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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
|X| Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2007
| | Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
---------- ----------
Commission file number 333-112603
CATSKILL LITIGATION TRUST
-------------------------
(Exact Name of Small Business Issuer as Specified in Its Declaration of Trust)
DELAWARE 16-6547621
- ------------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
C/O CHRISTIANA BANK & TRUST COMPANY
1314 King Street
Wilmington, Delaware 19801
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(302) 888-7400
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that Catskill Litigation Trust was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
As of May 14, 2007, 21,912,869 Units of beneficial interest were outstanding.
Transitional Small Business Disclosure Format (check one): Yes | | No |X|
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CATSKILL LITIGATION TRUST
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1. CONDENSED FINANCIAL STATEMENTS (unaudited)
Condensed Balance Sheet as of March 31, 2007 3
Condensed Statements of Operations for the Three Months Ended
March 31, 2007 and March 31, 2006 4
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 2007 and March 31, 2006 5
Notes to Condensed Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 11-15
ITEM 3. CONTROLS AND PROCEDURES 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16-18
ITEM 6. EXHIBITS 18
SIGNATURES 18
CERTIFICATIONS 18-22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATSKILL LITIGATION TRUST
CONDENSED BALANCE SHEET
March 31, 2007
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 220,371
-----------
Total Current Assets 220,371
-----------
TOTAL ASSETS $ 220,371
===========
LIABILITIES AND TRUST DEFICIENCY
Current Liabilities
Accrued expenses $ 186,079
Line of credit-related party 1,765,000
-----------
Total Current Liabilities 1,951,079
-----------
Trust Deficiency
Units of Beneficial Interest: authorized 21,912,869;
issued and outstanding 21,912,869, stated as 182,552
Accumulated deficit (1,913,260)
-----------
Total Trust Deficiency (1,730,708)
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TOTAL LIABILITIES AND TRUST DEFICIENCY $ 220,371
===========
The accompanying notes are an integral part of these
condensed financial statements.
3
CATSKILL LITIGATION TRUST
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
------------------ ------------------
General and Administrative Expenses:
Litigation Trustee Fees $ 30,000 $ 30,000
Administrative Trustee Fees 1,500 1,500
Consulting Fees 2,400 1,500
Legal Fees 278,872 14,368
Accounting Fees 12,000 12,000
Interest Expense 31,200 22,911
Other 4,972 1,830
------------ ------------
Total General and Administrative Expenses 360,944 84,109
Dividend Income 1,278 61
------------ ------------
Net Loss $ (359,666) $ (84,048)
============ ============
Loss per unit outstanding $ (0.02) $ (0.00)
Units outstanding 21,912,869 21,912,869
============ ============
The accompanying notes are an integral part of these
condensed financial statements.
4
CATSKILL LITIGATION TRUST
STATEMENTS OF CASH FLOWS
(Unaudited)
For the For the
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
------------------ ------------------
Cash flows from operating activities
Net loss $(359,666) $ (84,048)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Imputed interest expense 31,200 22,911
Changes in operating assets and liabilities:
Accounts payable -- 53,697
Accrued expenses 178,884 7,500
--------- ---------
Net cash (used in) provided by operating activities (149,582) 60
Cash flow from financing activities
Increase in line of credit-related party 250,000 --
--------- ---------
Increase in Cash and Cash Equivalents 100,418 60
Cash and Cash Equivalents - beginning of period 119,953 17,235
--------- ---------
Cash and Cash Equivalents - end of period $ 220,371 $ 17,295
========= =========
The accompanying notes are an integral part of these
condensed financial statements.
5
CATSKILL LITIGATION TRUST
Notes to Condensed Financial Statements--March 31, 2007 (Unaudited)
NOTE 1 - THE TRUST AND MANAGEMENT'S PLANS
The Catskill Litigation Trust is a Delaware statutory trust (the
"Litigation Trust") formed by Empire Resorts, Inc. ("Empire Resorts"),
Monticello Raceway Management, Inc., ("MRMI"), Monticello Casino
Management, L.L.C., Monticello Raceway Development Company, L.L.C.
("MRDC") and Mohawk Management, L.L.C. ("Mohawk"). On January 12, 2004,
22,702,896 units of beneficial interest were issued to the members and
stockholders of those entities. At that time, Empire Resorts, Catskill
Development, L.L.C. ("Catskill"), MRMI, Mohawk, Joseph E. Bernstein,
Paul A. deBary (Messrs. Bernstein and deBary are hereinafter referred
to as the "Litigation Trustees") and Christiana Bank and Trust Company
(the "Administrative Trustee") entered into the Declaration of Trust of
Catskill Litigation Trust (the "Declaration of Trust"). Pursuant to
Amendment No. 1 to the Declaration of Trust, dated as of November 15,
2004, the number of units issued was reduced to 21,912,869. From
January 12, 2004 to December 31, 2006, there were no additional units
issued.
In the Declaration of Trust, Catskill, MRDC and Mohawk assigned to the
Litigation Trust all of their claims under or related to the alienation
and frustration of their agreements and business relations with the St.
Regis Mohawk Tribe and their rights to any judgment or settlement that
may arise from any litigation relating to two litigations entitled
Catskill Development, L.L.C., Mohawk Management L.L.C. and Monticello
Raceway Development Company L.L.C., Plaintiffs v. Park Place
Entertainment Corporation, Defendant (the "PPE Case") and Catskill
Development, L.L.C., Mohawk Management, L.L.C., Monticello Raceway
Development Company, L.L.C., Plaintiffs v. Gary Melius, Ivan Kaufman,
Walter Horn, President R.C. - St. Regis Management Company, et al,
Defendants (the Melius, Kaufman & Horne Case, hereinafter collectively
with the PPE Case referred to as the "Litigation"). If at any time the
Litigation Trustees determine, in their absolute discretion, that the
assets of the Litigation Trust are not sufficient to justify its
continuance, the Litigation Trustees are authorized to terminate the
Litigation Trust. In addition, the Litigation Trust is to terminate on
the date that all litigation has been fully prosecuted to final
judgment or dismissal, including all appeals, and all Litigation Trust
assets have been distributed to the Litigation Trust's beneficiaries.
In June 2006, two of the plaintiffs in the PPE Case were dismissed
without prejudice on jurisdictional grounds as a result of a finding
that these parties lacked diversity of citizenship. A new complaint was
subsequently filed by the Trustees on behalf of these plaintiffs.
Pursuant to a stipulation entered into by all parties to the PPE Case,
the parties accepted all previous determinations of the trial court as
applicable to the new complaint and the case was consolidated with that
of the remaining plaintiff, essentially restoring the parties to the
status that had existed prior to the dismissal. Accordingly, references
to the "PPE Case" subsequent to the consolidation refer to the
consolidated case.
On January 24, 2007, the Litigation Trust entered into an agreement
(the "Joint Alliance Agreement") with the St. Regis Mohawk Tribe and
representatives of the litigants in a separate lawsuit against PPE.
That lawsuit pursued claims on behalf of enrolled members of the St.
Regis Mohawk Tribe that are similar to the claims that the Litigation
Trust is pursuing on behalf of its beneficiaries. As a result of the
common interests of the Litigation Trust's beneficiaries and the class
of enrolled tribal members, the parties to the Joint Alliance Agreement
have agreed to work together to merge their respective interests and
share in any recoveries of their respective claims. Additional units of
the Litigation Trust will be issued if a merger is consummated under
the Joint Alliance Agreement. Subject to any extension of the Joint
Alliance Agreement, such a merger must be consummated prior to the end
of the term of the Joint Alliance Agreement, which extends through July
30, 2007.
During the term of the Joint Alliance Agreement, the parties have
agreed to work together to accomplish a merger of their respective
litigation interests in the Litigation Trust. The litigants in the
tribal court litigation have agreed to execute and deliver appropriate
documentation providing for the transfer of all their right title and
interest in their claims to the Litigation Trust. The Litigation
Trustees have agreed to request the consent of the beneficiaries of the
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Litigation Trust to an amendment of the Declaration of Trust
establishing the Litigation Trust that would permit the prosecution of
such claims by the Litigation Trust and a doubling of the authorized
ownership units of the Litigation Trust. Upon the effectiveness of such
amendment, the Litigation Trust will obtain complete ownership rights
to the claims of the tribal litigants, including the Tribal Court
judgment, and 50% of the ownership units of the Litigation Trust will
become beneficially owned by the enrolled members of the St. Regis
Mohawk Tribe, as the class of plaintiffs certified by the Tribal Court.
Consummation of the merger of claims will involve an amendment to the
Declaration of Trust to authorize an increase in the number of units
outstanding and will require the consent of the unitholders of the
Litigation Trust pursuant to the Declaration of Trust and satisfaction
of other conditions, including approval of the Tribal Court. No
assurance can be given that such merger will be completed or completed
on a timely basis.
If the merger of these claims is consummated, the enrolled members of
the St. Regis Mohawk Tribe, as beneficial owners of the new units, will
be entitled to share equally in any future recovery or settlement in
the litigation currently being prosecuted by the Litigation Trust.
Similarly, the existing unitholders will be entitled to share in any
future recovery or settlement of the claims of the tribal litigants
that are granted to the Litigation Trust.
As discussed in Note 3, Empire Resorts, a related party, has provided
the Litigation Trust with a line of credit of up to $2,500,000 to pay
all expenses of the Litigation Trust permitted under the Declaration of
Trust. The line of credit expires upon the termination of the
Litigation Trust. Empire Resorts is a holding company, owning all the
capital stock or membership interests of certain other entities. Empire
Resorts is therefore dependent on these other entities to pay dividends
or make distributions in order to generate internal cash flow and to
satisfy its obligations, including its obligations under the line of
credit. There can be no assurance, however, that these other entities
will generate enough revenue sufficient for such purposes. Although
Empire Resorts significantly increased its level of operations in
recent years, it has yet to demonstrate that such operations can be
profitable. Therefore, there can be no assurance that Empire Resorts
will have the ability to meet its obligations under the line of credit.
Although funds currently available to the Litigation Trust are deemed
sufficient to cover its operations in connection with the appeal of the
PPE case, it is anticipated that the Litigation Trust will need to
raise additional funds in order to complete a trial in the PPE case and
recommence the Melius, Kaufman and Horn Case in the event that the
appeal is successful or if the unitholders approve the assignment of
the Tribal Court judgment pursuant to the Joint Alliance Agreement.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
These unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP"), and with Form 10-QSB and Item 310 of
Regulation S-B of the Securities and Exchange Commission (the "SEC").
In the opinion of the Litigation Trustees, the accompanying unaudited
condensed financial statements contain all the adjustments necessary
(consisting only of normal recurring accruals) for a fair presentation.
The interim results are not necessarily indicative of the results that
would be expected for the full year and do not contain all information
included in the Litigation Trust's annual financial statements and
notes for the year ended December 31, 2006.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the report on Form 10-KSB for the year ended December 31,
2006.
7
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Litigation Trustees to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on account, demand deposits and
certificates of deposit with original maturities of three months or
less at acquisition and money market funds. From time to time, the
Litigation Trust maintains significant cash balances in excess of the
amounts covered by the Federal Deposit Insurance Corporation. The
Litigation Trust has not incurred any losses in such accounts and the
Litigation Trustees believe it is not exposed to any significant credit
risk on cash.
INCOME TAXES
For federal income tax purposes, the Litigation Trust is treated as a
grantor trust. Under the grantor trust rules, each holder of a unit of
beneficial interest is treated as the owner of his or her share of the
Litigation Trust's assets. The treatment of income and expense items
under GAAP may differ from the tax treatment of such items. Expenses
incurred by the Litigation Trust are capitalized for tax purposes.
NOTE 3 - LINE OF CREDIT-RELATED PARTY
As discussed in Note 1, Empire Resorts, a related party, has provided
the Litigation Trust with a line of credit of up to $2,500,000. The
line of credit can be used to pay all expenses of the Litigation Trust
permitted under the Declaration of Trust, including but not limited to
professional fees and the fees and expenses of the Litigation and
Administrative Trustees. The line of credit is non-interest bearing and
is to be repaid from any amounts received from litigation settlements
or awards. The line of credit expires upon the termination of the
Litigation Trust.
As of March 31, 2007, $1,765,000 had been drawn against the line of
credit.
The Litigation Trust imputed interest on the borrowings at Empire
Resorts' borrowing rate (8.00% per annum at March 31, 2007). Interest
expense for the three months ended March 31, 2007 and March 31, 2006
amounted to $31,200 and $22,911, respectively. Imputed interest expense
is deemed contributed capital to the Litigation Trust.
NOTE 4 - DISTRIBUTIONS
The distribution of any net proceeds from litigation settlements or
awards, after amounts are applied to cover all current or expected
expenses of the Litigation Trust, is to be made at the sole discretion
of the Litigation Trustees and will be distributed as follows:
First: To pay the Litigation Trustees their fees arising from
litigation settlements or awards. (See Note 5.)
Second: To reimburse $7,500,000 to Empire Resorts for expenses incurred
in connection with the Litigation prior to the formation of the
Litigation Trust and, in addition, to repay Empire Resorts any amounts
outstanding under the line of credit.
Third: If any amount remains after the above requirements are met, such
amount remaining is to be divided among the beneficiaries of the
Litigation Trust in proportion to their ownership of units as of the
date the distribution is made.
8
NOTE 5 - COMMITMENTS AND CONTINGENCIES
COMPENSATION OF LITIGATION TRUSTEES
Each of the two Litigation Trustees is entitled to annual compensation
of $60,000 plus reimbursement of expenses incurred carrying out the
purpose of the Litigation Trust. In addition, one litigation trustee is
entitled to 4.0%, and the other 1.0%, of any litigation settlements or
awards.
COMPENSATION OF THE ADMINISTRATIVE TRUSTEE
The Administrative Trustee is entitled to a monthly administrative fee
of $500. In addition, the Administrative Trustee is entitled to a
custody fee on certain cash balances and marketable securities of 0.5%
per annum on the first $10,000,000 of fair value and 3.0% on the excess
and reimbursement for certain fees and expenses.
EXPENSES PAID PRIOR TO THE FORMATION OF THE LITIGATION TRUST
As discussed in Note 4, the Litigation Trust is obligated to pay to
Empire Resorts up to $7,500,000. This amount represents expenses
incurred prior to the formation of the Litigation Trust. The amount is
payable solely from the proceeds of litigation settlements or awards.
REPAYMENTS OF AMOUNTS DRAWN UNDER THE LINE OF CREDIT-RELATED PARTY
As discussed in Note 4, the expenses of the Litigation Trust are
expected to be paid from draws under the line of credit. Amounts drawn
under the line of credit are to be repaid from any amounts received
from litigation settlements or awards.
ADDITIONAL AMOUNTS PAYABLE TO APPEALS COUNSEL
Under the terms of the Litigation Trust's arrangement with the law firm
handling its appeal, additional fees in an aggregate amount not to
exceed $100,000 may be payable to that firm.
The exact amount payable in the event of a reversal of the decision by
the trial court will vary from $50,000 to $100,000 depending on the
precise nature of the outcome.
CONTINGENT FEE PAYABLE TO CONSULTANT
On January 24, 2007, the Litigation Trust retained the services of JAF
Management, LLC ("JAF") to serve as a consultant to the Litigation
Trust concerning strategic and structuring alternatives, capital market
and industry conditions and financial valuations relating to potential
settlement opportunities or active settlement negotiations. The term of
the consulting agreement expires on March 31, 2008. As compensation for
the services of JAF, the Litigation Trust has agreed to pay a success
fee in connection with any out-of-court settlement or termination
arrangement with respect to any of the litigations equal to three
percent (3%) of the amount by which the gross realizable value of such
settlement or termination arrangement exceeds $200 million. Any
compensation payable to JAF is to be treated as an expense of the
Litigation Trust and shall not be deducted in determining the value of
any settlement or termination arrangement.
NOTE 6 - CERTAIN RELATIONSHIPS
The Litigation Trustees are both currently members of Empire Resorts'
Board of Directors.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities a minimum threshold for
financial statement recognition of the benefit of tax positions, and
9
requires certain expanded disclosures. The Interpretation is effective
for fiscal years beginning after December 31, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The
adoption of the Interpretation did not have a material impact on the
financial statements of the Litigation Trust.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"). This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosure
of fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No.
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Litigation Trust does not expect
the adoption of SFAS No. 157 to have an impact on the results of
operations and financial condition of the Litigation Trust.
In September 2006, the staff of the SEC issued Staff Accounting
Bulletin No. 108 ("SAB 108") which provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. Adoption of SAB 108 did not have a material impact
on the Litigation Trust's consolidated financial position, results of
operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities ("SFAS 159"), to permit all entities to choose to
elect, at specified election dates, to measure eligible financial
instruments at fair value. An entity shall report unrealized gains and
losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date, and recognize upfront costs
and fees related to those items in earnings as incurred and not
deferred. SFAS 159 applies to fiscal years beginning after November 15,
2007, with early adoption permitted for an entity that has also elected
to apply the provisions of SFAS 157, Fair Value Measurements. An entity
is prohibited from retrospectively applying SFAS 159, unless it chooses
early adoption. SFAS 159 also applies to eligible items existing at
November 15, 2007 (or early adoption date). The adoption of the SFAS
159 did not have a material impact on the financial statements of the
Litigation Trust.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains "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 (the "Exchange Act"). All
statements other than statements of historical facts included in this Report,
including without limitation, the statements under "General," and "Liquidity and
Capital Resources," are forward-looking statements. All subsequent written and
oral forward-looking statements attributable to the Litigation Trust or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements.
The following discussions should be read in conjunction with our financial
statements and the related notes thereto and other financial information
appearing elsewhere in this report. The following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of various factors, including those discussed elsewhere
in this report.
GENERAL
We are a statutory trust created under Delaware law. Our formation was a
condition to the merger of Empire Resorts, Inc. ("Empire Resorts"), Monticello
Raceway Management, Inc., ("MRMI"), Monticello Casino Management, L.L.C.
("MCM"), Monticello Raceway Development Company, L.L.C. ("MRDC") and Mohawk
Management, L.L.C. ("Mohawk"). Also as a condition to that merger, each of
Catskill Development, L.L.C. ("Catskill"), MRDC, and Mohawk, agreed to assign to
us all of their claims under or related to the alienation and frustration of
their agreements and business relations with the St. Regis Mohawk Tribe. That
assignment included rights to any proceeds from any settlement or award that may
arise from any litigation relating to that claim. We currently maintain a web
site at WWW.CATSKILLTRUST.COM to facilitate communications and provide a
convenient source of more detailed information for our unit-holders and other
interested parties.
Our litigation claims arise from the efforts of each of Catskill, MRDC,
and Mohawk to develop with the St. Regis Mohawk Tribe a gaming casino in
Monticello, New York. The plaintiffs spent several years and substantial funds
to develop and obtain required approvals for the casino. Subsequently, Park
Place Entertainment Corporation, the world's largest gaming corporation and
Atlantic City's largest casino operator, entered into an agreement providing for
the St. Regis Mohawk Tribe to commit its future casino development efforts
exclusively to Park Place Entertainment Corporation. That agreement conflicted
with the Mohawk Tribe's agreements with Catskill, MRDC and Mohawk.
There is one lawsuit pending and one lawsuit that has been discontinued.
The first lawsuit is Catskill Development, L.L.C., Mohawk Management, L.L.C.,
and Monticello Raceway Development Company, L.L.C., Plaintiffs v.Park Place
Entertainment Corporation, Defendant. (Civil Action No. 00CIV8660 (CM) (GAY))
(United States District Court Southern District of New York) referred to herein
as the "PPE case." This lawsuit had initially been dismissed on a motion for
summary judgment. However, the trial court subsequently vacated the earlier
decision granting summary judgment to Park Place Entertainment, in order to
consider new evidence and allow additional discovery proceedings. After these
proceedings were completed, the dismissal was reinstated. An appeal has been
taken and a brief has been filed by the Litigation Trust. The respondent's brief
was filed on June 9, 2005 and the Litigation Trust's reply brief was filed on
July 12, 2005. Oral arguments on the appeal were heard on October 17, 2005. On
March 8, 2006, the Court of Appeals for the Second Circuit vacated the judgment
in the case. It determined that there was no jurisdiction over two of the
plaintiffs in the case and remanded it to the District Court for additional
findings as to the jurisdiction over the remaining plaintiff and as to the
possible third party beneficiary status of that plaintiff with respect to
contracts entered into by the other plaintiffs.
11
The District Court determined that Catskill Development and Mohawk
Management were not diverse and dismissed them from the case. Following the
dismissal, the Trustees of the Litigation Trust filed a new complaint on behalf
of the beneficiaries of the Trust against Harrah's Operating Company, the
successor in interest to Park Place Entertainment, Inc. with respect to the
claims of Catskill Development and Mohawk Management. The state citizenship of
the Trustees of the Trust, which had received the claims of the two non-diverse
parties by assignment, entitled them to claim jurisdiction in the federal court.
The parties to the case had previously agreed that all parties to the newly
filed case would be subject to the decisions made in the original case. This
allowed the Judge to consolidate the two cases and enter a decision granting
summary judgment and dismissing the case in its entirety. This effectively
restored the case to the status it had been at the time the appeal was filed,
with all parties and all claims represented and all of the decisions made in the
case applicable to all the parties.
On October 11, 2006, following the filing of a new complaint in the PPE
case by the Litigation Trustees on behalf of two of the plaintiffs who had been
dismissed, the District Court consolidated the new action with the existing
action. An amended answer to the new complaint was filed on November 2, 2006.
The effect of these actions has been to fulfill the technical requirements
necessary to restore the PPE case to the status it was in prior to the dismissal
of the two plaintiffs, whose claims will now be represented by the Litigation
Trustees.
On November 20, 2006 the District Court issued a decision on the issues
presented by the 2nd Circuit's remand. The District Court again entered summary
judgment against all the plaintiffs in the consolidated action for the reasons
given in its previous decisions. As a consequence of the consolidation process,
the issue of third party beneficiary status becomes less important to a proper
resolution of the appeal. However, as requested by the 2nd Circuit, the District
Court also addressed the question of whether Monticello Raceway Development, the
one plaintiff whose claim to federal diversity jurisdiction in the original case
had not been in question, would be a third party beneficiary of any of the
contracts entered into by the other plaintiffs. The plaintiffs argued that all
of the contracts were clearly interdependent as part of an overall structure
designed to accomplish the development and operation of the casino and that, in
particular, the Land Purchase Agreement contained an express obligation to
support the approval process for the other contracts. However, the Court found
that the references made in the Land Purchase Agreement and other documents to
the development agreement between Monticello Raceway Development and the Tribal
Gaming Authority were too vague to form the basis for a third party beneficiary
claim, particularly in light of express language in the development agreement
that she believed indicated that it was intended to stand on its own.
Accordingly, the District Court determined that there were no third party
beneficiary rights under the development agreement.
Following the issuance of this decision and order, the plaintiffs have
filed a new appeal to the 2nd Circuit. Since the restoration of the claims of
the two non-diverse plaintiffs to the case has resulted in all of the issues
remaining the same as on the previous appeal, it was anticipated by the parties
that the 2nd Circuit would be able to review the original briefs in the case as
they were originally filed, and that the only additional briefing that will be
necessary would be supplemental briefs to deal with cases and other developments
that have arisen since those briefs were issued. The ultimate decision on this
question rests with the Court, however. There is also no assurance that the
original panel that was assigned to the appeal last year will be assigned again.
Whether or not a new panel is assigned, it is likely that additional oral
arguments will be heard.
The second lawsuit is Catskill Development, L.L.C., Mohawk Management,
L.L.C., and Monticello Raceway Development Company, L.L.C., Plaintiffs against
Gary Melius, Ivan Kaufman, Walter Horn, President R.C. - St. Regis Management
Company, et al, Defendants. (Index No. 891/03) (Supreme Court of the State of
New York County of Sullivan). This lawsuit has been discontinued under an
agreement that permits it to be refiled at a future date without being barred by
the statute of limitations. Our purposes are the prosecution of our litigation
claims through the recovery of any settlement or final judgments and the
distribution of the net amount of any such recoveries to our beneficiaries.
12
The administration of our Litigation Trust will involve the authentication
and payment of fees and expenses for legal and related services in connection
with our litigation claims, reporting and regulatory compliance and the
maintenance of litigation, financial and unit-holder records. Administrative
expenses, exclusive of imputed interest and legal fees, are currently estimated
to be approximately $200,000 per year, comprised of the fees of the litigation
and administrative trustees, auditors and accountants and other support
services. Legal fees and other expenses involved in pursuing our litigation
claims are impossible to predict with any degree of accuracy. No assurance can
be given that the amounts available to us for the payment of such expenses under
our line of credit will be sufficient to carry our litigation claims through to
a successful conclusion or that alternative funds will be available for such
purpose.
Our unit-holders will only be entitled to the net proceeds from any
settlement or award, if any, of our litigation claims after the payment of our
expenses, the fees of our litigation trustees, any amounts outstanding under our
line of credit and $7,500,000 to Empire Resorts for reimbursement of prior
expenses incurred in connection with our litigation claims.
Under our agreement with counsel arguing the appeal, a portion of the fees
related to arguing the appeal will be contingent on the resulting decision.
However, these contingent fees do not relate to the additional matters relating
to jurisdiction that arose subsequent to the initial briefing of the case. As a
result, we currently expect significant additional expenses related to the
appeal. We do not expect additional expenses related to a trial (which is itself
dependent on the outcome of the appeal) until at least the second quarter of
2007.
On June 1, 2004, we filed a Voluntary Discontinuance and Tolling Agreement
with respect to the second lawsuit. Since there are many issues of fact and law
in the PPE case which relate to matters that are also at issue in the second
lawsuit, we believe that, as long as the right to recommence the suit without
regard to the statute of limitations was preserved, the discontinuance of this
suit was appropriate in order to avoid the cost of maintaining two separate
lawsuits.
On January 24, 2007, the Litigation Trust entered into an agreement (the
"Joint Alliance Agreement") with the St. Regis Mohawk Tribe and representatives
of the litigants in a separate lawsuit against PPE. That lawsuit pursued claims
on behalf of enrolled members of the St. Regis Mohawk Tribe that are similar to
the claims that the Litigation Trust is pursuing on behalf of its beneficiaries.
The lawsuit resulted in a $1.787 billion judgment against PPE, which was
rendered in the St. Regis Mohawk Tribal Court (the "Tribal Court") on March 20,
2001. An enforcement action by the plaintiffs to enforce that judgment in a
federal district court was subsequently dismissed, without prejudice. At the
time of the enforcement action, the validity of the Tribal Court was in question
and the matter was the subject of other judicial and administrative proceedings.
A subsequent decision issued in one of the related court cases reviewed
several determinations of the Department of the Interior, in light of prior
litigation relating to the governmental organization of the St. Regis Mohawk
Tribe. As a result of its review, the court vacated certain determinations made
by the Department of the Interior and ordered review of the matters de novo,
(i.e. from the beginning). Further determinations and legal proceedings may have
an effect on the ultimate recognition of the validity of the St. Regis Mohawk
Tribal Court by the federal courts.
As a result of the common interests of the Litigation Trust's
beneficiaries and the class of enrolled tribal members, the parties to the Joint
Alliance Agreement have agreed to work together to merge their respective
interests and share in any recoveries of their respective claims. Additional
units of the Litigation Trust may be issued as a result of the Joint Alliance
Agreement. The term of the Joint Alliance Agreement extends through July 30,
2007.
During the term of the Joint Alliance Agreement, the parties have agreed
to work together to accomplish a merger of their respective litigation interests
in the Litigation Trust. The litigants in the Tribal Court litigation have
agreed to execute and deliver appropriate documentation providing for the
transfer of all their right title and interest in their claims to the Litigation
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Trust. The Litigation Trustees have agreed to request the consent of the
beneficiaries of the Litigation Trust to an amendment of the Declaration of
Trust establishing the Litigation Trust that would permit the prosecution of
such claims by the Litigation Trust and a doubling of the authorized ownership
units of the Litigation Trust. Upon the effectiveness of such amendment, the
Litigation Trust will obtain complete ownership rights to the claims of the
tribal litigants, including the Tribal Court judgment, and 50% of the ownership
units of the Litigation Trust will become beneficially owned by the enrolled
members of the St. Regis Mohawk Tribe, as the class of plaintiffs certified by
the Tribal Court. Consummation of the merger of claims will involve an amendment
to the Declaration of Trust to authorize an increase in the number of units
outstanding and will require the consent of the unitholders of the Litigation
Trust pursuant to Section 9.3 of the Declaration of Trust of the Litigation
Trust and satisfaction of other conditions, including Tribal Court approval. No
assurance can be given that such merger will be completed or completed on a
timely basis.
If the merger of these claims is consummated, the enrolled members of the
St. Regis Mohawk Tribe, as beneficial owners of the new units, will be entitled
to share in any future recovery or settlement in the litigation currently being
prosecuted by the Litigation Trust. Similarly, the existing unitholders will be
entitled to share in any future recovery or settlement of the claims of the
tribal litigants that are granted to the Litigation Trust.
The Litigation Trust is not engaged in settlement negotiations with
respect to any of the claims at this time. The defendants have raised numerous
defenses to the various claims in the litigations and have pursued them
vigorously resulting in dismissals or judgments in their favor. The ability of
the Litigation Trust to prevail in the various litigations will depend on a
number of factors, including the ability to obtain reversals in the appellate
courts and to pursue the litigations successfully in the trial courts
notwithstanding potential defenses to the claims and the St. Regis Mohawk Tribal
Court judgment, including the alleged invalidity of the Tribal Court.
RESULTS OF OPERATIONS
For the three months ended March 31, 2007, we reported a net loss of $359,666.
Included in net loss are legal fees of $278,872, administrative expenses of
$50,872 and imputed interest of $31,200, offset by dividend income of $1,278.
For the three months ended March 31, 2006, we reported a net loss of $84,048.
Included in this net loss are legal fees of $14,368, administrative expenses of
$46,830 and imputed interest of $22,911, offset by dividend income of $61.
The expenditures for legal fees in the first quarter of 2007, as compared with
the comparable period for 2006, reflect the level of activity necessary to make
submissions of briefs for submission to the Court of Appeals for the Second
Circuit as well as the increase in activities resulting from the Joint Alliance
Agreement. Administrative expenses, excluding legal fees, also increased in the
first quarter of 2007, as compared with the first quarter of 2006, due
principally to expenses associated with the implementation of the Joint Alliance
Agreement. Imputed interest expense has increased significantly due to the
additional withdrawals on the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Empire Resorts has provided us with an irrevocable line of credit of up to
$2,500,000 to provide funds to pay any and all of our expenses permitted under
the Declaration of Trust. Although no interest is payable on amounts advanced
under our line of credit, the Litigation Trust imputes interest on the
borrowings at Empire Resorts borrowing rate (8% per annum at March 31, 2007). As
of March 31, 2007, $1,765,000 had been drawn down and was outstanding under this
line of credit. Amounts outstanding under our line of credit are to be repaid by
us from proceeds received from any settlement or award in connection with our
litigation claims after payment of an amount necessary to pay our Litigation
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Trustees the fees for their services as set forth in the Declaration of Trust.
Repayments of amounts outstanding under our line of credit may be made as a
whole or in part from time to time at any time without notice. We may reborrow
any amounts repaid. Our line of credit will remain in full force and effect
until our termination.
Empire Resorts is a holding company, owning all the capital stock or
membership interests of certain other entities. Empire Resorts is therefore
dependent on these other entities to pay dividends or make distributions in
order to generate internal cash flow and to satisfy its obligations, including
its obligations under our line of credit. There can be no assurance, however,
that these other entities will generate enough revenue to pay cash dividends or
make cash distributions. In addition, these entities may enter into contracts
that limit or prohibit their ability to pay dividends or make distributions.
Empire Resorts had no operating revenue during the fiscal year ended
December 31, 2003 and operating revenue of $45.0 million, $86.8 million and
$98.1 million for the fiscal years ended December 31, 2004, 2005 and 2006 and
sustained net losses of approximately $6.5 million, $12.7 million, $18.5 million
and $7.1 million, respectively, during such periods. Although Empire Resorts
significantly increased its level of operations during 2005 and 2006, it has yet
to demonstrate that such operations can be profitable. Therefore, there can be
no assurance that Empire Resorts will have the ability to meet its obligations
under our line of credit.
CRITICAL ACCOUNTING ESTIMATES
The Trustees use estimates and assumptions in preparing our financial statements
in preparing our financial statements in accordance with generally accepted
accounting principles (United States). These estimates and assumptions affect
the reported amounts of assets and liabilities and reported revenues and
expenses. The fair value of our cash and equivalents approximates their carrying
value.
OFF BALANCE SHEET ARRANGEMENTS
As of May 14, 2007, the Litigation Trust does not have any off balance sheet
arrangements.
ITEM 3. CONTROLS AND PROCEDURES
(a) The Litigation Trust carried out an evaluation, under the supervision and
with the participation of the Litigation Trust's management, including Joseph E.
Bernstein (acting Chief Executive Officer) and Paul A. deBary (acting Chief
Financial Officer), the Litigation Trust's Litigation Trustees, of the
effectiveness of the design and operation of the Litigation Trust's "disclosure
controls and procedures", as such term is defined in Exchange Act Rule 15d-15e,
as of the end of the period covered by this report. Based upon that evaluation,
Messrs. Bernstein and deBary have concluded that the Litigation Trust's
disclosure controls and procedures were effective as of the end of the periods
covered by this report to provide reasonable assurance that information required
to be disclosed by the Litigation Trust in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
(b) There have been no significant changes in the Litigation Trust's internal
controls or in other factors that could significantly affect the Litigation
Trust's internal controls subsequent to the date the Litigation Trust carried
out this evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no
internal controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
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PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a statutory trust created under Delaware law. Our formation was a
condition to the consolidation of Empire Resorts with MRMI, MCM, MRDC, and
Mohawk. Also, as a condition to that consolidation, each of Catskill, MRDC and
Mohawk, agreed to assign to us all of their claims under or related to the
alienation and frustration of their agreements and business relations with the
St. Regis Mohawk Tribe. That assignment included rights to any proceeds from any
settlement or award that may arise from any litigation relating to that claim.
Our litigation claims arise from the efforts of each of Catskill, MRDC and
Mohawk to develop with the St. Regis Mohawk Tribe a gaming casino in Monticello,
New York. We spent several years and substantial funds to develop and obtain
required approvals for the casino. Subsequently, Park Place Entertainment
Corporation, the world's largest gaming corporation and Atlantic City's largest
casino operator, entered into an agreement providing for the St. Regis Mohawk
Tribe to commit its future casino development efforts exclusively to Park Place
Entertainment Corporation. That agreement conflicted with the Mohawk Tribe's
agreements with Catskill, MRDC and Mohawk.
There is one lawsuit now pending and one lawsuit that has been
discontinued. The first lawsuit is Catskill Development, L.L.C., Mohawk
Management, L.L.C., and Monticello Raceway Development Company, L.L.C.,
Plaintiffs. v. Park Place Entertainment Corporation, Defendant. (Civil Action
No. 00CIV8660 (CM)(GAY)) (United States District Court Southern District of New
York). This lawsuit had initially been dismissed on a motion for summary
judgment. However, the trial court vacated the earlier decision granting summary
judgment to Park Place Entertainment, in order to allow consideration of new
evidence and additional discovery proceedings. Following those proceedings,
judgment in favor of the defendant was reinstated. An appeal has been taken and
briefs have been filed by the Litigation Trust. In preparing the brief on
appeal, our counsel became aware of a case that was decided shortly before the
plaintiffs brought the original complaint. The effect of this case is that
jurisdiction may not be found to exist for two of the three plaintiff entities.
We made the Court of Appeals aware of this circumstance. If the Court determines
that the federal courts lack jurisdiction over these plaintiffs, they may be
required to pursue their claims in the New York courts. This could increase the
expense involved, and result in additional delay, in prosecuting their claims.
The respondent's brief was filed on June 9, 2005 and the Litigation Trust's
reply brief was filed on July 12, 2005. Oral arguments on the appeal were heard
on October 17, 2005. At that time, one member of the panel questioned whether
there were factual issues that needed to be determined before the jurisdictional
issues could be resolved. On March 8, 2006, the Litigation Trust received a
Summary Order from the United States Court of Appeals for the Second Circuit
with regard to the Litigation Trust's appeal in the case of Catskill
Development, L.L.C., Mohawk Management, L.L.C., and Monticello Raceway
Development Company, L.L.C., Plaintiffs. v. Harrah's Entertainment, Inc.,
Defendant.
The unpublished order remanded the case to the District Court for
additional development of the record. In the appeal, the Litigation Trust
brought to the attention of the court a recent decision which measured the
diversity of a limited liability company according to the citizenship of its
individual members, rather than the state of its organization. If this decision
were found to be a precedent, the Litigation Trust conceded that diversity of
citizenship sufficient to establish subject matter jurisdiction in the case with
respect to Catskill and Mohawk would not exist. However, the Litigation Trust
argued that this decision has been inconsistently applied and therefore should
not be followed. The Court of Appeals has rejected the Litigation Trust's
arguments in this respect.
The Litigation Trust also requested the Court to preserve jurisdiction in
the case by dismissing the non-diverse plaintiffs and proceeding to rule on the
issues on appeal as they apply to the remaining plaintiff. However, the Court
found the record to be insufficient to determine the ownership of MRDC on the
date of the commencement of the action. Moreover, the Court felt that additional
findings of fact were required for the court to determine whether the dismissal
of the non-diverse plaintiffs would result in prejudice to any of the parties.
16
In remanding the case, the Court of Appeals vacated the original judgment,
directing that if the District Court determined that MRDC was a diverse party
whose jurisdiction should be preserved, it could consider whether to reinstate
all or part of its prior judgment. In addition, the Court of Appeals indicated
that the trial court should make a determination as to whether the remaining
plaintiff would be a third party beneficiary of the contracts made with the
non-diverse parties under New York law.
The District Court determined that Catskill Development and Mohawk
Management were not diverse and dismissed them from the case. Following the
dismissal, the Trustees of the Litigation Trust filed a new complaint on behalf
of the beneficiaries of the Trust against Harrah's Operating Company, the
successor in interest to Park Place Entertainment, Inc. with respect to the
claims of Catskill Development and Mohawk Management. The state citizenship of
the Trustees of the Trust, which had received the claims of the two non-diverse
parties by assignment, entitled them to claim jurisdiction in the federal court.
The parties to the case had previously agreed that all parties to the newly
filed case would be subject to the decisions made in the original case. This
allowed the Judge to consolidate the two cases and enter a decision granting
summary judgment and dismissing the case in its entirety. This effectively
restored the case to the status it had been at the time the appeal was filed,
with all parties and all claims represented and all of the decisions made in the
case applicable to all the parties.
On October 11, 2006, following the filing of a new complaint in the PPE
case by the Litigation Trustees on behalf of two of the plaintiffs who had been
dismissed, the District Court consolidated the new action with the existing
action. An amended answer to the new complaint was filed on November 2, 2006.
The effect of these actions has been to fulfill the technical requirements
necessary to restore the PPE case to the status it was in prior to the dismissal
of the two plaintiffs, whose claims will now be represented by the Litigation
Trustees.
On November 20, 2006 the District Court issued a decision on the issues
presented by the 2nd Circuit's remand. The District Court again entered summary
judgment against all the plaintiffs in the consolidated action for the reasons
given in its previous decisions. As a consequence of the consolidation process,
the issue of third party beneficiary status becomes less important to a proper
resolution of the appeal. However, as requested by the 2nd Circuit, the District
Court also addressed the question of whether Monticello Raceway Development, the
one plaintiff whose claim to federal diversity jurisdiction in the original case
had not been in question, would be a third party beneficiary of any of the
contracts entered into by the other plaintiffs. The plaintiffs argued that all
of the contracts were clearly interdependent as part of an overall structure
designed to accomplish the development and operation of the casino and that, in
particular, the Land Purchase Agreement contained an express obligation to
support the approval process for the other contracts. However, the Court found
that the references made in the Land Purchase Agreement and other documents to
the development agreement between Monticello Raceway Development and the Tribal
Gaming Authority were too vague to form the basis for a third party beneficiary
claim, particularly in light of express language in the development agreement
that she believed indicated that it was intended to stand on its own.
Accordingly, the District Court determined that there were no third party
beneficiary rights under the development agreement.
Following the issuance of this decision and order, the plaintiffs have
filed a new appeal to the 2nd Circuit. Since the restoration of the claims of
the two non-diverse plaintiffs to the case has resulted in all of the issues
remaining the same as on the previous appeal, it was anticipated by the parties
that the 2nd Circuit would be able to review the original briefs in the case as
they were originally filed, and that the only additional briefing that will be
necessary would be supplemental briefs to deal with cases and other developments
that have arisen since those briefs were issued. The ultimate decision on this
question rests with the Court, however. There is also no assurance that the
original panel that was assigned to the appeal last year will be assigned again.
Whether or not a new panel is assigned, it is likely that additional oral
arguments will be heard.
The second lawsuit is Catskill Development, L.L.C., Mohawk Management,
L.L.C., and Monticello Raceway Development Company, L.L.C., Plaintiffs.
against Gary Melius, Ivan Kaufman, Walter Horn, President R.C. - St. Regis
Management Company, et al, Defendants. (Index No. 891/03) (Supreme Court of
the State of New York County of Sullivan). This lawsuit has been
discontinued under an agreement that permits it to be refiled at a future
date without being barred by the statute of limitations.
17
Our purposes are the prosecution of our claims now through the recovery of
any settlement or final judgments and the distribution of the net amount of any
such recoveries to our beneficiaries.
The Joint Alliance Agreement that the Litigation Trust entered into on
January 24, 2007, with the St. Regis Mohawk Tribe and representatives of the
litigants in a separate lawsuit provides for the assignment of the claims of the
tribal members to the Trust in exchange for the issuance of additional units in
the Litigation Trust as described in item 2 above. Unless the term of the Joint
Alliance Agreement is extended, the consummation of this transaction will
require approval by the Tribal Court and the unit-holders prior to July 30, 2007
ITEM 6. EXHIBITS
a: Exhibits
*31.1 Certification of Acting Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Acting Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Acting Chief Executive Officer pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*32.2 Certification of the Acting Chief Financial Officer pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, Catskill
Litigation Trust caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL LITIGATION TRUST
(Registrant)
Date: May 14, 2007 By: /s/ Joseph E. Bernstein
----------------------------------------
Joseph E. Bernstein
Litigation Trustee
Date: May 14, 2007 By: /s/ Paul A. deBary
----------------------------------------
Paul A. deBary
Litigation Trustee
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