SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended: June 30, 2002
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 ______________
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
(Exact name of registrant as specified in its charter)
Mississippi Band of Choctaw Indians 64-0345731
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
PO Box 6260, Choctaw Branch, Philadelphia, MS 39350
(Address of principal executive offices) (Zip code)
(601) 650-9294
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Balance Sheets as of June 30, 2002 (unaudited) and September 30, 2001.....................................3
Statements of Operations and Comprehensive Income for the Three and Nine Months
Ended June 30, 2002 and 2001 (unaudited)..................................................................4
Statement of Owner's Equity for the Nine Months Ended June 30, 2002 (unaudited)...........................5
Statements of Cash Flows for the Nine Months Ended June 30, 2002 and
2001 (unaudited).........................................................................................6
Notes to Financial Statements (unaudited) ................................................................7
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................16
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk..................................................24
PART II -- OTHER INFORMATION.....................................................................................25
Signatures -.....................................................................................................26
PART I. Financial Information
Item 1 Financial Statements
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
BALANCE SHEETS
June 30, 2002 and September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------
June 30, September 30,
2002 2001
------------------- --------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 50,074,847 $ 81,822,543
Short-term investments - 81,949,037
Accounts receivable (net of allowance of
$2,311,263 and $1,685,009) 2,852,443 3,085,106
Inventories 1,647,167 1,517,052
Prepaid expenses and other 1,561,027 1,784,209
------------------- --------------------
Total current assets 56,135,484 170,157,947
Property and equipment, net 361,546,629 206,222,932
Restricted cash 2,606,939 2,568,256
Deferred loan costs, net 5,871,740 6,595,249
Other assets 1,446,084 1,302,131
------------------- --------------------
Total assets $427,606,876 $ 386,846,515
------------------- --------------------
Liabilities and Owner's Equity
Current liabilities:
Current maturities of long-term debt $ 300,000 $ 300,000
Accounts payable 1,859,205 2,519,767
Construction accounts payable 19,648,925 15,883,132
Due to Tribe 4,625,705 81,401
Accrued liabilities:
Accrued payroll and related 6,721,885 5,247,757
Accrued expenses and other liabilities 7,346,569 7,991,053
Accrued interest expense 4,975,294 9,597,633
------------------- --------------------
Total current liabilities 45,477,583 41,620,743
Long term debt, net of current maturities 220,000,000 200,000,000
Commitments and contingencies - -
Owner's equity:
Contributed capital 183,440,262 181,552,126
Retained earnings (deficit) (21,035,750) (35,932,309)
Accumulated other comprehensive loss (275,219) (394,045)
------------------- --------------------
Total owner's equity 162,129,293 145,225,772
------------------- --------------------
Total liabilities and owner's equity $427,606,876 $ 386,846,515
------------------- --------------------
The accompanying notes are an integral part of these financial statements.
3
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended June 30, 2002 and 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Casino $ 54,792,271 $ 54,522,252 $167,448,156 $168,136,076
Food & beverage 5,020,885 5,143,548 16,013,837 15,376,493
Rooms 2,336,567 2,081,706 6,440,302 6,227,209
Other 3,177,117 2,721,690 7,224,180 7,274,485
---------------- --------------- ---------------- ----------------
Gross revenue 65,326,840 64,469,196 197,126,475 197,014,263
Less: promotional allowances (4,932,607) (5,376,587) (16,470,447) (16,663,590)
---------------- --------------- ---------------- ----------------
Net revenue 60,394,233 59,092,609 180,656,028 180,350,673
---------------- --------------- ---------------- ----------------
Costs and expenses:
Casino 13,966,973 15,514,718 44,990,100 46,848,555
Food & beverage 1,859,098 1,804,004 5,415,359 5,254,891
Rooms 472,223 385,833 1,189,221 1,098,002
Other 2,606,502 1,954,616 6,066,537 5,301,421
Selling, general, and administrative 11,091,317 7,572,617 29,646,455 23,578,791
Maintenance and utilities 1,366,603 1,433,742 3,930,330 3,889,225
Depreciation 2,754,297 3,142,443 9,782,209 9,299,473
---------------- --------------- ---------------- ----------------
Total 34,117,013 31,807,973 101,020,211 95,270,358
---------------- --------------- ---------------- ----------------
Operating income 26,277,220 27,284,636 79,635,817 85,080,315
---------------- --------------- ---------------- ----------------
Other income (expense):
Interest income 114,093 1,663,116 1,615,355 2,336,508
Interest expense, net of interest capitalized (2,065,190) (5,413,168) (9,308,816) (8,388,833)
Other income (expense) 61,117 115,794 3,849,330 (1,286,220)
---------------- --------------- ---------------- ----------------
Total (1,889,980) (3,634,258) (3,844,131) (7,338,545)
---------------- --------------- ---------------- ----------------
Net income 24,387,240 23,650,378 75,791,686 77,741,770
Other comprehensive income (loss) 40,405 37,308 118,826 (432,008)
---------------- --------------- ---------------- ----------------
Comprehensive income $ 24,427,645 $ 23,687,686 $ 75,910,512 $ 77,309,762
---------------- --------------- ---------------- ----------------
The accompanying notes are an integral part of these financial statements.
4
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
STATEMENT OF OWNER'S EQUITY
For the Nine Months Ended June 30, 2002
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Retained Other Total
Contributed Earnings Comprehensive Owner's
Capital (Deficit) Loss Equity
----------------- ----------------- ----------------- -----------------
Balances, September 30, 2001 $ 181,552,126 $ (35,932,309) $ (394,045) $ 145,225,772
Net income - 75,791,686 - 75,791,686
Contributed capital 1,888,136 - - 1,888,136
Distributions - (60,895,127) - (60,895,127)
Reclassification adjustment
under SFAS 133 - - 118,826 118,826
----------------- ----------------- ----------------- -----------------
Balances, June 30, 2002 $ 183,440,262 $ (21,035,750) $ (275,219) $ 162,129,293
----------------- ----------------- ----------------- -----------------
The accompanying notes are an integral part of these financial statements.
5
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30,
----------------------------------------
2002 2001
------------------- -------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 75,791,686 $ 77,741,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change - (541,847)
Depreciation and amortization 10,099,893 10,427,700
Gain on disposal of property and equipment (599,401) -
Change in operating assets and liabilities:
Accounts receivable, net 232,663 1,390,777
Inventories (130,115) (183,771)
Prepaid expenses and other 223,182 (1,159,483)
Other assets (143,953) 2,465
Accounts payable and due to Tribe (617,473) (6,315,023)
Accrued liabilities (3,792,695) 6,418,492
------------------- -------------------
Net cash provided by operating activities 81,063,787 87,781,080
------------------- -------------------
Cash flows from investing activities:
Acquisitions of property and equipment, net of
amounts in construction accounts payable (156,929,412) (16,648,380)
Proceeds from disposal of property and equipment 689,915 -
Decrease (increase) in short term investments 82,513,481 (87,436,862)
Restricted cash (38,683) (101,618)
------------------- -------------------
Net cash used in investing activities (73,764,699) (104,186,860)
------------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of bonds - 200,000,000
Borrowing under credit facilities 20,000,000 -
Repayment of long-term debt - (62,500,000)
Contributions of cash from Tribe 1,888,136 22,110,727
Distributions to Tribe (60,895,127) (70,600,110)
Loan fees paid (39,793) (5,323,694)
------------------- -------------------
Net cash (used in) provided by financing activities (39,046,784) 83,686,923
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (31,747,696) 67,281,143
Cash and cash equivalents at beginning of period 81,822,543 34,779,920
------------------- -------------------
Cash and cash equivalents at end of period $ 50,074,847 $ 102,061,063
------------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 20,420,929 $ 2,925,085
------------------- -------------------
Supplemental disclosure of non-cash investing and financing
activities:
Contributions of property and equipment from Tribe $ - $ 3,156,740
------------------- -------------------
Due to Tribe for property and equipment $ - $ 816,468
------------------- -------------------
Contributions of other assets from Tribe $ - $ 1,843,927
------------------- -------------------
Accounts payable for construction $ 19,648,925 $ 9,182,914
------------------- -------------------
Exchange of property and equipment for a
note due to Tribe $ 4,501,215 $ -
------------------- -------------------
The accompanying notes are an integral part of these financial statements.
6
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Note 1--Summary of Significant Accounting Policies
Description of Operations
The Choctaw Resort Development Enterprise (the "Enterprise") is an enterprise of
the Mississippi Band of Choctaw Indians (the "Tribe"). The Enterprise was
established on October 12, 1999 by the Tribe for the purpose of managing the
existing and future Tribal gaming and other resort operations at the Tribe's
Pearl River Community. Prior to July 1, 2001, the Silver Star Hotel and Casino
(the "Silver Star") was the sole operating entity of the Enterprise. The Silver
Star commenced operations of a gaming, hotel, conference center and restaurant
complex near Philadelphia, Mississippi on trust lands of the Tribe on July 1,
1994. In addition, the Enterprise is currently developing a second hotel and
casino, the Golden Moon (the "Golden Moon"), to be located adjacent to the
Silver Star.
In connection with the development of the Silver Star, the Tribe entered into a
seven-year management agreement (the "Management Agreement") with Boyd
Mississippi, Inc., a subsidiary of Boyd Gaming Corporation ("Boyd"), to
construct and operate the Silver Star. The Tribe entered into a termination
agreement (the "Termination Agreement") with Boyd to terminate the Management
Agreement on January 31, 2000. Pursuant to the provisions of the Termination
Agreement, the Enterprise made a one-time termination payment to Boyd (the
"Termination Fee") in the amount of $72 million on February 1, 2000.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ended September 30, 2002. The interim financial
statements and notes thereto should be read in conjunction with the Enterprise's
audited financial statements and notes thereto for the year ended September 30,
2001.
Effective July 1, 2001, the Tribe contributed Dancing Rabbit Golf Club (the
"Dancing Rabbit") to the Enterprise. Prior to its contribution to the
Enterprise, the Dancing Rabbit operated as a separate, wholly owned
unincorporated business enterprise of the Tribe. Due to common control of the
Dancing Rabbit and the Enterprise the contribution was accounted for as a
reorganization of entities under common control. The financial statements of the
Enterprise for all periods are presented as if the contribution described above
occurred at the beginning of the earliest period presented and include the
accounts of the Enterprise and the Dancing Rabbit on a historical cost basis, in
a manner similar to a pooling of interests.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit with banks and
other financial institutions. The Enterprise considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
7
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
- -------------------------------------------------------------------------------
Short-term Investments
Short-term investments include debt securities and other investments, which
mature within one year but do not qualify as cash equivalents. All short-term
investments are classified as held-to-maturity because the Enterprise has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Inventories
Inventories, consisting primarily of food, beverage, and gift shop merchandise,
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out inventory method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Costs of
major construction, including interest incurred during construction of new
facilities, are capitalized; costs of normal repairs and maintenance are charged
to expense as incurred. Gains or losses on disposals of assets are recognized as
incurred.
Deferred Loan Costs
Deferred loan costs consist of costs incurred in the issuance of long-term debt.
Amortization of deferred loan costs is computed using the interest method over
the stated maturity of long-term debt. Accumulated amortization of the deferred
loan costs is $1,329,243 and $565,941 at June 30, 2002 and September 30, 2001,
respectively.
Accounting for Derivative Instruments and Hedging Activities
On October 1, 2000, the Enterprise adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments
and Hedging Activities", as amended by Statement of Financial Accounting
Standards No. 138. See Note 4.
Contributed Capital
Contributed capital consists of (i) equipment and facilities related primarily
to various construction and expansion projects since the Silver Star opened
which have been funded by the Tribe and contributed upon their completion at the
Tribe's cost, (ii) certain development costs for the Golden Moon, also funded by
the Tribe and contributed at the Tribe's cost, (iii) cash to fund Golden Moon
construction and development and (iv) cash to fund construction and development
of Geyser Falls, a water theme park proximate to the Silver Star.
Casino and Other Revenue
Casino revenue is net win from gaming activities, which is the difference
between gaming wins and losses. Gross revenues include the estimated retail
value of rooms, food and beverage, and other goods and services provided to
customers on a complimentary basis. Such amounts are then deducted as
promotional allowances.
The estimated cost of providing these promotional allowances is charged to the
casino department in the following amounts:
8
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- --------------- ---------------- ----------------
Food and beverage $ 3,429,843 $ 3,935,891 $11,718,646 $11,899,187
Rooms 888,372 822,058 2,575,635 2,501,616
Other 467,821 617,946 1,510,664 1,885,239
-------------- --------------- ---------------- ----------------
Total $ 4,786,036 $ 5,375,895 $15,804,945 $16,286,042
-------------- --------------- ---------------- ----------------
Complimentary revenues have been earned in the following casino departments as
follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- --------------- ---------------- ----------------
Food and beverage $ 3,383,536 $ 3,785,665 $11,714,399 $11,575,988
Rooms 1,212,745 1,239,702 3,683,039 3,738,633
Other 336,326 351,220 1,073,009 1,348,969
-------------- --------------- ---------------- ----------------
Total $ 4,932,607 $ 5,376,587 $16,470,447 $16,663,590
-------------- --------------- ---------------- ----------------
Income Taxes
The Enterprise is a business enterprise owned by the Mississippi Band of Choctaw
Indians, a federally recognized Indian Tribe located on reservation land held in
trust by the United States of America; therefore, the Enterprise was not subject
to federal or state income taxes for the three or nine months ended June 30,
2002 and 2001.
Advertising Expense
Advertising is expensed as incurred and is included in selling, general, and
administrative expense and casino costs and expenses. Advertising expense was
$1,017,238 and $1,008,379 for the three months ended June 30, 2002 and 2001,
respectively, and $2,719,116 and $3,557,461 for the nine months ended June 30,
2002 and 2001, respectively.
Use of Estimates
The preparation of 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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates used by the Enterprise
include the estimated useful lives of depreciable assets and the estimated
allowance for doubtful accounts receivable. Actual results could differ from
those estimates.
9
Preopening Expenses
Preopening costs are expensed as incurred and are included in selling, general,
and administrative cost. Preopening costs incurred during the three months ended
June 30, 2002 and 2001 were $1,278,283 and $252,862, respectively. Preopening
costs incurred during the nine months ended June 30, 2002 and 2001 were
$1,718,865 and $252,862, respectively.
Note 2--Property and Equipment
Property and equipment consists of the following:
Useful
Lives June 30, September 30,
(Years) 2002 2001
--------------- ------------------ --------------------
Land and improvements $ 16,799,809 $ 16,799,809
Buildings and improvements 20-40 127,674,903 124,375,524
Golf course improvements 5-15 2,723,984 2,723,984
Furniture and equipment 5-10 85,761,588 63,447,006
Aircraft 10 4,551,215 -
Vehicles 3 1,044,625 928,407
------------------ --------------------
238,556,124 208,274,730
Less accumulated depreciation 75,127,968 65,804,004
------------------ --------------------
163,428,156 142,470,726
Construction in progress 198,118,473 63,752,206
------------------ --------------------
$361,546,629 $ 206,222,932
------------------ --------------------
At June 30, 2002, construction in progress consists of $185,879,935 incurred
related to the development of the Golden Moon and $3,759,690 incurred related to
development of Geyser Falls Water Theme Park ("Geyser Falls"). Construction in
progress for Golden Moon includes $8,478,848 of interest capitalized as of June
30, 2002. The Enterprise capitalized interest in the amount of $3,412,561 and
$7,253,076 in the three and nine months ended June 30, 2002, respectively. The
Enterprise capitalized interest in the amount of $486,775 in the three and nine
months ended June 30, 2001.
Note 3--Restricted Cash
The Enterprise had $ 2,606,939 and $ 2,568,256 of restricted cash as of June 30,
2002 and September 30, 2001, respectively. The balances at June 30, 2002 and
September 30, 2001 are required by the Management Agreement for employment,
workers compensation and other third party claims not otherwise covered by
insurance proceeds (the "Claims Reserve") that may be filed or become due after
the Management Agreement termination date. The Claims Reserve will survive for
three years after the Termination Agreement and is governed by the terms of the
Management Agreement. Any unused portion of the Claims Reserve at the end of the
three-year period will become unrestricted.
Note 4--Long-Term Debt
In March 2001, the Enterprise issued unsecured senior notes (the "Notes") in the
amount of $200,000,000. The proceeds of the offering were used to retire a $75
million term loan and are being used to finance the construction of the Golden
Moon. The Notes bear interest at 9 1/4% and require semiannual payments of
interest beginning with the first payment on October 1, 2001 with the Notes
maturing on April 1, 2009. The indenture governing the Notes (the "Indenture")
contains certain financial covenants which restrict our ability to borrow money,
pay dividends or make distributions, make investments, create liens, enter into
certain transactions with affiliates and sell specific assets or merge with or
into another entity. Under specific circumstances, the covenant limiting our
ability to make certain payments, distributions and investments will be
suspended.
10
After April 1, 2005, the Enterprise may redeem all or a part of the Notes at
specified redemption prices plus accrued and unpaid interest on the redemption
date. The Notes are subject to redemption requirements imposed by certain gaming
laws and regulations.
On December 29, 2000, the Enterprise entered into a $125 million reducing
revolving credit facility (the "Facility"). The Facility will be used by the
Enterprise to (i) finance the construction of the Golden Moon, (ii) provide
working capital, (iii) finance permitted capital expenditures, and (iv) for
general purposes of the Enterprise. At June 30, 2002, a total of $20,000,000 was
drawn and outstanding on the Facility. For the three and nine months ended June
30, 2002, the Enterprise paid commitment fees totaling $145,347 and $416,555,
respectively, on the Facility. Advances on the Facility bear interest at LIBOR
plus a margin rate of 2.5%. At June 21, 2002 (the date of the initial draw under
the Facility), LIBOR was 1.86%.
The Facility is collateralized by the personal property of and the revenue
generated by the Silver Star and the Golden Moon. The Facility has a maturity
date of December 28, 2005. Borrowings available under the Facility will reduce
quarterly beginning on the earlier of December 31, 2002 or the last day of the
first full fiscal quarter following the completion of the Golden Moon, in the
amount of $6.25 million per quarter, until the amount of the Facility has been
reduced to $40 million. The interest rate on the facility varies based upon the
Enterprise's total recourse debt to gaming EBITDA ratio, as defined. The
Facility contains certain affirmative and negative covenants, including limiting
the Enterprise's Total Leverage Ratio and Fixed Charge Coverage Ratio, as
defined, during the term of the agreement. Additionally, the Enterprise is not
permitted to expend more than $325 million for the completion of the Golden Moon
project and has agreed to cause the Golden Moon to be open and available for
gaming patrons by September 30, 2002.
On October 26, 1999, the Enterprise entered into a note agreement with MBCI
Resort and Capital Fund, a related party, in the amount of $300,000 that is
payable on demand with annual interest of 6% due monthly.
As of June 30, 2002, management believes that the Enterprise is in compliance
with all debt covenants under the Notes and the Facility.
The Enterprise entered into an interest rate swap agreement for the purpose of
fixing interest rates on the term loan which was retired with proceeds from the
notes, thus reducing exposure to interest rate fluctuations. At June 30, 2002,
the Enterprise's interest rate swap had a notional amount of $31,250,000. This
agreement effectively fixed the interest rate on the term loan at 8.25%. The
notional amount does not represent amounts exchanged by the parties, and thus is
not a measure of exposure to the Enterprise. The amount exchanged is based on
the notional amount. The term of the interest rate swap agreement is through
January 31, 2004. The term loan was repaid on April 24, 2001, however, the
Enterprise did not concurrently settle the interest rate swap agreement. The
differences to be paid or received by the Enterprise under the terms of the
interest rate swap agreement are recognized as an adjustment to interest
expense. The agreement is with a major financial institution, which is expected
to fully perform under the terms of the agreement.
Effective October 1, 2000, the Enterprise adopted SFAS 133. The interest rate
swap agreement described above is defined as a derivative instrument under SFAS
133. In accordance with the transition provisions of SFAS 133, the Enterprise
recorded a cumulative-effect-type transition adjustment of $541,847 in other
comprehensive loss and in accrued expenses and other liabilities to recognize
the fair value of the Enterprise's liability under this swap agreement on
October 1, 2000. Although the Enterprise had designated this swap agreement as a
hedge since its inception on February 1, 2000, the Enterprise did not elect to
seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly,
during the period from October 1, 2001 through June 30, 2002, the Enterprise
recognized other income of $826,008 and a related decrease in accrued expenses
and other liabilities representing the effect during this period of interest
rate changes. Reclassifications to other comprehensive income during the period
from October 1, 2001 through June 30, 2002 are $118,826.
11
Note 5--Fair Value of Financial Instruments
The carrying values of the Enterprise's cash and cash equivalents, accounts
receivable, note payable, and accounts payable approximate fair value because of
the short maturity of those instruments. Estimated fair value of the Notes is
$206,000,000 at June 30, 2002 based on quoted market prices on or about June 30,
2002.
Fair value of the Enterprise's interest rate swap agreement is based on the
termination value of the agreement using quotes from the Enterprise's
counterparty. The fair value liability of the Enterprise's interest rate swap at
June 30, 2002 was $1,288,012 and is included in accrued expenses and other
liabilities.
Note 6--Enterprise Licensing and Regulation
The Mississippi Band of Choctaw Indians, by vote of the Tribal members,
authorized casino gaming on Tribal lands located in Mississippi. In accordance
with the Indian Gaming Regulatory Act, the Tribe signed a Tribal-State Compact
with the State of Mississippi on December 4, 1992 and enacted ordinances
authorizing bingo (Class II) and casino-type (Class III) gaming. The Tribal
Council created the Choctaw Gaming Commission and authorized it as the
regulatory agency responsible for the licensing of the Casino and the on-site
regulation of the gaming operations. The Choctaw Gaming Commission has
promulgated regulations that govern the gaming operations.
Note 7--Related Party Transactions
Net distributions to the Tribe were $17,689,072 and $28,440,299 for the three
months ended June 30, 2002 and 2001, respectively and $60,895,127 and
$70,600,110 for the nine months ended June 30, 2002 and 2001, respectively.
Subsequent to January 31, 2000, the Enterprise makes distributions to the Tribe
at the Tribe's discretion subject to the distribution restrictions under the
Notes described in Note 4.
Employees of the Enterprise are provided health coverage through the Tribe's
health plan. The Enterprise and its employees paid $2,142,691 and $2,012,987 to
the Tribe under this arrangement for the three months ended June 30, 2002 and
2001, respectively and $6,405,583 and $5,843,247 for the nine months ended June
30, 2002 and 2001, respectively.
The Enterprise collects and remits a 7% sales tax to the Tribe on rooms, food,
beverage, sundry and entertainment revenue. The total sales tax paid was
$248,051 and $199,663 for the three months ended June 30, 2002 and 2001,
respectively. The Enterprise paid sales tax of $639,664 and $593,456 for the
nine months ended June 30, 2002 and 2001, respectively. During the three and
nine months ended June 30, 2002, the Enterprise also paid rent for office space
and purchased certain goods and services from the Tribe and its businesses in
the amounts of $1,078,534 and $3,059,184, respectively. For the three and nine
months ended June 30, 2001, the Enterprise paid rent for office space and
purchased certain goods and services from the Tribe and its businesses in the
amounts of $1,061,224 and $9,326,183 respectively. The amount for the nine
months ended June 30, 2001 includes $6,577,227 for the construction of a parking
garage.
12
The Enterprise purchases coarse paper and janitorial supplies from Choctaw Paper
Company, Inc. in the ordinary course of business. Choctaw Paper Company, Inc. is
majority owned by a member of the Enterprises' board of directors. During the
three and nine months ended June 30, 2002 the Enterprise made purchases of
$235,907 and $624,135 from Choctaw Paper Company, Inc.
The Enterprise paid $62,500 to the Tribal/State Tourism Fund for the promotion
of tourism in Mississippi for each of the three-month periods ended June 30,
2002 and 2001 under the Tribal-State Compact. The Choctaw Gaming Commission was
paid $590,043 and $545,223 for the three months ended June 30, 2002 and 2001,
respectively, and $1,692,359 and $1,681,361 for the nine months ended June 30,
2002 and 2001, respectively, for fees assessed at 1% of gaming revenues per the
Tribal Code. Amounts paid to the Choctaw Gaming Commission along with amounts
paid the Tribal/State Tourism fund are included in selling, general and
administrative expense for the three and nine months ended June 30, 2002 and
2001.
The Enterprise paid Choctaw Development Enterprise $-0- and $1,021,202 for the
construction of administrative offices and a hospitality institute and $ -0- and
$57,000 for construction related to the Golden Moon project during the three and
nine months ended June 30, 2002, respectively.
During the three and nine months ended June 30, 2002 the Tribe did not
contribute property and equipment or other assets to the Enterprise, however
during the three months ended June 30, 2002 the Tribe did contribute $1,888,136
in cash related to construction and development of Geyser Falls. In addition,
the Tribe advanced $2,000,000 to the Enterprise for construction of Geyser Falls
which is included in Due to Tribe at June 30, 2002. During the nine months ended
June 30, 2001, the Tribe contributed property and equipment to the Enterprise at
the Tribe's cost of $3,156,740 . During the nine months ended June 30, 2001, the
Tribe contributed other assets to the Enterprise at the Tribe's cost of
$1,843,927.
During November 2001, the Tribe purchased on behalf of the Enterprise a 2000
model King Air aircraft. The total purchase price of this aircraft was
$4,551,215, of which $4,501,215 was paid by the Tribe. At the time of purchase,
the aircraft was contributed to the Enterprise and a corresponding non-interest
bearing payable to the Tribe was established. Repayment to the Tribe is to occur
in 12 equal monthly installments commencing in December 2001. During the three
and nine months ended June 30, 2002 the Enterprise has made payments to the
Tribe totaling $750,204 and $1,875,510, respectively, in connection with this
purchase.
Note 8--Employee Benefit Plans
Employees of the Enterprise are eligible to participate in the Tribe's 401(k)
plan. The Enterprise expensed contributions of $504,442 and $418,809 for the
three months ended June 30, 2002 and 2001, respectively, and $1,464,773 and
$1,280,567 for the nine months ended June 30, 2002 and 2001, respectively.
The Enterprise has no formal commitments to provide post-retirement health care
benefits to retirees.
13
Note 9 --Contingencies
The Enterprise is subject to various claims and litigation in the normal course
of business. In the opinion of management, all pending legal matters are either
adequately covered by insurance or, if not insured, will not have a material
adverse impact on the Enterprise's financial position, results of operations or
cash flows.
On July 26, 2001, a lawsuit was filed in a Mississippi state court by Eddie
Fears, "a citizen and taxpayer", against Ronnie Musgrove, Governor of the State
of Mississippi, the Mississippi Gaming Commission and members of the Mississippi
Gaming Commission. The lawsuit alleged that the Tribal-State Compact entered
into by the State of Mississippi and the Tribe is invalid for a number of
reasons, including that the then-Governor of the State of Mississippi did not
have the legal power to bind the State to the terms of the Compact. On February
21, 2002 this lawsuit was dismissed upon the filing of a notice of dismissal by
the Plaintiff in the Chancery Court of Hinds County, Mississippi.
Note 10--Subsequent Events
On July 8, 2002, July 12, 2002 and August 6, 2002, the Enterprise made
distributions of $5,000,000, $2,829,212 and $7,384,031 respectively, to the
Tribe.
On July 23, 2002 the Enterprise drew an additional $20,000,000 on the Facility
referred to in Note 4.
Note 11--Insurance Proceeds
On January 10, 2002 a settlement agreement for the insurance claim related to
the April 2001 flood was entered into between the Enterprise and the insurance
carriers. The Enterprise received $3,023,322, which represents the entire amount
of the settlement, during the quarter ended March 31, 2002. During the quarter
ended March 31, 2002 the Enterprise recognized $2,473,293 of other income and
$550,029 as a gain on disposal of assets related to the insurance settlement.
Note 12--Recently Issued Accounting Pronouncements
On January 1, 2001, the Enterprise adopted Emerging Issues Task Force Issues
00-14 and 00-22 ("EITF 00-14 and 00-22"). EITF 00-14 and 00-22 require that cash
discounts and other cash incentives related to gaming play be recorded as a
reduction to gross casino revenues. The adoption of EITF 00-14 and 00-22 did not
have a material effect on the Enterprise's financial statements. There is no
effect on previously reported net income.
In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS
No. 144. "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Statement requires that long-lived assets to be disposed of other than by sale
be accounted for under the requirements of SFAS No. 121 which requires that such
assets be measured at the lower of carrying amounts or fair value less cost to
sell and to cease depreciation. SFAS No. 144 requires a probability-weighted
cash flow estimation approach with situations in which alternative courses of
action to recover the carrying amount of a long-lived asset are under
consideration or a range of possible future cash flow amounts are estimated. As
a result, discontinued operations will no longer be measured on a net realizable
basis, and future operating losses will no longer be recognized before they
occur. Additionally, goodwill will be removed from the scope of SFAS No. 144 and
as a result will no longer be required to be allocated to long-lived assets to
be tested for impairment. The Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Enterprise is not currently affected by the
Statement's requirements.
14
On April 30, 2002 the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In rescinding FASB Statement No. 4 (SFAS 4), Reporting Gains and
Losses from Extinguishment of Debt, and FASB Statement 64 (SFAS 64),
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, SFAS 145
eliminates the requirement that gains and losses from the extinguishment of debt
be aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. However, pursuant to SFAS 145, an entity would not be
prohibited for classifying such gains and losses as extraordinary items so long
as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion
No. 30 (APB 30), Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 is effective for transactions
occurring after May 15, 2002. The Enterprise has adopted the provisions of SFAS
145 which have had no effect on the financial statements.
15
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001
- --------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations should be read together with the financial statements and notes
thereto.
Net Revenues. Net revenues were $60.4 million for the quarter ended June 30,
2002 compared to $59.1 million for the quarter ended June 30, 2001. The $1.3
million, or 2.2% increase in net revenue was primarily due to an increase in
gaming, room and other revenue. Net revenues were $180.7 million for the nine
months ended June 30, 2002 compared to $180.4 million for the nine months ended
June 30, 2001 representing a $0.3 million, or 0.2% increase in net revenue.
Complimentary revenues are included in gross revenues but are deducted as a
promotional allowance to arrive at net revenues.
Casino. Casino revenues increased $0.3 million, or 0.6%, to $54.8 million for
the quarter ended June 30, 2002 from $54.5 million for the quarter ended June
30, 2001. Casino revenues were $167.4 million for the nine months ended June 30,
2002 compared to $168.1 million for the nine months ended June 30, 2001, a
decrease of $ 0.7 million, or 0.4%.
Table game activity decreased as reflected in table games drop. The table game
drop was $38.8 million for the quarter ended June 30, 2002 compared to table
game drop of $39.5 million for the quarter ended June 30, 2001. This reflects a
decrease in table activity of $0.7 million or 1.7% over the corresponding period
in 2001. Table game revenue was $6.8 million for the quarter ended June 30, 2002
compared to $7.5 million for the quarter ended June 30, 2001, a decrease of $0.7
million, or 9.3%. The decrease in revenue is primarily due to the decrease in
table game drop combined with a lower hold percentage for the quarter ended June
30, 2002 as compared to the quarter ended June 30, 2001. Table game hold
percentage was 17.5% for the quarter ended June 30, 2002 compared to 19.0% for
the quarter ended June 30, 2001. The table game drop was $124.7 million for the
nine months ended June 30, 2002 compared to table game drop of $129.6 million
for the nine months ended June 30, 2001. This reflects a decrease in table
activity of $4.9 million or 3.8% over the corresponding period in 2001. Table
game revenue was $23.0 million for the nine months ended June 30, 2002 compared
to $26.2 million for the nine months ended June 30, 2001, a decrease of $3.2
million, or 12.2%. The decrease in revenue is primarily due to the decrease in
table game drop combined with a lower hold percentage for the nine months ended
June 30, 2002 as compared to the nine months ended June 30, 2001. Table game
hold percentage was 18.4% for the nine months ended June 30, 2002 compared to
20.2% for the nine months ended June 30, 2001.
Slot revenues were $49.4 million for the quarter ended June 30, 2002 compared to
$46.8 million for the quarter ended June 30, 2001, an increase of $2.6 million
or 5.6%. The increase is due to an increase in hold percentage for the quarter
ended June 30, 2002. Slot revenues were $143.4 million for the nine months ended
June 30, 2002 compared to $141.0 million for the nine months ended June 30,
2001, an increase of $2.4 million or 1.7%. The increase is primarily due to an
increase in coin-in for the nine months ended June 30, 2002, compared to the
same period in the prior year.
Food and Beverage. For the quarter ended June 30, 2002, food and beverage
revenues were $5.0 million, a decrease of approximately $0.1 million, or 2.0%,
from $5.1 million for the quarter ended June 30, 2001. During the quarter ended
June 30, 2002, the Silver Star turned 344,500 covers with an average revenue per
cover of $11.29 compared to 334,200 covers with an average revenue per cover of
$11.85 during the quarter ended June 30, 2001. For the nine months ended June
30, 2002, food and
16
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
beverage revenues were $16.0 million, an increase of approximately $0.6 million,
or 3.9%, from $15.4 million for the nine months ended June 30, 2001. During the
nine months ended June 30, 2002, the Silver Star turned 1,017,000 covers with an
average revenue per cover of $11.93 compared to 985,100 covers with an average
revenue per cover of $11.79 during the nine months ended June 30, 2001.
Rooms. Room revenues were $2.3 million for the quarter ended June 30, 2002
compared to $2.1 million for the quarter ended June 30, 2001. There was an
increase in the average daily room rate to $56.22 for the quarter ended June 30,
2002 from $51.93 for the quarter ended June 30, 2001. Our occupancy rate was
92.7% for the quarter ended June 30, 2002 compared to 90.5% for the quarter
ended June 30, 2001. During the quarter ended June 30, 2002, 52.7% of our hotel
revenue was attributable to rooms occupied by Silver Star customers on a
complimentary basis compared to 59.0% for the quarter ended June 30, 2001. Room
revenues were $6.4 million for the nine months ended June 30, 2002 compared to
$6.2 million for the nine months ended June 30, 2001.
Other. Other revenues increased $500,000 to $3.2 million for the quarter ended
June 30, 2002 from $2.7 million for the quarter ended June 30, 2001. The
increase in other revenue is attributable to increases in sales from our various
retail outlets and convention center during the three months ended June 30,
2002. Other revenues decreased $100,000 to $7.2 million for the nine months
ended June 30, 2002 from $7.3 million for the nine months ended June 30, 2001.
The decrease in other revenue is attributable to declines in sales from our
various retail outlet during the nine months ended June 30, 2002. Other revenues
are comprised primarily of revenue from our various retail outlets, the
convention center, fees earned from cash advances to customers and other
miscellaneous items. Also included in other revenue is the revenue from the
Dancing Rabbit. Golf revenues were $1,430,000 for the quarter ended June 30,
2002 compared to $1,418,000 for the quarter ended June 30, 2001, an increase of
$12,000 or 0.8%. Golf revenues were $2,785,000 for the nine months ended June
30, 2002 compared to $2,760,000 for the nine months ended June 30, 2001, an
increase of $26,000 or 0.9%. Slight golf revenue increases in both the three
months and nine months ended June 30, 2002 were the result of increased golf
rounds coupled with lower per round pricing associated with golf packages and
special promotions.
Promotional Allowances. Promotional allowances totaled $4.9 million for the
quarter ended June 30, 2002, representing a $500,000 or 9.2% decrease over
promotional allowances of $5.4 million for the quarter ended June 30, 2001.
During the quarter ended June 30, 2002 promotional allowances were 8.9% of
casino revenues compared to 9.9% for the quarter ended June 30, 2001.
Promotional allowances were $16.5 million for the nine months ended June 30,
2002, representing a $200,000 or 1.2% decrease over promotional allowances of
$16.7 million for the nine months ended June 30, 2001. During the nine months
ended June 30, 2002 and 2001, promotional allowances remained constant at 9.9%
of casino revenues.
Costs and Expenses. Total costs and expenses were $34.1 million for the quarter
ended June 30, 2002 compared to $31.8 million for the quarter ended June 30,
2001, an increase of $2.3 million or 7.2%. Total costs and expenses were $101.0
million for the nine months ended June 30, 2002 compared to $95.3 million for
the nine months ended June 30, 2001, an increase of $5.7 million or 6.0%. The
increase for both periods is primarily due to the increase in selling, general
and administrative expenses that are described below.
17
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
Casino. Casino costs and expenses were $14.0 million for the quarter ended June
30, 2002, compared to $15.5 million for the quarter ended June 30, 2001, a
decrease of $1,500,000 or 9.7%. Casino costs and expenses were $45.0 million for
the nine months ended June 30, 2002, compared to $46.8 million for the nine
months ended June 30, 2001, a decrease of $1,800,000 or 3.9%. The decrease for
both the quarter and nine-month period is attributable to the decline in table
game activity as well as management's effort to control operating costs and
expense.
Other. Other costs and expenses were $2.6 million for the three months ended
June 30, 2002, compared to $2.0 million for the three months ended June 30,
2001, an increase of $600,000, or 30.0%. Other costs and expenses were $6.1
million for the nine months ended June 30, 2002, compared to $5.3 million for
the nine months ended June 30, 2001, an increase of $800,000, or 15.1%. Other
expenses are comprised of the costs related to the operation of retail outlets
and the convention center. Also included in other expenses are the operating
expenses of the Dancing Rabbit. Golf operating expenses were $1,276,000 for the
three months ended June 30, 2002 and $1,171,000 for the three months ended June
30, 2001, an increase of $105,000, or 9.0%. Golf operating expenses were $3.2
million for the nine months ended June 30, 2002 compared to $2.9 million for the
nine months ended June 30, 2001, an increase of $300,000 or 10.3%. The increase
in golf operating expenses is attributable to increased golf rounds.
Selling, General and Administrative. Selling, general and administrative costs
and expenses were $11.1 million for the quarter ended June 30, 2002 compared to
$7.6 million for the quarter ended June 30, 2001, an increase of $3.5 million or
46.1%. Approximately $1.0 million of the increase is attributable to pre-opening
expenses incurred during the quarter ended June 30, 2002 that are included in
selling, general and administrative costs and expenses. There were $1.3 million
and $0.3 million of pre-opening expenses incurred for the quarters ended June
30, 2002 and June 30, 2001, respectively. Selling, general and administrative
costs and expenses related to the Silver Star were $8.3 million for the quarter
ended June 30, 2002 compared to $7.1 million for the quarter ended June 30,
2001. The $1.2 million, or 16.9% increase in selling, general and administrative
expenses for the Silver Star is primarily attributable to increased promotional
activity related to our slot customers and an increase in the employee incentive
bonus program expense. Selling, general and administrative costs and expenses
related to the operations of the Enterprise administrative office and training
center were $1.4 million for the quarter ended June 30, 2002 compared to $0.2
million for the quarter ended June 30, 2001, an increase of $1.2 million. The
training center was opened on November 9, 2001 and the administrative office has
130 employees as of June 30, 2002 compared to none at June 30, 2001.
Selling, general and administrative costs and expenses were $29.6 million for
the nine months ended June 30, 2002 compared to $23.6 million for the nine
months ended June 30, 2001, an increase of $6.0 million, or 25.4%. Approximately
$1.0 million of this increase is due to the payment during the nine months ended
June 30, 2002 as required by the "Settlement and General Release Agreement" with
the former Chief Executive Officer of the Silver Star. Approximately $1.4
million of the increase is attributable to pre-opening expenses incurred during
the nine months ended June 30, 2002 that are included in selling, general and
administrative costs and expenses. There were $1.7 million and $0.3 million of
pre-opening expenses incurred for the nine months ended June 30, 2002 and June
30, 2001, respectively. Selling, general and administrative costs and expenses
related to the Silver Star (excluding the $1.0 million described above) were
$24.3 million for the nine months ended June 30, 2002 compared to $22.9 million
for the nine months ended June 30, 2001. The $1.4 million or 6.1% increase in
selling, general and administrative expense for the Silver Star is primarily
attributable to the increased promotional activity related to our slot customers
and an increase in the employee incentive bonus program expense. Selling,
general and administrative costs and expenses related to the operations of the
Enterprise administrative office and training center were $2.6 million for the
nine months ended June 30, 2002 compared to $0.4 million for the nine months
ended June 30, 2001, an increase of $2.2 million. The training center was opened
on November 9, 2001 and the administrative office has 130 employees as of June
30, 2002 compared to none at June 30, 2001.
18
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
Operating Income (loss). Operating income was $26.3 million for the quarter
ended June 30, 2002 compared to $27.3 million for the quarter ended June 30,
2001, a decrease of $1.0 million, or 3.7%. Operating income was $79.6 million
for the nine months ended June 30, 2002 compared to $85.1 million for the nine
months ended June 30, 2001, a decrease of $5.5 million, or 6.5%. The decrease
for the both periods was primarily due to the revenue and expense variations
previously discussed.
Other Income (Expense). Other expense was $1.9 million for the quarter ended
June 30, 2002 compared to other expense of $3.6 million for the quarter ended
June 30, 2001, representing a decrease in expense of $1.7 million which is
primarily attributed to a decrease in interest expense of approximately $3.3
million and a decrease in interest income of $1.6 million. The decrease in
interest expense is primarily due to capitalization of interest in the amount of
$3.4 million during the quarter ended June 30, 2002 compared to $0.5 million for
the quarter ended June 30, 2001. The decrease in interest income is due to
decreased cash and investment balances which were used to fund Golden Moon
construction. Other expense was $3.8 million for the nine months ended June 30,
2002 compared to other expense of approximately $7.3 million for the nine months
ended June 30, 2001, representing a decrease in expense of $3.5 million which is
attributed to an increase in interest expense of approximately $0.9 million, a
decrease in interest income of $0.7 million, the recognition of $3.0 million of
other income due to the insurance settlement described below and $2.1 million
increase in other income related to the effect of interest rate changes on the
interest swap agreement. Interest capitalized for the nine months ended June 30,
2002 was $7.3 million compared to $0.5 million for the nine months ended June
30, 2001. The decrease in interest income is due to decreased cash and
investment balances that were used to fund Golden Moon construction. Other
income (expense) is comprised of interest income minus interest expense (net of
capitalized interest) and other expense. On January 10, 2002 a settlement
agreement for the insurance claim related to the April 2000 flood was entered
into between the Enterprise and the insurance carriers. During the quarter ended
March 31, 2002, the Enterprise received $3.0 million which represents the entire
amount of the settlement. During the quarter ended March 31, 2002 the Enterprise
recognized $2.5 million of other income and $0.5 million as a gain on disposal
of assets related to the insurance settlement.
Effective October 1, 2000, the Enterprise adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments
and Hedging Activities", as amended by Statement of Financial Accounting
Standards No. 138. The interest rate swap agreement referred to above is defined
as a derivative instrument under SFAS 133. Although the Enterprise had
designated this interest rate swap agreement as a hedge since its inception on
February 1, 2000, the Enterprise did not elect to seek hedge accounting for this
agreement upon adoption of SFAS 133. Accordingly, during the three months ended
June 30, 2002 and 2001, the Enterprise recognized other income of $126,000 and
other expense of $800,000, respectively, attributed to the effect of interest
rate changes on the interest rate swap agreement. During the nine months ended
June 30, 2002 and 2001, the Enterprise recognized other income of $826,000 and
other expense of $1.3 million, respectively, attributed to the effect of
interest rate changes on the interest rate swap agreement.
19
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
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 the Enterprise, including the use of
estimates and assumptions are presented in the Notes to the Consolidated
Financial Statements. Management bases its estimates on it historical
experience, together with other relevant factors, in order to form the basis for
making judgments which 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. The Enterprise believes
that estimates related to the following areas involve a high degree of judgment
and/or complexity; The allowance for doubtful accounts receivable, estimated
accruals for jackpots and slot club bonus points, self insurance related to
employee health plans and contingencies related to customer claims in the
ordinary course of business.
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments, which results in
bad debt expense. We determine the adequacy of this allowance by periodically
evaluating individual customer receivables and considering the customer's
financial condition, credit history and current economic conditions. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, we may increase the allowance.
We maintain accruals for health and workers compensation self-insurance and slot
club point redemption, which are classified as accrued liabilities in the
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 these accruals are overstated or
understated, we will adjust the assumptions utilized in the methodologies and
reduce or provide for additional accruals as appropriate.
We are subject to various claims and legal actions in the ordinary course of
business. Some of these matters include personal injuries to customers and
damage to customers' personal assets. We estimate guest claims and accrue for
such liability based on historical experience in accrued liabilities in the
balance sheets.
Liquidity and Capital Resources
As of June 30, 2002, we held cash and cash equivalents of $50.1 million. Our
principal sources of liquidity have consisted of cash provided by operating
activities and debt financing. Cash provided by operating activities was $81.1
million in the nine months ended June 30, 2002 compared to $87.8 million in the
nine months ended June 30, 2001. The decrease of $6.7 million was due primarily
to the decrease in net income to $75.8 million in the nine months ended June 30,
2002 from $77.7 million in the nine months ended June 30, 2001.
20
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
Cash used in investing activities in the nine months ended June 30, 2002 for
capital expenditures totaled $156.9 million. The Enterprise received $82.5
million from the sale of short-term investments in the nine months ended June
30, 2002. Cash used in investing activities in the nine months ended June 30,
2001 was primarily for changes in restricted cash, capital expenditures and
purchases of short term investments totaling $0.1 million, $16.6 million and
$87.4 million respectively.
Our outstanding revolving credit facility restricts our ability to make capital
expenditures. We may not spend more than $10 million on capital expenditures and
improvements in any fiscal year for each of the Silver Star and Golden Moon
(following its opening). In addition, we are limited to a maximum construction
expenditure, exclusive of the Golden Moon project, which includes the parking
garage adjacent to the Silver Star, of $25 million during the term of this loan.
In the ordinary course of business, we will continue to maintain and improve the
Silver Star as necessary to continue to provide a competitive and attractive
facility to our customers. We intend to make capital expenditures up to the
amounts permitted under our credit facilities to maintain the property.
We had $2.6 million of restricted cash as of June 30, 2002 and September 30,
2001. The balances are required by the Management Agreement for employment,
workers compensation and other third party claims not otherwise covered by
insurance proceeds that may be filed or become due after the date the Management
Agreement was terminated. The claims reserve will survive until January 31,
2003. Any unused portion of the claims reserve at the end of the three-year
period will become unrestricted.
Cash used in financing activities was $39.0 million in the nine months ended
June 30, 2002 compared to $83.7 million cash provided in the nine months ended
June 30, 2001. The primary use of cash in each period was distributions to the
Tribe of $60.9 million and $70.6 million in the nine months ended June 30, 2002
and 2001, respectively. The primary source of cash provided in the nine months
ended June 30, 2001 was proceeds from the issuance of $200 million of long-term
debt. During the nine months ended June 30, 2001, the Enterprise also repaid
$62.5 million of long-term debt.
Pursuant to the Indenture, we used a portion of the proceeds from the offering
of the notes to repay the remaining outstanding balance under the term loan and
used the remaining proceeds to finance the construction of the Golden Moon. On
December 19, 2000, we entered into a $125.0 million reducing senior secured
revolving credit facility and amended our outstanding amortizing senior secured
term loan. At June 30, 2002 a total of $20,000,000 was drawn and outstanding on
this facility. On July 23, 2002 the Enterprise drew an additional $20,000,000 on
the Facility. We anticipate that it will be necessary to make additional draws
from this facility to complete the Golden Moon.
The terms of the notes and the revolving credit facility restrict our ability to
sell or dispose of assets, incur additional debt or contingent obligations,
extend credit, make investments, commingle our assets with the assets of other
Tribal business enterprises, require us to maintain certain financial ratios,
limit our ability to make distributions to the Tribe and limit the amount of
capital expenditures we may incur related to the Silver Star.
Through June 30, 2002, $195.8 million of the budgeted $290.6 million Golden Moon
construction has been completed through proceeds from the $200.0 million note
offering, and contributions of cash and property and equipment from the Tribe.
We anticipate the remaining $94.8 million of budgeted expenditures to be
financed from cash on hand and short-term investments, which includes the
balance of the proceeds from the $200.0 million note offering and the $125.0
million revolving credit facility. The Golden Moon is expected to be completed
and opened on August 26, 2002.
21
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
- -------------------------------------------------------------------------------
The notes contain certain covenants that restrict our ability to borrow
additional money, pay dividends or make other distributions, make investments,
create liens, enter into certain transactions with affiliates, and sell certain
assets or merge with or into another person. Under specific circumstances, the
covenant limiting our ability to make certain payments, distributions and
investments will be suspended. The indenture prescribes that the Enterprise may
make an annual distribution to the Tribe (the "Annual Service Payment") in the
amount of $55 million per year (payable in equal monthly installments), which
amount is increased annually on each September 30, commencing with September 30,
2001, by 5% per annum. Any distributions to the Tribe are made at the Tribe's
discretion, but distributions other than the Annual Service Payment (referred to
as "Restricted Payments") are limited by the covenants of the Indenture. The
most significant of such covenants limit Restricted Payments such that the
cumulative Restricted Payments from inception of the Indenture shall not exceed
50% of the Enterprise's cumulative net income (with measurement commencing on
January 1, 2001) plus $75 million. Restricted Payments are further limited by
the Indenture's requirement for the Enterprise to maintain a minimum Fixed
Charge Coverage Ratio (as defined) of 2.5 to 1 (increasing to 3.0 to 1 after
December 31, 2001), and thus limiting the Enterprise's ability to incur
additional debt to make Restricted Payments.
As of June 30, 2002 and September 30, 2001 the Tribe had outstanding liabilities
of $4.7 million and $5.5 million, respectively, under credit facilities with
$3.9 million and $8.0 million, respectively, available in borrowings, which did
not preclude recourse to assets held by the Enterprise.
We believe that existing cash balances, operating cash flow and anticipated
borrowings under the credit facilities and the offering of the Notes will
provide sufficient resources to fund operations and to meet our debt payment
obligations and expected distributions to the Tribe, foreseeable capital
expenditure requirements at the Silver Star and construction, development and
opening costs of the Golden Moon.
During March 2002 the Tribe began construction of a water theme park.
Construction of the water theme park was completed in early July 2002 and the
park was opened to the public on July 9, 2002. The total estimated cost of
construction is estimated at $19.9 million of which a total of $3.8 million has
been incurred by the Enterprise through June 30, 2002. Of the total $3.8 million
construction cost incurred through June 30, 2002, the Enterprise has received
contributed capital of $1.8 million from the Tribe. It is anticipated that the
Enterprise will receive reimbursement for the balance of construction and
preopening costs incurred as well as any remaining construction and preopening
costs incurred subsequent to June 30, 2002.
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.
22
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three and Nine Months Ended June 30, 2002
Compared to Three and Nine Months Ended June 30, 2001 (Continued)
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Regulation and Taxes
The Silver Star is subject to extensive regulation by the Choctaw Gaming
Commission and the Golden Moon will also be subject to such regulation. Changes
in applicable laws or regulations could have a significant impact on our
operations.
The Enterprise is owned by the Tribe, a federally recognized Indian Tribe
located on reservation land held in trust by the United States of America;
therefore, the Enterprise was not subject to federal or state income taxes for
the three or nine month periods ended June 30, 2002 or 2001, nor is it
anticipated that the Enterprise will be subject to such taxes in the future.
Various efforts have been made in the United States Congress over the past
several years to enact legislation that would subject the income of tribal
business entities, such as the Enterprise, 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.
Disclosure Regarding Forward-Looking Statements
Certain information included in this Quarterly report and other materials filed
or to be filed by the Enterprise with the Securities and Exchange Commission
contains forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934. Such statements include information relating to
plans for future expansion and other business development activities as well as
other capital spending, financing sources and the effects of regulation
(including gaming and tax regulation) and competition. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements made by or on
behalf of the Enterprise. These risks and uncertainties include, but are not
limited to, those relating to development and construction activities,
dependence on existing management, leverage and debt service, domestic or global
economic conditions, pending litigation, changes in federal tax laws or the
administration of such laws and changes in gaming laws or regulations (including
the legalization of gaming in certain jurisdictions).
23
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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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. Our primary exposure to market risk is interest rate risk associated
with our long-term debt. We had previously entered into an interest rate swap
agreement to fix the interest rate on our term loan at 8.25%. Pursuant to the
Indenture dated March 30, 2001, we used a portion of the proceeds from the
offering of the Notes, which bear interest at a fixed rate of 9.25%, to repay
the remaining outstanding balance under the Loan. Upon the prepayment of the
related installment note agreement we did not settle the existing interest rate
swap agreement. At June 30, 2002, the interest rate swap agreement had a
notional amount of $31.3 million. The notional amount does not represent amounts
exchanged by the parties, and thus is not a measure of exposure to the
Enterprise. The amount exchanged is based on the notional amount. The term of
the interest rate swap agreement is through January 31, 2004. The fair value
liability of our interest rate swap is based on the cash termination value of
the agreement using quotes from our counter-party and was approximately $1.3
million at June 30, 2002. If the floating rate increased 25 basis points,
interest expense under the swap agreement for the three and nine months ended
June 30, 2002 would have been lower by $20,540 and $70,291 respectively. Current
borrowings under the revolving credit facility bear interest at the LIBOR base
rate plus a margin rate of 2.5%. If the LIBOR base rate had increased 25 basis
points, interest expense under the revolving credit facility would been higher
by $ 1,389 during the three and nine months ended June 30, 2002.
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.
24
PART II Other Information
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Item 1. Legal Proceedings.
The Enterprise is subject to various claims and litigation in the normal course
of business. In the opinion of management, all pending legal matters are either
adequately covered by insurance or, if not insured, will not have a material
adverse impact on the Enterprise's financial position, results of operations or
cash flows.
On July 26, 2001, a lawsuit was filed in a Mississippi state court by Eddie
Fears, "a citizen and taxpayer", against Ronnie Musgrove, Governor of the State
of Mississippi, the Mississippi Gaming Commission and members of the Mississippi
Gaming Commission. The lawsuit alleged that the Tribal-State Compact entered
into by the State of Mississippi and the Tribe is invalid for a number of
reasons, including that the then-Governor of the State of Mississippi did not
have the legal power to bind the State to the terms of the Compact. On February
21, 2002 this lawsuit was dismissed upon the filing of a notice of dismissal by
the Plaintiff in the Chancery Court of Hinds County, Mississippi.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Note 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
25
SIGNATURES
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Pursuant to the requirements of the Indenture, the Enterprise has duly caused
this Quarterly Report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: August 13, 2002 Choctaw Resort Development Enterprise
By: /s/ Jay Dorris
----------------------------
Jay Dorris
President
Choctaw Resort Development Enterprise
By: /s/ Michael A. Donald
-----------------------------
Michael A. Donald, CPA
Vice President of Resort Finance
Choctaw Resort Development Enterprise
(Principal Financial and Accounting Officer)
Certification of President
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Choctaw Resort Development Enterprise
(the "Enterprise) hereby certifies, to the best of such officer's knowledge,
that:
(i) the Quarterly Report on Form 10-Q of the Enterprise for the
quarterly period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Enterprise.
August 13, 2002 /s/ Jay Dorris
----------------
Jay Dorris
President
26
Certification of Vice President of Resort Finance
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Choctaw Resort Development Enterprise
(the "Enterprise) hereby certifies, to the best of such officer's knowledge,
that:
(i) the Quarterly Report on Form 10-Q of the Enterprise for the
quarterly period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Enterprise.
August 13, 2002 /s/ Michael A. Donald
-----------------------
Michael A. Donald
Vice President of Resort Finance
27