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EX-10.13 - EX-10.13 - River Rock Entertainment Authoritya09-36185_1ex10d13.htm

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-K

 

(Mark One)

 

o

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: 333-115186

 

RIVER ROCK ENTERTAINMENT AUTHORITY

(Exact name of registrant as specified in its charter)

 

Not Applicable

 

68-0490898

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

3250 Highway 128 East
Geyserville, California 95441
(707) 857-2777

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange
On Which Registered

NONE

 

NONE

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Class
NONE

 

Indicate by check mark if 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 registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Act. Yes x No o

 

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 twelve months (or 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 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 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. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

Large Accelerated Filer o

 

Accelerated Filer o

 

 

 

Non-accelerated Filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

 

The aggregate market value of common stock held by non-affiliates of the registrant was $0 on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009).

 

The registrant has no outstanding common equity.

 

Documents Incorporated By Reference

 

None.

 

 

 



Table of Contents

 

RIVER ROCK ENTERTAINMENT AUTHORITY

 

INDEX TO FORM 10-K

 

 

 

Page Number

 

 

 

 

PART I

 

 

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

20

Item 2.

Properties

20

Item 3.

Legal Proceedings

20

Item 4.

Reserved

21

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

Item 6.

Selected Financial Data

21

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

34

Item 8.

Financial Statements and Supplementary Data

34

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

34

Item 9A.

Controls and Procedures

34

Item 9B.

Other Information

35

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors and Executive Officers of the Registrant

35

Item 11.

Executive Compensation

37

Item 12.

Security Ownership of Certain Beneficial Owners and Management

41

Item 13.

Certain Relationships and Related Transactions, and Director Independence

41

Item 14.

Principal Accountant Fees and Services

42

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

43

 

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CAUTIONARY STATEMENT

 

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based upon current expectations that involve risks and uncertainties and include declarations regarding the intent, belief or current expectations of us and our management and may be signified by the words “believes,” “anticipates,” “plan,” “expects,” “intends” and similar expressions. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this report. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, whether as a result of new information, future events, or otherwise. All discussion in this report should be read in conjunction with our financial statements and the accompanying notes contained in this report.

 

References in this Form 10-K to the “Authority” and the “Tribe” are to the River Rock Entertainment Authority and the Dry Creek Rancheria Band of Pomo Indians, respectively. The terms “we,” “us” and “our” refer to the Authority.

 

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PART I

 

Item 1. Business.

 

OVERVIEW

 

River Rock Entertainment Authority (“we,” “us,” “our” or the “Authority”) is a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians of California (the “Tribe”). The Tribe is a federally recognized Indian tribe with 1,002 enrolled members, with an approximately 75-acre reservation in Sonoma County, California (“Sonoma County” or the “County”). We were formed in 2003 as an unincorporated governmental instrumentality of the Tribe, to own and operate the River Rock Casino in Sonoma County, California. The River Rock Casino had previously operated as a wholly-owned governmental operating property of the Tribe.

 

The Indian Gaming Regulatory Act of 1988, as amended (“IGRA”), permits federally recognized Indian tribes to conduct casino gaming operations on certain Indian lands, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the State of California entered into a compact (the “Compact”) in September 1999 which became legally effective when it was approved by the U.S. Department of the Interior and notice of approval was published in the Federal Register in May 2000. The Compact authorizes certain forms of Class III casino gaming, including slot machines and house-banked card games.

 

Our address is 3250 Highway 128 East, Geyserville, California 95441 and our telephone number is (707) 857-2777.

 

Our River Rock Casino

 

We own and operate the River Rock Casino, a gaming and entertainment facility located on the Tribe’s reservation, approximately 75 miles north of San Francisco, California. Our 62,000 square-foot gaming and entertainment facility, which is located in the Alexander Valley, has views of the surrounding countryside, is open 24-hours a day, seven days a week, and currently features:

 

·                  35,500 square feet of gaming space containing 1,212 slot and video poker gaming machines, 18 table games featuring Blackjack, Three Card Poker, Mini Baccarat and Pai Gow Poker, and 6 tables featuring Texas Hold’em Poker. We offer state-of-the-art gaming devices including video poker, video keno, progressive slots and guest favorites, such as Red Hot 7’s, Hot Shot, Jackpot Party, Quick Hits, Mystery Temple, Quick Strike and other various themes;

 

·                  both smoking and non-smoking gaming rooms in order to satisfy customer preferences;

 

·                  the Players Club, a player tracking system which offers our guests incentives for additional play;

 

·                  the Quail Run Restaurant, offering a buffet menu, with 152 indoor seats and 96 outdoor seats that overlook the Alexander Valley wine region and the Russian River;

 

·                  the all new Center Stage Bar & Grill with 64 seats, offering “bar top” video poker games, recently expanded to include a casual dining area and an upgraded stage and sound system;

 

·                  the all new Fortune Café, recently constructed to offer a quick service Asian-themed menu, with 24 seats;

 

·                  two snack bars, and a historic and contemporary Pomo basketry and art display;

 

·                  alcohol service, as a result of the May 2008 issuance of our liquor license;

 

·                  three parking structures and an adjacent parking lot allows us to accommodate approximately 1,584 self-parked customer vehicles and valet;

 

·                  an Arts and Crafts California Bungalow-style design and furnishings, incorporating Native American elements, that feature a cultural arts collection of traditional and contemporary Pomo art, including historical basketry for which the Tribe is known. The interior of our gaming facility utilizes an extensive amount of wooden casework and natural rock to emphasize the architectural style found throughout California wine country. In keeping with this motif, our gaming facility’s counters are constructed of natural stone and wood, and oak wainscoting grace the food and beverage facilities; and

 

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·                  a location in the heart of the beautiful Alexander Valley with spectacular views of the surrounding countryside. Guests entering our gaming facility are treated to a large, open-beamed Porte cochere that faces out towards sweeping vistas of Alexander Valley vineyards. Our gaming facility was designed to capitalize on the scenic vistas with the food and beverage facilities strategically placed to feature the expansive views.

 

In addition, to enhance the comfort of our guests, we have installed a state-of-the-art ventilation system that greatly reduces cigarette smoke and impurities, circulates air from the ground level and provides 100% fresh-air return. Our gaming facility also incorporates other environmentally sensitive engineering features, including irrigation using surplus wastewater and non-intrusive lighting in the parking lot. Furthermore, our state-of-the-art back-up and redundant generators are designed to provide electricity in the event of a power failure.

 

We maintain a digital surveillance system that tracks the entire casino floor to secure our facility and operations. We employ a 57 officer security force.

 

Competitive Strengths

 

We believe the following strengths have and will continue to contribute to our success:

 

Attractive Location with Convenient Access.  Our gaming facility is conveniently located off of Highway 101, a four-lane highway through Sonoma County that serves as a major thoroughfare between Los Angeles and Oregon.  Highway 101 travels directly through the nearby cities of San Francisco, San Rafael, Petaluma and Santa Rosa.  CALTRANS estimates of Average Annual Daily Traffic (AADT) on Highway 101 at the exit to Dry Creek Road to be around 66,000 north and south bound vehicles.  In addition, the nearby airport in Santa Rosa provides easy access for patrons traveling to wine country.

 

Strong Market Demographics.  Pursuant to the 2006-2008 American Community Survey, our gaming facility is easily accessible by all the approximately 7.0 million residents of the San Francisco Bay area market which include the major metropolitan cities of San Francisco, Oakland and the smaller cities of San Rafael, Berkeley, Santa Rosa, and Petaluma. We also benefit from the 7 million annual visitors to Sonoma County and 5 million annual visitors to Napa County which is known for their world-renowned wineries and related tourist attractions.

 

Limited Competitive Environment and High Barriers to Entry. Class III casino gaming may not be conducted in California other than on certain lands held for the benefit of federally recognized Indian tribes and pursuant to negotiated compacts with California and approved by the U.S. Secretary of the Interior. We believe these restrictions significantly limit potential future competition. We are not subject to any betting limits on Indian gaming activities.

 

High Quality Products and Amenities.  Our gaming facility offers state-of-the-art gaming devices and table games in an upscale, relaxed gaming environment. Our gaming devices feature comprehensive, integrated cashless technology permitting faster wagering and payouts. In addition, our restaurant offers premium food and beverages and was designed to capitalize on the spectacular views of the Alexander Valley. Our gaming and food and beverage facilities emphasize a high level of customer service, created and maintained through comprehensive employee training.

 

Emphasis on Gaming Devices.  Our gaming facility emphasizes slot and video poker gaming devices, which we believe, based on industry studies, represents the most consistently profitable and lowest risk segment of the gaming business. We offer a wide variety of games not only to attract guests but also to encourage them to play for longer periods of time.

 

Tax Free Cash Flow from Operations.  We currently generate significant cash flow from operations.  In addition, because these are governmental operations, they are not subject to any local, state or federal income taxes.

 

Experienced Senior Management Team and Staff.  Our management team is led by seasoned executives who have significant industry experience, leadership and expertise in operations, marketing, finance and development.  Members of this team have previously worked at premier local and destination casinos for commercial and tribally owned casinos.  We believe our management team and our experienced staff provide superior employee and customer care, and an in-depth understanding of the target market and how to maintain return business which enhances our competitive position.

 

Business and Marketing Strategies

 

Our business strategy is to grow our business to not only capture a greater share of our growing market, but also expand our target patron base to a broader demographic with the following competitive business strategies:

 

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Marketing & Promotions: Our advertising methods include radio, billboards, TV, newspaper, magazines, online and email blasts, plus bus billboards, signature shuttles, rack cards and direct mail.  The direct mail program is tiered based on player status and will be enhanced next year to include more levels of offers.  The program includes coupons and information regarding upcoming promotions, food and entertainment.  We will also send out mailers specifically tailored to our high end players. Over the years, we have analyzed promotions and player demand and have continued with successful promotions which have led to increased revenues.  Promotions that have proven successful and increased revenues are car and cash giveaways, cash wheel spins, and mortgage and rent promotions.  Along with continued promotions, we will also be adding slot and table games tournaments.  We will also be putting more emphasis on direct mail to the ethnic markets, including Latino and Asian signature markets in the Bay area.  With giveaways and promotions throughout the year, we will be able to continue to provide cutting edge entertainment for our guests.

 

Capitalize on Our Prime Location and Appeal of Sonoma County. We market our Casino to our local customer base and to our broader regional market and international patrons traveling to the area as part of the Sonoma Valley resort destination.  The picturesque Alexander Valley region in the heart of Sonoma County is a world-renowned tourist destination. We intend to capitalize on its appeal, including its reputation as one of California’s premier wine producing regions, to further expand our customer base. Sonoma County receives approximately 7 million tourists annually and over 5 million tourists visit Napa County annually.  Our marketing message emphasizes the convenient access to our gaming facility.

 

Partners Program. We continue to partner with local businesses and have created strong community relations with wineries, hotels, restaurants and Chambers of Commerce.  We believe that promoting one another will help increase tourism and bring in new potential customers to Sonoma County and our Casino.

 

Increased Time on Device and Win Per Unit.  We utilize state-of-the-art technology and sophisticated player tracking software which provides a customized and tailored gaming environment that generates increased time spent on a device and enhances the likelihood of return business.  This data base helps us determine our premier players and target their favorite games, and also helps us create a relationship with those patrons.

 

Continue to Develop our Appeal to the Asian Market.  The Asian market constitutes 22% of the Bay Area population and 31% of the San Francisco population.  We continue cultivating our Asian market customer base through our bus program from San Francisco’s Chinatown with our targeted gaming promotions.  In an effort to further increase our market exposure, we have increased our Asian targeted media and we have begun participating in Asian community events.  We will also increase our direct mail program to targeted ethnic groups.

 

Expand Marketing and Promotion Programs.  We will monitor the effectiveness of our advertising and brand awareness efforts through an extensive research analysis program and evaluate it against measurable objectives such as first name recall for our gaming facility and satisfied resident response rates. From our database, we are able to track our repeat business. Our database also provides us with information on new player sign-ups, which in 2009, has grown by 41,000. We have also promoted more frequent and longer visits and increased wagering at off-peak demand periods through promotions such as our “House is Rockin”, “Lucky Envelope” and “Hot Nights Cool Cash” . These promotions offer customers cash rewards on weekday nights and has resulted in increased net revenue whenever offered.

 

Supplement Demand with Our Bus Program.    We intend to supplement our overall demand with our line and charter bus program to provide customer transportation to our gaming facility. We believe that this program enabled us to maximize our number of guests during the off-peak times.  Our guests have appreciated the convenience offered by this program and we have experienced an increase in the use of our bus program.  We operated an average of approximately 32 buses a day in 2009. Our bus program brings guests from San Francisco, San Mateo, Contra Costa, Alameda and Marin Counties.  On our River Rock line runs, guests pay between $10 to $15 roundtrip to and from our Casino. Upon arrival, they receive an incentive package in the range of $15 to $25 towards use on gaming in our Casino. Our special charter bus guests also receive $20 towards use on gaming in our Casino.

 

COMPETITION

 

The gaming industry is very competitive. We face or will face competition from existing and proposed California Indian gaming facilities in the surrounding area, and elsewhere in California, and with casino gaming in Nevada, including gaming facilities that could be located closer to the San Francisco Bay area. We also compete with card rooms located in the surrounding area, and other forms of gaming that are legal in California, including on and off-track wagering and the California State Lottery, as well as with non-gaming leisure activities. The availability of such alternative gaming and non-gaming activities may increase in the future. Many of our competitors have substantially greater resources and name recognition than our Casino. In addition, we may also face competition in our market from new facilities that may be built by other Indian tribes in the future.

 

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Federal and California law currently permits Class III casino gaming only on federally recognized tribal lands pursuant to compacts negotiated with the State of California and approved by the U.S. Secretary of the Interior. Class II gaming for tribes is permitted only on federally recognized tribal lands. There are currently 55 tribes operating 56 compacted gaming facilities in the State of California. The closest existing competitors are the Hopland Sho-ka-wah Casino, located approximately 35 miles and 40 minutes north of the Tribe’s reservation; the Konocti Vista Casino, located approximately 45 miles and one hour and ten minutes northeast of the Tribe’s reservation; the Thunder Valley Casino, located approximately 124 miles and two hours and forty-five minutes east of the Tribe’s reservation; and Cache Creek Indian Casino and Bingo, located approximately 95 miles and two hours and fifteen minutes east of the Tribe’s reservation. In addition, several potential competitors are attempting to develop and open casinos near our Casino.

 

The greatest competition may come from the proposed Graton Rancheria casino. In April 2003, the Federated Indians of the Graton Rancheria, also known as the Coast Miwoks, announced plans to purchase land in Sonoma County near Highway 37 and Lakeville Highway, approximately 20 miles south of our gaming facility and closer to San Francisco than our reservation. The proposed location would lie directly between our Casino and the majority of the 7 million population base of the San Francisco Bay area. The announced plans include construction of a casino-hotel complex that will be managed by Station Casinos, Inc. based in Las Vegas, Nevada. The proposed facility would house approximately 2,000 slot machines, 120 card tables and bingo, as well as a 300-room hotel, five restaurants and a theater with up to 2,000 seats. As a result of environmental opposition to the development of such location, the Federated Indians of the Graton Rancheria announced plans to move the proposed casino-hotel complex to a site near Rohnert Park, California. The Rohnert Park City Council has approved an agreement with the Federated Indians of the Graton Rancheria to share revenues with Rohnert Park and various community groups, approximately $200.0 million over 20 years, to offset the impact of the proposed project.

 

In May 2008, the U.S. Department of Interior published in the Federal Register a notice to take the proposed Rohnert Park site into federal trust on behalf of the Graton Rancheria. This represents a significant step towards the development of a casino at Rohnert Park, as do the separate agreements negotiated between the Graton Rancheria and Sonoma County and Marin County, whereby the counties pledged to not challenge the land-into-trust decision and the Graton Rancheria agreed not to build any additional casinos in Sonoma or Marin counties. The U.S. Department of Interior’s land-into-trust decision has, however, been challenged by citizens group opposed to a casino in Rohnert Park. The federal district court dismissed the citizens group’s lawsuit on April 21, 2009, but the group has appealed the decision to the Ninth Circuit Court of Appeals.  The Department of the Interior has agreed to withhold action on taking the land into trust pending the appeal.  A spokesperson for the citizen’s group has also stated publicly that the group will challenge the adequacy of the environmental impact statement for the proposed Graton casino, which was issued in February 2009.  Another obstacle facing the proposed Graton Rancheria casino is the ability to obtain financing for the project.  In addition, the Graton Rancheria will also need to enter into a tribal-state compact with the State of California before it can operate Class III gaming at the Rohnert Park site.

 

The Hopland Sho-ka-wah Casino is located several miles east of Highway 101 on Route 175. The facility features a 40,000 square foot casino offering 570 slot machines and eight table games. The facility offers poker, pai gow, blackjack, card-based roulette, and card-based craps table games.  The facility contains a Mexican food taqueria, a small cafe-type food and beverage area, a fine-dining steak house and a bar. Hopland operates a small bus program but does not operate a hotel.

 

East of the Sho-ka-wah Casino is the Konocti Casino in Lakeport, California. Lakeport is located approximately 37 miles from Cloverdale with access off Highway 20.  The casino currently houses 349 slot machines and 6 table games. The facility also offers an 80-room hotel and marina with small pool as well as a 74-space recreational vehicle park. The food and beverage program includes a small restaurant, buffet and a newly remodeled steakhouse restaurant serving liquor.

 

The Thunder Valley Casino opened in June 2003 and is located at the intersection of Highway 65 and Interstate 80 just outside of Sacramento, California. The Nevada-style property offers over 2,400 slot machines and 98 table games that include blackjack, baccarat, and a variety of poker games including Let It Ride and Pai Gow. The facility features a salon, private dining rooms, bars and butler service. In addition, it houses a 500-seat buffet and various fast food options. The facility also features a nightclub.  In 2008, the Thunder Valley Casino announced plans to build a new 650-room, 23-story hotel featuring a spa, family center and other amenities.  Thunder Valley also planned to construct a 3,000-seat performing arts center, and to expand the casino to include three new restaurants, more gaming space and new poker room, and a parking structure capable of holding 5,000 cars.  Thunder Valley obtained financing for the expansion, which began in July 2008 but was halted in November 2008.  In May 2009, the casino resumed work on the expansion, but the project has been scaled down to include a 12-story hotel with 297 rooms; a 700-seat, 10,000-square-feet multipurpose entertainment center in place of the performing arts center; and a 7-story parking structure with approximately 3,800 spaces. Thunder Valley expects to open the hotel in July 2010.

 

The Cache Creek Casino is located approximately 50 miles west of Sacramento. The Cache Creek Casino offers over 2,400 slot machines. The casino recently added a 14-table poker room and houses 122 table games including blackjack, Texas Hold’em, Pai Gow and Caribbean Stud. The facility also includes a 200-room luxury hotel, 9 restaurant outlets, an entertainment pavilion with

 

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seating for 600, a spa and outdoor pool, an 18-hole golf course and a 1,883 spot parking structure. In 2007, Cache Creek announced plans to add more shops and parking and expand its gaming floor, and to add a 10-story hotel tower with 467 rooms, and a 62,500 square-foot convention center capable of seating 2,300 people.  These expansion plans were put on hold in early October 2009 but were resumed in January 2010 when the Cache Creek Casino announced plans to resume the expansion, proposing to add over 20,000 square-feet of casino space, a 52,000 square-foot convention center, and a 900-car garage.  The expansion is expected to be completed by 2013.

 

The Lytton Band of Pomo Indians currently operate a 70,000 square-foot casino with over 1,100 Class II electronic bingo machines and over 30 table games on a 9-acre site in a card room in San Pablo, near Oakland, California, on land that was placed in trust for the tribe through congressional legislation. The Lytton Band signed a compact with Governor Arnold Schwarzenegger for operating Class III casino gaming on the San Pablo site, but the state legislature withheld its approval. In May 2007, legislation was introduced in the U.S. Senate, which has the support of the Lytton Band, that would require the Lytton Band to forego any Class III machines at the San Pablo site and instead limit itself to operating its existing Class II machines. This legislation was passed by the Senate in November 2007 and referred to the Committee on Natural Resources of the U.S. House of Representatives, but no further action was taken.  The legislation was again introduced in the U.S. Senate in January 2009, and the Senate passed the bill on March 12, 2009.

 

The Twin Pine Casino and Hotel, owned and operated by the Middletown Rancheria of Pomo Indians, is located approximately 4 miles off Highway 29 in Napa County, approximately 34 miles from our gaming and entertainment facility. The Middletown Rancheria has recently completed an expansion of the Twin Pine Casino and Hotel which includes a 60-room hotel, three food areas and a wine tasting room, as well as 50,000 square feet of gaming space with approximately 520 slot machines and 12 table games consisting of blackjack and poker.

 

There are a number of other Indian tribes, including the Scotts Valley Band of Pomo Indians and the Guidiville Band of Pomo Indians, that have announced preliminary plans to develop gaming projects in the San Francisco Bay area.

 

The Guidiville Band hopes to have transferred to it land at the former Point Molate Naval Base in Richmond, California on which it hopes to operate a 240,000 square-foot casino with 124,000 square-feet of gaming space, along with two hotels, a conference center, retail shops, restaurants and two parking structures.  The project is still in its early stages, as the land transfer has not been approved and environmental reviews must be completed.  In January 2009, two environmental groups filed a lawsuit against the City of Richmond, the Guidiville Band and its financial backer and developer in an effort to stop the transfer of the land.  The Guidiville Band released the draft environmental impact study for the proposed project in July 2009, and the Bureau of Indian Affairs held a public hearing on the draft study in August 2009 and took public comments on the study until September 23, 2009.

 

The Scotts Valley Band hopes to build a 225,000 square-foot casino complex and five-story parking garage on a 29.87-acre site in unincorporated Contra Costa County, near Richmond, California.  In March 2008, the Bureau of Indian Affairs announced the filing of the Final Environmental Impact Statement for the proposed project.  In August 2008, the Contra Costa County Superior Court struck down a municipal services agreement between the City of Richmond and the Scotts Valley Band on the ground that the City failed to conduct the proper environmental reviews before signing the agreement but the superior court’s decision was overturned in February 2010.

 

The Cloverdale Rancheria has announced preliminary plans to build a 596,000 square-foot hotel/spa and casino resort some ten miles north of our Casino on U.S. Highway 101, and they and their financial backers have purchased approximately 79 acres for the proposed facility. The environmental review process for the proposed Cloverdale Rancheria project began in July 2008, and in December 2008 the U.S. Department of the Interior issued an opinion stating that if the lands were taken into trust, they would be eligible for gaming under the Indian Gaming Regulatory Act.

 

Each of these proposed projects face numerous obstacles in addition to environmental approvals, including the negotiation and approval of a compact with the State of California, approval from the U.S. Department of the Interior to take the land on which the project would be located into federal trust on behalf of the tribe, and, for the Guidiville and Scotts Valley projects, determinations from appropriate federal agencies that the tribes may conduct gaming on these lands pursuant to IGRA.

 

In June 2009, the Mishewal Wappo Tribe of Alexander Valley, a tribe with aboriginal lands and a former rancheria located in Sonoma County that was terminated by the federal government under the 1958 California Rancheria Act, filed suit against the United States Secretary of the Interior seeking to have their federally-recognized status restored.  The Chairman of the Mishewal Wappo Tribe has stated publicly that the tribe has no plans for casino, but the tribe could have the right to conduct gaming under IGRA if their federally-recognized status is restored.

 

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We also compete with other forms of gaming such as statewide lotteries, live and simulcast pari-mutuel wagering and card rooms.

 

In May 2007, Governor Schwarzenegger proposed that the California State Lottery be leased to a private concessionaire to increase its revenue and efficiency. Part of the Governor’s proposal includes authorizing the use of instant lottery video terminals that resemble and operate like slot machines at locations including horse racing tracks and card rooms. Approval of this proposal would require a two-thirds affirmative vote of the state legislature and could require a constitutional amendment to the Constitution of the State of California. While it is uncertain whether or when this proposal will be approved, implementation of such a proposal could adversely affect our and other Indian casinos’ competitive positions.  A proposal that would have allowed the California State Lottery to dedicate a higher percentage of its revenues to player winnings (with the hope of boosting lottery sales in California), securitize California State Lottery revenues, and change the amount of California Lottery revenues dedicated to education was defeated in a statewide ballot referendum in May 2009.

 

Other initiatives expanding competitive forms of gaming have been approved and may, from time to time, be approved by state or local authorities. Examples include the passage in California of recent legislation expanding off-site betting on horse races through expanded advance deposit wagering and increased satellite wagering sites, and a legislative proposal in the California Assembly in February 2007 to amend the California Penal Code to expand permitted bingo games by charitable organizations to include electronic bingo cards.

 

In August 2009, a federal district court judge issued an order, in ongoing litigation regarding the proper number of total slot machines allowed under the 1999 tribal-state gaming compacts, requiring that the State of California issue an additional 10,549 slot machine licenses.  A drawing was held on October 5, 2009, and 3,548 licenses were awarded to eleven different Indian tribes.  The only one of our competitors to receive licenses in the draw was the Middletown Rancheria of Pomo Indians, which operates the Twin Pine Casino and Hotel and received 100 additional licenses through the draw.  As with the licenses awarded to other tribes in the draw, the licenses awarded to the Middletown Rancheria will revert back to the State if the machines are not put into operation within one year of the draw.  The licenses could also be withdrawn if the State of California is successful in its appeal of the district court’s ruling to the United States Court of Appeals for the Ninth Circuit.

 

EMPLOYEE AND LABOR RELATIONS

 

As of December 31, 2009, we had 588 full and part-time employees. Our employees are not covered by any collective bargaining agreements. We believe that our relations with our employees are good. However, as part of the 1999 compact agreement, the Tribe was required to adopt labor ordinance provisions permitting opportunities for unions to attempt to organize our labor force. In addition, a decision by the United States Court of Appeals for the District of Columbia upheld a finding by the National Labor Relations Board that the National Labor Relations Act is applicable to tribal casinos.

 

REGULATION

 

General

 

We are subject to special federal and tribal laws applicable to commercial relationships with tribes and the management and financing of casinos owned by an Indian tribe. In addition, we are regulated by certain federal laws applicable to the gaming industry generally, with respect to the use of certain gaming equipment, and specifically applicable to the Indian gaming market. We are also regulated by the provisions of the Compact, which have been ratified under state law and are based in part on the California constitution and other state laws and policies. The following description of the regulatory environment, in which Indian gaming takes place and in which we operate our gaming facility, is only a summary and not a complete recitation of all applicable law. Moreover, our regulatory environment is more susceptible to changes in public policy considerations than others. Changes in these laws could have a material adverse impact on our operations.

 

Applicability of Federal Law

 

Federally recognized Indian tribes are independent governments, subordinate to the United States, with sovereign powers, except as to those powers that may have been limited by Congress, by treaty, or, in certain instances, by the public policy of the state in which the tribe’s lands are located. The power of Indian tribes to enact their own laws to regulate gaming derives from their sovereign right to govern and regulate their own affairs, particularly where it is consistent with federal law and the state’s public policy. Indian tribes maintain their own governmental systems and often their own judicial systems. Indian tribes have the right to tax persons and businesses conducting business on Indian lands and also have the right to require licenses and to impose other forms of regulations and regulatory fees on persons and businesses operating on their lands.

 

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The Indian Gaming Regulatory Act of 1988

 

Regulatory Authority.      Since 1988, the sovereign right of tribes to operate and regulate gaming on their lands has been subjected to the provisions of IGRA. IGRA is administered by the National Indian Gaming Commission (“NIGC”), an independent agency within the U.S. Department of Interior that exercises certain regulatory responsibilities in connection with Indian gaming on behalf of the United States. The NIGC has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating Class II and Class III gaming (as described below), approve management agreements for gaming facilities, conduct investigations and generally monitor tribal gaming. The Bureau of Indian Affairs, which is a bureau of the U.S. Department of the Interior, retains certain responsibilities under IGRA, such as the approval of per capita distribution plans of gaming revenues to individual tribal members and the approval of transfers of lands into trust status for gaming. The Bureau of Indian Affairs also has responsibility to review and approve land leases and other agreements relating to Indian lands. Criminal enforcement is a shared responsibility of the U.S. Department of Justice, and, depending on the terms of a tribal-state compact that is in effect, the state in which the tribe is located, and the tribe.

 

The NIGC is empowered to inspect and audit all Indian gaming facilities, conduct background checks on certain persons associated with Indian gaming, hold hearings, issue subpoenas, take depositions, adopt regulations, assess fees and impose civil penalties for violations of IGRA. IGRA also provides for federal criminal penalties for illegal gaming on Indian land and for theft from Indian gaming facilities. The NIGC has adopted rules implementing certain provisions of IGRA. These rules govern, among other things, the submission and approval of tribal gaming ordinances or resolutions and the maintenance of minimum internal control standards for the operation of gambling games and equipment. IGRA and the NIGC regulations require an Indian tribe to have the sole proprietary interest in, and to maintain a high level of responsibility for, the conduct of any gaming on its lands. Tribes are required to issue gaming licenses under articulated standards, conduct or commission financial audits of their gaming enterprises, perform or commission background investigations for primary management officials and key employees, and maintain facilities in a manner that adequately protects the environment and the public health and safety. These rules also set out review and reporting procedures for tribal licensing and background activities.

 

Classes of Gaming.      IGRA classifies gaming that may be conducted on Indian lands into three categories: Class I gaming includes social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as part of, or in connection with, tribal ceremonies or celebrations. Class II gaming includes bingo and pull tabs, lotto, punch boards, tip jars, instant bingo and other games similar to bingo if those games are played at the same location as bingo is played, and non-banked card games (such as poker) if permitted within the state. Class III gaming includes all other forms of gaming, such as slot machines, table games, lotteries, sports betting and pari-mutuel wagering.

 

Class I gaming on Indian lands is within the exclusive jurisdiction of Indian tribes and is not subject to federal regulation under IGRA. Class II gaming is permitted on Indian lands if:

 

·                  the state in which the Indian lands lie permits that gaming for any purpose by any person, organization or entity;

·                  the gaming is not otherwise specifically prohibited on Indian lands by federal law;

·                  the gaming is conducted in accordance with a tribal ordinance or resolution that has been approved by the NIGC;

·                  an Indian tribe has sole proprietary interest and responsibility for the conduct of gaming; and

·                  the primary management officials and key employees are tribally licensed and several other requirements are met.

 

Class III gaming is permitted on Indian lands if the conditions applicable to Class II gaming are met and, in addition, the gaming is conducted in conformity with the terms of a tribal-state compact (a written agreement between a tribe and the government of the state within whose boundaries the tribe’s lands lie).

 

Tribal-State Compacts.      IGRA requires Indian tribes to enter into tribal-state compacts in order to conduct Class III gaming. These tribal-state compacts may include provisions for the allocation of criminal and civil jurisdiction between the state and the Indian tribe necessary for the enforcement of these laws and regulations, taxation by the Indian tribe of the Class III gaming activity, remedies for breach, standards for the operation of the Class III gaming activity and maintenance of the gaming facility, including licensing, and certain other subjects that are directly related to the operation of gaming activities.

 

Tribal-state compacts usually specify the types of permitted games, establish technical standards for gaming devices, entitle the state to inspect casinos, require background investigations and licensing of casino employees, and require the tribe to pay a portion of the state’s expenses for establishing and maintaining agencies that participate in the regulatory process provided in the compact. Some tribal-state compacts are for set terms, while others are for indefinite durations.

 

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The Tribe entered into a Compact with the State of California in September 1999, which became effective in May 2000, that permits the Tribe to engage in some levels of Class III gaming. The Compact will expire on December 31, 2020. For additional information see “Part I. Item 1. Business—Description of Material Agreements—The Compact.”

 

Tribal Ordinances.      Under IGRA, except to the extent otherwise provided in a tribal-state compact as described below, and subject to certain oversight and enforcement authority by the NIGC, Indian tribal governments have primary regulatory authority over gaming on land within a tribe’s jurisdiction. Therefore, our gaming operations and persons engaged in gaming activities are subject to the provisions of the Tribe’s ordinances and regulations regarding gaming. The Tribe maintains a fully staffed tribal gaming agency (“TGA”), known as the Dry Creek Gaming Commission, to carry out the Tribe’s regulatory responsibilities under IGRA, its ordinances and the compact.

 

IGRA requires that the NIGC review tribal gaming ordinances and authorizes the NIGC to approve these ordinances only if they meet requirements relating to:

 

·                  the ownership, security, personnel background, recordkeeping and auditing of a tribe’s gaming enterprises;

·                  the use of the revenues from that gaming; and

·                  the protection of the environment and the public health and safety.

 

Licensing and Registration Requirements of the Compact and State Regulation

 

Compact.      The Compact requires that any person who directly or indirectly extends financing to the Tribe’s gaming facility or gaming operation must be licensed as a “financial source” by the TGA. However, as permitted by the Compact, the TGA has exempted federally- and state-regulated banks and savings and loan associations, as well as persons who hold less than 10% of our $200.0 million of 9-3/4% Senior Notes due 2011 (the “Senior Notes”). For an applicant who is a non-exempt business entity, these licensing provisions also apply to the entity’s officers, directors, principal management employees, owners (if an unincorporated entity), partners and greater than 10% shareholders. Under the Compact, a permanent license cannot be issued unless the TGA has conducted an investigation as to the suitability of the applicant. Any application for a gaming license may be denied, and any license issued may be revoked, if the TGA determines the applicant to be unsuitable or otherwise unqualified for a gaming license. Each license is subject to review for compliance at least every two years.

 

Prior to receiving a license, an applicant must apply to the California Gambling Control Commission (“CGCC”) for a determination of suitability. If the TGA receives notice that the CGCC has determined that a person is unsuitable, the Compact requires that the TGA revoke any license it has issued to such person.

 

The Compact states that any agreement between the Tribe and a “financial source” terminates upon revocation or non-renewal of the financial source’s license because of a determination of unsuitability by the CGCC. Upon such a termination, the Tribe’s only liability is for repayment of all outstanding sums owed as of the termination date, exclusive of unpaid accrued interest. Further, the Tribe is not permitted to enter into, or continue to make payments under, any financing agreement with anyone whose application to the CGCC for a determination of suitability has been denied or has expired without renewal.

 

State and Tribal Regulation.      The CGCC and the TGA, pursuant to the authority created in a tribal-state joint powers board known as the “Association,” have both adopted regulations that simplify the licensing and registration process for certain large institutional investors, both in the initial distribution of certain debt securities and the secondary market.

 

Under these regulations, certain regulated financial institutions with at least $100.0 million invested in non-affiliated securities may take advantage of an abbreviated licensing and certification process. The regulations do not require any licensing or registration for persons purchasing debt securities of a tribe subject to a compact with the State of California in the secondary market. However, as required by the regulations, the indenture for the Senior Notes provides that unless a holder of the Senior Notes is licensed or exempt from licensing, neither the holder nor the Trustee on the holder’s behalf will have any right to enforce any payment obligation relating to the Senior Notes. In addition, neither the Trustee nor the Tribe or we may make any payment of principal or interest on the Senior Notes as a result of any enforcement action or default acceleration of security payments, except to a person who is licensed or exempt from licensing.

 

Gaming Device Licenses

 

The Compact permits the Tribe to operate up to 350 gaming devices without licenses.  From March 2000 through December 2001, the Tribe obtained 1,250 gaming device licenses through a process conducted by a public accounting firm retained by a number of tribes under the Compact, thus permitting the Tribe to operate up to a total of 1,600 gaming devices. Following the allocation, the California Attorney General opined that only the CGCC has the authority to issue gaming device licenses under the

 

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compacts, and the Governor of California ordered the CGCC to control and monitor the gaming device licensing process. In June 2002, the CGCC ratified all gaming device license issued to the Tribe and the other tribes in the earlier process.

 

In accordance with the Compact and California law, the Tribe is obligated to remit certain fees to the CGCC on a quarterly basis for inclusion in a Revenue Sharing Trust Fund (“RSTF”) maintained by the State of California. The RSTF is for the benefit of tribes that have no or limited gaming. The RSTF fees are fixed amounts per device, calculated on an annual basis and paid quarterly. We pay these fees on behalf of the Tribe. RSTF fees for the years ended December 31, 2009 and 2008 were $1.3 million for each year.

 

In the summer of 2006, Governor Schwarzenegger renegotiated compacts with five Southern California tribes.  Four of these amended compacts took effect in January 2008; the other one has not been ratified by the tribe, which is required for it to take effect. These amended compacts allow the tribes to have additional slot machines, while imposing additional significant annual payments to the State of California and requiring extensive mitigation and compensation to impacted local communities and provisions affecting customers and employees.  In the summer of 2008, the State entered into a compact with a tribe in Central California that contains similar terms and provisions.  In 2009, the State entered into compacts with two tribes in Northern California that have similar provisions regarding mitigation and compensation to local communities and relations with customers and employees, but which require that a lesser percentage of revenues be shared with the State.  The Tribe has not sought or entered into an amendment of its Compact.

 

Issuance of Liquor License

 

In March 2008, the Tribe and the Sonoma County Board of Supervisors entered into a Memorandum of Agreement (the “MOA”) that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe, and provides a binding framework for resolving future disputes.  Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license.  In a related action, the Alexander Valley Association (“AVA”), a local business and residents association which has long objected to the issuance of a liquor license, agreed to withdraw its objections to the license and has persuaded its members and a number of other protestors to do likewise.

 

In May 2008, the California Department of Alcoholic Beverage Control issued a liquor license to our gaming and entertainment facility.  However, the Tribe has agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol altogether at midnight except for Friday and Saturday nights and the nights before holidays. The Tribe has also agreed not to serve liquor on the Casino floor, although patrons may bring drinks purchased at the restaurant or bar on to the Casino floor. The restrictions may be renegotiated following the first to occur of the three year anniversary of the MOA or the opening of a hotel, which is anticipated to occur within the next two to three years.

 

DRY CREEK RANCHERIA BAND OF POMO INDIANS

 

Tribal Administration

 

The Dry Creek Rancheria Band of Pomo Indians is a federally recognized, self-governing Indian tribe with 1,002 enrolled members. The reservation was established in 1915 under the authority of an Executive Order dated January 12, 1891. Pursuant to the Tribe’s Articles of Association, the Tribe is governed by a Tribal Council composed of all voting members. Certain authority is delegated to elected tribal officers who comprise the Board of Directors, consisting of a Chairperson, a Vice Chairperson, a Secretary/Treasurer and two members-at-large.  The members of the Board of Directors of the Tribe are the same members as our Board of Directors and serve in the same capacity.

 

The Tribal Gaming Commission

 

The Tribe enacted a tribal gaming ordinance in April 1997, which was approved by the NIGC in September 1997. Among other matters, the gaming ordinance created and established the TGA, known as the Dry Creek Gaming Commission, as a governmental subdivision of the Tribe. The TGA consists of three commissioners and supporting staff and is vested with the authority to regulate all gaming activity conducted on the Tribe’s lands.  TGA is responsible under our Compact to hire, monitor the performance of and, if necessary, replace the independent auditors and to approve any significant non-audit relationship with the independent auditors and assess the independent auditor’s qualifications and independence.  We do not have a separate audit committee of our Board of Directors. Our full Board of Directors has assumed the audit committee functions and the TGA participates in the process.

 

Each TGA Gaming Commissioner is appointed by the Tribal Council to serve a four-year term. The tribal gaming ordinance and the Compact require that each Commissioner undergo a comprehensive background check prior to his or her assuming office. Pursuant to the tribal gaming ordinance, the TGA is responsible for, among other matters, inspection of all gaming operations within

 

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the Tribe’s reservation boundaries, enforcement of all provisions of the tribal gaming ordinance, investigation of all allegations of violations of the tribal gaming ordinance, conducting or arranging for background investigations of all applicants for tribal gaming licenses and issuing gaming licenses in accordance with the tribal gaming ordinance and the Compact. Under law, our Casino cannot operate without TGA regulation. Therefore, the costs of such regulation, including the cost of operating the TGA have, since commencement of operations of the River Rock Casino, been paid by us and will continue to be paid by us.

 

DESCRIPTION OF MATERIAL AGREEMENTS

 

The following is a summary of the material terms of our material agreements and material agreements of the Tribe relating to our Casino. This summary does not restate these agreements in their entirety. We urge you to read these agreements because they, and not these summaries, define our rights and obligations, and the rights and obligations of the Tribe, contained in the agreements. Copies of these agreements are included as exhibits to this Form 10-K.

 

The Compact

 

In September 1999, the State of California and the Tribe entered into a Compact. Under its terms, the Compact was not effective until ratified by statute and a supporting state constitutional amendment was passed by the California voters. On March 7, 2000, the California voters amended the state constitution and enacted the Indian Self-Reliance Amendment. The Amendment permits federally recognized Indian tribes to conduct Class III gaming in California, in accordance with compacts between such tribes and the State of California, subject to approval by the Secretary of the Interior. In May 2000, the Secretary of the Interior approved the Compact, and that approval became effective when it was published in the Federal Register on May 16, 2000.

 

Under the Compact, the gaming activities that may be offered by the Tribe include up to 2,000 Class III gaming devices, banked and percentage card games, and any devices or games that are authorized by the California State Lottery, provided that the Tribe does not offer such games through use of the Internet unless others in California are permitted to do so.

 

The Compact establishes limitations on Class III gaming that may restrict our gaming activities. Among those, which are of importance to our gaming facility, are those that require the Tribe to adopt and comply with standards that are no less stringent than California laws, if any, prohibiting: cashing any check drawn against a federal, state, county, or city fund, including but not limited to Social Security, unemployment insurance, disability payments, or public assistance payments; free or reduced price alcoholic beverages, food or lodging as an incentive; the extension of credit for gaming activities; and persons under 18 (or under 21 if alcohol may be consumed) to be present in any room where Class III gaming is offered, other than simply to pass through the room.

 

The Compact requires the State of California and the Tribe to establish a method for licensing all key employees of a gaming entity and issuing work permits for other service employees. While the Tribe, as a sovereign governmental entity, is not required to be licensed, the California Gambling Control Act applies to all others associated with Class III gaming at our gaming facility. To facilitate that licensing and comply with all other provisions of IGRA, in 1997 the Tribe adopted a tribal gaming ordinance establishing the TGA. The Chairman of the NIGC approved the Tribe’s gaming ordinance in 1997.

 

Under the Compact, all persons connected with our gaming facility are required to be licensed or to submit to a background investigation under IGRA. All “Gaming Employees” and “Gaming Resource Suppliers” (as defined in the Compact) and certain other persons must be licensed by the TGA. Licenses granted by the TGA are subject to review and renewal every two years. Holders of licenses granted by the TGA must, except in limited circumstances, also be determined suitable by the CGCC to be employed by us.

 

The Compact requires the Tribe to adopt and enforce regulations to ensure the physical safety of casino patrons, to prevent illegal activity, to maintain the regularity and integrity of gaming operations, and to require an annual audit conducted by an independent certified public accountant.

 

The Compact requires the Tribe to carry public liability insurance with initial limits of at least $5.0 million for personal injury and property damage claims. The Tribe is required to waive its sovereign immunity to the extent of the $5.0 million liability insurance limits.

 

The Compact also requires the Tribe to adopt and comply with standards no less stringent than federal workplace and occupational health and safety standards, and to adopt and comply with standards no less stringent than federal and state laws prohibiting employment discrimination. However, our tribal gaming ordinance permits us to give preference to Indians in employment matters.

 

The Compact also mandates that the Tribe must follow certain procedures to assess the off-reservation environmental impact of any reservation construction expansion projects. The procedures require the Tribe to give notice of a covered project, to determine

 

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whether a project will have any significant adverse environmental impact, to accept and respond to comments, to consult with the county board of supervisors, and to hold a public meeting.

 

The Senior Notes and the Indenture

 

On November 7, 2003, we issued and sold notes (the “Prior Notes”) in a private placement to certain “qualified institutional buyers” pursuant to Regulation 144A of the Securities Act of 1933, as amended (the “Notes Offering”). On June 21, 2004, pursuant to a registration rights agreement entered into in connection with the issuance of the Prior Notes, we consummated an offer to exchange all of the Prior Notes for our Senior Notes registered with the Securities and Exchange Commission. The terms of the Senior Notes are substantially identical to the terms of the Prior Notes, except that the transfer restrictions and registration rights applicable to the Prior Notes do not apply to the Senior Notes. We did not receive any additional proceeds from the exchange offer. The Senior Notes and the Prior Notes were issued under an Indenture, dated as of November 7, 2003 (the “Indenture”), among us, the Tribe and U.S. Bank National Association, as trustee. The terms of the Senior Notes include those stated in the Indenture, as well as those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended.

 

The net proceeds from the Notes Offering were used to repay a majority of our outstanding indebtedness, to fund the completion of three parking structures and related infrastructure improvements, to fund the settlement of litigation involving the Tribe, to fund the acquisition of real property adjacent to the Tribe’s reservation, to build an additional access road to the Tribe’s reservation through such property, and to repay outstanding indebtedness of the Tribe.

 

The Senior Notes bear interest at a fixed rate of 9-3/4% per year, and mature on November 1, 2011. The Senior Notes are secured by a first priority pledge of our revenues and substantially all of our existing and future tangible and intangible personal property. The Senior Notes are senior debt.  As further described in the Indenture, the Senior Notes are subject to optional and mandatory redemption, and in some cases, holders of the Senior Notes may be required to surrender them for redemption by us (or to otherwise dispose of the Senior Notes) if certain gaming regulations are not satisfied.

 

The Indenture includes affirmative and negative covenants that limit our ability to borrow money, create liens, sell assets, engage in transactions with affiliates, engage in other businesses, open other gaming facilities, engage in certain mergers and consolidations, make certain investments, make certain accelerated payments on our indebtedness that is subordinated to the Senior Notes, and make payments to the Tribe.

 

Cash Collateral and Disbursement Agreement

 

Pursuant to the Cash Collateral and Disbursement Agreement among U.S. Bank National Association and Wells Fargo Bank, N.A. as disbursement agents, U.S. Bank National Association, as the trustee for the holders of the Senior Notes, Merritt & Harris, our independent construction consultant, the Tribe and us, a portion of the net proceeds of the Notes Offering was placed into a construction disbursement account, a construction escrow account, the Dugan Property improvements account, and an operating account, all to be disbursed by the disbursement agents pursuant to the Cash Collateral and Disbursement Agreement.

 

Construction Disbursement Account.      Approximately $61.1 million of the net proceeds of the Notes Offering was deposited into a construction disbursement account and was used to fund the design and construction of our expansion project. All funds in the construction disbursement account are pledged to the trustee for the benefit of itself, and the holders of the Senior Notes, until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. The construction disbursement account had $2.6 million remaining as of December 31, 2009.

 

Construction Escrow Account.      $10.0 million of the net proceeds of the Notes Offering was deposited into a construction escrow account to fund qualifying construction cost overruns.  All funds in the construction escrow account are pledged to the trustee for the benefit of itself and the holders of the Senior Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement.  The construction escrow account had $0.1 million remaining as of December 31, 2009.

 

Dugan Property Improvements Account.      $5.0 million of the net proceeds of the Notes Offering was deposited into the Dugan Property improvements account and will be used to build an additional access road to the Tribe’s reservation. All such funds will be held in the Dugan Property improvements account and pledged to the trustee for the benefit of itself and the holders of the Senior Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. Subject to certain exceptions, U.S. Bank National Association, as the disbursement agent, will disburse funds from the Dugan Property improvements account only upon certification by us that we have adequate funds to complete the road project, and upon the satisfaction of the other disbursement conditions set forth in the Cash Collateral and Disbursement Agreement. The Dugan Property improvements account had $4.3 million remaining as of December 31, 2009.

 

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Operating Account.      We deposit all of our cash and cash equivalents in excess of $2.0 million into our operating account.  Regularly, deposits are made Monday through Thursday of each week.  All such funds are held in the operating account and pledged to the Trustee for the benefit of itself and the holders of the Senior Notes until disbursed in accordance with the terms of the Cash Collateral and Disbursement Agreement. Funds may generally be disbursed by our bank from the operating account for all purposes permitted by the Indenture.  Until recently, Bank of America, N.A. had maintained our operating account.  We recently transferred our operating account to The Bank of the West.

 

Investments; Pledge of Accounts.      Our disbursement agent is required to invest any money held by it in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement, in cash equivalents and such government securities, as may be directed in writing by us from time to time. Any income or gain realized as a result of such investment is required to be held as part of the applicable account and reinvested as provided in the Cash Collateral and Disbursement Agreement. All funds, securities and other assets in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement are pledged to the Trustee for the benefit of the holders of the Senior Notes.  Unrestricted cash is available for operations, except in the event of a default as defined in the Indenture.

 

Memorandum of Agreement between the Tribe and Sonoma County, California

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe and provides a binding framework for resolving future disputes.  The MOA enables the Tribe to move forward with its proposed resort development project, including a new and expanded “Tuscan-themed” casino and hotel with luxury resort amenities.  Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license and we obtained our liquor license for the casino on May 29, 2008.

 

Under the MOA, the Tribe agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol at midnight except for Friday and Saturday nights and the nights before holidays. The restrictions may be renegotiated following the first to occur of three years or the opening of a hotel, which is projected to occur within the next two to three years.

 

In addition, the MOA commits the County Sheriff’s Department and Fire Marshall to provide public safety and fire investigation services to the casino and the Tribe’s future gaming projects on the reservation and provides detailed agreements on off-reservation impact mitigation measures.  Pursuant to the MOA, the County withdrew its opposition to the Tribe’s application to take into trust an approximately 18-acre parcel of land adjacent to the Tribe’s reservation (the “Dugan Property”).  Previously, the trust application had been approved by the Department of the Interior, which approval had been opposed by the County.

 

Pursuant to the MOA, the Tribe has agreed to pay the County $75 million in mitigation fees over a 12 year period, subject to adjustment under certain circumstances described in the MOA, to offset the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and to support the services being provided by the County.  The Tribe paid $7.5 million in 2008 and $2.8 million in 2009.  Future payments are scheduled to take place as follows: $5.0 million upon the earlier of March 18, 2011 or the opening of phase one of the resort project; $5.0 million in the subsequent year but no later than July 1, 2011; and $5.0 million plus 4% compounded annually on July 1 of each subsequent year until the entire $75.0 million has been paid.  The Tribe has not made any determinations to seek reimbursement or direct payment from us of amounts due to the County pursuant to the MOA.

 

In addition, the Tribe has agreed to pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental charges collected on occupied hotel rooms.  Such fees are required to be paid quarterly until five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State.

 

We believe the MOA has had significant positive impacts on the conduct of our business and our and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.

 

Lease for Casino

 

In May 2002, the Tribe entered into a lease with Sprung Instant Structures, Inc. for two dome-shaped structures that house our gaming facility. The lease agreement was assigned to us and was renewed through August 17, 2007. Monthly payments were $36,230. At the end of the lease term, at our option, 100% of the first four lease payments or, if all such payments have been timely made, 40% of the first twenty four lease payments will be credited towards the $1.5 million purchase price, resulting in a purchase price of $1.1 million.  Upon expiration of the lease on August 17, 2007, we opted to maintain the lease payments on a month- to- month basis.  On June 18, 2009, the lease agreement was renewed through June 17, 2012 at a reduced monthly rate of $25,395.

 

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Item 1A.  Risk Factors

 

The following is a description of what we consider our key challenges and risks:

 

Risks Related to Our Business

 

We have a substantial amount of indebtedness that could adversely affect our financial condition and prevent us from fulfilling our obligations under the Senior Notes.

 

As of December 31, 2009, we have approximately $199.4 million, net of unamortized issue discount of $0.6 million, of senior indebtedness outstanding, represented by our Senior Notes. We also have approximately $0.5 million in other debt.  Our substantial indebtedness could have important consequences and significant effects on our business and future operations. For example, it could:

 

·                  increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;

 

·                  limit our ability to fund future working capital, capital expenditures and other general operating requirements;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to repay our outstanding indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, development and other general operating requirements;

 

·                  place us at a competitive disadvantage compared to our competitors that have less debt or greater resources; and

 

·                  limit our ability to borrow additional funds.

 

The occurrence of any one of these events or conditions could have a material adverse effect on our business, financial condition, results of operations, prospects, ability to service or otherwise satisfy our obligations under the Senior Notes. In addition, the Indenture permits us to incur debt in addition to the Senior Notes in certain circumstances. If we were to incur additional debt, the related risks could intensify.

 

We will require a significant amount of cash to service our indebtedness and fund our gaming operations. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on and refinance our debt, including the Senior Notes, and to fund our gaming operations, will depend on our ability to generate cash flow from our gaming operations. Our ability to generate sufficient cash flow to satisfy our debt obligations will depend on our future operating performance that is subject to many economic, competitive, regulatory and business factors that are beyond our control. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments or seek to raise additional capital. These measures may not be available to us or, if available, they may not be sufficient to enable us to satisfy our obligations under the Senior Notes and may restrict our ability to pay operating expenses. If our cash flow is insufficient and we are unable to implement one or more of these alternatives, we may not be able to service our debt obligations or fund our gaming operations.

 

Since we depend on operations in a single location, certain events that we cannot control may adversely affect the business performance of our gaming facility.

 

We rely primarily on guests living within 100 miles of our Casino. We rely exclusively on cash flow from our Casino to service our obligations, including our obligations under the Senior Notes. Therefore, we are subject to greater risks than more geographically diversified gaming operations, including:

 

·                  a decline in the economies of the local areas where our guests are located or a decline in the number of gaming guests from these areas for any reason;

 

·                  a downturn in regional or local economic conditions;

 

·                  an increase in competition in the local areas where our guests reside;

 

·                  inaccessibility due to road construction or closures of primary access routes; and

 

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·                  natural and other disasters and climate conditions in the surrounding area.

 

The occurrence of any of the events or conditions described above could cause a material disruption in our business and cause us to be unable to generate sufficient cash flow to make payments on the Senior Notes.

 

We have experienced landslides and may not be insured against damage resulting from landslides.

 

Although we maintain insurance customary in our industry, including earthquake insurance, our insurance coverage may not be adequate to cover all the risks to which our business and assets may be subject to. Although we have experienced two landslides since our operations began, our landslide-related insurance is limited to events incident to earthquakes. Although neither landslide disrupted our operations or our expansion project, including the excavation, retaining wall and parking structures, the insurance is intended for future landslides.  A landslide could occur in the future that could materially disrupt our operations and materially affect our financial condition.

 

We face competition from other California Indian casinos, casinos located in Nevada and elsewhere and other forms of gaming.

 

The gaming industry is very competitive. We face or will face competition from existing and proposed Indian gaming facilities in the surrounding area, and elsewhere in California, and with casino gaming in Nevada, including gaming facilities that could be located closer to the San Francisco Bay area. We also compete with card rooms located in the surrounding area, and other forms of gaming that are legal in California, including on and off-track wagering and the California State Lottery, as well as with non-gaming leisure activities.  The availability of such alternative gaming and non-gaming activities may increase in the future.  Many of our competitors have substantially greater resources and name recognition than our Casino. In addition, we may also face competition in our market from new facilities that may be built by other Indian tribes in the future.  See Item 1 — “ Business - Competition.”

 

Restrictive covenants in the Indenture may limit our ability to expand our operations and to pursue our business strategies.

 

The Indenture includes covenants that limit our ability to borrow money, make investments, create liens, sell assets, engage in transactions with affiliates, engage in other businesses, open other gaming facilities and engage in mergers or consolidations. These restrictive covenants may limit our ability to expand our operations and to pursue our business strategies. If we are unable to capitalize on business opportunities, we may be unable to make payments on the Senior Notes. Additionally, a violation of any of these restrictive covenants would constitute a default under the Indenture.

 

Risks related to environmental matters could have an adverse effect on us.

 

We are subject to various federal laws and tribal ordinances and regulations, and the Compact which governs activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal of hazardous material or solid or hazardous waste. Environmental laws enacted in the future may create material obligations or liabilities which may have a material adverse effect on us. In addition, certain provisions of the Compact regarding environmental matters may be the subject of renegotiation with the State of California and could limit any future physical expansion of our gaming facility. If so, such limitations may have a material adverse effect on our operations.

 

Pursuant to and in accordance with the Compact, the Tribe adopted an ordinance and prepared and circulated by the Tribe an environmental study concerning potential off-reservation environmental impacts of any renovation, modification, and construction or development project relating to or associated with the gaming facility. Among other things, as required by the Compact in fashioning the ordinance, the Tribe made a good faith effort to incorporate the policies and purposes of the National Environmental Policy Act and the California Environmental Quality Act consistent with the Tribe’s governmental interests. The Compact’s environmental provisions are identical to such provisions in compacts for all other California tribes that entered into compacts in or around 1999. The Tribe believes it has complied, and intends to continue to comply, with all applicable requirements in its environmental ordinance. The State could claim the Tribe is in breach of the Compact and seek to have the Compact terminated.

 

Our business and assets could become liable for claims asserted against the Tribe if the Tribe waives its sovereign immunity with respect to our business or assets or if tribal law intended to limit such liability is ineffective.

 

We are an unincorporated instrumentality of the Tribe, formed pursuant to a law of the Tribe. This tribal law also provides that our obligations and other liabilities are not those of the Tribe and that the obligations and liabilities of the Tribe are not ours. This law is untested and generally has no direct counterpart in other areas of the law. If this law should prove to be ineffective at limiting our liability, our business and assets could become subject to claims asserted against the Tribe or its assets. Similarly, we would be liable for such claims if the Tribe waived its sovereign immunity (with respect to which we have no control) to an extent that allowed enforcement of such claims against our business or assets.

 

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Changes in U.S. or regional economic conditions could adversely affect the profitability of our business.

 

A decrease in economic activity in the United States, particularly in the State of California, could adversely affect demand for our business, thus reducing our revenue and earnings.  A decline in economic conditions could reduce attendance and spending at our Casino.  In addition, an increase in price levels generally, or in price levels in a particular sector, could result in a shift in consumer demand away from the entertainment we offer, which could also adversely affect our revenues and, at the same time, increase our costs.

 

Our business is subject to contingencies beyond our control, including the aftermath of terrorist acts and wars, which may significantly and adversely affect our business, financial condition, results of operations and ability to make payments on the Notes.

 

The United States’ ongoing military campaign against terrorism and continued violence, conflicts and instability in other areas of the world have created many economic and political uncertainties, some of which may affect our ability to attract customers outside our current primary market as well as our operations and profitability.  The potential short-term and long-term effects that these and other similar situations and events may have for our customers, our primary and secondary markets and the U.S. economy in general are uncertain.  These and other similar future events could have a significant impact on the number of customers visiting our Casino and, as a result, may have a material adverse effect on our business, financial condition, results of operations and ability to make payments on the Senior Notes.

 

Acts of terrorism may negatively impact our future profits.

 

Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties.  We cannot predict the extent to which terrorism, security alerts, war, or hostilities throughout the world, will continue to directly or indirectly impact our business and results.  As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available.  Given current conditions in the global insurance markets, we are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.  If any such event were to affect our properties, we likely would be adversely impacted.

 

A variety of uncontrollable events and natural disasters may reduce demand for our Casino.

 

Demand for our Casino is partly dependent on the general environment for travel and tourism.  The environment for travel and tourism can be significantly adversely affected in the United States or in specific regions as a result of a variety of factors beyond our control, including adverse weather conditions or natural disasters (such as excessive heat or rain, hurricanes and earthquakes); health concerns; and international, political or military developments.  These events, and others such as fluctuations in travel and energy costs, may also damage our ability to provide our services or to obtain insurance coverage with respect to these events.

 

Highway and bridge construction projects have impacted the length of travel to our Casino by certain customers.

 

On January 7, 2008, Caltrans began construction on a 3.3-mile stretch of Highway 101 from Santa Rosa (Steele Lane) to Windsor (River Road), California, approximately 20 miles south of our Casino.  The project is intended to widen Highway 101 resulting in an additional third lane in each direction.  The project requires the closure of one lane of Highway 101 in both directions from 11 p.m. to 5 a.m., Monday through Thursday, and from 12:00 a.m. to 5 a.m. on Fridays.  All lanes will be open during daylight hours and weekends. The project will also involve the closure of certain freeway entrance and exit ramps and some local streets.  The lane widening project is expected to be completed in the summer of 2010. There currently has been no major impact from this project on our operations.  However, potentially there may be future risks that could have an impact on our operations as a result of this project.

 

The loss of management and other key personnel could significantly harm our business.

 

Our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of the senior management team.  In addition to the senior management team, the operation of our Casino will require other qualified and skilled employees with gaming and hospitality industry experience and qualifications.  Currently, there is a shortage of skilled labor in the gaming industry in general.  In addition, we are subject to the policy of Tribal hiring preference that requires us to give preference to members of the Tribe. Despite these limitations, our future success depends upon, among other things, our ability to attract and retain senior management and highly qualified employees.  Currently, approximately 94 percent of the employees at the Casino are not members of the Tribe. We compete with other potential employers for employees, and we may not succeed in hiring or retaining the executives and other employees that we may need, particularly due to the very small number of workers skilled in the gaming industry that reside in the immediate vicinity of our businesses.

 

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Currently, we have vacancies in the offices of the Chief Executive Officer and General Manager of our Casino and are conducting a search to fill the vacancies.  We do not have employment agreements with any key executives or employees other than with our Chief Financial Officer.  We do not maintain key-man life insurance policies for any of our executives.  A sudden loss or inability to replace key employees could have a material adverse effect on our financial condition and results of operation.

 

A federal court decision could lead to unionization in the tribal gaming industry.

 

A decision by the United States Court of Appeals for the District of Columbia upheld a finding by the National Labor Relations Board that the National Labor Relations Act is applicable to tribal casinos.  This decision could lead to unionization activities, which could adversely affect our operations.

 

Energy price increases may adversely affect our costs of operations and our revenues.

 

Our Casino uses significant amounts of electricity, natural gas and other forms of energy.  While we have not experienced any shortages of energy to date, the recent substantial increases in the cost of energy in the United States could negatively impact our operating results.  In addition, energy price increases could result in a decline in disposable income of potential customers and a corresponding decrease in visitation to our gaming and hotel facilities, which could negatively impact our revenues.

 

Our business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.

 

Consumer demand for gaming properties, such as ours, are particularly sensitive to downturns in the economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, the current housing crisis and the credit crisis, the impact of high energy and food costs, the increased cost of travel, the potential for continued bank failures, perceived or actual disposable consumer income and wealth, effects of the current recession and changes in consumer confidence in the economy, or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we offer, thus imposing practical limits on pricing and harming our operations.

 

The current housing crisis and economic slowdown in the United States has resulted in a significant decline in the amount of tourism and spending on gaming operations. If this decline continues, our financial condition, results of operations and cash flows may be adversely affected.

 

Risks Relating to the Indian Gaming Industry

 

Our gaming operations are extensively regulated by federal laws and the Compact, and non-compliance with these laws or the Compact by us or the Tribe, as well as changes in the laws or future interpretations of the laws or the Compact, could have a material adverse effect on our gaming operations.

 

Gaming on the Tribe’s reservation is regulated extensively by federal, state and tribal regulatory bodies, including the NIGC, the CGCC, the California Department of Justice and the TGA. The Compact imposes ongoing compliance obligations on us. Our failure to observe any of these obligations could result in a breach of the Compact and the loss of our right to conduct gaming.

 

Changes in applicable laws or regulations, or future interpretation of these laws or regulations could limit or materially affect the types of gaming that we may offer and, consequently, our revenue. Congress has regulatory authority over Indian affairs and can establish and change the terms upon which Indian tribes may conduct gaming. Currently, the operation of all gaming on Indian lands is subject to IGRA. For the past several years, legislation has been introduced in Congress designed to amend IGRA, including proposed legislation limiting the scope of gaming that can be offered and the conditions under which gaming may be offered. While none of the substantive proposed amendments to IGRA have proceeded very far in the legislative process, we cannot predict the ramifications of future congressional legislative acts. It is possible that future legislation may result in a material adverse effect on our operations.

 

Tribal-state compacts are renegotiable and the outcome of any renegotiation may negatively impact our competitive position or otherwise adversely affect our financial condition, results of operations or cash flows.

 

In March 2003, the State of California requested renegotiations with the Tribe and other tribes with respect to matters related to the number of slot machines permitted at tribal casinos under tribal-state gaming compacts, the way in which slot machine licenses are allocated within the state under those compacts, and the fees charged for slot machine licenses. We did not renegotiate the terms of our compact, although some other tribes in California have done so. Those renegotiations, plus the addition of new compacts the State may be entering into with tribes in our market area that were not previously engaged in gaming, may have negative effects on our

 

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competitive position, and our results of operations could be materially and adversely affected. Even if our negotiations with the State of California were to result in an increase in the number of slot machines we could operate, the State has indicated that any increase could result in higher license fees being imposed, which, in light of possible other competition, could result in lower revenues. In addition, the State’s willingness to renegotiate over slot machine limits has been tied to its imposition of further regulations on Indian gaming, particularly on the subject of greater County involvement, provisions favoring negotiating opportunities for organized labor, and other non-economic issues. The effect of the State’s injection of those issues into the renegotiation process, and the resistance of some tribes to renegotiate because of those issues, could have a negative impact on the public’s view of Indian gaming, the effect of which we cannot predict. Finally, any amendment to our compact or any other compact in the State requires the approval of the tribe, the Governor, the California legislature and the U.S. Secretary of the Interior. Some renegotiated (and new) compacts have been approved through that process, but the public debate that has surrounded those renegotiations and the approval process could have a negative impact on Indian gaming generally within the State and on a national level, the likelihood or extent of which cannot be predicted.

 

A change in our current non-taxable status could have a material adverse effect on our cash flow and ability to fulfill our obligations under the Senior Notes.

 

Based on current interpretations of U.S. tax laws, we are not now, and it is anticipated that we will not be, a taxable entity for U.S. federal income tax purposes. If these interpretations are reversed or modified, or if the federal tax law changes in this regard, our cash flow, results of operations, financial conditions and our ability to fulfill our obligations under the Senior Notes would be adversely affected.

 

Efforts have been made in Congress over the past several years to tax the income of tribal business enterprises. These have included a House of Representatives bill that would have taxed gaming income earned by Indian tribes as business income subject to corporate tax rates. Although such legislation was not enacted, similar legislation could be passed in the future. Future legislation in this area could materially adversely affect our ability to fulfill our obligations under the Senior Notes.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

Our Casino is located on the Tribe’s 75-acre reservation near Geyserville, located in the heart of the Alexander Valley in Sonoma County, California. We do not own the land on which our gaming business is located. The use of tribal land is provided to us free of rent by the Tribe. The United States government holds all the real property underlying our facility in trust for the benefit of the Tribe.

 

We made a distribution to the Tribe from the net proceeds of the Notes Offering to enable the Tribe to acquire and develop the Dugan Property. Title to the Dugan Property is held by the Tribe, although the Tribe is seeking to have the parcel taken into trust for the Tribe’s benefit. The Tribe has granted us access to any benefits the property may have for our Casino, including road access and water rights. As of December 31, 2009, we had $4.3 million remaining in an improvements account which was funded from proceeds from the Notes Offering to be used primarily to build an additional access road to the Tribe’s reservation through the Dugan Property. The Dugan Property may be subject to certain zoning, use, environmental and other restrictions, permits and processes under county and state law, including but not limited to certain agreements that have been made relative to the Dugan Property regarding agricultural use limitations and related property tax benefits. We have completed the initial planning on the road from the Dugan Property to the Tribe’s reservation.  The improvements to the Dugan Property are being recorded to construction in progress.

 

On June 28, 2007, we along with the Tribe announced plans to build a destination resort as more fully described in the press release furnished as an exhibit to our Form 8-K dated June 28, 2007. We do not currently have adequate liquidity or cash flow to finance the project as proposed. We will consider various sources of liquidity to finance the first phase of the proposed project.

 

Item 3. Legal Proceedings.

 

Runyan Litigation

 

On March 7, 2008, Norman Runyan, our former Chief Operations Officer, filed a wrongful termination suit against us, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of our Board, in the Sonoma County Superior Court.  We believed the case lacked merit and moved to dismiss.  On October 17, 2008, the Court issued an Order dismissing the lawsuit.  On December 3, 2008, the Court entered an Order granting our motion and dismissed the case.

 

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On January 14, 2009, Mr. Runyan filed a Petition for Order Compelling Arbitration with the Sonoma County Superior Court, and on January 30, 2009, he filed a Motion for Order Compelling Arbitration.  In both the Petition and the Motion, Mr. Runyan sought to have the Court issue an order compelling arbitration of the claims asserted in the complaint that was dismissed by the court in December 2008.  We believed, based on fact that Mr. Runyan entered into a Severance Agreement and General Release with us, the Casino, and other released parties, that there was no basis for Mr. Runyan to seek arbitration.  On April 13, 2009, we, the Casino, and Mr. Hopkins filed a hybrid motion to quash summons and dismiss the Petition and Motion.  On June 1, 2009, the Court granted the motion in its entirety, holding that the Court lacked personal and subject matter jurisdiction, that Mr. Runyan terminated and extinguished his purported employment agreement (which contained the arbitration clause he attempted to rely on) and that he waived any right to arbitration he might have had by settling and releasing all claims.  Finally, the Court held that we and the other respondents have tribal sovereign immunity from service of process.

 

Mr. Runyan filed a Notice of Appeal of the Superior Court’s Order on July 27, 2009 and filed his opening brief in the First District Court of Appeal on December 11, 2009.  Our respondents brief was filed on January 8, 2009, and Mr. Runyan’s reply brief was filed on February 26, 2010.  We are now awaiting a date to be set for oral arguments.  We continue to believe that there was no basis for Mr. Runyan to seek arbitration and will argue vigorously in favor of upholding the Superior Court’s Order granting the motion to quash summons and dismissing Mr. Runyan’s petition and motion for an order compelling arbitration.

 

Other Legal Matters

 

We are involved in other litigation and disputes from time to time in the ordinary course of business with vendors and patrons. The Authority believes that the aggregate liability, if any, arising from such litigation or disputes will not have a material adverse effect on its results of operations, financial condition or cash flows.

 

Item 4. Reserved.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

We have not issued or sold any equity securities.

 

Item 6. Selected Financial Data.

 

River Rock Casino has historically operated as a separate wholly owned operating property of the Tribe. We were formed as an unincorporated instrumentality of the Tribe to own and operate the River Rock Casino. Upon the issuance of our Notes, the Tribe reorganized so that its gaming business became owned and operated by us. This reorganization was accounted for as a reorganization of entities under common control. As a result, the assets and liabilities of the casino operating property are presented by us on a historical cost basis.

 

The following table presents summary historical statements of revenues and expenses, balance sheet and other data for the periods presented and should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the related notes thereto, all included elsewhere in this Form 10-K. The historical financial data for the years ended December 31, 2009, 2008 and 2007 and balance sheet data at December 31, 2009 and 2008 have been derived from our audited historical financial statements included elsewhere in this report.

 

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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

 

RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

 

 

Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(Dollars in Thousands)

 

Statements of Revenues and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

117,731

 

$

124,481

 

$

134,171

 

$

125,912

 

$

128,801

 

Food, beverage and retail

 

5,851

 

6,273

 

5,366

 

4,417

 

4,132

 

Other

 

912

 

598

 

615

 

623

 

663

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenues

 

124,494

 

131,352

 

140,152

 

130,952

 

133,596

 

 

 

 

 

 

 

 

 

 

 

 

 

Promotional allowances

 

(426

)

(779

)

(774

)

(333

)

(38

)

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

124,068

 

130,573

 

139,378

 

130,619

 

133,558

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

16,146

 

20,787

 

23,376

 

20,454

 

19,187

 

Food, beverage and retail

 

7,329

 

7,063

 

4,640

 

5,997

 

6,311

 

Selling, general and administrative

 

41,342

 

43,506

 

43,978

 

39,903

 

46,174

 

Depreciation

 

9,554

 

10,025

 

11,801

 

11,503

 

11,012

 

Credit enhancement fee

 

 

 

11,349

 

8,079

 

7,669

 

Gaming commission and surveillance expense

 

3,791

 

3,695

 

3,023

 

3,154

 

2,773

 

Compact revenue sharing trust fund

 

1,335

 

1,335

 

1,335

 

1,335

 

1,335

 

Loss on sale of assets

 

116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

79,613

 

86,411

 

99,502

 

90,425

 

94,461

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

44,455

 

44,162

 

39,876

 

40,194

 

39,097

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING EXPENSE-Net:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(20,860

)

(20,865

)

(20,872

)

(20,884

)

(21,047

)

Interest income

 

74

 

1,006

 

1,701

 

1,046

 

332

 

Other gain

 

 

 

4

 

(126

)

(104

)

Other income (expense), net

 

 

 

1

 

(1

)

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating expense-net

 

(20,786

)

(19,859

)

(19,166

)

(19,965

)

(20,821

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before Distributions to Tribe (a)

 

$

23,669

 

$

24,303

 

$

20,710

 

$

20,229

 

$

18,276

 

 

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Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Net cash provided by operating activities

 

$

53,957

 

$

54,617

 

$

65,215

 

$

60,550

 

$

55,749

 

Net cash used in capital and related financing activities

 

$

(36,438

)

$

(60,888

)

$

(40,505

)

$

(32,557

)

$

(45,870

)

Net cash provided by investing activities

 

$

74

 

$

1,006

 

$

1,701

 

$

1,046

 

$

332

 

Net cash used in non-capital financing activities

 

$

(13,324

)

$

(13,919

)

$

(12,427

)

$

(14,140

)

$

(11,180

)

Adjusted EBITDA (b)

 

$

54,391

 

$

55,193

 

$

53,383

 

$

52,615

 

$

50,335

 

Capital Expenditures

 

$

16,768

 

$

41,698

 

$

8,193

 

$

4,475

 

$

17,456

 

Ratio of earnings to fixed charges

 

2.15X

 

2.18X

 

2.01X

 

1.98X

 

1.88X

 

Distributions to Tribe

 

$

13,324

 

$

13,919

 

$

12,427

 

$

15,521

 

$

11,180

 

 

Summary of Assets and Long-Term Liabilities:

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Total Assets

 

$

208,306

 

$

194,570

 

 

 

 

 

 

 

Long-term liabilities

 

$

199,382

 

$

199,046

 

 

 

 

 

 

 

 

The following table reconciles EBITDA and net cash provided by operating activities for the periods indicated:

 

 

 

Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

Year Ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Net cash provided by operating activities

 

$

53,957

 

$

54,617

 

$

65,215

 

$

60,550

 

$

55,749

 

(Increase) decrease in accounts receivable

 

198

 

(239

)

104

 

110

 

39

 

(Increase) decrease inventories

 

(91

)

16

 

(7

)

1

 

(224

)

(Increase) decrease in prepaid expenses and other current assets

 

141

 

(190

)

32

 

(32

)

654

 

Increase (decrease) in accounts payable trade credit

 

435

 

518

 

(1,062

)

(322

)

1,220

 

Increase (decrease) in accrued liabilities

 

(207

)

(535

)

(1,256

)

(533

)

338

 

Gain/(Loss) on sale of assets

 

(116

)

 

5

 

(126

)

(104

)

Interest income received

 

74

 

1,006

 

1,701

 

1,046

 

332

 

Credit enhancement fee

 

 

 

(11,349

)

(8,079

)

(7,669

)

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (b)

 

$

54,391

 

$

55,193

 

$

53,383

 

$

52,615

 

$

50,335

 

 


(a) Our financial statements are prepared in accordance with Governmental Accounting Standards Board (“GASB”) pronouncements. There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with the Accounting Standards Codification (the “Codification”) issued by the Financial Accounting Standards Board (“FASB”). The Statements of revenues, expenses and changes in net assets (deficit) are a combined statement under GASB pronouncements. FASB Codification allows a statement of income or operations and a separate statement of owners’ or shareholders’ equity (deficit), which is where distributions to owners would be presented under the FASB Codification. The amount shown above as income before distributions to Tribe would be the most comparable amount to net income computed under the FASB Codification. River Rock Entertainment Authority is a separate enterprise fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ equity (deficit) as traditionally represented under the FASB Codification. The most comparable measure of owners’ equity (deficit) is presented on the River Rock Entertainment Authority balance sheet as net assets (deficit).

 

(b) Adjusted EBITDA, as calculated above, does not represent and should not be considered an alternative to net income or cash flow from operations, as determined by Generally Accepted Accounting Principles.  Moreover, our methodologies and practices in determining adjusted EBITDA may not be comparable to those used by other companies. Adjusted EBITDA is included in this Form 10-K because it is a basis upon which we assess our liquidity and because certain covenants in the Indenture are tied to similar measures. Adjusted EBITDA is also included in this Form 10-K because we believe that it presents useful information regarding our ability to service and incur indebtedness. Adjusted EBITDA does not take into account our debt service requirements and, accordingly, is not necessarily indicative of amounts that may be available for debt service.

 

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Table of Contents

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes beginning on page 21 of this Annual Report on Form 10-K, Item 6 — “Selected Financial Data” and Part I. Item 1. “Business.”

 

Overview

 

Current Year Highlights

 

As part of the effort to enhance the overall appeal of our product, we have reconfigured our gaming floor.  This effort has resulted in the reduction of approximately 358 slot machines and 4 table games, for the year ended December 31, 2009.  We will maintain our contractual rights under the Compact to operate a total of 1,600 slot machines in our Casino.  We considered many factors such as peak period demand, per unit productivity, and player comfort in our analysis to ensure that the reduction of gaming devices will not adversely impact our revenues.

 

A renovation was completed by December 31, 2009 as part of an overall strategic operating plan for the Casino.  In anticipation of building a new casino resort, the current facility had not been upgraded for several years.  In addition to the physical plant of the gaming operation, furniture, fixtures, equipment and gaming software was either not replaced or repaired to adequately service the needs of the business. The overall appearance and appeal of the Casino was insufficient to meet basic customer requirements.  Major components of the renovation project included upgrading slot accounting software, slot and table player tracking software, adding new carpeting, new slot chairs, interior and exterior signage and the replacement of paint and wall paper.  To additionally enhance the overall gaming experience and appeal to a broader spectrum of potential gamers, two additional food amenities were constructed.  The Fortune Café is a quick service Asian-themed restaurant designed to be a high-margin, high-volume, quick turn restaurant.  Additionally, the Center Stage Bar & Grill encompass a casual dining experience combined with the existing bar and an upgraded stage and sound system.

 

The construction of our expansion project has temporarily been postponed due to lack of available financing.  We are actively reviewing our financing options and remain “shovel ready” to proceed.

 

The Senior Notes mature on November 1, 2011. We are actively reviewing our options.  We have remained in contact with various financial institutions regarding the maturing debt to explore our options, which may include refinancing the Senior Notes.

 

General

 

We have historically operated as a separate wholly-owned operating property of the Tribe. We were formed as an unincorporated governmental instrumentality of the Tribe to own and operate the River Rock Casino. Upon the issuance of our Prior Notes, the Tribe reorganized so that its gaming business became owned and operated by us. This reorganization was accounted for as a reorganization of entities under common control. As a result, the assets and liabilities of the Casino are presented by us on a historical cost basis.

 

We offer Class III slot and video poker gaming machines, house banked table games (including Blackjack, Three card poker, Mini-baccarat and Pai Gow poker), Poker, featuring Texas Hold’em, comprehensive food and beverage offerings, and goods for sale in vending machines.

 

On November 7, 2003, we issued the Prior Notes. A portion of the net proceeds from the sale of the Prior Notes was used to fund three new parking structures, and related infrastructure improvements, to repay various debts and accrued expenses of the Tribe, as well as to increase our cash on hand. The balance of the net proceeds was used to fund a land purchase by the Tribe and settle litigation of the Tribe. In June 2004, we consummated our exchange offer of our Senior Notes for the Prior Notes.  The Senior Notes are secured by a first priority pledge of our revenues and substantially all of our existing and future tangible and intangible personal property.

 

At the beginning of 2003, we started our infrastructure projects, including the excavation of a hillside and the construction of retaining walls. In April 2003, we began the design process for the three new parking structures. The parking structure portion of the expansion project was completed in two phases and our existing gaming facility remained open during construction. On October 29, 2004, we obtained a temporary certificate of occupancy to open the entire first parking structure with 437 spaces. On December 1, 2004, we received a certificate of substantial completion on the first parking structure. The second phase, which included our second and third parking structures with 476 and 471 spaces, respectively, opened on December 29, 2004. Since December 31, 2006, we have had enough parking spaces available to accommodate a total of approximately 1,384 customer parked vehicles.

 

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Table of Contents

 

Critical Accounting Policies and Estimates

 

We have identified certain critical accounting policies and estimates that affect our more significant judgments and estimates used in the preparation of our financial statements. The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States of America, requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate those estimates, including those related to asset impairment, accruals for our promotional club, compensation and related benefits, revenue recognition, contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We believe that the following critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements:

 

·                  Casino Revenues — Casino revenue is recognized as the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive slot jackpots and certain player incentives, when earned by the customer.

 

·                  Capital Assets — Capital assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings and improvements

 

21 years

Furniture, fixtures and equipment

 

5 years

 

We evaluate our capital assets for impairment in accordance with the Accounting pronouncement GASB No. 42, “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries.”  This Statement establishes accounting and financial reporting standards for impairment of capital assets.  Our capital assets include building and improvements, furniture, fixtures and equipment.  A capital asset is considered impaired if both the decline in service utility of the capital asset is large in magnitude and the event or change in circumstances is outside the normal life cycle of the capital asset.  We are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred.  Common indicators of impairment include evidence of physical damage where restoration efforts are needed to restore service utility, enactment or approval of laws or regulations setting standards that the capital asset would not be able to meet, technological development or evidence of obsolescence, a change in the manner or expected duration of use of a capital asset or construction stoppage.  This Statement requires us to report the effects of capital asset impairment in its financial statements when they occur, rather than as part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset, and to account for insurance recoveries in the same manner.

 

·                  Accrued Progressive Slot Jackpots — Accrued progressive slot jackpots consist of estimates for prizes relating to various games that have accumulated jackpots. We have recorded the anticipated payouts as a reduction of casino revenues and as a component of accrued liabilities.  We do not accrue for the base jackpots.

 

·                  Contingencies — We assess our exposure to loss contingencies, including legal matters, and provide for an exposure if it is judged to be probable and estimable. If the actual loss from a contingency differs from management’s estimate, operating results could be materially impacted. As of December 31, 2009, we have determined that no accruals for claims and legal actions are required. If circumstances surrounding claims and legal actions change, the addition of accruals for such items in future periods may be required, which accruals may be material.

 

Codification — There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with the Codification issued by the FASB. The statements of revenues, expenses and changes in net assets (deficit) are a combined statement under GASB pronouncements. The FASB Codification allow a statement of income or operations and a separate statement of owners’ or shareholders’ equity (deficit), which is where distributions to owners would be presented under the FASB Codification. The amount shown as income before distributions to the Tribe would be the most comparable amount to net income computed under the FASB Codification. We are a separate enterprise fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ equity (deficit) as traditionally represented under the FASB Codification.  The most comparable measure of owners’ equity (deficit) is presented on our balance sheet as net assets (deficit).

 

Reclassifications — Certain prior year amounts in the statements of revenues, expenses and changes in net assets (deficit) have been reclassified to be consistent with current year presentation with no change to net revenues or net income as reflected in our prior Forms 10-K, including the reclassification of e-coupons and cash incentives from promotional allowances to contra-revenues. Certain cash flow statements amounts and footnote disclosures have been adjusted to be consistent with current year presentation.

 

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Table of Contents

 

Results of Operations

 

Quarterly Results of Operations

 

The following table sets forth unaudited quarterly operations data for each full quarter for the past three years. In our opinion, this data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the data. The results of operations for any quarter are not necessarily indicative of the results of operations for a full year or any future period. Certain amounts from prior quarters have been reclassified to be consistent with our current presentation, i.e. promotional allowances are now contra-revenue.  We expect our quarterly operating results to vary significantly in future periods.

 

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Table of Contents

 

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

 

2009

 

2009

 

2009

 

2009

 

2008

 

2008

 

2008

 

2008

 

 

 

Dollars in Thousands

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

30,158

 

$

28,152

 

$

29,469

 

$

29,952

 

$

29,789

 

$

31,090

 

$

31,728

 

$

31,874

 

Food, beverage and retail

 

1,485

 

1,459

 

1,481

 

1,426

 

1,772

 

1,308

 

1,874

 

1,319

 

Other

 

225

 

224

 

334

 

129

 

265

 

30

 

154

 

149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenues

 

31,868

 

29,835

 

31,284

 

31,507

 

31,826

 

32,428

 

33,756

 

33,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promotional allowances

 

(106

)

(101

)

(173

)

(46

)

(385

)

(127

)

(97

)

(170

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

31,762

 

29,734

 

31,111

 

31,461

 

31,441

 

32,301

 

33,659

 

33,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

4,378

 

3,670

 

3,925

 

4,173

 

5,714

 

5,173

 

4,862

 

5,038

 

Food, beverage and retail

 

1,752

 

1,812

 

1,703

 

2,062

 

1,144

 

1,689

 

2,505

 

1,725

 

Selling, general and administrative

 

11,237

 

9,739

 

10,108

 

10,258

 

11,529

 

9,778

 

11,781

 

10,418

 

Depreciation

 

2,410

 

2,388

 

2,381

 

2,375

 

2,338

 

2,337

 

2,410

 

2,940

 

Gaming commission and surveillance expense

 

889

 

986

 

1,050

 

866

 

1,032

 

807

 

854

 

1,002

 

Compact revenue sharing trust fund

 

333

 

334

 

334

 

334

 

333

 

334

 

334

 

334

 

(Gain)/loss on sale of assets

 

149

 

 

(33

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating expenses

 

21,148

 

18,929

 

19,468

 

20,068

 

22,090

 

20,118

 

22,746

 

21,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

10,614

 

10,805

 

11,643

 

11,393

 

9,351

 

12,183

 

10,913

 

11,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING EXPENSE-Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,215

)

(5,215

)

(5,215

)

(5,215

)

(5,215

)

(5,216

)

(5,217

)

(5,217

)

Interest income

 

21

 

21

 

24

 

8

 

25

 

227

 

266

 

488

 

Other income (expense), net

 

 

 

 

 

10

 

 

(1

)

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating expense-net

 

(5,194

)

(5,194

)

(5,191

)

(5,207

)

(5,180

)

(4,989

)

(4,952

)

(4,738

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before Distribution to Tribe (a)

 

$

5,420

 

$

5,611

 

$

6,452

 

$

6,186

 

$

4,171

 

$

7,194

 

$

5,961

 

$

6,977

 

 


(a) Our financial statements are prepared in accordance with Governmental Accounting Standards Board (“GASB”) pronouncements. There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with the Codification issued by the FASB. The statements of revenues, expenses and changes in net assets (deficit) are a combined statement under GASB pronouncements. The FASB Codification allows a statement of income or operations and a separate statement of owners’ or shareholders’ equity (deficit), which is where distributions to owners would be presented under the FASB Codification. The amount shown above as income before distributions to the Tribe would be the most comparable amount to net income computed under the FASB Codification. River Rock Entertainment Authority is a separate enterprise fund of the Tribe, a governmental entity, and, as such, there is no owners’ or shareholders’ equity (deficit) as traditionally represented under the FASB Codification. The most comparable measure of owners’ equity (deficit) is presented on the River Rock Entertainment Authority balance sheet as net assets (deficit).

 

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Table of Contents

 

RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

RESULTS OF OPERATIONS

For the Years Ended December 31, 2009, 2008 and 2007

 

 

 

Years Ended December 31,

 

Dollar Variance

 

Percentage Variance

 

 

 

2009

 

2008

 

2007

 

2009 vs. 2008

 

2008 vs. 2007

 

2009 vs. 2008

 

2008 vs. 2007

 

 

 

(Dollars in Thousands)

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

117,731

 

$

124,481

 

$

134,171

 

$

(6,750

)

$

(9,690

)

-5.4

%

-7.2

%

Food, beverage and retail

 

5,851

 

6,273

 

5,366

 

(422

)

906

 

-6.7

%

16.9

%

Other

 

912

 

598

 

615

 

314

 

(17

)

52.6

%

-2.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenues

 

124,494

 

131,352

 

140,152

 

(6,858

)

(8,801

)

-5.2

%

-6.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promotional allowances

 

(426

)

(779

)

(774

)

354

 

(4

)

-45.4

%

0.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

124,068

 

130,573

 

139,378

 

(6,504

)

(8,805

)

-5.0

%

-6.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

16,146

 

20,787

 

23,376

 

(4,641

)

(2,589

)

-22.3

%

-11.1

%

Food, beverage and retail

 

7,329

 

7,063

 

4,640

 

266

 

2,423

 

3.8

%

52.2

%

Selling, general and administrative

 

41,342

 

43,506

 

43,978

 

(2,164

)

(473

)

-5.0

%

-1.1

%

Depreciation

 

9,554

 

10,025

 

11,801

 

(470

)

(1,777

)

-4.7

%

-15.1

%

Credit Enhancement Fee

 

 

 

11,349

 

 

(11,349

)

0.0

%

-100.0

%

Gaming commission and surveillance expense

 

3,791

 

3,695

 

3,023

 

96

 

672

 

2.6

%

22.2

%

Compact revenue sharing trust fund

 

1,335

 

1,335

 

1,335

 

 

 

0.0

%

0.0

%

Loss on sale of assets

 

116

 

 

 

116

 

 

100.0

%

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

79,613

 

86,411

 

99,502

 

(6,798

)

(13,091

)

-7.9

%

-13.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

44,455

 

44,162

 

39,876

 

294

 

4,286

 

0.7

%

10.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING EXPENSE-Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(20,860

)

(20,865

)

(20,872

)

5

 

7

 

0.0

%

0.0

%

Interest income

 

74

 

1,006

 

1,701

 

(932

)

(695

)

-92.6

%

-40.9

%

Other gain

 

 

 

4

 

 

(4

)

0.0

%

-100.0

%

Other income, net

 

 

 

1

 

 

(1

)

0.0

%

-100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating expense-net

 

(20,786

)

(19,859

)

(19,166

)

(927

)

(694

)

-4.7

%

-3.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE DISTRIBUTIONS TO TRIBE

 

$

23,669

 

$

24,303

 

$

20,710

 

$

(633

)

$

3,592

 

-2.6

%

17.3

%

 

Results of Operations — Fiscal Years ended December 31, 2009 and 2008

 

Net Revenues. Net revenues for the fiscal year ended December 31, 2009 (“FY 2009”) decreased by $6.5 million to $124.1 from $130.6 million for the fiscal year ended December 31, 2008 (“FY 2008”). The decrease is attributed to a national and regional economic slowdown.  Approximately 94.9% of our net revenues, net of player incentives, were from gaming activities for FY 2009.  We generated $106.1 million, or 85.5% of net revenues, net of respective player incentives of $10.2 million, from gaming devices, and $11.6 million, or 9.4% of net revenues, net of respective player incentives of $0.1 million, from table games and poker for FY 2009, as compared to $110.2 million, or 84.4% of our net revenues, net of respective player incentives of $12.0 million, from gaming devices and $14.3 million, or 11.0% of our net revenues, net of respective player incentives of $0.2 million, from table games and poker for FY 2008.  Our win per slot machine per day was $218 for FY 2009, which increased by $26 from $192 for FY 2008.  The increase in net win per machine per day is primarily attributable to the decrease in the average number of slot machines on the floor.  We have been reconfiguring our gaming floor in an effort to enhance our overall appeal.  As part of this effort, we reduced the average number of slot machines to 1,333 for FY 2009, compared to an average of 1,570 for FY 2008.  At December 31, 2009, we had 1,212 slot machines on the gaming floor.

 

We generated $5.4 million in food, beverage and retail sales for FY 2009, compared to $5.5 million for FY 2008 net of promotional allowances.  The retail value of our food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances. Such allowances for FY 2009 and FY 2008 were $0.4 million and $0.8 million, respectively.  We do not provide complimentary alcoholic beverages to our patrons.

 

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Table of Contents

 

Promotional Allowances. Promotional allowances for FY 2009 were $0.4 million, or 0.3% of net revenues, compared to $0.8 million, or 0.6% of net revenues, for FY 2008.

 

Operating expenses. Operating expenses for FY 2009 were $79.6 million, or 64.2% of net revenues, compared to $86.4 million, or 66.2% of net revenues, for FY 2008. The decrease in operating expenses is attributable to expense reductions due to cost saving measures we adopted to adjust for the decline in customer demand, as described below under Casino expense, food, beverage and retail expense, and selling, general and administrative expense.

 

Casino expense includes costs associated with our gaming operations and an allocation of food and beverage expense related to the costs of complimentary activities. Casino expense for FY 2009 decreased to $16.1 million, or 13.7% of Casino revenues from $20.8 million, or 16.7% of Casino revenues for FY 2008. The decrease in Casino expense is attributable to decreases in salaries and wages and related benefits, temporary suspension of our 401K matching contribution, participation fees, and wide-area progressive commissions.

 

Food, beverage and retail expense for FY 2009 was $7.3 million, or 135.1% of food, beverage and retail revenue net of promotional allowances, increasing from $7.1 million, or 128.6% of food, beverage and retail revenue net of promotional allowances for FY 2008.  Our food and beverage expense ratio is still significantly higher than industry average because we have utilized these amenities as an opportunity to build customer loyalty rather than as a source of income.

 

Selling, general and administrative expense for FY 2009 decreased by $2.2 million to $41.3 million, or 33.3% of net revenues, from $43.5 million, or 33.3% of net revenues, for FY 2008. The decrease in selling, general and administrative expense is attributable to the decrease in advertising, bus expense, and an allocation of expenses paid for by the Tribe that we reimburse, including human resources and warehouse.

 

Depreciation expense for FY 2009 was $9.6 million compared to $10.0 million for FY 2008.  Depreciation expense was computed using the straight-line method over the useful lives of property, plant and equipment. The decrease in depreciation expense is due to an increase in the amount of our assets becoming fully depreciated.

 

Gaming Commission and surveillance expenses for FY 2009 were $3.8 million compared to $3.7 million for FY 2008.   The increase is due to hiring new positions in preparation for the anticipated continuation of the expansion project and those new hires remained in place throughout 2009.

 

Compact revenue sharing trust fund expense remained the same at $1.3 million for both FY 2009 and 2008. Compact revenue sharing trust fund expense includes payments associated with licenses for 1,600 gaming devices. These fees became payable by the Tribe when we commenced operations in September 2002, and are based on the number of our gaming device licenses. Compact revenue sharing trust fund expense includes payments to the Revenue Sharing Trust Fund (“RSTF”) as required by our Compact with the State of California. The Tribe is obligated to remit certain fees to the California Gambling Control Commission on a quarterly basis for inclusion in the RSTF.  The RSTF is for the benefit of tribes that have no or limited gaming. We pay these fees on behalf of the Tribe.

 

Income from operations. Income from operations for FY 2009 was $44.5 million, or 35.8% of net revenues, compared to $44.2 million, or 33.8% of net revenues, for FY 2008.

 

Other expense, net. Other expense, net for FY 2009 increased to $20.8 million, or 16.8% of net revenues, from $19.9 million, or 15.2% of net revenues, for FY 2008, primarily representing interest expense for both periods.  Other expense, net, included $74,172 of interest income for FY 2009 compared to $1.0 million of interest income for FY 2008.  The decrease in interest income was due to a significant drop in interest rates and the decline of invested funds.

 

Income before distributions to the Tribe. Income before distributions to the Tribe for FY 2009 decreased by $0.6 million to $23.7 million, or 19.1% of net revenues, from $24.3 million, or 18.6% of net revenues, for FY 2008.

 

Results of Operations — Fiscal Years ended December 31, 2008 and 2007

 

Net Revenues. Net revenues for the fiscal year ended December 31, 2008 (“FY 2008”) decreased by $8.8 million to $130.6 from $139.4 million for the fiscal year ended December 31, 2007 (“FY 2007”). The decrease is attributed to a national and regional economic slowdown.  Approximately 95.3% of our net revenues, net of player incentives, were from gaming activities for FY 2008.  We generated $110.2 million, or 84.4% of net revenues, net of respective player incentives of $12.0 million, from gaming devices, and $14.3 million, or 11.0% of net revenues, net of respective player incentives of $0.2 million, from table games and poker for FY 2008, as compared to $119.0 million, or 85.3% of our net revenues, net of respective player incentives

 

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of $11.3 million, from gaming devices and $15.2 million, or 10.9% of our net revenues, net of respective player incentives of $0.2 million, from table games and poker for FY 2007.  Our win per slot machine per day was $192 for FY 2008, which decreased by $15 from $207 for FY 2007.  There were an average number of slot machines of 1,570 for FY 2008, compared to an average of 1,566 for FY 2007.

 

We generated $5.5 million in food, beverage and retail sales for FY 2008, compared to $4.6 million for FY 2007, net of promotional allowances.  In part, the increase is due to the May 2008 issuance of our alcohol license resulting in alcohol sales that were non-existent in 2007 and the decrease of promotional allowances as a result of a strategic reduction to narrow our marketing focus on higher revenue generating players.  The retail value of our food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances. Such allowances for FY 2008 and FY 2007 were $0.8 million and $0.8 million, respectively.  We do not provide complimentary alcoholic beverages to our patrons.

 

Promotional Allowances. Promotional allowances for the FY 2008 were $0.8 million, or 0.6% of net revenues, compared to $0.8 million, or 0.6% of net revenues, for FY 2007.

 

Operating expenses. Operating expenses for FY 2008 were $86.4 million, or 66.2% of net revenues, compared to $99.5 million, or 71.4% of net revenues, for FY 2007. The decrease in operating expenses is primarily attributable to the elimination of the Credit Enhancement Fee in FY 2008 which totaled $11.3 million in FY 2007, along with the decrease in depreciation of original equipment that was placed into service when the Casino first commenced operations and has fully depreciated.

 

Casino expense includes costs associated with our gaming operations and an allocation of food and beverage expense related to the costs of complimentary activities. Casino expense for FY 2008 decreased to $20.8 million, or 16.7% of Casino revenues, from $23.4 million, or 17.4% of Casino revenues for FY 2007. The decrease in Casino expense is attributable to decreases in participation fees, and wide-area progressive commission.

 

Food, beverage and retail expense for FY 2008 was $7.1 million, or 128.6% of food, beverage and retail revenue net of promotional allowances, increasing from $4.6 million, or 101.1% of food, beverage and retail revenue net of promotional allowances for FY 2007.  The increase in food, beverage and retail expense is primarily attributed to the increase in costs of goods, salaries and wages and related benefits.  Our food and beverage expense ratio is still significantly higher than industry average because we have utilized these amenities as an opportunity to build customer loyalty rather than as a source of income.

 

Selling, general and administrative expense for FY 2008 decreased by $0.5 million to $43.5 million, or 33.3% of net revenues, from $44.0 million, or 31.6% of net revenues, from FY 2007.

 

Depreciation expense for FY 2008 was $10.0 million compared to $11.8 million for FY 2007.  Depreciation expense was computed using the straight-line method over the useful lives of property, plant and equipment. The decrease in depreciation expense is due to original equipment that was placed into service when the Casino commenced operation and has fully depreciated.

 

Credit Enhancement Fee expense was no longer applicable in FY 2008 compared to $11.3 million in FY 2007.  We began paying the credit enhancement fee to Dry Creek Casino (“DCC”) in June 2003. We had the right to terminate the Development Agreement by exercising a buy-out option and did so on January 31, 2007.

 

Gaming Commission and surveillance expenses for FY 2008 were $3.7 million compared to $3.0 million for FY 2007.   The increase is primarily due to an increase in wages and new positions, along with an increase in audit and legal fees due to financing activities.

 

Compact revenue sharing trust fund expense remained the same at $1.3 million for both FY 2008 and 2007. Compact revenue sharing trust fund expense includes payments associated with operating 1,600 gaming devices. These fees became payable by the Tribe when we commenced operations in September 2002, and are based on the number of our gaming device licenses. Compact revenue sharing trust fund expense includes payments to the RSTF as required by our Compact with the State of California. The Tribe is obligated to remit certain fees to the California Gambling Control Commission on a quarterly basis for inclusion in the RSTF.  The RSTF is for the benefit of tribes that have no or limited gaming. We pay these fees on behalf of the Tribe.

 

Income from operations. Income from operations for FY 2008 was $44.2 million, or 33.8% of net revenues, compared to $39.9 million, or 28.6% of net revenues, for FY 2007.

 

Other expense, net. Other expense, net for FY 2008 increased to $19.9 million, or 15.2% of net revenues, from $19.2 million, or 13.8% of net revenues, for FY 2007.  Other expense, net, included $1.0 million of interest income for FY 2008 compared to $1.7

 

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million of interest income for FY 2007.  The decrease in interest income was due to a drop in interest rates and the decline of invested funds.

 

Income before distributions to the Tribe. Income before distributions to the Tribe for FY 2008 increased by $3.6 million to $24.3 million, or 18.6% of net revenues, from $20.7 million, or 14.9% of net revenues, for FY 2007.

 

Liquidity and Capital Resources

 

Since our inception, we have funded our capital expenditures and working capital requirements primarily through operating cash flow, debt financing, gaming equipment supplier financing, and other financing.

 

Construction of our Casino and infrastructure improvements commenced on April 1, 2002. The first portion of our gaming facility was completed in September 2002. As of December 31, 2009, we had spent approximately $166.5 million, net of disposals, on the planning, development and construction of our gaming facility, infrastructure and furniture, fixtures and equipment, excluding the proposed future expansion project. We financed the development with borrowings and development advances.

 

In FY 2009, we spent $12,800 on the development of land adjacent to the Tribe’s reservation (the “Dugan Property”) which is expected to include an additional access road to our Casino. We have $4.3 million remaining in a restricted account funded from the proceeds of our Notes Offering for the development of the Dugan Property.

 

Our capital expenditures for FY 2009 and 2008 were $16.8 million and $41.7 million, respectively. Our capital expenditures in 2009 consisted primarily of slot machines and master plan development.  The master plan development related expenditures totaled $11.8 million of related expenditures reimbursed to the Tribe they had incurred on our behalf and $0.3 million of related expenditures paid by the Casino. Our 2008 capital expenditures consisted primarily of work contracted for by the Tribe on our behalf and completed in 2008 for master plan development costs for our proposed expansion project and infrastructure improvements, which includes the construction of the lower Acorn Road.

 

As of December 31, 2009, we had cash and cash equivalents of $31.6 million, as compared to $27.3 million as of December 31, 2008.  As of December 31, 2009 and 2008, respectively, we had restricted cash of $7.1 million.

 

Restricted cash consists of net proceeds from the Notes Offering and investment earnings thereon set aside in construction financing accounts, for construction costs for the three parking structures, infrastructure improvements and construction contingencies. It also includes funds that are reserved for additional construction contingencies and the funds for the development of the Dugan Property. Our restricted cash is held in escrow accounts that can only be used for authorized construction disbursements until the related projects are completed.  Additionally, our operating account is pledged to the Trustee for the benefit of itself and the holders of the Senior Notes until disbursed in accordance with the terms of the Cash Collateral and Disbursement Agreement. Funds may generally be disbursed by our bank from the operating account for all purposes permitted by the Indenture.

 

Our principal source of liquidity for uses other than our expansion project during FY 2009 consisted of cash flow from operating activities.  Net cash provided by operating activities for FY 2009 was $54.0 million, a decrease of $0.7 million, from $54.6 million for FY 2008. Net cash provided by operating activities for FY 2008 decreased by $10.6 million, from $65.2 million for FY 2007.

 

Net cash used in capital and related financing activities for FY 2009 was $36.4 million, as compared to $60.9 million for FY 2008.  Cash flow used in capital and related financing activities was primarily for the purchase of property and equipment and interest paid on the Senior Notes.  The decrease was primary attributable to the decrease in reimbursements to the Tribe for property and equipment as a result of completed work contracted for on our behalf by the Tribe for master plan development for our proposed expansion project and infrastructure improvements, which includes the construction of the lower Acorn Road, decreasing cash used in capital and related financing activities by $24.4 million.

 

Net cash used in non-capital financing activities for FY 2009 was $13.3 million, a decrease of $0.6 million from $13.9 million for FY 2008.  Net cash used in non-capital financing activities consist of distributions to the Tribe.

 

We believe that existing cash balances, cash from operations, as well as permitted disbursements from our restricted cash escrow accounts will provide adequate funds for our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future. However, our ability to fund our operations, make planned capital expenditures, make scheduled debt payments and refinance our indebtedness depends on our future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

 

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Additionally, the Indenture limits our ability to incur additional indebtedness. See Item 1 — “Business — Material Agreements — The Senior Notes and the Related Indenture.”

 

The Senior Notes mature on November 1, 2011. We are actively reviewing our options.  We have remained in contact with various financial institutions regarding the maturing debt to explore our options, which may include refinancing the Senior Notes.

 

On June 28, 2007, we and the Tribe announced plans to build a destination resort as more fully described in the press release furnished as an exhibit to our Form 8-K dated June 28, 2007. We do not currently have adequate liquidity or cash flow to finance the project as proposed. We will consider various sources of liquidity to finance the first phase of the proposed project.

 

The Tribe has incurred expenses on our behalf that relate to the master planning of the proposed resort and an allocable portion of infrastructure improvements on the Tribe’s reservation that benefit us.  Total expenses incurred and subsequently reimbursed to the Tribe for the year ended December 31, 2009 were $11.8 million.   On January 8, 2010, our Board of Directors authorized the reimbursement of the Tribe in an amount not to exceed $14.9 million for expenses that the Tribe incurred on our behalf for master planning of the proposed resort and our allocable share of infrastructure improvements on the reservation.  The approval included a payment schedule under which we will reimburse the Tribe $400,000 monthly from February 1, 2010 through April 1, 2010, and $700,000 monthly thereafter without exceeding $14.9 million. We believe that the $14.9 million of reimbursements represents the balance of master planning expenses and related infrastructure paid by the Tribe.  When the reimbursement payments are made, the related expenses will be capitalized and reflected in construction-in-progress. The reimbursed costs consist of engineering and design costs related to the proposed master plan development, including electrical, HVAC, landscaping, interior design services and consulting fees for legal, branding, feasibility, and public relations services, as well as the construction costs of the lower Acorn Road.

 

The construction of our expansion project has temporarily been postponed due to lack of funding.  We are actively reviewing our financing options and remain “shovel ready” to proceed.

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe and provides a binding framework for resolving future disputes.  We believe the MOA has had significant positive impacts on the conduct of our business and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.  Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over a 12 year period to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and is intended to support the services being provided by the County.  In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA. The Tribe has not made any determinations to seek reimbursement or direct payment from us of amounts due to the County pursuant to the MOA.

 

As part of the effort to enhance the overall appeal of our product, we have been reconfiguring our gaming floor.  This effort has resulted in the reduction of approximately 372 slot machines since June 2009 and 2 table games since August 2009.  We will maintain our contractual rights under the Compact to operate a total of 1,600 slot machines in our Casino and pay the related RSTF payments.  We considered many factors such as peak period demand, per unit productivity, and player comfort in our analysis to ensure that the reduction of gaming devices will not adversely impact our revenues.  The reduction of gaming units on the Casino floor has provided us an opportunity to upgrade current amenities, improve player comfort and enhance entertainment value. We are confident that these improvements, targeted at improving product appeal, will ultimately open up a greater spectrum of potential consumers within our designated market area.  In combination with our continuing effort to improve operational efficiency, upgrading our gaming technology, and refocusing our marketing efforts, we are confident that we will have set a solid foundation for improved and sustained cash flows.

 

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Contractual Obligations as of December 31, 2009

 

The following table summarizes our contractual obligations and commitments as of December 31, 2009:

 

 

 

Total

 

1 year

 

1-3 years

 

3-5 years

 

Long-term debt obligations (a)

 

$

200,492,203

 

$

492,203

 

$

200,000,000

 

$

 

Operating lease obligations

 

1,384,634

 

548,808

 

831,551

 

4,275

 

 

 

 

 

 

 

 

 

 

Total obligations (b)

 

$

201,876,837

 

$

1,041,011

 

$

200,831,551

 

$

4,275

 

 


(a)                                  Excluded from long-term debt obligations above are interest payments of $19.5 million in 1 year and $16.3 million in 2-3 years.

(b)                                 The Compact requires us to pay a quarterly fee of $0.3 million to the RSTF based on the number of our licensed gaming devices. Total obligations do not include the RSTF payments.  On January 8, 2010, our Board of Directors authorized the reimbursement of the Tribe in an amount not to exceed $14.9 million for expenses that the Tribe incurred on our behalf for master planning of the proposed resort and our allocable share of infrastructure improvements on the reservation.  The approval included a payment schedule under which we will reimburse the Tribe $400,000 monthly from February 1, 2010 through April 1, 2010, and $700,000 monthly thereafter without exceeding $14.9 million (see Note 4 of our financial statements) which are not included in total obligations.

 

Regulation and Taxes

 

We are subject to extensive regulation by the TGA, the California Gambling Control Commission and the National Indian Gaming Commission. Changes in applicable laws or regulations could have a significant impact on our operations.

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into the MOA that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe, and provides a binding framework for resolving future disputes.   Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license.  In a related action, the Alexander Valley Association (“AVA”), a local business and residents association which has long objected to the issuance of a liquor license, agreed to withdraw its objections to the license and has persuaded its members and a number of other protestors to do likewise.

 

On May 29, 2008, the California Department of Alcoholic Beverage Control issued a liquor license to our gaming and entertainment facility.  However, the Tribe has agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol altogether at midnight except for Friday and Saturday nights and the nights before holidays. The Tribe has also agreed not to serve liquor on the Casino floor, although patrons may bring drinks purchased at the restaurant or bar on to the Casino floor. The restrictions may be renegotiated following the first to occur of the three year anniversary of the MOA or the opening of a hotel, which is anticipated to occur within the next two to three years.

 

In addition, the MOA commits the County Sheriff’s Department and Fire Marshall to providing public safety and fire services to the Casino and the Tribe’s future gaming projects on the Rancheria, provides detailed agreements on off reservation impact mitigation measures, and permits the Tribe’s application to take the Dugan Property into trust, which has already been approved by the Department of the Interior (“DOI”) but was appealed by the DOI, to move forward without further County opposition.

 

The Tribe has agreed to pay the County up to $75 million in mitigation fees over a 12 year period to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and is intended to support the services being provided by the County.  In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.  The Tribe has not made any determinations to seek reimbursement or direct payment from us of amounts due to the County pursuant to the MOA.

 

We believe the MOA has had significant positive impacts on the conduct of our business and our and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.

 

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Since we are an unincorporated governmental instrumentality of the Tribe located on reservation land held in trust by the United States of America, we are not subject to federal or state income taxes. Various efforts have been made in Congress over the past several years to enact legislation that would subject the income of tribal governmental business entities, such as us, to federal income tax. Although no such legislation has been enacted, similar legislation could be passed in the future. It is not possible to determine with certainty the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on our operating results and cash flow from operations.

 

Impact of Inflation

 

Absent changes in competitive and economic conditions or in specific prices affecting the casino industry, we do not expect that inflation will have a significant impact on our gaming facility operations. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the casino industry in general.

 

Seasonality

 

We anticipate that activity at our gaming facility may be modestly seasonal with stronger results expected during the summer due in part to the relatively higher levels of tourism during such times of the year. In addition, our operations may be impacted by adverse weather conditions and fluctuations in the tourism business. Accordingly, our results may fluctuate from quarter to quarter and the results of one quarter may not be indicative of results expected from future quarters.

 

Item 7A. Quantitative and Qualitative Disclosure 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.

 

Through December 31, 2009, we had not invested in derivative or foreign currency-based financial instruments. Additionally, we primarily have fixed rate debt. As such, we do not believe we have material exposure to market risk.

 

Item 8. Financial Statements and Supplementary Data.

 

Our financial statements and notes thereto, referred to in Item 15(A) (1) of this Form 10-K, are filed as part of this report and appear in this Form 10-K beginning on page 43.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report, management performed, with the participation of our Acting Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Acting Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.  Based on the evaluation, our Acting Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.  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 in accordance with accounting principles generally accepted in the U.S.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.   Also, projection of any evaluation of effectiveness to future periods is 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.

 

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has conducted, with the participation of our Acting Chief Executive Officer and Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting as of December 31, 2009.  Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2009.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant.

 

We were formed in 2003 as an unincorporated instrumentality of the Tribe. We are governed by a five-member Board of Directors consisting of the same five members as those of the Tribe’s Board of Directors. The Tribe’s Board of Directors is elected biennially by the Tribal Council (the approximately 553 voting members of the Tribe), and consists of five members, including a Chairperson, a Vice Chairperson, a Secretary-Treasurer. The elections for our Board of Directors take place in late fall, every two years.  Our last election was postponed pending the resolution of the status of certain voting members of the Tribe.  The Tribe resolved these issues and the election proceeded on May 16, 2009.  The members of our Board of Directors will serve for so long as they serve on the Tribe’s Board of Directors.

 

Our Board of Directors

 

The table below sets forth information about the current members of our Board of Directors:

 

Name

 

Age

 

Position(s) Held

 

 

 

 

 

Harvey Hopkins

 

61

 

Chairperson

Augusto “Gus” Pina

 

66

 

Vice Chairperson

Salvina Norris

 

31

 

Secretary/Treasurer

Marina Nojima

 

28

 

Board Member

Gabe Nevarez

 

46

 

Board Member

 

Harvey Hopkins serves as our Chairperson.  Mr. Hopkins has served as Chairperson of the Tribe’s Board of Directors since November 20, 2004.  Mr. Hopkins served as our Chairperson from November 20, 2004 to July 14, 2006. Thereafter, Mr. Hopkins served as a Board Member until May 16, 2009.  Mr. Hopkins began a professional career in construction in 1970 and has been a licensed excavating contractor for 29 years.  He grew up in Santa Rosa, California, and has been a lifelong member of the Dry Creek Rancheria Band of Pomo Indians.  He and his wife have also been in the trucking business for the last 16 years and currently own American Indian Management Inc. Trucking Company.  Additionally, Mr. Hopkins worked for American Civil Constructors West Coast for the past 15 years.

 

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Augusto “Gus” Pina serves as our Vice Chairperson.  Mr. Pina had served as a Board Member since November 20, 2004. Mr. Pina retired as vice president of the Santa Rosa office of Bank of the West. Prior to joining Bank of the West in 1992, Mr. Pina served in various managerial positions at Crocker Bank and Bank of America. Mr. Pina was honorably discharged from the US Navy in 1964. Except during his service to the US Navy, Mr. Pina has lived in Sonoma County his entire life. He has been a member of Rotary International, Cotati Planning Commissioner, Cotati Chamber President, former board member of KRCB channel 22 and a former member of the Petaluma Boys & Girls Club.

 

Salvina Norris serves as our Secretary/Treasurer.  Ms. Norris has served as a Board member since May 16, 2009.  Mrs. Norris worked for the Casino from 2005 through 2008, starting in the security department and later in to the slot department.  Mrs. Norris worked for the Tribe’s Project Development Department from 2008 to 2009 specializing in document control.  Additionally, Mrs. Norris serves on the Tribe’s Code of Conduct Committee.

 

Marina Nojima has served as a Board Member since May 16, 2009.  Mrs. Nojima worked for the Tribe from 2003 through 2006, as an Indian Child Welfare Advocate.  Mrs. Nojima left her employment with the Tribe to obtain her Bachelor of Arts in psychology from Sonoma State University.  Ms. Nojima has been employed at Anova Center for Education since 2008, in the capacity of school secretary.  Additionally, Mrs. Nojima was a member of the Tribe’s Education and Peace Protection Committee.

 

Gabe Nevarez has served as a Board Member since October 7, 2006. Mr. Nevarez had served on the Tribe’s Board of Directors as a member-at-large from 1998 through 2004. He had previously served on our Board of Directors as a member-at-large from its inception through November 2004. Mr. Nevarez has been employed in retail sales in Santa Rosa, CA since 1986. Mr. Nevarez has previously served as a member of the Enrollment, Personnel, Housing and Legislative Committees of the Tribe.

 

Executive Officers

 

The table below sets forth information about certain key executive officers as of December 31, 2009.

 

Name

 

Age

 

Position(s) Held

 

 

 

 

 

John Cirrincione

 

47

 

Chief Operations Officer and Acting Chief
Executive Officer, General Manager

 

 

 

 

 

Joseph R. Callahan

 

57

 

Chief Financial Officer

 

On January 22, 2009, Mr. Shawn S. Smyth left the position of Chief Executive Officer and General Manager of the Casino to pursue other interests.  Upon Mr. Smyth’s departure, our Chief Operations Officer, Mr. John Cirrincione, was appointed as Acting Chief Executive Officer and General Manager.  From August 2009 through November 2009, Mr. Scott Garawitz served as our Chief Executive Officer and General Manager.  Upon Mr. Garawitz’s departure, Mr. Cirrincione again assumed the titles of Acting Chief Executive Officer and General Manager.  On January 22, 2010, Mr. John Cirrincione left the positions of Chief Operations Officer and Acting Chief Executive Officer and General Manager to pursue other interests.  Mr. Joseph Callahan was immediately appointed as the Acting Chief Executive Officer and General Manager.  Additionally, Mr. Hans Winkler assumed the role of Acting Assistant Chief Financial Officer.  Mr. Winkler has been the Chief Financial Officer of the Tribe since 2004 and will continue to act in that capacity.  Mr. Winkler served as our Chief Financial Officer from April through July 2006.  From 2002 to 2004, Mr. Winkler was Controller of the Tribe.  Prior to his employment by the Tribe, Mr. Winkler worked for the accounting firm of Ralph J. Ricciardi for 14 years.  Mr. Winkler is 47 years old.  We are currently conducting a search for a new Chief Executive Officer and General Manager.

 

Set forth below is a brief description of the business experience of our key executive officers. The following descriptions for our officers include employment by River Rock Casino as our predecessor.

 

John Cirrincione was our Chief Operations Officer from October 7, 2008 until January 22, 2010.  Mr. Cirrincione has 23 years experience in the gaming industry, most recently as General Manager of Downstream Casino Resort, a high-end casino facility with 2,100 slots, 45 games, 5 restaurants, 226 hotel rooms and a 36 hole golf course in Quapaw, Oklahoma.  Mr. Cirrincione was part of the project team credited with bringing the resort from groundbreaking to operation within 10 months and 26 days. Prior positions include serving as General Manager of Gila River Gaming Enterprises, Inc. in Chandler, Arizona, Director of Operations for the Sands Hotel Casino in Reno, Nevada from 1999 through 2003 and as a Casino Manager and start up team with Thunder Valley Casino Resort in Lincoln, California. Additionally, Mr. Cirrincione was employed by Mystic Lake Hotel Casino in Prior Lake, Minnesota, as Director of Table Games Operations, and as Assistant Director of Table Games for the Atlantis Casino Resort in Reno, Nevada. He graduated with a BS in Communications from the State University of New York College at Fredonia in 1984, and became certified in gaming management at the University of Nevada in 1994.

 

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Joseph R. Callahan has been our Chief Financial Officer since August 8, 2007.  Mr. Callahan has a diverse Casino Executive background in Finance and Accounting, Hotel, Food and Beverage and Gaming Operations. Most recently, Mr. Callahan worked for Fantasy Springs Casino in Indio, California where he had been the Director of Accounting and Finance since 2005.  Prior to that he spent 5 years with Mohegan Sun where he was Finance Director specializing in Strategic Planning and Analysis and Labor and Productivity.  Mr. Callahan has spent several years working for Station Casinos in Las Vegas, Nevada as an Analyst, Finance Director and also Director of Hotel Operations.  In 1994, Colonel Callahan retired from the U.S. Air Force after 20 years of service.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our executive officers, including our Chief Executive Officer and Chief Financial Officer. Our code of ethics is available on our website at www.riverrockcasino.com under “Contact Us/Investor Relations/Corporate Governance.” We will provide a copy of our code of ethics to any person upon request in writing to us at our address.

 

Audit Committee of the Board of Directors; Financial Expert

 

We do not have a separate audit committee of our Board of Directors. Our full Board of Directors has assumed the audit committee functions of our casino except that our TGA is responsible under our Compact to hire, monitor the performance of and, if necessary, replace the independent auditors and to approve any significant non-audit relationship with the independent auditors and assess the independent auditor’s qualifications and independence.

 

Our Board of Directors has determined that it does not have an audit committee financial expert.

 

Item 11. Executive Compensation

 

Compensation Discussion and Analysis

 

Philosophy

 

Our compensation policies are designed to attract and retain key employees, motivating them to achieve and rewarding them for superior performance.  We choose to pay competitive levels of base compensation and discretionary bonuses in order to attract and retain the necessary executive talent, reward annual performance and provide incentive for their balanced focus on long-term strategic goals as well as short-term performance. Since we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation on all of our employees.

 

We believe that the compensation of our officers should reflect their success as individuals and as members of a management team, in attaining key operating objectives, such as growth of revenues and operating earnings. We believe that the performance of the officers in managing our company, considered in light of general economic and specific company, industry and competitive conditions, should be the basis for determining their overall compensation. In setting our officers’ compensation, we intend to be competitive with other gaming companies. Our discretionary cash bonuses are an important element of our ability to recruit and retain talented employees and reward achievement since we do not pay any equity-based compensation.

 

Overview of Compensation and Process

 

In lieu of a compensation committee, our Board of Directors acts as a whole to make determinations regarding compensation of our executive officers. Elements of compensation for our executives include: salary, incentive bonus, and benefits such as health, disability, life insurance and perquisites. Base salaries for our non-contracted executives and discretionary bonuses for all executives are set for our officers annually by the Board of Directors.

 

As part of its annual review of officer compensation, our Board of Directors takes into account each officer’s total compensation from prior years, as well as information contained in compensation surveys. After reviewing the above factors, our Board of Directors makes the ultimate compensation determinations.  Compensation determinations relating to incentive bonuses to our executive officers and managers, as well as base compensation, are determined solely by our Board of Directors.

 

The following are certain factors that our Board of Directors will also take into account in determining the various components of our executive officers’ total compensation package:

 

·                  Performance against corporate and individual objectives for the previous year;

·                  Difficulty of achieving desired results in the coming year;

 

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·                  Value of their unique skills and capabilities to support our long-term performance;

·                  Performance of their management responsibilities;

·                  Responsibility and authority of each position relative to other positions within the Casino; and

·                  Contributions as a member of the senior management team.

 

These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, providing proper compliance and regulatory guidance, and helping to create a cohesive team.

 

In addition to wages, we normally provide all employees including executives with 401(k) match at 100% up to 3% of gross annual pay, as well as paid medical, dental, vision and life insurance.  We also provide insurance for dependents while paying for 50% of employee dependent premiums.

 

Overview of Director Compensation and Procedures

 

We review the level of compensation of our directors on an annual basis. To determine how appropriate the current level of compensation for our directors is, we have historically obtained data from a number of different sources such as salary surveys and industry standards.

 

Retention Agreements

 

We do not have individual retention agreements with any employee except for severance arrangements with our former Chief Operations Officer and with our Chief Financial Officer, who now also serves as our Assistant General Manager, contained in their respective employment contracts that are discussed in Item 11 - “ Executive Compensation - Employment Agreements.”

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Board of Directors has served as one of our officers or employees at any time. None of our executive officers serve as a member of the Board of Directors of any other company that has an executive officer serving as a member of our Board.

 

Board of Directors Report

 

Our Board of Directors has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the Board of Directors has approved the Compensation Discussion and Analysis and it is to be included in our Annual Report on Form 10-K for 2009. This report is provided by our full Board of Directors:

 

Harvey Hopkins, Chairperson

Gus Pina, Vice Chairperson

Salvina Norris, Secretary/Treasurer

Marina Nojima, Member

Gabe Nevarez, Member

 

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Executive Officers

 

The following tables provide summary compensation information for each of the fiscal years ended December 31, 2009, 2008 and 2007:

 

Executive Officers serving during 2009

 

Year

 

Salary

 

Bonus (a)

 

Other Compensation (b)

 

Total

 

 

 

(In Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shawn S. Smyth (c)

 

2009

 

126,396

 

75,000

 

4,661

 

206,057

 

Chief Executive Officer

 

2008

 

298,268

 

75,000

 

12,979

 

386,247

 

 

 

2007

 

324,038

 

51,500

 

18,753

 

394,291

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott Garawitz

 

2009

 

100,833

 

 

2,302

 

103,135

 

Chief Executive Officer (d)

 

2008

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph R. Callahan

 

2009

 

246,310

 

58,750

 

7,194

 

312,254

 

Chief Financial Officer (e)

 

2008

 

225,702

 

25,000

 

6,808

 

257,510

 

 

 

2007

 

78,346

 

19,587

 

2,182

 

100,115

 

 


(a) Dollar amounts for bonuses are not guaranteed and represent the maximum amount that the principal officer may receive.

(b) “Other Compensation” includes medical, dental, vision and other health benefits provided.

(c) Shawn S. Smyth began serving as our Chief Executive Officer in April 2006 and left the office in January 2009.

(d) Scott Garawitz began serving as our Chief Executive Officer in August 2009 and left the office in November 2009.

(e) Joseph R. Callahan began serving as our Chief Financial Officer as of August 8, 2007.  As of January 22, 2010, Mr. Callahan also serves as our Acting Chief Executive Officer.  On March 12, 2010, we entered into an employment agreement with Mr. Callahan to continue serving as our Chief Financial Officer and to begin serving as our Assistant General Manager.

(f) John Cirricione began serving as our Chief Operations Officer in October 7, 2008 and left the office in January 2010.  He also served as Acting Chief Executive Officer from January 2009 until August 2009 and from November 2009 until January 2010.

 

Employment Agreements.

 

We entered into an employment agreement with Mr. Joseph R. Callahan on October 17, 2007 effective as of August 8, 2007 to serve as our Chief Financial Officer. This three year employment agreement commenced on August 8, 2007, and provides Mr. Callahan an annual salary of $225,000 and a discretionary bonus, as determined by our Board, of not more than 25% of his annual salary based on various criteria.  If Mr. Callahan’s employment is terminated for other reasons set forth in the employment agreement including death or disability, Mr. Callahan will be entitled to his salary for three months.  Either party may terminate the agreement with a 30 day written notice.  Effective March 12, 2010, we entered into a new employment agreement with Mr. Callahan whereby Mr. Callahan will continue to serve as our Chief Financial Officer and will become the Assistant General Manager of the Casino.  The term of Mr. Callahan’s agreement is three years, unless terminated earlier by the parties under the terms of the agreement. The agreement provides for the payment to Mr. Callahan of an initial annual base salary of $250,000.  Mr. Callahan will also be eligible to receive an annual bonus at the discretion of the Authority’s Board of Directors not to exceed thirty percent (30%) of his annual base salary.  This agreement supersedes Mr. Callahan’s employment agreement dated October 17, 2007 that was scheduled to terminate on August 7, 2010.

 

We entered into an employment agreement with Mr. John Cirrincione on October 8, 2008 effective as of October 7, 2008 to serve as our Chief Operations Officer.  This three year employment agreement commenced on October 7, 2008, and provides Mr. Cirrincione an annual salary of $275,000 and a discretionary bonus, as determined by our Board, of not more than 25% of his annual salary based on various criteria.  If Mr. Cirrincione’s employment is terminated for other reasons set forth in the employment agreement including death or disability, Mr. Cirrincione will be entitled to his salary for three months.  Either party may terminate the agreement with a 30 day written notice.  Mr. Cirrincione resigned on January 22, 2010 and was paid severance in accordance with his employment agreement in the amount of $78,202.

 

We have no other employment agreements with our principal executive officers.

 

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Potential Payments to Named Executive Officers Upon Termination

 

Pursuant to his employment agreements, Mr. Callahan is entitled to potential severance payments upon certain terminations of employment.   The terms and conditions for when severance payments are triggered, how payment amounts are determined, and what conditions are attached to the executive’s receipt of severance payments are substantially similar for all of our executive officers.

 

Triggering Events: Mr. Callahan is entitled to receive severance payments in the event of any termination of his employment as a result of the following events:

 

·                  The executive dies or becomes unable to perform the duties and responsibilities set forth in his employment agreement by reason of long-term physical or mental disability, defined as a period of disability that exceeds three (3) months;

·                  We, for any reason, cease to operate the Casino; or

·                  We give the executive ninety (90) days’ written notice of executive’s termination.

 

If severance is owed to Mr. Callahan, we will be obligated to continue to pay the executive his base compensation in effect as of the date of termination for a severance period following termination equal to three months. Additionally, we will be obligated, to the extent elected by the executive, to continue all employee benefits for that three month period.

 

The following table sets forth a summary of the estimated payments required to be made by us as if severance had been triggered under our employment agreements on December 31, 2009:

 

Name and
Principal Position