sec document
EMPIRE RESORTS, INC.
701 N. GREEN VALLEY PARKWAY, SUITE 200
HENDERSON, NV 89074
May 4, 2006
United States Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549-3561
Attention: David R. Humphrey, Branch Chief
Re: Empire Resorts, Inc.
Form 10-K for the year ended December 31, 2005
Commission File Number: 001-12522
---------------------------------
Ladies and Gentlemen:
We acknowledge receipt of the letter of comment dated April 20, 2006 from the
Securities and Exchange Commission (the "Commission Letter"). The following
reflect our responses to the Commission Letter. The section and page number
references below refer to our annual report on Form 10-K for the fiscal year
ended December 31, 2005 filed with the Securities and Exchange Commission on
March 30, 2006. The responses are numbered to coincide with the numbering of the
comments in the Commission Letter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES, PAGE 34
1. WE NOTE THAT YOUR DISCLOSURES OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
PRIMARILY REPRESENT A DESCRIPTION OF ACCOUNTING POLICIES INCLUDED IN THE NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS. WE BELIEVE THAT FR-72 (RELEASE
33-8350) ELICITS A DISCUSSION THAT SUPPLEMENTS, NOT REPEATS THE DISCLOSURES IN
THE NOTES. WHILE THE NOTES GENERALLY DESCRIBE THE METHOD USED TO APPLY AN
ACCOUNTING PRINCIPLE, THE DISCUSSION IN THE MD&A SHOULD FOCUS ON THE ESTIMATES,
ASSUMPTIONS OR UNCERTAINTIES INVOLVED IN APPLYING A PRINCIPLE INCLUDING HOW
THESE ITEMS MAY IMPACT THE PRINCIPLE AND HOW THIS PRINCIPLE MAY HAVE DIFFERENT
EFFECTS ON YOUR FINANCIAL RESULTS OVER TIME. WE ALSO BELIEVE COMPANIES SHOULD
ADDRESS WHY THE ACCOUNTING ESTIMATES OR ASSUMPTIONS ARE SUBJECT TO CHANGE AND
ANALYZE THEIR SPECIFIC SENSITIVITY TO CHANGE, BASED ON OUTCOMES THAT COULD
REASONABLY LIKELY OCCUR AND MAY HAVE A MATERIAL EFFECT. IN THIS REGARD,
REGISTRANTS SHOULD PROVIDE QUANTITATIVE AS WELL AS QUALITATIVE DISCLOSURE WHEN
QUANTITATIVE INFORMATION IS REASONABLY AVAILABLE. FOR EXAMPLE, IN YOUR
DISCUSSION ON IMPAIRMENT ON LONG-LIVED ASSETS, YOU SHOULD ANALYZE HOW THE
COMPANY ARRIVED AT THE IMPAIRMENT AMOUNTS TAKEN DURING THE PERIODS, HOW ACCURATE
THE ESTIMATES AND ASSUMPTIONS HAVE BEEN IN THE PAST INCLUDING WHETHER THESE
ESTIMATES AND ASSUMPTIONS HAVE CHANGED OVER TIME AS WELL AS THE REASONABLE
LIKELINESS THAT THE CURRENT ESTIMATES AND ASSUMPTIONS BEING USED MAY CHANGE IN
THE FUTURE BASED ON THE SIGNIFICANT AMOUNT OF ASSET STILL BEING REFLECTED IN THE
FINANCIAL STATEMENTS.
It is our understanding from a conversation with a representative of the
Commission that this point may be considered to be primarily guidance for future
filings and we will follow the guidance in FR-72 (Release 33-8350) when
preparing our disclosures of critical accounting policies and estimates in our
future filings.
The following is additional factual information related to your example of the
discussion of the impairment loss for the year ended December 31, 2005. We
determined the amount of impairment loss recorded by specifically identifying
the deferred costs associated with the individual developments underway during
that period. The decision to recognize impairment losses was based fundamentally
on the change in the political circumstances and tribal leadership problems
which occurred during 2005. The severity of these issues in 2005 led us to
conclude that regardless of the potential of the future revenues from the
projects, the probability of a successful completion of them was so low that the
recovery of the deferred costs associated with them was very unlikely. The
deferred development costs of approximately $5.6 million at December 31, 2005
relate only to the St. Regis Mohawk Tribe development at Monticello Raceway. We
believe that the probability of that project coming to a successful conclusion
is quite high because the processing of the project applications by the
governmental agencies involved has progressed substantially in the last six
months. The revenue from the development and management fees for that project is
expected to be in excess of the amounts deferred at December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
TABLE OF CONTRACTUAL OBLIGATIONS. PAGE 40
2. WE NOTE THAT YOU HAVE INCLUDED ONLY PRINCIPAL PAYMENTS IN YOUR TABLE OF
CONTRACTUAL OBLIGATIONS, AND THAT FOOTNOTE (B) TO THE TABLE OFFERS A VERY
LIMITED DISCUSSION OF THE MATERIAL TERMS OF BOTH YOUR FIXED AND VARIABLE RATE
DEBT. BECAUSE THE TABLE IS AIMED AT INCREASING TRANSPARENCY, WE BELIEVE YOU
SHOULD ALSO INCLUDE ESTIMATED INTEREST PAYMENTS IN THE BODY OF THE TABLE AS
THESE PAYMENTS REPRESENT A CONTRACTUAL OBLIGATION. YOUR TABULAR DISCLOSURE
SHOULD BE ACCOMPANIED BY A MORE DETAILED FOOTNOTE EXPLANATION OF THE METHODOLOGY
USED IN THE CALCULATION, INCLUDING CURRENT INTEREST RATE ON VARIABLE RATE DEBT
USED IN YOUR CALCULATIONS. SEE SECTION IV.A OF FR-72 FOR GUIDANCE.
We note the guidance in Section IV.A of FR-72. The Company will add the
following table with more detailed footnotes reflecting the changes in our
disclosure.
CONTRACTUAL OBLIGATIONS
-------------------------------------------------------
CONTRACTUAL OBLIGATIONS
-------------------------------------------------------
Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
----- ---- ----- ----- -----
Senior Convertible Notes - principal (a) $ 65,000 $ ---- $ ---- $ ---- $ 65,000
Revolving credit facility -principal (b) 7,476 ---- 7,476 ---- ----
Senior Convertible Notes - interest (c) 44,200 5,200 10,400 10,400 18,200
Revolving credit facility -interest (d) 1,420 710 710 ---- ----
Operating lease obligations 797 232 554 11 ----
--------------------------------------------------------------------
Total $118,893 $ 6,142 $ 19,140 $ 10,411 $ 83,200
====================================================================
(a) The holders of our Senior Convertible Notes have the right to require
us to repurchase the notes at 100% of the principal amount outstanding
on July 31, 2009.
(b) The revolving credit facility matures on January 11, 2008.
(c) Interest is payable at 8% semi-annually on the Senior Convertible Notes
and this table is based upon those notes being repaid in 2014.
(d) The revolving credit facility bears interest at the Prime Rate plus 2
points or Libor Rate plus 4 points. Amounts in this table are based
upon an average interest rate of 9.5% on borrowings under this
facility.
2
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 45
3. PLEASE REVISE YOUR INCOME STATEMENT PRESENTATION TO INCLUDE IMPAIRMENT
LOSSES WITHIN CONTINUING OPERATIONS AS PART OF THE SUBTOTAL "INCOME (LOSS) FROM
OPERATIONS". REFER TO THE GUIDANCE IN PARAGRAPH 25 OF SFAS 144.
The Company will present its income statement, regarding impairment losses from
continuing operations, in accordance with the guidance in paragraph 25 of SFAS
144 in its future filings.
4. AS A RELATED MATTER, YOUR CURRENT DISCLOSURE DISCUSSING THE $8.5 MILLION
IMPAIRMENT ON DEFERRED DEVELOPMENT COSTS RELATED TO YOUR WORK WITH THE CAYUGA
NATION STATES THAT THE CONTINUED DEFERRAL OF SUCH COSTS WOULD NOT BE IN
ACCORDANCE WITH YOUR ACCOUNTING POLICY, BUT DOES NOT STATE WHY. PLEASE EXPAND
YOUR DISCLOSURE SURROUNDING YOUR IMPAIRMENT LOSSES TO INCLUDE A BRIEF
DESCRIPTION OF THE FACTS AND CIRCUMSTANCES LEADING TO THE IMPAIRMENT LOSS. REFER
TO THE GUIDANCE IN PARAGRAPH 26 OF SFAS 144.
The Company proposes to insert the following additional comment in accordance
with the guidance in paragraph 26 of SFAS 144.
"Our evaluation of the circumstances surrounding our development project with
the Cayuga Nation, particularly the continuing uncertainty involving tribal
governance, led us to believe that it was appropriate to recognize an impairment
of the deferred development costs associated with that tribe and project. We
concluded that even though the future income from the project would be very
significant, it is appropriate to apply a low probability to acquiring that
income on the basis of circumstances at December 31, 2005."
CONSOLIDATED STATEMENT OF CASH FLOWS. PAGE 48
5. WE NOTE THAT YOU HAVE CLASSIFIED DEBT ISSUANCE COSTS (I.E. DEFERRED
FINANCING COSTS) AS FINANCING ACTIVITY OUTFLOWS. HOWEVER, THE REQUIREMENTS OF
PARAGRAPH 28 OF SFAS 95 REQUIRES ADJUSTMENT FROM NET INCOME TO REMOVE THE EFFECT
OF ALL DEFERRAL OF PAST OPERATING CASH PAYMENTS IN DETERMINING NET CASH FLOW
FROM OPERATING ACTIVITIES. AS THESE COSTS REPRESENT DEFERRAL OF A PAST OPERATING
CASH PAYMENT AND DO NOT MEET THE DEFINITION OF A CASH OUTFLOW FOR A FINANCING
ACTIVITY (I.E. PRINCIPAL PAYMENTS OR REPAYMENT OF AMOUNTS BORROWED) AS REQUIRED
BY PARAGRAPH 20 OF SFAS 95, THEY SHOULD BE TREATED AS A RECONCILING ITEM WITHIN
OPERATING ACTIVITIES ON THE CONSOLIDATED STATEMENT OF CASH FLOW.
6. FURTHERMORE, IN YOUR SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES, WE ALSO NOTE THAT OTHER DEFERRED FINANCING COSTS WERE PAID
WITH PROCEEDS RECEIVED ON A REVOLVING CREDIT FACILITY ($485,000), ISSUANCE OF
SENIOR CONVERTIBLE DEBT ($2.78 MILLION) AND LOAN FROM A BANK ($118,000) IN EACH
OF THE THREE FISCAL YEARS. FOR EXAMPLE, IN FISCAL YEAR 2004, THE $2.78 MILLION
OF DEFERRED FINANCING COSTS RECOGNIZED AS A NON-CASH ACTIVITY IS TREATED AS
BEING TAKEN FROM THE $65 MILLION OF SENIOR CONVERTIBLE DEBT ISSUED SO THAT YOUR
FINANCING ACTIVITIES ONLY REFLECT THE NET PROCEEDS OF $62.22 MILLION BEING
RECEIVED FROM THE ISSUANCE OF THIS DEBT. HOWEVER, IN EFFECT YOU RECEIVED THE
FULL PROCEEDS OF THE $65 MILLION IN DEBT ISSUED AND PAID THE $2.78 MILLION IN
DEFERRED FINANCING COSTS FROM THOSE PROCEEDS. THEREFORE, YOUR CONSOLIDATED
STATEMENT OF CASH FLOWS SHOULD REFLECT THE GROSS ACTIVITY FROM THESE
TRANSACTIONS BY RECOGNIZING A FINANCING ACTIVITY CASH INFLOW OF $65 MILLION FOR
THE ISSUANCE OF THE DEBT AND AN OPERATING ACTIVITY CASH OUTFLOW FOR THE PAYMENT
OF THE $2.78 MILLION DEFERRED FINANCING COSTS. THE RECOGNITION OF THE GROSS
3
AMOUNTS OF CASH RECEIPTS AND PAYMENTS WOULD THEN BE CONSISTENT WITH THE GUIDANCE
IN PARAGRAPH 11 OF SFAS 95 AS WELL AS THE GROSS RECOGNITION OF THE RELATED DEBT
AND ASSET IN YOUR CONSOLIDATED BALANCE SHEET FOR THESE ITEMS. IN ADDITION, WE
BELIEVE THIS TREATMENT IS ESPECIALLY RELEVANT AND MEANINGFUL WHEN THE PAYMENTS
AND RECEIPTS IMPACT TWO DIFFERENT CASH FLOW ACTIVITIES. THIS SAME TREATMENT
SHOULD BE AFFORDED TO ALL YOUR DEFERRED FINANCING COSTS RECOGNIZED IN EACH OF
THE FISCAL YEARS IN THE CONSOLIDATED STATEMENT OF CASH FLOWS BOTH WITHIN
FINANCING ACTIVITIES AND AS SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES.
7. WITH THE RECOGNITION OF ALL THESE PAYMENTS (CASH OUTFLOWS) OF DEFERRED
FINANCING COSTS AS A RECONCILING ITEM WITHIN OPERATING ACTIVITIES, WE NOTE THAT
THE AMOUNTS OF "NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES" WILL BE
MATERIALLY REDUCED IN EACH OF THE THREE FISCAL YEARS. THEREFORE, IN THE
AMENDMENT OF YOUR FORM 10-K, WE BELIEVE YOU SHOULD RESTATE YOUR CONSOLIDATED
FINANCIAL STATEMENTS TO REFLECT THIS CHANGE IN TREATMENT AND INCLUDE ALL THE
DISCLOSURES REQUIRED BY PARAGRAPH 37 OF APBO NO. 20. THIS CHANGE ALSO REQUIRES
RECOGNITION IN THE AUDITORS REPORT THROUGH THE ADDITION OF AN EXPLANATORY
PARAGRAPH IN ACCORDANCE WITH THE GUIDANCE IN PARAGRAPH 12 OF SECTION 420 IN THE
CODIFICATION OF STATEMENT ON AUDITING STANDARDS.
We are responding to Items 5, 6 and 7 together because it appears that the basic
issue is the primary classification for the costs associated with obtaining debt
financing in the statement of cash flows.
SFAS 95 is the authoritative pronouncement dealing directly with this issue. The
Emerging Issue Task Force considered the subject of debt issue costs in
September 1995 in Issue 95 - 13, Classification of Debt Issue Costs in the
Statement of Cash Flows, and noted that there had been some diversity in the
practice of applying SFAS 95. The conclusion reached by the Task Force was, "The
Task Force reached a consensus that cash payments for debt issue costs should be
classified in the statement of cash flows as a financing activity". To our
knowledge, there have been no subsequent pronouncements addressing this issue.
In addition, the Company asks that you consider the following element of
paragraph 18 of SFAS 95. "Financing activities include...; anD OBTAINING AND
PAYING FOR other resources obtained from creditors on long-term credit"(emphasis
added). The Company is of the opinion that this statement includes payments of
the costs of obtaining credit as financing activities.
The Company agrees that the "grossing up" of the proceeds of financing and the
cost of financing is appropriate and believes that the costs of financing should
be reported as a reduction of cash provided by financing activities. The
"grossing up" of the proceeds and the cost of financing will have no effect on
the net cash flows provided by financing activities. Accordingly, the Company
proposes to adopt the change prospectively.
NOTE B - IMPAIRMENT OF LONG-LIVED ASSETS, PAGE 54
8. WE NOTE YOUR ACCOUNTING POLICY ON HOW YOU ASSESS IMPAIRMENT OF LONG-LIVED
ASSETS BY ESTIMATING FUTURE CASH FLOWS (UNDISCOUNTED AND WITHOUT INTEREST
CHARGES) AND RECOGNIZE AN IMPAIRMENT LOSS IF THE CASH FLOWS ARE INSUFFICIENT TO
RECOVER THE CARRYING VALUE OF THE ASSETS. HOWEVER, YOUR ACCOUNTING POLICY SHOULD
BE EXPANDED TO STATE HOW THE IMPAIRMENT LOSS IS MEASURED ASSUMING IT IS BASED ON
THE CRITERIA IN PARAGRAPH 7 OF SFAS 144, WHERE A LOSS REPRESENTS THE AMOUNT BY
WHICH THE CARRYING VALUE OF A LONG-LIVED ASSET EXCEEDS ITS FAIR VALUE. IN
ADDITION, YOU SHOULD PROVIDE THE METHODOLOGY ON HOW FAIR VALUE IS MEASURED AS
PROVIDED BY THE GUIDANCE IN PARAGRAPHS 22-24 OF SFAS 144. IF A PRESENT VALUE
TECHNIQUE IS USED, YOU SHOULD DESCRIBE THE SPECIFIC TECHNIQUE. IN VIEW OF THE
FACT THAT YOU HAVE INCURRED SIGNIFICANT AMOUNTS OF IMPAIRMENT LOSSES IN TWO OF
4
THE LAST THREE FISCAL YEARS, WE BELIEVE THAT YOUR ACCOUNTING POLICY DISCLOSURES
ADDRESSING THESE MATTERS SHOULD BE TRANSPARENT, CLEAR AND COMPLETE TO A READER
OF YOUR FINANCIAL STATEMENTS.
As the Company has indicated in connection with Items 1 and 4 above, the
impairments recognized comprised ALL of the costs associated with projects which
we believed had low probabilities of success as of the valuation date. As of
December 31, 2005, the Company has deferred development costs associated with
one project for which the regulatory review process is well advanced. A
reasonable estimate of the present value of the future income exceeds the book
value of costs deferred at December 31, 2005 ($5.6 million).
In the Company's review of deferred development costs, it is not believed that
it was appropriate to apply sophisticated quantitative techniques. The questions
about continued deferral of costs were very basic and directed towards the
fundamental likelihood of success of the project in light of the facts and
circumstances at the valuation dates.
NOTE E, DEFERRED DEVELOPMENT COSTS, PAGE 58
9. WE NOTE THAT YOUR DEFERRED DEVELOPMENT COSTS COMPRISE APPROXIMATELY 10% AND
23% OF TOTAL ASSETS AT DECEMBER 31, 2005 AND 2004, RESPECTIVELY, AND THAT DURING
FISCAL 2005 YOU TOOK SIGNIFICANT IMPAIRMENT CHARGES ON BALANCES RELATING TO
AGREEMENTS WITH VARIOUS TRIBES. PLEASE REVISE YOUR DISCLOSURE HERE AND IN MD&A
TO INCLUDE THE AMOUNTS FUNDED TO EACH TRIBE, THE SPECIFIC USE OF THE AMOUNTS
FUNDED, THE REMAINING FUNDING COMMITMENT TO EACH TRIBE, AND THE MAJOR
ASSUMPTIONS USED TO ESTIMATE FAIR VALUES AND RECOVERABILITY OF THESE ASSETS
(SUCH AS PROJECT START DATES, REVENUE ASSUMPTIONS, DISCOUNT RATES, PROBABILITY
OF SUCCESS, ETC.) CONSIDER TABULAR PRESENTATION FOR CLARITY, AS APPROPRIATE.
PLEASE PROVIDE US A DRAFT OF YOUR PROPOSED DISCLOSURE WITH YOUR RESPONSE.
As explained in previous responses, deferred development costs at December 31,
2005 relate to only one project and location. The Company has one formal
commitment for funding as described at page 34 in the MD&A. The Company will add
the following sentence to Note E.
"The impairment losses reflect all of the deferred costs associated with the
projects noted below. We decided that the losses should be recognized because of
changes in circumstances which resulted in a very low probability of success for
the indicated projects."
NOTE K - STOCKHOLDERS' EQUITY (PREFERRED STOCK AND DIVIDENDS), PAGE 67
10. REFERENCE IS MADE TO YOUR SERIES E PREFERRED STOCK WHEREBY YOU INCLUDE
APPROXIMATELY $6.8 MILLION OF THESE SECURITIES WITHIN STOCKHOLDERS' EQUITY. WE
NOTE FROM YOUR DISCLOSURES THAT THE SERIES E PREFERRED STOCK CONTAINS A
REDEMPTION VALUE. WE ASSUME FROM YOUR CLASSIFICATION OF THESE SECURITIES WITHIN
STOCKHOLDERS' EQUITY THAT ALL REDEMPTION PROVISIONS ARE WITHIN THE CONTROL (OR
SOLELY AT THE OPTION) OF THE ISSUER. IF TRUE, THE NOTES SHOULD BE EXPANDED TO
CLEARLY STATE THIS FACT.
The Company will add to future filings a sentence to the paragraph on this
subject as follows. "Redemption of the Series E Preferred Stock is solely at our
discretion."
NOTE L STOCK OPTIONS AND WARRANTS, PAGE 69
11. SUPPLEMENTALLY EXPLAIN TO US THE FACTS AND CIRCUMSTANCES SURROUNDING THE
STOCK OPTION CANCELLATIONS AND GRANTS DURING FISCAL 2003. SPECIFICALLY ADDRESS
WHY THE OPTIONS WERE CANCELLED AND WHETHER THE OWNERS OF ANY CANCELLED OPTIONS
ALSO RECEIVED GRANTS DURING 2003. YOUR RESPONSE SHOULD INCLUDE THE TIMING AND
PRICING OF SUCH CANCELLATIONS AND GRANTS. WE MAY HAVE FURTHER COMMENT ON YOUR
RESPONSE.
5
On February 12, 2002 the Company entered into employment agreements with each of
Robert Berman and Scott Kaniewski, the Company's former Chief Executive Officer
and Chief Financial Officer, respectively, providing for, among other things,
options to purchase, at an exercise price of $17.49 per share, up to an
aggregate of 95,016 shares of the Company's common stock, which number of shares
were subject to increase to an aggregate of up to 295,689 upon stockholder
approval. These options were to originally vest over a three-year period. On
January 9, 2003, the Company's Board of Directors (the "Board") modified the
employment agreements of each of Robert Berman and Scott Kaniewski. The
modifications, among others, included the cancellation of the above options and
the issuance of new options to each of Robert Berman and Scott Kaniewski to
purchase up to an aggregate of 95,016 shares of the Company's common stock, at
an exercise price of $2.12 per share (which number of shares were subject to
increase to an aggregate of up to 295,689 each upon shareholder approval). These
new options vested immediately. Subsequently, in March 2003, the stockholders
approved the remaining grant of options, which vested immediately, to each of
Robert Berman and Scott Kaniewski to purchase up to an aggregate of 200,673
additional shares of the Company's common stock, at an exercise price of $2.12
per share. The Board determined that the purpose of the stock options were not
being adequately achieved with respect to these employees holding unvested
options that were exercisable at prices above current market value and that it
was in the best interests of the Company and its stockholders that the Company
retain and motivate such employees.
The Company acknowledges that it is responsible for the adequacy and accuracy of
the disclosure in the filings, that staff comments or changes to disclosures in
response to staff comments do not foreclose the Commission from taking any
action with respect to the filings and the Company will not assert staff
comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
Sincerely,
/s/ Ronald J. Radcliffe
Ronald J. Radcliffe
Chief Financial Officer