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 identifyingthe 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
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CORRESP Filing
Empire Resorts (NYNY) Inactive CORRESPCorrespondence with SEC
Filed: 4 May 06, 12:00am