Filed On 3/14/07 11:42am ET · SEC File 1-12522 · Accession Number 921895-7-560
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/14/07 Empire Resorts Inc 10-K 12/31/06 8:46 Olshan Grund..Rosenzweig
Document/Exhibit Description Pages Size
1: 10-K Annual Report HTML 358K
2: EX-21.1 Subsidiaries of the Registrant HTML 5K
3: EX-23.1 Consent of Experts or Counsel HTML 5K
4: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 8K
5: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 8K
6: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) HTML 5K
7: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) HTML 5K
8: EX-99.1 Miscellaneous Exhibit HTML 27K
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
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, 2006
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 number 1-12522
EMPIRE RESORTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4141279
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 N. Green Valley Parkway, Suite 200, Henderson, NV 89074
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (702) 990-3355
--------------
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 par value per share Nasdaq Global Market
--------------------------------------------------------------------------------
5-1/2% Secured Convertible Notes Due 2014 The PORTAL Market
--------------------------------------------------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
--------------------------------------------------------------------------------
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 (ss.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 this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the issuer's common equity held by
non-affiliates, as of June 30, 2006 was $154,338,650, based on the closing price
of the common stock on the Nasdaq Small Cap Market.
As of March 7, 2007, there were 29,429,902 shares of the issuer's common
equity outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 11 of Part III will be incorporated by
reference to certain portions of a definitive proxy statement, which is expected
to be filed by the Registrant within 120 days after the close of its fiscal
year.
PART I........................................................................1
Item 1. Business........................................................1
Item 1A Risk Factors...................................................12
Item 1B Unresolved Staff Comments......................................22
Item 2. Properties.....................................................22
Item 3. Legal Proceedings..............................................23
Item 4. Submission of Matters to a Vote of Security Holders............24
PART II......................................................................24
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.....................................................24
Item 6. Selected Financial Data........................................26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................27
Item 7A Quantitative and Qualitative Disclosures About Market Risk.....35
Item 8. Financial Statements and Supplementary Data....................36
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................68
Item 9A Controls and Procedures........................................68
Item 9B Other Information..............................................69
PART III.....................................................................70
Item 10 Directors and Executive Officers of the Registrant.............70
Item 11 Executive Compensation.........................................73
Item 12.Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................73
Item 13 Certain Relationships and Related Transactions.................75
Item 14 Principal Accounting Fees and Services.........................75
PART IV......................................................................76
Item 15 Exhibits, Financial Statement Schedules........................76
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, reflecting
management's current expectations. Examples of such forward-looking statements
include our expectations of results with respect to our strategy. Although we
believe that our expectations are based upon reasonable assumptions, there can
be no assurances that our financial goals will be realized. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Numerous factors may
affect our actual results and may cause results to differ materially from those
expressed in forward-looking statements made by us or on our behalf. Any
statements herein that are not statements of historical fact may be
forward-looking statements. Among others, the words, "believes," "anticipates,"
"plans," "estimates," and "expects" are intended to identify forward-looking
statements. Factors that could cause actual results, performance or achievements
to differ materially from those expressed or implied by these forward looking
statements include, but are not limited to, the risk factors set forth in Item
1A of this Annual Report. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date of this filing.
We assume no obligation to update the forward-looking information to reflect
actual results or changes in the factors affecting such forward-looking
information.
ITEM 1. BUSINESS.
OVERVIEW
Empire Resorts, Inc. was organized as a Delaware corporation on March
19, 1993, and since that time has served as a holding company for various
subsidiaries engaged in the hospitality and gaming industries.
Through our subsidiaries, we currently:
o own and operate Monticello Raceway, a harness horseracing facility
located in Monticello, New York, 90 miles Northwest of New York City.
At Monticello Raceway, we conduct pari-mutuel wagering through the
running of live harness horse races, the import simulcasting of harness
and thoroughbred horse races from racetracks across the country and the
export simulcasting of our races to offsite pari-mutuel wagering
facilities.
o operate in conjunction with the New York State Lottery more than 1,500
video gaming machines ("VGMs") at the grandstand of Monticello Raceway.
o have an agreement with the St. Regis Mohawk Tribe to develop and
manage, subject to regulatory approval, a Class III Indian casino on 29
acres of land adjacent to Monticello Raceway.
We plan to grow and diversify our business by marketing our services to
gaming and hospitality clients, seeking consulting relationships with additional
gaming clients and pursuing acquisitions, joint ventures or other growth
opportunities.
MONTICELLO RACEWAY
Monticello Raceway began operations in 1958 and currently features:
o 1,587 VGMs;
o year-round live harness horse racing;
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o year-round simulcast pari-mutuel wagering on thoroughbred and harness
horse racing from across the country;
o a 5,000-seat grandstand and a 100-seat clubhouse with retractable
windows;
o parking spaces for 2,000 cars and 10 buses;
o a 350-seat buffet and food court with three outlets;
o a large central bar and an additional clubhouse bar; and
o an entertainment lounge with seating for 75 people.
Monticello Raceway derives its racing revenue principally from:
o wagering at Monticello Raceway on live races run at Monticello Raceway;
o fees from wagering at out-of-state locations on races run at Monticell
Raceway using export simulcasting;
o revenue allocations, as prescribed by law, from betting activity at
off-track betting facilities in New York City, Nassau County and the
Catskills region of the State of New York;
o wagering at Monticello Raceway on races broadcast from out-of-state
racetracks using import simulcasting; and
o admission fees, program and racing form sales, food and beverages sales
and certain other ancillary activities.
SIMULCASTING. Over the past several years, import and, particularly,
export simulcasting has become an increasingly important part of Monticello
Raceway's business. Simulcasting is the process by which a live horse race held
at one facility (the "host track") is transmitted to another location that
allows its patrons to wager on that race. Amounts wagered are then collected
from each off-track betting location and combined into appropriate pools at the
host track where the final odds and payouts are determined. With the exception
of a few holidays, Monticello Raceway offers year-round simulcast wagering from
racetracks across the country, including Churchill Downs, Hollywood Park, Santa
Anita Racetrack, Gulfstream Park, Aqueduct Raceway, Belmont Park and Saratoga
Racecourse. In addition, races of national interest, such as the Kentucky Derby,
Preakness Stakes and Breeders' Cup supplement regular simulcast programming.
Monticello Raceway also exports live broadcasts of its races to casinos and
off-track betting facilities in other states.
PARI-MUTUEL WAGERING. Monticello Raceway's racing revenue is derived from
pari-mutuel wagering at the track and government mandated revenue allocations
from certain New York State off-track betting locations. In pari-mutuel
wagering, patrons bet against each other rather than against the operator of the
facility or with pre-set odds. The dollars wagered form a pool of funds from
which winnings are paid based on odds determined by the wagering activity. The
racetrack acts as a stakeholder for the wagering patrons and deducts from the
amounts wagered a "take-out" or gross commission from which the racetrack pays
state and county taxes and racing purses. Monticello Raceway's pari-mutuel
commission rates are fixed as a percentage of the total handle or amounts
wagered.
MONTICELLO GAMING AND RACEWAY
We currently operate a 45,000 square foot VGM facility called Monticello
Gaming and Raceway (formerly called Mighty M Gaming at Monticello Raceway). VGMs
are electronic gaming devices that allow patrons to play electronic versions of
various lottery games of chance and are similar in appearance and feel to
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traditional slot machines. VGM operations at Monticello Gaming and Raceway began
on June 30, 2004. At December 31, 2006, the number of VGMs in operation was
1,587.
Each of the VGMs is owned by the State of New York and, by statute, 32% of
the first fifty million, 29% of the next one hundred million and 26% thereafter
of gross revenue from our VGM operations is distributed to us. The statute also
provides a vendor's marketing allowance for racetracks operating video lottery
programs of 8% on the first $100.0 million of net revenues generated and 5%
thereafter.
During the past decade, the operation of video gaming devices at
racetracks in several states outside New York has enhanced state lottery
revenues and improved the racetrack's economic performance. Our VGM operations
have helped to increase our racing revenues through increased attendance at our
racetrack from customers for our VGM facility resulting in increased handles at
the racetrack. In addition, the VGM operations have supported increased purses,
which allow for higher profile racing activities.
VGM activities in the State of New York are presently overseen by the
Division of the Lottery of the State of New York.
CASINO DEVELOPMENT
We have agreements with the St. Regis Mohawk Tribe to develop and manage
an Indian casino. The casino is proposed on land adjacent to Monticello Raceway.
ST. REGIS MOHAWK RESORT DEVELOPMENT
We had previously attempted to develop a casino with the St. Regis Mohawk
Tribe beginning in 1996. On April 6, 2000, the United States Department of the
Interior advised New York State Governer George Pataki that it had determined
that the acquisition of 29 acres adjacent to Monticello Raceway would be in the
best interest of the St.Regis Mohawk Tribe and would not be detrimental to the
community. Such determinations required the concurrence of the Governor of New
York in order for the project to proceed. For a period of time thereafter, the
St. Regis Mohawk Tribe agreed to work exclusively with Park Place Entertainment
Corporation (now part of Harrah's Entertainment, Inc.), which proposed to
develop a casino for the St. Regis Mohawk Tribe at the nearby Kutsher's Sporting
Academy. However, by Summer 2005, the needed approvals for a casino at Kutsher's
Sporting Academy had not materialized, and we and the St. Regis Mohawk Tribe's
leaders discussed the possibility of moving forward with the previously obtained
approvals for the casino project at Monticello Raceway.
On August 1, 2005, we entered into a letter agreement with the St. Regis
Mohawk Tribe under which we and the St. Regis Mohawk Tribe affirmed, subject to
the requested concurrence by Governor Pataki, all prior contracts to develop an
Indian casino at Monticello Raceway. The St. Regis Mohawk Tribe further agreed
to (1) satisfy all requirements for the Bureau of Indian Affairs (the "BIA") in
connection with the transfer of the 29 acres of land to the United States
government in trust for the St. Regis Mohawk Tribe, (2) resolve any remaining
issues for the finalization of the pre-existing management agreement with one of
our subsidiaries for the project previously submitted to the National Indian
Gaming Commission (the "NIGC"), (3) execute any amendment or revision to such
management agreement, or any collateral agreements, that may be mutually agreed
upon in such process, (4) support the approval of such management agreement, as
so amended or revised, by the NIGC and (5) take any and all reasonably required
steps to consummate the land to trust transfer of the parcel pursuant to the
April 6, 2000 determination as promptly as practicable following the concurrence
of Governor Pataki.
On September 9, 2005, in response to a letter from Governor Pataki, the
Acting Deputy Secretary for Economic Development and Policy, wrote to the St.
Regis Mohawk Tribe to confirm that the Department of the Interior considered the
2000 Secretarial determination to be of continuing validity and subject to
concurrence by the Governor.
After notification from the St. Regis Mohawk Tribe, the BIA recommenced
review process for the acquisition of the 29 acres adjacent to the Raceway by
the St. Regis Mohawk Tribe. On April 13, 2006 the St. Regis Mohawk Tribe was
notified that the BIA had completed its review of the Environmental Assessment
("EA") for a proposed transfer of land into trust for a casino at the Monticello
Raceway site. The review identified certain additional areas to address and the
St. Regis Mohawk Tribe completed the filing of the responses to those items on
July 5, 2006. Following this filing, the review of the EA by the BIA was
completed on September 12, 2006 and the document was made available for public
review and comment on that date. The St. Regis Mohawk Tribe has provided to the
BIA responses to all of the comments received during the comment period.
On December 21, 2006, the St. Regis Mohawk Tribe received a letter from
James R. Cason of the BIA stating that the Tribe's Final Environmental
Assessment for the project had been deemed sufficient, that an Environmental
Impact Study will be not be required and that a formal Finding of No Significant
Impact ("FONSI") related to the proposed federal action approving the request of
the Tribe to take 29.31 acres into trust for the purpose of building a Class III
gaming facility to be located at Monticello Raceway, in accordance with the
Indian Gaming Regulatory Act of 1988 (the "Land-to-Trust Transfer") has been
issued. On February 16, 2007, its partner, the St. Regis Mohawk Tribe, received
a copy of a complaint filed in the United States District Court for the Southern
3
District of New York in the case of Sullivan County Farm Bureau, Catskill Center
for Conservation and Development, Inc., Orange Environment, Inc. and Natural
Resources Defense Council v. United States Department of the Interior, Dirk
Kempthorne, in his official capacity as Secretary of the Interior, James E.
Cason, in his official capacity as Associate Deputy Secretary of the Interior
and Acting Assistant Secretary of the Interior for Indian Affairs and BIA. The
claim alleges that the BIA violated the National Environmental Policy Act and
the Administrative Procedure Act by issuing the Finding of No Significant Impact
without requiring an environmental impact statement under the National
Environmental Policy Act. The plaintiffs are seeking an order requiring the
preparation of an environmental impact statement prior to Department of the
Interior's granting final approvals for the proposed St. Regis Mohawk Casino at
Monticello Raceway and prior to the Department of the Interior's causing the
transfer of the subject land into federal trust.
On February 19, 2007, New York Governor Eliot Spitzer issued his
concurrence with regard to the April 2000 Secretarial Determination that found
that the acquisition of the 29 acres adjacent to Monticello Raceway by the St.
Regis Mohawk Tribe for the purpose of building and operating a Class III gaming
facility would be in the Tribe's and its members' best interest and would not be
detrimental to the surrounding communities. In addition to the concurrence,
Governor Spitzer also signed an amendment to the gaming compact between the St.
Regis Mohawk Tribe and New York State pursuant to which New York State would
receive 20 percent of slot-machine revenues for the first two years after the
St. Regis Mohawk Tribe's Class III casino to be located at Monticello Raceway
opens, 23 percent for the next two years and 25 percent thereafter. The U.S.
Department of the Interior can now begin its final administrative review so that
the Secretary of the Interior can determine whether to approve the request of
the Tribe to take the 29 acres into trust.
The current plans for the Indian casino resort at Monticello Raceway are
expected to feature:
o 160,000 square feet of gaming space with 3,500 slot machines and 125
table games, with sufficient space to accommodate an additional 500
slot machines;
o nine restaurants, including a fine dining restaurant and a buffet;
o several bars and a nightclub;
o 5,000 parking spaces, including 4,200 covered spaces all located
directly underneath or adjacent to the casino;
o an enclosed retail corridor connected to Monticello Raceway;
o a central entertainment lounge; and
o a 40,000 square foot multi-function room.
The plans are only in a preliminary stage and are subject to approval
by relevant government authorities and the St. Regis Mohawk Tribe.
On March 20, 2006, we submitted a proposed form of amended and restated
gaming facility management agreement (the "Gaming Facility Management
Agreement") and collateral agreements to the NIGC for review and approval or
disapproval. Until approved by the Chairman of the NIGC, the gaming facility
management agreement is not in force. Neither the St. Regis Mohawk Tribe nor the
St. Regis Mohawk Gaming Authority (the "Authority") has approved the Gaming
Facility Management Agreement. We expect, but cannot guarantee, that the St.
Regis Mohawk Tribe will approve the Gaming Facility Management Agreement.
Under the currently proposed form of the Gaming Facility Management
Agreement, the Authority will retain us to manage all casino style gaming
activities, other than horserace wagering and Class II gaming, that may be
conducted on the land for seven years commencing upon opening and the NIGC's
approval of the agreement. We would also be retained to manage all lawful
commercial activities on the land related to gaming such as automatic teller
machines, food service, lodging and retail. At the same time, we have agreed to
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assist the Authority to obtain financing for the gaming enterprise and all
related commercial activities. In exchange for these services, we are entitled
to receive a management fee equal to 30% of the net revenues derived from the
operations it manages.
Under the Gaming Facility Management Agreement, before we can pay
ourselves our fee, we must first pay to the Authority a minimum return of
approximately $517,000 per month. These minimum priority payments are to be
charged against the Authority's distribution of net revenues and, when there is
insufficient net revenue in a given month to pay the minimum return, we are
obligated to advance the funds necessary to compensate for the deficiency, with
the Authority reimbursing us in the next succeeding month or months. The minimum
return is required to be paid to the Authority every month gaming is conducted,
including on a pro rata basis during those months when gaming is conducted only
for part of a month.
While the terms of the proposed Gaming Facility Management Agreement
provide us with wide discretion as to the day-to-day management of the gaming
facilities, all major decisions or expenditures must first be approved by a
management business board to be comprised of four persons, two of whom are to be
appointed by the Authority and the other two of whom are to be appointed by us.
In carrying out our duties as manager of the gaming facility, we are
required to provide the St. Regis Mohawk Tribe and other recognized Indian
tribes with certain preferences including giving preference in recruiting,
training and employment first to qualified members of the St. Regis Mohawk
Tribe, and secondly to other qualified Indians and the local community,
providing training programs for members of the St. Regis Mohawk Tribe; and in
entering into contracts for the supply of goods and services for the gaming
enterprise, giving preference first to qualified members of the St. Regis Mohawk
Tribe, and qualified business entities certified by the Authority or the St.
Regis Mohawk Tribe as being controlled by members of the St. Regis Mohawk Tribe,
and second to other qualified Indians and qualified business entities certified
by the Authority to be controlled by Indians and to the local community.
We also entered into a gaming facility development and construction
agreement with the Authority and the St. Regis Mohawk Tribe (the "Gaming
Facility Development and Construction Agreement"), pursuant to which we were
granted the exclusive right to design, engineer, construct, furnish and develop
a Class III Indian casino resort with the St. Regis Mohawk Tribe, and we agreed
to help arrange financing of the project. In exchange for these services, the
Authority agreed to pay us a development fee equal to 5% of the first $505
million of the project's construction costs, not to exceed $15 million, payable
monthly as the project costs are incurred. However, the Authority is entitled to
retain 10% of such development fees until the project is 50% completed and then
5% until the project is completed. On the completion date, the Authority is
required to pay us these retained fees.
Similar to the Gaming Facility Management Agreement, in the execution of
our duties under the Gaming Facility Development and Construction Agreement, we
must first seek approval from a development business board before any major
decisions or material expenditures are made. The development business board
shall be comprised of four persons, two of whom are to be appointed by the
Authority and the other two of whom are to be appointed by us. Finally, similar
to the covenants of the Gaming Facility Management Agreement, the Gaming
Facility Development and Construction Agreement provides that any general
contractor hired by Monticello Raceway Development shall use its reasonable best
efforts to give, and to cause subcontractors to give, a hiring preference to
qualified members of the St. Regis Mohawk Tribe.
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COMPETITIVE ADVANTAGES
We believe that if we are able to develop gaming operations in the
Catskills region in the State of New York, they will be successful because the
Catskills area is approximately 90 miles northwest of New York City, making it a
shorter trip from the nation's most populous metropolitan area than either
Atlantic City or any regional Indian casino, including Foxwoods and Mohegan Sun
in Connecticut. There are approximately 1.3 million adults living within 50
miles of the Catskills area. In addition, roughly 18.4 million adults live
within 100 miles of the Catskills area, an area where household income averages
approximately $76,000. Specifically, Monticello Raceway is directly adjacent to
Highway 17, has highly visible signage and convenient access, and is less than
1,000 feet from the highway's exit. There is currently no direct competition for
our VGM operations within 75 miles of Monticello Raceway.
GOVERNMENT REGULATION
INDIAN GAMING REGULATORY ACT. The terms and conditions of management
contracts for the operation of Indian-owned casinos, and of all gaming on Indian
land in the United States, are subject to the Indian Gaming Regulatory Act of
1988, as amended, which is administered by the NIGC, and also are subject to the
provisions of statutes relating to contracts with Indian tribes, which are
administered by the Secretary of the Interior and the BIA. More specifically,
the NIGC regulates Class II gaming, reviews and approves ordinances and
management contracts, conducts background investigations and approves licensing
of key personnel. The Secretary of Interior has authority over Class III gaming
which includes approval of compacts, per capita plans, leasing and gaming on
lands acquired in trust after 1988. The regulations and guidelines under which
the NIGC will administer the Indian Gaming Regulatory Act are evolving. The
Indian Gaming Regulatory Act and those regulations and guidelines are subject to
interpretation by the Secretary of the Interior and the NIGC and may be subject
to judicial and legislative clarification or amendment.
We may need to provide the BIA or the NIGC with background information on
a variety of people, including each person with management responsibility for
the gaming facility management agreement, our directors and the directors of our
operating subsidiaries, and our ten largest stockholders. Background
investigations of others may also be required.
The Indian Gaming Regulatory Act of 1988, as amended, currently requires
the NIGC to approve management contracts and certain collateral agreements for
Indian casinos. The NIGC will review our gaming facility management contract and
collateral agreements for compliance with the Indian Gaming Regulatory Act, and
approve or reject the gaming facility management contract and any other of the
collateral agreements constituting a management contract.
The NIGC has broad discretion to approve or not approve a management
contract. A management contract can be approved only after the NIGC determines
that the contract provides, among other things, for:
o adequate accounting procedures and verifiable financial reports, which
must be furnished to the tribe;
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o tribal access to the daily operations of the gaming enterprise,
including the right to verify daily gross revenues and income;
o minimum guaranteed payments to the tribe, which must have priority over
the retirement of development and construction costs;
o a ceiling on the repayment of such development and construction costs;
and
o a contract term not exceeding five years and a management fee not
exceeding 30% of profits; provided that the NIGC may approve up to a
seven year term and a management fee not to exceed 40% of profits if
the NIGC is satisfied that the capital investment required, the risk
exposure, and the income projections for the particular gaming activity
justify the larger profit allocation and longer term.
The Indian Gaming Regulatory Act of 1988, as amended, established three
separate classes of tribal gaming -- Class I, Class II, and Class III. Class I
gaming includes all traditional or social games played by a tribe in connection
with celebrations or ceremonies. Class II gaming includes games such as bingo,
pull-tabs, punch boards, instant bingo and card games that are not played
against the house. Class III gaming includes casino-style gaming including table
games such as blackjack, craps and roulette, as well as gaming machines such as
slots, video poker, lotteries, and pari-mutuel wagering.
Class I gaming on Indian lands is within the exclusive jurisdiction of
Indian tribes and is not subject to the Indian Gaming Regulatory Act of 1988, as
amended. Class II gaming is permitted on Indian lands if:
o the state in which the Indian lands lie permits such gaming for any
purpose by any person, organization or entity;
o the gaming is not otherwise specifically prohibited on Indian lands by
federal law;
o the gaming is conducted in accordance with a tribal ordinance or
resolution which has been approved by the NIGC;
o an Indian tribe has sole proprietary interest and responsibility for
the conduct of gaming;
o the primary management officials and key employees are tribally
licensed; and
o several other requirements are met.
Class III gaming is permitted on Indian lands if the conditions applicable
to Class II gaming are met and, in addition, the gaming is conducted in
conformance with the terms of a tribal-state compact (a written agreement
between the tribal government and the government of the state within whose
boundaries the tribe's lands lie).
Under the Indian Gaming Regulatory Act of 1988, regulated gaming by an
Indian tribe is permitted only if the casino is located on an Indian reservation
or land held by the United States in trust for the nation (or subject to similar
restrictions on transfer), and only if that tribe exercises governmental powers
over the casino site. That same Act, however, generally prohibits gaming on land
acquired in trust after October 17, 1988. A tribe can overcome the gaming
prohibition if one of the exceptions provided in Section 20 of the Indian Gaming
Regulatory Act of 1988 applies. We believe that two exceptions to the general
prohibition of gaming on newly acquired trust lands are available to the St.
Regis Mohawk Tribe. The so-called two part determination exception permits
gaming on land taken into trust after October 17, 1988 if, after consultation
with the tribe and applicable state, local and other nearby tribal officials,
the Secretary of the Interior determines that a gaming establishment on newly
acquired land would be in the best interest of the tribe and its members, and
would not be detrimental to the surrounding community, but only if the Governor
of the applicable State concurs. Another exception to the general prohibition of
gaming on newly acquired trust lands is the exception that allows gaming on
lands taken into trust as part of a settlement of a land claim.
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TRIBAL-STATE COMPACTS. The Indian Gaming Regulatory Act of 1988, as
amended, requires states to negotiate in good faith with Indian tribes that seek
to enter into tribal-state compacts for the conduct of Class III gaming. Such
tribal-state compacts may include provisions for the allocation of criminal and
civil jurisdiction between the state and the Indian tribe necessary for the
enforcement of such laws and regulations, taxation by the Indian tribe of gaming
activities in amounts comparable to those amounts assessed by the state for
comparable activities, remedies for breach of compacts, standards for the
operation of gaming and maintenance of the gaming facility, including licensing
and any other subjects that are directly related to the operation of gaming
activities. While the terms of tribal-state compacts vary from state to state,
compacts within one state tend to be substantially similar. Tribal-state
compacts usually specify the types of permitted games, establish technical
standards for gaming, set maximum and minimum machine payout percentages,
entitle the state to inspect casinos, require background investigations and
licensing of casino employees and may require the tribe to pay a portion of the
state's expenses for establishing and maintaining regulatory agencies. Some
tribal-state compacts are for set terms, while others are for indefinite
duration.
Our jointly developed Indian casino resort would therefore be subject to
the requirements and restrictions contained in the compact with the State of New
York. An outline of the basic terms for this compact is set forth in the
proposed Tribal-State Compact between the St. Regis Mohawk Tribe and the State
of New York governing Class III Gaming in Sullivan County. Pursuant to the terms
of this document, the tribe would be permitted to develop a tribal casino in the
Town of Thompson in Sullivan County, New York that will permit the operation of
slot machines, but not VGMs, for an initial term of 14 years, with an automatic
seven year renewal and shall provide the tribe, along with certain other Indian
tribes, the exclusive right to operate slot machines in the counties of Bronx,
Delaware, Greene, Kings, New York, Orange, Queens, Richmond, Rockland, Sullivan,
Ulster and Westchester (which includes all of New York City). Under the proposed
compact, the tribe is required to contribute 20% of its slot machine net revenue
to the State of New York during the first two years of operation, with such
contribution subsequently increasing to 25%. The St. Regis Mohawk Tribe must
commence gaming operations within 24 months of receiving all requisite state and
federal approvals. Finally, the tribe agreed to collect and remit to the State
of New York, all state and local taxes in connection with all sales made by
vendors with respect to the gaming facility of alcoholic beverages, cigarettes,
tobacco products, gas and all other personal property and services sold to non
members of the tribe. This compact, however, does not become effective until the
enactment of federal and state legislation and tribal resolutions that formally
implement its terms.
There is an existing compact between the St. Regis Mohawk Tribe and the
State of New York, which was amended on February 19, 2007 to incorporate terms
relevant to the project at Monticello Raceway under existing legislation. This
compact, however, does not become effective until the enactment of federal and
state legislation and tribal resolutions that formally implement its terms. The
following is a summary of certain terms of the compact between the St. Regis
Mohawk Tribe and the State of New York, as amended:
o The St. Regis Mohawk Tribe may establish one gaming facility within
Town of Thompson in Sullivan County, New York.
o The St. Regis Mohawk Tribe shall commence construction of a permanent
gaming facility within 180 days of the latter of the effective date of
the compact or when a qualifying parcel is acquired or accepted by the
Secretary of the Interior in trust for the benefit of the St. Regis
Mohawk Tribe; and commence Class III gaming activities within a
permanent gaming facility on such site within 24 months of the latter
of the effective date of the compact or when a qualifying parcel is
acquired or accepted by the Secretary of the Interior in trust for the
benefit of the St. Regis Mohawk Tribe.
o The St. Regis Mohawk Tribe is specifically authorized to conduct Class
III gaming including slot machines ,baccarat, bang, beat the dealer,
best poker hand, blackjack, Caribbean stud poker, chuck-a-luck, craps,
gaming devices, hazard, joker seven, keno, let it ride poker,
minibaccarat, pai gow poker, red dog, roulette, sic bo, super pan,
under and over seven, wheel games, casino war, Spanish blackjack,
multiple action blackjack and three card poker.
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o The compact provides for a term of 14 years following the commencement
of gaming activities, unless renewed or terminated as provided in the
compact. The compact allows for automatic renewal unless objected to by
the State of New York. Video lottery terminals are not permitted.
o The St. Regis Mohawk Tribe will provide reasonable access to the Class
III gaming and related facilities to labor union organizers and for
union purposes and shall enter into an agreement with the New York
Hotel & Motel Trades Council for the unionization of certain employees.
o The St. Regis Mohawk Tribe, along with certain other Indian tribes,
receives the exclusive right to operate slot machines in the counties
of Bronx, Delaware, Greene, Kings, New York, Orange, Queens, Richmond,
Rockland, Sullivan, Ulster and Westchester.
o New York State would receive 20 percent of slot-machine revenues for
the first two years after the St. Regis Mohawk Tribe's Class III casino
to be located at Monticello Raceway opens, 23 percent for the next two
years and 25 percent thereafter
o The St. Regis Mohawk Tribe shall collect and remit to the State of New
York all state and local taxes in connection with all sales made by
vendors with respect to the gaming facility of alcoholic beverages,
cigarettes, tobacco products, gas and all other personal property and
services sold to non members of the tribe.
o The St. Regis Mohawk Tribe waives any defense that it may have by
virtue of sovereign immunity with respect to any action brought in
United States District Court to enforce an arbitration award under the
compact.
o The St. Regis Mohawk Tribe and the State of New York will establish a
method of non-judicial dispute resolution. The parties shall meet to
negotiate in good faith any unresolved disputes which are to be settled
by arbitration. The decision of the arbitrator shall be final, binding
and not subject to appeal. For breaches of the compact, the arbitrator
may impose as a remedy only specific performance. Either party may seek
a temporary restraining order or preliminary injunction in accordance
with the Indian Gaming Regulatory Act and either party may bring an
action in the United States District Court of the Northern District of
New York to enforce the arbitrator's decision and award.
In addition to the Indian Gaming Regulatory Act of 1988, as amended,
tribally-owned gaming facilities on Indian land are subject to a number of other
federal statutes. The operation of gaming on Indian land is dependent upon
whether the law of the state in which the casino is located permits gaming by
non-Indian entities, which may change over time.
COMPETITION
MONTICELLO RACEWAY
Generally, Monticello Raceway does not compete directly with other harness
racing tracks in New York State for live racing patrons. However, Monticello
Raceway does face intense competition for off-track wagering at numerous gaming
sites within the State of New York and the surrounding region. The inability to
provide larger purses for the races at Monticello Raceway has been a significant
limitation on its ability to compete for off-track wagering revenues.
MONTICELLO GAMING AND RACEWAY
The primary competition for Monticello Gaming and Raceway is expected to
be from two racetracks located within the New York City metropolitan area,
Yonkers Raceway and Aqueduct Raceway. Yonkers Raceway re-opened during the
fourth quarter of 2006. It appears that the VGM facility at Aqueduct Raceway
will not be opened until at least late 2007. In addition, proposals have been
made for the implementation of a similar program in New Jersey, which would
include a facility at the Meadowlands Racetrack.
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In July 2004, Pennsylvania enacted a law legalizing the operation of up to
61,000 slot machines at 14 locations throughout the state. The holders of horse
racing licenses in Pennsylvania may apply for 7 of the 14 licenses to operate
slot machines at their racetracks while the other 7 locations have yet to be
identified. On January 25, 2005, the Mohegan Tribal Gaming Authority acquired
Pocono Downs Racetrack and five off-track wagering operations. Pocono Downs
Racetrack opened in January 2007 with approximately 3,000 machines. Pocono Downs
Racetrack is located in Wilkes-Barre, Pennsylvania, approximately 75 miles
southwest of Monticello.
COMPETING CASINOS AND PROPOSED CASINO PROJECTS
The Stockbridge Munsee Band of Mohicans, currently located in Wisconsin,
asserting aboriginal roots in New York State, has applied for approval to
develop an Indian casino in the Catskills region of the State of New York. Their
partner, Trading Cove Associates, Inc., developers of the successful Mohegan Sun
casino in Connecticut, has purchased an option on 300 acres as a potential site
on which to build a $600 million hotel and casino on a site approximately 5
miles east of Monticello Raceway.
In November of 2004, a number of other Indian tribes entered into
agreements with the State of New York with respect to land claims against the
State. As in the case of the St. Regis Mohawk Tribe, these agreements also
require state and federal legislation to be enacted in order to implement their
provisions.
In November 2004, the Stockbridge Munsee Band of Mohicans entered into an
Agreement of Settlement and Compromise to resolve certain land claims against
the State of New York. In return, the State of New York agreed to negotiate and
enter into a mutually satisfactory gaming compact (subject to the review and
approval of the Secretary of Interior of the United States) that will authorize
the Stockbridge Munsee Band of Mohicans to operate a Class III gaming facility
in the Catskills region of the State of New York and to fully support all
regulatory approvals required for such facility. Such parcel of land will be
Indian Country under 18 U.S.C. ss.1151.
In November 2004, the Wisconsin Oneidas entered into an Agreement of
Settlement and Compromise to resolve certain land claims against the State of
New York. In return, the State of New York agreed to negotiate and enter into a
mutually satisfactory gaming compact (subject to the review and approval of the
Secretary of Interior of the United States) that will authorize the Wisconsin
Oneidas to operate a Class III gaming facility in the Catskills region of the
State of New York and to fully support all regulatory approvals required for
such facility.
It is unlikely, however, that the development of these other casinos in
the Catskills region of the State of New York will be able to occur in the near
future. The legislation introduced in 2005 to implement these proposed
settlements was not enacted by the New York State Legislature. Other New York
based federally recognized Indian tribes or tribes with historical ties to New
York have expressed interest in operating casinos in the Catskills region of the
State of New York, but none has submitted applications to the BIA for such
purpose. Two of these, the Oneida Nation of New York and the Seneca Nation, have
already been active in the development of casinos in Western New York. In July
1993, the Oneida Nation of New York opened "Turning Stone," a casino featuring
24-hour table gaming and electronic gaming machines with approximately 90,000
square feet of gaming space, near Syracuse, New York. In October 1997, the
facility expanded to include a hotel, expanded gaming facilities, a golf course
and a convention center. Turning Stone is completing an additional expansion
consisting of 50,000 square feet of gaming space, additional hotel rooms,
additional golf courses and a water park. The Seneca Nation completed its
negotiations with New York State and, on January 1, 2003, opened a casino in
Niagara Falls, New York. The casino offers full Las Vegas style gambling with
slot machines and table games. Although the Oneida Nation and the Seneca Nation
have expressed interest in operating a casino in the Catskills region of the
State of New York and have been engaged in preliminary development work, neither
has publicly identified a site, submitted federal applications or entered into a
settlement agreement with the State of New York.
In February 1992, the Mashantucket Pequot Nation opened Foxwoods Resorts
Casino, a casino hotel facility in Ledyard, Connecticut (located in the far
eastern portion of such state), an approximately two and one-half hour drive
from New York City and an approximately two and one-half hour drive from Boston,
Massachusetts, which currently offers 24-hour gaming and contains approximately
7,400 slot machines, 380 table games and over 1,400 rooms and suites, 26
restaurants, 19 retail stores, entertainment and a year-round golf course. Also,
a high-speed ferry operates seasonally between New York City and Foxwoods Resort
and Casino. The Mashantucket Pequot Nation has also announced plans for a
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high-speed train linking Foxwoods Resort and Casino to the interstate highway
and an airport outside Providence, Rhode Island.
In December 2006, the Mashantucket Pequot Nation announced that they had
signed agreements with a major casino company, MGM Mirage, to collaborate on a
major destination hotel/casino resort adjacent to the existing Foxwoods facility
and other development activities. The new facility will be known as the "MGM
Grand at Foxwoods" and is expected to open in Spring 2008 and will operate
subject to a long term licensing agreement.
In October 1996, the Mohegan Nation opened the Mohegan Sun casino in
Uncasville, Connecticut, located 10 miles from Foxwoods Resort and Casino. The
Mohegan Sun casino has approximately 6,400 slot machines and 300 table games,
off-track betting, bingo, 30 food and beverage outlets, and retail stores and
completed the first phase of an expansion project that included a 115,000 square
foot casino, a 10,000 seat arena, 40 retail shops, dining venues and two
additional parking garages, accommodating up to 5,000 cars, in September 2001.
The second phase included a 1,200 hotel guest room 34 story tower with
convention facilities and a spa and opened in the summer of 2002.
A number of groups are seeking to become federally-recognized Indian
tribes in order operate casinos near the New York metropolitan area. There have
been periodic proposals for locating an Indian casino in the City of Bridgeport,
Connecticut. Should a federally-recognized tribe be successful in doing so, it
would have an economic impact on any casinos in the Catskills region of the
State of New York since Bridgeport is close to a large portion of the New York
metropolitan area. In addition, the Shinnecock Indian Nation, a state-recognized
Indian tribe, is attempting to construct a casino in Southampton, New York. The
Shinnecocks take the position that because they are state-recognized, but not
federally recognized, they have the right to engage in gaming free of state
regulation and without the restrictions imposed by the Indian Gaming Regulatory
Act (including the need for a gaming compact). The Shinnecocks broke ground on
their casino on June 30, 2003, but the State of New York brought suit against
the Shinnecocks, and a federal district court enjoined the Shinnecocks from
moving ahead with their casino because they are not a federally recognized
tribe. The court initially stayed the case for 18 months so that a decision on
the Shinnecocks' request for federal recognition could be made, but later
determined that the request could take the federal government several years to
process, and agreed to move toward trial on the issue of whether the
Shinnecocks, as a state-recognized tribe, are immune from the state's lawsuit.
No trial date has been scheduled, but if the court determines that the
Shinnecocks are immune from the suit, the injunction may be lifted and the
Shinnecocks may move ahead with their casino in Southampton. Should the
Shinnecocks operate a gaming facility in Southampton, New York, which is
approximately 90 miles from New York City, it is expected to have some level of
economic impact on any casino in the Catskills region of the State of New York.
In Atlantic City there are currently more than 10 casino hotels. Moreover,
substantial new expansion and development activity has recently been completed,
is under construction, or has been announced in Atlantic City, including the
summer of 2003 opening of the Borgata Casino developed by MGM Mirage and Boyd
Gaming and the expansions at Harrah's, Tropicana and Showboat.
Legislation permitting other forms of casino gaming is proposed, from time
to time, in various states, including those bordering the State of New York. Six
states have legalized riverboat gambling while others are considering its
approval. Several states are also considering, or have approved, large-scale
land-based VGM operations based at their state's racetracks. The business and
operations of Monticello Raceway could be adversely affected by such
competition, particularly if casino and/or video gaming is permitted in
jurisdictions close to New York City. Currently, casino gaming, other than
Indian gaming, is not allowed in New York, Connecticut or in areas of New Jersey
outside of Atlantic City. However, proposals were introduced to expand legalized
gaming in each of those locations and in Pennsylvania.
EMPLOYEES
As of March 8, 2007, we and our subsidiaries employed approximately 370
people.
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ITEM 1A. RISK FACTORS.
RISKS RELATED TO OUR BUSINESS
IF REVENUES AND OPERATING INCOME FROM OUR VGMS AT MONTICELLO RACEWAY DO
NOT INCREASE OR IF WE ARE UNABLE TO DEVELOPA SUCCESSFUL INDIAN CASINO, IT
COULD ADVERSELY AFFECT OUR ABILITY TO SERVICE OUR OUTSTANDING DEBT.
Our ability to service our senior secured convertible notes or loans under
our credit facility with Bank of Scotland will depend upon the success of our
VGM facility, our ability to successfully develop and manage an Indian casino
for the St. Regis Mohawk Tribe and our ability to attract sufficient attendance.
There can be no assurance that VGMs will draw sufficiently large crowds to
Monticello Raceway to increase local wagering to the point that we will realize
a profit. The operations and placement of our VGMs, including the layout and
distribution, are under the jurisdiction of the New York State Lottery and the
program contemplates that a significant share of the responsibility for
marketing the program will be borne by the New York State Lottery. The New York
State Lottery may make decisions that we feel are not in our best interest and,
as a consequence, the profitability of our VGM operations may not reach the
levels that we believe to be feasible or may be slower than expected in reaching
those levels. Until recently, our VGM operations were losing money, as we are
only permitted to retain 32% of the first $50 million of our VGM revenue, 29% of
the next $100 million of our VGM revenue and 26% our VGM gross revenue in excess
of $150 million. Moreover, the legislation authorizing the implementation of
VGMs at Monticello Raceway expires in 2013, prior to the stated maturity of our
senior secured notes, and no assurance can be given that the authorizing
legislation will be extended beyond this period. Similarly, the development of
our proposed Indian casino is subject to many regulatory, competitive, economic
and business risks beyond our control, and there can be no assurance that it
will be developed in a timely manner, or at all. Any failure in this regard
could have a material adverse impact on our operations and our ability to
service our debt obligations.
AS A HOLDING COMPANY, WE ARE DEPENDENT ON THE OPERATIONS OF OUR
SUBSIDIARIES TO PAY DIVIDENDS OR MAKE DISTRIBUTIONS IN ORDER TO GENERATE
INTERNAL CASH FLOW.
We are a holding company with no revenue generating operations.
Consequently, our ability to meet our working capital requirements, to service
our debt obligations (including under our senior secured notes or the Bank of
Scotland credit facility), depends on the earnings and the distribution of funds
from our subsidiaries. There can be no assurance that these subsidiaries will
generate enough revenue to make cash distributions in an amount necessary for us
to satisfy our working capital requirements or our obligations under our senior
secured notes or the Bank of Scotland credit facility. In addition, these
subsidiaries may enter into contracts that limit or prohibit their ability to
pay dividends or make distributions. Should our subsidiaries be unable to pay
dividends or make distributions, our ability to meet our ongoing obligations
would be jeopardized. Specifically, without the payment of dividends or the
making of distributions, we would be unable to pay our employees, accounting
professionals or legal professionals, all of whom we rely on to manage our
operations, ensure regulatory compliance and sustain our public company status.
CHANGES IN THE LAWS, REGULATIONS, AND ORDINANCES (INCLUDING TRIBAL AND/OR
LOCAL LAWS) TO WHICH THE GAMING INDUSTRY IS SUBJECT, AND THE APPLICATION OF
EXISTING LAWS AND REGULATIONS, OR OUR INABILITY OR THE INABILITY OF OUR KEY
PERSONNEL, SIGNIFICANT STOCKHOLDERS, OR JOINT VENTURE PARTNERS TO OBTAIN OR
RETAIN REQUIRED GAMING REGULATORY LICENSES, COULD PREVENT THE COMPLETION OF OUR
CURRENT CASINO DEVELOPMENT PROJECTS, PREVENT US FROM PURSUING FUTURE DEVELOPMENT
PROJECTS, FORCE US TO DIVEST THE HOLDINGS OF A STOCKHOLDER FOUND UNSUITABLE BY
ANY FEDERAL, STATE, REGIONAL OR TRIBAL GOVERNMENTAL BODY OR OTHERWISE ADVERSELY
IMPACT OUR RESULTS OF OPERATION.
The ownership, management and operation of gaming facilities are and will
be subject to extensive federal, state, provincial, tribal and/or local laws,
regulations and ordinances that are administered by the relevant regulatory
agency or agencies in each jurisdiction. These laws, regulations and ordinances
vary from jurisdiction to jurisdiction, but generally concern the
responsibilities, financial stability and character of the owners and managers
of gaming operations as well as persons financially interested or involved in
gaming operations, and often require such parties to obtain certain licenses,
permits and approvals. These laws, regulations and ordinances may also affect
the operations of our gaming facilities or our plans in pursuing future
projects.
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Licenses that we and our officers, directors and principal stockholders
are subject to generally expire after a relatively short period of time and thus
require frequent renewals and reevaluations. Obtaining these licenses in the
first place, and for purposes of renewals, normally involves receiving a
subjective determination of "suitability." A finding of unsuitability could lead
to a material loss of investment by either us or our stockholders, as it would
require divestiture of one's direct or indirect interest in a gaming operator
that conducts business in the licensing jurisdiction making the determination of
unsuitability. Consequently, should we or any stockholder ever be found to be
unsuitable by the federal government, the State of New York or the St. Regis
Mohawk Tribe, to own a direct or indirect interest in a company with gaming
operations, we or such stockholder, as the case may be, could be forced to
liquidate all interests in that entity. Should either we or such stockholder be
forced to liquidate these interests within a relatively short period of time, we
or such stockholder would likely be forced to sell at a discount, causing a
material loss of investment value.
During 2002, certain affiliates of Bryanston Group, Inc. ("Bryanston
Group"), our former largest stockholder, and six of our former officers and
directors were indicted for various counts of tax and bank fraud. On September
5, 2003, one of these former directors pleaded guilty to felony tax fraud, and
on February 4, 2004, four additional former officers and directors were
convicted of tax and bank fraud. None of the acts these individuals were charged
with or convicted of relate to their former positions with or ownership
interests in us and their remaining interests do not provide them with any
significant control in the management of the Company. However, there can be no
assurance that none of the various governmental agencies that now, or in the
future may, regulate and license our gaming related activities will factor in
these indictments or criminal acts in evaluating our suitability. Should a
regulatory agency fail to acknowledge that these indictments and convictions do
not bear on our suitability, we could lose our gaming licenses or be forced to
liquidate certain or all of our gaming interests.
We received a letter from the New York State Racing and Wagering Board on
January 16, 2006, requesting information about our plans to divest Bryanston
Group and its affiliates of their remaining interests in us. We have advised the
New York State Racing and Wagering Board that approximately one-half of the
ownership of Bryanston has been forfeited to the United States as a result of
the convictions referred to above. According to the terms of our Series E
preferred stock, we have the option to redeem these shares at a price of $10 per
share plus all accrued and unpaid dividends. The cost of redeeming these shares,
as of December 31, 2006, was approximately $22.9 million. We may not be able to
obtain sufficient financing in amounts or on terms that are acceptable to us in
order to redeem all of these shares, should this be required.
THE GAMING INDUSTRY IN THE NORTHEASTERN UNITED STATES IS HIGHLY
COMPETITIVE, WITH MANY OF OUR COMPETITORS BETTER KNOWN AND BETTER FINANCED
THAN US.
The gaming industry in the northeastern United States is highly
competitive and increasingly run by multinational corporations or Indian tribes
that enjoy widespread name recognition, established brand loyalty, decades of
casino operation experience and a diverse portfolio of gaming assets. Atlantic
City, the second most popular gaming destination in the United States, with more
than 10 full service hotel casinos, is approximately a two hour drive from New
York City, the highly popular Foxwoods Resort and Casino and the Mohegan Sun
casino are each only two and a half hour drives from New York City. Harrah's
Entertainment, Inc., a large gaming company, Trading Cove Associates, Inc., the
developers of the Mohegan Sun casino, and the Wisconsin Oneidas are each
planning to develop Indian casinos on properties that are near Monticello
Raceway. Additionally, on July 4, 2004, the State of Pennsylvania enacted a law
allowing for the operation of up to 61,000 slot machines at 14 locations.
Pursuant to this new law, slot machine facilities could be developed within 30
miles of Monticello Raceway that would compete directly with our VGMs. One such
development, the Mohegan Sun at Pocono Downs, opened in January, 2007 in
Wilkes-Barre, Pennsylvania, approximately 75 miles southwest of Monticello.
Moreover, a number of well financed Indian tribes and gaming entrepreneurs are
presently seeking to develop casinos in New York and Connecticut in areas that
are 90 miles from New York City such as Bridgeport, Connecticut and Southampton,
New York. In contrast, we have limited financial resources and currently operate
only a harness horse racing facility and VGMs in Monticello, New York, which is
approximately a one and a half hour drive from New York City. No assurance can
be given that we will be able to compete successfully with the established
Atlantic City casinos, existing and proposed regional Indian casinos, slot
machine facilities in Pennsylvania or the casinos proposed to be developed by
Harrah's Entertainment, Inc., Trading Cove Associates, Inc. and the Wisconsin
Oneidas in the Catskills region of the State of New York for gaming customers.
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BECAUSE OF THE UNIQUE STATUS OF INDIAN TRIBES, GENERALLY, OUR ABILITY
TO SUCCESSFULLY DEVELOP AND MANAGE OUR PROPOSED INDIAN CASINO WILL BE SUBJECT
TO UNIQUE RISKS.
We have limited experience in managing or developing Indian casinos, which
presents unique challenges. Indian tribes are sovereign nations and possess the
inherent power to adopt laws and regulate matters within their jurisdiction. For
example, tribes are generally immune from suit and other legal processes unless
they waive such immunity. Gaming at a casino developed with the St. Regis Mohawk
Tribe will be operated on behalf of such tribe's government, and that government
is subject to changes in leadership or governmental policies, varying political
interests, and pressures from the tribe's individual members, any of which may
conflict with our interests. Thus, disputes between ourselves and the St. Regis
Mohawk Tribe may arise. With respect to disputes concerning our existing gaming
facility management agreement and development agreement with the St. Regis
Mohawk Tribe, the St. Regis Mohawk Tribe has waived its sovereign immunity,
although if for any reason that waiver should be ineffective, we might be unable
to enforce our rights under such agreement. Also, it is possible that we might
be required to seek enforcement of our rights in a court or other dispute
resolution forum of the St. Regis Mohawk Tribe, instead of state or federal
courts or arbitration. As discussed below, until the gaming facility management
agreement has been approved by the NIGC and by the St. Regis Mohawk Tribe, the
operative provisions of that agreement will not be valid or binding on the
applicable tribe, and under relevant federal court precedent, it is likely that
some or all of our other agreements with such tribe will also be inoperative
until such gaming facility management agreement has been approved by the NIGC.
Indian gaming is also governed by unique laws, regulations and
requirements arising from the Indian Gaming Regulatory Act of 1988, as amended,
any applicable Class III gaming compact, and gaming laws of the applicable
Indian tribe, and certain federal Indian law statutes or judicial principles. A
number of examples exist where Indian tribes have been successful in obtaining
determinations that management-related contracts (including development or
consulting contracts) were void as a result of the application of the unique
provisions of these laws. For all of the foregoing and other reasons, we may
encounter difficulties in successfully developing and managing an Indian casino
with the St. Regis Mohawk Tribe. Several companies with gaming experience that
have tried to become involved in the management and/or development of Indian
casinos have been unsuccessful. Due to our management's limited Indian gaming
experience, no assurance can be given that we will be able to avoid the pitfalls
that have befallen other companies in their efforts to develop successful Indian
gaming operations.
GAMING IS A HIGHLY REGULATED INDUSTRY AND CHANGES IN THE LAW COULD HAVE
A MATERIAL ADVERSE EFFECT ON US AND OUR ABILITY TO CONDUCT GAMING, AND THUS
ON OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.
Indian casinos in New York are regulated extensively by federal, state and
tribal regulatory bodies, including the NIGC and agencies of the State of New
York. As is the case with any casino, changes in applicable laws and regulations
could limit or materially affect the types of gaming that may be conducted, or
services provided, by our planned casino and the revenues realized from it.
Currently, the operation of all gaming on Indian lands is subject to the
Indian Gaming Regulatory Act. Over the past several years, legislation has been
introduced in the United States Congress with the intent of addressing a variety
of perceived problems with the Indian Gaming Regulatory Act. Specifically,
legislation has been proposed which would have the effect of prohibiting the
operation of particular classes of gaming on parcels of land, such as ours, that
are not located on existing Indian reservations. While none of the substantive
proposed amendments to the Indian Gaming Regulatory Act have been enacted, we
cannot predict future legislative acts. In the event that Congress passes
prohibitory legislation, and if such legislation is sustained in the courts, we
may be unable to move forward in developing our planned Indian casino and our
ability to meet our debt service obligations would be materially and adversely
affected. In addition, under federal law, gaming on Indian land is dependent on
the permissibility under state law of specific forms of gaming or similar
activities. If the State of New York were to make various forms of gaming
illegal or against public policy, such action may have an adverse effect on our
ability to develop Indian gaming operations in the Catskills region of the State
of New York.
A TRANSFER OF A PROPOSED CASINO SITE TO THE UNITED STATES, TO BE HELD IN
TRUST FOR THE BENEFIT OF THE ST. REGIS MOHAWK TRIBE MIGHT NOT OCCUR OR MAY BE
DELAYED FOR A SUBSTANTIAL PERIOD OF TIME; AND UNTIL SUCH A TRANSFER OCCURS, IT
WILL NOT BE POSSIBLE FOR THE ST. REGIS MOHAWK TRIBE TO OPERATE A CASINO IN THE
CATSKILLS REGION OF THE STATE OF NEW YORK FOR US TO MANAGE.
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Under the Indian Gaming Regulatory Act of 1988, as amended, the St. Regis
Mohawk Tribe will be able to operate a casino in the Catskills region of the
State of New York only if the casino is located on land held by the United
States in trust for the tribe (or subject to similar restrictions on transfer),
and only if such tribe exercises governmental powers over the casino site. That
same Act, however, generally prohibits Indian casinos on land transferred into
trust after October 17, 1988, subject to certain exceptions, one of which is
being pursued by the St. Regis Mohawk Tribe, without any assurance that it will
be obtained.
The exception being pursued by the St. Regis Mohawk Tribe permits land to
be transferred after October 17, 1988, if, after consultation with the tribe and
applicable state, local and other nearby tribal officials, the Secretary of the
Interior (who acts through the Bureau of Indian Affairs (the "BIA")) determines
that a gaming establishment on the land proposed for transfer would be in the
best interest of the tribe and its members, and would not be detrimental to the
surrounding community, and the Governor of the applicable State concurs in such
determination. To date, the instances are very limited where this exception has
been successful for off-reservation land, particularly in circumstances where
the land to be placed in trust is located a substantial distance from the
ancestral lands or reservation of a tribe. While the St. Regis Mohawk Tribe has
certain ancestral ties to the Catskills region of New York, the region is a
substantial distance from land recognized to be a part of the Tribe's current
reservation. Nevertheless, we were advised that on December 21, 2006 the St.
Regis Mohawk Tribe received a letter from the Secretary of the Interior stating
that the St. Regis Mohawk Tribe's Final Environmental Assessment had been deemed
sufficient, that an Environmental Impact Study would not be required, and that a
FONSI related to the proposed federal action approving the request of the St.
Regis Mohawk Tribe to take 29.31 acres into trust for the purpose of building a
Class III gaming facility to be located at Monticello Raceway, in accordance
with the Indian Gaming Regulatory Act of 1988 had been issued. On February 19,
2007, New York Governor Eliot Spitzer issued his concurrence with this
determination by the Secretary of the Interior and signed the amendment to the
Class III gaming compact between the St. Regis Mohawk Tribe and the State of New
York. Such amendment to the gaming compact between the St. Regis Mohawk Tribe
and New York State effecting the Land-to-Trust Transfer must be reviewed and
approved by the BIA and the BIA must take the necessary administrative action to
effect the Land-to-Trust Transfer. No assurance can be given that the BIA will
provide such approval or take the necessary administrative action to effect the
Land-to Trust Transfer.
IF OUR GAMING FACILITY MANAGEMENT AGREEMENT IS NOT APPROVED BY THE
NIGC, WE WILL NOT BE ABLE TO EXECUTE OUR CURRENT BUSINESS PLAN OF DEVELOPING
AND MANAGING AN INDIAN CASINO.
Our agreement with the St. Regis Mohawk Tribe will not be effective to
allow us to commence the development or management of a gaming facility until
our management agreement is first approved by the NIGC, and that approval might
not be obtained or might be obtained only after we agree to modify terms that
either reduce our revenues under the agreement or otherwise adversely affect us.
No management contract for tribally operated Class II or Class III gaming
is valid until approved by the NIGC, and under current case law in New York,
provisions of any agreement collateral to a management contract, such as our
development agreement, are likewise not valid until the management agreement is
so approved. The NIGC has broad discretion to approve or reject proposed
management contracts, and by law the NIGC can approve management fees exceeding
30% of related net gaming revenues only if the Chairman of the NIGC is satisfied
that the capital investment required, and income projections, require the
additional fee. The St. Regis Mohawk Tribe has agreed to pay us a 30% management
fee, as well as other compensation under the development agreement. Our gaming
facility management agreement with the St. Regis Mohawk Tribe had been under
review with the NIGC for approximately 3 1/2 years when, in 2000, the St. Regis
Mohawk Tribe renounced their agreements with us and entered into an agreement
with Park Place Entertainment Corporation (now Harrah's Entertainment, Inc.).
Consequently, our request for review by the NIGC of the gaming facility
management agreement was subsequently withdrawn. On August 1, 2005, we entered
into a letter agreement with the St. Regis Mohawk Tribe pursuant to which, among
other items, both parties re-affirmed their prior contracts. In March 2006, we
re-submitted a gaming facility management agreement to the NIGC, which contained
revisions to address certain comments made by the NIGC in their prior reviews.
No assurance can be given that the NIGC will approve the gaming facility
management agreement, as amended, or that further modifications to such
agreement will not be required prior to the NIGC granting approval. Such
modifications could include a material reduction in the management fees or other
compensation we have negotiated with the St. Regis Mohawk Tribe. As amended, and
approved by the NIGC, the gaming facility management agreement will require
formal approval by the St. Regis Mohawk Tribe before such agreement becomes
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effective. We cannot guarantee that the St. Regis Mohawk Tribe will approve the
amended gaming facility management agreement in order to obtain approval from
the NIGC.
A CLASS III GAMING COMPACT BETWEEN THE STATE OF NEW YORK AND THE ST.
REGIS MOHAWK TRIBE MUST BE NEGOTIATED AND BECOME EFFECTIVE BEFORE SUCH TRIBE
CAN OPERATE A CASINO FOR US TO MANAGE.
The St. Regis Mohawk Tribe can not lawfully engage in Class III gaming in
the Catskills region of the State of New York unless such tribe and the Governor
for the State of New York enter into a Class III gaming compact for such gaming
that is approved or deemed approved by the Secretary of the Interior. Although
courts have invalidated two other Class III gaming compacts between New York
tribes and the State of New York due to lack of legislative authority, the
Governor has received requisite legislative authorization to enter into a Class
III gaming compact with the St. Regis Mohawk Tribe in the Catskills region of
the State of New York. Such gaming compacts will not be entered into until the
appropriate land has been taken into trust by the United States for the benefit
of such tribe. On February 19, 2007, the St. Regis Mohawk Tribe and the State of
New York entered into an amendment to their compact for Class III gaming,
pursuant to which, among other things, New York State would receive 20 percent
of slot-machine revenues for the first two years after the Tribe's Class III
casino to be located at Monticello Raceway opens, 23 percent for the next two
years and 25 percent thereafter.
Pursuant to the Indian Gaming Regulatory Act of 1988, the compact for
Class III gaming entered into by the State of New York and the St. Regis Mohawk
Tribe does not become effective until an approval of the compact by the
Secretary of the Interior has been published in the Federal Register.
Additionally, the compact could become effective, but only to the extent it is
consistent with the Indian Gaming Regulatory Act of 1988, upon publication of a
notice in the Federal Register that forty-five days have elapsed after the
compact was submitted for approval to the Secretary of the Interior and the
Secretary of the Interior neither approved nor disapproved the compact. No
assurance can be given that the Secretary of the Interior will approve the terms
of any compact agreed to by the St. Regis Mohawk Tribe and the State of New
York. In particular, the existence of revenue sharing provisions in a compact by
which a state receives a share of tribal gaming revenues has provided a basis
for the Secretary of the Interior to disapprove a compact. The Indian Gaming
Regulatory Act of 1988 generally prohibits a state from imposing a tax on tribes
for the privilege of conducting gaming in the state. The Seneca Nation-State of
New York gaming compact that governs the Seneca Niagara Falls Casino, for
example, was neither approved nor disapproved within the required 45-day period,
and therefore became effective upon publication of a notice in the Federal
Register. In the letter to the Seneca Nation and the Governor of New York, the
Secretary of the Interior stated that the State of New York's right to receive
up to 25% of gross gaming revenues was primarily based on the State of New
York's grant of an extensive area in which the Seneca Nation would have broad
exclusive gaming rights. If the Secretary of the Interior disapproves any agreed
upon compact, the compact will not become effective and the St. Regis Mohawk
Tribe will not be able to conduct gaming under its terms. Since 2003, a bill has
been pending in Congress that would limit a State's right to share in a tribe's
gaming revenues unless the State provided the tribe a "substantial economic
benefit." We cannot predict if this or other legislation will be enacted or, if
enacted, would prevent a gaming compact between the St. Regis Mohawk Tribe and
the State of New York.
WE MAY REQUIRE ADDITIONAL FINANCING IN ORDER TO DEVELOP OUR PROPOSED
INDIAN CASINO AND WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
AND EXECUTE OUR BUSINESS STRATEGY.
Because we may not be able to continue to generate sufficient cash to fund
our operations, we may be forced to rely on external financing to develop our
Indian casino project and to meet future capital and operating requirements. Any
projections of future cash needs and cash flows are subject to substantial
uncertainty. Our capital requirements depend upon several factors, including the
rate of market acceptance, our ability to expand our customer base and increase
revenues, our level of expenditures for marketing and sales, purchases of
equipment, revenues and other factors. If our capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. We can make no assurance that financing will be
available in amounts or on terms acceptable to us or within the limitations
contained in our credit facility with Bank of Scotland or the indenture
governing our senior secured convertible notes, if at all. Further, if we issue
equity securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock, and debt financing, if available, may involve
restrictive covenants which could restrict our operations or finances. If we
cannot raise funds, if needed, on acceptable terms, we may be required to delay,
scale back or eliminate some of our expansion and development goals related to
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the casino projects and we may not be able to continue our operations, grow
market share, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements which could negatively impact our
business, operating results and financial condition.
In addition, the construction of the Indian casino project may depend upon
the ability of the St. Regis Mohawk Tribe to obtain financing for the project.
In order to assist the St. Regis Mohawk Tribe to obtain any such financing, we,
or one of our subsidiaries, may be required to guarantee the St. Regis Mohawk
Tribe's debt obligations. Any guarantees by us or one of our subsidiaries or
similar off-balance sheet liabilities, if any, will increase our potential
exposure in the event of a default by the St. Regis Mohawk Tribe.
OUR MANAGEMENT REVENUES FROM OUR PROPOSED INDIAN CASINO MAY BE
ADVERSELY AFFECTED BY MATTERS ADVERSE TO THE ST. REGIS MOHAWK TRIBE THAT ARE
UNRELATED TO US.
When constructed, our proposed Indian casino site will be either owned by
the St. Regis Mohawk Tribe, or held by the United States in trust for the
benefit of the St. Regis Mohawk Tribe. We and our subsidiaries will derive
revenues from the site based on our management and development contracts. If the
St. Regis Mohawk Tribe does not adequately shield its gaming operations at the
site from obligations arising from its other non-gaming operations, and the St.
Regis Mohawk Tribe suffers a material adverse event such as insolvency, a
default or civil damages in a matter in which it did not have sovereign
immunity, creditors could attempt to seize some or all of the personal property
or profits from the St. Regis Mohawk Tribe's gaming operations or move to have a
receiver or trustee appointed. Such a result could lead to the voidance or
indirect modification by a court of our subsidiaries' management and development
contracts with the St. Regis Mohawk Tribe, leading to a material adverse affect
on our operations. We may be required by lenders who finance the casino to
subordinate all or part of our management fees to the prior payment in full of
their financing. In addition, if creditors were to seize any or all of the St.
Regis Mohawk Tribe's revenues from gaming operations, our subsidiaries'
management and development agreements with the St. Regis Mohawk Tribe would be
rendered worthless, as the ability to conduct casino style gambling on that
property may no longer be permissible.
THE CONTINUING DECLINE IN THE POPULARITY OF HORSE RACING AND INCREASING
COMPETITION IN SIMULCASTING COULD ADVERSELY IMPACT THE BUSINESS OF MONTICELLO
RACEWAY.
Since the mid-1980s, there has been a general decline in the number of
people attending and wagering at live horse races at North American racetracks
due to a number of factors, including increased competition from other forms of
gaming, unwillingness of customers to travel a significant distance to
racetracks and the increasing availability of off-track wagering. The declining
attendance at live horse racing events has prompted racetracks to rely
increasingly on revenues from inter-track, off-track and account wagering
markets. The industry-wide focus on inter-track, off-track and account wagering
markets has increased competition among racetracks for outlets to simulcast
their live races. A continued decrease in attendance at live events and in
on-track wagering, as well as increased competition in the inter-track,
off-track and account wagering markets, could lead to a decrease in the amount
wagered at Monticello Raceway. Our business plan anticipates the possibility of
Monticello Raceway attracting new customers to its racetrack wagering operations
through VGM operations and potential casino development in order to offset the
general decline in raceway attendance. However, even if the numerous
arrangements, approvals and legislative changes necessary for casino development
occur, Monticello Raceway may not be able to maintain profitable operations.
Public tastes are unpredictable and subject to change. Any decline in interest
in horse racing or any change in public tastes may adversely affect Monticello
Raceway's revenues and, therefore, limit its ability to make a positive
contribution to our results.
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF THEIR SERVICES WOULD
ADVERSELY AFFECT OUR OPERATIONS.
If we are unable to maintain our key personnel and attract new employees
with high levels of expertise in those gaming areas in which we propose to
engage, without unreasonably increasing our labor costs, the execution of our
business strategy may be hindered and our growth limited. We believe that our
success is largely dependent on the continued employment of our senior
management and the hiring of strategic key personnel at reasonable costs. If any
of our current senior managers were unable or unwilling to continue in his or
her present position, or we were unable to attract a sufficient number of
qualified employees at reasonable rates, our business, results of operations and
financial condition will be materially adversely affected.
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SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT
OUR CASH FLOW, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
As a result of the issuance of our senior secured notes, our debt service
obligations increased substantially. There is the possibility that we may be
unable to generate cash sufficient to pay the principal or interest on and other
amounts due in respect of our indebtedness when due. We may also incur
substantial additional indebtedness in the future. Our level of indebtedness
will have several important effects on our future operations, including, without
limitation:
o a portion of our cash flow from operations will be dedicated to the
payment of any interest or principal required with respect to
outstanding indebtedness;
o increases in our outstanding indebtedness and leverage will increase
our vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure; and
o depending on the levels of our outstanding indebtedness, our ability to
obtain additional financing for working capital, general corporate and
other purposes may be limited.
Our ability to make payments of principal and interest on our indebtedness
depends upon our future performance, which is subject to general economic
conditions, industry cycles and financial, business and other factors affecting
our operations, many of which are beyond our control. Our business might not
continue to generate cash flow at or above current levels. If we are unable to
generate sufficient cash flow from operations in the future to service our debt,
we may be required, among other things:
o to seek additional financing in the debt or equity markets;
o to refinance or restructure all or a portion of our indebtedness,
including our senior secured convertible notes; or
o to sell selected assets.
Such measures might not be sufficient to enable us to service our
indebtedness. In addition, any such financing, refinancing or sale of assets may
not be available on commercially reasonable terms, or at all.
WE MAY NOT HAVE THE ABILITY TO REPURCHASE OUR SENIOR SECURED
CONVERTIBLE NOTES.
Upon the occurrence of a change in control (as defined in the indenture
governing our senior secured convertible notes), we would be required to
repurchase all of our outstanding senior secured convertible notes tendered to
us by the holders of such notes. In addition, we may be required to repurchase
our senior secured convertible notes on July 31, 2009. We cannot assure you that
we will have sufficient financial resources, or will be able to arrange
financing, to pay the purchase price for all of such notes tendered by the
holders in connection with any such repurchase. Any failure to repurchase the
notes when required will result in an event of default under the indenture.
In addition, the events that constitute a change of control under the
indenture may also be events of default under any credit agreement or other
agreement governing future debt. These events may permit the lenders under such
credit agreement or other agreement to accelerate the debt outstanding
thereunder and, if such debt is not paid, to enforce security interests in the
collateral securing such debt, thereby limiting our ability to raise cash to
purchase the notes, and reducing the practical benefit of the offer to purchase
provisions to the holders of the notes.
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET OR THE
CONVERSION OF OUR SENIOR SECURED CONVERTIBLE NOTES COULD ADVERSELY AFFECT THE
TRADING PRICE OF SHARES OF OUR COMMON STOCK, THE VALUE OF OUR SENIOR SECURED
CONVERTIBLE NOTES AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
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Future sales of substantial amounts of shares of our common stock in the
public market, the conversion of our senior secured convertible notes into
shares of our common stock, or the perception that such sales or conversion are
likely to occur, could affect prevailing trading prices of our common stock and,
as a result, the value of our senior secured convertible notes. As of March 7,
2007, we had 29,429,902 shares of common stock outstanding. Because our senior
secured convertible notes generally are initially convertible into shares of our
common stock only at a conversion price in excess of the recent trading price, a
decline in our common stock price may cause the value of our senior secured
convertible notes to decline. In addition, the existence of our senior secured
convertible notes may encourage short selling by market participants due to this
dilution or facilitate trading strategies involving our senior secured
convertible notes and our common stock.
On January 12, 2004, 18,219,075 shares of our common stock were issued
pursuant to our acquisition of Monticello Raceway Management, Inc., Monticello
Casino Management, LLC, Monticello Raceway Development Company, LLC and Mohawk
Management, LLC, all of which may be sold to the public pursuant to a
registration statement under the Securities Act. We also issued 4,050,000 shares
of our common stock to multiple investors in February 2004 in a private
placement. On December 28, 2006, we entered into an Amendment to that option
agreement, dated November 12, 2004, between the Company and Concord Associates
Limited Partnership ("Concord") pursuant to which (i) Concord exercised options
for 2,500,000 shares of the Company's common stock for an aggregate cash
consideration of $18,750,000 which was paid on January 26, 2007 and (ii) Concord
retained the right to exercise options for an additional 1,000,000 shares of the
Company's common stock at $7.50 per share until December 27, 2007. At December
31, 2006, we had outstanding options to purchase an aggregate of 3,283,909
shares of common stock at an average exercise price of $6.06 per share and
250,000 warrants at $7.50 per warrant. If the holders of these shares, options
or warrants were to attempt to sell a substantial amount of their holdings at
once, the market price of our common stock would likely decline. Moreover, the
perceived risk of this potential dilution could cause stockholders to attempt to
sell their shares and investors to "short" the stock, a practice in which an
investor sells shares that he or she does not own at prevailing market prices,
hoping to purchase shares later at a lower price to cover the sale. As each of
these events would cause the number of shares of our common stock being offered
for sale to increase, the common stock's market price would likely further
decline. All of these events could combine to make it very difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
THE VALUE OF THE CONVERSION RIGHT ASSOCIATED WITH THE SENIOR SECURED
CONVERTIBLE NOTES MAY BE SUBSTANTIALLY LESSENED OR ELIMINATED IF WE ARE PARTY
TO A MERGER, CONSOLIDATION OR OTHER SIMILAR TRANSACTION.
If we are party to a consolidation, merger or binding share exchange or
transfer or lease of all or substantially all of our assets pursuant to which
shares of our common stock are converted into cash, securities or other
property, at the effective time of the transaction, the right to convert senior
secured convertible notes into shares of our common stock will be changed into a
right to convert the note into the kind and amount of cash, securities or other
property which the holder would have received if the holder had converted its
senior secured convertible notes immediately prior to the transaction. This
change could substantially lessen or eliminate the value of the conversion
privilege associated with the notes in