant to the Consulting Agreement, Nima agreed to
provide, at the request of the Board of Directors, the services of Eric Reehl as
acting chief restructuring officer and/or chief financial
officer. Nima will assist in our efforts to identify, negotiate and
secure additional debt and/or equity capital and will coordinate our
restructuring efforts. We will pay Nima a retainer of $20,000 per
month for a term of six months from April 8, 2009, to continue on a monthly
basis unless terminated by either party on 30-days notice. In the
event that we achieve, exchange or otherwise modify or resolve conclusively our
first and second mortgage indebtedness sufficient to effect a restructuring
transaction or series of transactions approved by us before September 30, 2009,
we will pay to Nima (or its designee) a cash amount of $300,000 less all amounts
previously paid as a retainer.
On July
27, 2009, we entered into the Loan Agreement, among us, the subsidiary
guarantors party thereto, The Park Avenue Bank, in its capacity as assignee of
Bank of Scotland, and The Park Avenue Bank, as assignee of Bank of Scotland, as
agent, which amends and restates our $10.0 million secured credit facility with
the Bank of Scotland (the “Original Loan Agreement”). In connection
with the closing of the Loan Agreement, Bank of Scotland assigned to The Park
Avenue Bank its rights, title and interest as agent and lender in all loans made
under the Original Loan Agreement and all liens and other security interests
granted in connection with the Original Loan Agreement.
Immediately
prior to the closing of the Loan Agreement, the outstanding balance under the
Original Loan Agreement was approximately $6.9 million. Upon the
closing of the Loan Agreement, we repaid approximately $2.5 million of the
outstanding balance under the Original Loan Agreement. As a result,
the initial outstanding principal amount of the loans under the Loan Agreement
is approximately $4.4 million. The Park Avenue Bank, as sole lender
under the Loan Agreement, executed a loan participation agreement with Stamford
(Victoria) LP (the “Participant”) with respect to $1.0 million of the loans
under the Loan Agreement. Under the terms of the Loan Agreement, we
may request that The Park Avenue Bank and the Participant make available to us
up to approximately an additional $5.6 million in advances under the Loan
Agreement through the participation of third parties acceptable to The Park
Avenue Bank.
This Loan
Agreement continues to be secured by a first mortgage on the 230-acre Monticello
Raceway, which was originally granted in favor of the Bank of Scotland by our
wholly-owned subsidiary, MRMI. The Loan Agreement is also secured by
all of our other assets, now owned or later acquired, including a pledge of our
equity interests in all of our current and future
subsidiaries. Pursuant to the terms of that certain Intercreditor
Agreement, dated as of July 11, 2005, by and among Bank of Scotland, The Bank of
New York, as trustee under the indenture for the benefit of each holder of the
notes, we and certain of our subsidiaries, the liens securing the obligations
under the Loan Agreement have a first priority position notwithstanding the
security interests granted in connection with our issuance of $65 million of
notes.
Amounts
outstanding under the Loan Agreement bear interest at a rate per annum equal to
the greater of (i) the US prime rate plus 5.50% and (ii) 9.00%, which amount is
payable monthly following the closing of the Loan Agreement.
As a
condition to the closing of the Loan Agreement, we issued warrants to purchase
an aggregate of 277,778 shares of our common stock, at an exercise price of
$0.01 per share, to The Park Avenue Bank and a designee of the Participant
(together, the “Warrants”). The Warrants expire on July 26,
2014. On July 27, 2009, we also entered into an Investor Rights
Agreement with The Park Avenue Bank and the Participant in connection with
issuance of the Warrants (the “Investor Rights Agreement”). The
Investor Rights Agreement provides the holders of the Warrants with, among other
things, certain rights with respect to the registration under the Securities Act
of 1933, as amended, of the resale of the shares issuable upon exercise of the
Warrants.
The Loan
Agreement provides for a short term maturity date of July 28,
2009. On July 29, 2009, The Park Avenue Bank delivered to us and the
subsidiary guarantors under the Loan Agreement, a notice of the occurrence of an
event of default under the Loan Agreement as a result of our failure to pay
principal thereunder when due on the maturity date of July 28,
2009. As a result, all principal outstanding under the Loan
Agreement, in the amount of approximately $4.4 million, is immediately due and
payable. Pursuant to the terms of the Loan Agreement, during the
continuance of this event of default, we are to pay interest on the unpaid
principal amount of the outstanding loans at a rate per annum equal to the
greater of (i) the US prime rate plus 5.50% and (ii) 9.00%, plus, in either
case, 6%.
On July
29, 2009, The Park Avenue Bank delivered a notice to The Bank of New York
advising that, as a result of the occurrence of the event of default under the
Loan Agreement described above, a standstill period has commenced under the
Intercreditor Agreement. Under the terms of the Intercreditor Agreement, during
the continuance of the standstill period each holder of the notes and The Bank
of New York, as trustee under the indenture, for the benefit of each holder of
the notes, are prohibited from exercising any rights or remedies in respect of
collection on, set off against, marshalling of, or foreclosure on the collateral
pledged by us to secure its obligations under the notes. The
standstill period will continue until the earlier to occur of: (i) The Park
Avenue Bank’s express waiver or acknowledgement of the cure of the applicable
event of default in writing or the occurrence of the discharge of the Loan
Agreement secured obligations, and (ii) the date that is 90 days from the date
of the Bank of New York’s receipt of the standstill notice.
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory
judgment action in the Supreme Court of the State of New York in Sullivan
County, in which we named as defendants the trustee, i.e., The Bank of New York
Mellon Corporation, The Depository Trust Company and twelve entities claiming
interests in the notes. In the action, we allege two causes of
action, one seeking a declaration by the Court that the defendants failed to
properly exercise any option pursuant to Section 3.07(a) of the indenture to
require us to purchase their interest in the notes, and the other cause of
action seeking a declaration that the three entities which gave the purported
notice of default have not invoked the Default Consequences under the indenture.
We did not make the interest payment on the notes of $2.6 million that was due
on July 31, 2009. We are obligated to pay interest on overdue
installments of interest at a rate of 9% and will be in default on such payment
if it is not made by August 31, 2009. The same three entities that gave us the
notice on August 3, 2009 also gave written notice to us on August 11, 2009,
asserting that we were in default under the indenture for not paying the
interest due on July 31, 2009.
If a
settlement or restructuring transaction between us and the holders of the notes
occurs within 90 days of the maturity date of the Loan Agreement of July 28,
2009, provided that all interest that would be due and payable on the unpaid
principal has been paid prior to the commencement of such 90 day period, the
maturity date of the Loan Agreement is to be extended to July 28,
2011. If certain conditions are satisfied, the maturity date may be
further extended for up two consecutive periods of six months
each. We and The Park Avenue Bank also agreed, pursuant to the terms
of a side letter agreement entered into on July 27, 2009, that in the event we
reach an agreement with the holders of the notes providing for an extension of
the date upon which the notes mature or become mandatorily redeemable, then the
July 28, 2011 maturity date is to be extended to a date that is at least seven
days prior to such date.
Effective
August 5, 2009 and continuing through July 31, 2010, the New York State Lottery
will implement a subsidized free play pilot program at Monticello Casino and
Raceway. During this 52 week pilot program, Monticello Casino and
Raceway will be authorized to deduct promotional free play from video gaming
revenue (net win) up to 10% of the prior month’s net win. The intent of this
pilot program is to evaluate whether net win increases or decreases when free
play is used extensively and deducted from net win.
The
program will be evaluated each week for its effect on Monticello Casino and
Raceway’s net win. After the initial 26 weeks of this pilot program,
the New York State Lottery will make a determination as to whether the pilot
program has been successful. If the New York State Lottery determines
that the pilot program has caused a detrimental effect on net win, the program
will be discontinued. If the New York State Lottery determines that
the pilot program has had a positive effect on Monticello Casino and Raceway’s
net win, the pilot program will continue for the remaining 26
weeks. Parameters for determining program success will be mutually
agreed on by the New York State Lottery and Monticello Casino and Raceway,
taking current revenue trends into consideration.
On August 3, 2009, August
4, 2009 and August 14, 2009, the Compensation Committee awarded payments
aggregating $559,000 to several directors for services performed from November
2007 through July 2009. As of June 30, 2009, $506,000 was accrued for
these services.
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, 2008.
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, 2008, 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.
Liquidity
and Going Concern
The
accompanying condensed consolidated financial statements have been prepared on a
basis that contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. Our
ability to continue as a going concern is dependent upon a determination that we
did not have the obligation to repurchase our senior convertible notes on July
31, 2009, and/or our ability to arrange financing with other sources to fulfill
our obligations under the Loan Agreement, as defined below, and senior
convertible notes, if required. We are continuing our efforts to
obtain financing, but there is no assurance that we will be successful in doing
so. These factors, as well as continuing net losses and negative cash flows from
operating activities, raise substantial doubt about our ability to continue as a
going concern. These condensed consolidated financial statements do not include
any adjustments to the amounts and classification of assets and liabilities that
may be necessary should we be unable to continue as a going
concern. These circumstances caused our Independent Registered Public
Accounting Firm to include an explanatory paragraph in their report dated March
13, 2009 on our consolidated financial statements at December 31, 2008 and for
the year then ended regarding their substantial doubt about our ability to
continue as a going concern. Substantial doubt about our ability to
continue as a going concern may create negative reactions to the price of the
common shares of our stock and we may have a more difficult time obtaining
financing.
On July
27, 2009, we entered into an amended and restated loan agreement (the “Loan
Agreement”), among us, the subsidiary guarantors party thereto, The Park Avenue
Bank, in its capacity as assignee of Bank of Scotland, and The Park Avenue Bank,
as assignee of Bank of Scotland, as agent, which amends and restates our $10.0
million secured credit facility with the Bank of Scotland. The Loan
Agreement provides for a short term maturity date of July 28,
2009. On July 29, 2009, The Park Avenue Bank delivered to us and the
subsidiary guarantors under the Loan Agreement, a notice of the occurrence of an
event of default under the Loan Agreement as a result of our failure to pay
principal thereunder when due on the maturity date of July 28,
2009. As a result, all principal outstanding under the Loan
Agreement, in the amount of approximately $4.4 million, is immediately due and
payable. Pursuant to the terms of the Loan Agreement, during the
continuance of this event of default, we are to pay interest on the unpaid
principal amount of the outstanding loans at a rate per annum equal to the
greater of (i) the US prime rate plus 5.50% and (ii) 9.00%, plus, in either
case, 6%.
On July
29, 2009, The Park Avenue Bank delivered a notice to The Bank of New York
advising that, as a result of the occurrence of the event of default under the
Loan Agreement described above, a standstill period has commenced under the
Intercreditor Agreement. Under the terms of the Intercreditor Agreement, during
the continuance of the standstill period each holder of the notes and The Bank
of New York, as trustee under the indenture, for the benefit of each holder of
the notes, are prohibited from exercising any rights or remedies in respect of
collection on, set off against, marshalling of, or foreclosure on the collateral
pledged by us to secure its obligations under the notes. The
standstill period will continue until the earlier to occur of: (i) The Park
Avenue Bank’s express waiver or acknowledgement of the cure of the applicable
event of default in writing or the occurrence of the discharge of the Loan
Agreement secured obligations, and (ii) the date that is 90 days from the date
of the Bank of New York’s receipt of the standstill notice.
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory
judgment action in the Supreme Court of the State of New York in Sullivan
County, in which we named as defendants the trustee, i.e., The Bank of New York
Mellon Corporation, The Depository Trust Company and twelve entities claiming
interests in the notes. In the action, we allege two causes of
action, one seeking a declaration by the Court that the defendants failed to
properly exercise any option pursuant to Section 3.07(a) of the indenture to
require us to purchase their interest in the notes, and the other cause of
action seeking a declaration that the three entities which gave the purported
notice of default have not invoked the Default Consequences under the indenture.
We did not make the interest payment on the notes of $2.6 million that was due
on July 31, 2009. We are obligated to pay interest on overdue
installments of interest at a rate of 9% and will be in default on such payment
if it is not made by August 31, 2009. The same three entities that gave us the
notice on August 3, 2009 also gave written notice to us on August 11, 2009,
asserting that we were in default under the indenture for not paying the
interest due on July 31, 2009.
If the
notes have been validly exercised pursuant to the purported right to demand
repayment of the notes, we do not have an immediate source of repayment for our
obligations under the Loan Agreement or the senior convertible
notes. Moreover, our current operations will not provide sufficient
cash flow to repay these obligations at maturity, if we are required to do
so.
A failure
to repurchase the notes when required would result in an event of default under
the indenture and could result in a cross-default under any other credit
agreement to which we may be a party at such time. In addition, an
event that may constitute a change in control under the indenture may also be
events of default under any credit agreement or other agreement governing future
debt. These events permit the lenders under such credit agreement or
other agreement to accelerate the debt outstanding thereunder and, if such debt
is not paid, to enforce security interests in the collateral securing such debt
or result in our becoming involved in an insolvency proceeding.
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. (“MRMI”), we
currently own and operate Monticello Casino 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 Casino and Raceway,
we operate more than 1,200 VGMs as an agent for the New York State Lottery and
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.
On June
11, 2009, MRMI entered into a management services agreement (“the Agreement”)
with Sportsystems Gaming Management at Monticello, LLC (“Sportsystems”), a
wholly owned subsidiary of Delaware North Companies, dated as of June 10, 2009,
whereby MRMI retained Sportsystems to provide MRMI with management and
consulting services in connection with the video gaming, food service, and
related hospitality businesses conducted by MRMI for a term of three
years. Sportsystems will be paid a base management fee of 0.75% of
the gross gaming revenue of MRMI. In addition, Sportsystems will earn
an incentive fee equal to 20% of any improvement of EBITDA over a base EBITDA of
$9.4 million after accounting for the base management fee, subject to adjustment
under certain circumstances. If the planned Concord Hotel and Casino
commences gaming operations during the term of the Agreement, MRMI and
Sportsystems have agreed to renegotiate in good faith to make changes to the
method by which the management and incentive fees are calculated as are
reasonable, appropriate and equitable under the circumstances.
We also
plan to grow and diversify our current business operations by 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 Empire Raceway Corp. (“Raceway Corp.”), a
subsidiary of Concord Associates, L.P, to provide advice and general managerial
oversight with respect to the operations at a harness to be constructed at that
certain parcel of land located in the Town of Thompson, New York and commonly
known as the Concord Hotel and Resort. 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.
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 Casino and
Raceway.
On July
18, 2008, our subsidiaries, MRMI, Monticello Raceway Development Company, LLC
and Monticello Casino Management, LLC 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 was amended on October 10, 2008 to eliminate any remaining
unfulfilled conditions and included our agreement to reimburse the St. Regis
Mohawk Tribe approximately $444,000 for expenses incurred by them in connection
with the project.
Much of
our ability to develop a successful business plan is now dependent on our
efforts 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, assuming that we continue as
a going concern.
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, which is much closer to New York City, has a harness
horseracing facility, approximately 5,500 VGMs, food and beverage outlets and
other amenities.
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.
Results
of Operations
Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008.
Revenues. Net
revenues decreased approximately $1.3 million (or 7%) for the quarter ended June
30, 2009 compared to the quarter ended June 30, 2008. Revenue from
racing operations increased by approximately $572,000 (or 35%); revenue from VGM
operations decreased by approximately $1.4 million (or 9%) and food, beverage
and other revenue decreased by approximately $135,000 (or
10%). Complimentary expenses (“Promotional allowances”) increased by
approximately $362,000 (or 61%).
Racing
revenue increased in part because of approximately $332,000 received from
Off-Track Betting Corporations (“OTB’s”) in payment of amounts previously
contested by the OTB’s. In November, 2007 litigation with the OTB’s over these
payments ended with a decision that did not support the OTB’s withholding
payment to the racetracks.
We
believe that our VGM operations continue to be adversely affected by the
competing VGM facility at Yonkers Raceway and slot machine facilities in
Pennsylvania. Our number of daily visits increased approximately 3% but the
daily win per unit fell from $106.11 for the three months ended June 30, 2008 to
$96.75 for the three months ended June 30, 2009 (or 9%). 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 average
amounts spent by patrons.
The
increase in complimentary expenses (“Promotional allowances”) is almost entirely
attributable to increased utilization of “free play” coupons as a marketing and
promotional technique.
Racing
costs. Racing costs excluding a $1,250,000 settlement with our
horsemen in 2008 increased by approximately $92,000 (or 6%) to approximately
$1.7 million for the three months ended June 30, 2009. This is
less than the increase in racing revenues because we have been able to reduce
some operating expenses at our facility while our revenues derived from sources
other than live racing at our facility increased compared to the corresponding
quarter in the prior year.
Gaming
costs. Gaming (VGM) costs decreased by approximately $836,000
(or 7%) to approximately $10.7 million for the three months ended June 30, 2009
compared with the corresponding period in 2008. The decrease
is result of the reduction in revenue for period.
Food, beverage and other
costs. Food, beverage and other costs decreased approximately
$96,000 (or 18%) to approximately $439,000 primarily as a result of continuing
cost control initiatives and lower revenues in 2009.
Selling, General and Administrative
expenses. Selling, general and administrative expenses
increased approximately $643,000 (or 24%) for the three months ended June 30,
2009 as compared to the three months ended June 30, 2008. This
increase was a result of an increase in salaries and wages of approximately
$129,000 related primarily to severance payments to employees and additional
directors’ fees of $506,000.
Stock-based compensation
expense. The increase in stock-based compensation of
approximately $2.4 million was primarily a result of options granted to
directors, our new CEO and key operating executives and the modification of
resigning officers’ option terms in April and June, 2009. During the period
from April 15, 2009 to June 8, 2009 we granted approximately 3.2 million options
to directors and officers at exercise prices that varied from $1.11 to $1.78
(exercise price was determined by using the closing stock price on the day of
grant), but the grants were subject to stockholder approval of an amendment to
increase the number of shares in our 2005 Equity Incentive Plan. Stockholder
approval was obtained on June 16, 2009 on which date the stock price was
$1.57.
Interest expense and
income. Interest expense decreased approximately $38,000 as a
result of lower interest rates on our bank line of credit during 2009 and
interest income decreased by approximately $51,000 as a result of lesser amounts
invested at lower rates in 2009.
Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008.
Revenues. Net
revenues decreased approximately $2.6 million (or 8%) for the six months ended
June 30, 2009 compared to the six months ended June 30, 2008. Revenue
from racing operations increased by approximately $571,000 (or 16%); revenue
from VGM operations decreased by approximately $2.4 million (or 8%) and food,
beverage and other revenue decreased by approximately $201,000 (or
9%). Complimentary expenses (“Promotional allowances”) increased by
approximately $557,000 (or 51%).
Racing
revenue increased because of approximately $710,000 received from OTB’s in
payment of amounts previously contested by the OTB’s. In November, 2007
litigation with the OTB’s over these payments ended with a decision that did not
support the OTB’s withholding payment to the racetracks.
We
believe that our VGM operations continue to be adversely affected by the
competing VGM facility at Yonkers Raceway and slot machine facilities in
Pennsylvania. Our number of daily visits decreased approximately 4% and the
daily win per unit fell from $99.35 for the six months ended June 30, 2008 to
$91.11 for the six months ended June 30, 2009 (or 8%). 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
visits and reduced average amounts spent per patron.
The
increase in complimentary expenses (“Promotional allowances”) is almost entirely
attributable to increased utilization of “free play” coupons as a marketing and
promotional technique.
Racing
costs. Racing costs excluding a $1,250,000 settlement with our
horsemen in 2008 remained almost the same at approximately $3.3 million for the
six months ended June 30, 2009. This was achieved despite the
increase in racing revenues because we have been able to reduce some operating
expenses at our facility while our revenues derived from sources other than live
racing at our facility increased compared to the corresponding quarter in the
prior year.
Gaming
costs. Gaming (VGM) costs decreased by approximately $3.3
million (or 14%) to approximately $20.5 million for the six months ended June
30, 2009 compared with the corresponding period in 2008. Of this amount,
approximately $1.2 million (or 6%) 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 $2.1 million (or
8%) reflects cost reductions to adjust to lower levels of customer
visits.
Food, beverage and other
costs. Food, beverage and other costs decreased approximately
$146,000 (or 15%) to approximately $801,000 primarily as a result of continuing
cost control initiatives and lower revenues in 2009.
Selling, General and Administrative
expenses. Selling, general and administrative expenses
increased approximately $97,000 (or 2%) for the six months ended June 30, 2009
as compared to the six months ended June 30, 2008. This increase was
primarily a result of an increase in directors’ fees of $506,000 offset by
reductions in direct marketing expenses (excluding promotion allowances) of
approximately $340,000.
Stock-based compensation
expense. The increase in stock-based compensation of
approximately $2.5 million was primarily a result of options granted to
directors, our new CEO and key operating executives and the modification of
resigning officers’ option terms in April and June, 2009. During the period from
April 15, 2009 to June 8, 2009 we granted approximately 3.2 million options to
directors and officers at exercise prices that varied from $1.11 to $1.78
(exercise price was determined by using the closing stock price on the day of
grant), but the grants were subject to stockholder approval of an amendment to
increase the number of shares in the Company’s 2005 Equity Incentive Plan.
Stockholder approval was obtained on June 16, 2009 on which date the stock price
was $1.57.
Interest expense and
income. Interest expense decreased approximately $93,000 as a
result of lower interest rates on our bank line of credit during 2009 and
interest income decreased by approximately $128,000 as a result of lesser
amounts invested at lower rates in 2009.
Liquidity
and Capital Resources
In July
2009, MRMI reached a settlement agreement with Suffolk Regional Off-Track
Betting Corporation (“Suffolk OTB”), pursuant to which Suffolk OTB paid
MRMI approximately $1.93 million, approximately half of which we are obligated
to fund to our purse escrow account to be used for the payment of purses for
live harness racing at the Raceway.
On July
27, 2009, we entered into the Loan Agreement reflecting the assignment of our
revolving credit agreement from Bank of Scotland to The Park Avenue
Bank. In connection with that transaction, we made a cash payment of
$2.5 million to reduce the principal amount outstanding to approximately $4.4
million. One of the provisions of the Loan Agreement is a short term
maturity date of July 28, 2009. On July 29, 2009, we received a
notice of the occurrence of an event of default under the Loan Agreement as a
result of our failure to pay the principal due on July 28, 2009.
On July
29, 2009, The Park Avenue Bank delivered a notice to The Bank of New York
advising that, as a result of the occurrence of the event of default under the
Loan Agreement, a standstill period has commenced under the Intercreditor
Agreement. Under the terms of the Intercreditor Agreement, during the
continuance of the standstill period, each holder of our senior convertible
notes and The Bank of New York, as trustee under the indenture for the benefit
of each holder of the notes, are prohibited from exercising any rights or
remedies in respect of collection on, set off against, marshalling of, or
foreclosure on the collateral pledged by us to secure its obligations under the
notes. The standstill period will continue until the earlier to occur
of: (i) The Park Avenue Bank’s express waiver or acknowledgement of the cure of
the applicable event of default in writing or the occurrence of the
discharge of the Loan Agreement secured obligations, and (ii) the date that is
90 days from the date of the Bank of New York’s receipt of the standstill
notice.
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory
judgment action in the Supreme Court of the State of New York in Sullivan
County, in which we named as defendants the trustee, i.e., The Bank of New York
Mellon Corporation, The Depository Trust Company and twelve entities claiming
interests in the notes. In the action, we allege two causes of
action, one seeking a declaration by the Court that the defendants failed to
properly exercise any option pursuant to Section 3.07(a) of the indenture to
require us to purchase their interest in the notes, and the other cause of
action seeking a declaration that the three entities which gave the purported
notice of default have not invoked the Default Consequences under the indenture.
We did not make the interest payment on the notes of $2.6 million that was due
on July 31, 2009. We are obligated to pay interest on overdue
installments of interest at a rate of 9% and will be in default on such payment
if it is not made by August 31, 2009. The same three entities that gave us the
notice on August 3, 2009 also gave written notice to us on August 11, 2009,
asserting that we were in default under the indenture for not paying the
interest due on July 31, 2009.
If the
notes have been validly exercised pursuant to the purported right to demand
repayment of the notes, we do not have an immediate source of repayment for our
obligations under the Loan Agreement or the senior convertible
notes. Moreover, our current operations will not provide sufficient
cash flow to repay these obligations at maturity, if we are required to do
so.
If a
settlement or restructuring transaction between us and the holders of the notes
occurs within 90 days of the maturity date of the Loan Agreement of July 28,
2009, provided that all interest that would be due and payable on the unpaid
principal has been paid prior to the commencement of such 90 day period, the
maturity date of the Loan Agreement is to be extended to July 28,
2011. If certain conditions are satisfied, the maturity date may be
further extended for up two consecutive periods of six months
each. We and The Park Avenue Bank also agreed, pursuant to the terms
of a side letter agreement entered into on July 27, 2009, that in the event we
reach an agreement with the holders of the notes providing for an extension of
the date upon which the notes mature or become mandatorily redeemable, then the
July 28, 2011 maturity date is to be extended to a date that is at least seven
days prior to such date.
A failure
to repurchase the notes when required would result in an event of default under
the indenture and could result in a cross-default under any other credit
agreement to which we may be a party at such time. In addition, an
event that may constitute a change in control under the indenture may also be
events of default under any credit agreement or other agreement governing future
debt. These events permit the lenders under such credit agreement or
other agreement to accelerate the debt outstanding thereunder and, if such debt
is not paid, to enforce security interests in the collateral securing such debt
or result in our becoming involved in an insolvency proceeding.
Net cash
used in operating activities during the six months ended June 30, 2009 was
approximately $2.5 million compared to net cash used in operating activities for
the six months ended June 30, 2008 of approximately $4.9 million, a decrease of
approximately $2.4 million.
The net
loss excluding stock-based compensation was approximately $3.3 million for the
six months ended June 30, 2009 and approximately $5.3 million the six months
ended June 30, 2008; a decrease of approximately $2.0 million. The decrease
in net loss for the six months ended June 30, 2009 is largely attributable to
the benefit received of approximately $1.2 million (or 6%) due to a change in
the law, which allows VGM operators to pay a lower percentage of VGM revenues to
the New York State Lottery and the expense incurred in the prior year regarding
the settlement of Horsemen litigation of approximately $1.3 million, which were
offset by an increase in directors’ fees of approximately $506,000.
Net cash
used by investing activities was approximately $89,000 for six months ended June
30, 2009 compared with net cash provided of approximately $108,000 in the
corresponding period in 2008. In 2008, we benefited from collections of
restricted cash from the Racing Capital Improvement account of approximately
$269,000, offset partly by capital additions of approximately
$161,000.
Net cash
used by financing activities was approximately $700,000 for six months ended
June 30, 2009 compared with net cash provided of approximately $3.0 million in
the corresponding period in 2008. In 2008, we benefited from the proceeds from
the sale of common stock of $ 3.0 million and in 2009 we repaid $700,000 on our
revolving credit facility.
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 $6.9 million at June 30, 2009 under our
revolving credit facility. A change in interest rates of one percent
on the balance outstanding at June 30, 2009 would cause a change in total annual
interest costs of $69,000. The carrying values of these
borrowings approximate their fair values at June 30, 2009.
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 our 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, 2009 under the supervision and with the
participation of management, including our 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, our
Chief Executive Officer and 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, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
OTHER
INFORMATION
We
are currently in default under the terms of the Loan Agreement and we do not
have the ability to repay the $4.4 principal amount due thereunder, or to
purchase our senior convertible notes, pursuant to a purported right to
demand repayment on July 31, 2009, of $65 million principal amount plus accrued
and unpaid interest.
On July
29, 2009, The Park Avenue Bank delivered to us and the subsidiary guarantors
under the Loan Agreement, a notice of the occurrence of an event of default
under the Loan Agreement as a result of our failure to pay principal thereunder
when due on July 28, 2009. As a result, all principal outstanding
under the Loan Agreement, in the amount of approximately $4.4 million, is
immediately due and payable. Pursuant to the terms of the Loan
Agreement, during the continuance of this event of default, we are to pay
interest on the unpaid principal amount of the outstanding loans at a rate per
annum equal to the greater of (i) the U.S. prime rate plus 5.50% and (ii) 9.00%,
plus, in either case, 6%.
On July
29, 2009, The Park Avenue Bank delivered a notice to The Bank of New York
advising that, as a result of the occurrence of the event of default under the
Loan Agreement described above, a standstill period has commenced under the
Intercreditor Agreement. Under the terms of the Intercreditor Agreement, during
the continuance of the standstill period each holder of the senior convertible
notes and The Bank of New York, as trustee under the Indenture for the
benefit of each holder of the senior convertible notes, are prohibited from
exercising any rights or remedies in respect of collection on, set off against,
marshalling of, or foreclosure on the collateral pledged by us to secure its
obligations under the notes. The standstill period will continue
until the earlier to occur of: (i) The Park Avenue Bank’s express waiver or
acknowledgement of the cure of the applicable event of default in writing
or the occurrence of the discharge of the Loan Agreement secured obligations,
and (ii) the date that is 90 days from the date of the Bank of New York’s
receipt of the standstill notice.
On June
30, 2009, pursuant to the indenture, we furnished the written notice required to
be delivered by us to the trustee of our senior convertible notes of the time
and manner under which each holder could elect to require us to purchase the
notes. As contemplated by the indenture, we included with the notice
the written form to be completed, signed (with signature guaranteed), and
delivered by each holder to the trustee before close of business on July 31,
2009 to require us to purchase the notes. However, on July 30 and 31, 2009, and
on August 3, 2009, we requested, but never received, from the trustee copies of
all forms delivered to it by which any election was made for us to purchase the
notes or any part thereof. Neither the trustee nor any holder
furnished to us any originals or copies of any such signed forms which had to be
completed, signed and delivered to the trustee by close of business on July 31,
2009 to require us to purchase the notes. As the forms required to be
completed, signed, and delivered by July 31 2009 were not completed, signed and
delivered by then, we concluded that we are not obligated to purchase and pay
for the notes before their maturity on July 31, 2014. On August 3,
2009, we received a notice from three entities, asserting that they were
beneficial holders of notes in an aggregate principal amount of $48,730,000, and
that we were in default under the indenture by not purchasing and paying for
them. Accordingly, on August 5, 2009, we instituted a declaratory
judgment action in the Supreme Court of the State of New York in Sullivan
County, in which we named as defendants the trustee, i.e., The Bank of New York
Mellon Corporation, The Depository Trust Company and twelve entities claiming
interests in the notes. In the action, we allege two causes of
action, one seeking a declaration by the Court that the defendants failed to
properly exercise any option pursuant to Section 3.07(a) of the indenture to
require us to purchase their interest in the notes, and the other cause of
action seeking a declaration that the three entities which gave the purported
notice of default have not invoked the Default Consequences under the indenture.
We did not make the interest payment on the notes of $2.6 million that was due
on July 31, 2009. We are obligated to pay interest on overdue
installments of interest at a rate of 9% and will be in default on such payment
if it is not made by August 31, 2009. The same three entities that gave us the
notice on August 3, 2009 also gave written notice to us on August 11, 2009,
asserting that we were in default under the indenture for not paying the
interest due on July 31, 2009.
If a
settlement or restructuring transaction between us and the holders of the notes
occurs within 90 days of the Loan Agreement maturity date of July 28, 2009,
provided that all interest that would be due and payable on the unpaid principal
has been paid prior to the commencement of such 90 day period, the maturity date
of the Loan Agreement is to be extended to July 28, 2011. If certain
conditions are satisfied, the maturity date may be further extended for up two
consecutive periods of six months each. We and The Park Avenue Bank
also agreed, pursuant to the terms of a side letter agreement entered into on
July 27, 2009, that in the event we reach an agreement with the holders of the
Notes providing for an extension of the date upon which the notes mature or
become mandatorily redeemable, then the July 28, 2011 maturity date is to be
extended to a date that is at least seven days prior to such date.
While we
are actively pursuing additional financing sources, there can be no assurance
that we will be able to obtain financing on acceptable terms, or at
all.
Our
Independent Registered Public Accounting Firm has issued a “going concern”
opinion raising substantial doubt about our financial viability
As a
result of our continuing losses, negative cash flows, and lack of funds to repay
either the credit facility at maturity or to purchase our senior
convertible notes upon a valid earlier acceleration on July 31, 2009, our
Independent Registered Public Accounting Firm, Friedman LLP, issued a “going
concern” opinion in connection with their audit of our financial statements for
the year ended December 31, 2008. This opinion expressed substantial
doubt as to our ability to continue as a going concern.
Our
ability to continue as a going concern was deemed by our Independent Registered
Public Accounting Firm to be dependent upon our ability to negotiate a renewal
or extension of the maturity dates, obtain additional equity or debt financing,
generate additional revenue, and/or reduce expenditures. Substantial
doubt about our ability to continue as a going concern may create negative
reactions to the price of our common stock, limit our ability to access certain
types of financing, and prevent us from obtaining financing on acceptable
terms.
We
may require additional financing in order to develop any projects and we may be
unable to meet our future capital requirements and execute our business
strategy.
Because
we are unable to generate sufficient cash from our operations, we may be forced
to rely on external financing to develop any future projects and to meet future
capital and operating requirements. Any projections of future cash needs and
cash flows are subject to substantial uncertainty. The capital requirements
depend upon several factors, including the rate of market acceptance, our
ability to expand our customer base and increase revenues, our level of
expenditures for marketing and sales, purchases of equipment and other factors.
If the capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We can make no assurance
that financing will be available in amounts or on acceptable terms or within the
limitations contained in the credit facility or the indenture governing the
notes, if at all.
If we
cannot raise funds, if needed, on acceptable terms, we may be required to delay,
scale back or eliminate some of our expansion and development goals and we may
not be able to continue our operations, grow market share, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements which could negatively impact our business, operating results and
financial condition.
The
construction of a Class III casino will also depend upon the ability of an
Indian tribe to obtain the necessary state and regulatory approvals and
financing for the project. Construction of the project with Concord Associates,
L.P. will require financing as well.
Substantial
leverage and debt service obligations may adversely affect our cash flow,
financial condition and results of operations.
As a
result of the issuance of our notes in the principal amount of $65 million, our
debt service obligations increased substantially. We may be unable to repay $65
million if determined judicially that purported beneficial owners of the notes
have properly ‘put’ their notes on July 31, 2009. While we are
actively pursuing additional financing sources, there can be no assurance that
we will be able to obtain financing on acceptable terms, or at all.
We may
also incur substantial additional indebtedness in the future. Our level of
indebtedness will have several important effects on our future operations,
including, without limitation:
·
|
a
portion of our cash flow from operations will be dedicated to the payment
of any interest or principal required with respect to outstanding
indebtedness;
|
·
|
increases
in our outstanding indebtedness and leverage will increase our
vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure;
and
|
·
|
depending
on the levels of our outstanding indebtedness, our ability to obtain
additional financing for working capital, general corporate and other
purposes may be limited.
|
Our
ability to make payments of principal and interest on our indebtedness depends
upon our future performance, which is subject to general economic conditions,
industry cycles and financial, business and other factors affecting our
operations, many of which are beyond our control. Our business might not
continue to generate cash flow at or above current levels. If we are unable to
generate sufficient cash flow from operations in the future to service our debt,
we may be required, among other things, to:
·
|
seek
additional financing in the debt or equity
markets;
|
·
|
refinance
or restructure all or a portion of our indebtedness, including our notes;
or
|
Such
measures might not be sufficient to enable us to service our indebtedness. In
addition, any such financing, refinancing or sale of assets may not be available
on commercially reasonable terms, or at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
(a) On
June 16, 2009, the Company held its annual stockholders’ meeting in New York,
New York.
(b) The
following directors were elected based upon the following tabulations of
votes:
|
|
|
|
|
Bruce
Berg
|
|
|
27,419,324 |
|
|
|
1,027,592 |
|
James
Simon
|
|
|
27,408,449 |
|
|
|
1,038,467 |
|
The
second order of business was to consider and vote upon a proposal to amend the
Company’s 2005 Equity Incentive Plan to increase the number of shares of the
Company’s common stock subject to the 2005 Equity Incentive Plan by 5,000,000
shares to 8,500,000 shares, which passed based upon the following tabulations of
votes:
|
|
|
|
|
|
|
|
|
|
|
8,040,996
|
|
|
2,076,083
|
|
|
93,101
|
|
|
18,236,736
|
|
ITEM 5. OTHER INFORMATION
On August
12, 2009, we entered into Amendment No. 1 to the Separation and Release
Agreement, dated as of April 14, 2009, by and between us and Ronald J.
Radcliffe, our former chief financial officer (the “Amendment No.
1”). We entered into Amendment No. 1 to correct errors in Exhibit A
thereto. As such, Amendment No. 1 corrects the number of shares
underlying certain options held by Mr. Radcliffe, which were previously
misstated.
The
foregoing summary of Amendment No. 1 does not purport to be complete and is
qualified in its entirety by reference to the full copy of such agreement, which
is filed herewith as Exhibit 10.4 and is incorporated herein by
reference.
10.1
|
Management
Services Agreement by and between Sportsystems Gaming Management at
Monticello, LLC and Monticello Raceway Management, Inc. dated as of June
10, 2009.*
|
|
|
10.2
|
Employment
Agreement, dated as of June 29, 2009, by and between Empire Resorts, Inc.
and Charles Degliomini.
|
|
|
10.3
|
Employment
Agreement, dated as of June 29, 2009, by and between Empire Resorts, Inc.
and Clifford Ehrlich.
|
|
|
10.4
|
Amendment
No. 1, dated as of August 12, 2009, to the Separation and Release
Agreement, dated as of April 14, 2009, by and between Empire Resorts, Inc.
and Ronald J. Radcliffe.
|
|
|
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
|
*
|
Schedules
and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Company agrees to furnish supplementally a copy of any omitted schedule to
the SEC upon request.
|
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.
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Dated: August
17, 2009
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Joseph
Bernstein
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Chief
Executive Officer
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Dated: August
17, 2009
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Mark
Marasco
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Principal
Financial and Accounting Officer
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