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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ------------
Commission File No. 0-1607
MID-STATE RACEWAY, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrants as specified in their respective charters)
New York 15-0555258
- ------------------------------------------ ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
PO Box 860, Vernon, New York 13476
- ------------------------------------------ ---------------------------------
(Address of Principal Executive Offices) Zip Code)
Registrant's Telephone Number, Including Area Code: (315) 829-2201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
The aggregate market value of the voting stock held by non-affiliates
of the Company as of January 10, 2004 is not determinable due to limited
trading.
Indicate the number of shares outstanding of each of the Company's
classes of common stock, as of January 10, 2004: 892,766 shares
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: common stock, $0.10
par value
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 2000
MID-STATE RACEWAY, INC.
Page
----
Part I
Item 1. Business ..................................................................... 1
Item 2. Properties ................................................................... 2
Item 3. Legal Proceedings ............................................................ 2
Item 4. Submission of Matters to a vote of Security Holders .......................... 5
Part II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters ............................................ 5
Item 6. Selected Financial Data ...................................................... 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 8
Item 7A. Qualitative and Quantitative Disclosures about
Market Risk ........................................................ 19
Item 8. Financial Statements and Supplementary Data .................................. 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................................ 19
Part III
Item 10. Directors and Executive Officers of the Registrant .......................... 19
Item 11. Executive Compensation ...................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management ..................................................... 23
Item 13. Certain Relationships and Related Transactions .............................. 24
Item 14. Controls and Procedures ..................................................... 25
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ........................................................ 26
Signatures
Certifications
Mid-State Raceway, Inc. has not filed its Form 10-Q's and Form 10-K's since its
June 30, 2000 quarterly filing. With this report, we are concurrently filing the
delinquent reports for all periods through December 2002.
PART I
Item 1. Business.
(a) Mid-State Raceway, Inc., ("MSR" or the "Company"), owns and operates a
harness horse race track (the "Track" or "Vernon Downs") known as
Vernon Downs, situated in Vernon, New York. MSR is licensed under and
subject to the regulations of the Pari-Mutual Revenue Law and the
supervision of the New York State Racing and Wagering Board to conduct
live harness racing at its track and to simulcast racing to and from
other tracks. Such licenses are subject to annual renewal.
Mid-State Development Corporation ("MSD"), formerly known as Mid-Year
Sales, Inc., is a wholly owned subsidiary of the Company. Prior to
1999, MSD was an inactive corporation. Beginning in October 1999, MSD
commenced operating food and beverage concessions at the Track owned by
the Company. In January 2000, MSD began operating special events
(concerts, snowmobile racing, motorcycle racing, etc.) at Vernon Downs.
In June of 2000, MSD began operating a hotel situated on property owned
by MSR and adjacent to the Track (the "Hotel"). Operations of the food
and beverage concessions from January 2000 and operations of the hotel
from June 2000 to December 2000 are included in the consolidated totals
as of and for the year ended December 31, 2000.
Vernon Hospitality, Inc. (formed in June 2000) and Vernon Productions,
Inc. (formed in July 2000) are inactive wholly-owned subsidiaries of
MSR.
(b) The Company was engaged in one business segment during 2002. In 2003 the
Company (i) filed its application to be licensed as a video gaming
agent so as to install and operate video lottery terminals (VLTs) at
its facility in Vernon Downs, (ii) substantially constructed a 35,000
square foot "Racino" and (iii) commenced to hire and train a staff to
operate the Racino. It is anticipated that operations at the VLT
facility will commence shortly after the first quarter of 2004.
(c) Generally, the Company is not in competition with other harness racing
tracks in New York State for patrons. Saratoga race track, a
thoroughbred race track, which conducts a day-time racing meet, is
located about 110 miles from Vernon, New York, and competes to some
extent for the Vernon Downs customers primarily on weekend dates.
Saratoga race track is expected to have its VLT operations open in
early first quarter 2004. However, their VLT operations are not
expected to have a significant impact on VLT revenues of Mid-State
Raceway, which due to open shortly thereafter.
1
Increased off-track wagering on thoroughbred and harness racing due to
a live television signal being sent into OTB shops in Central New York,
the New York State Lottery and the Oneida Indian Nation's Turning Stone
Casino, approximately 7 miles away in Verona, New York, all continue to
affect Vernon's on-track daily averages of handle and attendance.
Competition for good horses with the resultant attractive racing
programs, has increased in recent years, particularly from the
metropolitan New York and New Jersey area. This has adversely affected
both the number and quality of horses racing at Vernon Downs.
The Company employed an average of 324 full-time equivalent employees
during the calendar year 2000.
Item 2. Properties.
The Track is located in Vernon, Oneida County, New York. Since the opening of
the plant and related facilities in 1953, the Company has maintained a policy of
continuously improving and modernizing its facilities. In the year ended
December 31, 2000, $658,394 was expended for equipment and renovations to the
plant.
The grandstand and club house at the Track can accommodate approximately 14,000
patrons, which includes seating for 2,000 in the Grandstand and 1,700 in the
Clubhouse. There are parking facilities for approximately 5,900 automobiles.
In June of 2000, the Company completed construction of an expanded 7/8-mile oval
stone dust track, which is comparable with tracks located in major metropolitan
areas. Previously the track was a 3/4-mile oval stone dust track with a 1/4-mile
chute and a passing lane running from the last turn to the finish line. The
chute and passing lane have been eliminated. The track is illuminated by a
metal-halide and quartz lighting system. Most races are for a distance of one
mile. The stables accommodate approximately 1,000 horses and are located
adjacent to three exercise tracks and the main track.
Item 3. Legal Proceedings.
(a) In March 1998, MSR provided financial information to Richard C. Breeden,
Trustee of the Bennett Funding Group, Inc., bankruptcy, relating to
approximately $1,200,000 of corporate sponsorships it received over a
period of years from bankrupt affiliates of its former majority
shareholder. Subsequently, the Trustee commenced a lawsuit against MSR
to recover the payments based on the theory of fraudulent conveyance.
On November 5, 1999, MSR issued 38,000 shares of its common stock
valued at $10.00 per share, to the Trustee in full settlement of the
claim. The settlement of this lawsuit was classified as an operating
expense in the December 31, 1999 consolidated statements of operations.
2
(b) Jerome Wilson, Frank White, Sr., and Robert Jaquint, former Officers of
MSR,commenced an action against MSR alleging breach of contract and
fiduciary duty for MSR's decision to eliminate its Supplemental
Retirement Benefit Plan (the "Plan") in March of 1998. Messrs. Wilson,
White and Jaquint are the primary beneficiaries of the Plan, which was
established in 1977 as a supplemental retirement plan for Officers and
Directors of MSR. The suit has been settled by MSR during the first
quarter of 2000 for payment of a total of 4,380 shares of MSR's Stock
valued at $10.00 per share.
(c) MSR is a defendant in an action brought by Mary A. LaClair, who owns
property adjacent to MSR's track facilities. Mary LaClair claims that
noise and debris from a rock concert conducted by MSR caused her
$50,000 of damages. MSR believes that this case will not result in any
recovery for the plaintiff because MSR has been conducting concerts
since before the Plaintiff purchased her property and because Plaintiff
suffered no significant damage as result of the concert.
(d) When MSR purchased Gwen Bennett's stock in Comfort Associates, Inc. ("CAI")
on May 19, 2000, it agreed to indemnify her for any liability she may
have had with respect to the Comfort Inn franchise agreement for the
hotel. Following the purchase, MSR terminated the franchise agreement
and Gwen Bennett was sued by Choice Hotels International for damages of
approximately $557,000. She has answered the Complaint in such action
claiming, among other things, that the signature on the franchise
agreement was not hers. She has notified MSR of the claim and has
requested indemnification if the suit is successful. While the outcome
is not presently determinable, MSR believes that Mrs. Bennett did not
sign the agreement and accordingly believes it is more likely than not
the lawsuit against her will not be successful.
(e) On May 19, 2000, MSR purchased the stock of CAI. CAI operated the Comfort
Suites Hotel on land leased from MSR. On May 24, 2000, MSR secured an
order of eviction, effective on May 27, 2000, evicting CAI from MSR's
land. On June 20, 2000, CAI transferred the Hotel to MSR's subsidiary,
MSD, in settlement of the eviction action. MSR assumed no indebtedness
of CAI in connection with the settlement. MSD is currently operating
the Hotel.
MSR has agreed to pay $2,816,000 to Richard C. Breeden, Trustee of the
Bennett Funding Group, Inc. bankruptcy in exchange for relinquishment
of their claims and the claims of High Mountain Associates against
the Hotel. Payment is due in February 2002.
(f) In 2001, the New York State Legislature approved Video Lottery Terminal
(VLT) legislation to allow for the installation and operation of VLT's
at New York State harness race tracks. MSR is currently working with
the New York State Lottery Commission on implementation of the
activities allowed by the VLT legislation. MSR has been initially
authorized to install 1,000 VLT's on its Track premises.
3
As a result of this legislation, MSR was named as a defendant in two
separate lawsuits challenging the legality of the legislation and the
operation of VLT's at harness race tracks. The outcome of these
lawsuits is not presently determinable.
(g) In July 2002, MSR (along with certain MSR directors, Shawn A. Scott, Vernon,
LLC, and All Capital, LLC) was named as a defendant in a lawsuit filed
by a group of private purchasers. The lawsuit alleges bad faith and
breach of contract against MSR and seeks not less than $30 million in
damages from the Raceway plus interest. The lawsuit also alleges fraud
by certain MSR directors and seeks damages from those defendants to be
determined at trial plus legal fees. In addition, the lawsuit alleges
tortuous interference with contract by certain MSR directors, Shawn A.
Scott, Vernon, LLC, and All Capital, LLC and seeks $30 million in
damages from those defendants plus interest. The agreement upon which
the action is based contains a provision for the payment of a $130,000
"break up fee" which has been recorded in the financial statements.
This action was dismissed for failure of prosecution by the plaintiff
but was subsequently reinstituted and is presently pending. The Company
has notified its insurance carrier of the commencement and pendency of
the subject action. The outcome of this lawsuit is not presently
determinable and, as such, no provision for any unfavorable outcome
that may arise from this litigation has been included in the financial
statements.
(h) On December 3, 2002, MSR was served with a summons and complaint from both
its former President (John Signorelli) and a current Board member and
then member of the Board's Audit Committee (Dominic Giambona) seeking,
inter alia: (I) monetary damages in the amount of $10 million and/or
the issuance of warrants to acquire up to 175,000 shares with a strike
price of $10 per share that would enable the plaintiffs to acquire such
additional common stock upon payment of $1.75 million; such warrants
allegedly to have anti-dilution and percentage maintenance protection
for their combined interests of 39.9%,;(II) the issuance of 21,600
additional shares of common stock; the issuance of additional warrants
with a strike price of $5 per share to enable each of them to maintain
his present 17.19% interest in the future; and (III) other declaratory,
equitable, and monetary relief. Such shares and warrants have not been
issued and the issuance of these shares and warrants has not been
approved by the shareholders. The Company believes that is has valid
defenses to the lawsuit, has asserted counterclaims against the
plaintiffs based on various breaches of conduct and duties and intends
to seek dismissal of the case.
(i) On November 19, 2003 John Signorelli, a former officer of the Company and
two other stockholders (one of whom owns 200 recently acquired shares
of Common Stock) commenced an action in U.S. District Court for the
Southern District of New York against the Company, certain of its
directors and others seeking damages for alleged fraud, violations of
fiduciary duties and "looting". The Company believes that it has valid
defenses to this action and intends to
4
vigorously defend it. The Company filed a motion to dismiss on December
30, 2003. A hearing of the Company's motion, scheduled for January 22,
2004, was adjourned to February 12, 2004 to be heard before Judge
Miriam Cedarbaum in New York City.
(j) MSR is a defendant in several litigation matters involving its operations.
Management believes that liabilities resulting from these lawsuits, if
any, will be immaterial or covered by insurance policies.
Item 4. Submission of Matters to a Vote of Securities Holders.
The annual meeting of the shareholders of MSR was held on September 8, 2000. At
the meeting, four directors were elected to three-year terms that will expire in
the year 2003. The four directors were Justice M. Cheney, Leighton R. Burns,
Joel Gosler and John J. Signorelli.
The voting tabulation for the election of directors was as follows:
Votes For
---------
Justice M. Cheney 292,077
Leighton R. Burns 290,710
Joel Gosler 290,300
John J. Signorelli 292,249
The shareholders approved an amendment to the Certificate of Incorporation to
establish the position of Chairman of the Board as separate from the President
by a vote of 290,527 for and 858 against. However the Certificate of
Incorporation has not been so amended as of this date.
The Shareholders also approved an amendment to the Certificate of Incorporation
to amend the objects and purposes for which the Company was formed to include
the operation of a hotel on the Company's premises, the conduct of events,
festivals, concerts, fairs, shows and the like on the Company's premises,
farming and ranching on the Company's premises and any activity which will
enhance and supplement the Company's horse racing business. The vote for this
amendment was 292,087 in favor and 0 against.
The shareholders were also asked to approve an amendment to the Certificate of
Incorporation and by-laws to increase the maximum number of directors from
twelve (12) to fifteen (15). However, since the Certificate of Incorporation
requires an 80% vote of all shares issued and outstanding to change this section
of the Certificate of Incorporation and since only 66% of all shares issued and
outstanding were present at the meeting, this amendment was defeated.
PART II
5
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
(a) Price Range of Stock
MSR's common stock trades on the over-the-counter bulletin board market
under the symbol "MRWY.OB". The stock is not listed or reported by any
stock market exchange or by NASDAQ.
The following table shows the high and low bid prices for the quarters
indicated for the Company's common stock in the over-the-counter
bulletin board market for the calendar quarters indicated. The prices
are based upon reported quotes only, as the stock is not listed or
reported by NASDAQ. The quotations may not necessarily represent actual
transactions and do not necessarily reflect retail mark-up, markdown or
commission.
Bid Prices
Year Ended December 31, 2000
Low High
--- ----
Quarter Ended March 31 $6.00 $8.00
Quarter Ended June 30 $5.00 $8.25
Quarter Ended September 30 $5.50 $8.00
Quarter Ended December 31 $4.50 $8.50
Bid Prices
Year Ended December 31, 1999
Low High
--- ----
Quarter Ended March 31 $6.00 $ 7.00
Quarter Ended June 30 $7.00 $ 7.00
Quarter Ended September 30 $6.75 $12.00
Quarter Ended December 31 $6.75 $ 6.75
(b) At November 24, 2003, there were 499 holders of record of the Company's
common stock as reported by the Registrar and Transfer Company. As of January
10, 2004, there were 500 holders of record of the Company's common stock.
6
(c) There were no dividends paid during the years ended December 31, 2000 and
1999.
There are no restrictions on the payment of dividends on the Company's
common stock. Future payment of dividends will be within the discretion
of the Company's Board of Directors and will depend on earnings,
capital requirements and the operating and financial condition of the
Company.
Item 6. Selected Financial Data.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
OPERATING RESULTS
Number of racing days 93 114 122 77 115
OPERATING REVENUES:
Net pari-mutuel commissions and
breakage $ 4,996,851 $ 5,439,471 $ 5,940,500 $ 5,107,853 $ 6,325,331
Room rental revenue 1,410,333 - - - -
Admissions 69,270 68,843 70,925 61,740 92,655
Food, beverage and concessions 848,237 195,038 193,057 109,236 142,721
Other revenues 284,494 250,195 197,434 102,498 168,373
----------- ----------- ----------- ----------- -----------
Total operating revenues 7,609,185 5,953,547 6,401,916 5,381,327 6,729,080
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES 8,882,553 7,453,820 7,222,285 5,992,916 8,139,585
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,273,368) (1,500,273) (820,369) (611,589) (1,410,505)
----------- ----------- ----------- ----------- -----------
Other Income (loss) (577,592) 135,059 933,811 60,482 152,591
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (1,474,868) (1,368,967) 113,038 (880,865) (1,361,438)
EXTRAORDINARY ITEM - GAIN ON
EXTINGUISHMENT OF DEFERRED
RETIREMENT BENEFIT LIABILITY,
NET OF DEFERRED INCOME TAXES 593,261 - - - -
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (881,607) $(1,368,967) $ 113,038 $ (880,865) $(1,361,438)
=========== =========== =========== =========== ===========
Per share of common stock -
basic and Diluted
Net (loss) income before
extraordinary Item $ (3.33) $ (4.89) $ 0.45 $ (3.52) $ (5.44)
Extraordinary item $ 1.34 - - - -
Net (loss) income $ (1.99) $ (4.89) $ 0.45 $ (3.52) $ (5.44)
Cash dividends per share - - - - -
FINANCIAL CONDITION
TOTAL ASSETS $ 6,993,375 $ 4,386,727 $ 3,189,768 $ 2,430,423 $ 3,303,847
TOTAL LIABILITIES $ 6,917,030 $ 3,477,595 $2,750675 $ 2,104,368 $ 2,094,632
STOCKHOLDERS' EQUITY $ 76,345 $ 909,132 $ 439,093 $ 326,055 $ 1,209,215
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year Ended December 31, 2000 as Compared to Year Ended December 31, 1999
During the year ended December 31, 2000, the Company's net loss from operations
decreased by $227,000 (15%) as compared with the year ended December 31, 1999.
Following are the significant factors in this decrease in loss from operations:
1. Mid-State Raceway, Inc. ("MSR") operates a harness racing track at Vernon
Downs. MSR generated a loss from operations of approximately $1,275,000
in 2000 versus a loss from operations of approximately $1,500,000 in
1999, a decrease of 15%. A significant factor in this decrease was a
decrease in the number of live racing days from 114 in 1999 to 93 in
2000.
2. Mid-State Development Corporation ("MSD"), a wholly owned subsidiary of MSR
took over effective control of the Comfort Suites Hotel in May of 2000
from Comfort Associates, Inc. Since MSD has taken over control of
operations, the hotel has generated approximately $573,500 in net
operating income, exclusive of food and beverage operations.
3. MSD has also taken over the operation of concessions (food and beverage) in
2000 at the harness racing track owned by MSR and the food and beverage
operation of the hotel. Significant start up costs incurred by MSR
resulted in a net operating loss of approximately $534,000 in 2000.
4. Additionally, MSD has taken over the operation of special events at Vernon
Downs. Administrative costs associated with the production divisions'
operations resulted in an operating loss of approximately $40,000 in
2000.
Other losses of $577,600 in 2000 versus other income of $135,000 in 1999 were
primarily due to:
Net losses from special events in 2000 amounted to $411,000 versus net
profit of $41,000 in 1999. The losses from special events in 2000 were caused by
MSD promoting some events that proved to be unattractive to the public which
were also hampered by inclement weather. Management has determined that in the
future, Vernon Downs through MSD will function in the capacity of a "venue"
rather than as a "promoter" for most major events such as concerts, motorcycle
and snowmobile races.
8
Increase in interest expense in 2000 of $184,000 versus the year 1999
(126% increase) was due to additional borrowings, utilization of a line of
credit and capital leases.
In March 1998, MSR voted to terminate its unfunded deferred compensation plan.
Subsequent to this termination, a lawsuit was brought against MSR by
beneficiaries of the deferred compensation plan challenging the plan's
termination and seeking damages of $1,200,000. The lawsuit was settled in
February 2000 with the beneficiaries receiving 4,380 shares of MSR's common
stock, valued for financial reporting purposes at $10 per share, in full
settlement of their claim. The gain on this settlement of approximately
$970,000, net of applicable taxes of $376,800 is recognized as an extraordinary
item.
MSR's simulcast operations continued to offer a variety of racing from over 58
different harness and thoroughbred tracks from around the country and
internationally during the year ended December 31, 2000. While the simulcast
operations operate at a profitable margin, the revenues are not sufficient to
cover the losses experiences through live racing.
Expansion of the racing rack to 7/8ths of a mile was successfully completed in
June 2000. It is expected that wagering will increase as a result of the
expanded track and stables are now entering higher quality horses in races at
the track.
Recent legislation in New York State allows MSR to institute a point system to
reward its high roller bettors. The points system can be used to attract high
rollers in much the same way casinos attract high rollers. The point system
combined with telephone account wagering and renovations to the hotel is
expected to increase simulcast and live racing revenues.
STATISTICAL COMPARISON:
12 MONTHS ENDED DECEMBER 31, 2000 VS 12 MONTHS ENDED DECEMBER 31, 1999
TWELVE MONTHS ENDED
DECEMBER 31, INCREASE
2000 1999 (DECREASE)
----------- ----------- -----------
GROSS HANDLE:
Live Harness $ 4,650,566 $ 7,036,061 $(2,385,495)
OTB & ITW 8,976,421 10,825,173 (1,848,752)
Thoroughbred Simulcast 4,998,655 4,679,854 318,801
Harness Simulcast 8,449,587 8,879,904 (430,317)
----------- ----------- -----------
27,075,229 31,420,992 (4,345,763)
DAILY AVERAGE:
Live Harness Handle $ 50,006 $ 61,720 $ (11,714)
OTB & ITW Handle 96,521 94,958 1,563
Attendance (95,407 in 2000 and 154,128 in
1999) 1,026 1,352 (326)
LIVE RACING DAYS 93 114 (21)
9
Year Ended December 31, 1999 as Compared to Year Ended December 31, 1998
During the year ended December 31, 1999, operating revenues decreased $448,369
as compared to the year ended December 31, 1998. A substantial portion of the
decrease was due to eight (8) less live racing days during the 1999 racing
season and a significant decline in commission and breakage from wagering at the
Comfort Suites Hotel located on the Company's track property. Net pari-mutuel
commissions and breakage from wagering at the hotel amounted to approximately
$450,000 during 1999 versus approximately $1,060,000 during 1998.
Operating expenses for 1999 increased $231,535 compared to the year ended
December 31, 1998. A significant cause for this increase was the settlement of a
lawsuit against MSR. In March 1998, MSR provided financial information to the
bankruptcy trustee of the bankrupt companies affiliated with MSR's former
majority shareholder relating to approximately $1,2000,000 of corporate
sponsorships it received over a period of years from bankrupt affiliates of its
former majority shareholder. Subsequently, the trustee commenced a lawsuit
against MSR to recover these payments, based on the theory of fraudulent
conveyance. On November 5, 1999, MSR issued 38,000 shares of its common stock,
valued at $10 per share, to the trustee in full settlement of the claim. This
$380,000 charge to operating expenses was somewhat offset by the decrease in the
number of live racing days from 122 to 114 in 1999 versus 1998 respectively.
MSR's simulcast operations continued to offer a variety of racing from over 58
different harness and thoroughbred tracks from around the country and
internationally during the year ended December 31, 1999. While the simulcast
operation operates at a profitable margin, the revenues are not sufficient to
cover the losses experienced through live racing.
Track management plans to substantially increase its core businesses of
simulcasting and live racing by expanding the track to 7/8ths of a mile. This
will make racing at the track more attractive to on track bettors and to bettors
from other locations. The expanded track will also draw higher quality horses to
the facility, which will in turn increase betting handled at the track.
Management has established a program to utilize the Comfort Suites hotel along
with a betting points system to attract high rollers to its facilities on a
regular basis. Management also has extensive plans to utilize its facilities to
sponsor and promote special events.
MSR's Board of Directors adopted a year 2000 action plan at its Board of
Directors meeting on December 15, 1998. The plan determined that minor upgrades
to its existing computer hardware and software would be required to make it year
2000 compliant. MSR was fully year 2000 compliant prior to the end of 1999 and
experienced no year 2000 problems. The maximum cost to MSR of year 2000
compliance was less than $25,000.
10
MSR did not have a contingency plan because it fully expected to be year 2000
compliant without material work required of it or its vendors.
Subsequent Events
Anti-Dilution Stock
On January 11, 2001, the Board of Directors of MSR authorized the issuance of a
total of 27,590 shares of common stock to four individual shareholders (three of
whom were board members and two of whom were officers of MSR) in an effort to
prevent the dilution of such shareholders' ownership interest in MSR. These
anti-dilution shares of common stock were never issued by MSR. On December 17,
2001, the Board of Directors clarified the minutes of the January 11, 2001
meeting to state the 27,590 shares of common stock would be issued for past
services to MSR. However, issuance of the stock is subject to approval by the
shareholders.
New York State Racing and Wagering Board Compliance Audit
During early 2001, the New York State Racing and Wagering Board (the Board)
reviewed MSR's compliance with the Board's policies and procedures. In March
2001, the Board issued a report documenting numerous instances on non-compliance
with applicable Board statues, rules and regulations. This report was also
critical of certain MSR business and managerial practices. The Board also fined
MSR's then President and CEO $5,000 for MSR's non-compliance. On March 28, 2001,
the Board granted MSR a limited 90- day track and simulcast license. Further,
the Board required MSR to demonstrate compliance and continued financial
viability over the 90-day period in order to receive a racing license for the
2001 live racing season.
On June 21, 2001, the Board approved MSR's track and simulcast license for the
remainder of 2001, based on the receipt of a June 2001 satisfactory report from
a Board approved compliance monitor on the status of MSR's compliance with Board
policies and regulations subsequent to March 28, 2001.
Mechanic's Lien
In July 2001, a contractor who allegedly performed work on MSR's racetrack
between October 1999 and April 2001 filed a mechanic's lien in the amount of
$99,165 for unpaid services. MSR believes that all of this contractor's work was
completed by June 2000 and that it paid the contractor in full for all work from
October 1999 through June 2000. No amounts, related to this lien, have been
recorded in MSR's financial statements. Prior to the date hereof such lien was
first bonded and thereafter released when the contractor's claims were settled
by payment.
Exclusive Option Agreement
11
On September 12, 2001, MSR's Board of Directors authorized its President and
Chief Executive Officer to execute an option agreement ("Exclusive Option
Agreement") for the sale of the Company to a group of private prospective
purchasers. This group of prospective purchasers includes a member of the
Company's Board of Directors. The agreement was formally executed on September
15, 2001 and granted the prospective purchasers an exclusive irrevocable option
to purchase the Company for $9,077,350, with an expiration date of March 15,
2002. If exercised, the Exclusive Option Agreement calls for the purchasers to
pay off all MSR debt and payables and pay up to $1,400,000 to existing MSR
shareholder. The $1,400,000 payment to the shareholders is subject to adjustment
based upon the debt outstanding at the exercise closing date. Accordingly, the
$1,400,000 could increase or decrease as a result of this adjustment. As a
result of the magnitude of the Company's debt had the option been exercised on
March 15, 2002 the full $1,400,000 would have been applied to the Company's
indebtedness and the MSR shareholders would have received nothing in exchange
for their stock. The Exclusive Option Agreement is subject to the approval of
the Company's shareholders and the New York State Racing and Wagering Board.
If the Exclusive Option Agreement is not approved by MSR's shareholders and the
prospective purchasers fully and timely perform their obligations under the
agreement, the Company is required to pay the purchasers a one-time payment of
$130,000. Additionally, if the Exclusive Option Agreement is not approved by the
Company's shareholders or not exercised by the prospective purchasers, the
agreement requires that a $250,000 loan from the prospective purchasers be
repaid along with all accrued interest thereon.
Concurrent with the execution of the Exclusive Option Agreement , the
prospective purchasers provided a $700,000 working capital line of credit to MSR
with interest at 10%, secured by a second mortgage on MSR's building and
improvements, due March 15, 2002.
12
2002 FINANCING AND LOAN AGREEMENTS
$400,000 FINANCING AGREEMENT
In mid-March 2002, MSR entered into a Financing Agreement with Vernon, LLC (a
company controlled by a shareholder). Under the terms of the Financing
Agreement, MSR sold a $400,000 secured convertible promissory note to Vernon,
LLC. The note matures on December 31, 2003 with interest originally at 10%
(amended to 15% in April 2002). The note was initially convertible (subject to
the Exclusive Option Agreement), at the option of Vernon, LLC at any time after
August 1, 2002, into 40,000 shares of MSR common stock at the rate of $10 per
share subject to certain anti-dilution provisions outlined in the Financing
Agreement and the note. The note is secured by a mortgage and security interest
on MSR property and was subordinate to all other mortgage debt. Additionally,
the Financing Agreement includes a provision for tag along warrants (also
subject the Exclusive Option Agreement) to be issued if, but only if, the note
is paid prior to the exercise of the conversion privilege. These warrants permit
the recipients to purchase shares of Common Stock for a period of three years.
The Financing Agreement also granted Vernon, LLC the right of first refusal with
respect to any subsequent debt and/or equity financings undertaken by MSR prior
to December 31, 2003 and allowed Vernon, LLC to appoint up to two Directors on
MSR's Board. The Financing Agreement also provided that if the Exclusive Option
Agreement (described in the notes to the financial statements) was approved by
the shareholders that the note would be immediately repaid and the number of
shares issuable upon conversion of the note (or the tag along warrants) would be
reduced to 10,000 shares.
$8,500,000 LOAN AGREEMENT
In late March and early April of 2002, MSR and MSD entered into an $8.5 million
loan agreement with All Capital, LLC, a company affiliated with Vernon, LLC and
controlled by a shareholder. The loan agreement was funded in two installments
and is secured by a first mortgage on MSR and MSD land, buildings and
improvements. The initial funding provided $3,695,000 in funds to MSR to satisfy
the $2,816,000 obligation to the bankruptcy trustee described in the notes to
the financial statements. The second funding provided $4,805,000 in funds to MSR
to repay all of the then existing first and second mortgage obligations. The
loan agreement matures March 31, 2003 with interest payable at 15%. The loan
agreement provides MSR with the option to extend the loan for up to four
successive quarters with a final maturity of March 31, 2004. Each quarterly
extension requires MSR to pay an extension fee equal to 1.25% of the unpaid
portion of the loan.
The loan agreement also required MSR to pay a commitment and loan fee equal to
5% of the total loan. The commitment and loan fee was paid by MSR using a
portion of the loan proceeds. On April 1, 2002 in connection with the loan
agreement, MSR issued a warrant to purchase 500,000 shares of common stock at a
rate of $2 per share to All Capital, LLC, exercisable (subject to the Exclusive
Option Agreement) subsequent to August 1, 2002. In accordance with the
anti-dilution and other provision of the $400,000 secured
13
convertible promissory note referred to above the number of shares which are
issuable to Vernon, LLC upon conversion of the $400,000 note was increased to
200,000 and the exercise price upon conversion was reduced to $2 per share.
In the event that the Exclusive Option Agreement was approved by the
shareholders (a) the $8,500,000 would be immediately repayable (b) the warrant
issued to All Capital, LLC would not thereafter be exercisable, and (c) the
number of shares issuable upon conversion of the $400,000 secured convertible
note described above (or the tag along warrants) would be reduced to 50,000
shares.
All Capital, LLC was also granted the right in the loan agreement to designate
four members to the Board of Directors of MSR. Consistent with the ruling of the
New York State Racing and Wagering Board, MSR, Vernon LLC and All Capital, LLC
(and the latter's principal) executed an undertaking not to place nominees on
the Board of Directors or participate in the management of MSR until the
nominees and the principal of All Capital, LLC were licensed. On July 2, 2002,
the nominees and principal were licensed and were subsequently seated as
participating members of the Board of Directors of MSR.
HARNESS RACING LICENSE
On April 8, 2002, the New York State Racing and Wagering Board (the Board)
issued MSR a 90-day limited period harness racing license for the 2002 racing
season. The license expired on July 6, 2002 and was conditional upon numerous
factors involving the $400,000 and $8,500,000 loans referred to above. Extension
of the 2002 license past the July 6, 2002 expiration date was dependent upon,
among other things, the individual licensability, under Board laws and
regulations, of the principals involved in such loans. On July 2, 2002, the
Board voted to extend MSR's limited period track and simulcast license through
December 31, 2002. As a condition of the license extension, MSR was required to
create a segregated escrow account to ensure the payment of purses to horsemen
for sums due to them for periods prior to December 31, 2001.
$1,000,000 LOAN
On July 16, 2002, MSR and MSD entered into a $1,000,000 Interim Loan Agreement
with All Capital, LLC. The loan agreement was funded in one installment and is
secured by a mortgage on MSR and MSD land, buildings and improvements. Proceeds
of this loan were applied to the extent of $350,000 to establish a purse escrow
account required by the New York State Racing and Wagering Board as a condition
to the maintenance of the live racing and simulcast licenses; and as to the
remainder, to the short-term obligations and working capital requirements of the
two companies. The loan bears interest at the rate of 15% per annum and matures
on July 15, 2003. The loan agreement also required MSR to pay a commitment and
loan fee equal to 5% of the loan; which fee was paid by MSR out of a portion of
the loan proceeds. On July 16, 2002 in connection with this $1,000,000 loan, MSR
issued a warrant to All Capital, LLC to purchase
14
100,000 shares of common stock at the rate of $2.00 per share exercisable
(subject to the Exclusive Option Agreement) subsequent to August 1, 2002. The
issuance of this warrant did not trigger any of the "anti-dilution" provisions
of either the $400,000 Secured Convertible Promissory Note or the warrant to
purchase 500,000 shares of common stock previously granted to All Capital, LLC
in connection with the $8,500,000 loan. In the event the Exclusive Option
Agreement was approved by the shareholders the warrant to purchase 100,000
shares would not thereafter be exercisable.
$15,000,000 Loan Agreement
On August 28, 2002, MSR and MSD entered into $15,000,000 Loan agreement with All
Capital, LLC. The loan agreement is to be funded in multiple installments and is
secured by a first mortgage on MSR and MSD land, buildings and improvements. The
$12,500,000 proceeds of the first installment of this loan were applied to the
extent (a) $9,900,000 to refinance and consolidate the $400,000, $8,500,000 and
$1,000,000 loans described above, and (b) $2,600,000 for working capital and
payment of the costs associated with the loan. The remaining proceeds of the
loan in the amount of $2,500,000 are to be disbursed in connection with and for
the construction of facilities to be utilized for the installation and operation
of video lottery terminals and for working capital. The loan bears interest at
the rate of 15% per annum and matures on August 28, 2003; however, the loan
agreement provides MSR with the option to extend the loan for up to four
successive quarters with a final maturity date of August 28, 2004 subject to the
payment of a quarterly extension fee of 1.25% of the unpaid portion of the loan.
The loan agreement required MSR to create an interest reserve account to hold
the amount necessary to fund the payment of interest over the initial one-year
term of the loan. The interest reserve was funded by a portion of the loan
proceeds and a credit for the unused balances of interest reserves maintained
for the $8,500,000 and $1,000,000 loans. The loan agreement also required MSR to
pay a commitment and loan fee equal to 5% of the loan; which fee was paid by MSR
out of a portion of the loan proceeds. On August 28, 2002 in connection with the
loan agreement, MSR issued a warrant to All Capital, LLC to purchase 900,000
shares of common stock at the rate of $2.00 per share. The issuance of this
warrant did not trigger any of the "anti-dilution" provision of any of the
$400,000 Secured Convertible Promissory Note or the warrants to purchase 500,000
and 100,000 shares of common stock, respectively, previously granted to All
Capital, LLC described above. In the event the Exclusive Option Agreement is
approved by the shareholders the warrant to purchase 900,000 shares would not
thereafter be exercisable. Also, in connection with the consolidation of the
four loans described above into one $15,000,000 loan, the "tag along" warrant
provisions of the $400,000 Secured Convertible Promissory Note were triggered; a
"tag along" warrant to purchase 200,000 shares of common stock at $2.00 was
issued to All Capital, LLC and the conversion rights to purchase a similar
number of shares at a similar price per share contained in the note were
terminated. Both prior to and after the termination of such conversion rights
and the issuance of the "tag along warrant" All Capital, LLC had the right, upon
exercise of the warrants and/or the conversion rights in the $400,000 note to
acquire 1,700,000 shares of common stock at the rate of $2.00 per share. Under
the terms of the loan agreement All Capital, LLC retained the right to designate
six members of the Board of Director of MSR (and the
15
right of Vernon, LLC, an affiliate of All Capital, LLC to designate two members
was terminated).
2003 LOAN AGREEMENTS AND OTHER FINANCING
$18,000,000 LOAN AGREEMENT
On January 29, 2003, MSR and MSD entered into an $18,000,000 Loan Agreement with
All Capital, LLC. This loan agreement was secured by a first mortgage on MSR and
MSD land, buildings, and improvements and was also secured by the personal
property of MSR and MSD. The $18,000,000 proceeds of this loan were applied to
the extent of (a) $11,903,831 to refinance and consolidate the $15,000,000 loan,
and (b) $3,689,169 for payment of loan commitment fees, a fund of one year
interest reserve, and for payment of the costs associated with the loan. The
remaining proceeds of the loan in the amount of $2,407,000 were to be disbursed
for working capital and in connection with and for the partial funding of
construction of facilities were to be utilized for the installation and
operation of video lottery terminals. The loan boar interest at the rate of 12%
per annum and was to mature on July 31, 2004. The loan could be extended by MSR
for up to four successive quarters, until July 30, 2005, subject to the payment
of applicable extension fees. The loan agreement required MSR to create an
interest reserve account to hold the amount necessary to fund the payment of
interest over the initial one year term of the loan. The interest reserve was
funded by a portion of the loan proceeds and a credit for the unused balance of
interest reserve maintained for the $15,000,000 loan. The loan agreement also
required MSR to pay a commitment and loan fee equal to 8% of the loan; which fee
was paid by MSR out of a portion of the loan proceeds. Additionally, in the
event of VLT installation at MSR, the loan agreement required the Company to pay
All Capital, LLC the greater of 2% gross or 6% net VLT revenues earned by MSR
through the term of the loan in exchange for management services subject to the
terms of a separate management agreement between All Capital, LLC and MSR. This
management contract was never entered into between All Capital, LLC and MSR
because the loan was repaid prior to the installation of VLTs at MSR.
$23,000,000 LOAN AGREEMENT
On June 30, 2003, the MSR and MSD (collectively the "Borrower") entered into a
Loan Agreement (the "Loan Agreement") with Vestin Mortgage, Inc. (a Nevada
corporation) pursuant to which Vestin Mortgage, Inc. ("Vestin") agreed to lend
to the Borrower up to $23,000,000 (the "Vestin Loan"). The Vestin Loan was
evidenced by a Consolidated Secured Promissory Note (the "note") in the original
principal amount of $23,000,000 and was secured by (a) a first mortgage
encumbering all of the real property and improvements thereon owned by the
Borrowers and (b) a first priority security interest in all of the personal
property of the Borrower. Additionally, the owner of All Capital, LLC had agreed
to guarantee the payment of all interest (other than default interest) and
principal payments due under the note until such time as video lottery terminals
("VLTs") are installed and operating at Vernon Downs Racetrack. Neither All
Capital LLC nor its owner received any compensation in connection with the
issuance of such
16
guaranty. The loan boar interest at the rate of 11% per annum and was to mature
on June 30, 2005. Additionally, Vestin had the right to designate three members
to the Board of Directors of the applicant (none have been as of the date hereof
exercised by Vestin).
On June 30, 2003, Vestin advanced $20,300,000 pursuant to the terms of the Loan
Agreement and the note. Such proceeds were applied as follows: (a) $15,834,485
to All Capital, LLC ("All Capital") in satisfaction of the Borrowers obligation
to All Capital pursuant to a certain $18,000,000 Consolidated Secured Promissory
Note dated January 29, 2003 (which promissory note was assigned to Vestin); (b)
$1,686,667 to fund the interest reserve; (c) $1,840,000 to the payment of loan
commitment fees; (d) $150,000 to the payment of closing costs, and (e) $788,848
to working capital of the applicant. An additional $2,700,000 of loan proceeds
were approved to be subsequently drawn down by the Borrower in connection with
the construction of a facility to house the VLTs.
By agreement dated June 30, 2003, Vestin sold a $3,000,000 junior participation
in the Vestin Loan and the proceeds thereof, (the "Junior Participation"), to
All Capital LLC. Payments of interest and principal on or with respect to the
Junior Participation were junior and subordinate to the payment of Vestin of
interest and principal on or with respect to Vestin's retained senior
participation (the "Senior Participation") in and to the Vestin Loan, the note
and the loan documents evidencing and/or securing the Vestin Loan and the note.
During November 2003 Vestin repurchased the Junior Participation from All
Capital LLC.
During November 2003, the Vestin Loan Agreement was modified to increase the
maximum amount thereof to $26,000,000; and in connection with such modification
the Company was required to pay loan commitment fees of $300,000 to Vestin and a
loan broker. All of the remaining terms of the loan were unchanged.
V.I.P. STRUCTURES, INC. DEFERMENT
V.I.P. Structures, Inc. ("VIP"), the design/builder of the Company's VLT
Facility, has agreed to defer payment of $800,000 of the construction costs
until November 2004; and in connection therewith All Capital LLC has issued a
limited guarantee of $500,000 of such obligation to VIP. The Company has agreed
to indemnify All Capital LLC for any liability under such guaranty. All Capital
LLC received no compensation in connection with the issuance of such guaranty.
$250,000 SUNSET MANAGEMENT LLC LOAN
During November 2003, Sunset Management LLC loaned to the Company, on an
unsecured basis, the sum of $250,000 at the rate of 25% per annum. This bridge
loan was promptly repaid by the Company and the interest expense with respect
thereto was less than $4,000.
2003 RACING AND SIMULCAST LICENSES
17
In December 2002, the New York State Racing and Wagering Board (the "Board")
denied MSR's application for 2003 racing and simulcast licenses. The Board's
determination with respect to MSR's 2003 licenses was stayed by court order.
2003 license negotiations between MSR and the Board continued through the first
quarter of 2003. In April 2003, MSR and the Board entered into a stipulation and
settlement (the "SS Agreement"), which effectively granted MSR conditional
racing and simulcast licenses for the 2003 racing season. The SS Agreement
requires that MSR and an associate of MSR's then major creditor complete new
applications in a timely period and that the associate be subject to a
background investigation by the Board. The SS Agreement further provided for a
$25,000 fine (of which $15,000 was abated) for conduct committed by prior
management in violation of the Board's rules and regulations.
Concurrent with the SS Agreement, MSR and the associate entered into a separate
agreement whereby the associate (who otherwise had no obligation to do so)
agreed to file such application and cooperate with the Board's investigation.
MSR agreed to reimburse the associate for all reasonable costs associated with
complying with the Board's investigation. Further, as additional consideration,
MSR agreed to pay an incentive fee of $280,000 to the associate over a 28-month
period commencing May 2003. Also, in April 2003, in connection with the
agreement, MSR granted the associate a warrant to purchase 23,800 shares of MSR
common stock at a price of $8.58 per share. The warrant expires on April 8,
2008.
From the proceeds of the increase in the Vestin Loan from $23,000,000 to
$26,000,000, the Company paid in full (a) all sums due pursuant to the SS
Agreement and (b) the Sunset Management LLC $250,000 loan.
Liquidity and Capital Resources
In the first two (2) quarters of 2001, funding of business operations and
capital requirements will be substantially sourced from existing cash. See
"Purchase Option Agreement" under "Subsequent Events" for funding for the
balance of 2001.
The Company's current ratio at December 31, 2000 was .31:1. The Company's
current ratio at December 31, 1999 was 1.86:1.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations (SFAS 141),
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), and Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). In August 2001,
FASB issued Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144).
18
SFAS 141 addresses financial accounting and reporting for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Additionally, SFAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
SFAS 142, effective October 1, 2001, provides that goodwill and certain
indefinite lived intangible assets will no longer be amortized but will be
reviewed at least annually for impairment and written down and charged to income
when their recorded value exceeds their estimated fair value. Separable
intangible assets that do not have an indefinite life will continue to be
amortized over their useful lives. SFAS 143, effective in 2003, requires
recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. SFAS 144, effective
in 2002, provides new guidance on the recognition of impairment losses on
long-lived assets to be held and used or to be disposed of and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented.
The adoptions of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 have not had a
material impact on the consolidated results of operations or financial position
of the Company.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
The Company presently does not hold any derivative financial instruments that
would subject it to market risk inherent in derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and the report of the
independent accountants are submitted under item 15 of this report and should be
read in conjunction with the Companies Form 10-K filed concurrently for the
years ended December 31, 2001 and 2002.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III.
19
Item 10. Directors and Executive Officers of the Registrant
The directors and officers of the Company as of December 1, 2003 are as follows:
COMMON SHARES
Beneficially
Became Owned as of
Name Age Director December 1,2003 Percent
---- --- -------- --------------- -------
* Paul V. Noyes 73 1998 - -
* Dominic A. Giambona 65 1999 68,833 7.71%
** Edward A. Kiley 61 1999 250 ***
Deborah Bishop 53 2002 - -
*,** Jerry D. Mottern 45 2002 - -
* Hoolae Paoa 53 2002 - -
Joan Rae Parker 65 2002 - -
*,** Victoria Ann Scott 61 2002 450,000 50.41%
* John Stone 46 2002 - -
Jack D. Dallas 63 - - -
David E. Wilson 67 - - -
Rose H. Frawert 39 - - -
All officers and directors
as a group 519,083 58.12%
* Member of Executive Committee
** Member of Audit Committee
*** Less than one percent
DEBORAH BISHOP (age 53) was appointed to the Board of Directors in 2002 and
serves as the Assistant Secretary. She is a proven professional in the field of
corporate administration. Ms. Bishop recently was associated with Delta Downs
thoroughbred racing in Vinton, Louisiana and subsequently Vernon Downs in an
administrative capacity.
JACK D. DALLAS (age 63) is Mid-State Raceway's Vice President of Hospitality and
Resort Operations. Mr. Dallas has an extensive background in hospitality and
gaming, having directed the truck stop gaming operations in Louisiana for Delta
Downs. He also has worked as the general manager or head of operations for
numerous hotels, including the Disneyland Hotel, the Royal Lahaina Resort,
Radisson Hotel at Fisherman's Wharf and several others.
DOMINIC A. GIAMBONA (age 65) was Chairman of the Board from September 8, 2000
through September 26, 2001 and has served as a Director since September 1999.
Mr. Giambona is a private investor and business consultant. Born and raised in
Rome, New York, Mr. Giambona now resides in Jupiter, Florida. He is a graduate
of Syracuse University and has more than 40 years experience with building
construction, facilities management, development and marketing.
20
EDWARD A. KILEY (age 61) has served as a Director since June 1999 and is
currently the Secretary of the Company. He is a 1964 graduate of Brown
University and Dean's List and Cum Laude graduate of the Syracuse University
School of Law. A member of the New York, Florida and United States Supreme court
bars before retiring from the practice of law in 1995, he is currently employed
as a financial planner. He is the eldest son of Vernon Downs founder William F.
Kiley.
JERRY D. MOTTERN (age 45) was appointed to the Board of Directors in 2002. He is
in the practice of Public Accounting as a sole practitioner based in Twin Falls,
Idaho. Previously, Mr. Mottern was an associate of McMullen, McPhee and Company,
CPA's and Cooper Norman and Company. Mr. Mottern practices principally in the
area of taxation. He received his Bachelor of Science from the University of
Idaho in 1980 and is a member of the American Institute of Certified Public
Accountants.
PAUL V. NOYES (age 73) has served as a Director since August 1998. He is an
attorney with an office in Sherrill, New York. Mr. Noyes, a former shareholder
of Mid-State Raceway, Inc. (1968-2003), is a graduate of Hamilton College and
Cornell University Law School.
HOOLAE PAOA (age 53) is the Chairman of the Board, President and CEO of
Mid-State Raceway, Inc. His background is primarily in hospitality and facility
development, including hotels, restaurants, retail centers, golf courses,
racetracks and casinos. Mr. Paoa was recently responsible for the operations,
expansion and ultimate sale of Delta Downs Racetrack and Casino. Born and raised
in Hawaii, Mr. Paoa currently resides in Vernon, New York. The New York Racing
and Wagering Board refused to renew Mr. Paoa's individual license to participate
in New York racing on December 12, 2003. Dave Wilson is the acting president
during Mr. Paoa's appeal process.
JOAN RAE PARKER (age 65) was appointed to the Board of Directors in 2002. She
recently retired from a career in the field of corporate administration with
Bridge Capital, LLC. Ms. Parker attended the University of Idaho and currently
resides in Henderson, Nevada.
VICTORIA ANN SCOTT (age 61) has served on the Board of Directors since 2002. Her
extensive experience in the gaming industry includes the responsibility of
building, licensing and managing video poker lounges in Louisiana. She holds two
gaming device owner licenses and four video poker type V licenses. Effective
November 13, 2003, Ms. Scott acquired and exercised warrants to purchase 450,000
shares of Common Stock (previously issued to All Capital LLC); and in connection
therewith paid the Company $900,000 for such shares.
JOHN STONE (age 46) was appointed to the Board of Directors in 2002. He has an
extensive background and is currently involved in property management in the
private sector. Mr. Stone received a Bachelor of Science degree from DeVry
Institute of Technology.
21
DAVID E. WILSON (age 67) is the Vice President of Racing and Facilities and
acting Chief Operating Officer for Mid-State Raceway, Inc. Mr. Wilson has over
45 years of experience in the racing industry, including stints at many
prestigious tracks, as well as the Daily Racing Form. Most recently, he was the
Vice President of Racing and the General Manager of Delta Downs in Louisiana. He
also serves as Vice President for the Lea Downs Racetrack and Casino in Hobbs,
New Mexico.
ROSE FRAWERT (age 39) was appointed Treasurer and Chief Financial Officer of the
Company on November 14, 2003 replacing James R. Wise who had served in such
capacities since October 1997. Ms. Frawert joins Mid-State Raceway after most
recently serving as Casino Controller for the Reno Hilton, a Park Place
Entertainment business. Prior experience includes serving as assistant Corporate
Controller for Phoenix Leisure, a gaming development and management company, and
with Caesar's World, where she advanced through the company's financial
structure. Ms. Frawert holds a bachelors degree in accounting and is a Certified
Public Accountant.
Item 11. Executive Compensation
The following table sets forth summary information concerning compensation paid
or accrued by the Company for services rendered during the last three fiscal
years by the named Executive Officers.
Consulting
Name and Principal Position Salary Bonus Fees
--------------------------- ------ ----- ----------
Justice M. Cheney
President and Chief Executive Officer
January 1, 1998 to May 1998 - - $ 19,050
June 1998 to December 31, 1998 $ 34,616 - -
January 1, 1999 to December 31, 1999 60,000
January 1, 2000 to October 28, 2000 50,769 - -
John J. Signorelli
President and Chief Executive Officer
September 1, 1999 to December 31, 1999 - - $ 26,000
January 1, 2000 to December 31, 2000 - - 75,000
November 26, 2000 to December 31, 2000 $ 6,000 - -
No other executive officer received an annual salary and bonus in excess of
$100,000 during the fiscal years ended December 31, 1998, 1999 and 2000. Dominic
A. Giambona received consulting fees of $60,900 during 2000.
22
Item 12. Security Ownership of Certain Beneficial Owners and Management
At the close of business on December 1, 2003, the Company had outstanding
892,776 shares of common stock. No person or group is known by the Company to
beneficially own more than 5% of the Company's common stock except as set forth
in the following table.
Amount of
Name and Address Beneficial Percent
Of Beneficial Officer Ownership Class
--------------------- --------- -----
Richard C. Breeden, Trustee 38,000 shares 4.25%
Bennett Management &
Development Corp.
Two Clinton Square
Syracuse, NY 13202
Richard C. Breeden, Trustee 126,657 shares 14.18%
The Bennett Funding Group, Inc.
And Neil H. Ackerman, Trustee
NW Investors II
555 Fifth Ave.
New York, NY 10017
Dominic A. Giambona 68,833 shares 7.71%
249 Barbados Drive
Jupiter, FL 33458
John J. Signorelli 68,833 shares 7.71%
25 Mandia Lane
PO Box 386
Goldens Bridge, NY 10526
Victoria Scott 450,000 shares 50.40%
P.O. Box
St. Pete Beach, Florida 33736
Item 13. Certain Relationships and Related Transactions
At December 31, 2001 the Company had outstanding borrowings of $1,650,000 with
interest at 12% to a lender who was also a board member. Interest expense
incurred related to this loan was $181,000 in 2001. In March 2001, to extend the
due date of these loans to May 2002, the lender was granted a warrant to
purchase 10,000 shares of stock at
23
a price of $10 per share. This loan was repaid in April 2002 in connection with
a refinancing of substantially all of the Company's debt with All Capital LLC.
The Company had outstanding at December 31, 2001 $166,500 of debt with two board
members, one of whom was an officer. The debt bears interest at 12%. Interest
expense related to this loan approximated $20,000 in 2001. The amount
outstanding was repaid in April 2002 with the refinancing discussed above.
At December 31, 2001, the Company had a $300,000 loan outstanding due to a board
member. The debt bears interest at 13%. Interest expense related to this loan
approximated $42,250 in 2001. In March 2001 in consideration for amendments to
this loan agreement, the lender was granted a warrant to purchase 2,700 shares
of stock at a price of $10 per share. This loan was repaid in April 2002 with
the refinancing discussed above.
On January 11, 2001, the Board of Directors of the Company authorized the
issuance of a total of 24,840 shares of common stock to four individual
shareholders (three of whom were board members and two of whom were officers) in
an effort to prevent the dilution of such shareholders' ownership interest in
the Company, which includes 21,600 shares that are subject to pending
litigation. These anti-dilution shares of common stock were never issued. Due to
the fact that these shares were authorized without consideration on the part of
the shareholders, legal counsel for the Company has advised that any such
issuance would not be valid. Further, since the stock certificates were not
issued to the shareholders for the shares in question, legal counsel believes
that the Company does not need to take any action to rescind the authorization
for the issuance of such shares. On December 17, 2001 the Board of Directors
clarified the minutes of the January 11, 2001 meeting to state the 24,840 shares
of common stock will be issued for past services. However, issuance of the stock
is subject to approval by the shareholders, by Board resolution.
See elsewhere herein information with respect to the following transactions:
(I) In March 2002 the Company entered into a Financing Agreement with
Vernon, LLC, a company controlled by a shareholder;
(II) In April 2002 the Company entered into an $8,500,000 Loan Agreement
with All Capital, LLC, a Company affiliated with Vernon, LLC.
(III) On July 16, 2002 the Company borrowed $1,000,000 from All Capital LLC.
(IV) On August 28, 2002, the Company entered into a $15,000,000 loan
agreement with All Capital, LLC.
(V) On January 29, 2003, the Company entered into an $18,000,000 Loan
Agreement with All Capital LLC.
24
In 2002, 2001, and 2000, MSR paid approximately $59,000, $131,000, and $232,000,
respectively, to related parties for consulting services, lodging, and interest,
including amounts attributable to long-term debt (Note 7).
In December 2002, in order to induce the NYS Racing and Wagering Board (the
"Board') to issue a license to its President and CEO, the Company advanced
approximately $67,000 in the form of a security deposit to a third party for the
benefit of its President and CEO. Upon the satisfaction by the President and CEO
of the provisions of a certain undertaking given to the Board, the advance will
be returned to MSR. Should the advance be applied to the benefit of the
President and CEO it will, at that time, be treated as additional compensation.
A Company owned by MSR's President and CEO has a consulting agreement with MSR
to provide VLT consulting services to MSR in exchange for monthly payments of
$6,500 through March 2004.
Item 14. Controls and Procedures
(a) Disclosure Controls and Procedures.
Within the 90 days before the date of this Form 10-K, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures". Mid-State Raceway, Inc. and Subsidiary conducted this evaluation
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer.
(i) Definition of Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are
designed with the objective of ensuring that information required to be
disclosed in our periodic reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As defined by the SEC, such disclosure
controls and procedures are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, in such a manner as to
allow timely disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and
Internal Controls.
The Company recognizes that a system of disclosure controls and procedures (as
well as a system of internal controls), no matter how well conceived and
operated, cannot provide absolute assurance that the objectives of the system
are met. Further, the design of such a system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues have been detected. These inherent limitations include the
realities that judgments in decision-
25
making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented in a number of ways. Because
of the inherent limitations in a cost-effective control system, system failures
may occur and not be detected.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and
Procedures.
Subject to the limitations described above and not withstanding the delinquency
of this report, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures going forward are
effective in timely alerting them to material information relating to Mid-State
Raceway, Inc. and subsidiary required to be included in The Company's periodic
SEC filings.
(b) Changes in Internal Controls.
There have been no significant changes in The Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
Page
----
(1) Reports of Independent Auditors 32
Consolidated Balance Sheets at December 31, 2000 and 1999 33
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 34
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2000, 1999 and 1998 35
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 36
Notes to Consolidated Financial Statements 37
(2) The following financial statement schedules are included in this
Form 10-K report
None.
All other schedules are omitted because they are not required, are
inapplicable or the information is otherwise shown in the financial statements
or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 2002
None.
(c) Exhibits:
Exhibit 21.1 - Subsidiaries of the registrant.
(d) Exhibit 31.1 Certification Chief Executive Officer
31.2 Certification Principal Financial and Accounting Officer
32.1 Sarbanes-Oxley Chief Executive Officer
32.2 Sarbanes-Oxley Principal Financial and Accounting Officer
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MID-STATE RACEWAY, INC.
(Registrant)
BY: /S/ HOOLAE PAOA
--------------------------------------
Hoolae Paoa
Chief Executive Officer
JANUARY 10, 2004
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 10th day of January 2004.
/S/ HOOLAE PAOA
Hoolae Paoa
President, Chief Executive Officer, and Chairman of the Board
/S/ ROSE H. FRAWERT
Rose H. Frawert
Principal Financial and Accounting Officer
/S/ DAVE WILSON
Dave Wilson
Acting Chief Operating Officer
/S/ ANDREW EDWARD KILEY
Andrew Edward Kiley
Secretary and Director
/S/ VICTORIA SCOTT
Victoria Scott
Director
/S/ JERRY MOTTERN
Jerry Mottern
Director
/S/ DEBBIE BISHOP
Debbie Bishop
Director
/S/ JOHN STONE
John Stone
Director
/S/ JOAN PARKER
Joan Parker
Director
27
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Mid-State Raceway, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Mid-State
Raceway, Inc. and Subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As explained further in Notes 8, 13, 15, and 17 to the financial statements, the
Company has defaulted on certain of its debt obligations during 2001, and
substantially all of the Company's other debt obligations are scheduled to
mature between February and May 2002, including $2,816,000 in February 2002, and
$1,149,950 in May 2002; the Company is delinquent with respect to certain of its
filings with the Securities and Exchange Commission, the consequences of which
are not presently determinable; and based on unaudited financial information as
of November 30, 2001, the Company had a working capital deficiency of
approximately $7,100,000 and a shareholders' deficiency of approximately
$1,573,000. Further, as indicated in Note 16 to the financial statements, the
Company has granted purchasers an option to purchase the Company for $9,077,350,
with an expiration date of March 15, 2002, subject to the approval of Company
shareholders and the New York State Racing and Wagering Board.
In our opinion, the consolidated financial statements referred to in the first
paragraph above present fairly, in all material respects, the financial position
of Mid-State Raceway, Inc. and Subsidiary as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ URBACH KAHN & WERLIN LLP
Albany, New York
November 14, 2001
28
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 146,180 $ 1,113,529
Cash restricted for purses, capital improvements and
uncashed winning tickets 127,568 157,909
Grant receivable - 233,751
Other receivables, net of allowance for doubtful accounts of
$10,000 in 2000 and $112,000 in 1999 311,372 339,864
Investments 501,475 200,125
Other current assets 164,429 161,264
----------- -----------
Total current assets 1,251,024 2,206,442
----------- -----------
PROPERTY, BUILDINGS AND EQUIPMENT
Land, buildings and equipment 17,162,848 13,223,647
Other properties 121,671 121,671
----------- -----------
17,284,519 13,345,318
Less accumulated depreciation 11,551,072 11,194,298
----------- -----------
5,733,447 2,151,020
----------- -----------
OTHER ASSETS
Other assets 8,904 29,265
----------- -----------
8,904 29,265
----------- -----------
$ 6,993,375 $ 4,386,727
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of real estate taxes payable $ 60,000 $ 72,000
Line of credit 347,333 -
Current portion of long term debt 1,963,622 -
Accounts payable and accrued expenses 1,576,262 964,070
Uncashed winning tickets 82,921 63,392
Retention for capital improvements 39,892 84,272
----------- -----------
Total current liabilities 4,070,030 1,183,734
----------- -----------
REAL ESTATE TAXES PAYABLE, less current portion - 30,000
----------- -----------
LONG-TERM DEBT, net of current portion 2,847,000 1,250,000
----------- -----------
DEFERRED RETIREMENT BENEFITS (Note 15) - 1,013,861
----------- -----------
CONTINGENCIES (Notes 15 and 16)
SHAREHOLDERS' EQUITY
Common stock, parvalue $.10 per share;
authorized 10,000,000 shares; issued and
outstanding 442,766 shares in 2000, 438,386 shares in 1999 44,277 43,839
Additional paid-in capital 2,084,909 2,041,547
Accumulated deficit (2,061,867) (1,180,260)
Accumulated other comprehensive income 9,026 4,006
----------- -----------
Total shareholders' equity 76,345 909,132
----------- -----------
$ 6,993,375 $ 4,386,727
=========== ===========
See Notes to Consolidated Financial Statements.
29
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
(93 RACING DAYS) (114 RACING DAYS) (122 RACING DAYS)
---------------- ----------------- -----------------
Operating revenues:
Net pari-mutuel commissions and breakage from wagering:
Vernon Downs Harness $ 896,222 $ 1,230,005 $ 1,454,373
Off-track betting (OTB) and inter-track wagering (ITW) 1,530,777 1,613,935 1,514,899
Simulcasting 2,569,852 2,595,531 2,97l,228
--------------- ----------------- -----------------
4,996,851 5,439,471 5,940,500
Room rental revenue 1,410,333 - -
Admissions 69,270 68,843 70,925
Food beverage and concessions 848,237 195,038 193,057
Other revenues 284,494 250,195 197,434
--------------- ----------------- -----------------
Total operating revenues 7,609,185 5,953,547 6,401,916
--------------- ----------------- -----------------
Operating expenses:
Purses 1,796,874 1,992,214 1,886,450
Payroll 2,355,818 1,524,236 1,484,055
Taxes, other than income 302,807 401,921 386,807
Outside services and rentals 405,276 209,434 563,342
Utilities 739,793 469,621 448,049
Simulcasting expenses 935,124 994,934 1,010,918
Food and beverage costs 311,984 - -
Depreciation 356,774 191,984 197,667
Bad debts (recovery) (101,637) 91,586 18,837
Settlement of lawsuit (Note 15) - 3,80,000 -
Other expenses 1,779,740 1,197,890 1,226,160
--------------- ----------------- -----------------
Total operating expenses 8,882,553 7,453,820 7,222,285
--------------- ----------------- -----------------
Loss from operations (1,273,368) (1,500,273) (820,369)
--------------- ----------------- -----------------
Other income (loss):
Special events income (loss), net (411,008) 41,418 97,826
Commissions for capital improvements 101,960 - 86,330
Aid from state and local governments 36,248 233,751 372,750
Gain on sale of land - - 399,999
Gain on sale of other assets - - 73,500
Investment income (loss) 26,243 6,598 (17,378)
Interest expense (331,035) (146,708) (79,236)
--------------- ----------------- -----------------
Total other income (loss) (577,592) 135,059 933,811
--------------- ----------------- -----------------
(Loss) income before provision for federal and state
income taxes and extraordinary item (1,850,960) (1,365,214) 113,442
--------------- ----------------- -----------------
Provision for federal and state income taxes:
Currently payable (708) (3,753) (404)
Deferred benefit 376,800 - -
--------------- ----------------- -----------------
Total provision (benefit) for federal and state income tax 376,092 (3,753) (404)
--------------- ----------------- -----------------
Income (loss) before extraordinary item (1,474,868) (1,368,967) 113,038
--------------- ----------------- -----------------
Extraordinary item - gain on extinguishment of deferred retirement
benefit liability, net of deferred income taxes of $376,800 (Note 593,261 - -
--------------- ----------------- -----------------
Net (loss) income $ (881,607) $ (1,368,967) $ 113,038
=============== ================= =================
(Loss) income per common share - based on weighted
average shares outstanding
(Loss) income before extraordinary item $ (3.33) $ (4.89) $ 0.45
Extraordinary item $ 1.34 $ - $ -
(Loss) income after extraordinary item $ (1.99) $ (4.89) $ 0.45
=============== ================= =================
See Notes to Consolidated Financial Statements.
30
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2000, 1999, and 1998
(ACCUMULATED) ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT)/ OTHER
ISSUED AND OUTSTANDING PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1988 250,386 $ 25,039 $ 225,347 $ 75,669 $ - $ 326,055
Net income for the year - - - 113,038 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 250,386 25,039 225,347 188,707 - 439,093
Comprehensive income (loss)
Net loss for the year - - - (1,368,967) - (1,368,967)
Unrealized gain on securities available for sale - - - - 4,006 4,006
------------------------------------------
Total comprehensive income (loss) (1,368,967) 4,006 (1,364,961)
Issuance of common stock through private placement,
net of issuance costs of $ 45,000 150,000 15,000 1,440,000 - - 1,455,000
Issuance of common stock for settlement of law suit
(Note 15) 38,000 3,800 376,200 - - 380,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 438,386 43,839 2,041,547 (1,180,260) 4,006 909,132
Comprehensive income (loss)
Net loss for the year - - - (881,607) - (881,607)
Unrealized gain on securities available for sale - - - - 5,020 5,020
------------------------------------------
Total comprehensive income (loss) (881,607) 5,020 (876,587)
Issuance of common stock for extinguishment of
retirement benefit liability (Note 15) 4,380 438 43,362 - - 43,800
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 442,766 $ 44,277 $2,084,909 $ (2,061,867) $ 9,026 $ 76,345
==================================================================================================================================
See Notes to Consolidated Financial Statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
(93 RACING DAYS) (114 RACING DAYS) (122 RACING DAYS)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (881,607) $ (1,368,967) $ 113,038
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Settlement of lawsuit - 380,000 -
Extinguishment of deferred benefit liability (593,261) - -
Deferred tax benefit (376,800) - -
Depreciation 356,774 191,984 197,667
Change in allowance for doubtful accounts (102,000) 90,000 15,000
Realized and unrealized (gain) loss on investments 17,917 (4,006) -
Imputed interest expense 128,947 - -
Gain on sale of other assets - - (73,500)
Loss on sale/disposal of equipment - - 14,596
Gain on sale of land - - (399,999)
Changes in:
Restricted cash 30,341 (70,431) (25,268)
Accounts and grants receivable 364,243 (167,011) (324,588)
Other current assets (3,165) 91,613 (231,137)
Other assets 20,361 48,341 (20,703)
Real estate taxes payable (42,000) (72,000) 174,000
Accounts payable 266,336 481,302 (545,529)
Uncashed winning tickets 19,529 4,134 (2,952)
Retention for capital improvements (44,380) 63,484 20,788
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (838,765) (331,557) (1,088,587)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and sales of available-for-sale
investment securities 168,160 - -
Purchase of available-for-sale investment securities (487,427) (192,113) -
Proceeds from sale of other assets - - 122,500
Proceeds from sale of equipment - - 501
Proceeds from sale of land - - 400,000
Purchase of properties and equipment (658,394) (505,042) (193,170)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (977,661) (697,155) 329,831
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 897,333 250,000 1,000,000
Principal payments on capital leases (48,256) - -
Net proceeds from sale of stock - 1,455,000 -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 849,077 1,705,000 1,000,000
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (967,349) 676,288 241,244
Cash at beginning of year 1,113,529 437,241 195,997
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 146,180 $ 1,113,529 $ 437,241
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 176,656 $ 137,958 $ 120,000
Income taxes $ 696 $ - $ 712
===================================================================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of hotel building and equipment:
Debt incurred $ 2,421,155 $ - $ -
Accounts payable and other liabilities assumed 345,856 - -
Capital leases $ 508,776 $ - $ -
===================================================================================================================
See Notes to Consolidated Financial Statements.
32
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
Mid-State Raceway, Inc. ("MSR"), known as Vernon Downs, operates a
harness racing track in Vernon, New York. MSR is licensed by the
New York State Racing and Wagering Board to conduct live harness
racing at its track and to simulcast racing from other tracks.
Such licenses are subject to annual renewal.
Mid-State Development Corporation ("MSD"), formerly known as
Mid-Year Sales, Inc., is a wholly owned subsidiary of MSR.
Beginning in October 1999, MSD commenced operating concessions at
the harness racing track owned by MSR. Prior to 1999, MSD was an
inactive company. In June of 2000, MSD began operating a hotel
adjacent to the track. Operations of the hotel from June 2000 to
December 2000 are included in the consolidated totals as of and
for the year ended December 31, 2000 (see Note 13).
Vernon Hospitality, Inc. (formed in June 2000) and Vernon
Productions, Inc. (formed in July 2000) are inactive wholly-owned
subsidiaries of MSR.
PRINCIPLES OF CONSOLIDATION:
The accompanying 2000 consolidated financial statements include
the accounts of MSR and MSD (collectively referred to as the
Company). All significant inter-company accounts and transactions
have been eliminated in the consolidation. Prior to 1999, MSD was
inactive and had no assets, liabilities, revenues or expenses.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported 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 EQUIVALENTS:
For purposes of reporting cash flow, cash and cash equivalents
include money market accounts and any highly liquid debt
instruments purchased with a maturity of three months or less.
PROPERTY, BUILDINGS AND EQUIPMENT:
Property, buildings and equipment are carried at cost less
accumulated depreciation computed by the straight-line and
accelerated methods.
The estimated useful life to the various classes of assets on
which current provisions were based are as follows:
33
PROPERTY, BUILDINGS AND EQUIPMENT (CONTINUED):
Land improvements 5 to 20 years
Buildings and improvements 10 to 40 years
Other structures 15 to 31 1/2 years
Equipment 3 to 20 years
INCOME (LOSS) PER COMMON SHARE:
Income (loss) per share of common stock has been calculated based
on the weighted average shares outstanding during each year. The
weighted average number of common shares outstanding was 442,382
during 2000, and 279,805 and 250,386 for the years December 31,
1999 and 1998, respectively. Outstanding warrants (Note 12) at
December 31, 2000 were 185,000. These warrants were excluded from
the income (loss) per share calculations because their effect is
anti-dilutive.
ADVERTISING:
MSR follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $80,710, $116,750,
and $214,413, for the years ended December 31, 2000, 1999, and
1998, respectively.
INCOME TAXES:
The Company recognizes deferred income taxes for the tax
consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized. Income tax expense is the tax payable for the period
and the change during the period in deferred tax assets and
liabilities.
REVENUE RECOGNITION:
MSR recognizes revenue for commissions from wagering, corporate
sponsors, and admissions when the related racing event is run.
Revenue from hotel and other services are recognized at the time
the related service is performed. Commissions for capital
improvements are recognized when the related qualifying
expenditures are incurred. Investment income is recognized on the
accrual basis.
ASSET IMPAIRMENT ASSESSMENTS:
The Company reviews long-lived assets for impairment whenever
events or circumstances indicate that the carrying value of such
assets may not be fully recoverable. An impairment is recognized
to the extent that the sum of undiscounted estimated future cash
flows expected to result from use of the assets is less than the
carrying value. No impairment has been recognized through December
31, 2000.
34
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142), and Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS 143). In
August 2001, FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment of Disposal of
Long-lived Assets (SFAS 144).
SFAS 141 addresses financial accounting and reporting for business combinations
and requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001.
Additionally, SFAS 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. SFAS 142, effective
October 1, 2001, provides that goodwill and certain indefinite
lived intangible assets will no longer be amortized but will be
reviewed at least annually for impairment and written down and
charged to income when their recorded value exceeds their
estimated fair value. Separable intangible assets that do not have
an indefinite life will continue to be amortized over their useful
lives. SFAS 143, effective in 2003, requires recording of the fair
value of liabilities associated with the retirement of long-lived
assets in the period in which they are incurred. SFAS 144,
effective in 2002, provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to
be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented.
Management does not expect the adoption of SFAS 141, SFAS 142,
SFAS 143, and SFAS 144 will have a material impact on the
consolidated results of operations or financial position of the
Company.
RECLASSIFICATIONS:
Certain balances in prior year financial statements have been
reclassified for comparative purposes.
NOTE 2. GRANT RECEIVABLE
Grant receivable at December 31, 1999 represents amounts due MSR
from New York State in relation to 1999 and 1998 New York State
Legislative grant appropriations for the purposes of preserving
employment and increasing marketing. In connection with the 1999
grant, MSR was required to incur qualifying expenditures between
July 1, 1999 and December 31, 1999 and submit a reimbursement
request to New York State. All expenditures submitted for
reimbursement were approved by New York State.
NOTE 3. OTHER RECEIVABLES
Other receivables consist of the following at December 31, 2000
and 1999:
35
NOTE 3. OTHER RECEIVABLES, CONTINUED
2000 1999
- ---------------------------------------------------------------------
Shift adjustments $ 68,360 $156,928
Commissions 74,800 87,532
Room rental 108,745 -
Other 69,467 207,404
- ---------------------------------------------------------------------
Total 321,372 451,864
Less allowance for doubtful accounts 10,000 112,000
- ---------------------------------------------------------------------
Other receivables, net $311,372 $339,864
=====================================================================
NOTE 4. INVESTMENTS
MSR's investments are classified as available-for-sale securities
and are reported at fair value at December 31, 2000 and 1999, with
unrealized gains included in comprehensive income. At December 31,
2000, investments consist principally of government securities and
certificates of deposit. These securities had a fair value of
$501,745, a cost of $492,719, and an unrealized gain of $9,026. At
December 31, 1999, investments consist principally of corporate
stocks. These stocks had a fair value of $200,125, a cost of
$196,119, and an unrealized gain of $4,006.
NOTE 5. PROPERTY, BUILDINGS AND EQUIPMENTS
Property, buildings and equipment consists of the following:
CONSOLIDATED CONSOLIDATED
MSD MSR 2000 1999
- ---------------------------------------------------------------------------------------------------
Land, buildings and equipment:
Land - 77,802 77,802 77,802
Land improvements - 1,805,432 1,805,432 1,414,619
Buildings and improvements 2,329,116 7,828,472 10,157,588 7,240,478
Equipment 512,509 4,609,517 5,122,026 4,321,307
Construction in progress - - - 169,441
- ---------------------------------------------------------------------------------------------------
2,841,625 14,321,223 17,162,848 13,223,647
Other properties:
Land 121,671 - 121,671 121,671
- ---------------------------------------------------------------------------------------------------
2,963,296 14,321,223 17,284,519 13,345,318
Less accumulated depreciation 108,135 11,442,937 11,551,072 11,194,298
- ---------------------------------------------------------------------------------------------------
2,855,161 2,878,286 5,733,447 2,151,020
NOTE 6. REAL ESTATE TAXES PAYABLE
In May 1998, Oneida County and MSR entered into an agreement
whereby MSR would make 36 monthly installments of $6,000,
commencing May 29, 1998, to satisfy its liability to Oneida County
for nonpayment of 1997 property taxes, totaling $216,000, levied
against MSR by Oneida County in 1997. The $60,000 outstanding
balance at December 31, 2000 is due in 2001.
36
NOTE 7. LINE OF CREDIT
MSR, under a revolving line of credit agreement with an investment
company, had available credit providing for maximum borrowings of
$351,000. The agreement provided for borrowings at 3.15% over the
30 day commercial paper rate (9.70% at December 31, 2000). Line of
credit borrowings are collateralized by MSR's investments. The
balance outstanding under this line at December 31, 2000 was
$347,333. This line of credit did not exist at December 31, 1999.
The line of credit was terminated in October 2001.
NOTE 8. LONG-TERM DEBT
Long-term debt is comprised as follows at December 31, 2000:
2000 1999
- -------------------------------------------------------------------------------------------------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG- TERM TOTAL
- -------------------------------------------------------------------------------------------------------------------
Notes Payable
(A) $1,149,950 $ - $1,149,950 $ - $1,000,000 $1,000,000
(B) 166,500 - 166,500 - 250,000 250,000
(C) 300,000 - 300,000 - - -
(D) 250,000 - 250,000 - - -
Other Obligations -
(E) - 2,483,652 2,483,652 - - -
(F) 97,172 363,348 460,520 - - -
- -------------------------------------------------------------------------------------------------------------------
$1,963,622 $2,847,000 $4,810,622 $ - $1,250,000 $1,250,000
===================================================================================================================
(A) In May 1998, MSR obtained a $1,000,000 loan from a private
lender, who is also a board member. The loan is
collateralized by a first mortgage on MSR's racing plant,
buildings and improvements. In March 2000, MSR obtained an
additional loan from this private lender in the form of
equipment and food service inventory, valued at $66,450.
This additional loan was added to the $1,000,000 first
mortgage. Additionally, $83,500 of the loan described in
(B) below came from this lender and was added to the first
mortgage agreement in 2000. The loans bear interest at 12%
and require monthly interest-only payments. No principal
payments are required until the final due date. This loan
was originally due May 15, 2001. In March 2001, the due
date was extended to May 15, 2002 in exchange for granting
the private lender a warrant to purchase 10,000 shares of
MSR common stock at $10 per share with an expiration date
in March 2005. During 2001, MSR obtained an additional
$500,000 loan from this private lender. This amount was
also added to the first mortgage agreement.
The loan agreement required MSR to pay the lender $47,500
in financing fees at closing. Financing fees paid at
closing are being amortized over the original term of the
loan and are included in interest expense. At December 31,
2000 and 1999, the unamortized portion of financing fees
is included in other assets. Interest expense incurred by
MSR in 2000, 1999, and 1998 related to this loan totaled
$143,697, $135,833, and $79,236 respectively.
(B) In August 1999, MSR obtained $250,000 in loans from three
board members, one of whom was an officer. $83,500 of this
$250,000 loan came from the lender referred to in (A)
above. The loans bear interest at 12%, and were originally
secured by a second mortgage on MSR's racing plant,
buildings, and improvements. In 2000, $83,500 of the
original $250,000 was added to the first mortgage
agreement described in (A) above. The remaining $166,500
remains secured by a second mortgage agreement and was due
in August 2001. No interest has been paid on the $166,500
loan as of December 31, 2000. Unpaid interest related to
this loan approximating $26,000 through December 31, 2000,
is included in accounts payable and accrued expenses. The
lender called the $166,500 loan in September 2001, but MSR
did not make payment. As such, the loan is considered to
be in default as of September 2001.
(C) In September 2000, MSR obtained a $300,000 loan from
another private lender, who is also a board member. The
loan is secured by a second mortgage on MSR's racing
plant, buildings and improvements. The loan bears interest
at 13% and repayment was due in September 2001. No
principal payments are required until the final due date.
Interest expense in 2000 totaled $9,750 for this loan. In
consideration for making this loan to MSR, the lender was
granted a warrant to purchase 2,500 shares of MSR common
stock at $10 per share with an expiration date in August
2004. Additionally, in March 2001, in
37
NOTE 8. LONG-TERM DEBT, CONTINUED
consideration for certain amendments made to this loan,
MSR granted this lender a warrant to purchase 2,700 shares
of MSR common stock at $10 per share with an expiration
date in March 2005. MSR did not repay the loan, as
scheduled, in September 2001.
(D) In December 2000, MSR obtained a $250,000 loan from
private lenders, with interest originally at 6%, to be
paid in the form of MSR common stock. The note is secured
by certain MSR and subsidiary assets, including machinery,
equipment, and receivables. The note was originally
scheduled to mature in February 2001. In May 2001, the
note was amended due to the fact that MSR was in default
under note terms. The amendment extended the due date
until August 15, 2001 and required the payment of all
accrued but unpaid interest on the note. In September
2001, in connection with an irrevocable purchase option
agreement whereby MSR granted the lenders of this note an
option to purchase MSR (see Note 16), the note maturity
was extended to March 15, 2002, the expiration date of the
purchase option agreement. Additionally, the interest rate
was increased to 10% and the note was added to the second
mortgages previously mentioned in (B) and (C), above.
Interest expense in 2000 approximated $780 for this loan.
(E) Represents the present value of the amount payable to a
bankruptcy trustee in relation to a settlement agreement
between the trustee and MSR for the purchase of a hotel
located on MSR's land adjacent to its harness racing track
(see Note 13). The initial April 2000 settlement agreement
was amended in July 2001 and was formally approved by the
bankruptcy court in August 2001. The approved agreement
calls for MSR to pay $2,816,000 to the bankruptcy trustee
by February 18, 2002 for the purchase of the hotel. For
financial reporting purposes, the $2,816,000 was
discounted using an incremental borrowing rate of 10% and
the present value discount is being treated as imputed
interest. Imputed interest expense for 2000 related to
this transaction approximated $129,000. In the event that
MSR does not make the required payment to the trustee by
February 18, 2002, the trustee may either enter into a 24
year mortgageable lease agreement for the hotel with MSR
or take title to the hotel and the land on which it is
located, subject to the mortgage described in Note 8 (A).
Title to the land requires fair market value payment to
MSR.
(F) During 2000, MSR and MSDC entered into various capital
leases for equipment with monthly payments ranging from
$137 to $2,168 including imputed interest from 6.9% to
24.5%. These leases mature at various dates through 2006.
In 2000, interest expense totaled approximately $36,000
for these capital leases.
Future maturities of long-term debt (exclusive of capital lease
obligations), as of December 31, 2000, are as follows:
YEAR ENDING DECEMBER 31 AMOUNT
- --------------------------------------------------
2001 $1,866,450
2002 2,483,652
- --------------------------------------------------
Totals $4,350,102
==================================================
At December 31, 2000, the cost of equipment acquired through
capital lease obligations totaled $508,776 and is included in
land, building, and equipment on the balance sheet. Accumulated
depreciation related to these assets totaled $79,812 at December
31, 2000.
The following is a schedule by years of the future minimum lease
payments under capital leases, together with the present value of
the net minimum lease payments, as of December 31, 2000:
38
NOTE 8. LONG-TERM DEBT, CONTINUED
YEAR ENDING DECEMBER 31 AMOUNT
- ------------------------------------------------------------------------------------------
2001 $126,629
2002 128,613
2003 130,677
2004 138,190
2005 71,698
Thereafter 4,318
- ------------------------------------------------------------------------------------------
Total minimum lease payments 600,125
Less amount representing interest 139,605
- ------------------------------------------------------------------------------------------
Present value of net minimum lease payments 460,520
Current maturities 97,172
- ------------------------------------------------------------------------------------------
Capital lease obligation, net of current maturities $363,348
==========================================================================================
NOTE 9. INCOME TAXES
Net deferred tax assets are provided for the temporary differences
between the tax bases of assets and liabilities and their
financial reporting amounts. The temporary differences that give
rise to a significant portion of the deferred tax liability and
deferred tax asset and their approximate tax effect are as
follows. The net deferred tax asset at December 31, 2000 and 1999
has been offset by an equivalent valuation allowance because of
uncertainty concerning MSR's ability to utilize net operating loss
carryforwards in future years.
DECEMBER 31
2000 1999
----------------------------- -----------------------------
TEMPORARY TEMPORARY
DIFFERENCE TAX EFFECT DIFFERENCE TAX EFFECT
- -------------------------------------------------------------------------------------------------------------
Deferred compensation $ - $ - $ 1,013,000 $ 376,800
Net operating loss carryforwards 5,930,000 2,016,000 4,080,000 1,387,000
other 22,000 8,800 14,000 5,600
- -------------------------------------------------------------------------------------------------------------
5,952,000 2,024,800 5,107,000 1,769,400
Less valuation allowance - (2,024,800) - (1,769,400)
- -------------------------------------------------------------------------------------------------------------
$ 5,952,000 $ - $ 5,107,000 $ -
=============================================================================================================
The net operating loss carryforwards will expire at various dates
from December 31, 2009 through December 31, 2014.
A reconciliation of the provision for income taxes to the
statutory amount is as follows:
39
NOTE 9. INCOME TAXES, CONTINUED
FOR THE YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-----------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------
Statutory federal income tax (benefit) $(629,000) (34.0) $(465,000) (34.0) $ 38,500 34.0
Variances from statutory rate:
Add state income tax, net of
federal tax benefit 708 0.1 3,753 0.3 404 0.4
Increase (decrease) in valuation
allowance 255,400 13.6 442,000 32.3 (26,800) (23.6)
Other (3,200) (0.1) 23,000 1.7 (11,700) (10.4)
--------- ----- --------- ----- -------- -----
Provision (benefit) for income taxes $(376,092) (20.4) $ 3,753 0.3 $ 404 0.4
========= ===== ========= ===== ======== =====
NOTE 10. LEASES
The Raceway leases certain equipment for use during each racing season
including an agreement for pari-mutuel totalisator equipment and
services. Total rent expense for the years ended December 31, 2000,
1999, and 1998 amounted to $432,220, $512,568, and $654,910 of which
$275,400, $280,105, and $399,263 was paid on the totalisator contract
for the respective years.
The current totalisator operating lease agreement expires in 2004.
Under the agreement, MSR is charged a flat fee for the equipment and
services plus an additional amount that is dependent upon wager
volume. Future minimum rental charges for totalister equipment are as
follows:
2001 $ 265,000
2002 275,000
2003 285,000
2004 295,000
-----------
$ 1,120,000
===========
NOTE 11. INVESTMENT (LOSS) INCOME
Investment (loss) income consisted of the following for the years
ended December 31, 2000, 1999, and 1998:
DECEMBER 31
--------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
Interest and dividends $ 30,772 $ 27,921 $ 6,753
Other (4,529) (21,323) (24,131)
-------- -------- ----------
$ 26,243 $ 6,598 $ (17,378)
======== ======== ==========
40
NOTE 12. PRIVATE PLACEMENT AND STOCK WARRANTS
During 1999, MSR issued 150,000 shares of common stock, at $10 per
share, through a private placement offering. Additionally, in November
1999, MSR entered into a common stock warrant agreement with two
former officers, who were also board members, granting them the option
to purchase at least 150,000 but not more than 175,000 shares of MSR
common stock at $10 per share. Prior to its expiration on November 15,
2000, the agreement was extended until November 14, 2004. Also, in
November 2000, MSR granted another board member a warrant to purchase
up to 7,500 shares of MSR common stock at $10 per share with an
expiration date of November 14, 2004. Additionally, as discussed in
Note 8(C) MSR granted another board member a warrant to purchase 2,500
shares of MSR common stock at a price of $10 per share, with an
expiration date of August 31, 2004. A summary of these warrants
outstanding as of December 31, 2000 is as follows:
NUMBER OF EXERCISE EXPIRATION
STOCK WARRANTS PRICE DATE OF
ISSUE DATE ISSUED PER SHARE STOCK WARRANTS
- ---------------------------------------------------------------------
November 14, 2000 150,000 - 175,000 $10 November 14, 2004
November 14, 2000 7,500 $10 November 14, 2004
September 1, 2000 2,500 $10 August 31, 2004
================= === =================
NOTE 13. HOTEL LEASE AND ACQUISITION
During fiscal year 1994, MSR, as lessor, entered into a lease
agreement with Comfort Associates, Inc. ("CAI"), a company affiliated
with MSR's former majority shareholder. MSR leased, for an initial
period of twenty years, a certain portion of their property for the
purpose of permitting CAI to construct, own, and operate a hotel.
Construction of the hotel by CAI was completed in October 1994.
Anytime during the lease or any renewal period of the lease, MSR could
have elected to assume all of CAI's duties, obligations, rights, and
responsibilities under the lease for a nominal amount. Lease payments
during the initial twenty year period were $10,000 per year. In May
2000, the lease was terminated, and MSR purchased all of the issued
and outstanding shares of stock of CAI for $5,510, plus an additional
$48,000 acquisition fee.
An investigation conducted by the bankruptcy trustee of the bankrupt
companies affiliated with MSR's former majority shareholder revealed
that the aforementioned hotel constructed, owned, and operated by CAI
was built by funds fraudulently transferred from the bankrupt
companies affiliated with MSR's former majority shareholder. The
trustee subsequently filed suit against CAI for any and all ownership
interests in the hotel.
Pursuant to an original April 11, 2000 settlement agreement between
the trustee and MSR that was later amended on July 30, 2001 and
formally approved by the bankruptcy court in August 2001, MSR turned
over the issued and outstanding stock of CAI to the trustee and
acquired the hotel from the trustee. The agreement calls for MSR to
pay the trustee $2,816,000 (the fair market value of the hotel less
$184,000 in unpaid real estate taxes) by February 18, 2002 (see Note
8(E)). It is also the responsibility of MSR to pay the $184,000 of
unpaid real estate taxes on the hotel. In the event that MSR does not
make the required payment to the trustee by February 18, 2002, the
trustee may either enter into a 24 year
41
NOTE 13. HOTEL LEASE AND ACQUISITION, CONTINUED
mortgageable lease agreement for the hotel with MSR or take title to
the hotel and the land on which it is located. See Note 8, which
describes various mortgages on MSR property. Title to the land
requires fair market value payment to MSR.
The purchase method of accounting was used to account for the June
2000 hotel acquisition, and the purchase price was allocated as
follows:
Property and equipment $ 2,611,000
Current assets 89,000
Liabilities assumed (345,000)
Debt incurred (2,355,000)
-------------
$ -
=============
The accompanying financial statements include the operations of the
hotel for the period from June 20, 2000 through December 31, 2000.
When MSR purchased the issued and outstanding stock of CAI in May
2000, it agreed to personally indemnify CAI's former sole stockholder
for any liability that stockholder may have had with respect to a
franchise agreement for the hotel. Subsequent to the stock
transaction, the stockholder was sued by the franchisor for damages
approximating $557,000. The stockholder answered the complaint,
notified MSR of the claim, and requested indemnification if the suit
is successful. Although MSR believes that the lawsuit will most likely
not be successful, the ultimate outcome is not presently determinable.
A provision for a possible unfavorable outcome is not included in
these financial statements.
During 2000, the aforementioned bankruptcy trustee questioned payments
of approximately $136,000 made by CAI to MSR, while MSR was operating
the hotel from May 20, 2000 to June 22, 2000 for rent, water, and
sewer charges. In September 2000, MSR provided financial information
to the trustee relating to these expenses. While MSR believes the
matter to be resolved, the trustee has not yet indicated that the
matter is closed.
MSR operates pari-mutuel wagering on the hotel premises. Net
pari-mutuel commissions and breakage from wagering on these premises
approximated $481,000 for the year ended December 31, 2000 ($450,000
for the year ended December 31, 1999, and $1,060,000 for the year
ended December 31, 1998).
NOTE 14. OTHER RELATED PARTY TRANSACTIONS
In March 1998, MSR sold idle land with nominal book value, to an
affiliate of a member of MSR's Board of Directors for $400,000. The
corresponding gain from this sale is reflected in the statement of
operations for the year ended December 31, 1998.
In 2000 and 1999, MSR paid approximately $350,000 and $210,000 to
related parties for consulting services, lodging, and interest,
including amounts attributable to long-term debt (Note 8).
NOTE 15. CONTINGENCIES
NEW YORK STATE RACING AND WAGERING BOARD COMPLIANCE AUDIT
42
During early 1998, the New York State Racing and Wagering Board (the
Board) reviewed MSR's compliance with the Board's policies and
procedures. Based upon the Board's findings, MSR was fined $416,000 on
March 9, 1998 for instances of non-compliance and was also directed to
reimburse MSR's capital improvement account for any unqualified
capital expenditures. The Board indicated its willingness to abate the
fine if MSR demonstrated compliance during the subsequent (1998)
racing season. On November 13, 1998, the Board retroactively approved
all of MSR's capital expenditures made from 1994 to 1997. As a result,
MSR was not required to reimburse its capital improvement account
because all capital expenditures made during the aforementioned period
were deemed qualified. On December 17, 1998, based on the receipt of a
satisfactory report from a Board approved compliance monitor, on the
status of MSR's compliance with the Board's policies and procedures
subsequent to the imposition of the fine, the Board discharged the
aforementioned $416,000 fine.
FORMER MAJORITY SHAREHOLDER
In March 1998, MSR provided financial information to the
aforementioned bankruptcy trustee relating to approximately $1,200,000
of corporate sponsorships it received over a period of years from
bankrupt affiliates of its former majority shareholder. Subsequently,
the trustee commenced a lawsuit against MSR to recover these payments,
based on the theory of fraudulent conveyance. On November 5, 1999, MSR
issued 38,000 shares of common stock, valued at $10 per share, to the
trustee in full settlement of the claim. The settlement of this
lawsuit is classified as an operating expense in the December 31, 1999
consolidated statement of operations.
OTHER
In March 1998, MSR voted to terminate its unfunded deferred
compensation plan. At December 31, 1999, there was a $1,013,861
liability recorded in MSR's consolidated balance sheet related to this
plan. Subsequent to this termination, a lawsuit was brought against
MSR by beneficiaries of the deferred compensation plan challenging the
plan's termination and seeking damages of $1,200,000. The lawsuit was
settled in 2000 with the beneficiaries receiving 4,380 shares of
stock, valued for financial reporting purposes at $10 per share, in
full settlement of their claim. The gain on this settlement, of
approximately $970,000, is recognized as an extraordinary item in the
December 31, 2000 consolidated statement of operations, net of
applicable income taxes of $376,800.
PURSE FUND AGREEMENT
MSR routinely enters into agreements with the Harness Horse
Association of Central New York to establish purses for harness
meetings at MSR. In December 1999, both parties signed an agreement
that required MSR to pay approximately $2,282,000 in purses in 2000.
Total actual purses and fees paid by MSR in 2000 approximated
$1,876,000, mostly due to a decrease in live racing days from 114 in
1999 to 93 in 2000. A June 22, 2001 amendment to the December 1999
agreement requires MSR to pay approximately $2,453,000 in purses and
fees in 2001. This amount includes approximately $406,000 in under
funded purses from 2000.
43
NOTE 15. CONTINGENCIES, CONTINUED
OTHER LITIGATION
MSR is a defendant in various litigation matters arising from its
operations. No estimate can yet be made of the potential liability or
damages, or the likely outcome of the litigation. Management believes
that liabilities resulting from these lawsuits, if any, will be
immaterial or will be completely covered by insurance policies.
DELINQUENT SECURITIES AND EXCHANGE COMMISSION (SEC) FILINGS
MSR is delinquent in filing a number of periodic reports, including
annual and quarterly financial information, required to be filed with
the SEC. The consequences of the Company's failure to file these
reports and the actions, if any, that the SEC might initiate against
the Company in this connection, are not presently determinable.
NOTE 16. SUBSEQUENT EVENTS
ANTI-DILUTION STOCK
On January 11, 2001, the Board of Directors of MSR authorized the
issuance of a total of 27,590 shares of common stock to four
individual shareholders (three of whom were board members and two of
whom were officers of MSR) in an effort to prevent the dilution of
such shareholders' ownership interest in MSR. These anti-dilution
shares of common stock were never issued by MSR. Due to the fact that
these shares were authorized without consideration on the part of the
shareholders, legal counsel for MSR has advised that the issuance was
not valid. Further, since the stock certificates were not issued to
the shareholders for the shares in question, legal counsel believes
that MSR does not need to take any action to rescind the issuance of
such shares. On December 17, 2001 the Board of Directors clarified the
minutes of the January 11, 2001 meeting to state the 27,590 shares of
common stock will be issued for past services to MSR. However,
issuance of the stock is subject to approval by the shareholders. No
amounts have been recognized in this connection for the year ended
December 31, 2000.
NEW YORK STATE RACING AND WAGERING BOARD COMPLIANCE AUDIT
During early 2001, the New York State Racing and Wagering Board (the
Board) reviewed MSR's compliance with the Board's policies and
procedures. In March 2001, the Board issued a report documenting
numerous instances of non-compliance with applicable Board statutes,
rules, and regulations. This report was also critical of certain MSR
business and managerial practices. The Board also fined MSR's
President and CEO $5,000 for MSR's non-compliance. On March 28, 2001,
the Board granted MSR a limited 90-day track and simulcast license.
Further, the Board required MSR to demonstrate compliance and
continued financial viability over the 90-day period in order to
receive a racing license for the 2001 live racing season.
On June 21, 2001, the Board approved MSR's track and simulcast license
for the remainder of 2001, based on the receipt of a June 2001
satisfactory report from a Board approved compliance monitor on the
status of MSR's compliance with Board policies and regulations
subsequent to March 28, 2001.
44
NOTE 16. SUBSEQUENT EVENTS, CONTINUED
MECHANIC'S LIEN
In July 2001, a contractor who allegedly performed work on MSR's race
track between October 1999 and April 2001 filed a mechanic's lien in
the amount of $99,165 for unpaid services. MSR believes that all of
this contractor's work was completed by June 2000 and that it paid the
contractor in full for all work from October 1999 through June 2000.
No amounts, related to this lien, have been recorded in these
financial statements.
PURCHASE OPTION AGREEMENT
On September 12, 2001, MSR's Board of Directors authorized its
President and Chief Executive Officer to execute an option agreement
for the sale of MSR to a group of private purchasers. This group of
purchasers includes one of the private lenders described in Note 8(D).
The agreement was formally executed on September 15, 2001 and grants
the purchasers an exclusive irrevocable option to purchase MSR for
$9,077,350, with an expiration date of March 15, 2002. If exercised,
the option agreement calls for the purchasers to pay off all MSR debt
and payables and pay $1,400,000 to existing MSR shareholders. The
$1,400,000 payment to the shareholders is subject to adjustment based
upon the debt outstanding at the exercise closing date. Accordingly,
the $1,400,000 could increase or decrease as a result of this
adjustment. The option agreement is subject to the approval of MSR's
shareholders and the New York State Racing and Wagering Board.
If the agreement is not approved by MSR's shareholders, MSR is
required to pay the purchasers a one-time payment of $130,000.
Additionally, if the option is not approved by MSR's shareholders or
not exercised by the purchasers, the agreement requires that the loan
described in Note 8(D) be repaid along with all accrued interest
thereon.
Concurrent with the execution of the option agreement, the purchasers
provided a $700,000 working capital line of credit to MSR with
interest at 10%, secured by a second mortgage on MSR's buildings and
improvements, due March 15, 2002.
NOTE 17. UNAUDITED SELECTED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The following selected interim consolidated financial information has
been prepared by management as of and for the eleven months ended
November 30, 2001. This information has not been audited.
Total current assets $ 1,218,000
Total current liabilities 8,323,000
-------------
Working capital deficiency (7,105,000)
-------------
Shareholders' deficiency (1,573,000)
=============
Total operating revenues 8,338,000
Total operating expenses 9,477,000
-------------
Loss from operations (1,139,000)
-------------
Total other loss, principally interest (500,000)
-------------
Net loss $ (1,639,000)
=============
45