THE NEW YORK RACING ASSOCIATION, INC. (A Component Unit of the State of New York) Quarterly Financial Statements. March 31, 2014

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1 Quarterly Financial Statements March 31, 2014 (With Independent Auditors Report Thereon)

2 Table of Contents Page(s) Independent Auditors Report 1 2 Management s Discussion and Analysis (unaudited) 3 11 Condensed Basic Financial Statements: Condensed Statements of Net Position (unaudited) 12 Condensed Statements of Revenues, Expenses and Changes in Net Position (unaudited) 13 Condensed Statements of Cash Flows (unaudited) 14 Notes to Condensed Basic Financial Statements (unaudited) 15 22

3 KPMG LLP Suite Walt Whitman Road Melville, NY Independent Auditors Report Board of Directors The New York Racing Association, Inc. Report on the Financial Statements We have reviewed the accompanying condensed statement of net position of The New York Racing Association, Inc. (NYRA), a component unit of the State of New York, as of March 31, 2014, the related condensed statements of revenues, expenses, and changes in net position for the three-month period ended March 31, 2014 and 2013, and the related condensed statements of cash flows for the three-month period ended March 31, 2014 and Management s Responsibility NYRA s management is responsible for the preparation and fair presentation of the condensed interim financial information in accordance with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with U.S. generally accepted accounting principles. Auditors Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Basis for Modification Based on information furnished to us by management and as more fully described in note 2 to the interim financial information, we believe that NYRA has not reported pension benefits provided through its defined benefit pension plans in accordance with U.S. generally accepted accounting principles. Conclusion Based on our review, with the exception of the matter described in the preceding paragraph, we are not aware of any material modifications that should be made to the accompanying condensed interim financial information for it to be in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Report on Condensed Statement of Net Position as of December 31, 2013 We have previously audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the statement of net position as of December 31, 2013, and the related statements of revenues, expenses and changes in net position, and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited basic financial statements in our report dated March 31, In our opinion, the accompanying condensed statement of net position of NYRA as of December 31, 2013, is consistent, in all material respects, with the audited basic financial statements from which it has been derived. Melville, New York May 23,

5 Management s Discussion and Analysis (Unaudited) The following Management s Discussion and Analysis (MD&A) of The New York Racing Association, Inc. (NYRA) provides an overview of NYRA s financial position and activities for the quarter ended March 31, Following this MD&A are the condensed basic financial statements of NYRA. The condensed basic financial statements are designed to provide readers with a broad overview of NYRA s finances in a manner similar to a private-sector business in that the economic resources measurement focus and accrual basis of accounting are applied. The condensed statements of net position present information on all of NYRA s assets and liabilities and deferred inflows and deferred outflows of resources, with the residual balance among the elements being reported as net position. The condensed statements of revenue, expenses and changes in net position present information showing how NYRA s net position changed during the fiscal year. The condensed basic financial statements also include notes that explain some of the information in the condensed financial statements and provide more detailed data. Financial Highlights March 31 December 31 Dollar Percentage change change (Dollars in thousands) Summary of net position: Current assets $ 79,978 78,351 1,627 2% Capital assets, net 56,993 51,930 5, Other noncurrent assets 18,233 18, Deferred outflows of resources 16,488 16,488 Total assets and deferred outflows of resources 171, ,976 6,716 4% Current liabilities 71,907 66,104 5,803 9% Accrued pension liabilities 30,232 30,232 Accrued post-employment benefit obligations 29,366 29,366 Other noncurrent liabilities 5,467 3,780 1, Deferred inflows of resources 8,243 8,243 Total liabilities and deferred inflows of resources 145, ,725 7,490 5% Net position: Net investment in capital assets 50,806 48,188 2,618 5% Restricted 14,084 12,147 1, Unrestricted (38,413) (33,084) (5,329) 16 Total net position $ 26,477 27,251 (774) (3)% Total assets and deferred outflows of resources increased $6.7 million (4%) primarily due to a $5.1 million (10%) increase in net capital assets. The largest increase to capital assets was $3.5 million in construction in 3 (Continued)

6 Management s Discussion and Analysis (Unaudited) process for the Longshots simulcast facility at Aqueduct. Longshots is a new, state-of-the-art simulcasting center and sports bar, with more than 270 individual handicapping carrels and 55 self-service betting terminals, and more than 400 large-screen televisions or personal seat monitors for race fans to watch races on. Longshots opened in April Total liabilities and deferred inflows of resources increased $7.5 million (5%), primarily due to a $10.8 million increase in accrued stakes and purses driven by Q1 video lottery terminal (VLT) purse proceeds of $14.5 million, and a $2.5 million increase in unearned concession fee revenue from Genting LLC s (Genting) contractual contribution to the Longshots simulcast facility at Aqueduct. In total, Genting has contributed $5 million to Longshots as of March 31, The contribution by Genting is considered concession fee revenue and will be recognized over the term of the concession agreement with Genting commencing with the opening of Longshots in April. The increase of total liabilities and deferred outflows of resources is partly offset by a $3.4 million paydown of NYRA s debt facility with Genting, and a $3.0 million decrease in the horsemen s liability. Net position, the difference between total assets combined with deferred outflows of resources and total liabilities combined with deferred inflows of resources, decreased by $0.8 million from $27.3 million to $26.5 million. Net assets invested in capital assets increased 5% to $50.8 million. Restricted net assets (unexpended funds received for particular specified purposes) increased 16% to $14.1 million. Unrestricted net position, (which can be used to finance operations without constraints established by debt covenants, enabling legislation, or other legal requirements), decreased $5.3 million or 16%. Three months ended March 31 Change Percentage change (Dollars in thousands) Summary of changes in net position: Operating revenues: Pari-mutuel and simulcasting revenue $ 36,417 36, % State of New York off-track betting 6,091 6,499 (408) (6) Other revenues 1,870 1, Total operating revenues 44,378 43, Operating expenses: Employee compensation and benefits 19,275 17,891 1,384 8 Stakes and purses 18,878 18, VLT purse expense 14,469 13,120 1, (Continued)

7 Management s Discussion and Analysis (Unaudited) Three months ended March 31 Change Percentage change (Dollars in thousands) Statutory and contractual commissions $ 2,798 2,869 (71) (2)% Facility operating expenses 13,640 13, Pension expense 1,408 1, Post-employment benefit expense 2,000 2,113 (113) (5) Depreciation 1, Total operating expenses 73,647 69,425 4,222 6 Operating loss (29,269) (25,475) (3,794) 15 Nonoperating items: VLT operating and support revenues 20,315 18,743 1,572 8 Interest (43) (77) 34 (44) Income taxes 428 (87) 515 (592) Nonoperating revenue 20,700 18,579 2, Loss before capital contributions (8,569) (6,896) (1,673) 24 Capital contributions 7,795 7, Change in net position (774) 601 (1,375) (229) Total net position, beginning of year 27,251 (16,909) 44,160 (261) Total net position, end of quarter $ 26,477 (16,308) 42,785 (262)% Operating revenues increased 1% from $44.0 million to $44.4 million. During the three months ended March 31, 2014, NYRA generated $412.3 million in total handle, an increase of $5.5 million or 1.3% compared to the same period last year. The increase in handle is attributable to three additional race days compared to the same period last year. Revenue from NYS OTB s was $0.4 million or 36% lower compared to Q This can be attributed to unfavorable weather conditions throughout the first two months of 2014 which caused cancellations at regional tracks, affecting out of state simulcasting handle. The $0.5 million increase in other revenue is driven by advanced deposit wagering (ADW) source market fee legislation that went into effect in 2014 where a fee is now collected from out of state ADW sites accepting wagers from New York customers. Operating expenses increased 6% from $69.4 million to $73.6 million. The increase in operating expenses is primarily due to a $1.3 million increase in VLT purse expense due to a 0.5% increase of purse support payments. Effective October 27, 2013, purse support payments increased from 7% to 7.5% of Gross VLT Revenues in accordance with NYRA s franchise agreement with the State. Since the VLT purse revenue is included in nonoperating revenue in accordance with U.S. generally accepted accounting principles (GAAP) for governments, as prescribed by the Governmental Accounting Standards Board (GASB), the classification of the 5 (Continued)

8 Management s Discussion and Analysis (Unaudited) associated VLT purse expense as an operating expense represents $14.5 million of additional operating loss to NYRA. Excluding VLT purse expense, the operating expenses would have been $59.1 million. Excluding pension, post-employment, and depreciation expense totaling $4.6 million, operating expenses would have been $54.5 million compared to $52.5 million, representing a $2.0 million increase. That $2.0 million increase was primarily a $1.4 million increase in employee compensation and benefits due to retroactive accruals for expired union contracts, bringing certain Aqueduct union labor in-house as opposed to being outsourced to Genting in Q1 2013, and a $0.7 million increase in stakes and purses. Nonoperating revenue increased $2.1 million, primarily due to receiving an increase of $1.3 million of VLT purse support payments, and an increase of $.2 million of VLT operating support payments from Resorts World Casino. The increase in VLT purse support is attributable to the terms in NYRA s franchise agreement with the State whereby NYRA received 7.5% of VLT revenue as purse support compared to 7% in Q In addition, in Q1 2014, Resorts World Casino had a higher win per machine (WPM) of $433 per day with the number of machines averaging 5,004 QTD as compared to Q WPM of $416 and an average number of machines of 5,002. NYRA also recorded $0.4 million of income tax benefit for the quarter ended March 31, 2014 as opposed to $0.1 million of income tax expense for the quarter ended March 31, Capital contributions increased $298 thousand from $7.5 million to $7.8 million. Capital contributions are composed of the 4% VLT capital support payments received from Resorts World Casino that are restricted for use in maintaining and upgrading NYRA s racetracks. Those VLT capital contributions also increased due to higher WPM at Resorts World Casino. Capital Spending Q Q (Dollars in thousands) Aqueduct: Patron area improvements $ 3, Barn area improvements Other Total Aqueduct spending 3, Belmont: CAFO and storm water management Patron area improvements Barn area improvements Other Total Belmont spending (Continued)

9 Management s Discussion and Analysis (Unaudited) Q Q (Dollars in thousands) Saratoga: Surveys and master planning $ 52 Barn area improvements Patron area improvements Other Total Saratoga spending NYRA TV Fleet equipment Information technology Total $ 6,242 2,177 Capital spending highlights: Patron area improvements: $4.3 million was spent on patron area improvements at all three racetracks, including the construction of the Longshots simulcast facility at Aqueduct, renovations to the first floor, seating upgrades and murals. Patron area improvements at Belmont included backyard renovation and Americans with Disabilities Act (ADA) compliance upgrades. Improvements at Saratoga included benches for the apron and restroom upgrades. New televisions were added to all three tracks. Barn area improvements: $0.5 million was spent on barn area improvements at all three racetracks. Belmont improvements included new stall flooring, replacement doors for the cottage boiler rooms and an ice machine. Aqueduct improvements included dormitory renovation and renovations to the sump for Concentrated Animal Feeding Operations (CAFO) compliance. Saratoga improvements included upgrading the dormitory electrical system and sea containers for storage. Information technology: $0.5 million was spent on information technology, including hardware and software upgrades to NYRA s ADW platform for Global Betting Exchange. Fleet and equipment: $0.4 million was spent on fleet and equipment, including a new ambulance, maintenance vehicles, and a new security vehicle. NYRA TV: $0.1 million was spent on television production equipment, including purchase of a new video encoder to facilitate coverage of the races in Spanish. Other capital spending: Other significant capital expenditures included adding security cameras to the Belmont and Saratoga facilities and $96,000 of CAFO related compliance costs at Belmont. Long-Term Debt At March 31, 2014, NYRA had $0.1 million in debt remaining of the $25 million loan with Genting ($3.5 million at December 31, 2013). The entire balance is classified as a current liability. Consistent with the loan agreement, 7 (Continued)

10 Management s Discussion and Analysis (Unaudited) repayments of principal and interest commenced on April 28, 2012, which was six months from the date the VLT operations began at Aqueduct. The amount payable is deducted from the VLT distributions Genting is required to pay to NYRA on a daily basis and is equal to 25% of the portion of VLT revenues that NYRA receives for both operating and capital funds. The remaining debt was paid in full in April Handle Analysis Handle refers to amounts wagered at the track, on computers, by phone, by internet, and at simulcast centers. NYRA retains an average of 10% of handle as pari-mutuel commission reflected in operating revenues. The following table analyzes fluctuations handle underlying operating revenue: Percentage Percentage Percentage Q share Q share 2014 vs (Unaudited, dollars in thousands) Aqueduct winter meet: Race days % Live $ 44,462 11% $ 43,030 11% 3.3 Export 289, , Import 78, , (3.3) Total handle $ 412, % $ 406, % 1.3% Live handle Wagering on live NYRA races that originates from a NYRA facility (Aqueduct, Belmont, Saratoga, or NYRA Rewards). Export handle Wagering on live NYRA races that originates off-track. Export refers to the exporting of the NYRA race signal to outside entities. Examples of export locations include, but are not limited to, New York OTB s as well as race tracks and national ADW s. Also included in Export handle is noncommingled international handle. Noncommingled handle refers to international handle that does not enter the NYRA pools and is not captured by NYRA s totalisator but is instead reported by the various international jurisdictions. Import handle Wagering on races run by entities other than NYRA. Import refers to the importing of race signals from around the world. Examples of import locations are Gulfstream, Santa Anita, Churchill Downs, Finger Lakes, and Dubai. NYRA ran 54 race days during the three months ended March 31, 2014, three more days as compared to last year. Aqueduct Winter Meet (January 1 st through March 31 st ) Results from the 2014 Aqueduct winter meet through March 31, 2014 were impacted by extreme weather conditions in January and February that forced racing cancellations at tracks across the region. Estimated on-track attendance at Aqueduct during the meet was 177,689 patrons, a decrease of 10,983 or 5.8% compared to last year. There were a total of 492 races run through March 31st, a 4.7% increase compared 8 (Continued)

11 Management s Discussion and Analysis (Unaudited) to the 470 races held during the same period last year. During the quarter, NYRA generated $412.3 million in total handle compared to $406.9 million last year. Statistical Handle Highlights Three months ending March 31 Change Dollar Percentage (Unaudited, dollars in thousands) On-track handle components: ADW (phone, internet and on-track) $ 58,224 54,135 4, % Aqueduct 52,025 56,788 (4,763) (8.4) Belmont 13,057 13,637 (580) (4.3) Total NYRA on-track handle 123, ,560 (1,254) (1.0) Off-track handle (export): NYOTB downstate 21,389 22,276 (887) (4.0) NYOTB upstate 10,802 10, NY inter-track wagering 7,303 7, Out-of-state 242, ,937 7, International separate pool 7,176 7,255 (79) (1.1) Total off-track (export) handle 289, ,309 6, Total handle $ 412, ,869 5, % During the three months ended March 31, 2014, NYRA generated $412.3 million in total handle, an increase of $5.5 million or 1.3% compared to the same period last year. On-track handle of $123.3 million decreased $1.3 million or 1.0% compared to prior year, driven primarily by decreased nonrewards handle at Aqueduct and Belmont in Export handle of $289.0 million increased $6.7 million or 2.4%, primarily due to three more race days in 2014 when compared to the same period last year. 9 (Continued)

12 Management s Discussion and Analysis (Unaudited) Industry Update NYRA management evaluates NYRA s position in the industry to ensure continued competitive positioning and high quality racing. The following table analyzes NYRA s position in relation to the industry. Three months ended March 31 Percentage Three month comparison variance Industry as provided by Equibase: Wagering on U.S. races* $ 2,557,489,328 2,612,278,122 (2.1)% U.S. purses $ 214,922, ,209,912 (1.5) U.S. race days 974 1,041 (0.1) Handle yielded per purse dollar invested $ (0.6) NYRA: Wagering on NYRA races* $ 326,322, ,083, NYRA purses $ 22,573,640 21,639, NYRA. race days Handle yielded per purse dollar invested $ (1.7) NYRA as Percentage of Industry: Wagering on U.S. races* 12.8% 12.2% U.S. purses U.S. race days * Equibase provides wagering information on commingled handle only and does not include noncommingled international handle. For purposes of this schedule, wagering on NYRA races only includes commingled handle. Based on information provided by Equibase, for the three months ended March 31, 2014, wagering on U.S. races decreased 2.1% compared to a 2.6% increase in wagering on NYRA races resulting from three more race days compared to prior year. NYRA contributed 5.5% of total industry race days, offered 10.5% of purses and generated 12.8% of thoroughbred handle across the United States. Every dollar invested in purses at NYRA during the three months ended March 31, 2014 yielded $14.46 in handle compared to $11.90 industry-wide. Factors Bearing on NYRA s Future The horse racing industry is impacted by a number of risk factors including, but not limited to, general economic conditions, legislative and regulatory oversight, gaming competition and consumer interest. The horse racing industry is heavily regulated by various agencies and heavily influenced by various governmental entities. Changes in regulations and political influences could materially impact NYRA s business going forward. 10 (Continued)

13 Management s Discussion and Analysis (Unaudited) The New York off-track betting corporations represent a risk to NYRA s financial condition, with the NYC OTB bankruptcy in 2010 and Suffolk OTB bankruptcy in NYRA will continue to monitor the remaining OTBs operational viability. NYRA operates in a geographic region with many competitive gaming options, including state-sponsored lotteries, VLTs, other casinos in the state as well as in neighboring Connecticut, New Jersey, and Pennsylvania. Additionally, legalized internet-based interactive gaming and wagering is becoming increasingly competitive. NYRA has a significant dependence on unionized labor with approximately 61% of employees working under 25 collective bargaining agreements at March 31, Nine of those 25 contracts were expired as of March 31, 2014, representing 80% of the unionized work force, which could represent risk of labor disruption which could disrupt operations. All of our racetracks compete for horses with other racetracks that run live race meets at the same time as ours. Our ability to compete for horses is substantially dependent on our ability to offer and fund competitive purses as well as other regulations imposed that make New York different from other states. The ability to offer races with full field sizes may result in less wagering on our races. Our ability to offer full fields depends on our ability to attract a sufficient number of horse owners and trainers, the overall horse population available, and our ability to offer competitive purses. Other risks include a general decline in attendance and wagering on live horse races at North American racetracks, inclement weather which could affect our ability to conduct live racing, competitive pressures from external ADW s as well as successful changes to NYRA s ADW platform, success of other strategic initiatives, and the effect of price increases. NYRA has several key strategies for 2014, which are intended to drive improvements in 2014 as well as have longer reaching effects for years to come. ADW is a growing portion of the racing industry and of NYRA s business. There will be significant focus on NYRA s ADW business with a new strategic partnership focused on developing a stable and improved technology platform and potential for true customer relationship management in the future. Additionally, new funding opportunities for customers with increased limits and access to a network of funding terminals are expected to drive additional handle. Another strategic focus will be on marketing: a comprehensive strategy has been planned to leverage key events including the Belmont Stakes, as well as heightened advertising and support of NYRA Rewards. Strategic focus also remains on improving the on-track experience of our customers, which includes the opening of Longshots, which is a state of the art simulcast center at Aqueduct, significant improvements to the backyard at Belmont, and continued planning for Saratoga redevelopment. Contact information for financial related requests can be found at 11

14 Condensed Statements of Net Position (Dollars in thousands) March 31, December 31, Assets and Deferred Outflows of Resources (Unaudited) Current assets: Cash and cash equivalents $ 17,659 13,279 Restricted cash: Horsemen s account and NYRA Rewards account 19,673 22,760 VLT capital expenditure fund 13,349 11,517 Other 4,569 4,356 Receivables, net of allowance for doubtful accounts of $4,211 in 2014 and $4,463 in ,676 17,187 Deferred tax asset, current 3,877 3,856 Prepaid and other current assets 4,175 5,396 Total current assets 79,978 78,351 Noncurrent assets: Capital assets, net 56,993 51,930 Deferred tax asset, non current 17,072 17,052 Other assets 1,161 1,155 Total noncurrent assets 75,226 70,137 Total assets 155, ,488 Deferred outflows related to changes in net pension liabilities 16,488 16,488 Total assets and deferred outflows of resources $ 171, ,976 Liabilities, Deferred Inflows of Resources and Net Position Current liabilities: Horsemen s liability $ 16,522 19,495 NYRA Rewards liability 3,152 3,265 Stallion Series unearned income 1,111 1,003 Stakes and purses 17,186 6,415 Accounts payable and other accrued expenses 23,855 24,860 Accrued environmental liability Accrued pension costs 2,801 2,861 Accrued post-employment benefit obligations 1,055 Outstanding pari-mutuel tickets 760 2,049 Loan payable 149 3,549 Other 5,188 2,479 Total current liabilities 71,907 66,104 Noncurrent liabilities: Accrued pension liabilities 30,232 30,232 Accrued post-employment benefit obligations 29,366 29,366 Other 5,467 3,780 Total noncurrent liabilities 65,065 63,378 Total liabilities 136, ,482 Deferred inflows related to changes in net pension liabilities 8,243 8,243 Total liabilities and deferred inflows of resources 145, ,725 Net position: Net investment in capital assets 50,806 48,188 Restricted for capital expenditures and other 14,084 12,147 Unrestricted (38,413) (33,084) Total net position 26,477 27,251 Total liabilities, deferred inflows of resources and net position $ 171, ,976 See accompanying notes to condensed financial statements. 12

15 Condensed Statements of Revenues, Expenses and Changes in Net Position (Dollars in thousands) (Unaudited) Three months ended March 31, Operating revenues: Gross pari-mutuel commission and breakage $ 19,645 20,636 State of New York off-track betting 6,091 6,499 On-track racing related revenues Intrastate simulcasting Interstate simulcasting 15,502 14,295 International simulcasting Other revenues 1,403 1,030 Total operating revenues 44,378 43,950 Operating expenses: Employee compensation and benefits 19,275 17,891 Stakes and purses 18,878 18,242 VLT purse expense 14,469 13,120 Statutory and contractual commissions 2,798 2,869 Facility operating expenses 13,640 13,534 Pension expense 1,408 1,008 Other post employment benefit expense 2,000 2,113 Depreciation 1, Total operating expenses 73,647 69,425 Operating loss (29,269) (25,475) Nonoperating revenues (expenses): VLT operating support payments 5,846 5,623 VLT purse support payments 14,469 13,120 Interest (43) (77) Income taxes 428 (87) Net nonoperating revenues 20,700 18,579 Loss before capital contributions (8,569) (6,896) Capital contributions: VLT capital support payments 7,795 7,497 Total capital contributions 7,795 7,497 Change in net position (774) 601 Total net position beginning of period 27,251 (16,909) Total net position end of period $ 26,477 (16,308) See accompanying notes to condensed financial statements. 13

16 Condensed Statement of Cash Flows (Dollars in thousands) (Unaudited) Three months ended March 31, Cash flows from operating activities: Cash receipts from: Customers $ 44,884 48,571 Cash payments for: Statutory commissions and purses (14,192) (13,747) VLT purse funding (14,469) (13,120) Vendors (11,809) (14,749) Employees (21,279) (20,500) Net cash used in operating activities (16,865) (13,545) Cash flows from non-capital financing activities: Cash receipts from VLT operating support 5,729 5,610 Cash receipts from VLT purse support 14,084 13,081 Principal payments of loan payable (3,400) (3,203) Payments for interest (43) (77) Net cash provided by non-capital financing activities 16,370 15,411 Cash flows from capital and related financing activities: Cash receipts from VLT capital support 7,640 7,480 Other 2,162 Purchase of capital assets (3,777) (2,177) Payments of capital lease obligations (19) (2) Net cash provided by capital and related financing activities 3,844 7,463 Cash flows from investing activities: Equity investments (11) Net cash used in investing activities (11) 3,338 9,329 Cash and cash equivalents and restricted cash, beginning of the year 51,912 47,096 Cash and cash equivalents and restricted cash, end of the year $ 55,250 56,425 Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (29,269) (25,475) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation 1, Loss from equity method investments, net of cash received Changes in assets and liabilities: Receivables, net 1,168 3,651 Prepaid and other assets 1,609 1,202 Horsemen s liability (2,973) (2,582) NYRA Rewards liability (113) 70 Stallion series unearned income Stakes and purses 10,771 9,789 Accounts payable and other accrued expenses (1,006) (1,611) Accrued environmental liability (314) Accrued pension costs and postretirement obligations including deferrals Outstanding pari-mutuel tickets (1,289) (1,388) Other liabilities 1,949 1,273 Net cash used in operating activities $ (16,865) (13,545) For the three months ended March 31, 2014, capital expenditures on the statement of cash flows excludes $2,465 of capital asset additions provided by a concession agreement with a service vendor. See accompanying notes to condensed financial statements. 14

17 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) (1) Summary of Significant Accounting Policies (a) Basis of Presentation The New York Racing Association, Inc. (NYRA) is considered a governmental entity engaged only in business type activities. Accordingly, except as disclosed in note 2, the accompanying condensed basic financial statements of NYRA have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for governments. Such principles are prescribed by the Governmental Accounting Standards Board (GASB), which is the standard setting body for establishing governmental accounting and financial reporting principles in the United States of America. NYRA follows the economic resources measurement focus and the accrual basis of accounting for revenues and expenses whereby revenues are recognized when earned and expenses are recognized when obligations are incurred. The financial information as of March 31, 2014 and for the three month periods ended March 31, 2014 and 2013 is unaudited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the statement of net position, the statements of revenues, expenses and changes in net position and the statements of cash flows for the periods presented have been made on a consistent basis. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed financial statements should be read in conjunction with NYRA s audited financial statements for the year ended December 31, NYRA s earnings are seasonal in nature. For instance, the majority of live racing occurs during the second and third quarters with the Belmont Stakes Day and Saratoga meet. Therefore, the results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, (b) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant estimates relate to accounts receivable allowances, pension and post-employment benefit liabilities, and judgments regarding the realizability of deferred tax assets. 15 (Continued)

18 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) (2) Defined Benefit Pension Plans NYRA sponsors five Defined Benefit Pension Plans (DBPPs) covering its union and administrative employees and the obligations of contributing sponsor under the Employee Retirement Income Security Act (ERISA). This includes the obligation to make required minimum funding contributions pursuant to the DBPPs and ERISA. The DBPP benefits are based on years of credited service and employee compensation. NYRA s policy is to fund, at a minimum, amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. Assets of the plans are administered by an independent trustee and are invested principally in common collective trusts, registered investment companies, equity securities and immediate participation guarantee contracts. For the three months ended March 31, 2014 and 2013, employer contributions paid by NYRA totaled $1.4 million and $1.2 million, respectively. For the full year ended December 31, 2014, NYRA expects total employer contributions to be approximately $8.1 million (compared to $6.5 million of actual contributions in 2013). GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, establishes standards for the measurement, recognition, and reporting of NYRA s DBPPs. For purposes of these condensed interim financial statements, NYRA estimated its pension expense for the three months ended March 31, 2014 and 2013 of $1.4 million and $1.0 million, respectively, using actuarial and other assumptions that were consistent with those used to prepare NYRA s audited financial statements for the year ended December 31, However, all the necessary adjustments required by GASB Statement No. 68 were not calculated or recorded. NYRA does not believe that this departure from GAAP has a material impact on the condensed interim financial statements. (3) Other Post-Employment Benefits (OPEB) Obligation NYRA sponsors certain other post employment benefits (OPEB) plans. The OPEB plans include post employment benefit plans (PRPs), post employment healthcare, as well as other forms of post employment benefits such as life insurance provided separately from a pension plan. GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, establishes standards for the measurement, recognition, and reporting of the OPEB plans. Annual OPEB costs are equal to NYRA s annual required contribution to the plans, with certain adjustments for past contributions. The PRPs are contributory and contain cost sharing features such as deductibles and co-payments. NYRA s policy is to fund the costs of these benefits as the costs are incurred. For the three months ended March 31, 2014 and 2013, employer contributions paid by NYRA totaled $1.2 million and $0.9 million, respectively. For the full year ended December 31, 2014, NYRA expects total employer contributions to be approximately $4.8 million. For the three months ended March 31, 2014 and 2013, OPEB expense was $2.0 million and $2.1 million, respectively. 16 (Continued)

19 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) (4) Income Taxes NYRA is subject to Federal income tax and foreign withholding taxes. Under its agreement with New York State, NYRA is not subject to NYS or NYC corporate income tax; however, it is subject to other non-income taxes, which are included in statutory and contractual commissions in the accompanying condensed statements of revenues, expenses, and changes in net position. Although NYRA s operations were located solely in New York during 2014, NYRA does hold an interest in certain pass-through entities doing business in Kentucky and therefore, is subject to Kentucky income taxes. NYRA has a current tax benefit of $0.4 million for the three months ended March 31, 2014, and a current tax expense of $0.1 million for the three months ended March 31, At March 31, 2014 and December 31, 2013, NYRA had net deferred tax assets of $20.9 million Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes, primarily related to pension and post employment obligations, allowances for doubtful accounts, accrued expenses, and tax attribute carry forwards. In assessing the realizability of deferred tax assets, management considers all positive and negative evidence as to whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, or prior to expiration of carry forward items. Management considers the expected reversal of deferred tax liabilities, expected levels of future taxable income and tax planning strategies in making this assessment. Based on these considerations, management believes it is more likely than not that NYRA will realize the benefits of its deferred tax assets. NYRA s effective income tax rate is different from the U.S. federal statutory tax rate primarily due to certain non-deductible items. NYRA has not paid any income taxes during the first three months of 2014 and paid $0.1 million in the first three months of NYRA s 2012 federal income tax filing is currently under examination by the Internal Revenue Service. Based on the NYRA s analysis of its tax positions, it has not recorded any liabilities related to uncertain tax positions. 17 (Continued)

20 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) (5) Capital Assets Capital asset activities for the three month period ended March 31, 2014 are summarized as follows: Three months ended Beginning Ending March 31, 2014 balance Additions Disposals Transfers balance Nondepreciable assets: Construction in progress $ 12,931 5,767 (1,324) 17,374 Depreciable assets: Leasehold improvements 26, ,486 Machinery and equipment 22, (36) ,313 Vehicles 4, ,351 Computer equipment Computer software 1, ,105 Total depreciable assets 54, (36) 1,324 56,619 Accumulated depreciation: Leasehold improvements 2, ,052 Machinery and equipment 10, (36) 10,625 Vehicles 2, ,745 Computer equipment Computer software Total accumulated depreciation 15,857 1,179 (36) 17,000 Capital assets, net $ 51,930 5,063 56,993 (6) Noncurrent Liabilities Noncurrent liability activity for the three month period ended March 31, 2014 includes the following: Beginning Ending balance Additions Reductions balance Installment notes payable $ 447 (119) 328 Unearned concession fee revenue 2,535 2,465 (659) 4,341 Workers compensation collateral $ 3,780 2,465 (778) 5, (Continued)

21 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) (7) Commitments and Contingencies (a) Litigation In the normal course of business, NYRA is involved in legal proceedings, including environmental, labor and collective bargaining, safety, liability and insurance matters. NYRA accrues a liability, if any, for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. NYRA believes it has meritorious defenses to these proceedings and intends to vigorously defend them. As such, NYRA believes any liability with respect to these actions will not materially adversely affect its statement of net position, statement of revenues, expenses, and changes in net position or cash flows. (b) Environmental Matters GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, requires governments to reasonably determine potential polluted sites and provides guidance regarding when to recognize pollution remediation obligations as a liability. Compliance with the New York State Environmental Conservation Law In 2004, The New York State Department of Environmental Conservation (DEC) alleged that NYRA s predecessor was in violation of the New York State Environmental Conservation Law because of an alleged failure to apply for a general State Pollutant Discharge Elimination permit required for Concentrated Animal Feeding Operations (CAFO). After a period of negotiations, an agreement with the DEC was reached and documented in an administrative order on consent. Subsequently, the DEC extended certain compliance milestones contained in the order. In September 2008, following NYRA s receipt of a new operating franchise for the three race tracks, the DEC granted NYRA a final extension to November 1, 2009 to comply with the compliance milestones. In order to timely comply with the order, NYRA committed to a work plan in 2009 which includes constructing 90 horse wash pads and sewer connections for the barn area sanitary sewer, providing storm drain connections for barn roof drainage, constructing a drainage control system around the inner and outer perimeter of the two dirt tracks, and constructing drain lines to direct clean run-off away from the sump, as well as enlarging the sump by dredging. NYRA s cost for meeting compliance is estimated at $2.9 million, of which $2.6 million has been spent through March 31, 2014, and discussions with the DEC are continuing. No amounts have been accrued relating to this plan, as these costs pertain to pollution prevention activities. Certain of these costs are expected to be recorded as capitalized expenditures when the project is finalized. As of March 31, 2014 and December 31, 2013 respectively, NYRA had accrued $78,000 and $78,000, the estimated cost of dredging the Belmont sump, a critical drainage area for Belmont Park Racetrack. 19 (Continued)

22 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) Controlling Storm Water Discharges from NYRA s Saratoga Race Course NYRA has been involved in proceedings involving the DEC, the US Army Corps of Engineers (ACOE), and the Yaddo Foundation regarding controlling storm water discharges from Saratoga into downstream surface water bodies. NYRA is required to construct a storm water retention structure to control the storm water discharges, construct a wetland within a forested area adjacent to the exercise track, and remove accumulated sediment from the Yaddo ponds. In 2012, NYRA completed the construction of the wetland and the building of the storm water retention structures, and in 2013, the dredging of the three Yaddo ponds was completed. The remaining commitment involves the removal of waste resulting from the dredging of three of the Yaddo ponds and is estimated to be $50. Such amount is recorded as accrued environmental liability as of March 31, (c) Governmental Review Office of the State Comptroller The State of New York, Office of State Comptroller issued an audit report addressing NYRA s financial condition and selected governance activities in July 2010, followed by a first interim report on the ongoing audit of NYRA operations in August 2010, and a second interim report in January The most recent report noted that NYRA has made progress in addressing the recommendations. NYRA remains committed to fully addressing all of the recommendations in the reports. New York State Department of Taxation and Finance Pursuant to notification received by NYRA in November 2013, The New York State Department of Taxation and Finance (Queens District Office) is currently conducting a sales tax audit covering the period June 1, 2011 through August 31, NYRA has paid $181 as settlement for underpayment of tax on program sales for this period and has estimated and accrued an additional $494 in potential exposure at March 31, New York State Inspector General At the request of the NewYork State Franchise Oversight Board (FOB), the New York State Inspector General (NYSIG) has been conducting a general investigation of NYRA s operations since June The investigation is ongoing. The NYSIG has collected and reviewed NYRA documents, including electronic documents. NYRA has been and will continue to be fully cooperative in the investigation. NYRA does not believe it has material exposure in the matter of this investigation. NYSGC Funding Investigation The New York State Gaming Commission (NYSGC) conducted an investigation of NYRA s wagering account funding practices. NYRA does not permit bettors to wager in lieu of appropriately having funds available on deposit at NYRA to do so. As such, NYRA does not believe that it has any material exposure in this matter. To NYRA s knowledge, the investigation remains open. The New 20 (Continued)

23 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) York State Gaming Commission has informally advised NYRA that the matter has been referred to NYSIG. NYSGC Take-Out Investigation In June 2008, as part of Chapter 115 of the New York session laws, a two year provision, which was to expire on September 15, 2010, was enacted that changed the range of allowable take out rates. This effectively mandated that NYRA increase take out rates on all NYRA pools by one percent. Since NYRA s take out rate on exotic pools was already set at the highest percentage within the range (25%) at the time the legislation was enacted, the provision set the exotic take out at 26%. In December 2011, NYRA was verbally notified by the NYSGC that the take out rate NYRA was charging bettors on exotic pools was incorrect since September 15, 2010, the impact of which was immaterial. Upon notification of this oversight, NYRA took immediate steps by requesting, in a letter to the NYSGC dated December 20, 2011, approval to reduce the take out rate on exotic pools from 26% to 24%. Subsequently, in a letter dated December 21, 2011, the NYSGC approved the rate reduction on the condition of NYRA satisfying certain requirements, including submitting a letter to the NYSGC from NYRA s totalisator provider (United Tote) with the relevant computer printout confirming the newly approved rates, recalculating the payoff price on affected exotic pools, identifying and making corrected winning wagers to all account holders, bearer accounts (by account numbers only) and W2G winners, providing a report to the NYSGC that listed the total number of account holders and individuals that were credited with the additional total amount paid, and if presented with an unexpired qualifying un cashed winning ticket on or after February 17, 2012, paying individuals the recalculated correct payout. In response to the NYSGC s directive and through its totalisator provider, NYRA determined the affected exotic pool payoff prices, identified the account holders, including bearer accounts by account number, and bettors who had W2G winnings on exotic pools. NYRA paid corrected winning wagers to the identified qualifying account holders and bettors with W2G winnings by March 30, NYRA also paid the correct payout amount to any individual who presented an unexpired qualifying un-cashed winning ticket in accordance with the NYSGC s directives. NYSIG has been conducting an investigation of the circumstances surrounding the incorrect take-out rate. The investigation is ongoing. The NYSIG has collected and reviewed NYRA documents, including electronic documents and interviewed current and past employees. NYRA has been and will be fully cooperative in the investigation. NYRA does not believe it has material exposure in the matter of this investigation. Prevailing Wages NYRA is working with the State of New York Department of Labor (DOL) to determine if it was obligated to comply with prevailing wage law and, if so, when it was effective. Two cases were brought by the DOL against NYRA relating to these matters. 21 (Continued)

24 Notes to Condensed Basic Financial Statements (Unaudited, dollars in thousands except as noted) In May 2013, NYRA reached a settlement agreement with the DOL regarding one of the cases. In connection with this settlement, NYRA paid $0.4 million during the second quarter of 2013, which included interest and penalties. NYRA also agreed to perform additional self-audit procedures relating to periods from November 2009 through April 2013, the results of which were submitted to the DOL for approval on October 30, At March 31, 2014, NYRA has accrued approximately $0.7 million relating to its estimated exposures for these matters. Such amounts are included within the accounts payable and other accrued expenses in the accompanying condensed statement of net position. 22