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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-113140
INN OF THE MOUNTAIN GODS RESORT AND CASINO (Exact Name
of Registrant as Specified in Its Charter)
NOT APPLICABLE 85-0098966
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
287 CARRIZO CANYON ROAD
MESCALERO, NEW MEXICO 88340
(Address of Principal Executive (Zip Code)
Offices)
(505) 464-6595
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
Securities registered under
Section 12(G) OF THE ACT:
(Title of Class)
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes [__] No [X]
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 the 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [__] No [X]
REFERENCES IN THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K" OR THIS
"REPORT") TO (A) THE "TRIBE" REFERS TO THE MESCALERO APACHE TRIBE, A FEDERALLY
RECOGNIZED INDIAN TRIBE, (B) "IMG RESORT AND CASINO" REFERS TO INN OF THE
MOUNTAIN GODS RESORT AND CASINO, A BUSINESS ENTERPRISE OF THE TRIBE, (C) "CASINO
APACHE" REFERS TO CASINO APACHE, A BUSINESS ENTERPRISE OF THE TRIBE, (D) THE
"INN" REFERS TO INN OF THE MOUNTAIN GODS, A BUSINESS ENTERPRISE OF THE TRIBE,
(E) THE "TRAVEL CENTER" REFERS TO CASINO APACHE TRAVEL CENTER, A BUSINESS
ENTERPRISE OF THE TRIBE AND (F) "SKI APACHE" REFERS TO SKI APACHE, A BUSINESS
ENTERPRISE OF THE TRIBE. EACH OF CASINO APACHE, THE INN, THE TRAVEL CENTER AND
SKI APACHE IS A WHOLLY-OWNED SUBSIDIARY OF IMG RESORT AND CASINO." REFERENCES IN
THIS FORM 10-K TO "WE," "OUR," "OUR" AND "US" REFER TO IMG RESORT AND CASINO.
FORWARD-LOOKING STATEMENTS
THIS FORM 10-K INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS. STATEMENTS REGARDING OUR EXPECTED FINANCIAL
CONDITION, RESULTS OF OPERATIONS, BUSINESS, STRATEGIES AND FINANCING PLANS UNDER
THE HEADINGS "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN THIS FORM 10-K
ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS
FORM 10-K, THE WORDS "ANTICIPATE," "EXPECT," "PLAN," "INTEND," "WILL,"
"DESIGNED," "ESTIMATE," "ADJUST" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US
OR OUR MANAGEMENT, INDICATE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS MAY PROVE TO BE INCORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS DISCLOSED IN
THIS FORM 10-K INCLUDE, WITHOUT LIMITATION, RISKS RELATING TO THE FOLLOWING: (A)
OUR LEVELS OF LEVERAGE AND ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS; (B) OUR
FINANCIAL PERFORMANCE; (C) CONTINGENCIES ASSOCIATED WITH THE CONSTRUCTION OF OUR
TWO-PHASE CONSTRUCTION PROJECT, WHICH WE REFER TO AS THE PROJECT, AND
DISRUPTIONS CAUSED THEREBY; (D) RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS;
(E) REALIZING THE BENEFITS OF OUR BUSINESS PLAN AND BUSINESS STRATEGIES; (F)
CHANGES IN GAMING LAWS OR REGULATIONS, INCLUDING POTENTIAL LEGALIZATION OF
GAMING IN CERTAIN JURISDICTIONS; (G) THE IMPACT OF COMPETITION IN OUR MARKETS;
(H) OUR ABILITY TO ATTRACT INCREASING NUMBERS OF CUSTOMERS ONCE THE PROJECT IS
COMPLETE; (I) GENERAL LOCAL, DOMESTIC AND GLOBAL ECONOMIC CONDITIONS; AND (J)
OTHER FACTORS DISCUSSED UNDER "RISK FACTORS" OR ELSEWHERE IN THIS FORM 10-K.
YOU ARE URGED TO CONSIDER THESE FACTORS CAREFULLY IN EVALUATING THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K. ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY OUR CAUTIONARY STATEMENTS.
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE MADE ONLY AS OF
THE DATE OF THIS FORM 10-K. WE DO NOT INTEND, AND UNDERTAKE NO OBLIGATION, TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
OVERVIEW
IMG RESORT AND CASINO
IMG Resort and Casino, established on April 2, 2003, is a wholly owned
enterprise of the Tribe with the exclusive power to conduct and regulate gaming
activities on the Tribe's reservation. We operate New Mexico's only all-season
gaming destination resort on the Tribe's 725 square mile reservation in
south-central New Mexico. We are located in the forests of the Sacramento
Mountains and our operations include: two full- service casinos offering 39,600
square feet of gaming space including 1,180 slot machines and 38 table games as
of April 30, 2004; a new resort hotel and casino on the banks of Lake Mescalero
(currently under construction); the second largest ski resort in New Mexico; a
championship golf course; big-game hunting and various other outdoor
recreational activities. We are located approximately 120 miles north of El
Paso, Texas and the Mexican border, approximately 200 miles south of
Albuquerque, New Mexico and approximately 10 miles west of the resort town of
Ruidoso. Ruidoso and its surrounding area offers tourists a variety of
year-round activities, including skiing, golfing, hunting, boating, fishing,
camping, swimming, horseback riding and cultural events. The neighboring town of
Ruidoso Downs features the Ruidoso Downs Race Track and Casino, offering quarter
horse and thoroughbred racing throughout the summer months and is home of the
world's richest quarter horse race, the All-American Futurity. White Sands
National Monument, which attracts in excess of 500,000 visitors a year, is
located approximately 60 miles away from our properties.
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Our casinos and resort hotel are conveniently located off of a heavily
traveled four-lane highway, U.S. Highway 70. According to the New Mexico State
Highway and Transportation Department, approximately 5.9 million vehicles travel
across U.S. Highway 70 each year. We are the only full-service casino operator
within our primary market area, encompassing southern New Mexico, including the
cities of Ruidoso, Alamogordo, Las Cruces and Roswell and western Texas,
including the cities of El Paso, Lubbock and Odessa, and northern Mexico,
including Ciudad Juarez.
THE PROJECT
We are currently engaged in a two-phase construction project, which we
refer to as the Project. We successfully completed Phase I of the Project,
construction of our new Casino Apache Travel Center in May 2003, at a cost of
$16.0 million. We are currently constructing Phase II of the Project, the Inn of
the Mountain Gods Resort and Casino, or the Resort. We have entered into a fixed
price contract for the Phase II construction costs and expect to complete the
Resort in April 2005 at a cost of $171.3 million.
Management believes the Project will position us as the "Southwest's Best
All-Season Resort" by expanding and modernizing our gaming and hotel facilities
to meet customer demand and address the limitations of our existing casino,
Casino Apache, and our old hotel, the Inn of the Mountain Gods. Casino Apache
currently operates at capacity on weekends, holidays and during promotional
events even though it was originally designed as a two-floor convention space
and not a high-traffic casino. Casino Apache is also affected by poor
ventilation and limited parking and gaming space. Although it was opened in 1975
as a luxury resort hotel, by 2002 the Inn of the Mountain Gods hotel was an
aging and dated facility that required significant modernization to serve the
needs of our customers. These capacity and design issues have limited our
ability to attract additional gaming and resort customers from both within and
beyond our primary market area. Nevertheless, our gaming revenues have continued
to grow, experiencing a compound annual growth rate of approximately 15.0% from
our fiscal year ended April 30, 2000 through April 30, 2004.
PHASE I -- TRAVEL CENTER
In May 2003, we successfully completed Phase I of the Project, construction
of the Travel Center, on time and on budget. The Travel Center targets locals
and casual day-trip visitors and complements our gaming operations at Casino
Apache. The Tribe funded the entire construction cost of the Travel Center with
equity contributions to us from cash on hand. The 14-acre Travel Center, which
includes a 30,000 square foot main building, is located on U.S. Highway 70, and
at April 30, 2004 featured:
o 17,000 square feet of gaming space including 502 slot machines and 13
table games, including blackjack and roulette;
o two video poker bars -- a 12-seat circular bar located in the center
of the facility, which features video poker at all 12 seats, and an
11-seat full-service bar, which features video poker at five seats;
o "Smokey-B's Grill," a 2,300 square foot, 135-seat casual dining
restaurant;
o a 2,500 square foot convenience store, which carries food, candy, hot
and cold beverages and travel and sundry items;
o an 800 square foot tax-free smoke shop, which offers a variety of
brand-name carton cigarettes at discounted prices;
o a Conoco-branded fuel station with 12 gasoline and eight diesel
pumping stations;
o a 2,000 square foot shower and laundry facility;
o 700 on-site parking spaces, including a separate parking area for
semi-trucks, with over 24 over-sized spaces; and
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o shuttle service to Casino Apache.
PHASE II -- INN OF THE MOUNTAIN GODS RESORT AND CASINO
In January 2003, we demolished the existing Inn of the Mountain Gods hotel
and began Phase II of the Project, construction of the new Resort on the site of
the old hotel. Construction of the Resort has been designed to minimize
disruption of our existing Casino Apache operations, which has been and will
remain open during the construction period. We expect to complete the Resort in
April 2005.
We intend to fund the construction of the Resort from proceeds of the sale
of the 12% Senior Notes issued on November 3, 2003, or the notes, cash on hand,
equity contributions from the Tribe, operating cash flows and permitted
equipment financing. We have approximately $69.9 million of construction and
equipment costs remaining to be paid to complete the Resort. As of April 30,
2004, we had approximately $34.5 in a construction disbursement account to pay
for the remaining costs of the Resort. We intend to fund the remaining $35.4
million from operating cash flow and permitted indebtedness.
Upon completion of the Resort, Casino Apache will be relocated into the
Resort. The Resort is designed to be a premier gaming resort destination hotel
and casino, targeting the mature, affluent gaming and entertainment patron, as
well as middle market clientele. The casino will offer higher table gaming and
slot machine limits and a broader mix of table games than the Travel Center. Key
design elements include:
CASINO - Situated on the main level, adjacent to the Grand Hall, the 38,000
square foot casino will be easily accessible from all resort amenities via the
connecting public concourse encircling the Resort Entry Plaza. All gaming
activities will be located on a single level with good sight lines, varying
ceiling heights and machine layouts to create an interesting and comfortable
feel. Initially, the casino is expected to operate with 1,000 slot machines (and
capacity for 1,500 machines) and 34 table games.
HOTEL - We have designed the 273-room hotel with the size of the rooms and
quality of furnishings comparable to first-class, full-service, chains such as
Westin, Marriot or Hyatt. The hotel structure will vary between four and eight
stories in height, depending upon the location along the hotel corridor, and
will allow for easy traveling distance to and from the casino and events center.
Our over-sized deluxe guest rooms will be either 480 square feet or 610 square
feet and our suites will be 1,200 square feet (with the ability to connect to a
480 square foot deluxe guest room, providing a total of 1,680 square feet in
that configuration). In-room amenities will include high-speed Internet access,
coffee makers, ironing boards and irons, mini-bars, toiletries, free and
pay-per-view movies and other standard and premium channels. All rooms feature a
balcony view of Lake Mescalero and either Sierra Blanca Mountain or the
forest-lined golf course. The hotel will also feature an indoor swimming pool
and fitness center including a yoga and aerobics workout area, steam and sauna
facilities for both men and women and a family locker area.
The hotel will also feature various food and beverage venues including a
150-seat indoor/outdoor casual and fine dining restaurant; a 250-seat buffet
style restaurant; a 100-seat sports bar, a 75-seat night club featuring live
entertainment and dancing and a "quiet" lounge featuring an oversized fireplace.
EVENTS CENTER - Guests will access the main entrance of the 37,000 square
foot events center from the Grand Hall and connecting corridor. The events
center will accommodate a wide variety of activities, including entertainment
and sports events, such as concerts, comedy shows and boxing, as well as trade
shows and exhibitions.
RESORT ENTRY PLAZA AND GRAND HALL - The "Resort Entry Plaza" will make use
of a centralized circular driveway entrance, with easy access to the casino,
hotel, events center and parking. Ample parking will be available for our
customers and employees in our 1,700 space underground parking structure and 500
spaces of surface parking. The design is intended to route guests to their
destination while ensuring that all amenities are highly visible. The design
also provides each element of the resort - casino, hotel and events center -
with its own separate entrance, but still ties together the entire facility.
The "Grand Hall" is designed as a central atrium space from which guests
can access all resort amenities. The space will connect the casino to the
southwest, the hotel along the lake to the north, and the events center to the
southeast. The Grand Hall will offer panoramic views of Lake Mescalero, the
"Lakefront Walk" and Sierra Blanca
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Mountain. Several dining and retail areas will be conveniently located off the
Grand Hall as well as the hotel lobby and guest elevators. A curvilinear
dual-staircase leads to the fine dining and patio areas below.
DESIGN AND CONSTRUCTION TEAM
The following is a brief description of the design and construction
professionals we have selected to assist in the development of the Resort:
CENTEX/WORTHGROUP, LLC - We have retained Centex/WorthGroup, LLC to design
and construct the Resort. Centex/WorthGroup is a joint venture comprised of
WorthGroup Architects, L.P., who designed the Resort, as well as the Bellagio,
Hard Rock Hotel & Casino and Mandalay Bay, in Las Vegas, and Centex Construction
Company, Inc., who will construct the Resort. Centex has extensive experience in
the resort and hospitality sector, with clients including Harrah's Casino in Las
Vegas, Atlantis Paradise Island Resort and Casino in the Bahamas and Disney's
All Star Resort in Lake Buena Vista, Florida. The Tribe has a successful working
history with Centex/WorthGroup, who successfully designed, built and opened the
Travel Center on time and within budget in May 2003. In addition, the Tribe
previously selected Centex to build its new K-12 school in Mescalero, which also
opened on schedule and within budget in May 2002, and has won three national
awards in the construction and design/build fields.
RIDER HUNT LEVETT & BAILEY - We have retained Rider Hunt Levett & Bailey to
provide project management services, budgeting services and ongoing schedule
management for construction of the Resort. Rider Hunt has extensive experience
in managing the design and construction of casinos including Chukchansi Gold
Resort & Casino, Pechanga Entertainment Center, Excalibur Las Vegas Resort Hotel
and Casino, Hard Rock Hotel and Casino and Silver Legacy Resort Casino.
PROFESSIONAL ASSOCIATES CONSTRUCTION SERVICES - Professional Associates
Construction Services, Inc. of Orange, California has been retained as an
independent construction consultant on behalf of the holders of the notes. The
conditions under the cash collateral and disbursements agreement generally
provide that funds will be disbursed only if Professional Associates certify to
the disbursement agent that there is sufficient available funds to complete the
Resort in accordance with the budget. Professional Associates has acted as
construction consultant in connection with the construction of Chukchansi Gold
Resort & Casino, Pechanga Entertainment Center, Barona Casino and Station
Casino's Green Valley Ranch Resort.
CONSTRUCTION CONTRACT
We have entered into a fixed price design and build contract, which we
refer to as the Fixed Price Contract, for approximately $135.2 million with
Centex/WorthGroup, LLC for the cost associated with the design and construction
of the Resort. Centex/WorthGroup is responsible for achieving substantial
completion of the Resort by February 28, 2005, with final completion within 60
days thereafter. As of April 30, 2004, we had paid approximately $96.2 million
to Centex/WorthGroup under the Fixed Price Contract, leaving approximately $39.0
million remaining under the agreement. Neither we nor the Tribe can provide you
with any assurance that the Resort will be completed within budgeted costs.
OUR BUSINESS ACTIVITIES
IMG Resort and Casino was formed by the Tribe on April 2, 2003 to be the
holding company for all of the Tribe's gaming and resort enterprises. Prior to
the formation of IMG Resort and Casino, the Tribe had been operating all of its
gaming and resort activities through four separate tribal enterprises: Casino
Apache, which owned and operated the Tribe's original casino, Casino Apache,
since the commencement of its operations in 1992; Ski Apache, which owned and
operated the Tribe's ski resort, since the commencement of its operations in
1964; Inn of the Mountain Gods, which owned and operated the Tribe's resort
hotel, the Inn of the Mountain Gods, since the commencement of its operations in
1975; and the Travel Center, which owned and operated the Tribe's second gaming
facility, Casino Apache Travel Center, since the commencement of its operations
in April 2003. On April 2, 2003, each of the Tribe's gaming and resort
enterprises - the Travel Center, Casino Apache, Ski Apache and Inn of the
Mountain Gods - were contributed to IMG Resort and Casino by the Tribe and are
wholly-owned subsidiaries of IMG Resort and Casino.
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GAMING
We currently operate two gaming facilities, the Travel Center and Casino
Apache. The Travel Center, opened on May 21, 2003, is located directly on U.S.
Highway 70 and is highly visible to drivers in both directions. Casino Apache,
opened in 1992, is located two miles off of U.S. Highway 70, adjacent to the
future site of the Resort. As of April 30, 2004, Casino Apache featured 22,600
square feet of gaming space, 678 slot machines and 25 table games, including
craps, blackjack, roulette, three-card poker and "Let it Ride;" a 100-seat
buffet restaurant; a gift shop and approximately 400 customer parking spaces.
Our gaming operations have experienced continued growth since fiscal 2000.
Gaming revenues have increased from $35.4 million for the twelve months ended
April 30, 2000 to $60.3 million for the twelve months ended April 30, 2004, a
compound annual growth rate of 15.0%. In May 2003, we opened the Travel Center
with approximately 500 slot machines, comprised of approximately 200 slot
machines moved from Casino Apache and approximately 300 new slot machines. Upon
completion of the Resort, the current space at Casino Apache will be converted
into child care center for guests and employees, which we will refer to as "Camp
Mescalero."
RESORT AMENITIES
Since opening the original 118-room hotel as a five-star resort facility in
1975, we have built a strong reputation as a leading destination resort in our
region. Our cool mountain climate and resort amenities typically attract
capacity crowds from May through September. Our resort amenities include our
championship golf course, rated the 35th "Best Golf Resort" in the country in
2002 by Golf Week(TM), a golf pro shop, big game hunts, shooting ranges,
horseback riding, boating, fishing and a casual dining restaurant and bar.
During construction, we have been and will continue to operate substantially all
of our resort amenities. In addition, we have instituted a partnership with more
than a dozen local hotels to provide our regular lodging patrons with
accommodations throughout this period.
SKIING
We have owned and operated Ski Apache since 1964. Ski Apache has 750-acres
of ski area and is the second largest snow ski area (based upon acres of ski
area) in the State of New Mexico. Our ski resort is located on U.S. Forest and
Tribal land on the 12,003-foot Sierra Blanca Mountain, on the southern tip of
the Rocky Mountains, approximately 20 miles from the site of the Resort.
Approximately 200,000 skiers, primarily from New Mexico, Texas, Arizona and
Mexico, visited Ski Apache during each of our last three ski seasons, which
typically run from Thanksgiving to Easter. At April 30, 2004, Ski Apache
featured:
o 11 lifts providing the largest lift capacity in New Mexico (over
16,500 people per hour), which include a four-passenger gondola (the
only one in New Mexico), two quad chair lifts, five triple chairs, one
double chair lift and two surface lifts;
o a base elevation of 9,600 feet and a vertical drop of 1,900 feet;
o 55 ski trails, of which 20 percent are beginner, 35 percent are
intermediate and 45 percent are advanced, as well as Apache Bowl, an
expert open bowl ski area;
o a Professional Ski Instructors of America ski and snowboarding school;
and
o a sport shop with ski rental, offering top quality ski and
snowboarding equipment.
Although Ski Apache typically averages over 15 feet of snowfall each year,
Ski Apache features a multi-million dollar snowmaking system, which covers 1,000
feet of vertical drop, trails for all ability levels and the use of 8 of its 11
lifts.
BUSINESS STRATEGY
We are the only full-service casino operator offering both slot machines
and table games within our primary market area, which encompasses southern New
Mexico, including the cities of Ruidoso, Alamogordo, Las Cruces and Roswell,
western Texas, including the cities of El Paso, Lubbock and Odessa and northern
Mexico, including
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Ciudad Juarez. Our primary feeder markets include cities over 200 miles away. We
have identified this market based on information we have obtained from our
approximately 90,000 member customer loyalty program, the Apache Spirit Club. We
believe that our facilities will continue to be attractive to these customers
because of our location. Within our primary market area we are the closest
gaming facility to offer both slot machines and table games and we are the
closest resort destination offering all-season amenities, including skiing and
championship golf.
Upon completion of the Project, we believe we will be able to increase
penetration within our existing primary market and expand our market to include
a greater number of customers from New Mexico, Mexico, Texas, Oklahoma,
Colorado, Arizona, and California. In connection with the Project, we also
intend to implement a comprehensive business and marketing strategy to enhance
operations at our facilities. Key measures include:
o CROSS MARKET OUR RESORT FACILITIES - Cross market all of our resort
facilities to increase market penetration and expand our market by
highlighting our diverse range of attractive all-season activities;
o INTEGRATE MANAGEMENT - Further expand our management team and
consolidate our management structure across our resort enterprises,
which were formerly operated as separate businesses, to drive greater
operating efficiencies and economies of scale for our resort
enterprises as a whole;
o BROADEN CUSTOMER BASE - Offer different gaming and slot machine
limits, mixes of table games, and non-gaming amenities across our
casino and new resort to broaden our customer base;
o IMPLEMENT PREMIUM PRICING - Capitalize on our new resort facilities,
including luxury accommodations, to implement premium pricing to
target a more affluent customer base;
o SHOULDER AND OFF-PEAK MARKETING - Create targeted promotions to
achieve higher utilization during shoulder and off-peak periods; and
o EXPAND CUSTOMER LOYALTY PROGRAM - Continue to expand the Apache Spirit
Club across all of our resort facilities, to recognize gaming and
non-gaming spending habits and create individually targeted promotions
for our customers. We have increased memberships in the Apache Spirit
Club by approximately 61.0% from March 2003 through April 2004.
The Project is part of our business strategy to develop an integrated
resort, increase our market reach and realize operating benefits from business
synergies. We may not be able to fully implement this strategy if we experience
changes in general or local economic conditions, increased competition, other
changes in our industry, or our plan to promote our customers' utilization of
our various resort amenities, including our gaming, hotel, entertainment and
other amenities does not achieve its intended results.
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GAMING IN NEW MEXICO
OBJECT OMITTED
COMPETITION
Our primary market area encompasses southern New Mexico, including the
cities of Ruidoso, Alamogordo, Las Cruces and Roswell, western Texas, including
the cities of El Paso, Lubbock and Odessa and northern Mexico, including Ciudad
Juarez. According to the U.S. Census Bureau and Desarrollo Economico de Ciudad
Juarez/INEGI there are approximately 3.1 million people in our primary market
area and 1.8 million adults.
Currently, we are the only full-service casino operator within our primary
market area. We currently face competition in our primary market area from two
racinos, Ruidoso Downs, 10 miles away in Ruidoso and Sunland Park Racetrack and
Casino, 125 miles away in Sunland Park, New Mexico. Ruidoso Downs offers quarter
horse and thoroughbred racing from May through September, as well as a 20,000
square foot casino featuring 300 slot machines and a buffet restaurant. Sunland
Park offers quarter horse and thoroughbred racing from mid-November to
early-April, a 36,000 square foot casino facility, 700 slot machines and five
restaurants. Both of these facilities lack table games and lodging facilities.
In addition, we compete with 11 other New Mexico Indian casinos and one racino
located in and around Albuquerque and Santa Fe, New Mexico, which is outside of
our primary market area.
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We also compete with other forms of legal gaming in New Mexico, Texas and
Northern Mexico, including horse racing, Class II gaming, pari-mutuel wagering,
the New Mexico State Lottery, the Texas State Lottery, as well as non-gaming
leisure activities. Upon completion of the Project, we intend to expand our
existing geographic market and increase the percentage of our overnight and
larger spending customers who tend to live greater distances from us. We will
begin to compete more directly for regional overnight and national customers
with casinos and resorts located in other parts of the country.
MESCALERO APACHE TRIBE
TRIBAL ADMINISTRATION
The Tribe is a federally recognized Indian tribe located on a 750 square
mile reservation in south-central New Mexico and has approximately 4,100
members. The Indian Reorganization Act of 1934 and subsequent federal
legislation govern the relationship between the Tribe and the United States
government. The Tribe operates under a constitution approved by the United
States Secretary of the Interior on March 25, 1936, revised on January 12, 1965,
and amended on May 31, 1985.
In accordance with its Constitution, the Tribe is governed by and enacts
laws through ordinances and resolutions of the Mescalero Apache Tribal Council,
or the Tribal Council, which is comprised of a President, Vice President and
eight Council Members, each of whom is elected by a majority vote of the
eligible adult enrolled members of the Tribe. The President is a non-voting
member of the Tribal Council and the Vice President only votes if necessary to
break a tie. Each member of the Tribal Council serves a two-year term, with the
terms of the voting members staggered so that each year four of those eight
positions are up for election. The Tribal Council has the power, by ordinance,
to establish the principles and policies governing the operation and control of
all enterprises of the Tribe. The Tribal President has the power to contract for
the Tribe upon authorization from the Tribal Council.
The Tribal Executive Committee, or the Executive Committee, has
responsibility for oversight of all business activities on behalf of the Tribal
Council. The Executive Committee is comprised of the President and Vice
President as well as a Secretary and Treasurer, both of whom are appointed by
the President.
TRIBAL COURT SYSTEM
The Constitution and Tribal Code provides for the establishment of the
tribal court known as the Mescalero Apache Tribal Court, or Tribal Court. The
jurisdiction of the Tribal Court extends to all matters, criminal and civil,
except where prohibited by the Constitution, laws or treaties of the United
States of America, and except as this jurisdiction may be otherwise limited from
time to time by ordinance of the Tribal Council. The criminal offenses over
which the Tribal Court has jurisdiction may be embodied in a Code of Laws,
adopted by ordinance of the Tribal Council, and subject to review by the
Secretary of the Interior. The duties and procedures of the Tribal Court are
determined by ordinance of the Tribal Council.
The Tribal Court consists of a chief judge and two associate judges,
appointed by the President of the Tribe, with the concurrence of not less than a
three-fourths majority vote of the whole membership of the Tribal Council. The
Tribal Council also sits as a court of appeals whenever necessary and may hear
appeals at any regular or special meeting. The tenure and salary of tribal
judges is established by resolution of the Tribal Council.
A judge of the Tribal Court must be an Indian as defined in the Tribal
Code, not less than thirty-five years or more than seventy years of age; and
cannot have been convicted of a felony, or, within one year, of a misdemeanor.
The Tribal Code defines an "Indian" as someone who possesses at least
one-quarter Indian blood, and is a member of any federally recognized tribe,
nation, or band of Indians, or is an Eskimo, Aleut, or other Alaskan.
The Tribe has adopted its own rules of procedure and evidence, which are
found in the Tribal Code. In determining cases, a tribal court judge relies on
the applicable laws in the following order of precedence: (a) Tribal
Constitution, Tribal Code, ordinances, traditions and customs and (b) federal
laws not in conflict with tribal laws and customs.
8
MESCALERO APACHE TRIBAL GAMING COMMISSION
On August 20, 1999, the Tribe formed the Mescalero Apache Tribal Gaming
Commission as a governmental subdivision of the Tribe. The Mescalero Apache
Tribal Gaming Commission consists of 4 members, including a Chairman, Vice
Chairman and Secretary-Treasurer and Commissioner. The Mescalero Apache Tribal
Gaming Commission is vested with the authority to regulate all licenses and
gaming activity conducted on tribal lands, including licensing persons, vendors,
financial sources and contractors employed by the casino, ensuring compliance
with internal control standards established by the National Indian Gaming
Commission, or the NIGC, an independent agency within the U.S. Department of the
Interior and establishing technical specifications for gaming devices. The
Mescalero Apache Tribal Gaming Commission is responsible for carrying out the
Tribe's regulatory responsibilities under federal, state and tribal law and the
2001 Compact.
GOVERNMENT REGULATION
GENERAL
We are subject to federal, state and tribal laws governing commercial
relationships with Indians, Indian gaming and the management and financing of
casinos owned by an Indian tribe. In addition, we are regulated by federal and
state laws applicable to the gaming industry generally and to the distribution
of gaming equipment. The following description of the regulatory environment in
which Indian gaming takes place and in which we operate our casinos is only a
summary and not a complete recitation of all applicable law. Moreover, this
particular regulatory environment is more susceptible to changes in public
policy considerations than others. We cannot predict how certain provisions will
be interpreted from time to time or whether they will remain intact. Changes in
these laws could have a material adverse impact on our business and results of
operations and our ability to meet our debt service obligations.
TRIBAL LAW AND LEGAL SYSTEMS
APPLICABILITY OF FEDERAL LAW. Federally recognized Indian tribes are
independent governments, subordinate to the United States, with sovereign
powers, except as those powers may have been limited by treaty or by the U.S.
Congress. The power of Indian tribes to enact their own laws to regulate gaming
derives from the exercise of tribal sovereignty and is subject to federal law.
Indian tribes maintain their own governmental systems and often their own
judicial systems. Indian tribes have the right to tax persons and businesses
operating 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.
WAIVER OF SOVEREIGN IMMUNITY; JURISDICTION; EXHAUSTION OF TRIBAL REMEDIES.
Indian tribes enjoy sovereign immunity from unconsented suit similar to that of
the states and the United States. To sue an Indian tribe (or an enterprise,
agency or instrumentality of an Indian tribe, such as us), the tribe must have
effectively waived its sovereign immunity with respect to the matter in dispute.
Further, in most commercial disputes with Indian tribes, the jurisdiction of the
federal courts, which are courts of limited jurisdiction, may be difficult or
impossible to obtain. A commercial dispute is unlikely to present a federal
question, and courts have ruled that an Indian tribe as a party is not a citizen
of any state for purposes of establishing diversity jurisdiction in the federal
courts. The remedies available against an Indian tribe also depend, at least in
part, on the rules of comity requiring initial exhaustion of remedies of tribal
tribunals and, as to some judicial remedies, the tribe's consent to
jurisdictional provisions contained in the disputed agreements. Under U.S.
Supreme Court case law, where a tribal court exists, the remedies in that forum
first may have to be exhausted before any dispute arising on or involving the
affected tribe's reservation and to which the tribe, a tribal enterprise such as
us or a tribal member is a party, can be properly heard by federal or state
courts which would otherwise have jurisdiction. Generally, where a dispute as to
the existence of jurisdiction in the tribal forum exists, the tribal court first
may need to rule as to the limits of its own jurisdiction, subject to certain
limited exceptions enumerated by the U.S. Supreme Court.
THE INDIAN GAMING REGULATORY ACT OF 1988
REGULATORY AUTHORITY. The operation of casinos and of all gaming on Indian
land is subject to IGRA. IGRA is administered by the NIGC which exercises
primary federal regulatory responsibility over Indian gaming. The NIGC has
exclusive 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, and
conduct investigations and generally monitor tribal gaming. The Bureau of Indian
Affairs, or the BIA,
9
which is a bureau of the Department of the Interior, retains certain
responsibilities under IGRA (such as the approval of per capita distribution
plans to tribal members and the approval of transfers of lands into trust status
for gaming). The BIA 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, the state in which the Tribe
is located and the Tribe, in accordance with federal law.
The NIGC is empowered to 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
require an Indian tribe to have the sole proprietary interest in and
responsibility for the conduct of any gaming on its lands. Tribes are required
to issue gaming licenses only 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 of gaming operation employees.
CLASSES OF GAMING. IGRA classifies games 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, pulltabs, lotto, punch boards,
non-banked card games, tip jars, instant bingo and other games similar to bingo,
if those games are played at the same location as bingo is played. Class III
gaming includes all other forms of gaming, such as slot machines, video casino
games, banked table games and other commercial gaming, such as sports betting
and pari-mutuel wagering.
Class I gaming on Indian lands is within the exclusive jurisdiction of the
Indian tribes and is not subject to IGRA. Class II gaming is permitted on Indian
lands if:
o the state in which the Indian lands lie permits that gaming for any
purpose by any person, organization or entity;
o the gaming is not otherwise specifically prohibited on Indian lands by
federal law;
o the gaming is conducted in accordance with a tribal ordinance or
resolution which has been approved by the NIGC;
o an Indian tribe has sole proprietary interest and responsibility for
the conduct of the gaming;
o the primary management officials and key employees are tribally
licensed; and
o several other requirements are met.
Class III gaming is permitted on Indian lands if the conditions applicable
to Class II gaming are met and, in addition, the gaming is conducted in
conformity with the terms of a tribal-state compact, which is a written
agreement between the tribal government and the government of the state within
whose boundaries the tribe's lands lie. IGRA requires Indian tribes to enter
into tribal-state compacts in order to conduct Class III gaming.
TRIBAL-STATE COMPACTS. 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 in amounts comparable to those
amounts assessed by the state for comparable activities, remedies for breach,
standards for the operation of the Class III gaming activity and maintenance of
the gaming facility, including licensing and any other subjects that are
directly related to the operation of gaming activities. While the terms of
tribal-state compacts vary from state to state, compacts within one state tend
to be substantially similar. Tribal-state compacts usually specify the types of
permitted games, establish technical standards for video gaming machines, set
maximum and minimum machine payout percentages, entitle the state to inspect
casinos, require background investigations and licensing of casino employees and
may require the tribe to pay a portion of the state's expenses for establishing
and maintaining regulatory agencies. Some tribal-state compacts are for set
terms, while others are for indefinite duration.
10
TRIBAL ORDINANCES. Under IGRA, except to the extent otherwise provided in a
tribal-state compact as described below, Indian tribal governments have primary
regulatory authority over Class III gaming on land within a tribe's
jurisdiction. Therefore, a tribe's gaming operations, and persons engaged in
gaming activities, are guided by and subject to the provisions of that tribe's
ordinances and regulations regarding gaming.
IGRA requires that the NIGC review tribal gaming ordinances and authorizes
the NIGC to approve these ordinances only if they meet requirements relating to:
o the ownership, security, personnel background, recordkeeping and
auditing of a tribe's gaming enterprises;
o the use of the revenues from that gaming; and
o the protection of the environment and the public health and safety.
POSSIBLE CHANGES IN FEDERAL LAW
Several bills have been introduced in Congress that would amend IGRA. While
there have been a number of technical amendments to the law, to date there have
been no material changes to IGRA. Any amendment of IGRA could change the
governmental structure and requirements within which we could conduct gaming,
and may have an adverse effect on our business and results of operations or
impose additional regulatory or operational burdens.
EMPLOYEE AND LABOR RELATIONS
As of April 30, 2004, we had 990 full-time team members, excluding
approximately 400 additional full-time team members which will be hired during
the ski season at Ski Apache, which typically runs from Thanksgiving to Easter.
We expect to hire approximately 350 additional full-time team members in
connection with the opening of the Resort. We have developed and implemented
training programs for our hotel and resort team members and believe that we will
be able to hire and train a sufficient number of employees for the operation of
the casino upon completion of the Project. Our team members are not covered by
any collective bargaining agreements. We believe our labor relations with our
team members are good.
WEBSITE AVAILABILITY OF OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
We maintain a website with the address www.innofthemountaingods.com. We are not
including the information contained on our website as a part of, or
incorporating it by reference into, this annual report on Form 10-K. We intend
to make available free of charge through our website our annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we
electronically file that material with, or furnish such material to, the
Securities and Exchange Commission.
ITEM 2. PROPERTIES
We do not currently, and will not, own the land on which our gaming and
resort enterprises are located, including the IMG Resort and Casino, Casino
Apache, the Travel Center and a portion of Ski Apache. The U.S. government holds
all of the land in trust for the benefit of the Tribe. The use of tribal land is
provided to us rent-free. In addition, we have a special use permit from the
United States Department of Agriculture, Forest Service for the operation of the
remaining portion of Ski Apache. The special use permit expires on December 31,
2014.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
SETTLEMENT OF COMPACT DISPUTE
In 1997, the Tribe entered into the 1997 Compact with the State of New
Mexico, which permits Class III gaming on the Tribe's reservation pursuant to
IGRA. In the State of New Mexico, the execution of an Indian gaming compact is
conditioned upon execution of a revenue sharing agreement providing for limited
exclusivity of gaming activities to the tribal entity in exchange for an
agreement to make quarterly revenue sharing payments to the State.
11
At the time the 1997 Compact was entered into by the Tribe, this revenue sharing
agreement provided for a revenue sharing fee equal to 16% of the Tribe's "net
win" from gaming. We have accrued as a liability on our financial statements the
full 16% revenue sharing and other regulatory fees claimed by the State of New
Mexico pursuant to the 1997 Compact, which at April 30, 2004 amounted to $47.5
million prior to the compact settlement.
The Tribe, along with other tribes and pueblos who entered into the 1997
Compact disputed the legality of the State of New Mexico's imposition of revenue
sharing fees and regulatory fees pursuant to the 1997 Compact. In 1998, The
Tribe initiated an arbitration to assert that the regulatory and revenue sharing
payments were void and illegal under IGRA. On February 14, 2000, the State of
New Mexico filed Petition No. 26,194, in the Supreme Court of New Mexico seeking
an order prohibiting the arbitrators in the arbitration from examining whether
or not the regulatory and revenue sharing payments were valid. On June 13, 2000
the State of New Mexico filed an action, CIV 00-851BB/LFG, against the Tribe
seeking that Court's determination that the revenue sharing payments are legal
under IGRA. The Tribe made no payments under the 1997 Compact.
In 2001, all of the New Mexico gaming tribes and pueblos (other than the
Tribe and the Pueblo of Pojoaque) settled the dispute regarding the 1997 Compact
and entered into a new gaming compact with the State of New Mexico, the 2001
Compact. On April 20, 2004, the Tribe and the State of New Mexico entered into a
settlement agreement which resolved their disputes regarding the 1997 Compact.
Under the settlement agreement, the State of New Mexico and the Tribe agreed
that the Tribe would pay the State of New Mexico $25.0 million and that they
would enter into the 2001 Compact. On April 20, 2004, we paid an initial payment
of $2.0 million pursuant to the terms of the settlement agreement.
The settlement agreement with the State of New Mexico provides that the
$25.0 million payment settles all revenue sharing and regulatory fees payable
under the 1997 Compact as well as all revenue sharing fees payable under the
2001 Compact through March 2005. The 2001 Compact provides for a revenue sharing
amount equal to 8% of "net win" from gaming machines, payable no later than 25
days after the last day of each calendar quarter and an annual regulatory fee of
$100,000, paid in quarterly installments of $25,000 on the first day of each
calendar quarter. Pursuant to the terms of the settlement agreement, we will
begin accruing revenue sharing payments to the State of New Mexico at the rate
of 8% of "net win" pursuant to the 2001 Compact in March 2005, with our first
revenue sharing payment under the 2001 Compact due in July 2005. In addition,
pursuant to the terms of the settlement agreement, we will begin accruing
regulatory fees, at the rate of $100,000 per year, from the date the approval of
the 2001 Compact is published in the Federal Register with our first payment for
regulatory fees under the 2001 Compact due on the first day of the first full
calendar quarter thereafter. On June 1, 2004, the Tribe and the State of New
Mexico entered into the 2001 Compact. On July 22, 2004, the Department of
Interior approved the 2001 Compact. We will make the remaining $23.0 million
payment required under the settlement agreement within ten business days after
the Department of Interior publishes notice in the Federal Register of the
affirmative approval of the 2001 Compact.
OTHER MATTERS
In addition to the matter described above, we are involved in litigation
incurred in the normal course of business; however, we are not currently a party
to any material pending claim or legal action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Resort has not issued or sold any equity securities.
12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The selected financial data set forth below for each of the five fiscal
years ended April 30, 2000, 2001, 2002, 2003 and 2004, have been derived from
our audited financial statements. You should read the following financial data
in conjunction with the section in this Form 10-K entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with our financial statements and the related notes included in this Form 10-K
beginning on page F-1. Our financial statements for each of the fiscal years
ended April 30, 2000, 2001, 2002, 2003 and 2004 were audited by Grant Thornton
LLP and are included in this Form 10-K.
FISCAL YEAR ENDED
APRIL 30,
---------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENTS OF INCOME DATA:
Revenues:
Gaming.................. $35,399 $39,655 $41,845 $46,942 $60,277
Food and beverage....... 4,607 5,152 5,287 4,894 5,615
Rooms................... 4,682 4,777 4,608 3,394 --
Recreation and other.... 6,391 11,713 11,229 11,953 16,472
----- ------ ------ ------ ------
Gross revenues........... 51,079 61,297 62,969 67,183 82,364
Less: promotional allowances 266 408 783 931 1,437
----- ------ ------ ------ ------
Net revenues............. $50,813 $60,889 $62,186 $66,252 $80,927
----- ------ ------ ------ ------
Operating expenses:
Gaming.................. 14,595 17,512 17,962 19,458 25,406
Reversal of accrued fees -- -- -- -- (27,136)
Food and beverage....... 6,398 5,310 5,067 4,955 6,587
Rooms................... 2,002 2,517 2,219 1,552 120
Recreation and other.... 4,067 5,335 5,333 5,757 10,702
General and administrative 8,695 6,529 5,672 6,500 9,038
Intercompany allocations
and charges............ -- -- 2,726 3,182 4,270
Pre-opening costs and expenses -- -- -- 1,390 3,072
Depreciation and amortization 3,441 4,077 3,916 9,213 4,930
----- ----- ----- ----- -----
Total operating expenses 39,198 41,280 42,807 52,008 36,989
----- ------ ------ ------ ------
Income from operations... 11,615 19,609 19,379 14,244 43,937
Interest income.......... 82 1,545 289 190 802
Interest expense, net of amounts
capitalized............. -- (497) (196) -- (5,252)
Other non-operating income 297 198 75 171 258
----- ------ ------ ------ ------
Net income............... $11,994 $20,855 $19,546 $14,605 $39,745
======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA(1)................ $15,353 $23,884 $23,370 $23,628 $48,869
Capital expenditures..... 982 928 1,633 30,699 107,003
Cash provided by operating
activities.............. 5,302 26,614 57,783 32,021 38,113
13
AS OF APRIL 30,
---------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PROPERTY DATA)
PROPERTY DATA (AS OF END OF PERIOD
EXCEPT WIN PER DAY DATA,
UNAUDITED):
Gross slot win per day..... $ 104 $ 125 $ 134 $ 155 $ 134
Table game win per day..... $ 520 $ 550 $ 505 $ 632 $ 550
Number of slot machines.... 898 827 839 803 1,180
Number of table games...... 25 25 25 25 38
Number of hotel rooms...... 252 252 252 -- --
Number of restaurant seats. 450 450 450 200 200
Gaming square footage...... 22,600 22,600 22,600 22,600 39,600
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 11,921 $ 15,188 $21,810 $ 9,332 $ 15,795
Total assets............... 86,002 74,438 82,506 96,595 316,210
Total debt and capital lease
obligations............... 7,247 2,729 2,104 7,453 201,947
Total equity............... 35,696 37,609 6,098 1,159 59,004
- ----------
(1) We define EBITDA as earnings before interest, taxes, depreciation and
amortization. We are instrumentalities of a sovereign Indian nation and are
not subject to federal or state income tax. Below is a quantitative
reconciliation of EBITDA to the most directly comparable GAAP financial
performance measure, which is net income:
FISCAL YEAR ENDED
APRIL 30,
------------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Net income................ $11,994 $20,855 $19,546 $14,605 $39,745
Interest expense (income), net (82) (1,048) (92) (190) 4,450
Depreciation and amortization 3,441 4,077 3,916 9,213 4,930
------- ------- ------- ------- -------
EBITDA.................... $15,353 $23,884 $23,370 $23,628 $48,869
We caution you that amounts presented in accordance with our definition of
EBITDA may not be comparable to similar measures disclosed by other issues
because not all issuers and analysts calculate EBITDA in the same manner.
EBITDA is presented in this Form 10-K because management believes it is a
useful supplement to income from operations and cash provided by operating
activities in understanding cash flows available for debt service, capital
expenditures and Tribal distributions. Accordingly, our management utilizes
EBITDA along with net income, income from operations and other GAAP measures
in evaluating our operations and performance. EBITDA should not be considered
as an alternative measure of our net income, income from operations, cash
flow or liquidity. EBITDA is not a measurement of financial performance or
liquidity in accordance with GAAP. Although we believe EBITDA enhances your
understanding of our financial condition and results of operations, this
non-GAAP financial measure, when viewed individually, is not necessarily a
better indicator of any trend as compared to GAAP financial measures (E.G.,
income from operations, net revenues, cash provided by operating activities)
conventionally computed in accordance with GAAP.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
IMG Resort and Casino is an unincorporated enterprise of the Tribe. The
Tribe formed IMG Resort and Casino to operate its resort enterprises, comprised
of Casino Apache, Casino Apache Travel Center, Ski Apache and Inn of the
Mountain Gods, each of which is an unincorporated Tribal enterprise wholly-owned
by IMG Resort and Casino. The combined activities of these enterprises comprise
the operations of IMG Resort and Casino. Our four primary areas of operation
are:
GAMING. Our gaming activities are authorized by IGRA, our gaming compact
with the State of New Mexico and a Tribal gaming ordinance. As of April 30,
2004, we had 39,600-square feet of combined gaming space featuring 1,180 slot
machines and 38 table games between our facilities at Casino Apache, opened in
1992, and the Travel Center, opened in May 2003.
FOOD AND BEVERAGE. Our current food and beverage operations consist
primarily of casual dining fare, including: a 100-seat casual restaurant
adjacent to Casino Apache; a 100-seat buffet-style restaurant in Casino Apache;
a 135-seat casual dining restaurant in the Travel Center; two video poker bars
in the Travel Center; and two bars in Casino Apache. Until we demolished the Inn
in January 2003, we also operated a 250-seat fine dining restaurant located in
the Inn.
ROOMS. Until we demolished the Inn in January 2003, our room operations
included 252 rooms at the Inn. During the construction period, we have continued
to maintain a minimal operations staff to service our "Tower" building that is
primarily used for office space.
RECREATION AND OTHER. Our all-season recreational operations include a
750-acre, 55-trail ski resort, the second largest in New Mexico, an 18-hole
championship golf course, seasonal big-game hunts, a shooting range, horseback
riding, boating and fishing. Our ski resort is typically open from Thanksgiving
until Easter, while our golf course generally operates from March through
October. Our retail outlets include a gift shop, golf and pro shop, ski shop, a
2,500-square foot convenience store, an 800-square foot smoke shop, a
Conoco-branded fuel station with 12 gasoline and eight diesel pumping stations
and laundry and shower facilities.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the recorded amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Significant accounting policies employed by us, including the
use of estimates and assumptions, are presented in the notes to our consolidated
financial statements included elsewhere in this Form 10-K. Management bases its
estimates on its historical experience, together with other relevant factors, in
order to form the basis for making judgments that will affect the carrying value
of assets and liabilities. On an ongoing basis, management evaluates its
estimates and makes changes to carrying values as deemed necessary and
appropriate. We believe that estimates related to the following areas involve a
high degree of judgment and/or complexity: the liability associated with
unredeemed Apache Spirit Club points, the estimated lives of depreciable assets
and pension costs. Actual results could differ from those estimates.
REVENUE RECOGNITION. In accordance with gaming industry practice, we
recognize gaming revenues as the net win from gaming activities, which is the
difference between gaming wins and losses. Gaming revenues are net of accruals
for anticipated payouts of progressive slot jackpots and table games. These
anticipated jackpot payments are reflected as current liabilities on our balance
sheets. Net slot win represents all amounts played in the slot machines reduced
by both (1) the winnings paid out and (2) all amounts we deposit into slot
machines to ensure there are a sufficient number of coins to pay out the
winnings. Table games net win represents the difference between table game wins
and losses. The table games historical win percentage is reasonably predictable
over time, but may vary considerably during shorter periods. Revenues from food,
beverage, rooms, recreation, retail and other are recognized at the time the
related service or sale is completed. Player reward redemptions for food and
beverage, hotel rooms and other items are included in gross revenue at full
retail value.
PROMOTIONAL ALLOWANCES. We reward our customers with "points" based on the
volume of their gaming activity through our customer loyalty program, the Apache
Spirit Club. These points are redeemable for player reward services or
merchandise. Points are accrued and reflected as current liabilities on our
consolidated balance sheets.
15
We determine the adequacy of these accruals by periodically evaluating the
historical experience and projected trends related to these accruals. If such
information indicates that the accruals are overstated or understated, we will
adjust the assumptions utilized in the methodologies and reduce or provide for
additional accruals as appropriate.
CLASSIFICATION OF DEPARTMENTAL COSTS. Gaming direct costs are comprised of
all costs of the Resort's gaming operations, including labor costs for
casino-based personnel (including personnel supporting the food and beverage
operations located in the casinos), facilities rent, occupancy costs, supply
costs, certain marketing, advertising and promotional expenses (including costs
of operating our players' club) and other direct operating costs of the casinos.
Food and beverage direct costs are comprised of all costs of the Resort's food
and beverage operations, including labor costs for personnel employed by the
Resort's restaurants and other food outlets (but not including personnel
supporting the food and beverage operations located in the casinos), facilities
rent, occupancy costs, supply costs for all food and beverages served in the
casinos or sold in the Resort's restaurants and other food outlets and other
direct operating costs of the food and beverage operations. Recreation and other
expenses include direct labor and operating expenses related to the activities.
General and administrative direct costs are comprised of administrative expense
at our headquarters, including the salaries of corporate officers, rent,
accounting, finance, legal and other professional expense and occupancy costs
and other indirect costs not included in the direct costs of our operating
departments.
DISPOSAL OF LONG-LIVED ASSETS. On May 1, 2002, we adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," or SFAS 144, which provides for the treatment of
the disposal of long-lived assets. SFAS 144 provides that if an entity commits
to a plan to abandon a long-lived asset before the end of its previously
estimated useful life, depreciation estimates shall be revised to reflect the
use of the asset over its shortened useful life. In January 2003, we demolished
a substantial portion of the Inn to allow for the construction of the Resort. As
a result of the demolition, the adoption of SFAS 144 for the fiscal year ended
April 30, 2003 had the effect of increasing depreciation in fiscal 2003 by $5.4
million.
DEFERRED FINANCING COSTS. Debt issuance costs incurred in connection with
the issuance of the Resort Project financing are capitalized and amortized to
interest expense using the straight-line method over the stated maturity of the
debt, which approximates the effective interest method. Unamortized deferred
financing costs totaled approximately $11,029,493 as of April 30, 2004.
DISAGREEMENTS WITH THE STATE OF NEW MEXICO. The Tribe challenged the
legality of the revenue sharing prescribed by the 1997 Compact, claiming them to
be an illegal tax on Indian gaming under the IGRA. The Tribe invoked its right
to seek a resolution of the disagreements through the arbitration process
provided for in the 1997 Compact and no revenue sharing or regulatory fees were
remitted to the State. As of April 30, 2004, we accrued approximately $38.1
million for the revenue sharing and $8.8 million for the regulatory fees for the
full amount of the state claimed obligation on our consolidated balance sheet.
The accrued revenue sharing and regulatory fees are included as a gaming
expense. As of April 30, 2004, we set aside in restricted accounts with respect
to these accruals approximately $38.0 million for the revenue sharing fees and
approximately $700,000 for regulatory fees.
16
On April 20, 2004, the Tribe settled with the State of New Mexico all of
its obligations under the 1997 Compact. Under the settlement agreement, the
State of New Mexico and the Tribe agreed that the Tribe would pay the State of
New Mexico $25.0 million and enter into a new compact, which we refer to as the
2001 Compact. On April 20, 2004, we paid an initial payment of $2.0 million
pursuant to the terms of the settlement agreement. The settlement agreement
provides that the $25.0 million payment settles all revenue sharing and
regulatory fees payable under the 1997 Compact as well as all revenue sharing
fees payable under the 2001 Compact through March 2005. The 2001 Compact
provides for a revenue sharing amount equal to 8% of "net win" from gaming
machines, payable no later than 25 days after the last day of each calendar
quarter and an annual regulatory fee of $100,000, paid in quarterly installments
of $25,000 on the first day of each calendar quarter. Pursuant to the terms of
the settlement agreement, we will begin accruing revenue sharing payments to the
State of New Mexico at the rate of 8% of "net win" pursuant to the 2001 Compact
in March 2005, with our first revenue sharing payment under the 2001 Compact due
in July 2005. In addition, pursuant to the terms of the settlement agreement, we
will begin accruing regulatory fees, at the rate of $100,000 per year, from the
date the approval of the 2001 Compact is published in the Federal Register with
our first payment for regulatory fees under the 2001 Compact due on the first
day of the first full calendar quarter thereafter. On June 1, 2004, the Tribe
and the State of New Mexico entered into the 2001 Compact. On July 22, 2004 the
Department of Interior approved the 2001 Compact. We will make the remaining
$23.0 million payment required under the settlement agreement within ten
business days after the Department of Interior publishes notice in the Federal
Register of the affirmative approval of the 2001 Compact.
As of April 30, 2004, we had approximately $38.7 million ($35.7 million in
the construction reserve account and $3.0 million in another restricted account)
reserved to pay for the $47.5 million we accrued as a liability on our financial
statements for revenue sharing fees and other regulatory fees under the 1997
Compact. We will provide the $25.0 million settlement amount from funds in the
construction reserve account. Upon payment of the $25.0 million settlement
amount, approximately $10.7 million (the difference between the $35.7 million
deposited in the construction reserve account to settle the 1997 Compact dispute
and the settlement amount of $25.0 million) will be transferred from the
construction reserve account to the construction disbursement account. In
addition, upon payment of the $25.0 million settlement amount, the additional
$3.0 million we have reserved to pay for our accrued liability relating to the
1997 Compact, currently held in a restricted account, will become unrestricted
cash. The settlement with the State of New Mexico will have no effect on our
cash flows and will be reflected in operating costs and expenses as a settlement
of revenue sharing and regulatory fees in the consolidated statements of income
and regulatory fees paid in advance through 2005 will be recorded as a prepaid
expense in the consolidated balance sheets.
The terms of the 2001 Compact are substantially similar to the terms of the
1997 Compact and revenue sharing agreement, except for the following material
differences:
o revenue sharing fees under the 2001 Compact are 8% of "net win" from
gaming, rather than 16% as provided by the 1997 Compact;
o regulatory fees under the 2001 Compact are $100,000 per year, while
the 1997 Compact requires quarterly regulatory fees (subject to an
annual increase of 5% beginning on January 1, 1999) of $6,250 per
gaming facility, $300 per gaming machine and $750 per gaming table;
o the 2001 Compact expires June 30, 2015, while the 1997 Compact expires
on August 29, 2006, subject to an automatic one year extension; and
17
o insurance coverage required by the 2001 Compact to insure the Tribe,
IMG and its employees and agents from claims against liability for
bodily injury and property damages by a visitor is required to be at
least $50 million, while the 1997 Compact requires $10.0 million of
such coverage.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 2004 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2003
NET REVENUES. Net revenues increased $14.6 million, or 22.0%, to $80.9
million for the fiscal year ended April 30, 2004 from $66.3 million for the
fiscal year ended April 30, 2003. The increase was due to an increase in gaming
revenues offset by a decrease in room revenue and a decrease in food and
beverage revenue due to the closure of the Inn in January 2003. Player reward
redemptions are included in gross revenues but are deducted as a promotional
allowance to arrive at net revenues.
GAMING. Gaming revenues increased $13.4 million, or 28.6%, to $60.3 million
for the fiscal year ended April 30, 2004 from $46.9 million at the fiscal year
ended April 30, 2003. Slot revenues led the increase, growing to $52.7 million
for the fiscal year ended April 30, 2004 from $41.2 million for the fiscal year
ended April 30, 2003, an increase of $11.5 million, or 27.9%. Gross slot win per
unit was $134 for the fiscal year 2004 compared to $155 for the fiscal year
2002; in this period the weighted average number of units increased by 552, or
87.9%. Table games revenue increased $1.8 million, or 31.0%, to $7.6 million for
the fiscal year ended April 30, 2004 from $5.8 million for the fiscal year ended
April 30, 2003. The increase was the result of the increase in the table game
drop of $11.7 million, or 40.9%, to $40.3 million for the fiscal year ended
April 30, 2004 from $28.6 million for the fiscal year ended April 30, 2003,
combined with a reduction in hold percentage to 18.7% for the fiscal year ended
April 30, 2004 from 20.2% for the fiscal year ended April 30, 2003.
FOOD AND BEVERAGE. Food and beverage revenues increased $.7 million, or
14.3%, to $5.6 million for the fiscal year ended April 30, 2004 from $4.9
million for the fiscal year ended April 30, 2003. While there was a loss of
revenue due to the closing of the restaurants located at the Inn in January
2003, this loss was offset by the opening of Smokey B's, our casual dining
restaurant at the Travel Center in May 2003.
ROOMS. Room revenues decreased $3.4 million, or 100%, for the fiscal year
ended April 30, 2004 due to the closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other revenues increased $4.5 million,
or 37.5%, to $16.5 million for the fiscal year ended April 30, 2004 from $12.0
million for the fiscal year ended April 30, 2003. The increase was due to the
opening of our Travel Center in May 2003, which resulted in increased revenues
from the convenience store, smoke shop, and gasoline and diesel sales located at
the facility.
PROMOTIONAL ALLOWANCES. Promotional allowances increased $0.5 million, or
55.6%, to $1.4 million for the fiscal year ended April 30, 2004 from $0.9
million for the fiscal year ended April 30, 2003. The increase in gaming
revenues and the opening of the Travel Center have resulted in an increase in
promotional allowances.
TOTAL OPERATING EXPENSES. Total operating expenses decreased $15.0 million,
or 28.8%, to $37.0 million for the fiscal year ended April 30, 2004 from $52.0
million for the fiscal year ended April 30, 2003. The decrease was primarily due
to the reversal of previously recorded revenue sharing and State regulatory fees
as a result of the settlement of the Compact dispute offset by an increase in
our gaming and pre-opening expenses associated with the opening of the Travel
Center in May 2003.
GAMING. Gaming expenses increased $5.9 million, or 30.3%, to $25.4 million
for the fiscal year ended April 30, 2004 from $19.5 million for the fiscal year
ended April 30, 2003. The increase was primarily due to the addition of team
members at the Travel Center which opened in May 2003.
FOOD AND BEVERAGE. Food and beverage expenses increased $1.6 million or
32.0%, to $6.6 million for the fiscal year ended April 30, 2004 from $5.0
million for the fiscal year ended April 30, 2003, primarily due to the addition
of food and beverage team members at the Travel Center coupled with an increase
in the cost of sales due to increased food covers.
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ROOMS. Costs and expenses associated with hotel rooms decreased $1.5
million, or 93.8%, to $0.1 for the fiscal year ended April 30, 2004 from $1.6
million for the fiscal year ended April 30, 2003, primarily due to a
reassignment of team members as a result of closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other costs increased $4.9 million, or
84.5%, to $10.7 million for the fiscal year ended April 30, 2004 from $5.8
million for the fiscal year ended April 30, 2003. The increase was primarily
attributable to the addition of new team members at the Travel Center and
increased cost of sales and related expenses for the convenience store, smoke
shop, refueling center and laundry and shower facilities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$2.5 million, or 38.5%, to $9.0 million for the fiscal year ended April 30, 2004
from $6.5 million for the fiscal year ended April 30, 2003. The increase was
primarily due to an increase in expenses due to the addition of executive staff
in response to the needs of our new resort complex and increased reporting
requirements associated with the issuance of the Notes as well as an increase in
marketing, advertising and promotional activities. This increase in expenses was
partially offset by a reduction in utilities and other expenses related to the
closure of the Inn in January 2003.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $3.1 million for
the fiscal year ended April 30, 2004 compared to $1.4 million for the fiscal
year ended April 30, 2003, and consisted principally of personnel costs,
training costs and payroll costs for retaining the former employees of the Inn.
Pre-opening costs and expenses are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $4.3
million to $4.9 million for the fiscal year ended April 30, 2004 from $9.2
million for the fiscal year ended April 30, 2003. The decrease was primarily the
result of the demolition of the Inn in January 2003.
OPERATING INCOME. Operating income increased $29.7 million, or 209.2%, to
$43.9 million for the fiscal year ended April 30, 2004 from $14.2 million for
the fiscal year ended April 30, 2003. The increase in operating income was
primarily due to the reversal of previously recorded revenue sharing and State
regulatory fees as a result of the settlement of the Compact dispute offset by
an increase in our gaming and pre-opening expenses associated with the opening
of the Travel Center in May 2003.
OTHER INCOME (EXPENSES). Other income (expenses) increased $4.6 million to
$(4.2) million for the fiscal year ended April 30, 2004 from $0.4 million for
the fiscal year ended April 30, 2003. The increase was primarily due to interest
expense, net of amounts capitalized, in an amount equal to $5.3 million during
the period. Other income (expenses) is comprised of interest income and other
income minus interest expense and other expense.
FISCAL YEAR ENDED APRIL 30, 2003 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2002
NET REVENUES. Net revenues increased $4.1 million, or 6.5%, to $66.3
million for the fiscal year ended April 30, 2003 from $62.2 million for the
fiscal year ended April 30, 2002. The increase was due to an increase in gaming
revenues offset by a decrease in room revenue and a decrease in food and
beverage revenue due to the closure of the Inn in January 2003. Player reward
redemptions are included in gross revenues but are deducted as a promotional
allowance to arrive at net revenues.
GAMING. Gaming revenues increased $5.1 million, or 12.2%, to $46.9 million
for the fiscal year ended April 30, 2003 from $41.8 million at the fiscal year
ended April 30, 2002. Slot revenues led the increase, growing to $41.2 million
for the fiscal year ended April 30, 2003 from $37.2 million for the fiscal year
ended April 30, 2002, an increase of $4.0 million, or 10.6%. Gross slot win per
unit was $155 for the fiscal year 2003 compared to $134 for the fiscal year
2002; in this period the weighted average number of units decreased by 36, or
4.5%. Table games revenue increased $1.2 million, or 25.0%, to $5.8 million for
the fiscal year ended April 30, 2003 from $4.6 million for the fiscal year ended
April 30, 2002. The increase was the result of the increase in hold percentage
to 20.2% for the fiscal year ended April 30, 2003 from 17.4% for the fiscal year
ended April 30, 2002, combined with the table game drop increase of $2.2
million, or 8.0%, to $28.6 million for the fiscal year ended April 30, 2003 from
$26.5 million for the fiscal year ended April 30, 2002.
19
FOOD AND BEVERAGE. Food and beverage revenues decreased $0.4 million, or
7.4%, to $4.9 million for the fiscal year ended April 30, 2003 from $5.3 million
for the fiscal year ended April 30, 2002. The decrease was primarily due to the
closure of our 250-seat fine dining restaurant at the Inn in January 2003. Our
food and beverage outlets turned 522,306 covers with average revenue per cover
of $9.37 for the fiscal year ended April 30, 2003 compared to 562,321 covers
with average revenue per cover of $9.40 at the fiscal year ended April 30, 2002.
ROOMS. Room revenues decreased $1.2 million, or 26.3%, for the fiscal year
ended April 30, 2003 to $3.4 million from $4.6 million for the fiscal year ended
April 30, 2002, due to the closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other revenues increased $0.8 million,
or 6.5%, to $12.0 million for the fiscal year ended April 30, 2003 from $11.2
million for the fiscal year ended April 30, 2002. The increase was attributable
to an increase in ski revenue due to better snow and ski conditions offset by a
decrease in sales at golf and other retail outlets in connection with the
closure of the Inn in January 2003.
PROMOTIONAL ALLOWANCES. Promotional allowances increased $0.1 million, or
18.8%, to $0.9 million for the fiscal year ended April 30, 2003 from $0.8
million for the fiscal year ended April 30, 2002. The increase was consistent
with our marketing strategy to increase the utilization of our rewards programs
to our frequent gaming guests.
TOTAL OPERATING EXPENSES. Total operating expenses increased $9.2 million,
or 21.5%, to $52.0 million for the fiscal year ended April 30, 2003 from $42.8
million for the fiscal year ended April 30, 2002. The increase was primarily due
to an increase in depreciation expenses relating to the demolition of the Inn in
January 2003, as well as an increase in our gaming and pre-opening expenses
associated with the opening of the Travel Center in May 2003.
GAMING. Gaming expenses increased $1.6 million, or 8.7%, to $20.8 million
for the fiscal year ended April 30, 2003 from $19.2 million for the fiscal year
ended April 30, 2002. The increase was primarily due to the addition of team
members at Casino Apache, as well as an increase in accrued revenue sharing and
regulatory fees due to higher net slot win.
FOOD AND BEVERAGE. Food and beverage expenses remained constant at $5.3
million for the fiscal year ended April 30, 2003 and the fiscal year ended April
30, 2002. There was no change in expenses despite the closure of our fine dining
restaurant as a result of variations in the cost of food and team member related
expenses.
ROOMS. Costs and expenses associated with hotel rooms decreased $0.6
million, or 26.1%, to $1.6 for the fiscal year ended April 30, 2003 from $2.2
million for the fiscal year ended April 30, 2002, primarily due to a
reassignment of team members as a result of closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other costs increased $0.5 million, or
9.0%, to $6.0 million for the fiscal year ended April 30, 2003 from $5.5 million
for the fiscal year ended April 30, 2002 primarily due to increased labor,
maintenance and other costs and expenses associated with increased usage at Ski
Apache during the period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.0 million, or 14.8%, to $7.7 million for the fiscal year ended April 30, 2003
from $6.7 million for the fiscal year ended April 30, 2002. The increase was a
result of increased insurance and utility costs at Casino Apache and Ski Apache
and payments to the U.S. Forest Service relating to higher utilization at Ski
Apache.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $1.4 million for
the fiscal year ended April 30, 2003 and consisted principally of personnel
costs, training costs and payroll costs for retaining the former employees of
the Inn. Pre-opening costs and expenses are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $5.3
million to $9.2 million for the fiscal year ended April 30, 2003 from $3.9
million for the fiscal year ended April 30, 2002. The increase was primarily the
result of the demolition of the Inn in January 2003.
OPERATING INCOME. Operating income decreased $5.2 million, or 26.5%, to
$14.2 million for the fiscal year ended April 30, 2003 from $19.4 million for
the fiscal year ended April 30, 2002. The decrease in operating income
20
was primarily due to an increase in depreciation expense because of the
demolition of the Inn and, to a lesser extent, pre-opening costs and to the
other revenue and expense variations previously noted.
OTHER INCOME (EXPENSES). Other income (expenses) increased $0.2 million, or
115.3%, to $0.4 million for the fiscal year ended April 30, 2003 from $0.2
million for the fiscal year ended April 30, 2002. The increase was primarily due
to the capitalization of interest expense in an amount equal to $0.2 million
during the period. Other income (expenses) is comprised of interest income and
other income minus interest expense and other expense.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2004 and 2003, we had cash and cash equivalents (net of
amounts in restricted accounts) of $15.8 million and $9.3 million, respectively.
Our principal sources of liquidity for fiscal years 2004 and 2003 consisted of
cash flows from operating activities, which was $38.1 million for the fiscal
year ended April 30, 2004 compared to $32.0 million for the fiscal year ended
April 30, 2003. The $6.1 million increase included net income of $39.7 million
in net income with increases in interest payable of $12.0 million offset by a
reduction of accrued revenue sharing and regulatory fees of $16.8 million and an
increase in prepaid revenue sharing fees as a result of the Compact settlement.
Cash flows from operating activities were $57.8 million for the fiscal year
ended April 30, 2002. Under the terms of the indenture pursuant to which are
notes were issued, we are required to "sweep" excess cash above the established
thresholds from our operating accounts to restricted accounts on a monthly
basis. Of the $15.8 million in cash held by us in unrestricted accounts at April
30, 2004, $6.3 million was deposited in restricted accounts subsequent to year
end pursuant to these requirements.
Cash used in investing activities for fiscal year 2004 was $100.5 million
and primarily relates to construction costs for the Project. Cash used in
investing activities for fiscal year 2003 was $23.5 primarily relates to
construction costs for the Travel Center. Cash used in investing activities for
fiscal year 2002 was $1.6 million and was primarily related to the routine
acquisition of property, plant and equipment, including the purchase of $1.0
million of new ski resort equipment at Ski Apache.
Cash provided from financing activities was $68.9 million for the fiscal
year ended April 30, 2004 compared to $20.9 million used by financing activities
for the fiscal year ended April 30, 2003. The $89.8 million increase in cash
provided from financing activities is primarily due to the issuance of $200.0
million in senior notes offset by $10.5 million in deferred financing costs,
$4.7 million in debt payments, and $151.6 million of cash held for use in paying
construction expenditures for the construction project. Cash used from financing
activities for fiscal year 2003 was $21.0 million and primarily related to
distributions and payments to the Tribe offset by equity contributions to fund
the Travel Center and other costs related to the Project. Cash used from
financing activities in fiscal year 2002 was $49.5 million and primarily related
to distributions and payments to the Tribe.
In April 2003, we entered into a revolving credit facility with Citicorp
North America, Inc., due December 31, 2003 to fund construction of the Project.
Use of proceeds from the credit facility is limited to construction related
expenditures for the Project. We repaid all amounts borrowed under the credit
facility with a portion of the proceeds from the offering of the original notes
and retired the credit facility upon its repayment.
Construction of the Resort, which began in January 2003, is expected to be
completed in April 2005. As of April 30, 2004, we paid $96.2 million designing,
developing, constructing, equipping and opening the Resort. We expect to incur
an additional $39.0 million to complete the Project during fiscal 2005 (the
Resort is expected to be completed by the April 2005). At April 30, 2004 we had
balances in restricted accounts in the aggregate amount of $133.3, of which
$25.0 million will be used to fund our settlement of our compact dispute with
the State of New Mexico, $36.4 million will be available for the first three
interest payments on the notes and $71.9 of which will be available for
completion of the Project and construction contingencies. Additional funds
needed to complete the Project are expected to be provided by funds from
operations and equipment financing (permitted by the indenture). Capital
expenditures in fiscal year 2005, other than those related to the Project, are
not expected to be significant.
We believe that existing cash balances, operating cash flows and proceeds
from our recent high yield offering, or the offering, as well as contemplated
equipment leasing lines (permitted by the indenture) will provide adequate funds
for completion of construction of the Resort, our working capital needs, planned
capital expenditures, including the new resort equipment and furnishings,
settlement of our compact dispute with the State of New Mexico and debt service
requirements for the foreseeable future. However, our ability to fund our
operations, make planned capital expenditures, make scheduled 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.
Additionally, as a result of the offering, our
21
ability to incur additional indebtedness is limited under the terms of the
indenture governing the 12% Senior Notes due 2010, or the notes.
DESCRIPTION OF INDEBTEDNESS
THE NOTES
On November 3, 2003, we issued $200.0 million senior notes, with fixed
interest payable at a rate of 12% per annum. Interest on the notes is payable
semi-annually on May 15 and November 15. The notes mature on November 15, 2010.
The notes are secured until completion of the Resort, by first priority security
interests in the following accounts:
o an interest reserve account, which was funded at the time the notes
were sold with approximately $36.4 million, which, together with
interest earned thereon, will be used to make the first three (3)
interest payments on the notes. As of April 30, 2004, the balance in
the interest reserve account is $36.6 million;
o a construction disbursement account, which was funded at the time the
notes were sold with approximately $94.3 million and will be used to
fund completion of the Resort. As of April 30, 2004, the balance in
the construction disbursement account was $34.5 million;
o a construction reserve account, which was funded at the time the notes
were sold approximately $53.6 million and will be used to (i) fund
contingencies related to the construction of the Resort and (ii) fund
a resolution of the Tribe's disagreement relating to the 1997 Compact.
As of April 30, 2004, the balance in the construction reserve account
was $53.8 million; and
o a construction retainage account. As of April 30, 2004, the balance
the construction retainage accounts was $7.5 million.
The notes rank senior in right of payment to all of our future indebtedness
or other obligations that are, by their terms, expressly subordinated in right
of payment to the notes. In addition, the notes rank equal in right of payment
to all of our existing and future senior unsecured indebtedness and other
obligations that are not, by their terms, expressly subordinated in right of
payment to the notes. Casino Apache, Inn of the Mountain Gods, Casino Apache
Travel Center and Ski Apache are guarantors of the notes.
GENERAL INDEBTEDNESS
The Tribe, for the benefit of the Inn, executed a promissory note dated
September 1, 1982, which we refer to as the BIA Note in favor of the Department
of Interior, Bureau of Indian Affairs in the amount of approximately $3.5
million. The BIA Note accrues interest at the rate of 8.5% per annum payable
annually from the date of the BIA Note until paid in full on September 1, 2011.
The Inn has been making payments of approximately $27,000 on the BIA Note each
month. As of April 30, 2004, there is approximately $1.5 million outstanding on
the BIA Note.
In addition, as of April 30, 2004, we have approximately $.2 million of
equipment financing of unsecured debt with Kronos Incorporated.
CREDIT FACILITY
On June 15, 2004, we entered into a $15.0 million credit facility with Key
Equipment Finance, a Division of Key Corporate Capital Inc., one of the nation's
largest financial services firms. The fixed rate loan is fully amortizable over
five years and bears an interest rate indexed off the 3-year Treasury Interest
Rate Swaps. Proceeds from the loan will be used to fund furniture, fixtures and
equipment for the Project.
OFF-BALANCE SHEET ARRANGEMENTS
As of April 30, 2004, we have no off-balance sheet arrangements that affect
our financial condition, liquidity and results of operation. We have certain
contractual obligations including long-term debt, operating leases and
employment contracts.
22
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth, as of April 30, 2004, our scheduled
principal, interest and other contractual annual cash obligations due by us for
each of the periods indicated below (Dollars in thousands):
PAYMENTS DUE BY PERIOD
--------------------------
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------ ------- --------- ------ ----- --------
Long-Term Debt $201,946 $252 $430 $508 $200,756
-------- ---- ---- ---- --------
Obligations............
Purchase Obligations (1) 39 39 ---- ---- ----
Total.................. $201,985 $291 $430 $508 $200,756
======== ==== ==== ==== ========
- ----------
(1) Amounts remaining to be paid pursuant to the $135.2 million fixed
price design and build contract with Centex/Worthgroup for
construction of the Resort Project.
In addition, under a settlement agreement entered into with the State of
New Mexico on April 20, 2004, we are obligated to pay $25.0 million on behalf of
the Tribe with respect to its settlement of its dispute with the State of New
Mexico with respect to the 1997 Compact. This settlement payment is intended to
be funded out of the construction reserve account provided for by the indenture.
IMPACT OF INFLATION
Absent changes in competitive and economic conditions or in specific prices
affecting the industry, we do not expect that inflation will have a significant
impact on our 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 hotel and casino industry in general.
REGULATION AND TAXES
We are subject to extensive regulation by the Mescalero Apache Tribal
Gaming Commission, the NIGC and, to a lesser extent, the New Mexico Gaming
Control Board. Changes in applicable laws or regulations could have a
significant impact on our operations. We are unincorporated Tribal enterprises,
directly or indirectly owned by the Tribe, a federally recognized Indian tribe,
and are located on reservation land held in trust by the United States of
America; therefore, we were not subject to federal or state income taxes for the
fiscal years ended April 30, 2002, 2003 or 2004 , nor is it anticipated we will
be subject to such taxes for the foreseeable future. Various efforts have been
made in the U.S. Congress over the past several years to enact legislation that
would subject the income of tribal business entities, such as us, to federal
income tax. Although no such legislation has been enacted, similar legislation
could be passed in the future. A change in our non-taxable status could have a
material adverse affect on our cash flows from operations.
NEW ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, or SFAS 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections." In
rescinding FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and FASB Statement 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," SFAS 145 eliminates the requirement that gains and
losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, pursuant to SFAS 145, an entity would not be prohibited from
classifying such gains and losses as extraordinary items so long as they meet
the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
23
Occurring Events and Transactions." The adoption of this standard has no impact
on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies (for guarantees issued after January 1, 2003) that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligations undertaken in issuing the guarantee. At April 30, 2004,
we do not have any outstanding guarantees and accordingly, the adoption of FIN
45 did not have any impact on our financial position, results of operations or
cash flows.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, or FIN 46, "Consolidation of Variable Interest Entities."
This interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
economic beneficiary as a result of their variable economic interests, and is
intended to provide guidance in judging multiple economic interests in an entity
and in determining the primary beneficiary. The interpretation outlines
disclosure requirements for variable interest entities created after January 31,
2003. We have reviewed the interpretations related to our major relationships
and overall economic interests with other companies consisting of related
parties and other suppliers to determine the extent of its variable economic
interest in these parties. The adoption of this standard has no impact on our
consolidated financial statements.
RISK FACTORS
SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FACTORS ASSOCIATED WITH THE
FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED OR FORECASTED IN THIS REPORT ARE INCLUDED IN THE STATEMENTS BELOW. IN
ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING CAUTIONARY STATEMENTS AND RISK FACTORS. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS AND UNCERTAINTIES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS COULD SUFFER. THE RISKS DISCUSSED BELOW ALSO INCLUDE
FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM
THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS
RISKS RELATING TO OUR BUSINESS
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
As of April 30, 2004, we had an aggregate of approximately $202.7 million
of indebtedness outstanding, which includes $200.0 million of debt on the notes
issued on November 3, 2003. This substantial indebtedness could have important
consequences to you and significant effects on our business and future
operations. For example, it could:
o make it more difficult for us to satisfy our debt service obligations;
o increase our vulnerability to general adverse economic and industry
conditions or a downturn in our business;
o limit our ability to fund future working capital, capital expenditures
and other general operating requirements;
o require us to dedicate a substantial portion of our cash flow from
operations to service our outstanding indebtedness, thereby reducing
the availability of our cash flow to fund working capital, capital
expenditures, the Project and other general operating requirements;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit our ability to borrow additional funds.
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Our indebtedness could result in a material adverse effect on our business,
financial condition and results of operations. If we incur additional debt in
the future, these adverse consequences could intensify.
OUR FAILURE TO GENERATE SUFFICIENT CASH FLOW FROM OUR GAMING AND OTHER RESORT
OPERATIONS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR DEBT SERVICE
OBLIGATIONS.
Our ability to make payments on and repay or refinance our debt will depend
on our ability to generate cash flow from the operations of our gaming and other
resort operations. Our ability to generate sufficient cash flow from operations
to satisfy our obligations will depend on our future operating performance,
which is subject to many economic, competitive, regulatory and other 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. For the following reasons, among others, these
alternatives may not be available to us on reasonable terms or at all, or, if
available, they may not be available in amounts adequate to enable us to satisfy
our debt service obligations:
o unlike non-governmental businesses, we are prohibited by law from
generating cash through an offering of equity securities;
o our ability to incur additional debt is limited by the covenants of
the indenture governing the notes; and
o the indenture governing the notes includes covenants which limit our
ability to create liens on or sell our assets.
If our cash flow is insufficient and we are unable to raise additional
capital, we may not be able meet our debt service obligations.
WE MAY NOT BE ABLE TO GENERATE ENOUGH CASH FLOW TO COMPLETE THE RESORT.
In May 2003, we successfully completed Phase I of the Project, construction
of the Travel Center, at a cost of $16.0 million. In January 2003, we began
construction of Phase II of the Project, construction of the Resort, and expect
to complete construction of the Resort in April 2005 at a cost of $171.3
million. We expect the remaining cost of designing, developing, constructing,
equipping and operating the Resort to be approximately $69.9 million, comprised
of $39.0 million of remaining construction costs and $30.9 million of furniture,
fixtures and equipment and pre-opening costs. As of April 30, 2004, we had
approximately $34.5 in a construction disbursement account to pay for the
remaining costs of the Resort. We will need approximately $35.4 of cash flow
from operations and permitted indebtedness to complete the Resort.
We cannot assure you that we will be able to generate the required amount
of cash from our operations. If we are not able to generate enough cash to pay
for the Project, or if we cannot meet our budget, we will need to find
additional sources of funds to pay for the Resort. We may not be able to raise
any additional funds that are required on terms acceptable to us, if at all.
Further, if we incur additional debt to cover the cost of the Resort, risks
related to our substantial indebtedness could intensify. If we cannot generate
enough cash or find alternative sources of funding to complete the Resort, our
business, financial condition and results of operations could be materially
adversely affected and we may not be able to meet our debt service obligations.
CONSTRUCTION OF THE RESORT IS SUBJECT TO CONTINGENCIES ASSOCIATED WITH
CONSTRUCTION AND FAILURE TO COMPLETE THE RESORT ON TIME OR ON BUDGET COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND OUR ABILITY
TO MEET OUR DEBT SERVICE OBLIGATIONS.
Construction projects such as the Resort are subject to significant
development and construction risks, any of which could cause unanticipated cost
increases and delays. These include, among others, the following:
o shortages of energy, material and skilled labor;
o weather interference or delays;
o engineering problems;
25
o environmental problems;
o changes in the scope of the Resort or to the plans or specifications;
o labor disputes and work stoppages;
o fire, earthquake, flood and other natural disasters or acts of war or
terrorism; and
o geological, construction, excavation and equipment problems.
If we cannot meet our construction schedule, we may need to devote
additional resources to construction of the Resort, which could increase costs
and divert management time and attention away from our existing operations and
could cause our business to suffer. If we cannot complete the Resort on budget
or on time, our business, financial condition and results of operations could be
materially adversely affected and we may not be able to meet our debt service
obligations.
OUR OPERATIONS AT CASINO APACHE COULD BE ADVERSELY AFFECTED DURING CONSTRUCTION
OF THE RESORT.
Although we have planned the construction of the Resort to minimize
disruptions to Casino Apache, the construction may disrupt its business. We are
highly dependent upon Casino Apache's cash flow. If the construction of the
Resort disrupts Casino Apache's business, we may lose customers and our
business, financial condition and results of operations could be materially
adversely affected and we may not be able meet our debt service obligations.
RESTRICTIVE COVENANTS IN THE INDENTURE GOVERNING THE NOTES MAY LIMIT OUR ABILITY
TO EXPAND OUR OPERATIONS AND CAPITALIZE ON OUR BUSINESS OPPORTUNITIES.
The indenture governing the notes includes covenants which limit our
ability to borrow money, make investments, create liens, sell assets, engage in
transactions with affiliates, engage in other businesses and engage in mergers
or consolidations. These restrictive covenants may limit our ability to expand
our operations and capitalize on business opportunities. If we are unable to
expand our operation or otherwise capitalize on our business opportunities, our
business, financial condition and results of operations could be materially
adversely affected and we may not be able to meet our debt service obligations.
WE MAY NOT BE ABLE TO REALIZE THE BENEFITS OF OUR BUSINESS STRATEGY.
The Project is part of our business strategy to develop an integrated
resort, increase our market reach and realize operating benefits from business
synergies. We may not be able to fully implement this strategy or may not fully
realize these anticipated benefits. Implementation of our business strategy
could be adversely affected by a number of factors beyond our control, including
general or local economic conditions, increased competition or other changes in
our industry. In particular, we may not be able to attract a sufficient number
of guests, gaming customers and other visitors in order to achieve our
performance goals. Furthermore, we may not be successful in our plan to promote
our customers' utilization of our various resort amenities, including our
gaming, hotel, entertainment and other amenities as anticipated or to a degree
that will allow us to achieve our performance goals. Additionally, our business
strategy, intended to capitalize on the spending levels of our patrons, attract
customers from new target markets and reduce seasonality, may not achieve its
intended results. A failure to effectively implement our business strategy could
have a material adverse effect on our business, financial condition, results of
operations and our ability to meet our debt service obligations.
FEDERAL, STATE AND TRIBAL LAWS AND REGULATIONS, AND OUR GAMING COMPACT, REGULATE
OUR GAMING OPERATIONS AND NONCOMPLIANCE WITH THESE LAWS AND REGULATIONS BY US OR
THE TRIBE, AS WELL AS CHANGES IN THESE LAWS AND REGULATIONS (WHICH ARE
SUSCEPTIBLE TO CHANGES IN PUBLIC POLICY) OR FUTURE INTERPRETATIONS THEREOF,
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO CONDUCT GAMING, AND THUS
ON OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.
Federal, state and Tribal laws and regulations, and our gaming compact,
regulate our gaming operations. For example, various regulatory bodies,
including the NIGC, the Mescalero Apache Tribal Gaming Commission and the
26
New Mexico Gaming Control Board have oversight of our gaming operations. In
addition, Congress has regulatory authority over Indian affairs and can
establish and change the terms upon which Indian tribes may conduct gaming. The
operation of all gaming on Indian lands is subject to IGRA.
The legal and regulatory environment governing our activities, which
involve gaming and commercial relations with Indian tribes, is susceptible to
changes in public policy regarding these matters. For example, over the past
several years, legislation has been introduced in Congress designed to address a
myriad of perceived problems with IGRA, including proposed legislation repealing
many of the provisions of IGRA and prohibiting the operation of gaming on Indian
reservations in states where gaming is not otherwise allowed on a commercial
basis. While none of the substantive proposed amendments to IGRA have proceeded
out of committee hearings to a vote by either house of the U.S. Congress, we
cannot predict the ramifications of future legislative acts. Changes in
applicable laws or regulations, or a change in the interpretation of these laws
or regulations or our gaming compact with the State of New Mexico could limit or
materially affect the types of gaming, if any, that we may offer. Any
restrictions with respect to gaming could have a material adverse effect on our
business, financial condition, results of operations and our ability to meet our
debt service obligations.
WE COMPETE WITH CASINOS, OTHER FORMS OF GAMING AND OTHER RESORT PROPERTIES. IF
WE ARE NOT ABLE TO SUCCESSFULLY COMPETE, WE WILL NOT BE ABLE TO GENERATE
SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS..
Currently, we compete with 15 tribal gaming casinos and non-tribal racinos
operated within 200 miles of our location, one of which, Ruidoso Downs, is
approximately 10 miles away from us in Ruidoso, and another, Sunland Park
Racetrack and Casino, is approximately 125 miles away from us in Sunland Park,
New Mexico. Ruidoso Downs offers quarter horse and thoroughbred racing from May
through September, as well as a 20,000 square foot casino featuring
approximately 300 slot machines and a buffet restaurant. Sunland Park offers
quarter horse and thoroughbred racing from mid-November to early-April, a 36,000
square foot casino featuring approximately 700 slot machines and five
restaurants. The other 11 tribal gaming casinos and one racino are located in
and around Albuquerque and Santa Fe, New Mexico, all which are outside of our
primary market area. We also compete with other forms of legal gaming in New
Mexico, Texas and Northern Mexico, including horse racing, Class II gaming,
pari-mutuel wagering, the New Mexico State Lottery, the Texas State Lottery, as
well as non-gaming leisure activities. Upon completion of the Project, we intend
to expand our existing geographic market and increase the percentage of our
overnight and larger spending customers who tend to live greater distances from
us. We will begin to compete more directly for regional overnight and national
customers with casinos and resorts located in other parts of the country. Many
of our competitors in this expanded geographical market have substantially
greater resources and name recognition than we do or are in a more convenient
location, which is closer to a major population center or transportation hub. If
we are unable to compete successfully, our business, financial condition and
results of operations could be materially adversely affected and we may not be
able to meet our debt service obligations.
WE ARE HIGHLY DEPENDENT ON OUR SURROUNDING MARKET AREA. AS A RESULT, WE FACE
GREATER RISKS THAN A GEOGRAPHICALLY DIVERSE COMPANY.
We rely primarily on drive-in customers living within our primary market
area consisting of southern New Mexico, western Texas and northern Mexico for
the majority of our revenues. After we complete the Project, we expect to
increase our market reach, but if our marketing strategy is not successful, our
primary customer base will continue to be a predominately local one. Therefore,
we are subject to greater risks than more geographically diversified gaming or
resort operations. Among others, the following conditions could have a material
adverse effect on our results of operations:
o a decline in the economies of our primary market area or a decline in
the number of gaming customers from these areas for any reason;
o an increase in competition in our primary market area or the
surrounding area;
o inaccessibility due to road construction or closures of primary access
routes; and
o natural and other disasters in the surrounding area including forest
fires and floods.
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These factors may cause a disruption in our business and as a result have a
material adverse effect on our business, financial condition, result of
operations and our ability to meet our debt service obligations.
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
MEET OUR DEBT SERVICE OBLIGATIONS.
After completion of the Project, we hope to attract customers from beyond
our primary market who will have to travel by air to our property. The recent
war with Iraq, the terrorist attacks of September 11, 2001, 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
similar other situations and events may have for our customers, our primary and
secondary markets and the U.S. economy in general are uncertain. These and
similar other future events could have a significant impact on the number of
customers visiting the Travel Center and the Resort and, as a result, may have a
material adverse effect on our business, financial condition, results of
operations and ability to meet our debt service obligations.
WE MAY FACE DIFFICULTIES IN RECRUITING, TRAINING AND RETAINING QUALIFIED
EMPLOYEES.
The operation of our resort requires us to continuously recruit and retain
a substantial number of qualified professionals, employees, executives and
managers with gaming, hospitality, management and financial reporting
experience. There can be no assurances that we will be able to recruit, train
and retain a sufficient number of qualified employees. A failure to be able to
recruit and retain qualified personnel could result in management, operating and
financial reporting difficulties or affect the experience and enjoyment of our
patrons, either of which could have a material adverse effect on our business,
financial condition, results of operations or ability to meet our debt service
obligations.
WE DO NOT HAVE A HISTORY OF OPERATING ON AS LARGE OF A SCALE AS CONTEMPLATED BY
THE PROJECT.
As a result of the Project, our business operations will be significantly
expanded in size and diversity. Our gaming space will grow by more than 32,000
square feet (including the addition of a second casino location) and our gaming
positions by approximately 700 slot machines and 22 table games. In addition, we
will have significantly expanded restaurant, lounge and bar operations, a fuel
station and a number of additional retail facilities. The expansion of our
resort operations places a significant demand on our management resources which
may affect our ability to effectively manage our growth. These increased demands
on our management could distract them from the operation of our business, which
could have a material adverse effect on our business, financial condition,
results of operations and ability to meet our debt service obligations.
A CHANGE IN OUR CURRENT NON-TAXABLE STATUS COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR CASH FLOW AND OUR ABILITY TO FULFILL OUR DEBT SERVICE OBLIGATIONS.
Based on current interpretations of federal and state tax laws, we are not
a taxable entity for federal and state income tax purposes. If these
interpretations are reversed or modified, or if the applicable tax law changes
in this regard, our cash flow and ability fulfill our debt service obligations
may 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 that legislation has
not been enacted, similar legislation could be enacted in the future. Any future
legislation permitting the taxation of the Tribe or our businesses could have a
material adverse effect on our business, financial condition, results of
operations or ability to meet our debt service obligations.
AS A RESULT OF THE PROJECT, THE OFFERING AND THE EXCHANGE OFFER, WE HAVE
RECENTLY EXPANDED OUR FINANCE STAFF, CONSOLIDATED OUR FINANCIAL REPORTING
SYSTEMS AND HAVE BECOME AN SEC REPORTING ENTITY FOR THE FIRST TIME.
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Historically, our financial management and reporting functions have been
conducted by separate staffs at each of our business enterprises and our
financial reports were consolidated from the separate reporting units. This
resulted in delays in preparing our consolidated financial statements and did
not provide us with the advantages attendant to a consolidated financial
reporting system. In connection with the Project, we have consolidated the
financial reporting system for each of our business enterprises into one
financial reporting system managed by a single finance group.
In addition to consolidating our financial reporting systems, we have
recently expanded our finance staff to prepare for our obligations to file
annual, quarterly and other periodic reports under the Securities Exchange Act
of 1934, as amended, or the Exchange Act. In December 2003, we hired a financial
consultant, who in March 2004 became our Director of Finance (our principal
accounting officer), in September 2003, we hired a new Chief Financial Officer
(our principal financial officer), in August 2003 we hired a new Controller and
in July 2003 we hired a new financial analyst. We may face challenges in
connection with integrating these additional personnel into our financial
reporting system.
THE TERMS OF FOUR OF THE EIGHT VOTING MEMBERS OF THE TRIBAL COUNCIL EXPIRE EACH
YEAR AND THE TERMS OF THE TRIBE'S PRESIDENT AND VICE PRESIDENT EXPIRE EVERY TWO
YEARS; CHANGES IN THE TRIBAL COUNCIL OR ITS POLICIES COULD AFFECT THE PROJECT OR
OTHER ASPECTS OF OUR BUSINESS.
The Tribe is governed by a ten member Tribal Council, consisting of the
President and Vice President of the Tribe and eight voting Tribal Council
members. The President is a non-voting member of the Tribal Council and the
Tribe's Vice President only votes in the event of a tie in the voting of the
eight voting members of the Tribal Council. Terms of all Tribal Council members
(including the President and Vice President of the Tribe) are two years, with
members elected on a staggered basis so that four Tribal Council members are
elected each year. The terms of four of the voting members of the Tribal Council
expire in January 2005. If there is a significant change in the composition of
the Tribal Council, the new Tribal Council may not have the same agenda or goals
as the current government, in particular with respect to the Project. In
addition, the Tribal Council acts by majority vote and with respect to any issue
or policy, a change in views by one or more members could result in a change in
the policy adopted by the Tribal Council. Changes in the Tribal Council or its
policies could result in significant changes in our structure or operations or
in the Project, which could adversely affect our business plan or otherwise
result in a material adverse effect in our business, financial condition,
results of operations or ability to meet our debt service obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Resort's primary exposure to market risk is interest rate
risk associated with our sort term debt. At October 31, 2003 we had $19 million
of variable rate debt tied to LIBOR; therefore, our interest rate on our credit
facility will change as LIBOR changes. Based on our $19 million of outstanding
short term debt at October 31, 2003, a hypothetical 100 basis point (1.0%)
increase in LIBOR would result in an annual interest expense increase of
approximately $190,000. However, this debt was repaid from proceeds of the
offering of the original notes on November 3, 2003.
Management has and will continue to limit our exposure to interest rate
risk by maintaining a conservative ratio of fixed rate, long-term debt to total
debt such that variable rate exposure is kept at an acceptable level and fixing
certain long-term variable rate debt through the use of interest rate swaps or
interest rate caps with appropriately matching maturities.
As of April 30, 2004, the Resort held no derivative instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and notes thereto appear on pages F-3
through F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this annual report, we conducted an
evaluation, under the supervision and with the participation of IMG Resort and
Casino's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective at the reasonable assurance
level and designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within IMG Resort and Casino have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the controls. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, along with the
other members of management, evaluate our disclosure controls and procedures as
of the end of the period covered by our reports filed pursuant to the Exchange
Act. Our Chief Executive Officer and Chief Financial Officer have concluded that
the disclosure controls and procedures are effective in alerting the Chief
Executive Officer and Chief Financial Officer on a timely basis to material
information relating to IMG Resort and Casino and its consolidated subsidiaries
required to be included in our periodic and other filings with the Commission.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Tribe has established IMG Resort and Casino as an unincorporated
enterprise of the Tribe to operate its gaming, hotel, resort and ski businesses.
IMG Resort and Casino is governed by a Management Board comprised of between
seven to nine members, including: the four members of the Executive Committee of
the Tribe (including the President of the Tribe who serves as Chairperson, as
well as the Vice President, Secretary and Treasurer of the Tribe); the Chief
Operating Officer of IMG Resort and Casino, and at least one, and up to three,
independent members. The Management Board designates officers to administer the
economic and business affairs of IMG Resort and Casino.
The following are our current officers and members of the Management Board
of IMG Resort and Casino:
NAME AGE POSITION
----------------- ---- -----------------------------
Mark Chino....... 50 Management Board Member (Chairperson),
President of the Tribe
Ferris Palmer.... 51 Management Board Member,
Vice President of the Tribe
Alfred LaPaz..... 56 Management Board Member,
Treasurer of the Tribe
Glenda Brusuelas. 49 Management Board Member,
Secretary of the Tribe
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Manuel Lujan, Jr. 76 Management Board Member
R. Miles Ledgerwood 49 Management Board Member
Michael French... 49 Management Board Member,
Chief Operating Officer of IMG Resort and Casino
Richard Williams. 59 Chief Financial Officer of IMG Resort and Casino
Brian Parrish.... 42 Director of Marketing of IMG Resort and Casino
Wayne Marks...... 58 Director of Finance of IMG Resort and Casino
There are no family relationships between any Management Board Member
and/or any executive officer.
MARK CHINO has served as Chairperson of the Management Board of IMG Resort
and Casino and President of the Tribe since January 2004. Mr. Chino's term on
the Tribal Council and Executive Committee expires in January 2006. Prior to his
election as President of the Tribe, Mr. Chino was employed by the Bureau of
Indian Affairs for nearly 30 years, serving as a Police Officer, Lead Police
Officer (Sergeant) and Supervisory Police Officer (Lieutenant) from 1975 to
1988, and then as a Criminal Investigator from 1988 to 2004. Mr. Chino received
a Bachelor of Police Science degree from New Mexico State University in 1977.
FERRIS PALMER has served as a member of the Management Board of IMG Resort
and Casino since July 2003 and Vice President of the Tribe since January 2002.
Mr. Palmer was re-elected as Vice President of the Tribe in the 2003 election.
Mr. Palmer's term on the Tribal Council and Executive Committee expires in
January 2006. Mr. Palmer served as Tribal Administrator, responsible for
overseeing the day-to-day operations of the Tribe, the tribal enterprises and
all other tribal activities, from 1998 through early 2000, when he left to head
up Mescalero Hardware and Lumber, a start-up operation. Mr. Palmer's term on the
Tribal Council and the Executive Committee expires in January 2006.
ALFRED LAPAZ has served as a member of the Management Board of IMG Resort
and Casino since June 2004. Mr. LaPaz also serves as Treasurer of the Tribal
Council and as Chairperson of the Programs Committee. Mr. LaPaz's term on the
Tribal Council and Executive Committee expires in January 2005. Since 2000, Mr.
LaPaz has been employed by IMG Resort and Casino as Director of Security. Prior
to his experience at IMG Resort and Casino, Mr. LaPaz was employed with the
Federal Law Enforcement and retired as Captain after 30 years of service.
GLENDA BRUSUELAS has served as a member of the Management Board of IMG
Resort and Casino since January 2004. Ms. Brusuelas was elected as Secretary of
the Tribe and Chairperson of the Tribal Community Services Committee in January
2004. Ms. Brusuelas' term on the Tribal Council and Executive Committee expires
in January 2005. Since 2001, Ms. Brusuelas has been employed by Mescalero Apache
Telecom (a business enterprise of the Tribe) as a customer service
representative. From 1977 to 2001, Ms. Brusuelas was employed by the Tribe in
several areas including the judicial system (as a court clerk) and the
educational system (in various capacities, including as secretary to the
superintendent, financial secretary and cultural secretary).
MANUEL LUJAN JR. has served as an independent member of the Management
Board of IMG Resort and Casino since January 2004. Mr. Lujan also currently
serves as the Chairman of the board of directors of Laguna Construction Company,
which is owned by the Pueblo of Laguna in New Mexico. Mr. Lujan served as U.S.
Congressman representing the State of New Mexico from January 1969 to January
1989 and as Secretary of the Interior under the Bush Administration from 1989 to
1993. Since 1993, Mr. Lujan has served as a lobbyist in Washington, D.C. through
his company Manuel Lujan Associates, a consulting firm dealing with matters
involving federal agencies.
R. MILES LEDGERWOOD has served as a member of the Management Board of IMG
Resort and Casino since March 2004. Mr. Ledgerwood has also served as President
and CEO of Alamogordo Federal Savings and Loan Association since 1983. Mr.
Ledgerwood also currently serves as a member of the Board of Directors of
Alamogordo Financial Corporation, Alamogordo Federal Savings and Loan
Association and Space Age City Service Corporation.
MICHAEL FRENCH has served as a member of the Management Board of IMG Resort
and Casino since November 2003 and as its Chief Operating Officer since December
2002. Mr. French has over 30 years of experience in the hotel and gaming
industry, most recently at the Venetian Resort Hotel Casino in Las Vegas,
Nevada, where he was Senior Vice President of Operations from 1998 to 2002.
Prior to his experience at the Venetian, from 1995 to 1998, Mr. French was
Senior Vice President of Hotel Operations at Caesars Palace in Las Vegas. Mr.
French also served as Managing Director of the Loews Anatole Hotel in Dallas,
Texas and as Vice President/General Manager of the Peabody Hotel in Orlando,
Florida. In 1989, Mr. French was awarded Orlando's Up and Comer's Award, given
to
32
executives under the age of 35 for his accomplishments at the Peabody Hotel. Mr.
French received his certification from the American Hotel and Lodging
Association as a Certified Hotel Administrator in 1988.
RICHARD WILLIAMS has served as Chief Financial Officer of IMG Resort and
Casino since September 2003. Mr. Williams has over 30 years of financial
management experience in public and private companies, and has significant
experience in the casino and development industries, most recently as Chief
Financial Officer at the East Valley Tourist Development Authority, an
instrumentality of the Cabazon Band of Mission Indians near Palm Springs,
California, from July 2002 to September 2003. Mr. Williams also served as Chief
Financial Officer of the Cabazon Tribe from September 2001 to June 2002. Prior
to his experiences at the Cabazon Tribe and the Authority, from 1996 to 2001,
Mr. Williams was Senior Vice President of Finance for Herbalife International,
Inc. and The Irvine Company from 1985 to 1995. Mr. Williams also served as Vice
President and Controller at Caesars World, Inc., Wickes Companies, Inc. and
Trusthouse Forte, Inc., and as an Adjunct Professor of Finance for the Executive
M.B.A. Program of the University of Southern California, or USC, Chairman of the
Board of Advisors for USC's School of Accounting and member of the Real Estate
Committee of the AICPA. Mr. Williams is a certified public accountant.
BRIAN PARRISH has served as the Director of Marketing of IMG Resort and
Casino since January 2003. Mr. Parrish has over 15 years of marketing
experience, recently at the Venetian Resort Hotel Casino in Las Vegas, Nevada,
where he was Vice President of Marketing from 2000 to 2002. Prior to his
experience at the Venetian, Mr. Parrish served as Vice President of Hotel
Operations and Regional Marketing of the Boyd Gaming Corporation from 1999 to
2000 and as Regional Vice President of Marketing from 1997 to 1999. Mr. Parrish
also served as Director of Casino Marketing for the Flamingo Hilton in Las
Vegas, Nevada from 1993 to 1995. Mr. Parrish also worked in the U.S. Defense
Intelligence Industry from 1983 to 1988.
WAYNE MARKS has served as Director of Finance of IMG Resort and Casino
since March 2004. Previously, Mr. Marks served as a Financial Consultant of IMG
Resort and Casino from December 2003 to March 2004. Mr. Marks has over 35 years
of financial management and consulting experience in public and private
companies, and has significant experience in the casino and financial services
industries, most recently as Director of Finance at the East Valley Tourist
Development Authority (Fantasy Springs Resort and Casino), an instrumentality of
the Cabazon Band of Mission Indians near Palm Springs, California, from January
2000 to December 2003. Prior to his experiences at the Authority, Mr. Marks was
General Manager of Fiesta Slots and Bingo in Lima, Peru from July 1997 to
December 1999 and served as Chief Financial Officer of sureBET Casino, Inc. the
parent company of Fiesta Slots and Bingo. Mr. Marks also worked and held senior
financial positions in the Federal Farm Credit System for 18 years.
AUDIT COMMITTEE FINANCIAL EXPERT
On behalf of the Board, the Audit Committee is responsible for providing an
independent, objective review of our auditing, accounting and financial
reporting process, public reports and disclosures, and system of internal
controls regarding financial accounting. Currently, R. Miles Ledgerwood serves
as the audit committee financial expert.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics applicable to all of
our employees, including our Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer and all other senior financial executives, and to
our directors when acting in their capacity as directors. Our Code of Business
Conduct and Ethics is designed to set the standards of business conduct and
ethics and to help directors and employees resolve ethical issues. The purpose
of our Code of Business Conduct and Ethics is to ensure to the greatest possible
extent that our business is conducted in a consistently legal and ethical
manner. Employees may submit concerns or complaints regarding audit, accounting,
internal controls or other ethical issues on a confidential basis by means of a
toll-free telephone call or an anonymous email. We investigate all concerns and
complaints. Copies of our Code of Business Conduct and Ethics are available to
investors upon written request. Any such request should be sent by mail to Inn
of the Mountain Gods Resort and Casino, 287 Carrizo Canyon Road, Mescalero, New
Mexico 88340, Attn: Chief Operating Officer or should be made by telephone by
calling (505) 464-6595.
32
We intend to disclose on our website amendments to, or waivers from, any
provision of our Code of Business Conduct and Ethics that apply to our Chief
Executive Officer, Chief Financial Officer, Principal Accounting Officer and
persons performing similar functions and amendments to, or waivers from, any
provision which relates to any element of our Code of Business Conduct and
Ethics described in Item 406(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Operating Officer and as to
each of the other four most highly compensated executive officers whose
compensation exceeded $100,000 during fiscal 2004 (referred to as the named
executive officers), information concerning all compensation paid for services
to us in all capacities for each of the three years ended April 30 indicated
below.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- -----------------------
NAME AND PRINCIPAL AWARDS PAYOUTS
POSITION(1)
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
---- ------ ------ ------------ ---------- ------------ ------- -------------
Michael French,
Chief Operating
Officer(2).......... 2004 $250,000 $23,238 $ 36,000(3) $ -- $ -- $ -- $ --
2003 $107,958 $ -- $ 15,000(4) $ -- $ -- $ -- $ --
2002 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Richard Williams,
Chief Financial
Officer(5)....... 2004 $121,667 $50,000(6) $ 16,000(7) $ -- $ -- $ -- $ --
2003 $ -- $ -- $ -- $ -- $ -- $ -- $ --
2002 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Brian Parrish,
Director of
Marketing(8)...... 2004 $175,072 $ -- $ -- $ -- $ -- $ -- $ --
2003 $ 72,947 $19,500 $ -- $ -- $ -- $ -- $ --
2002 $ -- $ -- $ -- $ -- $ -- $ -- $ --
- ----------
(1) Other than as set forth below, none of our other officers received
compensation in excess of $100,000 during the last fiscal year. Wayne
Marks, our Director of Finance, was hired in December 2003 and receives an
annual salary of $120,000.
(2) Michael French was hired on December 5, 2002 and receives an annual salary
of $250,000 and certain other compensation.
(3) Consists of a housing allowance of $3,000 per month, calculated from May
2003 to April 2004.
(4) Consists of a housing allowance of $3,000 per month, calculated from
December 2002 to April 2003.
(5) Richard Williams, our Chief Financial Officer, was hired in September 2003
and receives an annual salary of $200,000 and certain other compensation.
(6) Consists of a signing bonus.
(7) Consists of a housing allowance of $2,000 per month, calculated from
September 2003 to April 2004.
(8) Brian Parrish was hired on December 12, 2002 and receives an annual salary
of $175,072 and certain other compensation.
33
COMPENSATION OF THE MANAGEMENT BOARD AND AUDIT COMMITTEE
Members of the Management Board who are officers of the Resort but are not
Tribal members do not receive any additional compensation or fees for attending
Management Board or Audit Committee meetings. Tribal members serving on the
Management Board and Audit Committee receive $200 per meeting. Independent
members serving on the Management Board and Audit Committee receive $500 per
meeting and an additional $1,000 per quarter.
EMPLOYMENT AGREEMENTS
MICHAEL FRENCH. Pursuant to an employment agreement dated December 5, 2002,
Mr. French provides services to the IMG Resort and Casino as its Chief Operating
Officer - Resort Operations until April 30, 2008. The agreement provides that
either Mr. French or the Tribe may terminate the agreement for any reason
whatsoever. If either Mr. French or the Tribe terminates the agreement
involuntarily, the Tribe is obligated to pay Mr. French the then current monthly
base salary, benefits and allowance continuation for a period of six months or
until Mr. French has secured employment with another employer. The Tribe is not
required to pay any compensation if Mr. French terminates the agreement
voluntarily. Mr. French receives an annual salary of $250,000, as well as a
housing allowance and a bonus based on one-quarter of one percent (.25%) of the
adjusted net profits of the Tribe's resort operations.
RICHARD WILLIAMS. Pursuant to an employment agreement dated September 22,
2003, Mr. Williams provides services to the IMG Resort and Casino as its Chief
Financial Officer until April 30, 2006. The agreement provides that either Mr.
Williams or the Tribe may terminate the agreement for any reason whatsoever. If
either Mr. Williams or the Tribe terminates the agreement involuntarily, the
Tribe is obligated to pay Mr. Williams the then current monthly base salary,
benefits and allowance continuation for a period of six months or until Mr.
Williams has secured employment with another employer. The Tribe is not required
to pay any compensation if Mr. Williams terminates the agreement voluntarily.
Mr. Williams receives an annual salary of $200,000, as well as a signing bonus,
housing allowance and a bonus equal to the greater of $25,000 per year or
one-quarter of one percent (.25%) of the adjusted net profits of the Tribe's
resort operations.
BRIAN PARRISH. Pursuant to an employment agreement dated December 2002, Mr.
Parrish provides services to the IMG Resort and Casino as its Director of
Marketing until April 30, 2008. The agreement provides that either Mr. Parrish
or the Tribe may terminate the agreement for any reason whatsoever. If either
Mr. Parrish or the Tribe terminates the agreement involuntarily, the Tribe is
obligated to pay Mr. Parrish the then current monthly base salary, benefits and
allowance continuation for a period of six months or until Mr. Parrish has
secured employment with another employer. The Tribe is not required to pay any
compensation if Mr. Parrish terminates the agreement voluntarily. Mr. Parrish
receives an annual salary of $175,072, as well as a bonus based on one-quarter
of one percent (.25%) of the adjusted net profits of the Tribe's resort
operations.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DISTRIBUTIONS TO THE TRIBE WITH OTHER PAYMENTS
Distributions to the Tribe were $19.7 million, $40.6 and $13.2 million for
the fiscal years ended April 30, 2002, 2003 and 2004, respectively. We make
distributions to the Tribe under the terms of an annual Tribal budget resolution
passed at the discretion of the Tribal Council. We intend to continue to make
distributions to the Tribe subject to the restrictions set forth in the
indenture, which generally provide we can make no distributions unless we meet
certain debt leverage tests, other than the following: (a) $5.0 million in
aggregate at any one time, (b) $8.0
34
million a year for government services and (c) amounts to fund a resolution of
the Tribe's dispute with the State of New Mexico regarding the 1997 Compact.
The Tribe provides health insurance to IMG Resort and Casino, which
reimburses the Tribe for all costs and expenses associated with this insurance.
IMG Resort and Casino paid the Tribe approximately $0.9 million, $0.4 million
and $0.5 million for the fiscal years ended April 30, 2002, 2003 and 2004,
respectively.
The Tribe provides pension benefits to IMG Resort and Casino. No
contributions have been made to the Tribe for any period through October 2003.
Beginning in November 2003, IMG Resort and Casino began making payments equal to
our pro-rata share of the Tribe's periodic pension cost. The pro-rata periodic
pension cost related to IMG Resort and Casino has been $1.9 million, $1.3
million and $1.3 million for the fiscal years ended April 30, 2002, 2003 and
2004, respectively.
TRIBAL TAXES
The Tribal Code provides for the imposition of a gross receipts tax on the
sale of food, beverages, retail sales and services and the rental of rooms on
the Mescalero Reservation. The rate of the tax is comparable to the cumulative
state and local sales or use tax imposed on identical transactions taking place
outside the reservation and within the State of New Mexico. This tax applies to
sales at our current operations and will apply to sales on future operations.
IMG Resort and Casino collects and remits the gross receipts tax to the Tribe on
a monthly basis.
The Tribal Code also provides for the collection of an excise tax on
gasoline sold at retail on the Mescalero Reservation. The rate of the tax is
equivalent to the same tax imposed by the State of New Mexico on identical
transactions taking place outside the reservation and within the State of New
Mexico. IMG Resort and Casino collects and remits the excise tax to the Tribe on
a monthly basis.
The Tribal Code also provides for the imposition of a special assessment
school tax on the resort enterprises to provide a source of funds to service
debt incurred to construct the Tribe's K-12 School. The rate of the tax, for
each month, is equal to the difference between $200,000 and all taxes imposed on
or collected by and remitted by the resort enterprises to the Tribe for that
month. If the total taxes imposed on us by the Tribe for any month is greater
than $200,000, then the special assessment tax for that month is zero.
SHARED SERVICES AND COST ALLOCATIONS
In connection with the issuance of the original notes, IMG Resort and
Casino and the Tribe entered into a service and cost allocation agreement,
provides that the Tribe or its enterprises will continue to provide IMG Resort
and Casino and its resort enterprises the following services in accordance with
past practice: (i) insurance; (ii) telecommunications; (iii) propane; (iv)
payroll processing; and (v) gaming regulation, and that IMG Resort and Casino
and its resort enterprises will pay, on behalf of the Tribe, for (a) revenue
sharing and regulatory fee obligations required under the 1997 Compact or any
new compact, (b) federal regulatory fees required by IGRA, (c) an amount equal
to the monthly payments required under the BIA Note and (d) amounts for certain
other miscellaneous liabilities.
EMPLOYEE BENEFITS COST ALLOCATIONS
In connection with the issuance of the original notes, IMG Resort and
Casino and the Tribe entered into an employee benefits cost allocation
agreement, which provides that the Tribe will continue to provide IMG Resort and
Casino and its resort enterprises with certain employee benefits in accordance
with past practice, including group health benefits, worker's compensation
insurance, disability insurance, unemployment benefits and pension benefits.
ATM FEES
IMG Resort and Casino does not receive revenues from the use by our
customers of the ATM machines provided at our business locations. Pursuant to
agreements with third party ATM providers, the Tribe receives a portion of the
transaction fees paid by ATM users. The Tribe will continue to receive payments
related to the ATM services provided in our new facilities under similar
arrangements, and we will receive no revenue from these services.
35
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the aggregate fees billed to IMG Resort and
Casino for fiscal 2004 and 2003 by Grant Thornton LLP:
PERCENTAGE
YEAR ENDED APRIL 30, OF SERVICES
2004 2003 2004 2003
---- ---- ---- ----
Audit Fees $307,241 $208,207 93.23% 30.77%
Audit-Related Fees 22,293 468,397 6.77% 69.23%
All Other Fees -- -- -- --
-------- --------- --------- ---------
Total Fees $329,534 $676,604 100% 100%
======== ========= ========= =========
"Audit Fees" billed during fiscal 2004 and 2003 were for professional
services rendered for the audit of our financial statements. "Audit-Related
Fees" were for services related to accounting consultation and review of
documents filed with the Securities and Exchange Commission. "All Other Fees"
consist of fees for products and services other than the services reported
above.
The Audit Committee has adopted a policy for the pre-approval of all audit
and non-audit services to be performed for IMG Resort and Casino by its
independent auditor. The Audit Committee has considered the role of Grant
Thornton LLP in providing audit and audit-related services to IMG Resort and
Casino and has concluded that such services are compatible with Grant Thornton
LLP's role as IMG Resort and Casino's independent auditor.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS - See Index to Consolidated
Financial Statements of this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES - All financial statement
schedules have been omitted because they are not applicable
or are not required, or because the information required to
be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS - See Exhibit Index on pages 36-37 of this Annual
Report on Form 10-K.
(b) None.
(c) See Exhibit Index on pages 36-37 of this Annual Report on Form
10-K.
(d) None.
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION
3.1* Mescalero Apache Tribe Resolutions 03-05, 03-28 and
03-29 establishing and governing the Inn of the
Mountain Gods Resort and Casino adopted and approved
April 2, 2003, July 15, 2003 and July 15, 2003,
respectively.
3.2* Charter of the Management Board of IMG Resort and Casino.
4.1* Indenture, dated as of November 3, 2003, among the Mescalero Apache
Tribe, Inn of the Mountain Gods Resort and Casino,
Casino Apache, Inn of the Mountain Gods, Casino Apache
Travel Center, Ski Apache and U.S. Bank National
Association, as
36
Trustee, relating to the 12% Senior
Notes due 2010 of the Inn of the Mountain Gods Resort
and Casino.
4.2* Form of 12% Senior Note Due 2010 of the Inn of the Mountain Gods
Resort and Casino.
4.3* Registration Rights Agreement, dated as of November 3,
2003, among the Mescalero Apache Tribe, Inn of the
Mountain Gods Resort and Casino, Casino Apache, Inn of
the Mountain Gods, Casino Apache Travel Center, Ski
Apache and Citigroup Global Markets Inc, as the Initial
Purchaser.
10.1* Second Amended Design/Build Construction Contract, by and among Inn of
the Mountain Gods Resort and Casino, Centex/WorthGroup, LLC, as
Design/Builder, and Rider Hunt Levett & Bailey, as Construction
Manager, dated as of September 6, 2003, and Change Order No. 9
thereto, dated October 24, 2003.
10.2* Cash Collateral and Disbursement Agreement, dated as of
November 3, 2003, among Inn of the Mountain Gods Resort
and Casino, Casino Apache, Inn of the Mountain Gods,
Casino Apache Travel Center, Ski Apache, U.S. Bank
National Association, as Disbursement Agent,
Professional Associates Construction Services, Inc., as
Independent Construction Consultant and U.S. Bank
National Association, as Trustee.
10.3* Ski Apache Special Use Permit received from the United States
Department of Agriculture, Forest Service dated April 23, 1985.
10.4* Employment Agreement dated December 5, 2002, between the Mescalero
Apache Tribe and Michael French.
10.5* Employment Agreement dated September 22, 2003, between the Mescalero
Apache Tribe and Richard Williams.
10.6 Employment Agreement dated December 12, 2002 between
the Mescalero Apache Tribe and Brian Parrish (filed
herewith).
10.7 2001 Compact between the Mescalero Apache Tribe and the State of New
Mexico, entered into June 1, 2004 (filed herewith).
12.1 Statement regarding Computation of Ratios (filed herewith).
14.1 Code of Business Conduct and Ethics of Inn of the Mountain Gods Resort
and Casino (filed herewith)
14.2 Code of Ethics for Principal Executive Officer and Senior Financial
Officer (filed herewith)
21.1* Subsidiaries of the Registrant.
23.1 Consents of Experts and Counsel (filed herewith).
24.1 Power of Attorney (Included with Signature Page)
24.2 Power of Attorney (filed herewith).
31.1 Certification of Michael French, Principal Executive Officer, pursuant
to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2 Certification of Richard Williams, Principal Financial Officer, pursuant
to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
32.1 Certification of Michael French, Principal Financial Officer and Richard
Williams, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to IMG Resort and Casino's Registration Statement
on Form S-4 filed with the SEC on February 27, 2004 (SEC File No.
333-113140).
** Incorporated by reference to IMG Resort and Casino's Amendment No. 1 to
Registration Statement on Form S-4 filed with the SEC on April 22, 2004
(SEC File No. 333-113140).
37
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on the Reservation of the Mescalero
Apache Tribe, State of New Mexico, on July 29, 2004.
INN OF THE MOUNTAIN GODS RESORT AND CASINO
By /s/ Michael French
---------------------------------
Michael French
Its: Chief Operating Officer and
Management Board Member
Each person whose signature appears below constitutes and appoints Michael
French and Richard Williams, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Mark Chino Management Board Member (Chairperson) July 29, 2004
----------------------
Mark Chino
/s/ Ferris Palmer* Management Board Member July 29, 2004
----------------------
Ferris Palmer
/s/ Alfred LaPaz Management Board Member July 29, 2004
----------------------
Alfred LaPaz
/s/ Glenda Brusuelas Management Board Member July 29, 2004
----------------------
Glenda Brusuelas
/s/ Manuel Lujan, Jr. Management Board Member July 29, 2004
----------------------
Manuel Lujan, Jr.
/s/ R. Miles Ledgerwood Management Board Member July 29, 2004
----------------------
R. Miles Ledgerwood
Chief Operating Officer and Management July 29, 2004
/s/ Michael French Board Member
----------------------
Michael French (Chief Executive Officer)
/s/ Richard Williams Chief Financial Officer July 29, 2004
----------------------
Richard Williams
/s/ Wayne Marks Director of Finance July 29, 2004
----------------------
Wayne Marks (Chief Accounting Officer)
*By /s/ Michael French
-----------------------
Michael French
Attorney-in-Fact
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
UNINCORPORATED BUSINESS ENTERPRISES OF THE MESCALERO APACHE TRIBE
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Registered Public Accounting Firm F-2
Audited Financial Statements
Consolidated Balance Sheets as of April 30, 2003 and
2004............................................. F-3
Consolidated Statements of Income for the Years ended
April 30, 2002, 2003 and 2004.................... F-4
Consolidated Statements of Changes in Equity for the
Years ended April 30, 2002, 2003 and 2004........ F-5
Consolidated Statements of Cash Flows for the Years
ended April 30, 2002, 2003 and 2004.............. F-6
Notes to Consolidated Financial Statements.......... F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Management Board
Inn of the Mountain Gods Resort and Casino and subsidiaries
Mescalero, New Mexico
We have audited the accompanying consolidated balance sheets of the Inn of the
Mountain Gods Resort and Casino and subsidiaries, an unincorporated enterprise
of the Mescalero Apache Tribe, as of April 30, 2003 and 2004 and the related
consolidated statements of income, changes in equity, and cash flows for each of
the three years in the period ended April 30, 2004. These financial statements
are the responsibility of the Inn of the Mountain Gods Resort and Casino and
subsidiaries management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Inn of the
Mountain Gods Resort and Casino and subsidiaries, as of April 30, 2003 and 2004
and the results of their operations and their cash flows for the each of the
three years in the period ended April 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Albuquerque, New Mexico
June 25, 2004
F-2
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30,
2003 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,331,922 $ 15,794,943
Restricted cash and cash equivalents 475,249 133,297,243
Accounts receivable, net 175,662 32,566
Inventories 855,529 968,585
Prepaid expenses 288,999 462,054
Prepaid revenue sharing fees - 4,218,673
Deferred financing cost, net 100,000 1,625,244
----------- -----------
Total current assets 11,227,361 156,399,308
NON CURRENT ASSETS:
Property, plant and equipment, net 48,256,640 150,329,503
Long term deferred financing cost, net - 9,404,249
Other long term assets 16,000 76,912
----------- -----------
Total assets $ 59,500,001 316,209,972
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and other short-term liabilities $ 1,410,471 612,873
Construction in progress accounts payable 7,155,922 13,609,367
Accrued expenses 1,750,238 5,322,061
Accrued revenue sharing and regulatory fees 39,821,082 23,000,000
Accrued interest 12,048,378
Deposits and advance payments 749,508 667,100
Current portion of long-term debt 5,765,427 252,053
----------- -----------
Total current liabilities 56,652,648 55,511,832
NON CURRENT LIABILITIES:
Long-term debt, net of current portion 1,688,032 201,694,541
----------- -----------
Total liabilities 58,340,680 257,206,373
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Contributed capital 24,844,077 56,113,676
Retained earnings (deficit) (23,684,756) 2,889,923
----------- -----------
Total equity 1,159,321 59,003,599
Total liabilities and equity $ 59,500,001 316,209,972
=========== ============
The accompanying notes are an integral part of these statements.
F-3
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30,
2002 2003 2004
Revenues: ------------- -------------- ---------------
Gaming $ 41,845,471 $ 46,942,180 $ 60,277,052
Food and beverage 5,287,497 4,893,997 5,614,672
Rooms 4,608,418 3,394,434 -
Recreation and other 11,228,444 11,952,860 16,471,890
------------- -------------- ---------------
Gross revenue 62,969,830 67,183,471 82,363,614
Less - promotional allowances 783,634 931,160 1,437,129
------------- -------------- ---------------
Net revenue 62,186,196 66,252,311 80,926,485
------------- -------------- ---------------
Operating costs and expenses:
Gaming 17,962,606 19,457,655 25,405,661
Reversal of accrued fees (27,136,255)
Food and beverage 5,067,579 4,955,537 6,587,472
Rooms 2,129,502 1,552,133 119,722
Recreation and other 5,333,865 5,757,452 10,701,499
General and administrative 5,671,552 6,500,909 9,037,815
Pension (allocated by related party) 1,331,088 1,631,828 1,886,333
Gaming regulatory commission
fees (charged by related party) 720,271 750,821 1,193,011
Insurance (allocated by related party) 549,000 647,000 902,621
Telecommunication (charged by related
party) 126,200 152,200 289,182
Pre-opening costs and expenses - 1,389,967 3,071,982
Depreciation and amortization 3,915,779 9,213,224 4,930,236
------------- -------------- ---------------
Total operating expenses 42,807,442 52,008,726 36,989,279
------------- -------------- ---------------
Income from operations 19,378,754 14,243,585 43,937,206
Other income (expenses):
Interest income 288,521 190,120 801,266
Interest expense, net of amounts
capitalized (196,022) - (5,251,687)
Other income 75,202 170,984 258,098
------------- -------------- ---------------
Total other income (expenses) 167,701 361,104 (4,192,323)
------------- -------------- ---------------
Net income $ 19,546,455 $ 14,604,689 $ 39,744,883
============= ============== ===============
The accompanying notes are an integral part of these statements.
F-4
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED APRIL 30,
Retained
Contributed Earnings Total
Capital (Deficit) Equity
-------------- -------------- -------------
Balances, April 30, 2001 $ 35,143,163 $ 2,466,013 $ 37,609,176
Contributed capital from Mescalero Apache Tribe:
Forgiveness of allocated pension cost 1,331,088 - 1,331,088
Distributions to Mescalero Apache Tribe:
State revenue sharing fee accrual transfer (32,648,152) - (32,648,152)
Operating transfers - (19,740,211) (19,740,211)
Net income - 19,546,455 19,546,455
-------------- -------------- -------------
Balances, April 30, 2002 3,826,099 2,272,257 6,098,356
-------------- -------------- -------------
Contributed capital from Mescalero Apache Tribe:
Construction of the Resort 14,389,215 - 14,389,215
Forgiveness of due from Inn 9,443,716 - 9,443,716
Forgiveness of allocated pension cost 1,631,828 - 1,631,828
Distributions to Mescalero Apache Tribe:
State revenue sharing fee accrual transfer (4,446,781) - (4,446,781)
Forgiveness of due to Casino - (13,405,098) (13,405,098)
Forgiveness of due to Ski - (1,193,833) (1,193,833)
Operating transfers - (25,962,771) (25,962,771)
Net income - 14,604,689 14,604,689
-------------- -------------- -------------
Balances, April 30, 2003 24,844,077 (23,684,756) 1,159,321
-------------- -------------- -------------
Contributed capital from Mescalero Apache Tribe:
Construction of the Resort 29,960,298 - 29,960,298
Forgiveness of allocated pension cost 1,309,301 - 1,309,301
Distributions to Mescalero Apache Tribe:
Operating transfers - (13,170,204) (13,170,204)
Net income - 39,744,883 39,744,883
-------------- -------------- -------------
Balances, April 30, 2004 $56,113,676 $ 2,889,923 $ 59,003,599
============== ============== =============
The accompanying notes are an integral part of these statements.
F-5
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30,
2002 2003 2004
------------ ------------- ---------------
Cash flows from operating activities:
Net income $ 19,546,455 $ 14,604,689 $ 39,744,883
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,915,779 9,213,224 4,930,236
Gain on sale of property, plant and
equipment - (13,741) -
Changes in assets and liabilities:
Restricted cash and cash equivalents 26,824,075 (114,304) (58,265)
Accounts receivable, net of allowance 17,666 (58,908) 143,096
Inventories (108,182) (267,736) (113,056)
Prepaid revenue sharing fees - - (4,218,673)
Prepaid expenses 52,144 (77,586) (173,056)
Interest receivable 451,506 - -
Other long-term assets - (1,000) (60,911)
Accounts payable (110,885) 583,895 (797,598)
Accrued expenses (5,619) 454,795 3,571,823
Accrued revenue sharing and regulatory
fees 7,231,531 7,717,219 (16,821,082)
Accrued interest payable 12,048,378
Deposits and advance payments (31,198) (20,034) (82,408)
------------ ------------- ---------------
Net cash provided in operating activities 57,783,272 32,020,513 38,113,367
Cash flows from investing activities:
Purchase of property, plant and equipment (1,633,352) (23,578,641) (100,549,654)
Proceeds from sale of property, plant and
equipment - 35,198
Net cash used in investing activities (1,633,352) (23,543,443) (100,549,654)
Cash flows from financing activities:
Deferred financing costs - (100,000) (10,929,493)
Cash held for construction payments - - (132,763,729)
Cash proceeds from the issuance of notes - - 200,000,000
Advances from Mescalero Apache Tribe, net 2,153,606 (6,660,807) -
Borrowings on revolving line-of-credit - 5,000,000 -
Principal borrowings (payments) on long-term
debt, net (625,024) 349,764 (5,506,865)
Distributions to Mescalero Apache Tribe (52,388,363) (45,008,483) (13,170,204)
Contributions from Mescalero Apache Tribe 1,331,088 25,464,759 31,269,599
------------ ------------- ---------------
Net cash (used by) provided by financing
activities (49,528,693) (20,954,767) 68,899,308
------------ ------------- ---------------
Net increase (decrease) in cash and cash
equivalents 6,621,227 (12,477,697) 6,463,021
Cash and cash equivalents, beginning of year 15,188,392 21,809,619 9,331,922
------------ ------------- ---------------
Cash and cash equivalents, end of year $ 21,809,619 $ 9,331,922 $ 15,794,943
============ ============= ===============
Supplemental cash flow information:
Cash paid for interest $ 196,681 $ 173,407 $ 60,115
============ ============= ===============
Non-cash investing and financing activities:
Distributions to Mescalero Apache Tribe $ - $ 1,193,833 $ 38,981,173
============ ============= ===============
Property, plant and equipment acquired through
increase of payables, net $ - $ 7,155,922 $ 6,453,445
============ ============= ===============
Contributions from Mescalero Apache Tribe $ 1,331,088 $ 7,820,274 $ 1,309,301
============ ============= ===============
The accompanying notes are an integral part of these statements.
F-6
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002, 2003 AND 2004
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY AND OPERATIONS
The Inn of the Mountain Gods Resort and Casino (the "IMG Resort and
Casino"), an unincorporated enterprise of the Mescalero Apache Tribe (the
"Tribe"), was established on April 30, 2003 for the purpose of managing all
resort enterprises of the Tribe including activities of IMG Resort and
Casino and its wholly owned subsidiaries: Casino Apache, Casino Apache
Travel Center, Inn of the Mountain Gods and Ski Apache (collectively the
"Resorts"). Effective April 30, 2003, the Tribe contributed the Resorts to
the IMG Resort and Casino. Prior to such contribution to IMG Resort and
Casino, the Resorts operated as separate, unincorporated enterprises of the
Tribe. Due to common control of the Resorts and IMG Resort and Casino, the
contribution was accounted for as a reorganization of entities under common
control. The Tribe is the sole owner of the IMG Resort and Casino. The IMG
Resort and Casino is a separate legal entity from the Tribe and is managed
by a separate management board.
Casino Apache (the "Casino") offers Class III gaming as defined by the
Indian Gaming Regulatory Act, on the tribal land in Mescalero, New Mexico.
The Casino Apache Travel Center (the "Travel Center"), which opened for
business on May 22, 2003, also offers Class III gaming as defined by the
Indian Gaming Regulatory Act, on tribal land in Mescalero. The Inn of the
Mountain Gods (the "Inn") operated a 253-room resort hotel located on the
Tribe's reservation in Mescalero. The resort hotel has been demolished as
of April 30, 2003 and the construction of a new resort hotel and casino
(the "Resort Project") on the same site is in process and is scheduled for
completion in the fourth quarter of fiscal year 2005. Ski Apache operates a
ski resort within the Tribe's reservation in Mescalero and on the U.S.
Forest Service land. The IMG Resort and Casino's activities primarily
support the development and management efforts related to the new resorts.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the IMG Resort and Casino and its wholly-owned subsidiaries. All significant
intercompany accounts have been eliminated in consolidation. These consolidated
financial statements present only the consolidated financial position, results
of operations and cash flows of the IMG Resort and Casino and subsidiaries and
are not intended to present fairly the financial position of the Tribe and the
results of its operations and cash flows.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make
F-7
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates included in the
accompanying financial statements relate to the liability associated with the
unredeemed Apache Spirit Club points and the estimated lives of depreciable
assets and pension cost. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash includes cash on hand for change drawers and in the vault for daily
casino activities and cash on deposit with financial institutions in demand
accounts, savings accounts and short-term certificates of deposit. For
purposes of the statement of cash flows all cash accounts that are not
subject to withdrawal restrictions or penalties and all highly liquid debt
instruments purchased with an original maturity of three months or less are
considered to be cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents includes cash on deposit with
financial institutions in demand accounts, savings accounts and short-term
certificates of deposit that are subject to withdrawal restrictions (see
Note 3).
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of hotel and other non-gaming
receivables. The Resort maintains an allowance for doubtful accounts which
is based on management's estimate of the amount expected to be
uncollectible considering historical experience and the information
management obtains regarding the creditworthiness of the non-gaming
customer. The collectibility of these receivables could be affected by
future business or economic trends.
INVENTORIES
Inventories consist of food and beverage items, livestock and stables,
fuel, retail merchandise in the golf and pro shop, ski shop, gift shops and
other miscellaneous items, parts and supplies. All inventories are stated
at the lower of cost or market. Casino and Ski Apache inventories are
determined using the first-in, first-out method. The Inn's inventories are
determined using the average cost method.
DEFERRED FINANCING COSTS
Debt issuance costs incurred in connection with the issuance of the Project
financing are capitalized and amortized to interest expense using the
straight-line method over the stated maturity of the debt, which approximates
the effective interest method. Unamortized deferred financing costs totaled
$100,000 as of April 30, 2003 and $11,029,493 as of April 30, 2004. The
accumulated amortization related to this deferred financing cost was $0 and
$791,812 as of April 30, 2003 and 2004, respectively.
F-8
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented at historical cost, less
accumulated depreciation and amortization. Expenditures for additions,
improvements and replacements, including interest incurred during
construction of new facilities, are capitalized while maintenance and
repairs, which do not improve or extend the service lives of the respective
assets, are expensed as incurred. Interest incurred during the construction
period is capitalized at the borrowing rate for the related loan and is
amortized over the life of the related asset. Equipment sold, or otherwise
disposed of, is removed from the accounts with gains or losses on disposal
recorded in the statements of income.
Depreciation and amortization is provided over the estimated service lives
of the respective assets, using the straight-line method based on the
following useful lives:
Non-gamingequipment, furniture and other 3 - 15 years
Gaming equipment 5 - 7 years
Leasehold and land improvements, lake and golf course 5 - 30 years
Buildings, lifts and snowmaking equipment 10 - 50 years
IMPAIRMENT OF LONG LIVED ASSETS
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of such assets may
not be recoverable. In August 2001, the Financial Accounting Standards
Board issued during the year ended April 30, 2003, the Inn demolished a
substantial portion of the existing hotel building and began construction
of a new resort hotel and casino facility. Under the provisions of
Statement of Accounting Standards No. 144 ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), a long-lived asset to be
abandoned is disposed of when it ceases to be used. If an entity commits to
a plan to abandon a long-lived asset before the end of its previously
estimated useful life, depreciation estimates shall be revised to reflect
the use of the asset over its shortened useful life. As a result of the
demolition of the hotel, the adoption of SFAS 144 for the year ended April
30, 2003 resulted in an impairment of the demolished portion of the Inn's
hotel related property, plant and equipment of approximately $5,391,000,
which was recorded as depreciation expense in the accompanying consolidated
statements of income during fiscal 2003 (see Note 5).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued expenses, bank financing
facilities and capital lease obligations approximate fair value. The fair
market value of the IMG Resort and Casino's senior notes was $216,000 at
April 30, 2004, based on quoted market prices.
F-9
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONTRIBUTED CAPITAL
Contributed capital represents contributions from the Tribe and consists of
(i) cash to fund certain construction and development of the Resort
Project, (ii) forgiveness of debt from the Inn to the Tribe and (iii)
allocated pension costs related to the Mescalero Apache Tribe Defined
Benefit Plan (see Note 8).
REVENUES
In accordance with gaming industry practice, the Casino recognizes casino
revenue as the net win from gaming activities, which is the difference
between gaming wins and losses. Gaming revenues are net of accruals for
anticipated payouts of progressive slot jackpots and table games. Such
anticipated jackpot payments are reflected as current liabilities in the
accompanying consolidated balance sheets.
Revenues from food and beverage, rooms, recreation and other are recognized
at the time the related service or sale is completed. Revenues include the
retail value of food and beverages and other items which are provided to
customers on a reward basis.
PROMOTIONAL ALLOWANCES
The Casino periodically rewards rooms and other promotions, including
Apache Spirit Club points and gift certificates, to their customers. The
retail value of these promotional allowances are recognized by the Casino
as a reduction from gross revenue. The total promotional allowances
recognized by the Casino were approximately $784,000, $931,000 and
$1,437,000 for the years ended April 30, 2002, 2003 and 2004, respectively.
The Casino's Apache Spirit Club allows customers to earn "points" based on
the volume of their gaming activity. These points are redeemable for
certain complimentary services or merchandise. Points are accrued based
upon their historical redemption rate multiplied by the cash value or the
cost of providing the applicable complimentary services. The players club
points liability is included in accrued expenses and totaled approximately
$131,000 and $380,000 at April 30, 2003 and 2004, respectively.
Emerging Issues Task Force ("EITF") Issue No. 00-14, ACCOUNTING FOR CERTAIN
SALES INCENTIVES requires that discounts which result in a reduction in or
refund of the selling price of a product or service in a single exchange
transaction be recorded as a reduction of revenues. The resorts adopted
EITF 00-14 on April 30, 2001. The Casino's accounting policy related to
free or discounted food and beverage and other services already complies
with EITF 00-14, and those free or discounted services are generally
deducted from gross revenues as "promotional allowances."
In January 2001, the EITF reached a consensus on certain issues related to
Issue No. 00-22, ACCOUNTING FOR POINTS AND CERTAIN OTHER TIME-BASED OR
VOLUME-BASED SALES INCENTIVE OFFERS, AND OFFERS FOR PREPRODUCTS OR SERVICES
TO BE DELIVERED IN THE FUTURE. On October 1, 2001, the Resorts adopted EITF
00-22, which requires that cash or equivalent amounts provided or returned
to customers as part of a transaction not be shown as an expense, but
instead as an offset to the related revenue. The Resorts offer cash
equivalent rewards in certain circumstances and has reflected approximately
$623,000, $837,000 and $1,288,000 for the fiscal years ended April 30,
2002, 2003 and 2004, respectively, in the promotional allowance as an
offset to gaming revenues for these incentives.
F-10
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The estimated cost of providing such complimentary allowances, as they
relate to the Casino, was included in casino expenses as follows:
Year Ended April 30,
2002 2003 2004
----------- ----------- -----------
Rooms $ $ 226,181 $ 175,133 $ -
Food and beverage 31,428 231,131 40,475
Other 19,970 17,617 22,169
----------- ----------- -----------
$ 277,579 $ 423,881 $ 62,644
=========== =========== ===========
COMPENSATED ABSENCES
Compensated absences are included in accrued expenses. The personnel
policies allow the workforce to accrue annual leave as follows:
o One week of annual leave after one year of employment.
o Two weeks of annual leave after two years of employment.
o Three weeks of annual leave after three years of employment.
o Four weeks of annual leave after fifteen years of employment.
Except for personnel at Ski Apache, annual leave may be accumulated by all
personnel up to a maximum of 120 hours or 160 hours for fifteen-year
employees. Any annual leave accrued above these limits is forfeited. Due to
the seasonality of the Ski Apache's business, Ski Apache's policy requires
all accrued annual leave to be taken by the end of the Tribe's fiscal
year-end, or it is forfeited. Personnel may be compensated for accrued
annual leave only upon termination.
Sick leave is accrued at 2.1 hours per pay period after 90 days of
employment and 3.1 hours after three years of employment. Personnel are not
compensated for accrued sick leave on termination. Accordingly, the
compensated absence accrual does not include a provision for sick leave.
PRE-OPENING COSTS AND EXPENSES
Pre-opening costs and expenses consist principally of direct incremental
personnel costs, training costs and payroll costs for retaining the
employees of the Inn during the fiscal year 2003 construction period. In
accordance with the American Institute of Certified Public Accountants'
Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES,
pre-opening costs and expenses are expensed as incurred.
ADVERTISING COSTS
The IMG Resort and Casino's advertising costs are expensed as incurred and
are included as general and administrative expenses in the accompanying
consolidated statements of income. Advertising costs for the years ended
April 30, 2002, 2003 and 2004 were approximately $615,000, $696,000 and
$1,426,000, respectively.
F-11
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
TRIBAL TAXES
The Resorts are subject to tribal taxes as long as the enterprises are not
subject to New Mexico Gross Receipts Tax. Ski Apache is subject to New
Mexico Gross Receipts Tax. A tribal tax charge of 10.75% of room revenue,
6.75% of food and beverage revenue, and 6.5% of other revenue is accrued
monthly and is payable to the Tribe. The Tribe uses these funds to
reimburse the Inn for advertising costs. The Resorts have recorded
approximately $- and $200,000 for tax payable to the Tribe as of April 30,
2003 and 2004. The amounts are recorded as an accrued expense in the
accompanying consolidated balance sheets. The Tribe re-classified
approximately $2,553,000 of tax payable from the Inn to equity contribution
to the Inn as of April 30, 2003 to reflect the forgiveness of the tax
payable.
INCOME TAXES
As an unincorporated enterprise of the Tribe, the IMG Resort and Casino and
the Resorts are exempt from federal and state income taxes.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). The key provision of SFAS 145, which may affect
IMG Resort and Casino and the Resorts, rescinds the existing rule that all
gains or losses from the extinguishments of debt should be classified as
extraordinary items. Instead, such gains and losses must be analyzed to
determine if they meet the criteria for extraordinary item classification
based on the event being both unusual and infrequent. Prior period gains
and losses must be analyzed to determine if they meet the criteria to be
classified as extraordinary items. If they fail the criteria, prior period
gains and losses must be reclassified. IMG Resort and Casino and the
Resorts adopted SFAS 145 on May 1, 2003 and they did not have a material
impact on the consolidated financial position, results of operations or
cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002;
while the provisions of the disclosure requirements are effective for
financial statements of interim or annual reports ending after December 15,
2002. At April 30, 2004, the IMG Resort and Casino had no indirect
guarantees outstanding. The IMG Resort and Casino has adopted FIN 45, which
has no material effect on the consolidated financial statements.
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Resorts maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments,
which results in bad debt expense. The Resorts determine the adequacy of
this allowance by periodically evaluating individual non-gaming customer
receivables and considering the Resorts' non-gaming customers financial
condition, credit history and current economic conditions. If the financial
condition of non-gaming customers were to deteriorate, resulting in an
impairment of their ability to make payments, the Resorts may increase the
allowance.
F-12
The allowance for doubtful accounts and bad debt expense is as follows at
April 30:
2003 2004
----------- -----------
Allowance, beginning of year $ 3,448 $ 3,448
Bad debt expense 16,548 -
Write-offs (16,548) -
----------- -----------
Allowance, end of year $ 3,448 $ 3,448
=========== ===========
NOTE 3 - RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash consists of the Compulsive Gambler Fund and various funds
held for the construction project. The balances were $475,249 and
$133,297,243 at April 30, 2003 and 2004, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following at April 30:
2003 2004
----------- -----------
Food and beverage $ 263,066 $ 219,628
Golf and pro shop 121,925 132,936
Gift shops, fuel and other 470,538 616,021
----------- -----------
Total inventories $ 855,529 $ 968,585
=========== ===========
F-13
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows at April 30:
2003 2004
----------- -----------
Land $ 538,894 $ 538,894
Buildings, lifts and snowmaking equipment 25,702,414 39,287,564
Non-gaming equipment, furniture and other 20,772,051 25,498,837
Gaming equipment 7,250,967 11,370,236
Leasehold and land improvements, lake and golf course 5,541,108 6,480,058
----------- -----------
Subtotal 59,805,434 83,175,589
Less accumulated depreciation and amortization 41,396,363 46,281,098
----------- -----------
Property, plant and equipment, net 18,409,071 36,894,491
Construction in progress 29,847,569 113,435,012
------------- -----------
$48,256,640 $150,329,503
============= ============
The IMG Resort and Casino capitalized $168,000 and $7,892,314 of interest
cost related to construction of the Travel Center and Resort Project during
fiscal years 2003 and 2004, respectively.
NOTE 6 - LONG-TERM DEBT
On November 3, 2003, IMG Resort and Casino issued $200.0 million of its 12%
Senior Notes (the "Notes"). IMG Resort and Casino is using the proceeds of
these notes to pay, in part, construction cost of the Resort Project, to
repay a $19.0 million revolving credit agreement with Citicorp North
America, Inc. and to pay the costs of the offering. The Notes bear interest
at 12% per year, payable on May 15 and November 15 of each year, beginning
on May 15, 2004. The Notes will mature on November 15, 2010. The Notes may
be redeemed at any time on or after November 15, 2007 at fixed redemption
prices plus accrued and unpaid interest, if any. If a change in control
occurs, holders of the notes will have the right to require the repurchase
of their Notes at a price equal at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any. The Notes are guaranteed by the
Resorts.
Until completion of the resort project, the Notes and guarantees are
secured by a first priority security interest in certain collateral
accounts and bank accounts of IMG Resort and the guarantors, which had an
aggregate balance of approximately $133 million at April 30, 2004. The
Notes will, after completion of the resort project, be the general
unsecured obligations of IMG Resort and Casino and will rank equal in
rights of payment to all of its existing future and senior unsecured
obligations and senior in right of payment to any obligations that are by
their terms subordinated to the Notes and are effectively subordinated to
its secured obligations to the extent of the assets securing those
obligations.
The indenture governing the Notes contains covenants that limit, among
other things, IMG Resort and Casino and the guarantors' ability to pay
dividends and make distributions to the Tribe; make investments; incur
additional debt or types of debt; create liens; sell equity interests in
subsidiaries; enter into transactions with affiliates; enter into sale and
leaseback transactions; engage in other businesses; transfer or sell
assets; and merge or consolidate with or into other entities
F-14
NOTE 6 - LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as of April 30 as follows:
2003 2004
------------ ------------
Senior Notes, bearing interest at a fixed
rate of 12%, maturing in 2010 $ - $ 200,000,000
Bureau of Indian Affairs, unsecured notes payable
with payments of $27,100 per month, including
interest at 8.5%, maturing in 2011. $ 1,861,650 $ 1,744,651
Citicorp North America Inc., revolving
credit agreement of $50 million, bearing
interest at the 12 month LIBOR (2.42% as
of April 30, 2003) plus 1%, maturing on
December 31, 2003. 5,000,000 -
Various notes payable with payments ranging
from $3,603 to $21,900 per month, plus accrued
interest ranging from 4.25% to 10%, maturing between
2001 and 2004. 591,809 201,943
------------ ------------
7,453,459 201,946,594
Less current portion 5,765,427 252,053
------------ ------------
Long-term portion $ 1,688,032 $ 201,694,541
============ ============
The maturities of long-term debt as of April 30, 2004 are as follows:
Year Ending April 30:
2005 $ 252,053
2006 205,667
2007 223,847
2008 243,633
2009 265,519
Thereafter 200,755,875
-------------
$201,946,594
=============
Total interest costs were $196,022, $167,968 and $13,144,001 for the year
ended April 30, 2002, 2003 and 2004, respectively, of which $167,968 and
$7,892,314 was capitalized as of April 30, 2003 and 2004, respectively.
NOTE 7 - GAMING REVENUES SHARING AND REGULATORY FEES
The Tribe regulates the Resort's gaming activities through the Mescalero
Apache Tribe Gaming Regulatory Commission, an agency of the Tribe (the
"Commission"). The Commission reports directly to the Tribal Council. A
regulatory fee is paid to the Tribe as reimbursement for the cost of
regulating the gaming activities. The Casino also pays a federal regulatory
fee. All tribal and federal regulatory fees have been paid when due.
F-15
NOTE 7 - GAMING REVENUES SHARING AND REGULATORY FEES (CONTINUED)
On August 29, 1997, the Tribe and the State of New Mexico (the "State")
entered into a Tribal-State Compact (the "Compact") to govern gaming on the
Mescalero Apache Reservation. The terms of the Compact subject the Casino
to various regulatory fees and revenues sharing payable to the State. Among
the provisions of the Compact are requirements for quarterly revenues
sharing payments consisting of 16% of the net win from video gaming and
quarterly regulatory fees assessed on the number of gaming facilities, the
number of gaming machines and the number of gaming tables and other
devices. The Tribe has challenged the legality of these fee arrangements,
claiming them to be an illegal tax on Indian gaming under the Indian Gaming
Regulatory Act.
On April 20, 2004, the Tribe and the State of New Mexico entered into a
settlement agreement which resolved all of their disputes regarding the
1997 Compact. Under the settlement agreement, the State of New Mexico and
the Tribe agreed that they would enter into a new gaming compact, the 2001
Compact, and that the Tribe would pay the State of New Mexico $25.0 million
in full settlement of all revenue sharing and regulatory fees payable under
the 1997 Compact as well as all revenue sharing fees payable under the 2001
Compact through March 2005. On April 20, 2004, we paid an initial payment
of $2.0 million pursuant to the terms of the settlement agreement.
The 2001 Compact provides for a revenue sharing amount equal to 8% of "net
win" from gaming machines, payable no later than 25 days after the last day
of each calendar quarter and an annual regulatory fee of $100,000, paid in
quarterly installments of $25,000 on the first day of each calendar
quarter. Pursuant to the terms of the settlement agreement, we will begin
incurring revenue sharing payments to the State of New Mexico at the rate
of 8% of "net win" pursuant to the 2001 Compact in March 2005, with our
first revenue sharing payment under the 2001 Compact due in July 2005. In
addition, pursuant to the terms of the settlement agreement, we will begin
incurring regulatory fees, at the rate of $100,000 per year, from the date
the approval of the 2001 Compact is published in the Federal Register with
our first payment for regulatory fees under the 2001 Compact due on the
first day of the first full calendar quarter thereafter. On June 1, 2004,
the Tribe and the State of New Mexico entered into the 2001 Compact. On
July 22, 2004, the Department of Interior approved the 2001 Compact. We
will make the remaining $23.0 million payment required under the settlement
agreement within ten business days after the Department of Interior
publishes notice in the Federal Register of the affirmative approval of the
2001 Compact. As a result of the settlement with the State, expense and the
liability for accrued revenue sharing and regulatory fees has been reduced
by $27,136,255 for the year ended and as of April 30, 2004.
NOTE 8 - DEFINED BENEFIT PENSION PLAN
IMG Resort and Casino and the Resorts participate in the Mescalero Apache
Tribe Defined Benefit Plan (the "Plan"), a single-employer defined benefit
pension plan that covers substantially all full-time employees of the
Tribe. Individuals who provide services to IMG Resort and Casino and the
Resorts are employees of the Tribe and participate in the Plan. The Tribe
is the Plan sponsor and handles all administration and funding of the Plan.
The Tribe reserves the right to amend any or all provisions of the Plan.
Changes to Plan provisions and contribution requirements must be approved
by the Tribal Council. The Plan provides retirement, disability and death
benefits to plan members and beneficiaries.
The Tribe, upon advice from legal counsel, has determined that the Plan is
a "governmental plan" as described in Section 414(d) of the Internal
Revenue Code ("IRC"). As such, the Plan is exempt from many of the
requirements placed on qualified plans, including (but not limited to) the
reporting and disclosure requirements of ERISA, coverage under the Pension
Benefit Guaranty Corporation ("PBGC") and the minimum and maximum funding
requirements of IRC Sections 412 and 404.
No separately prepared financial statements of the plan are available.
F-16
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
EFFECTIVE DATE AND PLAN YEAR
The Plan was established effective January 1, 1976, with the latest plan
restatement effective January 1, 1998. The Plan year end is December 31,
while IMG Resort and Casino and the Resort's fiscal year ends April 30 and
the Tribe's fiscal year ends September 30.
ELIGIBILITY
Each employee is eligible to become a participant in the plan on January
1st or July 1st immediately following completion of one year of service in
which the employee completes at least 1,000 hours of service.
SERVICE
Service credited for benefit and vesting purposes is defined as the number
of the plan years in which the employee completes at least 1,000 hours of
service, subject to certain break in service rules. Service prior to the
1976 plan year shall be based on continuous service, with a full year
credited for each year in which the participant was employed for at least
one hour.
COMPENSATION
Compensation for a plan purposes is defined as W-2 compensation paid to an
employee by the employer. A participant's annual compensation for plan
purposes is limited consistent with Internal Revenue Code Section
401(a)(17).
NORMAL RETIREMENT
CONDITION
The normal retirement date is the January 1 coincident with or next
following the participant's 65th birthday.
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
BENEFIT
The normal retirement benefit, 1/12th of which is payable monthly for the
life of the participant, is equal to the sum of the following:
o 1.20% of average earnings multiplied by the participant's years of
benefit service limited to 30 years, plus
o .65% of average earnings in excess of $9,996, multiplied by the
participant's years of benefit service not in excess of 30 years.
"Average earnings" is the average annual compensation of a participant for
the five consecutive plan years that produce the highest average.
ACCRUED BENEFIT
The accrued benefit is the monthly benefit with payments beginning at
normal retirement, which has been earned due to compensation and benefit
service as of any determination date. The accrued benefit is payable for
the life of the participant and is computed in the same manner as for
normal retirement, using the participant's average earnings and benefit
service as of the date of determination.
F-17
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
LATE RETIREMENT
CONDITION
A participant may choose to postpone their retirement beyond their normal
retirement date, in which event no benefit shall be payable until actual
retirement.
BENEFIT
The participant's benefit, commencing on the January 1 following the actual
date of retirement, shall be greater of the actuarial equivalent of the
benefit the participant would have received at their normal retirement
date, and the benefit computed using the participant's compensation and the
benefit service earned after the normal retirement date.
DISABILITY RETIREMENT
CONDITION
If a participant becomes totally and permanently disabled, as demonstrated
by the receipt of Social Security benefits, the employee will be entitled
to receive a disability retirement benefit.
BENEFIT
The participant shall receive the single sum actuarial equivalent value of
their accrued benefit determined as of the January 1 following the
participant's termination of employment due to disability.
DEATH BEFORE RETIREMENT
CONDITION
In the event of death of a participant after becoming eligible for a vested
benefit under the Plan, and while either (i) actively employed by the
employer, or (ii) on deferred vested status but prior to receiving any
retirement benefits, a death benefit shall be payable to the participant's
named beneficiary.
F-18
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
BENEFIT
The death benefit shall be the single sum actuarial equivalent of the
participants accrued benefit determined as of the participant's date of
death.
MINIMUM DEATH BENEFIT
A monthly benefit is payable on the first day of the calendar month
following the participant's date of death or the earliest date the
participant could have elected benefit payments to commence, whichever is
later, and continuing for the lifetime of the surviving spouse. The benefit
is determined as 50% of the benefit the participant would have received if
the participant had terminated employment the day before his death (or on
his actual date of termination if earlier), had lived to the benefit
commencement date, and elected an immediate joint and 50% to survivor
benefit. The value of any other death benefit provided under the Plan shall
be reduced by the value of this surviving spouse benefit.
TERMINATION OF EMPLOYMENT
CONDITION
If a participant terminates employment after completing 3 or more years of
vesting service, participant is entitled to a deferred vested benefit with
payment commencing on their normal retirement date.
F-19
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
BENEFIT
The amount of the benefit is calculated as the product of a vesting
percentage and the accrued benefit determined as of the participant's date
of termination. The vesting percentage is determined from the following
table:
Years of Vesting Vesting
Service Percentage
--------------------- -------------
Less than 3 0%
3 20
4 40
5 60
6 80
7 or more 100
If employment is otherwise terminated before retirement, no benefits are
provided under the Plan.
ACTUARIAL EQUIVALENCE
Actuarial equivalent values shall be computed based on the 1971 Individual
Annuitant Mortality Table, male rates offset 2 years, with a pre-retirement
interest rate of 5.5% and a post-retirement interest rate of 5%. For lump
sum amounts only, the PBGC interest rates in effect as of the first date of
the Plan year in which the calculation is made are used if a higher benefit
results. Notwithstanding the foregoing, if a lump sum amount is greater
than $25,000, the lump sum shall be determined using 120% of the PBGC rates
in effect as of the first day of the plan year in which the calculation is
made, but shall be no less than $25,000.
PLAN EXPENSES
All expenses of the Plan are paid by the Tribe. Allocated pension expenses
totaled $1,331,088, $1,631,828 and $1,886,333, for the years ended April
30, 2002, 2003 and 2004, respectively. Until September 2003, such costs
were not required to be reimbursed to the Tribe and therefore have been
accounted for as contributed capital.
CONTRIBUTIONS TO THE PLAN
Upon retirement, the Tribe contributes actuarially determined amounts to
fund retirement benefits. No contributions by participating employees are
required.
FUNDING POLICY
The Plan provides that Guaranteed Retirement Annuity Contracts (guaranteed
interest contracts) are purchased to provide retirement benefits to
participants. Funding to purchase contracts is based upon actuarially
determined deposits made by the Tribe.
F-20
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
Although the Tribe has determined that it is not subject to Internal
Revenue Code Section ("IRC") 412 regarding funding, the annual funding
according to the latest actuarial valuation at January 1, 2000, was based
on this criteria. The contribution rate is based on a pay-as-you-go basis
and, therefore, there is no set contract contribution rate. No
contributions have been made by the Tribe, or billed to any of the
enterprises, for any year ended through 2003.
The Plan requires an actuarial valuation every three years. The latest full
actuarial valuation was performed as of January 1, 2000 and was updated
with current assumptions by the actuary as of January 1, 2001, 2002 and
2003. Census data from the January 1, 2000 actuarial valuation was used for
these projections. Liabilities were then projected to the end of each
disclosure year, taking into account additional liabilities for new
participants based on the liability for participants first considered in
the 2000 actuarial valuation. Since actual census data was not used in
valuation for period from December 31, 2000 through January 1, 2003, actual
cost and liability may significantly differ from the amounts projected and
disclosed below.
The Tribe has the ability to request reimbursement for costs related to the
periodic pension cost from IMG Resort and Casino and the Resorts if it
should choose to do so; however, no such requests have been made. The Tribe
has also represented that a request for reimbursement of such costs would
not be made in the future related to prior years.
FUNDING STATUS AND PROGRESS
The amount shown below as the "pension benefit obligation" is a
standardized disclosure measure of the present value of pension benefits
adjusted for the effects of projected salary increases estimated to be
payable in the future as a result of employee service to date. The measure
is intended to help users assess the funding status of the Plan on a
going-concern basis, and to assess progress made in accumulating sufficient
assets to pay benefits when due. The measure is the actuarial present value
of credited projected benefits and is independent of the funding method
used to determine contributions to the Plan. The amounts may be
significantly different up on the next full actuarial valuation.
The Plan's funded status as of January 1 consist of:
2002 2003
------------- -------------
Actuarial present value of accumulated
plan benefits:
Vested $ 14,050,989 $ 18,318,552
Nonvested 1,394,597 2,069,634
------------- -------------
$ 15,445,586 $ 20,388,186
============= =============
2002 2003
------------- -------------
Accrued pension costs:
Projected benefit obligation $(20,852,106) $ (26,893,541)
Plan assets at fair value 1,882,774 1,434,904
------------- -------------
Funded status (18,969,332) (25,458,637)
Unrecognized net loss 8,224,899 11,200,615
------------- -------------
Accrued pension cost $(10,744,433) $ (14,258,022)
============= =============
F-21
NOTE 8 - DEFINED BENEFIT PENSION PLAN (CONTINUED)
2002 2003
------------- -------------
The net pension expense consists of:
Service cost $ 1,563,881 $ 1,776,505
Interest cost 1,256,082 1,503,361
Expected return on plan assets (188,960) (141,334)
Amortization of net loss 297,271 375,057
------------- -------------
Periodic pension cost $ 2,928,274 $ 3,513,589
============= =============
Pension cost allocated to IMG Resort
and Casino $ 1,331,088 $ 1,631,829
============= =============
Under the terms of an agreement with the Tribe executed in 2003, the Resort
pays a fixed amount of 9.75% of salaries and wages as a fixed contribution
to the retirement plan. The total pension expense under this agreement for
the fiscal year ended April 30, 2004 was $1,886,333.
Significant assumptions used in the January 1, 2002 and 2003 valuation are
as follows: the weighted average discount rates used in determining the
actuarial present value of accumulated plan benefits were 7.25%, 6.75%,
respectively; the rate of compensation increase used to measure the
projected benefit obligation was 3% for both years; the weighted average
expected long-term rate of return on plan assets was 8% for both years.
NOTE 9 - RISK MANAGEMENT
The IMG Resort and Casino manages the exposure to the risk of most losses
through various commercial insurance policies. There have been no
reductions in insurance coverage. Settlement amounts have not exceeded
insurance coverage for 2002, 2003 and 2004, respectively.
The Tribe is self-insured for employee health and accident insurance. The
IMG Resort and Casino's employees are covered by this plan and remit
amounts to the Tribe for their share of the self-insurance costs. The total
amount reimbursed to the Tribe were approximately $549,000, $647,000 and
$902,000 for 2002, 2003 and 2004, respectively.
The Tribe maintains worker's compensation insurance coverage under a
retrospective rated policy whereby premiums are accrued based on the loss
experience of the Tribe and its various enterprises. The IMG Resort and
Casino's and the Resorts' employees are covered under this plan. Under this
policy, premiums may be adjusted at the end of the coverage period based on
loss experience for the coverage period. Management of the Tribe, the IMG
Resort and Casino and the Resorts have not provided an estimate for losses
that may result in premium adjustments at the end of the coverage period.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
The IMG Resort and Casino and the Resorts are involved in various legal
actions incident to their operations that, in the opinion of management,
will not materially affect the IMG Resort and Casino's financial position
or the results of its operations.
F-22
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OCCUPANCY FEE
A special use permit was obtained from the United States Department of
Agriculture Forest Service for Ski Apache's use of 80 acres of land in
Lincoln National Forest. The permit is dated April 23, 1985, and has a term
of 30 years with a quarterly occupancy fee based on revenue and gross fixed
assets. Occupancy fee for the years ended April 30, 2002, 2003 and 2004
totaled approximately $111,800, $121,000 and $130,000, respective1y.
CONSTRUCTION AGREEMENT
In February 2002, the Tribe entered into a construction agreement for the
development of the Travel Center and the new Hotel and Casino on behalf of
the IMG Resort and Casino. Estimated construction cost is approximately
$149,720,000 and as of April 30, 2004, IMG Resort and Casino had
outstanding construction commitments of approximately $39.0 million.
NOTE 11 - RELATED-PARTY TRANSACTIONS
The Tribe operates other entities and enterprises in various industries,
including telecommunication, timber and forest products, gas and convenience
store; in addition, the Tribe has a housing authority, school and nursing
facility. Financial results of the Tribe and its other enterprises and entities
are not included in these consolidated financial statements.
The IMG Resort and Casino uses Mescalero Apache Telecommunications for some
its telecommunications related services. The IMG Resort and Casino paid
Mescalero Apache Telecommunications approximately $126,200, $152,200 and
$289,000 for the years ended April 30, 2002, 2003 and 2004, respectively, for
such services.
In addition to the amounts due to the Casino from the Tribe in connection
with revenues sharing and regulatory fees (see Note 7), there were no amounts
due to the Tribe from the Resorts at April 30, 2003 and 2004. The Tribe
reclassified $6,890,716 due from the Resorts as an equity contribution and
$1,193,833 due to Ski Apache from the Tribe as an equity distribution as of
April 30, 2003, in connection with the reorganization (see Note 1).
F-23
NOTE 12 - OPERATING SEGMENTS
The IMG Resort and Casino has five operating segments. Gaming, Hotel, Ski ,
Resort Management and Travel Center. The Gaming segment information
includes the activities of the Casino. The Hotel segment information
includes the activities of the Inn, hunting, golf, fishing and horseback
riding. The Ski Apache segment includes the activities of Ski Apache.
Resort/Holding Company Operations includes the activities of the IMG Resort
and Casino and the pre-opening activities of the Casino and the Inn. The
Travel Center which opened in May 2003 includes the pre-opening activities.
These operating segments represent distinct business activities, which are
managed separately.
Resort/ Travel
Holding Center
2002 Gaming Hotel Ski Co. Operations
Operations Operations Operations Operations Eliminations Total
------------------- ---------- ---------- ---------- ---------- ------------- ----------
Net revenue $42,644,693 $19,112,047 $9,429,456 $ - $ - $ (9,000,000) $ 62,186,196
Income from
operations 8,777,733 7,952,473 2,648,548 - - - 19,378,754
Segment assets 60,944,479 20,248,720 15,489,333 - - (14,176,098) 82,506,434
F-24
NOTE 12 - OPERATING SEGMENTS (CONTINUED)
Resort/
Holding Travel
2003 Gaming Hotel Ski Co. Center
Operations Operations Operations Operations Operations Eliminations Total
------------------- ---------- ---------- ---------- ---------- ------------- -------------
Net revenue $ 47,636,772 $13,261,039 $10,604,500 $ - $ - $ (5,250,000) $ 66,252,311
Income from
operations 13,056,515 (1,682,758) 2,932,412 - (62,584) - 14,243,585
Segment
assets 4,829,867 10,882,615 14,032,654 29,814,295 - (59,430) 59,500,001
Resort/
Holding Travel
2004 Gaming Hotel Ski Co. Center
Operations Operations Operations Operations Operations Eliminations Total
------------------- ---------- ---------- ---------- ---------- ------------- -------------
Net revenue $33,136,364 $ 2,146,082 $8,138,252 $ (750,941) $ 38,256,728 $ - $ 80,926,485
Income (loss)
from operations 36,176,134 (1,254,844) 1,371,554 (12,327,251) 19,971,613 - 43,937,206
Segment
assets 16,903,688 8,985,424 13,506,463 299,476,501 30,830,402 (53,492,506) 316,209,972
NOTE 13 - SUBSEQUENT EVENTS
On June 15, 2004, we entered into a $15.0 million credit facility with Key
Equipment Finance, a Division of Key Corporate Capital Inc., one of the
nation's largest financial services firms. The fixed rate loan is fully
amortizable over five years and bears an interest rate indexed off the
3-year Treasury Interest Rate Swaps. Proceeds from the loan will be used to
fund furniture, fixtures and equipment for the Project.
NOTE 14 - CONSOLIDATING INFORMATION
In connection with IMG Resort and Casino's issuance in November 2003 of
$200,000,000 of 12% senior notes, IMG Resort and Casino and the Resorts (the
"wholly owned Guarantors") have, jointly and severally, fully and
unconditionally guaranteed the 12% senior notes. These guarantees are secured
only until the completion of the Resort Project and thereafter unsecured and
subordinated in right of payment to all existing and future indebtedness
outstanding and any other indebtedness permitted to be incurred by IMG Resort
and Casino under the terms of the indenture agreement for the 12% senior
subordinated notes.
Pursuant to Rule 3-10 of Regulation S-X, the following consolidating information
is for IMG Resort and Casino and the wholly-owned Guarantors of the 12% senior
notes. This consolidating financial information has been prepared from the books
and records maintained by IMG Resort and Casino and the wholly-owned Guarantors.
The consolidating financial information may not necessarily be indicative of
results of operations or financial position had the wholly owned Guarantors
operated as independent entities. The separate financial statements of the
wholly-owned Guarantors are not presented because management has determined they
would not be material to investors.
F-25
NOTE 14 - CONSOLIDATING INFORMATION (CONTINUED)
The Resorts are wholly owned subsidiaries of IMG Resort and Casino. IMG Resort
and Casino was established on April 2, 2003 for the purpose of managing the
Resorts. The following consolidating information is presented as of and for the
year ended April 30, 2004 and 2003 as the IMG Resort and Casino did not exist
prior to April 2, 2003 (see Note 1).
CONSOLIDATING BALANCE SHEETS
AS OF APRIL 30, 2004
Guarantor
IMGRC Subsidiaries Eliminations Consolidated
------------- ------------- ------------ ------------
Cash and cash equivalents $ - $ 15,794,943 $ - $ 15,794,943
Restricted cash and cash equivalents 132,763,729 533,514 - 133,297,243
Accounts receivable, net - 32,566 - 32,566
Inventories 4,869 963,716 - 968,585
Prepaid Revenue Sharing - 4,218,673 - 4,218,673
Prepaid other 55,805 406,249 - 462,054
Deferred financing cost, net 1,625,244 - - 1,625,244
Total current assets 134,449,647 21,949,661 - 156,399,308
Advances to Affilates 12,869,591 10,982,198 (23,851,790) -
Property, plant and equipment, net 113,112,297 37,217,206 - 150,329,503
Long-term deferred financing expenses, net 9,404,249 - - 9,404,249
Other long-term assets - 76,912 - 76,912
Investment in subsidiaries 29,640,717 - (29,640,717) -
-------------- ------------- ------------- -------------
Total Assets $299,476,501 $ 70,225,977 $(53,492,507) $316,209,972
============== ============= ============= =============
Accounts Payable and other short term
liabilities $ - $ 612,873 $ - $ 612,873
Construction in progress acounts
payable 13,609,367 - - 13,609,367
Accrued expenses 977,306 4,342,424 2,331 5,322,061
Accrued revenue sharing and regulatory
fees - 23,000,000 - 23,000,000
Accrued interest
12,000,000 48,378 - 12,048,378
Deposits and advance payments - 667,100 - 667,100
Current portion of long-term debt - 252,053 - 252,053
-------------- ------------- ------------- -------------
Total current liabilities 26,586,673 28,922,828 2,331 55,511,832
Advances from affiliates 13,886,229 9,967,892 (23,854,121) -
Long-term debt, net of current portion 200,000,000 1,694,541 - 201,694,541
-------------- ------------- ------------- -------------
Total liabilities 240,472,902 40,585,258 (23,851,790) 257,206,371
Contributed Capital 56,113,676 20,166,161 20,166,161) 56,113,676
Current Year Net income (Loss) 39,744,883 56,404,793 (56,404,793) 39,744,883
Retained equity (36,854,960) (46,930,237) 46,930,237 (36,854,960)
------------ ------------ ------------- --------------
Total equity 59,003,599 29,640,717 (29,640,717) 59,003,599
----------- ------------ ------------ --------------
Total liabilities and equity 299,476,501 70,225,975 (53,492,507) 316,209,970
=========== ============ ============ ==============
F-26
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED APRIL 30, 2004
Guarantor
IMGRC Subsidiaries Eliminations Consolidated
------------- ------------- ------------ -------------
Revenues:
Gaming $ - $ 60,277,052 $ - $ 60,277,052
Food and Beverage 5,691 5,608,982 - 5,614,672
Rooms - - - -
Recreation and other 70 16,471,820 - 16,471,890
------------- ------------- ------------ -------------
Gross Revenue 5,761 82,357,854 - 82,363,614
Less - Promotional Allowances 756,701 680,428 - 1,437,129
Net Revenue (750,940) 81,677,426 - 80,926,485
Operating Expenses
Gaming 2,157,633 23,248,028 - 25,405,661
Reversal of accrued fees - (27,136,255) - (27,136,255)
Food and Beverage 704,864 5,882,608 - 6,587,472
Rooms - 119,722 - 119,722
Recreation and other 471,800 10,229,699 - 10,701,499
General and administrative 5,866,274 3,171,541 - 9,037,815
Insurance 157,333 745,288 - 902,621
Pension 410,231 1,476,102 - 1,886,333
Tribal Regulatory 505,032 687,979 - 1,193,011
Mescalero Phone 40,006 249,176 - 289,182
Pre-opening 1,263,138 1,808,844 - 3,071,982
Depreciation - 4,930,236 - 4,930,236
------------- ------------- ------------ -------------
Total Operating Expenses 11,576,311 25,412,968 - 36,989,279
------------- ------------- ------------ -------------
Operating Income (12,327,251) 56,264,458 - 43,937,206
Other Income (Expense)
Interest Income 767,698 33,567 - 801,266
Interest Expense (5,100,317) (151,370) - (5,251,687)
Income from subsidiaries 56,404,753 - (56,404,753) -
Other Income - 258,098 - 258,098
------------- ------------- ------------ -------------
Total Other Income (Expense) 52,072,134 140,295 (56,404,753) (4,192,323)
------------- ------------- ------------ -------------
Net Income $ 39,744,883 $ 56,404,753 $(56,404,753) $ 39,744,883
============= ============= ============ ==============
F-27
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30, 2004
Guarantor
IMGRC Subsidiaries Eliminations Consolidated
Cash flows from operating activities:
Net income $39,744,883 $56,404,753 $(56,404,753) $39,744,833
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - 4,930,236 - 4,930,236
Gain on sale of property, plant and equipment -
Changes in assets and liabilities:
Restricted cash and cash equivalents - (58,265) - (58,265)
Accounts receivable, net of allowance 75,635 67,461 - 143,096
Inventories (4,869) (108,187) - (113,056)
Prepaid revenue sharing fees 4,448 (4,223,121) - (4,218,673)
Prepaid expenses - (173,056) - (173,056)
Other long term assets - (60,911) - (60,911)
Accounts payable - (797,598) - (797,598)
Accrued expenses - 3,571,823 - 3,571,823
Accrued revenue sharing and regulatory fees - (16,821,082) - (16,821,082)
Accrued interest payable 12,000,000 48,378 - 12,048,378
Deposits and advance payments - (82,408) - (82,408)
------------ ------------ ------------ ------------
Net cash provided by operating
activities 51,820,097 42,698,023 (56,404,753) 38,113,367
------------ ------------ ------------ ------------
Cash flows from investing activities:
Investment in subsidiaries (56,404,753) - 56,404,753 -
Purchase of property, plant and equipment (101,301,951) 752,297 - (100,549,654)
------------ ------------ ------------ ------------
Net cash used by investing activities (157,706,704) 752,297 56,404,753 (100,549,654)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Deferred financing costs (10,929,493) - - (10,929,493)
Cash held for construction payments (132,763,729) - - (132,763,729)
Cash proceeds from the issuance of notes 200,000,000 - - 200,000,000
Principal borrowings (payments) on
long-term debt, net - (5,506,865) - (5,506,865)
Distributions to Mescalero Apache Tribe - (13,170,204) - (13,170,204)
Contributions from Mescalero Apache Tribe 49,568,542 (18,298,943) - 31,269,599
------------ ------------ ------------ ------------
Net cash used by (provided by)
financing activities 105,875,320 (36,976,012) - 68,899,308
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (11,287) 6,474,308 - 6,463,021
------------ ------------ ------------ ------------
Cash and cash equivalents, beginning of year 11,287 9,320,635 - 9,331,922
------------ ------------ ------------ ------------
Cash and cash equivalents, end of year $ - $15,794,943 $ - $15,794,943
============ ============ ============ ============
Supplemental cash flow information:
Cash paid for interest $ 60,115 $ - $ - $ 60,115
============ ============ ============ ============
Non-cash investing and financing activities:
Distributions to Mescalero Apache Tribe $ - $38,981,173 $ - $38,981,173
============ ============ ============ ============
Property, plant and equipment acquired through
increase of payables, net $ - $ 6,453,445 $ - $ 6,453,445
============ ============ ============ ============
Contribution from Mescalero Apache Tribe $ 328,618 $ 980,683 $ - $ 1,309,301
============ ============ ============ ============
F-28
CONSOLIDATING BALANCE SHEETS
AS OF APRIL 30, 2003
Guarantor
IMGRC Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,221 $ 9,302,701 $ - $ 9,331,922
Restricted cash and cash equivalents - 475,249 - 475,249
Accounts receivable - 175,662 - 175,662
Inventories 208,466 647,063 - 855,529
Prepaid expenses 15,785 273,214 - 288,999
Deferred financing costs 100,000 - - 100,000
----------- ------------ ------------- ------------
Total current assets 353,472 10,873,889 - 11,227,361
NON CURRENT ASSETS:
Liquor license - 16,000 - 16,000
Property, plant and equipment, net 29,460,823 18,795,817 - 48,256,640
INVESTMENT IN SUBSIDIARIES (15,782,894) - 15,782,894 -
----------- ------------ ------------- ------------
Total assets $14,031,401 29,685,706 $15,782,894 $59,500,001
=========== ============ ============= ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and other short term
liabilities $ - $ 1,410,471 $ - $ 1,410,471
Construction in Progress Accounts Payable 7,155,922 - - 7,155,922
Accrued expenses 136,062 1,614,176 - 1,750,238
Accrued revenue sharing and regulatory fees - 39,821,082 - 39,821,082
Deposits and advance payments - 749,508 - 749,508
Current portion of long-term debt 5,580,096 185,331 - 5,765,427
----------- ------------ ------------- ------------
Total current liabilities 12,872,080 43,780,568 - 56,652,648
NON CURRENT LIABILITIES:
Long-term debt, net of current portion - 1,688,032 - 1,688,032
----------- ------------ ------------- ------------
Total long-term debt - 1,688,032 - 1,688,032
Total liabilities 12,872,080 45,468,600 - 58,340,680
EQUITY:
Contributed capital 24,844,077 7,901,862 (7,901,862) 24,844,077
Retained deficit (23,684,756) (23,684,756) 23,684,756 (23,684,756)
----------- ------------ ------------- ------------
Total equity 1,159,321 (15,782,894) 15,782,894 1,159,321
----------- ------------ ------------- ------------
Total liabilities and equity $14,031,401 $29,685,706 $15,782,894 $59,500,001
=========== ============ ============= ============
F-29
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED APRIL 30, 2003
IMGRC Subsidiaries Eliminations Consolidated
------------ ------------ ----------- -------------
Revenues:
Gaming $ - $46,942,180 $ - $46,942,180
Food and beverage - 4,893,997 - 4,893,997
Rooms - 3,394,434 - 3,394,434
Recreation and other - 11,952,860 - 11,952,860
------------ ------------ ----------- -------------
Gross revenues - 67,183,471 - 67,183,471
Less - promotional allowances - 931,160 - 931,160
------------ ------------ ----------- -------------
Net revenue - 66,252,311 - 66,252,311
------------ ------------ ----------- -------------
Operating costs and expenses:
Gaming - 19,457,655 - 19,457,655
Food and beverage - 4,955,537 - 4,955,537
Rooms - 1,552,133 - 1,552,133
Recreation and other - 5,757,452 - 5,757,452
General and administrative - 6,500,909 - 6,500,909
Pension Cost - 1,631,828 - 1,631,828
Gaming and regulatory commission fees - 750,821 - 750,821
Self insurance costs allocated from - 647,000 - 647,000
the Tribe
Mescalero Apache Telecommunication - 152,200 - 152,200
Pre-opening costs and expenses - 1,389,967 - 1,389,967
Depreciation and amortization - 9,213,224 - 9,213,224
------------ ------------ ----------- -------------
Total operating expenses - 52,008,726 - 52,008,726
------------ ------------ ----------- -------------
Income from operations - 14,243,585 - 14,243,585
------------ ------------ ----------- -------------
Other income:
Interest income - 190,120 - 190,120
Other income - 170,984 - 170,984
------------ ------------ ----------- -------------
Total other income - 361,104 - 361,104
------------ ------------ ----------- -------------
Net Income $ - $14,605,689 $ - $14,604,689
============ ============ =========== =============
F-30
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30, 2003
Guarantor
IMGRC Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ - $14,604,689 $ - $14,604,689
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization - 9,213,224 - 9,213,224
Gain on sale of property, plant and
equipment - (13,741) - (13,741)
Changes in assets and liabilities:
Restricted cash and cash equivalents - (114,304) - (114,304)
Accounts receivable, net of allowance - (58,908) - (58,908)
Inventories (208,466) (59,270) - (267,736)
Prepaid expenses (15,785) (61,801) - (77,586)
Liquor license - (1,000) (1,000)
Accounts payable - 583,895 - 583,895
Accrued expenses 136,062 318,733 - 454,795
Accrued revenue sharing and regulatory fees - 7,717,219 - 7,717,219
Deposits and advance payments - (20,034) - (20,034)
------------ ------------ ------------ ------------
Net cash provided by operating (88,189) 32,108,702 - 32,020,513
============ ============ ============ ============
Cash flows from investing activities:
Investment in subsidiaries 15,782,894 - (15,782,894) -
Purchase of property, plant and equipment (29,460,823) (1,273,740) - (30,734,563)
Construction in progress accounts payable 7,155,922 - - 7,155,922
Proceeds from sale of property, plant and
equipment - 35,198 - 35,198
------------ ------------ ------------ ------------
Net cash used by investing activities (6,522,007) (1,238,542) (15,782,894) (23,543,443)
============ ============ ============ ============
Cash flows from financing activities:
Deferred financing costs (100,000) - - (100,000)
Advances from Mescalero Apache Tribe (11,107,588) - (11,107,588)
Borrowings on revolving line of credit 5,000,000 - - 5,000,000
Principal borrowings (payments) on
long-term debt, net 580,096 (230,332) - 349,764
Distributions to Mescalero Apache Tribe - (40,561,702) - (40,561,702)
Contributions from Mescalero Apache Tribe 1,159,321 8,522,544 15,782,894 25,464,759
------------ ------------ ------------ ------------
Net cash used by financing activities 6,639,417 (43,377,078) 15,782,894 (20,954,767)
============ ============ ============ ============
Net (decrease) increase in cash and cash
equivalents 29,221 (12,506,918) - (12,477,697)
Cash and cash equivalents, beginning of year - 21,809,619 - 21,809,619
------------ ------------ ------------ ------------
Cash and cash equivalents, end of year $ 29,221 $ 9,302,701 $ - $ 9,331,922
============ ============ ============ ============
Supplemental cash flow information:
Cash paid for interest $ 5,439 $ 167,968 $ - $ 173,407
============ ============ ============ ============
Non-cash financing activities:
Distributions to Mescalero Apache Tribe $ - $ 1,193,833 $ - $ 1,193,833
============ ============ ============ ============
Contribution from Mescalero Apache Tribe $ - $ 7,820,274 $ $ 7,820,274
============ ============ ============ ============
F-31