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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [__]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [__] No [X]
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
As of As of
April 30, 2004 October 31, 2004
2004 2004
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,794,943 $ 17,692,695
Restricted cash and cash equivalents 133,297,243 76,544,632
Accounts receivable, net 32,566 149,370
Inventories 968,585 1,091,811
Prepaid expenses 462,054 607,486
Prepaid revenue sharing fees 4,218,673 2,139,144
Deferred financing cost, net 1,625,244 1,625,244
---------------- -----------------
Total current assets 156,399,308 99,850,382
NON CURRENT ASSETS:
Property, plant and equipment, net 150,329,503 193,323,237
Long term deferred financing cost, net 9,404,249 8,524,032
Other long-term assets 76,912 1,170,532
---------------- -----------------
Total assets $ 316,209,972 $ 302,868,183
================ =================
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and other short-term liabilities $ 612,873 $ 5,740,160
Construction in progress accounts payable 13,609,367 11,878,796
Accrued expenses 5,322,061 3,312,040
Accrued revenue sharing and regulatory fees 23,000,000 -
Accrued interest 12,048,378 11,200,000
Deposits and advance payments 667,100 -
Current portion of long-term debt 252,053 192,501
---------------- -----------------
Total current liabilities 55,511,832 32,323,497
NON CURRENT LIABILITIES:
Long-term debt, net of current portion 201,694,541 201,450,655
---------------- -----------------
Total liabilities 257,206,373 233,774,152
---------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Contributed capital 56,113,676 66,113,676
Retained earnings 2,889,923 2,980,355
---------------- -----------------
Total equity 59,003,599 69,094,031
---------------- -----------------
Total liabilities and equity $ 316,209,972 $ 302,868,183
================ =================
The accompanying notes are an integral part of these statements.
1
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the Three Months For the Six Months
Ended Ended
October 31, October 31,
2004 2003 2004 2003
----------- ----------- ----------- ------------
Revenues:
Gaming $17,297,976 $16,174,601 $34,943,762 $31,775,051
Food and beverage 1,361,377 1,371,768 2,774,525 2,608,863
Recreation and other 4,474,971 3,221,659 7,805,759 4,463,222
----------- ----------- ----------- ------------
Gross revenue 23,134,324 20,768,028 45,524,046 38,847,136
Less - promotional allowances (114,119) 173,697 148,216 428,172
----------- ----------- ----------- ------------
Net revenue 23,248,443 20,594,331 45,375,830 38,418,964
----------- ----------- ----------- ------------
Operating costs and expenses:
Gaming 5,307,861 7,680,368 10,335,540 13,093,632
Hotel - - - 128,130
Food and beverage 1,848,415 1,435,309 3,536,421 3,431,975
Recreation and other 3,673,169 2,519,789 6,762,900 4,104,035
General and administrative 2,408,943 2,203,220 4,660,588 4,259,867
Insurance (allocated by related party) 265,308 249,848 404,964 412,681
Pension (allocated by related party) 468,147 479,130 1,012,686 956,968
Telecommunication (charged by related party) 71,400 106,037 126,157 143,588
Fees (charged by related party) 218,800 64,932 902,801 417,064
Pre-opening costs and expenses 711,168 761,131 1,774,213 1,861,356
Depreciation and amortization 1,584,658 1,376,194 3,020,275 2,408,285
----------- ----------- ----------- ------------
Total operating expenses 16,557,869 16,875,958 32,536,545 31,271,581
Income from operations 6,690,574 3,718,373 12,839,285 7,201,383
Other income (expenses):
Interest income 143,199 8,563 352,614 22,053
Interest expense, net of amounts capitalized (2,485,257) - (5,415,856) -
Other income (1,083) 67,181 101,069 137,266
----------- ----------- ----------- ------------
Total other income (expenses) (2,343,141) 75,744 (4,962,173) 159,319
----------- ----------- ----------- ------------
Net income $4,347,433 $3,794,117 $7,877,112 $7,360,702
=========== =========== =========== ============
The accompanying notes are an integral part of these statements.
2
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ended October 31,
2004 2003
--------------- -----------------
Cash flows from operating activities:
Net income $ 7,877,112 $ 7,360,702
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,020,275 2,408,285
Changes in assets and liabilities:
Restricted cash and cash equivalents - (29,281)
Accounts receivable, net of allowance (116,804) (169,372)
Inventories (123,225) 17,771
Prepaid revenue sharing fees 2,079,529 (194,805)
Prepaid expenses (145,432) -
Interest receivable (48,563) -
Other long-term assets (1,045,058) -
Accounts payable 5,127,285 2,572,852
Construction in progress accounts payable (1,730,571) -
Accrued expenses (2,234,126) 3,132,168
Accrued revenue sharing and regulatory fees (23,000,000) 5,381,879
Accrued interest (848,378) -
Deposits and advance payments (442,995) (749,508)
--------------- ----------------
Net cash (used in) provided by operating activities (11,630,950) 19,730,691
Cash flows from investing activities:
Purchase of property, plant and equipment (46,014,009) (55,712,916)
--------------- ----------------
Net cash used in investing activities (46,014,009) (55,712,916)
Cash flows from financing activities:
Deferred financing costs 880,217 (1,664,145)
Cash held for construction payments 33,752,611 29,297,470
Payment of compact settlement 23,000,000 -
Advances to Mescalero Apache Tribe - (1,886,240)
Borrowings on revolving line-of-credit - 14,000,000
Principal borrowings (payments) on long-term debt, net (303,437) 160,947
Distributions to Mescalero Apache Tribe (7,786,680) (9,202,654)
Contributions from Mescalero Apache Tribe 10,000,000 2,425,748
--------------- ----------------
Net cash provided by financing activities 59,542,711 33,131,126
--------------- ----------------
Net (decrease) increase in cash and cash equivalents 1,897,752 (2,851,099)
Cash and cash equivalents, beginning of period 15,794,943 9,331,922
--------------- ----------------
Cash and cash equivalents, end of period $ 17,692,695 $ 6,480,823
=============== ================
Supplemental cash flow information:
Cash paid for interest $ 12,848,446 $ 192,340
=============== ================
The accompanying notes are an integral part of these statements.
3
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE QUARTERS ENDED OCTOBER 31, 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 ("IGRA"), on 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 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 and the capitalization of construction bond interest costs.
Actual results could differ from those estimates.
4
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 $11,029,493 as of April 30, 2004 and $10,149,276 as of
October 31, 2004.
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-gaming equipment, 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
5
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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. 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.
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 IMG
Resort and Casino's senior notes fair value at April 30, 2004 was
approximately $216.0 million and $232.0 million at October 31, 2004, based
on quoted market prices.
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 $173,697 and $(114,119) for the
quarters ended October 31, 2003 and 2004, respectively.
The Casino Apache Spirit Club program 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 related
liability is included in accrued expenses and totaled approximately
$380,000 at April 30, 2004 and $156,000 at October 31, 2004.
6
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 $173,697 and $(114,119) for the quarters ended October 31,
2003 and 2004, respectively, in the promotional allowance as an offset to
gaming revenues for these incentives.
The estimated cost of providing such complimentary allowances, as they
relate to the Resorts, was included in gaming expenses as follows:
Quarter Ended October 31,
2004 2003
------------ -----------
Food and beverage 16,785 41,049
Other - 7,685
------------ -----------
$ 16,785 $ 48,734
============ ===========
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 construction period of the Resort. 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.
7
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 quarters ended
October 31, 2003 and 2004 were approximately $210,000 and $828,746,
respectively.
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 $200,000 for taxes payable to the Tribe as of April 30, 2004
and October 31, 2004, respectively. The amounts are recorded as an accrued
expense in the accompanying consolidated balance sheets.
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.
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.
8
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS (CONTINUED)
The allowance for doubtful accounts and bad debt expense is as follows at
October 31:
2004 2003
----------- -----------
Allowance, beginning of year $ 3,448 $ 3,448
Bad debt expense - -
Write-offs - -
----------- -----------
Allowance, end of year $ 3,448 $ 3,448
=========== ===========
NOTE 3 - RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash consists of various funds held for the construction
project. The balance was $133,297,243 for the fiscal year ended April 30,
2004 and $76,544,632 for the quarter ended October 31, 2004.
NOTE 4 - INVENTORIES
Inventories consist of the following at:
APRIL 30, October 31,
2004 2004
------------- ------------
Food and beverage $ 219,628 $ 275,197
Golf and pro shop 132,936 212,666
Gift shops, fuel and other 616,021 603,948
------------- ------------
Total inventories $ 968,585 $ 1,091,811
============= =============
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows at:
APRIL 30, October 31,
2004 2004
------------- ------------
Land $ 538,894 $ 538,894
Buildings, lifts and snowmaking equipment 39,287,564 39,287,564
Non-gaming equipment, furniture and other 25,498,837 26,801,321
Gaming equipment 11,370,236 12,255,340
Leasehold and land improvements, lake and golf course 6,480,058 6,229,724
------------- ------------
Subtotal 83,175,589 85,112,843
Less accumulated depreciation and amortization (46,281,098) (49,301,431)
------------- ------------
Property, plant and equipment, net 36,894,491 35,811,412
Construction in progress 113,435,012 157,511,853
------------- ------------
$150,329,503 193,323,237
============= ============
The IMG Resort and Casino capitalized $7,892,314 and $3,929,379 of interest
cost related to construction of the Travel Center and Resort Project during
the fiscal year ended April 30, 2004 and the quarter ended October 31,
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 used proceeds of these
notes to pay a $19.0 million revolving credit agreement with Citicorp North
America, Inc. and to pay the costs of the offering, and is using the
9
NOTE 6 - LONG-TERM DEBT (CONTINUED)
remaining proceeds to pay, in part, construction costs of the Resort
Project. 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 $76.5 million at October 31, 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.
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 credit facility is
fully amortizable over five years and bears an interest rate indexed off
the 3-year Treasury Interest Rate Swaps. As of October 31, 2004, there were
no funds drawn under this facility. Proceeds from the loan will be used to
fund furniture, fixtures and equipment for the Project.
Long-term debt is summarized as follows:
APRIL 30, October 31,
2004 2004
------------- ------------
Senior Notes, bearing interest at a fixed rate
of 12%, maturing in 2010 $200,000,000 $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. $ 1,744,651 $ 1,643,156
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. 201,943 -
------------- ------------
201,946,594 201,643,156
Less current portion (252,053) (192,501)
------------- ------------
Long-term portion $ 201,694,541 $ 201,460,655
============= ==============
10
NOTE 6 - LONG-TERM DEBT (CONTINUED)
The maturities of long-term debt as of October 31, 2004 are as follows:
Quarter Ending October 31:
2005 $ 192,501
2006 205,162
2007 221,125
2008 242,838
2009 264,511
Thereafter 200,517,019
-----------
$201,460,655
Total interest costs were $13,144,001 and $6,035,191 for the fiscal year
ended April 30, 2004 and the quarter ended October 31, 2004, respectively,
of which $7,892,314 and $3,929,379 was capitalized as of April 30, 2004 and
October 31, 2004, respectively.
NOTE 7 - GAMING REVENUE 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.
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 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, the Resorts 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 the
first revenue sharing payment under the 2001 Compact due in July 2005. In
addition, pursuant to the terms of the settlement agreement, the IMG Resort
and Casino will begin incurring regulatory fees, at the rate of $100,000
per year, from July 22, 2004, the date the approval of the 2001 Compact was
published in the Federal Register. The IMG Resort and Casino's first
payment for regulatory fees under the 2001 Compact was paid on September 1,
2004, the first day of the first full calendar quarter after publication of
approval of the 2001 Compact in the Federal Register. 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. On August
10, 2004, the IMG Resort and Casino made the remaining $23.0 million
payment required under the settlement agreement. As a result of the
settlement with the State, expense and the liability for accrued revenue
sharing and regulatory fees has been reduced by $1.5 million for the
quarter ended October 31, 2004.
11
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.
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 three and six months ended October 31, 2004 was $468,147 and $1,012,686
respectively.
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 the quarters ended October 31, 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 the Plan and remit amounts
to the Tribe for their share of the self-insurance costs. The total amount
reimbursed to the Tribe were approximately $249,848 and $265,308 for the
quarters ended October 31, 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 the 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.
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.
12
CONSTRUCTION AGREEMENT
In September 2003, the IMG Resort and Casino entered into a construction
agreement for the development of the Travel Center and the new Resort
Project. Estimated construction cost is approximately $135.0 million, and
as of October 31, 2004, the IMG Resort and Casino had outstanding
construction commitments of approximately $15.3 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 $106,037 and $71,400 for
the quarters ended October 31, 2003 and 2004, respectively, for such
services.
There were no amounts due to the Tribe from the Resorts at October 31, 2003
and 2004.
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.
Three Months Ended
OCTOBER 31, 2003 Resort/ Travel
Gaming Hotel Ski Holding Co. Center
Operations Operations Operations Operations Operations Eliminations Total
----------------------------------------------------------------------------------------------
Net revenue $8,480,063 $ 1,436,665 $ - $ - $10,677,603 $ - $ 20,594,331
Income from operations 2,295,032 245,543 (817,044) (2,446,998) 4,441,790 - 3,718,373
Segment assets 54,483,117 10,752,946 10,006,979 49,075,038 23,971,652 (26,705,933) 150,974,538
13
NOTE 12 - OPERATING SEGMENTS (CONTINUED)
Three Months Ended
OCTOBER 31, 2004 Resort/ Travel
Gaming Hotel Ski Holding Co. Center
Operations Operations Operations Operations Operations Eliminations Total
-----------------------------------------------------------------------------------------------
Net revenue $9,594,298 $ - $ 385 $ (3,667) $13,657,427 $ - $ 23,248,443
Income (loss)
from operations 2,964,415 10,468 (1,353,622) (2,019,537) 7,201,010 - 6,690,574
Segment assets 12,523,645 10,242,862 11,249,292 305,502,642 39,378,612 (75,968,869) 302,868,183
Six Months Ended
OCTOBER 31, 2003 Resort/ Travel
Gaming Hotel Ski Holding Co. Center
Operations Operations Operations Operations Operations Eliminations Total
----------------------------------------------------------------------------------------------
Net revenue $18,759,729 $ 2,012,199 $ 1,130 $ (36,370) $17,682,276 $ - $ 38,418,964
Income from operations 2,295,032 245,543 (817,044) (2,446,998) 4,441,790 - 7,201,383
Segment assets 54,583,117 10,752,946 10,006,979 49,075,038 23,971,652 (26,705,933) 150,974,538
Six Months Ended
OCTOBER 31, 2004 Resort/ Travel
Gaming Hotel Ski Holding Co. Center
Operations Operations Operations Operations Operations Eliminations Total
-----------------------------------------------------------------------------------------------
Net revenue $17,573,342 $ - $ 385 $ (2,059) $27,804,162 $ - $ 45,375,830
Income (loss)
from operations 4,336,230 - 2,175,257 (3,920,923) 14,599,235 - 12,839,285
Segment assets 12,523,645 10,242,862 11,249,292 305,502,642 39,378,612 (75,968,869) 302,868,183
NOTE 13 - CONSOLIDATING INFORMATION
In connection with the IMG Resort and Casino's issuance in November 2003 of
$200,000,000 of 12% senior notes, the 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 the 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 the
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.
The Resorts are wholly owned subsidiaries of the IMG Resort and Casino. The
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 three and six months ended October 31, 2004 and 2003.
14
CONSOLIDATING BALANCE SHEETS
AS OF OCTOBER 31, 2004
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ----------- -------------
Cash and cash equivalents $4,137,921 $13,554,774 $ - $17,692,695
Restricted cash and cash
equivalents 76,544,632 - - 76,544,632
Accounts receivable, net 9,764 139,606 - 149,370
Inventories 5,366 1,086,445 - 1,091,811
Prepaids other 261,173 346,313 - 607,486
Prepaid revenue sharing fee - 2,139,144 - 2,139,144
Deferred financing cost, net 1,625,244 - - 1,625,244
----------- ------------ ----------- -------------
Total current assets 82,584,100 17,266,282 - 99,850,382
Advances to affiliates 11,223,714 20,197,465 (31,421,179) -
Property plant and equipment, net 157,569,029 35,754,208 - 193,323,237
Long-term deferred financing
expenses, net 8,524,032 - - 8,524,032
Other long-term assets 1,054,077 116,455 - 1,170,532
Investment in subsidiaries 44,547,690 - (44,547,690) -
----------- ------------ ----------- -------------
Total Assets $305,502,642 $73,334,410 $(75,968,869) $302,868,183
=========== ============ =========== =============
Accounts payable and other short
term liabilities $ 5,677,790 $ 62,370 $ - $ 5,740,160
Construction in progress accounts
payable 11,878,796 - - 11,878,796
Accrued expenses 894,540 2,417,500 - 3,312,040
Accrued interest 11,200,000 - - 11,200,000
Current portion long-term debt - 192,501 - 192,501
----------- ------------ ----------- -------------
Total current liabilities 29,651,126 2,672,371 - 32,323,497
Advances from affiliates 6,757,485 24,663,694 (31,421,179) -
Long-term debt, net of current
portion 200,000,000 1,450,655 - 201,450,655
----------- ------------ ----------- -------------
Total Liabilities 236,408,611 28,786,720 (31,421,179) 233,774,152
Contributed Capital 66,113,676 20,166,161 (20,166,161) 66,113,676
Current year net income (loss) 7,877,112 16,765,697 (16,765,697) 7,877,112
Beginning Retained earnings
(deficit) (4,896,757) 7,615,832 (7,615,832) (4,896,757)
----------- ------------ ----------- -------------
Total Equity 69,094,031 44,547,690 (44,547,690) 69,094,031
Total Liabilities and Equity $305,502,642 $73,334,410 $(75,968,869) $302,868,183
=========== ============ =========== =============
15
CONSOLIDATING STATEMENTS OF INCOME
QUARTER ENDED OCTOBER 31, 2004
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ---------- ------------
Gaming Revenue $ - $17,297,976 $ - $ 17,297,97
Food & Beverage Revenue 1,361,377 1,361,377
Recreation & Other Revenue - - 4,474,971 - 4,474,971
------------ ------------ ---------- ------------
Gross Revenue - 23,134,324 - 23,134,324
Promotional Allowances 3,667 (117,786) (114,119)
------------ ------------ ---------- ------------
Net Revenue (3,667) 23,252,110 - 23,248,443
Gaming Expenses 68,632 5,239,229 5,307,861
Food and Beverage Expenses 37,634 1,810,781 1,848,415
Retail Recreation & Other 647 3,672,522 3,673,169
General Administrative Expenses 1,129,562 1,279,381 2,408,943
Health Insurance - Medical 30,489 234,819 265,308
Pension 77,665 390,482 468,147
MATI Telephone Expense 12,864 58,536 71,400
Tribal Regulatory Fees 218,800 218,800
Pre Opening Expense 601,299 109,869 711,168
Depreciation Expense 57,077 1,527,581 - 1,584,658
------------ ------------ ---------- ----------
Total Operating Expense 2,015,869 14,542,000 - 16,557,869
Operating Income (2,019,536) 8,710,110 - 6,690,574
Interest Income 136,426 6,773 143,199
Interest Expense (2,476,994) (8,263) (2,485,257)
Other Income (Expenses) (1,083) - (1,083)
Income from affiliates 8,708,620 - (8,708,620) -
------------ ------------ ---------- ----------
Non Operating Income (Expenses) 6,366,969 (1,490) (8,708,620) (2,343,141)
------------ ------------ ---------- ----------
Net Income $4,347,433 $8,708,620 $(8,708,620) $4,347,433
============ ============ ========== ==========
16
CONSOLIDATING STATEMENTS OF INCOME
QUARTER ENDED OCTOBER 31, 2003
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ---------- -----------
Gaming Revenue $ - $16,174,601 $ - $16,174,601
Food & Beverage Revenue 1,371,768 1,371,768
Recreation & Other Revenue 3,221,659 3,221,659
------------- ------------ ---------- ----------
Gross Revenue - 20,768,028 - 20,768,028
Promotional Allowances 173,697 173,697
------------- ------------ ---------- ----------
Net Revenue - 20,594,331 - 20,594,331
Gaming Expenses 7,680,368 7,680,368
Food and Beverage Expenses 283,323 1,151,986 1,435,309
Retail Recreation & Other 2,519,789 2,519,789
General Administrative Expenses 1,737,430 465,790 2,203,220
Health Insurance - Medical 47,870 201,978 249,848
Pension 103,113 376,017 479,130
MATI Telephone Expense - 106,037 106,037
Tribal Regulatory Fees 23,750 41,182 64,932
Pre Opening Expense 329,217 431,914 761,131
Depreciation Expense 1,376,194 1,376,194
------------- ------------ ---------- ----------
Total Operating Expense 2,524,703 14,351,255 - 16,875,958
Operating Income (2,524,703) 6,243,076 - 3,718,373
Interest Income 8,563 8,563
Other Income (Expenses) 67,181 67,181
Income from affiliates 6,318,820 (6,318,820) -
------------- ------------ ---------- ----------
Non Operating Income (Expenses) 6,318,820 75,744 (6,318,820) 75,744
------------- ------------ ---------- ----------
Net Income $3,794,117 $6,318,820 $(6,318,820) $3,794,117
============= ============ ========== ==========
17
CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED OCTOBER 31, 2004
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ---------------- ------------- --------------
Gaming Revenue $ - $34,943,762 $ - $34,943,762
Food & Beverage Revenue 1,608 2,772,917 2,774,525
Recreation & Other Revenue - 7,805,759 7,805,759
--------------- ---------------- ------------- --------------
Gross Revenue 1,608 45,522,438 - 45,524,046
Promotional Allowances 3,667 144,549 148,216
--------------- ---------------- ------------- --------------
Net Revenue (2,059) 45,377,889 - 45,375,830
Gaming Expenses 133,567 10,201,973 10,335,540
Food and Beverage Expenses 122,891 3,413,530 3,536,421
Retail Recreation & Other 760 6,762,140 6,762,900
General Administrative
Expenses 1,616,322 3,044,266 4,660,588
Health Insurance - Medical 54,433 350,531 404,964
Pension 233,351 779,335 1,012,686
MATI Telephone Expense 67,621 58,536 126,157
Tribal Regulatory Fees 24,952 877,849 902,801
Pre Opening Expense 1,607,889 166,324 1,774,213
Depreciation Expense 57,077 2,963,198 3,020,275
--------------- ---------------- ------------- --------------
Total Operating Expense 3,918,863 28,617,682 - 32,536,545
Operating Income (3,920,922) 16,760,207 - 12,839,285
Interest Income 341,708 10,906 352,614
Interest Expense (5,407,593) (8,263) (5,415,856)
Other Income (Expenses) 98,222 2,847 101,069
Income from affiliates 16,765,697 (16,765,697) -
--------------- ---------------- ------------- --------------
Non Operating Income 11,798,034 5,490 (16,765,697) (4,962,173)
(Expenses)
--------------- ---------------- ------------- --------------
Net Income $ 7,877,112 $ 16,765,697 $(16,765,697) $ 7,877,112
=============== ================ ============= ==============
18
CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED OCTOBER 31, 2003
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------------- ------------ ------------
Gaming Revenue $ - $31,775,051 $ - $31,775,051
Food & Beverage Revenue 2,608,863 2,608,863
Recreation & Other Revenue - 4,463,222 4,463,222
------------ ------------ ------------ ----------
Gross Revenue - 38,847,136 - 38,847,136
Promotional Allowances 36,440 391,732 428,172
------------ ------------ ------------ ----------
Net Revenue (36,440) 38,455,404 - 38,418,964
Gaming Expenses 13,093,632 13,093,632
Hotel Expenses 128,130 128,130
Food and Beverage Expenses 475,633 2,956,342 3,431,975
Retail Recreation & Other 471,800 3,632,235 4,104,035
General Administrative Expenses 2,885,936 1,373,931 4,259,867
Health Insurance - Medical 72,224 340,457 412,681
Pension 203,547 753,421 956,968
MATI Telephone Expense - 143,588 143,588
Tribal Regulatory Fees 23,805 393,259 417,064
Pre Opening Expense 785,947 1,075,409 1,861,356
Depreciation Expense 2,408,285 2,408,285
------------ ------------ ------------ ----------
Total Operating Expense 4,918,892 26,298,689 - 31,217,581
Operating Income (4,955,332) 12,156,715 - 7,201,383
Interest Income 22,053 22,053
Other Income (Expenses) 137,266 137,266
Income from affiliates 12,316,034 (12,316,034) -
------------ ------------ ------------ ----------
Non Operating Income (Expenses) 12,316,034 159,319 (12,316,034) 159,319
------------ ------------ ------------ ----------
Net Income $ 7,360,702 $12,316,034 $(12,316,034) $ 7,360,702
============ ============ ============ ==========
19
CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED OCTOBER 31, 2004
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ -------------
Cash flows from operating activities:
Net income $7,877,112 $16,765,697 $(16,765,697) $7,877,112
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 57,077 2,963,198 - 3,020,275
Changes in assets and liabilities:
Accounts receivable, net of
allowance 9,764 (126,568) - (116,804)
Inventories 497 (123,722) - (123,225)
Prepaid revenue sharing - 2,079,529 - 2,079,529
Prepaid expenses 205,368 (350,800) - (145,432)
Interest receivable - (48,563) - (48,563)
Other Long term assets (1,045,058) - - (1,045,058)
Accounts payable 5,677,790 (550,505) - 5,127,285
Construction in progress
accounts payable (1,730,571) - - (1,730,571)
Accrued expenses 82,765 (2,316,891) - (2,234,125)
Accrued revenue sharing and
regulatory fees - (23,000,000) - (23,000,000)
Accrued interest payable (800,000) (48,378) - (848,378)
Deposits and advance payments - (442,995) - (442,995)
------------- ------------- ------------ -------------
Net cash provided by (used
in) operating activities 10,334,744 (5,199,998) (16,765,697) (11,630,950)
------------- ------------- ------------ -------------
Cash flows from investing activities:
Purchase of property, plant and
equipment (45,768,596) (245,442) (46,014,009)
Investment in subsidiaries (16,765,697) 16,765,697 -
------------- ------------- ------------ -------------
Net cash used by investing
activities (62,534,293) (245,442) 16,765,697 (46,014,009)
------------- ------------- ------------ -------------
Cash flows from financing activities:
Deferred financing costs 880,217 - - 880,217
Cash held for construction payments 33,752,611 - - 33,752,611
Payment of compact settlement 23,000,000 - - 23,000,000
Advances to (from) affiliates (9,456,358) 9,456,358 - -
Principal borrowings (payments) on
long-term debt, net - (303,437) - (303,437)
Distributions to Mescalero Apache
Tribe (1,839,000) (5,947,680) - (7,786,680)
Contributions from Mescalero Apache
Tribe 10,000,000 - - 10,000,000
------------- ------------- ------------ -------------
Net cash used by financing
activities 56,337,470 3,205,241 - 59,542,711
------------- ------------- ------------ -------------
Net (decrease) increase in cash and
cash equivalents 4,137,921 (2,240,199) - 1,897,752
Cash and cash equivalents, beginning
of period - 15,794,973 - 15,794,943
------------- ------------- ------------ -------------
Cash and cash equivalents, end of period $4,137,921 $13,554,774 - $17,692,695
============= ============= ============ =============
20
CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED OCTOBER 31, 2003
(UNAUDITED)
NOTE 13 - CONSOLIDATING INFORMATION (CONTINUED)
GUARANTOR
IMGRC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ -------------
Cash flows from operating activities:
Net income $7,360,702 $12,316,034 $(12,316,034) $7,360,702
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization - 2,408,285 - 2,408,285
Changes in assets and liabilities:
Restricted cash and cash
equivalents - (29,281) - (29,281)
Accounts receivable, net of
allowance 294 (169,666) - (169,372)
Inventories - 17,771 - 17,771
Prepaid revenue sharing - (194,805) - (194,805)
Accounts Payable - 2,572,852 - 2,572,852
Accrued expenses - 3,132,168 - 3,132,168
Accrued revenue sharing and
regulatory fees - 5,381,879 - 5,381,879
Deposits and advance payments - (749,508) - (749,508)
---------- ------------ ------------ -------------
Net cash provided by
operating activities 7,360,996 24,685,729 (12,316,034) 19,730,691
---------- ----------- ------------ -------------
Cash flows from investing activities:
Purchase of property, plant and
equipment (35,605,725) (20,107,191) (55,712,916)
Investment in subsidiaries (12,316,034) - 12,316,034 -
---------- ----------- ------------ -------------
Net cash used by investing
activities (47,921,759) (20,107,191) 12,316,034 (55,712,916)
---------- ----------- ------------ -------------
Cash flows from financing activities:
Deferred financing costs (1,664,145) - - (1,664,145)
Cash held for construction
payments 29,297,470 29,297,470
Advances to Mescalero Apache Tribe (1,886,240) - (1,886,240)
Advances to (from) affiliates (1,072,562) 1,072,562
Borrowings on revolving
line-of-credit 14,000,000 - 14,000,000
Principal borrowings (payments)
on long-term debt, net - 160,947 160,947
Distributions to Mescalero Apache
Tribe - (9,202,654) (9,202,654)
Contributions from Mescalero
Apache Tribe - 2,425,748 - 2,425,748
---------- ------------ ------------ -------------
Net cash provided by
(used by) financing
activities 40,560,763 (7,429,637) - 33,131,126
---------- ----------- ------------ -------------
Net decrease in cash and
cash equivalents - (2,851,099) - (2,851,099)
Cash and cash equivalents,
beginning of period - 9,331,922 - 9,331,922
---------- ----------- ------------ -------------
Cash and cash equivalents, end of
period $ - $ 6,480,823 $ - $ 6,480,823
========== =========== ============ =============
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
REFERENCES IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q" 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," AND "US" REFER TO IMG RESORT AND CASINO.
FORWARD-LOOKING STATEMENTS
THIS FORM 10-Q 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 HEADING "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-Q ARE FORWARD-LOOKING
STATEMENTS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS FORM 10-Q, 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-Q
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; AND (I)
GENERAL LOCAL, DOMESTIC AND GLOBAL ECONOMIC CONDITIONS.
YOU ARE URGED TO CONSIDER THESE FACTORS CAREFULLY IN EVALUATING THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q. 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-Q ARE MADE ONLY AS OF
THE DATE OF THIS FORM 10-Q. WE DO NOT INTEND, AND UNDERTAKE NO OBLIGATION, TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
IMG Resort and Casino is an unincorporated business 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 business 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 the Indian Gaming
Regulatory Act of 1988, or IGRA, our gaming compact with the State of New Mexico
and a Tribal gaming ordinance. As of October 31, 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.
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
22
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-Q. 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. 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 Project financing are capitalized and amortized to interest
expense using the straight-line method over the stated maturity of the debt,
23
which approximates the effective interest method. Unamortized deferred financing
costs totaled approximately $10.1 million as of October 31, 2004.
DISAGREEMENTS WITH THE STATE OF NEW MEXICO. The Tribe challenged the
legality of the revenue sharing fees prescribed by the compact entered into
between the Tribe and the State of New Mexico in 1997, which we refer to as the
1997 Compact, claiming them to be an illegal tax on Indian gaming under 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.
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. On June 1, 2004, the Tribe
and the State of New Mexico entered into the 2001 Compact. On August 10, 2004,
we made the final $23.0 million payment to the State required by the settlement
agreement which was paid out of a Trustee held Construction Reserve Account.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 31, 2004 COMPARED TO QUARTER ENDED OCTOBER 31, 2003.
NET REVENUES. Net revenues increased $2.6 million, or 12.6%, to $23.2
million for the quarter ended October 31, 2004 from $20.6 million for the
quarter ended October 31, 2003. The increase was due to an increase in gaming
revenues, food and beverage revenues and retail revenues. Player reward
redemptions are included in gross revenues but are deducted as a promotional
allowance to arrive at net revenues.
GAMING. Gaming revenues increased $1.1 million, or 6.8%, to $17.3 million
for the quarter ended October 31, 2004 from $16.2 million for the quarter ended
October 31, 2003. Slot revenues increased to $14.9 million for the quarter ended
October 31, 2004 from $14.3 million for the quarter ended October 31, 2003, an
increase of $0.6 million, or 4.2%. Gross slot win per unit was $154 for the
quarter ended October 31, 2004 compared to $149 for the quarter ended October
31, 2003; in this period the weighted average number of units remained constant
at 1180 units and slot handle increased by $8.8 million or 3.9% while hold
remained constant at 6.4%. Table games revenue increased $0.4 million, or 22.5%,
to $2.4 million for the quarter ended October 31, 2004 from $2.0 million for the
quarter ended October 31, 2003. The increase was the result of an increase in
the table game hold percentage to 19.6% for the quarter ended October 31, 2004
from 16.4% for the quarter ended October 31, 2003, while table game drop
remained constant at $11.2 million.
FOOD AND BEVERAGE. Food and beverage revenues remained constant at $1.4
million for the quarter ended October 31, 2004 as compared to the quarter ended
October 31, 2003.
RECREATION AND OTHER. Recreation and other revenues increased $1.3 million,
or 40.6%, to $4.5 million for the quarter ended October 31, 2004 from $3.2
million for the quarter ended October 31, 2003. The increase was due to
increased revenues from the convenience store, smoke shop, and gasoline and
diesel sales located at Travel Center.
PROMOTIONAL ALLOWANCES. Promotional allowances declined $0.3 million for
the quarter ended October 31, 2004 compared to the quarter ended October 31,
2003.
TOTAL OPERATING EXPENSES. Total operating expenses decreased $0.3 million,
or 1.8%, to $16.6 million for the quarter ended October 31, 2004 from $16.9
million for the quarter ended October 31, 2003. The decrease was primarily due
to a decrease of $2.4 million in gaming expenses offset by a $1.2 million
increase in retail and recreation expenses associated with the new Travel
Center.
GAMING. Gaming expenses decreased $2.4 million, or 31.2%, to $5.3 million
for the quarter ended October 31, 2004 from $7.7 million for the quarter ended
October 31, 2003. The decrease was primarily due to a reduction in revenue
sharing expenses associated with the Compact settlement.
FOOD AND BEVERAGE. Food and beverage expenses increased $0.4 million or
28.6%, to $1.8 million for the quarter ended October 31, 2004 from $1.4 million
for the quarter ended October 31, 2003, primarily due to an increase in the cost
of sales at both the Travel Center and Casino Apache.
24
RECREATION AND OTHER. Recreation and other costs increased $1.2 million, or
48.0%, to $3.7 million for the quarter ended October 31, 2004 from $2.5 million
for the quarter ended October 31, 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
$0.2 million, or 9.1%, to $2.4 million for the quarter ended October 31, 2004
from $2.2 million for the quarter ended October 31, 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.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $0.7 million for
the quarter ended October 31, 2004 compared to $0.8 million for the quarter
ended October 31, 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 $0.2
million to $1.6 million for the quarter ended October 31, 2004 from $1.4 million
for the quarter ended October 31, 2003. The increase was primarily the result of
the addition of the Travel Center in May 2003.
OPERATING INCOME. Operating income increased $3.0 million, or 81.1%, to
$6.7 million for the quarter ended October 31, 2004 from $3.7 million for the
quarter ended October 31, 2003. The increase in operating income was primarily
due to improved operating margins in gaming, food and beverage, and operations
in Casino Apache and the Travel Center.
OTHER INCOME (EXPENSES). Other non-operating expenses increased $2.4
million to $2.3 million for the quarter ended October 31, 2004 from $0.1 million
for the quarter ended October 31, 2003. The increase was primarily due to
interest expense, net of amounts capitalized, in an amount equal to $2.5 million
during the period. Other income (expenses) is comprised of interest income and
other income minus interest expense and other expense.
SIX MONTHS ENDED OCTOBER 31, 2004 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2003
NET REVENUES. Net revenues increased $7.0 million, or 18.2%, to $45.4
million for the six months ended October 31, 2004 from $38.4 million for the six
months ended October 31, 2004. The increase was due to an increase in gaming
revenues, food and beverage revenues and retail revenues. Player reward
redemptions are included in gross revenues but are deducted as a promotional
allowance to arrive at net revenues.
GAMING. Gaming revenues increased $3.1 million, or 9.7%, to $34.9 million
for the six months ended October 31, 2004 from $31.8 million for the six months
ended October 31, 2003. Slot revenues increased to $30.4 million for the six
months ended October 31, 2004 from $28.1 million for the six months ended
October 31, 2003, an increase of $2.3 million, or 8.3%. Gross slot win per unit
was $155 for the six months ended October 31, 2004 compared to $154 for the six
months ended October 31, 2003; in this period the weighted average number of
units remained constant at 1,180 units and slot handle increased by $37.4
million or 8.4% while hold remained constant at 6.3%. Table games revenue
increased $0.9 million, or 24.3%, to $4.6 million for the six months ended
October 31, 2004 from $3.7 million for the six months ended October 31, 2003.
The increase was the result of an increase in the table game hold percentage to
20.2% for the six months ended October 31, 2004 from 16.4% for the six months
ended October 31, 2003, while table game drop increased $0.2 million, or 0.9%,
to $22.8 million for the six months ended October 31, 2004 from $22.6 million
for the six months ended October 31, 2003.
FOOD AND BEVERAGE. Food and beverage revenues increased $0.2 million, or
7.7%, to $2.8 million for the six months ended October 31, 2004 from $2.6
million for the six months ended October 31, 2003.
RECREATION AND OTHER. Recreation and other revenues increased $3.3 million,
or 73.3%, to $7.8 million for the six months ended October 31, 2004 from $4.5
million for the six months ended October 31, 2003. The increase was due to
increased revenues from the convenience store, smoke shop, and gasoline and
diesel sales located at Travel Center.
PROMOTIONAL ALLOWANCES. Promotional allowances declined $0.3 million for
the six months ended October 31, 2004 compared to the six months ended October
31, 2003.
25
TOTAL OPERATING EXPENSES. Total operating expenses decreased $1.3 million,
or 4.2%, to $32.5 million for the six months ended October 31, 2004 from $31.2
million for the six months ended October 31, 2003. The decrease was primarily
due to a decrease of $2.8 million in gaming expenses offset by a $2.7 million
increase in retail and recreation expenses associated with the new Travel
Center.
GAMING. Gaming expenses decreased $2.8 million, or 21.4%, to $10.3 million
for the six months ended October 31, 2004 from $13.1 million for the six months
ended October 31, 2003. The decrease was primarily due to a reduction in revenue
sharing expenses associated with the Compact settlement.
FOOD AND BEVERAGE. Food and beverage expenses increased $0.1 million or
2.9%, to $3.5 million for the six months ended October 31, 2004 from $3.4
million for the six months ended October 31, 2003, primarily due to a decrease
in the cost of sales at both the Travel Center and Casino Apache.
RECREATION AND OTHER. Recreation and other costs increased $2.7 million, or
65.9%, to $6.8 million for the six months ended October 31, 2004 from $4.1
million for the six months ended October 31, 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
$0.4 million, or 9.3%, to $4.7 million for the six months ended October 31, 2004
from $4.3 million for the six months ended October 31, 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.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $1.8 million for
the six months ended October 31, 2004 compared to $1.9 million for the six
months ended October 31, 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 $0.6
million to $3.0 million for the six months ended October 31, 2004 from $2.4
million for the six months ended October 31, 2003. The increase was primarily
the result of the addition of the Travel Center in May 2003.
OPERATING INCOME. Operating income increased $5.6 million, or 77.8%, to
$12.8 million for the six months ended October 31, 2004 from $7.2 million for
the six months ended October 31, 2003. The increase in operating income was
primarily due to improved operating margins in gaming, food and beverage, and
operations in Casino Apache and the Travel Center.
OTHER INCOME (EXPENSES). Other non-operating expenses increased $5.2
million to $5.0 million for the six months ended October 31, 2004 from $0.2
million for the six months ended October 31, 2003. The increase was primarily
due to interest expense, net of amounts capitalized, in an amount equal to $5.4
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 October 31, 2004, we had cash and cash equivalents
(net of amounts in restricted accounts) of $15.8 million and $17.7 million,
respectively. Our principal sources of liquidity for the fiscal year ended April
30, 2004 and the six months ended October 31, 2004 consisted of cash flows from
operating activities, which was $11.6 million used by operating activities for
the six months ended October 31, 2004 compared to $19.7 million provided by
operating activities for the six months ended October 31, 2003. Net income
provided $7.8 million for the six months ended October 31, 2004, compared to
$7.4 million for the six months ended October 31, 2003. A total of $23.0 million
was used to pay the final compact settlement in August 2004 as compared to $5.4
million provided by revenue sharing and regulatory fees in the six months ended
October 31, 2003.
Cash used in investing activities for the six months ended October 31, 2004
and 2003 was $46.0 million and $55.7 million, respectively, and primarily
relates to construction costs for the Project.
26
Cash provided by financing activities for the six months ended October 31,
2004 and 2003 was $59.5 million and $33.1 million, respectively. The $26.4
million increase in cash provided from financing activities is primarily due to
$4.4 million increase of cash held for use in paying construction expenditures
for the construction project with the $23.0 million payment of the Compact
settlement and a $10.0 million capital contribution by the Tribe offset by $7.8
million in distributions to the Tribe.
Construction of the Resort, which began in January 2003, is expected to be
completed in April 2005. As of October 31, 2004, we paid $137.8 million
designing, developing, constructing, equipping and opening the Resort. We expect
to incur an additional $15.3 million under our fixed price contract to complete
the Project during fiscal 2005 (the Resort is expected to be completed by the
April 2005). At October 31, 2004 we had balances in restricted accounts in the
aggregate amount of $76.5 million, $23.8 million of which will be available for
the next two payments on the notes and $46.4 million of which will be available
for completion of the Project, including amounts remaining under our fixed price
contract, furniture, fixtures and equipment and construction contingencies and
$6.3 million for retainage. 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 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 October 31, 2004, the balance in
the interest reserve account was $23.8 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 October 31, 2004, the balance in
the construction disbursement account was $7.4 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 October 31, 2004, the balance in the construction reserve
account was $38.9 million, which reflects the $25.0 million payment
made to settle all disputes with the State of New Mexico related to
the 1997 Compact; and
o a construction retainage account. As of October 31, 2004, the balance
the construction retainage accounts was $6.3 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.
27
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 October 31, 2004, there is approximately $1.6 million outstanding
on the BIA Note.
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. 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. As of October 31, 2004 there
were no funds drawn under this facility.
OFF-BALANCE SHEET ARRANGEMENTS
As of October 31, 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.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth, as of October 31, 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 THAN1-3 YEARS 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS 5 YEARS
---------------------------------- --------- ----- -------
Long-Term Debt
Obligations............ $201,643 $192 $426 $507 $200,518
-------- --------- -------- -------- ----------
Purchase Obligations (1) 15 15 - - -
-------- --------- -------- -------- ----------
Total.................. $201,658 $ 207 $ 426 $ 507 $200,518
======== ========= ======== ========= ==========
- ----------
(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 paid $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 was 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
28
significant impact on our operations. We are unincorporated Tribal business
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 quarters ended October 31, 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.
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 October 31, 2004, we had an aggregate of approximately $201.6 million
of indebtedness outstanding, which includes $200.0 million of debt on the notes
issued on November 3, 2003. This substantial indebtedness
29
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.
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.
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;
o environmental problems;
o changes in the scope of the Resort or to the plans or specifications;
o labor disputes and work stoppages;
30
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 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
31
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.
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.
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
32
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.
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 3. 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 short term variable rate debt. As of October 31, 2004,
we had no variable rate debt outstanding.
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 October 31, 2004, the Resort held no derivative instruments.
33
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this 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.
34
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
SETTLEMENT OF COMPACT DISPUTE
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) EXHIBITS:
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized
INN OF THE MOUNTAIN GODS RESORT AND CASINO
Date: December 15, 2004 By /s/ Michael French
----------------------------------
Michael French
Its: Chief Executive Officer (Principal
Executive Officer and Authorized
Signatory)
Date: December 15, 2004 By /s/ Richard Williams
----------------------------------
Richard Williams
Its: Chief Financial Officer (Principal
Financial Officer)
36
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 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.
10.7*** 2001 Compact between the Mescalero Apache Tribe and the State of New
Mexico, entered into June 1, 2004.
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).
*** Incorporated by reference to IMG Resort and Casino's Annual Report on Form
10-K filed with the SEC on July 29, 2004.
1