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EX-3.1 - EMPIRE RESORTS INCex31to10k05558_12312009.htm
EX-3.3 - EMPIRE RESORTS INCex33to10k05558_12312009.htm
EX-31.1 - EMPIRE RESORTS INCex311to10k05558_12312009.htm
EX-23.1 - EMPIRE RESORTS INCex231to10k05558_12312009.htm
EX-32.1 - EMPIRE RESORTS INCex321to10k05558_12312009.htm
EX-21.1 - EMPIRE RESORTS INCex211to10k05558_12312009.htm
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, 2009

OR

o
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.
(Exact name of registrant as specified in its charter)
 
Delaware
 
13-3714474
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
     
 
c/o Monticello Casino and Raceway, Route 17B,
 P.O. Box 5013, Monticello, NY 12701
(Address of principal executive offices)                                                                           (Zip Code)
   
Registrant’s telephone number, including area code: (845) 807-0001

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
     
Rights to Purchase Series A Junior Participating Preferred Stock
 
 
Nasdaq Global Market
     
 
 
 
 
Securities registered under Section 12(g) of the Act:
 None
(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 o 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 o 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 o
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
   
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.
o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 

 
Large accelerated filer  o
Accelerated filer  o
 
 
Non-accelerated filer  o
Smaller reporting company  x
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
 
The aggregate market value of the issuer’s common equity held by non-affiliates, as of June 30, 2009 was $44,976,397, based on the closing price of the registrant’s common stock on the Nasdaq Global Market.

As of March 22, 2010, there were 69,479,340 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Item 10 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.
 

 
INDEX
 
1
 
1
 
10
 
22
 
22
 
23
 
24
       
25
 
25
 
27
 
27
 
36
 
36
 
65
 
65
 
66
       
68
 
68
 
71
 
71
 
75
 
77
       
78
 
78
 
i

 
PART I
 
FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains forward-looking statements, about management’s current expectations.  Examples of such forward-looking statements include discussions of the expected results of various strategies.  Although we believe that our expectations are based upon reasonable assumptions, there can be no assurance that our financial goals will be realized.  Our forward-looking statements concern matters that 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 the future results, performance or achievements described 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 the forward-looking statements made by us or on our behalf.  Any statements that are not statements of historical fact may be forward-looking statements.  Among others, we have used the words, “believes,” “anticipates,” “plans,” “estimates,” and “expects” to identify forward-looking statements.  Such statements may be considered forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). 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.  As used in this Annual Report, the words “Empire,” the “Company,” “our,” “us” or “we” refer to Empire Resorts, Inc.
 
We currently own and operate Monticello Casino and Raceway, a video gaming machine (“VGM”) and harness horse racing facility located in Monticello, New York, 90 miles Northwest of New York City.  At Monticello Casino and Raceway, we operate 1,090 VGMs as an agent for the New York State Lottery and 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 world and the export simulcasting of our races to offsite pari-mutuel wagering facilities.
 
In the past, we have also made efforts to develop a 29.31 acre parcel of land adjacent to Monticello Casino and Raceway as the site for the development of a Class III casino and may pursue additional commercial and entertainment projects on the remaining 200 acres of land owned by the Company that encompass the site of our current gaming and racing facility.  Currently, either an agreement with a Native American tribe, together with certain necessary federal and state regulatory approvals, or an amendment to the New York State Constitution would be required for us to move forward with our efforts to develop a Class III casino.
 
As used herein, Class III gaming means a full casino including slot machines, on which the outcome of play is based upon randomness, and various table games including, but not limited to, poker, blackjack and craps,  and Class II gaming means a gaming facility with VGMs and no table games.  VGMs are similar to slot machines, but they are electronically controlled from a central station and the procedure for determining winners is based on algorithms that distribute wins based on fixed odds, rather than mechanical or other methods designed to produce a random outcome for each play.
 
1

 
Recent Events
 
On August 19, 2009, we entered into that certain investment agreement (the “Investment Agreement”) with Kien Huat Realty III Limited, a corporation organized under the laws of the Isle of Man (“Kien Huat”), pursuant to which (i) we issued to the Kien Huat 6,804,188 shares of our Common Stock (the “First Tranche”), or approximately 19.9% of the outstanding shares of Common Stock on a pre-transaction basis, for aggregate consideration of $11 million, and (ii) agreed, following stockholder approval of the transaction, to issue an additional 27,701,852 shares of Common Stock to Kien Huat (the “Second Tranche”) for additional consideration of $44 million.  We held a special meeting of our stockholders on November 10, 2009, at which our stockholders approved, among other things, the issuance of shares and related proposals to facilitate the Second Tranche.  The closing of the Second Tranche occurred on November 12, 2009, at which time we issued an additional 27,701,852 shares of Common Stock to Kien Huat for consideration of $44 million in accordance with the terms of the Investment Agreement.  We have used and intend to use the proceeds of the First Tranche and the Second Tranche for transaction costs, to pay interest on existing indebtedness and for general working capital.  Such proceeds may also be used as a part of a restructuring of the Company’s capital base. The shares of Common Stock issued pursuant to the Investment Agreement have not been registered under the Securities Act.
 
As a result of the closing of the Second Tranche, as of November 12, 2009, Kien Huat owned 34,506,040 shares of Common Stock, representing just under 50% of our voting power.  As of the closing of the Second Tranche we had certain options and warrants outstanding.  Under the Investment Agreement, if any of such options or warrants are exercised (or any of the first one million options or warrants issued after the closing of the First Tranche to our officers and directors who held either of such positions as of July 31, 2009), Kien Huat has the right to purchase an equal number of additional shares of Common Stock as are issued upon such exercise at the exercise price for the applicable option or warrant, which right we refer to herein as the “Option Matching Right.”  Following any such purchase by Kien Huat, Kien Huat may not own more than one share less than 50% of our voting power.
 
Under the terms of the Investment Agreement, Kien Huat is entitled to recommend three directors whom we are required to cause to be elected or appointed to our Board of Directors (the “Board”), subject to the satisfaction of all legal and governance requirements regarding service as a member of our Board and to the reasonable approval of the Governance Committee of the Board.  Kien Huat has designated Au Fook Yew and G. Michael Brown as members of the Board pursuant to its rights under the Investment Agreement.  Kien Huat has not yet identified to the Board the third director whom it will recommend for appointment to the Board pursuant to the Investment Agreement.  Kien Huat will continue to be entitled to recommend three directors for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election or appointment to the Board will be reduced proportionally to Kien Huat’s percentage of ownership.  Under the Investment Agreement, for so long as Kien Huat is entitled to designate representatives to the Board, among other things, Kien Huat will have the right to nominate one of its director designees to serve as the Chairman of the Board, and Mr. Brown has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation.  Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, the Board will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors designated by Kien Huat.
 
We are seeking a judicial determination in the Supreme Court of New York, Sullivan County, against the beneficial owners of our $65 million of 5 ½% senior convertible notes (the “Notes”), as well as The Depository Trust Company and the Bank of New York Mellon Corporation (the “Trustee”) that (1) no Holder, as defined under the indenture dated July 26, 2004 (the “Indenture”), delivered an executed Put Notice, as defined under the Indenture, to the office of the Trustee within the lawfully mandated time for exercise of a Holder’s put rights under the Indenture prior to the close of business on July 31, 2009, and that (2) the three entities that gave the purported notice of default may not and have not accelerated the Notes or invoked certain other consequences of a default.  See the section of this annual report entitled “Item 3 — Legal Proceedings.”  We are unable to predict the length of time the Supreme Court of New York may take to resolve ultimately the pending dispute, or the length of time it will take for the Third Judicial Department of the Appellate Division, or the State of New York Court of Appeals, to issue a final, non-appealable judgment.  In the event that a final non-appealable ruling is issued declaring that the right to demand repayment of the Notes had been validly exercised, we would not have an immediate source of funds from which to pay our obligations under the Notes, and no assurance can be made that other sources of financing will be available at such time on commercially reasonable terms, if at all, to satisfy our obligations under the Notes.  Our ability to continue as a going concern depends on our ability to fulfill our obligations with respect to our Notes. A final, non-appealable determination that we did have the obligation to repurchase the Notes on July 31, 2009, would result in our being in default under the Indenture and the holders of the Notes could require us to repurchase the Notes at par.  The Company does not currently have sufficient cash resources to make such purchase and does not anticipate generating such cash through operations in time to meet any such requirement.
 
2

 
In March 2010, we entered into an agreement with Bank of America/Merrill Lynch (“BofA/ML”) to serve as our financial advisor to assist us in analyzing and structuring our efforts to effect a restructuring of our existing debt and preferred stock and to recommend possible steps to improve our liquidity. Such steps may include negotiations with the current beneficial holders of the Notes to resolve the current litigation. BofA/ML will provide advice to us on the timing, nature and terms of new securities, other consideration or other inducements to be offered to effect a restructuring.  At this time, we are unable to make any assurances as to the results of our restructuring efforts.
 
As part of our efforts to improve our liquidity and free cash flow, we are working to improve our operating results and cash flow from our core businesses at our wholly-owned subsidiary Monticello Raceway Management, Inc. (“Monticello Raceway Management”), which operates Monticello Casino and Raceway.  We are also exploring means of restructuring our debt, resuming our casino development efforts and seeking other growth opportunities.
 
In February 2008, we entered into an agreement (the “Contribution Agreement”) with Concord Associates, L.P. (“Concord”), pursuant to which we and Concord were to form a joint venture to develop, finance and construct a hotel, convention center, gaming facility and harness horseracing track on 160 acres of land located in Kiamesha Lake, New York.  For a variety of factors, including recent conditions in the financial markets, certain contingencies for the implementation of this agreement have not been able to be achieved.  Consequently, the Contribution Agreement was terminated in March 2009 as a result of the execution of a new agreement with Concord.  On March 23, 2009, we entered into an agreement (the “Concord Agreement”), with Concord, pursuant to which we (or a wholly-owned subsidiary reasonably acceptable to Concord) shall be retained by Concord Empire Raceway Corp. (“Raceway Corp.”), a subsidiary of Concord, to provide advice and general managerial oversight with respect to the operations at the harness track to be constructed at that certain parcel of land located in the Town of Thompson, New York and commonly known as the Concord Hotel and Resort (the “Concord Property”).  The Concord Agreement has a term of forty years.  The closing of the transactions contemplated by the Concord Agreement is to take place on the date that Concord or its subsidiary secures and closes on (but not necessarily funds under) financing in the minimum aggregate amount of $500 million (including existing equity) from certain third-party lenders in connection with the development of the harness track and certain gaming facilities on the Concord Property.  In the event that the closing of the Concord Agreement has not occurred on or before July 31, 2010, the Concord Agreement may be terminated by either Concord or us by written notice.  No assurance can be made that the financing required as a condition to the consummation of the transactions contemplated by the Concord Agreement will be obtained by Concord.
 
Monticello Casino and Raceway
 
Monticello Casino and Raceway began racing operations in 1958 and currently features:
 
 
·
1,090 VGMs;
 
 
·
year-round live harness horse racing;
 
 
·
year-round simulcast pari-mutuel wagering on thoroughbred and harness horse racing from across the world;
 
 
·
a 3,000-seat grandstand and a 100-seat clubhouse with retractable windows;
 
 
·
parking spaces for 2,000 cars and 10 buses;
 
 
·
a 350-seat buffet and food court with three outlets;
 
 
·
a 3,800 square foot multi-functional space used for events;
 
 
·
a large central bar and an additional clubhouse bar; and
 
 
·
an entertainment lounge with seating for 75 people.
 
3

 
VGM Operations.  We currently operate a 45,000 square foot VGM facility at Monticello Casino and 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 traditional slot machines.  Revenues derived from our VGM operations consist of VGM revenues and related food and beverage concession revenues.  Each of the VGMs is owned by the State of New York.  By statute, for a period of five years which began on April 1, 2008, 42% of gross VGM revenue is distributed to us, which represents an increase over the prior vendor fee of 32% for the first $50 million annually, 29% for the next $100 million annually, and 26% thereafter.  Following that five-year period, 40% of the first $50 million, 29% of the next $100 million and 26% thereafter of gross VGM revenue will be distributed to us. Gross VGM revenues consist of the total amount wagered at our VGMs, less prizes awarded.   The statute also provides a vendor’s marketing allowance for racetracks operating video lottery programs of 10% on the first $100 million of net revenues generated and 8% thereafter, which represents an increase over the prior marketing allowance of 8% for the first 100 million annually, and 5% thereafter.  The legislation authorizing the implementation of VGMs at Monticello Casino and Raceway expires in 2013.
 
VGM activities in the State of New York are presently overseen by the Division of the Lottery of the State of New York.
 
Raceway Operations.  Monticello Casino and Raceway derives its racing revenue principally from:
 
 
·
wagering at Monticello Casino and Raceway on live races run at Monticello Casino and Raceway;
 
 
·
fees from wagering at out-of-state locations on races run at Monticello Casino and Raceway using export simulcasting;
 
 
·
revenue allocations, as prescribed by law, from betting activity at off-track betting facilities in the State of New York;
 
 
·
wagering at Monticello Casino and Raceway on races broadcast from out-of-state racetracks using import simulcasting; and
 
 
·
admission fees, program and racing form sales, food and beverages sales and certain other ancillary activities.
 
Simulcasting.  Import and, particularly, export simulcasting is an important part of Monticello Casino and 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’s tote facility where the final odds and payouts are determined.  With the exception of a few holidays, Monticello Casino and Raceway offers year-round simulcast wagering from racetracks across the country, including Aqueduct, Belmont, Meadowlands Racetrack, Penn National Race Course, Turfway Park, Santa Anita Racetrack, Gulfstream 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 Casino and Raceway also exports live broadcasts of its own races to race tracks, casinos and off-track betting facilities in the United States, Canada, Germany, Austria, South Africa, Mexico, South America and the United Kingdom.
 
Pari-mutuel Wagering.  Monticello Casino and 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 Casino and Raceway’s pari-mutuel commission rates are fixed as a percentage of the total handle or amounts wagered.
 
4

 
Electronic Table Games.  The Division of the Lottery of the State of New York has disclosed in public statements that it is considering permitting the expansion of gaming options at the state's existing video lottery facilities to include electronic table games. While the Division of the Lottery of the State of New York has indicated that it does not require legislation to implement these games, in January 2010, legislation was introduced in the New York State legislature to permit the expansion of gaming options at the state's existing video lottery facilities to include electronic table games.  If approved, such legislation would permit New York’s video lottery facilities, including Monticello Casino and Raceway to offer electronic versions of casino games such as roulette, baccarat and blackjack.   No assurance can be made, however, that the Division of the Lottery of the State of New York will implement these games or that such legislation will be approved or that we will otherwise be permitted to offer electronic table games.
 
Competitive Environment
 
Our gaming operations are located in the Catskills region in the State of New York, which has historically been a resort area, although its popularity declined with the growth of destinations such as Atlantic City and Las Vegas.  The opening of Empire City at Yonkers Raceway (“Yonkers Raceway”) with its Empire City Casino in Yonkers New York, approximately 90 miles from our location, has significantly intensified competition in our primary area. We compete with Yonkers and two Pennsylvania casinos located in Northeastern Pennsylvania, for guests from Orange, Duchess and Ulster Counties in New York. Our property offers fewer slot machines and amenities than our competition.  In August 2009, the New York State Lottery approved a pilot test period for us and one other New York State racino authorizing the use of tax-free VGM play for our guests. The pilot program was to last six months and the New York State Lottery was to evaluate the success of the pilot program by February 4, 2010. The use of tax-free VGM play provided us the opportunity to reward our guests based on their level of VGM play and to offer promotions that can compete with the offerings of our competitors located in Pennsylvania.  On February 4, 2010, we received authorization to continue the use of tax-free VGM play for another six months.
 
Located approximately 90 miles northwest of New York City, a Class III casino resort at the current Monticello Casino and Raceway site would be a shorter trip from the nation’s most populous metropolitan area than either Atlantic City or any regional Native American casino, including Foxwoods and Mohegan Sun in Connecticut.  There are approximately 18.4 million adults who live within 100 miles of the Catskills area, an area where household income averages approximately $76,000.  Specifically, Monticello Casino and 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.
 
While we currently face intense competition within the gaming industry in the northeastern United States, which is increasingly run by multinational corporations or Native American tribes that have numerous competitive advantages over us, we believe that our proximity to the New York City metropolitan area would strengthen our position within our market if we are able to develop a Class III casino and/or other commercial and entertainment projects.  The development of a Class III casino, however, would require either an amendment to the New York State Constitution to permit Class III casino gaming or an agreement with a Native American tribe for the development of a Class III casino, together with certain necessary federal and state regulatory approvals.  Accordingly, there can be no assurance that we will be successful in developing such projects in the foreseeable future or at all.
 
Development
 
Concord Management Agreement
 
On March 23, 2009, we entered into the Concord Agreement, with Concord, pursuant to which we (or a wholly-owned subsidiary reasonably acceptable to Concord) shall be retained by Raceway Corp., a subsidiary of Concord, to provide advice and general managerial oversight with respect to the operations at a harness horse racing facility (the “Track”) to be constructed at the Concord Property.  The Concord Agreement has a term of forty years.  The closing of the transactions contemplated by the Concord Agreement is to take place on the date that Concord or its subsidiary secures and closes on (but not necessarily funds under) financing in the minimum aggregate amount of $500 million (including existing equity) from certain third-party lenders in connection with the development of the Track and certain gaming facilities (the “Concord Gaming Facilities”) on the Concord Property.
 
5

 
Under the terms of the Concord Agreement, if the Track and Concord Gaming Facilities commence operations, we are to receive an annual management fee in the amount of $2 million, subject to adjustment, and an annual fee in the amount of two percent of the total revenue wagered with respect to video gaming machines and/or other alternative gaming located at the Concord Property, net of certain fees and payouts (the “Adjusted Gross Gaming Revenue Payment”).  In the event that the Adjusted Gross Gaming Revenue Payment paid to us is less than $2 million per annum, Concord is to guaranty and pay to us the difference between $2 million and the Adjusted Gross Gaming Revenue Payment distributed to us with respect to such calendar year. In addition, upon a sale or other voluntary transfer of the Concord Gaming Facilities to any person or entity who is not an affiliate of Concord (the “Buyer”), Raceway Corp. may terminate the Concord Agreement upon payment to us of $25 million; provided, that the Buyer shall enter into an agreement with us whereby the Buyer shall agree to pay the greater of (i) the Adjusted Gross Gaming Revenue Payment or (ii) $2 million per annum to us for the duration of the Term of the Concord Agreement.
 
In the event that the closing of the transactions contemplated by the Concord Agreement has not occurred on or before July 31, 2010, the Concord Agreement may be terminated by either Concord or us by written notice.  No assurance can be made that the financing required as a condition to the consummation of the transactions contemplated by the Concord Agreement will be obtained by Concord.
 
Class III Casino Development
 
We have identified 29.31 acres of land adjacent to Monticello Casino and Raceway for the development of a Class III casino.  A Class III casino resort at Monticello Casino and Raceway, as planned, is expected to feature between 70,000 to 80,000 square feet of gaming space with 2,000 slot machines and 100 table games, restaurants, bars and other amenities consistent with such a facility.
 
The 29.31-acre site has already received zoning and site plan approval for the proposed Class III casino.  However, the construction plans are only in a preliminary stage and are subject to additional approvals by relevant government authorities.  Currently, we are not permitted to operate a Class III casino at Monticello Casino and Raceway because Class III casino gaming, other than Native American gaming, is not allowed in New York.  In order for the Company to own and operate a Class III casino at Monticello Casino and Raceway, therefore, an amendment to the New York State Constitution to permit Class III casino gaming would need to be passed or we would need to enter into an agreement with a Native American tribe for the development of such a Class III casino.  In order to be amended to permit Class III casino gaming, the New York State Constitution requires the passage of legislation in two consecutive legislative sessions and then passage of the majority of the state's voters in a statewide referendum.  Previous legislation to amend the New York State Constitution to permit Class III casino gaming did not obtain the required approval of two consecutive legislative sessions.  However, new legislation has been introduced in both the Senate and Assembly, which if passed by two successive legislative sessions, would provide for the statewide referendum required to amend the Constitution to permit casino gaming in Sullivan County.  If we enter into an agreement with a Native American tribe for the development of a Class III casino, we would be required to sell the 29.31 acre site to a federally recognized Native American Tribe and obtain certain federal and state regulatory approvals, including the approval of any management or related agreements between the Company and the Tribe.
 
We have been working to develop a Class III casino with various Native American tribes beginning in 1996.   This process requires certain determinations to be made by the Department of Interior, a concurrence by the governor of New York State, and completion of federal environmental reviews.  During this process, in April 2000, the St. Regis Mohawk Tribe received the required two-part determination necessary to conduct gaming activities on newly acquired land.  On February 19, 2007, the Governor of New York issued his concurrence with regard to this April 2000 Secretarial Determination that found that 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 Casino and Raceway, in accordance with the Indian Gaming Regulatory Act of 1988, as amended (the “Land-to-Trust Transfer”) would be in the St. Regis Mohawk Tribe’s and its members’ best interest and would not be detrimental to the surrounding communities.  In addition to the concurrence, the Governor 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% of slot-machine revenues for the first two years after the St. Regis Mohawk Tribe’s Class III casino to be located at Monticello Casino and Raceway opens, 23% for the next two years and 25% thereafter.  On December 21, 2006, the St. Regis Mohawk Tribe received a letter from James E. Cason of the Bureau of Indian Affairs (the “BIA”) stating that the St. Regis Mohawk Tribe’s Final Environmental Assessment for the project had been deemed sufficient, that an Environmental Impact Study would not be required and that a formal Finding of No Significant Impact (“FONSI”) related to the proposed federal action approving the Land-to-Trust Transfer had been issued.
 
6

 
We were advised, however, that on January 4, 2008, the St. Regis Mohawk Tribe received a letter from James E. Cason of the BIA denying the St. Regis Mohawk Tribe's request to take 29.31 acres into trust for the purpose of building a Class III gaming facility to be located at Monticello Casino and Raceway, in accordance with the Indian Gaming Regulatory Act of 1988, as amended.  The request was apparently denied based upon newly-issued guidance concerning regulations promulgated under the Indian Gaming Regulatory Act of 1988, as amended, relating to the need of the St. Regis Mohawk Tribe for additional land, the purposes for which the land would be used, and the distance of the land from the St. Regis Mohawk Tribe’s reservation.
 
The St. Regis Mohawk Gaming Authority failed to establish a closing date by December 31, 2007 for the consummation of the transactions contemplated by the Second Amended and Restated Land Purchase Agreement between the St. Regis Mohawk Gaming Authority and Monticello Raceway Management, dated as of December 1, 2005, as amended.  As a result, the Second Amended and Restated Land Purchase Agreement, and related agreements, expired by their terms.  On February 5, 2008, we notified the St. Regis Mohawk Tribe that as a result of the BIA’s January 4, 2008 action, we were postponing further development efforts, but would continue to work with the St. Regis Mohawk Tribe with respect to their litigation to overturn the Secretary of the Interior's decision. On February 6, 2008, the St. Regis Mohawk Tribe issued a press release accusing us of abandoning the St. Regis Mohawk Tribe and breaching our gaming agreements with it.  On February 14, 2008, three of our subsidiaries filed for arbitration with the American Arbitration Association seeking declarations as to the effectiveness of their agreements with the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming Authority.
 
On July 18, 2008, our subsidiaries, Monticello Raceway Management, Monticello Raceway Development Company, LLC (Monticello Raceway Development) and Monticello Casino Management, LLC (Monticello Casino Management) entered into a settlement agreement with the St. Regis Mohawk Gaming Authority and the St. Regis Mohawk Tribe pursuant to which the parties agreed to release all claims against the other parties. The settlement was amended on October 9, 2008 to eliminate any remaining unfulfilled conditions and included our agreement to reimburse the St. Regis Mohawk Tribe approximately $444,000 for expenses incurred by them in connection with the project.
 
On January 30, 2010, the St. Regis Mohawk Tribe held a referendum vote to authorize the Nation to proceed with the development of a Class III casino off its reservation. The members of the St. Regis Mohawk Tribe indicated, by a vote of 538 - 371, that they support the tribe pursuing off-reservation gaming in the Catskills region of the State of New York.  News reports during the past eighteen months have indicated that the BIA is reevaluating the “guidance” under which the January 4, 2008 decision, with respect to the St. Regis Mohawk’s Tribe request to take our 29.31 acre site located at Monticello Casino and Raceway into trust, was made and might also rescind certain actions taken under that guidance.  We have been advised by the St. Regis Mohawk Tribe that they have not received sufficient information to warrant formal consideration on its part concerning the matter.  No assurance can be given that the BIA will rescind its prior actions as a whole or in part, that any such action will permit the reinstatement of the application of the St. Regis Mohawk Tribe or that, even if such actions were to be rescinded, St. Regis Mohawk or the Company would seek to resume the joint effort to develop a Class III casino on the 29.31 acre site.
 
Competition
 
Monticello Casino and Raceway
 
Generally, Monticello Casino and Raceway does not compete directly with other harness racing tracks in New York State for live racing patrons.  However, Monticello Casino and 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 compete with larger purses for the races at Monticello Casino and Raceway has been a significant limitation on its ability to compete for off-track wagering revenues.
 
7

 
In New York, the primary competition for Monticello Casino and Raceway is expected to be from two racetracks located within the New York City metropolitan area, Yonkers Raceway and Aqueduct Racetrack.  In February 2010, the Governor of New York announced a preferred developer and operator for the Aqueduct Raceway, Aqueduct Entertainment Group (“AEG”).  There were conditions placed on the award of this license that must be satisfied in thirty days, including the payment of a $300 million upfront fee.  In March 2010, AEG was disqualified and the offer to develop Aqueduct Raceway was rescinded.  At this time, it is uncertain when the VGM facility at Aqueduct Racetrack will be constructed and opened, or what steps the representatives of the New York State Government will take to select a suitable developer and operator for Aqueduct Raceway.  In addition, proposals have been made for the implementation of a similar program at Belmont Park. From time to time, New Jersey has reviewed options to place slot machines in various locations including the Meadowlands Racetrack. Due to its budget deficit, New Jersey is again looking at options for both its casinos located in Atlantic City and possibly at video lottery facilities at racetracks to increase its share of gaming taxes and to support its distressed horseracing and breeding industries.
 
In January 2010, the Pennsylvania legislature authorized and its Governor approved table games in its existing casino facilities. The bill authorizes all table games, including blackjack, craps, roulette, baccarat, and poker at thoroughbred and harness racetracks with slot-machine facilities and stand-alone slot-machine parlors. In addition, the bill authorized the granting of credit to guests of the Pennsylvania casinos. We currently anticipate that table games will be operational in Pennsylvania’s casinos in the latter part of the third or beginning of the fourth quarter of this year. Both Pennsylvania casinos that we compete against have indicated their commitment to install and offer table games at their facility. This bill augmented the legislation passed in July 2004, whereby Pennsylvania legalized the operation of up to 61,000 slot machines at 14 locations throughout the state.  As of March 2010, there were nine casinos in operation within Pennsylvania, with seven located at racing tracks.  One such development is the Mohegan Sun at Pocono Downs, which has approximately 2,500 slot machines.  The Mohegan Sun at Pocono Downs opened in January 2007 in Wilkes-Barre, Pennsylvania, approximately 75 miles southwest of Monticello.  In addition, in October 2007, the Mount Airy Casino Resort opened with approximately 2,500 slot machines, a hotel, spa and a golf course.  The Mount Airy Casino Resort is located in Mount Pocono, Pennsylvania, approximately 60 miles southwest of Monticello.
 
Competing Casinos and Proposed Casino Projects
 
In Atlantic City there are currently 11 casino hotels. Several of these casino hotels are in bankruptcy, and the overall gaming market has been adversely impacted by the opening of casinos in the Philadelphia and northeastern portion of Pennsylvania (five in total).
 
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.  In addition, 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 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 is known as the “MGM Grand at Foxwoods” and opened in 2008 and operates under 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-guest room, 34-story tower hotel with convention facilities and a spa, which opened in the summer of 2002.
 
8

 
In 2001, the New York State Legislature and the New York State Governor authorized the building of three Native American casinos in the Catskills region of the State of New York.  In November of 2004, a number of Native American tribes entered into agreements with the State of New York with respect to land claims against the State.  These agreements require state and federal legislation to be enacted in order to implement their provisions.  Recent court decisions have adversely affected the likelihood of such legislation being adopted.
 
The Stockbridge Munsee Band of Mohicans currently located in Wisconsin and asserting aboriginal roots in New York State, applied to have lands taken into trust for a Class III Native American 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 Casino and Raceway. 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 would 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.  In January 2008, the Stockbridge Munsee Band of Mohicans’ land-into-trust application to the BIA with respect to the land in New York was rejected. However, it has been reported that with the recent election of President Obama and the appointment of a new Secretary of Interior, the Stockbridge Munsee Band of Mohicans will be seeking reconsideration of their application under existing regulations.  New York Senator Schumer has expressed support for such reconsideration.
 
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 unknown at this time whether Congress will be receptive to land claim settlements that include the development of Class III casinos in the Catskills region of the State of New York.  In addition to Congressional support, the New York State Legislature would have to approve and enact legislation to support tribal land claim settlements that include Class III gaming. The legislation, which was introduced in 2005 to implement these proposed settlements, was not enacted by the New York State Legislature.
 
In recent months, other New York based federally recognized Native American 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.  The Oneida Nation of New York and the Seneca Nation currently operate Class III 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, only the Seneca Nation has acquired land in fee in Sullivan County.  A press statement issued by the tribe in January 2009 indicates the Seneca Nation will seek to have the land taken in trust or restricted status to qualify the land as “Indian land”.  The Indian Gaming Regulatory Act of 1988 requires land acquired after 1988 to be qualified as Indian land if such land is intended for gaming.
 
There are a number of groups seeking to become federally-recognized Native American tribes in order to be granted the right to operate casinos near the New York metropolitan area.  There have been periodic proposals for locating a Native American 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 Native American tribe, has expressed its interest in building a casino in Southampton, New York or at another location in downstate New York. On December 15, 2009, the Shinnecock received preliminary federal recognition.  Once federally recognized, the Shinnecock would immediately have the right to build a Class II casino on their 800-acre reservation in Southampton, New York, but the Shinnecock have expressed a desire to develop a casino closer to New York City.
 
9

 
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 Casino and 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 Native American 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.
 
Employees
 
As of March 22, 2010, our subsidiaries and we employed approximately 319 people.
 
Website Access
 
The Company's website address is www.empireresorts.com. The Company's filings with the Securities and Exchange Commission ("SEC") are available at no cost on its website as soon as practicable after the filing of such reports with the SEC.
 
Item 1A.
Risk Factors.
 
Risks Related To Our Business
 
If a court of competent jurisdiction determines that the right to demand repayment of the Notes has been validly exercised, we may not have an immediate source of repayment for our obligations under the Notes.
 
Our ability to continue as a going concern is dependent upon our ability to fulfill our obligations with respect to the Notes.
 
On June 30, 2009, pursuant to the Indenture governing the Notes, we furnished the written notice required to be delivered by us to the Trustee of the Notes under the Indenture, of the time and manner under which each Holder could elect to require us to purchase the Notes under the Indenture.  As contemplated by the Indenture, we included with the notice the written form to be completed, signed (with signature guaranteed), and delivered by each Holder of the Notes to the Trustee before close of business on July 31, 2009 to require us to purchase the Notes.  We requested, but never received, from the Trustee copies of any forms delivered to it by which any election was made for us to purchase the Notes or any part thereof.  Neither the Trustee nor any Holder furnished to us any originals or copies of any such signed forms which had to be completed, signed and delivered to the Trustee by close of business on July 31, 2009 to require us to purchase the Notes.  Because the forms required to be completed, signed, and delivered by July 31, 2009 were not completed, signed and delivered by then, we do not believe that we are obligated to purchase and pay for any Notes before their maturity on July 31, 2014.  On August 3, 2009, we received a notice from three entities, asserting that they were beneficial holders of the Notes in an aggregate principal amount of $48,730,000, and that we were in default under the Indenture by not purchasing the Notes on July 31, 2009.  On August 5, 2009, we instituted a declaratory judgment action in the Supreme Court of the State of New York in Sullivan County (the “Court”), seeking a declaration confirming that (i) the Holders of the Notes failed to properly exercise the put rights contained in the Indenture in respect of any of the Notes and (ii) the three entities that gave the purported notice of default are not, therefore, entitled to invoke, and have not invoked, the rights and remedies available upon the occurrence of a default under the Indenture, including accelerating the Notes. See the section of this annual report entitled “Item 3 — Legal Proceedings.”
 
10

 
If the Court, or another court of competent jurisdiction, issues a non-appealable final judgment holding that the right to demand repayment of the Notes has been validly exercised, we would not have an immediate source of repayment for our obligations under the Notes.  Neither the remaining proceeds of the $55 million in new equity capital invested in the Company by Kien Huat nor cash flow generated by our current operations is anticipated to be sufficient to repurchase the Notes in full, if we are required to do so.  A failure to repurchase the Notes when required would result in an event of default under the Indenture and could result in a cross-default under any other credit agreement to which we may be a party at such time.  Accordingly, our ability to continue as a going concern is dependent upon a determination that we did not have the obligation to repurchase the Notes on July 31, 2009, and/or our ability to arrange financing to fulfill our obligations under the Notes, and no assurance can be made that financing necessary to fulfill our obligations under the Notes will be available on commercially reasonable terms, if it all.
 
Our Independent Registered Public Accounting Firm has issued a “going concern” opinion raising substantial doubt about our financial viability
 
The accompanying consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern depends on our ability to fulfill our obligations with respect to our Notes.  In addition, we have continuing net losses and negative cash flows from operating activities.  These conditions raise substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.  These circumstances caused our independent registered public accounting firm to include an explanatory paragraph in their report dated March 24, 2010 regarding their concerns about our ability to continue as a going concern.  Substantial doubt about our ability to continue as a going concern may create negative reactions to the price of the common shares of our stock and we may have a more difficult time obtaining financing.
 
We may require additional financing in order to develop any projects and we may be unable to meet our future capital requirements and execute our business strategy.
 
Because we are unable to generate sufficient cash from our operations, we may be forced to rely on external financing to develop any future projects and to meet future capital and operating requirements. Any projections of future cash needs and cash flows are subject to substantial uncertainty. The 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 and other factors. If the 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 acceptable terms or within the limitations contained in the Indenture governing the Notes, if at all.
 
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 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.
 
If revenues and operating income from our operations at Monticello Casino and Raceway do not increase or if we are unable to develop a Class III casino, it could adversely affect our ability to service our outstanding debt.
 
Our ability to service the Notes will depend upon the performance of our VGM and racing facilities, and our ability to successfully develop and manage a Class III casino at the location of our current operations.
 
There can be no assurance that our operations will draw sufficiently large crowds to Monticello Casino and 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 is not required to make decisions that we feel are 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.  Our VGM operations have historically been insufficient to service our debt, as we were 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% of our VGM gross revenue in excess of $150 million. Although new legislation was passed in 2008 that increased our share of VGM revenue, no assurance can be given that such increased revenue will be sufficient to support our ability to service our outstanding debt.  Moreover, the legislation authorizing the implementation of VGMs at Monticello Casino and Raceway expires in 2013, prior to the stated maturity of the Notes, and no assurance can be given that the authorizing legislation will be extended beyond this period.  Similarly, the development of a Class III 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.
 
11

 
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 the Notes), 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 the Notes.  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 or interpretation 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 us from pursuing future development projects, including future Class III casino 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 our current and any future 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.
 
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 any Native American tribe with which we may seek to develop a Class III casino, 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 certain of our other stockholders were indicted for various counts of tax and bank fraud.  On September 5, 2003, one of these stockholders pleaded guilty to felony tax fraud, and on February 4, 2004, four additional stockholders were convicted of tax and bank fraud.  None of the acts these individuals were charged with or convicted of relate to their 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.
 
12

 
We received a letter from the New York State Racing and Wagering Board on January 5, 2010, requesting updated information about our plans to divest Bryanston Group and its affiliates of their remaining interests in us.  In response, we have informed the New York State Racing and Wagering Board that we are in the process of engaging an investment banking firm to explore our options with respect to the restructuring of our debt and other obligations, including our Series E Preferred Stock.  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, 2009, was approximately $27.1 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 Native American 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, Rotate Black Inc., a resort and gaming corporation, and the Wisconsin Oneidas have each previously announced plans to develop Native American casinos on properties that are near Monticello Casino and Raceway.  Additionally, on July 4, 2004, the Commonwealth of Pennsylvania enacted a law allowing for the operation of up to 61,000 slot machines at 14 locations.  Pursuant to this law, slot machine facilities could be developed within 30 miles of Monticello Casino and 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.  In addition, in October 2007, the Mount Airy Casino Resort opened with approximately 2,500 slot machines, a hotel and a golf course.  The Mount Airy Casino Resort is located in Mount Pocono, Pennsylvania, approximately 60 miles southwest of Monticello. Furthermore, new legislation enacted by the Commonwealth of Pennsylvania on January 7, 2010 permits tables games such as blackjack, poker and roulette at existing slot machine casinos in Pennsylvania. Under this new law, thoroughbred and harness racetracks with slot-machine facilities and stand-alone slot-machine parlors will be permitted to table games, such as blackjack, poker and roulette.  The development of new casinos and slot machine facilities and the introduction of table games at existing harness racetracks and casinos in Pennsylvania will likely increase the degree of competition within our market and may have an adverse effect on our business and future operating performance.  Moreover, a number of well financed Native American 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 addition, we face competition for our VGMs from Yonkers Raceway and Aqueduct Racetrack, both of which are located closer to New York City than our facility.  Yonkers Raceway re-opened during the fourth quarter of 2006.  It is uncertain at this time as to when Aqueduct Racetrack may open with a new VGM facility.  In addition, proposals have been made for the implementation of a similar program at Belmont Park and in New Jersey, which would include a facility at the Meadowlands Racetrack.  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 Native American casinos, slot machine facilities and table games facilities in Pennsylvania or New Jersey, competing VGM facilities at Yonkers Raceway and Aqueduct Racetrack or the casinos proposed to be developed by Harrah’s Entertainment, Inc., Trading Cove Associates, Inc., Rotate Black Inc. and the Wisconsin Oneidas in the Catskills region of the State of New York for gaming customers.
 
13

 
The continuing decline in the popularity of horse racing and increasing competition in simulcasting could adversely impact the business of Monticello Casino and 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 Casino and Raceway.  Our business plan anticipates the possibility of Monticello Casino and Raceway attracting new customers to its racetrack wagering operations through VGM operations and potential Class III casino development in order to offset the general decline in raceway attendance.  However, even if the numerous arrangements, approvals and legislative changes necessary for Class III casino development occur, Monticello Casino and Raceway may not be able to maintain profitable operations.  Public tastes are unpredictable and subject to change.  Any further decline in interest in horse racing or any change in public tastes may adversely affect Monticello Casino and Raceway’s revenues and, therefore, limit its ability to make a positive contribution to our results.
 
The filing by the New York City Off-Track Betting Corporation (“NY OTB”) for protection under Chapter 9 of the United States bankruptcy code could prevent us from collecting on the receivables owed to us by the NY OTB and cause a reduction in future revenue to be received from NY OTB, which could have an adverse effect on our results of operations.
 
On December 3, 2009, the NY OTB filed for protection under Chapter 9 of the United States bankruptcy code.  The Chapter 9 reorganization may allow the NY OTB to delay and potentially reduce payment of its existing debts.  As a result of the NY OTB’s Chapter 9 reorganization filing, an allowance for doubtful accounts has been recorded for all such receivables deemed uncollectible by us as of December 31, 2009.  In addition, NY OTB may seek to reduce or eliminate certain payments that they are currently required to pay to us, which, if reduced or eliminated, would negatively impact our results of operations.
 
We depend on our key personnel and the loss of their services would adversely affect our operations and our failure to replace our Chief Financial Officer with an individual with the required level of experience and expertise in a timely manner could have an adverse impact on our operations and business strategy.
 
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.  On December 31, 2009, the term of our employment agreement, dated June 1, 2009, with Joseph E. Bernstein expired in accordance with its terms.  As a result of the expiration of his employment agreement, Mr. Bernstein ceased to serve as our Chief Executive Officer.  On December 24, 2009, our Board appointed Joseph A. D’Amato, who also serves as our Chief Financial Officer, to replace Mr. Bernstein as Chief Executive Officer effective January 1, 2010.  We are seeking to hire a successor to replace Mr. D’Amato as our Chief Financial Officer and pending such replacement, Mr. D’Amato has agreed to serve as both Chief Executive Officer and Chief Financial Officer.  Competition for qualified executives is intense and we can give no assurance that we will be able to hire a qualified replacement with the required level of experience and expertise for Mr. D’Amato’s position as Chief Financial Officer. Additionally, recruiting and hiring a replacement for this position could divert the attention of other senior management and increase our operating expenses.  In the event that we are unable to hire a new Chief Financial Officer to replace Mr. D’Amato in a timely manner, there can be no assurance that Mr. D’Amato will be able to continue to successfully perform the duties of both the Chief Executive Officer and Chief Financial Officer positions.  Therefore, our future performance will depend on our ability to recruit and retain an individual to serve as our Chief Financial Officer and our business could suffer if we are not able to attract a qualified replacement in a timely manner.
 
14

 
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 the Notes in the principal amount of $65 million, our debt service obligations increased substantially. We may be unable to repay $65 million if determined judicially that purported beneficial owners of the Notes have properly ‘put’ their Notes on July 31, 2009.  While we are actively pursuing additional financing sources, there can be no assurance that we will be able to obtain financing on acceptable terms, or at all.
 
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:
 
 
·
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;
 
 
·
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
 
 
·
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, to:
 
 
·
seek additional financing in the debt or equity markets;
 
 
·
refinance or restructure all or a portion of our indebtedness, including the Notes; or
 
 
·
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 will require additional financing in order to develop a Class III casino or other projects and we may be unable to meet our future capital requirements and execute our business strategy.
 
Because we are unable to generate sufficient cash from our operations, we will be forced to rely on external financing to develop a Class III casino or other projects 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 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 the Indenture governing the 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 the Class III 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.
 
15

 
In addition, the construction of a Native American Class III casino may depend upon the ability of a Native American tribe with which we may seek to develop a Class III casino resort to obtain financing for the project.  In order to assist such tribe to obtain any such financing, we, or one of our subsidiaries, may be required to guarantee the 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 tribe. Our Indenture would not currently permit us to guarantee such financing.
 
Currently, Class III casino gaming, other than Native American gaming, is not allowed in New York.  There can be no assurance that the required amendment to the New York State Constitution will be passed in order to allow Class III casino gaming, other than Native American gaming, in a timely manner, or at all.
 
Currently, we are not permitted to operate a Class III casino at Monticello Casino and Raceway because Class III casino gaming, other than Native American gaming, is not allowed in New York.  In order to operate a Class III casino at Monticello Casino and Raceway, an amendment to the New York State Constitution to permit Class III casino gaming would need to be passed or we would need to enter into an agreement with a Native American tribe for the development of such a Class III casino.  In order to be amended to permit Class III casino gaming, the New York State Constitution requires the passage of legislation in two consecutive legislative sessions and then passage of the majority of the state's voters in a statewide referendum.  There can be no assurance given that an amendment to the New York State Constitution to permit Class III casino gaming will be passed in a timely manner, or at all.
 
We currently do not have a development and management agreement with the St. Regis Mohawk Tribe or any other Native American tribe for the development of a Class III casino resort and we may not be able to enter into such an agreement on terms favorable to us, or at all.  In addition, such a transaction with a Native American tribe for the development of a Class III casino resort will be subject to various federal and state regulatory approvals.
 
On December 31, 2007, the Second Amended and Restated Land Purchase Agreement by and between St. Regis Mohawk Gaming Authority and Monticello Raceway Management, dated as of December 1, 2005, as amended, and the related agreements, expired by their terms.  On January 4, 2008, the St. Regis Mohawk Tribe received a letter from the BIA denying its request to take 29.31 acres into trust for the purpose of building a Class III gaming facility to be located at Monticello Casino and Raceway, in accordance with the Indian Gaming Regulatory Act of 1988, as amended.  As a result, we no longer have a development and management agreement with a Native American tribe for the development of a Class III casino resort.  The St. Regis Mohawk Tribe’s Election Board issued a press release on January 30, 2010 announcing the results of a referendum of its members pursuant to which the members of the St. Regis Mohawk Tribe indicated, by a vote of 538 - 371, that they support the tribe pursuing off-reservation gaming in the Catskills region of the State of New York.  Nevertheless, there can be no assurance that we will be able to enter into agreements with the St. Regis Mohawk Tribe or any other Native American tribe for the development of a Class III casino resort on the land that we own at Monticello Casino and Raceway on terms favorable to us, or at all.
 
Native American casinos in New York are regulated extensively by federal, state and tribal regulatory bodies, including the National Indian Gaming Commission (“NIGC”) and agencies of the State of New York.  Consequently, a transaction with a Native American tribe for the development of a Class III casino resort will be subject to various federal and state regulatory approvals.  For example, any agreement that we may enter into a Native American tribe will not be effective to allow us to commence the development or management of a gaming facility until a management agreement is first approved by the NIGC.  In addition, a Native American tribe cannot 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.  Such gaming compacts generally will not be entered into until the appropriate land has been taken into trust by the United States for the benefit of such tribe.  No assurance can be given that such land will be taken into trust or that any required approvals will be obtained on terms acceptable to us or at all.
 
16

 
The FONSI that was issued to the St. Regis Mohawk Tribe in connection with an effort to develop a casino at our Monticello location was challenged in federal court, and its validity was called into question.
 
The National Environmental Policy Act requires federal agencies to consider the environmental impacts of activities they perform, fund, or permit, as well as alternatives to those activities and ways to mitigate or lessen those impacts.  Under the National Environmental Policy Act, federal agencies must prepare an environmental assessment to determine whether the proposed action will have a significant effect on the quality of the environment.  If the agency determines that the action will not have a significant effect on the environment, it issues a FONSI, and the project can move forward; if the agency finds to the contrary, it must then prepare an environmental impact statement, detailing the environmental impacts, alternatives, and mitigation measures.
 
We believe that the fact that a FONSI was issued to the St. Regis Mohawk Tribe with respect to the 29.31 acres of land at Monticello Casino and Raceway, stating that the St. Regis Mohawk Tribe’s Final Environmental Assessment for the project had been deemed sufficient, that an Environmental Impact Study would not be required and that the fact that a formal FONSI related to the proposed federal action approving the Land-to-Trust Transfer was issued to the Tribe could significantly improve our chances of and expedite the process with respect to the potential future development of a Native American Class III casino resort on such land with the St. Regis Mohawk Tribe or with any other Native American tribe with which we may seek to develop a Class III casino resort.  On February 16, 2007, however, the St. Regis Mohawk Tribe received a copy of a complaint filed in the United States District Court for the Southern 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 FONSI without requiring an environmental impact statement under the National Environmental Policy Act.  The plaintiffs sought 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 Casino and Raceway and prior to the Department of the Interior’s causing the transfer of the subject land into federal trust.   If a full environmental impact statement were required, this could result in significant delays to developing a Native American Class III casino.  Moreover, the costs involved in obtaining a full environmental impact statement are significant.
 
Because of the unique status of Native American tribes, our ability to successfully develop and manage a Native American Class III casino would be subject to unique risks.
 
Native American 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 Class III casino developed by a Native American 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 us and any such Native American tribe may arise.  It is possible that we may be required to seek enforcement of our rights in a court or other dispute resolution forum of the tribe, instead of state or federal courts or arbitration.  Until a gaming facility management agreement has been approved by the NIGC and by the relevant Native American 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 any other agreements with such tribe will also be inoperative until such gaming facility management agreement has been approved by the NIGC.
 
Native American 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 Native American tribe, and certain federal Native American law statutes or judicial principles.  A number of examples exist where Native American 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 a Native American Class III casino with a Native American tribe.  Several companies with gaming experience that have tried to become involved in the management and/or development of Native American Class III casinos have been unsuccessful.  Due to the unique challenges associated with Native American gaming, 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 Native American gaming operations.
 
17

 
The value of the conversion right associated with the 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 the 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 Notes immediately prior to the transaction. This change could substantially lessen or eliminate the value of the conversion privilege associated with the Notes in the future. For example, if we were acquired in a cash merger, each Note would become convertible solely into cash and would no longer be convertible into securities whose value would vary depending on our future prospects and other factors.
 
Risk Relating to Our Ownership Structure
 
Stockholders’ ability to influence corporate decisions may be limited because our major stockholders own a large percentage of our Common Stock.
 
 Kien Huat is the beneficial holder of 34,800,892 shares of our Common Stock, representing approximately 50.3% of our presently outstanding shares of our Common Stock or just less than 50.0% of our voting power.  Additionally, under the terms of the Investment Agreement, if any option or warrant outstanding as of November 12, 2009, the date of the final closing of the Investment Agreement, (or, in limited circumstances, if issued after such date) is exercised, Kien Huat has the right (following notice of such exercise) to purchase an equal number of additional shares of our Common Stock as are issued upon such exercise at the exercise price for the applicable option or warrant.  Under the terms of the Investment Agreement, Kien Huat is also entitled to recommend three directors whom we are required to cause to be elected or appointed to our Board, subject to the satisfaction of all legal and governance requirements regarding service as a director and to the reasonable approval of the Governance Committee of the Board.  Kien Huat has designated Au Fook Yew and G. Michael Brown as members of the Board pursuant to its rights under the Investment Agreement.  Kien Huat has not yet identified to the Board the third director whom it is entitled to recommend for appointment to the Board pursuant to the Investment Agreement.  Kien Huat will continue to be entitled to recommend three directors for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election or appointment to the Board will be reduced proportionally to Kien Huat’s percentage of ownership.  Under the Investment Agreement, for so long as Kien Huat is entitled to designate representatives to the Board, among other things, Kien Huat will have the right to nominate one of its director designees to serve as the Chairman of the Board, and Mr. Brown has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation.  Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, the Board will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors designated by Kien Huat.  Consequently, Kien Huat has the ability to exert significant influence over our policies and affairs, including the election of our Board and the approval of any action requiring a stockholder vote, such as approving amendments to our certificate of incorporation and mergers or sales of substantially all of our assets, as well as other matters where the interests of Kien Huat may differ from the interests of our other stockholders in some respects, which may lead to stockholder votes that are inconsistent with other stockholders’ best interests or the best interest of us as a whole.  This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.
 
18

 
Factors Affecting the Market Value of our Common Stock
 
The market price of our Common Stock is volatile, leading to the possibility of its value being depressed at a time when our stockholders want to sell their holdings.
 
The market price of our Common Stock has in the past been, and may in the future continue to be, volatile.  For instance, between January 1, 2008 and March 22, 2010, the closing bid price of our Common Stock has ranged between $4.51 and $0.40 per share.  A variety of events may cause the market price of our Common Stock to fluctuate significantly, including but not necessarily limited to:
 
 
·
quarter to quarter variations in operating results;
 
 
·
adverse news announcements; and
 
 
·
market conditions for the gaming industry.
 
In addition, the stock market in recent years has experienced significant price and volume fluctuations.  This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance.  These market fluctuations may adversely affect the price of our Common Stock and other interests in the Company at a time when our stockholders want to sell their interest in us.
 
In addition, future sales of significant amounts of shares held by Kien Huat, or the perception that such sales may occur, could adversely affect the market price of our Common Stock. Kien Huat’s stock ownership may also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
 
Certain provisions of our certificate of incorporation and bylaws as well as our stockholder rights plan discourage unsolicited takeover proposals and could prevent stockholders from realizing a premium return on their investment in our Common Stock.
 
Our Board is divided into three classes, with each class constituting one-third of the total number of directors and the members of each class serving staggered three-year terms.  This classification of the Board makes it more difficult for our stockholders to change the composition of the Board because only a minority of the directors can be elected at once.  The classification provisions could also discourage a third party from accumulating our stock or attempting to obtain control of us, even though this attempt might be beneficial to us and some, or a majority, of our stockholders.  Accordingly, under certain circumstances our stockholders could be deprived of opportunities to sell their shares of Common Stock at a higher price than might otherwise be available.  In addition, pursuant to our certificate of incorporation, our Board has the authority, without further action by the stockholders, to issue up to 3,130,045 shares of preferred stock on such terms and with such rights, preferences and designations, including, without limitation, restricting dividends on our Common Stock, dilution of our Common Stock’s voting power and impairing the liquidation rights of the holders of our Common Stock, as the Board may determine.  Issuance of such preferred stock, depending upon its rights, preferences and designations, may also have the effect of delaying, deterring or preventing a change in control.  Our stockholder rights agreement, the triggering of which would cause substantial dilution to any person or group attempting to acquire our company on terms not approved in advance by our Board could also discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our stockholders. This may have a negative effect on the market price of our Common Stock.
 
Future sales of shares of our Common Stock in the public market or the conversion of the Notes could adversely affect the trading price of shares of our Common Stock, the value of the Notes and our ability to raise funds in new stock offerings.
 
Future sales of substantial amounts of shares of our Common Stock in the public market, the conversion of the 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 the Notes.  As of March 22, 2010, we had 69,479,340 shares of Common Stock outstanding.  Because the 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 the Notes to decline.  In addition, due to this dilution, the existence of the Notes may encourage trading strategies involving the Notes and our Common Stock, including short selling by market participants, 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.  Furthermore, we may be required to issue additional shares of our Common Stock to Kien Huat pursuant to the Option Matching Rights under the Investment Agreement at less than the then-existing market price, which could reduce the price per share of shares held by existing stockholders.
 
19

 
At December 31, 2009, we had outstanding options to purchase an aggregate of 8,080,342 shares of our Common Stock, warrants to purchase an aggregate of 111,111 shares of our Common Stock and Option Matching Rights to purchase an aggregate of 7,441,453 shares of our Common Stock at weighted average exercise prices of $3.00 per share, $0.01 per share and $2.91 per share, respectively.  If the holders of these options, warrants or Option Matching Rights were to exercise their options, warrants and/or matching rights and attempt to sell a substantial amount of the shares issued to them upon such exercise 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.  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.
 
General Business Risks
 
Instability and volatility in the financial markets could have a negative impact on our business, financial condition, results of operations and cash flows.
 
The demand for entertainment and leisure activities tends to be highly sensitive to consumers' disposable incomes, and the recent economic recession that has affected the U.S. and global economies, the tightened credit markets and eroded consumer confidence had a negative impact on overall trends in the gaming industry in 2009.  Discretionary consumer spending habits have been adversely affected by the recent economic crisis and the actual or perceived fear of the extent of the recession could lead to further decrease in spending by our customers.  We cannot predict at what level these negative trends will continue, worsen or improve and the ultimate impact it will have on our future results of operations. The continued weakness in our market and the deterioration of the broader global economy would have a material adverse effect on our industry and our business, including our revenues, profitability, operating results and cash flow.
 
Moreover, to the extent we do not generate sufficient cash flows from operations, we may need to incur additional indebtedness to finance our plans for growth or make scheduled payments on or to refinance our obligations under the Notes.  Recent turmoil in the credit markets and the resulting impact on the liquidity of certain large financial institutions has had, and may continue to have, an effect through the U.S. economy, including limiting access to credit markets for certain borrowers at reasonable rates.  Due to the recent instability and existing uncertainty in the credit markets, we may be unable to incur additional indebtedness to fund our business strategy or refinance our Notes, in the public or private markets, on terms we believe to be reasonable, if at all.
 
Terrorism and the Uncertainty of War May Harm Our Operating Results.
 
The terrorist attacks of September 11, 2001 and the after-effects (including the prospects for more terror attacks in the United States and abroad), combined with recent economic trends and the U.S.-led military action in Afghanistan and Iraq had a negative impact on various regions of the United States and on a wide range of industries, including, in particular, the hospitality industry.  In particular, the terrorist attacks, as well as the United States war on terrorism, may have an unpredictable effect on general economic conditions and may harm our future results of operations as they may engender apprehension in people who would otherwise be inclined to travel to destination resort areas like the Catskills region of the State of New York.  Moreover, in the future, fears of recession, war and additional acts of terrorism may continue to impact the U.S. economy and could negatively impact our business.
 
20

 
We are subject to greater risks than a geographically diverse company.
 
Our proposed operations are limited to the Catskills region of the State of New York, which has been affected by a decades long decline in economic conditions.  As a result, in addition to our susceptibility to adverse global and domestic economic, political and business conditions, any economic downturn in the region could have a material adverse effect on our operations.  An economic downturn would likely cause a decline in the disposable income of consumers in the region, which could result in a decrease in the number of patrons at our proposed facilities, the frequency of their visits and the average amount that they would be willing to spend at the proposed Class III casino.  We are subject to greater risks than more geographically diversified gaming or resort operations and may continue to be subject to these risks upon completion of our expansion projects, including:
 
 
·
a downturn in national, regional or local economic conditions;
 
 
·
an increase in competition in New York State or the northeastern United States and Canada, particularly for day-trip patrons residing in New York State, including as a result of recent legislation permitting new Native American Class III casinos and VGMs at certain racetracks and other locations in New York, Connecticut and Pennsylvania;
 
 
·
impeded access due to road construction or closures of primary access routes; and
 
 
·
adverse weather and natural and other disasters in the northeastern United States.
 
The occurrence of any one of the events described above could cause a material disruption in our business and make us unable to generate sufficient cash flow to make payments on our obligations.
 
Our business could be affected by weather-related factors and seasonality.
 
Our results of operations may be adversely affected by weather-related and seasonal factors.  Severe winter weather conditions may deter or prevent patrons from reaching our gaming facilities or undertaking day trips.  In addition, some recreational activities are curtailed during the winter months.  Although our budget assumes these seasonal fluctuations in gaming revenues for our proposed Class III casino to ensure adequate cash flow during expected periods of lower revenues, we cannot ensure that weather-related and seasonal factors will not have a material adverse effect on our operations.  Our limited operating history makes it difficult to predict the future effects of seasonality on our business, if any.
 
We are vulnerable to natural disasters and other disruptive events that could severely disrupt the normal operations of our business and adversely affect our earnings.
 
Currently, our operations are located at a facility in Monticello, New York and our proposed Class III casino will be located in the same general geographic area.  Although this area is not prone to earthquakes, floods, tornados, fires or other natural disasters, the occurrence of any of these events or any other cause of material disruption in our operation could have a material adverse effect on our business, financial condition and operating results.  Moreover, although we do maintain insurance customary for our industry, including a policy with $10 million limit of coverage for the perils of flood and earthquake, we cannot ensure that this coverage will be sufficient in the event of one of the disasters mentioned above.
 
We may be subject to material environmental liability as a result of unknown environmental hazards.
 
We currently own 232 acres of land.  As a significant landholder, we are subject to numerous environmental laws.  Specifically, under the Comprehensive Environmental Response, Compensation and Liability Act, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or chemical releases on or relating to its property and may be held liable to a governmental entity or to third parties for property damage, personal injury and for investigation and cleanup costs incurred by such parties in connection with the contamination.  Such laws typically impose cleanup responsibility and liability without regard to whether the owner knew of or caused the presence of contaminants.  The costs of investigation, remediation or removal of such substances may be substantial.
 
21

 
Potential changes in the regulatory environment could harm our business.
 
From time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations in the jurisdictions in which we operate or intend to operate.  In addition, from time to time, certain anti-gaming groups propose referenda that, if adopted, could force us to curtail operations and incur significant losses.
 
The BIA, through its denial on January 4, 2008 of the St. Regis Mohawk Tribe's request to take 29.31 acres into trust for the purpose of building a Class III gaming facility to be located at Monticello Casino and Raceway, in accordance with the Indian Gaming Regulatory Act of 1988, as amended, as well as its denial of other proposed off-reservation casinos, was based, in part, of its opinion that the casinos were not within a reasonable commuting distance from the reservations.  While the basis of the denial, the newly promulgated “commutability rule,” is reported to be under review by the U.S. Department of the Interior, no assurance can be made that the BIA will change its position.  The current position of the BIA will likely have an adverse effect on the ability of companies to develop off-reservation Native American gaming operations.
 
We are dependent on the State of New York, Sullivan County, the Town of Thompson and the Village of Monticello to provide our proposed facilities with certain necessary services.
 
It is uncertain whether the local governments have the ability to support the level of economic development associated with the construction of one or more gaming facilities.  The demands placed upon the local governments by these expansion efforts or local economic conditions may be beyond the infrastructure capabilities that these entities are able to provide.  The failure of the State of New York, Sullivan County, the Town of Thompson or the Village of Monticello to provide certain necessary services such as water, sanitation, law enforcement and fire protection, or to be able to support increased traffic demands for our proposed facilities, would have a material adverse effect on our business.
 
Item 1B.
Unresolved Staff Comments.
 
None.
 
Item 2.
Properties.
 
Monticello Land
 
Our primary asset, which is held in fee by Monticello Raceway Management, our wholly owned subsidiary, is a 232 acre parcel of land in Monticello, New York.  Facilities at the site include Monticello Casino and Raceway, which includes a 3,000-seat enclosed grandstand, a clubhouse bar, pari-mutuel wagering facilities (including simulcasting), a paddock, exterior barns and related facilities for the horses, drivers, and trainers.  In addition, our VGM operation is conducted in the renovated lower level of the grandstand portion of Monticello Casino and Raceway, which includes a gaming floor with a central bar and lounge and a separate high stakes VGM area, a 350-seat buffet and food court with three outlets, employee changing areas, storage and maintenance facilities, surveillance and security facilities and systems, cashier’s cage and accounting and marketing areas, as well as parking areas for cars and buses.
 
Of these 232 acres of land, we have identified a 29.31-acre parcel of land for the development of a Class III casino if either Class III casino gaming is legalized in the State of New York or if we enter into an agreement with a Native American tribe for and obtain the necessary approvals in connection with the development of such a Class III casino.  This site was subjected to the New York State Environmental Quality Review Act (“SEQRA”) with the completion of extensive reviews in developing an Environmental Impact Statement issued March 10, 1998, with a 2003 SEQRA update of information and confirmation of the validity of the findings issued by the Village of Monticello Planning Board, issued on July 22, 2005.  If we pursue the development of a Class III casino with a Native American tribe, the parcel of land is to be conveyed to the United States of America to be held in trust for the benefit of a Native American tribe following the BIA’s approval of such transfer and its authorization to use such land for Class II and Class III gaming. We may also be required to enter in an agreement with such Native American tribe pursuant to which, among other things, we will agree not to use such property for any purpose other than Class II or Class III gaming, and activities incidental to gaming such as the operation of entertainment, parking, restaurant or retail facilities.
 
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The Trustee under the Indenture for the benefit of the holders of the Notes has the benefit of a mortgage recorded with respect to such security interest on the Monticello property for the benefit of the holders of the Notes.  This security interest shall terminate upon satisfaction of all of our obligations under the Notes.
 
Item 3.
Legal Proceedings.
 
Empire Resorts, Inc. v. The Bank of New York Mellon Corporation and The Depository Trust Company
 
On August 5, 2009, we filed a declaratory judgment action against the beneficial owners of the Notes, as well as The Depository Trust Company and the Trustee, in the Supreme Court of the State of New York in Sullivan County (the “Action”).  In the complaint, we seek a judicial determination that (1) no Holder, as defined under the Indenture, delivered a Put Notice to the office of the Trustee within the lawfully mandated time for exercise of a Holder’s put rights under the Indenture prior to the close of business on July 31, 2009, and that (2) Plainfield Special Solutions Master Fund Limited (“Plainfield”), Highbridge International LLC (“Highbridge”) and Whitebox Advisors LLC (“Whitebox”) may not and have not accelerated the Notes or invoked certain other consequences of a default.  In October 2009, we entered into a stipulation in connection with the Action.  Pursuant to the stipulation, we agreed to discontinue our claims against all beneficial owners of the Notes who executed the stipulation (the “Consenting Defendants”), who represent substantially all of the outstanding principal amount of the Notes, including Plainfield, Highbridge and Whitebox, without prejudice, and Plainfield, Highbridge and Whitebox agreed to withdraw the notices of default and acceleration of the Notes that they sent to us on August 3 and August 11, 2009. The Consenting Defendants have further agreed to (i) be bound by any final non-appealable judgment with respect to the declaratory judgment sought by us against The Depository Trust Company and the Trustee, and (ii) not to commence any action or proceeding concerning the subject matter of the declaratory judgment until there has been a final non-appealable judgment with respect to the declaratory judgment sought by us.
 
On October 16, 2009, the Trustee and The Depository Trust Company answered the complaint, denying that we are entitled to the determination sought in the Action.  On October 27, 2009, the Trustee and The Depository Trust Company filed a motion for summary judgment, seeking a determination that the Notes were properly put to us for repurchase on July 31, 2009. On December 3, 2009, we filed opposition papers and a cross-motion for summary judgment, requesting that the Court determine that the Holders of the Notes have failed to properly exercise any option to require that we repurchase the Notes by reason of a Holder put right exercisable prior to the close of business on July 31, 2009, and, as a consequence, that we are not in default of the Indenture.
 
On November 5, 2009, the Trustee filed (i) an amended answer, (ii) a counterclaim against us and (iii) a third party complaint against Alpha Monticello, Inc., Alpha Casino Management Inc., Monticello Raceway Development, Monticello Casino Management, Mohawk Management, LLC, and Monticello Raceway Management, as guarantors of our obligation under the Notes. The amended answer again denied that we are entitled to the determinations which we seek in the Action.  The counterclaim and third party complaint seek (a) a declaration that we are in default under the Indenture for failure to repurchase the Notes upon the purported exercise of the Holders’ put right under the Indenture and that the Trustee has properly accelerated the Notes in accordance with the terms of the Indenture, and (b) damages, including all unpaid principal and interest on the Notes, prejudgment interest and costs and expenses in bringing the action, including attorney’s fees.  On February 1, 2010, the Company and the Guarantors filed a reply to the counterclaim and answer to the third party complaint denying liability and asserting certain affirmative defenses.
 
We are unable to predict the length of time the Supreme Court of New York may take to resolve the pending motions and cross-motion for summary judgment or to ultimately resolve the pending dispute, or the length of time it will take for the Third Judicial Department of the Appellate Division, or the State of New York Court of Appeals, to issue a final, non-appealable judgment.  In the event that a final non-appealable ruling is issued declaring that the right to demand repurchase of the Notes had been validly exercised, we would not have an immediate source of funds from which to pay our obligations under the Notes, and no assurance can be made that other sources of financing will be available at such time on commercially reasonable terms, if at all, to satisfy our obligations under the Notes.
 
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Empire Resorts, Inc. v. Joseph E. Bernstein
 
On January 7, 2010, we filed a complaint against Joseph E. Bernstein, our former Chief Executive Officer, in the United States District Court for the Southern District of New York.  In the complaint, we are seeking injunctive relief, unspecified monetary damages and a judgment declaring that Mr. Bernstein is bound by the non-competition restrictions in his employment agreement. Prior to the expiration of his employment agreement, Mr. Bernstein had made numerous financial demands on us.  After we refused his demands, Mr. Bernstein issued a 17-page letter to the New York State Racing and Wagering Board making numerous accusations against us and certain of our directors (the “R&W Letter”), which we maintain are false and baseless.  In the R&W Letter, Mr. Bernstein reveals our confidential and proprietary information and discloses confidential attorney-client privileged communications.  We are cooperating fully with the New York State Racing and Wagering Board with respect to their investigation into this matter.  We are seeking relief from Mr. Bernstein for his alleged: (i) breach of his employment agreement caused by his dissemination of our confidential information in contravention of the terms of the employment agreement as a result of his widespread dissemination of the R&W Letter, (ii) breach of his fiduciary duties to us caused by his improper use of and dissemination of the R&W Letter, (iii) violation of his good faith and loyalty obligations to us as a result of, among other things, disclosing confidential information and attorney-client privileged information of us as a result of his dissemination of the R&W Letter, and (iv) tortious interference with prospective business relations caused by Mr. Bernstein’s attempted interference with our business relations with the St. Regis Mohawk Tribe.  Prior to issuance of the R&W Letter, we received a letter from Mr. Bernstein’s counsel alleging that we breached Mr. Bernstein’s employment agreement and summarizing Mr. Bernstein’s claims against the Company.  As of the date hereof, Mr. Bernstein has not asserted any claims against us in court.
 
Other Proceedings
 
We are a party from time to time to various other legal actions that arise in the normal course of business.  In the opinion of management, the resolution of these other matters will not have a material and adverse effect on our consolidated financial position, results of operations or cash flows.
 
Item 4.
(Removed and Reserved).
 
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PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Performance Graph
 
 
Company/Index
 
12/31/2004
   
12/31/2005
   
12/31/2006
   
12/31/2007
   
12/31/2008
   
12/31/2009
 
Empire Resorts, Inc.
  $ 100.00     $ 66.37     $ 77.76     $ 30.58     $ 9.78     $ 18.92  
NASDAQ Market Index
  $ 100.00     $ 102.20     $ 112.68     $ 124.57     $ 74.71     $ 108.56  
Hemscott Group Index
  $ 100.00     $ 97.69     $ 152.83     $ 172.62     $ 31.02     $ 24.10  
Morningstar Industry Index
  $ 100.00     $ 92.03     $ 135.18     $ 149.76     $ 29.23     $ 20.91  

Assumes $100 invested on December 31, 2004 in the Company’s Common Stock, the NASDAQ Market Index, the Hemscott Group Index and the Morningstar Industry Index.
 
The calculations in the table were made on a dividends reinvested basis.
 
The future market performance of the Company’s Common Stock may be better or worse than the trends depicted in the above graph.
 
Market Information
 
Our Common Stock is listed on the Nasdaq Global Market under the symbol “NYNY”. The following table sets forth the high and low intraday sale prices for the Common Stock for the periods indicated, as reported by the Nasdaq Global Market.
 
25

 
   
High
   
Low
 
Year ended December 31, 2008
           
First Quarter
  $ 3.43     $ 0.86  
Second Quarter
    4.66       1.36  
Third Quarter
    4.25       2.02  
Fourth Quarter
    3.00       0.88  
                 
Year ended December 31, 2009
               
First Quarter
  $ 1.85     $ 0.40  
Second Quarter
    2.79       0.75  
Third Quarter
    3.97       1.50  
Fourth Quarter
    3.59       1.80  

Holders
 
According to Continental Stock Transfer & Trust Company, there were approximately 219 holders of record of our Common Stock at March 22, 2010.
 
Dividends
 
During the past two fiscal years, we did not declare or pay any cash dividends with respect to our Common Stock and we do not anticipate declaring any cash dividends on our Common Stock in the foreseeable future.  We intend to retain all future earnings for use in the development of our business.  In addition, the payment of cash dividends to the holders of our Common Stock is restricted by undeclared dividends on our Series E preferred stock.  We have accumulated unpaid Series E preferred dividends of approximately $9.8 million as of December 31, 2009.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table provides information as of December 31, 2009 with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans.
 
   
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
   
Weighted-average exercise price of outstanding options, warrants and rights
(b)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
 
Equity compensation plans approved by
security holders
    8,030,342     $ 2.96       2,058,466  
Equity compensation plans not approved by
security holders
    50,000       8.53       --  
Total
    8,080,342     $ 3.00       2,058,466  
 
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Item 6.
Selected Financial Data.
 
The following selected financial information is qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” contained elsewhere herein. The selected consolidated income statement data for the years ended December 31, 2009, 2008 and 2007 and the selected consolidated balance sheet data as of December 31, 2009 and 2008 are derived from our audited consolidated financial statements which are included elsewhere herein. The selected consolidated income statement data for the years ended December 31, 2006 and 2005 and the selected consolidated balance sheet data as of December 31, 2007, 2006 and 2005 are derived from our audited consolidated financial statements not included herein.
 
STATEMENTS OF OPERATIONS DATA
 
(All dollar amounts in thousands, except per share data)
 
   
Years ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
NET REVENUES
  $ 67,634     $ 68,551     $ 77,300     $ 100,873     $ 89,124  
Operating costs and expenses, including depreciation
    71,805       73,266       83,537       101,489       88,063  
Impairment loss – deferred development costs *
    ---       ---       12,822       ---       14,291  
LOSS FROM OPERATIONS
    (4,171 )     (4,715 )     (19,059 )     (616 )     (13,230 )
NET LOSS
    (10,575 )     (10,609 )     (24,649 )     (7,076 )     (18,527 )
Undeclared dividends on preferred stock
    (1,551 )     (1,551 )     (1,551 )     (1,551 )     (1,551 )
NET LOSS APPLICABLE TO COMMON SHARES
  $ (12,126 )   $ (12,160 )   $ (26,200 )   $ (8,627 )   $ (20,078 )
 
Loss per common share, basic and diluted
  $ (0.30 )   $ (0.38 )   $ (0.89 )   $ (0.32 )   $ (0.77 )
                                         
                                         
OTHER FINANCIAL DATA:
                                       
Capital Expenditures
  $ 187     $ 277     $ 339     $ 320     $ 1,967  
                                         
BALANCE SHEET DATA:
                                       
Cash and cash equivalents
  $ 50,080     $ 9,687     $ 15,008     $ 9,471     $ 6,992  
Total assets
    89,421       49,096       54,199       60,564       57,245  
Debt payable within one year
    65,000       72,617       ---       ---       ---  
Long-term debt
    ---       ---       72,617       72,617       72,476  
Proceeds from exercise of stock options, Option Matching Rights and sale of common stock
    55,277       5,191       18,932       1,166       283  
Total stockholders’ equity (deficit)
    15,548       (32,371 )     (28,077 )     (25,723 )     (27,215 )

*           Impairment loss represents the write-off of costs associated with efforts to develop Native American casinos in New York State.
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this document.
 
Liquidity and Going Concern
 
The accompanying consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  Our ability to continue as a going concern depends on our ability to fulfill our obligations with respect to our $65 million of Notes.  In addition, we have continuing net losses and negative cash flows from operating activities.  These conditions raise substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.  These circumstances caused our independent registered public accounting firm to include an explanatory paragraph in their report dated March 24, 2010 regarding their concerns about our ability to continue as a going concern.
 
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We are seeking a judicial determination in the Supreme Court of New York, Sullivan County, against the beneficial owners of the Notes, as well as the Trustee that (1) no Holder, as defined under the Indenture governing the Notes delivered an executed Put Notice to the office of the Trustee within the lawfully mandated time for exercise of a Holder’s put rights under the Indenture prior to the close of business on July 31, 2009, and that (2) the three entities that gave the purported notice of default may not and have not accelerated the Notes or invoked certain other consequences of a default.  See the section of this annual report entitled “Item 3 — Legal Proceedings.”  We are unable to predict the length of time the Supreme Court of New York may take to ultimately resolve the pending dispute, or the length of time it will take for the Third Judicial Department of the Appellate Division, or the State of New York Court of Appeals, to issue a final, non-appealable judgment.  In the event that a final non-appealable ruling is issued declaring that the right to demand repayment of the Notes had been validly exercised, we would not have an immediate source of funds from which to pay our obligations under the Notes, and no assurance can be made that other sources of financing will be available at such time on commercially reasonable terms, if at all, to satisfy our obligations under the Notes.
 
In March 2010, we entered into an agreement with BofA/ML to serve as our financial advisor to assist us in analyzing and structuring our efforts to effect a restructuring of our existing debt and preferred stock and to recommend possible steps to improve our liquidity. Such steps may include negotiations with the current beneficial holders of the Notes to resolve the current litigation. BofA/ML will provide advice to us on the timing, nature and terms of new securities, other consideration or other inducements to be offered to effect a restructuring.  At this time, we are unable to make any assurances as to the results of our restructuring efforts.
 
As part of our strategic plan to improve our liquidity and free cash flow, we are committed to improving our operating results and cash flow from our core businesses at our wholly-owned subsidiary Monticello Raceway Management, which operates Monticello Casino and Raceway, restructuring our debt, and seeking other growth opportunities.
 
On August 19, 2009, we entered into the Investment Agreement with Kien Huat pursuant to which (i) we issued to the Kien Huat 6,804,188 shares of our Common Stock in the First Tranche, or approximately 19.9% of the outstanding shares of Common Stock on a pre-transaction basis, for aggregate consideration of $11 million, and (ii) agreed, following stockholder approval of the transaction, to issue an additional 27,701,852 shares of Common Stock to Kien Huat in the Second Tranche for additional consideration of $44 million.  We held a special meeting of our stockholders on November 10, 2009, at which our stockholders approved, among other things, the issuance of shares and related proposals to facilitate the Second Tranche.  The closing of the Second Tranche occurred on November 12, 2009, at which time we issued an additional 27,701,852 shares of Common Stock to Kien Huat for consideration of $44 million in accordance with the terms of the Investment Agreement.  We have used and intend to use the proceeds of the First Tranche and the Second Tranche for transaction costs, to pay interest on existing indebtedness and for general working capital.  Such proceeds may also be used as a part of a restructuring of the Company’s capital base.  The shares of Common Stock issued pursuant to the Investment Agreement have not been registered under the Securities Act.
 
As a result of the closing of the Second Tranche, as of November 12, 2009, Kien Huat owned 34,506,040 shares of Common Stock, representing just under 50% of our voting power.  As of the closing of the Second Tranche we had certain options and warrants outstanding.  Under the Investment Agreement, if any  of such options or warrants are exercised (or any of the first one million options or warrants issued after the closing of the First Tranche to our officers and directors who held either of such positions as of July 31, 2009), Kien Huat has the right to purchase an equal number of additional shares of Common Stock as are issued upon such exercise at the exercise price for the applicable option or warrant.  Following any such purchase by Kien Huat, Kien Huat may not own more than one share less than 50% of our voting power.
 
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Overview
 
We were 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 wholly-owned subsidiary, Monticello Raceway Management, we currently own and operate Monticello Casino and Raceway, a VGM and harness horseracing facility located in Monticello, New York, 90 miles Northwest of New York City.  At Monticello Casino and Raceway, we currently operate 1,090 VGMs as an agent for the New York State Lottery and 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.
 
We are concentrating on improving our cash flow at our current operation at Monticello Raceway Management and restructuring our balance sheet with the infusion of new capital from Kien Huat.  We have an agreement, subject to certain conditions, with Raceway Corp., a subsidiary of Concord, to provide advice and general managerial oversight with respect to the operations at a harness to be constructed at that certain parcel of land located in the Town of Thompson, New York and commonly known as the Concord Hotel and Resort, which agreement may be terminated by either party in the event that the closing of the transaction contemplated by such agreement has not occurred on or before July 31, 2010.  No assurance can be given that the conditions to the closing of the transaction will be satisfied in order to complete the transaction, as planned.
 
We have been working since 1996 to develop a Class III casino on a site 29.31 acre owned by us adjacent to our Monticello, New York facility.  As used herein, Class III gaming means a full casino including slot machines, on which the outcome of play is based upon randomness, and various table games including, but not limited to, poker, blackjack and craps.  Initially, this effort was pursued through agreements with various Native American tribes.  Our most recent efforts were with the St. Regis Mohawk Tribe.  We were advised, however, that on January 4, 2008, the St. Regis Mohawk Tribe received a letter from the BIA denying the St. Regis Mohawk Tribe’s request to take 29.31 acres into trust for the purpose of building a Class III gaming facility to be located at Monticello Casino and Raceway.  The basis for the denial, a newly promulgated “commutability rule,” is reported to be under review by the U.S. Department of the Interior.
 
On July 18, 2008, our subsidiaries, Monticello Raceway Management, Monticello Raceway Development and Monticello Casino Management entered into a settlement agreement with the St. Regis Mohawk Gaming Authority and the St. Regis Mohawk Tribe pursuant to which the parties agreed to release all claims against the other parties.  The settlement was amended on October 10, 2008 to eliminate any remaining unfulfilled conditions and included our agreement to reimburse the St. Regis Mohawk Tribe approximately $444,000 for expenses incurred by them in connection with the project.
 
Off-Balance Sheet Arrangements
 
On January 12, 2004, in order to better focus on the implementation of the New York State Lottery’s VGM program and the development of other gaming operations at Monticello Casino and Raceway, all claims relating to certain litigation against parties alleged to have interfered with Catskill Development, L.L.C.’s relations with the St. Regis Mohawk Tribe, along with the rights to any proceeds from any judgment or settlement that may arise from such litigation, were transferred to a grantor trust (the “Litigation Trust”) in which our common stockholders of record immediately before the consolidation’s closing were provided a 19.75% interest, with the members of Catskill Development, L.L.C. and Monticello Raceway Development immediately before the consolidation’s closing owning the remaining 80.25%.  We separately entered into an agreement with the grantor trust pursuant to which we agreed to provide the Litigation Trust with a $2.5 million line of credit to finance the litigation.
 
As of December 31, 2007, we had provided $2.5 million to the Litigation Trust. We had also recorded a valuation reserve for the full amount of the credit provided. On October 21, 2008, we were advised that a decision rendered in the case that involved the Litigation Trust was adverse to the position of the Litigation Trust. As a result, it appears very unlikely that we will recover any of the amounts advanced to the Litigation Trust and have written off the receivable at December 31, 2008.
 
29

 
Critical Accounting Policies
 
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and judgments related to the application of certain accounting policies.
 
While we base our estimates on historical experience, current information and other factors deemed relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to our reported financial results if (i) the accounting estimate requires us to make assumptions about matters that are uncertain and (ii) different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements.
 
We consider our policies for revenue recognition to be critical due to the continuously evolving standards and industry practice related to revenue recognition, changes which could materially impact the way we report revenues. Accounting polices related to: point loyalty program, accounts receivable, impairment of long-lived assets, stock-based compensation, fair value and income taxes are also considered to be critical as these policies involve considerable subjective judgment and estimation by management. Critical accounting policies, and our procedures related to these policies, are described in detail below.
 
Revenue recognition. Revenues represent (i) the net win from VGMs, (ii) revenues from pari-mutuel wagering earned from live harness racing and simulcast signals from other tracks and (iii) food and beverage sales and other miscellaneous income. Revenue from the VGM operations is the difference between the amount wagered by bettors and the amount paid out to bettors and is referred to as the net win. The net win is included in the amount recorded in our consolidated financial statements as gaming revenue. We report incentives related to VGM play and points earned in loyalty programs as a reduction of gaming revenue. We recognize revenues from pari-mutuel wagering earned from live harness racing and simulcast signals from other tracks, before deductions of such related expenses as purses, stakes and awards. Some elements of the racing revenues from Off-track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty and timing of payments.
 
We currently have a point loyalty program for our VGM customers, which allows them to earn points based on the volume of their VGM activity. The estimated redemption value of points earned by customers is recorded as an expense in the period the points are earned. We estimate the amount of points which will be redeemed and record the estimated redemption value of those points as a reduction from revenue in promotional allowances. The factors included in this estimation process include an overall redemption rate, the cost of awards to be offered and the mix of cash, goods and services for which the points will be redeemed. We use historical data to estimate these amounts.
 
Accounts Receivable.  Accounts receivable are stated at the amount we expect to collect. If needed, an allowance for doubtful accounts is recorded based on information on specific accounts. Accounts are considered past due or delinquent based on contractual terms and how recently payments have been received and judgment of collectability. In the normal course of business, we settle wagers for other racetracks and are exposed to credit risk.  These wagers are included in accounts receivable.  Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 
Impairment of Long-Lived Assets.  We periodically review the carrying value of our long-lived assets in relation to historical results, as well as management's best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, we will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value.
 
Stock-Based Compensation.  The cost of all share-based awards to employees, including grants of employee stock options and restricted stock, is recognized in the financial statements based on the fair value of the awards at grant date.  The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant.  The fair value of restricted stock awards is equal to the market price of our Common Stock on the date of grant.  The fair value of share-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant.  All unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our plans is expected to be recognized over a period of three years. This expected cost does not include the impact of any future stock-based compensation awards.
 
30

 
Fair value.  In the first quarter of 2008, we adopted the Fair Value Measurements and Disclosure standard issued by Financial Accounting Standards Board (“FASB”) for financial assets and liabilities and elected the deferral option available for one year for non-financial assets and liabilities.  This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.  This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  On January 1, 2009, we adopted the remaining provisions as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis.  The adoption of the remaining provisions did not materially impact our consolidated financial statements.  As permitted in 2008, we chose not to elect the fair value option as prescribed by FASB, for our financial assets and liabilities that had not been previously carried at fair value.  Our financial instruments are comprised of current assets and current liabilities, which include the Notes at December 31, 2009.  Current assets and current liabilities approximate fair value due to their short term nature.
 
Income Taxes. We apply the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates for the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. A hypothetical 10% decrease in our deferred tax valuation allowance will result in an income tax benefit of approximately $7.2 million.
 
Results of Operations
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenues.  Net revenues decreased approximately $917,000 (1%) for 2009.  Revenue from VGM operations decreased by approximately $4.4 million (7%); revenue from racing operations increased by approximately $4.5 million (58%) and food, beverage and other revenue remained constant.  We believe that our VGM operations continue to be adversely affected by the competing VGM facility at Yonkers Raceway and, at a lesser extent, slot machine facilities in Pennsylvania.  Our number of daily visits decreased approximately 3% and the average daily win per unit increased from $100.32 for the year ended December 31, 2008 to $105.05 for the year ended December 31, 2009 (5%).  This increase in average daily win per unit was due to a reduction in our average number of machines during the 2009.  The average number of machines in service was 1,402 for 2009 and 1,587 for 2008.  If the average number of machines remained constant to the same period in 2008, our average daily win per unit would have decreased to $92.79 (7%) for the year ended December 31, 2009. Our VGM hold percentage was 7.9% and 7.7% for the years ended 2009 and 2008, respectively.  VGM revenues were recorded net of tax-free VGM play of approximately $2.5 million in the year ended 2009 and $0 for 2008 and 2007. The increase in tax-free VGM play was associated with a New York State Lottery pilot program that commenced in August 2009. The pilot program was evaluated by the New York State Lottery at the end of six month period and was extended another six months until August 4, 2010. During the period from the inception of the pilot program, our rate of reduction of VGM net win has declined. We will continue to use this program in conjunction with our marketing promotional programs and increased television advertising in 2010 to increase our awareness in our primary markets and to regain market share.
 
Racing revenue primarily increased as we received approximately $3.7 million from various OTBs in payment of amounts previously contested by the OTBs.
 
31

 
Promotional Allowances increased by approximately $1.0 million (45%), mostly due to an increase in taxable free play.
 
Gaming costs.  Gaming (VGM) costs decreased by approximately $4.7 million (10%) to approximately $42.1 million for the year ended December 31, 2009 compared with 2008.  Of this amount, approximately $1.2 million (3%) is attributable to a change in the tax rate permitting VGM operators to pay a lower percentage of VGM revenues to the New York State Lottery.  The decrease is the result of the reduction in gaming revenue for the current period decreasing commissions paid by approximately $4.2 million, and payroll saving of approximately $838,000, due to a reduction in the number of employees required for our current business volume.   These savings were offset by costs incurred of approximately $794,000 in regards to the Sportsystems Gaming Management at Monticello, LLC (“Sportsystems”) contract costs, which includes a settlement payment of $650,000.  Sportsystems provided management services and marketing assistance to us from June 11, 2009 through December 31, 2009.
 
Racing costs.  Racing costs excluding a $1,250,000 settlement with our horsemen in 2008 increased by approximately $2.2 million (29%) to approximately $9.8 million for the year ended December 31, 2009.  This increase is a result of the horsemen’s share of approximately $1.8 million from increased revenues and various other costs of approximately $565,000 offset by cost savings of approximately $169,000 in payroll due to a reduction in the number of employees required for our current business volume.
 
Food beverage and other costs.  Food, beverage and other costs decreased approximately $223,000 (11%) to approximately $1.8 million primarily as a result of continuing cost control initiatives and lower patron visits in 2009.  Food costs as a percentage of revenue were 49% in 2009 compared to 55% in 2008 and beverage costs as a percentage of revenue were 21% in 2009 compared to 23% in 2008.
 
Selling, general and administrative expenses.  Selling, general and administrative expenses decreased approximately $2.0 million (15%) for the year ended December 31, 2009 as compared to the year ended December 31, 2008.  This decrease was a result of a reduction in direct marketing expenses of approximately $1.2 million (43%), primarily consisting of savings in: promotional prize expenses of $775,000 and the remainder in lower music and band, newspaper advertising, television advertising, special events, and marketing agency expenses. This decrease was partially offset by an increase in direct mail expense of approximately $259,000.  In addition, we had a decrease in development fees of approximately $1.3 million, primarily due to a settlement, in 2008, with the St. Regis Mohawk Tribe of approximately $444,000 and other development costs of approximately $818,000, as well as payroll savings of approximately $302,000, due to a headcount reduction, and various other cost reductions of approximately $430,000. These decreases were offset by increases in directors’ fees of approximately $984,000 and costs associated with the assignment of our revolving credit agreement of approximately $460,000.
 
Stock-based compensation expense.  The increase in stock-based compensation of approximately $4.4 million was primarily a result of options granted to directors, officers, key operating executives and the modifications of option terms of certain former officers and directors.  During the period from April 15, 2009 to June 8, 2009 we granted approximately 3.2 million options to directors and officers at exercise prices that varied from $1.11 to $1.78 (exercise price was determined by using the closing stock price on the day of grant), but the grants were subject to stockholder approval of an amendment to increase the number of our shares in the 2005 Equity Incentive Plan.  Stockholders’ approval was obtained on June 16, 2009 on which date the stock price was $1.57.  On September 11, 2009 we granted 750,000 options to a director at an exercise price of $3.38 (exercise price was determined by using the closing stock price on the day of grant), but the grant was subject to stockholder approval, which was obtained on November 10, 2009 on which date the stock price was $3.11.
 
Interest expense and income.  Interest expense increased approximately $407,000 (7%) as a result of warrants granted with a value of approximately $564,000.  The increase was offset by a decrease in interest paid on The Park Avenue Bank of New York (“PAB”) line of credit due to principal repayments and an interest rate reduction during 2009.  The PAB line of credit was fully paid in 2009.  Interest income decreased by approximately $103,000 (41%) as a result of lesser amounts invested at lower rates in 2009 offset by interest received on OTB settlements.
 
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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Revenues.  Total net revenues decreased approximately $8.7 million (11%) for the year ended December 31, 2008. VGM operations accounted for approximately $6.2 million (10%) of that reduction and racing accounted for approximately $2.1 million (22%). The remainder of the decrease was attributable to food, beverage and other revenues decreasing by approximately $618,000 (11%) offset by decreased complimentary expenses (“promotional allowances”) of approximately $184,000 (7%).
 
We believe that the decrease in VGM revenues can be attributed primarily to more competition from VGM facilities at Yonkers Raceway (opened November, 2006) and new casinos opening in Pennsylvania in 2007. It is likely that the economic conditions in the fourth quarter of 2008 also had an adverse effect on revenues. Patron visits decreased by 19.6% and the average daily win per unit was reduced from $110.68 to $100.04 (10%). The average number of machines in operation was 1,587 in both years.  The decrease in promotional allowances is primarily a result of reduced revenues.
 
The decrease in racing revenue was primarily a result of reduced revenue allocations from OTB facilities. Yonkers Raceway was operating for the full year 2008 with a new VGM facility and other improvements. Because a part of the OTB revenue sharing arrangements is based upon the revenues of each participant relative to the total revenues of all participants, our share is adversely affected by strong competition from other participants.
 
Gaming costs.  Gaming (VGM) costs decreased by approximately $9.6 million (17%) to approximately $46.7 million for 2008 compared with 2007.  Of this amount, approximately $3.4 million (6%) is attributable to a change in the law which allows VGM operators to pay a lower percentage of VGM revenues to the New York State Lottery. The remainder of the decrease of approximately $6.2 million (11%) reflects cost reductions to adjust to lower levels of customer visits.
 
Racing costs.  Racing costs increased in 2008 by approximately $200,000 (2%) to approximately $8.8 million. The primary reason for this increase was the cost of a settlement reached with our Horsemen of $1.25 million. Purses and other racing expenses decreased by approximately $1.0 million (12%). This percentage decrease is less than the percentage decrease in racing revenues because not all of our operating expenses will vary directly with revenue changes.
 
Food, beverage and other costs.  These costs decreased by approximately $357,000 (15%) to approximately $2.0 million for 2008 compared with 2007.  The percentage reduction was greater that the reduction in revenues primarily as a result of expense reduction initiatives undertaken in 2008.
 
Selling, General and Administrative expenses.  Selling, general and administrative expenses decreased approximately $556,000 (4%) in 2008 to approximately $14.4 million.  The decrease is comprised of a reduction in stock-based compensation of approximately $2.2 million, a decrease in other compensation of approximately $176,000, an increase in marketing costs of approximately $216,000 and an increase in professional fees and other expenses related to development activities of approximately $1,642,000.
 
Interest expense.  Interest expense was approximately $5.7 million and $5.9 million, respectively, for the years 2008 and 2007.  The interest rates charged on our credit facility were based upon market rates and were lower in 2008 than those charged in 2007.
 
Liquidity and Capital Resources
 
On August 19, 2009, we entered into the Investment Agreement with Kien Huat, pursuant to which (i) we issued to the Kien Huat 6,804,188 shares of our Common Stock in the First Tranche, or approximately 19.9% of the outstanding shares of Common Stock on a pre-transaction basis, for aggregate consideration of $11 million, and (ii) following stockholder approval of the transaction, as required under applicable NASDAQ Marketplace Rules, and the satisfaction of other customary closing conditions, we issued to Kien Huat an additional 27,701,852 shares of Common Stock in the Second Tranche for additional consideration of $44 million on November 12, 2009.  We have used and intend to use the proceeds of the First Tranche and the Second Tranche for transaction costs, to pay interest on existing indebtedness and for future working capital.  Such proceeds may also be used as a part of a restructuring of the Company’s capital base.  The shares of Common Stock issued to Kien Huat pursuant to the Investment Agreement have not been registered under the Securities Act.
 
33

 
As a result of the closing of the Second Tranche, as of November 12, 2009, Kien Huat owned 34,506,040 shares of Common Stock, representing just under 50% of our voting power.  As of the closing of the Second Tranche we had certain options and warrants outstanding.  Under the Investment Agreement, if any of such options or warrants are exercised (or any of the first one million options or warrants issued after the closing of the First Tranche to our officers and directors who held either of such positions as of July 31, 2009), Kien Huat has the right to purchase an equal number of additional shares of Common Stock as are issued upon such exercise at the exercise price for the applicable option or warrant.  Following any such purchase by Kien Huat, Kien Huat may not own more than one share less than 50% of our voting power.  The Option Matching Rights were valued using the Black-Scholes valuation model and treated as part of the transactions contemplated by the Investment Agreement pursuant to the terms of such agreement.
 
Net cash used in operating activities during the year ended December 31, 2009 was approximately $4.6 million and approximately $10.5 million for the year ended December 31, 2008.  The decrease of approximately $5.9 million was primarily a result of an increase in stock-based compensation of approximately $4.4 million, an increase in accrued expenses and other current liabilities of approximately $839,000 and an increase in interest expense related to the warrants issued of approximately $564,000.  The remaining decrease was primarily attributable to the changes in restricted cash and prepaid expenses and other current assets.  Restricted cash increased by approximately $2.3 million due to an increase in the purse escrow account of approximately $1.9 million as a result of increased racing revenues and a restricted cash account addition of $400,000, as required by the New York State Lottery, in 2009.  Prepaid expenses and other current assets decreased by approximately $904,000 in 2009 compared to an increase of approximately $2.3 million in 2008, primarily due to a reduction of the current portion of the Empire Zone real estate tax credit receivable of approximately $616,000 in 2009 compared to an increase of the receivable of approximately $1.7 million in 2008.  The 2009 Empire Zone real estate tax credit receivable consisted of the Empire Zone real estate tax credits for 2008 compared to the 2008 receivable, which consisted of the Empire Zone real estate tax credits for 2006 and 2007.  The 2008 receivable was collected in 2009.
 
Net cash used by investing activities was approximately $251,000 for the year ended December 31, 2009 compared to approximately $30,000 in 2008.  In 2008, we benefited from collections of restricted cash from the Racing Capital Improvement account of approximately $247,000.
 
Net cash provided by financing activities was approximately $45.2 million for the year ended December 31, 2009 compared to $5.2 million in 2008.  In 2009, we benefited from the proceeds of approximately $55.0 million from the issuance of 27,701,852 shares of our Common Stock to Kien Huat, the redemption of our restricted cash account under our credit facility of approximately $467,000, which were offset by stock issuance costs of approximately $2.9 million and repayment of our $7.6 million credit facility. In 2008, we benefited from the proceeds of from the issuance of our Common Stock of approximately $5.2 million.
 
At December 31, 2009, we had undeclared dividends on our Series E Preferred Stock of approximately $9.8 million and undeclared dividends for 2009 on our Series B Preferred Stock of approximately $167,000.  We are in compliance with our Certificates of Designations, Preferences and Rights of the issued and outstanding preferred shares.
 
On February 23, 2010, our Board authorized issuance of 74,705 shares of Common Stock in payment of dividends due for the year ended December 31, 2009 on our Series B Preferred Stock.  The value of these shares when issued was approximately $137,000.
 
On March 9, 2009, our Board authorized the issuance of 124,610 shares of our Common Stock in payment of dividends due for the year ended December 31, 2008 on our Series B Preferred Stock. The recorded value of these shares was approximately $111,000.
 
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Recent Accounting Pronouncements
 
In January 2010, the FASB issued Accounting Standards Update No.  2010-0, “Improving Disclosures about Fair Value Measurements” (the “Update”).  The Update provides amendments to FASB Accounting Standards Codification (“ASC”) 820-10 that require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  In addition the Update requires entities to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).  The disclosures related to Level 1 and Level 2 fair value measurements are effective for us in 2010 and the disclosures related to Level 3 fair value measurements are effective for us in 2011.   The Update requires new disclosures only, and will have no impact on our consolidated financial position, results of operations, or cash flow.

In June 2009, the FASB issued The FASB ASC and the Hierarchy of GAAP (the “Codification”).  This standard replaces The Hierarchy of GAAP, and establishes only two levels of U.S. GAAP, authoritative and non-authoritative.  The FASB ASC became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants.  All other non-grandfathered, non-SEC accounting literature not included in the ASC will become non-authoritative.  This standard was effective for financial statements for interim or annual reporting periods ending after September 15, 2009.  We began to use the new guidelines and numbering system prescribed by the ASC when referring to GAAP in the third quarter of 2009.  As the Codification did not change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
 
In April 2009, the FASB issued ASC 825-10-50-10, (formerly FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). This FASB staff position amends FASB Statement No. 107 to require disclosures about fair values of financial instruments for interim reporting periods as well as in annual financial statements. The staff position also amends APB Opinion No. 28 to require those disclosures in summarized financial information at interim reporting periods. This FASB staff position becomes effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this FSP for the interim reporting period ending March 31, 2009.

In April 2009, the FASB issued ASC 320, (formerly SFAS No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”) which amends the other-than-temporary impairment guidance in GAAP for debt securities. If an entity determines that it has an other-than-temporary impairment on a security, it must recognize the credit loss on the security in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The staff position expands disclosures about other-than-temporary impairment and requires that the annual disclosures in FASB Statement No. 115 and FSP FAS 115-1 and FAS 124-1 be made for interim reporting periods. This statement becomes effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this FSP for the interim reporting period ending March 31, 2009. There was no material impact on our consolidated financial position or results of operations upon adoption.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (now ASC 820-10-35-51A). This FSP provides additional guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability. A significant decrease in the volume or level of activity for the asset of liability is an indication that transactions or quoted prices may not be determinative of fair value because transactions may not be orderly. In that circumstance, further analysis of transactions or quoted prices is needed, and an adjustment to the transactions or quoted prices may be necessary to estimate fair value. This FSP becomes effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this FSP for the interim reporting period ending March 31, 2009 and it did not have a material impact on our consolidated financial position or results of operations.
 
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Contractual Obligations
 
   
Payments due by period
(in thousands)
 
   
Total
   
Less than 1 year
   
1 – 3 years
   
3 – 5 years
   
More than 5 years
 
Senior Convertible Notes (a):
                             
Principal
  $ 65,000     $ ----     $ ----     $ 65,000     $ ----  
Estimated interest (b)
    26,000       5,200       10,400       10,400       ----  
Total
  $ 91,000     $ 5,200     $ 10,400     $ 75,400     $ ----  

(a)
The holders of the Notes had the right to require us to repurchase the Notes at 100% of the principal amount outstanding on July 31, 2009.  See the section of this annual report entitled “Item 8 — Financial Statements and Supplementary Data - Note F. Senior Convertible Notes.”
 
(b)
Interest is payable at 8% semi-annually on the Notes.
 
Subsequent Events
 
On February 23, 2010, our Board authorized the issuance of 74,705 shares of our Common Stock in payment of dividends on our Series B Preferred Stock for 2009.  The value of these shares was approximately $137,000.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.  As of December 31, 2009, the Notes bear interest at a fixed interest rate.  As of December 31, 2008, borrowings under our then existing $10 million credit facility with the Bank of Scotland  which was assigned to The Park Avenue Bank on July 27, 2009, constituted variable rate debt.  However, we repaid in full the amounts outstanding under this credit facility on December 18, 2009.  We do not have any financial instruments held for trading or other speculative purposes and do not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.  We invest our excess cash primarily in short term U.S. Treasury Fund. Due to the short-term nature of these investments, a 1% change in market interest rates would not have a significant impact on the total value of our portfolio as of December 31, 2009. Accordingly, while changes in interest rates could decrease interest income, we do not believe that an interest rate change would not have a significant impact on our operations.
 
We do not have exposure to foreign currency exchange rate fluctuations, as we do not transact business in international markets and are not a party to any material non-U.S. dollar-denominated contracts.
 
We do not use derivative financial instruments nor do we enter into any futures or forward commodity contracts since we do not have significant market risk exposure with respect to commodity prices.
 
Item 8.
Financial Statements and Supplementary Data.
 
 
Page
Financial Statements as of December 31, 2009 and 2008 and for the three years ended December 31, 2009:
 
Report of Independent Registered Public Accounting Firm
37
Consolidated Balance Sheets
39
Consolidated Statements of Operations
40
Consolidated Statements of Stockholders’ Equity (Deficit)
41
Consolidated Statements of Cash Flows
42
Notes to Consolidated Financial Statements
44
 
36

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Stockholders
Empire Resorts, Inc.


We have audited the accompanying consolidated balance sheets of Empire Resorts, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2009.  We also have audited Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principals used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
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The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note A to the consolidated financial statements, the Company’s ability to continue as a going concern depends on its ability to fulfill its obligations with respect to its $65 million of 5 ½% senior convertible notes.  In addition, the Company has continuing net losses and negative cash flows from operating activities.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management's plans concerning these matters are also described in Note A.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
/s/ Friedman LLP
 
New York, New York
March 24, 2010

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EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In thousands, except for per share data)
 
   
2009
   
2008
 
     ASSETS
           
Current assets:
           
     Cash and cash equivalents
  $ 50,080     $ 9,687  
     Restricted cash
    2,890       969  
     Accounts receivable, net of allowance for doubtful accounts of $763 in 2009 and $0 in 2008
    1,759       1,570  
     Prepaid expenses and other current assets
    2,595       3,500  
               Total current assets
    57,324       15,726  
Property and equipment, net
    28,877       29,908  
Deferred financing costs, net of accumulated amortization of $2,063 in 2009 and $2,193 in 2008
    1,878       2,287  
Other assets
    1,342       1,175  
TOTAL ASSETS
  $ 89,421     $ 49,096  
                 
     LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities:
               
      Revolving credit facility
  $ ---     $ 7,617  
      Senior convertible notes
    65,000       65,000  
      Accounts payable
    2,401       2,969  
      Accrued expenses and other current liabilities
    6,472       5,881  
               Total current liabilities
    73,873       81,467  
                 
Commitments and contingencies
               
                 
Stockholders’ equity (deficit):
               
     Preferred stock, 5,000 shares authorized; $0.01 par value -
               
          Series A, $1,000 per share liquidation value, none issued and outstanding
    ---       ---  
          Series B, $29 per share liquidation value, 44 shares issued and outstanding
    ---       ---  
          Series E, $10 per share redemption value, 1,731 shares issued and outstanding
    6,855       6,855  
Common stock, $0.01 par value, 95,000 shares authorized in 2009 and 75,000 shares authorized in 2008, 69,134 shares issued and outstanding in 2009 and  33,913 shares issued and outstanding in 2008
    691       339  
     Additional paid-in capital
    117,632       59,379  
     Accumulated deficit
    (109,630 )     (98,944 )
               Total stockholders’ equity (deficit)
    15,548       (32,371 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
  $ 89,421     $ 49,096  

The accompanying notes are an integral part of these consolidated financial statements.
 
39

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
YEARS ENDED DECEMBER 31
 
(In thousands, except for per share data)
 
   
2009
   
2008
   
2007
 
REVENUES:
                 
Gaming
  $ 53,751     $ 58,109     $ 64,290  
Racing
    12,228       7,753       9,887  
Food, beverage and other
    5,051       5,037       5,655  
GROSS REVENUES
    71,030       70,899       79,832  
Less: Promotional allowances
    (3,396 )     (2,348 )     (2,532 )
          NET REVENUES
    67,634       68,551       77,300  
COSTS AND EXPENSES:
                       
Gaming
    42,079       46,729       56,334  
Racing
    9,794       7,581       8,633  
Racing – settlement of Horsemen litigation
    ---       1,250       ---  
Food, beverage and other
    1,820       2,043       2,400  
Selling, general and administrative expense
    11,351       13,310       11,627  
Stock-based compensation
    5,544       1,124       3,363  
Depreciation
    1,217       1,229       1,180  
Impairment loss - deferred development costs
    ---       ---       12,822  
          TOTAL COSTS AND EXPENSES
    71,805       73,266       96,359  
LOSS FROM OPERATIONS
    (4,171 )     (4,715 )     (19,059 )
Amortization of deferred financing costs
    (410 )     (410 )     (419 )
Interest expense
    (6,142 )     (5,736 )     (5,932 )
Interest income
    148       252       761  
          NET LOSS
    (10,575 )     (10,609 )     (24,649 )
Undeclared dividends on preferred stock
    (1,551 )     (1,551 )     (1,551 )
NET LOSS APPLICABLE TO COMMON SHARES
  $ (12,126 )   $ (12,160 )   $ (26,200 )
                         
Weighted average common shares outstanding,
          basic and diluted
    40,433       31,874       29,523  
Loss per common share, basic and diluted
  $ (0.30 )   $ (0.38 )   $ (0.89 )

 
The accompanying notes are an integral part of these consolidated financial statements.
 
40

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands)
 
   
Preferred Stock*
                               
     Series B    
Series E
   
Common Stock
                         
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Amount due from exercise of option
   
Additional paid-in capital
   
Accumu­lated Deficit
   
Total Stockholders’ Equity (Deficit)
 
Balances, January 1, 2007
    44     $ ---       1,731     $ 6,855       29,428     $ 294     $ (18,750 )   $ 49,113     $ (63,235 )   $ (25,723 )
                                                                                 
Declared and paid dividends on preferred stock
    ---       ---       ---       ---       19       ---       ---       189       (189 )     ---  
Collection of amounts due from 2006 exercise
    ---       ---       ---       ---       ---       ---       18,750       ---       ---       18,750  
Common stock issued from exercise of stock options
    ---       ---       ---       ---       46       1       ---       181       ---       182  
Stock-based compensation
    ---       ---       ---       ---       89       1       ---       3,362       ---       3,363  
Net loss
    ---       ---       ---       ---       ---       ---       ---       ---       (24,649 )     (24,649 )
Balances, December 31, 2007
    44       ---       1,731       6,855       29,582       296       ---       52,845       (88,073 )     (28,077 )
Declared and paid dividends on preferred stock
    ---       ---       ---       ---       117       1       ---       261       (262 )     ---  
Issuance of Common Stock
    ---       ---       ---       ---       4,200       42       ---       5,136       ---       5,178  
Common stock issued from exercise of stock options
    ---       ---       ---       ---       14       ---       ---       13       ---       13  
Stock-based compensation
    ---       ---       ---       ---       ---       ---       ---       1,124       ---       1,124  
Net loss
    ---       ---       ---       ---       ---       ---       ---       ---       (10,609 )     (10,609 )
Balances, December 31, 2008
    44       ---       1,731       6,855       33,913       339       ---       59,379       (98,944 )     (32,371 )
Declared and paid dividends on preferred stock
    ---       ---       ---       ---       125       ---       ---       111       (111 )     ---  
Issuance of Common Stock
    ---       ---       ---       ---       34,506       345       ---       36,254       ---       36,599  
Issuance of Option Matching Rights
    ---       ---       ---       ---       ---       ---       ---       18,401       ---       18,401  
Stock issuance expense
    ---       ---       ---       ---       ---       ---       ---       (2,891 )     ---       (2,891 )
Common stock issued from exercise of stock options
    ---       ---       ---       ---       129       2       ---       136       ---       138  
Common stock issued from exercise of warrants
    ---       ---       ---       ---       166       2       ---       (2 )     ---       ---  
Common stock issued from exercise of Option Matching Rights
    ---       ---       ---       ---       295       3       ---       136       ---       139  
Issuance of  warrants
    ---       ---       ---       ---       ---       ---       ---       564       ---       564  
Stock-based compensation
    ---       ---       ---       ---       ---       ---       ---       5,544       ---       5,544  
Net loss
    ---       ---       ---       ---       ---       ---       ---       ---       (10,575 )     (10,575 )
Balances, December 31, 2009
    44     $ ---       1,731     $ 6,855       69,134     $ 691     $ ---     $ 117,632     $ (109,630 )   $ 15,548  
 
* Series A preferred stock, none issued and outstanding.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
41

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands)
 
   
2009
   
2008
   
2007
 
          CASH FLOWS FROM OPERATING ACTIVITIES
 
Net loss
  $ (10,575 )   $ (10,609 )   $ (24,649 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
          Depreciation
    1,217       1,229       1,180  
          Amortization of deferred financing costs
    410       410       419  
          Provision for doubtful accounts
    763       ---       985  
          Impairment loss - deferred development costs
    ---       ---       12,822  
          Stock – based compensation
    5,544       1,124       3,363  
          Interest expense - warrants
    564       ---       ---  
          Loss on disposal of property and equipment
    ---       ---       1  
   Changes in operating assets and liabilities:
                       
          Restricted cash –NYS Lottery and Purse Accounts
    (2,323 )     61       609  
          Accounts receivable
    (952 )     (169 )     2,401  
          Prepaid expenses and other current assets
    904       (2,256 )     1,078  
          Other assets
    (167     548       (1,049 )
          Accounts payable
    (568 )     (561 )     (766 )
          Accrued expenses and other current liabilities
    591       (248 )     (3,806 )
NET CASH USED IN OPERATING ACTIVITIES
    (4,592 )     (10,471 )     (7,412 )
          CASH FLOWS FROM INVESTING ACTIVITIES
 
Purchase of property and equipment
    (187 )     (277 )     (339 )
Restricted cash - Racing capital improvement
    (64 )     247       (106 )
Advances to Litigation Trust
    ---       ---       (985 )
Deferred development costs
    ---       ---       (4,531 )
NET CASH USED IN INVESTING ACTIVITIES
    (251 )     (30 )     (5,961 )
          CASH FLOWS FROM FINANCING ACTIVITIES
 
Repayment on revolving credit facility
    (7,617 )     ---       ---  
Proceeds from issuance of Common Stock
    55,000       5,178       ---  
Proceeds from exercise of stock options
    138       13       18,932  
Proceeds from exercise of Option Matching Rights
    139       ---       ---  
Stock issuance costs
    (2,891 )     ---       ---  
Restricted cash - Revolving credit facility
    467       (11 )     (22 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
    45,236       5,180       18,910  
Net increase (decrease) in cash and cash equivalents
    40,393       (5,321 )     5,537  
Cash and cash equivalents, beginning of year
    9,687       15,008       9,471  
Cash and cash equivalents, end of year
  $ 50,080     $ 9,687     $ 15,008  

The accompanying notes are an integral part of these consolidated financial statements.
 
42

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31
(In thousands)
 
 
2009
   
2008
   
2007
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
     Cash paid for interest during the year
  $ 5,579     $ 5,736     $ 5,932  
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
     Common stock issued in settlement of preferred stock dividends
  $ 111     $ 262     $ 190  
                         
     Noncash additions to deferred development costs
    ---       ---       562  
 

The accompanying notes are an integral part of these consolidated financial statements
 
43

 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note A. Organization and Nature of Business
 
The consolidated balance sheets as of December 31, 2009 and 2008, and the consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years ended December 31, 2009, 2008 and 2007 include the accounts of Empire Resorts, Inc. and subsidiaries (“Empire,” the “Company,” “our,” “us” or “we”).
 
On August 19, 2009, we entered into that certain investment agreement (the “Investment Agreement”) with Kien Huat Realty III Limited, a corporation organized under the laws of the Isle of Man (“Kien Huat”), pursuant to which (i) we issued to the Kien Huat 6,804,188 shares of our Common Stock (the “First Tranche”), or approximately 19.9% of the outstanding shares of Common Stock on a pre-transaction basis, for aggregate consideration of $11 million, and (ii) agreed, following stockholder approval of the transaction, to issue an additional 27,701,852 shares of Common Stock to Kien Huat (the “Second Tranche”) for additional consideration of $44 million.  We held a special meeting of our stockholders on November 10, 2009, at which our stockholders approved, among other things, the issuance of shares and related proposals to facilitate the Second Tranche.  The closing of the Second Tranche occurred on November 12, 2009, at which time we issued an additional 27,701,852 shares of Common Stock to Kien Huat for consideration of $44 million in accordance with the terms of the Investment Agreement.  We have used and intend to use the proceeds of the First Tranche and the Second Tranche for transaction costs, to pay interest on existing indebtedness and for general working capital.  Such proceeds may also be used as a part of a restructuring of the Company’s capital base. The shares of Common Stock issued pursuant to the Investment Agreement have not been registered under the Securities Act.
 
As a result of the closing of the Second Tranche, as of November 12, 2009, Kien Huat owned 34,506,040 shares of Common Stock, representing just under 50% of our voting power.  As of the closing of the Second Tranche we had certain options and warrants outstanding.  Under the Investment Agreement, if any of such options or warrants are exercised (or any of the first one million options or warrants issued after the closing of the First Tranche to our officers and directors who held either of such positions as of July 31, 2009), Kien Huat has the right to purchase an equal number of additional shares of Common Stock as are issued upon such exercise at the exercise price for the applicable option or warrant, which right we refer to herein as the “Option Matching Right.”  Following any such purchase by Kien Huat, Kien Huat may not own more than one share less than 50% of our voting power.
 
Under the terms of the Investment Agreement, Kien Huat is entitled to recommend three directors whom we are required to cause to be elected or appointed to our Board of Directors (the “Board”), subject to the satisfaction of all legal and governance requirements regarding service as a member of our Board and to the reasonable approval of the Governance Committee of the Board.  Kien Huat has designated Au Fook Yew and G. Michael Brown as members of the Board pursuant to its rights under the Investment Agreement.  Kien Huat has not yet identified to the Board the third director whom it will recommend for appointment to the Board pursuant to the Investment Agreement.  Kien Huat will continue to be entitled to recommend three directors for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election or appointment to the Board will be reduced proportionally to Kien Huat’s percentage of ownership.  Under the Investment Agreement, for so long as Kien Huat is entitled to designate representatives to the Board, among other things, Kien Huat will have the right to nominate one of its director designees to serve as the Chairman of the Board, and Mr. Brown has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation.  Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, the Board will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors designated by Kien Huat.
 
In March 2010, we entered into an agreement with Bank of America/Merrill Lynch (“BofA/ML”) to serve as our financial advisor to assist us in analyzing and structuring our efforts to effect a restructuring of our existing debt and preferred stock and to recommend possible steps to improve our liquidity. Such steps may include negotiations with the current beneficial holders of our $65 million of 5 ½% senior convertible notes (the “Notes”) to resolve the current litigation. BofA/ML will provide advice to us on the timing, nature and terms of new securities, other consideration or other inducements to be offered to effect a restructuring.
 
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Going Concern
 
The accompanying consolidated financial statements have been prepared on a basis which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  Our ability to continue as a going concern depends on our ability to fulfill our obligations with respect to the Notes.  Under terms of the Notes, we had an obligation to repurchase any of the Notes at a price equal to 100% of their principal amount on July 31, 2009, to the extent that the Holder as defined under the indenture dated July 26, 2004 (the “Indenture”) delivered a properly executed Put Notice, as defined under the Indenture.  We are seeking a judicial determination in the Supreme Court of New York, Sullivan County, against the beneficial owners of the Notes, as well as The Depository Trust Company and the Bank of New York Mellon Corporation (the “Trustee”) that (1) no Holder, delivered an executed Put Notice to the office of the Trustee within the lawfully mandated time for exercise of a Holder’s put rights under the Indenture prior to the close of business on July 31, 2009, and that (2) the three entities that gave the purported notice of default may not and have not accelerated the Notes or invoked certain other consequences of a default.  We are unable to predict the length of time the Supreme Court of New York may take to ultimately resolve the pending dispute, or the length of time it will take for the Third Judicial Department of the Appellate Division, or the State of New York Court of Appeals, to issue a final, non-appealable judgment.  In the event that a final non-appealable ruling is issued declaring that the right to demand repayment of the Notes had been validly exercised, we would not have an immediate source of funds from which to pay our obligations under the Notes, and no assurance can be made that other sources of financing will be available at such time on commercially reasonable terms, if at all, to satisfy our obligations under the Notes.
 
In addition, we have continuing net losses and negative cash flows from operating activities.  These conditions raise substantial doubt about our ability to continue as a going concern.  These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
 
Nature of Business
 
We currently own and operate Monticello Casino and Raceway, a video gaming machine (“VGM”) and harness horse racing facility located in Monticello, New York, 90 miles Northwest of New York City.  At Monticello Casino and Raceway, we operate approximately 1,090 VGMs as an agent for the New York State Lottery and 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 world and the export simulcasting of our races to offsite pari-mutuel wagering facilities.
 
In February 2008, we entered into an agreement (the “Contribution Agreement”) with Concord Associates, L.P. (“Concord”), pursuant to which we and Concord were to form a joint venture to develop, finance and construct a hotel, convention center, gaming facility and harness horseracing track on 160 acres of land located in Kiamesha Lake, New York.  For a variety of factors, including recent conditions in the financial markets, certain contingencies for the implementation of this agreement have not been able to be achieved.  Consequently, the Contribution Agreement was terminated in March 2009 as a result of the execution of a new agreement with Concord.  On March 23, 2009, we entered into an agreement (the “Concord Agreement”), with Concord, pursuant to which we (or a wholly-owned subsidiary reasonably acceptable to Concord) shall be retained by Concord Empire Raceway Corp. (“Raceway Corp.”), a subsidiary of Concord, to provide advice and general managerial oversight with respect to the operations at the harness track to be constructed at that certain parcel of land located in the Town of Thompson, New York and commonly known as the Concord Hotel and Resort (the “Concord Property”).  The Concord Agreement has a term of forty years.  The closing of the transactions contemplated by the Concord Agreement is to take place on the date that Concord or its subsidiary secures and closes on (but not necessarily funds under) financing in the minimum aggregate amount of $500 million (including existing equity) from certain third-party lenders in connection with the development of the harness track and certain gaming facilities on the Concord Property.  In the event that the closing of the Concord Agreement has not occurred on or before July 31, 2010, the Concord Agreement may be terminated by either Concord or us by written notice.  No assurance can be made that the financing required as a condition to the consummation of the transactions contemplated by the Concord Agreement will be obtained by Concord.
 
45

 
In the past, we have also made efforts to develop a 29.31 acre parcel of land adjacent to Monticello Casino and Raceway as the site for the development of a Class III casino and may pursue additional commercial and entertainment projects on the remaining 200 acres of land owned by the Company that encompass the site of our current gaming and racing facility.  Currently, either an agreement with a Native American tribe, together with certain necessary federal and state regulatory approvals, or an amendment to the New York State Constitution would be required for us to move forward with our efforts to develop a Class III casino.
 
As used herein, Class III gaming means a full casino including slot machines, on which the outcome of play is based upon randomness, and various table games including, but not limited to, poker, blackjack and craps.  As used herein, Class II gaming means a gaming facility with VGMs and no table games.  VGMs are similar to slot machines, but they are electronically controlled from a central station and the procedure for determining winners is based on algorithms that distribute wins based on fixed odds, rather than mechanical or other methods designed to produce a random outcome for each play.
 
We operate through three principal subsidiaries, Monticello Raceway Management, Inc. (“Monticello Raceway Management”), Monticello Casino Management, LLC (“Monticello Casino Management”) and Monticello Raceway Development Company, LLC (“Monticello Raceway Development”).  Currently, only Monticello Raceway Management has operations which generate revenue. During 2008, for administrative purposes, we merged eight of our inactive subsidiaries into one entity.

VGM Operations.  We currently operate a 45,000 square foot VGM facility at Monticello Casino and 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 traditional slot machines.  VGM operations at Monticello Casino and Raceway began on June 30, 2004.  At December 31, 2009, the number of VGMs in operation was 1,090.
 
Revenues derived from our VGM operations consist of VGM revenues and related food and beverage concession revenues.  Each of the VGMs is owned by the State of New York.  By statute, for a period of five years which began on April 1, 2008, 42% of gross VGM revenue is distributed to us for the first $50 million annually, 29% for the next $100 million annually, and 26% thereafter.  Following that five-year period, 40% of the first $50 million, 29% of the next $100 million and 26% thereafter of gross VGM revenue will be distributed to us. Gross VGM revenues consist of the total amount wagered at our VGMs, less prizes awarded.   The statute also provides a vendor’s marketing allowance for racetracks operating video lottery programs of 10% on the first $100 million of net revenues generated and 8% thereafter.  The legislation authorizing the implementation of VGMs at Monticello Casino and Raceway expires in 2013.
 
VGM activities in the State of New York are presently overseen by the Division of the Lottery of the State of New York.
 
Raceway Operations.  Monticello Casino and Raceway offers pari-mutuel wagering, live harness racing and simulcasting from various harness and thoroughbred racetracks across the country.  Monticello Casino and Raceway derives its revenue principally from (i) wagering on live races run at our facility; (ii) fees from wagering at out-of-state locations on races simulcast from our facility using export simulcasting; (iii) revenue allocations, as prescribed by law, from betting activity at Off Track Betting facilities located in New York State; (iv) wagering at our facility on races broadcast from out-of-state racetracks using import simulcasting; and (v) admission fees, program and racing form sales, the sale of food and beverages and certain other ancillary activities.
 
Note B.  Summary of Significant Accounting Policies
 
Revenue recognition. Revenues represent (i) the net win from VGMs, (ii) revenues from pari-mutuel wagering earned from live harness racing and simulcast signals from other tracks and (iii) food and beverage sales and other miscellaneous income. Revenue from the VGM operations is the difference between the amount wagered by bettors and the amount paid out to bettors and is referred to as the net win. The net win is included in the amount recorded in our consolidated financial statements as gaming revenue. We report incentives related to VGM play and points earned in loyalty programs as a reduction of gaming revenue. We recognize revenues from pari-mutuel wagering earned from live harness racing and simulcast signals from other tracks, before deductions of such related expenses as purses, stakes and awards. Some elements of the racing revenues from Off-track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty and timing of payments.
 
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Principles of Consolidation.  The consolidated financial statements include our accounts and our wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
 
Cash and Cash Equivalents.  Cash and cash equivalents include cash on account, demand deposits and certificates of deposit with original maturities of three months or less at acquisition.  We maintain significant cash balances with financial institutions, which are not covered by the Federal Deposit Insurance Corporation. We have not incurred any losses in such accounts and believe we are not exposed to any significant credit risk on cash. Approximately $1.0 million of cash is held in reserve in accordance with New York State Lottery regulations.  We granted the New York State Lottery a security interest in the segregated cash account used to deposit New York State Lottery’s share of net win in accordance with the New York State Lottery Rules and Regulations.