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TMCNet:  EMPIRE RESORTS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[May 19, 2014]

EMPIRE RESORTS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 Condensed Consolidated Financial Statements and related notes thereto in Empire Resorts, Inc. ("Empire") and subsidiaries' (the "Company", "us", "our", or "we") Annual Report on Form 10-K for the fiscal year ended December 31, 2013.


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 our Annual Report on Form 10-K for the year ended December 31, 2013, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict.

You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we will not update these forward-looking statements, even if our situation changes in the future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-looking statements.

Overview We were organized as a Delaware corporation on March 19, 1993, and since that time have served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.

Through our wholly-owned subsidiary, Monticello Raceway Management, Inc.

("MRMI"), we currently own and operate Monticello Casino and Raceway, a 45,000 square foot video gaming machine ("VGM") and harness horseracing facility located in Monticello, New York, 90 miles northwest of New York City. Monticello Casino and Raceway operates 1,110 VGMs which includes 20 electronic table game positions ("ETGs"). VGMs are similar to slot machines, but they are connected to a central system and report financial information to the central system. We also generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities.

In December 2012, MRMI entered into a master development agreement (the "MDA") with EPT Concord II, LLC ("EPT") to develop 1,500 acres located at the site of the former Concord Resort in Sullivan County, New York (the "EPT Property"), which is owned by EPT and EPR Concord II, LP, each a wholly-owned subsidiary of EPR Properties Trust ("EPR"). The parties envision developing a comprehensive resort destination that will provide year-round indoor and outdoor activities, including hotels, spas, salons, entertainment, dining, retail, golf, high tech meeting and convention spaces and casino gaming (the "Project"). The initial phase of the Project contemplates the development of a casino and hotel by MRMI (the "Casino Project"). Over the past three years, the Company has expended substantial energy on designing the Casino Project and, in conjunction with EPR, working with local and state agencies and officials to obtain the necessary permits and approvals to begin construction. The Company intends to apply for a destination gaming resort license, which is described in more detail below, which would allow the Casino Project to include a full-scale casino. The development of the Project and the Casino Project is contingent upon various conditions, including obtaining all necessary governmental approvals, as described in the MDA, and the Company's ability to obtain necessary financing.

Recent Events On March 31, 2014, the Siting Board approved the RFA relating to the Gaming Facility License application. In accordance with the RFA schedule, which is discussed further below, on April 18, 2014, the Company paid the $1 million Gaming Facility License application fee ("Application Fee") in indication of its intent to apply for a Gaming Facility License. On May 12, the New York State Gaming Facility Location Board ("Siting Board") announced that applicants for Gaming Facility Licenses must make a minimum capital investment in the Gaming Facility to be developed, as set forth in the chart below. The Casino Project will be located in the Hudson Valley-Catskills Area (as defined below).

23 -------------------------------------------------------------------------------- For a Gaming Facility The minimum located in: capital investment is: REGION 1 Dutchess or Orange Counties: $ 350,000,000 If no License is awarded for a Gaming Facility located in Dutchess or Orange Counties, then for the remaining portion of Region 1 (comprising Columbia, Delaware, Greene, Sullivan and Ulster Counties): $ 130,000,000 If a License is awarded for a Gaming Facility located in Dutchess or Orange Counties, then for the remaining portion of Region 1 (comprising Columbia, Delaware, Greene, Sullivan and Ulster Counties): $ 100,000,000 REGION 2 $ 135,000,000 REGION 5 Broome, Chemung, Schuyler, Tioga or Tompkins Counties: $ 85,000,000 Wayne County or Seneca Counties: $ 135,000,000 If a License is awarded on Wayne or Seneca Counties, then for the remaining portion of Region 5 (comprising Broome, Chemung, Schuyler, Tioga or Tompkins Counties): $ 70,000,000 The Siting Board said that the Request for Applications ("RFA") (described below) minimum capital investment standard established were intended to reflect the fact that some parts of the total investment that developers will make do not create the type of economic development benefits that the Gaming Act (defined below) is intended to foster, so these were treated as excluded investments in the calculation of the minimum investment requirement. The excluded investments include the licensing fee, land, financing costs, and certain startup expenses among other factors, which the Siting Board believes typically constitute about 35 percent of the total investment of this type of new development. Accordingly, the minimum capital investment levels established are approximately 65 percent of the total amounts of the investment that developers are expected to make.

MRMI and the Monticello Harness Horsemen's Association (the "MHHA") had an agreement (the "MHHA Agreement") that governed the conduct of MRMI and MHHA relating to horseracing purse payments, the simulcasting of horse races and certain other payments. The MHHA Agreement expired pursuant to its terms on January 31, 2014. MRMI and MHHA were attempting to negotiate a new agreement and engaged in several mediation sessions conducted by the New York State Gaming Commission ("NYSGC") in an attempt to reach an agreement. In such negotiations, the Company offered the MHHA, among other things, 1 million shares of its common stock, which offer was rejected. Absent an agreement, MRMI will continue to run live harness races and pay MHHA members based on the requirements of statutory provisions. MRMI races will be simulcast to New York racetracks and Off-Track Betting facilities and MRMI will accept simulcast races from New York racetracks. However, because of the federal Interstate Horseracing Act, without a written agreement with the MHHA, which includes permission to simulcast into and out of New York, effective as of February 1, 2014, MRMI has suspended all simulcasting other than intra-state simulcasting.

On April 2, 2014, the Company commenced a rights offering of common stock to holders of its common stock and Series B Preferred Stock (the "April 2014 Rights Offering"). The Company distributed to its common stock holders and Series B Preferred Stock holders one non-transferable right to purchase one share of common stock at a subscription price of $6.25 per share for each fifteen shares of common stock owned, or into which their Series B Preferred Stock was convertible, on March 31, 2014, the record date for the April 2014 Rights Offering. In addition to being able to purchase their pro rata portion of the shares offered based on their ownership as of March 31, 2014, stockholders were able to oversubscribe for additional shares of common stock.

24 -------------------------------------------------------------------------------- Upon completion of the April 2014 Rights Offering, the Company issued 2,138,881 shares of common stock and raised approximately $13.4 million. This includes 453,165 shares issued to holders upon exercise of their basic subscription rights, 1,512,629 shares issued to Kien Huat upon exercise of its basic subscription rights and 173,087 shares issued to holders upon exercise of their over-subscription rights in the April 2014 Rights Offering. The Company expects to utilize the estimated net proceeds of approximately $13.2 million for certain expenses relating to the the Project and Casino Project (as defined below) and maintaining our on-going operations and facilities in support of our pursuit of a Gaming Facility License.

Regulation Our operations are overseen by the NYSGC. The legislation that created the NYSGC provides that the Board of the NYSGC shall consist of seven members. As of May 14, 2014, six members have been appointed to the Board of the NYSGC. The NYSGC has the authority and responsibility to promulgate rules and regulations that affect the operations of our business. Prior to the creation of the NYSGC, our harness horseracing and simulcasting activities were overseen by the New York State Racing and Wagering Board ("RWB") and our VGM activities were overseen by the New York Lottery ("NYL"). Now, our VGM, harness horseracing and simulcast activities in the State of New York are overseen by the NYSGC, Division of Lottery and Division of Horse Racing, respectively.

In a letter dated April 11, 2014, the NYSGC assigned to MRMI the race dates requested for the month of May of 2014. The NYSGC has not yet approved MRMI's racetrack and simulcast license renewal applications for calendar year 2014.

Generally, the annual license renewal process requires the NYSGC to review the financial responsibility, experience, character and general fitness of MRMI and its management.

On July 30, 2013, the Upstate New York Gaming and Economic Development Act ("Gaming Act") was enacted. The Gaming Act, among other things, provides the statutory framework for the regulation of full-scale casino gaming, which was approved by New York State voters in November 2013 when they voted to approve a constitutional amendment to permit full-scale casino gaming (each a "Gaming Facility"). The Gaming Act amends the racing, pari-mutuel wagering and breeding law, the penal law, the tax law and the state finance law in relation to full-scale gaming. The Gaming Act authorizes the NYSGC to award up to four (4) upstate destination gaming resort licenses (each a "Gaming Facility License").

Gaming Facilities are authorized in three regions of the state: the Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties, in which we are located (the "Hudson Valley-Catskill Area"); the Albany, Fulton, Montgomery, Rensselaer, Saratoga, Schenectady, Schoharie and Washington counties ("Capital District-Saratoga Area"); and the Broome, Chemung (east of State Route 14), Schuyler (east of State Route 14), Seneca, Tioga, Tompkins, and Wayne (east of State Route 14) counties ("Eastern Southern Tier"). Up to two (2) Gaming Facilities can be located in any of the three regions. No Gaming Facilities can be authorized in Putnam county, Westchester county, Rockland county, New York City or Long Island.

In addition, the Gaming Act amends the executive law, state finance law, Indian law, tax law and the racing, pari-mutuel wagering and breeding law in relation to: authorizing the settlement of disputes between the Oneida Nation of New York, the state, Oneida county and Madison county; identifying nations and tribes; video lottery gaming; administration of certain funds and accounts related to the commercial gaming revenue fund; enacting the state operations budget, in relation to commercial gaming revenues; directing the NYSGC to annually evaluate video lottery gaming; account wagering on simulcast horse races; and video lottery gaming vendor's fees. The Gaming Act amended the penal law to add new definitions and gaming crimes and to address the operation of unlawful electronic sweepstakes. Further, the Gaming Act authorizes Nassau Off-Track Betting Corporation ("Nassau OTB") and Suffolk Regional Off-Track Betting Corporation ("Suffolk OTB") to file video lottery gaming license applications to establish one VGM facility each, at an Off-Track Betting site operated by Nassau OTB and Suffolk OTB respectively, with a maximum of one thousand (1,000) VGMs at each site.

In accordance with the Gaming Act, the Siting Board is charged with selecting applicants that are qualified to receive a Gaming Facility License and determining the location of such Gaming Facilities. The NYSGC is not required to issue a license if the Siting Board determines that there are no qualified applicants in a specific region. Once granted, there will be a seven (7) year exclusivity period for holders of Gaming Facility Licenses, commencing with the awarding of the license, during which no further Gaming Facilities will be licensed by the NYSGC. If the Legislature authorizes additional Gaming Facility Licenses within this period, licensees shall have the right to recover a pro-rata portion of the license fee paid. The NYSGC's website provides that casino siting and operators are expected to be formally announced in early Fall 2014.

On March 12, 2014, the NYSGC appointed the first three individuals to serve on the Siting Board. Pursuant to the Gaming Act, the NYSGC is responsible for appointing five members to the Siting Board.

25 -------------------------------------------------------------------------------- On March 24, 2014, the NYSGC announced that it had selected the firm of Taft, Stettinius & Hollister LLP to provide gaming advisory services in its review and ultimate selection of casino applicants for Upstate New York. It further announced that Taft, Stettinius & Hollister LLP has subcontracted with several entities to assist in the project, including financial advisory firm Christiansen Capital Advisors, investment bank Houlihan Lokey and gaming facility consultant Macomber International, Inc.

On March 31, 2014, the NYSGC held a public meeting at which it approved the draft RFA and the forms for Gaming Facility License Application, Multi-Jurisdictional Personal History Disclosure Form and New York Supplemental.

Also on March 31, 2014, the Siting Board held a public meeting at which it approved the RFA and the forms for Gaming Facility License Application, Multi-Jurisdictional Personal History Disclosure Form and New York Supplement.

Pursuant to the RFA, the Siting Board has set the following schedule: RFA Issued March 31, 2014 Applicant's First Questions Due by 4:00 p.m. EDT April 11, 2014 $1 Million Application Fee April 23, 2014 Siting Board Responses to First Questions April 23, 2014 Mandatory Applicant Conference April 30, 2014 Written Summary of Applicant Conference May 2, 2014 Applicant's Second Questions Due by 4:00 p.m. EDT May 7, 2014 Siting Board Responses to Second Questions May 14, 2014 Applications Due by 4:00 p.m. EDT June 30, 2014 Oral Presentations of Applications on or after July 21, 2014 Selection of Gaming Facility Operator Early fall Pursuant to the RFA, each Applicant is required to pay to the NYSGC an application fee of $1 million ("Application Fee") to help defray the costs associated with the processing of the application and investigation of the applicant; provided, however, that if the costs of processing, investigation and related costs exceed the initial application fee, the applicant shall pay the additional amount to the NYSGC within 30 days after notification of insufficient fees or the application shall be rejected and further provided that should the costs of such investigation not exceed the fee remitted, any unexpended portion shall be returned to the applicant. An individual, entity, consortium or other party evincing interest becomes an applicant upon payment of the Application Fee which must be paid on or before April 23, 2014. On April 18, 2014, the NYSGC confirmed that it received our Application Fee. On April 18, 2014, the NYSGC confirmed that it received our Application Fee. On April 23, 2014, the NYSGC announced that it had received Application Fees from 22 entities. Applicants in our region include Caesars Entertainment, a joint venture between the Cordish Companies and Penn National Gaming, Inc. and an affiliate of our largest stockholder.

26 -------------------------------------------------------------------------------- Pursuant to the RFA, a Licensee must pay a minimum licensing fee within thirty (30) days after the award of a Gaming Facility License. However, nothing shall prohibit an Applicant from agreeing to pay an amount in excess of the fees listed below: The minimum For a Gaming Facility located in: licensing fee is: REGION 1 Region 1 in Dutchess or Orange Counties $70 million If no License is awarded for a Gaming Facility located in Dutchess or Orange Counties, then for the remaining portion of $50 million Region 1 (comprising Columbia, Delaware, Greene, Sullivan and Ulster Counties) If a License is awarded for a Gaming Facility located in Dutchess or Orange Counties, then for the remaining portion of $35 million Region 1 (comprising Columbia, Delaware, Greene, Sullivan and Ulster Counties) REGION 2 $50 million REGION 5 Region 5 in Broome, Chemung, Schuyler, Tioga or Tompkins Counties $35 million Region 5 in Wayne or Seneca Counties $50 million If a License is awarded for a Gaming Facility located in Wayne or Seneca Counties, then for the remaining portion of Region 5 $20 million (comprising Broome, Chemung, Schuyler, Tioga and Tompkins Counties) An Applicant may agree to pay a licensing fee in excess of the fee set forth above for its proposed Gaming Facility.

Within ten (10) business days after the Mandatory Applicant Conference, the Siting Board will promulgate the Minimum Capital Investment required. The Siting Board will evaluate Gaming Facility applications based on specific criteria which will be weighted as follows: 70 percent of the decision will be based on economic activity and business development factors, 20 percent will be based on local impact and 10 percent will be based on workforce factors. Additionally, local support for the Gaming Facility application must be demonstrated as a threshold application requirement. The duration of the initial licenses will be ten (10) years and the NYSGC will set the duration of, and fee for, renewal licenses. The NYSGC will oversee regulation of Gaming Facilities.

The tax rate on slot machines will range from 37% to 45% depending on the region and the tax rate on table games will be 10%. The tax rate of existing VGM facilities within each region will remain at the existing NYSGC commission rates and will include an additional commission from NYL based on a rate related to the effective tax rate on all gross gaming revenue at the Gaming Facility or Gaming Facilities, if any, developed in the region. Existing payments to the racing industry for purses and breeding will be maintained. The minimum gambling age for Gaming Facilities will be 21, and no smoking will be authorized. Gaming Facilities will be required to develop comprehensive problem gambling programs, and part of the decision for siting a Gaming Facility will be determined by the quality of the applicant's problem gambling program. All Gaming Facilities will be required to have exclusion policies and self-exclusion programs. As a condition of licensure, licensees are required to commence gaming operations no less than twenty-four months following the award of a Gaming Facility License by the NYSGC.

If the Company were awarded a Gaming Facility license by the NYSGC, for the Hudson Valley-Catskill Area, the Gaming Act provides the tax rate on slot machines would be 39% and the tax rate on table games would be 10%. However, an applicant may agree to supplement the tax with a binding supplemental fee. The Gaming Act imposes a $500 annual fee on each slot machine and table game. In addition, the Gaming Act requires the maintenance of the horsemen and breeder payments at the 2013 dollar level to be adjusted annually pursuant to changes in the consumer price index. A racetrack location awarded a Gaming Facility license is required to maintain racing activity and race dates. If the Company is not awarded a Gaming Facility license, and the Company were to continue its VGM operations at Monticello Casino and Raceway, the Gaming Act provides that MRMI would receive its current NYSGC commission rate and would receive an additional commission from NYSGC based on a rate related to the effective tax rate on all gross gaming revenue at a Gaming Facility or Gaming Facilities, if any, developed in the Hudson Valley-Catskill Area.

27 --------------------------------------------------------------------------------Development Master Development Agreement EPT and EPR Concord II, LP, each a wholly owned subsidiary of EPR, are the sole owners of 1,500 acres located at the site of the former Concord Resort, which we refer to as the EPT Property. On December 14, 2012 (the "Effective Date"), EPT and MRMI entered into the MDA to develop the EPT Property. The MDA defines and governs the overall relationship between EPT and MRMI with respect to the development, construction, operation, management and disposition of the Project to be developed by the parties on the EPT Property. The term of the MDA commenced on the Effective Date and shall expire on the earlier of (i) the earliest date on which the Casino Project, the Golf Course Project and the Initial Resort Project (as such terms are defined below and in the MDA) are all open to the general public for business and (ii) the sooner termination pursuant to the terms of the MDA. The parties also agreed to continue to cooperate in good faith with the on-going development plans and have agreed to share certain mutually agreed upon expenses including expenses relating to common infrastructure work. Either party has the right to terminate the MDA prior to the execution of a lease between EPT and MRMI with respect to the EPT Property prior to the commencement of construction on the Casino Project (the "Casino Lease"). Following the payment of any additional amounts accrued pursuant to the MDA as of the date of termination, neither party shall have any obligations under the MDA.

In accordance with the terms of the MDA, MRMI shall be responsible for the development and construction of the Casino Project, in which MRMI has agreed to invest a minimum of $300 million. In connection with the Casino Project, the Company will apply for a Gaming Facility license pursuant to the Gaming Act.

Once the development is completed, MRMI shall then be responsible for maintaining and operating the Casino Project in accordance with the operating standards contained in the Casino Lease.

MRMI and EPT agreed to cooperate with each other and appropriate governmental authorities and to provide such information as may be reasonably requested by such governmental authorities in order to obtain and maintain all gaming licenses required to operate the Casino Project. In accordance with the terms of the Option Agreement, which is discussed below, MRMI provided EPT a certificate of the MRMI Board of Directors which, in substance, waives MRMI's right to terminate the MDA pursuant to specified provisions therein and, unless the Option terminates due to the occurrence of a Trigger Event, which is defined below, so long as EPT has provided its notice to proceed, the Master Declaration has been executed and EPT is not in breach of the Option Agreement or any other agreements between the parties, MRMI is prohibited from building or operating a full-scale non-tribal casino in the Hudson Valley-Catskill Area anywhere other than at the EPT Property or building or operating a VGM facility anywhere other than at MRMI's existing site or at the EPT Property for a period of five years following the termination of the Option Agreement. The development of the Project, including the Casino Project, is contingent upon various conditions, including obtaining necessary governmental approval, as fully set forth in the MDA and the Company's ability to obtain necessary financing.

Option Agreement On December 21, 2011 (the "Option Effective Date"), MRMI entered into an option agreement with EPT, which was last amended by a letter agreement dated November 22, 2013, between EPT and MRMI (as amended, the "Option Agreement"). Pursuant to the Option Agreement, EPT granted us a sole and exclusive option (the "Option") to lease certain portions of the EPT Property pursuant to the terms of the form of Casino Lease negotiated between the parties. Our rights and obligations pursuant to the Option Agreement are subject to certain existing EPT agreements.

Among other things, the Option Agreement reflects the parties' agreement of when MRMI must decide whether it will lease the EPT Property for purposes of constructing the Casino Project. Pursuant to the Option Agreement, on November 30, 2013, MRMI exercised its right to extend the date by which it must make such determination (the "Option Exercise Period End Date") for up to a twelve month period ending November 30, 2014 (the "First Extended Option Exercise Period").

In addition, the final date by which MRMI must decide whether or not to execute the Casino Lease (the "Final Option Exercise Outside Date") was extended to a date that is (i) 120 days from the earliest to occur of specified triggers relating to whether MRMI is chosen to receive a Gaming Facility license or (ii) 60 days from when affiliates of MRMI enter into an agreement to develop a non-tribal casino with someone other than MRMI (each a "Trigger Event"). In consideration of such extension, MRMI is obligated to make monthly option payments (each an "Option Payment"). If a Trigger Event occurs, EPT may, in its sole discretion, extend the Final Option Exercise Outside Date by a maximum of 90 days and, before the Final Option Exercise Outside Date, waive such Trigger Event in writing (in which case the Option Agreement would continue as if such Trigger Event had not occurred).

If a Trigger Event has not occurred as of the end of the First Extended Option Exercise Period, (i) MRMI may extend the Option Exercise Period End Date by up to an additional twelve months (the "Second Extended Option Exercise Period") from 28 -------------------------------------------------------------------------------- November 30, 2014 to November 30, 2015 by making monthly Option Payments at a higher amount. If a Trigger Event has not occurred as of the end of the Second Extended Option Exercise Period, MRMI may extend the Option Exercise Period End Date on a monthly basis until the occurrence of a Trigger Event by making monthly Option Payments at an even higher amount. If MRMI exercises the Option and the Casino Lease for the EPT Property is executed between the parties, any Option Payments made by MRMI shall constitute prepaid rent and shall be applied against amounts due to EPT as rent under the Casino Lease.

If a Trigger Event occurs, EPT shall have the immediate right to discuss or negotiate with any other entity with respect to developing a casino or seeking a Gaming Facility License regarding the EPT Property and, if MRMI has not exercised the Option by the applicable Final Option Exercise Outside Date, EPT shall have the immediate right to enter into an agreement with another entity to develop a casino or seek a Gaming Facility License with respect to the EPT Property.

During the term of the Option Agreement, MRMI agreed to make a good faith effort to pursue a Gaming Facility License. If MRMI fails to diligently pursue the Gaming Facility License, MRMI shall notify EPT and the Final Option Exercise Outside Date shall be 60 days following the receipt of such notice by EPT. In furtherance of the Project and the Casino Project, EPT and MRMI negotiated the terms of a Master Declaration which was executed by EPT on December 6, 2013, which addresses the covenants, conditions, easements and restrictions of the Concord Resorts Master Association, LLC for the Project. In addition, EPT entered into an agreement with Aquatic Development Group to be the water park developer and operator for the Project and, in connection with such commitment, MRMI reimbursed EPT for certain out-of-pocket costs and expenses incurred by Aquatic Development Group pursuant to, and subject to the limitations contained in, the Option Agreement.

EPT has also granted MRMI the option to purchase the EPT Property, together with the other property owned by EPT at the site of the former Concord Resort, which option is exercisable upon the occurrence of a Trigger Event or any time between May 1, 2015 and June 30, 2015, at book value as of the date August 30, 2013 plus capitalized expenses incurred by EPT after such date through the purchase date and related to the development of the EPT Property.

Regulatory Permits and Approvals In January, 2013, the Town Board (the "Town Board") of the Town of Thompson, in which the EPT Property is located, unanimously approved certain zoning amendments necessary for the development of the Project and the Comprehensive Development Plan for the entire project site. Moreover, in July 2013, the Planning Board of the Town of Thompson granted final site plan approval for the Casino Project. MRMI will need to submit detailed construction plans to the Town of Thompson and received other regulatory approvals, including approvals from the U.S. Army Corps of Engineers and the New York State departments of Environmental Conservation, Transportation and Health prior to the commencement of construction on the Casino Project.

On March 19, 2013, the County of Sullivan Industrial Development Agency ("IDA") approved a Resolution (1) taking official action authorizing the issuance of revenue bonds to enable MRMI to use the industrial development revenue bonds for the financing of the Casino Project; (2) describing the forms of financial assistance being contemplated by the IDA to include: (i) an exemption from New York State ("State") and local sales and use taxes with respect to certain items used in, or for the acquisition, construction and equipping of, the Casino Project, estimated to be $15 million, (ii) the grant of one or more mortgage liens on IDA's interest in the Casino Project to secure the bonds and/or any other indebtedness incurred by or for the benefit of MRMI in connection with the Casino Project, which Mortgages would be exempt from all mortgage recording taxes imposed in the State, estimated to be $1.1 million, and (iii) a partial (or full) real property tax abatement, estimated to be $126 million over sixteen (16) years; and (3) appointing MRMI as IDA's agent to undertake the Casino Project. Fees for the utilization of the bonds and other financial assistance would be paid by MRMI to the IDA.

Expenses of Development Previously, we capitalized our development costs for the Casino Project because such development was to be a VGM facility. However, with the enactment of the Gaming Act in 2013 and the subsequent referendum approving a constitutional amendment in November 2013 to permit Gaming Facilities in New York, we will now apply, in a competitive environment, for a Gaming Facility License for the Casino Project. As it is not certain that we will obtain a Gaming Facility License necessary for the Casino Project, such expenditures cannot be capitalized; accordingly, during the fourth quarter of 2013, we expensed approximately $16.0 million of previously capitalized costs. All costs incurred for the Casino Project as a Gaming Facility pursuant to the Gaming Act will now be expensed until we are awarded a Gaming Facility License for the Casino Project.

29 -------------------------------------------------------------------------------- In the first quarter 2014, the total Project and Casino Project development costs incurred were approximately $1.6 million. The $1.6 million consisted of $500,000 in architectural fees, $750,000 of non-refundable payments pertaining to the Option Agreement with EPR and $350,000 in legal, construction manager costs, consultants and other professional services.

Competition Monticello Casino and Raceway Our gaming operations are located in the Catskills region in the State of New York, which has historically been a resort area, although its popularity declined with the growth of destinations such as Atlantic City and Las Vegas. We are located approximately 90 miles northwest of New York City. There are approximately 17.5 million adults who live within 100 miles of the Catskills area. In Sullivan County, the median household income from 2008 to 2012 was approximately $48,050. Specifically, Monticello Casino and Raceway is directly adjacent to New York State Route 17 (the future Interstate 86), has highly visible signage and convenient access, and is less than 1,000 feet from the highway's exit.

Racing Competition Generally, Monticello Casino and Raceway does not compete directly with other harness racing tracks in New York State for live racing patrons. However, Monticello Casino and Raceway does face intense competition for off-track and other legalized wagering at numerous gaming sites within the State of New York and the surrounding region. The inability to compete with larger purses for the races at Monticello Casino and Raceway and the limitation on other forms of legalized wagering that Monticello Casino and Raceway may offer has been a significant limitation on our ability to compete for off-track and other legalized wagering revenues. Moreover, our inability to simulcast races to and from facilities outside of New York State, because we do not currently have a horsemen's agreement in place with MHHA, has and will continue to adversely impact our racing operations revenues in 2014.

New York In New York, we face competition for guests from Orange, Duchess and Ulster Counties in New York for our VGM operation from a VGM facility at Yonkers Raceway, located within the New York City metropolitan area. Yonkers Raceway has a harness horse racing facility, approximately 5,400 VGMs, food and beverage outlets and other amenities.

In 2001, the New York State Legislature and the New York State Governor authorized the building of three Native American casinos in the Catskills region of the State of New York. On November 22, 2010, former Governor Paterson of New York signed a land settlement agreement with the Stockbridge-Munsee Community Band of Mohican Indians, a Wisconsin based Tribe ("Stockbridge-Munsee Band") with alleged roots in New York. As part of this land settlement, former Governor Paterson and the Stockbridge-Munsee Band executed a compact permitting the construction and operation of a Class III tribal casino on property located in Bridgeville, New York, approximately five miles from Monticello Casino and Raceway. On January 5, 2011, the United States Department of the Interior ("USDOI") received the compact. Approval of the compact is a condition precedent to the land settlement agreement becoming effective. In addition to approving the compact, the USDOI must also authorize the taking of the land into trust for the benefit of the Stockbridge-Munsee Band. On February 18, 2011, the USDOI notified New York State Governor Cuomo and the Stockbridge-Munsee Band that the compact is disapproved because the limitations on the use of the land violate the Indian Gaming Regulatory Act ("IGRA"). The USDOI indicated that it did not have enough information to conduct analysis on the compact's revenue sharing or exclusivity provisions and it also had outstanding questions regarding the relationship between the compact and the proposed settlement agreement. In early 2012, the Stockbridge-Munsee Band filed an updated application to have the USDOI take 330 acres in the Town of Thompson into trust. On January 31, 2014, the Bureau of Indian Affairs (BIA) published in the Federal Register a notice that it was making available for public review the Stockbridge-Munsee Band's Final Environmental Impact Statement ("FEIS") for the proposed conveyance of 330 acres of land into trust status and construction of a gaming complex. The FEIS considers a range of project alternatives, including: (1) preferred casino-hotel complex; (2) reduced casino size; (3) alternative financial ventures; (4) different site locations; (5) different site plans and (5) no action. We are unable to predict when or if the compact will be resubmitted to the USDOI or the final decision of the USDOI after consideration and analysis of the applicable regulations and the alternatives analyzed in the FEIS.

Twenty-two entities have submitted the Application Fee to the NYSGC in response to the RFA, eleven of which are tribal and other entities that have reportedly expressed an interest in gaming in the Hudson Valley-Catskill region. However, to date, no governmental action has been taken by the State of New York to enable such tribes or entities to engage in legalized gaming activities. Except as set forth in the RFA, as described above, we are unable to determine when or if any tribal or other entities would obtain the ability to engage in legalized gaming activities in the Hudson Valley-Catskill region.

30 -------------------------------------------------------------------------------- On June 14, 2011, the USDOI Assistant Secretary-Indian Affairs announced that he has rescinded a January 3, 2008 memo which said, among other things, that tribes could develop casinos on land off their reservations only if it was within "commutable distance" of the reservation which was considered by the USDOI to be approximately 40 miles. The other requirements of IGRA will continue to be applied by the BIA even though the "commutability" standard has been rescinded.

The Shinnecock Indian Nation, a state-recognized Native American tribe, is an Indian entity recognized by the BIA. The Shinnecock Indian Nation has expressed its interest in building a casino in Southampton, New York or at another location in downstate New York. Since becoming federally recognized, the Shinnecock Indian Nation has the right to build a Class II casino (as defined in IGRA) on their 800-acre reservation in Southampton, New York, but the Shinnecock have expressed a desire to develop a Class III casino (as defined in IGRA) closer to New York City including the possibility of a casino at Belmont, New York.

Throughout 2013 and through the date of this filing, we and numerous other entities have expressed an interest in seeking a Gaming Facility License in New York, and in the Hudson Valley-Catskill Area in particular. We are unable to determine which entities will be awarded Gaming Facility Licenses. However, we anticipate competition will be fierce for obtaining such license.

Pennsylvania To a lesser extent, Monticello Casino and Raceway faces competition from two casinos that are in Pennsylvania. Pennsylvania casinos may operate table games and slot machines and have the ability to grant credit to guests of the casino.

Pennsylvania legalized the operation of up to 61,000 slot machines at 14 locations throughout the state. As of March 13, 2014, there were twelve casinos in operation within Pennsylvania, with six located at racetracks. One such racetrack facility is the Mohegan Sun at Pocono Downs, which has approximately 2,300 slot machines and 84 table games, including 18 poker tables, and a new hotel and spa that opened in November 2013. The Mohegan Sun at Pocono Downs in Wilkes-Barre, Pennsylvania, is approximately 70 miles southwest of Monticello.

In addition, the Mount Airy Casino Resort has approximately 1,875 slot machines and 74 table games, including 9 poker tables, a hotel, spa and a golf course.

The Mount Airy Casino Resort is located in Mount Pocono, Pennsylvania, approximately 60 miles southwest of Monticello. The Pennsylvania Gaming Control Board ("PGCB") is currently evaluating proposals from five applicants for an additional license in Philadelphia.

Pennsylvania is also considering allowing Internet gaming. On December 4, 2013, the Pennsylvania Senate passed a resolution directing the Legislative Budget and Finance Committee ("LBFC") to (i) study the current condition and future viability of gaming in Pennsylvania and (ii) analyze the potential impact of on-line gaming on the gaming industry, including the impact on-line gaming may have on the Pennsylvania's tax revenues and employment at the casinos. The LBFC was directed to issue a report of its findings and recommendations to the General Assembly no later than May 1, 2014.

On January 2, 2014, a bill was introduced by the Pennsylvania House that would authorize and regulate VGMs in restaurants, bars, and clubs with a valid liquor license. Each licensed establishment will be limited to a maximum of three VGMs.

The bill was referred to a Pennsylvania House Committee on January 2, 2014.

New Jersey From time to time, New Jersey has reviewed options to place slot machines in various locations including the Meadowlands Racetrack located in Bergen County, New Jersey. Currently no slot machines or legalized full-scale casino gambling is permitted at the privately-operated Meadowlands Racetrack, and New Jersey Governor Chris Christie and Senate President Stephen Sweeney have stated publicly that they do not currently support permitting any form of gambling other than thoroughbred and harness related racing wagering at the Meadowlands Racetrack.

In November 2011, the voters in New Jersey approved a constitutional amendment permitting the Legislature to authorize by law wagering, at casinos in Atlantic City and at current or former racetracks, on the results of professional, certain college, and amateur sport and athletic events. The New Jersey State Legislature approved a bill that would allow the state Casino Control Commission to issue licenses to casinos and racetracks to accept bets on some professional and collegiate events and Governor Christie signed the legislation. The ability for racetracks and casinos to offer sports wagering, however, remains pending due to the existing federal ban on such wagering and the outcome of a federal lawsuit between certain sports leagues and the State of New Jersey.

New Jersey law permits mobile gaming with the use of iPads, smartphones and other wireless devices, in addition to devices issued by the casino, in any area located within the property boundaries of a casino hotel facility, including any recreation or swimming pool and excluding parking garages and parking areas.

31 -------------------------------------------------------------------------------- New Jersey law permits racetrack customers to place bets on live or simulcast racing using their mobile devices, such as iPads and smartphones. The New Jersey Racing Commission indicated it will develop regulations to oversee mobile wagering. Racetrack patrons would set up accounts to place bets while they are on racetrack property. Outside the tracks, the mobile gambling devices would be inoperable. In addition to the Meadowlands Racetrack, there are three other horseracing tracks in New Jersey: Monmouth Park in Monmouth County; Freehold Raceway in Monmouth County; and Atlantic City Race Course in Atlantic County.

Mobile gambling will allow racetrack patrons to bet on live or simulcast racing while they are on racetrack property, including the restaurants and outdoor areas, such as the paddock.

On November 25, 2013, the casino industry was granted permission to conduct 24-hour Internet gaming operations. New Jersey's Internet gaming law authorizes the New Jersey Division of Gaming Enforcement ("DGE") to license, regulate, investigate and take any other action regarding all aspects of authorized games conducted through the Internet. All hardware, software, and other equipment that is involved with Internet gaming must be located in casino facilities in Atlantic City, NJ. Casino licensees must hold an Internet gaming permit in order to engage in Internet wagering activity. The Law provides that wagers may be accepted from individuals who are not physically present in New Jersey if the DGE determines that such wagering is not inconsistent with federal law or the law of the jurisdiction, including any foreign nation, in which any such person is located. The authorization to conduct Internet gaming expires ten (10) years following the operative date established by the DGE.

Other Gaming Currently electronic gaming machines are operated in 39 states and there are 15 states with commercial casinos that also offer table games. Legislation permitting other forms of casino gaming is proposed, from time to time, in various states, including those bordering the State of New York. Our business could be adversely affected by such competition.

In December 2011, the United States Department of Justice ("Department") confirmed the reversal of a long-standing precedent that applied a 1961 federal gambling law to Internet gambling. The Wire Act, 18 U.S.C § 1084, et. seq., prevents wagers from taking place over phone lines. Deputy Attorney General James Cole wrote in a letter to William J. Murray, then Deputy Director and General Counsel for New York Lottery, "The Department's Office of Legal Counsel ('OLC') has analyzed the scope of the Wire Act, 18 U.S.C § 1084, and concluded that it is limited only to sports betting." We are uncertain if the Department's position would have any effect on our operations.

32 --------------------------------------------------------------------------------The results of operations for the three months ended March 31. 2014 and 2013 (unaudited) are summarized below: 3/31/2014 3/31/2013 Variance Percentage Variance (dollars in thousands) Revenues: Gaming $ 13,462 $ 14,625 $ (1,163 ) (8 )% Food, beverage, racing and other 2,121 2,945 (824 ) (28 )% Gross revenues 15,583 17,570 (1,987 ) (11 )% Less: Promotional allowances (976 ) (739 ) (237 ) (32 )% Net revenues 14,607 16,831 (2,224 ) (13 )% Costs and expenses: Gaming 9,987 10,987 1,000 9 % Food, beverage, racing and other 2,297 2,706 409 15 % Selling, general and administrative 4,117 2,819 (1,298 ) (46 )% Stock-based compensation 149 81 (68 ) (84 )% Depreciation 340 343 3 1 % Total costs and expenses 16,890 16,936 46 - % Loss from operations (2,283 ) (105 ) (2,178 ) 2,074 % Amortization of deferred financing costs (23 ) (18 ) (5 ) (28 )% Interest expense (3,043 ) (331 ) (2,712 ) (819 )% Net loss $ (5,349 ) $ (454 ) $ (4,895 ) 1,078 % Gaming revenue Gaming revenue decreased by $1.2 million or 8% for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. The severe weather during the first quarter of 2014 significantly impacted gaming revenue.

During the first quarter the property was closed three days and had several additional days impacted due to the severe weather. We estimate that the net gaming revenue impact to be approximately $725,000. VGM hold percentage was unchanged at 7.3% for the three months ended March 31, 2014 and for the three months ended 2013. The average daily win per unit decreased from $146.40 for the three months ended March 31, 2013 to $134.75 for the three months ended March 31, 2014. Handle decreased by approximately $11.0 million or 5.4% for the three months end March 31, 2014 as compared to March 31, 2013. We continue to concentrate our marketing efforts on more profitable guests and programs to increase loyalty.

Food, beverage, racing and other revenue Food, beverage, racing and other revenue decreased by $824,000 or 28%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Racing revenue decreased by $854,000 for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The decrease in racing revenue is largely due to the inability to simulcast races to and from facilities outside of New York State because we do not currently have a horsemen's agreement. Food and beverage revenue decreased by $50,000 for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The decrease in food and beverage revenue was largely due to lower cash sales in the buffet and the food court. The lower cash sales in the buffet and food courts were slightly offset by higher complimentary revenue from marketing promotions. These decreases were offset by a increase in other revenue of $80,000 for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase is principally due to additional ATM revenue resulting from a new contract.

33 --------------------------------------------------------------------------------Promotional allowances Promotional allowances increased by $237,000 or 32%, for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 primarily due to more non-subsidized free play in the amount of $885,000, which was offset by a credit of $604,000. The non-subsidized free play was reduced due to a credit from NYSGC, which resulted in an reduction of promotional allowances in the amount of $604,000, therefore the net non subsidized free play amount for the three months ended March 31, 2014 was $281,000. The additional non-subsidized free play increased both gross gaming revenue and promotional allowance. Also, food and beverage comps increased by $38,000. These increases were offset by a decrease in player club awards of $82,000.

Gaming costs Gaming costs decreased by $1 million or 9%, for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily due to lower NYSGC and other commissions of $1.1 million, resulting from lower gaming revenue, including taxable free play, as compared to the same period in the prior year. The lower NYSGC and other commissions were offset by higher gaming wages and related benefits of $53,000 as compared to the same period in the prior year. This increase is largely due to higher medical, dental, vision and other benefit related costs. Other gaming expenses increased $121,000 due to higher utilities and software repairs and maintenance.

Food, beverage, racing and other costs Food, beverage, racing and other costs decreased approximately $409,000 or 15% for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily due to lower purse expenses of $332,000 attributed to reduced racing revenue and the inability to simulcast races to and from facilities outside of New York State because we do not currently have a horsemen's agreement. Additionally, food and beverage costs of goods decreased by $62,000 due to lower food and beverage revenue. Food, beverage and racing other expenses decreased by $43,000. These decreases were offset by and increase in food, beverage and racing payroll and related benefits in the amount of $28,000.

Selling, general and administrative expenses Selling, general and administrative expenses increased by $1,298,000 or 46%, for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. Included in the selling, general and administrative expenses for the three months end March 31, 2014 are $1.6 million in development costs for the Casino Project. The $1.6 million consists of $500,000 in architectural fees, $750,000 of non-refundable payments pertaining to the Option Agreement with EPR and approximately $350,000 in legal, construction manager costs and consultants and other professional services. Payroll and related benefits costs increased approximately $71,000 largely due to higher medical, dental, vision and other benefit related costs. Marketing related expenses increased $182,000 for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. These increases are offset by reduced legal fees of approximately $555,000.

Stock-based compensation expense Stock-based compensation increased by $68,000 or 84%, related to compensation expense attributable to options granted to directors during the quarter ended March 31, 2014 and the vesting of restricted stock granted to management during the November 2013 that had a three year vesting period.

Interest expense Interest expense increased $2.7 million, for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. For the three months ended March 31, 2014, the Company recognized interest expense of approximately $3.0 million. The Series E Preferred Stock became contractually redeemable subject to the terms and conditions of the Settlement Agreement and has been classified as a liability on the accompanying balance sheet as of that date.

Increases in the amount that such liability would be settled at the balance sheet date pursuant to the terms of the Settlement Agreement are recorded as interest expense accordingly, the Company recorded a non-cash charge of $2.6 million for the three months ended March 31, 2014.

34 --------------------------------------------------------------------------------Liquidity and Capital Resources The accompanying 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. As of March 31, 2014, we had total current assets of approximately $12.8 million and current liabilities of approximately $27.3 million, including the $17.4 million Kien Huat Note (as discussed below). We have had continuing net losses and negative cash flow from operating activities, including a loss from operations of $2.3 million for the quarter ended March 31, 2014 which management believes is principally due to the impact of severe weather causing a reduction in revenues, $1.6 million of development expenses for the Casino Project (as defined above) and reduced racing revenue due to the suspension of all simulcasting other than intra-state simulcasting until an agreement with the MHHA is reached. However, the Company anticipates that its current cash and cash equivalents balances and cash generated from operations will be sufficient to meet its operating expenses for the next twelve months. Whether the Company's resources are adequate to meet the Company's liquidity needs beyond that period will depend on its growth and operating results. We anticipate refinancing or extending the term of the Kien Huat Note (as defined below) prior to its maturity. However, there can be no assurance that the Company will be successful in refinancing the Kien Huat Note or amending its terms. If the Company is unable to refinance or amend the Kien Huat Note prior to its maturity, it could have a material adverse affect on the Company.

The Company will also require additional capital resources to pursue a destination gaming resort license ("Gaming Facility License") and to develop the Casino Project (as defined below) in the event we are granted a Gaming Facility License. On May 12, the New York State Gaming Facility Location Board ("Siting Board") announced the minimum capital investment in the Gaming Facility to be developed, which amounts are discussed below. Moreover, applicants must describe their financing plans by June 30, 2014, the date on which applications for Gaming Facility Licenses are due. To support these efforts, we may seek to enter into strategic agreements, joint ventures or similar agreements or we may sell additional debt or equity in public or private transactions. On January 3, 2014, we filed a shelf registration statement on Form S-3, which was declared effective on February 12, 2014, covering the offer and sale of up to $250 million of our securities. As of May 7, 2014, we had up to $236.6 million available for future issuances under the Form S-3. The sale of additional equity will result in additional dilution to the Company's existing stockholders and financing arrangements may not be available to the Company, or may not be available in amounts or on terms acceptable to the Company.

On April 2, 2014, the Company commenced a rights offering of common stock to holders of its common stock and Series B Preferred Stock (the "April 2014 Rights Offering"). The Company distributed to its common stock holders and Series B Preferred Stock holders one non-transferable right to purchase one share of common stock at a subscription price of $6.25 per share for each fifteen shares of common stock owned, or into which their Series B Preferred Stock was convertible, on March 31, 2014, the record date for the April 2014 Rights Offering. In addition to being able to purchase their pro rata portion of the shares offered based on their ownership as of March 31, 2014, stockholders were able to oversubscribe for additional shares of common stock.

Upon completion of the April 2014 Rights Offering, the Company issued 2,138,881 shares of common stock and raised approximately $13.4 million. This includes 453,165 shares issued to holders upon exercise of their basic subscription rights, 1,512,629 shares issued to Kien Huat upon exercise of its basic subscription rights and 173,087 shares issued to holders upon exercise of their over-subscription rights in the April 2014 Rights Offering. The Company expects to utilize the estimated net proceeds of approximately $13.2 million for certain expenses relating to the the Project and Casino Project (as defined below) and maintaining our on-going operations and facilities in support of our pursuit of a Gaming Facility License.

Net cash used in operating activities was approximately $2.3 million and $3.1 million provided during the three months ended March 31, 2014 and 2013, respectively, which was primarily due to the increase in the net loss for the period.

Net cash used in investing activities was approximately $101,000 and $667,000 for the three months ended March 31, 2014 and 2013, respectively. The decrease of approximately $566,000 is largely a result of project development costs previously being capitalized that are now currently expensed.In addition, less was spent on the purchase of property and equipment.

Net cash provided in financing activities was approximately $995,000 and $0 for the three months ended March 31, 2014 . During the three months ended march 31, 2014 we received approximately $995,000 pertaining to the proceeds from exercising of stock options.

On February 19, 2014, our Board authorized the issuance of 30,833 shares of our common stock in payment of dividends due for the year ended December 31, 2013 on our Series B Preferred Stock. The recorded value of these shares was 35-------------------------------------------------------------------------------- approximately $218,000. At December 31, 2013, the Company had undeclared dividends on the Series B Preferred Stock of approximately $218,000.

On February 12, 2013, our Board authorized the issuance of 75,530 shares of our common stock in payment of dividends due for the year ended December 31, 2012 on our Series B Preferred Stock. The recorded value of these shares was approximately $167,000.

Our common stock is transferable only subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold directly or indirectly, a license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.

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