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NYNY > SEC Filings for NYNY > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for EMPIRE RESORTS INC

Form 10-Q for EMPIRE RESORTS INC


13-Aug-2013

Quarterly Report


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 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, 2012. 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, 2012, 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. Regulation
At its meeting held on January 31, 2013, the New York State Racing and Wagering Board ("RWB") approved the Company's racetrack and simulcast applications for the 2013 calendar year. Generally, the annual license renewal process requires the RWB to review the financial responsibility, experience, character and general fitness of MRMI and its management. The tax law was amended on July 30, 2013, to provide that all current VGM licenses shall expire on June 30, 2014. All VGM renewal licenses shall be valid for a period of five (5) years and the New York State Gaming Commission ("NYSGC") may decline to renew licenses, after notice and an opportunity for a hearing, for certain violations of gaming laws or the failure of the licensee or its stockholders to be of the requisite good character or financial fitness.

On February 1, 2013, the NYSGC became effective. The NYSGC was formally created via Chapter 60 of the Laws of 2012 as part of the 2012/2013 Enacted State Budget. The measure merged the RWB with the New York Lottery ("NYL") into a single state agency. The legislation that created the NYSGC provides that the Board of the NYSGC shall consist of seven members. On June 20, 2013, New York Governor Andrew Cuomo announced the confirmation of four members to the Board of the NYSGC. The NYSGC has the authority and responsibility to promulgate rules and regulations. The legislation specifies that all rules, regulations, acts, orders, determinations and decisions of the NYL and RWB shall continue as rules, regulations, acts, orders, determinations and decisions of the NYSGC until modified or abrogated by the NYSGC and all of the functions and powers and obligations and duties of the RWB and NYL were transferred to the NYSGC. Our VGM, harness horseracing and simulcast activities in the State of New York are overseen by the NYSGC.

On June 26, 2013, the NYSGC had its first meeting, during which it designated a Presiding Officer in the absence of a Chair, summarized the transition process, adopted a mission statement and a plan of organization, delegated authority to staff and ratified actions and determinations of staff. The NYSGC also approved a comprehensive reorganization of the rules of the NYL and RWB into a set of rules for the NYSGC. Additionally, technical amendments were proposed throughout the former agencies' regulations to reflect the NYSGC's four divisions
(Charitable Gaming, Gaming, Horse Racing and Pari-Mutuel Wagering and Lottery)
and to standardize language style and usage throughout the NYSGC's regulations. The legislation that created the NYSGC established four divisions: Charitable Gaming, Gaming, Horse Racing and Pari-Mutuel Wagering, and Lottery. We have joined with other VGM facility operators in New York State to form the New York Gaming Association, whose principal effort is to seek approval for passage of a constitutional amendment authorizing table games at the VGM facilities in New York, which would permit us to develop and operate a full-scale casino which would include slot machines and table game wagering and the extension of credit. Generally, a constitutional amendment must be approved by both houses of the New York State Legislature ("Legislature"), approved again by a newly elected Legislature, and approved by the voters at a general election, in which instance it becomes effective on the following January 1. On March 15, 2012, Governor Andrew Cuomo, Assembly Speaker Sheldon Silver and Senate Majority Leader Dean Skelos announced that a constitutional amendment authorizing up to seven non-tribal casinos at locations to be determined by the Legislature, was approved by the Legislature. On June 21, 2013, the newly elected Legislature passed the amendment. Therefore, there will be a general referendum in November 2013. However, there can be no assurance given that an amendment to the New York State Constitution to permit full-scale casino gaming will be passed in a timely manner, or at all, or that, if such amendment were passed, we would be able to effectively develop and operate a full-scale casino.


On July 30, 2013, the Upstate New York Gaming Economic Development Act ("Gaming Act") (as more fully discussed below) was enacted. Effective immediately, if any existing video lottery gaming licensee pays in excess of one thousand dollars ($1,000.00) in support of or in opposition to the constitutional amendment regarding full-scale casino gaming, it must be reported to the NYSGC, with a copy of all communications. The NYSGC will post on its website all campaign receipt/expenditure reports received from the New York State Board of Elections. Pursuant to the Gaming Act, if the constitutional amendment is passed in the general voter referendum in November 2013, the Gaming Act would authorize the NYSGC to award up to four (4) upstate destination gaming resort licenses. Up to two (2) destination gaming resorts could be located in a region consisting of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties ("Hudson Valley-Catskill Area"). In accordance with the Gaming Act, a siting board selected by the NYSGC (the "Siting Board") is charged with selecting applicants that are qualified to receive a destination gaming resorts license and determining the location of such destination gaming resorts. The NYSGC is not required to issue a license if the Siting Board determines that there are no qualified applicants in a specific region.
If the constitutional amendment is passed and the Company were to be awarded a destination gaming resort license by the NYSGC, 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 would impose a $500 annual fee on each slot machine and table game. In addition, the Gaming Act would require the Company to maintain the current horsemen and breeder payments and a racetrack location awarded a destination gaming resort license shall maintain the racing activity and race dates.
We are currently evaluating the Gaming Act and its effect on the Company. It is the opinion of management that if the constitutional amendment is passed, the Gaming Act may repeal a favorable tax rate/NYL commission available to the Casino Project (as defined below) and replaces it with the possibility of a NYL commission in addition to the existing NYL commission rate. Therefore, if the Company is not awarded a destination gaming resort license, and the Company were to continue its operations at Monticello Casino and Raceway, the Gaming Act provides that MRMI would receive its current NYL commission rate and would receive an additional commission from NYL based on a rate related to the effective tax rate on all gross gaming revenue at a destination gaming resort(s), if any, developed in the Hudson Valley-Catskill Area. If our current understanding is correct, if the constitutional amendment is passed and the Company develops and operates the Casino Project, the Casino Project would receive a commission from the NYL equal to that which is currently applicable to Monticello Casino and Raceway, plus an additional commission based on a rate related to the effective tax rate on all gross gaming revenue at a destination gaming resort(s), if any, developed in the Hudson Valley-Catskill Area. The Company believes that if the favorable tax rate/NYL commission for the Casino Project has been repealed, such repeal was inadvertent and the Company has received clarification from legislative staff that the intent of the sponsor of the Gaming Act was to preserve the current provisions authorizing the favorable tax rate/NYL commission available to the Casino Project whether or not the referendum was approved. Further, the clarification states that the interpretation of the Gaming Act is that if the statutory guidelines are met
(including an aggregate total "qualified capital investment" of $600 million)
the favorable tax rate/NYL commission would be available to the Casino Project, "for a period of forty years", notwithstanding that another facility might be sited in the region at a higher rate as stated elsewhere in the Gaming Act. Accordingly, we believe that if the favorable tax rate/NYL commission is available to the Casino Project, the provisions regarding the possibility of an additional NYL commission in the Gaming Act would not apply to the Casino Project. The Company is reviewing the Gaming Act and any necessary alternatives regarding the manner in which this may be resolved. However, no assurances can be made that the Company will receive a favorable outcome.

Development
EPT Concord II, LLC ("EPT"), a wholly owned subsidiary of Entertainment Properties Trust is the sole owner of 1,500 acres located at the site of the former Concord Resort (the "EPT Property"). On December 14, 2012 (the "Effective Date"), EPT and MRMI entered into a master development agreement (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 integrated destination resort and community (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) sooner termination pursuant to the terms of the MDA. The parties also agreed to continue to cooperate in good faith on the on-going development plans and have agreed to share certain expenses related to the master planning work and common infrastructure work. Either party has the right to terminate the MDA prior to the execution of a lease. In the event of termination, EPT shall reimburse to MRMI any amounts paid by MRMI


pursuant to the Option Agreement, which is described below. 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.

The parties envision us developing a comprehensive resort destination that includes a casino and a harness racetrack and may also include one or more hotels, food and beverage outlets, a spa facility, retail venues, space for conferences, meetings, entertainment and special events in a multi-purpose conference space supported by separate meeting rooms and parking facilities (the "Casino Project"). In addition to the Casino Project, the Project is expected to include a golf course and a resort including a variety of amenities.

In accordance with the terms of the MDA, we shall be responsible for the development and construction of the Casino Project. We shall then be responsible for maintaining and operating the Casino Project in accordance with the operating standards contained in the Casino Lease (as defined in the MDA), to be entered into by and between EPT and us prior to the commencement of construction on the Casino Project. We and EPT agreed to cooperate to consult appropriate governmental authorities as to the steps necessary to obtain authorization to relocate the gaming licenses currently used to operate the Monticello Casino and Raceway to the Casino Project such that, upon its substantial completion, we shall be entitled to obtain any required gaming license to operate the Casino Project without the need for any further discretionary action by applicable governmental authorities. The development of the 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.

In addition, the parties have agreed that the Project will include an aggregate total "qualified capital investment" of $600 million on the development of the Project in accordance with statutory guidelines, the compliance with which the parties agree is essential to the success and viability of the Project. We have agreed to invest a minimum of $300 million in the development and construction of the Casino Project.

On December 21, 2011 (the "Option Effective Date"), MRMI entered into an option agreement with EPT, which was last amended by a letter agreement on July 30, 2013, between EPT and us (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 a lease negotiated between the parties our rights and obligations pursuant to the Option Agreement are subject to certain existing EPT agreements.
The Option has an initial term of six months from the Effective Date (the "Option Exercise Period"). In addition, subject to the conditions of the Option Agreement, the Option Exercise Period may be extended for one or more six month periods. In connection with the execution of the Option Agreement, we paid EPT an option payment in the amount of $750,000. Any extension of the Option Exercise Period must be accompanied by an additional option payment of $750,000 for the six-month extension period. On March 8, 2013, we exercised the option to extend the Option Exercise Period to June 30, 2013. Accordingly, we paid EPT a pro-rated option payment in the amount of $472,603. The Option Exercise Period has been further extended by MRMI and EPT, the most recent of which extends the Option Exercise Period to August 14, 2013.

In the process of obtaining necessary governmental approval, on March 8, 2012, EPT and we presented an overview of the master plan for redevelopment of the EPT Property to the Town of Thompson Town Board ("Town Board") and formally submitted the proposed redevelopment plan to the Town of Thompson for an assessment of its environmental impact as prescribed by the State Environmental Quality Review provisions of the New York Environmental Conservation Law ("SEQR"). The SEQR hearing was held on August 28, 2012. The SEQR process was continued by the Town Board on January 2, 2013, when the Town Board accepted a Final Environmental Impact Statement for the entire development project, including Phase I, namely, the Casino Project. On January 15, 2013, the Town Board, as Lead Agency, issued an Environmental Findings Statement for the entire development project and held public hearings on the proposed zoning amendments to the Planned Resort Development provisions of the zoning law of the Town of Thompson and regarding a new Comprehensive Development Plan ("CDP") for the entire project site. After the close of the public hearings, the Town Board unanimously approved the zoning amendments and also approved the CDP for the entire site. On February 13, 2013, EPT and MRMI filed a site plan application for Phase I and a subdivision application for the EPT Property with the Town of Thompson Planning Board ("Planning Board") and the Planning Board conducted an informal review of those applications with representatives of EPT and us. The site plan application describes the facilities that will be developed during Phase I. On March 13, 2013, there was a joint public hearing before the Planning Board on the site plan application for Phase I and the subdivision application. On April 10, 2013, the Planning Board granted preliminary site plan approval for Phase I and preliminary subdivision approval for the EPT Property. On July 10, 2013 the Planning Board granted final site plan approval for Phase I. MRMI will be required to submit detailed construction plans to the Town, and receive 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 its ability to commence construction.


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 us 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 us as IDA's agent to undertake the Casino Project. Fees for the utilization of the bonds and other financial assistance would be paid by us to the IDA. On May 5, 2011, Concord Associates, L.P. ("Concord") announced that it has agreed to terms with the Mohegan Tribal Gaming Authority ("MTGA") to develop a new gaming and racing facility on its 116 acre site adjacent to the EPT Property. On May 6, 2011, Empire issued a press release announcing that neither Concord nor MTGA have valid New York State licenses to operate a harness racetrack or VGMs in Sullivan County, prerequisites to the operation of VGMs at the proposed development. As such, the Company cannot predict the outcome of its efforts to implement its plan to develop jointly with EPT the EPT Property. Competition
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, an area where average per capita income is approximately $35,000. Specifically, Monticello Casino and Raceway is directly adjacent to Highway 17, has highly visible signage and convenient access, and is less than 1,000 feet from the highway's exit.

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.
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 horseracing facility, approximately 5,300 VGMs, food and beverage outlets and other amenities.
On July 30, 2013, Governor Cuomo signed into law the Gaming Act. 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 and adds a new article that provides the statutory framework for the regulation of full-scale casino gaming if the constitutional amendment to permit full-scale casino gaming is approved by the voters in New York on November 5, 2013. The Gaming Act also 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. There are several different effective dates addressed in the Gaming Act.

Effective immediately are amendments to the penal law to add new definitions and gaming crimes and to address the operation of unlawful electronic sweepstakes. In addition, the Gaming Act immediately 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 video lottery gaming 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.

Effective on January 1, 2014, the Gaming Act amends the racing, pari-mutuel wagering and breeding law in relation to account wagering. The Gaming Act addresses the requirements for account wagering licenses and sets licensing and wagering fees for out-of-state account wagering licensees. NYSGC may begin accepting account wagering license applications on October 1, 2013.


If the constitutional amendment to permit full-scale casino gaming is approved by the voters in New York on November 5, 2013, effective on January 1, 2014, the Gaming Act will amend the racing, pari-mutuel wagering and breeding law, the tax law and the state finance law in relation to full-scale casino gaming. The Gaming Act authorizes the NYSGC to award up to four (4) upstate destination gaming resort licenses. Destination gaming resorts are authorized in three regions of the state: 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"). If determined by the Siting Board, one region may have up to two casinos. The NYSGC is not required to issue a license in any region if the Siting Board determines that there are no qualified applicants in a specific region. No destination gaming resorts can be authorized in Westchester, Rockland, New York City or Long Island. There will be a seven (7) year exclusivity period, commencing with the awarding of the license, during which no further destination gaming resorts will be licensed by the NYSGC. If the Legislature authorizes additional destination gaming resort licenses within this period, licensees shall have the right to recover a pro-rata portion of the license fee paid. The NYSGC will appoint the members of the Siting Board which will determine the required minimum amount of capital expenditures, set the license fee required of a destination gaming resort applicant in each region and make the selections. There will be a one million dollar ($1,000,000.00) application fee. The Siting Board will evaluate destination gaming resort 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 destination gaming resort 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 destination gaming resorts. 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 video lottery gaming facilities within each region will remain at the existing NYL 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 destination gaming resort(s), if any, developed in the region. Existing payments to the racing industry for purses and breeding will be maintained. The minimum gambling age for destination gaming resorts will be 21, and no smoking will be authorized. Destination gaming resorts will be required to develop comprehensive problem gambling programs, and part of the decision for siting a destination gaming resort will be determined by the quality of the applicant's problem gambling program. All destination gaming resorts will be required to have exclusion policies and self-exclusion programs. Applications must be issued by the Siting . . .

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