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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: December 31, 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 333-63348
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)
Box 6260, Choctaw Branch, Choctaw, 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
1
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
INDEX TO QUARTERLY REPORT
Balance Sheets as of December 31, 2002 (unaudited) and September 30, 2002..........................3
Statements of Operations and Comprehensive Income for the Three Months
Ended December 31, 2002 and 2001 (unaudited).......................................................4
Statement of Owner's Equity for the Three Months Ended December 31, 2002 (unaudited)...............5
Statements of Cash Flows for the Three Months Ended December 31, 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
Item 4 -- Controls and Procedures............................................................................25
PART II -- OTHER INFORMATION................................................................................26
Signatures - ...............................................................................................27
2
PART I. Financial Information
Item 1 Financial Statements
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
BALANCE SHEETS
December 31, 2002 and September 30, 2002
- --------------------------------------------------------------------------------
December 31, September 30,
2002 2002
------------------- --------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 55,555,869 $ 72,783,499
Accounts receivable (net of allowance of
$2,538,547 and $2,411,237) 4,694,671 3,961,599
Inventories 2,292,262 2,120,422
Prepaid expenses and other 1,406,272 1,403,550
------------------- --------------------
Total current assets 63,949,074 80,269,070
Property and equipment, net 419,914,984 410,892,145
Restricted cash 2,627,561 2,617,915
Deferred loan costs, net 5,362,269 5,617,005
Other assets 4,368,231 2,631,964
------------------- --------------------
Total assets $496,222,119 $ 502,028,099
------------------- --------------------
Liabilities and Owner's Equity
Current liabilities:
Current maturities of long-term debt $ 100,300,000 $ 300,000
Accounts payable 6,165,774 8,209,279
Construction accounts payable 7,730,344 17,375,937
Due to Tribe 3,125,891 3,875,465
Accrued liabilities:
Accrued payroll and related 8,787,365 8,195,759
Accrued expenses and other liabilities 8,544,633 9,047,224
Accrued interest expense 5,212,120 9,808,719
------------------- --------------------
Total current liabilities 139,866,127 56,812,383
Long term debt, net of current maturities 200,000,000 275,000,000
Commitments and contingencies - -
Owner's equity:
Contributed capital 200,439,881 199,888,916
Retained earnings (deficit) (43,891,827) (29,439,139)
Accumulated other comprehensive loss (192,062) (234,061)
------------------- --------------------
Total owner's equity 156,355,992 170,215,716
------------------- --------------------
Total liabilities and owner's equity $496,222,119 $ 502,028,099
------------------- --------------------
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 Months Ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
---------------------------------
2002 2001
--------------- ---------------
(Unaudited) (Unaudited)
Revenue:
Casino $ 61,910,328 $ 53,515,273
Food & beverage 7,353,637 5,407,666
Rooms 3,756,157 1,990,685
Other 3,612,716 2,101,062
--------------- ---------------
Gross revenue 76,632,838 63,014,686
Less: promotional allowances (8,092,096) (5,820,938)
--------------- ---------------
Net revenue 68,540,742 57,193,748
--------------- ---------------
Costs and expenses:
Casino 21,829,876 15,869,377
Food & beverage 3,390,544 1,603,442
Rooms 1,013,979 354,643
Other 2,563,553 1,955,082
Selling, general, and administrative 15,203,904 9,515,963
Maintenance and utilities 2,233,595 1,356,050
Preopening expense - 325,774
Depreciation 6,982,064 3,486,418
--------------- ---------------
Total 53,217,515 34,466,749
--------------- ---------------
Operating income 15,323,227 22,726,999
--------------- ---------------
Other income (expense):
Interest income 60,202 1,162,773
Interest expense, net of interest capitalized (6,222,518) (4,143,186)
Other income (expense) 252,691 245,242
--------------- ---------------
Total (5,909,625) (2,735,171)
--------------- ---------------
Net income 9,413,602 19,991,828
Other comprehensive income (loss) 41,999 38,740
--------------- ---------------
Comprehensive income $ 9,455,601 $ 20,030,568
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
4
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
STATEMENT OF OWNER'S EQUITY
For the Three Months Ended December 31, 2002
(Unaudited)
- --------------------------------------------------------------------------------
Accumulated
Retained Other Total
Contributed Earnings Comprehensive Owner's
Capital (Deficit) Loss Equity
----------------- ----------------- ----------------- -----------------
Balances, September 30, 2002 $ 199,888,916 $ (29,439,139) $ (234,061) $ 170,215,716
Net income - 9,413,602 - 9,413,602
Contributed capital 550,965 - - 550,965
Distributions - (23,866,290) - (23,866,290)
Reclassification adjustment
under SFAS 133 - - 41,999 41,999
----------------- ----------------- ----------------- -----------------
Balances, December 31, 2002 $ 200,439,881 $ (43,891,827) $ (192,062) $ 156,355,992
----------------- ----------------- ----------------- -----------------
The accompanying notes are an integral part of these financial statements.
5
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
----------------------------------------
2002 2001
------------------- -------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 9,413,602 $ 19,991,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,278,799 4,184,090
Gain on disposal of property and equipment 2,205 29,507
Change in operating assets and liabilities:
Accounts receivable, net (733,072) (411,650)
Inventories (171,840) (163,371)
Prepaid expenses and other (2,722) 912,222
Other assets (1,736,267) (569,339)
Accounts payable and due to Tribe (2,793,079) 322,263
Accrued liabilities (4,507,584) (4,919,869)
------------------- -------------------
Net cash provided by operating activities 6,750,042 19,375,681
------------------- -------------------
Cash flows from investing activities:
Acquisitions of property and equipment, net of
amounts in construction accounts payable (25,652,701) (33,357,509)
Proceeds from sales and maturities of short term investments - 74,567,321
Restricted cash (9,646) (15,679)
------------------- -------------------
Net cash (used in) provided by investing activities (25,662,347) 41,194,133
------------------- -------------------
Cash flows from financing activities:
Borrowing under credit facilities 25,000,000 -
Contributions of cash from Tribe 550,965 -
Distributions to Tribe (23,866,290) (19,631,218)
Loan fees paid - (39,793)
------------------- -------------------
Net cash provided by (used in) financing activities 1,684,675 (19,671,011)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (17,227,630) 40,898,803
Cash and cash equivalents at beginning of period 72,783,499 81,822,543
------------------- -------------------
Cash and cash equivalents at end of period $ 55,555,869 $ 122,721,346
------------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,564,382 $ 10,064,043
------------------- -------------------
Supplemental disclosure of non-cash investing and financing activities:
Accounts payable for construction $ 7,730,344 $ 22,019,591
------------------- -------------------
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 (Continued)
(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. The operations of the Enterprise are collectively
referred to as the Pearl River Resort. 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 has opened the Golden
Moon Hotel and Casino (the "Golden Moon") which commenced operations on August
26, 2002. The Golden Moon operates a gaming, hotel and restaurant complex
directly across the highway from Silver Star. The Enterprise also operates
Geyser Falls Water Theme Park ("Geyser Falls"), which opened July 8, 2002, and
the Choctaw Hospitality Institute, which opened November 9, 2001, for the
training of Pearl River Resort employees. Geyser Falls and the Choctaw
Hospitality Institute were contributed to the Enterprise at the Tribe's
historical cost.
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. Prior to establishment of the
Enterprise, the Silver Star operated as a separate, wholly owned unincorporated
business of the Tribe. On October 12, 1999, the Tribe contributed the Silver
Star to the Enterprise. Due to the common control of the Silver Star 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 contributions described above occurred at the beginning
of the earliest period presented and include the accounts of the Enterprise, the
Silver Star, and the Dancing Rabbit on a historical cost basis, in a manner
similar to a pooling of interests.
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.
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 month period
ended December 31, 2002 are not necessarily indicative of the results that may
be expected for the year ended September 30, 2003. 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,
2002.
7
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
The consolidated financial statements include the accounts of the Enterprise,
the Silver Star, the Golden Moon, Geyser Falls, the Dancing Rabbit and the
Choctaw Hospitality Institute. All necessary eliminating entries have been
recorded.
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.
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. The Enterprise periodically reviews the carrying value of property and
equipment to determine if circumstances exist indicating impairment in carrying
value of the property and equipment. If impairment is indicated, an adjustment
will be made to the carrying value of the property and equipment.
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 $1,838,714 and $1,583,978 at December 31, 2002 and September 30,
2002, 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.
8
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:
Three Months Ended
December 31,
----------------------------------
2002 2001
---------------- ----------------
Food and beverage $5,667,050 $4,166,093
Rooms 895,250 854,703
Other 699,021 581,999
---------------- ----------------
Total $7,261,321 $5,602,795
---------------- ----------------
Complimentary revenues have been earned in the following casino departments as
follows:
Three Months Ended
December 31,
----------------------------------
2002 2001
---------------- ----------------
Food and beverage $5,034,152 $4,016,300
Rooms 2,172,217 1,252,735
Other 885,727 551,903
---------------- ----------------
Total $8,092,096 $5,820,938
---------------- ----------------
Income Taxes
The Enterprise is an unincorporated business enterprise 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 months ended December 31, 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
$1,360,979 and $1,116,107 for the three months ended December 31, 2002 and 2001,
respectively.
9
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.
Preopening Expenses
Preopening costs are expensed as incurred. Preopening costs incurred during the
three months ended December 31, 2001 were $325,774. Preopening expense is
comprised primarily of materials and supplies and other costs incurred in
connection with the opening of the Golden Moon.
Reclassifications
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation. These reclassifications had no effect on the
Enterprise's net income or financial position.
Note 2--Property and Equipment
Property and equipment consists of the following:
Useful
Lives December 31, September 30,
(Years) 2002 2002
---------------- ------------------ --------------------
Land and improvements $ 16,816,096 $ 16,799,809
Buildings and improvements 20-40 359,392,818 346,831,079
Golf course improvements 5-15 2,728,275 2,740,271
Furniture and equipment 5-10 118,948,380 115,798,611
Aircraft 10 4,551,215 4,551,215
Vehicles 3 1,094,073 1,293,396
------------------ --------------------
503,530,857 488,014,381
Less accumulated depreciation 83,615,873 77,122,236
------------------ --------------------
$419,914,984 $ 410,892,145
------------------ --------------------
Note 3--Restricted Cash
The Enterprise had $2,627,561 and $ 2,617,915 of restricted cash as of December
31, 2002 and September 30, 2002, respectively. The balances at December 31, 2002
and September 30, 2002 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 until
January 31, 2003 and is governed by the terms of the Management Agreement. Any
unused portion of the Claims Reserve after January 31, 2003 will become
unrestricted.
10
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 for the construction of the Golden Moon. The Notes bear
interest at 9.25% 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.
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. As of December 31, 2002, a total of
$100,000,000 had been drawn and was outstanding on the Facility. The Enterprise
pays commitment fees based on 0.5% of the available balance of the Facility. For
the three months ended December 31, 2002 and 2001, the Enterprise paid
commitment fees totaling $121,041 and $145,347, respectively, on the Facility.
The interest rate on the facility varies based upon the Enterprise's total
recourse debt to gaming EBITDA ratio, as defined. At December 31, 2002,
outstanding advances under the facility bore LIBOR interest at rates ranging
from 1.44% to 1.81%. During the three months ended December 31, 2002, the
Enterprise recorded interest expense totaling $1,012,828 on the outstanding
balance of the facility.
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 December 31, 2002, in the amount of $6.25 million per
quarter, until the amount of the Facility has been reduced to $40 million.
Accordingly, borrowing capacity available under the Facility has been reduced to
$118,750,000, of which $100,000,000 was outstanding at December 31, 2002. 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.
During the three months ended December 31, 2002, the Enterprise violated
covenants related to the Fixed Charge Coverage Ratio and the Total Leverage
Ratio under the Facility. The Enterprise has received a waiver for such covenant
violations from the Facility lender. The Enterprise is required to meet these
covenants each quarter. Based on forecasted results of operations, management
believes that it is likely that the Enterprise will not achieve the Fixed Charge
Coverage Ratio for the remaining quarters of fiscal 2003. The Enterprise is
currently negotiating a modification of this covenant with the Facility lender
in order to ensure future compliance. The Enterprise expects to complete such
negotiation during the quarter ending March 31, 2003 and to have the modified
covenant effective for the March 31, 2003 measurement date. If the Enterprise is
unable to modify the terms of this covenant and is unable to obtain waivers from
the lender for possible future violations of this covenant, the lender could
demand payment of the balance of the Facility. If the lender demanded repayment,
the Enterprise would seek to refinance the balance of the Facility with another
lender. There can be no assurance that the Enterprise will successfully modify
the terms of the covenant or refinance the balance under the Facility.
Accordingly, the outstanding balance of the Facility has been presented as
current in the accompanying financial statements. If the Enterprise were unable
to modify the covenant or refinance the debt, the classification of the Facility
as currently payable would have a material adverse effect on the Enterprise's
ability to pay its current obligations as they become due. As of December 31,
2002, management believes that the Enterprise is in compliance with all other
debt covenants under the Notes and the Facility.
11
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.
Maturities of long-tem debt at December 31, 2002 are as follows:
2003 $ 100,300,000
2004 -
2005 -
2006 -
2007 -
Thereafter 200,000,000
---------------------
Total $ 300,300,000
---------------------
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 December 31,
2002, the Enterprise's interest rate swap had a notional amount of $21,875,000.
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.
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, 2002 through December 31, 2002, the Enterprise
recognized other income of $252,691 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, 2002 through December 31, 2002 are $41,999.
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
$211,500,000 at December 31, 2002 based on quoted market prices on or about
December 31, 2002.
12
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
December 31, 2002 was $782,657 and is included in accrued expenses and other
liabilities.
Note 6 - Enterprise Licensing and Regulation
The Tribe, 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
Distributions to the Tribe were $23,866,290 and $19,631,218 for the three months
ended December 31, 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.
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.
13
Future Annual Service Payments under the Indenture are as follows:
2003 $60,637,500
2004 63,669,375
2005 66,852,844
2006 70,195,486
2007 73,705,260
Thereafter 77,390,523
-----------------
Total $412,450,988
-----------------
Employees of the Enterprise are provided health and life insurance coverage
through the Tribe's health and life insurance plans. The Enterprise paid
$2,867,335 and $1,909,512 to the Tribe under this arrangement for the three
months ended December 31, 2002 and 2001, respectively.
The Enterprise collects and remits to the Tribe a 7% sales tax to the Tribe on
rooms, food, beverage, sundry and entertainment revenue. The total sales tax
paid was $390,011 and $207,868 for the three months ended December 31, 2002 and
2001, respectively. For the three months ended December 31, 2002 and 2001, the
Enterprise paid rent for office space and purchased certain goods and services
from the Tribe and its businesses in the amount of $1,131,730 and $1,362,197,
respectively
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. For the three
months ended December 31, 2002 and 2001, the Enterprise made purchases of
$348,165 and $154,323 respectively, from Choctaw Paper Company, Inc.
The Enterprise paid $62,500 to the Tribal/State Tourism Fund for the promotion
of tourism in Mississippi during three months ended December 31, 2002 and 2001,
as required under the Tribal-State Compact. The Choctaw Gaming Commission was
paid $665,502 and $562,671 for the three months ended December 31, 2002 and
2001, respectively, for fees assessed at 1% of gaming revenues per the Tribal
Code and employee licensing fees. Amounts paid to the Choctaw Gaming Commission
along with amounts paid to the Tribal/State Tourism fund are included in
selling, general and administrative expense for the three months ended December
31, 2002 and 2001.
The Enterprise paid $729,430 to the Choctaw Development Enterprise for the
construction of administrative offices and a hospitality institute and $57,000
for construction related to the Golden Moon project during the three months
ended December 31, 2001.
During the three months ended December 31, 2002, the Tribe contributed $550,965
in cash to fund construction and development of Geyser Falls.
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 transferred to the Enterprise and a corresponding non-interest
bearing payable to the Tribe was established. During the three months ended
December 31, 2002 and 2001, the Enterprise made payments to the Tribe totaling
$750,204 and $375,101, respectively, in connection with this purchase. At
December 31, 2002, $1,125,891 was due to the Tribe under this note and in is
included in Due to Tribe.
14
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 December 31, 2002 the Tribe had outstanding liabilities of $2.3 million
under credit facilities with $3.1 million available in borrowings, which did not
preclude recourse to assets held by the Enterprise.
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 $491,901 and $495,446 for the
three months ended December 31, 2002 and 2001, respectively.
The Enterprise has no formal commitments to provide post-retirement health care
benefits to retirees.
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.
Note 10--Subsequent Events
On February 4, 2003 the Enterprise distributed $3,555,000 to the Tribe.
Note 11--Recently Issued Accounting Pronouncements
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. The Enterprise has adopted the provisions of
SFAS 145 which have had no effect on the financial statements.
15
Item 2.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2002
Compared to Three Months Ended December 31, 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 $68.5 million and $57.2 million for the quarters
ended December 31, 2002 and 2001. The $11.3 million, or 19.8% increase in net
revenue was primarily due to increases in gaming, room, food and beverage and
other revenue attributable to operations of the Golden Moon. Complimentary
revenues are included in gross revenues but are deducted as a promotional
allowance to arrive at net revenues.
Casino. Casino revenues increased $8.4 million, or 15.7%, to $61.9 million for
the quarter ended December 31, 2002 from $53.5 million for the quarter ended
December 31, 2001.
Table game activity increased as reflected in table games drop. The table game
drop was $49.4 million for the quarter ended December 31, 2002 compared to table
game drop of $43.5 million for the quarter ended December 31, 2001. This
reflects an increase in table activity of $5.9 million or 13.6% over the
corresponding period in 2001. Table game revenue was $8.1 million for the
quarter ended December 31, 2002 compared to $8.4 million for the quarter ended
December 31, 2001, a decrease of $0.3 million, or 3.6%. The decrease in revenue
is due to a lower hold percentage for the quarter ended December 31, 2002 as
compared to the quarter ended December 31, 2001. Table game hold percentage was
16.4% for the quarter ended December 31, 2002 compared to 19.3% for the quarter
ended December 31, 2001. Table game hold percentage is reasonably predictable
over the long-term, but can fluctuate significantly from quarter to quarter,
affecting table games revenue.
Slot revenues were $53.3 million for the quarter ended December 31, 2002
compared to $44.8 million for the quarter ended December 31, 2001, an increase
of $8.5 million or 18.9%. The increase is due to a increase in coin in for the
quarter ended December 31, 2002 compared to the quarter ended December 31, 2001.
The increase in coin in is primarily attributable to operations of the Golden
Moon.
Food and Beverage. For the quarter ended December 31, 2002, food and beverage
revenues were $7.4 million, an increase of approximately $2.0 million, or 37.0%,
from $5.4 million for the quarter ended December 31, 2001. During the quarter
ended December 31, 2002, the Silver Star and Golden Moon turned 453,000 covers
with an average revenue per cover of $11.79. For the quarter ended December 31,
2001, the Silver Star turned 318,000 covers with an average revenue per cover of
$12.92.
Rooms. Room revenues were $3.8 million for the quarter ended December 31, 2002
compared to $2.0 million for the quarter ended December 31, 2001. There was an
increase in the average daily room rate to $56.56 for the quarter ended December
31, 2002 from $51.63 for the quarter ended December 31, 2001. Our occupancy rate
was 67.4% for the quarter ended December 31, 2002 compared to 86.6% for the
quarter ended December 31, 2001. With the opening of Golden Moon, the Enterprise
now has a total of 1,067 rooms for the quarter ended December 31, 2002 compared
to 496 rooms for the quarter ended December 31, 2001. During the quarter ended
December 31, 2002, 55.3% of our hotel revenue was attributable to rooms occupied
by Silver Star and Golden Moon customers on a complimentary basis compared to
62.9% for the quarter ended December 31, 2001.
16
Other. Other revenues increased $1.5 million to $3.6 million for the quarter
ended December 31, 2002 from $2.1 million for the quarter ended December 31,
2001. Other revenues are comprised primarily of revenue from the casino's
various retail outlets, the convention center, fees earned from cash advances to
customers, other miscellaneous items, Dancing Rabbit, Geyser Falls and the
Choctaw Hospitality Institute. The increase in other revenue is directly
attributable to an increase in retail, convention center sales, miscellaneous
revenue and revenue generated by the Choctaw Hospitality Institute. Retail
revenues were up $0.6 million or 120%, to $1.1 million for the quarter ended
December 31, 2002 compared to $0.5 million for the quarter ended December 31,
2001. Convention center revenues were $0.8 million for the quarter ended
December 31, 2002 compared to $0.5 million for the quarter ended December 31,
2001, an increase of $0.3 million or 60%. Other revenue, which includes
telephone, spa charges and miscellaneous items, was $0.8 million for the quarter
ended December 31, 2002 compared to $0.3 million for the quarter ended December
31, 2001, an increase of $0.5 million or 167%. Revenue generated by the Choctaw
Hospitality Institute was $0.5 million for the quarter ended December 31, 2002
compared to none for the quarter ended December 31, 2001. Golf revenues were
$0.5 million for the quarter ended December 31, 2002 compared to $0.8 million
for the quarter ended December 31, 2001, a decrease of $0.3 million or 37.5%.
The decrease in golf revenues is primarily attributable to decreased golf
rounds.
Promotional Allowances. Promotional allowances totaled $8.1 million for the
quarter ended December 31, 2002, representing a $2.3 million or 39.7% increase
over promotional allowances of $5.8 million for the quarter ended December 31,
2001. During the quarter ended December 31, 2002 promotional allowances were
13.1% of casino revenues compared to 10.8% for the quarter ended December 31,
2001. The increase in promotional allowances is the result of management's
efforts to reward valued guests and increase market share.
Costs and Expenses. Total costs and expenses were $53.2 million for the quarter
ended December 31, 2002 compared to $34.5 million for the quarter ended December
31, 2001, an increase of $18.7 million or 54.2%. This increase is primarily
attributable to additional operating costs associated with the Golden Moon.
Casino. Casino costs and expenses were $21.8 million for the quarter ended
December 31, 2002, compared to $15.9 million for the quarter ended December 31,
2001, an increase of $5.9 million or 37.1%. This increase is primarily
attributable to additional operating costs associated with Golden Moon.
Food and Beverage. Food and beverage costs were $3.4 million for the quarter
ended December 31, 2002 compared to $1.6 million for the quarter ended December
31, 2001, and increase of $1.8 million or 112.5%. This increase is primarily
attributable to the increase in the number of restaurant covers and additional
operating costs associated with the operation of Golden Moon.
Other. Other costs and expenses were $2.6 million for the three months ended
December 31, 2002, compared to $2.0 million for the three months ended December
31, 2001, an increase of $0.6 million, or 30.0%. 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
and Geyser Falls. Golf operating expenses were unchanged at $1.1 million for the
three months ended December 31, 2002 and 2001. Geyser Falls operating expenses
were $0.4 million for the three months ended December 31, 2002.
17
Selling, General and Administrative. Selling, general and administrative costs
and expenses were $15.2 million for the quarter ended December 31, 2002 compared
to $9.5 million for the quarter ended December 31, 2001, an increase of $5.7
million or 60%. The increase in selling, general and administrative expense is
due to additional administrative costs associated with operation of Golden Moon.
Depreciation. Depreciation expense was $7.0 million for the quarter ended
December 31, 2002 compared to $3.5 million for the quarter ended December 31,
2001. The $3.5 million or 100% increase is primarily attributable to additional
depreciation related to property and equipment and construction costs incurred
for Golden Moon and Geyser Falls.
Operating Income (loss). Operating income was $15.3 million for the quarter
ended December 31, 2002 compared to $22.7 million for the quarter ended December
31, 2001, a decrease of $7.4 million, or 32.6%. The decrease is primarily
attributable to additional operating costs associated with operation of Golden
Moon, and to a lesser extent, the revenue and expense variations previously
discussed.
Other Income (Expense). Other expense was $5.9 million for the quarter ended
December 31, 2002 compared to other expense of $2.7 million for the quarter
ended December 31, 2001, representing an increase in expense of $3.2 million
that is primarily attributable to an increase in interest expense of
approximately $2.1 million and a decrease in interest income of $1.1 million.
Other income (expense) is comprised of interest income minus interest expense
(net of capitalized interest) and other expense. The increase in interest
expense for the three months ended December 31, 2002 is related to additional
interest expense incurred totaling $1.0 million on outstanding amounts on the
revolving credit facility and the fact that no interest was capitalized during
this period. During the quarter ended December 31, 2001, the Enterprise recorded
capitalized interest totaling $1.4 million related to Golden Moon construction.
The decrease in interest income is due to decreased cash and investment balances
that were used to fund Golden Moon construction.
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
December 31, 2002 and 2001, the Enterprise recognized other income of $253,000
and $200,000 respectively, attributed to the effect of interest rate changes on
the interest rate swap agreement.
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's 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.
18
The Enterprise maintains 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. The Enterprise determines 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, the
Enterprise may increase the allowance.
The Enterprise maintains accruals for health and workers compensation
self-insurance and slot club point redemption, which are classified as accrued
liabilities in the balance sheets. The Enterprise determines 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, the Enterprise will adjust the
assumptions utilized in the methodologies and reduce or provide for additional
accruals as appropriate.
The Enterprise is 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. The Enterprise estimates guest claims
and accrues for such liability based on historical experience in accrued
liabilities in the balance sheets.
Liquidity and Capital Resources
As of December 31, 2002, the Enterprise held cash and cash equivalents of $55.5
million. Our principal sources of liquidity have consisted of cash provided by
operating activities and debt financing. Cash provided by operating activities
was $6.8 million in the three months ended December 31, 2002 compared to $19.4
million in the three months ended December 31, 2001. The decrease of $12.6
million was due primarily to the decrease in net income to $9.4 million in the
three months ended December 31, 2002 from $20.0 million in the three months
ended December 31, 2001.
Cash used in investing activities in the three months ended December 31, 2002
for capital expenditures totaled $25.7 million. Cash used in investing
activities in the three months ended December 31, 2001 for capital expenditures
totaled $33.3 million. The Enterprise also received $74.6 million from the sale
of short-term investments in the three months ended December 31, 2001.
The Enterprise's outstanding revolving credit facility restricts our ability to
make capital expenditures. The Enterprise 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 and Golden Moon 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.
19
We had $2.6 million of restricted cash as of December 31, 2002 and September 30,
2002. 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
and any unused portion of the claims reserve will become unrestricted after such
date.
Cash provided by financing activities was $1.7 million in the three months ended
December 31, 2002 compared to $19.7 million used in the three months ended
December 31, 2001. The primary use of cash in each period was distributions to
the Tribe of $23.9 million and $19.6 million in the three months ended December
31, 2002 and 2001, respectively. The primary source of funds provided by
financing activities during the three months ended December 31, 2002 was $25.0
million drawn on the revolving credit facility.
On December 19, 2000, the Enterprise entered into a $125.0 million reducing
senior secured revolving credit facility. The Facility has a maturity date of
December 28, 2005. Borrowings available under the Facility will reduce quarterly
beginning on December 31, 2002, in the amount of $6.25 million per quarter,
until the amount of the facility has been reduced to $40 million. Accordingly,
borrowing capacity available under Facility has been reduced to $118,750,000, of
which $100,000,000 was outstanding at December 31, 2002. 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.
The terms of the notes and the revolving credit facility restrict the
Enterprise's 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 and Golden Moon.
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.
20
During the three months ended December 31, 2002, the Enterprise violated
covenants related to the Fixed Charge Coverage Ratio and the Total Leverage
Ratio under the Facility. The Enterprise has received a waiver for such covenant
violations from the Facility lender. The Enterprise is required to meet these
covenants each quarter. Based on forecasted results of operations, management
believes that it is likely that the Enterprise will not achieve the Fixed Charge
Coverage Ratio for the remaining quarters of fiscal 2003. The Enterprise is
currently negotiating a modification of this covenant with the Facility lender
in order to ensure future compliance. The Enterprise expects to complete such
negotiation during the quarter ending March 31, 2003 and to have the modified
covenant effective for the March 31, 2003 measurement date. If the Enterprise is
unable to modify the terms of this covenant and is unable to obtain waivers from
the lender for possible future violations of this covenant, the lender could
demand payment of the balance of the Facility. If the lender demanded repayment,
the Enterprise would seek to refinance the balance of the Facility with another
lender. There can be no assurance that the Enterprise will successfully modify
the terms of the covenant or refinance the balance under the Facility.
Accordingly, the outstanding balance of the Facility has been presented as
current in the accompanying financial statements. As of December 31, 2002,
management believes that the Enterprise is in compliance with all other debt
covenants under the Notes and the Facility.
As of December 31, 2002 and September 30, 2002 the Tribe had outstanding
liabilities of $2.3 million and $2.4 million, respectively, under credit
facilities with $3.1 million and $3.2 million, respectively, available in
borrowings, which did not preclude recourse to assets held by the Enterprise.
The Enterprise believes 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 and foreseeable
capital expenditure requirements at the Silver Star and Golden Moon.
The following table presents the long-term debt maturities, future minimum lease
payments under non-cancellable leases, and the Annual Service Payment to the
Tribe under the indenture governing the Notes as of December 31, 2002:
------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- - -----
Long-term debt $ 100,300,000 $ - $ - $ - $ - $ 200,000,000 $ 300,300,000
Operating leases 236,187 14,778 - - - - 250,965
Annual Service Payment 60,637,500 63,669,375 66,852,844 70,195,486 73,705,260 77,390,523 412,450,988
------------------------------ -------------- ---------------------------- --------------- -----------------
$ 161,173,687 $ 63,684,153 $ 66,852,844 $ 70,195,486 $ 73,705,260 $ 277,390,523 $ 713,001,953
============================== ============== ============================ =============== =================
Additionally and in accordance with the Tribal Code, the Enterprise is required
to remit to the Choctaw Gaming Commission a monthly fee equal to 1% of gaming
revenues. Also, and in accordance with the Compact the Enterprise is required to
provide $250,000 annually to the State of Mississippi to be used for used for
advertising and tourism promotional activities.
21
Recently Issued Accounting Pronouncements
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 and is effective for financial statements issued on
or after May 15, 2002. The Enterprise has adopted the provisions of SFAS 145
which have had no effect on the financial statements.
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
The Silver Star and Golden Moon are subject to extensive regulation by the
Choctaw Gaming Commission. 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 month periods ended December 31, 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
22
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
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 Enterprise's primary exposure to market risk is interest rate risk
associated with our long-term debt. The Enterprise 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 to repay the remaining outstanding
balance under the Loan. Upon the prepayment of the related installment note
agreement, the Enterprise did not settle the existing interest rate swap
agreement. At December 31, 2002, the interest rate swap agreement had a notional
amount of $21.9 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 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 $0.8
million at December 31, 2002. If the floating rate increased 25 basis points,
interest expense under the swap agreement for the three months ended December
31, 2002 would have been lower by $15,137. Additionally, 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
$58,507 during the three months ended December 31, 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
Item 4. Controls and Procedures
The Enterprise maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Enterprise's reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Enterprise's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures which, by their
nature, can provide only reasonable assurance regarding management's control
objectives.
Within 90 days prior to the date of this Form 10-Q, the Enterprise carried out
an evaluation, under the supervision and with the participation of the
Enterprise management, including the Enterprise's Chief Executive Officer along
with the Enterprise's Chief Financial Officer, of the effectiveness of the
design and operation of the Enterprise's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the Enterprise's
Chief Executive Officer along with the Enterprise's Chief Financial Officer
concluded that the Enterprise's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Enterprise in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There have been no significant changes in
the Enterprise's internal controls or in other factors which could significantly
affect internal controls subsequent to the date the Enterprise carried out its
evaluation.
25
PART II Other Information
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.
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
26
SIGNATURES
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: February 13, 2003 Choctaw Resort Development Enterprise
By: /s/ Jay Dorris
----------------------------------------
Jay Dorris
President
Choctaw Resort Development Enterprise
By: /s/ Michael A. Donald
----------------------------------------
Michael A. Donald
Vice President of Resort Finance
Choctaw Resort Development Enterprise
(Principal Financial and Accounting
Officer)
27
CERTIFICATION OF PRESIDENT
I, Jay Dorris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Choctaw Resort
Development Enterprise;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
February 13, 2003 /s/ Jay Dorris
--------------------------------------------
Jay Dorris
President (Principal Executive Officer)
28
CERTIFICATION OF VICE PRESIDENT OF RESORT FINANCE
I, Michael A. Donald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Choctaw Resort
Development Enterprise;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
February 13, 2003 /s/ Michael A. Donald
--------------------------------------------
Michael A. Donald
Vice President of Resort Finance
(Principal Financial and Accounting
Officer)
29
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 December 31, 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.
February 13, 2003 /s/ Jay Dorris
--------------------------------------------
Jay Dorris
President (Principal Executive Officer)
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 December 31, 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.
February 13, 2003 /s/ Michael A. Donald
--------------------------------------------
Michael A. Donald
Vice President of Resort Finance
(Principal Financial and Accounting
Officer)
30